America's New Working Poor, Archive: PART 7: HOUSING AND BANKING – COLLAPSE OF MIDDLE CLASS HOUSING (8/13/13)

PART 7: HOUSING AND BANKING – COLLAPSE OF MIDDLE CLASS HOUSING

By Allen Stansbury, Senior Associate, Center for Community Futures, Berkeley, CA

“The stock market boom and the housing bubble of the early twenty-first century helped to hide the structural dislocation that America was going through. The real estate bubble offered work for some of those who lost their jobs, but it was a temporary palliative. ..it fueled a consumption boom that allowed Americans to live beyond their means: without the bubble, the weakening of incomes of so many in the middle class would have been readily apparent. This sectorial shift was one of the key factors in the increase in inequality in the US.[1]”

There is a growing concern by US policy makers that the US middle class has fallen behind the rest of the world in key areas such as education, health and medical, and related basic needs that serve to support its people. Not only has the US has continued to trend behind other developed nations, but the US is falling behind in several basic expectations by Americans.

Unfortunately, the housing bubble was not the only cause of the shift of middle income families to the working poor. Deregulation of the banking industry starting in 1999 eliminated protection of banks from riskier investments particularly investments based on derivatives, lending to unqualified buyers requiring little or no documentation, and then packaging these low-quality “subprime” mortgages and reselling them as “Grade A” investments. Speculation here alone caused even larger incomes and thus cheaper money.

Consequently when the credit market seized up, most of the other major institutions associated with the banking and mortgage industry failed to do their jobs. Financial Crises Inquiry Commission Report established by law to investigate and report back to Congress. Its final report was published January 2011 and concluded that the financial crises was “avoidable” and that “widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets” starting with the Federal Reserve, the Security Exchange Commission, the Comptroller of the Currency and other government institutions.

But, the key cause was “dramatic failures of corporate governance and risk management at many systemically important financial institutions” and that “there was a systemic breakdown in accountability and ethics.” The accounting firms, particularly the major multi-national firms and credit rating agencies were enablers of the financial meltdown. They failed to fulfill their fiduciary function assuring that there was proper accounting and auditing procedures being followed and securities were being properly rated. Instead the public was lead to believe that these AAA rated bonds were being traded when in fact they were worthless junk bonds created out of unsecured mortgages, and that major US financial institutions met all of the requirements for financial solvency and stability when in fact needed a huge bailout from the US government.

But, in doing so investment banks went under (Lehman Bros), AIG nearly collapse, and others that were closed overnight and merged into other banking institutions. Once the credit markets to seize up, trading ground to a halt, the stock market plummeted, and the economy plunged into a deep recession.

This had a catastrophic impact on the US middle class. The largest asset in most middle class investment portfolio was their home. The commission reported that about four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosure process or are seriously behind on their mortgage payments.

If that was not enough, many of the major banks including Well Fargo, Chase, Bank of America, Citigroup and Ally employed unethical schemes such as “robo signing” foreclosure documents which later led to a $25 billion foreclosure fraud settlement with 49 of 50 US States with another $40 billion by these five banks to aid their distressed mortgaged holders.

Nearly the collapse of the housing bubble resulted in $11trillion in household wealth losses, with retirement accounts and life savings swept away. However, the worse tragedy was that 26 million Americans ultimately lost their jobs from the resultant world-wide recession.[2]

Legislation such as (Frank-Dobbs) resulting from the failures of 2007-08 did not go far enough in regulating US financial institutions. Congress failed to include some serious provisions and now there are five banks that are “too big to fail” and account now for 90% of the mortgage market lending. [3]

As of this writing, banks are now solvent and are well capitalized and the housing market somewhat stable. Mortgage interest rates are lower now than ever. While foreclosure rates continue to drop, some regions, especially in the coastal communities are experiencing sharp rises in home sales. This has led to very low inventory in some areas causing sharp price increases. Some housing market experts are beginning to sense that this might be the start of another housing bubble.

Another cause of this sharp decrease in housing inventory is the very large number of inner city homes and apartments that were bank foreclosures but are not for resale. This is especially true of units in predominately black communities where banks have chosen not to secure nor maintain these properties so that they could be resold when the economy rebounded.[4]

In most regional markets home values are depressed making it an excellent time to buy one’s first home. However, for those who made their home investments 10-20 years ago, most homeowners still see their homes “underwater” (mortgages in excess of the property market value) and consequently are locked into higher and older mortgage interest rates. Paying on a property half its value at a rate 2-3 times the current rates make little sense.

