Watchdog Blog

Dan Froomkin: Time For Real-Estate Watchdogs To Start Howling Again

Posted at 12:24 pm, December 13th, 2010
Dan Froomkin Mug

You might not know it from reading the news, but the nation’s housing prices are in free fall again.

For the many Americans who have (or had) most of their wealth tied up in their homes, the consequences of this will be profound. The effect on nationwide consumption will inevitably be severe. In fact, there are some not inconceivable scenarios in which the housing market could just take the economy down with it again.

Despite the fact that the nation is officially in a period of economic recovery, the latest data show that home prices are diving. One recent survey pegged the decline at 0.7 percent per month; another found prices down 5.8 percent between August and October.

One analysis found  home values will likely drop more than $1.7 trillion this year, on top of the $1.05 trillion drop in 2009. That would bring the loss in wealth to $9 trillion since the June 2006 market peak, when the housing stock was valued at about $24 trillion.

And many market analysts expect prices to drop 10 percent or more in 2011.

The sudden decline starting this past summer is traced in part to the end of the home-buyer’s tax credit, in April. But the real problem is the huge downward pressure caused by the the record number of homes being foreclosed.

Foreclosures depress prices directly –  foreclosed homes are currently selling at a  32 percent discount. They also depress prices indirectly, by creating urban (and in some cases suburban) blight.

Banks prefer to sell an empty property, so they kick out residents and tenants even if it isn’t likely to get snapped up. Often, the property isn’t even put on the market (it becomes part of the “ghost inventory”).

The inevitable result is scores of abandoned, poorly kept-up homes — particularly in the inner cities. (This is the reason for the existence, and success, of groups like Project No One Leaves, which provide services to help low-income tenants and residents to stay put.)

The ongoing saga gets written up now and again. The New York Times had a particularly insightful story earlier this month about how it is the least expensive homes whose prices went up the most during the housing bubble. “And now it is those homes that are suffering the most.”

The Huffington Post, (where, not entirely by coincidence, I also work) ran an appropriately alarmist story last week.

But if there is coverage in the traditional media, most of it  is relegated to the business section — when this should be front page news, for every newspaper in America.

It’s a big national story, and it’s a huge local story, particularly in those 13 major cities where prices are officially in double-dip territory — with home prices that had gone back up now down again,  to their lowest levels since the downturn began. (Those cities are Charlotte, NC; Jacksonville, FL; Las Vegas, NV; Miami, FL; Nashville, TN.; Orlando, FL; Philadelphia, PA.; Portland, OR; Richmond, VA; Seattle, WA; Tampa, FL; Tucson, AZ; and Virginia Beach, VA.)

Dean Baker, co-director of the liberal Center for Economic and Policy Research, tells me the story isn’t getting nearly as much coverage as it should — if nothing else because “as you see a drop in home equity, you also see a drop in consumption.”

This is due to what Baker and other economists call the “wealth effect.” It reflects the fact that when you are feeling rich, you tend to spend more, and when you are feeling poor, you tend to spend less. So, Baker says, for every $1 of housing wealth lost, consumption can be expected to go down 5 to 7 cents.

What that means is that another trillion-dollar loss in housing wealth — something that could easily happen by next fall — translates to $50 billion to $70 billion less consumption; sort of an anti-stimulus.

That, in turn, simply adds to the unemployment problem. And when you realize that you can’t stabilize the housing market without people being gainfully employed, you see the vicious cycle we’re in.

22 Responses to “Time For Real-Estate Watchdogs To Start Howling Again”

  1. Don Lipscomb says:

    This article is refreshing to me! Yes, is it possible that the market will be allowed to determine housing prices? If there is a God, please return the 9% annual mortgage interest and return to non-government supported conventional financing with 20% down on a twenty year mortgage. If you study what happening to pension plans with the death of the defined plans, the Wall street rape of the 401K plans, and the battered Social Security System, the ONLY way left (other than winning the Lotto) is to start old fashioned savings plans (NOT so-called “INVESTMENTs” for the Wall streeters to gamble and plunder. Typical savings should be 20% of Gross annual income to be able to handle the evaporation of 401K/s and other retirement plans and Socal Security “promised” and paid for benefits. No longer will “affordable” mean what you CAN pay for a mortgage, but what you can PRUDENTLY pay for a mortgage with inclusion of a MINIMUM 20% gross income in savings. Bye bye 30 year no money down with “cash back” mortgages. Hello conventional 20 year mortgages that pay for themselves without government or Wall street games.

