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Great Leap Forward

Yes Folks, Housing is Looking UP, For the One Percent Ownership Society

Back in Summer of 2005 I wrote a piece, “THE OWNERSHIP SOCIETY: Social Security Is Only the Beginning . . .” that examined President Bush’s promise to create a new society of owners. During the 2004 campaign, he proclaimed: “The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country”. The centerpiece of his “Agenda” was the belief that “every American should have the right to own his or her home, to build his or her own future, and to have the flexibility to make the decisions about their own health care and retirement.” In addition, his “ownership” manifest included the promise to “fix Social Security,” expand saving and investment through tax-free savings accounts, reform pension rules and streamline retirement accounts, endorse health savings accounts, repeal “death taxes,” promote “affordable, reliable” energy, and “reduce the lawsuit burden.” Taken together, the policy changes would encourage ownership and individual responsibility.

While supporters held out the promise that access to wealth will be broadened by the president’s agenda, I argued at the time that such policies actually would increase inequality, a point that undermines an important justification for proposed ownership-society programs. Can anyone say “Nostradamus”? Read the piece here: http://www.levyinstitute.org/pubs/ppb_82.pdf

Oh, I know, hindsight is twenty-twenty. What did I say in 2005?

First, I showed that except for the rich, the only significant wealth held by the average American is the family home. As I said in 2005, “therefore, the case for existence of an ownership society rests on home ownership, since owner-occupied homes represent the only significant asset held by families across all income and wealth percentiles…. Thus, home ownership is a critical component of the claim that ours is an ownership society, and that broader ownership would further the social good…. families that do not own a home have insignificant amounts of other forms of wealth, with median family net worth equal to $4,800, median retirement accounts valued at only $6,800, and financial assets equal to just $3,900. Those who “choose” to rent rather than own their homes pay a huge penalty because of the close correlation between home ownership and wealth. Clearly, renters will not participate in any meaningful way in the ownership society envisioned by the neocons. By contrast, families that own their home have a median value of asset holdings equal to $240,100—about 18 times greater than the median holdings of renters who had any assets. Home ownership does seem to open the path to wealth.”

However, I noted that all was not hunky-dory even for homeowners: “there are two reasons that analysts should not get carried away with counting home values as “wealth” and therefore further proof we have already become an ownership society, at least for 70 percent of the population. First, many home “owners” have mortgages against their properties, and that debt has been rising quickly. In 1984, mortgage debt equaled 40 percent of personal disposable income, but that increased to 60 percent in 1998 and is 80 percent today…” Second, “families have to live somewhere, so liquidating the family home means purchase of another, or moving into a rental unit that is not usually of comparable quality, and that commits the family to rents in perpetuity….  Homes may be “liquid,” but they do not represent much “net” available to support other consumption. Indeed, rather than downsizing, what we have observed in recent years is a tendency to cash out equity—which has been described as the housing “ATM”phenomenon. This is a major contributing factor in the rising ratio of mortgage debt to income.”

Other debt was rising, too, and in an inverse manner so that those at the bottom of the income pyramid were taking on relatively more debt: “American families have taken on a lot of debt. About 75 percent of all families have some kind of debt. This varies—mostly inversely—by net worth, with 69 percent of the poorest quartile having some kind of debt, and 80 percent of families in the second-lowest quartile having debt… Nearly half of families at the very bottom of the wealth distribution had installment loan and credit card debt. Interestingly, while over 55 percent of all families in the top decile of net worth had home-secured debt, only a quarter had installment loan debt, and only 22 percent had credit card debt… Hence, installment debt and credit card balances entail a burden that varies inversely with wealth and income.”

The appearance that we were achieving Bush’s promised ownership society was deceiving—because wealth of all kinds but especially financial wealth was concentrated in the hands of the few: “In sum, the wealthiest decile enjoyed median family net worth that was 1,184 times greater, financial assets that  were 544 times greater, and nonfinancial assets worth 166 times more than those held by the lowest quartile. Further, 95 percent of the wealthiest decile of households owned a primary residence, and 42 percent also owned other residential property; only 14 percent of the bottom quartile owned a primary residence—and forget about a second home for this group. Yet, the poorest households faced much higher debt burdens, with nearly 14 times more families in the lowest income quintile carrying debt greater than 40 percent of their meager incomes, and with 60 times as many low-wealth families with debt in arrears when compared with the wealthiest families. So, while financial assets and net worth holdings are heavily skewed toward the richest households, debts are more “democratically” shared—with the bottom half of the wealth distribution actually “enjoying” more debt relative to income, and absolutely higher levels of debt in some cases.”

