A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The “stimulus package,” the Fed’s interest rate cuts, and new moves to increase the limit on “jumbo loans” all seem based on this assumption. Given that the U.S. is already racked with debt, I can’t quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there’s a much simpler explanation for the current housing woes:
The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, “forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.” And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.
Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.
If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America: