Friday, December 28, 2007

US Homeowners vs. Current Housing Slump

Imperceptibly we wake up to find that the country-wide housing slump has been with us for a good part of the current year. Media has been diligent in holding this critical issue up front in our collective consciousness especially during these times of escalating political campaigns, first for the upcoming primaries and late next year, for the real thing. We ourselves cannot help but see around town, most any town in the USA, the unavoidable signs of this slump with the ominous for-sale signs strategically planted in front of many shuttered houses, both new and old.

Because we pulsate more than just lifeless numbers in statistics, many of us find ourselves emotionally wallowing in the dreary consequences and in fearful straits of the eventual outcome of this slump. Remember the stats bare that most homeowners have families living with them. And most homeowners, whether under the shadows of a looming default or foreclosure, or those who negotiated their mortgages prior to the housing boom peak, or even those who currently hold their homes free and clear, would invariably be affected by what this lingering slump could inflict on the housing markets in the long run.

For those of us who have been homeowners for a while, we have some calming experiences to lean on in making our personal assessments of the current predicament. In 1990 we also witnessed a similar general housing downturn which lasted for a year or two. But we got over that and by 2005 the housing boom was in full bloom anew, in spite of the unimaginable turn of events in the intervening years – the crashing tech bust in 2000 and the ensuing financial letdown caused by the devastating events of 9/11.

As early as 2005, 68.9% of all housing units in the US were occupied by their owners. And the current housing slump is definitely hitting hardest from within that favored group. Divided racially, Whites (Europeans) hold the highest percentage in homeownership at 75%, while Asians trailed behind at 60%. And it should be noted that the other races are not far behind, both African Americans and Hispanics both registering close to 50%.

Clearly by 2007 homeownership had breached the 70% level and regardless of the eventual outcome it has become a singularly significant accomplishment for families latching on to the American dream.

We can now debate ceaselessly what brought about the many challenges in the housing markets, whose visibly glaring results have been the record defaults and foreclosures and family dislocations. Included in the mixed bag of causes has been the following: the easy money brought on by a host of factors, very lax and lenient lending practices, and the two capital human sins of greed and fraud. And throw in there the inaction and/or delayed responses by federal regulators in trying to stem that fast-rising trend that was heading toward what many adjudge as a speculative bubble.

Hindsight speculations, indiscriminate finger-pointing, or inveterate hand-wringing, and etc. will definitely not amount to much for those who are already in the throes of losing their precious homes many of whom were beneficiaries of sub-prime and other exotic mode of lending. And early corrective actions will benefit even those credit-worthy homeowners who will start to see values in their neighborhoods diminishing because of rushed or pressured sales, or even foreclosure auctions. Thus the cascading loss of equity in homes will begin to dry up a good source of increased consumer spending, a critical factor in continued economic growth.

And we are also learning of the spillover effects of this slump into initially, the support industries complementing housing construction like the flooring, carpet, tiles, and landscaping sectors. And in the long run to consumer confidence and spending. And thus ultimately, the broader economy would be affected.

But on the other side, we can continue to be hopeful and there are many encouraging signs pointing toward this direction. The US economy is still very vibrant and growth-oriented, productivity still at enviable levels. And while the slump in housing lumbers on, the broader economy at least is not beset with other potentially-catastrophic weaknesses that might impact on its ability to deal squarely with the housing slump. Even the recurring fears of a recession are being hotly debated on both sides, so it is still a toss-up as to whether we are experiencing the onset of one or not.

Thus while the housing slump has been with us for a long enough time, the broader economy continues to be on even keel, which is unequivocally a good sign. And already, corrective actions in the real estate markets are being felt. 30-year fixed mortgages are back in style while long-term interest rates continue to be attractive and affordable. True, resets in mortgage interest will continue to be a factor for the ensuing years for most of those loans under variable rates, which some estimate could stagger to a total of 1 trillion dollars worth. Again, we are hopeful the US economy can ride this over, over and above dark predictions such as that we have not seen foreclosures this much and this many, coupled with widespread home prices downswings, since the depression years of the 20’s.

Update:

One may wonder what the connection is between Narvik in faraway and cold Norway and the troubled housing slumps in sunny California and Florida. This should explain a bit how extensive the ripples are caused by the latter. And reveals somewhat who the rest of the international players that are involved in all this.

