Thursday, March 5, 2009

The social costs of home foreclosures

The foreclosure process is an evil process, affecting not only the families that are underwater, but also those in the neighborhood, or worse yet, those attached to the foreclosed home. Here is a nice piece by Camilo Jose Vergara at Slate.com, detailing the social costs of abandoned home when the foreclosed property is paired with an occupied home:
In Camden, N.J., perhaps the poorest American city I regularly visit, I photograph what I call paired houses: two dwellings, side by side, one occupied, the other empty. Those living in the occupied home often have their lives made more difficult by what happens on the other side of a shared wall. If I see a neighbor or meet the resident of one of the occupied houses, I ask how they're coping. They tell me that people throw trash in the front and back yards of the vacant unit, causing foul smells and attracting rats. Physical problems in the empty shell cause accelerated decay in the occupied house. Water may be left running in the unoccupied unit, causing moisture to migrate next door. In cold weather, pipes burst. Joists rot and collapse, tearing bricks out of the shared wall. And if the empty dwelling is not properly sealed, prostitutes and drug addicts may break in and start fires (read the rest here with more pictures).
This is just one case, but I am sure that all of you have a similar story to tell. My Mother, who lives in a more affluent neighborhood in Houston, Texas, keeps tabs on the number of foreclosed properties surrounding her home, which admittedly are few, but increasing in number and one is accross the street. I am sure that my Aunt (you all know her as Janie), who resides in Phoenix, has many stories to tell. But one thing is true, further price declines is sure to heighten the foreclosure process.

Home price discovery - finding the bottom - is still underway. However, I have argued that some cities have likely found a bottom, and in some cases probably undershot it.

The chart to the right illustrates the national home price-to-rent ratio, which is indexed to its low in 1996. The ratio is calculated as the Case-Shiller national home price index divided by the BLS estimate of owner-occupied equivalent rent (part of the CPI).

The index is still about 20% above its low, meaning that if 1996 is the equilibrium ratio, then prices will fall another 15-20%. However, there is no reason for me to believe that the low is the equilibrium price-to-rent ratio, and therefore, home values may not need to fall another 20% - see this Fed paper for a nice discussion of the price-to-rent ratio. My biggest worry is that national home values undershoot their equilibrium, which is looking more and more likely.

We can all blame the credit bubble, Greenspan, Clinton, the sub prime industry (borrowers and brokers); but in the end, the housing crash is devastating for everyone. Unfortunately, we just have to roll with the punches on this one, but some intervention - if planned well - is probably a good thing, especially if home values are on a trajectory undershoot their equilibrium.

Rebecca Wilder

5 comments:

  1. Rebecca,

    Great find! What a slide show huh??? Yea, growing up outside of Philly I'm well aware of Camden's poverty, but the pictures make it so profound! Obviously the effects of a neighboring foreclosed property is quite exasperated in a poverty-stricken environment, but the effects in general are not lost. Hopefully, as you said, the intervention will quell this awful epidemic.

    Great Post,
    Tim

    ReplyDelete
  2. Yes, that slide show was an eye-opener! Looked like some of those properties have been vacant for years.
    Maricopa County is now coming to grips with the reality that few of the homeowners in trouble will be helped by the federal stimulus. So many are way over the limit for "upside down" and/or have no job so can't qualify. The feeling is we just have to move through the mess and come out the other side come what may. Even in the retired 55-and-over communities, houses are in foreclosure. You'd think most retirees would own them outright but, many were bought by locals to turnover and didn't make it.

    ReplyDelete
  3. Oh, Rebecca, it's not EVIL. What's evil is when the Fed pumps money into a system primed for fraud and deceit because politicians urged Freddie and Fannie to lend to people with liar loans, 95% LTV, and then guarantee them. Now that people have borrowed beyond their means and some lender has the audacity to ask to be repaid, it's evil?

    ReplyDelete
  4. Rebecca, you say, "...further price declines is sure to heighten the foreclosure process."

    Price declines in other houses have nothing to do with foreclosure.

    Foreclosure happens because persons cannot meet their contractual debt obligation.

    In short, either they lack sufficient cash flow to pay both debt service for the cash that they have rented (mortgage) and to pay to live (food, energy, transport) or they refuse to pay because they're immoral -- deadbeats.

    A mortgage is a contract for RENTED CASH, which uses the deed to the parcel and its improvement (the house itself) as collateral.

    Foreclosure happens because persons breach their contract.

    Persons no longer pay as they obligated themselves to do so.

    Because prices decline, even to near zero does not absolve someone from a contract to which he or she pledged himself or herself.

    A contract forms a private law between the parties and is enforceable by petition to our courts.

    The party that owns the mortgage moves to foreclosure to repossess the collateral for loan (the parcel and improvement) because the cash rentee (mortgagee) has become a deadbeat.

    It's irrelevant that prices of other houses are falling.

    The mortgagee has a contractual obligation to pay for the cash he or she rented, irrespective of the street prices of other houses or even his or her own.

    For if he or she could sell the house at a price below the debt obligation, that man or woman would owe the balance on the rented cash all the same.

    The biggest mistake persons make is not seeing that a loan is rented cash.

    It is not the deed itself, neither the parcel nor the improvement (house).

    On the Equilibrium Fallacy and House Prices

    It's a fallacy that things have an equilibrium price.

    That's nothing but claptrap pushed by the ignorance of Academia.


    House prices do not sit in isolation from other things.

    Many factors go into the prices of houses throughout the USA during any time period you want to choose.

    Much is driven by demographics and societal mores.

    If singlehood for females is championed over marriage, and if credit is easy to come by, you might have a period of greater demand to the relatively fixed supply and hence prices rising.

    Perhaps persons favor college education over acquiring a deed and thus decide to live with several unrelated persons in a rented apartment or house.

    Building Material prices that reflect supply and demand on world markets affect the replacement price of a house and hence the price of both existing and new houses.

    The government monopoly over building permitting and oversight affect the replacement price of a house and hence the price of both existing and new houses.

    The demand in the desire to live in one region relative to others as reflected in new population growth from both net births and net in-migration.

    An excessive amount of credit made available for the purpose of buying houses can drive house prices higher (see history: 1997 to 2006).

    A change in tax laws regarding liquidating a position in a deed can drive house prices higher (see history: 1031 Exchange Law of 1997).

    On Camden

    Camden is a dump, not because of the Mortgage Debt - House Price Bubble, but because the persons who live there have their own subculture, a dehumanized subculture of lawlessness, squalor and ignorance.

    The chief promoters of the Subculture of Camden are the politicians and bureaucrats of U.S. government as well as the government of the State of New Jersey and meddling academicians everywhere who lack any knowledge or truth about human nature.

    ReplyDelete