A smaller housing bubble: prices up, easier credit but homeownership down, fewer involved

Discussion of a looming housing bubble hints at similar factors to the problems of the 2000s:

The number of FHA-insured borrowers who are behind on mortgage payments has jumped, Wade wrote in her testimony. The use of down payment assistance is up. The frequency of FHA borrowers who are spending more than 50 percent of their income on debt payments has increased, too. And the number of borrowers refinancing their homes to take cash out for other uses has swelled…

After years of tight credit in the aftermath of the Great Recession, both conventional mortgage lenders and the FHA have been easing credit standards — allowing for low down payments, for example, or higher levels of borrower debt — to lure first-time and low- to moderate-income buyers back to the housing market, industry observers say. By making it easier for these groups to obtain mortgages, the observers argue, it is only natural to see a modest uptick in missed payments — especially by FHA borrowers — after almost seven years of steadily dropping delinquency rates.

Not all market observers are convinced that these changes are OK. As federally sponsored mortgage giants Fannie Mae and Freddie Mac, as well as the FHA, have introduced these easier credit requirements to promote more homeownership, some critics worry that the mortgage industry could be headed toward dangerous  territory if it continues to become easier to get a mortgage — especially amid what Edward Pinto, a fellow at the conservative think tank American Enterprise Institute, currently calls the “Housing Boom 2.0.” By allowing borrowers to take on more debt or put less money down on a house in today’s super-charged real estate market, observers such as Pinto argue, lenders could be setting themselves up for higher rates of borrower default in the event of a recession — something that Pinto believes is not too far off…

To be sure, observers such as Nothaft add, the current easing of today’s requirements is nowhere near where it was a decade ago. Leading up to the recession, lenders were allowing borrowers to provide no documentation of their finances and granting loans with no money down.

Given the fallout and long recovery time after the burst housing bubble of the late 2000s, few policymakers or lenders would want a repeat. Yet, there are some significant differences in the housing market right now:

  1. Prices may be up and demand may be high but fewer people are participating in buying and selling homes.
  2. Home construction is not at the same level as it was through the 1990s and early 2000s.
  3. Lenders are not quite providing mortgages with the same terms they had in the 2000s (as noted above).
  4. Homeownership in the United States is at relatively low levels: 64.2% in the first quarter of 2018 after even lower figures in previous years.

All together, this suggests that the scale of a new housing bubble would be smaller than the last one. Perhaps significantly smaller. Fewer buyers, sellers, and lenders got caught up in the rising housing values (and low interest rates) of recent years.

This does not mean that there would not be pain if housing prices and lending collapsed a bit. But, the consequences would simply exacerbate some of the issues various interested parties have discussed:

  1. If prices decrease, even fewer people might be willing to sell their homes. This drives supply even lower.
  2. How much lower could interest rates really go? How much profit could lenders generate?
  3. This could decrease motivation for builders and developers, particularly at the lower ends of the market where there is already significant demand.

The conditions and consequences of a housing bubble today or the next year or two could be very different than the economic crisis we now think we have some handle on from the late 2000s.

The double-edged sword of record home prices in many American metro areas

The housing bubble of the late 2000s may be long gone as housing prices continue to rise:

Prices for single-family homes, which climbed 5.3 percent from a year earlier nationally, reached a peak in 64 percent of metropolitan areas measured, the National Association of Realtors said Tuesday. Of the 177 regions in the group’s survey, 15 percent had double-digit price growth, up from 11 percent in the third quarter.

Home values have grown steadily as the improving job market drives demand for a scarcity of properties on the market. While prices jumped 48 percent since 2011, incomes have climbed only 15 percent, putting purchases out of reach for many would-be buyers.

The consistent price gains “have certainly been great news for homeowners, and especially for those who were at one time in a negative equity situation,” Lawrence Yun, the Realtors group’s chief economist, said in a statement. “However, the shortage of new homes being built over the past decade is really burdening local markets and making homebuying less affordable.”

Having read a number of stories like this, I wonder if there is a better way to distinguish between economic indicators that are good all around versus one like this that may appear good – home values are going up! – but really mask significant issues – the values may be going up because many buyers cannot afford more costly homes. The news story includes this information but I suspect many will just see the headline and assume things are good. Another example that has been in a lot of partisan commentaries in recent years (with supporters of both sides suggesting this when their party was not president): the unemployment rate is down but it does not account for the people who have stopped looking for work.

In the long run, we need (1) better measures that can encompass more dimensions of particular issues, (2) better reporting on economic indicators, and (3) a better understanding among the general populace about what these statistics are and what they mean.

High housing prices drive more people to live in vans

When housing prices are high, residents adapt in a variety of ways:

He’s not alone. Last year, 4,600 cars and RVs were used as homes, according to The Los Angeles Times…

“The main expenses are insurance for the van, which is like $60 a month,” said Hutchins. “Then, I have a storage unit for like $60.”

That puts his monthly rent at $120. The van cost him just $125 at an auction…

Hutchins works part-time at a Taco Bell to help pay the bills, and he says living in a van has slashed his cost of living by $800 a month.

