A recent study conducted by University Urban and Environmental Planning Prof. Bill Lucy and Graduate Architecture student Jeff Herlitz challenges many popular beliefs about the relationship between the economy and foreclosures in the United States.
“Most of the country is actually quite stable in terms of housing markets,” Lucy said, even though specific locations have experienced large housing value decreases.
Problems occur when people apply skewed national findings to local business, he explained.
“People who are involved in buying, lending and making policy need to have a more nuanced, geographically varied understanding of house values and also development prospects,” Lucy said.
Lucy and Herlitz’ study found several surprising findings, Lucy said, including a difference between foreclosures in central cities and foreclosures in suburban areas. Cities tend to maintain property values better, Lucy said, a finding which might help explain why the Virginia suburb of Prince William County has seen 10 times more foreclosures than Washington D.C.
The data gathered by Lucy and Herlitz also contests widely accepted indicators of the national property market, such as the 20 City Index, which claims that all property values have gone down by an average of 18.5 percent.
Similarly, Lucy said he believes that reports from the Case-Shiller Index are weighted toward states with the highest foreclosure rates, such as California, Nevada, Arizona and Florida. Thus, the national average is skewed by outliers, and one might reasonably conclude that foreclosure rates are not nearly as bad in some states, including Virginia.
Additionally, the study revealed a decrease from 2004 to 2007 of 1.6 million households headed by people ages 30 to 44, the bracket which normally experiences the biggest increase in home ownership. This shift indicates that it is not only reckless lending and mortgage acceptances causing foreclosure problems, but also a change in the size of the buying public, Lucy said.
Along with a decrease in home purchases within the prime age bracket, Lucy said there was an increase of 3 million single family homes for sale from 1998 to 2005. These additional homes amount to an 44 percent increase during the course of seven years, he said.
Simultaneously, the traditional 2-to-1 ratio between house values and owners’ annual income became much wider, Lucy said. In 2007, “California house values were more than eight times [the] median family income, [which is] why California is the center of the foreclosure crisis,” he addded.
University Economics Department Chair William Johnson said the relationship between a declining economy and an increase in foreclosures is a cycle in which “the direction of causation could be either way.”
He said there are two areas where housing prices are declining significantly. In areas known for housing booms and busts, like Florida, Arizona, Nevada and central California, rapidly increasing price and construction levels caused huge stock increases based somewhat on speculative demand. Once the prices of properties stopped going up, Johnson said, speculative demand disappeared and prices fell, leading to an economic downturn.
The other main area of depressed prices is the Rust Belt of the Northeast and Upper Midwest. Many unemployed people in this area “[depend] on heavy manufacturing, which is not a booming part of the economy,” Johnson said.
“[The] overall problem isn’t necessarily as much as a national issue as people make it out to be,” Herlitz said. “It is from an economic standpoint but not necessarily from a housing standpoint.”
Mayor Dave Norris said Charlottesville is faring well enough to not qualify for federal aid offers like the Neighborhood Stabilization funds.
“Those funds were targeted to cities that had higher than average foreclosure, and we didn’t qualify for any of those funds because we just haven’t seen any epidemic of foreclosures that other parts of the state have experienced,” Norris said. Although the foreclosure rate in Charlottesville is higher than it was several years ago, foreclosure is “not nearly as big of an issue here as it is in other parts of the country,” Norris said.
Lucy, however, said one should remain cautious and seek to address local economic issues before they worsen. He noted that Charlottesville currently has a 3.5-to-1 ratio between property value and salary, a figure on the “outer limits of what’s sustainable.”
Exactly how home ownership impacts the stability of the housing industry, though, is still unknown, Herlitz said, adding that the study prompts the need for more research in the field.
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