July 02, 2007

The Cost of Mortgaged Suburbia: 3 Modern Housing Psychological Shifts

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 Manhattan. And we also have urban sprawl dominating our nation’s landscape. With the housing boom that occurred during the watch of Sir Alan Greenspan, we’ve seen builders subdivide and conquer the landscape of our nation with 3/2s popping up everywhere. It almost came down to a science; subdivide here, put 100 homes here, put a shopping center there with a Starbucks and Wal-Mart, and voila, you have yourself a new town. But will the people come?

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:

Commute Time:

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 Los Angeles County, there isn’t any land surrounding areas to add additional lanes or expand alternative routes. We’ve heard numerous times that they’ll double-deck certain congested areas but any work would take a decade at the very minimum. This talk occurs in the background while commute times increase every year.

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 Southern California. Each day the 405, 5, 10, 210, and other highways become flooded with millions of drivers heading to work. Red lights fill the lanes like busy ants. How much are people willing to take of commuting to realize the American dream of that big house on a nice plot of land? Is this dream really a nightmare in disguise for many metro residents? This leads us into our next discussion, the urban sprawl caused by growing cities.

Salton City and Other Outskirt Boom Areas

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 Southern California pursuing the dream of homeownership. Examples include areas such as Temecula, Hesperia, Victorville, and Rancho Cucamonga. Once thought to be too far away from the hub of the city, are now home to hundreds of thousands of commuters that now own a home.

An interesting article appeared in the LA Times discussing the boom/bust of Salton City. This city is near Salton Sea over in the inland empire desert area of Southern California. Builders with the current run-up in real estate prices figured that those retiring will see this area as a Mecca of growth. Salton City decades ago was thought to become a large resort like area rivaling Palm Springs. Big names like Sinatra and the Rat Pack made the desert area famous and are booming to this day. But the sea did not boom. The salinity levels in the water are much too high for biodiversity and it turns out that you can in fact be too far from metro hubs. There is a limit to what people will drive. The California land mentality has taken hold many times and builders point to areas such as those in the inland empire that once were thought too far away, and now are thriving suburbs.

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 Arizona or New Mexico where you get the same desert for hundreds of thousand less? After all, Social Security and other retirement funds are directly deposited into your account so you can retire anywhere. The money you save on your home, you can use at local airports to fly into the Southland should you need to (might even be faster than hitting the road). I’m not sure much thought was given to certain booming areas in California and other parts of the nation. They figured that if they built it, people would come. So much is based on the American dream of homeownership that builders believed folks would fork over 3 to 4 hours a day simply to make the mortgage payment. Many middle class Californians are voting with their feet and leaving the state to places such as Arkansas, Arizona, Oregon, and other diverse locations.

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 New York or London. The idea of a home on a large plot of land is nearly non-existent for the middle-class in these highly populated areas. Southern California will become that way or we will see a two-tier system solidly emerge; the lower and middle-classes paying rent or buying in the boondocks, and the upper-class staying put. Demand will be high in these prime areas because people are willing to pay to be near work. That is why I believe many of the 88 cities in Los Angeles County will decline in prices in the upcoming years while few select cities will stay put or even increase. Orange County will follow a similar path. When you factor in commuting cost and the median for LA County at $550,000 and Orange County at $635,000, you start to realize that most families simply work for their family and car with practically nothing left over at the end of the month.

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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Kevin said...

Unfortunately the prudent savers in our country will be affected by the hurt economy caused by the debt slaves. I wish Bush HAD said "It is patriotic responsibility to save" instead of what he said about its our duty to spend. I wonder if my employer will consider my request to be paid gold instead of USD *sigh*.

Anonymous said...

Very good article. I came upon this article (from canadianbusiness.com) and found an interesting note.


"Tote up costs for gas, insurance and car maintenance and the Canadian Automobile Association calculates that a husband and wife who each make the Hamilton-Toronto commute(about 75 km or 45 miles) in separate Chevy Cavaliers will spend close to $144,000 over five years on getting to work. In other words, after five years, your average commuting couple from Hamilton is paying extra to crawl along the highway for two hours every morning."

Yes better to live close to work so densification is necessary.

Anonymous said...

SNL Skit: Don't buy stuff you can't afford



tashina said...

Usually a lurker, but wanted to say thanks for the great article.

Anonymous said...

