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The NY Times has an article today on the increasing foreclosure rate in Atlanta. The article highlights several basic problems coming together and hurting the economy as a whole. These problems are massive consumer debt levels, stagnant pay scales and a housing market clearly in a bubble.
While the surge in foreclosures in other big cities like Cleveland, New Orleans and Detroit can be attributed to local economic challenges, Atlanta more closely reflects the nation. Its unemployment rate, 4.9 percent in May, is low and close to the national average of 4.5 percent. And businesses here are adding jobs, albeit at a slower pace than they were last year.
This paragraph illustrates a key point of the housing market. Logic would argue for an economic slowdown leading to a housing market problem. As the economy slows, people lose their jobs which means they start to fall behind on the mortgage etc.... However, the current housing slowdown started when the economy was strong and the unemployment rate was low. That means there are probably other fundamental factors at work here.
Like others across the country, homeowners here took out aggressive mortgages in the last few years when interest rates were low and housing prices were soaring. Now many are falling behind — some have lost jobs or experienced other financial difficulties, but many others are not able to refinance because their homes are worth less than they paid for them and their credit is now too weak for them to qualify for another loan.
.....
The real estate slump here and elsewhere is likely to worsen, given that most of the adjustable rate mortgages written in the last three years will be reset with higher interest rates, said Christopher F. Thornberg, an economist with Beacon Economics in Los Angeles. As a result, borrowers of an estimated $800 billion in loans will be forced in the next 12 months to 18 months to make bigger monthly payments, refinance or sell their homes.
Here is a graphic from the Big Picture Blog. The arrow is probably one column over to the to right by now.
ARMs and/or aggressive loans are a key reason for the current problems. Simply put, lenders sold these loans as the key to the American dream. However, it's also important to remember that people bought into these loans. In other words, there's plenty of blame to go around.
What started this buying frenzy was a real estate price bubble.
For example, a three-bedroom house near Turner Field, where the Atlanta Braves baseball team plays, fetched a high bid late last month of $134,000 at an auction by the bank that took possession of it. Almost three years ago, the new home was bought for $330,000.
While prices increased, pay hasn't.
Though Atlanta has added jobs in recent years, they pay less than the jobs the region lost after the technology boom of the late 1990s ended. The median household income was only 7.6 percent higher in 2005 than in 2000, according to the Census Bureau. That is about half the rate of inflation during that period, and it mirrors what has occurred nationally.
This is a key problem with the current expansion. As the Center For American Progress recently noted:
Factoring in inflation, hourly wages were 2.3% higher and weekly wages were 1.5% higher in April 2007 than in March 2001.
There is also the issue of the increasing level of consumer debt. According to the Federal Reserve's Flow of Funds Report, total household debt outstanding was $13 trillion in the first quarter of 2007. That's 114% of total income at the national level and 131% of national disposable income. It's also 95% of total US GDP in the first quarter of 2007. In short -- there's a ton of debt out there. And it looks like it is starting to have an impact.
There's also a ton of inventory on the market right now. Calculated Risk has been all over this story, but here are some of the highlights from the past month. The number of unsold homes in the biggest US markets is increasing at high rates, pending home sales are down another 3.5% this month, and several home builders reported declining earnings because of a weak real estate market, available inventory of existing homes is at an all-time high from an absolute number.
In short, there are a ton of reasons to expect to hear about cities aside from Atlanta -- cities in generally good economy shape -- to be having increased real estate related problems.