US Property — Prices Come Down, Poverty Goes Up

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Big shifts in the US income distribution continue. Trade and technology are all doing their work. But another cause is the asset price inflation of the last few years, now halted in its tracks — and going rapidly into reverse. Homeowner bankruptcies were up about 25% in 2007. Lenders are aggressively tightening their standards in areas where house prices are falling most — thereby driving demand and prices down further (Florida and Mississippi have the worst mortgage delinquency rates).

Tough if you are in the lower middle-class, even tougher if you are on a low income — and managed to get a NINJA (No Income, No Job, No Assets) mortgage a couple of years ago.

America’s financial wizards are getting a good kicking: rightly so. They repackaged the NINJA’s and sold them on to delighted financial markets — who were desperate for yield (every asset went up in price over the last five years, the consequence of the post 9-11 rate cuts and booming emerging markets: so yields fell everywhere. Heck, even Latin American debt looked good. See my paper here). The US authorities were quite happy: the global savings glut got recycled into the US, thereby financing a record external deficit. Now things look positively Argentinean for the US economy: boom-bust-boom-and bust again (see Paul Krugman in the NYT).

The property downturn is biting into revenues. States and local governments have done well over the last few years — the housing boom pushed up property taxes. Property is now being valued downwards, so taxes will fall. Funds for urban regeneration will take a hit. So, don’t expect America’s deprived neighbourhoods to get much better soon.

This all plays out in an election year (didn’t you notice?). The voters that count in US politics are not the poor but in the middle-income and lower-middle-income ranges. Its that part of the income distribution which presidential candidates keep an eye on. The Democrats are playing to the ‘anxious middle’ — America’s middle-class that isn’t as secure as it once was. Hilary Clinton started to do this in December when she cast doubt on the ‘virtues’ of free trade (see our December posts).

In the meantime America’s food banks will get even busier; America’s Second Harvest distributes two billion pounds of donated food and grocery products annually, and demand rose through 2007 as the housing crisis came on. But the food banks don’t have enough food to distribute, because America’s farmer are selling to China or turning to biofuel crops. So America’s poor face a double squeeze: job losses, and higher food prices. Expect child poverty rates to go up shortly — especially in urban low-income neighbourhoods with high rates of home foreclosure.

One effect of a US recession (or near-recession) will be fewer jobs for illegal immigrants (already happening in construction). So despite the political heat from the immigration issue, this might become less of a concern in US politics over the next year or two as recession bites. But it will be a big worry in Mexico and central America, as remittances dry up. The financial wizards have already marked down Mexico’s stockmarket, expecting the country to take a macro-hit — thereby recouping their losses on the NINJAs.

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