The housing bubble -- as seen on your street corner?
August 9, 2007 8:04 PM   Subscribe

I've been reading about the ongoing housing bubble collapse, and I am wondering how exactly neighborhoods are supposedly changing and especially where all these people go when they lose their home.

I recently read this passage on a webpage about the bubble: "As purchasers lose their homes to foreclosure, the real estate is being grabbed at bankruptcy prices by the banks and by any other investors with ready money. Whole neighborhoods of cities like Cleveland or Atlanta are turning into boarded-up ghost towns. And it’s not just lower-income home purchasers who are affected. The Washington Post has reported that for the first time in living memory that foreclosures are happening in Washington’s affluent suburban neighborhoods in places like Fairfax, Loudon, and Montgomery Counties."

So where do all these homeowners go exactly? Interestingly last month I was looking at rentals in a medium-sized city and there wasn't really any shortage on rentals. One would think displaced people would be lining up to sign leases from ghetto properties. But last month I was looking at medium-ranked rentals in a medium-sized city ($800/month rentals in the Midwest FWIW) and there was no sign of any rental shortages. There were lots of properties to look at.

Or are the Washington burbs just cherry-picked examples, with the collapse not really played out in full yet?

I guess I'm wondering what it is I should be seeing in my neighborhoods (and my parents neighborhood), and why it looks very much like business as usual. Are you all seeing anything different? Or is the turmoil limited mostly to the financial markets right now?
posted by calhound to Work & Money (25 answers total) 11 users marked this as a favorite
Response by poster: Also sorry for the duplicate repeat about shortages on rentals... I did sort of a hacked up editing job.
posted by calhound at 8:18 PM on August 9, 2007

A lot of the homes never had anyone living in them, as high as 40% of homes in some developments were flipper owned. Many of the hot markets are hugely over supplied. I read stats detailing 1, 2, 5, 19.6 years of inventory.

Aside from that in a down cycle people:
  • Move back in with their parents
  • double up (get roommates/take in boarders)
  • Move out of crashing areas into other areas. There has been a mass exodus out of Florida for example.

posted by Mitheral at 8:19 PM on August 9, 2007

Economics, much like physics and most sciences, gets terrible coverage in papers and web pages. Using standard econometrics or quantitative data (e.g., 2.3% increase in foreclosures) and narration such as "boarded up" and "ghost towns" is at its core, loaded language. Bubble, as used academically and by practitioners, varies wildly from the definition most people tend to give and I now consider the word a buzzword unless it comes from a very well respected source.

As to your question, more directly:

(1) You place a somewhat false dichotomy. Housing is not a commodity and is Beverly geometrically limited. A person whose job is in Washington DC and is a political consultant specializing in Latin American markets will not have many job opportunities in the Midwest. People do not simply pack up and move to entirely different areas of the country, therefore looking at Midwestern rental data is not going to be relevant or reveal anything.

(2) It is also bad to assume that affluent people would branch out to the nearby ghetto. Perhaps they are moving to less desirable geographically, but just as affluent outlying areas. They are willing to make the longer commute (gas is linear while housing prices are very non-linear functions when it comes to location -- theoretically the premium in most desirable neighborhoods approaches a limit and becomes sort of a competition, move out 20 minutes and drop your cash inflows by $300/mo on your mortgage and pay $300-(gas), gas not changing based on where you move).

(3) Again you use "collapse", but housing markets do not really collapse like equity and fixed-income markets are prone to do. They are incredibly local and we have yet to see them behave like a contagion. Currencies are a good example of something whose value depends greatly on other currencies, where one falls they all have a change of falling -- if the conditions are correct. Housing is completely different in that people can own houses and thus the market becomes incredibly illiquid. Liquidity is a huge factor when you talk in terms of bubbles, collapses and other behavior that cannot be described by supply/demand levels alone.

(4) What I am seeing now, is that housing in low-income minority neighborhoods are beginning to fall (the prime, sub-prime loan areas). This is sad as the area I drive by daily has really improved when families started owning and putting "pride in ownership" into their houses. When you're not renting from an uncaring landlord you tend to care about your equity. Most likely sleazy landlords will move back in, buy the houses on the cheap as banks desperately trying to get liquid and let the cycle of poverty continue itself.

