The housing crisis allows America to look in the mirror. What do we see?

One of the most fascinating narrative threads on this site has been about the oversupply of homes (technically “housing units”).  This over-building of units is the key to the housing crisis, as has been evident for at least 2 or 3 years.  A surplus of anything leads to falling prices until the surplus disappears, one of the iron laws of economics.

Yet even now this is not understood by many Americans, hence the increasingly insane proposals to prop up home prices at levels Americans cannot afford.  But since we do not see the problem, we can neither treat it early nor effectively cope with it once it hits in full force.

This is yet another manifestation of what might be America’s core problem, as I said in Diagnosing the eagle, chapter I — the housing bust (6 November 2007):

Something is wrong with America, rendering our society incapable of connecting effectively to reality. The late USAF Colonel John Boyd described this as a process: Observe, Orient, Decide, and Act. (For a description of the OODA loop see this; for a discussion of Orientation see this post by Chet Richards.)

Who can tell what has caused this social illness, a form of cultural Alzheimer’s? The symptoms appear in many aspects of our national public policy — collective action in critical areas such as energy, geopolitics, and management of our economy.  We find it difficult to recognize large problems until they are upon us, and to discern causes and effects. Worse, often we cannot weigh the various short- and long-term factors to rationally decide how to respond, so we choose seemingly easy and fast solutions without bothering to perform the necessary research and analysis. And, perhaps as a result of this flawed process, we frequently find ourselves unable to competently implement whatever course of action we choose.

Rather than provide a theoretical analysis, I’ll show a few case studies. Here we look at the housing cycle. Just a normal business cycle, although driven to amazing heights by a combination of factors — all noted at the time, with these warnings ignored by both our ruling elites and the citizenry …

This post updates that analysis, unfortunately without changing the conclusions.

Contents

  1. The problem is too many homes
  2. Our foolish responses make the problem worse
  3. The glut will disappear, one way or another
  4. Another expression of the problem:  falling rents
  5. Solutions
  6. Afterword and where to go for more information

1.  The problem is too many homes

Approximately 15% of the housing units in the US were vacant in the 4th quarter (per the US Census).  That’s almost 18 million units.  In the 4th quarter of 1994 it was 10%; in the 4th quarter of 1998 it was 11%.

The factor that best predicts defaults is home equity.  Negative equity, usually from falling prices, means more defaults.  Many people will not make payments to the banks that do not build equity.  Payments as a too-large fraction of their income are a contributing but not primary factor (“too-large” either because the loan was too large or their income has dropped).   Overbuilding means falling prices, which means negative equity, which means more defaults.

The problem is spreading across America, but not evenly.  As always, some areas are far more affected.  Areas like California, Florida, Arizona, Nevada.  And Detroit:  “The median price of a home sold in Detroit in December was $7,500, according to Realcomp, a listing service.”  (from the Chicago Tribune)

Hard times make the problem worse as the number of households — and the number of units occupied — decreases.  As seen here:  “Job Losses, Credit Market Conditions Challenge The Apartment Sector“, National Multi Housing Council (NMHC), 15 January 2009 — Results of their January 2009 Quarterly Survey. Excerpt (emphasis added):

Once again, apartment firms are facing tough market conditions not of their making,” noted Mark Obrinsky, NMHC’s Chief Economist. “Earlier in the decade the bubble-induced rise in homeownership eroded apartment demand; now the economic and financial collapse caused by the bursting of that bubble is taking a toll.”

“The long-term prospects for the sector are strong,” explained Obrinsky. “The number of people between 20-34 years of age is rising rapidly, and as they enter the rental market, demand will rise correspondingly. For now, though, that demographic advantage is being trumped by the worsening job market, which is leading more people to move back in with family or take on roommates to save on housing costs.”

2.  Our foolish responses make the problem worse

First it was a subprime mortgage crisis. Then it was a crisis of exotic mortgages (subprime, Alt-A, option adjustable rate mortgages).  So the solution was to provide more and easier mortgage credit via the government-sponsored enterprises (FNMA, etc) and the Federal Housing Administration — and modify existing mortgages with easier terms (but not lower balances).  Both methods have failed utterly.

(a)  Modifications that reduce payments but not the balance do not work.  Here is one of a large body of reports about this:  “After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”  (remarks by John C. Dugan, Comptroller of the Currency, 8 December 2008)

(b)  Easier credit (hair of the dog that bit us) does not help.  Again I’ll cite just one of a large body of evidence:  “The Next Hit: Quick Defaults“, Washington Post, 8 March 2009 — “More FHA-Backed Mortgages Go Bad Without a Single Payment”

But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding. With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.

… Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.

The overall default rate on FHA loans is accelerating rapidly as well but not as dramatically as that of instant defaults.

