Friday, September 26, 2008

A HIGH IMPACT FEE MAY HELP TO REVITALIZE DOWNTOWN, AND UNDERSTANDING WHY THE BAILOUT DOES NOT FIX THE FINANCIAL CRISIS

(EDITOR’S NOTE: This is about twice the length of what I wanted. If you are patient and read the entire thing you will see how an artificially low impact fee is bad for all of Brownsville and the economy.)

UPDATE ON NO TO BAILOUT:

There is no debate at this time as to its purpose. The taxpayers are to buy up the bad debt so that the financial institutions who through mismanagement created this mess can afford to extend more credit to more people - people who cannot afford it. I do not care where you are in the US - just click here - fill in the blanks - and an e-mail will be sent to your representatives opposing the bailout.

http://congressorg.capwiz.com/congressorg/issues/alert/?alertid=11957686



Key to the revitalization of any downtown or old city area is a willingness of new home buyers to buy older homes in need of revitalization. In Brownsville there is no desire by new home buyers to invest in and remodel older homes. A high impact fee will force a market change from new construction to old construction. Until people have an incentive to buy existing housing, neighborhoods such as old Brownsville will grow slum-like because remodeling is not the goal of the community. Those with money will always simply choose to buy into a new neighborhood.

Revitalization of old neighborhoods is as important to the tax base and image of the community as new construction homes. As a shortage of old construction homes develops the appraised value of these homes will increase. This in term grows the tax base. The end effect of a high impact fee is to force a revitalization of older neighborhoods, while increasing the value of older homes which in turn increases the tax base.

This is indirectly related to the financial crisis. It was artificial public policies which got us into the financial crisis. An artificially low impact fee discourages revitalization of older neighborhoods. This is never good for a community.

At the core of the financial crisis is a need for Americans to consume. Consumption is the energy source of any economy. The primary purpose of the FED is to keep the economy going. You do that by regulating interest rates which in turn either speeds up or slows down consumption, depending on the needs of the economy.

You cannot consume without money or credit. By the time Bill Clinton became President it was clear there was insufficient money held by consumers to keep the consumption going at a level which would drive a healthy economy. Everyone who could truly afford the credit needed for a new car owned a new car. Everyone who could truly afford a credit card had a credit card, and in many cases those people had maxed out their cards. Everyone who could afford a mortgage was in a house.

There was no where to go for more consumers. Those who could afford to consume cars and houses owned both. The economy needed new consumers or it would falter. The government under Bill Clinton began programs which expanded opportunities for people who could not traditionally afford a mortgage to buy a home. This in turn sent housing costs up as demand increased. Low income people could not afford the price of housing, so the government made it easier with sub-prime mortgages.

The same occurred with cars and trucks. The manufacturers were desperate for new buyers. They developed every new financing scheme they could think of. People who could not afford the payments found themselfs now saddled with new cars and a new home.

The states and federal government effectively deregulated credit card interest rates. It was not too long ago the maximum interest rate in Texas was 18%. I am not sure but is it now somewhere in the low 30%. The deal was, if these extortionist rates could be charged, the credit card companies and banks would agree to expand credit. Now these same people had a mortgage they could not afford, a car they could not afford, and maxed out credit cards.

The banks always looking for new ways to make money sought and obtained the right at the State level to do equity mortgages. I remember the fight in Texas when we amended the State Constitution to allow for equity mortgages. These became key to keeping consumption going.

With the demand for new housing on the increase as we expanded the number of people who could afford a home, the value of homes increased. This allowed people to borrow against their equity. Every couple of years people would go to the bank and borrow against their equity so that they could pay off their credit cards, maybe have some money left over for home repairs or even a down payment on a new car.

Over time the economy hit a dead end again. There was no one left who could afford to be consumers of houses, cars and other big ticket items. For years we counted in part on undocumented workers to help feed the economy through consumption. They bought new trucks, and homes using sub-prime mortgages. We then told them to get out. They stopped consuming as they lost their jobs or out of fear of losing their jobs.. The government’s failure to legalize these 10 million people helped to create the mess we are in. You cannot reduce the consumption of 10 million people and expect nothing to happen to the economy.

Far too many people in homes owe more on their home than it is worth. This is a consequence of too many equity loans and a downturn in the housing market. Once we ran out of buyers, the demand for housing had to go down, which in turn decreased the value of everyones home. This in turn made it impossible for people who could no longer afford to pay their mortgage to sell their homes. This lead to an increase in foreclosures. An increase in foreclosures means a further decrease in the value of homes. This meant no more equity loans to pay off credit cards, repair homes, or buy new cars. Collapse was all that was left.

