Millions Of Foreclosures . . . Why Are New Homes Being Built?

by Rory Cripps | August 3, 2009 at 05:12 pm

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There have been millions of home foreclosures throughout America during the current recession and we can expect many more to come. The consensus, today, is that most of the foreclosures are the result of the current recession and not the result of "sub prime" mortgages. Many of us knew that, however there are those out there that couldn't help pointing their fingers and saying that it was all the fault of those stupid American spendthrifts that took out mortgages and bought homes that they couldn't afford.

America is "development crazy" and I use the word "crazy" in the literal sense. The builders and local politicians, along with the real estate industry, cannot drive by a piece of vacant land without thoughts of raping that land and building something on it. It doesn't matter to them what they build on that land as long as they can make a buck from it.

It's not the fault of the American homeowner that the U.S. economy has taken the biggest dump since the Great Depression. The so-called professional economists had no idea what was coming down the economic pike let alone the average American. And in spite of all the so-called economist's current rosy forecasts that the "recession" is bottoming out, their statistics and leading indicators are meaningless to the 6.5 million Americans that are out of work.

Many of those 6.5 million unemployed Americans will continue to be out of work for another year or two or three and there's much more to come in terms of the unemployment numbers. And to add insult to injury, those that remain unemployed will be hearing and seeing all over the media that the American economy has rebounded, stock prices are up, and that everything is just peachy keen. Moreover, at least half of those 6.5 million that are currently unemployed, will never come close to making what they earned prior to this recession if and when they do return to work. For all intents and purposes, there is no hope whatsoever of reversing the financial hit that they took as a result of the so-called "free market".

I foresee much sociological fallout as a result of this current deep and severe recession: Divorces, bankruptcies, families falling apart, substance abuse . . . the list goes on. It's pure and total emotional turmoil when people see their jobs, homes, and investments evaporate into thin air within a couple years time--especially when no one, in the know, even gave a hint that it was on the horizon. None of it is good for the country let alone the economy.

Instead of building new homes that are not needed, I think that it's much wiser to focus on preventing foreclosure and keeping people in their existing homes.

Construction spending unexpectedly increased in June, the Commerce Department reported separately Monday, as the residential real estate sector showed improvement and construction projects funded by the $787 billion economic stimulus package increased as well.

The construction industry, which has lost 1.3 million jobs during the recession, has also been hit very hard. But it may have recently hit bottom.

Total construction spending increased 0.3 percent in June following a decline of 0.8 percent in May, the Commerce Department report revealed. Total construction spending in June was more than 10 percent below its year-earlier level.

After a plunge lasting three years, houses have finally become cheap enough to lure buyers. That, in turn, is stabilizing prices, generating hope that the real estate market is beginning to recover.

The release of the surprisingly strong Case-Shiller Price Index, compiled by Standard & Poor’s, followed earlier reports that sales of existing homes rose last month for the third consecutive time, while sales of new homes rose in June by the largest percentage in eight years.

Some skeptics say they believe the market is merely pausing before it resumes falling and that much of the life in the market is coming from speculators. Even the most enthusiastic analysts acknowledge that rising unemployment, another leap in foreclosures or a significant jump in interest rates could snuff out progress.

Brad Hunter, chief economist for Metrostudy, a research firm, said the new home numbers appeared to illustrate a resurgence of investors and speculators. Metrostudy’s own data showed that the number of buyers during the second quarter who actually moved into their new house declined 2.6 percent.

“Investors are turning right around and putting the houses on the market for sale or for rent,” Mr. Hunter said. “What appears to have been an absorption of excess inventory can be just a changing of ownership of that inventory.”

Another reason for the market’s resurgence is the prevalence of foreclosures, which make up about a third of all existing home sales. In some troubled regions, agents say they cannot remember the last transaction that did not involve a bank disposing of a property.

These communities are not yet showing any improvement in prices. Las Vegas was the worst-performing city in the May Case-Shiller index, falling 2.6 percent. Prices have fallen there by a third in the last year.

