The dangers of De-Occupy Your House

By Felix Salmon
December 14, 2011
Jim Surowiecki's sentiments this week about strategic default and the way in which it's entirely rational for homeowners to walk away from their underwater mortgages.

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I agree wholeheartedly with Jim Surowiecki’s sentiments this week about strategic default and the way in which it’s entirely rational for homeowners to walk away from their underwater mortgages. But I think he soft-pedals the consequences of what he calls “a De-Occupy Your House movement”:

Of course, many borrowers made bad decisions and acted irresponsibly. But so did lenders—by handing out too much money and not requiring sensible down payments. So far, banks have been partially insulated from the consequences of those bad decisions, because Americans have been so obliging about paying off overinflated mortgages. Strategic defaults would help distribute the pain more evenly and, if they became more common, would force lenders to be more responsible in the future.

This is all true, as far as it goes. If more people default on their mortgages, total mortgage-lending losses will rise — but a large part of that will simply be the transference of pain from homeowners to lenders. At the same time, however, there would also be a huge rise in foreclosures, evictions, and fire sales — with the result that house prices, which are still falling alarmingly, could see another stomach-churning lurch downwards. That in turn would only serve to increase the number of underwater homes, and would set off another set of of walk-aways and foreclosures, and — well, the vicious spiral is easy to foresee.

The fact is that if homeowners act rationally with regard to their mortgages, the housing market becomes unpleasantly volatile. The New York Fed recently put out a compelling piece of research saying that both the sharp rise in house prices and the subsequent sharp fall can in large part be attributed to speculative buyers — the small minority of people who do act rationally and are perfectly willing to overpay in bull markets and walk away in bear markets. What Surowiecki is encouraging, here, is that the rest of us start to behave much as the speculators did when house prices fall.

Historically, homeowners haven’t behaved that way, and not just because they’ve been guilt-tripped into paying their debts. Rather, they’ve done what bank lenders used to do in the good old days: hold their assets at par, rather than marking them to market. I’m a homeowner myself, and I simply don’t know what my apartment is worth; I certainly have no easy way of attuning myself to the ups and downs of the East Village real estate market each quarter. When I was looking to buy, I was hyper-aware of such things. But when I’m not actively in the market, I have much better things to do with my time.

A healthy housing market, in other words, is a reasonably opaque market. People buy the house they want to live in for the long term, and then slowly pay their fixed-rate mortgage down over 15 or 30 years. When they have to move, they have to move. And every so often, if interest rates fall substantially, they’ll refinance — but that’s just a function of interest-rate movements, and not at all a function of house-price movements.

What happened during the housing boom was the rise of cash-out refinancings. Homeowners were being encouraged to take their existing home and extract equity from it — that is, to essentially mark their home to market periodically. And once people started marking to market on the way up, it was inevitable that they would do the same thing on the way down.

Surowiecki’s ideal world, then, looks a lot like the kind of world that housing speculators live in. People constantly mark their homes to market, and they flip or cash out when house prices are rising, and strategically default when home prices are falling. This is a recipe for bubbles, busts, and general house-price volatility — and remember that house-price volatility is a lot more dangerous than stock-market volatility, because it’s an inherently highly-leveraged market. Even if lenders tightened up their lending standards substantially, people buying homes would still be levered up four or five times — the kind of leverage which is unthinkable even in the most insane leveraged ETFs.

To put it another way, in Surowiecki’s ideal world, the residential real estate market starts to look a lot like the commercial real estate market — a place where fortunes are made and lost, rather than a place dominated by individuals simply buying a roof over their heads and a place to bring up their family.

I’m not convinced that a world where homeowners mark their homes to market is an obvious improvement on the status quo ante — even though I’m wholly convinced that in any given case, it’s entirely rational for homeowners to walk away from their underwater houses. The question, of course, is whether we can ever return to the status quo ante.

In his excellent book The Devil’s Derivatives, Nick Dunbar explains how banks used to lend across the business cycle, more than making up in good years for the losses they suffered in bad years. Today, however, when banks mark their assets to market daily, that kind of activity is impossible, and the markets become convinced (justifiably) that all banks are insolvent whenever there’s a crisis.

Let’s say that you’re significantly underwater on your mortgage and you don’t have much in the way of savings. Does it then make sense to say that you’re insolvent? Historically, homeowners never thought that way — the mortgage was a monthly payment they made to stay in their home, and their home was a place to live rather than a financial asset.

If we move to a world where houses do become financial assets, that might be a good thing. But let’s be honest about what such a move entails: a large decrease in homeownership. It’s not sensible, on a financial level, to have so much of your net worth tied up in one illiquid asset. So if homes are marked to market, they become attractive mainly to landlords who will in turn rent them out to the rest of us.

If Surowiecki wants millions of Americans to walk away from their underwater mortgages, I hope he knows where the buyers of those homes are going to be found. Because if they don’t appear, we could have another massive housing crash and another huge recession.


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What’s the cost of the credit score hit that you take?

I would think there’d be more to the decision than just checking to see whether your liabilities are greater than your asset.

Are any of those defaulted speculators waiting in the wings to snap cheap homes, or is the financing too expensive after they busted the last time?

