Tuesday, December 09, 2008

End of Work, End of Affluence II: 3 Ways to Lower the Cost of Housing

December 9, 2008

As housing and the economy implode, households are consolidating. With 25 million homes owned free and clear, another 18 million units vacant and millions of used RVs, low or no-cost housing abounds--if you're willing to double up, live in an RV or occupy a "legal limbo" dwelling.

As the recession turns into a Depression in 2009, many people will be seeking to lower the cost of their shelter. Luckily, no or low-cost housing is plentiful--if you're willing to renew family bonds, camp in an RV or continue occupying a "legal limbo" dwelling.

Let's start with some financial context.

In the U.S., the average household pays anywhere from 30% to 50% of net wage income for housing, either as renters or heavily-mortgaged owners. Food--much of it wasted/thrown away or eaten in restaurants--requires about 15% of net income.

In developing nations, households spend from 40% to 65% of the household income on food and much less on shelter.

For residents of the U.S., this suggests that if you can eliminate or dramatically lower the cost of shelter, you can live pretty well on a drastically reduced income. Reduce housing to near-zero and you're suddenly able to get by on perhaps half your former income.

Fortunately, there are 25 million dwellings which are owned free and clear, and ready to house far more people for essentially no extra money beyond higher utilities. There are about 50 million mortgages, of which about 10% are distressed/impaired-- payments in arrears, in foreclosure, or in a modified "workout" which only staves off foreclosure for a few months--as described in this Wall Street Journal article recommended by correspondent Eugenio M.: .: Easing Mortgages Isn't a Panacea : Bank Data Show Many Homeowners Falling Behind Soon After Loans Are Modified

"More than half of homeowners fell behind on mortgage payments in the first six months after their loans were modified earlier this year, new data from the Office of the Comptroller of the Currency and the Office of Thrift Supervision show."

As wealth and income rose during the postwar boom and again during the Internet boom, household formation increased and household size shrank. If you made enough money, then why live at home, or indeed, have a roommate? In areas with plentiful jobs and youthful populaces, one-person households became entirely typical.

Now, as wealth and income fall dramatically, then household size can easily double. Already we see stories about the adult kids returning home to live with Ma and Pa, and we would do well to recall that multi-generational households were the norm everywhere until mobility and rising wealth enabled single wage-earners to buy their very own apartment or house.

Wealth created single-person households, poverty recreates extended families. Sure, everyone chafes under the rules, the negotiations, the shared bathrooms, the noise, etc. that go with sharing one dwelling with others. But if finances offer no alternative, then guess what: people make do.

Correspondent Alberto R. is a property manager, and his report bears first-hand witness to the trend toward consolidation of households as jobs disappear, hours are slashed and household income declines:

"I deal with people everyday looking for a place to live and lately I have noticed a significant increase on the following:
- I would say that 99% of the residents in the 3 properties that I manage can't go for 1 single month with their hours cut in half.

- Late payments are increasing along with evictions.

- People are (as per previous entries in you site) doubling up and moving in together into a 1-bedroom apartment if they are allowed (we allow 4 people), or two families are moving in together into a 2-bedroom apartment so they reduce their total rent payment by approximately 35%.

Here is an example:
One 1150 sq ft downstairs 2 bedroom / 2 bath rents for $1,495 in this area of Los Angeles, while each downstairs 800 sq ft 1 bedroom / 1 bath rents for $1,150 at same location.

From paying $2,300 for two 1-bedroom units with more privacy for each family, people are choosing to move together into a 2-bedroom and forget the extra privacy. The $805 difference pays for food.

- A large percentage of residents ask me all the time if I know of any employment opportunities (they tell me they would do anything) They usually ask for work after telling me the story on how their hours have been cut and their jobs are on the edge of disappearing.

- I hear news of of unemployment and jobs lost daily.

...and the list goes on, with everything that your site has mentioned on its way. "

Thank you, Alberto, for the first-hand report from the "front lines" of housing.
It's not too difficult to see how the scenario might unfold. Once unemployment runs out and all that's left is food stamps, then family members who were prudent (i.e. didn't HELOC their home's equity to zero) and paid off their mortgages will start getting the call: can I stay in the spare bedroom for awhile? Can the kids and I live in your garage?

25 million houses is a lot of shelter, and we can assume that many are in the hands of retirees or elderly folks who might possibly welcome some companionship and/or some helping hands.

It's also not too hard to anticipate some generational war, as spoiled teenagers of laisse-faire Boomers and 30-somethings face the expectations of a hardworking, no-nonsense generation with little tolerance for "mouth" (lack of respect), hours wasted on mindless videogames, sloth/torpor/sloppiness, junk food, and all the other vices of laziness and low expectations seemingly built into "modern" American life.

It's not too politically correct to make this observation, but there is some painfully obvious Social Darwinism at work here: the people who recognized the home equity line of credit fantasy was too good to be true, the ones who didn't trust borrowing, the skeptics of the whole bubble--they're the ones most likely to own homes free and clear.

The folks who bought into the fantasy of free money with no work required via leveraged "flipping" and no/low money down, the ones who believed the illusion that "housing never goes down" are the ones most likely to be losing their homes.