The agency’s share of the mortgage market is up from 2% three years ago to nearly a third of the mortgages now made, its highest level in at least two decades, according to Inside Mortgage Finance, an industry trade publication. The FHA does not lend money directly. It provides mortgage insurance for borrowers working with FHA-approved lenders and uses the premiums to cover its losses. If the premiums are not enough, taxpayers could be on the hook.

At the same time, Congress has substantially increased the amount a homeowner can borrow on an FHA loan in pricey areas, thrusting the agency into markets it was previously shut out of, such as California, where plunging home prices have made people more vulnerable to foreclosure.

3.  The glut will disappear, one way or another

Economic problems are self-correcting in a system using free markets.  Oversupply of homes can only be absorbed in two ways, as I wrote about the core of the housing problem in A vital but widely misunderstood aspect of our financial crisis (18 September 2008):

(1) Eventually our population will increase to fill these homes. But slowly.  Growth in the number of households occurs in two ways:

(a)  More children leaving home than households disappearing through combinations (children moving back, parents moving in with children) and death.  But in a recession the number of households shrinks as the latter exceeds the former.

(b)  Net migration into America.  Our slowing economy might already be slowing the rate of in-migration.  But a recession or political turmoil in Mexico might send floods of people north into America.

(2) Not so creative destruction:  housing units will be destroyed

Many vacant homes will be destroyed, the fast track to fixing this problem. Empty houses get vandalized, destroyed by the owners (spite or insurance fraud), occupied by squatters or meth labs, or wrecked by the forces of nature. In regions with net out-migration (e.g., Detroit) homes remain vacant for long periods, often abandoned by their owners (valueless but costly due to taxes and maintenance). As anyone familiar with the history of the South Bronx knows, empty homes act as an infectious blight that can devastate larger areas. After a decade or two, the result can look like Dresden after the bombing in 1945.

This was greeted in the comments with incredulous outrage, like telling a rural medieval priest that the Earth was not the center of the universe.  Sacrilege towards the true religion of America!  Signs of a defective OODA loop in action, sounding like a car running with no oil.  But even America has proven to be subject to the laws of economics, as these have proved accurate, as seen in these three articles.  Hundreds more can be found on Google.

(a)  “As projects grind to a halt, home sites turn to wasteland“, Los Angeles Times, 4 March 2009 — Excerpt:

By day, it’s far too quiet at the site of a planned housing and retail development on a former Navy base in Oakland. At night, neighbors can hear the thieves come out. They rip out copper wire, haul away pipes and take anything else they can steal from dozens of buildings on the site, abandoned after Irvine developer SunCal Cos. fell victim to the economy.

It’s a scene not uncommon throughout California, as residential construction grinds to a halt under the dual weight of the credit crunch and the housing crisis: a rusty chain the only barrier between the community and a half-built structure in Hollywood; a bare dirt lot in Pasadena; old stoves amid the trash at the site in Oakland. “I hear hacking and see scary bonfires in the middle of the night,” said Don Johnson, a retired Coast Guard employee who lives near the defunct Oak Knoll Naval Medical Center in Oakland.

(b)  “Foreclosures mount, so do vacant Peoria homes“, Journal Star, 14 February 2009 — Excerpt:

Vacant, neglected houses were a city’s headache even before fear of foreclosure loomed over every block. They attract rodents, dumping, vandals, arson, theft of copper wiring and other problems expected to increase along with rising foreclosure rates. Beyond crime and demoralized neighbors, many cities are just beginning to realize how costly vacant properties can be – for homeowners and municipalities.

“It costs a lot, and not just in the obvious ways,” says Jennifer Leonard, director of the National Vacant Properties Campaign, a Washington, D.C.-based coalition charged with searching out the best new methods to prevent and/or reclaim and reuse vacant properties. Cities spend time and money on code inspections, yard clean-up, demolitions, and, in many cases, tracking down absentee owners. (Peoria charges homeowners for services. If officials don’t collect, they put a lien on the house.) But vacant houses can also drain resources from police, fire, health and legal departments.

In Peoria, include the animal welfare shelter on the list. Director Lauren Malmberg requires animal welfare workers to report vacant houses to the city’s code enforcement department. “We were tired of pulling animals out of them.” They become havens for raccoons, stolen dogs, stray dogs and worse. Malmberg encountered a vacant house on the south side, in the 1800 block of Widenham, that had become a center for dogfighting. “Graffiti of dogfighting was painted everywhere, inside and out. There were dog carcasses, blood and feces everywhere.”

Vacant properties can also contribute to higher insurance rates and lower property values of surrounding houses, which further depletes a city’s tax base. Though it’s commonly assumed that vacant properties equal unpaid property taxes, it’s difficult to know because many cities don’t do comprehensive inventories of vacant houses.

