Tag Archives: housing crisis

“August 2023 will become the worst month for housing affordability this century”

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Housing in the United States is becoming less affordable than at any point in recent years:

Photo by Ketut Subiyanto on Pexels.com

On Monday, the average 30-year fixed mortgage rate reached 7.48%, marking the highest level since the year 2000. Even prior to this recent surge in mortgage rates, housing affordability, as monitored by the Atlanta Fed, had already deteriorated beyond the levels seen at the housing bubble’s peak in 2006. Once this latest mortgage rate surge is factored in, August 2023 will become the worst month for housing affordability this century.

The journey to this predicament can be traced back to last year’s sharp rise in mortgage rates, which escalated from 3% to over 7%. That rate surge, coupled with the Pandemic Housing Boom pushing U.S. home prices up over 40% in just over two years, deteriorated housing affordability across the nation…

While the current lack of housing affordability echoes the affordability conditions leading up to the 2008 housing crash, there are distinct differences that set the two periods apart. Unlike the years preceding the 2008 crash, the nation is not grappling with an excessive surplus of existing homes for sale. In fact, housing inventory levels are hovering at historic lows, with July 2023 witnessing a staggering 47% decline in homes available for sale compared to July 2019.

Furthermore, the U.S. housing market in 2023 is not plagued by the risky mortgage products that contributed to the 2008 bust. In fact, the Pandemic Housing Boom was the opposite of the boom in the aughts: This boom was primarily led by households with high incomes, who because of low mortgage rates and remote-work policies were seeking out a new home.

I am a little surprised there are not more leaders proposing solutions or calling for addressing this issue. Housing is often the biggest expense in a household budget. People may not be able to find stable, quality housing. They will not be able to develop wealth. It is difficult to move. People will pay more in interest. People can experience anxiety about housing. And so on.

There might be a temptation to sit back and say people should wait for interest rates to stabilize and/or decline. Or, the housing market will have more inventory at some point.

Yet, housing is a complicated issue and there are multiple ways to address it. How can more housing at lower price points be built? How can existing homeowners rally for the need for cheaper housing costs (even as they might benefit from rising home values)? What incentives or sticks are needed to get various actors in the housing industry moving on providing more options?

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?

President Obama vs. Mitt Romney on dealing with housing crisis

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Even though President Obama and Mitt Romney are not officially running against each other yet, they have presented contrasting plans to deal with the housing crisis. Yesterday, President Obama offered a new “revamped refinancing program” that would help 1 to 1.5 million homeowners:

Under Obama’s proposal, homeowners who are still current on their mortgages would be able to refinance no matter how much their home value has dropped below what they still owe…

At the same time, Obama acknowledged that his latest proposal will not do all that’s not needed to get the housing market back on its feet. “Given the magnitude of the housing bubble, and the huge inventory of unsold homes in places like Nevada, it will take time to solve these challenges,” he said…

Presidential spokesman Jay Carney criticized Republican presidential candidate Mitt Romney for proposing last week while in Las Vegas that the government not interfere with foreclosures. “Don’t try to stop the foreclosure process,” Romney told the Las Vegas Review-Journal. “Let it run its course and hit the bottom.”

“That is not a solution,” Carney told reporters on Air Force One. He said Romney would tell homeowners, “‘You’re on your own, tough luck.'”

How much of these proposals is about looking for votes versus actually seeking out a plan that will help ease dropping home values, foreclosures, and a housing glut?

At the same time, the Washington Post reports that government efforts in recent years haven’t helped much:

President Obama pledged at the beginning of his term to boost the nation’s crippled housing market and help as many as 9 million homeowners avoid losing their homes to foreclosure.

Nearly three years later, it hasn’t worked out. Obama has spent just $2.4 billion of the $50 billion he promised. The initiatives he announced have helped 1.7 million people. Housing prices remain near a crisis low. Millions of people are deeply indebted, owing more than their properties are worth, and many have lost their homes to foreclosure or are likely to do so. Economists increasingly say that, as a result, Americans are too scared to spend money, depriving the economy of its traditional engine of growth.