Hi Dr.HB.
I think your blog is great. Check this out.
$994 sg/ft.
It looks like a fun house. 548 sq ft.
I couldn't resist.

Anonymous said...

Great find, Anon (3:26PM).

Checked our friend, Zillow.
Z-Value: $475K...LOL

Sales History:
06/20/2007: $445,000...LOL
11/23/2004: $340,000...LOL

Anonymous said...

I worked out a while back that if you commute an hour each way you'll spend one waking month each year commuting.

Here's the math:
- 1hr e/w = 10 hrs/week, and if you work 48 weeks out of the year, that's a total of 480 hours commuting.
- Assuming 8 hrs sleep, a waking day is 16 hours, so a waking month = 16 x 30 = 480 hours.

socalwatcher said...

True true true, Dr. HB. It scares me that 70% of or economy is tied to consumer spending.

I was watching CNBC today. They were talking about the housing bust.

Why is it happening? Subprime and the slow implosion of Alt-A paper.

"Subprime allowed people to buy homes in unaffordable markets."

Read that a couple times and tell me that is one good reason out economy is in deep shit...

Son of Brock Landers said...

long time reader, first time commenter. i saw my boss leave my old company because of a 2 hour commute, and I vowed never to do it. I now have a 30 min commute in a totally different state. i'm an economic bear right now because of a lot of factors, but I have to consider this problem. With all of the overbuilding from companies like Centex, will we see people thrown out of homes, subdivisions stand empty, limited apt rentals in some zoned areas, and then see squatters? Not just squatters, but theft by people who raid the empty subdivisions for copper wiring, pipes, and other hard assets. I can see this as an issue in 3-4 years. I can see the black market developing for these goods with construction companies, especially companies that were so 'ethical' they hired illegals for their crews to save a buck.

Derek (Orlando) said...

You guys should read suburban nation. My professor in 2002 predicted all of this would happen. No one did a damn thing about and no one will. It will come crashing. Sooner the better. I've got 40 years of living ahead of me. I'll continue to rent here in Orlando, until I can find a better job/career in the carolinas somewhere. I'm hoping prices drop before I get there. Any one notice a lot less in your grocery shopping cart for $50 than 4 years ago?

Derek (Orlando) said...

Sorry, my grammar is pathetic today.

ImmigrantBayArea said...

This for sure won't help Housing (especially in the SF Bay Area or other areas with a lot of new LEGAL immigrants):

Legal Workers Lose Chance at Green Cards

nblaw said...

Your writing is often poetry. Well-done.

EconE said...

Excellent article. First time to your blog...gonna read further now.

Anonymous said...

Perhaps the rise in late payments on HELOCs is due to MORTGAGE FRAUD®.

WASHINGTON (AP) -- Late payments on home equity loans climbed to a 1 1/2-year high in the opening quarter of this year, while delinquencies on credit card bills fell, painting a mixed picture of how people are managing their debt


Rob Dawg said...

Excellent article marred by a math error. The Average Commuter spends 52 minutes a day commuting not 1.5 hours. Transit on average takes twice as long.

christo said...

Derek (Orlando),

You sound like a young guy. Congratulations, you've figured out something most Americans never will. You and your professor were right (and you're right about the grocery cart, too). The issue is how many of your fellow students listened to or even remember what your professor said? The fact that no one did anything about it is a sad fact of life here in the good ol' USA. If I can offer any advice, it's to not get too emotional about the complacency and ignorance that abound, but accept it and do what you can to abate it. I personally gave up after I realized that most people don't want to hear information that goes against their views and economic views are the true religion of almost everyone. If this article were to appear somewhere like Yahoo!, the animosity and venom that would pour forth would be astonishing. Signs of a sick society, IMO.

Dr Housing Bubble said...


It is hard to ask a country to save when the vitality of the country depends on the direct opposite, that of spending. When Japan had their real estate bubble, the reason it hit so hard is that as a generality, the culture is such where people save a lot of their disposable income. So when the market burst, it took the economy down with it.

@anon 12:40,

Thanks for the article. I only gave the basic cost of car and fuel. And as you mention, adding in scheduled/unscheduled maintenance only increases the cost. That $144,000 figure is staggering but I’d believe it. A Mercedes and BMW with schedule cost will run you that much (or more) over five years.

@anon 12:50,

Thanks for posting the link. Not very often we see SNL hit it on the head with something relevant to finance.

