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Dr. Raynor teaches finance at the State University of New York at Delhi, and is periodically a visiting professor at Universidad Catholica Santo Toribio De Mogrovejo in Peru. He has worked on a number of projects in other areas of Latin America, and was also a visiting professor in China. He is especially interested in international trade and labor issues, and has previous private sector experience in the banking industry.

I thought that visiting my wife's family in Peru this summer would provide temporary relief from the less than perfect news about the U.S. economy. At least, that is what I thought. Instead, I found myself concentrating on it even more--especially the housing market--and making comparisons between the two economies.

The U.S. housing market may require significant structural changes for several reasons:

1. Income levels: Even if the housing bubble had not happened, middle-class America would not have the income it once had. Many high-paying jobs have been outsourced and will not return. Replacement jobs frequently mean accepting lower pay, or working 2-3 jobs to maintain income levels. Thus, affording current home prices in the U.S., at least in some markets, seems problematic. Inflationary pressures now are compounding this problem.

2. Availability of lesser skilled jobs: Job losses because of the economic slowdown in the U.S. have aggravated the above problem. Higher skilled workers who have lost jobs impact the pool of workers for lesser skilled jobs. Thus, even the lower paying jobs--the ones U.S. citizens supposedly would not take--are becoming harder to find. There are many stories here in Peru of workers returning to South America because job opportunities in the U.S. have diminished.

Immigrant workers leaving the U.S. and returning to South America is one of the most profound developments for me. Most people in the U.S. would find job conditions and compensation levels unacceptable for limited skilled workers in many developing countries, although highly skilled workers are a different story. But, what does it say about the U.S. economy when many of these lesser skilled immigrant workers conclude that it is better to return to their home country where their job prospects are better?

3. Availability of higher-skilled jobs: In the U.S., the lack of the creation of higher paying jobs has been well documented. Some of these jobs have been eliminated because of automation or technological advances. Some have been lost to lower wage countries--mostly in Asia, but also to places like here in Peru. Because even the more complex jobs, such as engineering, accounting, architecture, IT, etc., can be done online, corporations often go to wherever talent on the planet is the cheapest. With less of these higher-end jobs in the U.S., who will buy homes that cost several hundred thousand dollars? How long will it take to clear out the excess unsold homes currently in inventory?

Even if a corporation stays in the U.S., the global talent pool of highly skilled workers via the Internet puts downward pressures on compensation. Thus, an engineer in the U.S., may accept a salary at a fraction of what it was before out of necessity. There is little evidence to suggest that incomes in many sectors will return to previous levels. Is it realistic to expect higher-end homes to be bought by highly-skilled professional workers who do not have higher incomes?

The very controversial H-1B visas aggravate the conditions described above. Under the H-1B program, corporations can bring highly skilled workers to the U.S. if a shortage is declared. However, abuse of the H-1B program has been well documented. Often, the H-1B recipient is paid a fraction of what his/her U.S. counterpart is paid, putting downward compensation pressures on everyone in the field. Cases have also been documented in which U.S. workers train their own replacements. Again, what is there to suggest that current and future income levels will support home buying at the prices we once knew?

4. Pre-bubble housing costs: U.S. housing costs, as a percentage of income, already were high, even before the bubble grew. Many people already were paying a large percentage of their incomes for housing-related expenses, such as mortgage, taxes, insurance, repairs, utilities, etc. Of course, the bubble made this worse. In previous decades when incomes were rising, which is to say when many people traded up to more expensive homes because there was an economic incentive to do so, it made sense. But now, how many people with 6000 square-foot homes and jumbo mortgages, wish they still had their old 2500 sq foot "starter" homes back? There may be lots of the smaller homes on the market, but many individuals cannot sell their upscale homes, or they owe more on them than they are worth. They are trapped from downsizing. In Peru, keeping a house for the long-term is more the norm, and "flipping" houses is virtually unheard of.

5. Housing bubble consequences: My wife and I recently went into a bank in Peru where they were financing and promoting a new housing development. A representative from the development was on the bank premises answering questions about the modest but nice homes. It was like going back in time. Down-payments are still required; mortgages are made to those that have the ability to repay them; interest-only mortgages are unheard of. Banks actually keep their loans, rather than selling them in the secondary market, and banks are not paranoid about lending, unlike those during the current credit crunch in the U.S. How long will it take to work off the excesses of the mortgage crisis in the U.S.? When will lending institutions return to a more normal operating mode?

6. Other expenses: Structural changes in other sectors of the economy adversely impact the U.S. housing market. We are all very much aware of the healthcare affordability/availability crisis, for example. How much of a drag on the housing market is there because of inefficiencies in the healthcare delivery system? Contrast this with what I just experienced in Peru. A family member had a fever and we took him to the ER as a precaution. After a few hours, they discharged him. Total cost including prescription was about $60 (no wonder medical tourism in the U.S. is taking off). While $60 is considerably more for a Peruvian than a U.S. citizen, the cost differential on a percentage basis of income is another matter. Bottom line: Home ownership in Peru is much less influenced by healthcare or other expenses, such as higher education, etc.

The big expense that is on everyone's mind now, of course, is the soaring cost of energy. Like many other countries, people in Peru use public transportation much more than we do in the U.S. While Peruvians also complain about high energy costs, the adverse impact on their personal finances, including home ownership, is significantly less. How much of the U.S. housing market is impacted because of energy costs?

New Types of Housing?

All of the above factors suggest we may need to rethink how we view future housing. Should we concentrate on smaller, more modest houses that are more affordable to buy? Should we concentrate on smaller houses that are more efficient to heat and cool? Should we concentrate on smaller houses that can be located in areas closer to work or in economically distressed areas? Should we concentrate on smaller more affordable mortgages that can be paid off more quickly?

As I sit here in Peru, I recall a BNWW article more than five years ago. In it, I discussed a more equilibrium level of wages internationally because of globalization. Forced change in the U.S. housing market is further evidence that this equilibrium could be becoming closer. The good news: people in the U.S. have always been best with creativity and innovation. How can we develop new types of housing that is comfortable, affordable, and energy efficient?

Articles by Dr. Raynor:
Employee Value: An Accounting Paradox
Globalization and the Offshore Outsourcing of White-Collar Jobs
Outsourcing Jobs Off-Shore: Short and Long-Term Consequences
Global Outsourcing and the Disappearing Middle Class
Globalization, the U.S. Military and the Catholic Framework for Economic Life
Globalization and Outsourcing In a Flat but Unbalanced World
Higher Education Reform: Use Institutional Research to Enhance Quality and Control Costs
Ranking Colleges and Placing a Value on Degree Worth
The Good Business
Facing foreclosure? Remember That Your Lender REALLY Doesn't Want Your House
Why a Second Stimulus Plan Should Target the Auto Industry
Abuse of Credit Reports and Scores
Sustainability and Allocation of Resources
American Housing: The View from Peru

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