The great housing turndown, which started as early as 2007, has entered a second and more difficult phase. We can trace this to Monday, September 15, 2008 just as October 29, 1929 – “Black Tuesday” – marked the start of the Great Depression. September 15 does not yet have a name and the name “Black Monday” has already been taken by the 1987 stock market crash. The 1987 crash looks in historical perspective like a slight downturn compared to what the world faces today.
On September 15 – let’s call it “Meltdown Monday” – the housing downturn ended its Phase I and burst into financial markets leading to the most serious global recession since the Great Depression. Indeed, International Monetary Fund head Dominique Strauss-Kahn now classifies it a depression.
Phase I claimed its own share of victims; Phase II seems likely to hit many more.
Phase I of the Housing Downturn
Whether in depression or recession, parts of the United States housing market were already in a deep downturn well before September 15. Phase I of the housing downturn started when house prices reached an unprecedented peak in some markets and began fell into decline. By September of 2008, house prices in the “ground zero” markets of California, Florida Las Vegas, Phoenix and Washington, DC had dropped from 25 percent to 45 percent from their peaks. These markets represented 75 percent of the overall lost value among the major metropolitan areas (those with more than 1,000,000 population).
The Varieties of House Price Escalation Experience: In Phase I, the house price escalation and subsequent losses were far less severe in other major metropolitan areas. This depended in large part to the degree of land use controls – such as land rationing (urban growth boundaries and urban service limits), building moratoria, large lot zoning and other restrictions on building routinely – that helped drive prices up to unsustainable levels. This effect, cited by a number of the world’s most respected economists, was exacerbated by the easy money policies adopted by mortgage lenders.
On the other hand, in the “responsive” land use regulation areas, the market (people’s preferences) was allowed to determine where and what kind of housing could be built. In these areas housing prices rose far less during the housing bubble and fell far less during Phase I of the housing downturn.
Leading to the International Financial Crisis: These radically differing house price trends set up world financial markets for ”Meltdown Monday.” The easy money led to a strong increase in foreclosure rates, an inevitable consequence of households having sought or been enticed into mortgage loans that they simply could not afford. Yet it was not foreclosure rates that doomed the market. It was rather the unprecedented intensity of those losses in particular markets.
Foreclosures were not the problem: Foreclosures happened all over. Foreclosure rates rose drastically in California and the prescriptive markets, but had relatively less impact in the responsive markets of the South and Midwest, where house prices changed little relative to incomes.
Intensity of the losses was the problem. The problem lay largely in the scale of house value losses in some markets, particularly the most prescriptive ones. Lenders faced foreclosure and short sales losses on houses that had lost an average of $170,000 in value in the ground zero markets. In the responsive markets, on the other hand, average house value losses were less than one-tenth that, at $12,000 per house (http://www.demographia.com/db-hloss.pdf).
By the end of Phase I of the housing downturn, house value losses in the prescriptive markets had reached nearly $2.3 trillion, accounting for 94 percent of the total losses in major metropolitan markets (those with more than 1,000,000 population). If the market had been allowed to operate in these markets, the losses in the prescriptive markets could easily have been one-fifth this amount. Most likely the mortgage industry and the international economy might have been able to handle such losses, sparing the world the current deep financial crisis.
True, the housing bust would not have happened without the easy money. Neither easy money nor prescriptive land use regulation were sufficient in themselves to send the world economy into a tailspin. But together they conspired to create the conditions for “Meltdown Monday”.
Phase II of the Housing Downturn
The Panic of 2008: By September 15, the “die had been cast.” The holders of mortgage debt could no longer sustain the losses that were occurring in the ground zero markets. This led to the Lehman Brothers bankruptcy and then to a financial sector that seems to be accelerating faster than the taxpayers can pick up the pieces. The ensuing “panic” – a 19th century synonym for a severe economic downturn – has led to millions of layoffs, decreases in demand across the economy and taxpayer financed bailouts around the world. Many have seen their retirement funds wiped out. Others have lost their jobs. American icons, such as General Motors and Bank of America have been relegated to begging on Washington’s K Street.
Housing Downturn Broadens and Deepens: The panic has now brought about a new phase in the housing downturn – what I label Phase II. In Phase II, a deteriorating economy starts to kick the bottom out of the rest of the housing market. With evaporating confidence in the economy and the drying up of demand, house prices have begun a free-fall in virtually all markets, regardless of the extent to which their prices had bloated.
Our analysis of National Association of Realtors data shows this. In almost all markets house price declines accelerated during the fourth quarter of 2008 (the first quarter following Meltdown Monday). In just three months, median house prices fell an average of more than 12 percent in the major metropolitan markets. In the ground zero markets, house prices dropped 14 percent, with the average loss from the peak exceeding 40 percent. In the responsive markets, prices fell 11 percent, approximately double the previous reduction from the peak (See Table).