Posted by djiddish98 | Report as abusive

good post, Felix. A key (obvious?) point I’ve been pounding the table on for years is that the current value of your house has little/no bearing on your ability to pay your mortgage. When your home value changes, your mortgage payment does not.

So there are two entirely different decisions we’re talking about – ability to pay (which is not affected by the current home price)and incentive to walk away (which IS).

your point here is astute:

“I’m not convinced that a world where homeowners mark their homes to market is an obvious improvement on the status quo ante — even though I’m wholly convinced that in any given case, it’s entirely rational for homeowners to walk away from their underwater houses. “

Posted by KidDynamite | Report as abusive

This is a Fallacy of Composition, like the Paradox of Thrift. What might be the best economical choice on an individual level might not be the best economical result on a society-wide level.

Can’t Surowiecki discuss the benefits of the individual choice without needing to offer a solution to the resultant society-wide knock-on effects?

Or does every opinion journalist owe a duty to society at large to only advocate ideas that are Pareto-optimal across 300 million people?

Posted by SteveHamlin | Report as abusive

I think Surowiecki’s point was less a call for people to walk away from underwater mortgages en mass and more of a counter to the arguments that homeowner defaults are somehow less responsible than corporate defaults. There have been increasing calls in some quarters to punish people for strategic defaults on their homes, when it is standard fare for corporate borrowers.

It is also a jab at the reluctance of lenders to do principal reductions for underwater homeowners. Lenders and bondholders are counting on legal and moral sanctions to keep people with underwater mortgages on the hook and protect the value of those assets at 100 cents on the dollar, rather than reducing the principal at all. Surowiecki piece should be a reminder that much worse fate may await the lenders if people start acting as “rationally” as corporate borrowers.

Posted by Ragweed | Report as abusive

Buyers exist, Felix. You simply don’t want to accept that the market-clearing price for the shadow inventory would be a massive hit to banks and municipality tax bases.

Surowiecki is completely on the money. House prices should drop to the point where the market CLEARS – today. Municipal and state tax bases will drop – tough. Banks will BK – tough. Why are you suddenly supporting socialism, Felix? No BK = socialism. It’s not capitalism.

Surowiecki supports buyers being completely rational. Corporations are people – so people have the right to walk away from loans whenever they want, since corporations walk away from CRE loans all the time.

Posted by Unsympathetic | Report as abusive

@Kid wrote “When your home value changes, your mortgage payment does not.”

But your opportunity cost does change. The opportunity cost for alternative housing is always market, even if you don’t think of your personal balance sheet that way.

The deal you signed is a sunk cost, and the appropriate analysis for today is “I can pay $2,000/month in interest expense, or I can pay $1,200/month in rent for the house next door” (+ moving expenses + future higher interest costs due to bad credit from the default).

Absent moral arguments, why should someone not pay the cheaper rate for the same value? Assuming they can afford both, why should their financial position have any impact on this decision?

Posted by SteveHamlin | Report as abusive

@Stevehamlin – sure. As noted, it’s totally rational to look at it that way. I was referring to the stuff we’d read nonstop a few years ago about how people could no longer afford their mortgage payments because their house was now underwater. That’s utter hogwash. If you can’t afford your mortgage payments with your depressed home value, you couldn’t afford the mortgage payments before. Unless there’s a newfangled mortgage I’m unaware of where the monthly payment changes with the home value (and inversely, at that!)…

of course, what people really meant was that they could no longer do cash-out refi’s at ever increasing home values to pay their mortgage. And my point is that people who needed such financial engineering to “afford” their mortgage payments could never afford their mortgage payments. it’s not about the home value.

Posted by KidDynamite | Report as abusive

My opinion, based on considerable professional experience, is that few “strategic defaults” involve much of what most people would considered strategizing. To the extent that they do, it usually has a lot more to do with “strategically” minimizing the disaster than pulling a fast one. The homeowner comes to the conclusion that he can no longer pay the mortgage, or that it no longer makes sense to do so — in real life the two blur together. Then he tries to figure out how it works from there, in a stew of financial, legal, family and emotional considerations. The decision is often some form of “walk away”, but in a way that often seems to involve very little worthy of the word “strategy”.

Posted by kenjd | Report as abusive

I would ditto what Ragweed said – Surowiecki can see that a ‘de-occupy movement’ might light a fire under the ass of the mortgage industry to actually use some of all that taxpayer money to do principal adjustments… on the other hand it might increase the political pressure to allow the ‘robo-signing’ foreclosure mills to go full tilt.

Posted by JimInMissoula | Report as abusive

The reluctance of lenders to do principal reductions, when it has been obvious that this would probably be the best course of action gives home owners no other choice.

Posted by desimal | Report as abusive

One of your best posts, Felix. You capture the dilemma with perfect nuance. And I believe this is what Garrett Hardin meant when he coined the term “tragedy of the commons.”

Posted by Curmudgeon | Report as abusive

Felix writes “A healthy housing market, in other words, is a reasonably opaque market.”

