The continuing housing bust...

I'm demo-ing a mini-excavator.  Besides being cuter than a speckled pup, I've semi-convinced myself it will be in many ways more useful that a backhoe. Anyhoo, there are some great deals now on equipment like this because the housing market, and hence construction - and housing prices -  can't seem to get restarted.

But comparing housing to stocks only adds to the confusing picture.

The point here is that houses are largely insulated from the kind of capital flows which drive everything from the stock market to the price of gold. There was a brief speculative bubble in housing from about 2000 to 2006, but even then the capital being deployed was largely borrowed rather than invested. Real estate is and always will be a game of debt: it’s almost unheard-of for people to buy up investment properties for cash.The other weird thing about the housing-stocks disconnect is that it seems to be peculiarly American. There have been gruesome property-market crashes in other countries too, of course — look at commercial property in Ireland, or speculative beach resorts in Spain. But in general, countries with much larger property bubbles than we saw in the U.S. have seen property prices fall much less during the bust. And indeed there are brand-new property bubbles popping up all over the Pacific Rim: what is it that’s causing huge demand in Sydney and Hong Kong and Shanghai and Vancouver which doesn’t seem to have any effect on San Francisco?I don’t have any good answers here, except to say that if housing is getting cheaper, in many ways that’s a good thing. Sure, it’s bad for banks, and it’s unpleasant for anybody who bought a house as an investment. But in general, the less money we Americans spend on housing every month, the more money we have to spend on more productive sectors of the economy, and the higher our disposable incomes. Falling house prices don’t make people richer. But they can make you feel richer than if you were spending hundreds of dollars more per month on a mortgage. [More]

The continuing loss of home equity may seem like good news for potential buyers, but it exacerbates an already tense investment/retirement picture for tens of millions of Americans. Small wonder that floating cutback schemes of any kind for SS and Medicare are not well received.

I see some parallels...

In the wake of the housing (mortgage) meltdown, some economists looking back are questioning the very basis of the "ownership society".  I think they make some sense.

The formula, however, changed dramatically at the end of the 20th century. From 1994 to 2005, the homeownership rate reached record highs, thanks largely to innovations in the mortgage-finance market that reduced down payments and minimized equity. This shifted the basic wealth-building proposition of homeownership away from savings to an almost exclusive focus on capital gains. Average down payments fell, reducing the savings required to “get in the door.” More significant was the rise of mortgages that involved no forced savings: the interest-only loan, in which no equity is built because the principal is never paid down, and the “negative amortization” loan, in which payments are so low that they do not even keep up with the interest, leaving homeowners more indebted, rather than less, each month. By 2006, more than one-third of subprime mortgages had amortization schedules longer than 30 years, nearly half of Alt-A mortgages were interest-only, and more than one-fourth were negative-amortization loans.

One effect was to reduce the social benefits of homeownership, because the benefits are a product of equity and not of the mere fact that a contract has been signed and a mortgage taken out. The relationship between homeownership and social goods had been misunderstood: The traits that enabled households to build up the savings necessary for significant down payments — hard work and the deferral of gratification — were misattributed to homeownership itself. Paying a mortgage did nothing to improve children’s educational outcomes; instead, the factors that gave rise to homeownership also led parents to raise children in a manner that led to greater educational attainment.

Without substantial down payments and conservative amortization schedules, the entire proposition of homeownership as a social good is turned on its head. Think of a homeowner with a zero-down, negative-amortization mortgage: The balance would equal at least 100 percent of the value of the house at origination and would steadily grow, putting him ever deeper in debt unless the market value of the house grew at an even faster rate. Rather than being a source of wealth, the mortgage would actually reduce the net worth of this homeowner below what it would have been had he rented.

Rather than providing a social benefit, then, homeownership without equity imposes costs. Andrew Oswald of the University of Warwick has argued that such homeownership can exacerbate unemployment by making workers less likely to move from one labor market to another. Labor mobility is badly undermined when homeowners in a depressed market can’t sell their property for anything approaching the principal balance of the mortgage they originally took out to buy it.  [More]

This may not be the minefield it first appears. Rather than saying we allowed the wrong people to borrow too much money betting on always-rising home prices, I believe the authors correctly suggest the housing policy was a gigantic subsidy to the wealthy and housing-specific businesses (construction, RE, finance, etc.) that actually harmed low-income people by diminishing the social goods associated with home ownership. 


In fact, what has been viewed as a causal relationship (home owners become better citizens, etc.) was probably a correlation.  As they illustrate, the behaviors that got a 20% downpayment and other underwriting criteria met are the same ones that cause more civic participation, education, social mobility, etc.


So far so good.  But tell me why this reasoning should not apply to the numerous farm ownership efforts or beginning farmer programs?


Back in the day when I served on the old FmHA local board, I wondered at the cases that clearly would never "graduate" to economic "adulthood".  I also began to question whether we actually helped with low interest, low downpayment, etc. tools.  It would be interesting to see the persistence of ownership from beginning farmer loan programs that subsidize first-time buyers with public funds.  How many still are farming or own the land in say 10 years?


