We've had this discussion before,
National median home prices have increased by more than 45 percent in the last decade (when adjusted for inflation). Average wages per worker, on the other hand, have only increased by 10 percent in the same period.
As a result, for almost the first time ever, individuals who are making the median household income cannot afford to buy a median priced home...
Why is the disconnect between home prices and fundamentals dangerous?
Just ask Japan. The country experienced a similar housing boom in the 1980s and is still reeling from the damage caused when the bubble burst.
Almost every circumstance leading up to the Japan housing crash has been present in the U.S. during the last decade:
* Historically low interest rates [kept intentionally low by that lunatic Greenspan to spur this bubble]
* Housing touted as a 'can't miss investment'
* Average home prices doubled
* Average home prices in the six largest cities tripled
* Lenders offered bad loans
* Government acted as a partner to industry
* Home price increases far outpaced wages and rents
To be clear, I think home ownership is a great and wonderful thing. I also think the government has a role to play in making it possible. But proceeding under the dementia that home ownership in and of itself was going to raise all boats, while ignoring the growing wage disparities, was criminally stupid.
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Why, they're just not
Why, they're just not working hard enough, I'll bet some of them only have TWO jobs, not three or four! Slackers!
Cause and effects?
I have wondered for several years now who buys all these $300,000 homes in Knox County. Stats relating to our average household incomes seem to indicate that most of us can't afford them.
Hence the booming sub-prime mortgage market, maybe?
And hence the increased incidence of "cheating" in my suburban community to obtain social services, as well?
(My 1500 square foot rancher is grand for nine months out of the year--we built oodles of covered porches and patios! That's $13/sq ft!)
I have wondered for several
I have wondered for several years now who buys all these $300,000 homes in Knox County. Stats relating to our average household incomes seem to indicate that most of us can't afford them.
I've wondered the same, and it's just not Knox County, its across the US. It's not like hundreds of high-paying jobs have been created to pay for them.
New car prices, too?
I'm reminded of some of my father's papers I came across several years back, following his death.
For the year 1973, Dad's W-2 reflected $22,000 in earnings. To my knowledge, his income was good, but not extraordinarily high. That same box of papers, though, contained the purchase order for a *new* 1973 Plymouth Satellite Sebring he had bought for $3,400. I recall calculating that on Dad's salary that year, he could purchase 6.47 new Plymouth Satellite Sebrings!
If we assume that the average cost of a new car today is $20,000 (I have no idea), then in order for a worker to purchase 6.47 of them annually, he would have to earn $129,400 per year, an amount significantly higher than any average wage I've ever seen reported for Knox County.
So, have new car prices also increased disproportionately, (or did I maybe grow up in a family much wealthier than my own is today)?
A little bit of both, perhaps
From the inflation calculator at bls.gov:
What cost $22000 in 1973 would cost $103211.22 in 2007.
What cost $3400 in 1973 would cost $15950.82 in 2007.
--edited because I can't cut and paste apparently
Conspicuous consumpsion up
So, I was a little bit rich at one point in my life? Who knew!
I certainly didn't get any Sweet Sixteen party for that birthday, nor a used car, either. This concept of a Senior Trip at high school graduation was unheard of, too. I recall getting a 13 inch B&W TV in my bedroom for HS graduation, the first one in our household to be placed in any bedroom. My dad mowed his own lawn.
It seems to me that our societal taste for conspicuous consumption has risen. I hear my own children speculate about how "rich" one friend or another might be. When I was their age, I had absolutely no concept of such things...
Yes, car prices increased
Yes, car prices increased exponentially; it's related to the same easy credit phenomenon. I sat through an excellent lecture on that a while back. I'll try to look if the speaker has anything online.
In addition to inflation,
In addition to inflation, one also has to consider that the average worker's wages have stagnated. The real buying power of a worker in 1973 was considerably greater than it is today.
The housing market has created the illusion that this isn't the case; increasing property values have masked that fundamental decline in buying power. What's more, people borrowed against those increased values, which means they're now saddled with unsecured debt (and for a lot of people, indentured servitude, since they're no longer allowed to declare bankruptcy).
Yes, that's true. Part of
Yes, that's true. Part of the onus has to be put on consumers for their failure to save. But I don't think one can read too much into the availability of cheap consumer goods like TVs (conservatives like to babble on about how everyone now has a microwave, which is supposed to prove that all boats are rising) or the expansion of the service economy, making it easy to outsource one's lawn work.