Folks, that was back in the good old days before the Global Financial Crisis destroyed jobs and the wealth of most Americans.

Finally, I warned of the precarious nature of home finance in the midst of a real estate bubble: “There is a sort of inexorably perverse ownership-society logic in all this. In recent years, banks have promoted “100 percent” (typically “80/20”) mortgages in which home buyers borrow a “down payment” (for example, 20 percent of the home value) at a high interest rate. According to one report, nearly half of new mortgages are no-money-down deals, and 36 percent of homes are bought with adjustable-rate mortgages; further, cashout home refinancings are now running at a pace of $400 billion yearly. With little or no equity cushion on many of these new mortgages, even a slight downturn in real estate prices—or a decline in household income—could lead to foreclosures. Moreover, the Fed continues to raise rates; although this has not yet had much impact on household mortgage rates, it will eventually succeed in raising them, causing variable rates to spike.”

And, indeed, it was the hybrid subprime loan that triggered the crisis in 2007.

I went on: “All of this comes at the peak of what appears to be a real estate bubble, [Greenspan] even invented a new term for the phenomenon, calling it housing market “froth,” fueled by speculation that has caused residential real estate prices to climb at double-digit rates for the last several years in many cities. One recent study found that 818,000 of the two million new jobs created since the end of 2001 can be linked to housing: construction, home-furnishing stores, and the real estate services sector. Greenspan tried to downplay the risks, arguing, ‘Even if there are declines in prices, the significant runup to date has so increased equity in homes that only those who have purchased very recently, purchased before prices actually, literally go down, are going to have problems’.”

Right, no big problems—homeowners have tons of equity. I didn’t buy it: “ However, the repercussions of a slowdown in real estate markets could be far-reaching, to say the least, given the level of household debt, given that the family home represents a huge chunk of typical household wealth, and given how important the housing bubble has been for job creation. The timing was thus impeccably inappropriate for bankruptcy “reform” designed to put pressure on “deadbeat” households—that is, on those families with little “ownership,” but lots of debt. It is ironic that the 30-year mortgage brought to us by New Deal government guarantees—making home ownership possible for working Americans for the first time—has morphed into a speculation-fueling, debt-pushing juggernaut that is likely to bury homeowners in a mountain of liabilities from which they will not be able to seek bankruptcy protection. Creditors will emerge as owners of the foreclosed houses and with claims on debtors, who will be subject to a form of perpetual debt bondage under Chapter 13 (which, unlike Chapter 7 bankruptcy, requires a repayment plan).”

Well how did all that work out? Exactly as planned. All wealth is flowing to the top few tenths of a percent. That is what the Ownership Society was all about.

Here’s an amazing update on the progress made on that score: Your New Landlord Works on Wall Street: Hedge funds are snatching up rental homes at an alarming rate, By David Dayen, http://www.newrepublic.com/article/112395/wall-street-hedge-funds-buy-rental-properties#.

“If you’ve signed a lease in the past year, there’s a good chance your landlord wears a tailored suit and works on Wall Street. One of the hottest trends in the financial sector is known as “REO-to-rental.” Over the past couple years, hedge funds, private equity firms and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, often in bulk, at bargain prices. Their strategy is to convert them to rental units for a while before reselling them when prices appreciate. The Wall Street firms are scooping up properties in the hardest-hit areas, promising high returns for the rental revenue streams—up to 10 percent annually —and starting bidding wars that have driven up some prices well above national averages. It’s the next Wall Street gold rush, with all the warning signs of a renewed speculative bubble….

According to a recent JPMorgan Chase report, Wall Street has already raised or committed as much as $10 billion for REO-to-rental, enough to purchase 15 percent of all bank-owned homes. The hedge fund Blackstone, a market leader with at least $2.7 billion in purchases already, announced in November the intention to buy $100 million worth of homes every week, with $1 billion in homes just in the Tampa Bay area. JPMorgan Chase recently put money from wealthy clients into the purchase of 5,000 single-family homes for rent in Arizona, California, Nevada and Florida, the so-called “sand states” which saw the greatest collapse during the foreclosure crisis. One study from the Urban Strategies Council showed that 42 percent of all homes that fell into foreclosure in Oakland, California between 2007 and 2011 have gone to investors. “Anybody here in Florida can see the rental signs; they’re everywhere,” said Michael Olenick, a housing data analyst based in the West Palm Beach area….

