Tag Archives: American Dream

Argument: homeownership is not worth risky financial situations

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Megan McArdle argues that policies and leaders promoting homeownership for those with less resources are doing a disservice:

Because, I think, most of us still haven’t managed to shed the idea that buying a house is a good way to get some unearned bonus wealth. Too many people managed to do just that for too many years. We think of 2008 as an aberration, rather than reversion to the mean. And that’s a costly mental error.

The long, steep increase in American home prices from 1946 to 2008 was driven by a whole lot of trends that are hard to repeat: the invention of the 30-year, fixed-rate, self-amortizing mortgage, which allowed people to pay more for a house by lowering the monthly payments. The securitization revolution, which lowered mortgage risk by bundling the loans into large, diversified portfolios, thereby lowering rates. Rising inflation, which pushed up the price of houses. Falling inflation, which lowered interest rates and monthly payments still further and allowed people to pay even more for those houses. The credit-scoring revolution, which allowed banks to offer loans to more people, increasing demand for the existing housing stock. And in dense coastal areas, you also had the rise of NIMBY zoning laws, which made housing scarcer and therefore more expensive…

Which is not to say I am against buying homes. I am very much for buying a home — so much so that I went and bought one myself a few years ago. But buying a house is a good idea only if you meet the following conditions:

  1. You can afford a sizable down payment to cushion you from the effects of local economic downturns or you have a super-stable job, such as working for the government or your father-in-law, that makes you unlikely to ever miss any payments.
  2. You can afford the maintenance as well as the payments, insurance and property taxes.
  3. You have good disability and/or mortgage insurance to make sure that you do not miss any payments even if you break your back and can’t do your job anymore.
  4. You are pretty sure you do not want to leave your area or move to a larger, more expensive home anytime in the next five years.
  5. Your payment is a reasonable percentage of your take-home pay (I shoot for under 25 percent; anything over 35 percent is far too risky).
  6. You have a sizable emergency fund to deal with contingencies.
  7. You can afford other forms of savings, rather than counting on your house as a piggy bank for future needs. In general, if declining home prices would send you into a hysterical panic about your financial situation, you are buying too much house.

If you do not meet these conditions, then buying a house is gambling — not just on rising home prices, but also on the continued soundness of your roof, boiler and plumbing. If you wouldn’t borrow the money to go to Vegas, then don’t borrow it for a house, either.

It sounds like McArdle is concerned with two issues:

1. People have not learned the lesson of the housing crash: housing prices do not inevitably go up. They may go up – and generally have over time – but this is not a guarantee. If you don’t accept this premise, then you will treat real estate differently.

2. The general American desire for owning a home is not enough compared to economic realities. Americans generally like owning homes: they are part of the American Dream in symbolizing status, we assume homeowners are less transient and care more about their communities, and they allow for individual freedom. But, if people can’t properly afford them, McArdle says it is not worth stretching financial bounds to make it possible. Instead, we need sound principles like saving up your money over time to make a good down payment on a house.

Both are valid concerns. Generally, Americans like seeing homes as an investment as well as an essential part of a successful life. Telling them otherwise may not be popular for politicians…

“Identical twins find identical houses”

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While the full story is hidden behind a paywall, the picture you can see says it all: two identical twins found identical houses right next to each other.

I know very little about the twin literature but I wonder if anyone has made any connections regarding the housing choices of twins. The American Dream tends to promote individualism in consumption – even among mass market items – and a house that you buy is supposed to say something about you or be your face to your neighbors and the rest of the world. Do twins buck this trend?

USA Today says American Dream costs $130k per year

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Living the American Dream isn’t cheap, according to calculations from USA Today. Here is what went into the cost:

•Home ownership is central to the American dream. So, we took the median price of a new home ($275,000), subtracted a 10% down payment, then projected the annual cost of a 30-year mortgage at 4% interest. We also added annual maintenance costs of 1% of the purchase price. Total: $17,062 a year.

