Two Income Trap and the Itch to Own

Thinking of stretching yourself into a home in this property-value slump? Beware! This is not the time to play chicken with the two income trap.

In The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, Harvard Law School Professor Elizabeth Warren argues that rising costs of essentials--such as housing, education and health care--are increasingly causing middle-class Americans to fall into debt, and from debt into disaster.

When women originally entered the workforce, their contributions to the family income were regarded as extra and went toward vacations, braces for the kids, improvements to the home and various other nicer things in life. Mom's income raised the family's standard of living. This was my own experience in the 1970s and 1980s. So if mom lost her job, it was not the end of the world. It was a bleaker world, but life would go on. If dad lost his job, the family could piece together a way of meeting its financial obligations until dad, the main bread winner, got back on his feet.

Since those days, we have fallen into "the two-income trap." People have been taking on debt and obligation commensurate with the entire, husband and wife, family income. The danger in this is that the family is now doubly vulnerable to financial disaster, e.g. foreclosure.

But Professor Warren cautions against thinking that these are all just people who are self-indulgently living beyond their means, and thus reaping what they have sown when they lose what they could not reasonably have expected to afford. The two-income trap is not that people have committed their incomes to paying for a big house, fancy cars and lots of electronics, but rather that the essentials are driving people to stretch their obligations over the two incomes. For example, as the public school system has deteriorated, it has become increasingly important to get a home in a so-called "good school district." That means higher property taxes and higher house prices. (Of course, if you bought a house in a less reputable school district you would have money for private schooling and better schooling, but people don't seem to consider that.) That drives families into the two-income trap.

If you are at the stage of life when you are facing decisions of this sort, read this book before you take any significant plunge.

As for the housing crisis, read "Housing Crisis is Over" by Cyril Moulle-Berteaux. He is a managing partner in Traxis Partners LP, a hedge fund firm based in New York. He says prices will not bottom out until sometime in 2009, but that price declines are going to start slowing as inventories decline to the point that they always trigger a market recovery.