Friday, December 9, 2011

Variations on the Boom and Bust

Last March, I speculated that Bridgeport had been insulated against the housing bust. That the market here had been less inflated by speculation in the first place, and that when the bubble burst, there was less fallout. Foreclosures haven’t been as frequent, lending didn’t drop off as much. People are still buying houses and banks are still giving them loans to do it.

Then I went around talking to property owners, and some of them are less optimistic.

One acquaintance bought his home in 2002, a new construction single family house on Aberdeen, near where he grew up. By 2006, it had doubled in value; by 2011, it had lost what it gained. And a little bit more than it had gained, he said. Now he finds himself obsessively checking Zillow for comparable sales. He’s not looking to sell, he just wants to know.

I had informal conversations with some small landlords. Some of them fit my ideal description of the good steward, defending the stability of Bridgeport’s housing stock into the future, but not all of them did.

One of them rents to the high end of the rental market. He’s lost a few tenants as they’ve lost jobs, or their circumstances changed, and they’ve left for cheaper apartments. He had a few vacancies when I spoke to him last spring, but he planned to keep his units open until he found tenants who would pay his rents. He acquired his buildings gradually, renovated them down to the bricks, managed the work himself. He didn’t have to rent right away.

One on them targets the lower end of the market. He says it’s more complicated renting to yuppies, they are more demanding, and the building inspectors follow them in. “The money is in slum housing,” he says. It’s easier renting to “murderers and rapists,” if they’ve got a leak, he says “here’s a bucket.”

Or so he claimed anyway, I think he was exaggerating a little to impress. His porches were bright with fresh paint and beds of flowers, and he was sitting outside supervising workers making improvements. He bought his first building 40 years ago, he says he enjoyed doing the work himself. But he’s older now, he wishes he’d sold during the boom when he was getting crazy offers.

He’s still getting offers, he says they never stopped. But they’re crazy low offers. “They’re looking for someone who doesn’t know” (what their building is really worth). Or someone like his neighbor. The building inspectors recently came in and told her she has to make $40,000 in improvements.

“She has the money,” he says, but it rankles with her, because the repairs will cost more than she paid for the building, decades ago.

I met at least one investor on the lookout for owners who don’t know what their building is really worth, or who are getting restless to sell. He lives in the neighborhood, and works in the construction trades, he’s always kept his eye out for opportunities.

He’d just heard that an owner who rejected his offer for a storefront on Halsted a few years ago recently sold it to someone else for a third the price. He’d just made a successful bid for a 6-flat in Bridgeport, and he’d been venturing east into Bronzeville, looking at properties for a few tens of thousands of dollars.

Now he squabbles with the bank though. They want him to spend more of his own money on the purchase. They say “You have the money,” and he says “I know I have the money, but I don’t want to spend it, I want to borrow it.”

Reading Into the Loan Data:
At the end of September, new residential loan data came out for 2010. Theoretically, numbers are an objective check for the stories you hear people tell. There is an actual number for residential loans made in Bridgeport in 2010 for instance. You can compare it to the number of loans made in 2005, or to the number made in other neighborhoods.

But what do you make of that count, once you know what it is? The comparisons invite interpretation.

The portion of residential loans that were made for home purchases, as opposed to loans made to refinance existing loans, proves that property is actually changing hands, which must happen more in hot markets. But loans made to non-occupants in particular seem to measure more speculative investment.

Then again, so might a loan refinance. During the boom it wasn’t unusual for a home buyer to close on his home loan, then refinance it multiple times within a few years. Hopefully, he was trading in for better terms. But some of his friends were sucking equity out from their houses to fuel other kinds of spending – they were speculating on their own property in a sense.

The same loans took on different connotations when the context changed. In the bust, loan refinances suggest the correction of past excess. Or at least the persistence of opportunity to make corrections.

In 2005, at the height of the boom, residential loans in the Chicago metropolitan area were evenly split between single family home purchase loans, and loan refinances, with each representing 47% of residential loans. (The remainder was made up of multi-family and home improvement loans.)

