Housing Markets Are Melting Down

The U.S. housing market, which helped keep the world economy afloat for the first half of this decade, is deflating. Here are some signals:

• The Census Bureau reports that sales of new homes in January 2007 were about 20 percent less than in January 2006. All of this decline was in the West (where new home sales fell by 50 percent) and South (where they fell by 11 percent); sales in the rest of the country were about the same.
• At least twenty-two mortgage companies who lend to subprime borrowers have gone bankrupt in the past two months, leading some to call this a “panic.”
• Almost 25 percent of existing mortgage debt is under adjustable rate loans whose rates will be adjusted upwards this year — in many cases to rates well above the fixed rates now available.
• Already, foreclosures are running 25 percent higher than last year.

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I’ve stated before that this crisis has been caused almost entirely by growth-management plans that have driven up the price of housing to unaffordable levels. If you don’t believe this, you’ll have to read my detailed report. Some of the worst problems are in California and Florida, which helps explain why new home sales in the West and South are down.

The reduction in housing affordability has encouraged many people to try to achieve the American dream through the use of risky mortgages, such as adjustable-rate mortgages and interest-only mortgages. Rising housing prices also led many existing homeowners to refinance and go on a spending spree, which helped prop up the world economy. If housing prices collapse, many people will be paying mortgages that are greater than the residual value of their homes, which will lead to more defaults.

“The whole world economy is at risk,” said The Economist in 2005. “It is not going to be pretty.”

Meanwhile, the National Association of Realtors — who have been putting their members heads in the noose with their strong support of smart growth — tried to pump up the market by issuing a press release claiming that “Sales of existing homes rose in January, reaching the highest level in seven months.” This press release is accurate only in the sense that black is white and the sun rises in the West.

In fact, the spreadsheet that the group offers to support its press release says entirely the opposite. Fewer existing homes were sold in January than in any month in more than a year. January sales were 363,000, which was 23 percent less than in December, which in turn was less than any month since last February. Sales in both January and February 2006 were greater than in January 2007.

So where does NAR get off claiming that sales were greater in January than in the previous seven months? Though you wouldn’t know it from reading their press release, they meant “seasonally adjusted sales.” Because of the weather, January is presumed to be the worst sales month, so the assumed annual rate based on January sales is higher than twelve times actual sales. But (as the press release admits) January 2007 had unusually mild weather, which pumped up sales a bit (though not as high as in January 2006).

This isn’t just spin; this is lying. The National Association of Realtors is lying to make prospective homebuyers think that the market isn’t collapsing so they won’t put off buying until prices fall some more.

Growth-management planning not only drives up housing prices, it makes prices more volatile. Harvard economics Professor Edward Glaeser estimates that “if an area has a $10,000 dollar increase in housing prices during one period, relative to national and regional trends, that area will lose $3,300 dollars in housing value over the next fi ve-year period, again relative to national and regional trends.”

In other words, what goes up must come down — though never to as low as the original price, which is why unaffordable areas just keep getting more unaffordable. Many California housing markets saw 10 percent declines in the early 1980s and 20 percent declines in the early 1990s. Each deflation took about five years, so — considering that prices are even more unrealistically high today than they wre in 1980 or 1990 — they will probably drop around 30 percent in the next five years. That’s just fine if you bought your house low and sold high, but not everyone gets to choose when to sell their house.

Suppose you put 10 percent down on a $400,000 house. After five years of payments, you still owe $330,000. But if the market has deflated by 25 percent, your house is now worth only $300,000. You might try to wait it out, but if your job moves across the country, it will cost you $30,000 to sell your home. You could default, but that just passes the problem onto someone else.

I hope the mortgage crisis doesn’t lead to a recession, as The Economist and others (caution: bad economic analyses) have warned. But if it does, we can give urban planners almost complete credit for it.