The housing crisis of 2018

Posted on May 9, 2018

Home prices are higher now than at the peak of the housing bubble in 2006. Since the bottom of the housing market in late 2011, the median price of new homes has increased by 48 percent (from $250,000 to $369,900) according to the Census Bureau, and for all homes sold the median price has increased 45 percent (from $147,000 to $213,000) according to Zillow. During the same period, the consumer price index (CPI-U) rose only 10.3 percent.

So even adjusting for inflation, home prices are very high.

But unlike the prior housing bubble, there is no oversupply of homes and there seems to be no underlying fraud in the mortgage market. As economist Dean Baker explained: “there are grounds for concern about excessive prices in the lower tier of the housing market in several cities, but none…provide a clear example of a bubble.”

There is a crisis. Homes are unaffordable for millions of would-be first-time buyers. Why?

First, homeowners aren’t moving, mostly because they can’t afford it. Americans are still recovering from the Great Recession. As a result, especially in the lower half of the housing market, there is insufficient supply—which increases prices.

Second, homebuilders have been focusing on the luxury market because it is more profitable, further choking supply of lower-priced houses.

Third—and here’s where it gets interesting—investors have increasingly moved into the business of owning homes. There are the garden variety domestic vultures, like Sean Hannity, who bought up distressed properties during the Great Recession. As the New York Times put it:

Hedge funds and private equity firms such as Blackstone Group bought up homes by the thousands from banks eager to get them off their books. They were so eager, in fact, that many homeowners were unlawfully bullied into foreclosure.

But more insidious—and probably more damaging to the market—are secretive “shell companies” buying up real estate without disclosing who owns the property. The U.S. makes it exceedingly easy for anyone to create a shell company or use an entity created in an offshore haven like the Cayman Islands.

As The Atlantic explains:

The problem…is that shell companies, through their attendant anonymity, also enable large-scale money laundering. Because of the lack of clarity on who’s benefiting from shell-company ownership, as Transparency International noted last year, “Nobody knows how many shell companies are used for legitimate purposes, and how many for dodgy purposes.”

And shell companies, including fronts for Russian and Chinese oligarchs, are buying a great deal of real estate. One indication is “all-cash purchases” which very few ordinary buyers can offer. Specifically:

Nationwide all-cash purchases accounted for 29.0 percent of single family home and condo sales in 2017, up slightly from 28.7 percent in 2016…. Among 156 metropolitan statistical areas with a population of at least 200,000 and sufficient cash sales data, those with the highest share of all-cash purchases in 2017 were Mobile, Alabama (69.8 percent); Binghamton, New York (60.9 percent); Macon, Georgia (57.7 percent); and Columbus, Georgia (56.2 percent).

In 2014, according to the Washington Post, all-cash purchases accounted for about 40 percent of home sales nationwide. The Post went on to say:

Wealthy people, foreigners and retirees are transforming markets across the United States with these all-cash deals, helping make up for an alarming shortage of first-time buyers who are struggling to save for a down payment or qualify for a loan, a cause of grave concern about the long-term health of the market and its prospects for a true recovery.

Which brings us back to one particular real estate investor, Donald Trump. USA Today reported in June 2017 that:

Since President Trump won the Republican nomination, the majority of his companies’ real estate sales are to secretive shell companies that obscure the buyers’ identities, a USA TODAY investigation has found. Over the last 12 months, about 70% of buyers of Trump properties were limited liability companies – corporate entities that allow people to purchase property without revealing all of the owners’ names. That compares with about 4% of buyers in the two years before.

We don’t have to sit back and let the corruption roll over us. States—and in some cases cities and counties—can require the disclosure of the actual individuals who own property. New York Senator Brad Hoylman announced that he plans to introduce a bill to do just that.

Why not push for disclosure legislation in your own jurisdiction?