@anon 3:26,

Wow, nice find. Great place in Pasadena. I love how they say “fun house” as if this was a reason for the place to cost $545,000 with 548 square feet. Maybe the foundation is made of diamonds, you never know.

@anon 4:29,

Trying to flip it for $100,000 in 1 month? Isn’t it great that transparency is now part of the industry? You can see the greed at the peak. No one (without fraud) would think of buying this place for that price.


Not only 70%, but a large portion tied to the housing industry via HELOC, credit cards, and debt spending. It’d be different if people used saved funds to purchase goods but this isn’t the case. I would love to see a study showing how much credit spending vs actual saved spending goes on (maybe a study showing check/debit/cash purchases vs loan/credt sales).

@son of brock landers,

Appreciate the post. What region of the country are you in? When you talk about folks stealing construction parts you don’t have to look too far, we had some folks doing this over in Orange County last year.

I’ve mentioned it many times and I think Q42007 and Q12008 we will see significant market shifts simply because rates and market trends will put too much pressure on housing.

@derek (Orlando),

Smart thing renting. If you are young, your greatest asset is yourself. Focus on increasing your earnings potential and doing something you are passionate about. Right now is not the time to buy especially in Florida. What’s the rush after all? Next year prices will be the same or less (my guess less). So right now you can continue renting, saving, and the time will be right for you to buy. Your frustration is echoed by many folks looking to buy their first house in today’s real estate market.


We won’t see any true reform until after the presidential election. This recent bill came down in flames and no one has the political will to resurrect it for fear it will damage their chances in winning. Politically, the momentum is gone for a few years but it doesn’t mean we don’t need some realistic solution to our growing immigrant population.


Glad you enjoyed. I think issues that affect LA also affect OC. We all deal with high home prices and massive commutes. Those two things keep our days very busy.


We look forward to having you back on.

@anon 8:15,

It is like a domino effect. It’ll trickle its way down from top to bottom. Currently, 7% of all sub-prime loans are in default and estimates predict 10% very soon. Considering the market is over $1 trillion, this is a large amount of money.

@rob dawg,

Thanks for pointing that out. I believe the large difference in sample response to overall numbers is based on a significant variance. From the article:

“For better or worse, America is a nation on wheels. To get where they need to go, 90 percent of Americans say they usually drive, reporting an average of 87 minutes a day behind the wheel. For car commuters, it's an average of 100 minutes; for parents with children at home, an average of 104 minutes (compared with 77 minutes for people without kids at home). The average household owns two cars, trucks or sport utility vehicles -- and one in four owns three or more.”

No doubt that in Los Angeles and Orange County, half of folks spend 45mins to 1 hr each way getting to work.


It is common sense most of us would think. If we spent one-hour really thinking about why we do the things we do, there will always be improvement for all of us. But the auto industry and the housing industry are heavy hitters in Washington and in state politics. An article like this would suggest we either improve highway systems, increase housing closer to metro areas (high density housing), and increase standards on issuing credit. Do we see this happening? Not with any significant changes as of yet. The credit card industry can impose rules on holding back credit on risky users but they don’t since they can milk them on fees and have them as debt slaves for life. They aren’t concerned about folks with 700+ FICO scores, these don’t make them large amounts of money. It is the person with a high rate paying his monthly nut and not seeing the balance decrease who they love.

Even the recent bankruptcy laws favor the companies and not the public. Either way, enforcement of standards and tighter credit are what is needed.


What do you think if we all use pseudonyms for posting? You can make it up and it will help with the flow of discussion.

Or, would you prefer a registered only comment section? This way folks would need to register (this can still be anon) but at least it will help develop a better thread of conversation.

I'll take a vote here since you are the one's that comment.


Dr. Housing Bubble

Anonymous said...

Dr. HB
..realistic solution to our growing immigrant population...
sorry, but the problem is not the "immigrant" it is the illegal criminal migrant from Mexico. Myself and all my legal immigrant friends are completely disgusted constantly being thrown into the same pot like these law breakers.. get in line, do it legally and pay your share..
None of the legal immigrants I know have any "problems" whatsoever, undocumented, over the fence illegal criminals have problems and cause severe problems for this country..
Thank you!!!!

Anonymous said...