One sign that this resembles a speculative bubble is that REO-to-rental has become a new asset class. Real Estate Investment Trusts (REITs), kind of a mutual fund for real estate that eliminates tax liability for the issuers, have been established as a conduit for capital formation. REITs like Silver Bay and Altisource Residential went public in December 2012, and many of the Wall Street firms buying in this space expect to create public REITs in the near future. They promise dividends from the rental income for their investors in the 5-7 percent range, though other investment groups promise even higher returns. In a time of low interest rates, that’s an attractive option. There’s a dearth of investable assets for institutional investors,” says Josh Rosner. While investors have questions about the long-term viability of bulk rental property management, the money keeps flowing into the space.

Perhaps worst of all, Wall Street has begun to explore the option of securitizing the rental revenue, much in the way that they used mortgage-backed securities to ramp up capital in the bubble years. Three separate REO-to-rental trusts appeared on the market, under the administration of Wells Fargo, in the past couple months. These are non-public offshore trusts that are unregistered with the SEC, and in all likelihood have no credit ratings, as the rating agencies have this time shied
away
from rating an unproven product. But they’ve attracted enough interest to move forward…”

Here we go again, folks.

And remember that–meanwhile–we buried households under credit card debt and student loans (each over a $Trillion) while destroying the value of their homes, stealing them in illegal foreclosures, and threw them out of their jobs.

What role do American families play in this new ownership society? Peasants in perpetual bondage to Wall Street–paying rent for the homes they used to own (and on which they still owe mortgages and second mortgages) and interest on all their consumer and student loan debts. Feudalism is back.

 

 

 

 

 

8 Responses to “Yes Folks, Housing is Looking UP, For the One Percent Ownership Society”

olly100February 13th, 2013 at 11:06 pm

Randall,

an unrelated question:

is there actually a law against the Treasury borrowing directly from the Fed, or not? If there is, do you know where can I find it?

Also, do you know if the Treasury has ever borrowed directly from the Fed in recent years?

Many thanks.

joseph glynnFebruary 14th, 2013 at 12:14 am

Well said.
We have been on a similar path here in Ireland. The rental sector has doubled in size in 5 years. Our housing system has failed comprehensively. Young people, singles and graduates pay exorbitant rents, or emigrate. Rents scarcely fell even though house and apartment prices fell by 50-60%. So now rental yields of up to 15% and more are available to those with cash to buy.
Feudalism is the only name for it.
I say capitalism is a sham; just two 6,000 year old private monopolies, the land monopoly and the bankers monopoly of credit money-issuance and allocation, colluding to keep us enslaved. They crashed the global economy in 2007/8 and devastated our future.

Perhaps a combination of land value taxation, carbon taxation and public interest banking might just enable humanity to escape their doomsday mega-machine.

Insightful, honest and courageous economists such as yourself may be our only hope.

L. Randall WrayFebruary 14th, 2013 at 12:37 am

Joseph: as you might know, I visited Ireland. My sympathies. You need a better class of policymakers. In my view, since 2007 the Irish have perpetrated the greatest act of charity in human history; unfortunately, its purpose was to save the most rapacious european banksters the world has ever seen. Time to revolt.

L. Randall WrayFebruary 14th, 2013 at 12:39 am

Olly: I think Scott Fullwiler is the best on this. My understanding: yes there is a law, but it allows some slack. So Yes Treas has directly sold bonds to Fed in recent years.
Does it matter? No. Fed and Treas use private banks as intermediaries. All functions smoothly. How do we know: a) Fed hits overnight target; b) Treas checks do not bounce.

olly100February 14th, 2013 at 1:17 pm

But if there is indeed a law against Treasury borrowing directly from the Fed, then isn't it possible that Treasury checks could bounce? The Fed isn't permitted to break the law, after all.

Mary KaplanFebruary 14th, 2013 at 11:41 pm

Yes, the US is in the doldrums on many levels. I never understood how financial institutions could offer no money down mortgages, and the proof was in the pudding as so many of these loans went upside down. Have we learned our lesson? I doubt it. Just waiting for the next shoe to drop!

lrwrayFebruary 15th, 2013 at 1:25 am

Mary: right. The puzzle is solved if you separate the interests of the crooks running the institutions (that is, the top management that rakes in tens of millions in bonuses) from the institution itself (pension fund owners, tellers and low level clerks). All the big institutions are run as what my colleague Bill Black calls "control fraud": to enrich top management with fraud as the weapon of mass destruction.

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