A problem of perception

Chris Thornberg, founder of Beacon Economics.

TEXT OF INTERVIEW

Tess Vigeland: Economists described the housing boom as yet another market mania, just like the dot-com frenzy. People's perceptions of the housing market reality were altered by everything from dinner party gossip to, yes, media hype -- jump in before it's too late!

But some of the changes in homeowner psychology go beyond mania. There's a longer-term shift in how people think about their homes and here to put us all on the couch is Chris Thornberg. He's an economist here in Los Angeles and has been watching the housing market for years.


Vigeland: Chris, nice to see you again.

Chris Thornberg: Absolutely great to be here.

Vigeland: You know it seems like for time in memoriam, one of the big financial goals in life was to pay off your house, do whatever it took to get to that mortgage burning party. Would you agree that we -- many of us at least -- think of our mortgages differently now?

Thornberg: I think certainly so. I think we live in a much more sophisticated age. If you look back over time, for your vast majority of households, their primary asset was their house. Most economists today would say that if you actually paid off your house, you have a portfolio that is probably weighted too much towards your house. 50 years ago, it made more sense.

Vigeland: Is this a generational shift at all, because I have to tell you, you know, when I got my first mortgage, the way I think about it, I really think about it as a monthly payment. I'm not planning to be in that house until I retire; I will probably move within the next 10 years, but my parents, I think, look at this and say "you're not planning to pay off your mortgage as quickly as you possibly can?" When did that shift happen?

Thornberg: I have had this same conversation with my father. My father has paid off his mortgage. Half of his assets are in his house. I said, "That's crazy!" and he says, "Well, that's the way I like it." It is a different era. We are people who are less rooted to a particular place. I also think that, in many ways, previous generations went through substantially more financial turmoil than I think our generation has experienced -- at least up until now, but of course, what we're talking about here is because we move so much, we don't need to have a house paid off, because hey, we can get up and go anywhere we want and in many ways, we live in a world where we have access to financial markets at the individual level. This isn't the realm of the elite anymore.

Vigeland: In that case, what's wrong with 100 percent financing, interest-only loans, in order to get you into that house?

Thornberg: The issue, of course, today, at the same time as we have unparalleled access to financial markets and ability to invest and buy stuff, we also have a situation where Americans don't save anymore. That kind of attitude is very, very problematic for the future of the U.S. economy. It's very sad that people seem to have lost this sense of the future. Maybe our confidence in the future is so great, we don't realize the kind of risk that we are putting ourselves into.

Vigeland: Well, that was certainly the case when people were buying and getting homes based on the idea that the value would always go up.

Thornberg: Right. Why do I have to save anything when I can buy assets that only go up in value? Well, guess what? Home prices don't go up forever and ever. In fact, now, we're going through the painful process of home prices coming down.

Vigeland: When we talk about the psychology of home ownership, you really have to address this idea of the American dream and that a big part of that is owning a house. Should our notion of well-being be so tied to the idea of home ownership, because it certainly isn't in other Western societies?

Thornberg: Absolutely not. Again, so much of the rhetoric going on out there in the context of the current crisis seems to be wrapped around this idea that "My God, we have to keep people in their homes no matter what." Home ownership is not the be all and end all. Home ownership is not the Holy Grail. There are plenty of people in plenty of circumstances for whom living in an apartment is a very logical thing to do.

Vigeland: Chris Thornberg is the founder of Beacon Economics here in Los Angeles. Thanks so much for coming in.

Thornberg: Great to be here.

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