The American dream comprises investing in housing at the right time and location, making a home, and harvesting the equities.
But given the track record from The Great Depression to The Great Recession and everything in between, is buying property an investment or is it a trap?
Non-profit organization advocating for the financial resilience of cities and towns during economic crises, Strong Towns, gave a few insights on the topic.
If what they predict is anything to go by, revolutionary changes are on the horizon.
Shelter or Investment?
“We have created this idea of the American dream, the idea that if you do everything right you get into a home that appreciates and values, build a nest egg, participate in society and you’ll be rewarded,” says Strong Towns founder and president, Charles Marohn.
He refers to this idea as a nostalgic perspective because if this is a reality, then it is only real for a few.
Currently, the interpretation of the housing crisis among Americans varies from person to person with a lot of disagreement on the true nature of this status quo.
What is not disagreed upon is the fact that the country is indeed facing a housing crisis.
There is a prevailing sense that something is not working and this feeling is not merely because rental accommodation is expensive, but rather due to a recurring sensation of precarity.
Psychosphere of Precary
This psychosphere of precariousness stems from overwhelming debt, financial pressure, and the strait-jacketed feeling of being unable to live where one wants.
The irony of the situation is that 21st-century America is the wealthiest society in human history.
Marohn makes references to the period leading up to The Great Depression in 1929. During that era, home buyers needed to make a down payment of at least 50% and this was because they were buying through local banks.
The Housing Crisis of The Great Depression
The small financial institutions of that day could not field the risk of long-term debt so home repayments had to be limited to between three and five years with a massive balloon payment at the end.
As the economic depression set in, homeowners who kept up with their monthly payments were unable to honor their residuals.
This led to foreclosure and whole families were evicted. The banks, needing to make their money back, placed the foreclosed homes back on the market at cut rates. This action sent an already ailing property scene into a deflationary spiral.
At this point, the Federal Government got involved and stopped the financial slide before it could deteriorate further.
A Historical Intervention
The Government used a simple method: They stopped the banks from reselling these seized homes and refinanced them for the evicted would-be owners.
The fact remained: These families were in financial dire straits, so, to compensate for the struggling economy, the federal government extended the leases–some for as long as 20 years.
The government’s plan at that point was to encourage the local banks to sell mortgages and permit more debt in the form of loans.
The ultimate goal was to increase the cash flowing through the economy and by 1933, the housing market pulled out of its nose-dive.
The Building of a Trap
By the end of WWII, industries supplying the allies in Europe and the Pacific Ocean were no longer needed and economists feared that the end of the war would mean a resurgence of The Great Depression.
“There was nothing fundamentally different about the economy in 1945 as there was in 1935,” Marohn says. Be this as it may, there was no economic depression when the troops returned from Europe in 1945.
The main reasons for this were that capacities in the form of wealth accrued from industries supporting the war effort, oil, manpower, and the national unity borne of having a common enemy were applied to building a better America.
The Same Tools Were Used in Post-WWII America
During this inspired period, the tools used to save the housing market from falling too far during The Great Depression were repurposed to inflate it.
The idea was to create a broader middle class, more jobs, and turn cities into self-charging economic powerhouses, and this was possible thanks to the broad psychosphere of positivity and idealism.
Setting the Trap
America uses a set formula to fix the economy when it gets into trouble. It lowers interest rates, pours money into real estate, and increases infrastructure spending.
This method has been effective to the point that by the 2000s, the US reached its fourth and largest subprime bubble.
Inevitably, it burst. The result was the 2008 recession that sent ripples around the world.
How Do You Recover to a Housing Bubble?
Ironically, the trending question following this massive financial fallout betrayed a lack of consideration for the US’s history with housing bubbles–specifically what comes afterward.
“How do you recover to a bubble, how do you restore the unsustainable, [and] how do you get your mojo back when it was all fake and not real to begin with” says Marohn mimicking the sentiment of the day.
According to Mahron, building another housing bubble “has been the project for the last 15 years.”
Trapped
This project went into play at a time when the millennials were ripe for entering the housing market.
In 2010, two years after The Great Recession, the residential construction market was at an all-time low.
So while there were marginal amounts of new residences being built, the Federal Government was waist-deep in its plan to “restore” the American economy.
Its strategy was to pump finances into banks whose missions, in turn, were to acquire as much residential property as possible.
This Has Wreaked Havoc on Our System
This action, it is hoped, will eventually create demand and push the prices of homes upwards and ultimately, result in another bubble.
“This has wreaked havoc on our system,” says Mahron. “It has created this kind of artificial scarcity where housing is way, way, way overinflated in price [and] desperately rare.”
“People who are trying to get into just basic housing products are struggling financially [and] to make ends meet. We have trapped ourselves in a financial trap of our own making.”
The Zoning Lockdown
American towns grew dramatically in the early decades of The Industrial Revolution. This expansion transpired organically as people relocated for economic opportunities and built their own homes.
As a result, neighborhoods were in a constant state of flux and their inhabitants became adept at adding to and subdividing their homes as their needs changed.
This resulted in a certain degree of discomfort. As a result, in the 1920s, zoning was introduced.
‘A Multi-Headed Hydra that Constrains Dramatically‘
Today zoning means planning neighborhoods and building them to their predetermined size but no bigger.
According to Strong Towns, this innovation has since sprouted a side effect: “A multi-headed Hydra that dramatically constrains what kinds of housing can be built and where it can be built. [It] has largely locked down most parts of most American cities preventing any sort of new housing from being created.”
The Not in My Backyard Movement
Today there is a prevalent “not in my backyard” (NIMBY) attitude among homeowners. These individuals are seen as the villains preventing a scenario where everybody benefits from their neighborhood–as was the case in fledgling America.
Back then more houses in an area meant more people, more businesses and by extension, economic activity with localized wealth.
Under the new suburban structure, those arteries of opportunity are severed for the sake of residential enclaves.
By living this way, leaving the house means driving in the car. Going to work, school, or shopping is a journey to a distant place when in another reality, all of this could have been accomplished on foot.
The way the system is set up today, neighborhoods are built to a finished state with all the amenities needed for a comfortable life there already.
What Does New Residential Growth Mean
In this context, what does new residential growth mean other than more housing, traffic on the roads, and larger class sizes in schools?
With the current status quo, the benefits of residential growth almost everywhere in America are difficult to see.
As such there are minorities – NIMBYs – railing against the idea of expansion when under traditional circumstances transplants would have been welcomed because they meant progression.
A Policy Revolution: Yes in My Backyard
For over five decades, no American cities loosened their policies on the building of residential buildings.
But that is changing. In the last ten years, there was a surge of municipalities and metro areas allowing slack in their regulations.
Two examples of this are exclusive single-family zoning and parking mandates.
A Growing Movement of Americans
As interpreted by Strong Towns, “this is the sign of a growing movement of Americans who recognize that our housing system is fundamentally broken.”
“[What] we need in this country […] is to relax the straight jacket a little bit [and] allow cities room to breathe and room to grow.”
“[Plan] a little less and that [will benefit] all of us in ways that may not be immediately obvious.”
Source: YouTube/StrongTowns
