As we firmly enter the summer selling season, we have a wonderful aroma of massive mortgage debt and overpriced homes filling the air. It is the smell of burning American Express plastic in the wallets of many itching to buy anything imported. Then we have home equity lines of credit and home loans fueling the real estate market to another dimension. Let’s face it, we are a debtor nation in every sense of the word. We are running massive trade deficits and are content turning on the printing press and letting inflation devour our green dollar. But there is a cost to this. This mixed panacea of suburbia creates mixed emotions in the hearts of many. Many families want a nice sized home and good schools for their children. But are you willing to sacrifice the quality of your own life by commuting one-hour each way simply to purchase a home? Are you willing to spend 50+ percent of your income servicing the debt on your home? The mental vision of a home with a stunning green lawn and a white picket fence are etched into the American psyche even if you grew up in a concrete jungle like
There are 3 quality of life points that many metropolitan areas are facing. One has to do with commuting. The second point discusses that extent to which sprawl can be supported. And finally we discuss our sudden nonchalant cultural acceptance of debt.
Love it or hate it, most Americans in metro areas commute. According to an ABC poll, American’s spend an average of 1.5 hours a day commuting to and from work. Below are some interesting figures:
Average 26 minutes
On a good day 19 minutes
On a bad day 46 minutes
The survey also found that those in congested cities found their commute “bad” as compared to those in rural areas. Aside, from that obvious tidbit, commuting does have a major impact on our society aside from the time lost on the highway. The average American family spends approximately $4,200 a year on fuel cost and another $2,000 in car insurance. According to Edmunds, the average MSRP of a new car is $30,000+. So total it all up and we are spending a large portion of our disposable income on automobile cost.
The highway system was constructed under the National Interstate and Defense Highways Act of 1956. The purpose was two-fold, to create standards of driving such as speed limits and for civil defense/emergency evacuation. Well of course we saw how well it handled an emergency evacuation with Katrina. The highway system was championed by the auto industry and has been a major reason for the economic growth of our nation for the past decades. However, the system itself is having challenges supporting urban sprawl and massive jumps in our population. 56% of the system is funded via taxes (largely the gasoline tax) and other federal and state taxes. Given the inordinate amount of money spent on fuel, do you wonder where this money is going? In large established areas such as
So what does this have to do with housing? For many people, it has a lot to do with their quality of life and where they choose to live. It is becoming obvious that living near your work is a luxury in
You are left with a few options regarding commuting. You can either rent near your work thus improving your commute time. You can buy near your work and pay market rates for a home in that area. Or you can buy miles away and increase your commute. The latter option has emerged as a booming trend for many in
An interesting article appeared in the LA Times discussing the boom/bust of
I’m not sure much thought was put into this land development. There is a point where working commuters will no longer travel. The breaking point seems to be about 2 hours each way. This part of the desert falls within that category. Homes are cheap in this area but you are in the desert where temperatures reach 120+ on hot summer days and you are far from any large metro area. If the argument is people will leave the area for more peaceful locations to retire, why won’t people simply move to
The argument has been made time and time again that we need more housing. This is correct. But the type of housing needed to support our population is high density affordable housing. Look at
Married to Debt
This seems gloomy but here is the good news. We love debt as a nation. Want to see the average and median on a few items? Take a look at this:
Average Wedding Cost: $27,000
Average New Car Cost: $30,000
Average New Home Cost: $236,100
Average American Credit Card Debt: $9,200
Average American Median Income: $46,300
The willingness to take on inordinate amounts of debt has also fueled the housing bubble. Given that our savings rate is negative, we are realizing that spending (via debt) is the way we keep the economy afloat. Whether people refinance their home or take money on through loans and credit card debt, consumer spending is by many estimates 70% of our economy. Now that credit is tightening up, we are seeing how quickly the economy is contracting. Many pundits are crying foul and blaming the Federal Reserve for spoiling the party. Yet we have set a standard that isn’t sustainable. I’m sure many of you saw the Saturday Night Live skit of debt reduction where they parody a commercial and a man comes out with a breakthrough idea, “spend less than you earn!” Somehow this idea hasn’t caught on. The fact that many Americans are locking themselves into 30 year mortgages in areas that will face market declines, will cause a negative wealth effect on the overall economy. Economics show that during recessions, people spend less especially if they perceive their employment being tenuous. This massive credit bubble will no doubt lead us to a recession because in reality, there is no other way out. We have few options. We can create more money by lowering credit rates thus fueling more spending via debt – with this the economy at least has the perception of staying afloat because spending is so vital to our growth. Or we increase rates, and flush out the excess credit. This will be a painful experience. The amount of credit through mortgage equity withdrawals, credit card debt, auto debt, student loan debt, is so incredibly high, any credit contraction will cause a major shift in the economy.
We are married to debt and seeing how expensive marriages are, we have put ourselves in debt for this matrimony. But one thing is more expensive than marriage and that is divorce. Soon we will face the divorcing of massive credit and it will be painful. It was fun while it lasted.
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