Tag Archives: housing crisis

Reporting

Housing Markets and the Broader Economy

My article for the Kogod School of Business

While the question of whether we will face a recession in 2023 and how bad it may be (terms like “soft landing” and “recalibration” dominate the discourse) has been daunting, economists’ discussion about the housing market and how it is affected by the current monetary policy has not been quite as prominent. Professor Jeff Harris, Kogod’s Gary D. Cohn Goldman Sachs Chair in Finance, recently spoke with WJLA News on the topic.

The housing market, which accounts for nearly 18 percent of the US economy, has recently shown some signs of cooling, with home sales sinking and prices beginning to soften. Yet, this is hardly enough to bring purchase and sale prices to anything even closely approximating the pre-pandemic days, when the market became (artificially, perhaps) red hot, when home prices soared 45 percent from December 2019 to June 2022.

The Fed is attempting to slow inflation via a process that economists call “demand destruction.” By raising interest rates, the central bank makes it more expensive to borrow and spend. As the most interest-sensitive sector of the economy, housing is greatly affected.

Professor Harris was closely involved in the bank bailouts in 2008 as chief economist at the US Commodity Futures Trading Commission–his knowledge of the mortgage markets is vast and practical. “In 2008, and very much similarly now, it was hard to get a handle on how many mortgages are out there. There is not one database that tracks that. Yes, banks have records of when they issue mortgages, but data on prepayment is lacking—for example, this is for people who pay off their mortgage earlier. This is why then and now, it is hard for the central bank to get a clear view of what is happening in that sector of the economy and how the interest rate hikes are affecting it.”

Data from January 5 shows that mortgage rates rose to the highest level since the week that ended December 1, resuming from a slight decrease in December–the average rate on the 30-year fixed rate mortgage was 6.48 percent. It was 6.42 percent as of January 6, 2023, and 3.22 percent a year ago. Freddie Mac estimated that 15 million potential homebuyers have been priced out of the housing market because, for the first time in US history, the average 30-year fixed-rate mortgage rate has more than doubled in a year’s time.

The monthly costs for some home buyers are essentially double what they would have been a year ago. Combine that with the already high prices, and this will keep a lot of people out of the market.”

But another segment that should be discussed is buyers with variable-rate mortgages. “Because there is about a four to five-month period before buyers with variable rate mortgages begin paying the prevailing market interest, we might not have seen the largest impact of the rate hikes on those mortgages until now. These buyers will struggle with contending with these punishing new payments.” And because buyers who take variable interest rate loans are already not as financially stable as those who purchase on a fixed rate, this could be very worrying.

Buyers may not find significant relief anytime soon. Mortgage rates are expected to edge lower this year but remain at about 5 or 6 percent. While demand may have dampened, the supply of homes remains low. “The housing markets vary widely across the country, with some places experiencing mild downturns and some continuing to see price hikes,” says Harris.

You will see some softening in prices for homes that have been sitting on the market for two to three months, but prices are unlikely to return to pre-pandemic levels.”

Harris believes that, in many ways, the worst is over, so to speak–even if the Federal Reserve continues with rate increases, mortgage rates will likely decrease from current levels. Yet, housing affordability is likely to remain low.

Reviews

Book Review: Homewreckers by Aaron Glantz

My review for the Washington Independent Review of Books

This exploration of the housing crisis evokes anger but comes off as a sloppy polemic in places.

The cover of Aaron Glantz’s Homewreckers depicts Donald Trump holding wads of cash, Steve Mnuchin riding a wrecking ball, and Wilbur Ross pulling money out of a house. It is a rather apt summary of the book’s main argument, along with the somewhat-hyperbolic characterization of the destruction of the “American dream” the title hints at.

While many books have been written about the 2008 Great Recession, including The Big Short and The Two Trillion Dollar Meltdown, few have explored who benefited from the bank bailouts and what happened to all of those foreclosed homes. Homewreckers tells that story — the story of what the author cleverly dubs “vulture capitalists” profiting off the very disaster they orchestrated.

But Glantz spends an unwarranted part of the book drawing detailed biographical sketches of people in Trump’s inner circle, including Mnuchin, Thomas Barrack Jr., Stephen Schwarzman, Sean Hannity, and Trump’s father, Fred Trump. While the investigative zeal with which he goes after these figureheads is keen and captivating, ultimately, it detracts — or, better put, distracts — from the strength of his argument.

Glantz points to the fact that U.S. homeownership rates began declining in 2012 to the present, reaching some of their lowest levels in history. He argues that this is at least partly due to buyers not being able to snatch up the foreclosed homes because banks were not interested in issuing post-meltdown mortgages, and the government preferred to sell to Wall Street:

“In March 2010, the U.S. Treasury estimated that 6 million home loans were at least 60 days delinquent but the federal government reported that only 230,801 Americans had renegotiated their loans with the help of the Making Homes Affordable program, the part of the bank bailout that was supposed to help homeowners stave off foreclosure.”

The most incisive condemnation of “business as usual” is the story of shadowy (and shady) banks hiding behind shell companies with sci-fi-esque names like ColFin AI-CA5 LLC that purchased foreclosed homes in bulk, only to flip them into rental properties with exorbitant rents and minimal maintenance costs. Between 2012 and 2014, for example, Schwarzman’s Blackstone Group spent $7.8 billion to buy 41,000 foreclosures and turn them into rentals.

The most bitter of ironies is that some of the owners who had lost their homes to foreclosure stayed on as tenants who now paid rent to these faceless, absentee landlords. But Homewreckers fails to convince the reader that rent-seeking alone is lucrative enough for these investors; Glantz hints at the creation of mutant mortgage-backed securities but offers no evidence to support it.

In other words, renting out 80,000 homes seems like small potatoes for these billionaire robber barons. Glantz doesn’t make a strong case for why we, the readers, should be outraged and not simply see this as sound capitalism (buying low and selling high is Investing 101).

He veers off track in exploring reverse mortgages, as well. These mortgages have been in place since before the meltdown. Are they predatory? Yes. But what they have to do with the 2008 debacle is not made explicit. Still, the story of Sandy Jolley, who lost her family home to a reverse mortgage and then sued the bank for constructive fraud and financial elder abuse is eloquently and poignantly narrated.

This is where Glantz’s journalistic prose shines, compelling and trenchant. Yet, he struggles to connect the story to his general argument. He details how Mnuchin’s OneWest Bank (which purchased failed IndyMac) foreclosed on thousands of reverse mortgages across Southern California, but again, there was nothing illegal about doing that even though no one will dispute the pernicious nature of reverse mortgages.

Glantz makes a stronger argument for the way in which a small cadre of billionaires took advantage of the government’s fire sale on lending banks that had crafted their own demise. He cogently traces the way in which American taxpayers ultimately footed the bill for the bank bailouts without reaping any of the benefits.

In that sense, Homewreckers is a captivating read, almost thriller-like in its way. But Glantz could have benefited from avoiding some of the rather petty and irrelevant asides, such as what fur coat Melania Trump wore and how “flipping wives went hand in hand with flipping houses.”mp wore and how “flipping wives went hand in hand with flipping houses.”