The housing recovery favors high-end homes

The housing market is slowly recovering, more than seven years after the economy collapsed into a pit of toxic mortgages. But look closely at the recovery and you can see another story: how government policy helps the affluent, not the desperate.

House prices are rising, home sales are increasing, and new building permits in May were up 30 percent from a year earlier, though that just restored them to 1994’s level. And while America has enjoyed a record 64 straight months of job growth, wages barely budged for most workers, making housing costs for many Americans a continuing struggle.

By contrast, the recovery has been much faster for the big banks, where many top executives remain in charge who got rich issuing mortgages that they knew were unlikely to ever be repaid. 

On the consumer side, despite low inflation and modest wage gains, house prices are on the rise in large parts of America, especially urban areas with strong job growth such as the California coast, Puget Sound and near the nation’s capital.

When housing prices rise faster than incomes, it suggests a bubble, as I warned about in 2004. The bubble was the result of inflated appraisals that 11,000 honest appraisers tried to stop as big banks abandoned traditional underwriting, in which they check income and credits to see if a loan can be repaid.

This time around, however, that home prices are rising faster than incomes reflects other factors. As anyone who has obtained a mortgage recently can tell you, borrowers now get run through a financial wringer even if they bring a big down payment and flawless credit history.

Significantly, The biggest mortgage growth is in jumbo loans. These are mortgages for more than $417,000 in most markets, though the threshold can be as high as $625,500 in high-cost markets such as San Francisco, Los Angeles and Honolulu. Jumbos cannot be resold to Fannie Mae and Freddie Mac, the two government-sponsored corporations whose purpose is to ensure a ready market for mortgages. They buy loans only below those thresholds.

In San Francisco more than 38 percent of mortgages this year were jumbos, up from 17.6 percent just three years ago. More than 1 in 5 Los Angeles mortgages is jumbo. In Detroit, America’s desperation capital, just 1.9 percent are jumbos, but that is more than double the rate in 2012.

Contrast the lower end of the housing market. Many big banks do not accept applications from people who want to borrow $100,000 or less to buy a home or refinance. And those that do sometimes propose fees that total 10 percent or more of the proposed loan, a subtle way of saying “Go away.”

And what of those living in the many parts of America where you need only $50,000 to buy a decent small house or apartment? Lenders are few because the complex new regulations that Congress enacted in the wake of the 2008 crisis raise their costs. There were simpler solutions to prevent fraud, but lobbying by banks and contributions from bankers made sure we got a costly Rube Goldberg regulatory machine instead of effective and simple reform.

So the housing recovery is really a story of high-end homes, not mass housing. And that fits perfectly with the trend of the last 35 years of government being a problem for the many but a boon to the few. Keep in mind that incomes at the very top are skyrocketing while the bottom 90 percent of earners are back to the inflation-adjusted income levels of the mid-1960s.

As for the big banks, they are enjoying a much faster and more robust recovery than the housing market. In the last few years, bank profits reached record levels, softened a bit by tens of billions of dollars in civil penalties (which came out of the wealth of not executives but shareholders). Still, some bank valuation increases are stunning.

Anyone who bought JPMorgan Chase at its 2009 low today enjoys a bulging wallet. Dividends and raising share prices combined produced a return of almost $5 for each buck invested back then. Chase CEO Jamie Dimon is now a billionaire, thanks to his $27 million annual pay, the rising stock market and his escaping personal responsibility for what the Justice Department said were mortgages that never should have been sold.

This disparity in the housing recovery between homeowners and bankers illustrates how government policy continues to tilt in favor of “the haves and the have mores,” as George W. Bush once jokingly described his base.

Central to this disparity is that Washington bailed out the banks, not the borrowers. Worse, Barack Obama’s administration declined to prosecute easily proved crimes by the big banks, including filing false documents, wire and mail fraud and fraudulently marketing securities.

Homeowners might also be in much better shape had the Obama administration early on embraced a smart idea to have the Federal Reserve buy up mortgages.

Obama turned his back on this in part because one of its proponents was Glenn Hubbard, the Columbia University business school dean who was the Bush administration’s top economic adviser. Hubbard told me this week that the time for the reform he proposed in 2008 has now passed.

The rise in housing prices in major urban markets shows how smartly the big mortgage-issuing banks have been about restricting the supply of existing housing that is for sale, which benefits them in several ways.

The big banks are strategically holding foreclosed properties off the market, often by letting people live in them free, years after they stopped making mortgage payments. The banks benefit because the occupants take better care of the property than if it were abandoned, which drives down prices and angers neighbors.

Residents in poor areas, who normally lack political power, have attracted the interest of Senate Democrats, who want an investigation into banks abandoning foreclosed properties in ways that they say are racially discriminatory — a charge the banks vigorously deny.

In addition to banks restricting the supply of existing housing for sale, more people are looking for homes. These include young people who moved back in with their parents after the mass layoffs in 2008 and 2009. Millions of Gen Xers and millennials, had it not been for the Great Recession, already would have bought houses.

So beware of the new rise in housing prices. It augurs not so much a general economic recovery as more evidence of how government policy helps the few at the expense of the many.