May312014
Developers profit from the poor through affordable housing programs
Affordable housing programs are intended to provide good homes to low wage earners; instead, they provide government handouts to developers.
Russ Wetherill, May 31, 2014
If there’s one thing I can’t stand…
[full-disclosure: there’s actually a lot of things I tolerate, but don’t really like very much, like stop lights – what are those good for? Sure they prevent accidents, and save lives, but I probably waste an hour a week just sitting there fish-eyeing the people in the next car for signs of instability.]
… but one thing that irks me more than most is phony compassion for the poor. The poor aren’t particularly wealthy, and thus generally not a very good source of revenue. In an ordinary universe, where up and down retain their normal directions, a business plan based on constructing a million housing units for the segment of the population with the least ability to pay for them would be unwise. Luckily for them, we live in an alternate reality, a stupidiverse if you will, where normal economic laws are only limited by the number of pigs that can crowd round the trough.
So how do you get overtaxed taxpayers to fund this venture with even more taxation? You commission a study on how poor poor-people are and don’t forget to push as many emotional buttons as you can.
Whenever a humanitarian cause needs money, they always trot out the bleeding children. “Look,” they say, “they’re children, and they’re bleeding. Give us money.” Heartless, I know. But they started it, not me.
Los Angeles Needs Half a Million More Affordable Housing Units
Businessweek: By Karen Weise May 29, 2014
California’s housing market has long been among the most expensive in the country, and the economic downturn has only made the situation worse. That’s one of the findings in a new report from the California Housing Partnership Corporation, a nonprofit group set up by the state, that determined that Los Angeles County needs at least 490,340 more affordable homes to ease the housing burden on the state’s poorest residents. The county-level results echo the group’s February report that found Californians need almost 1 million additional affordable housing units statewide.
Affordable to whom? That is the question. Affordable to the person living there, or to the person paying for it? Who has the responsibility to pay? And, how affordable is affordable, anyway? If these 1 million additional affordable housing units aren’t built, where will these people live? Where they are already living, that’s where.
I find it suspicious that this non-profit was set up by the state and the report is associated with the Southern California Association of NonProfit Housing (SCANPH). Which is a trade association dedicated to advocating the interests of “those dedicated to the DEVELOPMENT of affordable homes.” In other words a developer wants tax dollars to build and MAINTAIN one million homes. Great! How much is this going to cost me?
The CHPC’s reports are, frankly, devastating. The problem they lay out is that the financial crisis turned owners into renters while driving wages down at the same time. In Los Angeles County, rents went up 25 percent from 2000 to 2012, but incomes fell 9 percent over the same period. (This includes adjustments for inflation.)
How can rents rise 25% when incomes are falling 9%? I feel like I’m not being told something here; maybe, low-income population is expanding “devastatingly,” for instance.
Los Angeles has almost a million workers who earn less than half of the county’s median income of $37,950 but only enough units available to house about half of them affordably. To keep rent at an manageable level, which has generally been considered 30 percent of income, Angelenos would need to make $55,920 a year at the going rental prices for a two-bedroom apartment.
First of all, why would a single worker on the bottom rung of the economic ladder be living in a two-bedroom apartment? There’s no shame in being on the bottom rung, you have to start somewhere, right? But you don’t have to stay there, either. Minimum wage jobs aren’t meant to raise families on. They’re meant as stepping stones, not corner stones to build financial empires on.
Second, a two-income couple earning the median 38k each is 76k combined. This is more than enough to afford a one-bedroom apartment, which is all you really need as a single couple. Before our first child, we lived in a one-bedroom apartment just fine, and we were making a lot more than 76k combined. The extra savings went to retirement savings and vacations. A two-bedroom seemed like throwing money away. Someone at this stage shouldn’t be buying a house or renting more than they need, they should be scrapping together every cent they can and building up some financial security for themselves.
Once you decide to raise a family, expenses are going to rise, dramatically. Even if you continue on two-incomes, it will be the same as one income when you consider child care. The fact is that when you choose to raise a family in California, you choose between financial discomfort and financial distress. A three-bedroom apartment or SFR is much more expensive than a one-bedroom apartment. Unless you both make over the median $38k it will probably make sense for one spouse to stay home, and then you’re living on 38K! That means you will have to make do on less money to cover rising expenses. Reality. Better save up 5-7 years extra expenses to cover extras until the kids go to school.
