Tag Archives: economic crisis

The key to the American middle class is feeling middle class

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Forget material measures of being middle-class; what if the key is that people in the American middle class feel that they are comfortably middle class?

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Vincent is among a growing group of middle-class Americans — most recently defined in 2022 by the Pew Research Center as households earning between $48,500 and $145,500 — who don’t feel they can’t afford to live a traditional middle-class life, replete with a home and a comfortable retirement…

Collins suspects that most middle-class Americans feel anxious about their financial situation due to financial shock fatigue — the exhaustion of navigating one big economic shock after another — as well as a lack of financial planning…

Financial anxiety has hit an all-time high, according to a survey from Northwestern Mutual, and a survey from Primerica found that half of middle-class households say their financial situation is “not so good” or outright “poor.”…

Buying a home may be the greatest example of a tenet of middle-class life feeling out of reach for many, and that struggle is very real rather than merely negatively perceived.

The suggestion is that people feel less certain of their social class status because of financial uncertainty at the moment and in recent years. They may have resources, particularly a certain income level, but they do not feel secure.

What might this mean for defining the middle class? Perhaps this should lead to changing what it means. If people do not feel that certain markers provide a middle class status, then change the markers. These variables might need to change as economic conditions change.

It would also be interesting to see what social class those feeling financial anxiety say they are in. Traditionally, being in the middle class was a sign of making it and being successful. Would someone who might be classified as middle class by income and other markers say they are working class? Is there a big shift away from identifying as middle class?

    Regional banks and commercial real estate loans

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    As companies reduce their office footprint, what institutions hold many commercial real estate loans?

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    US banks hold about $2.7 trillion in commercial real estate loans. The majority of that, about 80%, according to Goldman Sachs economists, is held by smaller, regional banks — the ones that the US government hasn’t classified as “too big to fail.”

    Much of that debt is about to mature, and, in a troubled market, regional banks might have problems collecting on those loans. More than $2.2 trillion will come due between now and the end of 2027, according to data firm Trepp.

    Fears were exacerbated last week when New York Community Bancorp (NYCB) reported a surprise loss of $252 million last quarter compared to a $172 million profit in the fourth quarter of 2022. The company also reported $552 million in loan losses, a significant increase from $62 million the prior quarter. The increase was driven partly by expected losses on commercial real estate loans, it said.

    Because I know little about this, this leads to several questions:

    If patterns from earlier crises hold up, does this mean that when regional banks suffer difficulties they will be gobbled up by the larger banks?

    What do regional banks have more of these loans – is this more of their specialty or they are more familiar with the local markets?

    Who exactly decides which financial institutions are too big to fail and at what point might these regional banks qualify?

    If these are the losses of just one regional bank, what might we expect throughout the entire US within the next few years?

    US urban office space vacancies related to earlier office building booms

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    With the vacancy rate for office space in the major US cities almost at 20%, is now safe to conclude too much space was constructed in the first place?

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    America’s offices are emptier than at any point in at least four decades, reflecting years of overbuilding and shifting work habits that were accelerated by the pandemic.

    A staggering 19.6% of office space in major U.S. cities wasn’t leased as of the fourth quarter, according to Moody’s Analytics, up from 18.8% a year earlier. That is slightly above the previous records of 19.3% set in 1986 and 1991 and the highest number since at least 1979, which is as far back as Moody’s data go…

    That glut weighs on the office market to this day and helps explain why vacancies are far higher in the U.S. than in Europe or Asia. Many office parks built in the 1980s and earlier struggle to find tenants as companies cut back on space or leave for more modern buildings.

    “The bulk of the vacant space are buildings that were built in the 1950s, ’60s, ’70s and ’80s,” said Mary Ann Tighe, chief executive of the New York tri-state region at real-estate brokerage CBRE.

    And just as in the early ’90s, it is the overbuilt South that is hit hardest. Today, the three major U.S. cities with the country’s highest office-vacancy rates are Houston, Dallas and Austin, Texas, according to Moody’s. In 1991, Palm Beach and Fort Lauderdale in Florida and San Antonio held those positions.

    This sounds like a cyclical market: during financial downturns, fewer companies want office space and vacancies rise. During economic success, more companies expand and make use of the space. When more space is built during the good times, that same space is not necessarily needed later.

    Does that mean that COVID-19 was only a partial contributor to office vacancies? Was a reckoning going to come for urban office space even without a global pandemic? Or might office space be back in demand again soon as economic conditions change?

    I can see why new office space is desirable to fund and build. Whether it should be built, given the cycles discussed above, is another story. And if office space cannot be easily converted to other uses, how much more is really needed in major cities?

    Quickly describing the worst-case scenario of “the urban doom loop”

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    What might an urban doom loop look like? Here is one brief description:

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    The worst-case scenario would go like this: With more people working from home, companies from Milwaukee to Memphis are rethinking their leases or pulling out of them altogether. That drives vacancy rates up and makes it harder for landlords to attract new tenants or sell buildings for a healthy price.

