Tag Archives: economic crisis

New alternative to McMansions: “post-recession houses”

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A number of builders and architects have proposed alternatives to the McMansion but I recently ran into another term: “post-recession houses.” Here is a description of what such homes are about in Tennessee:

Powell expects houses in the Village section, which will range from 2,800 to 3,400 square feet, to appeal to young families and to older couples who are downsizing.

There, Woodridge Homes is building what company founder Lloyd Craig describes as the “post-recession house” with less square footage than the McMansions that were once popular but with high-quality finishes.

“The recession made all of us realize that more is not necessarily better. Bigger is not necessarily better,” said Craig.

Woodridge’s homes will feature open floor plans that combine the kitchen, dining and living spaces. They will also have walk-in storage, island “breakfast bars” in the kitchen, luxurious master baths and outdoor living spaces.

“People can buy a $375,000 house and have the same amenities as an $800,000 house,” he said.

The “bigger is not better” idea has been popular in recent years. However, two things work against this idea of a “post-recession house” in these new homes:

1. These homes are still larger than the average new American home which is around 2,500 square feet. So while these are not huge houses, they are still larger than normal. Families moving into these homes are still going to have plenty of space.

2. The homes are still going to be luxurious. While they won’t be as large as McMansions, they will still be well appointed. Again, people living in these houses are going to have plenty, though it will come in a smaller size.

To me, it sounds like the idea that these are “post-recession” means they will be slightly smaller and yet won’t skimp on the nicer features. The same critiques that are sometimes leveled at McMansions, that they are bigger than necessary and are about showing off wealth, could still be aimed at these new houses. (Plus, the homes are in a gated community with more expensive homes and nice features such as LED streetlights and a saltwater neighborhood pool.) Is this much of a change? Perhaps we could change the term for the homes to “less obvious McMansions”?

Contingency plans being developed for the bankruptcy of Detroit

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A number of municipalities have experienced fiscal troubles in recent years but the issues in Detroit may be pushing it to bankruptcy:

The working concept, still evolving, assumes that the state’s financial review would find severe financial distress in Detroit, that Mayor Dave Bing and City Council would be unable to push through overdue restructuring, and that the process would culminate in appointment of an emergency financial manager under Public Act 72.

The case would be filed under Chapter 9 of the federal bankruptcy code, according to two ranking sources familiar with the situation, following efforts to reach prenegotiated settlements with as many key creditors — unions, vendors and pension funds among them — as possible before any filing…

The evolving bankruptcy scenario is a clear signal that Gov. Rick Snyder and Treasurer Andy Dillon have lost confidence in the ability of the mayor, his management team and council to honor their commitments under the eight-month-old consent agreement with the state, or to make any meaningful progress on restructuring.

Over recent years, a number of suggestions have been thrown out regarding Detroit including the city should be contracted and it is an ideal site for urban farming and reclaiming the land from unused and/or vacant buildings.

I wish the article spent more time discussing what would then happen to Detroit moving forward. How will this affect city services and residents? After a managed bankruptcy, where does this leave the city? Realistically, what plans could be pursued that would put Detroit on a better financial footing and with some hope for the future?

Increase in McMansion construction in Australia

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The real growth in McMansions may be taking place in Australia:

But research reveals that while the size of Australian families is shrinking, our appetite for McMansions has supersized, with construction of six-or-more-bedroom homes jumping 21 per cent during the past five years.

And the number of five-bedroom McMansions increased 20 per cent over the same period, according to the 2011 Census data.

Demographer Mark McCrindle said despite forecasts of a McMansion glut in Australia – similar to parts of the US – the McDonald’s of housing is a vision of things to come rather than a relic of the past.

“McMansion popularity is being fuelled by the Sandwich generation, multigenerational households where parents have grown-up children and their own parents living at home,” Mr McCrindle said.

“It’s about affordability. The McMansion is efficient for homebuyers looking for big, cheap housing, it’s also about floor space that is flexible and adapts to a family’s changing needs.”…

Mr McCrindle said while new land blocks are getting smaller, Australians are building the largest houses in the world on those blocks. The average size of a new home is 10 per cent larger than the average new American home.

This raises several questions for me. One, will the fate that befall the United States that was partly attributed to McMansions also befall Australia? The argument made by some in the US is that the overconstruction and overconsumption of McMansions inevitably led to a housing and economic crisis. Is this necessarily the case or are there other factors in Australia that would change the outcome? Second, are these McMansions as bad as critics suggest if a good number of them are housing multigenerational families? McMansions are often criticized for being resource-hungry homes but some may be operating as more affordable housing (for some).

