Home Ownership and Markets
PART ONE

Edward J. Dodson

[Revised June, 1997]

The strength of a nation lies in the homes of its people." [Abraham Lincoln]

INTRODUCTION

Abraham Lincoln understood the degree to which a people derives self-sufficiency from widespread ownership of property, and particularly ownership of a home. Although the Jeffersonian vision of an independent yeomanry spread out across the North American continent was already undergoing a transition to an urban and industrializing society, Lincoln could still look out across the land at mid-nineteenth century and find the vast majority of his fellow citizens occupying their own homes and farming their own land. The waves of propertyless immigrants arriving from the most impoverished parts of the Old World had not yet stressed the capacity of U.S. cities to absorb newcomers. The heavy concentrations of unlearned and unskilled foreign-born peoples had not yet arrived to turn the oldest sections of Boston, New York, Philadelphia and the other Atlantic coast cities into overcrowded ethnic ghettos owned by absentee landlords. Nor had newly-free African-Americans migrated north to compete with other poor minorities for space and employment.

Despite the turmoil of our history and the disappointments associated with realization of the vision, few would argue with the inherent wisdom of Lincoln's words. The acquisition of shelter, safe from external interference or confiscation is a human desire that transcends societies. Within the world's industrialized social-democracies, housing is a cornerstone in the socio-political arrangements that sanction and protect a whole range of property rights. The more widespread is home ownership in a society, the higher that society generally appears on almost any objective scale measuring the distribution of wealth, income and well-being. How public policies, legislative initiatives and market forces affect housing is, therefore, of major concern to a wide range of observers and constituencies.

What policy analysts and public officials in every country rely on to monitor the housing sector is information gathered by a number of private groups and public agencies. Provided with data on the number of housing units under construction, sales of new and existing units and the financing gathered by banks and other lending institutions, the analysts attempt to forecast the future (or, more often, explain the past). What they seek to determine in advance are the probable outcomes of alternative public policy choices. Sometimes they are reasonably successful in their quest; in the majority of cases, however, they are thwarted by the complexity and unpredictable nature of our environment, which is both political and physical in nature. With good reason, one might lament that the one economic principle operating with unquestionable consistency is the law of unforeseen consequences. At best, what we are able to identify from the mountains of data gathered are tendencies. In the very short run (i.e., quarter to quarter) the degree of change is normally low. Over the very long run (i.e., centuries) change is easier to recognize but not necessarily easier to explain. Nevertheless, what makes economics such a difficult pursuit (and deserving of its reputation as the dismal science) is the intermediate term. Ask 100 economists whether we are at the beginning, the middle or end of a business cycle and the chances of getting a straightforward answer are about 100-to-1. One reason for this is, of course, the difficulty of systematically monitoring the global economy.

We live in an interdependent world where markets overlap, are global, national, regional and local all at once, and where the interactions between individuals and businesses are influenced by the geo-political actions of sovereignty-claiming governments. Each nation-state has its own peculiar form of government, framework of law and public policy agenda. Whereas ownership and control over natural resources, real estate, production facilities and financial institutions has become increasingly international, the political leaders of nation-states are frequently directed to invoke protectionist restrictions on trade and commerce out of perceived self-interest. In response, the senior decision-makers of multinational corporations attempt to maximize advantage in the global market place by influencing public policy decisions m many countries. The process is dynamic and the results often contradictory; the result is a long way from any theoretical model based on abstract assumptions of market clearing, propensities to save and invest, consumption functions, and the like.

To the lament of economists, what happens in the real world is only incidentally explained by theoretical models developed and refined during this century. The student of economics is introduced to a complex set of mathematical equations purporting to provide insight into the function of the global economy; however, in their search for mathematically-provable relationships, far too many economists today suffer the consequences of several serious flaws m how they have been taught to think about fundamental principles. What is needed above all else is that economists begin to look not at a theoretical world that does not exist but, rather, to a wider range of observations on what is actually happening in the one that does.

This paper examines the potential for looking at housing as a key indicator of where an economy is within the business cycle. Not in all societies, however, is housing important enough to warrant close monitoring and analysis. Only where the majority of households own or can potentially achieve ownership is housing key to the economic health of a society. For this reason, the United States offers one of the most reliable national models.