“The mom and pop that work at the Hilton can now afford a home here again,” said Justin Pechonis, a Las Vegas real estate agent. “Las Vegas is a great place to buy now.” But not from him. Sickened by seeing so many clients foreclosed on, he is getting out of the business. He now drives a taxi.

The U.S. economy performed better than expected during the second quarter, but revised data revealed that the intensity of the economic downturn has been much greater than economists thought.

Consumers have tightened the purse strings as home prices have plunged by a third. Also, the value of their stock portfolios, as measured by the broad-based Standard & Poor's 500-Stock Index, remains 37 percent below its pre-recession peak notwithstanding the market's impressive 45 percent rally since March. According to Federal Reserve data, household net worth has plunged by more than $12 trillion, or 20 percent, since the recession began in December 2007.

Since the recession began in December 2007, the economy has lost 6.5 million jobs, including 1.3 million jobs during the second quarter. However, job losses were even greater during the previous two quarters. The economy shed 1.7 million jobs in the fourth quarter of 2008, following the freeze in world credit markets. Another 2.1 million jobs were jettisoned in the first quarter of 2009. In June, the private sector employed fewer workers than it did at the end of 1999.

The June unemployment rate of 9.5 percent was the highest since 1983. Economists expect the rate to surpass 10 percent later this year even if the economy begins to recover.

Gross domestic product, which measures the output of all goods and services, shrank at a 1 percent annual rate in the April-June period, the Commerce Department reported Friday. It was the fourth consecutive quarter the U.S. economy has declined, something that hasn't happened since the government started keeping quarterly records in 1947.

The Commerce Department report included comprehensive revisions of GDP data from 1929 through the first quarter of 2009. The revised numbers reveal that the economy deteriorated during 2008 much more than previously reported. Earlier data indicated the economy shrank 0.8 percent during 2008. The revised data reveal a decline of 1.9 percent during 2008.

The 6.4 percent contraction during the first quarter of 2009 was the steepest quarterly downturn since the second quarter of 1980.

Revised data confirm that this recession, which began in December 2007, is the worst since World War II. However, last quarter's modest decline in economic activity suggests a recovery could be imminent.

"The U.S. economy is at - or very near - the bottom of the deepest recession of the postwar period," said Nariman Behravesh, chief economist of IHS Global Insight, who expects the third quarter to register small but positive growth.

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albertacowpoke

at 18:30 on August 3rd, 2009

Good Post Rory. It comes down to the basics. Food Shelter Pursuit of Happiness. It is amazing how they bombarded us with investments. Half the advisers didn't have a clue what they were doing either, but they got paid for each trade they made. There was an interesting documentary on that on Canadian television.

Rory Cripps

at 19:00 on August 3rd, 2009

Thanks Albertacowpoke. The current recession numbers look pretty bad. Also the time-lag for unemployment to come back down to the 6% level is pretty far out there. I expect to see the unemployment rate rise another few percentage points . . . the "dismal scientist" that I am. LOL! BTW: What is the title of that documentary?

albertacowpoke

at 19:25 on August 3rd, 2009

Rory I can't recall right now if it was on the "Fifth Estate", which is a investigative reporting show like 60 minutes or if it was part of a documentary on the nightly news "The National". I'm pretty sure it was on CBC though. The documentary featured a former trader/adviser and he revealed all.

christ0ph3r (not verified)

at 21:08 on August 3rd, 2009

Meh, I think it's good to see that new homes are being built, obviously there is a demand for those or they would not be made. it could be a sign that at least the housing market is coming out of his slump in some areas

Clint2 (not verified)

at 09:23 on August 18th, 2009

Well, we shopped for a home and toured a lot of foreclosure and short sale homes. A lot of these homes were in horrific conditions. Some of the former homeowners removed anything that was not nailed down. Some even ripped out thing that were nailed down including kitchen cabinets and A/C units. Some spraypainted nasty quotes on the walls or took hammers to the drywall. Most of the pools had turned to swamps. For what we would have paid for a foreclosure home plus the expense and hassle to get a property back to being a liveable space we could build a new house exactly the way we wanted it. So that's what we did, we got to choose all the colors, finishes, etc. and the home will be brand new and ready to move into when completed. Can you blame us?