The Obama effort fell short in part because the president and his senior advisers, after a series of internal debates, decided against more dramatic actions to help homeowners, worried that they would pose risks for taxpayers and the economy, according to numerous current and former officials. They consistently unveiled programs that underperformed, did little to reduce mortgage debts owed by ordinary Americans and rejected a get-tough approach with banks.

Too risky meaning that it was politically untenable when more people are concerned with risk and deficits?

The conversation about housing could play an interesting role in the 2012 elections as both parties look to claim the mantle of defenders of the American middle-class dream of homeownership.

A call to collect better data in order to predict economic crises

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Economist Robert Shiller says that we would be better able to predict economic crises if we only had better data:

Eventually, these advances led to quantitative macroeconomic models with substantial predictive power — and to a better understanding of the economy’s instabilities. It is likely that the “great moderation,” the relative stability of the economy in the years before the recent crisis, owes something to better public policy informed by that data.

Since then, however, there hasn’t been a major revolution in data collection. Notably, the Flow of Funds Accounts have become less valuable. Over the last few decades, financial institutions have taken on systemic risks, using leverage and derivative instruments that don’t show up in these reports.

Some financial economists have begun to suggest the kinds of measurements of leverage and liquidity that should be collected. We need another measurement revolution like that of G.D.P. or flow-of-funds accounting. For example, Markus Brunnermeier of Princeton, Gary Gorton of Yale and Arvind Krishnamurthy of Northwestern are developing what they call “risk topography.” They explain how modern financial theory can guide the collection of new data to provide revealing views of potentially big economic problems.

Even if more data was collected, it would still require interpretation. If we had the right data before the ongoing current economic crisis, I wonder how confident Shiller would be that we would have made the right predictions (50%? 70% 95%?). From the public narrative that has developed, it looks like there was enough evidence that the mortgage industry was doing some interesting things but few people were looking at the data or putting the story together.

And for the future, do we even know what data we might need to be looking at in order to figure out what might go wrong next?

Charlotte columnist suggests suburbs will face four problems

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American suburbs contain the majority of United States residents (and this figure is likely to grow in the latest 2010 Census figures). And yet, there are a lot of questions about what the future of suburbs will be. A columnist/editor in Charlotte suggests suburbs will face four problems in the near future:

Demographics. Population trends favor urban-style, multifamily development. Gen Y’ers have a clear preference, at least for now, for urban living. Meantime, aging boomers will be selling houses and moving to condos or apartments. As illness and infirmity hit, many will have to give up driving. They’ll want walkable neighborhoods.

With the foreclosure crisis, the single-family home market will be sluggish for years. The nation is overbuilt on large-lot suburbia, and underbuilt in cities. The Urban Land Institute’s “Emerging Trends in Real Estate 2011” has this advice to investors: “Avoid commodity, half-finished subdivisions in the suburban outer edge and McMansions; they are so yesterday.”

Fuel prices. Remember when $4-a-gallon gas walloped the economy in 2008? Now, gas prices are over $3 again. Gas prices are likely to keep rising, and already, transportation is the No. 2 cost for average U.S. households. With pay and jobs sinking, more people are likely to want to live where they can drive less.

Carbon footprint. If we’re to avoid creating even more destructive changes in the world’s climate (more droughts, floods, blizzards or heat waves) for our children and grandchildren to live with, more of us will need to live in tight-knit, walkable cities. It turns out city dwellers have a much smaller carbon footprint.

Suburbs on the brink. Although some first-ring suburbs are thriving, others aren’t. Many suburban neighborhoods are seeing rising poverty and crime, dead or dying malls and derelict strip centers and big-box stores. We can’t just abandon them to blight.

