In the wake of recent news about skyrocketing foreclosures in Massachusetts, ‘BUR had an ominous interview with housing scholar Barry Bluestone this morning. Bluestone calls our current situation “the perfect housing storm” — and thinks it’s the single biggest economic challenge facing the state.
Now, losing home equity is bad for the economy, no doubt; but so are frothily inflated home values, which drive away those young families that drive a healthy economy. So there may well be a silver lining, if Massachusetts somehow becomes cheap enough in relation to other places competing for the same folks. But that’s not happening yet, since current homeowners are keeping homes off the market, waiting for values to rebound.
On the public policy front, it’s a really difficult position. As Harvard’s Ed Glaeser has said, “If we think housing prices are too high, I think that means we want them to go down.” Should the state deregulate/subsidize new housing to such an extent that the market stabilizes at lower prices than we’ve seen? That’s a more stable and sustainable condition: Bluestone himself has found that prices stabilize — lower peaks and shallower troughs — as housing supply increases. We’d again attract those very families we’ve been losing, along with those businesses that want to employ them. Furthermore, there would be a local economic boost when people start spending money in their communities that otherwise would have gone to mortgage companies.
And yet … Massachusetts has a home ownership rate of some 65%. Does any politician have the stones to tell 65% of the population that their property’s value is dangerously over-inflated? That the forces that have given them so much equity are hurting the rest of the economy? How do we get beyond pull-up-the-drawbridge politics, and start to make this state a genuinely family- and business- friendly place again?
Foreclosures fell 8% in September. Too early to know if this is a trend.
They’re 2 1/2 times higher than 2006. So I’ll stick with “skyrocketing” as my cliche of choice.
that’s a national #.
…became frightened by the amount of inventory (number of houses) that they might be stuck with if they foreclosed on all of the houses at once. Mortgage brokers don’t want to own houses that they can’t sell, they want money.
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The downward spiral will continue for a while. This is not particularly dissimilar to 1987-88–potential buyers are holding off buying until the housing market appears to have hit bottom.
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One observation: are rental rates also receding as rapidly as housing prices? If not, it is probable that renters are waiting for the housing market (purchases) are waiting.
Considering that we have an aging population and the aged don’t seem to desire to live here, they will be forced to part with their home ( and its attendant equity) one way or the other.
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There are many forces working here. My children, as well as others, don’t seem to want to begin in a “starter” home as I did—and just about everyone else in my age group.
The “big house and big yard” right off the bat. Ergo high housing costs, resultant mortgage and taxes require two incomes. The cost of housing then rises because there seemed to be no threshold where folks said no. They kept on reaching for the brass ring. “Creative” loans etc. Then the bubble burst. I guess you gotta take the good with the bad and wait and see. This is not the first time this has happened. Approximately 1993 you couldn’t get a job in Massachusetts if you had a thousand bucks in your hand and a masters degree. Houses were real cheap, because our economy was on its way into the tank— and it did tank around 1997. You could buy a beautiful house—almost a mansion for $50K.
You mean 1977, not 1997, don’t you? If so, you also had the joy of an 18% mortgage to go along with that housing price. I really don’t recall any mansions @ $50k in ’95 when we finally bought our first house (unless it also was doubling as a crack den).
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The last bubble was the mid to late 80s; much of the condo market at that time was investor-driven. Changes in the tax law (TRA ’86) cut the legs off of the investor real estate biz, then was finished off by the ’90-’91 recession around here. Had too many friends in the early 90’s who couldn’t refinance their 11% mortgages as the market value of their house was less than their outstanding loan. Probably going to see that happening again around here, although unless they were mathematically challenged at closing probably are at decent interest rates on their mortgage.
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Certainly housing prices have boomed in the last 4-5 years in MA (although it is cool as heck right now – any prognosis you hear from NAR et al about the rebound being around the corner is just whistling past the graveyard). However, unlike the last time, the investor/flipper angle is much less pronounced in MA, unlike several other areas in the country (AZ, FL, to name a few). One thing that Greenspan has been alluding to (and was complicit with) was the depression of long-term rates after 9/11 to keep the economy collapsing. Unless you’re paying cash for your house, the far more important factor in housing cost is the mortgage interest rate. This certainly helped the runup in prices as they could easily be absorbed by lower rates.
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However, as my old prof Charles Kindleberger wrote about in Manias, Panics, and Crashes, bubbles aren’t sustainable. We will have to go through the excesses that developed over the last few years (although at least the blowup in the subprime market won’t have to be picked up, or better not be anyway, by the US Government, since they were securitized in the private markets, rather than banks and S&Ls.)
I also can’t buy a house. I’d have no problem buying a “starter home” if that meant I’d: a. Pay less than $400,000 for it and b. I didn’t have to move to North Adams to find one for the right price.
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It seems to me that problem is that a given housing market takes a good long time to correct. In the strictest sense, a home is “worth” what someone else will pay for it. When the little tiny cape across the street from me went on sale, I looked at it and thought, “Now there’s a house I would pay $325,000 for.” Know what they wanted for it? $550,000. So, there’s a disconnect between buyers and sellers right now.
