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.

Commuting

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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