Thus, the difference is that in Phase I, house price declines were in proportion to the previous price escalation. In Phase II, the percentage declines are generally similar without regard to the house price increases.
|
House Price Deflation from Peak
|
|||||
|
By Phase of the Housing Downturn
|
|||||
|
PRESCRIPTIVE LAND USE MARKETS
|
RESPONSIVE LAND USE MARKETS
|
||||
| Factor |
Ground Zero
|
Other
|
All
|
ALL MARKETS
|
|
| Prices: To Phase I |
-31.70%
|
-11.10%
|
-20.80%
|
-5.90%
|
-17.90%
|
| Prices: To Phase II |
-41.40%
|
-21.40%
|
-30.80%
|
-16.60%
|
-28.00%
|
| Prices in Phase II |
-14.20%
|
-11.60%
|
-12.60%
|
-12.40%
|
-14.20%
|
| Loss per House: To Phase I |
($193,800)
|
($42,400)
|
($96,300)
|
($12,200)
|
($66,900)
|
| Loss per House: To Phase II |
($253,000)
|
($81,800)
|
($142,700)
|
($34,200)
|
($104,800)
|
| Loss per House in Phase II |
($59,200)
|
($39,400)
|
($46,400)
|
($37,900)
|
($59,200)
|
| Gross Losses (Trillions): To Phase I |
($1.82)
|
($0.46)
|
($2.29)
|
($0.16)
|
($2.44)
|
| Gross Losses (Trillions): To Phase II |
($2.40)
|
($0.99)
|
($3.39)
|
($0.44)
|
($3.82)
|
| Gross Losses (Trillions): in Phase II |
($0.58)
|
($0.52)
|
($1.10)
|
($0.28)
|
($1.38)
|
| Phase I: To September 2008 | |||||
| Phase II: To December 2008 | |||||
| Major Metropolitan Markets (over 1,000,000 population) | |||||
| For markets by classification see: http://www.demographia.com/db-hloss.pdf | |||||
Recession or Depression?
It’s critical to note that the decline is by no means as deep as in the 1930s. On the other hand, there is no indication that conditions are going to improve markedly in the short run. Millions of households who saw their retirement accounts devastated are likely to curb consumption for years to come. The key question is whether we are in the equivalent of 1933, in the pit of the downturn, or in the equivalent of the late 1930s, soon to begin a long, slow climb out.
For housing though, this is a depression. Never before over the last half-century have house prices fallen as they have in the prescriptive markets during Phase I of the housing downturn. And since the bust, during Phase II, overall price declines are on a par with the worst years of the Great Depression. “Meltdown Monday” has incited a downward spiral whose course will be the topic of future commentaries on this site.
The classifications of the major metropolitan markets and price declines for each market are shown in http://www.demographia.com/db-hloss.pdf.
Also see: Mortgage Meltdown Graphic: http://www.demographia.com/db-meltdowngraphic.pdf
Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris. He was born in Los Angeles and was appointed to three terms on the Los Angeles County Transportation Commission by Mayor Tom Bradley. He is the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.
Comments
18 responses to “Housing Downturn Moves Into Phase II”
Congress, non voters, and voters should have learned from the Savings and Loans Crisis.
The financial crisis we are experiencing now was preventable.
Congress should have required down payments on homes and fixed rate mortgages. Allowing mortgage backed securities to be sold based on no money down mortgages was nuts.
Members of Congress should have cared more about regulating our financial system properly than about campaign contributions from financial companies and the possibility of lucrative paying jobs after leaving office with financial companies.
I recommend people read
“CURRENT POLICY OVERLOOKS THE NEW HOMELESS” by Ilie Mitaru
http://www.newgeography.com/content/00507-current-policy-overlooks-new-homeless
A lot more people may become homeless if elected officials in local government, state government, and the federal government do NOT get a lot smarter. They need to be encouraging job creation in the private sector.
Voters need to smarten up on economics. Voters have often voted for the wrong people for more than 40 years.
I discuss dealing with the financial crisis on http://www.newgeography.com/users/kenstremsky
Sincerely,
Ken Stremsky
The US economy is witnessing one of the worst recessions of all times. It is often said that this recession is comparable to The Great Depression. The brunt of mass layoffs, high gas prices, company declaring bankruptcy and ailing banks and financial institutes has severely affected millions of American households. In addition, the housing market crash has surged a wave of massive home foreclosures and has led to tremendous drop in the prices of properties all over North America.
This article is pretty relevant to this post:
http://housingnewslive.com/housing-market-crash-in-us.php
Housing Market Crash
Interesting perspective and data overall, and your Phase I and II breakdown seems broadly accurate.
However, the depths you reach to link everything back to your land use dogma is simply astonishing.
“Ground zero” markets like Phoenix, Las Vegas, Miami did not see bubble run-ups because of restrictive land use regulations. Those places sprawled like crazy. Or do you really think that having even MORE supply on the market would have helped things? REALLY?
Amazing.
GregK,
I agree that in markets like Phoenix or Las Vegas, the notion that strict land use regulations are the cause of a run up of prices leading to a bubble is severely flawed. For instance, back in 2004 I met a young woman sitting at a blackjack table in Las Vegas who had moved from the east coast to become a ‘flipper’. She owned 4 houses and let me tell you she was belligerently betting her home equity away at that table without a care in the world. This was the problem-not land use restrictions. There were a lot of houses, and easy credit transformed real estate investment into a different kind of gamble. With the mass investment in boom markets and the prolific spending of home equity-there was no where for prices to go but up. This racket is what prevented ‘normal’ people from the privilege of home ownership.
