What A Real Housing Recession Looks Like

Like Voldemort, it’s the economic event that dare not speak its name. (The home on the right sold a year ago to a nice couple. I hope they got an affordable mortgage.)

It is a true housing recession, and there has been just one in my lifetime of over 50 years.

Let me tell you about the last one.

Hardly anyone in today’s market can recall it. The 1973 oil shock caused a crash in housing values which lasted for the rest of the decade. Double-digit interest rates allowed it to persist, reducing the ability of people to leverage the expense. Then there was the fact that you needed real credit to buy a house, and the lender usually kept your note.

(To the left, a suburban tract built on top of an old airfield in California.)

One feature I remember from the 1970s was that, in many areas, the
actual value of housing fell below its replacement cost. That is, homes
were worth less than it would cost to build a new home. Even in
Houston, where I was living then, many homes in decent neighborhoods
were left un-renovated and were simply rented, their owners just hoping
to make the monthly nut. In poorer neighborhoods homes simply went to
seed, vacant, staring out with broken windows, occupied by winos, drug
addicts, the urban detritus.

In Houston this was not the case everywhere. Outside the Loop, on
the outskirts which kept leaping over highways and byways, new
construction kept rising throughout the 1970s, and freeways were
extended outward to meet them. They were led there by giant apartment
complexes, wood-framed, three-and-four story walkups, often built
around courtyards and little pools. It was a giant party in the 1970s.
Once the oil bust hit in 1981, it became the Gulfton Ghetto, the worst
neighborhood in a city known for bad neighborhoods.

Remember, too, that I am talking here of Houston, in the heart of the oil
boom. In other places, like Michigan, things were far worse. I well
remember how "black tags," former auto workers with Michigan plates,
came South with their families, desperate for jobs in the booming oil
and chemical industries. While waiting to afford a home, the families
camped out on the edges of the new sprawl-villes. Sometimes they were
chased away by the neighbors. Little did those neighbors know that,
once the oil bust hit, they would be the ones chased out in their cars,
desperate for work and a second chance, hated and feared and chased in
turn.

The purpose of this history lesson is one simple truth. It can happen here. It can happen again.

It has already started.

A story by David Leonhardt of The New York Times today describes the wave which is heading straight for us, but ol’ lionheart lacks the courage to call it what it is — a housing recession.

But the accompanying chart can’t be clearer. Over the next two years
as much as $1 trillion in adjustable rate loans with multi-year
"teaser" rates will be re-adjusted to the market. In some places, like
Atlanta, as many as one-in-three loans written over the last few years
were interest-only — no principle was being paid.

These aren’t just "sub-prime" loans we’re talking about. These are
good loans made in good faith to good borrowers, people who felt they
had to take the terms offered in order to move up, who figured they
could either trade-in the loan later or sell-out at a profit.

The music has now stopped and they’re all stuck.

Now, add this enormous wave of foreclosures to the normal turnover
in housing, as people move by choice or because life demands it of
them. Take careful note of how borrowing standards are being squeezed
all along the way — there are going to be fewer-and-fewer qualified
buyers for all those homes.

Foreclosure prices, in other words, are about to become real prices.

What happens next is a Darwinian fight for cash, as owners who can’t
sell seek renters. They won’t ask how many in the family. They won’t
ask about ethnicity or criminal records or any of the other things
which keep poor people in their ghettos during flush times. New ghettos
are going to be created, new "no-go" zones to be redlined by lenders
for years to come.

When my wife and I moved to Atlanta, in the early 1980s, the
neighborhood we chose to buy in was just coming out of this recession.
I offered $49,500 for a three-bedroom, one-bath, 60 year old craftsman
bungalow with original fixtures, a roofed porch and back deck, within a
half-block of a train station. My new neighbors said I was crazy to
offer so much. The owner was happy to take a lease-purchase deal and,
thanks to my father-in-law, we found the 10% down payment by April and
took possession.

The new ghettos won’t be where the old ones were. They will be
further away from the center of town, extending for miles outside the
ring roads or Loops or Perimeters which now define major cities. These
areas exist already outside many cities. They will simply
grow-and-grow. A 1980s ranch that once rang to the squeals of a white
family’s children will become like the homes I saw in intown Atlanta as
that home was being built.

Eventually, in the middle of the next decade, recovery will begin.
This is not a process that will take just a few months, or even just a
few years. Too many loans must be written off for that to happen. The
economy which recovers its housing footing will be completely unlike
what we see today, just as the world of 1983 was quite different from
that of 1973.

The crystal ball in this case is clear. I write with the hindsight
of history, from my own experience. I know what a housing recession
looks like, and this one has barely begun yet.