Picture, if you will, a Southern California suburb: 12 miles due north of Zuma Beach in Malibu, 36 miles to downtown Los Angeles, blessed with near-perfect weather and extraordinary schools. Barbra Streisand stops in for sushi on occasion, and Wayne Gretzky's and Joe Montana's kids play football nearby. Businesses reflect the community's priorities: day spas, high end home improvement boutiques, and financial planners. I came from a middle class neighborhood, where 1950s ranch houses with 3 bedrooms and 1600 square feet sold for $200,000, to a move-up neighborhood, where 4 bedroom, two story houses with 2700 square feet sold for between $375,000 and $450,000 from 1992 to 2000. The bubble was immensely good to this suburb -- its motto is "The Good Life" -- but its popping has hit the upper middle class, just as the larger recession has hit Muskegon, Michigan.
From The Housing Bubble blog 3/19/05:
When passive ownership of a house delivers riches far beyond what most people could accumulate from many years of working and saving, traditional virtues emphasising hard work, saving, enterprise and deferred gratification are likely to get eroded. Yet these are values on which capitalist liberal democracy ultimately depends.
Every home doubled its value in five years, except for a few pockets where they tripled or even quadrupled. Effectively, the bubble was a third income. How would you like to get a 50% salary increase? A house worth $200K in 2000: 250K in 2001; 300K in 2002; and hit $500K in 2005.
The ads were everywhere. "Make your money work as hard as you do." Pictures of pink piggybank-houses. "Live richly." "Unlock the equity in your home with a HELOC." The walls of my locally owned bank were plastered with pictures of shiny happy people doing things with home equity, like paying for college and taking vacations. The Los Angeles Times reported people using mortgages as a tool in financial planning, not just a debt to be repaid: "A refinance in 2005 to pay for the kitchen remodel, and another one in 2010 to pay for college." "Consolidate your debt!" was a common theme. Every single day, I got checks in the mail or ads promising me $50,000 on a signature. No documentation! No backup needed! Just endorse this check (withfineprintyouneedamicroscopetoread) and $50,000 will be yours, instantly!
So what did people do with their third income?
Harry, one neighbor, has two kids who are talented hockey players. They're both on travel teams that cost $12K/year, each. First Harry's wife went back to work. Then Harry borrowed against his home. Harry is, by all accounts, a wonderful dad who's giving his children an idyllic life. But a few operations have left him unable to work for months at a time and unable to pay the HELOC. He's hurting and scared.
Cara planned to own her house outright -- no mortgage -- by retirement age. But when her husband got sick, she refinanced, took cash out, and then took out a HELOC to keep her husband at home instead of putting him in a nursing home. She used the HELOC to pay for a 40 hour/week caregiver. When she needed the caregiver on weekends, she put the household bills on credit cards. She now owes $50K in credit card bills and she can't borrow any more. She's been selling household possessions at garage sales to get enough money to pay for groceries. Her husband died, and she's going to have to sell her house and move in with her daughter. She paid $400K for it in the 1990s. It went up to $800K, briefly, before coming down. She'll be lucky to net $25K from the sale. Cara and her husband were solid middle class working people their whole lives, but she has no accumulated wealth to show for it.
Frank is a firefighter, and Nancy is a nurse. They're the kind of person that gov't policies encouraging homeownership are supposed to help. With a third income, they bought a boat, since sold.
Dan and Stacey decided to use their third income instead of Stacey's second income: she could stay at home with the children. She volunteers at the school every Friday, she teaches Sunday school at the church, she went to disaster response training. When a neighbor was diagnosed with cancer, she organized the community garage sale so that he could pay the deductibles and the uninsured expenses.
I intended to enjoy the good life, but instead I got divorced. I didn't want to leave the family home. The answer was to refinance the home to take advantage of its equity. The answer came from my accountant, my divorce lawyer, my lawyer friends, my therapist, my ex husband and his divorce lawyer, my best friend, my mortgage broker friend, my mortgage broker clients, my bank, and random strangers at parties. I couldn't avoid it. Everyone preached the same answer. Charlie the chiropractor, my neighbor, used a $100,000 home equity line of credit to buy out his ex-wife's interest so that he could keep the house. Every day I got a junk fax touting the availability of negative-amortization, no money down loans. I resisted, but I can't emphasize enough that 90% of people in my situation would have taken out that exotic loan.
Only eight months ago, this community was supposed to be immune, because the good schools kept the home values up. However, of the 76 homes for sale in my zip code, 10 are foreclosures. (And virtually all of the foreclosures have granite countertops, upgraded stainless steel appliances, and hardwood floors.)
Propping up housing prices won't help any of these homeowners. They already earned that third income -- and spent it as fast as they could. They can all use a third income, but $50,000 a year just puts us back into the bubble. (And yes, many of us knew that it was a bubble as far back as 2003. We called it "affluenza.")
Any policy that props up all housing prices simply bars firefighters, teachers, nurses, and librarians from a community where the median sold price is $630,000. To buy a house worth $630,000, you must have a down payment of between $63,000 and $126,000, and be able to handle a mortgage between $3,200 and $3,600. That means a monthly salary in the $10,000-and-up range.
From the Ventura County Star 1/15/09:
"The primary cause of the rising foreclosure rate is really the jobless rate," said Sung Won Sohn, economics professor at CSU Channel Islands. In Ventura County, December foreclosure filings surged 37 percent from November and 97 percent from a year ago, according to RealtyTrac. There were 1,352 foreclosure-related filings, including 685 default notices, 386 auction sale notices and 281 bank repossessions.
For this good life community to survive, two things need to happen. Housing prices must come down to affordable levels (I don't know of a way to do that painlessly, and I don't like the pain of foreclosures). And, when salaries increase, people won't be hurting. Or, to put it even more simply, the housing crisis is not a housing crisis; it's a wage stagnation crisis.
From the Housing Bubble blog: