The United States is going through a unique phase in its history.
The Baby Boom is headed towards retirement, and the Echo Generation is not yet ready for prime time. The housing market is reeling from having overpriced itself beyond what young households can afford. A housing price gap exists between the older ‘haves,’ and the less affluent “Echo Boom” generation. And the sub-prime mortgage mess, caused by irresponsible lending practices, has only made the housing picture worse.
Local communities face a series of challenges in the next decade stemming from the turmoil in the real estate markets. The challenge for communities is not only coming from the real estate markets. There are other challenges as well. The big generational shift, historic levels of immigration, and in some areas, unnoticed population losses are causing significant demographic shifts. In addition, energy costs have begun to affect commuting patterns. And finally, the federal tax code has unintentionally exaggerated the ‘affordability gap’ that now exists between younger and older households.
Now would be an excellent time for local leaders to begin to monitor how all of these profound changes might affect their communities. Because so much of this change will happen in the real estate sector, local property tax bases necessarily will be affected.
In many areas, the shift in the demand for local housing could cause the community’s tax base to seriously erode. Finding remedies for a weakened housing sector will be the key to preserving communities.
Following is a list of trends to monitor:
Local Foreclosure Trends: Nationwide, it is reported by the specialty monitoring service, Realty Trac.com, that 650,000 homes are currently caught up in the complex foreclosure process. Some local markets, like Miami, Las Vegas, Phoenix, and California’s ‘Inland Empire,’ are being seriously affected by the sub-prime mortgage fiasco.
These markets are suffering from too much easily financed speculation. In other markets, the sub-prime mortgage debacle is affecting older localities, where population losses, and relatively low incomes, are creating a serious decline in housing prices. Areas in such markets as Cook County (Chicago,) Cuyahoga County (Cleveland,) and Wayne County (Detroit,) are reporting large number of properties that are either in pre-foreclosure, or that are already bank-owned.
Table 1: Foreclosure Trends in Selected Markets
(figures indicate number of properties)
Pre-Foreclosure |
Auction |
Bank-Owned |
|
|
Riverside County, CA |
16,356 |
6,547 |
20,999 |
|
Maricopa County, AZ |
59 |
24,392 |
19,855 |
|
Cook County, IL |
26,853 |
7,535 |
9,491 |
|
Clark County, NV |
17,474 |
8,374 |
10,980 |
|
Wayne County, MI |
7,930 |
7,152 |
20,311 |
|
Dade County, FL |
17,155 |
4,144 |
5,631 |
Table 2: A Sampling of State Ratios – Foreclosed Properties to All Properties
|
Arizona |
1: 195 |
|
California |
1: 185 |
|
Florida |
1: 186 |
|
Illinois |
1: 583 |
|
Nevada |
1: 106 |
|
New York |
1: 1,280 |
|
Ohio |
1: 377 |
|
Texas |
1: 10,447 |
|
Vermont |
1: 61,911 |
Source: Realty Trac.com. Note: The various foreclosure procedures followed in each state cause some striking differences when comparing statistics for the various states.
Demographic and Immigration Trends: The most confusing notion about the sub-prime and foreclosure mess is that the long-term demand for housing in the U.S. is actually very strong. Demographic indicators show that there are more Americans under age 25 than there were forty years ago, when the Baby Boom generation first caused the housing markets to boom.
In addition, immigration in the past twenty years has reached record levels. Most localities in this country have gained population due solely to the record amount of legal – and illegal – immigration. The problem with some of these localities however, is that their original populations are aging. The immigrant residents tend to have lower-paying jobs. Therefore, it is the demographic profile of such communities that will predict how their real estate markets will hold up in the face of the real estate slowdown.
Industrial areas such as Cleveland, Detroit, Chicago, and Houston have all experienced substantial recent immigration. However, the demand for housing in these different kinds of markets will be based on the age structure of the population, the type of new jobs being created there, and the skill sets of the recent immigrants. There is a huge difference between the car-dependant Detroit and oil-producing Houston. Population trends will have to be monitored regularly. (See Table Footnote # 3.)