I take that to be aid & comfort for the intellectual enemy, ideas like Gary Gorton’s advocacy on behalf of not looking too closely at the value of assets collateralizing short-dated ABS. Gordon wants more price-insensitive AAA-rated debt.

In May 09 Felix disagreed with Gordon’s idea arguing:

“In my view of the crisis, it’s precisely the demand for informationally-insensitive assets which is the problem. And we need to get individuals, companies, and institutional investors out of the mindset that they can do an elegant little two-step around the inescapable fact that anybody with money to invest perforce must take a certain amount of risk. If you have a world where people are all looking for risk-free assets, you end up shunting all that risk into the tails. And the way to reduce tail risk is to get everybody to accept a small amount of risk on an everyday basis. We don’t need more informationally-insensitive assets, we need less of them.” 09/05/29/why-the-government-shouldnt-ins ure-securitized-assets/

Today you think there may be something beneficial, “healthy” about a $20 trillion housing market that is opaquely valued?

I remain firmly on the side of your May 09 opinion.

Posted by dedalus | Report as abusive

If a wave of strategic defaults started, that would be a hell of a prod to the banks to start taking the idea of markdowns for underwater homeowners more seriously. Currently, they think they can keep extracting overpriced mortgage payments from homeowners. The reality is that the defaults are already more than they can digest, but it’s not yet bad enough for them to recognize that it’s in their long-term interest to accept a lower payment and keep the owner in the home.

Posted by Auros | Report as abusive

Felix may be right that the consequence of this would be decreased homeownership. There’s a good argument to go ahead with it anyway, though.

Homeownership rates in the US are unusually high for an industrialized nation. Part of that is because it’s a big country with cheap land and the cultural premium on owning a house. But there are also market distorting reasons: the tax code’s mortgage interest deduction (a massive subsidy to homeowners) and zoning laws that actively encourage exurban sprawl over urban development.

Cutting the homeownership rate should be a net plus, long-term. The US has a highly mobile population; renting would serve many people better than buying. Less sprawl would improve communities, be greener, etc.

So the real issue is about how to manage such a reduction. Maybe a volatile housing market is not ideal, but cutting homeownership may be a net plus to Surowiecki’s argument.

Posted by Dilettante | Report as abusive

@Dilettante: All your points a great. People assume that having a mobile workforce would be better, but there have been a lot of benefits to people getting stuck for 10-30 years in one spot. And other than a breakdown of a normal functioning real estate market, it has typically been easy to move if necessary.
I wonder if there is more to this “immobility” and economic prosperity than people give credit for.

Posted by desimal | Report as abusive

“A healthy housing market, in other words, is a reasonably opaque market.”

There’s no contradiction between opacity and walking away from a worthless house you can’t afford to pay for. Most of those who walk away from home-a-loss are generally, as Kenjd says, people who are pretty much screwed anyway. To put the responsibility for the housing disaster on the decision of ordinary homeowners to do a cash-out re-fi is just ridiculous. The home ATM phenomenon was a knock-on effect, happening because the whole market had turned insane. The insanity was mostly the lenders and the regulators faults. Clearing the market would probably be a good thing. (And I say that as a homeowner who bought in 2004).

Posted by colburn | Report as abusive

“People assume that having a mobile workforce would be better, but there have been a lot of benefits to people getting stuck for 10-30 years in one spot.”

Forty years ago, “Shockwave Rider” was written around the premise of a mobile society that had shed its fetters to job, neighborhood, and ultimately family… Brunner didn’t paint a pretty picture!

I can see social benefits of stability, even if economists might disagree.

Posted by TFF | Report as abusive

Great post by Felix. To kenjd’s point on homeowners not strategizing, I actually think that the negative costs of a mortgage default – a forced move, difficulty obtaining future credit, etc. – are such that many people would find it rational to keep paying a mortgage even if they are underwater by 10% or 20%. At that level, people who default do so because they are truly unable to pay. Additionally, per Felix’s point, that tends to be close enough to market that people who aren’t “marking to market” may be unsure if they’re really underwater.

What seems notable about this housing price declines is that prices have fallen so far in some areas – and some people had so little equity at close – that there are people who are 40% or 50% underwater. I’d agree that it doesn’t make much sense to keep paying a mortgage that far above current value. This decision assumes that a person is in a non-recourse state, since I’d think that most people who are truly “strategic” in the decision to default have some other assets.

These ideas, plus the principal reduction for equity upside swap mentioned by Surowiecki in his article, also highlight the importance of transaction costs and context. American’s bankruptcy costs for advisors and attorneys are going to be at least in the tens of millions, but it’s a small enough percent of the dollars at stake that those costs (and creditors’ time) are worthwhile. Similarly, post-Chapter 11 American will be able to get credit (I believe that they don’t have a DIP financing, but they could get that also) because the dollars are enough for creditors to spend time analyzing the credit. That’s not the case for a couple hundred thousand dollar mortgage, so a prior default is more devastating. Similarly, not worth the time to a creditor to figure out if a debt for equity upside swap makes sense. A couple million dollar revenue business that can’t or won’t pay its bank is going to have an experience a lot like a homeowner and not much like American’s. A bank isn’t going to reduce principal on a loan that small, and the company is far more likely to liquidate than reorganize in bankruptcy.