    If this occurs in any form…house prices will plummet (YEAH!) and people will be able to start living again, instead of running on a Realtor-Mortgage-Builder-Developer-government economic treadmill so fast that you can NEVER slow down enough to get off the machine safely.

    Consumerism will slow down just enough to build up savings, and return to REAL economic growth instead of the Realty -Other Peoples Money – Ponzi scheme of late night Real estate get rich quick infomercials.

  2. Steve C says:

    In the previous post, Don got it right. However, most people are missing the tragic consequences of our housing problem. Prices rose to levels forcing moms and dads to both work. As a result, the American family has disintegrated. Children lack a family atmosphere and guidance. Housing isn’t the only participant. Vehicle prices also shot up due to low interest rates and ez credit. If a couple has to buy 2 cars and a home, there will be nothing left for food. Of course, our government is bailing out every one doing their best to keep prices high and citizens broke and stressed out. No matter how you shake it, GM is going out of business. Within a few years the same old problems will resurface and they will go down. By then, more irresponsible Congressmen and Senators will be long gone. There won’t be any political will to save GM.

  3. Phil Perspective says:

    Why isn’t it on the front page of every newspaper? Easy. Here in Philadelphia, one of the biggest advertisers in said newspaper are the home builders. They want to try and prop up values, not be faced with reality. Extend and pretend, baby!!

  4. tyree says:

    “Prices rose to levels forcing moms and dads to both work.”

  5. Brent says:

    Here in Tampa, FL area foreclosures are selling at a 50 to 60 percent discount, almost double the rate above. Appraisals are matching the foreclosure discounts. Hardly anyone can refinance at that point and no one can afford to sell with that kind of loss. You end up with the only movement in housing and the labor force is from those willing to walk away. The shadow inventory is immense here.

  6. tyree says:

    Steve C said, “Prices rose to levels forcing moms and dads to both work.”
    Actually, Moms and Dads working help drive the prices up.
    Decades ago, only one income was allowed to qualify for a mortgage. Home prices were kept low and if the primary bread winner lost their job, the mortgage was such a low percentage of family income, keeping the home was easier. Then came change and multiple incomes were allowed to qualify for a loan. Prices soared and homes grew to McMansion size, and affordability for families with a stay-at-home parent just about disappeared. Change is not always good and often has disastrous consequences. We can never, ever go back. The overnight loss to the value of our real estate market would be another regulation made disaster.

  7. Ursus says:

    The economy won’t stabilize until housing prices return to actual value. Trying to find ways to prop up the pricing will only drag out the recession.

    That might be acceptable though. A slow long recession may be more tolerable than one that is short and deep. If that is the case then the govt should just buy up foreclosures and burn the houses down so as to tighten supply.

  8. Koblog says:

    So what’s the Huffington Post’s solution?

    Tax the productive to pay for homes that foolish people cannot afford? Give everyone in the country a home and a car or two? Borrow trillions from the Chinese to keep the unfunded state-employees’ pensions and GM union pensions fat and happy? Keep paying people not to work? Build more houses with borrowed money? Wait for Chris Dodd, Barney Frank and President Clinton, er, Obama, to sprinkle magic pixie dust over America and solve all our problems?

  9. Ironic Ending says:

    If the SCOTUS upholds the ObamaCare mandate, expect to see the Commerce Clause utilized to force everyone to buy a house “for the common good.”

  10. M. Simon says:

    Homes in my area are not being foreclosed in any great numbers and if they are tenant occupied the tenants are often living rent free.

