It had to happen. A man's home, that which has long been presumed to be his castle, is no longer a simple refuge from the world; it is instead a commodity in the new economy and the momentary key to the flimsy prosperity of our time. While most of us were distracted by the comeuppances of America's innumerable Ken Lays and the puncturing of the infamous Internet bubble of the late 1990s, a replacement phenomenon appeared on the field of play: the housing bubble, or what Fortune magazine calls, with pardonable hyperbole, the "real estate gold rush."
Americans, many of them at least, never learn. The something-for-nothing ethic of the '90s and its legacy of financial ruin should have taught some lessons. Apparently not. The smiling, shark-like visages of predatory CEOs and stock-market manipulators from a few years back have been replaced by similar faces, younger perhaps, of housing speculators -- the realty equivalent of the day traders of yore. Like their predecessors, they, too, plan to get rich quick by gaming the system, and damn the consequences.
As is the case in most free market frenzies, there are a few winners and lots of losers. The winners, Fortune ruefully admits, really are getting rich -- on paper. It documents the activities of what it calls "pure investors," the 10% of home buyers who exhaust their savings and buy on extreme credit simply to resell a few months later, doubling or tripling their money in a market gone mad. For the moment, they're ahead of the game, out of cash but flush with equity, watching houses purchased for, say, $125,000 appreciate to $300,000 or $400,000 in a year or two. Such good luck has, in turn, inspired others to take the plunge, buying multiple properties and hoping the housing market, unlike the stock market of a half dozen years ago, continues to expand. The number of chapters of the National Real Estate Investors Association, reports Fortune, has quadrupled in less than three years.
The housing-investment mania, complete with mass instructional meetings, motivational speakers, and best-selling how-to books, is based on average American home prices that have risen, according to the National Association of Realtors, from $165,000 in January 2003 to $210,000 in April 2005, with sales up over a million units a month in that time. In the past year alone, the cost of a median family home rose 15%, breaking the $200,000 barrier for the first time. Median prices in individual localities are worse (or better, if you're an investor/seller): New York City -- up 77% since 2000; Miami -- up 92%; San Diego -- up 105%. The bubble has swelled to its maximum in southern California, Florida and the Northeast generally, but its effects are felt everywhere.
From the viewpoint of the speculators, this is the best of times. For those in need of an actual residence, it's a disaster. In 1997, again quoting Fortune, the average price of a California home was $186,000; today, it's $495,000. Mortgage interest rates are low, but what good is that if you can't meet the skyrocketing prices? Houses, says The Economist, which has long noted the detrimental effects of the realty bubble, are now far more expensive in relation to incomes; their median price, 2.75 times median household income in the late 1990s, is now 3.40 times median income. Moreover, say economic analysts, home values are historically overpriced by as much as a third, clear evidence, along with rising foreclosure rates, of a bubble about to burst.
If (more likely, when) the bubble bursts, it will take down everything in sight, including a shaky economy that has come to depend on rising house construction and home equities to stimulate employment and consumer spending, and keep the US ship of state off the recessionary rocks. According to the chief economist at Fannie Mae, the government-sponsored mortgage lender, housing activity now accounts for over 30% of the national economy (versus a normal 20% to 25%), but at current prices, income-poor Americans will sooner or later be unable to add to the stimulus by purchasing homes. Radically rising prices combined with inflated home equity means the future housing market will be limited to present homeowners able to "trade up"; those on the outside looking in, however, will stay there, especially if interest rates rise. That's where the role of the new realty investment speculators in bidding up prices becomes fatal, exposing the nation's economic Achilles heel.
Typically, when home purchase prices go out of control, as now, those in need of housing turn to rentals; bad times to buy are usually good times to rent and vice versa. But in a perfect small scale economic storm, the high price of homes has begun to force potential buyers back into a rental market where undersupply, over-demand, years of government policy neglect and uncontrolled price gouging have eliminated most affordable rents. The number of available apartments nationwide, especially for poorer families, has been in decline since 1970, when surplus rental housing last existed. Partly, this reflects the federal government's abandoned commitment to public housing (HUD no longer builds new tenant units); partly, it reflects an end to national tax policies that encouraged the building of medium- and low-cost rentals; and partly, it reflects a precipitous decline in localized rent control across the country.
With affordable rentals becoming an endangered species, persons frozen out of the housing market by runaway purchase prices are caught between the proverbial rock and hard place. No answers are forthcoming from the Bush administration, but a unique proposal has surfaced in Great Britain, which is suffering from housing problems similar to those afflicting the US. The approach, a brainchild of the Labor party's Gordon Brown, chancellor of the exchequer in the Blair government and Tony Blair's designated successor, is called "shared ownership." Under Brown's plan, less affluent home buyers would no longer have to bear the full brunt of mortgage costs; instead, they would finance just 50% to 75% of the price of a dwelling, and the government would pick up the rest at low, pre-negotiated commercial rates. It's an imaginative twist on the concept of residential subsidies that Americans might well consider as we deal with our looming housing crisis.
Wayne O'Leary is a writer in Orono, Maine.