Wednesday, October 08, 2008

Housing is a red herring, but an important one.

UPDATE: a couple of new charts have been added to this post below. I'll put them over in the RIGHT (a little dyslexic there, previously) margin sometime later.

I am firmly of the opinion that it is the loss of living-wage jobs in this country for the vast amount of upper and lower middle class people that has been the primary cause of this financial crisis, there are still those who look at the housing issue and consider it the prime difficulty. My position is that there wouldn't be a difficulty of saving for down payments and qualifying for regular mortgages in the first place if everyone wasn't being forced to work at wally-wort and mowers-r-us and laundry-heaven type sub-living wage "service industry" jobs. People who can't really afford a house can't really afford to pay other people to do their chores, either.

Nonetheless, many if not most pundits see that Housing is where things started to go wrong as far as consumer economics is concerned (because they're focused on demand-side economics [spending], not supply side [income], so to speak). But as analyses of the "Housing" situation go, this is a pretty good one.

Of Two
Why Housing Is Far from Bottoming:
Depression, Demographics, Defaults and Dumps
Charles Hugh Smith(October 8, 2008)

The thesis stated again and again in the mainstream media (MSM) is that the U.S. economy can't get back on its feet until housing "recovers"--which makes the question "when will housing recover?" of paramount importance.

...Now we have the "reverse wealth effect." As equity has declined--in millions of cases, to negative net worth--homeowners feel poorer and thus they are spending less. Since equity extraction, which once flooded the economy with hundreds of billions of "free money" year after year, has now shrunk to near-zero, they also have less money to spend.

And I guess decline incomes for the past 30 years has nothing to do with it...but anyway:

As we can see in the chart, household real estate wealth is set to decline for the first time in 50 years. Financial wealth is also set to go negative, an unprecedented (in post-WW2 era) double-whammy to household wealth.

...OK, so isn't housing set to "rebound" next year, or in 2010 at the latest?

No. For as correspondent Pangolin notes, while mortgages may just be paper, the paper is based on real physical houses and neighborhoods. the "paper losses" are hitting the real houses and neighborhoods hard in four ways: Depression, Demographics, Defaults and Dumps.

Here are Pangolin's incisive comments:

Is it me or we all ignoring a fifth elephant in the financial living room? All of this debt is secured by assets, houses, on land, that were built with the presumption that well-employed people would live in them at about the ratio of 2.6 people per 2500 sq. feet. (sources: U.S. Census 2006, Square Footage Measurements and Comparisons Energy Information Administration)

That's a lot of volume for two people and when our various cousins, brothers, mom's, sisters and best friends lose their steady jobs that's a lot of space to rent or share. This is especially significant if other, non-optional expenses like food, heat and medical care continue to get more expensive. Meaning the occupied number of residences in the US could contract by a third overnight with little hardship.

I agree complete with this - as I have mentioned to you before, people's parents, kids, grandkids, and/or good friends are going to be moving in with them, due to a need to spread rising costs and rising home-based responsibilities over more adult hands.

...Some time soon homeowners (as opposed to mortgage paying tenants) are going to descend on local governments in a wrath and demand that vacant properties be occupied or maintained in a reasonable standard. Lawsuits will pile up, HOA liens will fly like fall leaves and town councils will get slapped awake by irate citizens.

Then there will be a proliferation of proposal that will amount to "use it or lose it" laws. Your vacant property may be seized, sold at auction for cash on the barrel-head to anybody who can demonstrate that they will a) occupy the property and b) have sufficient income/reserves to maintain it. There is nothing at all that makes this illegal. To the contrary laws have been adjusted to allow crony capitalists to seize property and build baseball stadiums, mini-malls and 'factory-outlets' with minimal fuss. It's also quite simple to tell a besieged banks legal department that the value of the property is exactly it's auction price in lieu of evidence of other buyers.

For several years banks will scream murder and property prices will dive but nobody is going to leave an empty house in their neighborhood if they can avoid it. Of course the results of this will make the bailout last week amount to a fart in a hurricane.

