Housing isn’t any kind of crisis right now, it’s wealth disparity
Your house, your tent in the city, your apartment in the sky, your manor and estate on the hill, your cottage and farm in the country — or whatever place you call home — is treated like a commodity, a raw material for the new digital financial marketplace. Property has a special investment purpose on Wall Street. The debt on our homes are traded in bundles called mortgage-backed securities, which gain equity and are capitalized, which might be hard to grasp for those living paycheck to paycheck. Commodity is commodity and your home is a tool for the financial sector.
Blackstone Group, a $300 billion financial corporation, did something tremendous from 2011-2013. It created the rental-backed security, by sweeping up 40,000 properties in some of the worst hit real estate markets to turn them around as rentals. This magnifies the old plan of bundling homeowners into a package for sale, only Blackstone discovered how to do this with renters, by gathering up foreclosed homes and renting them back to the same folks whose homes were foreclosed — in some cases, that is literally what happened.
Similar corporations fell in line, offering competitive rental-backed security packages, also known as bonds, so that by 2014, 200,000 single-family homes (and people living in them) were wrapped up in this scheme. Those people have a landlord that is a massive corporation, not a neighbor. Of course, reports of faceless-corporate-style abuse against renters and their basic needs are easy to hear about.
This has a destabilizing effect on the forward mobility of low-income people. First, this financial product is the result of a 5% decrease in American homeownership. It is market manipulation, purely, as this has become the new normal. If this bubble bursts the way mortgage-backed securities did in 2008, rental rates might shrink, but people will be evicted rather than go underwater in their own home. The difference is a family faced with a 30-day eviction notice versus six months of not paying the mortgage before the bank seizes their property.
Profit is bulletproof with this plan, at least for Blackstone. The properties should hold their initial low-investment value even in a collapse. In the last two years, reports of rental rates dramatically climbing have become commonplace across the country. Corporations enjoy collecting rental income on top of revenue from securities, and the investment banks don’t have to lend to risky wage-stagnant families. Obama enjoyed touting the housing recovery without discussing how the recovery was being driven, although, in fairness, he has pointed out wealth disparity every year he has been in office. Congress stalls action on anything that addresses this issue.
Low-income people never own more than one home at once, in their lifetime. Fewer and fewer own their own home at all while rental rates continue to soar in urban areas. These rental-backed securities depend on a low-income class. They don’t exist otherwise.
The term urban is changing its skin, its connotation “black” has expired. It now means modern, sharp, “white.” The once cherished middle-class suburbia has become a wasteland of displaced urban dwellers, languishing in their unsophisticated run-down 1980’s tract homes and condos.
The economic crisis of 2008 revealed families who overpaid on suburban homes and were forced into foreclosure when their property value, 401K, and jobs all burst into thin air with the credit bubble. The poor are too busy or uneducated to know about economics to see the bubble for what it is. The mind defaults to laziness and the savvy prey on that.
How the 2008 financial crisis affected my family
My own parents watched more than $100K dissolve at that time, not in cash, but in equity. A few years later, after relocating to Casa Grande to commute 80 miles per day to his job in Phoenix with American Family Insurance after the company’s Tuscon office closed, my father lost that job. It was the first workday of 2012 and after fifteen years without taking a sick day. His 401K was demolished. The company would report rising profits in 2012 and 2013.
While my father commuted north, my mother had to commute south, a 100-mile daily roundtrip, for a pittance full-time salary equating to $10.50 hourly, in an administrative position for a school district. She lost her job a few months after my father, just before retirement as well. Unemployment checks would subsidize her income until Social Security kicked in, after turning 65. Same for my father. It has become common practice for corporations to use social welfare as their own subsidization, rather than keep people on the payroll until retirement. My parents represent the generation that promised my generation, if you work hard you’ll keep your job, pay off your house, and retire well, maybe even with a second home.
Despite being forced to sell and buy the family home three times in my life, locked in a never-ending mortgage since I can remember, by 2011, my parents scarcely saved enough money to plan for retirement, with dreams of a lakeside home in Michigan for just $25K, the going sale price in some areas. It would be their homecoming, having grown up there, and perhaps they could die there too. Morbid but beautiful, it is their birthright. But it never worked out. Every home they sought out was outbid, despite offering the tag price in cash. By 2013, they stopped looking, frustrated when the exact same homes that they had bid on were relisted for $75K, just out of reach.
