Posts Tagged ‘housing’

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The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thoughtRudi Dornbusch

Last week, a wide variety of U.S. media (including the Wall Street Journal and USA Today) marked what they considered to be the ten-year anniversary of the beginning of the global economic crisis—from which we still haven’t recovered.

The event in question, which occurred on 9 August 2007, was the announcement by international banking group BNP Paribas that, because their fund managers could not calculate a reliable net asset value of three mutual funds, they were suspending redemptions.

But, as I explain to my students, “Beware the appearance of precision!” For example, the more numbers after the decimal point (2.9, 2.93, 2.926, etc.), the more real and precise the number appears to be. But such a number is only ever an estimate, a best guess, about what is going on (whether it be the growth of output or the increase in new home sales).

The same holds for dates. It would be odd to choose a particular day ten years ago that, among all the possible causes and precipitating events, put the U.S. and world economies on the road to the Second Great Depression. That would be like saying World War I was caused on 28 June 1914, when Yugoslav nationalist Gavrilo Princip assassinated Archduke Franz Ferdinand of Austria. Or that the first Great Depression began on Black Thursday, 24 October 1929.

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Given the centrality of housing sales, mortgages, and mortgage-backed securities in creating the fragility of the financial sector, we could just as easily choose July 2005 (when, as in the green line in the chart above, new one-family house sales peaked), January 2006 (when, as in the blue line, new privately owned housing units starts peaked), or February 2007 (when the Case-Shiller home price index, the red line, started its slide).

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Or, alternatively, we could choose the third quarter of 2006, when the U.S. corporate profit share (before taxes and without adjustments) reached its peak, at almost 12 percent of national income. After that, it began to fall, and the decisions of capitalists dragged the entire economy to the brink of disaster.

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Or the year 2005, when the profits of the financial and insurance sector were at their highest level—at $158.3 trillion—and then began to decline. Then, of course, it was bailed out after falling into negative territory in 2008.

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Or, given the centrality of inequality in creating the conditions for the crash, we can go all the way back to 1980, when the share of income going to the top 1 percent was “only” 10.7 percent—since after that it started to rise, reaching an astounding 20.6 percent in 2006.

Those are all possible dates, some of course more precise than others.

What is important is each one of those indicators gives us a sense of how the normal workings of capitalism—in housing, finance and insurance, corporate profits, and the distribution of income—created, together and over time, the conditions for the most severe set of crises since the first Great Depression. And now, as a result of the crash and the nature of the recovery, all of them have been restored.

Thus creating the conditions for the next crash to occur, ten years after the last one.

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A minimum-wage job should be enough to satisfy workers’ minimum needs, which of course includes putting a roof over their heads.

In reality, it doesn’t. A person working a full-time minimum-wage job will find it virtually impossible to rent an affordable home anywhere in the United States, according to a new study by the National Low Income Housing Coalition.

The report reveals that in fact there is not a single county or metropolitan area in which a minimum-wage worker can afford a two-bedroom home, which the federal government defines as paying less than 30 percent of a household’s income for rent and utilities. And in only 12 counties in the entire country is a one-bedroom rental home affordable.

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On average, a full-time worker in the United States must earn $21.21 per hour to afford a modest two-bedroom apartment and $17.14 to afford a one-bedroom apartment—figures that roughly correspond to the mean and median hourly wages in the country. As for everyone who earns less than that—the millions of low-wage workers, seniors and people with disabilities living on fixed incomes, and other low-income households—housing costs are simply “out of reach.”

Another way of seeing the problem is to calculate how many hours a minimum-wage employee would have to work to afford a one-bedroom rental home. Even Puerto Rico, which would require the fewest number of hours (45), exceeds the normal 40-hour workweek. At the other end, a minimum-wage worker in New Jersey would have toil more than two and a half times the normal week (106 hours) to afford a one-bedroom rental home.

It’s clear that private markets—in labor and housing—have failed American workers. They can provide neither decent-paying jobs nor the affordable housing for millions of members of the U.S. working-class to put a roof over their heads.

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The stock-in-trade of neoclassical economists, like Harvard’s Gregory Mankiw, is that free markets are the most efficient way of allocating scarce resources. Therefore, they spend a great deal of time celebrating free markets, and criticizing any kind of regulation of or intervention into markets.

Rent control is a good example, one that is taught to thousands of undergraduate students every semester. According to Mankiw, when governments establish price ceilings on rental housing, they cause a shortage of rental units. In the short run (as in the chart on the left above), when the supply of rental housing is fixed, the shortage may be relatively small. But in the long run (as in the chart on the right above), when both the supply of and the demand for rental housing are more “elastic” (that is, more sensitive to changes in price), the shortage grows.

When rent control creates shortages and waiting lists, landlords lose their incentive to respond to tenants’ concerns. Why should a landlord spend money to maintain and improve the property when people are waiting to get in as it is? In the end, tenants get lower rents, but they also get lower-quality housing. . .

In a free market, the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.

That’s the world according to neoclassical economic theory. And in reality?

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Philadelphia, the City of Brotherly Love—aka the nation’s poorest big city, and among the most racially segregated—according to Caitlin McCabe [ht: ja], “is increasingly becoming a renter’s haven.”

But what happens when too many renters, many of them higher-income, flood the market?

In cities such as Philadelphia, lower-income residents feel the squeeze. And it could be getting worse for them

A new study by the Federal Reserve Bank of Philadelphia shows that, as a result of gentrification, Philadelphia lost one-fifth of its low-cost rental-housing stock—more than 23,000 units renting for $750 a month or less—between 2000 and 2014.

Even more, the study found, the affordable housing that remains in the city is in danger, too—

since 20 percent of the city’s federally subsidized rental units will see their affordability restriction periods expire within the next five years. Of these rental units, more than 2,300 are in gentrifying neighborhoods.

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The short-term result of gentrification and the loss of low-cost rental housing is that Philadelphia is now the fifteenth-most-expensive rental city in the nation, with a median rent (for a one-bedroom apartment) of $1,400. In the long run, the shrinking stock of affordable housing leaves lower-income renters saddled with higher rent burdens, greater financial distress, and insecure housing arrangements, which combine to reinforce residential patterns that are already highly segregated by income and socioeconomic status.

As the Philadelphia Fed explains,

The pockets of gentrification in Philadelphia appear to reinforce these patterns in several ways. First, gentrifying neighborhoods become less accessible to lower-income movers, limiting their housing search to more distressed and less central neighborhoods. Vulnerable residents who remain in these upgrading neighborhoods often face higher housing costs and are less likely to see improvements in their financial health. In addition, vulnerable residents in neighborhoods that are in more advanced stages of gentrification may even become more likely to move out of these neighborhoods. Each of these consequences of gentrification reflects the impact of increasingly burdensome housing costs, driven by losses of both low-cost rental units and units with subsidized affordability.

The market for rental housing in Philadelphia is increasingly becoming a neoclassical economist’s dream—but a nightmare for low-income renters in the City of Brotherly Love.