•We used the U.S. Department of Agriculture’s April 2014 figure of $12,659 for a moderate-cost grocery plan for a family of four.

•In May, AAA estimated it would cost $11,039 a year to own one four-wheel-drive sport-utility vehicle.

•The Milliman Medical Index pegged annual health insurance premiums and out-of-pocket medical expenses at $9,144.

•We used various estimates for the costs of restaurants and entertainment; one family summer vacation; clothing; utilities; cable or satellite; Internet and cellphone; and miscellaneous expenses (see table).

•Total federal, state, and local taxes were pegged at 30% for households at this income level, based on a model developed for Citizens for Tax Justice.

•USA TODAY calculated current educational expenses for two children at $4,000 a year and college savings (all of it pretax, we assumed) at $2,500 per year per child, based on various rules of thumb.

•Finally, the maximum annual pretax contribution to a retirement plan for people under 50 is $17,500. That’s slightly less than 15% of this American dream household’s annual earnings, in line with financial planners’ recommendations.

Total: $130,357.

It sounds like a lot — and it is in a country where the median household income is about $51,000. Add one more child and another vehicle and you could easily reach $150,000.

I can see some places where costs could be trimmed, particularly with the car and a more minimalistic approach to retirement savings. I wonder if the emphasis here should be on the overall cost – which is high and the article notes it can vary quite a bit from region to region – or the assumptions about what the middle class is about. I was recently looking at a classic sociological study Working-Class Suburb written by Bennett Berger in 1960. There is a point in the book where Berger juxtaposes the suburban critic frowning at the ills of suburban life and the suburbanite who is happy with his relative comfort of a car, refrigerator, house, and little patch of lawn. In the decades since, expectations about the good life have increased, as Juliet Schor showed in The Overspent American. If Americans need $130,000 a year to have the basics, many of which are good things, then is being middle-class something completely different today?

Want a home with extra amenities? Just buy a condo with hotel services

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Developers are building more condos with hotel amenities:

Developers across the U.S. are reviving a concept that collapsed with the real estate crash in 2008: combining condominiums and hotels. In cities including Miami, New York and Los Angeles, a rebounding hospitality market is joining with rising demand for luxury homes, spurring developers to construct new full-service hotels and ask premium prices for residential units associated with a high-end brand…

“I love the amenities the building will have — a restaurant that can provide room service, a concierge, maintenance, a person that can clean your place, valet parking,” said Viete, 25, who works for his family’s real estate company in Caracas. The $250 million project, scheduled to break ground in August, is already 85 percent sold…

Condo developments with a hotel can be structured in several ways. In some cases, residences may be connected to the lodging segment only so that owners can take advantage of the hotel’s amenities and benefit from the brand’s prestige. That tends to put a premium on unit prices.

In other developments, known as condo-hotels, a portion of the condos are made available to the hotel when owners aren’t using them, producing revenue for residents.

Sounds nice if you have some extra money lying around. On one hand, the story doesn’t say how much extra such units would cost over and above condos available elsewhere but on the other hand, if you have to ask, this isn’t the market for you…

Thinking about these units, they are an interesting contrast to a common American narrative about homeownership that goes something like this: you work hard to put together enough to purchase a home, you work hard to maintain it, you are more likely to participate in local community life, and it is a long-term investment and place for sentimental moments. Yet, the housing options available to those with more money goes against these principles. Instead of putting sweat equity into maintaining the home, you can pay someone else. Instead of getting deeply involved with neighbors and local issues, the wealthy can travel from house to house in exciting locations. Instead of holding onto a home because of family life and memories, housing becomes just another commodity to be bought and sold. In other words, condos with hotel features are far beyond normal American conceptions of homeownership.

Wealthy Chinese seeking out McMansions

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The Financial Times suggests there is one primary reason more Chinese homebuyers are choosing McMansions: they are status symbols. One note: the McMansions hinted at in this article sound opulent beyond the average American McMansion.

