But what is it like?
Like I said, I’m watching the sub-prime market collapse with a lot of interest. I don’t know what to make of it. My primary interest, as always, is: what will it be like? I can imagine the personal side of it, from signing a loan that you maybe don’t trust but really, really want to believe in to the bills coming due to the horrible dread of foreclosure to the relief when that is at least over to the shameful moving back in with someone who will take you and your kids all sharing a room again. I can imagine that complete cycle. But I don’t entirely understand what it means for the houses. What does it mean that people cannot sell houses, that there are multiple for-sale houses per block in new construction neighborhoods. What does it mean that houses are sitting empty? That is going to be trouble, right?
I have always lived in California. In my world, housing is always in demand. When I first heard about empty houses in Detroit and Philadelphia, I was staggered. Houses that weren’t worth a lot? Abandoned houses? I don’t understand abandoned houses. How could one walk away from A HOUSE? What is that like, when there are empty houses all around. If you’re a teenager, you would break into them, right? I would totally break into them, were I still teenaged. Are they eyesores? If you couldn’t sell your distant house and it broke your heart anyway, how would ever work up the responsibility to tend that house while you were assembling your post-house life? If you’re a bank, would you let people live in the foreclosed house? No, that is just a hassle if you’re a bank; banks want to manage money, not real estate. But then there is all the utility of that house just sitting there, doing nothing. Why don't squatters just move into them, and rebuild a neighborhood? Can that work?
Margie says that all the prices on all those overdeveloped new construction neighborhoods will fall and fall until people can afford them for real, instead of with the fake money they used to buy houses during the bubble. Who are these people? Are they the same poor people who got taken the last time? Are they lower middle-class people with better credit than the last time? Does having a stock of empty houses mean that people can shift (up?) to the average-ish empty house?
How does the money flow in all this mess? Is having lots of empty new homes a transfer of wealth from developers to homeowners? I’m all for that. Are taxpayers the ultimate backstop for indemnifying the subprime industry? That is a bummer. I would rather that people never had the expectation they could live nicer than their means in the first place. Although, we collectively sell all Americans the dream of homeownership and consumerism, so maybe we collectively should bail out the people who respond to that dream in predictable ways. Or are we bailing out scummy sub-prime mortage brokers? ‘Cause if they’re the Orange County slicksters I think they are, I’m happy to let them rot. Are construction peoples hurt? I don’t want laborers to get hurt, but I also don’t want to support a construction industry that depends on constant growth. Remember that a voluntary population contraction and dense, well-designed cities is my goal for us. So I want a construction industry that is sized for maintenance, not constant growth.
Basically, I don’t understand this well enough to do what I’d love, which is to find villains and think bad thoughts about them. I have one fear, and that is that climate change will interrupt this cycle before those outer ring housing developments are filled again. In some ways, that is great. People can only live in the deserts of Santa Clarita and San Bernardino if energy is cheap enough to transport them to jobs and water to them. Those cities cannot last under other conditions, and I think other conditions are coming. So if those developments aren’t filled, that is great. Fewer people to contract. But I’m back to where I started, because I do not understand those empty houses. Will they just stand in the desert if energy prices go up and water is scarce? That strikes me as a really crappy way to store our stocks of concrete and timber and granite countertops. I would have preferred those to be stored as cement and trees and in quarries, where is cheaper to retrieve them.
Anyway, folks, if you have a clear vision of what this looks like, I am interested. How does a housing bubble bust show up in my/our daily life?
10/6/7: A decent description.
I have always lived in California. In my world, housing is always in demand. When I first heard about empty houses in Detroit and Philadelphia, I was staggered. Houses that weren’t worth a lot? Abandoned houses? I don’t understand abandoned houses. How could one walk away from A HOUSE? What is that like, when there are empty houses all around. If you’re a teenager, you would break into them, right? I would totally break into them, were I still teenaged. Are they eyesores? If you couldn’t sell your distant house and it broke your heart anyway, how would ever work up the responsibility to tend that house while you were assembling your post-house life? If you’re a bank, would you let people live in the foreclosed house? No, that is just a hassle if you’re a bank; banks want to manage money, not real estate. But then there is all the utility of that house just sitting there, doing nothing. Why don't squatters just move into them, and rebuild a neighborhood? Can that work?