For me, it would have been an opportunity to reconnect with my only living grandfather, and get to know other family back east. It would be a new place to visit for cheap summer vacationing. It was a bonding project to help my parents as they would need my handyman skills acquired over years of odd jobs — the kind of jobs that mostly the poor find themselves doing.
The financial capacity to own a home has shrunk
If a home costs one million dollars and you make $500K per year, would there be any question about buying it? The home price is double your income, a credit burden you can handle. But half a million, that’s an elite income. What if your household makes $100K? Is that still doable, buying a home at five times your income? This is a common scenario, and banks lend 15-year loans every day like this, and one could manage to pay it off by living humbly. In Portland, Oregon, right now the median combined household income is $74K, and the average home value is $300K. That is not a terrible disparity, but it is much worse than it used to be.
One problem is that housing costs in Portland are rising at three times the rate of wages, over the last two years, since Blackstone introduced their scheme. Those commanding the median income are more likely to have student debt as well. Cellular phone and home internet double-down on what used to be a home phone bill just twenty years ago. Plus the products we buy, from computers to cars and clothes, expire at a higher rate, causing us to spend more from our paychecks or take out further lines of credit.
America in 1965 was a time of civil unrest, yet it has the appearance of a time when economic and political engines were firing at full blast: a home cost $20K and a middle-class income was $10K. Median income was just under $7K while the average rent was only about $120 a month. Even if you were on the poverty line at $3K, your income was still three times your rent. The top income bracket was $15K and above and was liberally taxed. $100K earners were filthy rich. The workforce participation rate was 5% lower than it is today, at just 58%.
In 2015, a good salary is $50K, five times that of 1965. A good home is $200K, ten times the 1965 price. In other words, wages have lagged behind housing by 100%. Added to the burden is student debt and more bills. Added to the balance is wealth disparity. The wealthy are salaried more to the tune of $2M per year, and there is now an elite class of Billionaire. The tax rate has dropped from 90% to 30% on capital gains since the 60’s, while clever international banking has obscured staggering profits.
Given all of this, my point is that your home or any other product can cost anything, any price at all. Labor is a service, and that value must enable the average laborer to afford anything of necessity in the economy. There has got to be enough money to go around. Prior to this economy, the ecosystem provided equally for all humans, but money always seems to come up short.
What people do when they can never pay off their mortgage
Given stagnant wages, households have learned to adapt, by using their inflating home value. The dream of buying and owning a home outright to raise kids in a community has turned into something else. Families who know very little about financial products on Wall Street have been trained to will themselves into the game by treating their home as a profit center. They have been confused into thinking that their primary residence is supposed to give them a profit. The wealthy don’t behave like that, they buy your home and sell it back to you. An economically savvy family doesn’t relocate because of a little equity gained on their estate. They use that equity to invest. When families “invest” in their home as a product to be sold for a profit within a single decade they never actually accrue any serious wealth.
Logically speaking, the business makes no practical sense. The land itself has not improved. Houses, like cars, deteriorate and require maintenance. The land has actually been destroyed and paved over with cement and sod. It is virtually worthless in terms of producing food or animal products. Moreover, it has been polluted and wild game has disappeared. It is a miracle of Wall Street that sod and cement doubles in value in leveraging markets with a few years time.
The rapid rise in land value always associates with a rise in average household income, and the buzz word for this is gentrification. How average household income increases rapidly is never from the poorest up, because legally speaking, anyone with the means can start gobbling up properties. Investors use computers now and can recognize any trend in any area. Corporations increasingly sweep up those properties, either for rental securities or mortgage securities, rather than local investors, who have been booming housing markets for decades with quick-flipping schemes.
Gentrification starts when properties are improved and sold or rented to higher-income households. And then there goes the neighborhood.
Let’s all warm up to gentrification
Gentrification is literally the improvement of a household or district. There is a connotation as described above: pushing poor people out. This buzz word is usually hung up on that tricky definition of “improvement.” The well-to-do generally ignore the suffering of displacement when renters and business owners cannot afford increasing land values and fail to adapt to their changing environment — if they can’t compete then that’s their problem, the neighborhood is improving. I can admit that dilapidated buildings, drug dens, and rundown shady businesses sometimes have to go in a clean sweep. But when the residents who paid their rent and lived through it are displaced, there is a moral problem.