Posted by realist50 | Report as abusive

So, individual homeowners who are underwater should subordinate their personal financial interests to the societal interest of preventing another “another massive housing crash and another huge recession”; but the bankers, corporate executives and the rest of the rent-seeking ruling class remain free to continue to behave as sociopaths.

Apparently morality, like taxes, is only for the little people.

Posted by chris9059 | Report as abusive

Where do I begin?!?

* As others have pointed out, there is no practical difference between living in a house that is underwater on its mortgage and living in one that is worth more than its mortgage. The mortgage payments haven’t changed. The house hasn’t changed. All that has changed is the “opportunity cost”.

* If you walk away from your mortgage, your credit report gets dinged for the next seven years. Even if you were to buy at a lower price than your original mortgage, the additional interest cost could easily result in higher mortgage payments. Realistically, it is likely to take you a while to accumulate a new downpayment anyways. So if you walk away, you are stuck in rental housing (with a weak credit score that may scare off potential landlords) for the next seven years.

* Moving is expensive. It can easily cost $10k to move out of your home, then another $10k to move back into a new one when after several years you (hypothetically) buy at a lower price. If you are only $20k underwater, you might as well just stay put.

* Moving is stressful, right up there with “death of a loved one” and divorce. We tend to tie a portion of our identity into our home, into our community. That strengthens us for as long as we stay put — but rips us apart when we move. If you read “Shockwave Rider”, I suspect you will see parallels between the “plug-in lifestyle” and what Felix advocates. That may work for some, but for me (and many Americans) it would be a quick trip to mental illness.

In conclusion: Walking away from your mortgage probably makes sense if you are HEAVILY underwater, or if you bought more home than you could afford, but a lateral move from an underwater mortgage to a market-price mortgage (which nobody will give you for seven years anyways) simply won’t save you as much as you think. Yes, the bank will suffer even more. (That is the nature of inefficient events.) But that is different from actually BENEFITING the homeowner.

On a more general note, don’t forget the general principle of markets: the majority is always wrong. For as long as the majority stays put, then those who walk away from their mortgages will come out ahead. But if this ever becomes commonplace, you WILL see a market shift that will punish the behavior heavily. Perhaps the Fed responds by flooding the economy with (even more) new money? Perhaps landlords are cautious about jumping into a falling market, pushing rents rapidly higher? The outcome depends on policy decisions that have yet to be made. But time and time again, going with the flow has proven to be the worst possible choice.

Posted by TFF | Report as abusive

“It’s not sensible, on a financial level, to have so much of your net worth tied up in one illiquid asset.”

Yet again, we prove that people are different from hedge funds. Net worth, as conventionally calculated, is an almost meaningless number for your average individual.

If I were retiring from the public schools, after ~30 years of teaching, I would be looking at a pension worth ~$60k for the rest of my life. Net worth zero, perhaps, but a very comfortable retirement assured.

If instead I invested that money myself, earning the same actuarial 8.5% return, I would have a nest egg approaching $1M. High net worth, yet a riskier and potentially less comfortable retirement.

Okay, so that simply points out that vested pensions (and Social Security benefits) SHOULD be included in calculating individual net worth. Even if they are typically not. Doesn’t invalidate the meaning of the concept?

Then take another look at three owner/renter scenarios:
(1) Homeowner invests $300k capital into a home, held mortgage-free. Additional retirement savings of $600k.

(2) Homeowner borrows $300k on a mortgage, increasing the nest egg to $900k.

(3) Renter allowed the landlord to hold the mortgage. Same cash flow as #1 and #2, but a $900k nest egg and no debt.

The first individual has taken the least risky course. They may have 1/3 of their “net worth” invested in a single asset, but that “asset” is perfectly matched against one of their greatest retirement expenses. HOUSING. Stock and bond market fluctuations may cut into their ability to buy food and pay medical bills, but at least they have a roof over their head. And down the road, if necessary, that equity can be tapped through a reverse mortgage.

The second individual has assured their cost of housing, but is gambling that the stock/bond market returns will be sufficient to meet that cost. Historically that has been a good bet — with stock market returns exceeding mortgage costs — but this is obviously a riskier strategy.

The third individual is taking the riskiest course of all. They would suffer the most in an inflationary environment. (Their rent would increase while their bond investments would fall.) And they depend just as much on the market returns as the second person. But heck, they have a “net worth” that is 50% greater. So they are wealthy — let’s tax the heck out of them!!!

Which brings up another point: putting your wealth into investment assets exposes you to taxation on that income (and triggered taxation on Social Security benefits), even if every penny of that income is going towards paying off your mortgage or rent.

Final point: a typical couple might receive $2500/month of Social Security benefits, adjusted for inflation. If you were to purchase that as a private annuity, in your mid 60s, it would cost at least $600k. Thus the $300k of capital invested in the home is at most 1/3 of the couple’s ACTUAL net worth, even if they have zero investment assets. More typically, as in the examples above, the home represents just 1/5 of net worth.