Margie says that all the prices on all those overdeveloped new construction neighborhoods will fall and fall until people can afford them for real, instead of with the fake money they used to buy houses during the bubble. Who are these people? Are they the same poor people who got taken the last time? Are they lower middle-class people with better credit than the last time? Does having a stock of empty houses mean that people can shift (up?) to the average-ish empty house?
How does the money flow in all this mess? Is having lots of empty new homes a transfer of wealth from developers to homeowners? I’m all for that. Are taxpayers the ultimate backstop for indemnifying the subprime industry? That is a bummer. I would rather that people never had the expectation they could live nicer than their means in the first place. Although, we collectively sell all Americans the dream of homeownership and consumerism, so maybe we collectively should bail out the people who respond to that dream in predictable ways. Or are we bailing out scummy sub-prime mortage brokers? ‘Cause if they’re the Orange County slicksters I think they are, I’m happy to let them rot. Are construction peoples hurt? I don’t want laborers to get hurt, but I also don’t want to support a construction industry that depends on constant growth. Remember that a voluntary population contraction and dense, well-designed cities is my goal for us. So I want a construction industry that is sized for maintenance, not constant growth.
Basically, I don’t understand this well enough to do what I’d love, which is to find villains and think bad thoughts about them. I have one fear, and that is that climate change will interrupt this cycle before those outer ring housing developments are filled again. In some ways, that is great. People can only live in the deserts of Santa Clarita and San Bernardino if energy is cheap enough to transport them to jobs and water to them. Those cities cannot last under other conditions, and I think other conditions are coming. So if those developments aren’t filled, that is great. Fewer people to contract. But I’m back to where I started, because I do not understand those empty houses. Will they just stand in the desert if energy prices go up and water is scarce? That strikes me as a really crappy way to store our stocks of concrete and timber and granite countertops. I would have preferred those to be stored as cement and trees and in quarries, where is cheaper to retrieve them.
Anyway, folks, if you have a clear vision of what this looks like, I am interested. How does a housing bubble bust show up in my/our daily life?
10/6/7: A decent description.
posted by Megan at 6:04 PM
23 Comments:
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I'll only attempt to answer a small part of your question.
"...Detroit...Abandoned houses...a teenager...break into them...Are they eyesores?"
The abandoned houses in Detroit are set on fire, typically the night before Halloween, but other times, also. Eyesores? Oh my, yes.
Beautiful, structually, three story brick houses all over the city: boarded up if they are lucky, otherwise burned. Often just a pile of bricks.
Nothing good about it.
A4
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As Margie notes, it's not so much a housing bubble (bursting), but rather a housing price bubble (bursting). So, houses for sale will cost less and probably sit on the market longer. Fewer new houses will be built because the construction projects will no longer be (calculated as) profitable. But most houses have at least some value, so people will still buy them. I don't know who those people are, but I suspect many of them have been saving their money waiting for this to happen.
You lived through the tech bubble bursting, right? What was that like? The housing bubble bursting will probably be less dramatic than that. Knock on wood.
The deleted comments above were moved to the open thread, except for a gratuitous compliment that violated the comment policy.
As a person who works in real estate near Detroit. I have a few thoughts.
Teenagers do break in to abandoned houses, all the time. I know this because not only have I seen it often, but I personally did it when I was a teen, fairly regularly in the summer. College students also visit a lot.
I don't think squatters are uncommon either. In places where a lot of abandoned houses are in the same place I bet its very common. But squatters will never "fix up the place" because it draws attention to their illegal residence. Cops watch abandoned houses (because trouble some teenagers and drug dealers frequent them)and they keep a list of the owners, even if they are far away. If a house is made nice, I predict the owner will come back and try to sell it again.
You'd be surprised how many people are willing to buy such houses though. Real estate investors love abandoned properties because they can usually buy them for pennies on the dollar, if they can track down the owner. Since the houses are usually in very bad shape the standard procedure is to sell it to a construction company (for something like 60 cents on the dollar) who will knock it down and put up a McHouse. Right now investors from all over the country are doing deals in Detroit, its considered among the hottest investing markets.
The bottom line is that the homes are being bought by investors, instead of families, but it looks like nobody is buying because the investors tend to buy mostly from houses that have been for sale for a long time, or are n longer listed at all, because these owners give them the best deals. More families rent, which drives rents up long term, but this has been a slow process because rents have been falling for most of the last decade and property owners are slow to realize the rise in demand.