Not only is renting expensive, but buying is largely out of reach, too. Statewide, someone making the average wage of renters ($17.99/hr) would need to work 66 hours a week to afford a median-rent home, CHPC says. If a person earning that average wage wanted to buy a place, he or she would have to devote more than 60 percent of income to owning the home. And that assumes she could qualify for a 4.5 percent interest rate and could scrape together even a 10 percent down payment for a loan like those available from the FHA.
With all due respect, that person is never going to make it in California unless they start to earn a lot more. They better be going to college, starting a business, selling kidneys, or something. Working 66 hours a week to make rent, or paying 60% of gross income in PITI is not a viable long-term plan. It’s not even viable short-term. Living off the generosity of others is also not a viable long-term plan. Oh wait, we are in California, so maybe it is!
To make housing more affordable, either prices can go down, or income can go up. California is already raising the minimum wage to $10 an hour, and Los Angeles is considering increasing pay to $15.37 for hotel workers. But that’s no magic wand. As CHPC wrote, “The gap between housing cost and income is so great that just raising the minimum hourly wage by a few dollars will not significantly reduce the shortfall of affordable homes in most counties.”
Uh. Ugh. Raising the minimum wage won’t change anything regarding affordability. All wages are relative. You can’t talk in absolute minimums or absolute maximums when you’re discussing wages. If you raise the floor, you raise all the wages above the floor, too. What happens then? Everything becomes more expensive as all the prices adjust upwards to reflect the new floor in wages. Every job has a value based on the skill and demand.
Using the hotel industry as an example: let’s say you have a pay structure as follows: maids: $10/hr; front-desk: $15/hr; assistant manager $20/hr; manager $25/hr. If you start paying the maids $16/hr, you are going to have to pay the front desk $21/hr; and the assistant manager can’t manage someone making less than he/she, so he gets a bump in pay too, and the manager isn’t going to pay himself less than the assistant, so his pay goes up. At the end of the month, all the personnel decide they want to upgrade their apartments, so they go shopping. Since inventory is tight, they all bid up the price of all the apartments in the area to new highs. Affordability is still unaffordable and new complaints about minimum wages arise.
This example assumes that the hotel revenue somehow jumps up to compensate for the higher salaries. Prices would have to rise, or profits fall. If prices jump, then customer wages would have to rise to compensate or vacancies rise and profits fall, and so on and so on. If not, then the number of maids and front-desk personnel would be reduced to keep salaries from affecting prices and profits. There’s no free lunch.
That means prices would need to go down in a meaningful way to ease affordability. As I reported earlier this month, the price crunch for buying is likely here to stay in coastal areas such as California, and CHPC says the state isn’t doing enough to build more affordable rental units that could bring rates down. The state’s four major sources of funding to build affordable housing have fallen a collective 79 percent since the housing crisis kicked in.
Wait, I think I have a solution: there are entire “ghost” cities in China. Why don’t we just pay the poor to move there? Problem solved. Actually, two problems solved: 1) the poor have brand new houses to live in, and 2) we no longer have to pay for their EBT cards and the diabetes care from the junk food they buy with them. We can call it a “worker exchange” in the spirit of international unity. And Chinese workers are used to cramped living conditions, so they won’t complain so much! Brilliant, I say. Brilliant! The best part is that we don’t have to use our tax dollars to build one million homes. The Chinese already did it for us!
CHPC says there are some things the state can do, such as allocating more funds to build affordable homes and making it easy for cities to raise their own money for housing. Southern California is already one of the most overcrowded regions in the country. If wages don’t rise quickly, or enough affordable units don’t hit the market, even more people will need to cram into small spaces just to get by.
The nine scariest words in the English language are “I’m from the government and I’m here to help”; with a close second of: “… such as allocating more funds to build affordable homes…”
Why is this second? Let’s break it down. There are three parts to this: 1) such as, 2) allocating more funds, and 3) to build more affordable homes.
“Such as” is the worst part of this phrase since it empowers taking of one person’s wealth for the benefit of another. And it does it in an off-hand matter, like it’s so commonplace that it’s presumed to be acceptable. For example, we could say that we can fund our child’s college education by doing some simple things, SUCH AS clubbing a rich guy in the head and taking his money, or robbing a widow’s retirement fund. They both had it coming, so it’s perfectly alright.
“Allocating more funds” obviously means raising taxes or diverting tax revenue from somewhere else, or more correctly, someone else.