… The majority of Peoria’s 4,500 vacant housing units are concentrated in older neighborhoods … the 4,500-figure and subsequent vacancy rates are based on the U.S. Postal Service definition – houses that haven’t received mail in 90 days or more.

The code enforcement department’s figures on boarded-up houses give a clearer picture of the inherent flexibility of vacancy-related data. During 2008, a total of 217 properties were boarded up for various reasons. By year’s end, 74 had been brought into compliance by owners, 24 were demolished and 30 were going through the legal process for court-ordered demolition.

(c)   Update:  “All Boarded Up“, Alex Kotlowitz, New York Times Magazine, 8 March 2009 — About Cleveland.  Excerpt:

This is Brancatelli’s conundrum: many of the abandoned homes should be razed. They’re either so old or so impractically tiny that they have little resale value, or they have been stripped of their innards and are in utter disrepair. There are an estimated one million lender-owned properties nationwide, and on average each house sits empty for eight months, a length of time that is only growing. Demolition, though, is costly: roughly $8,000 a house.

Last summer, Congress appropriated $3.9 billion in emergency funds for cities to acquire and rehab foreclosed properties. (An additional $2 billion will be available under the recently enacted economic-stimulus package.) The legislation was labeled the Neighborhood Stabilization Program, but Cleveland and a handful of other cities had to lobby hard to convince Congress that “stabilization” in their cities meant tearing down houses – not renovating them. Last month, Cleveland said it planned to use more than half of its $25.5 million allotment to raze 1,700 houses. This presents an opportunity to reimagine the city, to erase the obsolete and provide a space for the new. (There’s little money now to build, so imagine is the operative word.)

… Other cities – including Minneapolis, Youngstown, Detroit and Cincinnati – have put aside at least a third of their neighborhood-stabilization funds for demolition. “As properties stay vacant for longer periods of time,” says Joe Schilling, a founder of the National Vacant Properties Campaign, “it’s inevitable that even in some of the fast-growing communities, they’ll have to look at demolition.” Phoenix, for instance, has set aside a quarter of its grant money to tear down abandoned homes.

4.  Another expression of the problem:  falling rents

A surplus of housing units not only directly pushes down prices, but also pushes down rents — which depresses the value of housing to investors.  For more on this see:

  1. Housing downturn hits L.A.-area rents“, LA Times, 8 January 2008 — “Overbuilding and foreclosures add to supply of units as the recession limits what people can pay.”
  2. The Residential Rental Market“, Calculated Risk, 9 January 2009
  3. Stress Test House Price Scenarios“, Calculated Risk, 25 February 2009
  4. What If Rents Cliff Dive?“, Calculated Risk 26 February 2009

This also destroys yet more wealth in America, and adds to the banks’ woes:  “Apartment-Complex Developers Falling Behind On Loan Payments”, Dow Jones News, 12 January 2009 — Excerpt from Calculated Risk:

The rapid reversal of fortunes in commercial real estate is taking down yet another sector: multifamily housing.

… While sharp declines in retail and office sectors of commercial real estate have commanded attention in recent months, some analysts say deterioration in the multifamily sector is quickly catching up. … Much of the multifamily sector’s problems center around troubles in converting apartments to condominiums, as is the case in Miami, or the challenges in converting rent-controlled units to market-rate apartments, as in Manhattan.

In Florida, California, Arizona and Nevada, the flood of unsold condominiums is entering the apartment market and the excess supply is lowering rents in those areas, BarclaysCapital analysts say. That’s resulted in lower revenues for owners, which in some cases is making it more difficult to keep up with mortgage payments.

… In November, the delinquency rate on securitized loans to apartment and condominium properties rose to 1.9%, a dramatic jump from the 0.9% at the start of the year, according to Realpoint LLC …

5.  Solutions

The fire has spread, so that now the housing crisis is just one aspect of the global economic crisis.  Large-scale macroeconomic measures — probably international in nature — are all that can buffer the global depression.  That is, minimize the suffering during the downturn, and lay the foundation for a powerful enduring recovery afterwards.  See section 7 below for links to discussion of solutions.

6.  Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

7.  For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

Posts about the housing crisis:

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
  3. Destroying houses in order to boost home prices, 16 December 2008

Posts about America’s broken OODA loop:

  1. News from the Front: America’s military has mastered 4GW!, 2 September 2007
  2. The two tracks of discussion about the Iraq War, never intersecting, 10 November 2007
  3. Another cycle down the Defense Death Spiral, 30 January 2008
  4. Quote of the day: this is America’s geopolitical strategy in action, 26 February 2008
  5. What do blogs do for America?, 26 February 2008
  6. Everything written about the economic crisis overlooks its true nature, 24 February 2009

Posts about warnings of this crisis:

  1. We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions.
  2. Making us dumber, chanting “Dude, where’s my recession?”, 3 June 2008 — Economic columnists do a disservice to their readers by ignoring the data showing a weakening economy.
  3. Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
  4. When did “Dude” predict a recession? How severe?, 6 June 2008 — Why accurate economic forecasting is difficult, what we know about current conditions, and warnings from a top economist.
  5. The most important news of the month. Perhaps the year., 29 September 2008 — Warnings from our foreign creditors.