Besides not everyone is on variable interest rate mortgages. I know quite a few affluent people paying ridiculously low, long mortgages when interest rates were rock bottom a while back.
posted by geoff. at 8:24 PM on August 9, 2007

Beverly = very, damn spell check
posted by geoff. at 8:24 PM on August 9, 2007

I live in the DC metro area and have been watching the housing market for the last few years. There has been a lot of flipping going on. Most of the people with any brains got out of it 18-24 mos ago, but I'm sure there were still some people who were still trying to flip property (whether out of stupidity or greed or just ignorance I have no idea) as the market has started to slacken in the last few months.

I'm sure there are people who had sub-prime loans that they frankly never should have had who are going to be in trouble, but there are definitely no "boarded up ghost towns" here. (Though that would be awesome, since then I could actually afford a freaking house.)

The biggest difference I've seen is that people who bought a house back in the mid 90s are now only being able to sell it for 250-275% of their original purchase price instead of 300% that they might have gotten a year ago.1

As this is an area where two-bedroom homes go for $350-400k, allow me to break out my very tiny violin. (Admittedly, I'm a very bitter, first-time homebuyer, who only lives here because this is where the work is.)

1 - Just a single datapoint: the house I used to rent was assessed at $181k in 1997, $202 in 2000, and $561k in 2007. It was a teardown, the house was a heap. From 1997 to 2006, it looks practically asymptotic on a graph. Right now, if you put it on the market today, I suspect it would still get $450-500k easily. So I don't see the market collapsing, as much as I see it correcting itself.
posted by Kadin2048 at 8:53 PM on August 9, 2007

the impact will not be anything spectacular. it will subtle. one big impact, already starting to occur, will be a drop in new homes sales. which means, less new homes being built, and thus many low income construction jobs will disappear. then, the standard of living of those families will suffer.

homes will be foreclosed in affluent neighbors, but they sell again (at a lower price). some of these homes will remain on the market longer. one visible difference will be how long for sale signs stay out in front of homes. a few years ago, the sign was up and marked sold in no time flat. now, a sign will sit, weather out an entire season, or longer.

one effect on many affluent people is that they will become chained to the home. they won't be able to sell, since that would mean taking a big lose. and as their mortgage rates adjust, they will be less able to float the monthly payment. so, they will have a nice beautiful home, but other areas of their lives will suffer, less vacation, no new car, etc.

the neighborhoods experiencing large scale collapse, that you mention, like parts of washington, detroit, and atlanta, all have other issues at play. these are all low income housing areas. detroit, as a city, has a collapsing economy, as the auto industry leaves. as those jobs leave, whole neighborhoods become unnecessary. in atlanta, some neighborhoods are being displaced by a growing economy. neighborhoods replaced by office parks. nationally, the downturn in the market will only hasten the problems that already exist is these neighborhoods. these people will slowly be displaced into other areas of the country. think of the displaced population from katrina, except it will occur slowly over years (and of course, it will effect only certain neighborhoods, not half the city like katrina).

ultimately, the housing bubble will mean a downturn in the national economy. it could trigger an all out recession (though i don't think it will).
posted by Flood at 8:54 PM on August 9, 2007

As seen in my neighborhood, there were a half-dozen houses up for sale with signs by not, say, Century21 or RE/MAX Realty, but sketchy no-name places like Help-U-Buy Brokers. I really don't know that the names are of subprime mortgage lenders, but I do wonder if they were foreclosures.
posted by salvia at 8:55 PM on August 9, 2007

It really depends on the location, both the metropolitian area and the neighborhood. I'm in San Diego, in a great neighborhood of craftsman homes and bungalows. I bought a undervalued house last year and I could flip it for a profit. So this market certainly hasn't collapsed.

In a good, established neighborhood the impact is minor. Nice houses still sell quickly. Houses with problems are sitting on the market much longer than they did previously. There's a 2 bedroom/1 bath house at the end of my street that's was on the market for a few months. The problem is that the house is only 700 sqft. Even in San Diego that's very small for a single family home. A year ago, that house would have been sold in a week or two.

