Our Real Estate Obsession Endures
Headline writers were in a creative frenzy this weekend in New York.
Describing an auction of foreclosed homes that took place at the Jacob Javits Convention Center, the newspaper Metro New York declared the proceedings “a steal for bidders,” while the Daily News decreed that for those “willing to pounce, big deals.” The generally reserved New York Times labeled the proceedings a “frenzy,” while the Wall Street Journal printed “Going, going, gone” atop a photo of an auctioneer’s assistant gesticulating wildly, presumably to help whip the crowd into the frenzy that the Times witnessed.
The articles accompanying these headlines were a mixture of astonishment and credulity. They marveled at the “crazy deals” that some bidders had snared and, as if to reaffirm our faith in the power of real estate, explained that underlying this rush of buying was the notion that a home is still a far better investment than savings in the bank, although presumably not to the many former owners whose houses were now being auctioned.
Reading these stories, I felt as if the housing bubble had never happened. For one thing, the media oohed and aahed over these deals based on little more than how much lower the winning bids were to the “previous value” of the homes listed by the auction company. Never mind that the previous values were vastly inflated, driven by dicey loans issued under discredited underwriting standards that aren’t likely to reappear any time soon to prop up home prices. Or that properties were auctioned with severe restrictions, such as requirements that some homes had to be bought with all-cash. Sorry, no financing allowed.
As far as I could tell, none of the reporters actually visited any of the properties that they judged to be “steals.” As someone who has researched and attended foreclosure auctions in the past, including in the days when the Resolution Trust Corp. sold homes seized from owners who had been lent money by failed savings banks, I’m reasonably sure some of the homes now being auctioned are not remotely in livable shape. Calling them fixer-uppers would be a stretch in many cases. Yes, those homes represent an opportunity for people willing to invest sweat equity and the cost of materials in making the places livable and salable again. But the work will be tough and the payoff is well down the road, when a market that hasn’t even hit bottom yet finally recovers years hence.
And to see a payoff, buyers will have to hope that the communities they are investing in make a comeback. You see, many of these properties are in struggling neighborhoods where real estate values have been depressed, in some cases for decades. Many homes for sale in New Jersey, one of the markets served by this auction, are in lower-income towns and struggling cities in two counties, Essex and Union, which a Federal Reserve Bank of New York study identified as ground zero for the mortgage meltdown in its district. In these places abandonments are leaving streets littered with boarded up homes. These auctions will certainly help that problem if the owners take possession and make improvements, but their ultimate payoff from these deals will depend at least somewhat on what other people in these neighborhoods do—or don’t do over time. Somehow the media forget to mention that risk.
In his new book The Ascent of Money, Niall Ferguson discusses the obsession that Anglo-American people have with investing in residential property in a chapter he ironically titles Safe As Houses. As Ferguson notes, the countries with the highest level of home ownership in the world are all English-speaking save Iceland—which is hardly an inspirational model. “No other asset allocation decision has inspired so many dinner-party conversations,” he writes.
So deep-seated is this obsession that we in the Anglosphere move seamlessly from discussing rising home prices and house flipping to conjecturing about the opportunities that waves of foreclosures will bring. Turn on your TV at 4 a.m. these days and you will find infomercials with titles like Profiting from Foreclosures have replaced infomercials with titles like How to Buy Real Estate With No Money Down.
This is nothing new. The housing downturn of the late 1980s and early 1990s, bound up as it was in the messy savings and loan crisis, nonetheless gave way to the housing boom of the late 1990s and then the housing bubble. The foreclosure crisis of the Great Depression, when at one point 1,000 homes a day were going into foreclosure, gave way to a post-War housing boom that sparked foreclosure problems by the 1950s. The frenzy that the New York Times describes seems to be in our DNA when it comes to housing.
The problem is that this obsession is not just a function of our cocktail party talk or front-page reporting. It goes right to the heart of public policy discussions in America, which is why our government often enables housing bubbles.
Even now, in the midst of our current woes, members of the Congressional Hispanic Caucus caution against reining in affordable housing lending because, “We need to keep credit easily accessible to our minority communities,” as Congressman Joe Baca has put it. And both Republicans and Democrats in Congress continue to put forward new programs to subsidize home ownership and kick start the housing market, without wondering whether further subsidies might just spark new foreclosure problems.
Our biggest danger, in other words, may very well be not the depth of this crisis, but the fact that we won’t learn much from it.