The Deepening Wedge

Edward J. Dodson

[Reprinted from Equal Rights, Winter 2005]

The wedge between the "haves" and the "have nots" is deepening in the United States. Equal Rights readers might want to take a look at the statistics I compiled and presented last year at the CGO conference in Bridgeport, CT. The report is available on the School of Cooperative Individualism website. At the same time, a large segment of the population is enjoying enormous increases in our paper net worth. Most homeowners are riding the upward spiral of land prices in communities all across the nation. Yet, even those who have never read Henry George or studied political economy as taught by George are smiling while keeping a watchful look over the horizon for signs that "the housing bubble" will burst on them.

Answer these questions: Today, without the benefit of "equity" in your home (and in the land parcel thereunder), could you afford to purchase the property you currently own? Could you afford to purchase any property in your community as a primary residence? Can your children afford to purchase any property in your community, town or within a reasonable driving distance from where you live unless they receive a gift from you or a grant for down payment and closing cost assistance from some government agency?

If you are able to answer "yes" to even one of the above questions, you are part of a declining minority of households in the United States. In fact, the rate of homeownership for families with children is lower than it was in the 1970s, falling from 62.5% to 56.6% according to study released by the Center for Housing Policy. Part of the story is rising housing costs. Part of the story is falling household incomes for many "blue collar" workers. Part of the story is the dramatic increase in single parent households. And, of course, part of the story - the part least reported on - is the spiraling cost of land.

For some, benefits of a booming land market are very real, even if not yet realized by the sale of the land held. A large number of households are experiencing enormous increases in their paper net worth because of rising land prices. This accrued land value is there to be cashed in on as people retire from their working lives and find themselves in need of an alternative source of income to supplement what they receive from employers and the Federal government. One result is that the "reverse mortgage" business is mushrooming, where homeowners relinquish equity for a monthly income supplement. With such a large percentage of households owning homes and owning some amount of relatively valuable land, the fact that the top few percent of the population control 40% of all household wealth and half of total financial wealth is obscured: the pie is huge and both government and private philanthropic programs mitigate the worst consequences for those at the bottom.

The United States is entering a very dangerous period, for a number of reasons. One is that the population is rapidly aging. Many will need to convert home equity into cash to pay for medical care, but the pressure on government to absorb the costs of medical care for perhaps one-third of the nation's elderly is very real. Unless the "supply-side" gamble of the Bush administration and its Congressional supporters pays off, the national debt will continue to escalate, putting upward pressure on interest rates and (if the Federal Reserve succumbs to government pressure to print new currency in exchange for government debt) an escalation of inflation.

As we know, no one in a position of authority is committed to implementing fundamental solutions to these challenges and risks. The tendency will likely hold for changes in public policy to proceed along the historical path of "disjointed incrementalism." So, in light of this socio-political environment, we ought to realistically expect the U.S. to experience some harder times ahead. Just when I would not hazard to predict. The paper net worth in land values held by existing homeowners is part of the equation, however. And, what follows are bullet points describing some of the key characteristics of homeownership in the United States:

• There are an estimated 293.6 million people and 110.4 million households in the United States. Some 75 million households (68% of the total) are homeowners - meaning they hold the deed to the property and are the beneficiaries of the equity created by a combination of loan amortization and rising land values. One in twelve of these properties contains between one and five rental units.
• Most homeowners have lived in their properties (or have been homeowners and moved from one or more properties) for a decade or longer. However, special financing programs, as well as government grants, make it possible for a significant number of households to achieve homeownership every year.
• The average price paid in 2003 for a new home was $246,300. The average price for existing homes is generally a good deal less than this. Yet, the proportion of land value to total value for existing housing is often greater than for new housing. Builders who have the financial reserves to land bank for long periods are able to take advantage of the fact that other builders must construct larger and amenity-rich homes - or gain permission from resistant local planning and zoning boards to construct large numbers of units per acre of land.
• In 2001, the average homeowner's equity above outstanding mortgage debt was 54%. Remarkably, this represented a decline from 60% in 1991 during a period of almost continuous increases in land values. One reason is that millions of households borrowed against their equity to pay off other debt, make significant improvements to their homes or obtain cash for their children's education expenses.

Now, let's take a look at estimating how much land value is attached to residential property.

The average price for all housing in 2003 was around $176,000. Using the 75 million figure as the total owner-occupied housing stock, the total market value of this housing is $13.2 trillion. A relatively conservative average land-to-total value ratio of 30% suggests these properties include $3.96 trillion in capitalized land value. (Note, then, that if the market capitalization rate is 5% per annum, the imputed annualized rent fund available to be captured for community use and distribution would be $19.8 billion.)

The Federal Reserve reported that as of 30 September 2003, the total mortgage debt held on one- to four-family residential properties had reached $7.1 trillion, leaving property owners with $6.1 trillion of total equity. Of course, this tells us nothing about the distribution of land-related equity among property owners. For that, we need to look at very detailed statistics on the housing stock.

We know, for example, that in many small towns distant from major metropolitan areas and not subject to resort area influences, a large home on an acre or more of land might cost less than a condominium unit located in a suburb of any major city. In the latter case, much more than 30% of the total value is in the land, while in the former case, much less than 30% of the total value is likely to be in the land. In many markets, leasing the second or more units will generate sufficient cash flow to cover the owner's mortgage payment, insurance and real estate taxes. Purchasers will often pay much more for these properties than for a single unit property with the same square footage on the same parcel of land. In other circumstances, these income-producing properties are acquired for extensive renovation and conversion into single-family properties.

All this means is that the housing market is extremely complex and very dynamic. Yet, for those of more modest means, land ownership (thru homeownership) and positive net worth are directly related. By virtue of all of the special programs and tax incentives associated with owning a home, the policies of disjointed incrementalism have managed to return just enough of the total rent fund to the middle 60% of the population to make them feel they are in the game. The bottom 20% -- low income renters and the homeless - share none of the rent fund and very little of the wealth pie.