This is why a high impact fee will help the housing market. It will make existing homes more marketable thereby increasing their demand. As demand goes up, values go up. As demand goes up it will be easier for people in financial crisis to sell their homes before foreclosure. With a decrease in foreclosures the value of housing begins to recover. The increased value of existing homes causes an increase in appraised value which in turn causes an increase in the tax base which is good for Brownsville.

In the end, once we revitalize our old neighborhoods, the price of existing housing will rise to the point that people will begin to consider new construction. We have to allow the market forces to guide the process. An artificially low impact fee creates a false market for new construction and tends to drag down the prices of existing homes. These leads to dilapidated neighborhoods and foreclosures.

The artificial markets created during the Clinton and Bush I and II years lead to today’s financial crisis. Nothing in the bailout addresses the fundamental problem -consumption the fuel which drives the economy. The bailout saves the financial institutions, but does nothing to promote consumption. Far too many people are broke. Their credit cards are maxed out. No one will extend credit. Credit which they cannot afford. Consumption is not an option for these people.

With the exception of allowing bankruptcy judges to remake mortgage loans to a payment the homeowner can afford, I say we let the system collapse. In time as people are relieved of their debt, they will be able to consume again. The new found ability to consume will feed the economy and in time it will recover.

Financing a bailout for those who sold the people the snake oil medicine which created artificial consumption is not an option.

6 comments:

Becky Syck said...

I completely agree, of course. Some decline in housing prices is inevitable and needed, especially on the East and West coasts.

This country needs an attitude adjustment on consumption and credit. Instead of having the courage to say this, the administration is kicking the economic can down the road by helping out their cronies.

We are due for a recession or depression, and infusing more money will not prevent it. We can explore ways to perhaps soften the landing, but the landing will come. I believe we also have some time to explore our options on how to soften it. The scare tactics being used to try to push this plan through are sickening.

Thanks for writing about this. We need to get the word out.

BobbyWC said...

Becky, the only reason politicos have to save the financial markets is to save their own butts. The fear the depression our economy needs for the adjustment. Yes they will be voted out because the people are fickled. But in time the economy will recover stronger.

I would prefer the government to use this taxpayers to rebuild the infrastructure of our roads and bridges. At least that creates jobs and spending.

We cannot get the word out unless we inform people.

E-MAIL E-MAIL E-MAIL - whether it is the BV post today or another bloggers post - when you read something you like e-mail it to a friend or 5 and tell them to e-mail it a friend or 5

Bobby WC

Anonymous said...

The market in Brownsville is unique, and sad. This market is below a sub prime market. Median income is so low, and credit scores are on the average lower than most cities that the pool of qualified buyers is almost non-existent. People buying homes in Brownsville are investors who are not re-selling the homes, rather renting them out, and perhaps even seller-financing with a big down payment. See, some how even with no credit, or bad credit, people find a way to come up with 10k down payment for an owner finance home. When you are the seller, you are not asking where that money comes from.

The builders are hurting, and they should be. They planned on Brownsville citizens continuing to live beyond their means. Cardenas' subdivision in Olmito! Partly empty. Edelstein's development off of Dana Rd., 1 model home. Huerta's development close to Rancho Viejo ...now doing owner financing.
The builders here in Brownsville have long fed off the less than qualified buyers to live beyond their means. There are a slew of homes on the market! If you are qualified looking for a home, buy an existing home. You can't build a home for what you can buy a home, and the builders know that!

Bail out? Needed, it will happen, and in a couple of weeks, it will be on the back pages and the bottom of the newscast. People will continue to charge their cards, people will continue to try to cheat the system in home purchasing with straw buyers, and gift funds! and in 4 years regardless of who the president is, we will be in the same position. Voters have a short attention span, they may be fired up now, but this too will fade.

Now put your pennies together, and start buying investment properties!

a little more than 100 words.

Anonymous said...

Bobby:

that was well thought out.
i enjoyed the read.
El Rocinante consistently, but tangentially, raises the issue of impact fees,
however, i could never get through the profanity and name-calling to make out what the real problem is.

now it seems clear.
i understand the developer's motive.

i love downtown.
even though i've seen the hundreds of times, i find myself staring at the old pics of brownsville at the Vermillion and the courthouse.
it is a dream of mine to live and office in and near downtown.
i could leave my car at home and walk everyday.
of course, a larger police presence, maybe on bike or horseback, would be needed.

Anonymous said...

of course, a larger police presence, maybe on bike or horseback, would be needed.

We could do more to cultivate civility and community ...

Anonymous said...

maybe its time for the consumption-based economy to collapse, eh?

Actually, it's growth based, isn't it? Of course, that's based on consumption, isn't it?

Of course, we're buying into it to the max, whatever it is. The 700 billion is on credit too, I believe. How long to pay that one down?