The Cul-de-Sac Syndrome

I've just published a book that millions will love to hate: The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (Bloomberg Press, 2009).

Here's an essay that summarizes the book. The conclusions are not pretty, but half the book talks about how to heal the country after the worst housing and credit crisis since the Great Depression. It's now in bookstores and at amazon.com and bn.com.

The Cul-de-Sac Syndrome and the Future of Housing

By John F. Wasik

Author, The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (Bloomberg Press, 2009), www.culdesacsyndrome.com

How did the U.S. succumb to one of the most devastating housing recessions since the 1930s? Was it as simple as saying that everyone from mortgage brokers to Wall Street just got greedy? Or did it have to do with Americans’ obsessions with ever-bigger homes?

Weren’t homes supposed to be the safest investments on the planet?
Much of what happened in this flood of exuberant optimism did not just happen overnight. The underlying causes of the debacle have been ingrained in Western culture for almost half a millennium, myths that came to full blossom precisely at a time when Americans’ view of themselves, their post 9/11 security and their shaky financial future was being tested like never before.

As it stands now, the housing bust may shake out as one of the biggest financial blow-ups in history, rivaling the Great Depression as more than $4 trillion in wealth evaporated. A bubble where demand exceeded realistic economic fundamentals was triggered by a number of uniquely American cultural values, desires and economic shortcomings.

Millions entered a financial cul-de-sac during this period of irrational exuberance. It may take years for them to escape from this dead end.
The stereotypical villains in this story have been Wall Street bankers, the government and greedy participants from speculating “flippers” to the Federal Reserve.

Although there’s plenty of blame to spread around when it comes to who was motivated by pure avarice or criminal exploitation, much of that picture has been illuminated. Those who thought they would profit handsomely have already been exposed, have taken their losses and are well known to anyone following this debacle. It’s far too easy, though, to point fingers at the purveyors of the usual human excesses. Something deeper and more profound triggered this crisis, something that lurks at the core of the American experience.

The nature of the American Dream – and what it has cost us – is what this book explores. How did we come to think that each home should be a worthy investment that propelled millions to leverage beyond their ability to pay? In an age of burgeoning info-technology, why are we still building homes with the latest 19th-century techniques?

What was the market behavior that drove homeowners into subprime loans and moving ever further out from jobs and cities? How did we come up with this idea that we should “buy as much house as we could afford?”

We’ve gotten stuck in an unsustainable cul-de-sac. After following the bubble and its aftermath for the past seven years as a personal finance columnist for Bloomberg News, I’ve gained some insights into urban planning, resource depletion, homebuilding techniques and economics that are disturbingly critical of the American dream of homeownership.

I am more intrigued at how America created what I call spurbs. These are car-dependent sprawling urban areas, unconnected to core cities by public transportation and beset by unsustainable costs for infrastructure, services and resources. As highly leveraged places now ravaged by foreclosures and falling property values, they will suffer the most in coming years.

How do we heal this syndrome? Even if the home market superficially recovers with higher prices, home starts and sales, there are some deep-seated problems that will haunt future generations if we don’t correct them.

Doubtless, it had been a great run. From 2000 to 2006, U.S. median home prices rose about 50 percent to an average $221,900. Whatever Americans were losing to inflation and stagnant wages during those boom years for housing, they were more than making up in their home values.

Family income only inched up 14 percent during that period. Yet home prices can only outpace family income for so long. After a while, the aberration had to disappear by what economists call ``regressing to the mean,’’ or returning to a historical average return, which is less than the rate of inflation when you subtract the myriad expenses of homeownership.

Was there something about the role of the home in American culture that convinced millions in a relatively short period of time that they could win the lottery just by taking out a mortgage? Could they suddenly re-invent themselves as passive investors and successful speculators who could ride the treacherous waves of the bond market, Wall Street’s propensity for bundling securities like frayed pieces of fabric and the property markets?

I submit that we need to do nothing less than reinvent the American Dream. Homes were unaffordable to begin with for nearly half the population. We can build them cheaper in factories within environmentally sound technologies. In the process, we can create millions of jobs and export technologies.

What about the communities that embraced the ever-expanding American home? What will enable a metropolitan area to grow in an age of expensive energy, rising taxes, constrained resources and an aging population? There are a host of approaches that I’ve culled from leading thinkers, research organizations and environmental groups.

• De-Link Property Taxes from School Funding and Local Development. In a handful of areas, this has been done. The key is to provide a diversified source of school and infrastructure funding from local, regional, state and federal sources. This will help address the reason why families move ever further out from central cities to find better schools and housing values. Educational quality simply needs to improve in every school district if America is to stay in the global economic game.

“The problem with U.S. education is a problem of inequality,” says Fareed Zakaria, a skilled observer of geo-politics. “This will, over time, translate into a competitiveness problem, because if the United States can’t educate and train a third of the working population to compete in a knowledge economy, this will drag down the country.”