63 thoughts on “The housing crisis allows America to look in the mirror. What do we see?”

  1. Details details! They endlessly resolve around what went wrong, which is very much more than what the common man is able to see in the mirror, even if he has the courage or strength of will to look.
    But here is something everyone ought to be able to see with ease: what housing really meant to our accepted standard of living. Generally speaking, Americans spend like crazy, save nothing, and rack up tons of debt but feel ok about it because of the equity building up from their homes.

    People in China rack up debt too but, in contrast to Americans, they feel ok about it because they are confident they will have A JOB, not because their homes will magically pay everything off when they get tired of working.

    The writing is in the mirror: you can’t get something out of nothing forever, and if you’re going to try then you’d better be ready when the gold reverts to straw. We weren’t.
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    Fabius Maximus replies: While the overall message seems right, the details are not. China’s gross svings/gdp is aprox 50% vs. aprox 13% for the US. Their government’s debt/gdp is aprox 10%, vs aprox 40% for the US. China’s total debt/gdp is 120% — one of the lowest in the OECD, vs. 260% for the US.

  2. I understand the Chinesee are coming to America to buy houses. Perhaps this is the answer.
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    Fabius Maximus replies: What is your basis for belief that this is happening in significant volume?

  3. Update: City governments around the nation destroy vacant ruined homes

    All Boarded Up“, Alex Kotlowitz, New York Times Magazine, 8 March 2009 — About Cleveland. Excerpt:

    This is Brancatelli’s conundrum: many of the abandoned homes should be razed. They’re either so old or so impractically tiny that they have little resale value, or they have been stripped of their innards and are in utter disrepair. There are an estimated one million lender-owned properties nationwide, and on average each house sits empty for eight months, a length of time that is only growing. Demolition, though, is costly: roughly $8,000 a house.

    Last summer, Congress appropriated $3.9 billion in emergency funds for cities to acquire and rehab foreclosed properties. (An additional $2 billion will be available under the recently enacted economic-stimulus package.) The legislation was labeled the Neighborhood Stabilization Program, but Cleveland and a handful of other cities had to lobby hard to convince Congress that “stabilization” in their cities meant tearing down houses – not renovating them. Last month, Cleveland said it planned to use more than half of its $25.5 million allotment to raze 1,700 houses. This presents an opportunity to reimagine the city, to erase the obsolete and provide a space for the new. (There’s little money now to build, so imagine is the operative word.)

    … Other cities – including Minneapolis, Youngstown, Detroit and Cincinnati – have put aside at least a third of their neighborhood-stabilization funds for demolition. “As properties stay vacant for longer periods of time,” says Joe Schilling, a founder of the National Vacant Properties Campaign, “it’s inevitable that even in some of the fast-growing communities, they’ll have to look at demolition.” Phoenix, for instance, has set aside a quarter of its grant money to tear down abandoned homes.

  4. “…incredulous outrage, like telling a rural medieval priest that the Earth was not the center of the universe…”

    That was a cute attempt at slander against fine rural medieval priests, F. Maximus; however you missed the mark because — as any honest student of medieval history knows — the same outrage would be elicited from any educated person of that time, including the urban ones. Duh. Something else you probably don’t know, F. Maximus, is that the best science of the day supported the conclusion that the Earth was the center of the universe.
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    Fabius Maximus replies: Quite correct, that was sloppy writing (albeit on a minor rhetorical point). I should have said a late 17th century rural priest. By the time Galileo and Keppler passed on the heliocentric theory had wide acceptance among educated circles in Europe, considerably furthered by the publication of Newton’s Principia in 1687.

    By the way, you should be careful about using the Force to determine what other people know or don’t know. It’s does not seem to work reliably for you, and the resulting sneering tone is therefore a bit off.

  5. I’d consider something like a Homestead act for unused homes. Our nation was built on the premise of giving away free land, it was a good idea, except maybe for the dust bowl problem. This would stimulate all kinds of other secondary development as people work on their own houses.
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    Fabius Maximus replies: You really don’t read these posts before commenting, do you? The Homestead Act gave way economically productive land. Homes are going vacant largely in areas with poor economies and resulting out-migration. Like Cleveland and Detroit. And areas in which housing and construction-related activity was 20%+ of local GDP (e.g., areas in the southwest and Florida).

