Tag Archives: economic crisis

Underwater mortgages slow housing recovery in Chicago area

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Crain’s Chicago Business highlights an issue that is slowing the real estate market in the Chicago area: homeowners with underwater mortgages.

More than 506,000 Chicago-area homes—or one-third of the market—were underwater as of the fourth quarter, according to California research firm CoreLogic Inc. That’s up 7.6 percent from the previous year.

Underwater properties are bogging down a residential market that’s clawing back from its post-crash ditch. By opting to stay put, these homeowners are removing a substantial portion of potential saleable properties from the market, limiting choices for those who are ready to buy…

Rising prices ultimately will push more underwater homeowners to sell, Mr. Humphries says, but it’ll be a while before prices get anywhere near the levels seen in the market apex of just a few years ago. The S&P/Case-Shiller index of single-family homes, a closely watched barometer of values, in February stood 34 percent beneath its September 2006 zenith.

For buyers, meanwhile, the process of finding and closing on a home has become a scrum—and it’s likely to stay that way for a while. This spring, showings are drawing crowds and bidding wars, and fast sales are common, buyers and brokers say.

I wonder how much of this is tied to the psychology that people feel losses, such as the value they may have lost in their house’s value, more than equal gains. What tactics could be used to convince people that they might be better off getting out of the mortgage? I’ve seen one such argument: the value loss on a smaller house is likely to be less in absolute dollars and then homebuyers could benefit from larger drops in prices for larger houses.

Defining what makes for a luxury home

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Here is how one data firm defines what it means to be a luxury housing unit:

Although upscale housing is selling better in some cities than in others, a monthly analysis by the Altos Research data firm for the Institute for Luxury Home Marketing says that overall, that segment of the market is gaining momentum and prices are rising…

Q: “Luxury home” is probably one of the most abused phrases in real estate-ese. How do you define it?

A: A price range that’s considered the high end of the market in one place might be something that’s average in another. So, “luxury” is local: Our organization generally defines it as the top 10 percent of an area’s sales in the past 12 months. But for the purposes of the research that we do with Altos for our monthly Luxury Market Report, we’ve taken the ZIP codes within each of 31 markets that have the highest median prices, and for about five years we’ve tracked the sales of homes in those (areas) that are $500,000 and above.

There are two techniques proposed here:

1. The highest 10 percent of a local housing market. Thus, the prices are all relative and the data is based on the highest end in each place. So, there could be some major differences in luxury prices across zip codes or metropolitan regions.

2. Breaking it down first by geography to the wealthiest places (so this is based on geographic clustering) and then setting a clear cut point at $500,000. In these wealthiest zip codes, wouldn’t most of the units be over $500,000? Why the 31 wealthiest markets and not 20 or 40?

Each of these approaches have strengths and weaknesses but I imagine the data here could change quite a bit based on what operationalization is utilized.

Interestingly, the firm found that luxury sales rebounded quicker than the rest of the market:

The interesting thing about this recovery is that the luxury segment, that group of affluent households, was able to recover fairly quickly. They shifted their assets around, and a lot of them were able to see opportunities in the down market. By 2010, there were almost as many high-end households as before the downturn, not just in the United States, but internationally, as well. This group focused on residential real estate as a pretty desirable asset — for them, a second or third home turned out to be a portfolio play.

This shouldn’t be too surprising – when an economic crisis hits, the wealthier members of society have more of a cushion. While the upper end is doing all right, others have argued the bottom end, those looking for starter homes, are having a tougher time.

More privatization of public roads

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Eric Jaffe takes a look at a recent trend: the privatization of public roads throughout the United States.

Public-private partnerships for infrastructure (often called PPPs or P3s) have been on the rise in recent years, and many experts believe the trend has yet to peak. If the activity of the past several weeks is any indication, they may be right. A billion-dollar PPP for the East End Crossing, in Indiana, was announced in late March. News of a $1.5 billion PPP overhaul of the Goethals Bridge, in New York City, came in April. The Pennsylvania D.O.T. placed an open call to private firms for PPP projects just last week.

PPPs provide a valuable public service while shifting the financial risk to private wallets. Advocates also mention efficiency: private developers, driven by an urgent push for profits, can keep costs lowers and complete work faster than the public sector. Supporters believe that in exchange for this revenue share they provide the public with the broader economic advantages of improved metro area mobility. Besides, states just don’t have the money right now to do these projects on their own…

The first “major” public-private road partnership of this new era was the E-470 tollway in Denver in 1989, says William Reinhardt, editor of Public Works Finance. That $323 million project, organized by a highway authority distinct from the state DOT, didn’t rely on public funding. In doing so it sent the country down a new road for new roads.

