Cities Struggle to Counter Post-Foreclosure Abandonment
Foreclosed homes continue to plague cities across the country as large swaths of land and entire neighborhoods are abandoned.
"Nationwide, the homeowner-vacancy rate, which measures the number of vacant homes for sale, rose to 2.8% in the fourth quarter, the Census Bureau recently reported. That matches a record set in the first quarter of 2007 and is the highest since the government began tracking vacant homes in the 1960s."
"The current vacancy rate could be the highest since the Great Depression, when an exodus of Americans left the Dust Bowl states for the West Coast, says Mark Zandi, chief economist at Moody's Economy.com.. Data 'strongly suggest that vacancies are at their highest level since the 1930s,' he says, adding that the empty homes aren't only depressing property values, 'they are weighing on the collective psyche of communities. ... It's kind of like playing for a losing team. It's debilitating.'"
"High vacancies in Florida, Nevada and California partly reflect overbuilding during the housing boom along with rising foreclosures. Cities in the Midwest have some of the highest vacancies, due not only to foreclosures but also to weak economies and population declines. In Cleveland, for example, the number of vacant homes has reached as many as 12,000, about 10% of the city's total housing stock, according to the treasurer of Cuyahoga County, which includes Cleveland."
"The rising number of unoccupied homes creates myriad problems for city governments. They're spending money cutting overgrown yards, draining swimming pools and securing homes to thwart vandals from ransacking empty houses."
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The Failure of Supply Side Economics
The foreclosure crisis is a terrible tragedy and perhaps just the beginning of a tailspin that was brought about by the unrealistic assumptions that were part of the supply side economics revolution of the last generation.
Contrary to Say's "Law", supply does not generate the equivalent in demand. The result of this folly has been the plethora of retail outlets and consumer products with insufficient demand due to the preponderance of low-paying retail and service sector jobs. Furthermore, there has been a huge over-extension of credit for both real property and consumer spending based on the faulty assumption that the short term success that building and stocking this commercial infrastructure would continue for many years.
Real estate, being much more of a stock resource rather than flow, has been particularly susceptible to this phenomenon of short-term demand. Those involved with speculation over the years have reaped tremendous benefits. An old man in my former community said, "I know people that paid $2,000 for apartment buildings, now they get that a month in rent". The people who are suffering from this unreported inflation (Reagan took housing out of the Consumer Price Index) are those who have just recently bought into the American dream or struggling to pay inflated rents (which may or may not be related to the ability of owners to pay the costs of ownership).
Then there are the homeless.
A strategy for making real estate affordable again, would be to form a cooperative trust that identified properties that were owned free and clear (or nearly so)and purchase, improve and offer limited equity cooperative ownership as a non-profit or not-for profit quasi-public enterprise. However, where would be the incentive for current owners to sell for any or much less than the so-called market rate, which is inflated by the mortgage costs of the last half-generation of "owners"? What would be the incentive for the mortgagees of foreclosed properties to do likewise?
Greed is not good and trickle-down economics offered a transitory boom for some, but has been a terrible bust for others. As the true misery index of this bust catches up to all, even those who realized tremendous long-term gains from "the Reagan Revolution" will be pulled down into the quagmire.
We need to work together as a unified people and agree to write-off the inflated prices of real and capital assets. I'm not sure just how this will be done.
Otherwise, we will all go down together.
Say's Law
A brief technical comment: Say's law has nothing to do with supply-side economics. It says the National Income is identical with National Product, and this identity is generally accepted by economists.
This obviously doesn't imply that building more retail outlets will generate more demand for retail outlets or that producing more consumer goods will generate more demand for consumer goods.
Charles Siegel
Econometric Abstractions
Hi Charles,
Economics, that dismal "science".
>Say's law ... says the National Income is identical with National Product, and this identity is generally accepted by economists.
In "light" of international trade and the recent trend of increasing globalization, Say's law is at best an irrelevant abstraction. People just accept economic indicators as gospel from which to operate their finacial and marketing plans and campaigns. All econometric measures and models are ridiculous, and predicated on the so-clled growth imperative, which is a self-fulfilling prophecy.
Infinite growth within a finite world is not possible. The measures of GDP measures waste in addition to production.
Growth is an abstraction based on the time value of money (TVM) and the notion of trickle down economics. TVM is based on the economic financial theory and practice that we must "discount the future". That is, it is predicated on the notion that money in the future will be worth less. Eventually worthless, at least relatively. It is a ferocious and pernicious driving force of inflation.
Economic Growth
Mike:
I share your aversion to economic growth, as you can see by looking at my booklet The End Of Economic Growth at http://www.preservenet.com/endgrowth/EndGrowth.html.
I am interested to see that your writing is on Jan Lundberg's site. Jan is an old friend of mine.
However, I think you are being much too extreme when you say:
"All econometric measures and models are ridiculous,"
and particularly when you say:
"Growth is an abstraction based on the time value of money (TVM)"
I wish growth were just an abstraction based on the time value of money, but the fact is that the average American drives twice as much today as in the 1960s, consumes more energy, covers more land with sprawl, etc. All those new freeways, power plants, and suburban developments don't look at all like abstractions to me.
Charles Siegel
Growth is Real
Hi Charles,
You are so right to correct my statement that growth is an abstraction. Like you say it is plain to see the damage done by an unefettered growth mentality.
However, the assumption of TMV is fundamental to the growth paradigm. TMV contributes both to unecological "growth" and inflation. It would be quite a task to remove TMV from our banking and finance controlled "culture". But such change is fundamental to realization of sustainability (and equity).
"Make no small plans".
