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Our Housing Challenge: Making Fine Wine Out Of The Grapes Of Wrath

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By JOE MYSAK

Bloomberg News

Published: November 8, 2008

Millions of Americans live in houses that are worth less than they borrowed to buy them.

I'm sure you saw the headlines the other week about how 7.5 million homeowners were "underwater," according to a report by First American CoreLogic, a Santa Ana, Calif.-based research firm. The hardest-hit states are the ones you might suspect: Florida, Nevada, Michigan, Arizona and California.

This doesn't mean that all those houses will be foreclosed. What it does mean is that if those homeowners had to sell, they would lose money.

And that means fewer Americans will be moving in the next couple of years. Is this a good or bad thing?

We relocate a lot. From 2006 to 2007, 38.7 million Americans moved to another home, or about 13 percent of the 305 million population, according to the U.S. Census Bureau. Only 4.9 million of those went to a different state.

People change abodes for lots of reasons: to get a better job, to shorten their commutes, to get a nicer house. This is a good thing, we are told; it's a sign of economic vitality. On the minus side, all this moving around doesn't do much for a sense of community or stability. Most people regard moving as one of the most traumatic events in their lives.

We have talked a lot about recession for most of this year. I even recall hearing one of those talking heads on television declare somewhat illogically that we were in a recession, no matter what the actual numbers said, back in February or March.

A recession is defined by the National Bureau of Economic Research as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Other people define recession as a decline in a country's gross domestic product for two consecutive quarters. We have had a decline in one so far this year.

The Commerce Department reported on Oct. 30 that GDP contracted 0.3 percent from July through September. Most forecasters expect the fourth quarter to be worse. We then would be able to state unequivocally that we are in a recession.

The questions then become: "How long? How bad? Will house prices continue to decline?" We know that the layoffs have just begun, and that the economy only turns up as companies are knee-deep in gore.

The real effect of recession on state and local finances, and so on municipal credit, has yet to be felt. Some states have already sounded the alarm about how they will have to cut spending, notably California and New York.

On a national level, though, there's a time lag. Keep that in mind as your broker keeps calling, telling you how attractive tax- exempt yields are right now. They are, but you really ought to understand first what you are buying.

It's safe to say that the country is looking at a relative decline in population mobility for the next few years. This is the continuation of a trend. From 1984 to 1985, 20 percent of the U.S. population moved to another home.

Staying put might not be such a terrible thing.

A lot depends on the length and severity of the recession. The flood of money and federal guarantees being lavished on the economy should eventually get some traction.

Not everyone will be thrown out of work for years on end, and we aren't going to turn into a nation of Joads, the family chronicled by John Steinbeck in the Depression classic "The Grapes of Wrath" (1939).

So what happens next? If people don't move, aren't broke, and have some home equity, perhaps they will embark upon some renovations and improve the places they live in.

Obviously, I'm not talking here about the people who have negative home equity, and I'm not talking about tearing down one's existing residence and building a McMansion.

Think the kind of renovation that boosts quality of life (including your neighbor's) and also, usually, the value of property.

And then maybe these same folks will think about how to improve their blocks, neighborhoods, schools and towns.

You never know. Maybe there's something in this hope-and-change business.

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