Since then the growth of private partnerships has been steady if not overwhelming. Twenty-four states plus Washington, D.C., have engaged in 96 public-private road partnerships worth about $54.3 billion. In 2011, PPPs accounted for roughly 11 percent of capital investment in highways, according to Reinhardt, and that’s with about 20 state legislatures yet to permit these types of deals. In a brief history of PPPs for a road builders association in 2011 [PDF], Reinhardt concluded that PPPs “will likely be the primary model for building new highway capacity in heavily congested urban areas in the decades ahead” — particularly for mega projects valued in the billions…

Still, as an urban scholar, Sclar is more frustrated that public-private partnerships tend to interfere with comprehensive approaches to city planning. He uses the example of State Highway 130 near Austin, Texas, a public-private toll road that made traffic worse because truckers chose to take the free I-35 through the city rather than pay the toll. The point is that seeing roads as individual profitable projects distracts from their role as part of the greater public network — capable of influencing everything from transport equity to urban density to environmental sustainability.

As I read through this overview, I’m struck by one thing: the biggest issue seems to be the lack of money available to governments to build roads. If they had such money, they likely wouldn’t choose privatization. But, in an era of growing infrastructure costs, privatization offers some up-front cash and moves the costs off the books for a while. This seems to be a matter of convenience rather than the preferred option for most governments.

Additionally, I don’t see much here about whether this helps or harms drivers. Again, governments are worried about their bottom lines and these certainly impact constituents and taxpayers. Roads aren’t really free. But, private firms want to make more money than perhaps governments might try to generate through roads. Do consumers come out ahead financially or in their experiences on these private roads?

Chicago area housing starts up 37%; still one-fifth of “normal”

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The good news: Chicago area housing starts are up. The bad news: housing starts had slowed so much in recent years that this is nowhere near “normal.”

Housing starts in the first quarter in the Chicago area rose 37 percent, which puts the local housing market on track to build 4,000 homes this year, the best performance in three years, according to Metrostudy, a housing research and consulting firm.

Still, a normal number for new-home starts in the Chicago area is 18,000 to 20,000. “We’re one-fifth of that. We’re a long way from being normal,” said Chris Huecksteadt, director of Metrostudy’s Midwest markets…

A lack of quality inventory and bidding wars among resale homes have caused some consumers to change their focus and consider buying newly constructed homes. Several local builders report that they’ve started homes as spec or model homes and the properties have gone under contract before the drywall is up…

Because of that kind of demand, as well as a recent spike in lumber prices, some local firms are raising prices by $5,000 to $20,000 per home to help offset the cost of materials and to maintain or improve their profit margins. No one is getting too aggressive with price hikes, though, because it might lead to problems with appraisals and mortgage financing.

This may be the new normal for quite a while. As the end of the article notes, it may be difficult to generate consistent demand until there are more jobs.

When I see figures like this, I always think about the existing housing stock. Does this automatically mean that the available number of houses is really low? Or, is there a growing interest in recent years among buyers to forgo the problems existing houses may have and instead pay a little more to get a spot-free home? If some of the existing housing stock is going unpurchased, what then happens to those homes? Some people may not be able to move while other houses, particularly those in more disrepair and neglect, could become a drag on some neighborhoods.

New Urbanist Andrés Duany discusses “lean urbanism”

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Architect Andrés Duany talks about his latest idea: lean urbanism.

Galina Tachieva: Can you summarize the big topics that are on your mind today? What about some short-term actions we can take as urban thinkers and doers?

Andrés Duany: We at Duany Plater-Zyberk & Company have been engaging many of those topics, and are in the midst of writing a book to be called Lean Urbanism. Big things changed on a permanent basis around the 2007 meltdown; many of the false premises that guided American urban planning seem almost comical today, while, in fact, in the past they had the dignity of seeming tragic. One of the most interesting topics is identifying another set of appropriate models. Our current thesis is studying the great American continental expansion of the latter half of the 19th century, when thousands of towns and cities were founded in the absence of financing. We must understand what allowed that and what makes it seem impossible today. Among the constituent elements are a very light hand of government and, often, management genius—as well as normative patterns like the continental survey, the town grid, etc. But the key element is successional urbanism. Start small at the inauguration, and later build well, culminating in the climax condition of the magnificent cities of the 1920s. By contrast, for the past 15 years or so, planners have been going straight to the climax condition, bypassing the inaugural condition and successional stages of urban molting. We need to develop protocols for every level—financial, administrative, and cultural—that will allow successional planning to occur again. Those are the big things…

Galina Tachieva: Why is it important to talk about and further develop Lean Urbanism?

