The American Consumer Is Just As Much To Blame As Is Wall Street
By Dave Gibson (10/11/08)
The term ‘House Poor’ has only recently been added to the American lexicon and it is applicable in more ways than one. Have you noticed that during the housing boom, you never saw any small or moderately sized houses under construction? Gone are the days of the brick ranch and the "starter home", they have given way to the mammoth single-family structures, built merely of pressboard and aluminum siding.
Everywhere we have seen signs proclaiming "luxury" or "custom" homes. Apparently "luxury" now means dozens of houses built so close to each other that you can literally reach out and touch your neighbor. A "custom" home really means that you can choose the color of the linoleum and cheap carpet. The only thing really luxurious about these houses is the price.
Homes are now slapped up in a few days and are sold for ten or even twenty times the cost to build them. My parents' first home sold for about $18,000 in the late 1970's and it is just as solid today as it was when it was built, over half a century earlier. In 2005, the average price of a new home was $264,000 and you can put your fist through the outer walls of most of them. Is this progress?
Even when you account for inflation, young people have been paying over 70% more for housing than their parents did. You see, our parents' generation bought homes which they could afford, our generation buys homes which we think we need. I cannot imagine my parents or grandparents having or even wanting a jetted-tub or a grand foyer. They owned good, solid, simple homes and they never had any difficulty in paying the bills. Everyone today though, seems to believe that they have to live in a "luxury" home.
However, there is a price for this perceived luxury and it is far greater than the bloated mortgage payment. The housing boom has created an enormous amount of debt. Unfortunately, those high-priced homes that have been popping up all around the country have helped to push over 9 million people into credit counseling, and many into bankruptcy. In 2003 (long before the bubble burst), 1.6 million Americans filed for bankruptcy. Actually, more people filed for bankruptcy that year than graduated from college...a very sobering statistic indeed.
Over the last few years, we have also seen the wide use of so-called home equity loans (we used to call them second mortgages). The loans are often taken-out for home improvement projects such as building a gourmet kitchen, to pay for lavish weddings, and even to take expensive vacations. While homeowners have been very happy to see how quickly these loans were approved, unable to make both mortgage payments, many of these people are now facing the harsh reality of foreclosure.
For too long, many Americans have been operating under the notion that home values can only rise, and they will always be able to refinance, borrow more money against the home, or as a last resort simply sell the house. Of course, as with any commodity, houses can lose value, but spurred on by unscrupulous loan officers, many of us truly believed that our homes were immune to reality. While the real estate and banking industries have been guilty of pushing homes and loans on scores of people which they could never afford, it is the people in those homes who actually signed the papers. It is difficult to have any sympathy for someone who willingly takes on an unnecessary debt, which they know they cannot repay.
Unfortunately, we are now seeing the down-side to the housing boom. Too many people who should not have, have been buying homes and instead of enjoying the American dream, they are ending up in a nightmare of crushing debt. Homes finally became so over-priced and the debt that Americans are carrying so large, that the housing market has crashed, just as hard as the stock market did in 1929.
In addition to the debt taken on by Americans buying homes, we have been relying on our credit cards as never before. Sadly, we have become a nation of debtors.
Ours is a consumer-driven economy, as the majority of the manufacturing jobs have moved overseas. While it may lift our spirits to purchase goods which we cannot really afford, crushing personal debt is now threatening to finish off an already shaky middle-class.
In 2004, the Consumer Federation of America determined that half of American households have amassed less than $1,000 in net financial assets. While the average amount of unsecured debt per household today is $9,000.
More than 90 million Americans are only making the minimum payment on their credit cards. On average, it will take 30 years to pay off the full amount on a credit card, by making only the monthly minimum payments (without using the card again). It is easy to imagine a day when most Americans will go to their grave in crushing debt, never achieving any wealth.
To compound the problem of reckless spending, Americans seem to be adverse to saving money. We could learn a valuable lesson from the nation of Japan. The average Japanese citizen saves 16 to 17 percent of their annual salary, while their U.S. counterpart saves between 0 and 2 percent of their annual earnings.
With soaring fuel prices, manufacturing jobs being replaced with low-wage service jobs (retail sales, customer service, etc.), and spending much more money than we actually have, a great number of Americans are now at real risk of sinking into poverty. Many of us have already adopted a 'poor man's mentality.' In fact, 27 percent of Americans now believe that their only chance to accumulate real wealth is by winning the lottery!
The United States has more billionaires (269) than any other country. It would seem that the majority of Americans are working hard to make a handful of people rich, while working just as hard to make themselves poor.
On a personal note, I will use the example set by my grandparents. My grandfather had a job for 25 years as a painter in a shipyard. Upon retirement, he took a job with the city. Not only did he have a good pension, but he and my grandmother had excellent health coverage and the addition of a small salary from his city job. They owned one car and never bought a house, choosing instead to rent an apartment. The never took on any debt, and only made purchases after they had saved enough money to actually buy the item.
When my grandfather died, my grandmother was left with a Social Security check and a tidy nest egg, on which she drew an income from the interest--never touching the principal. She lived for another 16 years and did so quite comfortably. I cannot remember her buying new furniture, nor really anything that she could not purchase from the local Sears.
Though many in the family tried to convince my grandmother to buy a home of her own, she always rejected the idea. She knew the value of being able to pick up the phone and call building maintenance to make repairs when something broke. She also knew the value in not being responsible for additional cost of those repairs. Her kitchen was probably about the size of my bathroom. She never had a dishwasher, and she would place a board across the top of the washer and dryer, as this served as her only counter space.
Despite the cramped quarters and the lack of modern appliances, she somehow managed to consistently prepare the most delicious and elaborate meals that I have ever enjoyed. In fact, I believe that I have only had maybe eight good meals since she died!
When my grandmother died, she left a considerable sum of money to my mom, and of course left behind no debts. So how did this woman of modest income, who did not finish high school, raised two children during the depression, and never owned property manage to amass a small fortune without incurring any debt?…She nor my grandfather never tried to live beyond their means!
They took modest vacations and spent most of their leisure time with their family. They never made irresponsible decisions with their money, and never felt the need to surround themselves with over-priced belongings. Of course, they also did not have HGTV!
Though wise, my grandparents were fairly typical for their day. At that time, most people would not have dreamed of spending more money than they actually make!…Probably why they didn’t make Ambien back then.
As families have become more disconnected and geographically spread-out, we have apparently tried to fill that void with stuff. Materialism has become the leading religion in this country.
If we do not change our spending habits and stop living beyond our means, we will surely face personal financial ruin as will this entire nation. While the current financial crisis is painful and will get worse before it ever gets any better, in the end we will have an opportunity to change and adopt responsible spending habits. Truthfully, the debt that many of us have acquired may be with us for the rest of our lives (or at least the affect of that debt). However, adopting a much more sensible approach to the way we deal with money will give us some measure of peace and more importantly, we will be able to pass those responsible attitudes on to our children and grandchildren.
While it is easy to place the blame for our economic woes upon our corrupt corporations as well as our seemingly inept elected representatives, it is not entirely fair. American consumers who have needlessly taken on crushing debt are also to blame. We are right to point the finger of accusation in the face of the arrogant men who ran AIG and Lehman Brothers into the ground, but if we are to change so that do not sink into this mess again, we must also take a good hard look in the mirror.
There is plenty of blame to go around.
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