    I assume the reason is to maintain some value in the structure vs having the copper cleaners pay a visit. Or problems with frozen water pipes. etc.

    Shadow inventory is probably huge.

    I know of a property that sold for around $80K before the bubble that was defaulted at $167K. Nice neighborhood. Small Midwest town that has been in recession for about 20 years (rust belt decline). So where exactly did the $167K valuation come from? It can’t be because of a booming economy because this town hasn’t boomed for 30 years. The best you can say is that in good times the decline temporarily halted.

    I know of another place where the renter left and took all the kitchen cabinets with him. Plus all appliances not built in.

  11. RM3 Frisker FTN says:

    “But the real problem is the huge downward pressure caused by the the record number of homes being foreclosed.”

    Q: Why are there foreclosures?
    A: Homeowners not making mortgage payments

    Q: Why are homeowners not making mortgage payments
    A: Two-parts with uncertain sharing between the two. One is homeowner lost job, having no income for making mortgage payment. Other is the homeowner’s ARM reset to a higher interest rate.

    Q: Why did homeowner get an option ARM mortgage?
    A: The option ARM mortgage was ‘pushed’ on the homeowner

    Q: Why did the homeowner loose their job?
    A: Recession

    Q: Why was the option ARM ‘pushed’ on the homeowner?
    A: Several reasons. Make mortgages ‘affordable’ to those who typically couldn’t afford to buy a home. Generate more mortgage transactions, resulting in more fees for mortgage brokers and the like. etc etc etc

    Q: Why was there a recession?
    A: This is tiring! Can’t a “credentialed but not educated” Huffington Post writer “Ask Why Five Times to get to Root Cause”? This is what technical professionals do when trying to solve problems, performing failure analysis.

    Wiki article here …

    Opinion: This Dan Froomkin piece is a disservice to the readers not actively following the slow-motion meltdown of the real-estate market.

  12. CJ says:

    Good article AND good comments. Only one point I`d like to make … Mr. Froomkin writes:

    “Foreclosures depress prices directly – foreclosed homes are currently selling at a 32 percent discount.”

    May I suggest that this “discount” reflects the real present value of the house — as opposed to the extend-and-pretend value that financial institutions and realtors (and homeowners) would like to believe is real.

  13. mark l. says:

    a modest filter to the the numbers…

    the overall economy. yes, house prices falling is a severe condition, but this is occurring in no small part due to a stagnant economy with high unemployment.

    put to a question:
    while the collapse of the housing market from 08-09 weighed heavily on the economy, has it reached a point where the it has become a symptom, where it once was the disease?

    a depressed housing market bears significant impact on the unemployment, but this broad malaise isn’t going to create any significant upward price pressures on housing, until the broader economy is resolved.

  14. backhoe says:

    “May I suggest that this “discount” reflects the real present value of the house — as opposed to the extend-and-pretend value that financial institutions and realtors (and homeowners) would like to believe is real.”

    That is the correct answer.

  15. WasteNot says:

    This exposition demonstrates the truth that markets act independently of policy and ultimately trump the policy if the market is significant. Government policies adopted to strengthen the housing market (Fred and Fan, Community Reinvestment Act, Fed lowering interest rates, deductibility of mortgage interest) served to generate a bubble that ultimately burst. We may be in meltdown, but the alternative is more market contortion (home buyer credits, freezing of foreclosures, etc.) which ultimately will overwhelm some other aspect of the economy. It may be painful to watch what our political class created, but there really is no alternative but (a) to let it play out, (b) to learn that central planning meddling in markets frequently leads to unintended and painful consequences, and (c) not to meddle in the future.

  16. RDG says:

    Steve C: I agree with you that GM will be out of business shortly (product offering stinks and prices are too high), but the politicians still accomplished what they wanted and that was to save union pensions and health care. They screwed the bondholders big time to get this done and the new burden will fall on taxpayers. With that done, yes, they will let GM go bankrupt this time.