In transitional neighborhoods, I'm sure the impact is much worse. People who gambled that their neighborhood would improve are probably losing money.
posted by 26.2 at 9:23 PM on August 9, 2007

Housing is not a commodity and is Beverly geometrically limited.

Beverly = very, damn spell check

How sad! I was looking forward to learning how to use "Beverly geometrically" appropriately in a sentence.
posted by gum at 9:39 PM on August 9, 2007

For the record, Detroit's housing market was in collapse well over a decade ago, in a chicken/egg spiral of "low tax base results in deteriorating infrastructure which results in nobody wants to live there which results in lower tax base......" To say that subprime mortgages have anything to do with it is like trying to blame NAFTA.

Today's highly mobile workforce adds an interesting wrinkle. Let's say Joe and Jane Average live in City A. Joe's company transfers him to City B (or maybe he gets a new job, doesn't matter). Joe and Jane find a place in City B (rented or purchased, again doesn't matter), but they can't find a buyer for their house in City A. Even if they could remotely find a renter for the place, it sure would be easier to let it be foreclosed. They already have a new place to live, so they aren't sweating the hit their credit rating would take.

This site may be of interest (or at least amusement) to you. My go-to guy for housing bubble issues is Dave Johnson at Seeing the Forest. You might also read The Mess that Greenspan Made.
posted by ilsa at 9:50 PM on August 9, 2007 [1 favorite]

People do not simply pack up and move to entirely different areas of the country, therefore looking at Midwestern rental data is not going to be relevant or reveal anything.

Of course they do, geoff. What world do you live in, anyway? I know a number of people, including myself, that have moved across the country for a new job more than once.

(3) Again you use "collapse", but housing markets do not really collapse like equity and fixed-income markets are prone to do.

Oh yes they do. Look at the huge housing collapse in Texas in the late 1980s. The damage was immense and very fast; many local banks failed. It was a complete cluster****. We're going to be seeing this all over the country.

They are incredibly local and we have yet to see them behave like a contagion.

Yet. We've never had a bubble of this magnitude across the entire country before. We're in entirely unexplored territory, and orthodoxy just isn't going to work anymore.

Housing is completely different in that people can own houses and thus the market becomes incredibly illiquid.

Which means that people just mail their keys to the bank and walk away.

Liquidity is a huge factor when you talk in terms of bubbles, collapses and other behavior that cannot be described by supply/demand levels alone.

Yep, but it's also the fact that houses in virtually all desirable geographic areas are priced far beyond the ability of normal people in this country to pay for them. The prices are going to drop a LONG way.

The reason the pricing went up so high was because of ridiculously easy credit availability. Lots of buyers led to house price rises, which led to very low foreclosure rates, which led to more credit, which led to higher availability and lower rates. Lenders kept coming up with crazier and crazier packages to let people get in on the insane returns on housing, packages designed for flippers. As soon as the market turned south, that entire category of loans did too.

Just like credit availability and all-time-low lending rates led to spiraling house prices and yet more liquidity, the credit crunch will cause a price collapse, many foreclosures, and an even deeper credit crunch, leading to lower prices, and more foreclosures, and less credit, and so on. Eventually this will bottom out, but it will take a long time.

The Fed will almost certainly try to forestall this by injecting yet more cash into the system, the same medicine that got us sick in the first place, but it's unlikely to work. The only reason they 'rescued' us from the stock market bubble of 2000 is because the huge liquidity they provided went into housing and debt; unless they can inflate an even MORE destructive bubble with yet MORE money, it's now endgame. The piper will be paid.

(3) Again you use "collapse", but housing markets do not really collapse like equity and fixed-income markets are prone to do.

Yes they do. Look at Texas in the late 80s.

Besides not everyone is on variable interest rate mortgages. I know quite a few affluent people paying ridiculously low, long mortgages when interest rates were rock bottom a while back

That's true, but even those people will be tempted to mail the keys to the bank if their home is worth less than they owe. When demand drops, prices drop. Credit drives demand, demand drives prices, prices drive credit. It works in reverse, too. Even the most solid of credits can be knocked into foreclosure if times get bad enough.
posted by Malor at 9:54 PM on August 9, 2007 [2 favorites]

Darn it, I forgot to add: calhound, this is a slow process. You're just seeing the tip of the iceberg. It'll take at least a decade to really shake out, and possibly two.

