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Op-Ed: The Real Housing Crisis Has Yet to Begin


More mortgage resets, more foreclosures, more homeowners underwater.

Editor's Note: James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career. He can be found online at

Super-Size It

The average home size in the US has increased from 1,000 square feet in 1950 to 2,400 square feet today - a 140% increase. The average household square footage per person has increased by 218%.

In 1950, only 1% of homes built had 4 bedrooms or more, but 39% of new homes had at least 4 bedrooms in 2003. We have one fewer person per household, but we've added one extra room. Our society has chosen to super-size our houses, our vehicles, our TVs, our kitchens, our burgers, our sodas, and our egos. This desire to "keep up with the Joneses" convinced millions to pour money into their homes and amenities. This seemed like a great idea when home prices were rising annually at a double-digit pace.

Now, with home prices down 25% to 50% in many parts of the country, the "Joneses" are in a heap of trouble.

The desire to appear more successful by owning more home transcends class. In his book Luxury Fever, Cornell University economist Robert Frank noted that Microsoft (MSFT) co-founder Paul Allen built a 74,000-square-foot house. According to Frank, that roughly equaled the size of Cornell's entire business school, with a staff of 100.

Frank sees a "cascading effect" of imitation all along the social spectrum. The super-wealthy influence the wealthy, who influence the upper middle class, and so on. The damage from this game of one-upsmanship would be minor, if all the money hadn't been borrowed.

Americans have accumulated so much stuff that their McMansions can't contain it all. In 1984, there were 6,601 self-storage facilities with 290 million square feet space; in 2008, there were 51,250 "primary" self-storage facilities representing 2.35 billion square feet - an increase of more than 2.0 billion square feet. There's 7.4 square feet of self-storage space for every man, woman and child in the nation; thus, it's physically possible that every American could stand -- at the same time -- within the space we've allotted to self storage.

Home Equity - The Drug of Choice

The tax code has always encouraged homeownership, with tax deductions for mortgage interest and property taxes. The bigger and more expensive the house, the bigger the tax deductions. In 1997, President Clinton signed a bill that essentially eliminated capital-gains taxes for selling your home. The tax incentive gave people a massive new inducement to invest ever more money in real estate - and they did.

Home ownership skyrocketed after this incentive was introduced. When prices started to take off in 2000, the rapid appreciation -- without tax consequences -- encouraged people to move to the most luxurious house they could "afford." No money down, option ARMs, and negative amortization loans made perfect sense, because you would just trade up in 2 years with the guaranteed 30% appreciation. This was a can't-lose proposition.
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