• Prioritize Transportation Funding. Channel the majority of federal transportation subsidies into public transportation and road and infrastructure repairs. Rebuild the bridges, overpasses, grade crossings and roads we have now. Direct a greater proportion of federal dollars into urban light rail, zero-emission buses, trails, public transit, bike paths and inter-city high-speed trains. Provide funding to new communities that emphasize grid layouts to minimize street traffic. Minimize the building of high-speed, multi-lane highways. Provide tax incentives and financing for transit-oriented developments that are within walking distance of public transportation.

• Create Model Zoning Codes. This can be done on the local, county and state level. Allow for mixed-use zoning that encourages pedestrian and bike traffic and discourages sprawl while promoting green buffer zones. There should be model ordinances on the books for areas that want to create livable, walkable and bikeable communities.


• Update Building Codes for the 21st Century. Require that all new construction and communities be required to meet the standards set forth in the LEED, Energy Star or other local programs. Montgomery County, Maryland, for example, is mandating that new homes meet Energy Star guidelines. Mandate water conservation measures in homes and subdivision design. A national energy building code needs to mandate conservation for every new or remodeled building. On a local level, building permit fees can be reduced for green improvements. The city of Chicago, for example, will waive up to $25,000 in fees, depending upon the level of improvements.

• Create Green Jobs, Particularly in Blighted Areas. Millions of jobs can be created to refurbish sub-standard housing, installing energy appliances, building public transportation and retrofitting buildings. According to the Apollo Alliance, for every $1 billion invested in public transportation, 47,500 jobs are supported. Wind power creates 2.77 jobs for every megawatt produced; solar photovoltaic manufacturers generate 7.254 jobs. A comprehensive energy program should mandate all new buildings follow national efficiency guidelines and provide as much funding that was invested in the Space Race of the 1960s to carbon-neutral energy technologies. A tax on carbon emissions on every level – industrial, commercial and residential – will finance this research and development. In addition, take away the $47 billion in subsidies to the oil and coal industries and invest it in clean energy and building research and tax credits.

• Trim Real Estate Tax Breaks. Write-offs for mortgage interest, property taxes and capital gains distort and artificially inflate home prices. It effectively provides subsidies for those in the most expensive areas, ranging from $26,285 per owner-occupied unit in the San Francisco Bay area to $12,759 in Hawaii, according to a University of Pennsylvania-Wharton School study. Start with repealing the mortgage-interest deduction. Desirable areas would still be in demand if these tax breaks go away and prices may fall in others. That will enhance affordability.

• Fund a Smart Grid. Provide the necessary funding to update the electrical grid for this century. Ideally, the grid should be able to respond automatically to power surges without breakdowns. Supplement the grid with substantial investments in clean energy and modern electrical storage. Mandate that utilities provide services to tell customers when off-peak power is available and provide tax incentives for homeowners who want to create their own clean power supplies. Require net metering and buy-back of home-generated electricity. Enhance the tax credit package to a 20-year horizon for those who want to invest in clean energy production. De-couple utility industry profits from sales through tax credits. Reverse the paradigm: the less power they sell through energy-conservation measures, the more money they can make.

• Create Private Incentives for More Affordable Housing. Mandate that new developments offer a variety of housing by size and price, including rentals and high-density townhomes. When home prices rise by $1,000, another 217,000 are priced out of purchase. Offer builders tax breaks for keeping homes under 3,000 square feet and increasing density.

• Personalized, National Health Care. American mobility is largely based on employment. Millions not only want a better job with higher wages, they want freedom from catastrophic health expenses. The only way to achieve this is to de-link health coverage from employment (and the tax breaks provided to employers for offering health care). In a personalized, national program, the government can contract with private companies who bid for the business to underwrite policies that cover the entire country. This will enable people to be more productive, take any kind of employment and move wherever they want. It will indirectly help housing because Americans won’t be locked into communities. They may be able to move to less-populous areas and pursue telecommuting. A guaranteed universal savings plan for all Americans is also essential.


That brings us to the American project itself, which dictated that ordinary homeowners could indeed start over as housing investors. Investment homes would become not only their retirement fund but their college savings vehicle. Castles could be profitable as long as land became scarcer. After all, they weren’t making any more of it.

Star Trek Rocks

I just saw the new Star Trek. The characters are well written and ably fleshed out by the actors and director JJ Abrams.

Spock is my favorite, always wrestling with his human side to great effect. Spock is a living study in the split-brain theory -- or at least the old version of it.

On one side, logic and reasoning prevails. This is the enlightenment in action, the rational course of events. The other side is less structured and more seat of the pants.