 

Mortgage interest deduction part of fiscal cliff negotiations

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The negotiations regarding the fiscal cliff include the mortgage interest deduction:

Limits on a broad array of deductions could emerge in any budget deal. It is likely that any caps would be structured to aim at high-income households, and would diminish or end the mortgage tax break for many of those taxpayers…

Such a move would be fiercely opposed by the real estate industry. The industry has played a crucial role in defending the tax break, even as other countries with high homeownership have phased it out…

One of the reasons the mortgage tax break is so vulnerable is that both Democrats and Republicans have recently favored capping deductions, including both President Obama and the recent Republican presidential nominee, Mitt Romney…

Taken on it own, the deduction limit wouldn’t make a huge difference. But it can play an important role in a broad plan to cut the deficit, and shows a willingness to tackle once sacred cows. The tax numbers suggest it may not be hard to structure deduction limits in a way that leaves most middle-income households untouched.

This is not a new idea – people have been suggesting for a few years now (see here) that the mortgage interest deduction tends to help the wealthiest the most. Capping the deduction would still provide a benefit for less wealthy homeowners and boost the housing market. Yes, homebuilders and real estate people may not be able to construct and sell as many large and expensive homes that provide higher profit margins and commissions but there are plenty of other arguments against such homes beyond the mortgage interest deduction (see the green argument and the moral argument). Wealthier Americans are probably still going to buy homes, because they have the money and there is still an American cultural push toward homeownership, whether the mortgage deduction is there for them or not.

There are other countries in the world with higher rates of homeownership even with the federal government’s decades-long support of homeownership. The data is a few years old but check out these figures reported by National Association of Home Builders: a number of European countries have higher and lower rates of homeownership. Of course, American homes tend to be larger than European homes and I’m reminded of quick suggestion in Suburban Nation that Americans may have the best private realm, referring to our homes, in the world.

I assume a capped deduction would also limit or remove the deduction for the purchase of second homes?

Perhaps the biggest thing to note here is that the mortgage interest deduction was indeed was once a “sacred cow” but tough economic times lead to new measures.

 

 

Was the US at a point where “every good American deserved a McMansion”?

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I’ve seen claims like this before but here is a great example of a broad description of how McMansions contributed to the American economic crisis:

A worrying and much commented on aspect of America’s Great Recession was that very few people saw it coming.

The autopsy revealed many obvious causes — the artful bundling and trading of bad debt, the notion that every good American deserved a McMansion in the suburbs whether or not he could pay for it, instituting big tax cuts and massive spending increases, pervasive debt, everywhere.

These were mostly ignored until it was too late.

What intrigues me here is not the argument that the construction of and mortgages provided for McMansions and other large houses contributed to the economic crisis. They did. However, the argument here is that Americans thought they deserved McMansions and other goods. Is this true? It is one thing to have the credit available to make such big purchases but another thing to have a pervasive ideology that everyone deserves such an opportunity. The real problem then was not McMansions but materialism and excessive consumption. This is why McMansions are often mentioned in the same sentence with SUVs: both have become symbols of unnecessary but wanted consumer goods.

This is the reason I have wondered repeatedly on this blog whether American consumer patterns will change once (if?) the economy turns around. Because of the downturn, it is more difficult to purchase and build things like McMansions. But, if the economy turns around, will people again turn to unnecessary consumer goods? A number of commentators have suggested spending patterns will change, particularly for younger adults who will have or want to delay purchases like cars or houses. Yet, we will have to wait and see and see whether the economic status of today sticks around for a long time or not and then how people respond.

When the economic crisis hits Naperville, life there is still better than in many places

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The Chicago Tribune looks at how the economic crisis has led to a “recalibration” for some in the large and wealthy suburb of Naperville:

For Naperville, in some ways the quintessential suburb for middle-class strivers, the latest census data show that the median household income of $101,911 is nearly double the Illinois median. Nearly two-thirds of the adults 25 and older have attained at least a bachelor’s degree, compared with 30.3 percent statewide.

Young families have flocked to the suburb about 30 miles west of Chicago since the 1980s, attracted by good schools, jobs along the Interstate 88 corridor and public transit to Chicago. With a population of 141,853 in 2010, Naperville was the fifth-largest city in the state. The local government pays attention to details, from maintaining well-manicured parks to coordinating the traffic lights in downtown Naperville during rush hour to ease traffic congestion…

But there are signs that more residents are struggling to get by in a stagnant economy…

People in their 40s and 50s with school-age children felt the brunt of the last recession through the destruction of home equity values and the loss of value in 401(k) accounts. Meanwhile, median family income has fallen substantially over an entire decade for the first time since the Great Depression. And health care costs have grown sharply during the same period.