Japan suffered for more than twenty years after their real estate bubble, and only importing our ridiculous inflation jumpstarted their economy... it restarted before it was really done shedding the old stupidities. The cycle of creative destruction hasn't completed there, because their government refused to allow it, so I imagine it will probably resume as soon as their central bank stops priming the pump.

Bubbles are the financial equivalent of a nuclear weapon.... but this will unfold slowly and agonizingly in most places, because of all the attempts that will be made to prop things up. You'll probably see some markets collapse very swiftly, but then the Feds will get involved and the remaining failures will be glacially slow.
posted by Malor at 10:01 PM on August 9, 2007

Do you really think this is happening nationwide, Malor? In Portland, there are areas where all the houses are over $600,000, but I also know a fair share of 20-somethings in ordinary jobs (barristas, social workers, accounts receivable, etc.) who are buying OK places for under $200,000, even as rents rise rapidly, the population grows, and our land use laws attempt to limit urban sprawl. Heck, I'm one of them. I worry, but then I think about people in more expensive cities who pay more in rent for smaller places than I'm paying on my mortgage.
posted by croutonsupafreak at 10:22 PM on August 9, 2007

crouton: the derivatives and bad-credit mess is worldwide. Europe is in trouble too. We've gotten into some remarkably stupid problems, and untangling them will be very difficult.

Some areas will ride it out pretty well, others won't. Portland's pretty high-tech, so I imagine they'll do better than many places, but... I dunno. All I can really say is that, unless the Fed can reflate the bubble, there will be a powerful deflationary undertow in house prices for a long time.

And even if they CAN, eventually we'll get right back where we are today. The system as it has been is not sustainable.
posted by Malor at 10:29 PM on August 9, 2007

croutonsupafreak, I'm not sure if you were even saying otherwise, but land use laws make almost no difference. (Skim down to "what do the experts say?") Yes, I'm a city planner.
posted by salvia at 12:07 AM on August 10, 2007

Colorado Springs is one of several places that had been undergoing hyper housing and road construction.

So much so that a bunch of the new housing (or older rentals) was occupied by the people doing the construction.

Those people will wind up moving to someplace they can get construction or worse jobs. That employment sector is rapidly shrinking in such ex-hyper markets.
posted by MonkeySaltedNuts at 1:16 AM on August 10, 2007

To get back to the original question here: I am wondering how exactly neighborhoods are supposedly changing.

You definitely want to be reading the wealth of anecdotes in the many, many comment threads on Ben Jones' excellent Housing Bubble Blog. He probably puts up at least four posts a day, whose text is mainly culled from newspaper stories about the housing market from around the country, and each post gets hundreds of comments reporting on first-hand observations of conditions all over the country that may or may not jibe with the stories cited. I highly recommend reading a lot of what he's posted from the past month or so, though his archives go way way back. A lot of blogs like his have been warning about the bubble crash for months now, since the height of the market in mid/late 2005, so there's plenty to wade through if you've got lots of time.

Better yet, you can also read up on housing bubble blogs that concentrate on specific areas of the country, as every metro area seems to have spawned its own mini-blog in the past year. To take one notoriously foreclosure-prone metro area as an example, you can read Sacramento blog #1, check out Sacramento blog #2, see a site that just tracks the Sacramento housing inventory, etc. Do a Google search on "[YourMetroArea] housing bubble blog" to get more specific information.

True, the plural of "anecdote" is not "data". But the people who tend to hang out in the comments sections of housing blogs tend to be involved in the real estate business to some degree, and often have connections to realtors or builders or mortgage companies or local banks, and they see things that many of us mundane folk wouldn't. The overall effect is like piecing together a jigsaw puzzle.

Finally, the most common "first wave" effects of houses being foreclosed upon and repossessed by the banks (who then often can't sell the houses, so they sit on the market empty and unmaintained) are often, in warmer areas, untended backyard swimming pools that breed mosquitoes, smell pretty nasty, annoy the neighbors, and which may help spread the West Nile virus. Also, overgrown lawns are another typical problem. The squatters come later...
posted by Asparagirl at 1:33 AM on August 10, 2007

Oh, and as for "why it looks very much like business as usual"?

That's because despite the recent spike in foreclosures, they're really just starting to roll in now. It won't get really bad until late next year, after a lot of households' ARM's (adjustable rate mortgages) start resetting and they can't keep making the new higher payments, or until people go in for a "normal" refinance and realize that the loan standards have become so tight that they can't get the HELOC they thought they could get to consolidate their other bills.

Also, it takes about six months from the time a family stops making payments until the bank actually starts kicking them out. Then the bank has to deal with the home on the market, and probably won't price it low enough to move it very quickly. That's partly why inventory has skyrocketed already -- they're kind of in denial about realistic home prices, so those condos and homes just sit there and don't sell and grow mold. (Literally grow mold, in the case of Florida REO homes.) And that doesn't help anybody either, not the neighborhood people who have to live with the empty house nearby and not the banks who are starting to need liquid money badly.

So, this is a slow moving trainwreck of a problem that is only going to get worse in 2008 and 2009. However, the effect on Wall Street -- on worldwide markets, really, not just the US anymore (have you seen the Nikkei lately?) -- has been quite scary in the past few days and may crash in a more extravagant way even before lots of people's ARM's even reset! Which a lot of people, even bearish types, were not expecting. It's getting kind of frightening. And no, the Federal government really can't help here, because for various reasons they can't raise nor lower interest rates without doing damage to the economy, no matter how much TV guys like Jim Cramer yell at them hysterically to do something, anything, before it all starts crashing down.
posted by Asparagirl at 1:53 AM on August 10, 2007

I'm going to have to agree with Geoff on this one - as a resident of the DC suburbs, I'm not seeing any signs of the DREADED COLLAPSE that's supposedly coming. Homes in my neighborhood (where I bought at just about the peak of the market, sadly) are still selling quickly. Not AS quickly, and not for the insane prices they would have gotten before, but they're still selling.

I take a very "The Economist" point of view towards all of this - yeah, the market is going to go soft. The sub-prime market fiasco isn't going to help, that's for sure. But take a look at world markets - the US has been behind the curve on this thing the whole way out, and I think we're going to stay that way. The UK had, percentage-wise, a notably larger increase in median home price over the last 20 years, and as far as I know, they're not freaking out like the American media is. Maybe it's because I'm not hearing about it, maybe it's because they're British, or maybe it's just because instead of "popping," the market is just going soft.

And Malor, I'm going to have to disagree with you a little bit - there are scads of people in the Washington area who are here solely because their job exists here, and nowhere else. I'm not just talking about "political" jobs per se, but tons of government-related jobs, and other things you wouldn't even think about - if you want to work fighting Human Trafficking, you can only do it in DC.

Really, the biggest flux I see in the DC housing market in the next few years will be if a Democrat wins in 2008 - tons and tons of Republicans will be selling their homes (in affluent areas) and moving back to their home states. Democrats will be buying them en mass, as they come to fill all the little jobs that need to be filled. To the victor the spoils, as they say.
posted by god hates math at 6:28 AM on August 10, 2007

Salvia, companies like Help-U-Sell (or Buy) are discount brokerages -- kinda like Zip Realty but even cheaper. For a couple of hundred bucks they'll put your property on MLS (the house listing service). This feeds it to tons of internet sites. It's up to you to advertise every where else. Sometimes homeowners can't afford to pay the listing agent commission, sometime they're just cheap.

Once a property has been foreclosed, the banks usually go with a national brokerage -- realtors know their neighborhood, advertising avenues, etc.
posted by whitneykitty at 6:38 AM on August 10, 2007

I'm in the DC area AND my house is on the market. It's a bad time to be selling. Since January, only 1 out of 6 houses in Fairfax/Loudoun/Falls Church put on the market has a contract on it, and it's worse for some of the closer-in counties.

