(Grand) Housing Fundamentals

Clearly pricing has changed with regard to stocks which have exposure to the housing market. I'm sure Warren Buffett spoke truly when he said that "we have usually made our best purchases when apprehensions about some macro event were at a peak." As I approach the much anticipated audits of the fourth quarter, I am reviewing the issue that's scaring everyone today: the housing market. The following graph describes home ownership percentages over the last thirty years.

With regard to ownership changes, it would seem intuitively that the "subprime" opportunity would have created a dramatic increase in home ownership rates. While the chart does show an upward movement, the increase seems slight - moving from 64% to 68%. What's the big deal? To me the most striking part is what it does not state: the change in the quality and size of the average house.

During the past five years, I have been amazed to see grand structures (sometimes called "McMansions" to describe their ubiquitousness) go up everywhere. From coast to coast, I noticed lots getting cleared of 50s and 60s ranch style homes and replaced with structures that could barely be contained by the lots. My question was always the same, "where are these people getting all that money?" This graph does not capture the real action that I saw - that it wasn't about the drama of increased ownership, but rather about the "movin' on up" nature of the housing boom.

If this is the case, then there needs to be a way to enable financial structures to support the change in quality. For example, in Europe 100-year loans are available. Domestically, a similar change occurred when the quality of cars improved. Suddenly, auto loans could be structured for six years, rather than three. If housing loans were extended beyond the traditional loans and interest rates were assisted, then perhaps these grand houses could be retained by the current owners. It may be that instead of housing finance being too creative, it hasn't been creative enough.