Federal Tax Subsidies to Home Ownership: Any industry that receives favors under the federal tax laws usually can be expected not to examine what those favors have done to free market prices. But a price gap exists in the current cost of owner housing which can be attributed to federal tax privileges.
Homeowners who are allowed to deduct some of their housing costs against their federal taxes are going to be less sensitive to what they pay to own a house. The problem arises with younger buyers, who have less need to deduct their home ownership costs from their (lower) federal income tax liability. Hence, a price gap develops.
Energy Costs: It appears that higher energy costs may become incorporated into the general American economy. The cost of commuting may become a real cost to suburbanites. In this case, local officials have cause to worry about what a change in commuting patterns could do to the demand for real estate in their town. As if the local real estate markets weren’t dealing with enough stress coming from an excess of foreclosed and unsold properties, commuting costs become yet another consideration for certain localities. The far Los Angeles suburbs, know as the ‘Inland Empire,’ appear to be experiencing a severe market adjustment. This may, in part, be due to the high cost of gasoline.
Long-Term Value of the Local Tax Base: If most home prices went up while the Baby Boom generation sought housing, not all prices will stay at those levels as the Echo Generation tries to find housing. Some local markets are going to adjust back down, and certainly many properties are going to have to be priced according to the changed demand for local homes. Local realtor associations are an invaluable source of information about local market trends. In addition, local realtors, who are area specialists, are key allies when local leaders try and assess the future of their local property tax base. The Chicago market is blessed with two capable realtor trade organizations. Both provide comprehensive and revealing long term market trends to their members. (See Footnotes # 3 & 4.)
Population trends and the relative attractiveness of a town will eventually be expressed in real estate prices. It takes a big shock, like the mortgage meltdown, or the rise in oil prices, to get our attention. But if a locale is currently losing population, or if it has ‘soft spots’ in its housing stock, now is the time to identify the negatives. What might the community be able to do about it? Local officials should be proactive, and marshal all their resources. That includes working with local real estate professionals who know a community well.
The new federal housing law of 2008 provides a wide array of lender, community, and state programs which will allow communities to participate in a whole new level of ‘real estate forensics.’ Now is the time to consider using this amazing array of policy options.
A word of warning: As always in this country, federal programs may be laudable and sometimes necessary. But it is privately-financed and market-based programs that almost always work better over time. Sometimes non-for-profit agencies can lend a hand. But in most cases, relying upon private market mechanisms, including realtor professionals, has proved its worth, especially in the private housing arena.
About the Author
Peter Fugiel, Ph.D., is a realtor with Keller Williams & Fox Associates on Chicago’s north side. His housing research web site, Chicago Realtyscape.com, provides a detailed look at the Chicago real estate market. For more information about specific properties, visit Peter’s Keller Williams real estate site.
Prior to joining Keller Williams, Peter was a vice president and senior housing analyst with Nuveen Investments for many years. At Nuveen, he specialized in housing development financings and mortgage pools in all regions of the country.
Article Footnotes
(3) U.S. Census State and County Quick Facts: this database offers a comprehensive profile of all localities in the U.S. that have populations over 30,000. Population growth between 1990 and 2003 is provided, along with comparative wealth and demographic characteristics. These benchmarks compare each locality to statewide averages. There are additional U.S. Census sources for smaller communities, and even by zip codes.
(4) Chicago Association of Realtors (CAR): In the Chicago metro region, this City-based realtor trade group has an excellent data base that goes back for more than ten years. Price trends for different types of properties, sales volume and market times are provided for hundreds of local real estate markets. Although this a private data base, there are always local realtors who are knowledgeable about such trends in a specific market. These professionals are an invaluable information resource to community planning. CAR’s historical data base, which also offers realtors quarterly market updates, may be one of the most in depth research resources in the country.
(5) Midwest Real Estate Data LLC (MRED): This realtor service company encompasses most of the Chicago metro region. As with all local multiple listing services, MRED collects vital market information for its members. Current sales activity, and past year real estate activity is easy to monitor by participating brokers and realtors. Once again, the Chicago-area multiple listing service, MRED, is an invaluable resource to its members who follow local real estate markets.
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