Monday, January 11, 2010

The Housing Crisis, Writ Miniscule

[AUTHOR'S NOTE: I'd wanted to rant about this while it was actually happening, but my paranoia knows no bounds. I wanted to make sure we got that mortgage first.]

As most of you know, my wife and I recently purchased our first home. In the 'burbs. I wanted to move back into the city. Desperately. Though where we lived is considered an incredibly "well-serviced" area--of the 'burbs--there is absolutely nothing within a two-mile radius of our old apartment. I had to drive, drive, drive everywhere--to the store, to any restaurant, to the bathroom. My morning commute of driving Mrs. Unknown to the train, dropping Pooh off at daycare, and going to work--all pretty much in the same town--took me over an hour every day.

I know most Americans live this life, but I wanted to leave it all behind. Most of my adult life has been spent in cities. I just feel more comfortable in them. And I really loved living in DC proper. With the city's lack of voting rights and Congress' continuously running roughshod over the District, it's the perfect place for a Lefty with a chip on his shoulder. I consider it Nirvana.

So, moving back within city limits was my main priority when we Unknowns started looking for our first home.

But DC's a tricky proposition. Like most US cities, it is rapidly regentrifying and has probably already lost its "Chocolate City" status. Even so, DC is split between the professional class and those who serve them. There is no real middle class (though households pulling in over six figures and living in million-dollar homes constantly lie to themselves, considering themselves middle class when they're really in the Top 10 Percent). Those who are actually middle class--administrative position-holders, teachers, police, etc.--have mostly been relegated to the 'burbs. What you have left is a disturbing dichotomy between rich and poor. You have some of the most educated and least educated living in the District. Some of the nation's best and worst schools. Some of the safest neighborhoods and the most dangerous. It's no surprise, then, that housing reflects this stark dichotomy.

For example, the average house in the neighborhood (where hardly any crime exists) we used to rent in costs about $1.4 million. It's not, by any means, the most expensive neighborhood in the city, but the cheaper, equally safe neighborhoods don't lag too far behind. But even the gentrifying spots are more expensive ($400K+) and still a bit dangerous (one place I was coveting had a kid shot in the head in the middle of the day in front of a grocery store while we were still searching). So, you can just imagine what the really affordable neighborhoods are like. It wouldn't have mattered as much before Pooh, but now, I don't want one of my daughter's childhood skills to be ducking bullets. How would that look on a resume?

So yeah, it was a long and arduous search, and I was just about to give up when I found the perfect place. It was an attached, foreclosed rowhouse in an actual middle class neighborhood yet to be gentrified. It had two floors, four bedrooms, a basement, and a weird deck two feet off the ground. It had a surprising amount of space for a DC rowhouse and even had a little backyard for Pooh to run around in.

But there were also some serious problems. The roof was shot to all hell. You could see all the water damage along the ceiling and down the top-floor walls. Also, the plumbing was shot, yes, to shit. There was more than one sink in the place clogged to the brim with a muck I prayed wasn't fecal. And the water damage on the first-floor walls was tremendous.

Still, it wasn't the worst foreclosed property we'd looked at during our search. And, the contractor informed us, these problems were nothing $40-60,000 couldn't fix. The only major problem left was the bank. And it was a major problem. They were asking $299,000.

Now, in a posh or "up-and-coming" neighborhood, this amount would've kept my eyes in their sockets. After all, who wouldn't gladly spend $350K, knowing their house would automatically be valued at $400-500K after repairs? But we looked. The houses in that hood (with only two exceptions) were going for $230K.

So, I offered $210K. I thought it was reasonable enough. Without those fixes, the house was unlivable. And, with surrounding prices, the house's worth post-fix would basically be what we would've put into it. Fair enough. My realtor thought so. The bank's realtor was on our offer like white on rice. That house had been sitting unsold for quite awhile, and he knew he probably wouldn't be selling it anytime soon. He'd basically take whatever he could get. But ... well, you can guess what happened...

