An Ignored Reason for the Mortgage Melt-Down in the United States

Here's an interesting quote from a real estate website:



The size of the average American home has more than doubled over the past half-century. The most recent statistics from the National Association of Home Builders show that the average American home grew from 983 square feet in 1950 to 2,434 square feet in 2005. In 1950, only one percent of homes built had four bedrooms or more, but 39 percent of new homes had at least four bedrooms in 2003. Garages have become almost obligatory, with only eight percent of new homes built without a garage, as opposed to 53 percent built without one in 1950.



Think about the implications of the information contained in that paragraph. Since most contractors charge for home construction on a square foot basis, and apparently bid their jobs out on that basis, this means that as the size of homes went up, so did the cost of building those homes. Now, for the most part, incomes also kept going up, so people could afford the increase in the size of the average home and didn't think about what that increase meant.



Well, here's what it meant: It meant more energy usage per home; it meant more money being tied up in real estate instead of other assets; and it meant that when times got bad, a lot of homeowners couldn't make the mortgage payments. It costs a lot less to pay for a 1300 square foot home than it does to pay for a 2600 square foot home.



Why did this happen? Homes went from being a way to house people to a way to show off your wealth. Homes went from being a practical thing to a status thing. Homes went from a place to raise your family to an investment. Children who grew up in "McMansions" began to believe that they were entitled to live that way, and so, when they got married, wanted to start where their parents had left off.



One way to solve the housing crisis is for Americans to start thinking of homes as a way to house people and not as a way to show their status, or as an investment. This won't happen overnight, but it will happen because America can no longer afford the "average American home."

Home Construction in Northeast Ohio Goes South

The Cleveland Plain Dealer reported today, December 23, 2008, that the number of building permits being issued in the Cleveland area declined by 61% in November of 2008 when compared to November of 2007. The actual number of permits issued in November of 2007 was 365 and the number of permits issued in November of 2008 was 140. The figure for November is also 49% less then the number of permits issued in October of 2008.

Not only are less houses being built, but less homes are being sold. The number of residences being sold declined by 13.8% when compared to the number that were sold a year ago. Statewide the decline was 21.7%. Nationwide the decline in residential sales was 8.6%. Just further proof, in case you needed it, that Ohio's economy is hurting.

You can read the entire article here.

Do Republican Presidencies Mean Financial Crisises?

One of the messages that Bubble-Boy and his band of merry right-wing radicals have pushed is the idea that his reckless tax cuts have been good for the economy. Any economic good news is seized on by the Bushies as evidence that their glorious leader's policies have been good for the American economy. They conveniently overlook the growing inequality in America and the fact that the great majority of his tax cuts went to the upper 5% of American households to argue that their fiscal policies do work.

Well, the chickens are coming home to roost as the American economy seems to be moving into a recession. The New York Times had an article up on its website dated November 8, 2007 about the Dow Jones losing over 300 points on Wednesday, November 7, 2007 and how the Chinese are beginning to sell off their tremendous holding of American dollars. This is the money quote, to make a bad pun, from the article about the Chinese decision: “We will favor stronger currencies over weaker ones, and will readjust accordingly,” Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress told a conference in Beijing on Wednesday.

What is apparently driving the down slide in both stocks and the value of the American dollar is the uncertainty over the fallout from the sub prime mortgage crisis. This is the second time since 1980 that there has been a financial crisis during a Republican administration. The first was the savings and loan crisis of the 1980s and now we are having the sub prime mortgage crisis of the first decade of the 21st century. Going back further in history we have the recession of the late 1950s under Eisenhower and, of course, the granddaddy of them all, the Great Depression under Hoover.

It is no mystery why there is this correlation between financial crisis and Republican presidential administrations. The Republican Party doesn't believe in government regulation and oversight. It does believe in the power of the marketplace to correct excesses. The market does correct excesses but by the time such excesses show up, the damage done by the correction to millions of Americans is much worse than it had to have been.

Financial diasters such as the savings and loan crisis of the 1980s or the sub prime mortgage crisis of this decade can be avoided. Take, for example, the sub prime mortgage crisis. Most commentators will tell you that a major reason why financial institutions made thousands of bad loans is that they sold the loans to other institutions instead of keeping them in-house. As a result, they didn't have incentives to make good loans and had incentives to make bad loans. Here's a thought: Why not make financial institutions keep the promissory notes for a minimum period, say five years. Such a law would give incentives to banks and other financial institutions to make good loans.

Republicans will say that such a law is an intolerable interference with the marketplace, but isn't such an interference better than having real estate markets collapse across America as thousands of homes go into foreclosure?