Long time lurker here. I bought a nice home in the Middle of the country with 40 acres with fruit trees and asparagus and blackberry patches for 172000 in 2005. Taxes are low about 1600 per year. I have a very good friend in Santa Maria who paid 655000 for 3600 square feet and no yard whatsoever. When I tried to convince him of moving to this part of the country his response was the weather and culture. It is not in some peoples mind that the severe credit crunch that is coming is going to affect them or their 401k. They have infinite faith in the powers that be. Will my property be affected by this crunch. Maybe but not by as much. At least I can grow food and enjoy nature. Even if I do deal with the occasional tornado and hail.

JimAtLaw in l.a. said...

Anon 1:27, the problem is, many of your legal immigrant compatriots spend a lot of energy campaigning for "rights" for illegals and characterizing these criminals as victims, while painting citizens who simply want our laws enforced as downright evil.

As long as legal immigrants are on the news every other night claiming it's "unfair" and "racist" to want to enforce our immigration laws, and there isn't another loud group of legal immigrants out actively protesting to the contrary, you will end up lumped in with them.

Here's hoping that legal immigrant protest movement comes soon.

Son of Brock Landers said...

@Dr HB - Keep typing the truth, and thanks for the laughs. I was living west of Boston, I now live north of Indianapolis. Completely different housing market as prices are more in line with incomes. Odd part is, my current company (and the recruiter) repeatedly said they have a hard time getting people to move out here. Metro Boston might be in worse shape than California because Mass has an aging population that gets hidden by the number of college students and illegal Brazilian immigrants walking around. State fiscal problems dead ahead.

Not simply stealing, but organized strip downs of boarded up homes or empty subdivisions. There was mention of it in Cleveland, but with suburban sprawl in non-armpit parts of the country, it is going to be tough to monitor.

To the board: I'm pro-legal immigration, especially skilled workers. We just need to crack down on illegals. There is a distinct difference and the media doesn't understand it. Too often it is very hard for skilled people who want to be here to get in, and too easy for unskilled people who want to get in.

wondermike said...

Great Article. The escalating imported oil and gasoline costs being experienced in the United States and beyond will speed this debt bubble crash in unpredictable ways.

Anonymous said...

Good stuff, doc.

Agreed on all points previously mentioned. Scary part is that our consumer nation is even more vulnerable now to gas price increases then in 1973 (when my dad traded in the 68 Mustang for a Datsun B210, but that is a problem for me and my analyst to work out).
The pump can whack us for $10 a gallon but most folks will pay because they have no choice in exurbia.

So much of this mess has been created by well-intentioned but bone-headed govt. policies: mortgage interest deduction, fed/res interest manipulation, goodies for comercial developers and property owners at all levels of government,etc. The blowback has been the creation of even more unaffordable housing realities, especially for those in most need of it at the entry level.

Bureaucrats will never beat the market and shouldn't even try.

sandpiper21212 said...

Thanks for your blog, Dr. H. I'm in my mid-40s and single in Maryland. After 19 years of work, digging myself out of bad spending habits that put me in debt, I'm finally at a place where I can buy a home. Or so I thought. I can't believe what's going on and am really depressed about it. All those dreams of a house to put Martha Stewart's good things to work, a garden straight out of the pages of Horticulture magazine ... all on indefinite hold. Perhaps impossible.

Your blog is good therapy for people like me. A part of me yearns to buy (I'm pre-approved and have seen many over-priced houses with my realtor), but your blog and the Baltimore housing blogs keep me sane and rooted in reality.

Thank you.

The North Coast said...

I admit I have a pro-urban bias, but I believe that over the next 20 years, we will witness the same kind of rapid, catastrophic disinvetment in the ex-urbs and "edge cities" that we saw in cities in the 50s and 60s.

This will happen because of escalating fuel costs and permanent tight (and shrinking) supplies.

This time it will play out differently. At least when people fled the cities for the suburbs 50 years ago, the people stranded in the cities had access to public transportation, great old buildings, and city cultural amenities that remained intact, such as museums, libraries, and some nightlife.

What will the stranded exurbanites of the future have? A cheaply-built, oversized, energy guzzling house in the middle of nowhere that is deteriorating rapidly, in a place where there is no access to anything.

Good to look for a berth in a nice, traditional small town or "gentrifying" neighborhood of a large city that still retains its core.

The North Coast said...

Please forgive typos in foregoing post.