I think I understand the purpose of the article: the economic crisis is even affecting wealthier communities like Naperville where it seems like many had reached the American Dream. On the other hand, I’m still not sure this article accomplishes its purposes. People the Tribune talked to have suffered setbacks but they are still doing okay compared to many Americans. One family was affected when the husband lost his well-paying job so the wife returned to full-time work. But the husband found a job again and the wife is now not working again. Another family owns a comedy club where business has been tight. However, business is now picking up and they still have their substantial investment in the club. More Napervillians are saving more or focusing more on their families but they can still generally afford to do this.

I’m not downplaying the troubles many in Naperville have faced. However, Naperville residents are not the ones who have been hit the hardest among Americans. Indeed, the median household income, the number of jobs, the quality of life, and the low levels of poverty and crime still make Naperville an unusually well-off place in the United States. Naperville and its residents will weather the storm better than many as long as the community is able to retain its strong white-collar employment base.

More builders looking to offer multigenerational homes

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More builders are constructing multigenerational homes:

To be sure, multigenerational living is nothing new. For years people have found creative ways to make space in their house for a friend or relative. The concept is a mainstay in many parts of the world, especially in places where housing is expensive. In the U.S., multigenerational living was relatively common until a suburban building boom helped make housing more affordable.

The Pew Research Center said the trend is on the upswing. Last year almost 17 percent of Americans lived in multigenerational households, including households with parents and adult children, as well as skipped generations with grandparents and grandchildren. That’s up from 12 percent in 1980.

The primary driver in recent years is economic. The recession forced many families to double up to save money, and a tough job market meant that many college grads had to move home. The Pew report showed that the trend actually helped reduce the poverty rate. There’s been a cultural shift, too, in the way of new entrants to the U.S. who are more accustomed to such arrangements.

Stephen Melman, director of Economic Services for the National Association of Home Builders, called it an “underserved market,” and said that a significant portion of these households have the buying power to choose high-quality housing that specifically meets their needs. Future growth of multigenerational households largely depends on the direction of the economy, he said.

Several thoughts on this:

1a. The article hints that the American preference for houses solely for immediate families is an American cultural value (perhaps also helped by relative economic prosperity) as immigrants might be more interested in multigenerational homes. Americans have a tendency toward mobility and weaker extended family ties.

1b. In recent decades, there have been numerous skirmishes in suburbs about how many people can live in a household. Such complaints are commonly directed at immigrants and minorities. So now this would be okay or even desirable if the homeowners are middle- to upper-class whites?

2. The houses mentioned in this article are still quite expensive and cost over $500,000. A multigenerational home might be desirable but how many could afford a new multigenerational home with over 3,500 square feet?

3. It is interesting to note that this article mentions nothing about the possibility of renting out space to people instead of only accommodating family members. Buying a home could be a more attractive prospect if renters helped pay the mortgage. I suspect this is where many suburban neighborhoods would draw the line: family can be trusted but renting out space to people then becomes too much like multi-family housing. Suburban residents think this is linked to transience, a lack of care for the neighborhood, and more unseemly activity.

Neither Obama or Romney tackling issue of housing

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There are plenty of issues to talk about this election season but neither Obama or Romney have done much to address housing:

For existing homeowners and the government, though, housing remains an enormous issue. If new government initiatives are not implemented, it could take another three to five years for the market to fully recover, analysts estimate. And The Wall Street Journal reports that neither candidate has offered ways to remake failed mortgage giants Fannie Mae and Freddie Mac, which have already cost taxpayers $140 billion and face further losses.

Across the United States, nearly 10.8 million properties — 22 percent of homes with a mortgage on them — remain underwater, according to CoreLogic, a data analysis firm. The numbers of properties where owners owe more than their home is worth is shrinking, but analysts say the process can, and must, be sped up.

Both Obama and Romney, though, have been silent on the issue. Why?

“It turns out to be a lose-lose issue for both candidates,” John Vogel, a professor at Dartmouth’s Tuck School of Business, recently told MarketWatch. “And therefore gets ignored.”

For each candidate, the reason for staying mum on housing is different. Obama does not have the strongest record to run on. And Romney has found that wading into housing opens himself up to being painted as a heartless corporate mogul.