Construction efforts will turn to more apartment buildings, which will help keep rent in check. Eventually rent will be high enough and homes will be cheap enough that the cycle will start over.
so I wrote this long, and probably inelegant reply, and it dissappeared into ether... so the short is, houses get abandoned because because the people that truly care, don't actually own them. Unless you have finished paying your mortgage M, the bank owns your house. If the extremity of your life required you to leave it, you would try to sell, but if it was worth less than you actually owed, then you would probably just take the hit and leave it.
For one person this isn't much of a problem. The bank takes it over, and sells it, potentially to their advantage.
On the other hand, if the livelyhood of the town goes away, and everyone has to leave, then there simply is no one to buy. Without interested individuals, things get run down, or trashed, and eventually everything is only worth the land it sits on, if that is worth anything.
IMHO, just like many other things in our culture, it takes a critical mass to get something started, and if a critical mass exists, things can be ripped apart as quickly. You mentioned builders and growth. I know many people who could build a house from scratch. I could too, but it would take forever. But if I asked them to build me a house, it would cost many times as much, simply because of the economies of scale. If you buy a gallon of paint it costs X, what happens if you buy a truckload? Same with sheetrock, same with granite countertops. If one guy is making custom granite countertops, it might take 6mo. for him to make one. He gets an order for 100 so he buys a machine, and now can make many, each individual falling in cost. And so forth. I'm a D-of-all-trades. I can do drywall well, but not professionally. If I build 100 houses, I hire guys that do nothing but drywall to do that part, not only fast but [potentially] better.
So. There is a critical mass needed to make it worthwhile to build a house. It's just maximization really.
But that's within our present circumstance. Long ago, when there was no mortgage industry, your family might have helped you build a house, and perhaps your parents would either give you land, or help you buy some. That was partly a self sustainig way of doing it, because everything was individual. It was also likely that you got a pair of shoes from a local cobbler. Because the economy of the entire world has changed since then, I would suggest that we cannot go back to that w/o a MAJOR meltdown, in society really.
As an overall function of life on earth, that might seem OK, but on the level of the individual? Yeah, carnage. Just like having your house foreclosed. The way credit is run today, a foreclosure or a bankruptcy not only nukes your credit, but it trashes your credit score. There are many things that use that score that have nothing to do with credit these days. Rent an apt.? If it's not from an individual, but a company, they'll probably look at that score. Get a job? same thing. Car insurance? yep.
The meltdown can be catastrophic. For those who don't have family to fall back on... living in your car becomes a frightening possibility. {I have friends that are in this boat for a variety of resons, so it's not theoretical to me.}
All that said, and the saddest part of all, is that there is no answer. Now that the Jinn is out of the lamp, and the subprime collapsed, it doesn't really matter WHY people tried to get those loans. If they took the hit, they mostly learned their lesson as an individual. Now it is just dealing with fallout, for the individual. For developers this is cyclical, and they will get through it, or go out of business. A lot of businesses fail. The interesting part will be how the cycle plays out among children. Will they never want to own homes, becuase they saw their parents struggle, and fail? Will they become even more likely to move around because they are not tied to a place? That may play out in the future, and THAT is quite a spiral. The more you move, the more a burden a house is. The more houses are sold as commodities, because people move so often, the more a blip in the economy dreails the whole thing. Perhaps we will get back to high density living after all, that way...
megan, feel free to move this comment as you wish.
to start with, the cardinal rule is that a mortgage should be no more than 2.5 times gross income. Now, compare median salaries in So.Cal. to median income and you will quickly find that housing needs to drop about 40% in large portions of LA, OC, Riverside and San Berdoo to become affordable.
next major point: billions of dollars of mortgages are inevitably going into default between now and 2010. People have adjustable rate mortgages that they simply cannot pay once the teaser rates reset over the next 2-3 years.
next major point: Housing prices are sticky. Banks hate holding REO (real estate owned), but they also hate slashing prices (undercuts the value of existing loans). However, between adjustments to fiscal policy and adjustments to regulatory policy, the federal government can to a certain extent control the rate at which prices will drop. Do you want a slow slide followed by a slow recovery, or a quick plummet followed by a return to normal growth? very hard question.
next major point: Many developers have lots of projects in the pipeline. At some point, no matter how fast prices are dropping, it's cost-effective to finish the house and get it off your inventory. So new houses are continuing to come on line.
next major point: Even so-called entry level developers like KB Homes have been building McMansions in recent years.
my conclusions: Core urban areas will do fine. They have lower turnover rates. Edge cities/communities like Natomas in the Sacto area are going to get slaughtered. New development simply will not sell. Builders will go broke and banks will have hard choices as what to do with large empty tracts. Housing prices will plummet and, under Prop. 13, homeowners will get their property re-appraised, lowering tax payments to already hurting local governments. McMansions may have to become multi-family housing, despite community resistance.
