Who Killed Our (Kids’) American Dream?
My grandfather was a poster boy for the “Greatest Generation.”
He was 6’3″, with a shock of white hair crowned beneath a silver-belly Stetson. He wore Western-cut shirts with a perfect circle worn into the front breast pocket, a mark left there by an ever-present tin of Copenhagen snuff. He carried a comb to keep presentable, often wielding it gracefully in hands tempered by decades of honest labor. He was a hard workin’ man.
His life started in a dryland bootlegger town two-years before Black Tuesday’s crash. His family was hit hard by the Depression. Looking for a way to lighten their burden, he volunteered to fight Hitler and while still in his teens, parachuted first into France and then again into Belgium.
After the war, he married his sweetheart and went to work in the oil fields. He worked his way from rough neck to tool push, driller to rig manager, and eventually became a consultant and worked offshore rigs in Nigeria and other exotic places.
He did things rather than just talk about them and he did them all, on a formal education he jokingly referred to as, “two-thirds of grade twelve,” — in other words eighth grade.
On retirement, he bought a ranch. There, he taught me to build and fix things while dispensing invaluable lessons on life.
One of these lessons was, “Renting is like putting half your income in a barrel every month and burning it. It keeps you warm for now, but leaves nothing to show for your work.”
It’s a simple idea. And as with most of my grandfather’s logic, simple always makes the most sense.
Homeownership is proof hard work pays off. It inspires community spirit and actively reduces crime. The idea is the core of the American Dream… And for many it is slipping out of reach.
As I write this, we are at the lowest recorded level of ownership ever, or at least since they began to track these numbers in 1965. In our paralyzed market, it’s still your right to pass on property to future generations, despite the government’s brutal estate tax.
We’ll explain the various methods we use to achieve this shortly, but first, let’s untangle some of the myths around the housing crisis, and expose the government for the problems they’ve created.
Some have attributed the decline to a shift in lifestyle, with younger groups marrying and having children later. Others suggest “Millennials” have little desire to own a home.
I call BS.
One recent survey found that 4 million current renters want to buy. They simply can’t. (How could they, when many are spending more than half their monthly income on rent?)
Another survey, conducted by Fanny Mae, found that 70% of respondents would buy a property if they were going to move (an all-time survey high).
“The aspiration to own a home is unchanged,” confirmed Fanny Mae’s chief economist, Doug Duncan.
How did it get this bad?
A lethal cocktail, median income has fallen 13% since the 2008 recession, yet in the last twelve months alone, house prices have risen by 5.2%.
This is the hangover from the burst housing bubble.
A million homeowners face foreclosure as of June 2016, and seven million more are floundering, thanks to unsustainable mortgages sold to people without the means to pay them.
Who is to blame?
Restrictive zoning policies and infuriating layers of bureaucracy have inflated prices to the point of madness. So, the real villain here is government.
Zoning regulations tell us how high we can build, what type of properties we can build where, and whether land can even be used for property.
These limitations strangle the supply of housing. It’s artificial scarcity. And we all know scarcity pushes up prices, it’s basic economics.
In any industry, the price of goods is determined by supply and demand. We know that demand for housing, of course, is high — the US population grows by 3.3 million every year — but government regulations choke supply.
If you want proof, look at Houston. This is a city with no formal zoning code. It has the fastest growing urban area in the country, and a three-bedroom home costs $110,000. That’s 15% what it costs in San Francisco, where regulation is a noose pulled tight.
The second needless problem is bureaucracy. Home builders are forced to jump through more hoops than ever. These delays add months to building projects. The extra cost is passed on to home buyers.
We need to stop overloading builders with needless restrictions and approvals. Quite simply, the government needs to get out of the way.
Let’s not forget they created this mess in the first place…
Of course, this all stems from a financial crisis with its roots in the housing market.
A crisis that was triggered by a “managed” economy and a central bank unwilling to turn the money tap off.
It began with the federal government trying to artificially increase home ownership. They created the Federal Housing Administration, Freddie Mac and Fannie Mae, which caused an accelerated growth in risky lending.
The Fed’s commitment to ultra-low interest rates after 9/11 also spurred a dangerous incentive to offer mortgages to families who couldn’t afford it.
It was a disaster waiting to happen.
We need home ownership, but to be sustainable it achieved through responsible lending and natural market growth, not artificially inflated on wafer-thin mortgages.
Now we’re living with the consequences of this disastrous policy; a decade of slow growth and stagnant wages, combined with inflated house prices, all triggered by government meddling.
Things aren’t likely to improve…
Both presidential candidates have made sweeping promises to the middle classes, but they are equally devoid of facts or policy.
Clinton says she “sweats the details,” yet has little to say on the economy. Indeed, the New York Times pointed out that her acceptance speech was “remarkably without hard facts.” When she has spoken about the housing crisis, she has promised more dangerous lending. With Clinton, expect Obamanomics Part II.
As for Trump, he appears to misunderstand the problem. Ron Paul summed it up best when he recently wrote:
“[Trump] promised that if elected he will bring back ‘the American dream.’ [But] he seems to have no idea that home ownership is so low because the Fed-created housing bubble exploded in 2007-2008.
How are these candidates going to fix the problems we face in America if they have absolutely no idea what caused the problems? No matter who is elected, Americans are going to be very disappointed in the outcome.”
It’s never been more important to keep your wealth in the family
We can’t personally fix the housing crisis, but we can help our families.
Perhaps you’ve got children or grandchildren battling to get on the housing ladder, and you may want to help them out.
The first step is minimizing (or eliminating entirely) your estate tax contributions. I don’t believe this government has the right to double tax your hard-earned wealth – which is what an estate tax is.
Using certain domestic trusts, we can pass wealth and homes onto our children quickly, quietly and legally — often without incurring the brutal estate tax. For high-net families, an international trust offers an even better structure.
Of course, many of our clients go one step further and jump ship altogether. There are plenty of emerging real estate markets that have enormous appreciation potential. Your money goes a whole lot further in some countries too.
In San Francisco, for example, $300,000 won’t even buy you a one-bedroom apartment. In Ecuador, you could buy a large house on the beach, and still have $200,000 left over.
The US government continues to play games with our economy, wreaking havoc on the housing market, and destroying our American Dream. Perhaps it’s time to make a Plan B.
Take care out there,
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