By my age, habits have become pretty well etched into the pattern of my life. However, I have to admit that I am joining that crush of people who are getting more of their news online. I have grabbed The Washington Post at my front door every day for the past five decades or so. For years, my day hasn’t really begun until I have a cup of coffee and The Post. But more frequently these days, I find myself early in the morning moving seamlessly from emails to news on my own schedule without worrying about whether The Post has been delivered yet. Now, I get my news most frequently by watching one or more cable TV news networks while balancing a laptop on my lap. Usually, on my computer screen is an email from Seeking Alpha, which suits my needs for news and opinion better than anything else I’ve discovered. They assemble articles from people with very high credentials who publish on the web, often on their own blogs or news services. The people from Seeking Alpha bring their own substantial and credible editing to the process. They allow their reader to specify the topics that interest them and send them a daily morning email with links to articles grouped by each area of interest specified. One of the areas I monitor is Housing. This morning (12/23/08), I was especially impressed by an article entitled “The Housing Blame Game, Redux.” It was written by Paul Jackson, who is the publisher of “Housing Wire,” which is a respected source of news and interpretation of the residential real estate market. In his article, Jackson makes a well-reasoned case that the Bush Administration’s “Ownership Society” policies, coming on the heels of similar goals of every Administration since Carter, must assume much of the blame for the crash of home prices. That prompted me to leave a reply to Jackson’s article that articulated my view that blaming the crash on political policies still isn’t enough. It’s a much deeper issue, in my opinion. Below, I am reiterating the comments I posted at his article, in an extended and edited form.

The Crash Of Home Prices, Like The Crash Of The Stock Market, Was Not An Isolated Episodic Event. It Happened In A Much Broader Context.

Although I think Paul Jackson’s article was enlightening, I also think his discussion misses the major point: new and ill-conceived financial instruments and political policies certainly exerted major influence on the housing bubble, but they existed within the context of a cultural phenomenon.

From mid-1986 until the very end of 1990, I was VP at NVR, which grew from a small IPO of a Greater Washington regional homebuilding company called NVHomes to become the nation’s largest homebuilder when, in a classic minnow-swallowing-the-whale case history, NVHomes acquired Ryan Homes. I worked closely with founder and then Chairman/CEO Dwight Schar, a brilliant businessperson who (at least from what I could observe) had an intuitive genius for real estate, how to market new homes, and how to operate a homebuilding business. (As an aside, he also has become a close friend of George W. Bush, and he has been one of the major fund raisers for the Republican Party for a number of years.) While working with (and learning much from) him, I attended four years worth of conferences where we and other public homebuilders made presentations to analysts and institutional investors. In fact, I sometimes took his place making the company presentations at those conferences.

In the process, I got to see all the other publicly owned builders make their presentations over a very dynamic four year period of boom-to-bust for the real estate business. This combination of having a close-up view of the homebuilding industry as a part of the senior management team of the nation’s largest homebuilder and as an observer in the audience listening on a regular basis to CEOs of other homebuilders gave me the opportunity to see a fundamental change happening in the residential real estate market.

Product Product Product.

The fundamental rule of real estate had always been: location location location. In the mid-80s, that rule changed to: product product product. Location did not become totally irrelevant in the marketing effort and it certainly influenced the price of the home, but if you take a look at the advertising and marketing of new homes at the time you will see that they were promoting product over location. They stressed bigness, open and big volume space, tubs so big that the water got cold by the time the tub was filled, over-size kitchens with islands, master bedrooms with sitting rooms, extensive upgrades, customizing, etc. In short, how the rich lived became the expectation of the non-rich. More, in fact, than mere expectation. Maybe closer to some weird sense of entitlement.

Consistent and concurrent with this trend, the market began to be segmented so that there was no longer just a “move-up” market but there was a “first time move-up,” a “second move-up,” and then the McMansion market. In other words, there was always a reason to sell your existing house and buy the next level up. By creating a “next step up,” homebuilders increased the size of their market. The consumer was lured to another sale. Each segment of the market was defined not so much by location but by the features and look of the house itself. Product became king. So what if the house was located in the far suburbs requiring an awful commute? Look what you could live in once you got home! How great you would feel! How impressed your friends will be when they see the house! Worth the commute.

