At first sight, Maple Heights, just outside Cleveland, looks much like any other ageing suburb in the industrial mid-west: a patchwork of small colonial-style houses built after the Second World War, with leafy streets and mown lawns. Up close, it is a community in collapse reports the Economist.
Every twelfth house stands empty, repossessed after its owner defaulted on a mortgage. There are no boarded windows (a local ordinance forbids them) and the city council cuts the grass around vacant homes. But the cracked panes, crumbling paint and rotting porches are hard to hide. Countless more homes sport “For Sale” signs as the remaining owners try to flee to better areas. With so many houses vacant, the property tax base has crumbled. Since 2003, the local government has laid off 35% of its staff.
As America’s housing bust grows ever deeper, the big question is how far Maple Heights is a harbinger of things to come. Nationally, people are defaulting on mortgages at a faster pace than at any point in recent decades. According to the Mortgage Bankers Association, some 5% of all mortgages are delinquent and the share rises to almost 15% for “subprime” mortgages—those lent to people with shaky credit histories. In the second quarter of 2007, almost 3% of subprime loans entered foreclosure (the process of default and repossession). RealtyTrac, a company that tracks foreclosures, reckons up to 1.5m households will enter the process this year (see chart), double last year’s figure. And with some 2.5m adjustable-rate mortgages resetting to higher rates before the end of 2008, everyone knows there is much worse to come.
The pain will probably be concentrated in two main areas. One, typified by Maple Heights, is the Midwest—states such as Ohio and Michigan, where the subprime bust is battering an industrial economy already in long-term decline. The other is quite different: booming states, such as Florida and California, where the subprime bonanza fuelled the biggest housing bubbles. Until recently, the highest default rates were in the industrial heartland. But that is changing fast. More than a third of all adjustable subprime loans are in California, Nevada, Arizona and Florida. California alone has 17% of them, and the numbers are soaring. In Riverside and San Bernardino counties, two sprawling counties east of Los Angeles that comprise an area called the “Inland Empire”, 1,900 houses were repossessed in August. It was 31 a year earlier.
The good news is that high default rates may be less painful in places whose sub-prime problem sits atop an economic boom. Cleveland has been losing inhabitants for years. In contrast, almost 800,000 people piled into the Inland Empire between 2000 and 2006, swelling the population by a quarter. The area is the main distribution hub for Chinese imports, and it has added 50,000 jobs in the past year.
Read it here: America’s Property Crisis