July 2008      

In this issue of Home Base:

June, 2008: A Month for Homeowners to Forget

Bad news on top of bad news for homeowners; when will we see a turnaround?

June was a very tough month for American homeowners. A prominent home valuation index recorded a decline of more than 15% in the value of homes in 20 major market areas, the steepest in recorded history. By the end of the month the stock market dropped 20% from recent highs to the lowest point in two years. Petroleum and gasoline prices soared to new records, creating an ominous scenario for low and middle income homeowners who will depend on home heating oil this winter. And finally, Congress left town for the July 4 recess without completing action on the housing recovery bill.

This is about as bad as its gets for an American homeowner, unless of course you were one of the many thousands of Midwestern homeowners whose home was also flooded out in June. With growing signs of a weakening economy, many are increasingly concerned about job security, on top of everything else. The key question of many homeowners at this point is “How much worse can it get?”

That’s a hard question to answer. Although home values have dropped dramatically in some areas, the declines have been relatively modest in most areas. In a few areas they have remained stable, and lucky homeowners in a couple markets have actually seen their homes appreciate in recent years. Two key factors in the outlook for home values everywhere are the relationship between home values and income, and the future health of the local economy.  One of the biggest causes of the bubble burst in home values was that home values appreciated far faster than peoples’ ability to afford more expensive homes. For a time, the gap was disguised by mortgage magic tricks, such as qualifying borrower’s ability to pay based only on the introductory interest rates, without considering the much higher rates and monthly payments they would soon face. Mortgage lenders also made loans based on unverified incomes. These ”stated income” loans often came to be known as “liars loans” for obvious reasons.

The deflation in home values in many areas is mostly a process of realigning home prices with the amount buyers in those markets can afford. In some cases, home prices are probably close to the bottom. If the inventory of unsold homes in your area has leveled out or is beginning to decline, that’s probably the case. If the inventory continues to grow, there’s probably going to be more declines in value.

There are other unknowns as well. The economy is beginning to show signs of weakness. Indeed, housing foreclosures are a large part of the reason that the financial sector is currently challenged. Further drops will only aggravate that challenge. A significant increase in unemployment and other measures of economic slowdown will not help the housing recovery.

On the bright side, pending housing rescue legislation will probably help. While the Senate failed to act on the legislation before the July 4 recess, we expect that Congress will pass the legislation sometime this summer. The content of the final measure is still a question mark, but in the weakest form it will help some and at best may be able to blunt significant further declines in many hard-hit markets. 

There may well be further losses in the stock market, but as a result of recent losses many securities are currently trading within ranges their performance historically supports in an “average” economy. Here, the unknown is also the economy. If the economy doesn’t weaken further, the stock market may hold up. If the country falls into a recession, further stock market drops are likely.

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Grassroots Alliance Urges Gasoline Conservation Measures

AHGA urges the Senate Energy Committee Chairman to enact immediate gas conservation measures.

In a meeting with the Chief of Staff of Senate Energy Committee Chairman Jeff Bingaman, American Homeowners Grassroots Alliance (AHGA) President urged the Chairman to consider tightly focused solutions to immediately reduce U.S. petroleum consumption. Chairman Bingaman has led the Committee’s efforts in developing a thoughtful and comprehensive U.S. energy policy that balances both environmental and economic goals.

While AHGA supports Senator Bingaman’s efforts in resolving the many complicated and challenging issues involved in developing a balanced energy policy, the recent spike in petroleum prices has created serious financial challenges for American homeowners and other consumers. They will become particularly acute this coming winter, when staggering increases in home heating oil will pose a tremendous challenge for low and moderate income homeowners.

AHGA believes that there are a number of steps that could be taken immediately to reduce current demand for gasoline and other petroleum products. We should implement those solutions now, while continuing the important effort to develop a comprehensive long term energy policy. Reducing demand is the best way to reduce gas prices and has substantial additional environmental benefits, the AHGA President told Stephen Ward, Senator Bingaman’s Chief of Staff.

The best way of reducing gas consumption is by not driving. Congress has previously passed legislation encouraging federal agencies to support telecommuting, and as a result 7% of federal workers now telecommute at least once a month. New legislation expanding those incentives has passed the House this year and is pending in the U.S. Senate. We also need to create similar incentives to encourage private employers to support teleworking. Congress provided tax credits of up to $2,000 for the purchase of hybrid vehicles for example, so why not offer similar tax credits for workers or employers towards the expenses of setting up home offices to make telecommuting possible? Telecommuting is not possible for manufacturing workers, but manufacturers could help their workers reduce gas consumption, and save on their own energy costs, by shifting from five day, eight hour work weeks to four day, ten hour work weeks. Congressional hearings could help identify cost effective ways to achieve these worthy goals.

