The housing rescue plan rolled out by the Obama ad-ministration in March is the 4th or 5th one to emerge since 2007 when foreclosures began to take on their Godzilla-like stature. The earlier plans were decidedly unsuccessful—they were described in an article on Bloomberg.com as “complete duds”—so it’s easy to understand the skepticism the new plan generated before it was even fully outlined.
What’s different about the criticism of the new plan is that so many of its detractors are focusing on who the plan does not help. The hardest hit, for example. Those whose homes lost the greatest value in the last couple of years, whose loan-to-value ratio is way over 105 percent, are not eligible for refinancing. And, of course, also not included are those homeowners who are struggling mightily, but not yet drowning.
Why have we gone from decrying bailouts in general to thinking that this new plan is not inclusive enough? My guess would be the loss of household wealth recently quantified by the Federal Reserve, a loss felt by nearly all Americans. The Fed reported that U.S. households lost more than $11 trillion, or about 18 percent, of their wealth (measured as assets such as homes and cash minus liabilities such as mortgages and other debt) in 2008. We lost $5 trillion in the last quarter of 2008 alone. Enormous numbers such as these are thrown around with impunity these days, but the Wall Street Journal put the figure in perspective by noting that the decline in 2008 “equals the combined annual output of Germany, Japan, and the U.K.” We’re talking big, big money here.
The last sizable loss of household wealth occurred in 2002 when the tech bubble burst. In that collapse, Americans lost what seems now to be a paltry 3 percent of their net worth, mainly in stocks. This time around, almost all assets have lost value. Stocks, bonds, homes, you name it. Together, they added up to the largest decline ever in the 57 years that the Fed has kept track.
We all feel it, and we’re all worried about it. From the twenty-somethings who bought their first home three years ago to the sixty-somethings who were looking forward to retirement, it’s struck a real note of fear. It’s even sent a bunch of us to the bank to open savings accounts and driven many more to think very carefully about every purchase—especially homes. And it’s greatly exacerbated the usual “Where’s mine?” clamor that’s accompanied the introduction of each bailout program.
It would be great if we could resist both the fear and the negative impulses it engenders. Unfortunately, those not covered by the new programs are going to find it more and more difficult (not to mention galling) to keep making the monthly payments on their vastly overvalued properties.
But here’s the deal. America’s disappearing “wealth” was simply a function of the runup in home values along with the euphoria in the stock market generated by the sales of mortgage-backed securities. Looking at a chart measuring household wealth between 1980 and the end of 2008, you can see the extraordinary deviations caused by both the dot-com bubble around 2000 and the housing boom starting in 2003. The numbers, however, which escalated so quickly, do not reflect any actual underlying strength in our nation’s economy and must go down again. Even after losing $11 trillion last year, we still have some distance to go before the normal trend line is restored.
As we approach the bottom, the bottom line for builders will be to focus laser-like attention on costs, both for themselves and for their customers. This month’s “Field Report: New Direction” (page 70) shows how four companies are pushing themselves, their employees, and their trades to not only operate in the leanest and most efficient way possible but also to provide homes for buyers that offer the best value for the lowest price. And not just at closing but for the entire life of a home, with a goal of providing a predictable monthly cost for the foreseeable future. That would be priceless.