August 4, 2007 § 14 Comments
There is something profoundly wrong with an economic system in which multimillionaires are considered to be working-class.
It’s really sad, but it’s not difficult to fall into your own rather limited reality. The rich can’t relate to the working class who can’t find work, while the working class can’t relate to the rich who feel they deserve a million dollar salary. It’s not right, but it is their reality.
Fair enough, but what troubles me is that entire sectors of the economy–in this case, the California housing market–are geared toward the top 1% of earners. If multimillionaires are “struggling” to keep pace, then what of the other 99% of the population? As one of them says in the article: “I don’t know how people live here on just a normal salary.”
At the end of the day, it is one thing to “struggle” to afford a Saab and a 3.5 million dollar home, and quite another to “struggle” to provide the basic necessities of life for oneself and one’s children. To describe these different realities using the same language makes them somehow equivalent, and risks making the latter invisible.
What I’d really like to see is a front-page article in a major national newspaper which examines the financial lives of California’s schoolteachers, or social workers, or firefighters. What pressures do they face in the new “Gilded Age”? Given the recent collapse of the US mortgage industry and the effect it is already having on world financial markets, it might tell us something important about the long-term unsustainability of our current economic practices.
There is a similar real estate phenomenon developing out here on Vancouver Island. Slightly less over the top, but you’d still struggle to find a nice house for less than four hundred thousand dollars. And at the same time the homeless are a prominent feature of the downtown core. Craziness.
“Given the recent collapse of the US mortgage industry and the effect it is already having on world financial markets, it might tell us something important about the long-term unsustainability of our current economic practices.”
What does the collapse of the US mortgage industry have to do with teachers vs. “rich people”
I agree that this was a very stupid article and I’m a little surprised people allowed themselves to be quoted, not thinking about how this article would be perceived.
But how does this article have anything to do with the “long-term unsustainability of our current economic practices.”? My understanding of the mortgage crisis is that people who couldn’t afford mortgages are now defaulting and hence today’s problems. Why are these people buying homes they can’t afford . Thats why there are rental apartments.
Just to be clear, I’m not attacking you here. I’m really interested in hearing your (and other perspectives) because I think that the “rich” take a lot heat just for being “rich”. I think capitalism works. Yes, it needs checks and balances, but being “rich” is not a bad thing in, and of itself.
(apologies in advance for any typos)
NYC: Thanks for writing. A couple of quick points, which I’d be happy to expand on later.
1. As I see it, everything is linked to hyperinflated housing prices, and, by definition, hyperinflation is always unsustainable in the long term. By way of illustration: according to Forbes.com, only 3% of the homes sold in Los Angeles in the first quarter of 2007 were affordable to households earning the median income. Think about that for a minute; that’s a housing market in which 97% of homes are out of reach to all but high-income earners. As you say, the rest can theoretically rent, but increased housing costs invariably lead to increased rents, which makes affordability an issue for renters as well.
2. It isn’t just people who couldn’t afford their mortgages that are fuelling the mortgage crisis, and, with it, the downward pressure on the stock market. According to the New York Times, defaults are already spreading to credit-worthy homeowners, and the problem is expected to get substantially worse over the next two years. As it is, the US is experiencing a higher rate of home foreclosures than at any time since the Great Depression, which is bound to have an effect on the larger economy. In fact, it is already impacting corporate borrowers, as this recent report makes quite clear.
So, no, it’s not about a simple dichotomy between “rich” and “poor”; it’s about what happens when a market is driven by short-term profits rather than longer-term viability. It’s bad for the economy, but more importantly, it’s bad for society, since, arguably, no market is as central to family and community life as the housing market. Everyone needs, and should have a right to, a place to live, after all.
BTW, be sure to check out the links I’ve provided to the articles mentioned above–you’ll see them if you move your cursor over the cited sources.
well NYC it’s much broader problem than you would think. Something in the neighborhood of 75% of home loans in California are what are termed as non traditional- Interest only arms and sometimes Neg Am Loans. Which just means that basically 75% of Californians couldn’t afford their mortgages to begin with-which goes beyond subprime loans and into Alt A loan(people with ok credit)/prime loans(people with great credit/assets). As many loans are just starting to balloon up to their longterm payments now(what the industry calls “payment shock”) the defaults are only just beginning. It’s become especially problematic-because, a lot of people, I think, were banking on getting equity through rising housing costs and then refinancing now-but are finding that they can’t because housing prices have been dropping/are flat. At this point, if you sold your house, you might actually sell it at a loss-or not at all-because home sales have slowed down. It’s connected to global markets because international investors(particularly in asia) have tended to buy loans-seeing it as a relatively safe investment-but less so now-which is why you are seeing a lot of subprime/alt a companies shutting down.
ps. you would survive in menlo park/palo alto by living in San Jose.
Right; it’s a reasonable one hour commute with normal traffic. Great way to live–this is why nobody feels rich, because you make a lot of compromises for something that frankly isn’t that special. Say you live in Menlo Park–you might have a very average looking house that cost you over a million dollars, you probably have a 45 minute commute to work and no social life because even if you live within walking distance to “downtown,” there are only a handful of restaurants–and they all close by 9:30. You think that you can pay more and have a better life, but really, San Jose is the same story, just with more middle-class incomes. Actual poor people live in Tracy.
