HOUSING ENIGMA: TO BE A MULTI-(MILLIONAIRE OR BILLIONAIRE)
TO BE A (MULTI-MILLIONAIRE OR MULTI-BILLIONAIRE), THAT IS THE QUESTION TO ANSWER
Anemic housing recovery has been a topic of discussion for years now since the great recession. There have been several articles published on this topic in various magazines, newspapers, and other media citing various factors such as, higher unemployment rate, millennials financial situation, overall higher levels of education and credit card debt, delay in starting families, lack of wage increases to name a few.  All these factors certainly appear to impact home ownership, but there could be deeper societal issues impacting homeownership in general. These key factors are:
i. Career insecurity and reduced level of career progression,
ii. Average number of jobs held during a career life span,
iii. Population increase,
iv. Decreasing median household income to median new home price ratio over the years,
v. Increased wealth gap,
vi. Increased divorce rates impacting family finances,
vii. Number of children mismatch between poor and rich families
Prior to looking into these factors in detail, we need to also get an idea on the current condition of housing market. The current homeownership rate of around 65% appears to align with the historical norms of 63 to 65% between the years 1960 to 1995. Moreover, the median new home prices have soared back to $275800 from 2012 to 2014, in spite of the fact that the median household income has not changed much over the last 10 years. At the same time, there is something about the housing market that is bothering economists, policy makers and homeowners in general. This question resulted in further analysis looking at the overall social trends in US.
As we know, Nobel Prize laureate Prof. Shiller is famous for tying behavioral/social science with housing bubbles. Along those lines, this article presents an overview of various potential factors impacting current homeownership due to behavioral/societal changes that have been happening over the years. Let us look at those factors in more detail:
1. Life of organizations:
Average life of S&P500 companies has come down to around 15 years now compared to 67 years in the 1920s, thus potentially creating instability to majority of the labor workforce. Moreover, thriving, diverse set of companies are localized more in certain parts of the country making the real estate market unstable in many other parts of the country.
US population has increased from 200 million to 320 million from 1960 to 2010, and is projected to increase anywhere between 400 to 450 million by 2050, thus increasing demand for creating more jobs. Even with the current participation rate of 63.2%, the number of people employed right now is around 155M. This increase in absolute numbers certainly demands for creation of more jobs in the future, and can certainly impact housing market in a big way.
3. Educational debt:
As repeatedly stated in several articles, education and credit card debt plays an important role in impacting buyer’s perspective towards home buying. To elaborate on this point, in the mid-1970’s, the percentage of individuals with a bachelor’s degree was around 10%, which has tripled now, but the median salary increase to median housing price ratio has decreased during this time period. Now with more post-graduate degree offerings in various different formats, we can expect a similar trend where the norm for education can increase to Masters degrees in the next 30 years without much relative increase in real earnings. While proposing education policies, decision makers should understand that it is not about graduating million or two million graduates, but instead the education should transform to meaningful career with prospects for progression.
In the past, education certainly played an important role in reducing the cumulative weeks of unemployment over a span of 30 years, but with population increase and larger debt coming with more education, it is difficult to predict the net worth of education during the next 30 years. Moreover, increasing educational expenses has also made education a dream for many poorer families, which used to be the best passport for this group to come out of poverty. Most importantly, as it is all about connections nowadays, it makes us wonder whether right kind of merit will be valued any more.
4. Educational mismatch:
Recent surveys suggest that a larger section of senior executives believe skills mismatch between the graduating students and the needs of the organization being the primary reason for many positions remaining unfilled.
Obviously, there could be many reasons such as productivity increase amongst employed workforce, sole focus to increase their exorbitant executive compensation from 300 to 1 to may be, 500 to 1 in the coming years, not updating themselves with latest scientific and technological developments, lack of awareness regarding the overall business climate, over-reliance on selected group of experts and third-party consultants for making decisions that might be resulting in this mismatch theory. Irrespective of the reasons, this issue should certainly be addressed to avoid any such mismatches in the future. It is also important to remind these executives that they relied on the same educational system before.
5. Number of children per family:
Over the years, wealthier families have had lesser number of children compared to poorer families. This structural change could also be playing a role in changing consumer preference towards home ownership in general.
6. Job stability:
Longitudinal study on youngest baby boomers (1957-1964) suggests that this section of baby boomers have changed 11.3 jobs from ages 18 to 46, which could be related to the average life span of US organizations. In addition, we have seen rapid progress in new technological innovations enhancing productivity during the last forty years. These trends are expected to remain the same or can increase further in the coming years, which in turn, can reduce percent growth in real earnings, and total number of weeks employed over a cumulative span of 30 years.
7. Wealth gap:
Widening wealth gap along with lack of relevant financial awareness amongst a larger section of the population gives certain sections of the population ability to exploit the housing and financial markets at the expense of common masses creating instability to the entire ecosystem.
8. Family welfare:
With divorce rates at an all time high, attitude towards home ownership certainly can take a backseat in those affected families. Moreover, though prior research findings present mixed conclusions on the impact of housing price (which forms the largest section of household wealth in majority of families) shocks on marriage stability, larger shocks to housing prices as a result of unsustainable policies and market trends has the potential to impact people’s attitude towards getting married, and also on stability of marriages over the longer-run. Most importantly, large fluctuations in home prices can alter family’s choices to key family needs such as, education and health care. This long-term change in personal and family’s attitude can further result in a cascading effect on the community and the society in general, and towards home ownership.
