Social Expectations and Housing Market Moves

It is the rare household that chooses a house based mostly on a thorough rational assessment of what kind of living space they need. The selection is likely to be influenced more by self-image and perceived peer pressure. It is hard to buy a much smaller or larger house than everyone says a person like you needs. You are boxed in by a web of social expectations, many of which are media creations, unless you consciously choose to step out of the box.

When there was a trend toward larger houses, a great many people followed that trend, in varying degrees. And now that the trend is toward smaller houses, they will follow that too.

At the least, the social pressure for a million-dollar household (or one of more modest means) to buy an oversized house has all but vanished. People who find themselves living in one of these big houses will make up excuses for the extra rooms. The excuses serve as a way of saying, “We realize this house is too big for us, but we have to settle for what we have.” Some people may make a part of their house disappear by installing a door in front of a section of it and leaving it unheated in winter — or perhaps renting it out, in situations where local laws and lifestyle considerations permit this.

A downsizing trend can never be fully recognized by the mass media, which always seem to favor the larger, brighter, more controversial side of everything. Not many reality TV shows are going to be placed in an average-sized house. Still, the media is fond of trends and has wasted little time pointing out the trend toward smaller houses.

Heating and cooling costs, time pressure, and a new financial realism are three of the primary reasons why house sizes are trending down. Social expectations and media images are secondary reasons, yet they may amplify the trend beyond what anyone is expecting at this point. There are just two more components of the downward pressure on demand for housing.

Not Keeping Up With the Joneses

The revelations about the financing of single-family homes that have come out in the last five years, and particularly in 2009, must have changed the cultural meaning of houses in a way that will affect the housing market for the rest of our lifetimes.

To my mind, the gee-whiz statistic about housing in the United States is the one about average home equity. At one point, in 2007 if I remember correctly, the average home equity fell below 50 percent. For all the houses combined, not just the ones that have mortgages, the banks’ share of equity is greater than that of the homeowners. Imagine that homeowners own all the houses west of the Mississippi River, while the banks own all the houses east of the Mississippi — the actual situation is a little bit worse than that.

If that statistic didn’t sink in, the large numbers of foreclosures and short sales surely did, making the same point. Americans, in general, do not really own their houses.

Before the public discussion of the housing market that has taken place since 2005, I have to think that many Americans had a mistaken picture of the financing of houses. Many homeowners, we now realize, had no idea how much they owed on their own houses. But among those who did know how deep in debt they were, they may not have realized how their houses compared to the houses around them, financially speaking. If you owe $395,000 on your $425,000 house, and sometimes have trouble making the payments, it’s easy to feel like an imposter. When you know your own financial situation, but don’t know the details of anyone else’s, you can imagine that most of your neighbors have mostly paid off their homes. How many households were secretly, shamefully in financial distress in 2004 or 2005, thinking that they were the only ones?

Of course, no one could imagine that now. If there is financial distress connected to the mortgage on your house, you now know that it’s not just you. It’s a problem that’s repeated in approximately half of the houses in the country. It isn’t really much comfort to realize that, but it does put the situation in a different light. This change in perspective has to affect people’s future home-buying decisions.

When you look at what might affect the housing market, perhaps the most profound implication is this thought: If I felt pressure to buy a house to keep up with everyone else, I was probably aiming too high. Most of the people I thought I was keeping up with can’t really afford their houses either. The people who are sitting pretty right now are not the people with the biggest or nicest houses, but the ones who have their houses paid for — along with the ones who don’t own a house at all. The next time I buy a house, I’m going to make sure it’s one I can easily afford.

It is not just people who dug themselves into a financial hole who may be reaching this conclusion. Those who considered doing so and decided against it may be even more emphatic about it. The thought might be: It is so much better to looking at ways to pay off a mortgage than it would be to be living in a house with an underwater mortgage and trying to find a way to get back to zero. The next time I buy a house, I hope I don’t have to borrow any money at all.

I have previously mentioned the lifestyle considerations that are leading people to look for smaller houses. Now, here is a separate reason that may be pushing people in the same direction. The result is a lasting, or essentially permanent, reduction in demand for housing. And, as this won’t show up until people move to a new house, it’s an effect that might continue to exert downward pressure on housing for the next 10 to 15 years.

Hospital Budget Problems Continue

The pattern of hospital budget problems continues. For a supposedly stable industry, there are far more expansions and layoffs than you would expect. Both may occur in succession, sometimes with a bankruptcy mixed in, at the same hospital. In total, hospitals face the same challenge of overbuilding that is affecting the housing sector.

The hospital overbuilding is, perhaps, more understandable. Hospital executives planned capacity based on population projections that have been relatively reliable in the past — and much of this planning has to be done eight years in advance, so it’s not all going to be accurate. In general, though, a 60-year-old baby boomer in 2010 doesn’t have the medical challenges you would expect by looking at the 60-year-olds of 2002, so many of the recently expanded hospitals are having trouble finding customers.

This is a trend that was already seen in 2008 and 2009. The big change this year is that more of the hospitals’ budget problem are being blamed on government programs, particularly Medicare. It’s true enough that Medicare reimbursements are disappointing at times, but the same is true of nearly all medical payment plans. The fundamental revenue problem at hospitals is a shortage of customers, who are not falling ill in the numbers that hospitals had planned on.

Hospitals have been putting the brakes on their spending, so there are not as many hospital bankruptcies now as there were last year. Unfortunately for hospital budgets, the trend toward people being generally healthier, particularly in their 60s, 70s, and 80s, is not likely to suddenly reverse. And there are other trends working against hospital revenue, even before you consider the political risks or the possibility of medical breakthroughs that may simplify the treatment of common illnesses. Many hospitals have taken on so much debt to fund their recent expansions that bankruptcy will end up being the only way out.