In looking around at comps, it was pretty easy to pick out 5-6 equivalent houses to mine that were clearly in foreclosure - either because they were priced so low as to be a clear make-my-money back move or because of the wording of the description. They were all represented by "real" real estate brokers. I think it's the tip of the iceberg, and there are more that aren't obvious. The discount brokers are hired by people who are looking to make as much money as they can by cutting the 6+% commissions (and the new, $300-500 "administrative fees" many but not all realtors are charging on top of their commissions around here).

I will probably end up making 25% less of a profit than if I had sold 1 year ago, and I'm OK with that. I'm also OK with it being on the market for a couple of months. I'm not under the gun to move right now this minute.
posted by julen at 7:06 AM on August 10, 2007

That's true, but even those people will be tempted to mail the keys to the bank if their home is worth less than they owe.

You're overstating the amount of drop in prices, and the willingness of people to walk away from a house.
posted by smackfu at 7:58 AM on August 10, 2007

Of course they do, geoff. What world do you live in, anyway? I know a number of people, including myself, that have moved across the country for a new job more than once.

Yes of course people move, they move for new jobs, not because the cost of a condo in midtown Manhattan. I don't have the data, and my rudimentary searches didn't turn up any data, but it would be interesting to see price correlated to location. I have a feeling it would follow a power-law distribution where you have extreme deviations against some sort of limit, but that the proverbial long-tail will aggregate to account from home sales, e.g., the majority of Americans are not affected by highly speculative buying/selling but those that are account for a high visible, but largely inconsequential share of the market. That is the opposite of what a market bubble collapse does, where one event can have devastating consequences.

That is we are more likely to see long-term downturn that is slow as people adjust, but nothing like the 1987-esque collapse that papers are seeming to insinuate.

I think we agree fundamentally. I whole-heartedly endorse the notion that we know what we don't know, and we should not fall into the trap of induction. I strongly believe bubbles are unknowable a posteriori and are not as deterministic as they are played off to be. I've seen plenty of currencies and commodities behave with "bubble-like behavior" ... I guess what I'm trying to clumsily apply is Cramer's large-deviation theory. Here's applied mathematical treatment in regards to asset returns and price changes ... starting on page 9. It is the only theory I've read that satisfactorily explains local large deviations and their effect (long-memory) on price movements. I have a feeling you'd find a strong long-memory on housing prices especially since we've had housing downturns in speculative markets in recent memory. Are the sub-prime concerns exogenous to this model? I don't believe so, as I believe the hypothesis is broad enough to account for such wild randomness ... the question is whether another element outside the model and independent of sub-prime concerns will override any contagion effect.

I recently picked up a copy of "Bubbles and crashes
in a behavioural finance model"
, but have not completed it. I have heard good things about it, so hopefully I'll complete it today and see if has any relevancy to this.
posted by geoff. at 11:18 AM on August 10, 2007

At the moment I am looking to buy a house so I really appreciated all the information in the answers to your question. As to my answer, it appears from where I sit (Houston, TX) the crisis, bubble-pop, whatever will be, is going to have a small effect (a few percentage points, five to ten) one way or another on established stable neighborhoods.

Buying into a new (or young) real estate development now is for people who have what the money books call a "high risk tolerance". I am nearly certain I do not have one.
posted by bukvich at 6:45 PM on August 10, 2007

I don't have the math background to follow that PDF; they're using many terms I've never heard of. My instinct is that it's complete bullshit: it has the sound of people lost in their own heads instead of here in reality. It's easy to mistake the map for the territory, and they're at so many levels of abstraction I'm not sure they'd even recognize the actual territory anymore.

The credit bubble is the primary driver of the real estate bubble, and the credit bubble is worldwide. Ergo, I presume the results will be worldwide. Real estate markets are local, but credit markets are not, and the driving force in skyrocketing prices is too much credit, not too little real estate.

But, yes, a geographical chart of deviations from the historical mean would be very interesting data. Could be applicable for future bubbles too. Do those who benefit the most from a bubble suffer the most when it pops? Or do they stay on top while everyone else suffers?

I'd honestly rather not have the opportunity to find that out, but it looks like we're going to, either now or later.
posted by Malor at 6:48 PM on August 10, 2007

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