Black is white? Risky is safe? Expensive is cheap? Sometimes you have to step back and look at the larger picture. Owning your home mortgage-free is a RISK-AVERSE strategy. It is only a fraction of what you need to ensure a comfortable retirement, but that is true no matter what course you choose.

Posted by TFF | Report as abusive

” I was referring to the stuff we’d read nonstop a few years ago about how people could no longer afford their mortgage payments because their house was now underwater.”

I think the issue there was that they could no longer afford their mortgage, and they were underwater. That plus resets on the teaser rates – you know, the mortgage payment doubled on their option-arm, and they were 30% underwater so they couldn’t refi to a fixed-rate.

Posted by Ragweed | Report as abusive

Yeah, there was some of that Ragweed… But those ARMs washed out early — the “underwater mortgages” we are seeing now are predominantly fixed-rate.

Biggest argument for renting over owning: it is easier/cheaper to downsize when you realize that you’ve bitten off more than you can chew (or when life circumstances change).

Posted by TFF | Report as abusive

The US government started down a path of trying to support mortgage lenders but left them with the buildings.

The Chinese government is moving from a situation where the government owned all assets and is now privatizing them. But I believe they still have the ability to back track some, if full privatization creates bubbles.

The US government is not likely to start to finance affordable housing any time soon. But there are millions of vacant or underwater sellers who won’t be able to sell except to real estate interests who want to pick these units up when they can. Towns, cities and the federal government could be doing that too. That could also be a less expensive way of financing them than through private mortgages (they could be bought through municipal bonds and pay them off without mortgages). They could resold or could serve as subsidized housing. Low high-end foreclosures might even serve the same purpose in the financing schemes as market rate housing serves in some subsidized housing developments I have seen.

It would have the advantage of spreading low and moderate-income occupants throughout residential neighborhoods and not segregating them in low-income projects. It would also prevent neighborhoods from being dragged down by vacant and abandoned property.

Posted by paintcan | Report as abusive

“Towns, cities and the federal government could be doing that too.”

Very bad suggestion. Being a landlord is a labor-intensive business. It has only little to do with actually buying the property. You need quite a bit of “sweat equity” to keep it in good condition and evaluate the tenants.

Towns/cities/feds would have an even harder time managing single-family housing than with managing the present low-income projects. The properties would rapidly deteriorate, leaving you with blighted eyesores dotting the landscape within a decade.

Better to let private landlords manage that business.

Posted by TFF | Report as abusive

Private landlords tend to be interested in areas where they can pay the bills and make a profit.

Vast areas of inner city housing (the South Bronx, Detroit, Philadelphia, some Boston neighborhoods (but years ago) , were un-maintained, became derelict and were finally bulls dozed, because landlords or bankers refused to lend, and were abandoned by them to the municipality, to razed. So that claiming that maintenance is better left to private interests does not always answer the question. It can happen anywhere, even in formerly prestigious neighborhoods like Beacon Hill, the south End, and possibly in a subdivision that today might be a gated community.

One possibility that might be tried is to lower rents for tenants who show willingness to keep their units in good condition and who may be willing to make repairs. One of the difficulties in public housing is that the tenants either have no skills at home repair or aren’t allowed to do anything to the buildings. Sweat equity projects have tired to engage tenants in their own housing rehab programs and they worked.

But one thing is obvious to me. Areas where the rents are exploited and repairs are not done in a timely way, or the tenants are segregated in rougher and more decayed conditions with others of similarly low income, breeds the existence of slums. It becomes a self-reinforcing cycle and cities seem to be prone to disease the same way human beings can become ill. I have lived in old buildings that aren’t in the best condition while I was a student and it was obvious that landlords can be lazy bastards too. There are abusive and stupid tenants and they have their counterparts in the owners sometimes. It is a recipe for urban hell whenever they meet and establish the character of a neighborhood. They can easily cause the relocation of a street of formerly stable owners or tenants. If the lenders reinforce the situation, the neighborhood starts to die and can well become a no mans land.

There is something almost unique to the American urban landscape that whole sections of cities can become no mans lands. I can’t think of many places on earth except war zones where that happens.

Posted by paintcan | Report as abusive

I have to make something clearer. Beacon Hill started as a wealthy neighborhood but by the 20′s was a slum. The South End started as a “fashionable” neighborhood after the Civil War and remained so until sometime after WWI and then declined. The South Bronx died almost over night after the appearance of Coop City. The owners of apartment buildings walked away when they couldn’t find enough low to middle income tenants who all moved to the newer buildings.

Now I understand, the problem with the coop city buildings, a few years ago, was that they are all towers that sit on rotting concrete columns that are decaying due wicking actions from the salty water table they are built on.

I can’t imagine than real estate buyers in this country are nay less finicky than the older examples and that even prestige neighborhoods can fail if they don’t meet the exacting expectations of buyers who may have no attachment to their neighborhoods.

In contrast to this situation are old sections of Kabul that appear to have once been ancient and very stable and were in many ways like the Old West End Boston. That was actually a very stable Italian neighborhood but was removed by urban renewal projects in the 50′s. The remaining North End neighborhood was able to react in time to save itself. Increase in real estate prices is causing old social systems to break up in Kabul and if the current development ends as abruptly as it started, the whole city could dry up without even the stability the old city still had.

