Several days ago an article in the Herald by Dave Gallagher entitled “Whatcom home values make big jump – is there an end in sight?” referenced Peter Orser, interim director of the Runstad Center for Real Estate Studie at the University of Washington. Orser said that he expects the 10% jump in Whatcom County real estate prices in the third quarter to be a “blip” from the normal 4% increases historically in Washington State. Orser expects a “correction”. A burst bubble is a more apt rubric and likely to be similar to the bubble that burst with the economic crisis in 2008. A similar bubble now exists with the open casino, often referred to as the Stock Market. That will be one hell of a pop as it bursts - and it will do so.
Behind all this and not much spoken about is the question of real estate and debt. Economist Michael Hudson speaks to the background on real estate financing in an interview with Sharmini Peries of the Real News Network. Hudson says:
“What they don’t realize is that the reason house prices go up isn’t simply because population grows or nature makes them go up. There are two factors. One, the public sector pays a lot of money on infrastructure. It builds new schools and parks and roads and sewer systems. Every time it builds a new transportation system, property goes up. When New York City built a subway in on 2nd Avenue, property prices are going up there. So, you have the public sector spending money on transportation. Taxpayers have to pay but the landlords all benefit and their taxes don’t go up.
“But most of all, think what a house is worth. It is worth whatever a bank is going to lend against it. The fact is that none of us have enough money to pay down cash for a house. All of us have to take out a mortgage and how much we can pay and whether we can outbid the next guy who’d like that house would be, who’s going to borrow the most money?”
In Whatcom County, the real estate tax has not gone up since 1997. Our county executive just vetoed a 1% tax increase saying we don’t need the money. I beg your pardon? But let’s continue…
Hudson says that all the increased housing prices do is raise the debt:
The result was that instead while house prices were going up, they [the buyers] didn’t think about the fact that their debt was going up proportionally. All their increased house price was matched by the increased debt that people were taking on. Instead of paying 25% of their income on the mortgage, which was the rule in 1960’s, the government today, in 2016, will provide a Federal Housing Authority guarantee for mortgages that absorb up to 43% of the borrower’s income. That’s a huge, historically unprecedented ratio, 43%. It’s made the bank rich, not homeowners.
And so “negative equity” is again going to be the fate of many homeowners in Whatcom County when Mr. Orser’s “correction” takes place. Hudson continues:
“...housing prices have been pushed up by shifting taxes off real estate, off the Donald Trumps of the world, onto homeowners, renters and consumers – the people who are not millionaires. But most people don’t realize why prices for real estate are going up. Most of all, they don’t realize that they’re not really better off if the price housing goes up, if their debt goes up even more. They didn’t anticipate that in 2008, housing prices would plunge and the debts would remain in place. Suddenly many families found themselves in what economists call negative equity. That’s the position that 10 million American families were in when they were foreclosed upon after 2008.
Now rethink all that interest you pay on your mortgage up front. Just why do banks do that?
