Friday, August 14, 2009

How to Fix US Housing Long Term

This is a piece I wrote for HNN.US.

For more information on the book, see

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 my 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.

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