That's a very interesting idea. I'll have to think about this one, but off the top of my head I don't believe that people's inherent property ownership rights will be that malleable anytime soon. First and foremost, there are so MANY foreclosed and failing properties right now, scattered far and wide and not contiguous, that for most of them it's simply not feasible for new developers to come and redevelop only the foreclosed homes - whole entire blocks of neighborhoods would have to be kept together as a unit, which would force OCCUPIED units into eminent domain, and people REALLY don't like that. It would not be popular at all, so I don't see anyone "clamoring" for that solution anytime soon. More likely they will insist the scavenged and derelict homes be razed to the ground - it's safer and produces greenspace instead of squatters.

...What we have right now: Depression (falling employment and household wealth), Demographics (falling number of households), and Defaults (foreclosures, walk-aways, etc.) reflected in the following:

1. massive oversupply of housing

2. falling "residents per household" in the U.S. is reversing

3. a tidal wave of housing-mortgage-related lawsuits which is already threatening to swamp U.S. courts

Let's start by recalling that there are 18.6 million vacant homes in the U.S.--a staggeringly large number.

Yes, several years worth of "regular" demand, to say the least. Prices will continue to fall until all excess inventory is cleared from the shelves, so to speak - a clearance sale on a grand scale, you might say - and since it is a few more YEARS until all of the flaky adjustable mortgages work their way out of the system, there will be no shortage of new stuff to cram onto the already overcrowded shelves.

And, more to the point, since wages aren't going to jump up anytime soon, the ugly reality that most middle class people can no longer afford to buy a home still applies. So you have an incredible glut of supply and a tiny trickle of demand. In other words, prices still have nowhere to go but down.

...A million new units sit empty, and only 20% are for sale. We can presume the builders/developers/lenders are hanging on to the other 800,000 empty new homes, hoping and praying that some miraculous turn-around in the housing market will enable them to sell a million vacant homes in the near future.

Even as the "downturn" worsens, over a million new dwellings will be constructed and added to the inventory this year. So let's just round up and say there are (or soon will be) 20 million vacant residences in the U.S.

True, unfortunately - the entire housing industry can't just disappear for several years while the glut is worked out.

...It seems to me you get a lot of reasons for household size to increase. Kids move back home, creaky retirees open up the house for a live-in assistant, and unable-to-retire folks start renting out all those empty rooms for extra income. And if household size even edges up slightly, that will greatly reduce the number of dwellings the nation needs for actually housing people as opposed to investment/gambling schemes. An increase in household size would radically increase inventory of unwanted/unsold/unrented dwellings.

Nice to see Mr. Smith agrees. And let's not forget:

...Just as cities are under increasing pressure to address vacant/vandalized housing, their property tax revenues are plummeting along with valuations. This puts cities which are trying to "do the right thing" on the horns of a dilemma: enforcement and lawsuits cost money, just as revenues are dropping.

...Another possibility is that the Federal government, via its Fannie Mae and Freddie Mac divisions, will become a massive owner-of-last-resort of U.S. real estate. Frequent contributor Harun I. recently sent in a link to an account of Home Owners' Loan Corporation (Wikipedia), a New Deal agency established in 1933 to refinance homes to prevent foreclosure. Harun's comment:

"The HOLC did not prevent the Great Depression even though it was created as early as 1933." A telling point; and I would add that the agency didn't finish its mandated business until 1951: fully 18 years after it was formed to "resolve the crisis. If history is any guide at all, we can thus anticipate all these "rescue" operations currently being thrown into place lasting until 2026.

More likely your great-grandchildren would still be paying for it, except that at this rate, our currency will become worthless long before then.

...We may yet become a nation of renters again, as we were in the Great Depression, when home ownership was around 44% compared to today's 64%.

There's no doubt about that prediction coming true - without living wages most people will not be able to save up for 10-20% down-payments even if mortgages were only a few percent APR.

Future headline: rent controls make a strong comeback.

And finally a note: I don't expect to be posting again until next Sunday, most likely. So have an easy fast and an enjoyable Shabbat. Shalom!

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