  6. FM:”Maximus replies: You really don’t read these posts before commenting, do you? The Homestead Act gave way economically productive land. Homes are going vacant largely in areas with poor economies and resulting out-migration. Like Cleveland and Detroit. And areas in which housing and construction-related activity was 20%+ of local GDP (e.g., areas in the southwest and Florida).”

    All the more reason for a Homestead act. A Homestead act for parts of the USA that are losing population would encourage immigration to those towns and stimulate economic growth there. Particularly, retired people would be attracted to free real estate in towns that are in danger of losing population but where jobs were scarce. Those retired people would need services from the young.
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    Fabius Maximus replies: Land in most declining areas is already cheap (and has been for decades), yet this has not reversed the outmigration. Today homes in Detroit are $5 – 10 thousand, yet the outmigration continues.

    For example, the great decline of the northeast during the decades since WWII results from deeper causes. IMO the key is a lethal combination of high taxes, over-regulation, rapacious unions (esp with regard to work rules), organized crime, and political corruption. All of these are known in the west, but seldom to the extent as found in NE cities. None of these are treatable with quack nostrums.

  7. Homestead Act did not give away anything. A person/family had to “prove up” a claim by building a dwelling, occupying it and making some kind of living from it over a period of years. This was railroad driven and did not create the populist dreamland which is associated with the term. Most poor people without resources did not prove up. People who succeeded came with resources or fronted people who supplied them. Great concept though and properly structured is a possible way forward to redevelop ruined 19th century urban scapes. How about urban collective farms? Must be lots of old folks in China and Russia who will offer guidance. Seriously, do think urban farming is both desirable, possible and valuable. We should be encouraging cooperation, even nurturing it in these ravaged localities.
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    Fabius Maximus replies: This is brutually absurd. Try going to Iowa and getting farmland without paying for it. “But you’re not giving it away to me — I’ll work the land.”

    As for urban farming, where do you get this nonsense? Converting urban areas to farms is perhaps the ultimate way of solving our housing problems — sending the people to live elsewhere, razing the cities to the ground, clearing the debris, and having a tiny remnant stay and work the land. It seems a bit drastic.

    Returning to the real world, farming is not viable in much of the US — even in many rural areas. For example, New England has been reverting to woodland for generations as farmers die and their land reverts back to the native ecology. That’s because few Americans wish to live at the low income and enjoy the back-breaking work of a Chinese peasant. Much of the western land that cowboys worked in the late 1800’s is almost empty wasteland today.

  8. Relax F.M. Camden, N.J. could produce a lot of tomatoes. I am talking about market gardening, creating work, cooperation and food all in short supply in these localities for decades. Not an answer to the economic crisis but this destruction of marginal housing is also not the cause of the meltdown. The poor are not responsible. Be sure pieces of the so-called stimulus will be ripped off in this mess.

  9. Fabius Maximus replies: “While the overall message seems right, the details are not. China’s gross svings/gdp is aprox 50% vs. aprox 13% for the US. Their government’s debt/gdp is aprox 10%, vs aprox 40% for the US. China’s total debt/gdp is 120% — one of the lowest in the OECD, vs. 260% for the US”
    Thanks for these instructive numbers! Yeah sorry.. I’m not very good at details >_< I didn’t mean to suggest Americans don’t save period, or that China doesn’t rack up debt. I was merely pointing out that, at least on the personal level, Americans try to mitigate debt with more debt (speculative consumption?) while the Chinese do so by producing things and saving. The former is haphazard and the latter is backbreaking; is there really nothing in between?

    FM, you just made me think of something. debt on the national level is a totally different story. Personal debt at 260% or 120% of an individual’s total worth is crushing, something that probably can’t be paid off in a lifetime. But nations don’t really die (right..?) since there’s always another generation to pay off debt. So is it fair to say that national debt is really not all that bad as long as a nation can avoid default or bankruptcy?

    And by extension, can it also be said that the current housing crisis is not an existential repudiation of our debt-financed lifestyle, so long as we have faith in the American economy recovering? If so, then no wonder Obama is trying to “stabilize” the housing market.. he almost has to as a matter of due confidence!
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    Fabius Maximus replies: Unfortunately nations do default on their debt. Frequently. For more on this see “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises“, Carmen M. Reinhart and Kenneth S. Rogoff, April 2008 — one of the best studies about governments getting in over their heads and the inevitable consequences that follow.

  10. Some of the land offered under the Homestead Act was productive as in able to support a family. Some was not. Remember the claim “Rain follows the plow”? The western Praires become increasingly arid as one moves from Illinois to Colorado. Dry land farming was generally not thought possible west of the 100th longitude but people were attracted by the free land. Many failed during the inevitable dry spells.