“To build more affordable homes” is a very strange prepositional phrase. Is the problem that homes cost too much to build or that they cost the residents of the home too much to live there? If the former is true, then we need to reduce the cost to build. But the largest cost of a home is the land on which it’s built. The poor generally already occupy the least expensive areas, so where are they going to get the land? From the Metro Transit Authority, that’s who. The developers want to get free land from the LACMTA next to transit lines. They are using anthropogenic global warming as the carrot/stick via green-house gas emission reduction claims based on locating high-density housing adjacent to mass transit. Crafty, but transparent to those who can see.
The second largest cost in constructing a house is wages. So we should pay construction workers less to make homes more affordable? How will that work? We make homes more affordable by further lowering prevailing wages. I get it. Well, not really.
The next largest cost is the materials mandated by the California building code. Are we going to allow substandard materials and construction processes to house the poor? That certainly isn’t ethical, but is it even legal? How exactly does the author propose “to build more affordable homes”, anyway? We could build them to the sky to reduce land costs, but good luck passing an earthquake study.
I assume the author means the latter, i.e. that the homes should be subsidized in their construction or rental price. But does it make sense to do this? Are we short of workers with these critical skill sets? Resort communities run into this same problem of lack of “workforce housing” to house the workers needed to keep the hotels, ski areas, restaurants and other amenities functioning. The appeal of a resort is the lack of overbuilt infrastructure encroaching on the wilderness.
Now “workforce housing” isn’t the same as “affordable housing” which is more of a Federal Section 8, deal. With high unemployment rates amongst the working poor and the 9% drop in wages, I don’t think we have a lack of workforce housing in California. What we have is an excess of low-wage workers to fill the required positions.
As housing prices rise, these workers will naturally relocate to other parts of the country where there skills are more valued. If we build more “affordable” houses then we only perpetuate the problem, we don’t solve it. In fact, we also make the problem worse by discouraging workers from relocating to areas with better jobs. And, we drain off seed capital through taxes that could be invested elsewhere, like creating jobs.
This also does a disservice to those in the “workforce housing” category who can’t find a place to live since the homes are either unaffordable or unavailable (since they make too much money). They find themselves in a Laodicean neutrality wedged between the beach and the ghetto with both sides expanding rapidly.
But the whole point of this article is to generate public monetary support for a private “non-profit” trade group to build “low-cost” housing that is really expensive to tax payers. I’m not opposed to low-cost housing as long as the cost isn’t to tax payers. If a private entity wants to risk their own money on this misadventure; design, build, staff, rent, and maintain the housing based on what the residents can pay, then go ahead. By all means. Make it so. I imagine their profit margins will be rather bleak, but non-profits are by definition, just that.
Russ Wetherill
Meet with us to register at Orchard Hills and save money
Orchard Hills is having a grand opening this weekend. We expect a big turnout to see this much anticipated debut.
We are offering buyers a refund of anything over 1.5% back on new construction from our fee that is paid to us by the builder.
Contact Shevy at 949.769.1599, and he will arrange to meet you at the opening to register. He must accompany you to registration in order to secure your rebate.
[listing mls=”OC14110051″]
Truly ignorant economists blame the weather for economic problems, but another ignorant meme in real estate economics is the “pent-up demand” meme. Whenever sales are slow or prices aren’t rising, economists point to some imaginary group of fence sitters who merely lack the confidence or motivation to buy homes. In their world, there is always plenty of qualified borrowers with down payment money just waiting to buy if only they had the proper motivation.
Driving the Market
For get prices. Forget mortgage rates. The main driver of housing demand—according to three separate and distinct market studies—is confidence, primarily assurance that the value of the home will increase over time.
“A setback to confidence means a setback to the recovery of the housing market,” according to Doug Duncan, chief economist at Fannie Mae. Karl E. Case of Wellesley College, Robert J. Schiller of Yale—namesakes of the often touted and quoted Case-Shiller Home Price Index—and Anne Thompson of McGraw Hill Construction studied the results of 11 surveys conducted over a 14-year period (first in 1988 and annually since 2003) to understand the forces that led to the development and then the bursting of the housing bubble and to determine which buyers understood the market and whether their perceptions matched reality. The trio acknowledges that the origins and end of the market bubble were studied extensively but “one aspect of this episode in the housing market has not received the attention that it deserves: the role of expectations,” they said. “What were people thinking when they bought a home?”
Assessing Home Purchases
Housing, economists observe, is unique among purchase and investment decisions. For the owner-occupant, buying a home is more than merely buying shelter because of the investment component, and similarly it provides the owner-occupant an investment vehicle while filling an immediate consumption need.
