Last week, the New York Times published an amazingly shallow article saying the “biggest defaulters on mortgages are the rich.” This contention is supported by a single pair of data: the owners of about 14 percent of homes worth more than $1 million are delinquent on their mortgages, while only “about” 8 to 9 percent of homes worth less than $1 million are behind in their payments.
The problem is, what is the Times‘ definition of “rich”? As one of the paper’s columnists pointed out a few days later, “Just because you have a million-dollar mortgage doesn’t make you a millionaire.” And if you live in a state that has a lot of growth-management planning, such as California or Florida, chances are good that you own a house worth more than $1 million simply because the median price of homes in many cities in these states was close to that much (or, in a few cases, more) at the peak of the bubble.
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The Times‘ data tend to confirm, as the Antiplanner has always contended, that the mortgage crisis was not caused by low-income borrowers buying homes they couldn’t afford but by middle- and upper-middle class borrowers buying homes that had been made unaffordable by state and local land-use policies. Like it or not, most Americans believe they have a birthright to own their own home, and they also want to own a home that befits their station in life. So when planners create an artificial housing shortage in the hope that more people will live in denser neighborhoods, a significant portion respond instead by devoting more than half their incomes to a mortgage (when traditional lending criteria say it should be no more than about a quarter).
The biggest crashes in housing prices are also in the states with the biggest bubbles (which, by and large, are the states with the most growth management). So it stands to reason that high-priced homes are most likely to be underwater, and therefore their owners are most likely to be delinquent. Add the fact that job growth has slowed in states with planning-induced housing shortages, while states like Texas that still have affordable housing still have healthy job markets, and more affordable homes also tend to be less likely to have high default rates.
So this is not a case of the rich carelessly walking away from their mortgage obligations, as the Times‘s effort at class warfare makes it out to be. Instead, it is a case of the middle class being squeezed by ruthless planners who care more about their smart-growth ideologies than about the wants and needs of ordinary people.
I don’t have anything of substance to say, so I’ll just say that the house in the photo deserved to get its windows busted. What a soulless monster. Meanwhile, people in other countries life in huts. Thank you Federal Reserve.
Soulless?
But Levettown homes were “soulless” when built cookie cutter style. Over the years people added on to them, modified them and changed the look. They are no longer “soulless” cookie cutters.
Of course religious people will tell you that only humans have a soul, so any home is, by definition, soulless.
Thanks
JK
JimKarlock said:
Soulless?
But Levettown homes were “soulless†when built cookie cutter style. Over the years people added on to them, modified them and changed the look. They are no longer “soulless†cookie cutters.
Of course religious people will tell you that only humans have a soul, so any home is, by definition, soulless.
Thanks
JK
THWM: Though not all suburbs are the same, that’s why it’s so ridiculous when you guys attack “suburban trains”.
I don’t see how anyone could qualify for a $1 million mortgage who is middle class by any stretch of the imagination.
$1M debt @ 6.5% for 30 years is $6300 per month. Property insurance would be another $300+ per month, and property taxes, if proportional to what others pay in these states for houses of 1/3 to 1/2 the value would be in the $2000 per month range. We would probably need to assume the person didn’t have $250,000+ for a down payment, and so is also paying mortgage insurance. We’ll be generous and assume the 6.5% jumbo loan rate holds for the entire debt and that it is not broken up into any higher rate tranches. All in, that’s around $9000 per month, or $108,000 per year. If that is 50% of post-tax income per Mr. O’Toole, we need to take home $216,000 per year, and if we assume 30% net in federal, state, and local income taxes plus FICA, we are up to an income north of $300,000 per year.
While that person is not “rich”, very few people would include anyone with that income or a house that expensive as middle class, and fewer still would hold them out as a “victim”, as if someone forced them to spend so much of their huge income on a bubble price house.
“The problem is, what is the Times‘ definition of ‘rich’?”
Sorry, but despite your data-free implication to the contrary, even at the height of the bubble, the vast majority of million-dollar mortgages really did go to the rich. Banks did many foolish things during the bubble, and maybe some of those mortgages were to truly middle-class families, but the lion’s share of million-dollar mortgages went to those with incomes in the upper 5%. To the extent they went to people with lesser incomes, both the individuals acdepting the mortgages and banks making them were either incapable or simply unwilling to make sound financial decisions. Nobody with an income of under $150,000 (roughly the 95th percentile) should be attempting to take on a million-dollar home loan.
BTW, you have cited an article to support the quote, “Just because you have a million-dollar mortgage doesn’t make you a millionaire.†Except when you actually follow the trail, it leads to a a single household, not general demographic data. Any guesses what the annual income of that single household is? Yes, they declare an income of $199,000 per year. Is that rich? To my way of thinking, being in the top 3% of all wage-earners in our very wealthy country counts as rich, yes.
In any case, a family with an annual income of $199K certainly shouldn’t be moving into a $1.7 million single-family home. “Fat-cat defaulter”? I think they are the very definition of the phrase.
Frank,
What an awful thought of yours: the house in the photo deserved to get its windows busted.
Why would you wish property damage on others? Do you go around vandalizing ugly buildings, based upon your opinion? Do you harm ugly people? I doubt most people would even find that house ugly. Most houses built before the 1950s are ghastly, according to some opinions. How tolerable of you. Are you racist too? You sound like a dictator, needing approval.
WTF is your problem to advocate violence?
What does a non-living thing have to do with a supernatural aura (soul)?
What do huts in other countries have to do with anything?
You are happy with the recession & the Fed’s involvement in helping it start with too low interest rates in the early 2000s?
For the point of the thread, yes the NYT, among others, did greatly expand the inclusion of “rich”. Those who did meet the Congressional inspired lower standards for $million loans were only in the top ~20%.
