Tuesday 14 May 2013

Savings, and loans

This morning I got an email from a woman in the United States of America. She designs 'infographics', and does marketing. She's done an 'infographic' (left) about the size of homes in the USA. She has obviously done a quick web search to find people who blog about housing, and so she's mailed me. I don't think she's actually read my blog, if she had she might not have chosen it. But her 'infographic' does raise interesting issues. Note - I haven't verified her data is correct, but whether it is or not, the issues raised are the same. Before I go on to discuss these issues, I'd like to write a little about the text and subtext of her graphic, as I see them.

The text is obvious. Homes in the US are big - really big. Everyone has a big home. They're big in city centres, bigger in the suburbs, simply huge in the outer suburbs, still big in remote rural locations. They're also, claims the graphic, growing rapidly - the last panel claims the median home has grown in size by 50% in just twenty five years - interestingly, up to 2007, a date we'll come back to later.

The graphic shows, but doesn't explicitly say, that they're also staggeringly expensive. In New York, where the median size is apparently around 1500 square feet, the price is given as US$1295 per square foot, or about 1.9 million US dollars for an ordinary family house. That's not the extreme - Phoenix, Arizona is shown as even more expensive (why?!?). At the other end of the scale, housing in Dallas, Texas is stated to sell for US$59 per square foot, with a median size of 1650 square feet implying a price of just under a hundred thousand US dollars.

The subtext is less obvious. This is my interpretation, and my interpretation is subject to my own biases - which, if you've read this blog, you know. But the infographic was designed for, and advertises, a business called 'Quicken Loans'; their business is selling mortgages. The subtext seems to me to be, everyone else has a really big house. If you don't have a really big house, you're missing out. Borrow lots of money from Quicken Loans, and you too can have a really big house, like everyone else. And that seems to me, for most people, a really bad idea.

Of Size

OK, let's step back a moment, and talk about size. How much room do you need to have housing which is spacious and comfortable? This house (I've just measured it, to be certain, because I normally think in square metres) has 308 square feet of floor space. Of course, part of its feeling of spaciousness comes from the relative lack of internal partitions - the only one is the water tank cabinet that screens the bathroom - and the relative height: as I sit here typing this the ceiling is sixteen feet above the floor. Finally, of course, the latrine is outside, and adds effectively another sixteen square feet of floor space, or 324 total. Furthermore, this is Scotland. It isn't warm, and it isn't dry. You can't usefully use outdoor space - yard, patio, terrace, decking, whatever - to extend living space for many months of the year, as you can in much of the US. So that 324 square feet is not extended by any significant outdoor living

This is, of course, strictly a one person house. I don't think I could comfortably share it, long term, with anyone else. But to produce a comfortable two person house, you wouldn't need to double it; for three or four people, you certainly wouldn't have to treble it. 

However, according to the graphic, the median home in the US has 800 square foot per person. That's more than twice what I have. More than twice what I need. Bigger homes? Really? What do you plan to put in them?

Of Energy

For equivalent levels of insulation, for an equivalent target indoor temperature, a bigger house needs more heating than a small one. Yes, of course you can do things with passive solar gain and so on to mitigate this, but they all scale with size - or rather, strictly, with surface area. A small house can have just as efficient solar gain and just as efficient insulation, area for area, as a large house, and if you double the floor area of a house, you substantially more than double the surface area - the area through which heat can be lost. So smaller houses are not just more efficient to heat because they're smaller, they're also more efficient to heat per square foot.

Of course the geometry of a house influences this. A circular house has less surface per unit area than a square one, and a square one has less surface per unit area than a long narrow one. But that's detail. The big picture is that a big house consumes proportionally more energy to heat than a small one.

And energy, for heating homes, is still primarily from fossil fuels. Burning fossil fuels introduces fossil carbon back into cycle, increasing the atmospheric burden of carbon dioxide and accelerating climate change. The alternatives are passive solar gain - but that works less well in winter, when it's needed most - or in-cycle carbon, which means firewood. Heating the average US home, according to Oklahoma State University, takes the production of about nine acres of hardwood forest. The USA has 313 million people in 114 million households but only 745 million acres of forest, so there simply isn't enough firewood to go round. So, in summary, bigger US homes inevitably mean more climate change.

Of Money

Which brings us around to money. The graphic doesn't give us a median price for a home, perhaps deliberately, but the US Census Bureau quotes US$186,000 as the median value of an owner-occupied home.  The median household income is quoted by the Census Bureau as US$52,000 (Ibid). That implies that the median house value (according to the census) is 360% of the median household income.