These are but a few approaches that could reduce U.S. gasoline consumption in the short term. No doubt there are other good ideas as well. If Congress acts fast, it is possible that we could reduce petroleum demand enough to welcome falling gasoline and home heating oil prices by the end of this year.
 
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Floodplain buyout: Maybe it’s time to stop rebuilding

Rural land expert Curtis Seltzer offers some thoughtful alternatives.

         “My heart -- that mean-spirited little pump I keep around for “Casablanca” and odd emotional assignments -- hurts for the Midwest folks who have been wiped out by flooding, once again.

         Three to four million acres were under water. About 2 million acres will not be planted. Twenty-four lives have been lost; property in the billions has been damaged or destroyed.

         The full economic impact will come into focus several years from now when all the damage, lost wages and lost sales are tallied against the money coming in from disaster aid and dollars spent rebuilding

         In 1993, Midwest flood damage came to $23 billion. Its tough getting kicked in the teeth again and again.

         My little valley below Snowy Mountain has cleaned up after three 100-year floods during the last 25 years. In the upper Potomac River watershed, we, too, have lost lives and homes.

         I know what it is to wade through belt-deep, flowing water at 3 am on a moonless November night during a lightning storm with a rope tied to a fence post to get two 60-year-old trapped neighbors up to dry ground.

         I like the stubbornness and the courage of people who rise from the floor. But I’ve stopped liking the idea of putting things back as they were in exactly the same vulnerable…stupid…place.

         I started feeling this way as I watched people in the counties around mine rebuild in their floodplains. Then I listened to the gutsy “We’ll-be-back promises” from New Orleans—a city below sea level, now guarded by rebuilt levees that will predictably fail as sure as wind blows and water rises.

         Some blame global warming for abnormally heavy rainfall; others don’t.

         Some argue that our own activities -- eliminating water-absorbing wetlands, channeling rivers, reducing the absorptive capacity of cropland by installing drainage tiles, reducing forestland buffers -- contribute to flooding’s severity and destructiveness.

         My point is different. While we can’t prevent big rains and flooding, we can minimize the damage.

         We can certainly do more traditional flood-control of the type we’ve been doing—digging deeper channels, building higher and better levees, rebuilding in the same place with insurance money. While this approach is familiar, it concedes that most levees will break or be breached eventually.

         Here’s a damage-control alternative that might be cheaper and work better: Let it flood where we want, not where it wants.

         Instead of trying to keep flooding within narrow river channels, let some of it spread over designated release areas in floodplains.

         These acres, for the most part, are now in private hands, used primarily as cropland with farmhouses and agricultural structures.

         Floodplain could be dedicated to flood control in two ways.  The federal government could purchase it in fee or buy a permanent conservation easement, or private landowners could donate it in fee or as a conservation easement for tax benefits.

         Some designated flood areas would be returned to permanent wetlands; the rest would be rented for agricultural use, thus repaying the buy-out program over time.

         Floodwaters would release themselves (where levees are lower) onto dedicated floodplain all along the river system. Spreading the flood, which is what happens anyway when levees fail, reduces its speed and power. Spread rivers in flood don’t crest as high as channeled rivers. Spreading would protect river-front cities and towns. 

         The way it works now, each levee that breaks allows flood water to spread willy-nilly, ruining buildings and farmland. By establishing release zones all along the waterway, flood impacts could be controlled and property damage minimized. 

         Residents would assume all risk of occupancy and structures in release zones. Federal flood-insurance would not be available. Private dykes could be built around buildings, but the land would be open to floodwaters.

         Public policy would tilt toward encouraging people to move but continuing to use much of the land for agriculture.

         If floodplain residents insist on staying in a release zone, they would forfeit assistance relief and subsidized insurance that now encourages them to do so.        

         If the government bought 4 million acres along the Mississippi River system for release zones at $3,000 per acre, the total cost would be $12 billion. Double that to cover buildings, and you get $24 billion, which is $1 billion less than the cost of the 1993 flood.

         Floodplain buyout programs now operate in many states, but on a very small scale. Structures are bought and demolished in floodways, the most dangerous part of the floodplain. Open space and wetlands remain. Funding comes from local, state and federal sources, such as the USDA’s Natural Resources Conservation Service and through HUD’s  Community Development Block Grant program.        

         Many will oppose this idea. People don’t like to change or move; I’m one of them.

         But doing what we’re doing succeeds only when flooding cooperates. Building levees that will fail only increases the eventual costs of these failures. Rebuilding levees in New Orleans to pre-Katrina standards won’t protect the city from the next Katrina.

         Rather than stand futilely against the flood, might we do better escorting it to areas of our choosing? Could that save us money and spare our hearts?”

Curtis Seltzer is a land consultant from Bluegrass, Virginia who works with rural land buyers. He is author of How To Be a DIRT-SMART Buyer of Country Property. His columns and more background on his services are available at www.curtis-seltzer.com. 

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