Didn’t it even occur to any one that the Country of Afghanistan might not be able to accommodate a large city on the strength of it’s own economy, in the long term?

Posted by paintcan | Report as abusive

“So that claiming that maintenance is better left to private interests does not always answer the question.”

Agreed, but I’ve taught in the public schools. Public property management is far worse than even the private abuses that you describe. Towns simply refuse to allocate budget to that purpose, no matter how obviously short-sighted that may be.

“Sweat equity projects have tried to engage tenants in their own housing rehab programs and they worked.”

Habitat for Humanity has had a lot of success with this kind of model, teaching skills while demanding “sweat equity”. Still, I don’t see much hope for running it as a public program.

Some of the decaying Boston neighborhoods were revitalized in the latest housing boom, as the influx of private dollars rebuilt the city. But equally important, as I see you recognize, was the influx of middle class households. Perpetual poverty is a disease that (in concentration) blights whole neighborhoods.

Posted by TFF | Report as abusive

It wasn’t just private dollars but substantial amounts of public funding that were used in some neighborhoods of the South End and Roxbury. The private money came in to renovate older and decayed pre Civil War bow fronts and public money was used to fill in gaps in the fabric with affordable units. The outlawing of redlining in neighborhoods like Roxbury was probably more important than anything else in allowing some very decayed housing stock to start to come back. But the whole issue of how economic activity effects human lives is very difficult to discuss or describe at all.

Habitat is the best-known group to allow low-income home-owners the option of turning their own labor into decent homes for themselves. But I recall, from over 25 years ago, there were other more local efforts that also allowed multifamily building tenants to provide their own sweat equity. Habitat seems to like single family houses for the most part but one project in the South End, that I only read a few articles about decades ago, seemed to allow potential low income tenants the ability to do it in condominium renovations in buildings.

Felix’s columns are aimed at people with more comprehension of economic issues. What struck me about the community-based initiatives was that they engaged people with very little understanding of how the economy works: how banks lend or markets operate. But they were able to engage these occupants, drawn from neighborhoods they were living in for decades, so that they were able to employ themselves to provide their own dwellings at a reduced cost. The cost of land and the cost of labor are the most significant factors in construction expense. The community planners were finding ways to accommodate low- income people, in very complex urban development schemes and could even coordinate private and public investment. The average ‘rational” homeowner James Suroweiki mentions, wasn’t nearly as sophisticated as they were.

Felix is making the point that sophisticated and rational sellers – people who look to maximize return on the investment, but who seem to allow for no other more emotional or non-economic considerations to be taken into account, such as stability of social networks (ancient Kabul), may not really be rational at all or seeing how their actions effect larger economic issues. They transfer their risk taking to a higher level. And the federal government has had to take up the bad debts (bets) or the entire housing market or the larger economy will collapse. They were sophisticated gamblers but they didn’t appreciate the whole impact of their actions.

He hasn’t mentioned (yet) the fact that the property taxes try to “mark to market” even when the market has lost value. All the rational building owners in the South Bronx faced was the choice between loosing money by paying taxes on very substantial apartment buildings that were old but not squalid or walking away from nearly worthless property they could no longer find tenants for who could pay the once higher rents. And that started the entire area of the S. Bronx on the decline. The no-man’s land still hasn’t come back to it’s former density – at least the last time I looked. I am not at all sure why Coop City was a significantly better neighborhood than the one the tenants left behind except that they became residents in more modern structures with better views perhaps, but miles away from the commercial life of the Grand Concourse area. They were also living in subsidized cities where before they were living in relatively low cost older buildings. The underlying decisions by the city and the tenants weren’t really rational as much as emotional. It was driven by the same desire to be more “modern”, to live in those once “fashionable” anti-urban Corbusian “Villes Radieuse’ with newer infrastructure that marked other failed public housing projects that have since been razed by the cities that built them. But I think it was in many ways as frivolous as the decision of former Beacon Hill millionaires to move to the more “fashionable” Back Bay or the fact that the South End could never be limited geographically enough in coverage to stay “fashionable” and “exclusive”.

It could happen again but at a gigantic scale and the cost of fuel, of miles of expensive and very fragile infrastructure, and the need to adapt to rising fuel costs, an aging population and a depressed economy, make inner city and suburban living even more expensive in buildings that require significant owner investment or they decay even more quickly than the older South Bronx apartment buildings.

Posted by paintcan | Report as abusive

“adapt to rising fuel costs”, should be “labor” costs.

Posted by paintcan | Report as abusive

Interesting points, paintcan. Thanks for the discussion!

“He hasn’t mentioned (yet) the fact that the property taxes try to “mark to market” even when the market has lost value.”

Depends on how it is set up. In MA, town revenues more or less automatically increase by 2.5% each year. The property tax rate is calculated from the target town revenues, less the state aid, divided by the taxable property in the town. Thus the rate goes up proportionately to the drop in property values.

