Monday, October 13, 2008

Don't Blame Main Street

Americans are standing with their mouths agape as the stock market lurches. They lie awake at night worrying about what the future holds for their jobs, their families, and their communities. Who is to blame for this unfolding financial crisis? The finger of blame is pointing in many directions, but one place that does not deserve the blame is Main Street.

Just in time to provide some perspective, the Census Bureau has released the latest American Housing Survey, with data collected only a few months ago in 2007. You can't get much more current than that. And what do the 2007 numbers tell us? They tell us that the average American has been betrayed by financial institutions that should have known better.

No doubt you have heard many a pundit exclaim--in print and on TV--that Americans did this to themselves. We bought houses we could not afford, we used our homes as ATM machines, and we have fallen so deeply in debt that millions of us face foreclosure. Our bad behavior has brought the nation's financial institutions to their knees.

Just because newspapers and television say so does not make it true. In fact, the average American has been careful with his money. But the institutions in which we entrusted our dollars gambled them away.

The 2007 American Housing Survey provides the evidence.

First, let's take a look at mortgages. In 2007, the 51 million American homeowners with mortgages remained well above water. They owed a modest median of $100,904 on their homes--just 54 percent of their home's value. This statistic has not changed much in years--it was 55 percent 10 years ago in 1997. Granted, home values have dropped since 2007 and are likely to fall even more. Still, for most homeowners a substantial cushion remains. Only 3 percent of homeowners owe more than their house is worth. The great majority of homeowners with mortgages have 30-year fixed-rate loans carrying a median interest rate of 6.4 percent. Things on Main Street appear to be in order.

Second, let's take a look at home equity loans. The way it is reported, you would think everyone has a home equity loan. But among the nation's 76 million homeowners, only 14 million had a home equity loan or line of credit in 2007. Do the math, and that translates into just 19 percent of homeowners. Or put it this way: 81 percent of homeowners do not have a home equity loan. Even those who have tapped into their equity have not been using their home as an ATM machine. The median amount owed on home equity loans is a reasonable $25,934. Again, nothing exciting to report on Main Street.

Third, let's take a look at foreclosures. Most of the foreclosure numbers in the press come from Realtytrac, an online business that sells foreclosed properties--and in the process of doing so, collects foreclosure data. Realtytrac provides foreclosure statistics to much of the media, including the Wall Street Journal. Not surprisingly, its data show a big increase in foreclosures. In 2007, says Realtytrac, "more than 1 percent of all U.S. households were in some stage of foreclosure." That sounds like trouble on Main Street. But read the fine print in the methodology, and you will discover that the definition of Realtytrac's "households" is the Census Bureau's count of "housing units." There is a big difference between the two concepts. When a household faces foreclosure, a family loses its home. A household is defined as an occupied housing unit--meaning that someone lives there. In contrast, many housing units facing foreclosure are vacant, owned by flippers and developers who gambled on rising prices and lost.

In 2007, 14 percent of the nation's housing units were vacant--a record high. Overbuilt, overpriced, and financed by cheap money, these housing units are the crux of the crisis--a crisis caused by lax lending standards. It was not Main Street, but Wall Street that drank the Kool-aid. Main Street, however, is paying the price.

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