Are there any records of the outcomes (with privacy protected, of course) for agencies such as IFDA? None that I can see from their minimal website.


Without such followup data, we could be fooling ourselves as to whether these programs are helping folks or simply employing transaction agents.

I'll bet 1031 swap ratios peaked last year...

Looking back at all those 10-for-1 (or better) land swaps to build houses and Walmarts on, it may be as severe a distortion of value as "desert-state" house prices.

Toll Brothers Inc., the largest U.S. luxury homebuilder, reported a narrower second-quarter loss after writedowns for land, developments and options fell by almost $170 million. [More]

 Having chewed through those losses, I can't imagine CEO's and directors would be particularly gung-ho about bidding up adjacent farmland to build unwanted shopping centers.

“Although population growth is not an absolute prerequisite for successful investment and development, it certainly helps to work with rather than against trends…Meeting the demands of explosive, evolutionary growth requires sensitivity to urban form and sustainable designs - new communities that offer mixed uses, walkable environments, and access to jobs. The real estate implications of demographic changes around the world are enormous.” [more]

In fact, the hot new trend could be reclaiming space leapfrogged by developers in the ever-widening expansion of urban areas.  For one thing, sprawl may now be a health issue.

"As cities have expanded into rural areas, large tracts of land have been frequently transformed into low-density developments in a 'leapfrog' manner.... The physical environment of a community can support opportunities for play, an essential component of child development, and for physical activity, a health behavior that not only reduces risk of excess weight gain but also has many other benefits for overall well-being."
Our newer neighborhoods, the study concludes, don't do that.
The conclusion is clear, The health of our children is harmed by the environment in which we raise them. Hampton Roads - with the exception of parts of Norfolk, Portsmouth and a few villages - more often than not seems like one giant, sprawling suburb. Parts of Suffolk, where growth has been particularly rapid in the past decade, can seem like a collection of unconnected neighborhoods leading out onto overused thoroughfares.
Sprawl is the natural result of cheap gas and cheap rural land. Builders move their operations into the exurbs, where they can erect bigger and cheaper houses because neither the cost of land nor the cost of transportation exacts an obvious or immediate penalty. The true cost becomes clear only later.
Planners have long known that sprawl kills community, makes municipal services expensive to provide, and forces residents to drive farther and pollute more. Now, doctors are saying that it's also making our kids sick and dangerously heavy.
The reasoning on weight goes something like this: Because we build neighborhoods that are hard for children to navigate - and because schools have been mostly centralized - kids don't walk or bike for exercise or to get someplace. [More]

Try to wrap your mind around children walking to school or families walking to get an ice cream cone.  Pretty radical!  If energy prices return to nosebleed levels via market forces or emissions limits, the economics of denser populations will be overwhelming, and maybe some very enjoyable communities created.

Assuming I'm close to correct on urban development, who will be the heavyweights in the farmland market now? 

Try looking in a mirror would be my first instinct.
 

What's the deal with Phoenix?...

 Long a winter haven for Midwest farmers, Phoenix has the dubious honor of leading the downward spiral in house prices.

 

[Click to enlarge]

[More]

Las Vegas, I can understand.  Heck, Henderson County was the fastest growing county for years back in the recent day.  But Phoenix?

Phoenix, Las Vegas and San Francisco continued to lead year-over-year decliners, with drops over 30%. Minneapolis continued to have large month-to-month drops, while the rate of decline accelerated in Chicago and Tampa.
Dallas, Denver, Cleveland, Boston, Charlotte and New York managed to avoid double-digit year-over-year declines. However, all of the 20 metro areas are in double digit declines from their peaks, with nine posting declines of greater than 30% and five of those (Las Vegas, Miami, Phoenix, San Francisco and San Diego) in excess of 40%.
“The large inventory overhang will continue to weigh on prices for some months yet. They could fall another 10%,” said Paul Dales, U.S. economist at Capital Economics. “Nevertheless, the more recent rise in mortgage applications and the rebound in home sales has made us hopeful that the rate of decline in house prices will soon moderate.” [More]

Think about it.  If you did everything right - came up with a 20% down payment, for example - and bought in 2007, say, you're still deeply underwater.  In the desert.

The only thing I can find to explain the Phoenix effect would be a massive oversupply of houses.  At some point, the price drop begins to feed on itself, I suppose, so potential buyers are holding back and saving money every day doing so.

Could be some hellacious bargains down there if you are into arid living and golf.

The CRA allegation...

For about the twentieth time, I have heard the assertion that the Community Reinvestment Act caused the housing crisis.  It has shown up in comments to my posts, as well.

Frankly, I was not that up to speed on the CRA so here is what I found.

