Friday, June 10, 2011

My Kingdom for a House

In this writer’s opinion, the major reason for the continuing decline in the overall economy is the ongoing disaster that is the housing industry. This includes new home sales, rentals, and existing home re-sales. In every instance, the impact of the sale or rental of a housing unit has a deep and profound impact across the economy.

The Joint Center for Housing Studies of Harvard University has just published The State of the Nation’s Housing 2011 (get here). If you weren’t depressed about the housing industry, you will be after reading through this report. Here are a few of the many bullet points that could be gleaned from just the first pages from the forty page report:
  • There has been a shift of 1.4 million single-family homes to rentals in the period of 2007-9
  • In February 2011, new home sales set another new low
  • Homeownership dropped from 69 percent in 2004 to 67 percent in 2010
  • Household growth has averaged 500,000 per year between 2007-10, down from an average of 1.2 million per year the previous seven years
  • The number of renters swelled by 3.9 million from 2004 to 2010
  • It is estimated that 3.8 million baby boomers will downsize during the coming decade
  • The number of households formed by those under 35 will grow to nearly 26.5 million during the next decade
  • 19.4 million households currently pay more than half their income for housing
  • 15 percent of homeowners find their properties are worth less than their mortgage
  • There are 2.2 million properties still in the foreclosure pipeline, and, within the foreclosure mess, 67 percent of owners have made no payments for a year, and 31 percent have made no payments for two years

To understand the impact on local and state governments one only has to look at this startling fact: The amount of real home equity fell from $14.9 trillion at its peak (and generating property tax revenues) in the first quarter of 2006 to 6.3 trillion at the end of 2010. This is well below the outstanding mortgage debt for these properties of $10.1 trillion. Broadly put, the amount of property tax revenues has dropped over 50 percent; now you know why fire stations and libraries have closed. We can blame a lot on pensions and salaries and the unions, but this is the fundamental reason for the current fiscal disaster of our local administrations, the massive reduction in real property values.

According to Casey’s Daily Dispatch (highly recommend this daily newsletter if you want to increase your government paranoia, it’s free), home prices measured against gold, are actually lower today than at the bottom the Great Depression (maybe a name change is now in order for the Great Recession). In 1930 a new home sold for 24.5 lbs of gold, in 1935 a new home sold for 6.83 lbs of gold, and today a new home requires 9.5 lbs of gold at about $1500 per ounce. In 1935 the price of a pound of gold was $560, today it is $24,000. Yes, home price are now very affordable but the impact on local government operations is catastrophic.

All housing markets are local. So to broadly paint the national market with the same brush is unfair, some markets are blacker than others. Yet it was announced last week that the Washington D.C. housing market is expanding, go figure. If we could find a way for these immigrants to our nation’s capital to stay in Washington and not have their policies meddle with our local economies, all’s the better. In fact keep ‘em.

Over the next few weeks I will take a long look at the current signs and opportunities beginning to peek their collective heads over the gray horizon. Yes, there are signs of change: tea cups are being read, bones are being thrown, and the Greek Oracles are being interviewed on CNN (at least those temples that haven’t been foreclosed).

Stay tuned . . . .

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