The concepts of 'pride of ownership' and 'sweat equity' complicated the American Dream of home ownership for many.
Last month, we talked about how the pride of ownership can lead our clients to overvalue their own preconceived notions about financial planning and investment management. We uncovered a couple of common financial decision points where marketing professionals have successfully used the pride of ownership against our clients for decades. Manipulations of the human pride of ownership have been at the center of many marketing campaigns for consumer products, but it doesn't stop there. This month, we are concentrating on how these concepts played out with respect to home ownership and the recent housing crisis.
The American Dream
The American Dream of home ownership was at the center of economic policy in the last decade, as relaxed lending standards made it possible for a larger and larger portion of the American population to "afford" a home of their own. Whether you believe our housing crisis was perpetrated by fraud and rampant corruption, savvy business people, or flawed financial decision-making by families, the pride of ownership concept was used on Americans in a way we have never seen before.
The machine of mortgage brokers, homebuilders, loan originators, realtors, big banks, economic policy, and investors created a system that allowed everyone the opportunity to feel the pride of ownership. The exuberance was most definitely economically irrational. No economically rational decision-maker would have taken on mortgages they couldn't afford to pay. No economically rational mortgage lender would have loaned money to a family who couldn't prove its income even existed. No economically rational investor would have invested in real estate on the premise that values only go up.
What really happened was that the system, intentionally or not, created a scenario where nearly everyone could feel the pride of ownership. Given the opportunity, almost everyone would jump at the chance to own a home and to make it their own.
The interesting complication in this situation was that people did not need to already own a home in order to make irrational decisions about its economic value. Instead they made the bad decisions in order to attain the pride of ownership. The American Dream they've strived for was now attainable, and who were they to look a gift horse in the mouth?
We think the crisis was spurred on by a little bit of irrational crowd behavior. People lined up at model home sites and waited in line for their chance to own a piece of the American Dream. Bidding wars created sellers' markets where buyers routinely paid more than the asking price for a home. Just think. Would you ever walk into a grocery store and willingly pay over asking price for a loaf of bread? Probably not. So there must have been an emotional component behind the economically irrational bidding wars that became common in the 2000s. The pride of ownership may have been the catalyst.
The irrational behavior didn't necessarily end after the home was purchased. Think also about the home improvement labor exerted by a homeowner and the perceived value of that labor on their real estate. We hear the term "sweat equity" often from clients. They are referring to the value they associate with a home based solely upon the work they have put into creating it.