9. Transportation system:
Lack of well-connected transportation networks connecting suburban areas results in exodus of families/residents whenever there is a disruption in local business environment. Even for those individuals willing to commute by car, it takes a toll on them over a longer period of time either in the form of health issues or family issues without their realization in many cases. Moreover, 69% of the carbon emissions increase since 1990 has come from the transportation sector (mainly through cars and trucks).
10. Household income to New Home Price ratio:
Coming to median household income to median new home price ratio, the median housing price for new homes to household income ratio was around 3.3 in 1975, whereas the current ratio of ~5.5 is significantly higher compared to 1975. For that matter, this ratio was around ~4.3 even at the market bottom couple of years back. We also need to understand that this ratio difference gets magnified, if we were to consider the total cost of owning a house, and the take-home net income post taxes.
11. CPI Index:
Though CPI appears to have been at a reasonably low level since great recession, it may not be a good reflection of price inflation. For example, though the median household income has not increased much from 1995 to 2013, the median rental price has almost doubled during the same time frame. Similarly, prices for several common households’ needs have all gone up significantly during this time frame, and even during the last five years when the US economy was still in the process of recovering from the great recession.
12. Employees’ morale:
Many of the above mentioned reasons might be playing a bigger role in worker’s morale, which appears to be at an all time low as presented in a recent HBR article, thus causing more social unrest within families and communities.
All of the reasons cited above are interconnected to some extent, and hence requires collective effort from all the stakeholders involved (especially decision makers at the highest level). Though there may not be an easy solution to address many of the social issues presented here, there are certain actions that can be taken to improve housing stability:
1. Organizational leaders, policy makers and we, the people, should work together to prevent housing bubbles. The first step in the process would be to increase awareness on the general market trends in terms of median home price and median household income over time. Understanding this information would give us all a better understanding of the current housing market conditions. [Resources]
2. With size of the labor force expected to increase during the coming years, it is important to develop new areas of focus where additional jobs can be created to match with the labor force increase.
3. Common masses should also be made aware of the possibility in reduction in cumulative real earnings, and number of weeks of employment over a period of 30 years, which can help in making prudent buying and financial decisions.
4. To avoid educational mismatch issues, educational institutions should work closely with the organizations to optimize their educational offerings aligning with the employer needs. As majority of the graduating students are looking for promising careers, helping them on that front would go a long way in strengthening the housing market.
5. Educational Attainment: Attaining higher level of education certainly placed that group in a better position compared to the rest during the last 30 years. At the same time, the premium for education has skyrocketed during the last 30 years. Moreover, with more bachelor’s degree holders now compared to thirty years back, there is already a question whether more advanced degrees would become a norm in the coming years. An alternative could be that organizations can work closely with educational institutions to invest more in relevant educational training to keep their employees updated with the latest developments rather than students piling up degrees. This effort obviously is tied to the next point, compensation structure.
6. Compensation structure for senior executives should not be shortsighted, and should incorporate social responsibility, accountability, and long-term performance. When it comes to long-term focus, strategic decisions should consider the longer-term impact on all the stakeholders.
To support this argument, let us bring in Prof. Dan Ariely, a behavioral economist, research findings into this discussion. As per Prof. Ariely’s research, knowledge employees’ performance tends to get negatively impacted with significant increase in incentives, potentially due to loss aversion mindset, which in turn, can result in taking irresponsible decisions. Hence, in order to promote responsibility and accountability, compensation structure should take into account the morale of employees, long-term performance, and job creation as part of the equation.
7. Widening wealth gap provides opportunities to exploit the stock and housing markets, thus causing further widening of the wealth gap.11 Government policies should limit such exploitations.
8. Improving mass transportation inter & intra-networks connecting local suburban areas with the city, and between major areas in neighboring states across different parts of the country can help in bringing and retaining a diverse talent pool over a longer period of time. It can also certainly help in reducing commuting related health issues. Further, improving mass transportation systems can play a significant role in reducing carbon emissions.
9. Public policymaking should focus on creating stronger local communities throughout the country, while boosting the economy. As part of this effort, it is necessary that educational institutions, local government and local organizations collaborate and communicate on a regular basis rather than pointing fingers at each other for the state of the economy.
Though the housing market appear to have recovered at least based on median housing price and supply of houses, it makes us wonder whether the recovery is real, and whether the housing market can remain stable without bubbles for a longer time. There will be certain sections of the population who might prefer large fluctuations in housing prices to exploit the housing market, but negative or positive shocks in housing prices has been shown to impact the behavioral aspects of families and communities causing longer-term social impact. For that reason, decision makers, irrespective of their political affinity, should take actions to limit housing bubbles. For those sections that rely heavily on surge in housing prices as their means to become multi-millionaires in the fastest time possible, please understand that a stable market can help in bringing stability to families and local community. This stability in housing market will provide more opportunities to those with big dreams to even become multi-billionaires with slightly more patience. Moreover, with US population expected to increase anywhere between 400 to 450 million by 2050 from the current population of 318 million, a stable marketplace would certainly call for more houses. Furthermore, the changing demographic profile in terms of age, ethnicity, consumer preferences, environmental and energy demand considerations would also require innovation in the type of houses sold in the marketplace. These innovations would not be possible, if the focus is constantly tilted towards frequent housing bubbles and bursts.
 http://futureofchildren.org/publications/journals/article/index.xml?journalid=63&articleid=408§ionid=2781; http://www.washingtonpost.com/blogs/wonkblog/wp/2014/03/27/divorce-is-actually-on-the-rise-and-its-the-baby-boomers-fault/
 Farnham, Martin et al., “House Prices and Marital Stability,” American Economic Review, 2011, 101 (3), 615 - 619