I will focus to a great extent on the historical and present situation in the United States and look at housing from the standpoint of its component sub-markets and the socio-political institutions that influence the performance of these sub-markets. Finally, I will use this knowledge in conjunction with population demographics to paint a likely scenario for the intermediate future.

HOUSING: TAKING STOCK

Housing forecasts are issued regularly in the United States by organizations such as the National Association of Home Builders, National Association of Realtors and the Mortgage Bankers Association -- as well as by the Federal Reserve Banks and various government agencies. Data on the number of housing units constructed and sold, on the sale of existing units and even on the loss of units to deterioration is available to the analyst for most regional markets. The challenge, of course, is to assess how this data relates to overall regional economic activity or aggregates into something approaching a national market. The task is neither simple nor automatically instructive. Nevertheless. at a minimum, knowledge about the condition of a region's housing market has much to reveal about the overall health and direction of such an economy. To accomplish a high degree of understanding, one's analyses must focus on the several mutually-dependent sub-markets that comprise the housing market as a whole; namely, the supply of and demand for, land; labor; capital goods; and credit.

Many economists and other policy analysts do look at housing as a reliable regional indicator; however, their macroeconomic theorizing has made very little progress in analyzing how and why regional markets operate as they do, or the influence they exert on national and international economic trends. The annual number of housing starts, for example, is considered an important national indicator in the United States and all industrialized social-democracies where owner-occupancy of housing units is reasonably widespread And, in a general way, the forecast and reporting of total housing starts is an indicator of demand. What is also important to know is the number of existing homes that have changed hands or have been lost to deterioration and abandonment. In the latter instance, the underlying reasons for the loss of these units is also important information -- as much for socio-political as purely economic reasons. Changing land use patterns and how land prices are affected is also important information for the policy analysts concerned about issues of housing affordability, orderly development, the loss of agriculturally-valuable land to development, increasing demands for public infrastructure, and environmental concerns.

Economists also monitor the median price of housing and the direction of interest rate movements as important guides to the future where housing is concerned. More recently, demographic studies have been utilized with some effectiveness to forecast demand, these same forecasts then used in the public debate over development and over the expenditure of revenue for housing-related programs.

Where a large percentage of a nation's households are home owners, these statistics are important indicators of overall economic strength. For the overwhelming majority of the world's population, however, only small percentages of total households own or have access to rental housing that meets even the most minimal standards of the housing have group of nations. The presence or absence of widespread home ownership visibly provides a significant benchmark for measuring the distribution of well-being in every society. Thus, policy analysts within housing have nations are legitimately concerned when statistics suggest that home ownership has reached a plateau or is on the decline. Widespread home ownership is, in fact, an essential component for economies built on domestic purchasing power for personal goods and services. This has certainly been the case in the U.S. -- the world's great consuming society.

Where the cost of home ownership is moderate and relatively stable in relation to increases in household income, discretionary income also tends to be high -- with the obvious result that more income is left over for the purchase of other goods and services. Conversely, where circumstances combine to make housing unaffordable or unavailable, economies (even those as dynamic as the Japanese and South Korean) continue to be dependent upon exporting to the housing have nations to sustain economic growth. What has many observers concerned is that even m the housing have nations, decent shelter is now beyond the reach of a growing number of households -- even those whose income meets or exceeds the median in many regional markets.[1] The peak in home ownership in the United States occurred in 1980, when nearly two-thirds of all households owned their places of residence. Despite the construction of millions of new housing units since the beginning of the 1980s, the percentage of home ownership has barely increased, if at all. And, of course, millions of housing units suffer from serious disrepair because their owners simply cannot afford to maintain them. Perhaps a slightly smaller number have been vacated and sit abandoned, waiting to be torn down or burned down or for the next upward turn and the possibility of rehabilitation.

The reasons for stagnant home ownership in the housing have societies are many. In the U.S., poverty -- exacerbated by a rapidly expanding number of households comprised of single parents and one or more children, by the continued deterioration of communities (as places where several generations live, work, are educated and interact), by widespread alcoholism, drug abuse and unemployment -- keeps many households from competing for decent housing. The housing stock in poverty-stricken urban centers throughout the world is disintegrating and disappearing (and, in too many cases, never existed at all). Maintaining older housing units requires the expenditure of cash that many poorer households cannot afford to make, and governments already heavily in debt to the world's bankers are unable to do anything to help -- even when those who govern have a sincere desire to do so. In many of these societies, socio-economic diversity and mobility is, for most people, difficult if not impossible; many of those who do manage to rise above their status at birth eventually opt to leave, taking their skills and potential for purchasing power with them.