Yep. The bank rejected our offer. In fact, they were soooooooo offended, they didn't even make a counter-offer. They wanted their $299K (with all the other houses going at $230K, with that $50K worth of damage) or they wanted nothing at all!

Crazy, I know. but not in the least bit surprising. Like the rest of the country, the DC area also has a skyrocketing amount of foreclosures and short sales (where the homeowner offers their house up at a loss and serious hit to their credit just to get out of a mortgage they can't afford). There should be a plethora of houses up for sale at a drastic discount right now. but there aren't. In fact, the housing market is quite tight here--despite the tons of abandoned properties the banks are holding. And they are holding them--simply refusing to sell.

Now, under normal circumstances, an industry hit as hard as the banks have been would've been forced to sell off whatever ("toxic") assets they had with a Crazy Eddie fervor ("Everything must go! Go! GOOOOO!!!"), clear the books at whatever cost, whatever loss, and gather as much capital as possible in order to stay in business and, hopefully, get healthy again.

However, as we all know, the Bush administration gave the bank away to the banks in what has to have been the largest transfer of wealth in human history. In the service of brevity, we call it "the bank bailout." True to Republican form, the bailout came with virtually no strings attached, and Obama, "Eraserhead" Geithner, and the Democratic Congress have felt it "too damaging" to put any strings in place.

There was a serious reckoning--or rather, "market correction"--that should've hit the housing market. It was a bubble, after all. Houses were overvalued. Prices should've plummeted as the banks sold off everything they could.

Now, those prices have actually fallen. There are bargains out there (our new house having been one of them), but nothing like the amount one would've expected from the devastation that has befallen housing and the banks.

If you ask me, the banks should've been forced to right the ship they were mainly responsible for running aground. That means clearing away all those toxic assets on their books, taking the cash they could get for them, and pay us taxpayers back ASAP. They should still be dumping those houses as I type this.

Yeah, they would've lost serious money, housing prices would've splatted against the cold, hard concrete of their true value, and many homeowners would've found that they were losing money on their houses. But guess what. We still are losing money on our houses. And we will continue to. November reports show that home purchasing has dipped since the original $8,000 tax credit for first-time buyers expired, and now some economists are talking about housing values possibly going through a "double dip." In fact, I heard one economist say that folks who bought their homes in '08 and '09 will probably be underwater themselves.

If the banks had dumped all those houses in the first place, it more than likely would've provided a pricing floor. Those values could've risen as the economy (hopefully) improved. Everybody would've had a better idea of the true value of their homes and could've acted accordingly. Maybe some mortgages could've been renegotiated (that was supposed to happen, wasn't it? I wonder what happened to that idea). And folks who were in a position to take advantage of the tax credit could've found more affordable housing. Basically, it could've given the housing market--and the economy itself--a fundamentally sounder base from which to rebound.

But the banks were not forced to do any of that. they were deemed "too big to fail" and have basically been given a blank check. They still have all those toxic assets on their books, but there's no rush, no need, to sell those off because they know, if they cause any trouble, Uncle Sam will simply give them more money.

Sure, the banks are paying Uncle back for fear of having their executive compensations curbed. But at what cost? Their institutions are still rotten at the core. All those foreclosed properties are still a cancer threatening to eat away at the veneer of health they're projecting to the world.

They are still artificially inflating the market. And now FHA is stepping in as the country's primary mortgage lender--allowing the government to, yet again, assume all the risks while the banks rake in all the profit. And what happens if there's another, even greater wave of foreclosures? Uncle will, of course, be on the hook for yet another financial catastrophe.

And while the banks are artificially inflating the market for their own gain, they are also depressing the market to our detriment. If they'd simply ripped off the Band Aid and taken the pain, who knows? Maybe we'd be on the "road to recovery" in a few years? Instead, we are wading in the mire of uncertain housing values with foreclosures still happening at an alarming pace. We are probably facing double, triple, ad infinitum dips in housing prices with folks still taking on mortgages they can only nominally afford in a very unstable job market. Meanwhile, a lot of good, foreclosed homes remain empty, further depressing the values of neighboring homes. A good market for squatters but definitely bad for home owners. And by the time a lot of these foreclosed properties find buyers, the homes themselves will be so deteriorated (like so many properties we saw), they'll have to be totally torn down and new houses put in their place. Good for speculators. Bad for you and me.