The quality of life is poor even for the rich and middle class because of how the land has been developed. EVERYBODY commutes, which is what happens when private groups have so much control over public land use. Yes, I know the companies buy the land, but it’s an issue of scale. It’s crazy when you hear ads for subdivisions that are the size of small towns–then you realize that the company isn’t just building houses, but they also decide where the parks go, where the schools go, where the roads will be and basically how people are going to live in their new homogeneous “community.” But then, they aren’t actually creating towns, so they don’t have to think about public good, only their consumers. People think differently when approached as consumers than when they are questioned as citizens.
I was hoping you two would chime in. Thanks…
Thanks for the responses and the links. I’ve read those articles. I actually work on Wall St. so all of this sub-prime default mess is near and dear to my heart (yes, Wall St. folks do have hearts).
I agree that people deserve a place to live, but the primary rule should be don’t buy above your means. If you can’t afford to buy, why get a loan for 90% (or in some cases 100%+ if you’re financing the down payment and closing costs) of something you know is overpriced? Yes, it can be frustrating to rent and wait (I rent in NYC so I know that feeling), but I can link to countless articles and cover stories over the past 5 years warning about the “top” of the housing bubble. “Affordable housing” is generally defined as paying 30-35% of your income for housing. If this is exceeded when thinking about buying a home, maybe you should think twice. Homeowners with shaky finances decided to gamble. Some of them are losing that bet. I’m not insensitive to that reality, but lets not leave that out of the discussion.
A default on a mortage is not caused by “the market” or by what happens to Countrywide Financial, Citigroup, or JPMorgan Chase. Default is caused by someone not being able to pay their obligations. Now, barring a job loss or a significant cut in salary (and I havent seen any data that says that defaults are being caused by layoffs), home buyers get a detailed mortgage schedule and there are plenty of mortage calculators available on the web to allow someone to think ahead about their liabilities. Most brokerage websites (e.g. http://www.corcoran.com) have these calculators right next to the home listings.
No one forces a borrower to take an IO loan. Yes, there are shady mortgage dealers, but I refuse to believe that the majority of defaults are being caused by borrowers who “had no idea” that there was a potential for rates could go up.
Rather, I think that folks got caught up in the hype and believed that home prices would keep on rising and would protect them. I’m not that old (under 30), but even I know that real estate is not a “sure thing”. Bubbles are fueled by greed & lack of foresight.
I agree that this environment is not sustainable and there are a variety of discussions we can have around the lack of affordable housing across the country, but I think those are slighty different issues.
Ultimately, I believe in supply and demand. If no one buys those overpriced homes then prices get reduced, or sellers pull listings and wait (assuming they live in those homes and aren’t specualtors).
I have to come back to my original point: when 97% of the real estate in a metropolitan area is unaffordable to average-income earners—not low-income, but average—there is a serious problem with the market. Of course, people shouldn’t make financial committments that they can’t afford, but people in high-rent areas are often encouraged to buy because the short-term cost of doing so is comparable to renting. Thus, we return to the issue of prohibitive housing costs that invariably trickle down to renters, who are in a no-win situation.
Moreover, people who are struggling to make rent or mortgage payments on hyper-inflated homes are not putting that money into other sectors of the economy. They’re not buying cars or other durable goods, they’re not taking vacations, and they’re cutting down on entertainment and leisure. Add that to high gas prices that show no sign of decreasing and you have a recipe for a full-blown recession, which some analysts are already predicting.
Finally, I would like to see stats on how much of the housing bubble was fuelled by speculators. From what I’ve read, they were a factor in driving prices up but that’s as much as I know. Uberfrau, any thoughts on this?
Part of the issue that hasn’t been brought up is the strong bias against living in apartments or townhouses. Growing up, if you didn’t live in a suburban house, it meant that you were really, really poor (especially since there are plenty of poor suburbs). Because of our history, having experience phenomenal growth only in the Twentieth Century* when personal automobiles were taken for granted, California is the most suburban state in the country. I recently saw an interesting exhibit about it at the San Jose art museum that you may want to check out (http://www.sjmusart.org/content/exhibitions/current/exhibition_info.phtml?itemID=272).
With the exception of San Francisco, most cities here are not truly urban. Socially, I don’t think that we have caught with the reality that we need to build up and not out in order to have affordable housing–especially the idea that middle class people may only be able to afford a townhouse or apartment instead if a traditional picket fenced single family home. Moreover, dense housing tends to be in large “complexes” that have the disadvantages of the suburbs (boring) and the disadvantages of urban living (close quarters). For new developments, land costs so much that the houses will be expensive regardless, so if you are developing a large area of land, usually on the outskirts of a city, you may as well make them “luxury” McMansions, because the house is not where the true cost is incurred. People are willing to drive from Temecula to San Diego, for example, because they can get the house there that they think they should be able to provide for their family as average wage earners. That is where the disconnect truly is–the idea that we have to go from suburban neighborhoods to urban ones is a bitter pill for many middle class people to swallow, especially when we have always idolized the opposite.
*Here’s a nice chart (http://www.npg.org/states/ca.htm).
It’s amazing how the same economic problems can be experienced so differently depending on which side of the continent you happen to be on. New York had a similar aversion to apartment housing in the late nineteenth century, as it was associated with tenements and therefore extreme poverty. The first apartment houses that were built there were marketed as luxury residences in order to overcome this perception, a strategy that continues in the city today. (Literally today!) In order to find affordable housing, you have to venture far into the exurbs, which are in real estate terms increasingly déclassé.
In any case, the art exhibit looks quite interesting. Thanks for the link.
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