    Even early ranchers like Teddy Roosveldt had to learn the hard way, by economic ruin, the limits of climate on agarian production. Now, make the land holdings 3,000 acres and add electrical deep well pumps to tap the Oghalla Aquifer for irrigation and you might make it.

    Even in the best of climates soils, small farmers can’t make it. My grandparents had 160 acres of prime Indiana black muck soil at one time. I never knew when my grandfather didn’t hold a factory job even running a dairy herd and some sheep.

    I would grant that some Humboldt County growers have found lucrative crops.

  11. Jonathan Rubinstein:”How about urban collective farms? Must be lots of old folks in China and Russia who will offer guidance. Seriously, do think urban farming is both desirable, possible and valuable. We should be encouraging cooperation, even nurturing it in these ravaged localities..”

    Funny you mention this, but just last year I purchased a couple of citrus trees. Here in Berkeley, you can plant an orange or a lemon tree, and it just pops out fruit with no other watering necessary. Apple trees also grow here, but they’re a hassle because of worms and birds. Vegetables require irrigation, which kills you with the water bills, though sometimes after a good rain, I’ll see some carrots just coming up on their own, from seeds in the ground from previous years. I’m on an old lot, which has a relatively large amount of yard space, relative to indoor living space, so that increases my agricultural potential.

    The next level would be to raise poultry, and I don’t know, fresh eggs would be nice, but really, like let’s not get crazy. If we have have more time and less money in the future, these kinds of projects become more viable. Home agriculture is not a solution to the problem, not even close, but I think it can be a component of a living-lean lifestyle. Also tomatoes grown at home are magic — that Costco produce is cheap, and you can survive off of it, but it’s no way to live.

    I imagine when the dust finally settles, even in the worst hit areas we’ll have a core of government workers still holding jobs. That likely some of the pensions will get bailed out, and the retirees, though bloodied, will have some income coming in. Walmart, MacDonalds, and some low-level jobs will continue, and then a whole lot of people making do on the fringes. The lesson of the last depression is to do what you have to do to survive. Do not sit around and wait for rescue — there’s no one coming to help the average person here.
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    Fabius Maximus replies: It’s nice that you have a hobby, but have you calculated what fraction of your household’s food you are growing — and at what cost in money and time? The economic impact of this kind of work is de minimus.

  12. Cathryn , what shall we do in the UK ? You describe our sunny life in the ’50 ‘s .
    But we couldnt quite feed ourselves in WW2 , despite strict rationing , planting veg on every wasteland , garden and playing field , keeping chickens in every backyard , eating every wild thing that wasnt poisonous .
    Now we have a lot more people here …we could send them ‘ home ‘ but many dont have an a home to be sent back to , due to wars , occupations or creeping deserts ….

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  14. Fabius, I am indebted to you for the effort and thought you put in imagining, creating, constructing and leading this excellent forum. Just remember, Homo ludens. Cathryn is fortunate to be living in heaven’s foyer. Shit grows. She obviously enjoys doing it. Gardening of course is not farming and people who become good gardeners learn an important life rule: be ruthless. You are deeply concerned about the state of our country,I venture you are even a patriot. You know better than I that macroeconomic analysis properly applied is not going to get America out of the complex malaise we have created for ourselves. Even if I did fully comprehend it,I could not describe it in this (or any other)rectangle. But its fixing requires many things, the change you mentioned the other day, and I daresay a spot of gardening wherever it’s possible would be excellent.
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    Fabius Maximus replies: I agree.

    It’s vital not to confuse economics — micro or macro — with life. Not everything need be justified by its advantages to society or ability to generate income. My wife spends many hours in her garden, and gains much from it. I spend time writing on this site and (in the future) building ships in bottles. There are many dimensions to life!

  15. American Agrarian

    FM: “Perhaps roots are part of the solution instead of the problem. Perhaps we should revamp the economy so money and jobs don’t fly around randomly, tieing them down to meet the needs of people — instead of people ripping their lives apart to follow the needs of incoherent and chaotic capitalism.”

    Exactly right FM, thank you.

    America has been forced in to becoming a nation of rootless cosmopolitans and wandering economic gypsies, and this naturally makes people feel highly insecure about stability and continuity.

    Roots are what is definitely needed; we need a return to good ol’ fashioned American rootedness and community building before a recovery can ever materialize because it will help people feel more secure.

  16. I also believe, as some have mentioned here, that many of these vacant or otherwise unusable homes should be razed or demolished and large gardens, orchards, or greenspace/parks should be put in their places.

    For instance: if you take a neighborhood of 100 homes, and demolish maybe 20-25 of them which are vacant or decrepit, that would create more than enough open garden space for that neighborhood’s inhabitants to grow or raise a very large portion of their fruits, vegetables, or other edible goodies within their own local community, thus saving people money and re-igniting interest in the most important occupation in human history: local agriculture.