The bottom line is that, despite the trappings and appearance of wealth, most Americans are far less financially secure than they were 35 years ago. And a major reason for that has to do with what used to be called public policy.
People keeping saying they own things, but
Most people are up to their eyeballs in credit debt. They have a lot of things, but they don't own a lot of things. Most of the time they are in the business of paying for a lot of things. And with the loose credit, just like the loose mortgages, they won't be able to pay their debt down for years and years, and some will have to go bankrupt. Though recent laws have made that tougher now. They (the shadowy mean guys) probably realized if the APRs went up too high, half the country would be lining up to get into bankruptcy court.
Obviously
We own three cars. You would likely guess by looking at them that they're paid in full ;-)
What gets me is that even
What gets me is that even before the subprime lending fiasco, people were being enticed to get home equity loans, up to 125% of their property values (which would not even technically be an "equity" loan), to pay off other debt including credit cards.
So if you follow that logic, you are buying a 15 or 30 year mortgage to pay off a pair of shoes or an expensive dinner that cost two or three hundred dollars and that you maybe shouldn't have bought in the first place that will now end up costing you thousands of dollars after interest, long after the shoes are worn out and the dinner is a forgotten burp. And now your house is in hock, too. But I guess you have the bonus of turning unsecured debt into secured debt.
Idiocracy, indeed.
1986 "overhaul"
"...even before the subprime lending fiasco, people were being enticed to get home equity loans, up to 125% of their property values,...to pay off other debt including credit cards."
IIRC, it was in 1986 that Reagan "overhauled" the federal income tax process, eliminating the itemized deduction for all consumer interest expense except mortgage interest.
Of course, one impetus for consumers to consolidate credit card debt under mortgages (or second mortgages or equity lines) was that interest rates were skyrocketing and mortgages represented the lowest possible rates. Still, the scramble to preserve one's income tax deduction must have exacerbated the problem, I would think.
I wonder, if only 20 to 25% of filers are able to itemize deductions today, how much greater was that percentage prior to the 1986 "overhaul?"
"Something really bad is going to happen"
My daughter worked in the mortgage part of a bank and years ago she saw this home equity disastor coming. Everybody was doing it, and people were buying expensive houses that cost too much because mortgages were cheap.
Part of the blame has to go to the "live-for-today" mentality. And those feelings always come from a feeling of hopelessness.
Also the government is acting like a loose horse when it comes to spending and finacial repsonsibility, so many people feel like it's okay if they act that way too.
Why not?
In a world where so few political leaders, celebrities, and corporations are held accountable for anything, it's easy to understand why a lot people have given up on trying to be honest and prudent.
The beginning of bottomless demand
I was a credit union loan officer in the early and mid-eighties.
Yuppie-dom was in full bloom and there was much ado about Dressing for Success, compelling lowly clerks of both genders to dress in suits they couldn't afford and carry superfluous attache cases. The Sharper Image was doing a booming mail order business for equally superfluous electronic gadgetry at shockingly high prices.
The IBM PC-AT (with a 20M hard drive) ran well over $2,000 and VCRs, also new on the market, ran around $1,500. A pocket calculator might cost $300.
I was writing unsecured loans for all of these items hand over fist. Our institution's loan committee, which set rates and policies, had jacked that unsecured loan rate up to 24%, specifically to slow the demand, but it had virtually no effect.
I tend to mark that period as the beginning of a long-running trend that continues today.
Yes, car prices increased
Yes, car prices increased exponentially;
However, car features have increased phenomenally as well.
In 1973 it was a luxury (and an option) on most cars to have airconditioning, radios (must less tape decks), carpet, power windows, auto on lights, auto off lights, remotes, cup holders, re-configurable seats, anti-theft, decent tires, sun roofs that didn't leak, etc, etc, etc.
Pessimism?
Part of the blame has to go to the "live-for-today" mentality. And those feelings always come from a feeling of hopelessness.
I disagree. I think it's due to optimism - I'll get a raise, I can't lose MY job, the folks will bail me out, etc. Either that or pure cluelessness.
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Less is the new More - Karrie Jacobs
Ah, yes..magical thinking...
Though sometimes I do believe the theory you only get what you subconciously expect to get...those who rely totally on wishful or magical thinking should rememeber the old adage," Wish in one hand and spit in the other".