The housing market is one of the most distressing indicators of long-term economic damage. The home pricing index fell once more in the first quarter, putting it off 33% since its 2006 peak. It only fell about 31% during the Great Depression. CNN quotes a Standard and Poor’s spokesman lamenting that “home prices continue on their downward spiral with no relief in sight.” Many analysts say it will take fifteen to twenty years before the housing market truly recovers.
The damage from the subprime-driven housing crisis is more profound than many people realize. I make this judgment because not enough people are howling for the heads of the politicians who caused it.
The drop in home prices wiped out trillions of dollars in personal net worth. Home equity used to be one of the most important investments for much of middle-class America. Owning a home increased consumer confidence. The responsibility of owning and maintaining a home encouraged a certain degree of prudence, and made homeowners feel connected to their community. That’s largely gone now, and it’s not coming back for a generation.
A flood of easy home-loan money led to a massive construction boom. Further borrowing occurred as artificially empowered home owners used the growing equity caused by surging home prices to turn their houses into piggy banks. When the bottom dropped out of the market, many of these new homeowners found themselves trapped “underwater,” with gigantic balances pinned to real estate that suddenly lost most of its value. The sense that selling a devalued home was essentially impossible turned these houses from assets into mousetraps, in the eyes of their frightened owners. In turn, reduced consumer confidence fueled our economic slowdown.
The market is now flooded with cut-rate existing inventory, which naturally reduces demand for new homes. That’s brutal for the construction industry, which is a significant component of the private sector, especially when you consider all the suppliers and equipment manufacturers who are also affected. No construction means no jobs.
The slowdown in new construction also means a halt to the improvement of new property, which slows down the overall creation of wealth in our system. New home construction causes a given parcel of land to become more valuable, because a house is now sitting on it. Large amounts of new home construction produce broad increases of value, as services and infrastructure are attracted, and a clump of new houses becomes a town.
I live in an area which saw explosive growth in the 1990s and 2000s. You could see communities forming with remarkable speed, bringing grocery stores, gas stations, shopping malls, and other amenities in their wake. The creation of value was stunning. Now many of those houses and shops stand empty. No one is being hired to work in the deserted strip malls. So much value has been lost.
Where do people live, when they’re not buying houses? They move into rental properties, where none of their monthly payments accrue as equity. A homeowner buys a little bit of his house with every mortgage payment. A renter earns nothing. Think of all the net worth that is not accumulating right now. Think of all the value that will not be available upon retirement, or passed on to children through inheritance. Coupled with the insolvency of Social Security, it conjures visions of a future where people retire with empty pockets, and countless parents have nothing to leave their children but debt.
The promise of owning a home has provided incentive for many young people, especially couples looking to begin a family. In the haunted graveyard of the U.S. housing market, they have nothing to look forward to, except renting a slightly larger apartment. Measured in dollars, the Fannie Mae meltdown was perhaps the largest experiment in the government manipulation of value in the history of mankind. The scale of its failure is difficult to appreciate. The damage will be with us for a generation to come.