Besides, when bankers, economists, and politicians speak of "recovery," shouldn't we continue to look at them with a jaundiced eye? Not just because of the unemployment numbers. But also because this very fundamental problem has not been addressed. Any "recovery" we see in the immediate future will still have this toxicity rotting in its middle. Until this is fully resolved, can we really expect to truly prosper?

Now don't get me wrong. Personally, I had no right to complain about what happened. To be looking for a home when so many people were losing theirs was no "crisis" by any means. As I often told myself, it was a "good problem." I just felt that our experience with the $299K money pit was indicative of a much larger problem that's been plaguing our country for far too long: our government's propensity to open up the public coffers to "help" the rich. It has got to stop. It has literally bankrupted this nation.

Banks are not the only monied interests who have benefited from Uncle's largesse. This goes from them to Walmart to billionaire team owners having tax dollars pay for their stadiums. Everywhere we turn, we middle- and working-class Americans are funding the rich's getting richer while all we get are falling wages and financial calamity in return.

Study after study show that cities actually lose money they never get back when they build stadiums. Yet they fall all over each other to build them for the Steinbrenners and Snyders of the world. Walmarts devastate town centers and local businesses and replace them with nothing but low-paying jobs. Yet there isn't a single municipality that won't offer them budget-crippling tax breaks for them to open one in their town.

GM and Chrysler were going bankrupt mainly because no one under the age of 50 wants to buy their frigging cars. But instead of rewarding their incompetence with closure, we taxpayers give them tens of billions to produce even more cars we don't want to buy.

These mortgage lenders speculated to their hearts' content, gambling on ever-skyrocketing housing values and lost. But they don't lose their businesses, their homes, they don't even have to skulk out of their self-made casino, shame-faced and banned from the establishment for good. No, they get hundreds of billions for their troubles and give themselves bonuses for a job well-done!

And why shouldn't they? The bailout came with no strings attached. There is no accountability, and they've spent millions of bailout money lobbying Congress to guarantee that there never will be.

Congress and Obama play at moral outrage, but they don't really do anything about it. No politician seems really willing to. Sen. Dodd realized that his voter constituent's interests ran directly counter to his hedge fund constituent's and retired. Barney Frank threatens to regulate the same bankers who are the main contributors to his political campaigns. But it's not as though he's alone. It's not as though there's a knight in shining armor in Congress or even the FCC who will put a stop to any of the madness that has put the US in the poor house. No, our politicians are all too willing to sell the rest of us down the Yangtze River in order to appease their rich donors.

Of course, the question isn't "Why?" That answer is simple: These bastards want to get re-elected. One of the more important questions is "What do we actually get out of this appeasement?" I know I didn't get an affordable house. The main question, though, has to be: "When the hell is this madness going to stop?"


jadedj said...

Excellent post. Unfortunately the answer to your concluding question is most likely, it isn't. The bank bailout was concentrated on the wrong end of the spectrum. The homeowners needed the help, not the damned banks. As to the so-called "modification" loans, good fricking luck. We have been in this process with B of A for SIX months now...still no answer. They are wearing us down with this, and we are almost ready to just drop the whole idea and bail. This is not what I consider good faith recovery for the country...this is a mind game by the powers that control our lives. I am quite disillusioned...and not just with the previous administration.

Folk said...

I have to agree that it's not going to end anytime soon. In fact it may be damage to the American system that is fundamentally damaged beyond repair.

Any and everyone knows that the bailout was for wallstreet and now main street. The only reason it was important was because of the politicians, their friends and families who work in upper management of those companies, and their friends of friends who also lead those companies that fund their campaigns.

I can only pay for Congressional term limits but even then, there would be evils in the systems with loop holes and pay backs.

It's the American way