    This would also have the effect of bringing neighbors together to socialize and work together for the common good, which seems to be very rare in many of these overbuilt and hastily constructed 21st Century American neighborhoods.
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    Fabius Maximus replies: I suspect that the problem centers — Detroit, Cleveland, the inland valley cities of California — have more serious problems than building open gardens in their inner cities. I suggest you write to their civic leaders. Any honest replies might be entertaining.

  17. FM: “Returning to the real world, farming is not viable in much of the US — even in many rural areas. For example, New England has been reverting to woodland for generations as farmers die and their land reverts back to the native ecology. That’s because few Americans wish to live at the low income and enjoy the back-breaking work of a Chinese peasant. Much of the western land that cowboys worked in the late 1800’s is almost empty wasteland today.”

    Most of the people here along with myself are not talking about a wholesale return to an agrarian economy, but rather the adoption of it as a supplementation to existing economic activity. Many people (even historians) rarely realize or acknowledge that America was founded as an agrarian republic, so they fail to understand how deep this mode of living runs in the blood of many Americans.

    Americans don’t at all have to return to the traditionally “low-income, back-breaking (peasant) work” lifestyle of previous times because agriculture today has been highly mechanized – the hardest work, plowing and tilling, is now done by machine; good topsoil (if needed) can be brought in by truck and spread by machines; planting seeds and fertilizing is mostly done by machine, and if not it’s rather easy – about the only ‘work’ involved in modern-day agriculture would be weeding and watering, which is no big deal. If we are talking animal husbandry (raising chickens, cows, or other food animals) there is more work involved, but still with modern technology it’s not difficult. It is also inherently enjoyable because it is HIGHLY PRODUCTIVE, which is more than one can say about many of the paper-shuffling jobs in many post-industrial economies.

    Again, I’m talking about supplementing the existing economic order with a Neo-Agrarian lifestyle – I think this is what this modern ‘green movement’ yearns for.

    Large areas of America which have become depopulated could be repopulated by people who seek to be more independent, away from the economic centralization which has led to the ruin of the American economy and eventually leads to totalitarianism; there could be a few full-time agrarianists in these newly rebuilt small or medium-sized towns, but most would pursue regular occupations (the butcher, baker, and candlestick maker…though nowadays it’s the office worker, banker, and healthcare worker) along with pitching in on the agricultural sector when needed.
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    Fabius Maximus replies: This would be more convincing if you could cite actual practice or professional analysis. It sounds like romantic nonsense to me, showing no evidence of understanding the practical economics of such activity. Small scale farming, as would take place on urban lots, seems to me (with zero knowledge of the subject) an inherently low value-added activity. My guess is that they would be better off financially working at Wal-Mart.

    As a hobby, or a community hobby, is a different kind of discussion.

    Your last paragraph sounds like fantasy to me, with no understanding of the economics involved in generating a community. In fact the next 20 years will see collapse of small towns throughout the midwest — the opposite of the phenomenon you describe, as a result of depopulation since WWII. Their average age will become too high for them to remain viable, a new generation of ghost towns.

  18. Fabius, thanks for the link you provided, a new one on me:

    “Just to site [sic] one of the many studies, see “Risky Mortgages, Homeownership Experiences, and Foreclosures“, Federal Reserve Bank of Boston, December 2007 — Excerpt: “Our second point is that house price depreciation—negative house price appreciation (HPA)—is the main driver of foreclosures. The easiest way to see this is to look at aggregate data. Figure 1 shows that periods of exceptionally high HPA in Massachusetts, as in 2002-2004, are associated with exceptionally low numbers of foreclosures, while periods of negative HPA, such as 1989-1991 and 2005-2007, are associated with high foreclosure rates. Cash flow problems at the household level, driven by job loss, for example, play a role, but only when HPA is low. For example, in 2001, a recession generated a record high number of delinquencies, a sign that many households had problems making monthly mortgage payments. During this time, however, there was a record low number of foreclosures in Massachusetts. Thus, the phenomenal levels of HPA in the early 2000s enabled many borrowers to either refinance or sell to avoid foreclosure.” They explain this over the following 60 pages.”

    Unfortunately, I have to rate this “no sale.” It is a study of mortgages executed through subprime channels, not all mortgages (a proportion that rose in the nly state included in the study–Massachusetts–from 3% to a maximum of 15% during the time period). The sample is too narrow to support conclusions as broad as “America–look in the mirror.”

    Moreover, many of the subprime mortgages in the study were not initial purchases, but actually subprime mortgages used to refinance homes that were originally purchased under prime mortgages. Why would someone move from a prime mortgage to a subprime? To extract equity at a time of cash flow problems that make it impossible to qualify for the much more common prime mortgage. Why would that person subsequently default? Continued income problems.

