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Monday, February 16, 2009

The illusion of wealth
Posted by Jill | 5:17 AM
I remember when I was a kid, thinking that having a patio -- yes, an ordinary concrete patio -- was a sign of the next income level up from my family. A pool was a sign of two incomes up, as was two full bathrooms instead of a bath and a half. On the rare occasions in high school that I was invited to parties in some of the old Georgian and colonial houses in town, wher people had china and glassware handed down through generations, THAT was wealth. Anything above that I couldn't even fathom. We lived in a $25,000 house and I remember my parents saying at various times that it would be nice to have a $30,000 house. Because in those days, home appreciation was slow and a few thousand dollars meant a difference in the kind and size of house you have, as well as the furnishings and accoutrements.

In the years since we've lived in our neighborhood, there's been a rash of bash 'n' builds, in which the postwar cape cods and ranches that populate the neighborhood have been torn down and monster houses have sprung up in their place. First it was that fake stucco that has since been proven to harbor mold, and then soaring manses with faux-stone fronts and vinyl siding on three sides and teeny-tiny stock windows. Inside, these houses boasted gourmet kitchens with granite countertops in which nobody cooked and crown moldings and the kids who would live in them would never, ever have to share a bathroom. They had "bridal staircases" down to soaring front foyers that were impossible to heat but were absolutely essential for that one day in your daughter's life when she'd come down the stairs in her bridal gown. And there was never a sense that a more luxurious house was not in the cards for those of modest income, that such things were for the future. Perhaps it's because people knew in their hearts even then that there WAS no future in which they could envision climbing to that point. But as Paul Krugman points out today, for nearly a decade, working- and middle-class people thought they were among the wealthy:
Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. And if the belief of many Americans that they could count on capital gains forever sounds naïve, it’s worth remembering just how many influential voices — notably in right-leaning publications like The Wall Street Journal, Forbes and National Review — promoted that belief, and ridiculed those who worried about low savings and high levels of debt.

Then reality struck, and it turned out that the worriers had been right all along. The surge in asset values had been an illusion — but the surge in debt had been all too real.

So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now.

For this is a broad-based mess. Everyone talks about the problems of the banks, which are indeed in even worse shape than the rest of the system. But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.


Hey, they had crown moldings and chandeliers in the foyers and a Sub-Zero range, of course they were wealthy. And they voted in accordance with how ongepotchket their houses were.

There are two signs of the times in my neighborhood. One of them is a brick-front, vinyl-on-three-sides McMansion a few blocks away. It's new, or it was when it was put on the market over a year ago at nearly a million and a half dollars. Over a year later, it's dropped to $1,249,000 -- and it's still sitting. Here's the kicker: it's not finished, or at least if it is, the photos the realtor originally took haven't been updated. The description of the house boasts of custom landscaping and a gorgeous kitchen and luxurious bath, but the house is on a scrubby, weed-choked lot and doesn't even have a driveway, there are no photos of this kitchen, and the photos of the bath show a "garden tub" with cement board surround -- no tile. And the rest of the photos show rooms without so much as a coat of white primer -- just sheetrock and tape and spackle. They do, however, show an elaborate fireplace mantel, crown molding and Roman columns.

A few blocks in the other direction is a cape. This is the kind of house that a year ago would have been torn down and replaced with a McMansion or had the roof torn off and an add-a-level put on, then perhaps faced with fake stucco and a big half-moon window with the owner's last initial carved into it. It's been sitting in disrepair for a year, but two weeks ago construction finally started. They're putting a dormer on the back to add a bath and make the two upstairs bedrooms larger, and putting two shed dormers in the front. It's still a cape, and it's charming. Four doors down from this house is a McMansion for sale that's about six years old. It's got stone AND stucco, and two turrets. They're asking $1.8 million for it. It's not moving.

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5 Comments:
Anonymous Anonymous said...
Sorry, you are bummed out, but the next wave has not burst yet.

Wait until the people who have insurance on those homes and the people who have excellent health insurance find out that the insurance companies are in worse shape than the banks.

No one has burst this bubble, so if you want to be first, feel free.
2/16/09, 9:44 AM  
Blogger Jennifer said...
We have acquaintances (my husband is in the military) who cannot believe that we aren't looking at new construction to buy. One couple in particular bought a house at the top of or just beyond what they can afford. An over-sized, soulless home similar to the ones you described (though not as expensive - we're talking military pay here!). Because they "need" four bedrooms and a three car garage (and yes they have three cars). For the two of them and their two cats.

And we know that there is no way they can afford their house and car payments and be putting money away. It's a dangerous mentality to have.
2/16/09, 9:53 AM  
Blogger Webomatica said...
Jen, are those people still living in 2006? I can't imagine anybody trying to stretch to buy a home of that wasteful nature today, that will certainly be worth much less a year from now.
2/16/09, 2:36 PM  
Anonymous Anonymous said...
hm nice blog. thank for coming.
2/16/09, 11:45 PM  
Anonymous Anonymous said...
people living in mcmansions aren't the only ones getting clobbered.

i bought a house in southeastern massachusetts in 2001 because rents in boston, where i had been living since 1977, were going up 12-15% every year during the late '90s ($700 apartment in 1993 was $1200 by 1999) and i had come into enough cash for a downpayment.

now i'm screwed. in 2006 took money out of the house so i could have finished ceilings and walls. the house is now barely worth what i owe. selling is not an option -- there's no one to buy it.
2/17/09, 5:46 PM  
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