At the time of purchase, a buyer of a capital asset buys a flow of services and benefits that will all come in the future, which is always uncertain.
“To buy a house an individual (or a household) must make a series of very difficult decisions that will in all likelihood impact their lives forever,” Case, Shiller, and Thompson wrote. “In virtually every case, a buyer walks into a closed room and writes a check and signs an offer sheet or a purchase and sale agreement. Anyone who ever signs an offer sheet, reads a building inspector’s report, or wonders what would happen if she lost her job, knows the decision is emotional, personal, and difficult.” But the decision process, they said, is more than “the process of thinking about the future, calculating subjective costs, risk aversion, and preference formation, all difficult topics for economists. It is really about what goes on in the minds of buyers.”
What happens in the market, they said, “depends on the behavior and attitudes of millions of individual participants, foremost among them: buyers.”
Their study tracked perceptions in four metropolitan areas: Middlesex County, Massachusetts, in the Boston-Cambridge-Quincy metropolitan statistical area (MSA); Orange County, California, in the Los Angeles-Long Beach-Santa Ana MSA; Alameda County, California, in the San Francisco-Oakland-Fremont MSA; and Milwaukee County, Wisconsin, in the Milwaukee-Waukesha-West Allis MSA. They measured responses to questions about anticipated housing trends and found buyers had a good understanding of what was happening to house prices at the time of the survey and were not lured by prospects of huge future gains.
Buyer Foresight
“Over the cycle,” they said, “buyers in boom cities were very much aware of contemporaneous changes in house prices and … were, if anything, out in front of changes that were occurring. When house prices turn down, buyers are cognizant of it.”
In many instances, buyers had a better sense of the market than professionals, the trio concluded. The survey data “show that buyers were, if anything, out in front of short-term changes that were occurring and that homebuyers’ short-run expectations under-reacted to the year-to-year changes in actual home prices … since most homebuyers own their homes for many years, [long-term expectations] are arguably the more important determinants of housing demand,” they said.
Buyers, the study found, anticipated a market downturn in 2004—two years before prices peaked. Homebuyers are “very much aware of trends in house prices at the time they make a purchase. There is a strong correlation between the descriptions that the [survey] respondents give to their perceptions of price trends and actual movements in prices,” according to Case, Shiller, and Thompson.
“Since homebuyers are likely an upward-biased sample of the population, in terms of their expectations, the perceived investment opportunity may be even lower for the general population,” they wrote in their paper for the National Bureau of Economic Research. “A survey of professional forecasters run by Pulsenomics LLC suggests that the professionals may have lower long-term expectations for home prices.”
Perceptual Shifts
The researchers note there was a clear change in public perception during the two years between 2004 and 2006. During that time, they say, there seems to have been an emergence of an idea, in media accounts, that there are such things as bubbles and that the bubble might be expected to burst. Over this two-year period, there were a number of analyses of bubble arguments, at such a level that few homeowners could grasp the issues. They must have viewed the news accounts of these debates as a sporting event, whose outcome is very uncertain.” According to the Case-Shiller-Thompson survey, where are prices going?
“Perceptions of where prices are headed turned more positive and expected short-term appreciation in home prices improved in 2012,” they found. “But, at the same time, long-term expectations continue [to] weaken. Thus, while a recovery may be plausible and home prices have been rising fairly strongly in recent months, we do not see any unambiguous indication in our expectations data of [a] sharp upward turning point in demand for housing that some observers, and media accounts, have suggested.” Price and value expectations, according to a separate study, are only one part of the equation, and buyers can easily be influenced.
Projection Bias
Meghan R. Busse of the Kellogg School of Management at Northwestern University, Devin G. Pope of the Booth School of Business at the University of Chicago, Jaren C. Pope of Brigham Young University, and Jorge Silva-Risso of the School of Business Administration at University of California, Riverside studied what they called “projection bias” in homebuying decisions. “Projection bias,” they wrote, “refers to … the adage, ‘never shop on an empty stomach,’” which, they said, is “a caution against projection bias: consumers are likely to over-predict the degree to which their future selves will appreciate the purchases that their current selves crave.”
In their study, they developed a methodology that enabled them to estimate the value that certain house characteristics (e.g., a swimming pool or central air) have at different times of the year by looking at two different sales for a single house while also controlling for variation in overall housing trends across time and space.
