Crisis and Recovery: A Century of Housing Market Challenges

Beyond BuzzFeed: Tackling the 25 Toughest Homeownership Questions – #10c

Are we headed for another Great Depression in Real Estate?
The following is the fourth of a six-part response to Suzanne’s Buzzfeed comment. Here are the links to the full series:

“I was in the process of building a modular home on my small 3/4-acre property but then stopped the process in construction. Ultimately, the interest rates were too high, and my mortgage payment would still be $2,500. I make $90K a year and can’t afford to buy a house. That used to be considered good money. Here in California, home prices are dropping, but I was told that prices have nothing to do with the ‘value’ of a home. I call bullshit. When enough people stop buying at the prices that are out there, and prices fall, then the value of homes is falling. They need to fall off the cliff; we need another Great Depression to bring home prices back down to reality. Big Business has its fingers wrapped around our throats because everyone needs to sleep somewhere, right? It’s a consumable that they have figured out how to wrangle every last dollar out of people, forcing people to be renters forever.” –Suzanne, 53, California

I’ve mentioned William Winner’s 2019 article “The Failure of the American Dream” in post 9 of this series.

The Great Depression did not bring housing prices back into “reality.” Instead, The Great Depression exposed the deep flaws in the American Dream. It showed that hard work alone could not guarantee economic security, especially during times of widespread economic collapse. The economic disparity and lack of upward mobility became evident as the Depression devastated the lives of millions.

Foreclosures became common as homeowners could not keep up with mortgage payments. Many families lost homes and were forced to seek alternative living arrangements, such as moving in with relatives or living in makeshift shelters. Even though the value of homes plummeted, no one could really afford the homes. And construction of new homes slowed significantly. In rural areas, some families could maintain their homes through subsistence farming and bartering. In contrast, urban areas were hit harder due to the loss of industrial jobs and higher living costs. In cities like Indianapolis, entire suburbs were left half-built and abandoned as developers went bankrupt, and prospective homeowners could no longer afford to buy homes. This left a landscape of partially completed neighborhoods and deteriorating properties.

Roosevelt’s “New Deal” was in response to this failure of the American dream.

Established in 1933, the HOLC refinanced home mortgages that were in default to prevent foreclosure. The HOLC bought up mortgages that were in trouble and restructured them to make payments more manageable for homeowners. This was crucial in stabilizing the housing market during the Great Depression. The FHA was created in 1934 to insure mortgages, thereby reducing the risk for lenders and making home loans more accessible. This led to longer-term, lower-interest loans and helped many people avoid foreclosure. The Public Works Administration was instrumental in construction public housing projects, which provided affordable housing options to many who were displaced or unable to afford private homes during the economic downturn. And founded in 1938, Fannie Mae created a secondary mortgage market, which increased the availability of funds for homebuyers and helped stabilize the mortgage market by ensuring lenders had a steady supply of capital.

We saw the Great Depression repeat in the Great Recession of 2008. Both crises involved banking sector collapses. In the Great Depression, bank failures wiped out savings and disrupted the financial system. In 2008, the collapse of major financial institutions and the bursting of the housing bubble triggered the global financial crisis. In 2007 to 2009, foreclosures were once again common.

I believe the main reason 2008 didn’t have the same decade long recovery was that during the Great Depression, initially, there was limited government intervention. (Actually, I believe we are still in the midst of the 2008 recovery but that’s probably a blog post for another time). Hoover had to get out of office before we could see Roosevelt’s New Deal. In 2008, rapid and coordinated government intervention took place. You saw The Troubled Asset Relief Program (TARP), Federal Reserve actions, and the American Recover and Reinvestment Act stabilize financial institutions, provide economic stimulus, and prevent further economic decline.

Then, you know, the Pandemic, and the government stepped in again….

Governments worldwide, not just the United States, particularly in advanced economies, responded swiftly with large-scale fiscal stimulus packages. In the United States, the CARES Act and subsequent relief packages provided direct payments to individuals, extended unemployment benefits, and offered loans and grants to businesses. Unlike the 1930s, modern economies are more diversified. While sectors like travel, hospitality, and entertainment were hit hard, others, such as technology, online retail, and logistics, experienced growth. The economy’s ability to shift focus towards sectors that could operate under pandemic conditions helped mitigate overall economic damage.

Additionally, programs were put in place to keep people in their homes—whether they owned or rented. The Centers for Disease Control and Prevention (CDC) issued a nationwide eviction moratorium, initially through the CARES Act and later extended multiple times. This moratorium prevented landlords from evicting tenants for nonpayment of rent, helping millions of renters stay in their homes. Many states and local governments also enacted their own eviction moratoriums, providing additional protection to renters in their jurisdictions. The federal government allocated billions of dollars to emergency rental assistance programs through various relief packages, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act. These funds were distributed to state and local governments to help tenants cover past-due rent and utilities. Through a combination of eviction moratoriums, mortgage forbearance programs, rental assistance, direct stimulus payments, expanded unemployment benefits, utility assistance, support for landlords, and increased funding for housing counseling and legal aid, the government implemented a comprehensive approach to keep people in their homes during the COVID-19 pandemic. These measures helped prevent a housing crisis and provided critical support to millions of households facing financial hardship.

I’ve rather glazed over all the different housing crisis the United States continues to experience over time. I did not talk about the Post-World War II housing shortage that led to overcrowding and a rapid increase in housing prices. I did not talk about the late 1970s and early 1980s where mortgage rates reached as high as 18%, making homeownership unattainable for many.