The morality of wealth inequality is hotly debated. Objectively speaking though, it is a failure of this economic structure to deal with people who had adjusted to living in poverty while income inequality widened over the decades and were forced out of their rapidly gentrifying urban neighborhood with no opportunities. It was the wealthy after all who over-inflated suburban properties, which have deflated. The term is demographic inversion, because both are economic refugees at different income brackets, so that urbanites are forced to move out to those very suburbs where rental rates are alright because the middle-class want a new pace of life. The poor end up as numbers in rental-backed securities while the middle-class end up in mortgage-backed securities. They’re both played by the investment class.
Fundamentally, it is the failure of this social structure to accommodate people who do not exactly “fit in.” Reasons for not fitting in are myriad, and it would be ignorant to assume that race-related standards are not at play in the hierarchy of this capitalist worldview. When the analogue to your skin color is poverty, how are you going to fit in where poverty gets you nothing? If you’re afraid to say it, it means acting more white, in every way.
In Portland, Oregon, for example, since I moved here twelve years ago, there were a handful of up and coming but very poor, “black neighborhoods” like the Alberta and Albina districts. I heard about hipsters getting jumped on Mississippi Avenue. I learned about hipsters’ effect on gentrification from the hipsters themselves, who complained ten years ago of increasing housing costs. They took advantage of available rentals, fairly, making neighborhoods “safer.”
The racial divide in this city is tremendous and I only accepted that in my heart recently. My own white mentality has prevented me from understanding what my role in economic injustice has been.
First, there is a demand from young, low-income artists (often white) seeking affordable housing or studio space where there is excess supply. Their education, culture, and slightly higher income bracket does bring some initial capital to the area. Because few of the poor black residents are property owners, the population does not benefit from this small but meaningful influx of excess wealth, but there is no immediate problem. These are liberal, starving artists, and they tend to be eager to learn how not to be racist.
Signs of gentrification start with the opening of a new hip cafe, broken storefronts turning into galleries, hipster nightlife, and then finally new buildings (bought by the 1%) are developed. Eventually there are food trucks selling grilled cheese for ten bucks to people driving in from the hills in their Prius because they read about the new cart in Portland Monthly. Who knows which among these new main street businesses and buildings benefit Wall Street. Because “go local” repeaters rarely do their research, Alberta and Albina have become something anti-local, a shopping trend, a tourist walking map.
Were the residents of the improving district to directly benefit, then gentrification would not be a dirty word. African-American business owners, employees, investors, homeowners, all enjoying the fruits of a booming economy, improving their storefronts, improving their homes: that could also be gentrification — but it never is.
The artist has a funny way of complaining when their neighborhood is taken from them, forgetting that they enabled the situation, and besides, historically speaking, the city emerged in despite of a native population who should rightfully steward the land. I understand short-term memory — human nature is forgetful and I smoke pot too — but long-term memory should be more difficult to let go than it is to swallow.
The 1% is who owns and administrates new developments; it is a very small number of people basically directing the “progress” of the city. Because they deal with permits and things in government, they know the people there. Money, one way or another, gets you a meeting with the Mayor. This pattern goes on all the way to the White House.
Arriving now at my moral question
Is it an important thing in life to keep an economy going? If so, do we do this out of pure faith that if we embrace it then it will embrace us? Because when it doesn’t, we just shrug and say, “the economy works in mysterious ways.” I think people have been doing that for a long time and they’ve run out of patience.
Are we confronted with a new economic worldview? Can humanity recognize itself in the mirror as one with all and stop holding harm to others, over property rights and social class? This social-economic structure depends on the self-interest of everyone and it necessitates a low-income class without which it can’t survive. Self-interest is divisive. If profit is the motivation, then what is good for the whole isn’t at play. This kind of ecosystem means that the elite are hawks who take to a boundless sky of wealth while preying on the critters existing at rock bottom. We aren’t wild animals though, we are human.
End of Part II
This is my second of four planned installments for a philosophical critique of capitalism. In the first, On Being in Economics, I established an existential premise before taking on specific topics. This article dealt with the illusion of gentrification as a housing problem and the moral imperative involved. My next piece will trace wealth disparity from 1965 to 2015 and relate that to social order and consciousness. The final piece will examine how economics have replaced all kinds of philosophical and moral truths. Your comments are always welcome in the dialogue below.