Also, as housing prices plummet and the fed govt extends some kind of relief to borrowers who can't pay their mortgages, borrowers who can pay will look at the house next door, which costs 40% less, and figure out that it's cheaper to walk away from the tiny amount of equity they have to get a substantially reduced mortgage. So once housing prices have cleared, we can expect a lot of sales of overpriced houses, further adversely affecting the purchasers of mortgage backed securities.
Where does it end? My bet is that LA, OC, most of Riverside and some of SB come through pretty quickly and OK, for the simple reason that people WANT to live here, and will return once prices fall. Lancaster / Palmdale and big chunks of SB may have many empty houses for long periods of time.
(A huge BUT. Water has suddenly become an enormous issue throughout California because a federal district judge by the name of Wanger has ordered massive reductions in Bay Delta pumping. The price and availability of residential water supplies, and the impact of the uncertainty on the housing crisis, are huge unknowns.)
cheers,
Francis
I wouldn't move that comment, Francis. It is exactly what I was hoping for when I was asking y'all to think it through.
I'm not quite sure if you would be interested, Megan, as this is only tangentially related, but here is an article (http://www.governing.com/articles/11cities.htm) about how Youngstown, OH, which has lost over 1/2 its population in 40 years, has adopted a strategy of managed shrinkage. This is in contrast to the typical response of old industrial belt cities, which is to embark on a series of white elephant projects to attract people and industries who will never come back.
t_n:
I saw something abut that a while back, and LOVED it. I was totally going to blog about it, but I don't know urban planning very well and I try to stick with what I know. But you were totally right that that would fascinate me.
I highly recommend Calculated Risk to everyone who wants to know more about what's going on in housing.
My short version:
Hundreds of mortgage companies will go (and are already going) bankrupt -- no more then they deserve, IMO, for some of the crap they put out.
People who bought more house then they could afford, and who are now or will soon be underwater in their mortgage and are facing a rate reset, are in deep doo-doo. Many of these people are flippers who deserve what they get. Many are first-time buyers that didn't read carefully enough or got bent over a barrel. These people -- we'll see, but I'm not so hopeful.
Builders keep building, even with declining prices and increasing inventory, because their balance sheets demand it. Many of them with go bankrupt, most of them deserve it.
In my area (PNW), the shiny new homes in the (sub,ex)urbs are standing empty and builders are giving away new cars(!) to get people to move in. Meanwhile, older homes in walkable neighborhoods are still appreciating (more slowly than before, mind you, but appreciating).
Eventually, prices on the new stuff will come down enough (either nominally or by inflation) that people will buy them and move in -- we're still growing as a population and in sq.ft./person -- that these houses won't stand empty forever. So yes, to a certain extent, the builders are subsidising new homes for buyers. Paid for in part by the profits earned from buyers two years ago....
The unknown at this point, though, is who really owns all of those worthless mortgages? I'm afraid the answer may be 'you do, in your pension plan', and that's going to hurt all of us.
--Dex
Here's an article about punks reclaiming basically-abandoned houses in Pittsburgh. To further pique your interest, most of these people (acquaintances of mine) are heavily into the bike scene.
Here's the difference, though, between the models of abandoned housing we're familiar with - Detroit or smaller milltowns like Homestead - and the dawning situation. Most of these older places still have reason to exist - there are still hundreds of thousands of good jobs in the city of Detroit. But when you get to exurbs, you can start thinking about another model - ghost towns of the Old West and abandoned farm communities of the Great Plains. When housing costs are artificially driven up by easy credit, a McMansion with a 2 hour commute makes some kind of warped sense. But that house doesn't make sense for anyone to live in when houses "just" an hour from a CBD are now affordable again.
Remember, part of what will happen is that the sub-prime borrowers will return to renting - millions of homeowners will beliving in multi-unit housing again. That's how these houses can actually be abandoned for awhile - the demand is disappearing, for years and years. Meanwhile, there's always new development, and some of it will be infill (as erik described), and in 5 years, no one will want a rundown McMansion way out in East Bumfuck.
