7 a.m. The roar of the highway, elevated somewhat above us here in Merced, spreads through the old town. A siren wails. A freight train rumbles through town on the north tracks, whistle blasting. The streets are already filling with traffic. The sun is taking the winter chill out of the air.
It all sounds and feels like the hustle and bustle of a town growing in prosperity, business, commerce, all the things that common sense calls good. So what if a few hundred people lose their houses on mortgages they should never have bought into? Even a few thousand. They made bad financial decisions.
Listen to the Big Sound rumbling on the highway and the rails. The Valley is growing, prosperity is coming. That sound means more work, maybe. So what if the air’s getting worse and we’ve got water and sewer issues? And what’s a morning in the Valley without greeting a homeless person on the sidewalk? The Valley has always had a population of mobile citizens without regular addresses.
Some say we ought to try to impose some limits on our growth, if not to avoid filling towns with strangers that do not a city make, to protect the environment and respect the natural resources. Others say, No. Government, alleged to be of, by and for the people, should stay out of the way of business. Let the market impose limits (as the present housing “correction” is doing). The environment is nothing but the arena in which growth happens. How growth occurs is totally a function of the invisible hand of the marketplace. Any assertions that the environment has intrinsic value or is related to public health and safety in any way, or that local land-use authorities ought to consider the limits included in environmental law and regulation, are nothing more than but irritating grumblings of malcontents. Furthermore, these malcontents do not realize that we must speak with One Voice to persuade upper echelons of government to help fund our growth. Because the best friend the free market ever had was a government controlled by business.
“Forget all your worries!” say the diesels rumbling up and down the highway, the freight trains whistling on the tracks. “This is the Valley! We work! We produce! We are many industries based on agriculture!”
In fact there were problems then and there are problems now. Then, the invisible opposable thumb of the free market was squashing a number of small farmers overproducing one of the most perishable fruits on earth, the cling peach of ancient memory. Throughout it all, processors rose and fell. The names on those canneries are largely forgotten. It’s ancient history. Other processors survived and flourished and became giants, supporting the remaining productive farms, now much larger themselves than the old farms and dairies. Urban growth occurred to take the overflow from the Bay Area, where industries new and old boomed and property values boomed. The ominous thing was that some time in there the Sierras and the Coast Range became invisible unless it had just rained or there was a strong wind.
At some point, well past the real moment of loss of balance between the urban and the rural, the city and the environment, even dull-witted people began to notice that it is almost impossible to travel in the Valley out of sight of urban development. Now, the Valley is a region of rural parts, but it is no longer rural.
Even remembering crops like the huge tonnage of cling peaches seems more than faintly ridiculous. It is gone, and with it, a local way of life is gone. The economy adjusted. We are here, now, not there, then. The economy should have no history. It is all about now and the future, just as, in those days, it was about that now and that future, the latter of which not resembling our present at all. Who could have imagined the changes? It was always disreputable to imagine changes or to remember "ancient history."
One of the paradoxes of the Valley economy begs the question whether growth raises all ships. Is it possible to have growth and at the same time growing poverty? Observing the ever-expanding outskirts of Sacramento, we see rings of tract housing that was once owned, is now rented, and is deteriorating. The paradox is that we usually assume that poverty is not a sign of growth because we equate growth with prosperity. But are all ships rising? In the recent speculative housing boom, the ships of all homeowners rose, at least on paper. But how many bad mortgages, mortgages the lenders knew the new homeowner would be unable to cover as the rate rose, are out there in the midst of the regional housing boom, ready to explode, leaving empty homes and unfortunate lives? The speculative housing boom seems to have been about money rather than a great need for houses, as our local unaffordable housing prices demonstrate. Nevertheless, I just received a telephone message telling me that a company had checked out my credit and decided I could afford to buy one of these houses – a statement that I know to be absurd.
Apparently, the way the mortgage business operates is that the predatory lender unloads mortgages (s)he knows full well will default into secondary markets. Housing economist Dean Baker sketches how the housing bubble is bursting:
The fall thus far has been relatively modest (around 3 percent nationwide), but with prices going in the wrong direction, most new homebuyers have no equity that they could rely upon to meet their monthly payments. As a result, delinquency rates began to soar in 2006. More than 10 percent of the subprime adjustable rate mortgages issued last year (the most risky category) were already seriously delinquent or foreclosed within 10 months of issuance. This is even before any of these mortgages reset to a higher interest rate. With foreclosure rates soaring, the music is about to stop. The investors who bought up these mortgages in the secondary market are now refusing to lend more money. Credit is drying up for both the subprime and the Alt-A market, which is a notch above subprime in creditworthiness. These two segments of the housing market together accounted for 40 percent of the mortgages issued in the last two years. If 40 percent of potential homebuyers suddenly have problems getting credit, it has to have a large impact on the housing market. Throw into the mix that the inventory of unsold homes is 25 percent higher than at the same time last year. And, the number of vacant units up for sale (normally an indication of a highly motivated seller) is up more than 40 percent compared to last year. Since house prices fell by three percent last year (six percent in real terms), it looks like we have the beginnings of a serious slide in house prices. And, a sharp fall in house prices will lead to more problems in the mortgage market. That is the story of a collapsing housing bubble. It is not pretty. It was predictable.
San Joaquin, Stanislaus and Merced counties already rank among the top foreclosure rates and least affordable housing in the nation. It might be predictable that the housing bubble will collapse more severely here.
The bust was predicted. The information was available to Valley business and political leaders. This information was suppressed, ignored, denied and mocked. Or is it that the Valley cannot think in any economic terms but boom and bust? Is that the legacy of agriculture?
Now the construction-defect lawsuits are starting. Some would say that is inevitable during an “inevitable” housing boom, when contractors are building too much, too fast, in a market driven by speculation. Toxic mold problems, which Merced has seen before, have not yet surfaced to the extent they have in class action suits in Sacramento suburbs. Already, however, there are rumors that homeowners are getting dire warnings from the developers that sold them their homes about the consequent loss of property value from disclosing defects.
The probable result is urban growth accompanied by the growth of poverty. Could this have been prevented? If so, how, in a state and region committed to the view that “growth is inevitable.” Think about the arrogance of this phrase for a moment, in terms of the huge parts of the US where growth is not happening at all -- in fact the reverse is happening. “Growth is inevitable,” our leaders say, shrugging their shoulders and collecting their cuts as the public schoolyards fill up with present-day equivalents of WWII surplus Quonset huts.
What sort of economic growth is suppressed by urban growth? Was construction, real estate sales, finance and insurance work the only kind of work? What are the economic and social costs of the steady deterioration of the quality of California public education since developers gained political control of the state? How about the costs of health care?
Why did Merced take the great plunge into housing development? Although it is still an unspeakable question, the consequences of the great speculative housing boom may make it a very pointed question by the end of the year.
Has the ideology of “raising all ships through inevitable growth” been a true guide or simply developer flak? Or, has it just redistributed income upward and caused the growth of more poverty?
How will our dear business and political leaders cover up all this, when even the local newspaper smells the story?
Bill Hatch
Notes:
3-6-07
Truthout.com
http://www.cepr.net/index.php?option=com_content&task=view&id=1072&Itemid=45
The Housing Bubble Starts to Burst
By Dean Baker