    The study is very insightful in pointing out that a person whose income leaves him or her struggling to make monthly mortgage payments might in fact soldier on a little longer if that person’s crystal ball predicts a future increase in home values and an opportunity to cash in later (and if home values are actually rising, that person might even manage to sell the white elephant and get out of the mess they are in that way).

    On the other hand, a person pessimistic about future home values or actually experiencing a neighborhood home market with home values in decline might be quicker to default. Good point, and one borne out by the data–more people default in a recession accompanied by declining home prices than default in a recession accompanied by rising home prices.

    Hope springs eternal, at least during a housing bubble.

    In the end, however, it is a person’s income that is the determining factor. To solve the current crisis, focus on increasing everyone’s income, and don’t rely on looney plans to destroy a significant portion of the housing stock in order to boost home prices! Or, as the authors themselves conclude: “…negative equity is a necessary (but not sufficient) condition for default.”
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    Fabius Maximus replies: I just grabbed the first study about this in my files. There are dozens, many available on the web. Many experts, such as Tom Zimmerman of UBS, have written about this. It has been, as I said, a well-established factor for many years. People tend to default when they have no equity in their homes.

    People’s income is not the determing factor, just a factor. This was the “prime mortgage seldom default” theory that is being disproved right now. The recent studies used subprime because that was the universe defaulting in 2006 and 2007; the data on prime defaults is coming in now.

    Questioning the role of home equity as a driver of defaults is esp odd this late in the game. For the past year lenders have been screaming about the rise of “walk-aways”, mailing back the keys on homes with negative equity. The non-recourse nature of many mortgages makes this a rational economic choice).

  19. Apologies for ‘blowing up’ this thread (this is my last one for now), but one more thing: the ‘crisis of industrialism’ which we are currently experiencing was predicted long ago, not least of which by the group which referred to themselves as the ‘Southern Agrarians’ in the late-1920s through the Depression-era 1930s, which was also a time of a major crisis in the industrial system.

    The introduction to their book of essays, I’LL TAKE MY STAND, explains and seemed to predict many of the problems we now face in our economy and social structure; read the intro to that book sometime if you have an extra few minutes:

    A few relevant excerpts:

    + “Even the apologists of industrialism have been obliged to admit that some economic evils follow in the wake of the machines. These are such as overproduction, unemployment, and a growing inequality in the distribution of wealth. But the remedies proposed by the apologists are always homeopathic. They expect the evils to disappear when we have bigger and better machines, and more of them.”

    + “Turning to consumption, as the grand end which justifies the evil of modern labor, we find that we have been deceived. We have more time in which to consume, and many more products to be consumed. But the tempo of our labors communicates itself to our satisfactions, and these also become brutal and hurried. {snipped at 250 words, cutting the remaing 300 words}
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    Fabius Maximus replies: This is what happens when the comment policy is not ruthlessly enforced. Topic drift, often getting longer and longer, hijacking the thread.

  20. FM sez: “This was the “prime mortgage seldom default” theory that is being disproved right now. The recent studies used subprime because that was the universe defaulting in 2006 and 2007; the data on prime defaults is coming in now.”

    You might be right. * shudder * I’ll study and learn. But I ain’t growing no tomatoes.

  21. FM wrote: “Fabius Maximus replies: You miss the point. If you have a vacant home next to you, with the plumbing, furnace, and wiring ripped out, lawn overgrown, a fire hazard — inhabited by vagants (or a meth lab) — you might feel differently about the “waste” of demolishing it. I suggest you read that NYT Magazine article. Then call the folks in Cleveland or California’s inland valley (e.g., Modesto, Stockton), who must actually deal with this mess — and share your lofty ideas about the situation.”

    Fair rebuttal. In suggesting a little more patience to let prices settle I was not thinking about devastated neighbourhoods like those in Cleveland etc. in the article(s) which I read before posting. But are such scenes typical all over the country where there was recently constructed oversupply? I don’t know but somehow I doubt it. The Cleveland situation is part of a longer term local crisis which the larger financial situation has exacerbated but not caused so I am not sure if it is fair to use it as an example of the typical situation. But there I go being ‘lofty’ again I guess!
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    Fabius Maximus replies: Jeepers, we’ve gone over this many times. The newspapers are filled with articles about this problem. Vacant homes get wrecked rapidly in most circumstances, even affluent neighborhoods. Plus they are expensive to maintain: security, taxes, and maintence.

    If it is such a wonderful thing to do, perhaps you could start a fund to buy and stockpile home! Take a moment to sketch out the numbers and try selling it to others.

  22. Pingback: Fha Mortgage Rates Chart In Bowdon Ga

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