I had finished working out when the nice lady on CNBC was talking about sub-prime mortgages, and noted with surprise something to the effect of “while you would expect sub-primes to mostly be in poor neighborhoods, in fact many turn out to be in some of the overheated housing markets that are currently experiencing downturns.” For example, places like Los Angeles and Las Vegas.
Now, the only thing that surprised me was her surprise. Part of the point of a bubble — any bubble — is that people buy and spend more than they can afford on fear that it will be even more expensive if they wait. It should be no shock that in the housing market, this meant many buyers would be turning to creative financing options. Aided and abetted by compliant appraisers and the market for mortgage backed securities — entities like Fannie Mae and Bear Stearns buying mortgages from the company that originally made the loan — this extra supply of buyers who otherwise could not afford to be in the market at all were helping maintain rising prices.
Now those buyers have to get out. Some are selling, which is contributing to a notable 5% increase in housing inventory, when inventory has been relatively stable for decades. Those who cannot get out are defaulting, and ending up in foreclosure. In some relatively small suburban neighborhoods, four or five banks own dozens of now-vacant houses.
Now, if you really want to know more about whether there is a housing bubble (I think there is regionally, maybe not nationally), and how it may be effecting the economy at large, your go-to man should be Dave Johnson over at Seeing the Forest. Even if I am correct about housing bubbles being regional, the fallout will be national.
Banks don’t want to own dozens of houses regionally or hundreds of houses nationally. That represents money tied up instead of working hard. And we aren’t talking about small, regional banks. We should be thankful for that, because a small bank would probably have to close if they had enough foreclosed property on the books. But the big, national banks that are involved want to get their money out. So they really have no choice but to sell for what they can get, hope to be even on the deal, and make profits elsewhere. Maybe they can raise the fees on your accounts again. They will certainly re-think loan standards. They will also be rethinking staffing levels both regionally and nationally. One major player, Bear Stearns, is at risk of takeover.
Neighbors don’t want empty houses sitting there, dragging down housing values that were too high to begin with, and attracting crime. They are going to have to live with lower housing values. This of course may put them in a pinch should they need any sort of refinancing, because they will need the house re-appraised and are unlikely to get approved for a loan high above the new, lower value of the house. And in some cases, the solution will involve a bulldozer.
All this action is going to reduce municipal tax bases. In short, there will be less money coming in for police, fire department, schools, roads, and the like. And good luck getting citizens to vote you a tax increase when their property has been decreasing in value.
And the people who have been forced out of their houses, either by sale or foreclosure? They still need an affordable place to live, close enough to their jobs that they can actually get there. Ultimately, the regional markets which are most effected are the ones where there are lots of jobs to be had, and for whatever reason (rent controls, geographical constraints) not quite enough housing for demand.
In closing, Carrie’s Nation is a very nice HR issues blog; even as we try to be more vigilant about Chinese imports, it’s hard to tell where food comes from (thanks to Big Agribusiness thwarting the rules), and in any event almost impossible to actually avoid Chinese imports for a whole week; is “Bush Bluffing”, or will Leahy really take him to court?; Zombie New Orleans slowly stumbles back to life; healthcare facts and figures versus the tricks of delightfully overheated rhetoric; in honor of Blog Against Theocracy week, some scary guys who think the First Amendment only protects their right to be whatever sort of Christian they want; and finally, not everybody gets LOLcats, “Well, they can’t spell very well. Because, see, they’re cats.”
Cross-posted at Central Sanity