“We find evidence,” they concluded, “that a swimming pool adds more value to a house that goes under contract in the summertime than it adds to the same house that goes under contract in the wintertime. Specifically, a house with a swimming pool that goes under contract in the summertime sells for an average of 0.4 percentage points more than the same house when it goes under contract in the wintertime . . . Projection bias predicts that consumers will overvalue … housing characteristics (e.g., swimming pools) when the weather is warm at the time of purchase.”
(They also studied projection bias in auto purchases and found similar projection bias. The choice to purchase a convertible, a four-wheel drive, or a black vehicle is highly dependent on the weather at the time of purchase.)
“From a policy perspective,” they said, the results “suggest that consumers would benefit from laws designed to help them better evaluate their decisions,” providing for a “cooling-off period” for certain purchases. While the Federal Trade Commission has an explicit cooling-off period for some transactions, it does not apply to real estate.
Case, Shiller, and Thompson found “long-term expectations have been consistently more optimistic than short-term expectations across both time and location, but the magnitude of the differences fell from a high of 8.3 percent in 2008 to just 0.8 percent in 2012.”
Powers of Persuasion
Expectations and projection bias are also affected by confidence. Anat Bracha, an economist in the research department at the Federal Reserve Bank of Boston, and Julian C. Jamison, a senior economist at the Federal Reserve Bank of Boston, looked at whether the recent U.S. housing crash affected individuals’ confidence in homeownership. During the Great Recession, they noted, the value of residential real estate fell by more than $4 trillion in 2007 and 2008, but nonetheless a Pew Research Center survey of 2,000 U.S. adults in March 2012 found, surprisingly, that 37 percent still strongly agreed that “buying a home is the best long-term investment a person can make.”
Although homeownership has fallen since the crisis, they say it is, “nevertheless remarkably stable: the homeownership rate fell from 69.2 percent at its apex in mid-2004 to 66.5 percent at the end of 2010. . . . Given the drop in real estate values, the persistent belief in the value of homeownership seems to reflect attitudes that go beyond financial rationales.” They looked at several datasets to match ZIP-code-level declines in housing prices and foreclosures with responses to questions that were added to the monthly Michigan Survey of Consumers and found a surprising result.
“People who in 2008 lived in ZIP codes that were hardest hit by the crash in housing prices—as compared to those who resided in areas that were least severely affected—are significantly more likely to be confident about owning a home if they are older (above 58 years old in our sample) but are significantly less likely to be confident about owning a home if they are younger,” they said. These results were skewed by whether respondents had a first- or second-hand experience related to the housing crash and whether they or someone close to them actually lost a large amount of money in real estate during the crisis.
“Merely possessing information about an adverse event is not enough to change behavior—rather, something like direct experience is required to change an individual’s confidence in homeownership,” they concluded. “People who did not personally suffer a loss from the housing crash or know someone close to them who did do not show a similar divergence in confidence.” But, they cautioned, real estate prices mainly had a negative effect on younger individuals’ confidence in buying a home while the drop in house prices led to more confidence in the financial soundness of buying rather than renting a home among older individuals.
“Older individuals have a fixed set of beliefs and interpret the crisis as a temporary decline from a known trend,” according to Bracha and Jamison. “Younger individuals who personally experienced the recent drop in house prices tended to have lower confidence in buying a home, a finding consistent with the idea that their beliefs are still flexible and can change over time.”
Whether young or old, a first-time homebuyer or an investor in many properties, the age-old adage of “perception is reality” rings true. In the end, what it really comes down to—no matter the market cycle—is the mindset of the American consumer. Without confidence and conviction, the market is certain to plod along no higher than it is now, but return those sentiments to the public psyche, and the market is poised for a measurable rebound.
Perception isn’t reality. Reality isn’t just what we perceive it to be. Facts are either true, or not. It’s either a good time to buy, or not.
And how do we perceive reality in its multitude of fractious elements? By a cold, hard, logical reading of economic fundamentals. But, do most buyers do this? Not so much… They predominantly use their intuition and personal experiences as their own reality filter. Which is not bad within their own personal sphere, but fails to extrapolate and encompass the housing market as a whole.
Other buyers see what they want to see — unable to rise above their own self-interests and see the forest for the trees. These are the buyers I feel the most for, but also the least for. On the one hand they are most likely to fall for a realtors siren song; on the other hand, they really should know better.
