Is Housing Market Squeezing Out the Middle Class?

More than 3 million minority families became homeowners in the past several years. But some say the market is still tough for middle-class families. Christian Weller, a senior economist at the Center for American Progress, and Azeem Ali, a foreclosure specialist with Pacific Coast Capital, weigh in on the state of home ownership.

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FARAI CHIDEYA, host:

From NPR News, this is NEWS & NOTES. I'm Farai Chideya.

President Bush is making a new effort to turn renters into homeowners. He'll seek $35 billion for the Department of Housing and Urban Development's 2008 fiscal year budget. That's nearly $2 billion more than his spending plan this fiscal year.

And the White House also notes that families of color are closing the homeownership gap with whites. But some economists aren't painting such a rosy picture. They say more middle class families are being shut out. So how's the market really faring?

We speak with two experts from opposite coasts. We've got Christian Weller, a senior economist at the Center for American Progress. He joins us from the studios at the center in Washington D.C. And also with us, Azeem Ali, he's a foreclosure specialist with Pacific Coast Capital. He joins us by phone from Los Angeles. And good to have you back on the program.

Welcome to you both. And Christian, let me start with you. What is the housing market looking like nationally? Is this a boom time? A slump time?

Mr. CHRISTIAN WELLER (Senior Economist, Center for American Progress): Well, I think you - when we look at the housing markets, it's important to understand what it was and what it wasn't. It's clearly a boom time - it was a boom time at least through early 2006 in terms of house prices.

The flipside of that is it made it harder for people to move into homeownership. If you look at the aggregate data for the United States, in particular from 2004 to 2005, homeownership rate actually dropped. And it dropped the most for African-Americans who still had the most to catch up relative to whites, for instance.

The same time the flips - the other flipside of this is also that those people who managed to move into their own homes had to borrow more money, had to take out more exotic mortgages - options only, adjust rate mortgages - that left them ultimately more vulnerable.

And that is particular concentrated among African-American homeowners. So it really was a double-edged sword. Those who basically could sit in their homes, watch the value appreciate, that didn't have to take out more loans, I think they made out nicely.

But I think a vast group of people, A, couldn't move into homeownership because of higher prices, and B, if they were moving into homeownership, had to borrow more money than in the past.

CHIDEYA: And Christian, you've also done some research on America's spending and saving habits, and you talk about the high rates of debt in general. Tell us just briefly about that.

WELLER: Well let me give you a number a little bit on the homeownership rate - on the homeownership vulnerability, because that's directly related to link and that's the most important reason why people borrow.

If you look at the data, about 49 percent of homeowners have one measure of vulnerability: high debt payments, high levels of variable interest rate debt, a very high leverage, they own very little of ground homes or they own very little outside of their homes.

That's for the 49 percent in 2004. As for the entire population for African-Americans it was 72 percent of home African-American homeowners with at least one of those measures of vulnerability. Now it's directly linked to the run-up in consumer debt.

And overall you see that the run-up at consumer debt truly was much more explained in the last few years by a fairly weak labor market, very weak job growth, especially in manufacturing, where especially African-American men are disproportionally concentrated.

And at the same time basically flat wage growth. And on top of that, you see rapid price increases for things like housing, health care, education and energy. And against that backdrop, people took out massive amounts of debt. Their debt payments have risen to the highest level on record. And clearly, I think that has left the middle class, whether they're homeowners or not, much more vulnerable to any economic shocks at this point.

CHIDEYA: Azeem, you deal really with people. You deal with numbers, of course, because you're in the foreclosure business, but you really deal with people who are having trouble. We had you on before to really talk about how you deal with people who are in crisis. What are you seeing now in your business?

Mr. AZEEM ALI (Foreclosure Specialist, Pacific Coast Capital): Well the biggest thing that I'm seeing is a lot of the individuals who have bought in the last three years, two years, where the housing market has been on such a drastic increase.

They - just like Mr. Weller said, they're really getting into a lot of different types of loans to make the cost of money, i.e. interest rate, more favorable for them on the entering into the market. So what you're seeing is they're not looking at the overall price of the home. So a home is half a million dollars. They're not looking at that per se.

They're looking at their monthly affordability. And a lot of mortgage brokers are presenting to them different, like Mr. Weller said, exotic ways to bring that cost down - reverse amortization loans, interest-only loans, teaser loans.

So when they see that they could pay $2,000 or $2,500 a month, that becomes their focus point and they're getting involved in those loans not knowing the dynamic of that loan and how they go up or how they aggregate overtime.

And then, once it goes up or once it changes form, unbeknownst to them, because they didn't read their contract thoroughly and their broker didn't really represent it correctly, they're starting to go belly up. And unfortunately, it always comes down to education for me. I'm a huge proponent of education at the point when you're getting into a loan.