Critics of McMansions would often argue a similar process is at work in the United States: McMansion owners want to impress others with their large house. While the price is not so much of an issue (much smaller pieces of real estate in desirable locations can cost much more), the homes show off through an impressive/ostentatious front, plenty of interior space, nice furnishings, and lots of stuff. On the other hand, I suspect a good number of owners purchased such homes because they say they need the space or got a good deal or liked the amenities of the home and neighborhood.

I’m not sure these are mutually exclusive arguments. Homebuyers can want a suburban experience and want to do it in a home that broadcasts their success. After all, the suburban single-family home represents middle- or upper-class success as well as expressions of individualism.

Argument: we’ve sacrificed everything for McMansions

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Critics of McMansions are not hard to find but Thomas Frank takes the argument further: McMansions are behind a whole host of issues including sprawl and inequality.

Of course there was something different this time around. In the 2008 collapse, the real-estate bust wasn’t the result of some larger economic trend but the cause of it. Although we are accustomed to blaming it all on subprime loans, about half of the disaster was attributable to the less-well-known fiasco in Alt-A instruments which fed the McMansion market, the “liar’s loans” which were securitized and sold off stamped with a big Triple-A. The worst recession of our lifetimes, in other words, was in large part the result of our superiors’ longing to get themselves a piece of the grandiose.

That astounding reversal of the usual chain of cause and effect changed the way I thought about the McMansion. I once believed it would be amusing to track stylistic change in the tract-mansion form—how, say, the fake French simplicity of Newt Gingrich’s 1987 McMansion gave way to the complex multigabled fakery of Michele Bachmann’s 2007 McMansion, with maybe a stop in between to contemplate Ricky Bobby’s McMansion in “Talladega Nights.”

But what I discovered is that the form doesn’t really change. Yes, the houses get bigger every year, gables and gazebos come and go, but what is really striking about the McMansion is its vapid consistency as the decades pass…

This is not some absurdity at the fringe of our way of life. This is civilization’s very center, the only thing that really makes sense in “clusterfuck nation,” the tawdry telos at which all our economic policies aim. Everything we do seems designed to make this thing possible. Cities must sprawl to accommodate its bulk, eight-lane roads must be constructed, gasoline must be kept cheap, coal must be hauled in from Wyoming on mile-long trains. Middle-class taxes must be higher to make up for the deductions given to McMansion owners, lending standards must be diluted so more suckers can purchase them, banks must be propped up, bonuses must go out, stock prices must ascend. Every one of us must work ever longer hours so that this millionaire’s folly can remain viable, can be sold successfully to the next one on the list. This stupendous, staring banality is the final outcome for which we have sacrificed everything else.

This is a strong statement: we created and generally buy into a system whose goal is to grant a privileged few the ability to live in private McMansions in nice neighborhoods. The fulfillment of the American Dream at the turn of the 21st century involves living in a McMansion. It is not just about suburbs, 0wning a car, buying cheap goods at Walmart, and sending your kids to nice schools; it is about having the glitzy, architecturally-dubious but spacious home.

What I don’t see in Frank’s piece is how exactly the dots connect. The number of McMansions are still relatively limited due to their cost. Not all gated communities have McMansions. Not all suburbs are edge cities or vacuous tract neighborhoods like the ones highlighted in Suburban Nation. I’d like to see the data where half of the housing bubble of the late 2000s was due to loans for McMansions. In other words, this may be a populist argument today given the status of McMansions but the true story is likely more complicated.

Critic: lack of good suburban novels

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Since World War II, there have been a number of novels that have dissected suburban life but one critic says the genre has suffered in recent years:

Suburban novels, much like many American suburbs themselves, have fallen on hard times.

Yes, there are some terrific books about the ‘burbs, only few lately that feel like they’re trafficking in the great realist tradition of John Updike, John Cheever and Richard Yates, whose novels and stories in the ’50s, ’60s and ’70s defined the quiet despair of the men of Metro-North.