Hey, remember, Obuma, has said that at some point, a person makes enough money. So, once a person amasses a certain net worth ($1-5 million ?), then stop working.
So for those high earners:
No more inventing.
No more new businesses.
No more acting.
No more playing sports.
No more entrepreneurs.
No more investing.
BO wants to increase unemployment among people who create much value.
There should then be no market for the really high-end houses, because people should not make that much money.
middle- and upper-middle class borrowers buying homes that had been made unaffordable by state and local land-use policies.
OF course, every time I ask for empirical evidence for this assertion, none is forthcoming. The thread gets really long, however, from the outrage and misdirection of others.
DS
Planners didn’t cause a shortage of homes, as you always assert. There was and is too many on the market as is.
On July 13th, 2010, Andrew said:
I don’t see how anyone could qualify for a $1 million mortgage who is middle class by any stretch of the imagination.
***********************
Actually a 30 year mortgage on $1 million is about $5,576 a month. What these people did was trade up, took the equity and put down 20% then took out an adjustable rate mortgate that they only paid interest on. So the payment was about $2,239 a month. The intrest rate adusted upward or the baloon payment came due and they lost the equity they had and the house.
Housing Prices
Many have failed to see why they increase.
One simple way to see that housing in a certain market is being restricted is to look at the vacancy rate–what % of homes are unoccupied.
Nationally, it’s about 11%, now. A few years ago, it was about 9%. Just about all markets that saw big price increases, had low vacancy rates, <6%. Some markets hardly even go much above 7% vacancy.
There are various reasons why construction did not add sufficiently to supply, to keep vacancy rates higher.
The 2 big disagreements/debates on what causes high prices are:
1. What prevents more homes from being built?
2. Does lower supply really push price?
For the latter, education in economics will reveal that basic principle. A big example is oil, when supply goes down, or cannot keep up with demand, prices rise. Demand is a factor, but it has interaction with supply.
For simple products, a big increase in demand can be met by more manufacturing. But when there is a big lag, and factors make it more difficult to build, the supply cannot keep up with demand, & prices rise. Several housing markets have seen large population increases, without big price increases, because supply kept up.
There is plenty of evidence that show how local policies restrict supply. Some of that is just taking extra time to build. Sometimes, just limited land holds back new supply, but often, buildable land is held back.
Think about building. If a market has high prices, there is more reason to build. A myriad of conditions stifles some building. And many residents like to limit growth, to prevent congestion, to raise their own prices, etc.
#7- Dan, I think folks like Mr. O’Toole and Wendell Cox have always regarded the housing bubble itself as de facto proof that regulations created a housing shortage. This argument is based in the simplistic notion that housing prices are only a factor of the balance between supply and demand. Of course, their argument completely ignores any data on housing supply, which shows that housing construction soared during the housing bubble, even in the areas they describe as being choked by regulation. It also ignores any data on the rental market, which represents half of the housing market in areas like NY and LA. Moreover, this argument ignores the many other factors that we know influence housing prices: mortgage rates, bank lending policies, and homebuyer incomes, just to name a few.
The definition of an economic bubble is that demand outstrips supply (thus the price goes up), so supply increases in reaction to the higher price. The bubble “bursts” when the price suddenly is much higher than demand, so the price drops drastically. What makes economic bubbles interesting is that a fast rising price can attract investors and speculators that can drive demand way up, beyond the real demand for the product. The result is that when the bubble bursts, it is very dramatic.
Jim Karlock:“But Levettown homes were “soulless†when built cookie cutter style. Over the years people added on to them, modified them and changed the look. They are no longer “soulless†cookie cutters.”
ws:Cookie cutter has nothing to do with anything. Many of Portland’s wonderful neighborhoods and homes were kit homes that came from Sears. Cheap and pre-fabricated.
The home on the cover of this post will never be quaint or resemble anything close to that of a traditional neighborhood, or even a Levittown. Its ugliness will metastasize as it ages, unlike many older neighborhoods that have retained their charm.
peter,
There has been plenty of data about regs & other factors that restrict supply. If you read more of what O’Toole, Cox, Reason & others have offered, you will see & learn. As I have stated, look at vacancy rate. Where it’s <6%, building is very likely restricted & prices are artificially high.
The fact that homes are built does not prove anything. Without restrictions, more homes would have been built in certain areas.
What else besides supply & demand affects price? Nothing.
All factors are part of [or affect] those 2 categories.
“I don’t have anything of substance to saY” should have been a tip off. Clearly my late night sarcasm, posing from the perspective of an urban elitist, was not detectable by some readers. My bad.
But I still place a lot of the blame on the Federal Reserve. Artificially low interest rates = malinvestment.
Actually, they present lots of data on housing supply, as do Virginia Postrel and Harvard economist Ed Glaeser. More data here.
The folks who disagree with them completely ignore the data on housing supply. House prices have to do with regulation, as the science clearly shows. The simple expediency of comparing the price of a an empty quarter-acre lot with a permit to build to the difference in price between identical houses on quarter and half acre lots shows that it’s not about just the price of land, but about the price of the right to build.
Here’s data (hosted by Wendell Cox) on housing permits per 1,000 residents. Unsurprisingly, areas like California are near the bottom. The chart shows current population and not change in population, which is why Las Vegas and other boom states that were the fastest growing by population built a lot of housing but still couldn’t keep up with population growth.
As someone else noted, even time to market makes a big difference. An area where it takes years from conceiving of housing to getting it to market will see more bubbles than a place where housing can be built quickly. It just will take longer to react.
We’ve discussed these…erm…arguments…here many times. And refuted them many times.
DS
i.e. Dan refuted them many times, and everybody just ignored his inane comments. Many times. Many, many times. Over and over again. And yet Dan still thinks people read his comments.