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Homes are leveraged to the point where people are paying mroe for them than they can afford. People sell high because they have to: 1. buy another place high, and 2. pay off their own mortgage when they sell. But, as a young buyer (a “young” buyer – I’m 32), I’m in no rush to double my monthly allottment for housing for a place I actually like less than my apartment.
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Until people pay mortgages down to the point where they can sell for what we’re willing to pay, then things will remain the same.
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In the strictest sense, a home is worth what someone else will pay for it and for what the owner will sell it, when those two numbers are equal.
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If you’re the high bidder on that Cape house at $325,000 and the owner won’t sell, it’s worth more than $325,000. After all, there exists a person who’d rather have the house than $325,000. When an item sells, you can put a price point on it, but it’s worth still isn’t set in stone since there may be consumer surplus and producer surplus.
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And remember, you’re a young buyer not in a rush to leave your apartment, which may explain why your price point of 325k isn’t the highest around — there may be someone willing to give 0.55 million dollars for that house, it just ain’t you. That may be the actual disconnect.
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It doesn’t seem tobe anyone else, either, seeing as how houses are sitting for longer and longer. Yeah, that house eventually sold (I have no idea whether they got their $550K), but that one buyer they were looknig for took a long time to show up. Hence, the overall state of the housing market, and the reason for this discussion.
I know it’s probably heresy on this board to read the Wall Street Journal, but today’s edition has a great article on the subprime mess (subscription required for Web access). Thought this was a great quote
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“We had an aggressive home-mortgage industry trying to get people into homes they couldn’t afford at a time when home prices were very high. It turned out to be a house of cards,” says Karl Case, an economics professor at Wellesley College. “We’re in the early stages of the cleanup.”
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If you have a chance, read the article.
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<url=http://online.wsj.co…
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The subprime loan debacle is not confined to low-income borrowers when you look at the data.
… of the WSJ but progressive opinions I value report to me that outside of the editorial and opinion pages, the actual reporting staff is excellent (and often reports facts contrary to the paper’s own op-ed page… sometimes in the same issue).
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Of course now Murdoch has his hands on it and we shall see.
…the London Times after he bought it.
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He isn’t really a journalist; he’s a marketer.
… but the reason his papers in other countries are considered liberal is because the establishment is liberal and he uses that to garner good relationships with power for leveraging all future exploits. That is why in the US Fox leans right. As such, there is a danger that he’d take the WSJ (the reporters, he already has the editorial board) there too.
…it should be acknowledged that Murdoch’s main claim to fame is in seeing opportunities and taking advantage of them. A couple of examples. Murdoch owns not only the London Times (and has not changed its news reporting particularly much), but also the Sun (a titty tabloid, and he has not changed its tittiness particularly much).
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In years past, he supplied his Sky “news” channel to cable services, including in Germany. It was an English language competitor to CNN International out of the UK. It was not as silly as the Faux News Channel–actually it was quite moderate. Apparently, it didn’t work out very well, and it isn’t on our cable service now.
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Regarding Faux News, pretty much irrelevant. The Fox entertainment network broadcasts programs that pretty much lampoon the knuckle dragging Faux News viewers. Have you seen Family Guy or American Dad recently?
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While the editorial board is dismally conservative (and often wrong) the rest of the WSJ ranks among the finest in the country.
Don’t tell them their houses are overpriced.
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Build more houses, increasing access to Massachusetts.
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Few, if any, will make the connection… if you can say there’s a connection at all. (We need more affordable housing, after all, regardless of housing prices.)
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One of key things, though, is to stop all these McMansions and $350-500k condos that really aren’t helping the situation. We need to create policy that will nudge developers to build affordable homes and condos for young families, which means they’re going to have to go for closer to 200 than 300k on the market, with at least 2 bedrooms.
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We already have some of this policy with affordable housing waivers, allowing developers to bypass many town regulations if they have a percentage of affordable housing units. However, the standard is way too low at about 10-15% of affordable units, with the rest being mega-luxury housing that cost way more than most of the market. If we demanded these units have 25-35% of their units be affordable, it may be enough to actually help the economy.
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Finally, I remember reading this in a Globe article a long while back, but a real estate market collapse is so much more likely if there isn’t new development. New development sustains housing markets: if desired real estate locations are so expensive that no young families can afford them, they’ll just go somewhere else. That means, because of a high demand, those prices keep rising… but soon, no one’s looking to actually move there, content to leave somewhere else. The market doesn’t even dip, so much as it dives. I think we’re on the verge of seeing that here.
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So, Charley, I guess here’s another anwser to your question: how do you tell families that we’re going to create policies that could, sort of, perhaps, maybe, hurt their property values a little, tiny bit? Tell them we’re helping prevent their values from crashing. I really don’t think more affordable housing would even hurt property values, though, if done in a smart and reasonable way.