Posted by TFF | Report as abusive

“Depends on how it is set up. In MA, town revenues more or less automatically increase by 2.5% each year. The property tax rate is calculated from the target town revenues, less the state aid, divided by the taxable property in the town. Thus the rate goes up proportionately to the drop in property values”

What are target towns? In NH, property tax is determined town by town. It must be the same in MA or you are describing a very strange system. The NH Department of Revenue Administration reviews the budget of each town and calculates the tax rate for each town separately. Isn’t it likely that if the taxable valuation of the town is dropping (but the towns don’t want to admit it and don’t revise their assessments downward?) that all the 2.5% does is make up for lost valuation? The 2.5% was an attempt to control the rapid increase in town spending during the boom years of the last two decades, wasn’t that it?

Otherwise it seems to me some kind of fraud. I can’t understand how the Towns around here justify their tax rates now except as how I just explained it. The houses that are showing up vacant are selling for less if at all, I think, so their valuations are being reset downward (I suspect) but one has to face the gorgon of the Tax Clerk to find out. Those records are online and are public records but require passwords to see. If you know someone in the town offices I’ll bet they let you know the pw. NH towns had a history of living with insider knowledge and almost incestuous relationships. “Spoon River Anthology” should be required reading for rural wannabe’s

Homeowners are not given repeated opportunities to file for abatements regardless of how long the falling values continue. The town is encouraging turnovers. And I think the whole business is a fraud now. My young neighbor tells me there are at least 50 vacant houses in this neighborhood alone, out of about 850. It implies that most of the houses are becoming worthless like those apartment houses in the S. Bronx. N’cest pas? They don’t even attract renters anymore. If it continues for much longer, and I truly expect it will, the area will be worthless and decaying. The speculators that came in and raised the prices are rapidly leaving or forcing old timers to leave and they destroy a social community.

I hate their guts actually because I was not a speculator and wanted to stay here to finally have roots. But the town colludes with them because it is in their won interest to believe in the speculators valuations even thought they can’t deliver on their bets anymore.

Posted by paintcan | Report as abusive

“What are target towns?”

Sorry, that parsed poorly…

Proposition 2.5% limits the growth of total revenues to 2.5%. It doesn’t constrain the property tax rate itself.

“It must be the same in MA or you are describing a very strange system.”

It is a different system in MA. Property values are used to apportion taxation, not to determine taxation. A fine distinction, perhaps, but an important one.

“Isn’t it likely that if the taxable valuation of the town is dropping that all the 2.5% does is make up for lost valuation? ”

Uh, no. It isn’t. Though admittedly in many years the 2.5% increase is insufficient to keep up with escalating health care and pension costs, on top of COLA raises. This was true even in the boom times, since the increase in valuation translated to LOWER tax rates.

Posted by TFF | Report as abusive

As an example, in 2003 the tax rate was 12.6 mils. In 2004 (after adjusting the assessments) the tax rate fell to 9.2 mils. Fell again three years later to 8.9 mils. The tax bill, of course, crept steadily upwards.

I’m not going to complain about the assessments. The town needs the money for the services, and schools are typically run on a shoestring budget. Far less wasteful than for-profit businesses (speaking from experience on both ends).

Posted by TFF | Report as abusive

I think all I’m trying to ask – when the property in a MA community isn’t selling at the boom prices – Towns don’t e generally reassess all the property in a town downward to reflect that fact. This town wants to claim that the house I live in is valued at 10% of market rate. That is what they tell you when you claim the valuation is too high.

It is up to the homeowner to prove that a building of comparable, size, age and amenities is being assessed at a lower level than your own. Property taxes assessments are something of an unspeakable act. It is something of an art form or a bluff. I dare say that if the property tax records were open (legally they are) to anyone to inspect – the process would fall apart overnight as a very rough guess.

I can’t forget when thinking about how economic goods are calculated in the overall economy that stocks and IPO’s will manufacture value by claiming that a small percentage of stock that may be sold to the general public – it the standard of value for the remaining stock that my be in the hands of the corporation that holds them. If that same logic was used for the same tax base of a municipality, the towns tax base would retroactively shrink as more houses sat unsold for long periods of time or the town began to shrink in population.

What tends to happen when towns fall on bad times is just what the article was saying. Owners consider the economic sense of selling for what it can fetch or abandoning it. This paper is not an advocate of charitable giving for it’s own sake. But the town was quick to ratchet up the assessed valuation and is loath to drop it as prices fall. But they will have very high tax rates for very cheap property if it stays where they want it. Or they catch the old timers like me in buildings more highly assessed than a house that may be larger, newer, and better equipped, that sold for far more just a few years ago, and that might now be sitting vacant of was just sold for less than what they claim mine might. I recall from working in town office briefly, that the deed of a property that has been sold in town passes through the Town Clerk’s office and they know what the purchase as recorded in the state Registry of Deeds. They can’t exceed the value of the purchase price when they assess a property. They don’t do it in reverse as prices go down. And those prices sometimes do stay down.

The abandonment of property is not a matter of foresight on the part of Town Officials. Municipal property valuations are something like climbing a ladder and never being able to step back down as times require. They will eat no man’s lands rather than do that.