Rory Cripps

at 14:46 on August 18th, 2009

Clint2: Of course I can't blame you! You're doing exactly what any intelligent and rational home buyer would do! But depending upon where you have your new home built, it might not turn out to be such a bargain down the road say ten years from now. How did it ever get to the point, in America, where millions of people were forced to leave their homes because the American "free market system" was allowed to run amuck? Most foreclosures are the result of an economy that was allowed to be devastated and not the result of people living beyond their means and buying homes that they couldn't afford. Now the real estate speculators are buying most of those foreclosed homes. That's just what we need in America--more real estate speculators!

br4d (not verified)

at 13:04 on August 21st, 2009

Your article has the cause and effect out of order ... housing market crashed due to people entering foreclosure, credit crunched, then we were in the recession.Your conclusion is self-contradicting - people in foreclosure are moving to rentals, not buying new homes. How can you condemn someone who has saved up money and is capable of paying for a new home to be built? And condemning construction, the industry many of those who are unemployed were laid off are from, doesn't seem to jive with logic.You also don't take into account that, as previously pointed out, many foreclosures are not inhabitable and new construction takes their place.

Rory Cripps

at 15:22 on August 21st, 2009

br4d: In my opinion, you're taking an extremely narrow and short-sighted view of things. And it appears that you haven't read the story. I haven't condemned any private individual that's buying a new home. You're putting words in my mouth and for you to make that assertion is totally disingenuous. Perhaps you're in the real estate or construction industry. If you are, then your only concern is to build, build, build, so that you can make a buck.

New home construction doesn't take foreclosed home's places. It's just new construction. The only places where new construction is taking the place of existing homes is in a situation where the property value is much higher than the value of the existing structure. The developers and builders don't give a crap about what they build or where they build it or what the ramifications to the infrastructure and environment will be in the coming years. They simply want to make a buck any way that they can make it. And it's absolutely unnecessary, in most cases, for home construction to continue at pre-recession levels.

There are millions of foreclosed homes that are in good to excellent condition. To imply that foreclosed homes have been trashed is just a ploy that developers use to get people to buy new homes. People facing foreclosure don't tear down the walls and break out the windows. That's bullshit and you know it! Real estate speculators, for the most part, are the ones buying up these homes

The economy went into the tank. People lost their jobs and ability to pay their mortgages. Their credit went into the tank. Millions of others that didn't lose their jobs watched their investments and home equity values plunge dramatically. Consequently their "wealth effect" plunged along with their ability to borrow against their home's equity or investment portfolio. In a recession, people don't buy the amount of things that they bought prior to the recession and the things that they do buy compose "inferior goods" in many cases because that's all that they can afford.

"How can you condemn someone who has saved up money and is capable of paying for a new home to be built?" Show me where, in my story, I condemned those people. Again, I think you're full of crap and you simply have an agenda.

New construction is an absurdity. How many more cookie-cutter developments does America need in your opinion? And how many more strip malls, Mcdonalds and Walmarts? How many more roads need to be dug up? Is their ever a limit to build, build, build? People like you would build on every square inch of land that America has to offer if you could get away with it. And most of what you guys build looks like crap anyway and has no socially redeeming value. And BTW: Are you really worried about the loss of American jobs in the construction industry? If you are, then why do your construction industry friends prefer to hire "illegals" as opposed to Americans? I know what's going on in the construction industry. I've probably been on a lot more construction sites than you have and have seen things first hand . . . .

jefhow22

at 13:54 on October 2nd, 2009

It is a sad state of affairs we have here in the States. The posts are excellent and "cut to the chase". The area I live in is a good representation of the limp housing market. Houses that have been on the market for months are still sitting there while just up the street they are building a six home cul de sac. Heck...a little bit futher up the road a house that was for sale seemed to have promise. Landscapers where there cutting down shrubs and some trees. To my surprise a few days later the house was leveled.....gone...kapoot. So what do you think is happening there now? A brand new house is being built on thesame lot. I just don't get it.