Meanwhile, those houses are filled with thousands of dollars of very portable copper and appliances and [cheesy] mantles and plumbing fixtures. No one will have their shit together to strip them legally - no one can admit that it's the best course - and so it will be done criminally, in the dark of night, in half-full cul-de-sac communities.
Weird, huh?
One thing that hasn't been said here that I think is worth being said, is that this isn't different from any other situation in which there are more people who want to sell a thing than there are people who want to buy it.
Thus, what you said about your experience in and around California is spot on: people always want to live there, lots of people flock there, so there's almost always more demand for houses than there is supply of houses (or, perhaps more relevantly, more demand for land on which to put houses than there is land worth putting houses on).
But that's not true everywhere. The fact of the matter is that we have, traditionally, built houses out of stuff that lasts a good long while. It does not follow that the demand to live there will last as long. I'm from Ohio, and as much as I like it there*, I have better opportunities elsewhere. That's true for a lot of places in Ohio, and thus there are all these houses built in the 1920s and 1930s (and also those built in the 1950s and 1960s) that are beautiful and sad and nobody wants to live in them because there is no economic opportunity worth pursuing in those places.
One more thing: please stop bashing on the "sleazy subprime lenders". What subprime lenders do is attempt to price accurately the risk of so-so borrowers. Some of them most certainly lied to customers. But even now, with very high rates of default in the subprime market, only about 13% of subprime mortgages get foreclosed (heard that on All Things Considered, I think). What that means to me is that there's a whole bunch of people who wouldn't have been able to own their own house a few years ago, but because of the loosening of credit, they are able and they do own. That's a good thing; those people have the security (or more of it) that you were talking about in your second post on housing.
*(I used to tend to dragons, Megan. They're smaller than you'd think, so you might have missed them when flying to the East Coast.)
What is it like?
Well, in the formerly superhot neighborhoods of Baltimore, there are 2-3 houses for sale on every block. It generally means houses sitting for sale for 100-300 days. Beautifully renovated empty houses. List prices stay about the same, while values drop at a good clip. If you're like me, eventually you give up on selling and you rent your house out. If you're lucky, the rent + the tax writeoff lets you break even when all is said and done.
If you're looking for villains, the Federal Reserve might be a good place to start.
And another thing...you asked about what people do with abandoned houses. Well it's pretty common in Baltimore for bums/junkies/etc. to move in to abandoned houses. They break in to boarded up properties.
Once, while working as a real estate agent, I was showing a boarded up property to an investor. When we got there we discovered that a junkie had moved in..there were vials of heroine strewn about, old coke bottles filled with urine, and a horrible stench of human waste. If you've ever watched The Wire, well, it's like that. Very real.
And just this week I discovered that a bum was living in my backyard. Luckily he wasn't there when I discovered his bedding and bicycle next to the AC unit. I made it clear that "someone had been there and that the jig was up" and when I went back the next day his belongings were gone. And thankfully so, because nothing turns off a prospective renter more quickly than a crackhead living in the back.
Carter, how big is your backyard that some dude could live in it for a while before you noticed? Or, are you no longer living in that house?
Can the Mortgage Crisis Swallow a Town?
Noel,
From his blog, it looks like Carter rents out his house when he can and found the guy's stuff on a visit to his house. But I do like the thought of a backyard so big that someone could live in it without your notice.
Megan, didn't you live in Cali during about 1991/92-1996? There was a pretty serious collapse in housing prices/sales then too. Complete with overbuilt suburban subdivisions sitting empty in the sun. My guess is this will look something like that did, maybe a little more or less severe, but in any case comparable.
I've been thinking for a while that people need something to shake them out of the "I need to own a home" mentality. Densities need to rise, because we have a somewhat better handle in that situation on people living together in terms of municipal services as I understand it. Build up, not build out.
So what this will look like is lots of apartments turned condos and lots of people giving up on a dream that as often as not is simply them being sold a bill of goods. And eventually the stigma associated with renting instead of owning will weaken, and renting will be seen as a valid choice long-term for people instead of them being chided for throwing away all that equity which they'll supposedly need in order to pay for old age.
Whether this attitude shift happens to this generation or its successor is something I can't fathom.
Noel,
The term yard is a bit misleading. My house is only 12 ft wide, so the backyard is probably 12 x 20 ft, most of which is occupied by a storage shed. I didn't realize there was someone living there because I wasn't around (the house was for sale and unoccupied).
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