The Housing Bubble

A weekend topic starting with D Magazine. “Dallas certainly has its own, particular financial problems: a police and fire pension fund that is facing insolvency, the legacy of a bungled affordable housing policity that lost millions of federal dollars in the couch cushions. But the city’s huge infrastructure needs, which, as council member Lee Kleinman pointed out during a recent conversation about the upcoming bond election, are something that the city can’t cover in its general fund, aren’t unique to Dallas. Faced with having to shell out billions just to keep the streets from not deteriorating any further, Dallas can’t pay for its own maintenance and has to go into debt just keep infrastructure status quo.”

“And so does the rest of America. In a fascinating article on Strong Towns, Charles Marohn, the group’s founder and president, takes an in-depth look into the financial sustainability of Lafayette, Louisiana. What he finds is a fundamentally unsustainable financial outlook and a pattern of growth and deterioration that is repeated in almost every American town and city.”

“What they found was not encouraging. In order get tax revenues to sustain the city’s infrastructure needs, an individual property owner in Lafayette would have to pay more than double in property taxes than what they currently pay. And that’s just for infrastructure. Factor in the other things that property taxes pay for –water, sewer, public buildings, etc. — and the total infrastructure revenue gap per taxpayer for Lafayette was around $8,000 per year. That’s in Lafayette, a small city with a median household income of $41,000.”

“So what’s wrong? Well, pretty much everything about the way America has built its towns and cities since World War II: ‘All of the programs and incentives put in place by the federal and state governments to induce higher levels of growth by building more infrastructure has made the city of Lafayette functionally insolvent. Lafayette has collectively made more promises than it can keep and it’s not even close. If they operated on accrual accounting — where you account for your long-term liabilities — instead of a cash basis — where you don’t — they would have been bankrupt decades ago. This is a pattern we see in every city we’ve examined. It is a byproduct of the American pattern of development we adopted everywhere after World War II.’”

“How did this happen? Were mayors and city managers asleep at the wheel? Is there a giant corporate conspiracy to drain tax dollars and line private pockets? Not really. Marohn argues that, essentially, human nature happened. Faced with new technologies, new financial tools, and new ideas about how cities should look and function, governments have funded an urban development system that is fundamentally unsustainable because it allowed policy makers to kick the costs of their investments down the road and out of view: ‘The way this happened is pretty simple. At Strong Towns, we call it the Growth Ponzi Scheme. Through a combination of federal incentives, state programs and private capital, cities were able to rapidly grow by expanding horizontally. This provided the local government with the immediate revenues that come from new growth — permit fees, utility fees, property tax increases, sales tax — and, in exchange, the city takes on the long term responsibility of servicing and maintaining all the new infrastructure. The money comes in handy in the present while the future obligation is, well….a long time in the future.’”

“Psychologists call this temporal discounting. Humans are predisposed to highly value pleasure today and to deeply discount future pain, especially the more distant it is. It’s easy today to rationalize that future expense, especially when you feel so assured that new growth will make those future people better off. This thinking is how you end up with two dollars of public infrastructure for every one dollar of private investment. This is how you spend yourself into bankruptcy.”

The Detroit Free Press. “The very first executive action by the new Trump administration wasn’t a sweeping order on immigration, trade or health care — but rather to block an Obama administration that would have reduced the cost of mortgages for millions of home buyers. In the first hour of Trump’s presidency, the U.S. Department of Housing and Urban Development sent a letter to lenders, real estate brokers and closing agents suspending the 0.25 percentage point premium rate cut for Federal Housing Administration-backed loans.”

“The change in mortgage premiums took Democrats and consumer groups by surprise. ‘I think we were surprised by how quickly this was something that they wanted to look at,’ said Sarah Wolff of the Center for Responsible Lending. ‘I think it unfortunately signals that they don’t place as great an emphasis as we would hope on access and affordability of mortgage credit.’”

“Senate Minority Leader Charles Schumer, D-N.Y., said Friday that Trump’s words in his inaugural speech ‘ring hollow’ following the mortgage premium action. ‘In one of his first acts as president, President Trump made it harder for Americans to afford a mortgage,’ he said. ‘What a terrible thing to do to homeowners. … Actions speak louder than words.’”

From The Missoulian. “The housing bubble had fans across the political spectrum. The Great Recession, well, not so much, but the bubble that floated us into recession was another story.”

“It was, after all, a housing bubble, in which the finance industry threw mountains of money at getting houses built. So, many a news story covered the Montana construction industry’s boom while the bubble was in bloom. For many Montanans, this meant jobs, and I have little doubt that a search of news stories of the day would find politicians’ boasts of the jobs, and of course the economic growth they’d somehow made possible.”

“Some saw it coming. As early as 2001, The Economist ran an article about two biggies behind the lending boom of the day – Fannie Mae and Freddie Mac. In its 2001 article, ‘Big Scary Monsters,’ The Economist warned that, ‘Indeed, there may right now be the makings of a bubble in house prices,’ and that it just might be a dangerous enough bubble to set a basis for the world’s next financial crisis.”

“For many Montanans, life in the days of the politically popular bubble had an appearance of community stability. It was, to be sure, a jobs-machine for the closely linked logging and construction industries alike. No politician dared say a word of warning about it.”

“Then the predicted financial crises swiftly wiped out jobs that the bubble had been supporting, and, in cruel irony, the bubble that floated us into the Great Recession wasn’t kind to loggers. According a report from a team led by Charles Keegan, University of Montana Bureau of Business and Economic Research, 71,000 logging-related jobs went to the chopping block and ‘virtually every major western mill suffered curtailments and 30 large mills closed permanently.’”

“Where’s the community stability in that?”