So housing greatly contributed to the economic crisis yet neither candidate wants to bring it up. Perhaps this topic might top an unfortunate list titled something like “topics that candidates absolutely do not want to talk about.” They can discuss a range of controversial topics like abortion, education, social security and medicare reform, the outsourcing of jobs, and tough foreign policy topics but not housing…

After seeing a variety of opinions on the topic of housing in the last few years, I wonder if most people, including the experts, are just hoping it comes back. Thus far, government policies do not seem to have helped much. As some have noted, without a more robust housing market, it is difficult for people to move and take advantage of the jobs that might be available. Local governments need increasing property tax values to bring in more revenues. Mortgage lenders, the real estate industry, and builders and developers would benefit from more activity. And if the housing industry doesn’t come back quickly? There doesn’t seem to be much in place for this possibility.

I wonder what Americans would want to hear about housing, if it even rates highly enough (or might simply be part of “the economy”). In the earlier stages of the economic crisis, there was a lot of talk about not providing a lot of support to people who should have known better than to take out mortgages they might not be able to afford. Who deserves to get help? Would Americans be happy with more regulation of mortgage lenders so they won’t be allowed to offer mortgages homeowners that could harm borrowers?

15 of 20 biggest mortgage originators in 2006 no longer in business

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Here is one of the consequences of the economic crisis: three-quarters of the biggest mortgage originators in 2006 are no longer operating.

Only five of the 20 biggest mortgage originators from 2006 are still around independently today. The rest either filed for bankruptcy or got bought as the mortgage market imploded in 2007 and 2008, as the table below from SNL Financial shows.

This is what capitalism looks like, kind of. Lenders that weren’t too big to fail did fail, and then got scooped up for what buyers thought were bargain basement prices — or in Countrywide’s case, managed to market themselves before the market completely collapsed.

The chart is pretty fascinating. Firms that were powerful and active not too long ago, including Countryside Home Loans, Washington Mutual Bank, Wachovia Mortgage FSB, and Countrywide Bank FSB, are no longer operating. Granted, some of these companies were acquired by other corporations but these were large firms in their own right and some were at the top in terms of market share.

My quick takeaway: business fields can change rapidly.

Creative class fared better in economic crisis than working and service classes

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Richard Florida discusses how the creative class weathered the economic crisis better than blue-collar workers:

The crisis hit hardest at blue-collar workers, while creative class workers and metros with higher shares of creative class jobs fared considerably better. The unemployment rate for creative class workers, which was 1.9 percent in 2006 before the crisis, increased to just 4.1 percent in the years following the recession’s official end — an increase of 2.2 percentage points. The unemployment rate for workers in blue-collar jobs increased from from 6.5 percent before the onset of crisis to 14.6 percent at its end, more than three times higher than that for creative class workers and a jump of more than 8 percentage points. The unemployment rate for workers in routine service jobs increased from 5 percent to 9.3 percent at its end, more than double that for creative class workers a 4.3 percent jump…

Even after controlling for all those things, the analysis found that having a creative class job dramatically reduced a person’s chance of being unemployed over the course of the crisis. All others things being equal, we found that having a creative class occupation reduced an individual’s probability of being unemployed by 2.0 percentage points between 2006 and 2011. Having a creative class job had a bigger effect on the probability of being unemployed than holding a college diploma and about the same effect as having an advanced degree…

The study also found that while unemployment rates were lower in metros with higher shares of creative class jobs, the biggest benefit for creative class workers came in regions with lower shares of creative class jobs. The impact of having a creative occupation on the likelihood of being unemployed, the study found, was slightly stronger in metropolitan areas with lower shares of creative workers…

These results, along with our findings related to the other major occupational groups, are indicative of a structural change taking place in the U.S. economy. This shift is characterized by high — and growing — unemployment in Working Class occupations, whereas the relative position of creative workers improved in the years following the recession.

These final sentences are key: the economic crisis exposed some of the larger structural issues in the American and global economy. The creative class, those with education, social status, and access to the white-collar and high-tech jobs often found in certain metropolitan areas that are producing a lot of wealth, did better in the economic crises. It didn’t mean that no creative class jobs were lost but relatively fewer jobs were lost. On the other hand, more working-class jobs were lost. On top of this, the working and service class didn’t have the same resources to weather the economic storm. When the value of investments, such as housing values and retirement plans, shrunk and jobs dried up, there wasn’t much to fall back on.

This situation is not likely to be fixed quickly. For example, it takes time to get education and only roughly a third of American adults have a college degree. It also takes time for a broader economy to shift away from a service and consumption oriented economy to one that creates more high-paying, information-age jobs.