    Then property owners might struggle to pay off their mortgages or clear other debt. Business districts would dry up, stifling tax revenue from commercial properties or employee wages. Shoppers and tourists would have fewer reasons to venture downtown to eat or shop, choking off spending and forcing layoffs at restaurants and retail stores.

    “Once those offices are empty, there are few alternatives and not a lot of life after hours,” said Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s Graduate School of Business who is one of the authors of a paper that coined the “urban doom loop” phrase. Midsize cities “have a much bigger chasm to cross than what New York City has to go through. The situation is worse in those places with so little else in place.” He added, “It is a train wreck in slow motion.”

    Once the primary use of a district starts disappearing, it can be hard to reverse the pattern. This is true in downtowns where much of the space is used for offices. It can be true for other uses as well, such as when retail dries up at shopping malls or a particular industrial activity slows down in a one industry place.

    Is the primary way of addressing this right now simply to hope it the doom loop does not get too far? Are there any interventions that could help protect against worsening conditions? This could be an interesting time for experimentation across American cities as places and firms adjust to less need for permanent office space.

    From subprime mortgage issues to superprime mortgage issues

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    The most recent financial uncertainty includes mortgages in a superprime era:

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    This is quite the turnaround. After 2008, banking the rich was often touted as a far better model. Even the biggest banks began aiming more of their consumer lending and wealth management at relatively better-off customers, and they scaled back on serving subprime customers. Wealthy customers seldom default, they bring lots of cash and commercial banking business and pay big fees for investments and advice, the thinking went.

    But when interest rates shot up last year, it exposed weaknesses in the strategy. It isn’t that the rich are defaulting on loans in droves. But the most flush depositors with excess cash last year started taking their cash and seeking out higher yields in online banks, money funds or Treasurys. On top of that, startups and other private businesses started burning more cash, leading to deposit outflows…

    A major way that the better-off do borrow from banks is to buy homes, and often in the form of what are known as jumbo mortgages. Jumbos are for loan amounts over $726,200 in most places, and over $1,089,300 in high-cost cities such as New York or San Francisco. Jumbo mortgages bring wealthy customers with lots of cash. They also are typically more difficult to sell to the market, in part because they aren’t guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. So banks often sit on them. But the value of these mortgages, many of which are fixed at low rates for the foreseeable future, have dropped as interest rates have risen.

    To be sure, not all banks that focus on wealthier individual clients are under intense pressure. Shares of Morgan Stanley and Goldman Sachs, are down less than half as much this month as the nearly 30% decline for the KBW Nasdaq Bank index. But those banks are more diversified and focus more on the steadier, fee-generating parts of the wealth business, such as stock trading and asset management, than on mortgages or deposits.

    I interpret this to mean that there is less money – or lower rates of return – to be made on big mortgages. Wealthy people will want to buy real estate, particularly because it is often assumed that the value of real estate will be good long-term, but the money does not generate the amount of money banks want.

    If mortgages are too “boring” or do not generate enough money, could we be headed to an era where banks do not want to do mortgages? Money for mortgages could come from elsewhere.

    I just want housing for Christmas, New Year’s, and the years to come

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    How about more housing for the holidays?

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    “We have a supply problem with housing,” Marc Norman, associate dean at the NYU Schack Institute of Real Estate, told Yahoo Finance Live (video above). “We’ll see the price declines, but I think the income gains that we are seeing lately are still not keeping up with the prices that we are seeing in the market — in most markets.”…

    “We, for the last 20 years, have underbuilt the housing,” Norman said. “In 2008, we saw the sort of demand go down, but it never came back in terms of supply.”

    After the 2008 real estate crash, residential construction activities in the private sector never recovered to the level of 2006. Although home building slowly increased year over year during the last decade, projects remained well below early 2000 levels, according to figures from the Census Bureau and. Department of Housing and Urban Development.

    Several thoughts in response:

    1. The United States has never fully recovered from the housing bubble in the late 2000s. The rise in housing values, homeownership, and lending activity led to a lot of trouble.
    2. How much money has the real estate and development sector made since the late 2000s? How much money has been left on the table by not building (or not being able to build, as discussed in the article, due to zoning and other restrictions)?
    3. How many older homes are retrofitted or renovated to meet current standards and tastes each year compared to how many new housing units are needed? Both routes could help provide housing.

    All of this could set up nicely for giving housing as a Christmas present in the future.

    American households lost trillions in 2022 due to stocks and inflation yet also gained trillions due to housing equity

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    A recent report detailing wealth losses in the United States also found housing equity increased in the first three quarters of 2022:

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    American households lost about $6.8 trillion in wealth over the first three quarters of 2022 as the stock market shed more than 25% of its value, the Federal Reserve reported Friday in the government’s quarterly financial accounts.