That being said, Cox’s assertion about the correlation between land use restrictions and prices certainly holds true in other cities-especially the one where I live, San Francisco. Here, factors such as a drawn-out planning approval process, exorbitant impact fees and strict zoning regulations have made it difficult for developers to market units within the middle-income range. Not to mention the restrictive geography of the city, on the tip of a peninsula and surrounded by water on three sides, which physically limits growth. The same problem applies to places like New York City and Portland, Oregon-where there happens to be an urban growth boundary.
Thank you for the cogent reply. I will acknowledge that Cox’s typical dogma is at least rational in the case of places like San Francisco and Portland. Certainly correlation, although I do not agree with causality.
However, his extending this dogma to the housing bubble is frankly absurd in my opinion, for the reasons articulated above.
Even in the case of San Francisco, it is the newer, less carefully regulated and more far-flung auto-oriented suburbs which “bubbled” most and have been most devastated by the meltdown. That’s my impression anyway, although you’d be more informed as a local.
In California, land use restrictions on the coast are pretty much determined politically by the availability of water, the presence of known fault-lines, the impact on agriculture, and the coastal range mountains.
The voters here have generally decided that if new development subtracts from any of the aforementioned resources or presents a danger to community resources by being built on a known fault-line, then that development proposal will probably rejected by Planning (the exception is Palmdale where homes have been built adjacent to the Palmdale Bulge (Avenue S) and along the San Andreas Earthquake Fault (such as Juniper Hills). I could go on and I could present an list of questionable subdivisions, but I think you’re getting my drift.
Water is the biggest issue everywhere in CA, but particularly the coast. In Santa Barbara and nearby Goleta for example, there has been some limited development over the past 20 years, but all in all, that area is just *somewhat* bigger size-wise. The population is solely dependent on Coast Water Project allotments, Gibralter Dam, Lake Cachuma, and underground aquafers.
http://www.water-ed.org/watersources/community.asp?rid=9&cid=681
With Arizona being restored water rights over the Colorado River and the courts deciding to restore water to Owens Lake, water has become even more precious of a resource in the south and coastal areas south of SF/Sacto, although SF is dependent on the Hetch-hetchy for their water. http://sepwww.stanford.edu/oldsep/joe/fault_images/BayAreaSanAndreasFault.html
Agriculture is huge and unfortunately, most developers want to build subdivisions and pave over valuable agricultural land – our food supply so-to-speak. Many advocates for growth restrictions have pointed out the craziness of making ourselves dependent on potential adversarial countries for our *food.*
One reason why the cost of coastal properties has gone up over the years is demand for housing adjacent to the coast. You could research all of the restrictions on growth to preserve the California Coast on the California Coastal Commission’s website:
http://www.coastal.ca.gov
Just so that you know, most of the coast here is sandstone and subject to erosion during rains. I know this for a fact since I used to live oceanfront in Santa Barbara and one year (1977) we received 25-inches of rain which one night, directly caused 6-feet of cliff next door to drop off onto the beach beneath.
So, there is a very good reason to restrict building on the cliffs and to protect coastal areas, like sloughs (pron. “slew”) like the ones near UC Santa Barbara and the Newport Bay in Newport Beach/Orange County.
Then, there are the coastal range mountains (combo of gov’t owned and privately owned land) which present a large geographical obstacle to growth. What do you want Californians to do? Blow these ranges up and re-arrange the landscape as was done by certain generals in the former USSR? (They used nuclear bombs to flatten certain mountains.)
I wish everyone could live on the coast, but there just isn’t the land available…sorry. Some of this pressure on the available land occurred due to the Baby Boomers and their numbers and jobs available in California. Some of this pressure was due to CEOs insisting on having the manufacturing facilities near to where they wanted to live (like Del Mar, for example, or Newport Beach). There isn’t a whole lot you can do to restrict psychopathic CEOs and their Boards, so I think land use restrictions was the best thing that could be done.
I could give more examples pertaining to inland areas, but I don’t want to take up valuable Comment space. Suffice to say, that water is a big deal in inland areas too. Earthquake faults are another thing – don’t want to build on a fault-line and have your subdivision experience liquifaction.
So its more than just “responsive” land regulation for regulation’s sake here in Cali.
Misstrial
4th Generation Californian
Interesting opinion on the matter. Your Phase I and II breakdown seems accurate. I agree that forclosures had nothing to do with it at all. Thanks consumer tips
As far as I know the real estate market managed to return to pretty normal state of being. I believe that because of this recession in some areas some sort of mortgages have become popular. For example Connecticut reverse mortgages have increased since the recession. I don’t think that this set back is as bad as it was in the ’30s.
My parents have recently taken out a reverse mortgage – At first I thought it was a horrible idea since we have had the home in our family now for many generations but after speaking to my lender they explained that my parents home be mine as long as I can pay off anything that the borrow. I am calculating that the home appreciation alone should cover over the interest costs so it is essentially a free loan for them – I’m glad that they now have more money for their retirement.
reverse mortgage
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