The U.S. Housing Market Is Crashing and Burning, Crushing Both Middle Class and Lower Income Families in the Process

While many wealthy individuals and investment companies have bought up foreclosed and distressed homes in all cash deals, the 80% in the middle class and lower incomes are having a hard time affording to buy or rent a place to live. One hears very little about this problem because the politicians we elect are for the most part unaware or indifferent, but this is a serious social and economic problem in the making. It’s where the rubber meets the road in the growing wealth divide that is crippling the economy.   

Housing construction fell well behind the rate of new family formation in the Great Recession of 2007-08, and the catching up that was supposed to fill the gap has fizzled. There is a housing boom of sorts underway, but it is concentrated in the million dollar plus segment of the market. We see statistics about how the price of houses is recovering -- a 12% increase we are told over the past year -- but a closer look shows that the increase in concentrated in the booming luxury and vacation home segment of the market where one house recently sold for the all-time record price of $200 million.

One of the beneficiaries of those sales, the luxury homebuilder Toll Brothers (TOL), reported last week that its net income more than doubled last quarter due to strong sales and rising home prices. Its executive chairman, Robert Toll, said he expects sales will rise, and if tight supplies remain, prices could increase rapidly.

Meanwhile there are still 10 million underwater mortgages, where the house is worth less than the mortgage, making it impossible for the hard pressed owners to sell and thus taking these homes off the market creating a shortage of homes for sale. With a scarcity of existing homes for sale, those available are quickly snapped up by corporate and other investors who can afford all cash deals or large down payments. Making matters even worse for first time home buyers, mortgage lenders have tightened loan standards and raised down payment requirements to the point that few are able to qualify.  

Another problem holding back mortgage lending is the lack of any progress whatsoever in resolving the future of Fannie Mae and Freddie Mac, the two Depression Era government sponsored enterprises (GSE’s) that currently account for over 90% of all mortgage insurance and securitization of mortgages. These GSE’s collapsed during the Great Recession of 2007-08 and have been in government receivership ever since. Without these institutions it is no exaggeration to say that there would be no mortgage financing and no housing market to speak of. Conservative Republicans would naturally like to eliminate all government involvement in mortgages and housing, in which case the typical home mortgage would probably look a lot like the 8 year 8% auto loans that are now becoming commonplace, while Democrats realizing that in the present political climate there is no chance of reasonable compromise on reforming the GSE’s, have been content to keep them operating in receivership. Given this uncertainty about the future of mortgage financing, most of the large banks have preferred to sit on the sidelines ceding the lion’s share of the market to one institution, Wells Fargo, that has long excelled in the field.

With construction of moderately priced houses stalled below the rate of new household formation, a shortage of affordable housing has become apparent in many markets. Meanwhile the demand for rentals is rising rapidly because of the middle class and lower income individuals frozen out of the mortgage market and pushed into renting, as well as a growing number who prefer to rent because they no longer see a home as a good investment and are already burdened by student loan debt. This short supply and rising demand has resulted in what Housing and Urban Development Secretary Shaun Donovan calls "the worst rental affordability crisis this country has ever known.”

A recent study by the Joint Center for Housing Studies at Harvard University found that almost half of all renters are paying more than 30% of their income in rent -- more than double the percentage in 1960. Business economists using aggregate data and generally far removed from the lives of ordinary Americans are blind to these realities which is one reason they are so far off in their projections. They have yet to grasp the reality that there are now two Americas, that of the 20% and that of the 80%. Home ownership, which is generally the only significant asset owned by the 80% is rapidly shrinking as many homes are passing from individuals to heavily capitalized corporations like the massive Blackstone Group (BX) and wealthy investors who are converting them to rentals at much higher rates of rent, which is one of the leading mechanisms through which in this case mainly the 3% are sucking the blood out of the 80%. There are hundreds of other mechanisms for transferring income and capital from the 80% to the 3%, but this is one of the most important. Until economists build these new realities into their projections they will continue to be far off in their projections.

The housing market is a cycle that needs buyers coming in at the bottom so others can move up. If that chain breaks down out at any point -- because of low supplies, tight lending requirements, or the absence of new buyers due to college debt, low wages or some other reason -- the whole edifice will come crashing down, which is what seems to be happening at present. The breakdown of the housing market is also a significant factor in the high unemployment and sluggish economic performance. The flexibility of the American economy, including the ability of workers of modest means to pick up and move to the places where jobs exist, was always one of its great strengths. With so many frozen in place with distressed mortgages or forced to live with family and friends because of the unaffordability of housing, that great strength has been dissipated. We see a shortage of workers in the booming oil fields of North Dakota and parts of Texas, with those hardy enough to move there paying exorbitant rents to live apart from their families in trailers, motel rooms and dormitories, when in years past we would have seen inexpensive houses spring up overnight by the thousands in such locations.

The result in human terms is that both lower income and middle class families, especially young new families, even when they can find work at very good wages, are having a hard time with no relief in sight.