Saturday Sermon: The Cultural Pathology Underlying the Housing Crisis

Between around 1999-2007, I never understood how so many people appeared to have so much money. Yes, some were actually rich and earned a lot of money, but I knew many people--too many people--who just didn't make that much money, but somehow were able to afford a home, payments on two nice cars, lots of nice clothes, and child care expenses. Then I ran across this piecever at the Irving Housing Blog, IrvineRenter describes the mentality that led to and fed upon the housing bubble:

...Southern Californians (with a little help from their own Big Brother, David Lereah, president of the National Association of Realtors) have convinced themselves the following:

• APPRECIATION IS INCOME
• CREDIT IS SAVINGS
• DEBT IS WEALTH

Just as these statements are contradictory and ridiculous, the proof that these statements are believed is that they are reflected in the actions of Southern Californians. For example, through borrowing against one's increasing home values, appreciation is turned to income; when people obtain more credit, they spend it like available savings, and a large amount of debt used to finance a large, opulent home makes one wealthy. Ask any homedebtor in Southern California, and they will tell you that makes perfect sense.

The problem is rooted in a basic misunderstanding of what separates the rich from the poor: the habit of saving. You have heard the expression, "the rich get richer and the poor get poorer." It is more accurate to say the rich save money and the poor spend it: in the end, the rich will have money, and the poor will have none. This is not one of life's inequities, but rather of of life's simple truths.

When you hear your average Joe tell you he wants to be rich, what he is really saying is he wants unlimited spending power. He wants the ability to spend like the rich people he sees wearing Rolexes and driving BMWs to their mansions in Shady Canyon. This is why, when given the chance, poor people will emulate the rich by spending beyond their means in order to be rich. Of course, in the process, they spend themselves poor.

And this pathology based on fantastic beliefs leads to real, earth-bound problems:

It is pathologic because it is not sustainable: It is a house of cards. There is an inevitable Day of Reckoning when all debts must be paid.... At some point, the debt becomes so large that no lender is willing to loan more money and no greater fool can be found to bail them out, and the whole system comes crashing down. However, while the debt was building, the debtor became accustomed to a certain lifestyle and level of spending. When the credit is cut off, the debtor can no longer spend, and a great deal of suffering ensues.

We are quickly approaching the Day of Reckoning in our housing market. In my view this will be Armageddon for California debtors: the spending will stop, they will lose their homes and with it their illusion of wealth, and they most definitely will not be enjoying life.

I would note two things:

1. While the author is absolutely correct, in that certain regions are afflicted far more than others, this still was a national phenomenon--or at least, not confined to Southern California (my experience in Long Island was similar).
2. At least some people are underwater not because they spent foolishly, but because they had little or no choice. When I lived in Long Island from 2000-2005, housing prices were so wacky, if you wanted to own, you had no alternative but to overpay for housing. Once that happened, it was far too easy, given how much money one spent on housing, to wind up on the HELOC Treadmill to Hell.

One other thing: that post should put the lie to the idea that no one saw Big Shitpile coming. It was written in 2007.