After a six-year boom in home prices, the housing bubble is flattening out, and in some areas, prices are dropping.
"The median price of new homes sold was 9.7% lower in September 2006 than in September 2005—the largest year-over-year decline since 1970," said economist Christian Weller.
"The steep downturn in the housing market has caused a major drag on jobs and the economy," added Paul Sarbanes, Democratic Senator from Maryland.
The 5-term, retiring senator noted that the housing market is presently experiencing "serious turbulence," and prices are dropping 10 to 25% in Florida, California, Northeast, and a lot of the Midwest. As a member of the Senate Banking, Housing, and Urban Affairs Committee, Sarbanes has been involved in every major housing issue before the Senate for over 20 years.
Sen. Sarbanes was invited December 8th by the liberal think tank, Center for American Progress (CAP), in Washington, D.C., to discuss policy issues regarding how the housing boom has adversely affected homeowners and the economy. Following his introductory remarks, three economists addressed the economic downside of the bauble burst, and a legal expert spoke on abusive lending practices that have proliferated during the housing boom.
Sen. Sarbanes acknowledged he was not an economist and was careful not to go into the intricacies of economic analysis, saying he would leave that for the economists who spoke after him. The economists at this forum agreed on several key points based on information made available by the federal government and by their own independent analyses. These facts were summarized by Christian Weller, Senior Economist at CAP, frequent guest on national TV and radio, and author of nearly 100 articles in academic and popular publications, according to his resume.
The Six Year Boom
Millions of homeowners will remember the six-year boom as a time when they were able to take advantage of the large appreciation in their home values above the purchase price. In addition, during this period, homeowners used the low interest rates to borrow against the seemingly ever rising value of their homes to finance home improvements, college tuition for their children, and other forms of consumption.
"Home values have consistently outpaced inflation, and that, of course, translates into wealth," said Sarbanes, pointing out the good side of the housing bubble. During the past six years, home equity has increased to 4˝ trillion dollars, and homeownership is nearly 70%, and this is all part of the "American Dream," commented Sen. Sarbanes.
The Housing Boom in the past six years was not a home-ownership boom. Instead, you have to go back to the mid-1990s to find an unprecedented boom in homeownership rates, particularly for racial minorities.
Homeownership for Blacks in 2000 was 47%—up from 43% in 1995. By 2005, homeownership had only reached 48%, based on data from the U.S. Census. For Hispanics, the increase was more noticeable: 1995-42%; 2000-46%; 2005-49%. Thus, the homeownership growth rate has slowed markedly for the boom period, 2000-2005.
Senator Sarbanes lamented the fact too that the gap between White and Black homeownership had not budged since 2000, after significant improvements during the 1990s.
For the population as a whole, homeownership was 69.2% at the end of 2004, but by the second quarter of 2006, it had declined to 68.7%, according to a Census Bureau report cited by Weller. "One clear effect of the rapid rise in home prices was that it made it harder, despite readily available credit, for families to become homeowners," writes Weller in "The End of the Great American Housing Boom," a publication that was released at this forum.
With the sharp run-up in home prices, "many American families may never take that first step in homeownership due to still over-inflated housing prices and rising interest rates," says Weller.
Also, more family wealth is now concentrated in residential homes, which makes families more vulnerable to housing market downturn. This is especially true for low and moderate-income families or anyone who has relatively large shares of their assets tied up in their homes.
Ruined By High Cost Home Loans
At the beginning of this year, housing prices began to flatten or reverse course. "Rising interest rates on adjustable rate mortgages and home equity lines of credit now leave first-time home buyers and many homeowners exposed to large debt payments," says Weller. More homebuyers chose the adjustable rate mortgages, or ARMs, because the interest rates, at least initially, were lower than a 20- or 30-year fixed rate mortgages. But the borrower of an ARM accepts higher risk of interest rates rising in the future.
Similarly, during this period of rising home values, many homeowners used the equity they held in their homes to finance the purchase of their home by a second mortgage, and again like the ARMs were subjected to the vicissitudes of variable interest rates.
Senator Sarbanes took aim at the high cost home loans and lack of full disclosure that low income and minorities had to use in order to purchase their homes. These are called subprime loans, which are typically more than 3 percentage points higher than prime rates and are for people who are of higher credit risks. The number of these mortgages has skyrocketed; in 2000, they made up only 2.4% of all mortgages, and in June 2006, subprime loans had reached 5.7 million, or 13.4% of the total, according to the Mortgage Bankers Association of America, as cited by the New York Times (Dec 6).
Nearly 55% of the home loans for African Americans were these high cost home purchase loans, whereas only 17% of Whites had such loans. Sarbanes cited data that show that 20% of Blacks forced into the subprime ARM loans would qualify for prime rates.
The problem with the subprime ARM loans is that they initially offer a "teaser" rate that may be affordable for a short period of time, most commonly two years (the "2/28s"), and then the payments are adjusted generally every six months. The "exploding" ARMs can increase up to 40% said Senator Sarbanes and Kimberley D. Warden, an attorney for the Center for Responsible Lending. With the decline in home appreciation or falling prices, the borrowers may not have enough equity in their homes to refinance. There is data coming in from certain locals that shows that the percents of delinquent payments and foreclosures are unusually high with subprime mortgages.
Some subprime lenders are aggressively selling loans that are not affordable or sustainable to people who don't understand the nature of the loan. Sarbanes and Warden want to enact legislation that would prevent lenders from qualifying applicants, who may not earn enough to make payments at the highest interest rates possible under the loan's terms.
Economy Hurt by Housing Construction Decline
Finally, another adverse impact of the end of the housing boom is that the construction boom, and all it did to boost the economy and job growth, is ending. Housing related industries have, during the past six years, accounted for a large share of jobs and an even larger share of job growth.
"Nationwide, a record of almost one in ten jobs is now in housing-related industries…No other industry, save healthcare, has contributed as much to the strength of the job market," says Mark M. Zandi, Chief Economist and co-founder of Moody's Economy.com, Inc. There has been about one-third decline in permits for new single-family homes, said Sarbanes. He expects 50,000 job losses per month for the next six months, and a decline of 1 to 2% in the GDP growth.
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