To view US housing and banking details and trends on the US middle class click on the downloadable PDF file below.

The Dots…Selected Housing and Banking Trends in the US: 1980-2010

1. In 1933 the Glass-Steagall Act was signed into law as the result of the great depression separating commercial bank practices from risky investment banking practices.

· However, starting in the Reagan presidency deregulation of the savings and loan industry and later the banking industry gave rise to the boom and bust eras of the housing industry, first starting in 1986.[5]

· 1999 Gramm-Leach-Bliley Financial Modernization Act effectively repealed the firewall between investment banking and commercial banking prohibited by Glass-Steagall.

· This deregulation is partially to blame for the dramatic increase in housing speculation and housing prices leading to a highly volatile housing market, crashing less than 10 years later in 2007-8.[6]

2. Depending upon location in the US, during the period 1979-2005 housing price increase varied from sustainable to dramatic unsustainable rates of increase

· The US housing market peaked in 1979-81, followed by declines in 1984-86; another peak during 1987-88, major decline 89-93; followed by a long term increase lasting until 2001 recession and then rebound until 2005-6 then entering a steep decline starting 2006 (see chart 1 below)

3. For most middle and low income families the home is their number one asset.

· During the global recession US housing values started to fall sooner than stock prices and, unlike the stock market, the housing market has not recovered

· Realtytrac, which publishes a database of foreclosure and bank-owned properties, has found that as of December 2011 there are over 45 million mortgages of which 28% were delinquent or foreclosure, in addition:

o 4 million foreclosures have been completed and 8.2 million initiated and that the average loss in value was nearly $200,000 per home (see chart 2).[7]

o There were over 3.6 million delinquent home mortgages at the end of 2011

o 12.5 million are “underwater”

· Zillow, an on-line real estate database, revealed that as of the end of 2010 the total value (of home equity in the US) lost since the market peaked in June 2006 to $9 trillion. [8]

· Currently, some 14.7 million homeowners owe $700 billion more on their mortgages than their homes are worth

4. For those over age 50, a recent published study by the AARP revealed:[9]

· As of December 2011, approximately 3.5 million loans of people age 50+ were underwater—meaning homeowners owe more than their home is worth, so they have no equity;

· 600,000 loans of people age 50+ were in foreclosure, and

· Another 625,000 loans were 90 or more days delinquent.

· From 2007 to 2011, more than 1.5 million older Americans lost their homes as a result of the mortgage crisis.

· Among people over 75, the foreclosure rate grew more than eightfold from 2007 to 2011, to 3 percent of that group of homeowners.

· Older Americans are losing their homes because of pension cuts, rising medical costs, shrinking stock portfolios and falling property values

5. The share of families living in middle-income neighborhoods has dropped from 65 percent in 1970 to 44 percent in 2007, during which this population shifted to low-income housing from 8% to 14%.[10]

· As the middle class declines it is moving to lower income neighborhoods

· At the same time those in the upper income bracket neighborhoods doubled from 15% to 31%

· What this means is that the classes are becoming more segregated as family and household incomes become more divergent.

6. Net results of the declining housing market and its economic impact on the US middle class are:

· Home that are “underwater” are causing many to walk away and abandon their properties. Consequently:

o Abandoned homes are causing further decline in home values

o Leading to further degradation of neighborhoods and increase in crime rates

· Collapse of the housing market, of housing finance, and of associated industries has caused:

o Doubling up of families means less housing demand

o Dramatic decline of urban neighborhoods in many locations, leading to higher poverty rates, abandoned housing, increased crime rates, etc.

o The number of American kids who are homeless are estimated to be 1.6 million, an increase of 38% between 2008 and 2011[11]

o Less income from property taxes for education means fewer teachers, drop in the quality of education and doubling up of students in class rooms

· Large percentage of mortgages of middle class houses are more than market value

· Low demand means increased supply, causing further decline in housing prices,

o Leading to increased foreclosures,

o More homeless

7. The social impacts are as great or greater in causing the decline of the US middle class and its segregation. A recent NY Times article[12] concluded:

· Children in mostly poor neighborhoods tend to have less access to high-quality schools, child care and preschool, as well as to support networks or educated and economically stable neighbors who might serve as role models.

· Further isolation of wealthy families means less interaction with people from other income groups and a greater risk to their support for policies and investments that benefit the broader public — like schools, parks and public transportation systems.