In 2006, residential lending stumbled, and was still falling through 2010. The balance among loans also changed. Home purchase loans, and loans to non-occupants, fell furthest. Refinances dropped the least. By 2010, refinances accounted for 3 in 4 loans made across the MSA. Though in some neighborhoods, loan refinances evaporated too.

Then in 2009, the number of refinances lurched upwards. The lurch was strong enough to make up for the year’s drop in home purchase loans, and to lift the count of residential loans across the metro area by 22%.

Not incidentally, 2009 was the year the federal government’s Making Home Affordable programs went into effect. They were designed to help borrowers who were current on their mortgages refinance loans that were underwater at more favorable terms. Or to help those who’d fallen behind negotiate modifications of their existing loans to avoid foreclosure. The state of Illinois and Cook County both took measures to give borrowers more time and leverage to use those programs.

Many have been frustrated by what the government interventions actually accomplished. By year end 2009, foreclosure filings in the Chicago metro area actually rose to 70,000 from less than 60,000 the year before. The Woodstock Institute, a fair lending advocate, concluded that the government interventions only delayed foreclosures. They clearly hadn’t reduced them.

But the surge in refinances suggests foreclosure filings would have been worse if those programs were not in effect. In some neighborhoods, refinances did not seem to slow foreclosures from increasing, but in others, they may have done just that.

By 2010, loans were dropping again, in the Chicago metro area as a whole. But there was a modest surge in loans to non-occupants – investors were apparently venturing out to pick up bargains. No neighborhood needs more absentee investors. But non-occupants aren’t necessarily absentee owners. And if nothing else, they take up some of the slack in the housing market. Their perking interest might give the homeowner watching Zillow a reason to hope his situation is beginning to improve.

Variations in Lending:
Looking at loans, Bridgeport didn’t escape speculation during the boom and it hasn’t escaped the bust either. But it still looks pretty good in contrast with the metro area.

It also stands out among its neighbors. Communities whose housing stock is similar in age (pre-war) and composition (single family and small apartments), whose populations are similar in occupation (growing numbers of white collar professionals, but persistently high numbers of blue collar trades) and in origin (large numbers of the foreign born, small but growing numbers of blacks).

For all the things they have in common, the neighborhoods in the larger Bridgeport area looked very different from one another in the boom and bust. In general, you might expect the ones that saw high rates of speculative fervor would be the ones that saw a sharp decline in loans, and particularly high rates of foreclosure, in later years. Though the connections aren’t always consistent.

The South Loop seemed a case study in excess a few years ago, but it exhibits at least one measure of resilience now.

Almost half the neighborhood’s housing stock was constructed in the 2000s. In 2005, the neighborhood was boiling with loans. In the Near South Side, which includes the South Loop from Roosevelt to Cermak, there were 19 loans made for every 100 housing units that year alone.

Neighborhoods like Lincoln Park and Logan Square saw 10 and 11 loans per 100 housing units in 2005.

Furthermore, 2 in 3 of the loans in the Near South Side represented property changing hands, which makes sense in a neighborhood so newly constructed, but which stands out in the metro area where home purchase loans were balanced with loan refinances. And a lot more of the Near South loans were made to non-occupants investors.

Considering the speculative fervor, it’s a little surprising to see that loan activity actually held up better in the South Loop than it did everywhere else. The weight of it shifted from home purchase, to refinance, as it did across the metro area. But across the metro area, loan refinances slowed down, they just didn’t slow as much as other kinds of loans. In the Near South Side, loan refinances increased 92%. Even home purchase loans dropped more slowly than they did other places. The South Loop's location advantage hasn't been overwhelmed.

Still, liquidity alone has not been enough to correct for prices the bubble brought, and foreclosure filings have been exceptionally high in the Near South Side. In 2009 there were filings per mortgageable property were almost 1 in 10. And by 2010, as filings have been dropping in some of the hardest hit neighborhoods, filings in the Near South Side were up another 50%.

By contrast, in the Bridgeport area, the neighborhoods where lenders and borrowers were busiest in 2005 saw the sharpest drop in loans in the 5 years to 2010.

New City and Brighton Park are two of those neighborhoods. In 2005, they were the 2 most active residential loan markets in the Bridgeport area, with 13 loans per 100 housing units. Bridgeport, by comparison had 7 loans for every 100 housing units.