He showers at the gym, cooks on a portable stove on a sidewalk (he stores his butane at his friends’ place nearby) and uses wifi at nearby coffeeshops.

Four quick thoughts:

  1. I assume this is more attractive for younger adults who are starting their careers. Even with all the buzz about tiny houses and having smaller and more sustainable settings, I can’t imagine too many people with more established careers choosing this.
  2. Traditionally, Americans like cars. This seems like a clever adaptation for people who can make it work (see #1): you have some people and it is mobile.
  3. How do municipalities view this? The article mentions that this is not against the law in Los Angeles though there may be issues with parking in different places. At the same time, how many communities would want to have significant numbers of people living in vehicles?
  4. It would be helpful to get more data on this: is this a viable option only when housing prices are really high or is this a choice made for additional reasons as well? Does the weather in LA make this easier?

A significant minority of Chicago area residents can’t find affordable housing

A new report suggests many Chicago area residents – poor and wealthier – have difficulty finding affording housing:

To identify “distressed homeowners and renters,” researchers used a housing rule of thumb that requires affordable housing to cost no more than 30 percent of a household’s gross income. In Chicago, 48 percent of people said they were devoting more than 30 percent of their income to rent or a mortgage. In the suburbs, 40 percent were stretching beyond the manageable 30 percent limit.

According to the research, 11 percent of households in Chicago had cut back on healthy food, and 12 percent had made cuts in health care to afford housing. Another 11 percent moved to less safe areas.

While the problem of finding affordable housing is most acute among people ages 18 to 34, African-Americans and households with incomes under $40,000, 49 percent of those in households with incomes over $75,000 said “it’s challenging to find affordable housing in my area.” Sixty-six percent of people with incomes under $40,000 noted the challenge…

In the Chicago area, 87 percent of adults said having stable housing that is affordable is a very important part of having a secure middle-class lifestyle, while 67 percent said it’s harder to afford stable housing than for previous generations.

Housing is crucial for many other areas in life as it influences daily well-being (do you feel safe?), schools that kids go to, amenities (local municipalities, recreation, retail, etc.) available nearby, what kind of neighbors you will interact with, commuting times, and more. So, if you don’t have the resources to live in a nicer community or have to stretch yourself, that will have consequences.

Is it time to reconsider the 30% rule? Of course, if you spend more than 30% on housing then you have to cut back elsewhere. But, given the housing bubble of the last decade and perhaps a new normal of higher rents and less new cheaper housing, perhaps Americans may have to devote more to housing in the future?

“Eager to Move to the City, but Stranded in the Suburbs”

The New York Times recently profiled a number of suburbanites who would prefer to live in the big city but can’t because of high housing prices:

Like many others in her sociological cohort these days — men and women whose children are grown and who want to trade those unused rooms in Tudor- and Victorian-style houses, as well as the steep suburban property taxes, for the city’s excitement and convenience — Ms. Fomerand finds herself stranded in the suburbs.

These empty-nesters have reaped the benefits of the suburbs: They sent their children to excellent public schools and raised them in safety and comfort, in backyards, playrooms and cul-de-sacs. And their houses have increased nicely in value. Now they would like to find apartments with doormen and elevators so they don’t have to climb stairs, shovel snow and schlep packages. They want a place where they can “age in place,” as the phrase goes. But they are finding that in the past 15 years, prices for such apartments in Manhattan and Brooklyn have risen far more than the values of their suburban homes, so much that they may never make it back to living in the city they always thought they would return to. Instead, they end up staying in their houses, or downsizing to smaller suburban homes or apartments.

To be sure, this is a problem largely felt by the comfortable: New Yorkers who have had the luck and income to live where they choose, who have had the luxury of planning and expecting a certain lifestyle when they grow older. These people could live less expensively in other cities, but often their family, friends and work are here, and they don’t want to leave the area.

“This is one of the most commonly discussed issues,” said Mark A. Nadler, director of Westchester sales for Berkshire Hathaway HomeServices. “People will say, ‘Yes, I’m moving to the city,’ but unless they’re wealthy, they end up resigning themselves to staying in the suburbs.”

Two quick thoughts in reaction to this piece.

  1. Those profiled in this story generally want to move to Manhattan or Brooklyn. Why don’t they consider moving to other parts of New York City? Underlying this could be continued ideas about what areas of New York City are desirable, safe, and more white. It is not really whether they can move to the city at all; it is more about whether they can move to the trendy neighborhoods in which they would prefer to live.
  2. There is only brief mention of affordable housing in a piece that is largely about housing prices. At the same time, this is kind of an odd note to hit; New York City prices are too high because a number of older suburbanites cannot find affordable housing in the city. If you want to talk about housing prices and affordable housing, why not highlight the less wealthy in the region who could truly benefit from such a move to the city (as opposed to doing so as a lifestyle choice)? Too often, stories about affordable housing highlight empty-nesters and downsizers (often alongside young professionals) – probably the sorts of people cities would love to have – rather than consistently examining the lives of lower-class residents.

Why are Chicago families fleeing for cheaper homes in the suburbs?

