In yesterday's column, I discussed mounting evidence that the continued lack of demand by first-time homebuyers is indicative of a structural/systemic/permanent change/shift in consumer attitudes toward housing. And that shift is also indicative of a profound change in how the U.S. economy functions.
Today, I will discuss the implications of that change.
Since the New Deal programs of the 1930s, including the creation of the Federal Housing Administration (FHA) in 1934 and Fannie Mae in 1938, the U.S. government and the elected officials running it have pursued programs encouraging home ownership.
The original impetus for this was the Great Depression and resulting collapse of the housing industry. The initial response was intended simply to provide support for getting that sector of the economy growing again. Over the next generation, however, government officials realized, with hindsight as a guide, that increasing home ownership provided an immediate boost to economic activity that, by extension, increased their prospects for reelection.
That is what gave rise to the idea "as goes housing, so goes the economy." It's also why achieving the "American dream" became to be considered synonymous with home ownership, which also encouraged ever more government support.
In the process, home ownership rates rose steadily, from about 40% in the 1930s to a high of about 68% in 2006. Simultaneously, average home sizes increased, over the same time, from about 1,000 square feet to about 2,300, while average family size decreased from about four members to about two and a half. As a result, by 2006, the average floor space per occupant in a home was equal to what an entire family had in the 1930s.
What was the prime driver of this seeming virtuousness of home ownership? The increasing amount of leverage a borrower was allowed to employ to become a mortgagor.
And this is where the problem really begins.
Prior to the 1930s homes were largely considered consumption items that were either purchased outright or with loans with durations of about 10 years and 50% down payments. But from the New Deal era forward homes increasingly came to be considered investments, vehicles that would appreciate in value.
Even though average home values after accounting for taxes and maintenance provided no real return, because consumers focused on nominal prices rather than real prices the idea that they were investments became socially ubiquitous. Along with this, first-time buyers were conditioned and encouraged to leverage themselves to the greatest extent possible when purchasing. This was the primary driver for the increase in home sizes from the 1930s onward.
But as home sizes increased, so did their costs, and both grew faster than incomes or real economic activity. Although this activity did appear to provide a catalyst for a virtuous cycle of economic activity in the immediate term, in reality it was a colossal pulling forward of consumption.
Primary residences are not investments. They are consumption items and liabilities indicative of lifestyle choices, which is what they were considered prior to the 1930s. Income allocated to housing is consumed and as such not available to be invested for greater returns elsewhere in the productive economy.
The crashing of home prices, starting about a decade ago, appears to be the wake-up call to this reality for younger generations, as well as the notion that the housing sector's impact on the economy from the 1930s to 2006 was essentially a generational Ponzi scheme.
And if this is indeed the case, it is indicative of the fundamental structural change in the economy I wrote about.
While this change will likely prove to be a negative for the housing sector -- builders, mortgage lenders, insurance companies and home-furnishing companies -- it should also cause real economic activity to increase, as capital is incrementally reallocated by the younger generations from housing-related consumption toward areas of the productive economy that provide greater financial multipliers and thus real investment returns.
If this structural shift in consumer attitudes and the economy is occurring, then fiscal authorities will have to realign policies to encourage activity in areas other than housing. The most logical shift would be to allocate fiscal resources toward domestic infrastructure spending for the rehabilitation of physical resources such as roads, bridges, power stations, ports, and transportation-related facilities.
This would also include investments in technology for universal broadband coverage, high-speed internet access, alternative energy generation, and technologies dedicated to reducing the cost of health care.
Much of this funding could be provided through an expansion of existing tax credits and deductions provided to the private sector for deploying capital, just as the mortgage interest tax deduction has been focused on promoting home ownership for the past several decades.