The collapse of the Chinese housing bubble will be a case study in market psychology. The few remaining potential bagholders are realizing the game is over, and they aren’t willing to become the greater fool. Perhaps they represent the mythical pent-up demand economists fantasize about, but with the supply that’s going to hit the market when sellers panic, no amount of pent-up demand is going to absorb it.
China’s Property Slump Worsens
NINGBO, China—China’s property slump is deepening despite growing government efforts to give home sales a lift, adding to concerns over the health of the world’s No. 2 economy.
Cities ranging from Tianjin in the north to Nanning in the south—Ningbo lies in between—have eased government restrictions on home buying and lending for purchases in recent weeks. The central government is also helping, entreating banks this month to lend more.
Authorities hope to reverse a downturn that has led to a 9.9% nationwide drop in housing sales by value in the first four months of the year, compared with a year earlier. Construction starts for housing have fallen 24.5% over the same period.
They are aiming to lure back buyers such as Ye Zhengwei, a 29-year-old branding consultant in Ningbo. But Mr. Ye isn’t biting.
“I wouldn’t buy another home even with the loosening of restrictions,” said Mr. Ye, who bought his first apartment in 2012 for 14,000 yuan ($2,250) per square meter. Now, a developer is offering a comparable home nearby for 25% less.
“I’m a victim of oversupply,” Mr. Ye said.
Market watchers are awaiting figures for May to see whether the slump deepens or shows signs of moderating. China Real Estate Index System, a data provider, is expected to release May price figures for 100 Chinese cities this weekend.
Property developers face a view among consumers that Chinese real-estate prices have peaked. Potential buyers are holding off on purchases. Summer Fan, a 29-year-old Ningbo civil servant, has tried for three years to sell her two-bedroom investment property to buy a new apartment near a good school for her 3-year-old son.
“My last offer was 800,000 yuan” nearly a year ago, Ms. Fan said. “I regret not selling then. I hope the market recovers soon.”
I’m seeing the exploding Chinese property bubble first hand. Chinese buyer is paying $740,000 for a new home in So. Cal that is selling for $517,000. Buyer is putting 50% down on 2 units (paying $740,000 for each house, when the asking price is $517,000!!) Buyer is “IN URGENT NEED TO CLOSE….NOW!!!” that’s what they told the agent/builder. yes, the 2 homes are model homes with some nice furniture and updating, but nobody should be willing to pay $223,000 OVER asking price, that is just crazy. It will be VERY interesting when the Chinese property bubble fully pops, that is going to seriously affect our CA real estate market. Foreign buyers make up 80-90% of the buyers in some of our major cities.
Five Reasons The Housing Market Is Failing
By now the housing market was supposed to be booming. Combine a growing population, low mortgage rates, years of pent-up demand, fewer foreclosures, lower unemployment plus a generally-better economy and the stage should be set for a very nice real estate lift-off.
It hasn’t happened — and the result may be very good news for buyers and investors.
“After a decade of boom-bust-boom,” explains Bloomberg Businessweek “the U.S. housing market is going downhill just when many economists thought it would be heading higher.”
“Some growth was inevitable after sub-par housing activity in the first quarter,” said Lawrence Yun, chief economist with the National Association of Realtors “but improved inventory is expanding choices and sales should generally trend upward from this point. Annual home sales, however, due to a sluggish first quarter, will likely be lower than last year.”
Here’s another term for “improved inventory.” It’s called “more unsold homes.” There’s now a 5.9-month supply of homes for sale versus 5.2 months a year ago and total existing home sales for 2014 are expected to be lower than last year.
With so many bright signs in the marketplace why have home sales stalled? Let’s look at five possible reasons.
First, we’re not as cuddly as we used to be. Household formations are down.
“Over five years during and after the 2007–09 recession, the number of households established in America plummeted by about 800,000 a year from the previous seven years,” according to the Federal Reserve Bank of Atlanta. In other words, four million additional household have not formed, a huge problem because new households have traditionally been a major source of first-time buyers. Imagine how different the real estate picture would be if household formations were at normal levels and we had an additional 200,000 sales per year.
Second, fewer of us are entering the real estate marketplace.
According to NAR, first-time buyers represented 29 percent of the market in April. That sounds like a lot but traditionally first-timers make-up about 40 percent of all buyers.
The lack of first-time buyers breaks an essential link in the usual chain of real estate sales. First-time buyers typically purchase entry-priced homes. The sellers of such properties can then move-up to bigger-and-better homes. In turn, the owners of bigger-and-better homes can then move-up to even larger and more wondrous properties but without the usual level of first-time purchasers a lot of entry-level homes take longer to sell or never come to market. The result is fewer move-up buyers and a weaker overall marketplace.