Although neuroscientists now know that both sides work together and emotions permeate nearly everything we do, it's not easy to make that split down the middle of the corpus callosum, the wiring that connects both hemispheres. The brain is more like a network of networks. Sort of like an organic internet that tells the body what to do.

Nevertheless, Spock represents the duality of human nature. We want to do the right thing, but we always get tripped up by gut instincts, hate, envy, revenge, lust, greed and a host of other emotions that make us totally anti-Vulcan.

James Tiberius Kirk is all instinct. He seems to have very little time to contemplate his actions; he knows what he's going to do before he can access the thought. He's a hair-trigger, jump into bed, ride'em high cowboy. He doesn't seem to worry about consequences and has the confidence of a gunfighter.

Spock cannot complete his self or resolve his conflicts without Kirk, who is the man Spock could be but can't be. Together, well, they boldly go where no one has gone before.

Filling out this symphony of personalities is Bones McCoy, the ever-cranky doctor; Chekov, the bright kid with a syrupy accent; Sulu the warrior; Uhuru the linguist and Scotty the eccentric engineer. I'm not sure if every vessel has these kinds of folks on board, but they better if they want to go anywhere.

Anyway, the movie is great. I've seen them all plus the TV shows. The theme still sounds hokey, but it will put a smile on your face. The franchise is alive and well and freshened up a bit for a new century, although I'm not sure which one.

Yes, I was on Glenn Beck

This should be subtitled "What you can't get into a four-minute Fox News show and we're afraid to ask."

Yes, I was on the Glenn Beck show this evening. That was me, answering questions about the US real estate market, hoping I would not be one of Mr. Beck's shredded targets. It's nice not being a target.

The interview featured your humble scribe talking about why it's too soon to be optimistic about the US real estate market. I had to qualify my comments, since in reality there is no ONE US real estate market. There are metro areas, neighborhoods, regions, states and whole corridors where people are walking away from homes and ghost town developments. They have been devastated for different reasons.

* In South Florida, where I was a few months ago, developers overbuilt and speculators used the cheap Fed bubble money like it was buttered popcorn.

* In Southern California, prices were -- and still -- obnoxiously high relative to the rest of the country, so homebuyers did everything they could to get into a house. Bankers and real estate agents bent over backwards (play limbo song here) to get them into these homes, some of which were located in the sprawling Mojave Desert and blistering Central Valley.

* In Michigan and Northern Ohio, you know what happened to the US auto industry.

* Elsewhere, price declines weren't as severe as the West Coast. Still, folks are hurting.

I believe that a combination of unemployment, supply and demand (too many homes, too few buyers), the complexities of mortgage guarantees (not enough of them), the failure to stem foreclosures (they continue) and the aging of the Baby Boomers (were downsizing the love shack, baby) all contribute to this housing malaise, which could last for decades.

Since that's a lot to squeeze into four minutes, I'm afraid I failed on that account and must have sounded like someone who's just a pessimist.

I'm a realist and believe that the mainstream media not only largely ignored the bubble but is failing to grasp the long-term consequences of the housing bust. Here's a few observations, all of which I expound on in my upcoming book "The Cul-de-Sac Syndrome," now available for pre-orders on amazon.com.

* Aging boomers will not be buying McMansions or moving to sprawling burbs, which I call "spurbs" in my book. They will want to be near amenities like museums, music venues, universities and cultural treasures. That means condos and townhomes in cities and inner suburbs.

* Large-scale superstores and malls are going to shrink big time. Boomers are scared to death of their diminished nest eggs. First they got clobbered by the dot-com scam, then the credit bubble, then the housing meltdown. They know they will have to work and SAVE much longer than they anticipated. They won't have their parent's retirement.

* Those places that were overbuilt (there are several lists in my book) will be crippled for perhaps a decade, maybe more.

* Congress and the Obama Administration haven't even begun to address the housing meltdown. They're going to have to do a LOT more than offer first-time homebuyers an $8,000 credit and a $1,000 check to loan servicers to modify the interest rate on mortgages that may be foreclosed upon. Mortgage guarantees need to cover most of the market for at least 10 years, either through Fannie Mae and Freddie Mac (which need to be restructured) or the FHA. The secondary market for mortgages either needs to be reinvented or government sponsored. Either way, you need to be able to sell a mortgage to an investor again.

* Congress needs to get realistic about lost equity. Some $6 trillion is gone and not coming back. I know the Senate killed a bill that would have allowed home owners to write down mortgage principal in bankruptcy, but that needs to be reconsidered. Write down the evaporated equity and move on. That's what the banks are doing.

So, dear readers, I can't possibly cover this ground (and more) in four minutes on national television, so I hope that you'll forgive me and give The Cul-de-Sac Syndrome a try. It will take more than four minutes of your time, but it might give you some novel ideas. For too long, "home was where the heart is." Let's start using our brains again when it comes to our domiciles.