COMMENTARY: As fourth in the series of America’s longer run ten crises, the following adds the continuing long term depression in Housing that will remain a fact throughout the rest of the present decade.
The U.S. economy today remains mired in what can only be accurately called a housing depression. Once producing residential housing at 1.5 million units a year and commercial property construction in the trillions of dollars annually, the economy has since 2008 been producing housing units less than 500,000 a year on average. Once consistently more than 1 million a year, new home sales remain in a range of low 300,000—two thirds below pre-2008 levels. Meanwhile, home prices have fallen by a third, experiencing not two, but three, ‘double dips’, and homeowners have lost more than $4 trillion in wealth.
Except for a small sign of growth in apartment construction, residential housing remains virtually flat today after nearly five years. To date there have been more than 12 million foreclosures since 2007 and more than 10 million of the 52 million mortgages in the US are in ‘negative equity’, with home market values less than the mortgage.
It is important to note that in every one of the 11 previous recessions in the US since 1947, housing has led the way in terms of recovery. After three and a half years from the start of recessions in 1970s and 1980s, housing was growing 32%-35%. Today in even the best months, housing sector growth remains stagnant at depressed levels at best.
Little to nothing has been done to effectively revive the housing sector since 2008. Obama administration policies toward housing since 2009 are an example of, at best, token neglect. For the first three years of his administration, Obama policies have targeted subsidizing mortgage lenders and mortgage servicers (e.g. big banks) rather than homeowners. Programs were barely funded, mostly providing incentive payments to banks to lower interest rates (which they resisted) and aimed at getting homeowners out of foreclosed homes and getting new buyers into the properties. Obama’s initial program in 2009-11, called HAMP, allocated $75 billion to housing recovery, but $50 billion of which were incentives to banks and the remainder earmarked for homeowners mortgage relief. But the latter were voluntary, administered by the banks, and bank refinancing of homeowners in foreclosure were limited to temporary interest reductions only, with no principal reductions. And no relief was provided for the 10 million plus homeowners in negative equity.
In 2012, the Obama administration introduced a program called HARP 2.0., as part of a deal to indemnify banks from liability actions by States’ attorneys general and homeowners. In return, the banks paid the States’ $25 billion, a pittance compared to the liability potential. Homeowners who were illegally foreclosed by the banks were to receive on average no more than $1500. The banks, in turn, were required to provide refinancing for homeowners in negative equity for the first time. But what is generally not known about HARP 2.0, is that the federal government’s agencies, Fannie Mae and Freddie Mac, will pay the banks that renegotiate negative equity mortgages a refund of ‘5 points’ on the loans. Congress will then have to reimburse Fannie Mae and Freddie the 5%. In other words, the government will pay the banks tens of thousands of dollars on average to refinance homes in negative equity, a major cash windfall for the banks at eventual taxpayer expense
Apart from the continuing depression level conditions that remain in housing, and the continuing subsidizing of mortgage lenders, mortgage servicers and the banks by the Obama administration and Congress, the longer term crisis in housing is its role as a prime sector for financial speculation. Since the 1980s, to the 2007 housing bust, financial speculators were allowed by Republicans and Democrats alike to exploit the housing sector to realize massive profit gains from speculation. It has resulted in repeated housing ‘busts’ in the US. First, in the early 1980s, followed by an even larger savings & loan sector housing bust in the late 1980s. These housing crash dress rehearsals were followed by the ‘main event’ of the subprime mortgage debacle of 2003-07. The US economic system’s financial elites periodically gorge themselves on property-based speculation. The housing busts are followed by ‘socialism for speculators’, whereby the public and taxpayer are forced to pay the cost of the cleanup. Taxpayers are still paying the bill, as Obama programs from HAMP to HARP 2.0 today continue to illustrate.
The cycle of housing speculative boom-bust will continue long term so long as banks and other financial speculators are allowed to continue preying upon the housing sector. What is needed is a utility banking system based on non-profit, direct lending at the cost of capital by new government agencies to homeowners and prospective homebuyers.
The longer term human consequences of the continuing housing crisis is that fewer Americans will purchase homes and those fewer will do so later in life. Expect incentives for the housing sector, such as mortgage interest deductions, to be significantly scaled back by Congress after the November 2012 elections as part of a major remake of the US tax code. Within a decade they will likely disappear. More younger Americans will have no alternative but to rent, while rent costs—already rising faster than home prices—continue to escalate. Rent costs will become the new focal point for inflation, just as once housing values were. More young Americans, in the 20-34 year range, will live with parents and and for longer periods. The economic consequences of this demographic shift in the longer run are significant. The role of housing in the US economy as a leading sector for growth and for dampening recessions will decline.
The solution to the housing crisis is simply to take from the banks and private financial institutions their key role as intermediaries of credit provision for housing. To prevent the chronic long run speculation in housing, and consequent housing booms and busts—and to return housing to its historic role of recession recovery sector—the government needs to stop subsidizing banks and mortgage companies. The most efficient way to this end is to remove the profit motive and the banker ‘middle men’ from residential housing by creating a utility banking system that will provide loans to homeowners at the cost of long term money based on the 30 year bond rate, today roughly 2.5%.