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Lust for big homes in US recalls dotcom bubble

DOWN the block from my home, workmen are finishing a new house. It replaces a small bungalow that had measured about 1,500 square feet. The new home has a covered front porch, two fireplaces and a finished basement. It comes in at just under 5,700 sq ft. What is it with Americans and their homes?

Everyone knows the direct causes of the present housing collapse: low interest rates; lax mortgage lending; rampant speculation. But the larger force lies in Americans’ devotion to homeownership. It explains why government officials, politicians and journalists (including this one) overlooked abuses in ‘sub-prime’ lending.

The homeownership rate was approaching 70 per cent in 2005, up from 64 per cent in 1990. Great. A good cause shielded bad practices. The same complacency lulled ordinary Americans into paying everrising home prices. Something so embedded in the national psyche must be okay.

‘House lust’ is what Dan McGinn calls it in his book by the same title. Mr McGinn documents – sympathetically, for he dotes on his own home – Americans’ housing excesses, starting with supersizing.

In Sweden, Britain and Italy, new homes average under 1,000 sq ft. By 2005, the average newly built US home measured 2,434 sq ft, and there were many double, triple or quadruple that.

After World War II, the first mass Levittown suburbs offered 750 sq ft homes. ‘We’re not selling shelter,’ says the president of Toll Brothers, a builder of upscale homes. ‘We’re selling extreme-ego, look-at-me types of homes.’

In 2000, Toll Brothers’ most popular home was 3,200 sq ft; by 2005, it had grown 50 per cent to 4,800 sq ft. These ‘McMansions’ often feature marble floors, sweeping staircases, vaulted ceilings, family rooms, studies, home entertainment centres, and more bedrooms than people.

In a nation of abundant land – unlike Europe and Japan – America’s housing obsession is understandable and desirable up to a point. People who own homes take better care of them. They stabilise neighbourhoods. In a world where so much seems uncontrollable, a house seems a refuge of influence and individuality.

In a 2004 survey, 74 per cent of would-be home buyers preferred a new home to an existing house. One reason is that a new house often allows buyers to select the latest gadgets and shape the design. The same impulse has driven the remodelling boom, which totalled US$180 billion in 2006.

Homes are a common currency of status. As Mr McGinn notes, many jobs in an advanced economy are highly technical and specialised. By contrast, a home announces that, whatever the obscurities of your work, you’ve succeeded. There’s a frantic competition to match or exceed friends, co-workers and (yes) parents.

Some house lust is fairly harmless. Several websites (www.zillow.com, http://www.realtor.com) provide estimated prices for homes. People can indulge their nosiness about their neighbours’, friends’, co-workers’ or relatives’ finances. They can also fantasise about their next real estate adventure by watching a cable channel devoted to houses, home buying and renovation.

Other effects are less innocuous. Although house prices recently exploded, they have increased only slightly faster than inflation since the 1890s, concluded a study by Yale economist Robert Shiller. The recent sharp run-up may imply years of price declines or meagre increases. ‘Buying a bigger house isn’t an investment,’ warned Wall Street Journal columnist Jonathan Clements. It’s ‘a lifestyle choice – and it comes with a brutally large price tag’.

Not only are mortgage payments higher; so are costs for utilities, furniture and repairs.

Worse, the government subsidises these supersized homes along with suburban sprawl and, just incidentally, global warming. In 2008, the tax deduction for mortgage interest payments will cost the federal government US$89 billion. The savings go heavily to the upper-middle class and wealthy – the least needy people – and encourage ever-larger homes. Even with energy-saving appliances, those homes are likely to generate more greenhouse gases than their smaller predecessors. As individuals and a society, Americans have over-invested in housing; they’d be better off if more of the savings went into productive investments elsewhere.

Sociologically, the ‘housing bubble’ resembles the preceding ‘tech bubble’. When people paid astronomical prices for profitless dotcom stocks, they doubtlessly reassured themselves that they were investing in the very essence of America – the pioneering spirit, the ability to harness new technologies. Exorbitant home prices inspired a similar logic. How could anyone go wrong buying into the American Dream? It was easy.

 

Source: The Washington Post Writers Group (Busines Times 2 Jan 08)

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