^ house prices zooming upward, and debt, of course. Worse if you look back to 1970.
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Back in the early-1970s, the typical house price in Greater Boston ranged from $ 20,000 to $ 40,000. Rents in Boston, for a two-bedroom apartment, ranged from about $ 125 to $ 300 month. Since that time, rents have increased ten-fold, house prices 12 to 16-fold. At the same time, median family income has gone up about four-fold.
In the above numbers lurks huge, vast consequences for our economy, most of it irreversible, much of it enormously damaging. You want to talk income inequality ? It begins with the enormous, unprecedented boom in house prices, a boom which as i see it, is the most significant event in my entire adult lifetime, at least since the mid-1960s civil rights revolution and, ultimately, maybe more significant even than that.
The boom in house prices affected not just Boston. the entire East Coast felt it big time, the West Coast too, and Chicago. No part of America entirely escaped, and only bankrupted cities like Detroit and Camden, New Jersey, have shaken off the boom entirely. And even these places live with the consequences nationally of the huge house price boom.
The rise in house prices from 20,000-40,000 to 250,000-600,000 did not happen because people’s cash on hand suddenly increaesed ten to twelve-fold,. It happened because mortgage debt increased vastly and then some. Before, mortgages were small loans given by neighborhood savings banks to local people and kept by those banks till paid off. Borrowers earned their incomne and paid off those small, 10,000 to 20,000 loans over a 20-year period : paid them off, and never again borrowed money on the security of tueir homes. The national custom was to buy a home, borrow a small amount, pay it off, and live the rest of one’s life free and clear.
Yes, the very very rich lived in their $ 250,000 to $ 500,000 mansions, mostly bought for cash. They were a rare breed. Their home purchases hardly quaked the nation’s economy.
But that was then. In 1970 a system was established whereby banks were encouraged to sell their house mortgages as negotiable instruments, like bonds: the Federal government would guarantee these mortgages for whoever bought them. The idea seemed good at the time : the banks that first gave mortgages would get paid and with that money would be free to lend again.
From Wikipedia’s “Housing Bubble” page comes the following excerpt. Read it. It tells the story in numbers and events —
- 1970 Federal Home Loan Mortgage Corporation (Freddie Mac) is chartered by an act of Congress, as a GSE, to buy mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market. The average cost of a new home in 1970 is $26,600  ($140,582 in 2007 dollars). From 1960 to 1970, inflation rose from 1.4% to 6.5% (a 5.1% increase), while the consumer price index (CPI) rose from about 85 points in 1960 to about 120 points in 1970, but the median price of a house nearly doubled from $16,500 in 1960 to $26,600 in 1970.
- 1974: Equal Credit Opportunity Act imposes heavy sanctions for financial institutions found guilty of discrimination on the basis of race, color, religion, national origin, sex, marital status, or age.
- 1977: Community Reinvestment Act passed to encourage banks and savings and loan associations to offer credit to minority groups on lower incomes or owning small businesses 12 U.S.C. § 2901 et seq.). Beforehand, the companies had been engaging in a practice known as redlining.
- July, 1978: Section 121 allowed for a $100,000 one-time exclusion in capital gain for sellers 55 years or older at the time of sale.
- 1980: The Depository Institutions Deregulation and Monetary Control Act of 1980 granted all thrifts, including savings and loan associations, the power to make consumer and commercial loans and to issue transaction accounts, but with little regulatory oversight of competing banks; also exempted federally chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. The cost of a new home in 1980 is $76,400  ($189,918 in 2007 dollars).
The housing market began to move faster and faster, and as it sped up, so prices began to rise. And we all know how that turned out. Less obvious the underlying consequence : mortgage debt increased enormously, to the point where, today, many trillions of dollars of house-secured debts distort the entire economy.
When one talks about inc ome inquality, pone shoiuld aslo think of the huge creditor interests that crowd the Us economy. Back in 1970, when house debt was 12 to 15 times smaller than it is now, the creditor interest loomed far less large — and paid far less income to bankers and other credit administrators. Today the enormous money pools that ultimately deliver the cash that gets paud out in mortgates generate nine-figure salaries and bonuses to managers of those money pools; and the money itself, instwsd of funding capital investments in production and service, spins its wheels in the markets in which mortgage dbets are boiught and sold. A great dea;l more such money sits parked in money-market accounts awaiting revival of the housing market ; because even hard-pressed home owners are a surer — and vastly more diversified — investment bet than risky enterprises, credit swaps, or excahnge-prate arbitrage. The more individual debtors a monmey pool can hook, the stronger its income stream — and the longer : becaue 30 year and 40 year mortgages commit a debtor way beyond the term of most business infestment.
There is no way to escape the enormous inequality that today exists between creditor money and debtor indebtedness. Today’s debtors live mostly from paycheck to paycheck and do not have any prospect of paying off their indebtedness. And it is not on;py house debt. The amount of studebnt loan debt keeps on rising, and as it — unlike house debt =– cannot be discharged in a bankrupytcy, it rebders its dbetors indentured srvants to the stiudent loan grantors. And were do you suppose the money comes from to pay college administratiors seven-figure salaries, or to fund the cutting edge education that businesses now dmand of their new hires ? Thus the economy of today takies its shape : assets intolerably overpriced, consumers burdened to the limit by those intolerable overprices.
But it all began with the house price boom. And how will it end, other than by destroying the entire credit economy ? it won’t. Bankrupting today’s creditor class would wipe out every part of the American economy beyond survival and subsistence.
We can raise the minimum wage, and we can cut interest rates on student debt. But we cannot make houses or education vastly cheaper without crippling the incomes of those who work in education and housing. We can loosen the low-pay strangle, relieve some debt, and bring on the innovation economy; and we should. None of it, however, resolves the fundamental imbalance, the economic unsustainability of the house price bulk boom, the immovability of credit.
—- Mike Freedberg / Here and Sphere