The real estate crash of the early to mid-1990s popped the market bubble for about seven years or so until people who bought at the market high saw their homes’ value recover to the price they originally paid. When the market came back, it came back with a vengeance, fueled by homebuilders who built and fed into the consumer’s appetite for more-and-better as defined by product. The marketing that was used to turn-on the market could not have succeeded unless the market itself was susceptible to that pitch. And that is my point: the market itself (our culture) also must assume a major burden for what has happened to home values. And, because the crash in home values is a major reason for the crash of the equity and debt markets, you could say by a simple extension of logic that it was our culture that gave rise to our current financial condition.

The evidence of wealth became a priority to Americans, and the house became the most important evidence of wealth. Even if you didn’t actually have wealth, you could still look like you had it. Remember the TV commercial that showed the guy with all the props of wealth who admitted that he was “in debt up to my eyeballs”? That was a perfect summary of the American Culture: The appearance of wealth not only became more important than actual wealth, it became so important that debt would be assumed to the degree that it actually undermined the reality of (or prospect of building) wealth just for the sake of giving the appearance of wealth. How perverse was that logic? So perverse that it could be attributed to only one thing: a bandwagon mentality gone horribly off-track.

Although the consumer’s ability to get themselves into that fix was helped by new financial instruments and government policies, as Paul Jackson’s article suggests, the consumer’s decisions and priorities were fueled less by financial instruments and more by the culture that dominated our society and nation at the time.

To dismiss the cultural issue when trying to identify the causes of the current financial crisis is a major mistake because if we are not sensitive to it as a cause, we will not observe cultural shifts as they occur as a necessary component of the solution. I think those cultural changes will exert at least as much influence in how and when the residential real estate market is reshaped as any new mortgage instruments that may be appear on the scene.

What Cultural Changes Might We Expect?

If my premise is correct, then the question becomes: What sort of cultural changes might we expect? I think that will be very difficult to predict correctly, but here’s my current guess as to attitudinal shifts in the American Public’s view of their homes:

• Resurrection of the importance of a home’s location.
• Acceptance of the concept that having a house that can be afforded is more important than having a house that is a financial stretch but gives you a certain image.
• Rejection of the importance of the appearance of success and wealth as a priority in life.
• Willingness to at least consider the proposition that in some cases renting a home might be wiser than buying a home.

If …

If those cultural changes are made as part of the revitalization of the residential real estate market, there will probably be similar and related cultural changes in society as a whole. As that occurs, the current American Dream of “Buy more … Buy bigger … Buy more expensive … Buy on credit even if you can’t afford it” will be transformed. Perhaps the transformation will include a reversal, at least in part, to the traditional American values of liberty, freedom, and individual responsibility and opportunism. We’d also be likely to see increased savings rates and decreased levels of debt. But I think the cultural change on the horizon will be much more than an updated restatement of former ideals. I believe new standards, priorities, ways of doing things and the basic definition of what makes for a “good life” will emerge.

I do not think this will happen overnight, and I think many of the changes will begin to emerge in very small and maybe unnoticeable increments (which would increase the need for being sensitive to the issue so that we can observe changes as they evolve). In the meantime, given the destroyed wealth that formerly existed in peoples’ homes, the ongoing southward direction of the equities and debt markets globally, increasing unemployment, and more dramatic stories of the Madoff ilk, it’s going to be very easy in 2009 for people to count their blessings. But the blessings they count will be less of the materialistic variety – less tied to money (or even the lack of it). And if “blessings” morph FROM things like the latest flat screen television in the media room with theater chairs TO things like reveling in family and non-capital-related assets, then the cultural change will be significant indeed. After all, there won’t be another catastrophe in sub-prime mortgages if there is no market for sub-prime mortgages in the first place.