Eventually, I trust, hospitals will stop overbuilding, and the current thrashing in the hospital sector can begin to wind down. In the meantime, the sector‘s transition from growing to declining is sure to be awkward.

Newfoundland After Hurricane Igor

A week ago, I was relieved that Hurricane Igor didn’t turn in my direction. It stayed offshore, missing the North American mainland — but not Newfoundland.

The post-tropical remnants of hurricanes often brush by Newfoundland, but Igor was still very much a hurricane when it swept across the island, with 90 mph winds and 12 inches of rain in some areas, causing a surprising amount of damage for an island that is used to stormy weather. More than 100 stretches of road were washed away, including bridges that collapsed when flood waters undercut both banks. There aren’t a lot of extra roads in the hilly terrain of Newfoundland, so some towns are cut off from the rest of the island.

And they may stay that way until spring, authorities are now saying. Bridges can’t be rebuilt between now and winter, and there are too many damaged stretches of road to repair them all in just a few weeks. Rebuilding that can’t be done before the first big snow will resume in the spring. In the meantime, a few towns in Newfoundland may be a little more isolated than usual for the rest of the fall and through the winter.

Cost-Cutting: Corporations Cutting Their Own Throats?

Cost-cutting has become so ingrained in corporate culture since the 1980s that it may ultimately kill off much of the corporate system. Like a patient cut down by blood pressure medication or anti-cancer drugs, a corporation that initially undertakes cost-cutting for its own survival can end up collapsing because of it.

Cost-cutting is a good thing when it enables a business to decrease its losses or increase its profits by eliminating unnecessary work. But corporations under pressure can start making decisions out of fear. Cost-cutting then becomes expensive, as each new change results in more costs, leading to more changes, in a downward spiral. You can find examples of cost-cutting gone too far in every day’s business headlines.

Consider these recent high-profile examples:

• BP made zero progress on capping its out-of-control oil well as long as its CEO was personally taking charge of the operation. Within days after the CEO was removed, the oil mostly stopped flowing. That happened, I believe, because the CEO had been making engineering decisions based on the fear of the costs the company might face. When engineers took over the engineering decisions, and made them out of a basic sense of problem-solving responsibility, things started to work. (A parliamentary committee this month was not entirely convinced when the CEO testified that the oil well’s problems were the result of bad luck rather than cutting corners.)
• GMAC Bank, Fannie Mae, and probably other major institutions in the mortgage business are in big trouble after it emerged that many foreclosure affidavits filed with courts in foreclosure proceedings were signed by workers who did nothing but sign affidavits all day. Two officers in particular are said to have signed nearly 10,000 foreclosure documents per month, or about one per minute, indicating that they could not have known what documents they were signing, never mind reading and verifying each one. This shortcut approach saved the companies millions of dollars, but now they face embarrassing questions and tens of billions in new expenses, as lawyers file motions to withdraw the erroneous documents, and some past foreclosures are sure to be overturned. Ally Financial, the parent company of GMAC Bank, has been forced to suspend foreclosure evictions in half the country while it checks its paperwork, a process that may take months, and Fannie Mae may be facing a similar delay.
• Wall Street companies that rushed to sell mortgages to investors in 2007, before the market collapsed, made similar shortcuts in paperwork, and as a result, neglected to tell investors of the deficiencies in the mortgages. If this can be shown in court, the Wall Street companies could be forced to take the mortgages back and refund investors’ money, and this could easily lead to the bankruptcy of half of Wall Street.
• Documents turned over to Congressional investigators in the Johnson & Johnson case paint a picture of a drug-manufacturing executive obsessed with cost-cutting, to the point of authorizing a “phantom recall” of defective drugs that a contractor purchased from store shelves so that J&J could avoid the expenses involved in notifying the public, something required by law and a necessary step in any product recall. J&J initially claimed that the phantom recall had never taken place. Abandoning that story, its new story is that the phantom recall was authorized by the FDA. Investigators could not find any evidence to support that story, however, and the FDA does not even have the statutory authority to authorize a phantom recall. The cost-cutting obsession may also explain the hundreds of manufacturing lapses that led to moldy Tylenol being sold for more than a year, and eventually prompted hundreds of recalls and the closing of the factory involved. The cost to Johnson & Johnson: the reputation of Tylenol and other brand names may have been permanently damaged.
• PG&E had budgeted money in 2007, from a rate increase approved that year, to replace the pipeline that spectacularly exploded south of San Francisco this month, but postponed the project several times, finally scheduling it for 2013. The company pocketed the money in the meantime, according to critics. State regulators now are likely to order PG&E to accelerate its neglected maintenance, which will cost the company far more in the short run than the roughly $5 million it was keeping in the bank for the pipeline project.

It is normal for large corporations to shrink. Established corporations, in total, shed enough jobs every year to put the U.S. economy into a recession, if new companies didn’t pick up the slack. In an aging corporation, however, if cost-cutting moves create large new expenses, this can put a business into a downward spiral in which no amount of cost-cutting can restore the company to financial health. This is the position General Motors finds itself in after failing to significantly restructure itself in bankruptcy, and you could make the case that half of the conglomerates in the United States are perilously close to that same predicament. But large corporations depend on each other to a significant extent, so the failure of some large corporations could lead, in a domino effect, to the decline and eventual failure of others. Corporations could, in theory, avoid this outcome by being more selective with their cost-cutting moves, but with cost-cutting so much a part of the corporate psyche now, I am not sure that is possible in practice.