Today, Tom Perrotta’s satires of strollerland feel overly broad. Jonathan Franzen’s “Freedom” brilliantly portrays the dark side of McMansion marriage, but it’s so brutal you want to avert your eyes.

Ted Thompson’s terrific debut novel, “The Land of Steady Habits,” feels like a natural extension of Yates’ classic “Revolutionary Road” or Updike’s Rabbit series. Call this elegant, witty and economical novel “Rabbit, Meltdown.”…

It’s not a stretch to say that this is the first great novel about post-crash American disillusionment, the flip side of “The Wolf of Wall Street.” Inside the ruined heart and soul of Anders Hill is a warning: even the life you think falls short of your dreams must not be taken for granted.

Perhaps the suburban decline novel needs some updating. Many of these stories, whether in novels, in films, or on TV, have a similar narrative: the characters look like they have the good life in the American suburbs with a newer house, family, and other consumers (cars, television, etc.) but the main characters are repressed in some way so they lash out and the suburban facade falls aside. There is some truth to such stories: the American Dream is heavily based on particular notions of success that are more in the reach of some (privileged groups) than others. At the same time, there are a variety of suburbs from wealthy and exclusive towns to more working-class communities and the mythology of the American suburban Dream continues to survive.

Americans across social classes spend a lot on housing and transportation

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Derek Thompson points out some interesting household expenditure data from the Bureau of Labor Statistics: Americans spend quite a bit on housing and transportation.

Families with radically different incomes—from lawyers and doctors down to high-school dropouts—all spend about half of it on homes and getting around, which suggests an historically tight relationship between marginal income growth and marginal spending growth on real estate and transportation. You get a raise, you shack up with roommates. You get another raise, you get nicer studio. A bigger raise and you move out to the suburbs and buy a house—commensurably increasing your spending on transportation (bigger car + gas).

This monopoly of housing/transit dominance is sticky for many reasons—America is big and has space for houses but zoning often limits development, leaving us with high relative housing prices and rents; suburban sprawl invites car ownership; infrastructure supports a car culture; our gas taxes are low and mortgage interest deductions are high; the list goes on—but it doesn’t have to be this way. Not every country spends half its income on homes and cars. They have other priorities, like the UK, where the typical family spends a walloping 20 percent of its income on the super-category of “fun stuff”: culture, entertainment, sports, alcohol, and tobacco. Or look at Japan, which spends more than twice as much as us on food consumed at home.

And where might this money go if it was not spent on these two areas?

Imagine what would happen if we didn’t spend $1 in $2 on houses and cars. It would be rocky for the real estate and auto industries who have come to rely on a steady stream of spending. But it would leave a lot of money left over other stuff—like smartphones, and dinners out with friends, and shoes whose fanciness belies our income level. This isn’t a vision of the future. It’s a description of the way a lot of young people live today, particularly educated twentysomethings who’ve moved to urban light areas (e.g.: newer subrubs within commuting distance of the city proper, like Arlington, Va.) where they can save on real estate, take public transit, and preserve enough of their lowish salaries to cobble together a connected and fairly social life outside work, if they have it. Maybe these trends are recession-era fads that will fade with the recovery. If not, it’ll be a big deal.

Owning a car and a home simply seem to be foundational features of modern America and the American Dream. The first offers independence and mobility. The second offers a private retreat from the harsh outside world and one’s own land to do as they please (though owners might choose to be part of homeowner’s associations that limit their options to enhance their property values). Being middle-class, a desired goal of many Americans, is tied to these two items. They also point to a person’s identity, representing one’s status and personal tastes.

All that said, Thompson hints at the possibilities if these foundational values (dating to roughly the 1910s and 1920s and then cemented in the prosperous post-World War II era when they became more attainable) fade and are replaced by others. It isn’t just an economic question of what happens to the auto industry or builders but rather a larger question about American social life: could be truly imagine an America without widespread praise and chasing after houses and cars?