6 comments:

  1. Great post on an issue that is being left mainly for the TV channels to talk about. Many factors are to blame but as you said, flawed lending practices and lack of federal regulation regarding the recycling of mortgage assets are primarily to blame for this setback. I work for a US financial institution operating in Canada so I ought to be concerned.

    The good news is only the real estate segment had been severely affected but not the vibrant equity market and this hopefully will not trigger a recession. The big financial institutions had the fortitude to write off staggering billions to equalize the balance sheet and still remain profitable and hopefully this will buoy up investor confidence.

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  2. Hi, bw:

    I wrote from the perspectives of both a homeowner and as one who was into real estate in the past, and in your case from the side of the financial institutions for indeed there are many concerned players in this issue.

    We also have the added perspectives of the hedge funds operators and the international investors who are also deep in on this. And even the perspectives of the real estate investors or simply those who bought investment properties. A case in point is our situation. While we bought an investment property over two years ago for which we went through the normal requirements, both documentary and financial, we are finding that the value of the property right now is below the original purchase price.

    Thus, collectively we are all one in resolve that we cannot allow this situation to fester longer than necessary. We heard a few weeks ago, the US president proposing some bail-out measures which will have to be debated for merits. And the Fed has now awakened and will do its best to prevent any slide to recession.

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  3. I always thought a home was something to be lived in, not used for borrowing against, or as a hedge against inflation, blah blah blah.

    When my greatx5 grandfather Robert Speir built his home in New York in 1790 some 24 years after coming over from Paisley, Scotland, I doubt seriously that he was thinking about equity. You know what? That house is still there and still being lived in.

    I never tried to buy a house the whole time I bounced around the world in the military. I guess its a good thing to do for a lot of reasons, but I never went for it. I just can't dredge up any sympathy for folks who seem to have bitten off more than they could chew. If they couldn't afford it they shouldn't have borrowed it. Lesson learned?

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  4. Phil, there is logic in the choices you made and the experiences you went through including that of your forebears. But for better or worse, the typical modern American has changed a lot including his values. Now, I hope I still remember my stats during my time as a real estate person, but this would be the typical profile of the homeowner in the US, granted that the actual figures are dated:

    The average household in the US accumulates a gross total income of about 2 million dollars during the productive years of the breadwinners, out of which one-half goes to living expenses ranging from rentals, purchases of appliances, furniture, or homeownership expenses such as mortgage payments, maintenance and repairs, etc. The other half for all other expenses necessary to feed and support oneself and family.

    The biggest “investment”, yes, it is now considered investment, a typical household makes is the purchase of a house. Many years ago, the average homeowner stayed in one house for 10-12 years before moving on. Now, it has gone down considerably, maybe 6-8 years. And the experience has been that even those who inherit homes from their parents and/or relatives tend to sell those houses so they could purchase their own.

    And these factors interplay in the real estate markets in many populous states of the Union for these many years.

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  5. Interesting, it's quite the opposite here in the Philippines, I suppose (I'd like to hear your comments on the country's real estate situation).

    Will you blog about oil? It's $100 a barrel now.

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  6. Dave:

    I have real estate properties in the old homeland and they are all located in Mindanao.

    Without much study, the real estate markets in the PI are quite different from that of the US. One could cite the kinds of financing available for residential properties. And the size of the markets there.

    In other fora, we do discuss these issues. And one pertinent question I asked given the improving peso and the obvious fact that many new residential developments emanating from Manila developers target foreign-based compatriots, is whether their pricing take into account this change in purchasing power of the peso. Do you adjust upward or downward?

    Re oil, we also discuss this in other fora. But the oil industry has become a very complicated concern that one has to go technical to explain it adequately. A common misperception is that when we read daily changes in crude oil prices, we should expect immediate reactions in the prices of refined gas products like gasoline. But we overlook that these prices essentially apply to futures contracts that those commodities traders are concerned with.

    Just to cite how absurd things can become even in this very serious business, it was reported that the first time the price of crude breached $100 it was because one trader bought the minimum lot, I believe 12 barrels, at $100 then immediately sold it for a loss amounting to about $600. When asked he said that he just wanted the attention as the man who broke the $100 mark.

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Welcome. Your comments are appreciated.