By Sarah Snell Cooke, Cooke Consulting Solutions
Google “big pharma” and you get 8.8 million results. Input “military industrial complex” and see how many results you get (3.9 million). And you can scroll to see the first several pages are exactly what you’d think they’d be about.
Now search “big housing.”
326,000 results, and none of them address the parallel topics to the above. It’s all about big housing projects or, well, big houses.
And “housing industrial complex.”
5,210 results.
With something as basic on Maslow’s hierarchy as shelter and just as ‘big’ as these other issues and the cause of the 08-09 housing crisis, you’d think more people would be digging into this. Shining a light on and labeling the problem with an equally concise and recognizable name that has cost so many their jobs, their homes, their family wealth, and so much more. No, we as a people just persist in whining about the lack of affordable housing.
The Economics of Housing in the US
According to the Bureau of Labor Statistics, “Between January 2008 and February 2010, employment fell by 8.8 million—the largest absolute decline in the series’ history. The previous record was 4.3 million net jobs lost from November 1944 to September 1945.”
The housing crisis was worse on jobs than World War II.
No worries because these people couldn’t afford a home anyway. The US median home price increased approximately $6,000-$7,000 per year in the earliest 00s, as reported by GoBankingRates.com. Between ‘04 and ’05, the media cost of a home skyrocketed just shy of $20K or nearly 10%. It then leveled off a bit and ultimately came crashing down as we all – at least most of us – witnessed. From $247,900 at its peak in 2007 to $216,700 in 2010.
And it started skyrocketing again. Apparently, none of us learned our lessons.
I posit that this occurred as the developers and investors tried to make up for lost income during the lean times.
Lean times that they caused, as they quit building truly affordable homes because there wasn’t enough money in it. In fact, in 2007, the top builders earned $124 billion gross total revenue, BuildersOnline.com reported, only to top that record by another $9 billion in 2017.
Lean times short-sighted investors caused because they’re chasing that quarterly return.
Lean times caused by appraisers who fudged the numbers under pressure from the builders, investors, hell even actual families looking to buy and borrow, who just needed to get that loan-to-value ratio.
Lenders who had their side of the loan-to-value equation to hit, too. Because lenders weren’t exactly making bank on the historically low interest rates, so they had to mitigate their risks in other ways.
Or not. No-doc, lo-doc, no problem. Especially for the most unscrupulous of subprime lenders.
Are we really building wealth?
In our rush to homeownership as a wealth-building tool, and it is, we were not as concerned about their ability to repay.
Now explain to me how giving someone a mortgage they can’t afford – or at least can’t afford given the total cost of homeownership, is building anyone’s wealth, other than Big Housing. Instead, we’re perpetuating poverty and debt. A lot of the government programs intended to create affordable housing, only mask the issue as families throw thousands of dollars at rent without building any wealth – except for the investors who buy or build these buildings and leave them in squalor, because they want the biggest return for their dollar. Never mind they choose to leave humans often living in mold-infested apartments (hello, increased health care costs) with broken appliances. They should just be grateful to have a roof over their heads; that probably leaks, too. (And I’m not going to get on my soapbox right now about how public schools are funded by property taxes!!)
And some big banks vow to invest billions in homeownership assistance but wash their hands of the subsequent problems after they cut the check to great fanfare and national PR. CU Strategic Planning’s Shirley Senn makes several great points in her article, Big Banks Taking Big Swings – and Misses – in Minority, Underserved Markets.
But back to home pricing for a minute. COVID jacked up home prices even more – more than $50K between 2021 and 2022! But this time, low rates aren’t adding fuel to the fire. Good thing, too, because a mortgage on the median-priced home ($454,900 as of yearend 2022) is nearly $50,000 a year!
Given the median household income is $80,440, per Seeking Alpha – pre-tax – the median home mortgage would gobble up the entirety of the median family’s income. At the same time, the lack of affordable homes to buy has driven up rents to more than $2,000 – or only more than half the median family’s pre-tax income. And these people are stuck renting, because the more affordable homes are snatched up by investors who are playing the game Big Housing has dealt them. And so, the cycle continues. Until another bubble bursts, only to make the investors who can hang on that much wealthier and housing even less affordable.
What some credit unions currently have in the works
Programs like Eden Village, which The SECU Foundation of North Carolina recently contributed half-a-million dollars to is a good start to attempt fixing the local homeless issue. How about credit unions work to prevent homelessness from the start? Certainly, other issues contribute to homelessness than just 1) availability and 2) affordability, but we have to start somewhere.
And from there, how do we help these people into jobs, into mortgages and into wealth building? It’s getting harder for the average family to buy or rent the average home. What are we going to do for those who can’t afford it at all? Contributing to affordable housing programs is another way to contribute, which can have bigger impacts when you partner with other organizations, as Horizon Credit Union has done with NeighborWorks Boise and the Federal Home Loan Bank of Des Moines. Same with UMassFive Credit Union and MassHousing. And many, many more credit unions – individually.