I said, earlier, that the date 2007, the date used as an indicator of median size increase in the graphic, was significant. Why? It's the year the subprime mortgage collapse really got going. What's a subprime mortgage? It's a mortgage where the borrower is under extreme financial stress - where any worsening of the financial conditions means that the borrower will not be able to repay. Of course, if one borrower  can't repay, their house is dumped onto the market, lowering the market price for housing locally and consequently increasing the negative equity, and consequently the financial stress - on neighbouring householders. Consequently, there tends to be a snowball effect - as the first borrowers fail to pay, and are foreclosed, more stress is placed on the next most vulnerable tier, who fail to pay and are foreclosed, and so on. 

This is what happened in 2007-2008. The collapse of the US subprime mortgage market lead to the collapse of major banks first in the US, but then, progressively, across the world. This had two consequences.

First, the whole world was tipped into a recession which we still, five years later, have no prospect of getting out of.

Second, governments around the world bailed out failing banks with simply vast sums of taxpayers' money. Enormous sums. Trillions of US dollars. Money taken, effectively, from ordinary taxpayers, and ending up, largely, enriching the already super-rich - including the same people who had profited from selling imprudent home loans in the first place.

What this boils down to is the fact that the whole economic crisis we're now living through, which has cost ordinary people across the world dearly, has ultimately been caused by people buying houses they can't afford.

Of Madness

You'll know, if you follow this blog at all, that housing isn't the only thing I write about; I also write about madness. In researching for my recent post on the new Diagnostic and Statistical Manual, I came across a startling fact. There is an extraordinarily high statistical correlation between borrowing and mental 'illness'. According to the Royal College of Psychiatrists, 'one in two adults with debts has a mental health problem, [and] one in four people with a mental health problem is also in debt'. There's particular evidence of strong links between mortgage debt, especially foreclosure, and madness.

Of Cost

I've shown evidence, in this essay, that housing debt is enormously costly to us all, both in terms of the larger economy and in terms of health. I've shown that larger houses are more costly in environmental terms than smaller houses. I've claimed - and reading through other articles in my blog will I hope persuade - that living in a well proportioned smaller house is perfectly comfortable.

The question is, what need a house cost? Well, I can answer that. I can answer that with confidence, because I've recently built (this) one. In its initial form, habitable but not yet comfortable, it cost £4,500; altogether, as it stands now, less than £7,000, or US$10,700 - and about three man months of my labour. A family home would cost about twice that, both in money and in time. Of course, that doesn't include the land. Land in an urban area with mains services inevitably costs. But, for example, it didn't take me much web searching to find a plot in Dallas, Texas for US$4,000. Interestingly, I was easily able to find plots in upstate (not urban) New York for much the same price. Very nice plots are available for around US$30,000. So the reasonable cost of a family home, including land, is somewhere between US$25,000 and US$50,000, and about six man months of labour.

Of Savings

There's a very big difference between the median price, according to the graphic, of US$100,000 for a comfortable house in Dallas, Texas, and the reasonable cost of US$50,000 for a comfortable house in Dallas, Texas. If you build your own small house simply and economically, that's a saving of at least US$50,000. To put it differently, for a Texan on median income, it's a saving of two whole years salary.

That's a lot.

It's even more in more highly valued areas of the US, since the price of 'building lots' doesn't vary nearly as much across the country as the price of completed houses.

If you can save that much, you may not need a loan. If you do need a loan, you'll need a much smaller loan, which you'll be able to pay off much more quickly and with much less stress. Furthermore, because your house cost less you are much less exposed to the risk of  rising interest rates, and, if house prices around you fall, of negative equity. You're at much less risk of foreclosure in the event of unemployment. Because you're under less stress, your health is likely to be better. And finally, as your smaller house is cheaper to heat and cheaper to tax, not only do you save on mortgage interest but you also save on other running costs. Win, win, win.

Of Reason

So if people in the US (and the same very much applies here in Scotland, too) could live comfortably in far cheaper houses than they do now, under far less financial stress than they do now, why don't they? The old myth - which I suppose some people still believe - is that a house is a safe investment, that buying a house is a good way to get richer. The other certain issue is status, the display of wealth, conspicuous consumption. People want to be seen to be successful, to be doing well, and I think this is perhaps especially so in the US. A big house is at least partially a way of advertising your success, and choosing a noticeably smaller house would perhaps be seen as 'being a failure'. That certainly seems to be the angle that Quicken Loans, sponsors of the 'infographic', are playing on.

But the housing crash of 2007-2008 should surely have shaken people out of the belief that houses are a safe bet. Of course, salesmen will be saying, now, that after the heavy falls of the past few years, they're bound to rise. They aren't. As I've shown, the current prices are about 200% - or more - of the reasonable cost. Ultimately, the price must fall to the reasonable cost, especially in the US where land is not inherently at a premium. That's the nature of the capitalist market. If you thought the crash of 2007-2008 was bad, baby, you ain't seen nothing yet.

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