In a tight corner

It does send a chill down the spine whenever one digs further into the story of the US subprime mortgage meltdown. But, for a book about the phenomenon, The Cul-De-Sac Syndrome scores points for being absolutely unputdownable. John Wasik’s analysis, more than being lucid and detailed, is an absolute kick in the stomach for even someone who does not reside in America.

Wasik, journalist and now a columnist for Bloomberg News, takes the bottom-up approach to examining the crisis that has resulted in turmoil in the world’s financial markets. Instead of probing further at Wall Street, he decided to find explanations for the crisis in the quintessential American Dream — owning a home.

 

There is enough literature around today about the collapse of Lehman Brothers and the bailouts to agencies such as Fannie Mae and Freddie Mac, and the domino effect it has had on banks and insurance conglomerates around the world. But accounts of real affected home buyers have been too few and far between. So, when Wasik narrates stories of actual buyers whose homes lost values by up to 44 per cent and buyers who mailed back their keys to the banks after deciding against paying back their mortgages, it makes you head for some supplemental oxygen. He says the examples are necessary to first bust a very important myth — home values can never register a net loss.

The story of the American Dream begins in the first half of the 20th century when, after shoving out the last remaining pockets of native Indians, the first wave of suburbs appear in America. This is temporarily halted by the Great Depression and then revived by President Roosevelt, when he lays the foundations for the modern mortgage industry. Roosevelt created the Home Owners Loan Corporation (HOLC) which rewrote the rules for mortgages by ensuring that a buyer can own a home by fronting just 10 per cent or less of its value and pay back the rest over a luxurious 20 years. The baby boom years followed with the suburban sprawl taking a breather in the late 1970s and early 1980s, but renewed its vigour in the dotcom-fuelled 1990s.

It is post the dotcom bust of the 21st century that Wasik puts forth the argument for why it all went wrong. He says the American Dream that till then looked only for a comfortable residence (and retirement) in a luxurious home, decided to instead morph it into the perfect investment vehicle. He quotes ample statistics to show that the post-2002 period saw the biggest spike in property growth by volume and prices. The spike, he says, was fuelled by average Americans losing faith in their investments in stocks and bonds, and retirement funds. It was an era, says Wasik, that saw employers totally shaking their hands off retirement benefits, healthcare, and when company stock options (read esops) became worthless.

The outcome was Americans owning multiple properties and paying mortgages on all of them, in the hope of a big cash-out one day. This led to the mushrooming of a new type of community called a Spurb (Wasik’s word for a suburb that appeared out of nowhere). Fuelled by Alan Greenspan’s policies at the Federal Reserve to make cheap credit (as low as 4 per cent for a home loan) available for all, Wasik says, this led to the birth of the “Cul-De-Sac Syndrome”. The lending to high credit-risk buyers was just the trigger that made the house of cards tumble down. The real devil, it seems, is overextending and random speculation of prices at all levels.

That was the postmortem. The real meat of the book is its latter part which makes for rather depressing reading. Wasik concludes, with hard evidence, that America is far from a recovery in market terms simply due to a glut in the housing sector, and even a recovery in the current model fails in sustainability over the long term. Rising property taxes (which are linked to maintaining community expenditure), increasing living costs combined with stagnant pay, absent social security, an ailing education system, an exodus of jobs from America, and finally ecologically unviable housing developments, are challenges that Wasik asserts require more than just access to easy credit again. As a consequence, he points out that American consumption — which is statistically strongly linked to new homes — is going to be hard to kickstart. It is hard to argue against Wasik’s opinion on the gloomy outlook for America.

In India, while we are still far from cheap lending and having a glut in unsold homes, the other factors that have been highlighted due to this crisis still apply. Housing is hardly affordable without overextending your paying means (and speculation is the property industry norm), we also have no social security and we have yet to come to terms with ecological footprints for our urban developments. We in all earnest want our economic growth to replicate the American Dream right here. Hopefully we still have time to avoid the cul-de-sac.

The Cul-De-Sac Syndrome
Turning Around the Unsustainable American Dream
John F Wasik
Bloomberg
207 pages; $24.95