The Economist: The American Dream?
Dr. M. Ray Perryman
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November 16, 2012 | 1165 views | Post a comment
Although the economy has been in a recovery phase for a while now, the national housing market is only recently showing signs of new life. Texas was spared the worst of the downturn, with a smaller price bubble and oversupply and, thus, a faster return to “normal.” In some areas of the United States, however, there is still a long way to go to reach a healthy state in the residential real estate market (and prior peaks may not be surpassed for decades, if ever).
When the housing downturn began, home ownership had reached almost 70% nationwide. After World War II, lower-priced developments and higher income levels led to increasing home ownership. In addition, the size of houses expanded. In 1973, the average single-family home was 1,525 square feet, compared to 2,248 square feet in 2006.
The total market value of all US homes more than doubled between 1999 and the peak in 2006/2007, with prices for individual homes up an average of about 50%. The jump in value was uneven, with the east and west coasts generally rising more than the center of the nation. For some metropolitan areas, prices more than doubled.
In Texas, prices rose by far less (closer to 25% in Houston, for example). We may have lamented that fact in the early 2000s as we watched the huge profits some lucky sellers were realizing in “hot” markets such as Las Vegas, but our lack of a big run-up in prices protected us from much of the damaging fallout when the bubble burst. Texas markets have almost recovered lost ground and are likely to continue to improve as the state economy and population grow.
The alternative to owning a home is, of course, renting. The US Bureau of Labor Statistics (BLS) recently looked at how spending by homeowners and renters has changed over the past 25 years. Using data from the Consumer Expenditure Survey, the BLS found that both owners and renters spent more for housing (adjusted for inflation) in 2010 than they did in 1986, up 11% for owners to $18,503 and up 16% for renters to $12,843.
However, overall total spending for both groups was essentially unchanged. In addition to housing, several other categories of spending also rose. The largest percent change was in healthcare and its subcategory health insurance (up 145% over the period for homeowners and 124% for renters), with gasoline, entertainment, and personal insurance and pensions also up for homeowners (though renters actually spent 6% less for entertainment). To offset these higher costs, consumers reduced spending for apparel and apparel services, food (particularly the subcategory food away from home), and transportation (though not the gasoline component).
No one would argue that the housing crisis is a proper or desirable way to improve affordability, though that will inevitably be one outcome, particularly once the job market improves. The changing patterns in consumer spending illustrate the increasing importance Americans have placed in their housing compared to cars, clothes, and eating out.
There is some empirical evidence (such as a study by economists at the Boston branch of the Federal Reserve Bank) that only those who suffered from the housing crisis directly or through someone close to them are likely to change their behavior based on it. For people who have merely seen the news stories and statistics, the decision of home ownership is far less likely to be affected. Age is also a factor, with younger people less confident that buying a house is a good idea than older individuals who may be more apt to see the recent pattern as an aberration in an otherwise known trend.
A survey supported by a major real estate firm (Coldwell Banker) concluded that Americans now have more respect for home ownership, and pointed out that a home is far more than a financial decision, but an emotion-laden aspect of happiness that isn’t easily measured by dollars.
Over the past several years, the housing market saga has been played out in the media with stories of displaced families, foreclosures, and bankruptcies. Against this backdrop of bad news, the natural question has arisen regarding whether home ownership is still “the American Dream.” The answer is as much psychological as it is economic.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com <http://www.perrymangroup.com> ). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.