Third, the impact of the foreclosure meltdown is not over.
“Contrary to the claims of many observers that the recent rise in housing prices is solving the nation’s foreclosure and related economic crises, millions of families continue to face financial devastation from which many may never recover,” says a new report from the Haas Institute for a Fair and Inclusive Society at UC Berkeley. Entitled “Underwater America,” the report also explains that the financial sting from millions of foreclosures has not been equally shared.
“For African Americans and Latinos specifically, between 2005 and 2009, they experienced a decline in household wealth of 52 percent and 66 percent, respectively, compared to 16 percent for whites,” according to the study.
Fourth, lower mortgage rates have not helped sales.
The usual understanding is that lower mortgage rates are the surest path to more home sales. Drop mortgage rates, affordability soars and it becomes easier to qualify for a loan at every income level.
There’s no doubt that mortgage rates are soft and mushy. They’re not down to the historic lows seen in 2012 but they’re not far off. The result has been a huge rush to refinance during the past two years, good news for borrowers but perhaps not so good for real estate sales.
With mortgages locked-in at low rates through refinancing many borrowers are loathe to move and get a new loan at today’s relatively “higher” mortgage levels, rates that are higher than in 2012 and early 2013 but rates which are also ridiculously low by historic standards.
In a sense, the historic low rates may well have created a large number of “captive borrowers,” individuals who now have a huge hedge against inflation in the form of long-term fixed rates and not much incentive to give up their current financing.
Fifth, new home builders have missed the mark.
With household incomes down it follows that a lot of would-be buyers are not looking for “starter mansions” and yet builders continue to churn out massive homes with big price tags.
“The average home size has continued to rise for the past four years, from 2,362 square feet in 2009 to 2,679 square feet in 2013,” said Rose Quint, assistant vice president for survey research with the National Association of Home Builders.
More interior acreage equals higher costs: The typical existing home sold for $201,700 in April, according to NAR while the home builders explain that “as homes get bigger, so does the average sales price, rising from $248,000 in 2009 to $318,000 in 2013.”
In a news release, NAHB reports that “sales of newly built, single-family homes rose 6.4 percent to a seasonally adjusted annual rate of 433,000 units in April, according to newly released data from HUD and the U.S. Census Bureau. The gain builds on an upward revision of sales numbers reported for the previous month.”
Sounds great. Oh, wait, here’s what else HUD and the Census Bureau said: April new home sales were 4.2 percent lower than a year ago.
The Bottom Line: Foreclosures and short sales remain in good supply, mortgage rates are low and because a lot of people are not buying prices nationwide are soft, vacancies are generally down and rents are generally up. That’s about as good a formula for buyer success as can be had.
Study: Housing ‘Recovery’ is Bypassing Many American Communities
Despite claims that the recent rise in housing prices is solving the nation’s foreclosure and economic crises, millions of families continue to face financial problems from which they may never recover, according to research from the Haas Institute for a Fair and Inclusive Society at the University of California, Berkeley.
In a new report, “Underwater America,” the group found that in 57 cities, at least 30 percent of all mortgaged homes are underwater, with nearly 1 in 10 Americans (28.7 million) living in the 100 hardest-hit cities.
Communities of color are disproportionately represented in the 151 ZIP codes studied by the group, with at least 50 percent of mortgaged homes underwater, according to the Haas Institute’s report.
In 71 of the 100 hardest-hit cities, the group found that African Americans and Latinos account for at least 40 percent of the population.
“Despite home prices rising in many parts of the country, the total value of owner-occupied housing still remains $3.2 trillion below 2006 levels. Despite rising home prices, there are still some 9.8 million households underwater, representing 19.4 percent of all mortgaged homes—nearly one out of every five such homes,” the group found.
The Haas Institute’s report found that the legacy of predatory lending has resulted in a “disproportionately negative impact on African American and Latino Communities.” The group found that from 2005 to 2009, African Americans and Latinos experienced a decline in household wealth of 52 percent and 66 percent respectively, compared to 16 percent for whites.
The disparity is attributed to homes being the largest portion of the two group’s wealth, which declined from a disparate level of foreclosures against minorities. “Homeownership constituted 92 percent of the net worth for African Americans and 67 percent for Latinos, compared to 58 percent for whites,” researchers said.