These are all possible issues. Some thoughts about each concern:

1. We will have to see what Generation Y and the aging Baby Boomers want in the long term. Will they want to move back to cities or will they be okay with denser suburban development?

2. Fuel prices are up and American driving is down. What happens if most people can access electric cars within 10 years?

3. Carbon footprints – are people convinced that they should change their personal, residential choices based on this evidence? Do Generation Y members choose to live in cities for this reason or for other reasons such as proximity to entertainment and culture.

4. Inner-ring suburbs are experiencing many of the issues that we once thought were limited to cities. Interestingly, a number of these issues are spreading beyond the inner-ring.

The columnist suggests we need to fight the suburban blight, marked by “separate municipalities outside a city, regardless of age or form…development with a specific pattern, typically built after 1945: single-use zones (stores separated from offices and housing, single-family houses apart from apartments); lots a quarter-acre or more; car dependent.”

There are several other issues that many suburban communities face:

5. Budget crunches with the economic crisis leading to a downturn in housing growth. Not much money is coming in and this will lead to cuts in services and amenities.

6. More suburbs reaching build-out and facing questions about whether denser development can fit within a community dominated by single-family homes.

6a. Will American suburbanites want denser development that may threaten their property values?

7. Increasing minority and immigrant populations that challenge the white majority that has dominate American suburban life. Stories like that of a controversy over a proposed mosque in DuPage County could become more common.

8. Of course, lots of empty houses or homes with reduced values (here or here). This limits people’s ability to move, the ability of communities to collect money, and builders and lenders to make money.

Housing prices dropping in places where it wasn’t supposed to keep dropping (like Seattle)

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It has been well-documented that the housing crisis has had a strong effect on places like Las Vegas and much of Florida. But this report suggests the drop in housing prices has spread to places once thought to be immune to these drops, such as Seattle:

Now, though the overall economy seems to be mending, housing remains stubbornly weak. That presents a vexing problem for the Obama administration, which has introduced several initiatives intended to help homeowners, with mixed success.

CoreLogic, a data firm, said last week that American home prices fell 5.5 percent in 2010, back to the recession low of March 2009. New home sales are scraping along the bottom. Mortgage applications are near a 15-year low, boding ill for the rest of the winter.

It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable.

In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982.

Two local economists were quoted all but guaranteeing that Seattle was immune “if history is any indication.”

A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off. Those who must sell close their eyes and hope for the best.

It doesn’t sound good for sellers in a lot of places.

It would be interesting to know more about why certain cities were thought to be immune. I can think of a few explanations off the top of my head: certain markets didn’t experience a big boom in prices in the 1990s-2000s so there wasn’t much room for prices to drop; certain areas attract jobs and employees so there will be more people always look for housing; and certain didn’t experience building booms so there isn’t a glut of houses or units to be sold. Does one of these explanations fit Seattle?

Large “shadow inventory” lurking behind foreclosures

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While foreclosures have drawn a lot of attention, there may be yet another threat: the “shadow inventory” of homes where owners are at least one month delinquent on their payments.

In the eight-county Chicago area, 19 percent of mortgages — representing nearly 1 in 5 residential properties with a loan — are delinquent by at least one month, helping create an inventory of almost 204,000 homes at risk of reverting back to lenders, according to data provided to the Chicago Tribune by John Burns Real Estate Consulting in Irvine, Calif. That “shadow inventory,” as experts define distressed homes not yet put up for sale, is the largest in absolute terms for any metropolitan area in the country.

Based on its calculations, the firm believes that 80 percent of those homeowners eventually will lose their property, either through foreclosure or a short sale, in which the lender permits the home to be sold for less than the value of the loan.

If these figures are correct, or even close to correct, the housing crisis will continue for years to come as they properties eventually come up for sale. This will continue to have a strong effect on housing values and new building starts.

This could also have specific effects for the Chicago region. While most of the foreclosure attention seems to be focused on the Southwest and Florida, this data suggests many homeowners are teetering on the edge of keeping their homes.