Circumstances in the U.S. are rather different. All of the same poverty-related pressures exist. Yet, the opportunity for determined individuals to excel and leave poverty behind has for at least a sizeable majority has existed for several generations. As a consequence, the attitude of many people in the U.S. is that poverty is more often self-inflicted than caused by socio-political arrangements. Addressing the merits of this position is, however, outside the primary focus of this paper. What is of immediate importance is that poverty means an absence of purchasing power, which results in a dependency on public subsidy for access to housing. And, in areas where the impoverished live in concentrated numbers, the condition of housing deteriorates for lack of attention and an absence of funds available for required maintenance.

For the offspring of middle and higher income households, the housing dilemma is rather different. The high cost of rental housing often prevents the accumulation of savings toward the purchase of a house. One result is that a large number of adults between ages 20 to 30 now return after completing their college education or technical training to once again live with parents. In a very real sense, the U.S. is experiencing a return to living arrangements associated with the extended family, with two or three generations of adults living within the same dwelling. How this demographic shift will impact housing and the economy as a whole is as yet unclear. Much will depend on whether individual incomes rise faster or slower than the cost of home ownership. Housing price increases have slowed considerably even in strong regional markets; and, in many other markets, after falling from around 1989 on housing prices have for the most part stabilized.

Another group experiencing the financing strain of high housing prices is home owners whose incomes have stopped increasing or have fallen (due to retirement, unemployment or underemployment). Reassessment of their homes for tax purposes to reflect current market value represents, where housing prices have increased, a serious threat to their ability to retain home ownership. In an environment of falling values, governments generally do not reduce assessments unless strongly pressed by citizen action to do so. Some law firms earn substantial fees filing for assessment reductions on behalf of business clients; however, few home owners are in a financial position to retain legal representation for this purpose. Computerization and the ongoing collection of data on property transactions is slowly changing this situation, but only slowly. Only the larger and revenue-rich communities are as yet utilizing these systems. Most put off reassessment for as long as possible, so that some property owners become dramatically over-assessed and others under-assessed over time. From the standpoint of the economic health and vitality of a community, assessment inequities have important economic consequences not broadly discussed or generally understood. However, assessments can and do influence investment and disinvestment decisions on the part of individuals and businesses.

In summary, the crucial questions for economists and other policy analysts are whether the underlying dynamics of housing markets when aggregated and analyzed can forewarn us of downturns in the larger economic arenas. If so, then the important question is, What are the appropriate policy choices available to mitigate or reverse these trends?

THE U.S. CASE
A Test for the Policy Agenda of Liberalism

Focusing on Housing in the United States as a basis for suggesting the presence of similar trends in the global arena has certain limits that must be discussed. Perhaps those of us who criticize the utility of existing forecasting efforts need to better appreciate the complexity of the task. Not only are there four primary sub-markets to monitor and on which to collect data, each of these markets exists -- to a greater or lesser degree -- independently in hundreds of regionally-centered multi-markets.

Each market is affected by natural and manmade advantages and disadvantages. Nature (generally speaking) dictates climate and topography, as well as accessibility to rivers, lakes and oceans. From nature, we also benefit from the availability of minerals, forests, fertile soils and other potentially usable natural resources. These are qualities of the natural environment that contribute to the ease with which human civilization is established and prospers. We add our labor within a socio-political structure that encourages or discourages efficient utilization of these resources. From this perspective, the citizenry of the United States (or at least those who control access to nature as a direct result of the title deeds they hold) benefit from numerous advantages of circumstance.

The North American continent is rich in natural resources and is blessed with an overall temperate climate. Where temperatures are rather hot, air-conditioning has leveled the playing field considerably. People living in North America have been extremely mobile, first as pioneers and farmers, then as owners and workers in the mines, on the railroads and for the timber companies. Despite the fact that, as historian Frederick Jackson Turner declared at the end of the nineteenth century, the frontier was no longer available as a safety value for an expanding population, ingenuity and consistently rising productivity brought people to every reach of the North American land mass. Even so, the population density of North America is considerably lower than that of most other heavily industrialized societies. Despite serious injustices inflicted by European-Americans on those whose ancestors had arrived thousands of years earlier from the Asian continent (but who have come to be described as the indigenous peoples), the socio-political framework established by European-Americans broadly encouraged individual enterprise and sanctioned a wide distribution of ownership in both nature and what was produced from nature. Nevertheless, the number and frequency of panics and recessions occurring during the nineteenth and early twentieth centuries -- a period when external influences can reasonably be described as minor in effect -- provides strong suggestive evidence that all has not been well structurally.