The United States has faced multiple housing crises over the decades, each with its unique causes and impacts. These crises have typically been triggered by a combination of economic, financial, and regulatory factors. The government’s response has varied from direct intervention and regulation to monetary policy adjustments, aimed at stabilizing the market and providing relief to homeowners and prospective buyers. But the takeaway here is that housing crises are par for the course in this country.

The current housing crisis, characterized by high prices and low inventory, can be attributed to several interrelated factors. Click here for the main reasons contributing to the crisis.

Suzanne, one of your concerns centered around investor purchases, I want to linger here for a minute. If you go back to post 4 in this series, you’ll discover the institutional investors only own approximately 13% of the U.S. market and are mainly active in Texas, Georgia, Oklahoma, Alabama, and Mississippi. People ask me this all the time here in New Hampshire—do you see a lot of corporations buying up houses?

“Nope. Very few.” I’m not sure anyone believes me.

“The investor problem is kind of a boogeyman for the housing market,” said Daryl Fairweather, economist with the real estate listing website RedFin. “People want to blame someone for high home prices and it’s easy to blame investors just because they’re, like, an opaque group of people…Really, the problem is just the lack of supply of housing.” And according to Cal Matters, only 3% of all single-family homes in California are investor owned.

^{Graph blatantly stolen from Inflation.com}

Since 1902, that’s for a hundred years, the housing market remained relatively flat. We saw slight increases shortly after World War II. Soldiers returned home from the war to discover a lack of homes. The GI bill introduced cheap mortgage options for veterans. Suburb developments like Levittown sprung up almost overnight. Lines wrapped around streets to get a glimpse of the small, modest, cookie cutter homes.

“Famously building one house every 16 minutes at the construction’s peak, using systems well-known in American automobile manufacturing but new to homebuilding. A variety of non-union subcontractors and ‘unskilled workers moved from house to house, each performing one of 26 highly specialised [SIC] steps in the overall assembly process – all using thoroughly standardized [SIC] materials, all purchased directly from their manufacturers. ‘We are not builders,’ said straight-talking Levitt, the operation’s mastermind. ‘We are manufacturers.’ He even went so far as to declare his company ‘the General Motors of the housing industry’, providing families the domestic component of the American dream, just as GM provided them the vehicular one. And they did so with the same aesthetic uniformity as the auto industry in its early years, initially stamping out house after house on the same architectural plan, drawn up by brother Alfred Levitt, albeit with subtle variations of colour [SIC], window treatment and roofline,” wrote Colin Marshall for The Guardian.

^{Photo blatantly stolen from The Guardian.}

Still, you don’t see the drastic rise in home values until 1980s. Probably, most likely, the increase in home values centered around the new consumer desire for bigger homes which increased construction costs. The more lumber you use, the more expensive the house.

This desire for a large home has not dissipated. The future house I want to build includes a gourmet chef’s kitchen with gas burners, a double oven, a brick oven, a steam oven who needs a microwave in that environment? It’d be cool to have a green house off the kitchen so I can have home grown tomatoes and herbs year-round. A library/study would be nice soundproof of course. And a media center, complete with green screen in the basement. Enough bathrooms no one is every fighting over toilets. You get the idea: absolutely massive. Do I need it? No. Do I want it? Yes.

Covid-19 caused a sharp spike in lumber prices due to supply chain disruptions. Although prices have stabilized somewhat, they remain higher than pre-pandemic levels. And stupid things continue to happen to the supply chain, like for example the Baltimore Bridge incident.

Additionally, because of global warming and climate change, the cost of fiberglass insulation has risen nearly 90% since 2021 due to increased demand for energy-efficient homes and regulatory changes. And this is happening whether you believe in global climate change or not—New York Times’s The Daily broadcasted a horrifying episode concerning climate change and home owner’s insurance.

“The threat of climate change isn’t quite what we thought,” reported Christopher Flavelle. “Maybe instead of climate change wrecking communities in the form of a big storm or a wildfire or a flood, […] climate change can wreck communities by something as seemingly mundane and even boring as insurance. Maybe the harbinger of doom is not a giant storm […]. Maybe the future of climate change is best seen not by poring over weather data from NOAA but by poring over spreadsheets from rating firms, showing the profitability from insurance companies, and how bit by bit, that money that they’re losing around the country tells its own story. And the story is these shocks are actually already here.”

^{Image blatantly stolen from Wired.}

Hardening homes is the process of making a home resistant to natural disasters, particularly wildfires, hurricanes, and severe storms. And even minor storms these days for that matter—people are still cleaning debris from our last winter storm in New Hampshire that hit on April 4th and left 104,000 without power. Hardening is one of the solutions to this financial disruption in the insurance business. But hardening is an expensive solution.

Additionally, many cities and towns can make building a new home cost-prohibitive from the outset. Building permit fees cost .25 cents per square foot here in Dover, but if the average home is 2000 square feet, that fee comes out to be about $500. The plan review fee is an additional 20% of the building permit fee. Several impact fees are assessed, which include things like paying off the police and the schools and the water treatment plant. These fees vary, but we can rough estimate $3000. Then you have an electrical permit, a plumbing permit, a mechanical permit. Do you need a driveway? That’s another fifty bucks.

Before you even break ground, you’ve spent at minimum over $5000.

Other posts in this series: