The housing mess: 5 'dumb' questions

By Marilyn Lewis

When it comes to the housing meltdown, there are no stupid questions.

You can't be any dumber than a guy who makes $30,000 a year but bought a $500,000 house. Or the banker who signed the guy's mortgage. Or an investment bank that thought bundling such deals together made buyers with bad credit less risky. Or regulators who thought investment bankers were smart.

Yet still you're probably wondering about the same things we are, the so-simple-it's-embarrassing stuff like:

Why on earth are we still building?

There's a year's worth of new and used homes on the market now. About 10% of rentals and nearly 3% of family-owned homes around the country are empty.

Yet houses and condos are still going up.

Like a chicken with its head cut off, new construction is slow to respond when the ax falls. It's taken three years (prices started falling many places in 2005), but builders finally have dropped production, to 817,000 "starts" of houses and apartments this year, a third fewer than a year ago and the lowest in 50 years.

But why build at all?

Crazy as it seems to keep on building, home construction is "not a tap that turns on and off real fast," says Caroline Latham, the owner of RealFacts, which gathers and sells statistics on rental markets. New-home developments take years to get off the ground. Buildings being put up today have been on the drawing board for years.

A developer breaking ground has already invested in paying an architect and running an expensive gantlet of governmental permits, reviews, reports and consultants. Before construction starts, it costs thousands -- or even millions -- of dollars to grade a site and install sewers, roads, and water and power lines.

If you've already taken out a loan for a development, you've got to generate cash flow to keep up your payments. "Maybe you build phase one and hope to get your money back from that," Latham says. "But if you put it down and walk away from it, the chances are you'll never get it back together again."

In a few places -- including the Carolinas, oil towns such as Wichita, Kan., and Tulsa, Okla., and much of Texas -- demand is still fairly strong. But even where there are too many houses for sale, the houses on the market may not be the ones that buyers want, so builders are putting up single-level homes for retirees, for instance, or condos close to new light-industrial parks or office clusters. With the midlevel market saturated, builders are concentrating mainly on two markets: luxury homes and starter homes.

Do we simply have too many houses?

In a word, yes. The Census Bureau says the U.S. has about 128 million houses, condos and apartments but just 112 million households.

Is that a problem? You bet it is. "We've got too much housing and yet not enough housing that people can afford," says Danilo Pelletiere, the research director for the National Low Income Housing Coalition. "There are a lot of houses, but they are in places and in shape that people can't use them." Also, many who want to buy can't get a loan because credit is tight.

These are among the drawbacks of free-market economics. In Soviet Russia, where the state owned the housing, planners -- in theory, anyway -- could have shuffled people and jobs around to fill up those empty houses. (It was supposed to have been a more efficient system, but, as time showed, it had its own problems.)

Another wrinkle: Even if all the empty homes were near the people who needed them -- and they're not -- their upkeep costs could be huge. Many homes for sale are just too grand for the buyers. The heating and cooling bills, repairs, paint, gutter cleaning and yard mowing could break many of the people who need homes. "Even if you give them to them for free, there would be this problem," Pelletiere says.

What's affordable? Spending no more than 30% of your income on housing. By 2007, almost 15% of Americans with mortgages were devoting half their incomes or more to home payments.

Affordability didn't seem like such a problem during the real-estate boom of recent years, although wages were falling or flat. While cheap introductory mortgage rates were available, developers and buyers were lured not to the small, thrifty homes they needed but to what were essentially luxury digs.

It's happened before. "In a lot of poor neighborhoods, there are mansions that have been turned into slums. You can see what it looks like when you build houses where the following generations and the demand can't keep up," Pelletiere says.

Where do those foreclosed families go?

Today, people are doing what they've always done when trouble strikes:

They bunch up. One traditional solution is to consolidate, usually by moving in with friends or relatives. Two single moms who tried and failed to become homeowners now stuff both of their families into one home.

"If they are youngish people, they go back home to their long-suffering parents," RealFacts' Latham says.

Some move mobile homes onto friends' properties. Grandparents take in adult children and their families. Some adult children take in parents. Adult brothers and sisters make room for siblings and their families. Sometimes families break apart, with the adults leaving town to find work while relatives take their children.

Continued: Renters and the homeless

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