U.S. Workers and the Housing Bust


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After the burst of the Information Technology bubble of the 1990s, many corporate and individual investors shifted their assets to the housing sector.  With historically-low interest rates and double-digit price rises in many markets, investing in a first or even second home seemed a “safe” way to go. Millions of people became home owners for the first time, and millions of others took out second, third, and even fourth mortgages, with the seemingly endless rising value of their homes as collateral. This artificial sense of wealth compelled millions to borrow money like never before, confident that rising house prices would indefinitely give them the economic breathing space they needed to catch up with their growing debts.

As is to be expected under the anarchy of the capitalist market, speculators piled in as well, buying up homes and “flipping” them for a quick profit. Others bought up lots and built new houses without regard to the real possibilities for selling them. This resulted in a classic crisis of capitalist overproduction – there are now “too many” homes available.  Not “too many” to meet the human needs of the homeless and inadequately housed, but “too many” to make a profit within the narrow limits of the capitalist market. In 2005, the housing market began to cool rapidly, and millions of homeowners and many speculators are now faced with a nightmare scenario – owing more on their loans than the homes are actually worth.

One result of this is the “sub-prime”, adjustable rate mortgage (ARM) crisis, which has already affected at least 10 percent of the housing loans industry. These predatory loans, which start out with a low “teaser” interest rate that then jumps to a much higher rate, has trapped millions of low-income workers in a vice.  In some cases, monthly mortgage payments jumped from $700 to $1,100 or more, literally overnight. This is an impossible increase to cover on the low wages made by most of those who “qualified” for these loans.

The crisis caused by the defaults on these loans may well spread to the broader financial services sector. At least 20 mortgage lenders who sold mostly sub-prime loans have filed for bankruptcy in recent months. Former Federal Reserve Chairman Alan Greenspan commented that the sub-prime crisis is “not a small issue…You can’t take 10 percent out of mortgage originations without some impact.”

According to the Mortgage Bankers Association, over 500,000 mortgages, were in foreclosure at the end of the fourth quarter 2006, with a total of over 43 million outstanding loans at the end of last year. Credit is being tightened and could take as many as one million potential home owners out of the market.

Home repossessions have spiked, as literally millions are faced with foreclosure on their homes. There is the danger of a vicious circle as repossessed homes are put on the market, adding even further to the glut of homes already for sale, putting even more downward pressure on prices. Dean Baker, co-director of the Center for Economic and Policy Research explained that “inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent. Now, with the tightening of credit, I don’t see how prices don’t fall another 5, 6 or 7 percent.”
Evidence of a deep crisis has come from various sources. The New York Times reported: “The slump in home prices from the end of 2005 to the end of 2006 was the biggest year over year drop since the National Association of Realtors started keeping track in 1982.”

According to the S&P/Case-Shiller index, a measure of home prices in 20 U.S. metropolitan areas, home values fell 0.2 percent in January from a year earlier. This was the first decrease since the group started the index in January 2001.

The National Association of Realtors reported in April 2007 that it expects its measure of home prices to fall in 2007 for the first time since it started tracking sales nearly 40 years ago.

A Bloomberg News survey reported that new home sales in the U.S. dropped 3.9 percent to an annual pace of 848,000 in February, despite predictions they would rise to 985,000. A report from the U.S. Census Bureau showed that in January, existing homes for sale were up 23 percent to 3.5 million. That same month, new homes completed and available for sale reached a record high of 175,000, up 47 percent from a year earlier. The Commerce Department announced that construction of new homes in January fell by 14.3 percent. The Census report also showed a record 2.1 million empty homes for sale on the market – a jump of 34 percent from a year earlier. This is nearly double the long-term vacancy rate, and the sixth straight quarter of record vacant homes.

In short, inventories are up, sales are down, profits are lower. Despite the inevitable fluctuations from month to month, many factors point to a steady downturn or at least stagnation for the housing industry in the coming period – a bleak outlook for the sector that buoyed the economy after the bust of the Information Technology bubble. Some analysts think that if inflation is taken into account, it may take five to seven years for prices nationally to reach the peaks hit in 2005. Others think prices may never recover their recent highs when adjusted for inflation.

The knock-on effect of the housing bust will almost certainly be felt throughout the broader U.S. economy and could even spread internationally.  The main victims of the sub-prime mortgage crisis are also those most likely to shop at large discount stores like Wal-Mart and Target, whose sales may be affected as a result. All told, it is estimated that as many as 1.5 million Americans may lose their homes, and another 100,000 people in housing-related industries could lose their jobs. For millions, the “American Dream” of home ownership has turned into a nightmare. As always, it is the working class that must pay for the greed of the speculators and bankers.


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