The foreclosure 'blob' and why a bailout won't work

Worthwhile reading: "Why a Housing Bailout Won't Help," an interesting piece from the Wall Street Journal's Holman Jenkins Jr.

Most of you have read the anti-bailout argument in many forms and forums. What makes this piece interesting is Holman's snapshot analysis of the underlying mortgage mess as a relatively simple, regional problem: too many people made bad bets on the future of residential real estate in remote southwestern suburbs. Think Palmdale, Inland Empire, newer parts of Sacramento, San Diego, Phoenix and Vegas. Put these areas together on a map and you have what Jenkins calls "a single, nearly contiguous blob reaching from Sacramento to the environs of Las Vegas and Phoenix."

His analysis neatly summarizes a trend I've written about here: bad bets on the future of far-flung suburbs. Holman calls these "communities that now appear to have little future." Ouch.

What's wrong out there? Jenkins: "Many of these homebuyers are underwater not just because they bought more house than their incomes could support, and not just because prices are falling. They were also betting on commute patterns and demographic expectations that are proving invalid.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat tip: EP, via e-mail.
Photo Credit: Associated Press

Comments

[MyLessThanPrimeBeef]

I am sure some are also underwater because of '6 shootings in a span of 6 hours' kind of issues. But the question remains, which came first: chicken or the egg? Did un-qualified buyers, using sophisicated forecasting algorithm run on quantum computers, placed tragic bets on false migration patterns, or these future underwater homeowners went there because these mass mortagage-grave sites were the conveniently suitable areas where the happily willing victims could be lured and 'stretched' (a team effort by everyone from the bubble-mongering Fed chairman down to the friendly, but not always...um, how should I put this, OK, let's just say they are not against financial euthanasia.) into buying on a massive scale for maximum efficiency?

[SteveStip]

Who would guess that a government-backed banking cartel that allows banks to CREATE and then lend out money could cause problems?

Who would guess that a banking system based on fraud and theft via inflation (ie. fractional reserve banking) could cause distress?

Who would guess that a systematic, government-backed violation of the commandments against lying and theft would have ill-effects?

[USC 8 OAR]

My fear as a layman is that the Federal government cannot be relied upon to regulate economic contingencies because representatives of the markets and their attorneys are major contributors to the campaigns of elected officials.
Thus, there is no real motivation in Congress to provide effective solutions to problems such as the housing crisis.

[USC 8-OAR]

My fear as a layman is that the Federal government cannot be relied upon to regulate financial markets because their officers and attorneys are major contributors to the campaigns of members of Congress.
There is no real motivation on the part of these elected representatives to create laws that might help avoid situations such as the present sub-prime lending crisis.

[The Duke of Moral Hazard]

MLTPB (henceforth referred to as Milty Pibb): "let's just say they are not against financial euthanasia"

Help me understand that one? You mean banks?

USC 8 OAR: You said it, girlfriend. We need some really really smart, experienced, disinterested (no not uninterested) people to sit down and come up with a better system. Maybe it will turn out to look like some amalgam of Socialism and Buddhism, with enough incentives thrown in to keep economies humming. I'm sure there have been some serious stabs at it in recent years by people who see the need to morph govt. into a tool for good. Any nominations for good books to read on the subject? Anyone? A.....ny.....ooooooooone? I'm sick of reading stats and stoning cartoon villains.

[Rich]

Pete, you need to wear a helmet when you read some of these crackpots. I've already criticized the article by Leinberger you reference earlier (predicting a revival of downtowns and an end to the 'burbs), and this guy Jenkins is also throwing up a 2-bit argument that may sound superficially appealing, but lacks any supporting evidence.

"These were bets on location, location, location – premised on the idea that people would be willing to live hours from anywhere for a chance to own a single-family home they could actually afford."

If you really start to pick that one apart, does it track with what you know of how people in your area got into home buying and why they were doing it? He's got the tail wagging the dog here--builders speculated in outlying areas because banks were willing to give borrowers a chance to own a single-family home they COULD NOT actually afford.

"They were also betting on commute patterns and demographic expectations that are proving invalid."

He offers no demographic analysis to back up his contention that the places where spec housing were built are inherently not viable and will not come back. It's a sexy thesis looking for some reality to support it.

It's clear from the tone of the article that Jenkins is a free-market pollyana like Larry Kudlow who doesn't want to acknowledge inconvenient facts, as evidenced by his statement "Lo, the economy has not descended into a depression, the credit markets are healing, banks are raising new capital and putting their mistakes behind them". Gravitate to these arguments if they feed your bias, but at least look at them critically.

[sfvrealestate]

I go to Phoenix frequently. "Far from town"? What "town"? There is no "town" in Phoenix now and never has been -- it's all suburbs except for a very small commercial corridor. And many of the outlying areas have developed their own economies with large employers, medical centers, schools and colleges, entertainment, etc. I'm not sure that commuting distances really have that much impact (unfortunately) on real estate in our Southwestern car-based culture.

[Julie Emery]

The rationale may be questionable, but I think the outer suburbs are in for serious long term problems. The deal was that people would give up time (long daily commute) for a better deal on a bigger house. With rising energy prices the commute is now ridiculously expensive and the big houses use too much energy to heat and cool. Add to that the lack of investment in infrastructure making commutes often as long as four hours RT and you begin to see why families are deciding it was a bad trade off.
I'm a real estate broker and I'm seeing more people moving further in, not out. And, everything I see about the next homebuying generation tells me they're unlikely to want a big suburban McMansion.