The mainstream media is now all over the housing bubble, but the housing market moves slowly, and we are a year or two away from really experiencing the bust. The fallout is likely to raise some rather nasty local government issues. First, the housing price boom, while sticking it to first time buyers, allowed local governments to increase property tax charges without voting to increase rates, but as property values and property transactions fall local governments will be left with a choice between service cutbacks and higher tax rates that they will have to vote for. There is already a property tax revolt underway in Florida, where soaring tax bills (exacerbated for tenants, commercial property owners, new buyers and snowbirds by rules that keep taxes low for long-time homeowners) are running into plunging property values. Indeed, fiscal problems are beginning to afflict local governments nationwide, despite a decent economy. Second, tightening lending standards and, in some markets, over-building is likely to lead to a glut of for-sale housing. The vacancy rate for owner-occupied housing is now at a historic high, according to the U.S. Census Bureau. So what will happen to the excess suburban housing? Will it be purchased by investors and subdivided into apartments, allowing the working class and perhaps even the poor to move to areas with good schools and available jobs, but reducing the fiscal insulation suburbanites receive from the less well off by living in separate local tax jurisdictions and threatening their property values? The free market is great, it seems, until it works to the disadvantage of the less well off.
Here, from suburban Memphis, is the first shot I've seen in what is likely to be a nationwide political war. According to the Memphis Commercial Appeal http://www.commercialappeal.com/mca/desoto/article/0,1426,MCA_451_5586936,00.html “In an effort to head off possible problems with multi-family housing sprouting up in areas zoned for single-family homes, Southaven officials Thursday amended its ordinance to more tightly define who may live in such areas. Mayor Greg Davis said there's no problem but that the city had reason to believe it could become a problem and wanted to stay ahead of the curve. ‘It has been brought to our attention that agencies that rent to multiple tenants could be headed our way.’”
The response is zoning restrictions. “Under the changes approved Thursday, a parent or parents and their children can live in a home zoned single-family residential, but no other adults who are not related are allowed.” Doesn't sound like you can bring grandma under the same roof either, which will become an issue as the population edges and someone has to take care of the seniors. “We just don't think it is fair to a family making a major purchase in a residential neighborhood to have the home down the street or next to them turn into a multiple tenant use.”
Houses don’t have to be subdivided into apartments to be rented, but local officials don’t want entire homes to be rented either. “In addition to the amended single-family ordinance, the city plans to look at a possible cap on rental homes in the city. He said officials will review a similar ordinance on rental property passed by officials in Tempe, Ariz. Southaven already has a 15 percent cap on multifamily housing, such as apartments.”
Thanks to rising foreclosures, hundreds of thousands of housing units are going to end up in the hands of mortgage bond servicers, who will eventually have to auction them off. The initial fallout has been among those with subprime mortgages, and has affected central city and older suburban neighborhoods. But as the price of property in prime suburban municipalities falls, new exurban McMansion developments far from a reasonable commute will also become less desirable. Unable to sell, banks, investors (including those buying foreclosures), homeowners forced to relocate, and others will seek to rent the buildings – legally or illegally, as they are or after subdividing them into smaller apartments – to gain income and avoid being eaten alive by rising mortgage, insurance, property tax, heating, and other costs. One 6,000-square-foot McMansion could be divided into four family-sized apartments the size of my older rowhouse – or ten one-bedroom apartments.
Preventing such rentals, however, could mean abandoned and deteriorating property, which isn’t good for nearby property values either. Already, in the parts of the country affected early in the down-cycle, empty homes are deteriorating, attracting squatters, or being used as marijuana growing greenhouses.
The issue of housing subdivision has already arisen as a result of the boom, rather than the bust. As housing prices soared far beyond what people could actually afford in bubble markets, some new homeowners took in tenants as well as taking out exotic exploding mortgages in an attempt to buy homes. According to The Fairfax County Times “at the start of June, Fairfax County formed a ‘strike force’ of county staff from 15 agencies to aggressively go after illegal boarding houses and other zoning violators in the county.” The first to be shut down housed 30 people. In this case existing owners benefited by having new owners take in boarders, as they could sell at higher prices and then move away.
But the issue will take on a new edge in housing prices are falling rather than rising, and existing owners feel trapped by an inability to sell. If a population that is more dependent on public services moves into town, even as tax revenues are falling and public employee pension and retiree health care costs are soaring, the result could be a cycle of rising taxes and declining services. New York City, like other viable older cities, has already survived that combination, though it has yet to fully recover. Newer communities, with few public employee retirees relative to their tax base (because their retiree population reflects their rural past), and relatively new housing, have yet to face those tests. Race may also enter into the equation, as it did during the “white flight” era in central cities.
Right now, the date of reckoning is being postponed. In foreclosure auctions, the foreclosing financial institutions are generally “buying” the houses for the outstanding value of the mortgage, rather than allowing them to sell for less to someone else, to avoid having to admit to a loss on their books. Sellers are holding out for inflated prices, even though buyers cannot afford them, rather than settle for less, so the volume of transactions rather than the average price is falling. Sooner or later, however, homeowners, financial institutions, and (much sooner) housing speculators and builders will be unwilling or unable to carry the monthly cost of financing unneeded housing. Then we will see real price declines over several years.
In the prosperous, heavily developed New York area buyers are likely to be found as soon as prices retreat to reasonable and affordable levels. But the New York area is unlikely to completely escape some of the fallout that will afflict the rest of the country. During housing bubbles, such as the 1980s and the years from 1997 to 2005, gentrification advances outward from Manhattan as the better off are priced out of neighborhoods where they would otherwise live. But during housing busts, such as the 1970s and the early 1990s, it is the less well off who spread out into places where the housing stock is hitting 50 years old and beginning to be passed down. In the New York area, aside from publicly supported affordable housing, most of those are outside the boundaries of New York City, as the city gained little unsubdisized new housing outside of Manhattan between the mid-1960s and the present.