    Nominal net worth fell 4.6% to $143.3 trillion, as the market value of assets fell by $6 trillion and liabilities rose by about $900 billion. Households’ balance sheets were propped up by a 10% increase in home equity, which is the greatest source of wealth for most American families…

    Homeowners, in particular, were in good shape financially as September ended, with the equity in their houses rising to a near-record 70.5% of market value from a record low of 46% in 2012. But if home prices continue to fall as they have done in the past several months, homeowners without much exposure to the stock market will begin to feel poorer. What will happen to home prices as mortgage rates rise is a major unknown facing policy makers and homeowners alike.

    Homeownership continues to bolster wealth. This fits with the emphasis on homeownership as an investment. And if people cannot purchase homes, they will not be able to build wealth in the same way.

    Thinking out loud: after what happened in the late 2000s with housing prices, how would people respond to a significant reduction in housing values? Or, how would this be received if inflation is ongoing and the stock market struggles? For now, some can rest assured that their homes will retain value. But, this is not guaranteed.

    The long-term consequences for those benefiting from buying a home during a recession

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    Thinking more about yesterday’s post on cooling home values in certain housing markets, how many people benefit from the lower prices? The typical emphasis in such economic times is to note the difficulty of buying a home when interest rates are higher and there is economic uncertainty.

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    But, lower prices means some might be able to buy when they could not otherwise. The hottest markets in good economic times have high prices and lots of competition. Even as borrowing money is harder in a recession, prices can be lower and the competition might not be as stiff.

    Some people are still buying and selling homes during economic downturns. This leads to a long-term question: are those who buy during a recession more or less likely to hold tightly to the idea of a home as an investment? Is buying at the height of the market – famously, such as right before the housing bubble burst in the late 2000s – tied to a deeper focus on property values and a strong return on investment? Or, because a home purchased during a recession might emphasize scarcity and economic uncertainty, might this lead to more concerns about property values?

    Explaining why there is not a flood of McMansion construction

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    Houses are in short supply, housing prices are up, there is money to be made. Why are more McMansions not under construction?

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    With houses selling for so much, you’d think there would be a big incentive for developers to throw up new units, which they can do quite quickly. I still remember driving around New Jersey during the McMansion boom and being amazed at how quickly houses went up. Why aren’t the developers rushing in now?

    In correspondence, my old M.I.T. classmate and economist Charles Steindel pointed me to the likely answer: It’s the supply chain, stupid.

    This makes sense given current conditions: an increased cost in materials plus difficulty acquiring materials might translate into fewer profits in building McMansions.

    I do wonder if there are additional factors at work. A few quick ideas:

    1. McMansions have an established reputation. There are still plenty of people who will buy one but there is also a clear connotation about the home when this specific term is used. Hence, “luxury homes” instead.
    2. How much land is available and how many communities would welcome them? It is one thing to have teardown McMansions in desirable communities and neighborhoods and another to build McMansions on the sprawling edges of suburbia.
    3. There is more money to be made in even larger houses. Why build McMansions when there are enough customers for even larger and/or more opulent homes? Perhaps the money in McMansions comes at a sizable building scale while the per lot/house profits on even more expensive homes is preferred.

    McMansions are not going away as they are an established part of the American housing stock. But, it will be worth watching how many new ones are constructed, where, and by whom.

    Great Quotes in Homeownership #4: Obama in 2013

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    Speaking at a Arizona high school in August 2013, President Obama both addressed specific policies he hoped Congress would pass regarding homeownership as well as the dream of middle-class homeownership. Here is part of the speech connecting middle-class aspirations and homeownership:

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    What we want to do is put forward ideas that will help millions of responsible, middle-class homeowners who still need relief.  And we want to help hardworking Americans who dream of owning their own home fair and square, have a down payment, are willing to make those payments, understand that owning a home requires responsibility.  And there are some immediate actions we could take right now that would help on that front, that would make a difference.  So let me just list a couple of them…

    So I want to be honest with you.  No program or policy is going to solve all the problems in a multi-trillion dollar housing market.  The housing bubble went up so high, the heights it reached before it burst were so unsustainable, that we knew it was going to take some time for us to fully recover.  But if we take the steps that I talked about today, then I know we will restore not just our home values, but also our common values.  We’ll make owning a home a symbol of responsibility, not speculation — a source of security for generations to come, just like it was for my grandparents.  I want it to be just like that for all the young people who are here today and their children and their grandchildren.  (Applause.)

    These sections echo common themes of how the American public often thinks about housing:

    1. Homeownership is a symbol of successful hard work and responsibility. Put it in the time and effort and it should lead to a home.
    2. Systems and particular actors can conspire against possible homeowners – financial speculators, irresponsible people – but the government should be in the business of helping people achieve homeownership.
    3. Homeownership is a goal across American generations, from grandparents to current adults to future children.
    4. The middle class and homeownership are intertwined.

    Even as President Obama sought specific actions, he appealed to cultural goals and narratives very familiar in American life.

    (This is part of a very occasional series of quotes about homeownership. See #1 featuring William Levitt, #2 featuring Herbert Hoover, and #3 involving George W. Bush.)