Yes, some prudent people hit with job layoffs and unexpected medical bills are also facing foreclosure. But the relative levels of vulnerability are related to just how skeptical and prudent one was during the bubble. The fact is that in 2005-2006, anyone with a pulse could have extracted equity from their home, and 25 million people resisted the "advice" to do so.

The fact is that a 20% "cushion" of equity in a house which tripled in value in 10 years was not all that large a cushion, just as 20% down payment was not much of a cushion if someone bought at the top of a frothy bubble market.

It may be a source of denial or envy, but the fact remains that many people recognized the bubble for what it was--unsustainable--and they sold their homes in the 2004-2007 timeframe, and did not risk their capital by buying another property. Others rented and saved their money during the bubble, while others refinanced their existing loan into shorter-term mortgages when rates fell, guaranteeing their property would be owned free and clear in years, not decades.

In other words: the "ants" may not be all that thrilled to have the "grasshoppers" move in unless the "grasshoppers" adopt the habits of the "ants." Nonetheless, 25 millions homes with very low operating costs (property taxes and utilities) are ready and waiting for additional occupants seeking shelter from the storm.

A large number of people live in RVs fulltime--you can check out Jim Twamley's excellent blog on fulltime RVing, RV Now for a taste.

Though many people enjoy moving about the country in their RV, there is a heck of a lot of private land in the U.S., and you can certainly live on your own property in an RV, and dig a privy/outhouse, run lights etc. off a generator or propane, and just generally "camp out" with the amenities offered by a used RV.

There is a polite gentleman who lives in a pickup truck camper in my urban area; he parks a few nights a week on my street, then moves over a few blocks to avoid being tagged. I see him every once in awhile and assure him he's "cool" because he never dumps trash or makes a mess.

There are thousands of people who live in campers and RVs in urban areas right now, and many thousands more may well join the caravan. It's not an easy lifestyle, but you own your shelter and if the neighbors are cool, or you can live in a friend's or family member's driveway, it's certainly better than living in a tent. And the price (near-zero, a little gas money) is right.

In more rural areas with mild weather, a solid little plywood shelter is pretty easy to build if you enjoy carpentry or masonry. We built a 12 X 16 very snug little cabin with just hand tools (a handsaw, no power tools) in 1978. Most wood is dimensional (cut to standard length) so it's really not that hard, as not many cuts are required. The tradition of fashioning one's own shelter on one's own land (or a family member or friend's) goes back a long way, and with a 5-gallon propane tank life can be pretty comfortable.

Then there's, ahem, squatting. Believe it or not, readers have described situations in which the lender goes belly up and the ownership of the property is literally in limbo, so they don't even know who to pay rent to. They are living in the dwelling but paying nothing, because nobody's established legal ownership/management of the property.

Imagine sorting out who "owns" a house when the originator of the loan is belly up and the mortgage has been bundled into a mortgage-backed-security (MBS) along with hundreds of other loans; the legal tangles are still being explored.

So many people--not just those who stopped paying their mortages, but apartment renters whose buildings have slipped into foreclosure/MBS purgatory--are "forced" to occupy the dwelling without paying rent.

We have all read accounts of homeless/druggie squatters taking over abandoned suburban and urban houses, but there also plenty of stories of people who just stopped paying their mortgages and who know enough to "game" the system to forstall foreclosure--perhaps for years. As we know, banks are not anxious to load their balance sheets with yet more bad debt, so any pretense to keep the unpaid mortgage off their "bad debt/impaired mortgage" ledger has a very good chance of succeeding for some time.

I have also read accounts of people leaving one foreclosed home and simply buying another house, and then never paying the mortgage on that one. Is anyone still foolish enough to sell a house to unqualified buyers? It might be too soon to say "no." Do I recommend this? No; I merely note that millions of dwellings are unoccupied and there appears to be a number of ways to occupy them despite the fact that few payments are being made.

Then there's the 18 million vacant dwellings, of which some 4 million are listed as vacation rentals. Could Uncle be persuaded to let us live in his second home? Perhaps; and how about lobbying the local city to use redevelopment funds to seize a few thousand foreclosed homes via eminent domain and then rent them out for a few hundred dollars a month....

For the statistics, please read Why Housing Is Far from Bottoming: Depression, Demographics, Defaults and Dumps (October 8, 2008).

Bottom line: with 25 million homes owned free and clear (no mortgage), another 18 million vacant dwellings and millions of trailers, RVs and campers around, the possibilities for no-cost or low-cost housing abound. Right now it may be a choice to cut housing costs; perhaps in 2009 and beyond, it will be a necessity. The nation is not short of shelter, it's only short of low-cost-structure shelter.

Here is Part II of Chris Sullins' strategic action thriller, Operation SERF:

Operation SERF, Part II
(Chris Sullins, December 6, 2008)

It was a half hour after dawn and the early morning light provided enough illumination to the living room via the large broken picture window and open doorway to Eduard Morgan’s home. Mark had regretted allowing his aunt Maria to come back to the home with him to check things out. She was now knees down on the carpet next to Eduard’s body sobbing with her face buried in her hands.
Operation SERF, Part I


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