Another Perspective On The Subprime Mess

Here's an interesting article claiming that the lenders who offered the adjustable-rate mortgages and other subprime loans are not primarily to blame for the crisis in the lending market. Rather, we should blame housing costs that are rising far too quickly. The writer points out that the median cost of a house was roughly equal to the median national income forty years ago - it is now roughly four times that, and worse in major housing markets. The writer proposes that financial minds get to work on coming up with new ideas for lending so that people can afford houses without getting hosed.

But the writer fails to address why the median house prices have exploded. Then I noticed the writer's vocation - president of a luxury house-building company. And on a lark, I looked up this chart on average house size since 1973. My conclusion: house prices have gone up, in part, because houses are getting too damn big.

The median newly constructed home size in America has gone up 47% since 1973, and 12% since 1998. In metropolitan areas, new home sizes have increased by 42% - remarkable since major metropolitan areas have less room for new houses as construction increases. Bizarre also is that new homes built in metropolitan areas are 20% larger than homes built in rural areas. That's gotta lead to a land crunch that drives prices of existing homes way upward too. (Not to mention your power bill - all that square footage has to be heated and cooled somehow.) Oh, and the population of the U.S. has increased by about a third since the '70s too. That's a third more people buying houses that are roughly one and a half times bigger.

All this would make sense if people were having more kids. There's some truth to this - our fertility rate was 1.7 in 1976 and 2.1 now. That's a 24% increase - enough for maybe half the growth in house size. But certainly not all.

What I'm getting at is that there was a market goof at the root of all this, but it may not be the market goof we all think there was. The market goof is this: somewhere along the line builders, perhaps sensing a demand signal, stopped building small houses in metropolitan areas. This created a land crunch that drove prices up. Logically, high new single-family home prices would lead to more people buying townhouses and small existing houses, but urban population exploded between 1973 and now, so there weren't enough affordable properties to go around... which drove prices up even more. People now had a choice between renting and buying a house that was way too big and at the margins of affordability - they chose the latter. Lenders were uneasy about giving loans to people who could barely afford to pay it back, but they still wanted to make money, and so lenders came up with the tape-and-string alternative: the subprime loan. And builders noticed that people kept buying the bigger houses, assumed that people bought big houses because that's what they really wanted, and kept building them. The demand for smaller houses was still there, but builders didn't recognize it because consumers' pride prevented them from saying they wanted a smaller house.

Sheesh. This crap's complicated. I guess my point is that had house sizes not been expanding rapidly, we would have had more affordable houses, we wouldn't have had the rapid price expansion that led to the housing bubble, and the subprime market wouldn't have been so slapdash and may not have suffered a cave-in of this magnitude. Of course, I don't understand economics, so this is probably just an incoherent rant. But whatever.