Are You House Poor?

The great American Dream has always revolved around owning one's own home. Sure, having the 2.3 kids, the cushy corporate job and the stylish car to drive to work every day are also part of the image in people's minds, but nothing quite summed up Americana quite like the white picket fence. But if recent economic indicators are to be believed, this dream is rapidly turning into a nightmare for many Americans.

According to data released by the United States Census Bureau, an increasing number of homeowners are spending a larger and larger percentage of their incomes on housing than in previous years. People in 49 out of 50 states reported an increase. The only state that didn't, Alaska, spent the same amount. The report showed that people are spending around 21 percent on their housing needs, up from 19 percent in 1999.

The increasing cost of housing, combined with the contraction in the availability of credit, is a huge problem for first-time buyers. Many are now finding themselves priced out of housing markets altogether and are left with little choice but to continue to rent. The problem is not the result of any one factor, but the convergence of several. The housing bubble, the gross inflation of housing prices in several areas as the result of rampant speculation by people of the "flip this house" persuasion, is the most obvious target. However, now that the housing bubble has burst and left many homeowners with loans tens and hundreds of thousands of dollars underwater, and banks with enormous inventories of foreclosed homes they cannot sell, the housing bubble alone cannot be blamed for people's inability to find a home they can afford.

Normally a large inventory of surplus goods would result in lowered prices until demand catches up with supply. However, in the case of big-ticket items like a home, very few people can afford to pay the entire cost up-front, but instead must obtain a loan. And one of the big results of the collapse of the housing bubble has been a sudden reduction in the amount of credit that is available. The banks simply don't have the money to lend, and what money they are lending will go only to extremely well-qualified individuals. In some cases, banks that have been in trouble for questionable mortgage practices may not be able to lend at all because the questions about their procedures make it impossible to initiate foreclosure proceedings.

Just to put the cherry on top, average wages and salaries have been stagnant in relation to prices. If you look around, you'll see that everything is going up. It seems like every time you go to the grocery store, the drugstore, the gas station, you're paying more for those routine purchases. The jug of milk, the bottle of pain killer, the gallon of gas, all keep going up. But people's paychecks simply aren't keeping pace, leaving families further and further behind every month. When credit was still easy to come by, many people just used their credit cards for routine liquidity and let the balances pile up. But the credit crunch has also tightened down credit limits on the plastic, so consumers are finding they have to cut back somewhere.

In fact, the real buying power of wages and salaries have actually shrunk. Even people who have been careful with their money are continually having to pay a greater proportion of their monthly income to necessities such as food and housing. In some cases, the percentage of people's income that is going to housing is creeping up dangerously high. National guidelines suggest that more than 30% of household income for housing is excessive and not financially healthy. But a frightening number of families are paying well more than that, sometimes as much as half of each month's paycheck, just to keep a roof over their heads, because they literally have no cheaper options. Especially if they're in neighborhoods with restrictive covenants that limit the number of unrelated persons who may share a dwelling, they may not be able to turn to the traditional standbys of getting a roommate or rending out a spare bedroom.

What does this situation mean in the long run?

Most experts agree that until income can catch up to housing, the real estate market will remain stagnant. And since real estate is one of the biggest drivers to the overall economy, a weak real estate market means a weak economy. Unless people's incomes can catch back up to housing prices so that people can afford to keep a roof over their heads and still be able to buy other things, we're going to be stuck with that huge glut of empty homes on the market, with shrinking retail sales, and an economy that seems to have gone in a tailspin. Some people are even starting to talk the d-word -- depression. As in the Great Depression of the 1930's that our grandparents and great-grandparents survived.

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