Oscar Wilde once commented on a man who knew “the price of everything and the value of nothing.”
Most Americans would be surprised to realize that there is a difference. And yet, with the advance of the U.S. housing bubble, the gap between the two widens.
A housing bubble is very different from a stock market bubble. A stock market bubble is a financial phenomenon; a real estate bubble is an economic one. When a stock bubble explodes investors are hurt. When a property bubble pops, ordinary people feel extraordinary pain. That is when prices collapse back to real value and we will find out what stuff we are made of.
We say that because it will come as a great disappointment to many people to discover what their houses are really worth. When tech stocks crash, most people read the news with approval; they never bought the stocks anyway and are pleased to find that they weren’t such idiots after all. But when property goes down, the shock of it is likely to upset them deeply.
“There are five separate social classes in American society,” explains Richard Benson of Specialty Finance Corp. “They are the Upper, Professional Upper-Middle, Middle-Middle, Lower-Middle or ‘working poor,’ and the Lower. America used to be a land with a few upper class, some lower middle class and the rest were somewhere in the professional upper-middle and middle-middle category. Factory workers were middle-middle. Now when a worker loses their job at the factory and takes a job at Wal-Mart for one-third of his previous wage, are they still in the middle?
“A new class seems to be developing. I call it the ‘House Poor.’ In this over-heated real estate market where homes are selling above list prices and speculative buyers are quickly flipping properties at a record pace, the House Poor are keeping up with the rising cost of living by paying the bills through home equity extraction, home-equity loans and cash-out refinancing. While many homeowners believe they can live like the upper class and appear to be wealthy, they’ll be the first to end up in the poor house. Those easy money real estate speculators who purchased several investor properties are now beginning to see that renters are more difficult to find these days but the bills to maintain their properties keep coming in.
“Indeed, homes have a tendency to actually make you poor because they need to be finished and furnished; older homes become deep money pits; roofs need replacing; drains clog; termites gnaw at foundations while squirrels and mice move in; pipes break; furnaces fail, and, in the south, mold and mildew can’t even be insured; walls need paint; bricks cry out for tuck-pointing and yards need constant care. Worse yet, when it comes to the state and local government, they are always looking for someone to tax. As soon as you buy a house, you have just raised your hand and announced, ‘please tax me’! While some localities offer tax breaks to primary residents, second home and investor property owners get hit full bore on tax increases!”
In California, the typical person lives in a box with neither grace nor charm. But it is worth $522,000, according to the latest figures. The man figures he is half way to being a millionaire. He might as well spend a little of his fortune, he believes, before it gets away from him. And so he “takes out” what Benson calls the “phony equity” and uses it to improve his standard of living. Which is to say, he spends money. Whether the spending actually improves his quality of life or not is hard to say. Until now, he didn’t have to worry about it. The money was almost free. It came without work or sacrifice. Getting rid of it as fast as possible only seemed appropriate.
But there’s nothing quite as expensive as free money. Home ownership has reached a record 69% in the U.S. Trouble is, the homeowners don’t own much. Most houses are heavily mortgaged. As many as one in ten “homeowners” have no financial stake in their houses. A typical mortgage payment for a typical California house is over $3,000 a month. You would need an income of $122,000 per year to get a conventional loan for that amount. Not many people earn that much; it’s more than twice as much as the median family income. That’s why many people are spending half their income on shelter. But as long as prices rise, they don’t worry about it.
It’s when prices stop rising that real values show up. Then, the homeowner has only the expenses…and the debt…to think about. Then he begins to wonder what it’s really worth to him to live there.
How much? We don’t know. But the value of the typical California house is probably much less than today’s asking prices.
This morning, all is calm. Out on the lawn, Maria and an actress friend are practicing what sounds like Buddhist chants. Or maybe it voice training. The younger children are playing in the gravel…or chasing the cat with a squirt gun. Henry and his mother are riding horses. Edward and his cousin are playing tennis in town. And up in a bedroom, our own dear mother lies in bed, recovering from a blow to the head.
We are getting to know the local emergency ward. Last night, after a fireworks display, the 84-year-old pitched backward in her chair and hit her head on a granite step. It looked for a moment as though she were a goner. But then, the lights came on and the doctor rushed in.
After a quick test, it was decided that we should take the woman to the local emergency room for stitches. We got to the place at 1AM and walked mother to a bed, where a foreign doctor who looked a little like Gunga Din proceeded to sew her up, assisted by a pretty blonde nurse. Then, all of a sudden, the young infirmiere pitched over and fell onto the floor as if she were having a seizure. We forgot about Mother and went over to try to help the girl. We held her head off the floor and wondered what to do next…
The doctor came over.
“Put her head down,” he said. We obeyed.
He then slapped the poor girl on the cheek. Smacking an unconscious girl may or may not be effective. But the man seemed to be enjoying himself…we held our tongue.
Then, when his first blow failed to revive her he took another whack at her, harder than the first time. We know as little about emergency medical procedures as we do about economics. But that doesn’t stop us from having opinions. We decided it was time for a second opinion.
Two nurses came running. Just as they arrived the young woman came to her senses.
“She just fainted,” said the doctor. “It is probably the first time she’s seen someone getting stitches.”
The two nurses escorted the nurse into an adjoining room and the doctor went back to work.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.