Andrés Duany: Some of the conditions we find ourselves in are permanent. Even when the effects of the real estate bubble are overcome, what is revealed is an underlying impoverishment. We are no longer the fantastically wealthy nation that we had been since the Second World War, in which we could implement simpleminded ideas and then proceed to mitigate them by throwing money at them. The primary wasteful idea is the building of very high-grade highway infrastructure, not just for inter-city commerce, but also for securing quite ordinary things. Taking an arterial to get a cup of coffee at Starbucks is now conventional. This posits an urbanism in which it is assumed every adult will purchase a car because it is a prerequisite for a viable social and economic life. This is an astoundingly profligate conceit, and one quite unfair to the 50 percent or so Americans who don’t drive because they are too young, too old, or too poor to have access to a car. We can no longer even pretend to afford that kind of thing.

There is more interesting material in the full interview including Duany’s take on the historical stages of New Urbanism.

The portion in the quote above sounds like New Urbanism tweaked for a recession era: you can’t put it all together at once so you need to build in modules and continue to question some of the basic assumptions about planning so that we don’t incur unnecessary long-term costs (like keeping up with cars). Of course, the economy doesn’t necessarily have to stay in the doldrums, oil may be plentiful, and Americans may have more wealth down the road to continue to have cars (which are quite costly). But, it sounds like Duany assumes these problems will persist – and this may just be good for New Urbanism in hte long run.

If the economic situation continues to be difficult, it would then be interesting to ask how this is supposed to work out in practice. Building whole towns in a New Urbanist style is out? It is worth noting that Duany mentioned the need not just to have good planning of physical space but also the right administrative and cultural elements. Indeed, the physical planning may be the easiest part as it takes a lot to put together good yet limited management/government within communities that are meaningful from the start.

US homeownership rate drops to 65%

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The homeownership rate in the United States dropped in the last quarter to its lowest level since 1995:

The Census Bureau reported Tuesday that the nation’s homeownership rate slipped to 65 percent in the three months that ended in March, a decline from 65.4 percent posted in both the first and last quarters of 2012.

This suggests the housing market is still having a lot of trouble.

Here is the complete 12 page press release from the Census. Some interesting extra info:

-Homeownership rate 1Q 2013 by age: Under 35 36.8%; 35-44 60.1%; 45-54 71.3%; 55-64 77.0%; 65 and over 80.4%.

-Homeownership rate 1Q 2013 by race/ethnicity: Non-Hispanic White alone 73.4%; Black alone 43.1%; All other races 54.6%; Hispanic (of any race) 45.3%.

Here is a table of homeownership rates each decade since 1900 – the biggest jump seems to be from 1940 to 1960, coming out of the Great Depression and then into the era of mass suburbanization.

 

 

American middle class worried about downward mobility

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A new poll suggests the American middle class is anxious about falling out of the middle class:

That’s the deeply ambivalent message from the latest Allstate/National Journal Heartland Monitor Poll exploring the public’s perception of what it means to be middle class in America today. Fully 56 percent of those surveyed said they believe they will eventually climb to a higher rung on the economic ladder than they occupy now. But even more said they worry about falling into a lower economic class sometime in the next few years. Reaffirming the results in earlier Heartland Monitor polls, most of those surveyed said the middle class today enjoys less opportunity, job security, and disposable income than earlier generations did. And strikingly small percentages of American adults said they consider it “very realistic” that they can meet such basic financial goals as paying for their children’s college, retiring comfortably, or saving “enough money to … deal with a health emergency or job loss.”

In all, the survey suggests that after years of economic turmoil, most families now believe the most valuable–and elusive–possession in American life isn’t any tangible acquisition, such as a house or a car, but rather economic security. Asked to define what it means to be middle class, a solid 54 percent majority of respondents picked “having the ability to keep up with expenses and hold a steady job while not falling behind or taking on too much debt”; a smaller percentage defined it in terms of getting ahead and accumulating savings. “It seems like that class of the people just live from paycheck to paycheck,” said Dale High, a trucker from near Idaho Falls, Idaho, who responded to the poll. “Everything is going up, but wages are staying the same. And people can’t live like that.”

Several quick thoughts:

1. Is this mainly the result of the current economic conditions? In other words, if the American economy rebounded significantly in the next few years, would the middle class again be more optimistic? I’m wondering if this is a temporary anxiety or is this a longer-term insecurity based on a perception that the world and their position within it is more fragile than before.

2. This seems related to research that suggests people feel losses more deeply than equivalent gains. Moving down is much more influential than moving up.

3. How do these perceptions actually line up with economic realities? Here is one indicator:

People who responded to the Allstate/National Journal poll reported a substantial amount of economic churning in their own lives–showing, again, a close balance between upward and downward mobility in American life. Exactly 30 percent of those surveyed reported they had risen from a lower economic class, and 27 percent said they had slipped down from a higher class. Forty-three percent had seen no movement at all…

This fear of losing ground is rooted in the conviction that, in the past few years, downward mobility has become much more common than upward movement. Asked whether more Americans recently had “earned or worked their way into the middle class” or had “fallen out of the middle class because of the economy,” almost eight times as many respondents took the bleaker view.