Your work looks interesting. Thanks for the reference.
Jan does good work.
Inaccurate Characterization
I don't think what you are talking about here has anything to do with supply side economics or Ronald Reagan. I think you are just being a political opportunist.
You are correct in saying that supply does not generate demand. Builders have to be sensitive to product demand like anyone else. Where the homebuilders went wrong in this cycle is they completely underestimated the "investment house" phenomenon and the "flipping" that was being done. All of their market research was based on an absorption rate that was not sustainable because many of those buyers were not occupiers. They are paying for their mistakes now and in the last 1.5 years or so as they should.
As far the "foreclosure crisis" as you and many others are calling it, I'm not so sure. I actually think it's a necessary market correction and yes, some people get hurt. That's capitalism. But, the homeownership rate was slowly rising and had peaked around 67% or so and then suddenly spiked to 71% during the boom. Now, we are returning to the 67-68% where we were before the unsustainable part of the housing boom. That is still very good relative to anywhere in the world and it's not a number we should worry about too much unless it gets very low. A lot of people were buying homes they couldn't afford with mortgages they didn't understand and many bought with little to no equity. Thus, what are they losing? Not much, especially in CA, a "mail the keys in" state. The lenders are getting killed as they should for their terrible underwriting. The former homeowners can just rent. Many will take a hit on their credit as they should.
As for your inflation comment, I both agree and disagree. Housing was taken out of the CPI because it was thought many of the inputs of construction were already included in the CPI like wood, drywall, etc. But, we know from the past several years that housing values have risen faster than the rate of construction cost increases. This is because land has risen in value rather sharply, and unsustainable, in my opinion. To that extent, I would agree that not considering land in the CPI has made us mistakenly think there was little inflation in the economy when in fact that was some in this segment of the economy. You might take a look at the Case-Schiller Index and Schiller's hitorical housing values tables. He notes that until 2000, housing appreciated at roughly the rate of inflation, and then rose sharply faster after 2000 until about 2005. He believes that housing prices will decline until we reach the point of historical growth rates. Rents (multifamily/commercial) have also not risen much faster than the CPI, except for a few metro areas.
As far as overbuilt retail, it is quite common to see aggressive development when money is cheap and we see so much housing development, but retail vacancy nationwide is just under 10%, according to the latest Marcus and Millichap report forecasting to rise only 50 bps next year to about 10.2%. This would imply a market that is in balance. So, I don't follow your concern there.
As far as your "affordable housing strategy", there are community housing trusts out there. I don't really love the idea, but they seem fairly similar to your concept. There is also the LIHTC which I don't like much either. I would rather just give people rental subsidies. There is below market financing for low income homeownership. But, none of that stuff has anything to do with trickle down economics. And, I don't envision quite the misery you do. Asset prices rise and fall in a market economy. Practice financial prudence, understand what you are buying, do some due diligence in your large purchases in life and you and most everyone else should be fine. Housing prices should continue to fall, but I don't think it's a reason to fear the sky will fall even if it causes a recession. Bigger worry = inflation.
Technocratics
Would you have the same attitude if you lost your income or it was drastically reduced?
Although because of the Federal tax subsidies for mortgage interest, rents for existing properties don't rise as fast as for new developments, there is still a formidable inflationary force based on pricing policies that are based on what the market will bear. Viewing the situation from an economic technocratic standpoint suggests that one has no personal experience with poverty, job loss, or significant reduction in income. Please excuse me if I am wrong.
That's Capitalism, you say. That sounds rather cold-hearted to me. It smacks of Social Darwinism.
Your reference to economic statistical sources is very authoritarian. What makes you put so much trust in these numbers?
Who benefits from rental subsidies? Who pays for them? If the goal is to help the poor, shouldn't subsidies go towards giving them equity?
Sounds like you are a political apologist for a dysfunctional status quo.
No need to apologize
First, I have to say I agree with CP here. Mike has not supplied anything resembling evidence for his position, though I detect a lot of “feelings.” I suppose that, insofar as one can attribute human emotions to an economic system, you could say capitalism is cold-hearted. The truth is, it is a system that doesn’t reward the stupid. If, for example, you buy a house you can’t afford, you will probably lose that house. Hopefully, you will have learned a valuable (if expensive) lesson.
As far the status quo, the system is working perfectly. It is correcting itself after an unreasonable run-up in home prices, caused by people trying to cash in on their increased equity. While this is not normally a bad thing to do, the price spike led too many to try and buy income property, to the point of over-saturating the various markets with rentals. Rent rates went down with the increased supply, and suddenly the mortgages couldn’t be paid. The sub-prime issue is only a small portion of the market (well under 10%). Once the inventories are reduced, things will stabilize. So, there is no need to “apologize,” as if such a thing was even possible.
Facts and Logic
I'm sorry I used facts and logic to debate your political rhetoric. If we made decisions as a society solely on the basis of our personal experiences, we would certainly be doomed. I have personal experience with many of the unfortunate realities you mention. But, if we are talking about all of society and the masses, we need to look beyond our own experiences and try to analyze the situation from a higher perspective.
If you are going to comment on a public forum, you should be prepared to debate what you have said. But, you have not really provided any useful counterpoint. I welcome any comments on what I post and many times, there is plenty. I don't consider my previous thoughts "status quo" or "dysfunctional", but rather my assessment of a situation backed by some factual evidence. Perhaps it is you who is trying to make this a political left/right issue. But, if we want to truly understand and assess economic or policy issues like this one, we should all hope for better than that.
Counter-productive
Sorry that I reacted angrily to your charge that I am a political opportunist.