The eleven states with the highest number of hardest-hit ZIP codes are (in order): Georgia, Florida, Illinois, Michigan, Ohio, New Jersey, Maryland, Missouri, California, Nevada, and North Carolina.
The group offered recommendations to help improve the current housing problem for minorities, including encouraging loan holders to reduce the principal on underwater mortgages to current market values and if they are unwilling to do so, then allowing underwater mortgages to be purchased by publicly-owned or nonprofit entities that are willing to restructure them.
Additionally, local municipalities should reset mortgages to current market value, and encourage banks, Fannie Mae, Freddie Mac, and investors that own vacant, foreclosed homes to sell them to publicly-owned or nonprofit entities that can convert them to affordable housing for the local community, in lieu of selling the foreclosed properties to speculators.
The group also recommended taking vacant, foreclosed homes and turning them into affordable housing by using “reverse eminent domain” to acquire properties.
[…] Developers profit from the poor through affordable housing programs You commission a study on how poor poor-people are and don't forget to push as many emotional buttons as you can. Whenever a … To keep rent at an manageable level, which has generally been considered 30 percent of income, Angelenos would need to make … Read more on OC Housing News (blog) […]
First, there’s not a single county in the United States where someone earning minimum wage can afford a two-bedroom apartment (and a single mother needs two bedrooms), so the problem of affordable housing is not limited to California. Or even the United States. Second property owners receive many subsidies–zoning being one of the more important–that increase the price of housing. In California Prop 13 gives homeowners rent control, in that they don’t have to pay the full cost of providing them services. (It also perversely encourages the construction of very expensive housing, and encourages local communities to zone for office and retail space, since those bring in more money and cost less to service.)
Also labor is an unusual commodity, as Adam Smith recognized more than 200 years ago, in that its price can fall below the cost of (re)production. Unlike other commodities, which go out of production, humans can only go out of production one way, and I can’t think that you are advocating that.
Finally capital can move easily from country to country, while labor can’t. I doubt that China would want to take in our tired, our poor etc., even if if would fill up empty cities.
A single mother should be getting child support, right? Where is the father? Why do I have to pay to house some miscreant father
s children because he can’t live up to his responsibilities? Also, earning minimum wage, I imagine this family also receives food stamps, and the earned income credit. What about this single mothers parents? Where are they in this situation? Or a brother or sister that could help out? Is the family structure completely broken down in these neighborhoods? What would these people do if there was no nanny state to support them?
And, why does she need a two-bedroom apartment? We are talking survival here, not comfort. There are many countries in the world where entire families share one room, and they are happy to have it. She should think outside the box. Maybe shared housing would give her some extra money. For low-income individuals, there are rafts of money floating downstream to pay for education. All they have to do is get on.
The China segment was pure satire. The logistics alone make this a non-starter.
As for homeowner subsidies, I’m against these too. But, if these are to be eliminated, then the entire progressive tax-code needs to be reworked based on ability to pay based on area COL, not income alone. Prop 13 took a good idea (limiting taxes) and wreaked havoc on later generations.
The MID is necessary to balance tax rates between high-cost areas and low-cost areas since 100k income is not the same in Los Angeles and Las Cruces. The ability to pay is the cornerstone of progressive tax theory; but what if the ability is not the same due to higher COL?
I have no idea what you are saying regarding Adam Smith. Labor can become obsolete by innovation. Thank goodness! In Wealth of Nations, Adam Smith describes how a single man can make 20 nails in one day. By division of labor, 10 men can make 2000 nails in one day, or a factor of ten increase in productivity. By automating the process, a crew of 5 can operate and maintain a machine that produces a million nails a day (ignoring the labor that went into producing the machine, of course). So, instead of taking 1,000,000/20 = 50,000 men, only 5 are now required. Assuming it takes another 1000 men to produce the machine, we are still far ahead by automating.
It’s been a while since I read Wealth of Nations, but I believe that Adam Smith was saying that the minimum amount labor will cost is based on the workers expenses: shelter, food, wife, 2 kids, their education, etc. Any less than this is unworkable long-term. They simply won’t be able to maintain the level of skill requisite for the job if they pay less. This is the market setting mechanism of wages. Minimum wage laws try to set the wage rates above this minimum. If wages fall below the natural minimum allowed to maintain the performance of the worker, then production will suffer. This is bad for everyone. Thus an optimum wage/performance ratio is reached. When labor in short supply wages rise. When there is an overabundance of labor wages fall to the minimum required to sustain the worker.