Argument: trends suggest younger Americans won’t experience the dream of homeownership

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Dr. Housing Bubble argues young Americans may not be able to achieve the American ideal of owning a home:

Many young Americans will be accustomed to paying their student debt and rents on a monthly basis while these income streams go into banks, many that own their property.  Not a bad situation if the market wasn’t rigged by banks where preference is given to large money and low rates matter little when the Fed has set a fuse to Wall Street to buy out large portions of real estate in the market.  Of course many will try to pretend that this is some sort of free market.  The housing market is fully subsidized and juiced to the gills and while this is going on, a younger generation gets older and their dreams of homeownership move further and further away.  At least they can bunk with mom and dad and enjoy stories of those beautiful golden real estate handcuffs.

There are several interesting assumptions going on here:

1. Homeownership is the better long-term option for the country and for individuals over renting or living with family. This is tied to ideas about independence and achieving the American Dream as opposed to renters or those who live with family who can’t be self-reliant and don’t care as much about their property.

2. Younger Americans should aspire to homeownership. They may not as much in the future as owning home creates a significant financial obligation, may prevent the mobility needed to chase jobs or other opportunities, and may not be as exciting as other consumer options (new technologies, entertainment/cultural/travel options, etc.).

3. The difficult economy where a majority of Americans can’t make significant financial progress will necessarily continue and limit the number of people who can buy homes (and the number of new homes that are built). We’ll have to wait and see how this turns out. If anything, this all reinforces how big the housing bubble was in the mid-2000s.

Update on increasing number of teardowns in Los Angeles

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The number of teardowns isn’t close to the peak of 2006 but there is increasing teardown activity in Los Angeles and this is drawing concern:

The rebounding housing market has sparked the demolitions. In November, the median price for a home in Southern California was $385,000, up nearly 20% compared with the same month a year earlier, according to research firm DataQuick. Builders such as Leonard are constructing houses “on spec,” confident that they’ll find buyers…

In the city of Los Angeles last year, builders received approval to raze 1,227 houses and duplexes from January through mid-December, according to Department of Building and Safety records. That’s 29% higher than in all of 2012, though still well off the pace of more than 3,000 in 2006, during the housing bubble…

Carlton and his neighbors want the city to take action. They are pushing Los Angeles to tighten the so-called anti-mansionization ordinance passed in 2008. Critics say it has failed to stop the construction of outsized homes that rob views, block sunlight and alter the character of established neighborhoods.

In October, the Los Angeles City Council imposed additional size limits on new houses in the Beverly Grove neighborhood. But the changes don’t mandate a particular style…

Tear-downs have long stirred controversy, especially in beach communities — once-funky towns that have seen property values skyrocket over the years amid an influx of wealthy residents, chic boutiques and cafes. Many who grew up in the area have moved out, unable to afford a house with an ocean breeze. Many who did own homes couldn’t resist cashing in.

I don’t think there is an easy answer to this, particularly in Los Angeles. Because the housing market is currently tight, teardown opportunities are attractive to builders. Additionally, there is enough money floating around for people to want to purchase expensive new homes. This, of course, alters existing neighborhoods in a way that tends to irritate neighbors who think the new homes are all about the individual owner and not about fitting in with the neighborhood. I wonder how many residents who oppose teardowns would prefer no new construction at all, perhaps going for historic preservation rather than tighter mansionization guidelines.

I’m not sure why this strikes me right now but it does seem a bit odd that California, the home of American dreams (weather, Hollywood, sprawl leading to single-family homes and lots of driving), seems to be home to so many bitter housing and land disputes. Perhaps the stakes are higher – people’s dreams are on the line – so the fights get more intense. Or places like Los Angeles and San Francisco are simply too desirable and there isn’t enough housing to go around. Or all of this helps lay bare the American tendency to want to be the last one in to enjoy the neighborhood before slamming the gate behind them to preserve the features forever.