I had the privilege of speaking to the CEO of a $30 million credit union recently that had made its very first mortgage loan. They leveraged a CDFI grant to promote, train and add to their team, as well as partner with an organization; together they prep members for homeownership over months at a time. That first mortgage was $65,000. As an increasing number of small credit unions are merged out of existence with each passing year, who will be left to serve these communities?
Yes, credit unions, we are part of the problem. Now, what can we do collectively?
2 thoughts on “Why is no one talking about ‘big housing?’”
Sarah, this is an interesting article and quite thought provoking.
However, I’m not sure I agree with your take. First, you seem to suggest builders are at fault for trying to make up for lost income during the great recession. Builders took the Great Recession on the chin, and they lost plenty. They run businesses. They have to make payroll. They are not the Fed government that can borrow uncontrollably. Time has shown they tend to have a better memory than bankers and housing policymakers. They don’t want to overbuild and be stuck with very expensive inventory to carry. I have no problem with trying to make up for "lost time." Look around-you’ll see a lot of that going on right now in any number of companies and businesses. They lost money during COVID and they’re trying to recoup some of it.
Secondly, I would argue the problems builders experienced were NOT due to building enough affordable housing leading up to the Great Depression. Far from it. What occurred was that in response to the 2003 historic refi boom, lenders and investors were looking for: 1. Volume 2. Yield. That lead to the creation of the pick-a-payment mortgage and the surge in sub-prime mortgages. Sub-prime mortgages had been around for decades-at LTV’s closer to 60-70%. Remember the old company, The Money Store? They did sub-prime the correct way, which worked for decades, regardless of the closing of the "old" Money Store in 2000-2001. They closed because First Union bought them and didn’t know how to run the business. Builders suffered because they built too many homes. They relied too much on the trend lines-fueled by subprime and PAP. Rampant speculation in real estate was occurring as well-remember the sand states? What do you think was happening? Easy money-easy mortgage, easy flipping-for a while. Do you remember the "Millionaire University" loans that many credit unions got involved with, flipping homes in the Lehigh Acres area of Florida? Builders were simply trying to keep up until the sub-prime portfolios started to explode. Now, if you want to blame some isolated builders that were all a part of THAT fraud in Florida, that’s another story, because Florida has a long and sordid history of real estate shenanigans.
I also disagree with your thoughts on the current run-up in prices. I blame the Fed’s actions to lower rates to zero and basically keep them there for too long, in addition to their MBS purchases to drive down rates. This created historically cheap money, and people became almost hysterical in their quest to buy homes, offering over asking price, buying homes sight unseen (a house is not a 24-pack of toilet paper you buy on Amazon, for gosh sakes) and waiving little things like inspections, etc. The last time I checked, builders had nothing to do with this. Yes, new home prices have exploded. How about blaming the shortage of building materials….have you heard of inflation? How about our failed immigration policies? There are not enough people in the US willing to do the hard work to build the homes that need to be built. Congress has to fix immigration. So, let’s go back to those builders you want to vilify. They have no idea what a home will really cost to build. They’re not sure if they’ll have the labor to build the home, and what they’ll have to pay. Unlike credit unions, that are not for profit, but certainly not "non-profit," builders need to make a profit. And quite frankly, if they price a house for less than what it could be flipped for, the flipped might make a greater profit on it than the builder who worked hard to construct it. This was happening in 2005-2006 in Florida and other hot areas. I read an article in the Orlando Sentinel in January of 2006 detailing what was happening-people were having $450k homes built, closing on them on a Friday, and selling them a month later for a $100k profit. That’s when I knew the market was on the verge of collapsing. I lived in Florida as a homeowner for 12 years and my home increased in value from $108k to $135k in that time-homes simply did not go up in value there, not to that extent. Another story" three decades ago my former credit union did business with a local auto broker. The owner once told me, while discussing a deal where the member had complained he wasn’t getting enough for their trade, "Bill, I’m not going to play the game unless I can win." It was a crude way of saying as a business owner, he was taking a risk, he was borrowing money, putting personal capital at risk, making investments of time and money, and that he had to have an adequate return.
The problem of affordable housing is a very difficult and fragile one. The wrong decisions can create another generation of heartbroken consumers who lose their home, or lose most if not all of their equity. There is no one solution. There are probably 10 different things that need to happen. Well-intended credit unions may decide to offer grants and other down payment assistance….which could have the effect of adding to the demand to buy a home when there isn’t the supply to support the additional demand. Economics 101 would suggest that will create upward pressure on prices. Fannie Mae and the FHFA can’t relax standards to make it happen either. I could write 10 articles on the 10 things that need to happen, to fix the situation we have now…
Thank you, Bill, for the input. I very much appreciate your expertise and insights, as well as your willingness to respond! Housing certainly is a complex problem that I hope credit unions can (and have the will to) help improve. I can see an American moving ever-closer toward a handful of haves and a whole lot of have-nots. I’m very much a capitalist, but I hope we can get to a point in which more of us feel and actually have ‘enough.’
I have to disagree with one point of your disagreement: I did list more than half a dozen contributors to the housing crisis, including the historically low rates and no/low-doc loans. It’s not just builders but the entire Housing Industrial Complex that has played a role, including unintended consequences of well-meaning actions from both the private and public sectors.