They are geographically adjacent, but historically different – they began to resemble each other more over the course of the 2000s.

New City includes Canaryville and the Back of the Yards neighborhoods. It’s traditionally been working class, and dominated by renters. In 2000, Brighton Park had higher incomes, and more homeowners. It started out as an extension of Bridgeport and McKinley Park – families would move down the Archer corridor as they moved up in the world.

In 2005, loans associated with home sales in New City slightly outpaced loan refinances, and almost a quarter of all residential loans were made to non-occupant investors. Brighton Park saw fewer home sales and less speculation of the non-occupant variety, and more homeowners grappling for terms, or for cash.

Both neighborhoods saw some of the steepest drops in loan activity in subsequent years. And the highest rates of foreclosure. Foreclosure filings in New City peaked in 2008, and have been falling since. But there were still 461 of them in 2009, or 57 per 1,000 mortgageable property. And they have contributed to a growing stock of vacant buildings. In 2009, only 3 Chicago neighborhoods -- Austin, Roseland and Englewood -- had more.

Foreclosure filings in Brighton Park have lagged behind New City’s, but there were still more of them, proportionate to mortgageable properties, than in other neighborhoods in the area. And the cycle has corresponded with changing incomes, and home values, that have brought the neighborhood more in line with New City than its old Archer Avenue peers.

The Lower West Side also stands out for its steep drop in loan activity after 2005. But foreclosure filings have remained relatively modest there, maybe because loan activity before 2005 was less intense. Despite rumors of gentrification progressing through Pilsen, loans south of 18th Street remained modest in volume, and also in the portion that involved actual property sales. It is true the Lower West Side is dominated by rental apartments, but no more so than New City, where property sales, and foreclosures, spiked.

The other neighborhood that looked comparably quiet in 2005 was Armour Square. In 2005, both Armour Square and the Lower West Side saw just 5 loans for every 100 housing units. But in Armour Square, that loan activity didn’t disappear. Loans of all kinds were fewer in number by 2010, but they hadn’t dropped off at the same rates they did for the metro area, or for other neighborhoods in greater Bridgeport for that matter.

As in the South Loop, loan refinances in particular were resilient. They were down slightly in 2008 from 2005 (down 13%) but by 2009 there were more than there had been in 2005 (112 vs 107), and in 2010, they were still increasing (to 124). And unlike the South Loop, foreclosure filings have been all but non-existent in Armour Square. There were 4 filings per 1,000 mortgageable properties in 2009.

If there is a single neighborhood in the area that shows where moderation in the housing market helped guard against disaster later on, Armour Square is the one.

But Bridgeport looks a lot like it. Bridgeport wasn’t immune to speculation, at least it attracted a fairly large share of non-occupant investors in 2005. But it saw less lending overall than several of its neighbors, and more of those loans were to existing owners, adjusting their position, rather than property changing hands.

Lending dropped off more in Bridgeport than it did in Armour Square, but it didn’t drop off as much it did in the MSA, or as in most of its neighbors. Foreclosures have been on the rise, but they remain modest as a portion of mortgageable properties.

In a map that shows change in overall lending between 2005 and 2010, Bridgeport stands out, together with Armour Square and the South Loop. But a map of loans made in 2010 shows that actual optimism may be more diffuse.

The South Loop remains particularly rich in loans – of course it also particularly rich in foreclosure filings. Meanwhile, lending activity continues down the Archer Corridor, and into Canaryville, and parts of Back of the Yards. New loans suffuse neighborhoods where other measures have not looked so good. There are lots of loans made in Bridgeport west of Halsted Street, and there’s a cluster of lending between 35th Street and Pershing Road that extends from Normal Avenue to Western.

That cluster shows up again in a map showing where non-occupant loans stepped up between 2009 and 2010. The spurt of non-occupant investment penetrates pockets of New City and Brighton Park.

In fact, Brighton Park, the neighborhood that may have lost the most in the decade of the boom and bust, saw the best news by another measure: in 2010, it is the only community in the area that saw a spurt of new home purchase loans. Some of them may have been loans to non-occupant investors. But since the former outnumber the latter, most of them were not.

No comments:

Post a Comment