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Hullabaloo


Thursday, December 19, 2013

 
More goodies for the asset class in our broken economy: most federal housing subsidy goes to households over $100K

by David Atkins

Danny Vinik notes in Business Insider that most federal housing subsidies are going to those with household incomes over $100K, while a whopping $34 billion in subsidies are going to household over $200K. Needless to say, households making over $200K are in the top 5% of incomes nationally.

Here is the chart:



This is madness on so many levels. First, of course, is the fact that the aid should be going to those who are most in need, not those least in need. It's true that $100K household doesn't go very far in the highest-cost-of-living areas, but the overwhelming majority of people even in those areas make far less than $100K household and still need to put a roof over their heads. Renters in particular are getting hosed in this economy.

But second, the country needs to be rethinking the very idea of housing subsidies. It's going to be painful process to roll back 30-40 years of outrageously stupid economic policy, but it must be done.

In order to disguise and offset wage stagnation, American policy makers did three things: 1) attempt to reduce the price of consumer goods even at the expense of American labor; 2) extend credit as broadly as possible; and 3) drive everyone into assets. That last bit involved many pieces, including the switch from pensions to 401Ks and the idea that whatever was good for the Dow Jones was good for the broader economy. But, of course, by far the biggest asset everyone was pushed into was homeownership.

Not surprisingly, then, housing prices started to balloon upward in an almost preposterous fashion. To truly appreciate the price inflation in housing, simply watch the Case Shiller Rollercoaster:



That video goes through 2010. Note that wages have remained flat for the last 40 years, and it's obvious that the purchase price of housing is far beyond what wages can sustain, even after the crash. The bottom hasn't even started to fall out of the market to match wage reality. The housing market is almost entirely driven by investors and subsidies at this point. Actual human buyers are priced out.

But there's an even bigger generational bomb going off. Let's say you're a baby boomer who lives in California or New York, and you bought your house for $200,000 back in the 1980s. In California, you benefit from Proposition 13 which keeps your property tax rate essentially locked in. Your house is probably worth around $500,000 to $1 million today, depending on location.

Congratulations! You won the generational lottery, largely through no particular skill or effort of your own. But what, exactly, is the next generation supposed to do? Commutes are already monstrous and fuel costs are rising, so getting cheap housing far, far away from job centers isn't an answer. Buying densified, small condo-style situations is an option. But it's not great for raising kids, and a dramatic reduction in quality of life from the spacious houses, yards and picket fences of the previous generation. And there's absolutely no way that those $500,000 to $1 million homes are affordable at the wages most 20-40 year olds can command.

This is creating an aristocracy in housing, wherein those who bought property decades ago are leaving it to their heirs, who either move into the property or sell to investors in order to split the assets. But there's no mobility for real wage earners there.

And it's only exacerbated by the unequal distribution of subsidies that are artificially keeping prices high in order to maintain the only savings vehicle allowed to a cash-strapped middle class.

But the bomb is going to go off, the real estate bubble is going to pop again both through generational attrition and downward pressure from wages that aren't meeting prices.

It's just another way in which the economy is seriously broken with no sign of a coherent plan from either political party.



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