A 50% fall in house prices helps buyers later but hurts others now?
Housing+credit crisis crunches jobs, incomes, and looks to worsen.
| We abridge four 2007 articles forecasting hard times as home+sites' price peak proves unsustainable. "Recession Time! The Housing Bubble Bursts the Economy" by Dean Baker, co-director of the Center for Economic and Policy Research and author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer at Truthout (11 Sept); "Pending Home Sales Index Hits Record Low" by Alan Zibel of the Associated Press in the Washington Post (Oct 2); "The banker predicting house prices to halve" by Lucy Farndon in the Daily Mail (13 Sept); and an email from colleague Dr. Michael Hudson of U Missouri - KC, recently named economic advisor to US presidential candidate Dennis Kucinich. |
by Jeffery J. Smith
October, 2007
Baker (for whom jobs seems to trump leisure): During the eighties and nineties, the economy lost jobs during three months; in two of those, there were major strikes. Now, mortgage banking is laying off more than 50,000. Construction and real estate will also see sharp declines in employment in the months ahead.
For millions of low- and moderate-income homebuyers, interest rates are resetting to levels they cannot afford. Subprime mortgages accounted for one-fourth of all mortgages issued in 2006. The equally troubled Alt-A mortgage category accounted for another 15%.
Prices of house+sites in cities that had been the hottest bubble markets, such as San Diego, Las Vegas, Phoenix, and Miami, are declining at double-digit rates. Prices in slightly less bubbly markets, such as New York City, Washington, DC, and Boston, are falling at single-digit rates. As the housing bubble of $7 trillion disappears, homeowners consume less, leading to more job losses.
Zibel: An index that forecasts near-term home sales fell in August -- 6.5% from July and 21.5% from a year ago -- to 85.5, the lowest ever for the index, which started the first of 2001. A reading of 100 is what sales activity was in 2001.
With defaults rising among borrowers with weak credit, lenders in August backed off from all but the safest customers. So would-be homebuyers had difficulty getting mortgages. In some areas, up to 30% of signed contracts fell through.
JJS: While many think of the housing market as local, it has gone global. The US Federal Reserve influences lending rates everywhere and global capital seeks returns in every lucrative local market. It’s only a matter of time before the hinterlands catch up to the financial centers.
Farndon: One senior director at a FTSE bank (in the Financial Times Stock Exchange top 100) actually wagered that, at some point over the next three years, UK house prices will have fallen by 50% from the level they are at now.
Hudson: In 2000, the median home in the United States cost about $130,000 -- about three times typical household income, which is what it was back in the “golden age” of the 1960s. The ratio was quite steady for over thirty years. Since 2000, the typical home cost 4.5 times normal income.
Houses were over-mortgaged by issuing “junk mortgages” much as junk bonds were issued and packaged in the 1980s (and by the same Wall Street investment bankers, minus Drexel Burnham to be sure). The creditors, the upper 10% lending to the bottom 90%, have a no-lose game. They lend money to enable people to buy homes, but more people hunting for homes bids up the price of housing (as corporate raiders bid up stock prices), forcing new buyers to borrow yet more!
People who had paid off their homes now fall back into debt. In 2001, 10% of households headed by someone 75 years old or more had mortgages; three years later the number had almost doubled. Among households headed by someone between 65 and 74, in 1992 19% had a mortgage on their primary residence; in 2004, over 32%.
Although house prices have tapered off, interest rates are unlikely to slow. The September Fed cuts in the discount rate benefit banks and large borrowers -- but not homeowners. Mortgages are now seen as requiring higher long-term premiums, given accelerating price inflation of goods and services for consumers as the dollar weakens against the euro, sterling, and other currencies; already fuel and electricity prices are rising. So with shorter maturities and higher interest rates, debt service is likely to rise as a proportion of household income, even if house prices stabilize or drift downward.
Government could lower the price of land beneath homes -- and thereby lower the amount homebuyers need to borrow -- by taxing land; as the tax on land rises, the price on land falls. Shifting the property tax would entail a sharp shift in public policy; local governments in 1930 raised 80% of state and local budgets from taxing property but today just 16%.
---------------------
Jeffery J. Smith runs the Forum on Geonomics.
|
Also see: The “Crash of 2007-8” is underway -- and the Fed is our pilot
Will There Be a Recession?
Economic Inequality Is Real (Bad) |
| Email this article | Sign up for free Progress Report updates via email |
What are your views? Share your opinions with The Progress Report:
| Page One | Page Two | Archive |
| Discussion Room | Letters | What's Geoism? |