  17. PamK says:

    Lots of “productive” people went for the bigger is better mindset with houses. Lots of retirees sold smaller homes in high tax states, moved, and built the “McMansions” in low tax states. “Infilling” in Atlanta and desirable golf communities in SC saw the destruction of modest brick homes covering 20% of a property to 6000 sg. ft. monstrosities dominating lots with 80% coverage. What will happen to these homes with increasing utility bills? Environmentally and aesthetically they are disasters. Bigger is not better and lots of people are going to get burned if/when these places come back to market.

  18. Glenzo says:

    Lower prices of housing, over time, will lead to a better more reasonably balanced economy. For new buyers, homes will consume less income and savings freeing up capital and disposable income for other things.

  19. Steve Adams says:

    ** Houses Most Affordable in 10years!!! ** – Expect More Improvement in Affordability in the Near Term.

    As the market begins to set prices again based on non-bubble bs (put 5% down and make money in your sleep) a real supply and demand system will work again – it just will stink to own a house now on the way. Similar to the 20′s when people had 90% margins on stocks the 95% debt on houses encouraged one sided gambling and speculating.

  20. Alice Finkel says:

    Yes, but why did the leftists in the US Congress (Barney Frank, Maxine Waters, etc) force people to buy houses which they could not afford? Because it was good for Freddie and Fannie. Everybody takes a cut, everybody’s a winner!

    How to go to Congress penniless, and emerge years later a made man or woman. It worked for Harry Reid and it will work for you too. Give it a try.

  21. DeeBee says:

    The article mentions a couple of solutions that need to be done more. Lenders (I work for one) hurt themselves by doing things harmful to the housing market. Froomkin says that lenders like to have empty houses to resell. That is true, but it is ridiculous and couterproductive.
    Faced with a bad housing market a couple of decades ago, we kept people in the houses. They helped to mitigate our loss by keeping the house occupied and maintained. Competing lenders resold abandoned houses at substantial losses. We resold better kept homes (after renting them out for a season) at substantially better prices.
    In our cases, the borrowers had lost jobs and were resigned to the fact that their equity was gone and they could no longer support their mortgage. They knew they had to live somewhere (like an apartment) while they searched for a new job in another state. They were most concerned about their credit. So we took a deed in lieu of foreclosure. They released all interest in the property to the bank. We then leased it to them at a monthly amount that was like apartment rent. All properties were listed and they had to keep them show-ready. If they became uncooperative, the tenancy would be terminated like any rental. But virtually all cooperated and were appreciative of the win-win alternative to an ugly situation. If people’s houses sold and they were not ready to leave town, we would rotate them into other vacant houses.
    Our yield calculations showed that for us to continue to get some amount on the loan (say $450 per month instead of the $900 per month payments) and then eventually sell at 95% of principal value was a huge difference from our competition that foreclosed, got nothing during the abandonment and resell period and then only got 85% of their principal months later.
    There are several reasons why this isn’t done today, all of them related to “financial reform” legislation passed over the years to solve banking problems.

  22. Roger Expat says:

    @Alice Finkel: I can’t stand it any more. Nobody “forced” people to buy houses which they couldn’t afford. However, the companies which made mortgages (not banks) aggressively sold people on either taking out too large a mortgage or refinancing to take advantage of the “increased equity.” Many of those mortgages were purposely pushed on people who clearly could not afford them because investment banks wanted mortgages which would fail, so they could create defivatives (CDOs) which they could then aggressively sell to their customers (pension funds, widows, orphans) and which would be sure to fail, so the investment banks would profit hugely.

    Fannie and Freddie did not make mortgages to anybody. They buy mortgages from the companies which make mortgages (rarely banks, nowadays).

    Chris Dodd is certainly culpable for helping to cut regulations, Barney Frank not so much.

    The Community Reinvestment Act had absolutely nothing to do with any of this because most of the companies which were making subprime mortgages were not banks. The CRA did not apply to non-banks, and in fact most of the banks found that making loans to the areas they had previously “red-lined” turned out to be profitable, both for them and their customers.

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