So how much “economic churning” is acceptable? Where do these ideas that people are falling behind at larger rates coming from – statistics about stagnant median household incomes, anecdotal evidence from family, friends, and neighbors, media coverage, etc.?

4. I wonder if this is also related to American interest in keeping up with others. Critics have argued that American consumption and life in suburbia has been motivated by “keeping up with the Joneses.” Is this still the case when times are tougher – people don’t want to fall behind relative to others around them? There is also some measure of generational comparison in this poll data – perhaps future generations will have it tougher in living in a “decent life.”

What to do with closed schools

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Once schools are closed, what should communities do with them?

One of the thorniest issues (in what is a veritable forest of mess) is what to do with those school buildings once they’re empty. Often, the facilities are in poor shape, with promised renovations put off quasi-indefinitely. Many are located in depressed neighborhoods. And there are only so many developers with the know-how and resources to convert classrooms into condos or a community center.

Then, there are often complex laws that limit who may or may not take over city-owned property. Some cities ban charter schools from moving into empty traditional schools (officials know that moving a new school into an old school can foment frustration with the district); others require time-consuming input from the community. Laws like these can tie school districts’ hands and slow re-development…

It’s not unusual for closed schools to sit empty for years at a time. A 2011 Pew Charitable Trusts report estimated that there were 200 vacant public school campuses in six cities — Philadelphia, Detroit, Kansas City, Milwaukee, Pittsburgh and Washington, D.C. — alone…

Kansas City isn’t the only place to have found success with school building conversions. In Chicago, one closed school became an Irish American Heritage Center with a library, museum, and regular step dancing performances. In Lansing, Michigan, an elementary school was turned into a hub for technology start-ups; another was converted into a business incubator. The third was reborn as a gym.

It sounds like the biggest issue is for cities to move relatively quickly when schools close and find new uses. In fact, the buildings might even generate a little income that could then help the cash-strapped cities that had to close schools in the first place. But, having no plan simply means communities lose potential opportunities.

With that in mind, what is Chicago planning to do with all the schools they just announced would be closing?

More wealthy city neighborhoods hire private police

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This is one benefit of being wealthy in the city: more urban neighborhoods are hiring private police.

Long known for patrolling shopping malls and gated communities, private security firms are beginning to spread into city streets. While private security has long been contracted by homeowners associations and commercial districts, the trend of groups of neighbors pooling money to contract private security for their streets is something new.

Besides Oakland, neighborhoods in Atlanta and Detroit – both cities with high rates of crime – have hired firms to patrol their neighborhoods, says Steve Amitay, executive director of the National Association of Security Contractors.

“It’s happening everywhere,” Mr. Amitay says. “Municipal governments and cities are really getting strapped in terms of their resources, and when a police department cuts 100 officers obviously they are going to respond to less crimes.”…

Meanwhile, the private security industry is projected to grow by about 19 percent – from 1 million to 1.2 million guards – between 2010 and 2020, according to the Bureau of Labor Statistics. Most of that growth will come because private firms are doing jobs once held by law enforcement, according to the bureau.

Another side effect of the economic crisis. Of course, this reinforces some of the differential opportunities and resources available to different neighborhoods and communities. Similar to other areas like education or health care, the wealthy can simply purchase the services they need to live int he way they would like.

Stockton, CA the first big US city to enter bankruptcy

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Stockton, California, home to more 291,000 people and over 685,000 people in the metropolitan area, is the largest US city to enter bankruptcy:

A judge accepted the California city of Stockton’s bankruptcy application on Monday, making it the most populous city in the nation to enter bankruptcy.

U.S. Bankruptcy Judge Christopher Klein said the bankruptcy declaration was needed to allow the city to continue to provide basic services…

Its salaries, benefits and borrowing were based on anticipated long-term developer fees and increasing property tax revenue. But those were lost in a flurry of foreclosures beginning in the mid-2000s and a 70 percent decline in the city’s tax base

The city’s creditors wanted to keep Stockton out of bankruptcy—a status that will likely allow the city to avoid repaying its debts in full.

They argued the city had not cut spending enough or sought a tax increase that would have allowed it to avoid bankruptcy.

An interesting case. I think the real question is whether Stockton is the last or biggest city to declare bankruptcy and whether there are more to come. Stockton is part of an area in California that was hit particularly hard by the housing bubble and a number of other cities have experienced financial difficulties. For example, several California cities have outsourced basic services.

Speaking more broadly, what punitive measures can be leveled against a community in such debt? Is it the taxpayers and creditors who end up being the real losers?