As the United States of America entered the industrial era, as their unsettled frontiers disappeared; then, as cities literally absorbed tens of millions of immigrants from all parts of the globe, problems of wealth and income distribution similar to that present in the Old World quickly emerged. This problem was, in part, characterized in the early decades of this century by a serious shortage of decent housing in and around the nation's urban centers.

Prior to the depression years of the 1930s, most families in the United States achieved home ownership only after saving and pooling income from the extended family group. When mortgage financing could be obtained, the loan amount was generally due in full at the end of a period that could be as short as three to five years. If (whether for reasons of personal failure or uncontrollable economic circumstances) one was unable to refinance the loan when repayment came due, foreclosure ensued and the lender would end up as owner of the house and the parcel of land the house sat on. Because long-term mortgage financing was considered by lenders as unacceptably risky given the boom-to-bust nature of even regional economies, such financing was rarely available.

In 1930 only about 12 million housing units were owner-occupied,[2] most U.S. households rented and lived in large, multi-family dwellings or tenements, many of which were of very poor quality and lacked even basic provisions for sanitation. The interest of reform-minded liberals in slum clearance began with the Progressive movement during late nineteenth century and the first two decades of the twentieth century. In an effort to stimulate housing construction and at the same time rid the nation's cities of terrible living conditions, Franklin Roosevelt later pushed through legislation to allocate funds to housing.[3] This legislation established the Federal Housing Administration (FHA) as the agency charged with expanding the nation's housing stock.

The FHA's primary tool was its authority to insure mortgage loans and thereby protect private lending institutions from loss m the event of nonpayment. As a direct result, the long-term, amortizing mortgage loan came into existence, enabling millions more households to qualify for financing and thereby achieve home ownership. As a result, between 1934-86 over 15 million U.S. families purchased homes under FHA programs.[4] Combining guaranteed repayment with a very low down payment requirement removed for several decades any real need for prolonged savings as a condition to securing home ownership; the key criteria were stability of employment and income. The earlier creation in 1932 of the Federal Home Loan Bank System also made long-term lending feasible by providing to member savings and loan institutions government protection against runs on deposits that normally occurred during panics. In prior decades, such panics had often forced the closing of otherwise healthy and well-run lending institutions.

Even before the U.S. economy surged toward full employment during the Second World War, the changes in housing financing had already made a considerable impact on the construction of new housing units. In 1933 only 90,000 housing units were constructed; by 1940 this number had already increased to over 600,000.[5] A tremendous pool of individual savings was then accumulated by workers and those in the military during the war, and these reserves became a ready pool for investment in housing after 1945.

The house buying capability of veterans was further enhanced by Federally-guaranteed loan programs that insured repayment of mortgage loans to veterans up to the full purchase price of a new home. Between 1946-1950 more than 5 million new housing units were constructed -- and the pace of homebuilding continued at around 1.4 million new units each year through 1965, rising to a high of 2.4 million units in 1972.[6] While putting families into new housing, however, long-term mortgage debt also simultaneously arose as an important factor in the overall health of the U.S. economy. Already by 1965 U.S. households owed over $200 billion to commercial banks, savings banks, savings and loan associations and various Federal agencies -- secured by the market value of housing units and the land thereunder.[7]

Over the next three decades the growth of the U.S. economy would become increasingly dependent upon debt-driven spending and consumption. What is now of paramount concern is that in the large middle-income segment of the housing market, household income is no longer keeping pace with rising costs of acquiring both existing and newly-constructed housing units. Although the problem is far from being equally distributed across the nation, diminished housing affordability is bringing instability and economic troubles to even those regions with high levels of per capita income. In those regions of the nation with the greatest diversity of manufacturing, service, government, technology and educational employment, the affordability problem is one of home ownership costs rising faster than incomes; in regions more dependent upon agribusiness and energy-related industries, housing prices fell quickly during the late 1970s and have recovered only in pockets and slowly. For example, although median housing prices for metropolitan Houston, Texas fell only moderately (except in the very speculative condominium and new subdivision markets), there has been only a modest return to upward moving prices despite several periods of single digit interest rates on long-term mortgage financing. The median price stabilized in the $65,000 to $69,000 range during the last half of the 1980s and has since increased at 2-3% annually. Metropolitan St. Louis, Missouri -- a major center for agribusiness -- experienced a modest 10 percent increase in prices from 1986-89, going from $70,900 to $77,500. Chicago, Illinois, on the other hand, although still in the Midwest and the center of agribusiness and commodities trading, saw prices rise by more than 20 percent during the same period to $107,200.