CHIDEYA: Now what are you seeing in Los Angeles? This is one of the cities where housing prices really has shot up. I know a lot of African-American families are moving out to the desert towns like Lancaster because they can't afford to live in L.A. anymore.

Are you seeing a lot of foreclosures? Are you seeing - it's kind of a split screen because on the one hand one person's disaster could be another person's opportunity to own. What about that part of the picture?

Mr. ALI: You hit the nail right on the head. I mean there's a lot of activity going on. There's a lot of quick turnover on properties, unfortunately, because you are noticing, especially in the entry level - the Lancasters, the Palmdales - those areas that are very favorable to entry level homeowners because of the price.

You're noticing that individuals are getting involved in those areas. But unfortunately, Palmdale and Lancaster have this extremely high foreclosure rate. And what's happening is - you're right. You're noticing, though individuals get involved, getting into the home, and then no more than a year later it's turning over.

And someone else is walking in and getting a great deal now. Now at this point it's still - the prices are still holding pretty steady, but you're noticing that the banks are starting to - their appetite for holding these properties is not really great. They don't want to hold these properties ,so they're just counting these properties and getting them into the second homeowner's hands.

CHIDEYA: Christian, this directly relates to some new census figures that said that 2.1 million vacant homes are for sale at the end of 2006, up from 1.56 million a year before. So what should that vacancy tell us about how the market is doing?

WELLER: Well the market is definitely slumping and there we see weaknesses. And the fear is here, really, we're entering a vicious cycle that, as more homes are on sale, more homeowners who need to sell will cut their prices. Which also means ultimately, because many people are so highly leveraged, they have such high outstanding mortgages, they will ultimately go into foreclosure because they can't repay their mortgages with a lower sale price. And that ultimately has a ripple effect. Goldman Sachs just warned yesterday about this ripple effect, which can be very serious.

That ripple effect is that the banks will ultimately see mounting losses and they will just simply stop lending to particular segments in the market. And it's often called a credit crunch. And the big fear is that that will particular hurt those homeowners, those communities that are often have hard times getting access to the formal credit markets.

We're talking largely minorities but also small business owners here. And I think that's the big worry here that as we have an oversupply, a large supply of homes on the market, we get these ripple effects to the default rates that ultimately lead to less lending and that ultimately bring down, slow down the economy, particular in certain communities.

CHIDEYA: Azeem and Christian, I'm going to ask you the same question. Is the American dream working? On some level, the home, whether it has a white picket fence or not, whether it's a condo or a co-op or a detached home, that's the American dream. Is it in jeopardy, Azeem?

Mr. ALI: Well, I'm going to go back to my soapbox once again. I think that the gap that needs to be closed is in education. I mean, financial education is probably one of the biggest problems when it comes to individuals obtaining and keeping - not just obtaining but keeping that American dream, because you can obtain it.

But keeping it is a different thing. And once the banks and the loan brokers start to become more responsible in that area, then the homeowners will have a problem with retaining that American dream. There's still, and I advise on this all the time, there's still a lot of very creative ways to get into a home affordably and have it work for you. But you have to be educated. You have to be educated on the whole cycle.

CHIDEYA: And Christian, I'll pose the same question to you. But also, whose responsibility is it to make sure that Americans can own homes? Is it government's responsibility? Azeem seems to hint that some lenders should be more forthright in the terms they put out. Whose responsibility is it to ensure that people can safely and intelligently make a purchase?

Mr. WELLER: I cannot agree more. I think the chance of holding on to the American dream has declined. Clearly, people are leveraged; they have too much debt. It's harder for them to - it's easy for them to get into a home but harder to hold on to that.

But then I think making the American dream work is a shared responsibility between everybody. Yes, individuals should become better educated of the loan products and what they mean. But I think lenders have to become more responsible, because it's their own interest. Ultimately, they pay the price through higher default rates.

And I think policy makers need to step in, and that requires reducing, eliminating practices that are clearly either illegal or onerous. But also the other parties, we've got to get beyond just simply looking at housing as a stand-alone issue. Say, okay, why are people borrowing so much money. It's not because the house prices alone are so much higher. It's also because income hasn't grown.

And so I think you've got to see the full picture, and I think public policy is really demanded here to come up with creative public policy solutions, to make sure that people have actually income to payback the loans that they have taken on.

CHIDEYA: All right, well we're going to have to leave it there. But I hope we can catch up with you gentlemen again soon, because these issues of housing are not going anywhere.

Christian Weller, Azeem Ali, thank you so much.

Mr. ALI: Thank you.

Mr. WELLER: Thank you very much.

CHIDEYA: Christian Weller is a senior economist at the Center for American Progress in Washington D.C. He joined us from the studios at the Center. And Azeem Ali is a foreclosure specialist of Pacific Coast Capital. He joined us by phone from Los Angeles.

And just ahead, are U.S. automakers on their knees? Plus a Southern journalist helped solve civil rights murders.

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