Posted by paintcan | Report as abusive

“Towns don’t e generally reassess all the property in a town downward to reflect that fact.”

Yes they do. I believe my town updates the assessments every three years. The last update was (obviously) downward.

I don’t understand the obsession with that number, however. It is used to APPORTION the tax burden, not DETERMINE the tax burden. It doesn’t really matter whether the valuations are high or low relative to market, as long as they are consistent with each other.

But from what I’ve seen, they are relatively consistent with the market.

Posted by TFF | Report as abusive

I wonder — perhaps the NH system is simply screwed up?

Massachusetts distributes the tax burden between property tax, sales tax, and income tax. As best I can tell, New Hampshire relies almost exclusively on the property tax. A quick review of the tax rates in NH shows many towns with rates in excess of 30 mils (3% of assessed value annually). Our property tax rate here is less than a third of that.

There are good reasons NOT to push all of the costs onto a single tax. You do a good job of explaining some of them. Happily most states have better sense than this.

Posted by TFF | Report as abusive

In MA they may use it to “apportion” the tax burden. That is not the way it is used in NH. And I am not “obsessed” as you put it. I am trying to make sense of the numbers. They don’t just make them up out of whole cloth or perhaps they do? I am inclined to think that all economic calculations – other than my checkbook – are works of art.

I would repeat a very old post but not now. But just prior to the bust, the assessment on my property changed three times in three years and always drastically upward and by two different town wide assessments by two different real estate assessment companies. The actual bill always rose a hundred or so with each assessment but the way it was calculated was looking like a joke. The town got so much grief for the first one they threw out all the paper work (the fact sheet that recorded the specifics of my house and lo) and didn’t refer to each others fact sheets and insisted on starting from scratch for the whole town. Both firms charged the town for their services and both firms I believe were paid in full. They may as well have picked the numbers out of a hat. I lost all confidence that the calculations were anything more than guesswork and bluff. The property values have dropped and they are actually talking of a new assessment. I seriously doubt I am going to see a drop in assessed valuation. The old system was slowly assembled and I understood how it seemed to work and I had even read the old assessors handbook. If I am obsessed with anything it is this house. It is my comfort and joy and don’t want to loose it to the prevarications and double talk of town officials.

They should open the record to full online access and I’d like to see hope their numbers actually match the facts on the ground. This is a state that was notorious for changing new comers with nearly the same house one bill for the new sale and a very different one for someone who may have been there a long time. They were all also likely to hit the new arrivals with fees and assessments designed to shift the burden onto the perceived “richer: out-of-staters. You are a very naive and trusting soul. I used to be too. Are they so much more honest and straight forward in MA?

But it is obvious the rest of my discussion is over your head.

Posted by paintcan | Report as abusive

“In MA they may use it to “apportion” the tax burden. That is not the way it is used in NH.”

Very possibly. I freely admit my ignorance of the NH property tax system. I suspect the dynamics are different in places which distribute the tax burden across multiple taxes, however.

“They should open the record to full online access”

Have you tried Zillow? They’ve captured the tax assessments in my town.

“Are they so much more honest and straight forward in MA?”


“But it is obvious the rest of my discussion is over your head.”

Always a possibility!

Posted by TFF | Report as abusive

“the towns tax base would shrink” is an error. The total assessed valuation of taxable property should shrink.

I think what happens now, when a town’s tax base shrinks, it means that owners are walking away from their mortgages and some even abandon the buildings, usually houses and undeveloped lots, to the town because they are in tax delinquency. And up here it means – it the oner can’t unload quickly enough – the town gets the whole thing and the owner looses the entire value of the house and not just the back taxes. The towns rational is that the owner should be able to sell before the two years allowed for arrears have expired. I’m not sure houses are selling within that two year period now. Sale signs seem to be up for a long time.

This town used to have periodic abandoned property sales. This is a rural area and the town was not that sophisticated yet. It’s learning fast. But they aren’t doing things like MA does. There’s a lot of “attitude” up here about MA.

Posted by paintcan | Report as abusive

“But they aren’t doing things like MA does. There’s a lot of “attitude” up here about MA.”

The Massachusetts system isn’t perfect either. But there are dozens of other states you could look at which don’t rely exclusively on the property tax to fund their public services. I can see why a high property tax rate would make it more likely for an owner to dump an unsalable property on the town and/or bank.

We also aren’t seeing the same level of vacancies in MA that you are in NH. The real estate market here is subdued but not moribund.

Is NH losing population? During the boom years, I thought it was growing pretty rapidly.

Posted by TFF | Report as abusive

“Is NH losing population? During the boom years, I thought it was growing pretty rapidly.”

It was growing and I should try to find out. It probably is shrinking again.

I think that if fuel costs continue to increase, and especially, if the second home mortgage deduction is ever taken away, the situation up here could change enormously.

But rising fuel costs could change the value of all real estate that is remote from urban areas.

Posted by paintcan | Report as abusive

It’s been weeks since I wrote my comments and I missed a big mistake. I meant to say the town claims my house is valued at 100% of market value. My eyesight is crap and the “Zero” key sticks.

I really need a proof reader and better glasses!

Posted by paintcan | Report as abusive