The Chicago Tribune leads with the story of a Chicago family who left the city for a townhouse in River Forest:

Megan Keskitalo and her husband, Glenn Eckstein, were enthusiastic city dwellers until the suburbs began calling. First it was Chicago’s crime, then it was worry about school districts, and in the end, it was money that pushed them past the city’s edge.

After a long search, the parents of two young daughters packed up their $1,300-a-month three-bedroom Lincoln Square apartment and in September paid $286,000 for a three-bedroom town house in River Forest.

“We were looking (in the city), but we couldn’t find anything in our price range, which was under $350,000,” Keskitalo said.

But, just how many Chicago families are doing this? The story sticks to general trends without any numbers:

They aren’t the only ones. While experts say Chicago’s housing market is sizzling — home sales were up about 8.1 percent in Chicago through November of this year, says the Illinois Association of Realtors — not everyone can afford to buy in the city. That’s because home prices are up too…

It’s not unusual for millennials and Generation Xers with children to flee to what real estate experts call “surbans” — walkable, amenity-rich suburbs — once they get married, have kids and are looking for less party and more quiet.

The implication of this article is that families like this are being priced out of Chicago: they might stay if they could find housing in their price range in attractive neighborhoods. Yet, there is a lot more going on here:

  1. The article also says real estate prices are on the rise in Chicago. This is generally seen as a good thing – unless it pushes desirable people, like young white families (or recent college graduates or older long-time city residents) out.
  2. There are real issues of affordable housing in Chicago and the whole region. However, there is often disagreement about who such housing should serve. Should it help keep wealthier residents in a community or serve those with much lower levels of income? Chicago is building plenty of high-end condos but there is not much action on the lower end of the market with affordable units in decent neighborhoods.
  3. This family had particular conditions for where they were willing to live: less crime, good schools, cheaper housing. Overall, they wanted a particular quality of life. They could have found cheaper housing in Chicago but without being willing to compromise on these particular issues, they left for the suburbs.
  4. How much of this is tied to the ongoing process of white flight? This family left a trendy Chicago neighborhood for an established wealthy and white suburb: River Forest is roughly 85% white and the median household income is over $113,000. Again, they could have found cheaper housing in the city (#3 above) if they were willing to live in more places that might not have been as white.

The house the Tanner family on Full House could really afford in the Bay Area

With rumors of a possible Full House remake, Trulia took a look at what the Tanner family could realistically afford:

Like the concept of home itself, the Full House house is largely placeless: Shots of the exterior come from the Lower Pac Heights Victorian at 1709 Broderick, the Painted Ladies of Alamo Square encourage all kinds of assumptions in the credits, and the address the characters use (1882 Girard) is actually wedged up against the 101 in Visitacion Valley. Still, it’s fairly obvious that the Tanner family of today could not so easily swing a Painted Lady, or its stand-in, in this market. Trulia actually ran the numbers and came up with the budget that a morning-show host, a musician, and a rock-paper-scissors champion would need to house the pre-mogul-phase Olsen twins and those other sisters. That number is $1.23M. And you know what? We found them a house!

First, the math:

Trulia used 1709 Broderick as the baseline. They say that the property sold last year for $2.865M. (Which is weird. Per the MLS, the last sale was in 2006, for $1.85M. Property Shark estimates the property’s current value at just over $2.05M—perhaps they were looking at that?) Gah, so much of this is theoretical, anyway: The real 1709 Broderick is only a three-bedroom, and according to these plans, they need at least four.) Anyway, the point is that the Bob Saget hair helmet and its costarring ‘dos need a lower mortgage payment. Here is what Trulia figured, assuming 20 percent down and a 30-year, 4.1 percent fixed-rate mortgage:

Let’s do the math: if Danny (played by Bob Saget) made close to $160,000 a year as the host of the local TV show, Wake Up, San Francisco, Joey made $30,000 doing stand-up gigs around the country, and Uncle Jesse raked in $48,000 as a musician, together, they could only afford a home around $1.23 million or about a $6,000-a-month mortgage.Of the homes around the $1.23M mark on the market right now, this four-bedroom Victorian in the Inner Richmond, just a block and a half from the park, is the only candidate that makes any kind of sense. It just squeezes in under budget at $1.15M, comes with a backyard large enough for a picnic table and the doling of woodwind-scored life lessons, and even has mint-sherbet-shingle synchronicity with this actual Painted Lady. There’s no garage, though, so Uncle Joey would need to live in the storage space.

Two thoughts:

1. This gives some quick insight into the superheated Bay Area housing market. The Tanners are not buying a cheap house with this estimated income yet they are clearly not living in the implied homes from the exterior shots because they could not afford it.

2. This is a common trend among family sitcoms on television: the “normal” family depicted often lives in a home that is realistically way beyond their means. I’ve been looking at some research regarding depictions of homes on TV and this dates back to the nuclear family sitcoms of the 1950s where families tended to live in pretty big houses for their time. Sociologist Juliet Schor argues that this increased level of consumption on television – the middle-class family living in bigger houses and having more stuff, seemingly without having to worry about finances – influenced American consumer patterns as their expectations of “normal” changed.