Bernanke, responding to a letter from Sen. Robert Menendez, D-N.J., said the Fed's experience with 1977's Community Reinvestment Act - including data on the subprime loan market - "runs counter to the charge that CRA was at the root of, or otherwise contributed in any substantive way to, the current mortgage difficulties." Bernanke, continuing in the Nov. 25 letter to Menendez, said declining home values, inadequate risk management of complex financial instruments, and lending models that favored quantity over quality all contributed to the current problems.
"The available evidence to date, however, does not lend support to the argument that CRA is to blame for causing the subprime loan crisis," Bernanke wrote.
The CRA has come under fire from some conservative lawmakers for being a major factor in the current financial crisis. Proponents of the law note it does not require banks to make risky loans, and instead directs federal banking regulators such as the Fed to encourage banks to lend to underserved areas in a manner that is "consistent with safe and sound operation." [More]

And this

        • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

        • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

        • What about "No Money Down" Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

        • Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

        • Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

        • Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

        • How exactly did legislation force Moody's, S&Ps and Fitch to rate junk paper as Triple AAA?

        • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment -- at the same time?

        • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn't have been: Titled How to Get an "Iffy" loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

        • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada;  Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

        • Did the GSEs require banks to not check credit scores? Assets? Income?

        • What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

        • What was it in the Act that forced banks to make "interest only" loans? Were "Neg Am loans" also part of the legislative requirements also?

        • Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages -- was that a CRA requirement too, or just a grab for more market share, and bad banking?  

    The answer to all of the above questions is no, none, and nothing at all.
 [More]

and finally, this rebuttal from Tyler Cowen:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default. [More]

In balance, I'm going with Bernanke.

Let the Great Scapegoat Search continue.

Addendum:  Thinking about it this afternoon, I realized how ludicrous the "predatory borrowing" concept is.  So a bunch of poor people with evil in their hearts forced bankers to lend them money by bald-faced, easily refuted lies?  How stupid does that make the lenders?

If he is asserting the government made them make what they knew to be bad loans he does not say it, nor has anyone shown that to be fact. 

My verdict is once they discovered securitized CDO's lenders went into overdrive to package garbage and sell it to foolish investors.

Urban crawl?...

One of farmers' long-standing complaints (unless you were selling, of course) has been urban sprawl. I have been less uptight about this than many, feeling inherent problems would curb sprawl (Heh).

Well, between energy prices, total inertia in home building, and a new political atmosphere, anti-sprawl wishes may come true faster than we ever imagined.

For example, the debate over optimum population density is impacting transportation and city planning.

On to St Louis. It’s hard to talk in too much detail about places I’m not very familiar with. But the pace at which things can change is going to be dictated, in part, but the extent to which there’s actual interest in building anything in the metro area. At the moment, clearly, nobody is going to undertake large new building projects—dense or otherwise—in St. Louis or anywhere else. And a small city in the midwest is under no particular obligation to turn itself into a particularly dense metropolis. But what you want is to avoid a situation where you’re preventing density. St Louis has a couple of decent rail transit lines and it’s important to allow dense projects to be built near those stations and along the corridors that are served by rail. These things are expensive to build, and once they’re there it’s important to utilize the served areas in the most efficient way possible. That doesn’t mean forcing people to build extremely tall projects near them, but it does mean letting such projects go through without demanding vast fields of parking to be placed around everything. 

In general, I would also just note that it can get misleading to look at citywide density averages. The relevant issue for a city that (like St. Louis) has some transit is whether or not you’re achieving density at your transit nodes. Additional consideration that are important is that ideally the stations will be close enough together to create not just pockets of density but whole corridors of density, even if the corridors are surrounded by pretty traditional suburbs. The stretch of Arlington County running from Rosslyn to the Metro stations at Court House, Clarendon, Virginia Square, and Ballston are a great example of how this can look. [More]

The increased availability of light rail to create "corridors" of density might be a compromise image more farmers could buy into.  Of course, this also implies small communities not in the corridor could see further economic stress.

Living at the mall...

Oddly this idea makes some sense to me (and I'm not alone). While the feasibility could be harder than first glance, why not add residential buildings to overbuilt malls to end up with walking-friendly communities?

The lonely box of concrete plopped in the suburban diaspora, outdated and, in many cases, dying, isn’t quite what Victor Gruen, the Austrian-born Holocaust survivor largely credited with inventing it, envisioned. Instead, the regional enclosed shopping mall was supposed to be a community center—a little bit of downtown and a car-free haven that would include day care facilities, offices, and, perhaps most importantly, residential living components a stone’s throw from the building; the mall was always supposed to have housing nearby.

Perhaps today Gruen would finally be satisfied, because in its newest incarnation, the mall has finally become not just a place to shop, but to live. The mortgage meltdown, shifting demographics and a growing antipathy toward suburban sprawl have caused developers to see malls not as retail dinosaurs but as giant land banks, where going vertical can appease environmentalists, potential buyers and stockholders alike.

It’s happening slowly, but it’s happening all over America, and industry experts expect the trend to grow. If inner cities are starting to see condo projects go rental or remain unsold, and some new suburban subdivisions are settling into modern ghost towns as the foreclosure crisis deepens, the one bright spot in the housing market might just be here: at the mall. [More]

I mean, it's not like we can turn them back into cornfields.

The key factor might be energy prices and/or energy policy that makes suburban car-dependence even less enjoyable.