What should be very clear even without deeper analysis or reference to detailed statistics is that the net short-run results of changing housing prices (whether upward or downward) is difficult to forecast without putting these changes into the context of more complete economic and societal information. In an effort to provide a basis for this analysis, a necessarily brief exploration into the individual housing sub-markets and other externalities affecting housing follows.

Although housing is often viewed as the sum of countless localized markets, none of which individually have much effect on aggregate activity, housing has gradually acquired a global dimension that both influences and is influenced by the tendencies for labor, physical capital and credit to seek the highest possible returns. Thus, aggregate demand for and affordability of housing has become highly sensitive to changes in global economic decisions. For example, shifts in the location of production activities or redirection of government spending filter through to individual regions in a very direct way. Merely the announcement of increased or decreased private or public sector activities will stimulate changes in the strategies of a wide range of investors, developers, financiers, owners of small businesses and individual consumers.

Throughout the United States, individual and corporate producers are facing stiff competition from all around the world. Foreign (a term that requires careful use given the transnational structure of many of the world's largest business enterprises) producers are able to match or exceed quality standards and do so while offering their goods or services at a price significantly lower than the operational costs of many U.S. based producers. Although the reasons why some domestic U.S. producers lost markets to external producers during the 1980s are complex -- and not wholly undesirable -- the intermediate term result has been to destabilize employment for a labor force accustomed to infrequent layoffs and near permanent jobs. These changes in the employment stability of workers and managers have also dramatically impacted the nation's housing sector.

In the arena of the politician and policy analyst, forecasting the effectiveness of government programs must now take account of global interdependency and what seem like overnight shifts in where goods are produced. The name of the policy game, therefore, is to create reasons for employers to locate within one's geopolitical and taxing jurisdiction. One example of what are considered appropriate public policy approaches to development is the abatement of taxes on investment in capital equipment or construction of office buildings, retail centers and housing, as well as on the revenue generated by these investments. So-called enterprise (or, in recent years, empowerment) zones have been established in many urban areas to attract and stimulate business investment. Land parcels are often acquired from private titleholders by public agencies. pooled together into larger tracts, then resold at substantial discounts to companies willing to commit to the construction of new facilities that create employment. Government also funds special training programs designed to provide businesses with a more competent labor force. And, finally, government provides subsidies or direct grants to home buyers to moderate the cost of home ownership and stimulate the construction of new or rehabilitated housing in areas where normal market operations are not accomplishing this objective.

All of the above programs and strategies have made housing highly dependent on the ability of regional and municipal government agencies to attract investment. This has occurred during a period in the U.S. when Federal assistance has been severely curtailed or entirely withdrawn. Unfortunately regional governments have too often responded by turning for revenue to the very private sector activity they need and want to encourage. Ostensibly caught in a catch 22 dilemma, public officials have generally not recognized the contradictions inherent in their revenue decisions. During the 1980s, many officials and analysts mistakenly adopted Reaganomics and called what they did supply-side economics. The end result turned out to be a rather poor bargain for the revenue-raising side of the balance sheet. Unable to balance budgets on the backs of business, many regional and particularly urban governments have scaled back their expenditures on municipal services -- at a time when need is escalating. Some state governments have faced similar challenges; others have been more fortunate in attracting high technology industry and a highly educated and skilled work force. The finances of the U.S. government are almost beyond comprehension. Deficit spending escalated during the Reagan presidency and has continued largely unabated. U.S. taxpayers must somehow find the financial reserves to carry the interest on a national debt that is well passed $5 trillion. At an interest rate of 8 percent, the annual cost of this debt is $400 billion. For those who must compete in the credit markets for scarce financial reserves, such a drain by government on the supply of investment reserves has a powerful upward pull on interest rates.