The collapse of Lehman Brothers 10 years ago today began the financial crisis that crippled and even killed for some the American dream as we had known it. Donald Trump might be starting to change that, at least for Americans who aren’t determined to remain in our bluest and priciest cities.
Overall an estimated nine million jobs and nearly $20 trillion in household wealth were lost. Job levels finally recovered but most of those who suffered from the Great Recession—and particularly current and former middle-income homeowners—did not see their wealth restored when the economy turned around.
Perhaps worst of all, the recession undermined our traditional belief in a better day ahead. Just one in five Americans is confident that life for today’s children will turn out better than it did for their parents, according to a 2014 survey conducted by NBC News and the Wall Street Journal.Nearly three in five Americans expect today’s children to be worse off, according to a 2017 Pew survey.
Some of this pain was self-inflicted, to be sure, as buyers seeking to catch up and get ahead of the market—they thought prices would just keep rising—drove up the home-ownership rate with dodgy loans many could not afford to repay. After approaching 70 percent, the rate is now back in the 63-to-65-percent range of the quarter-century preceding the housing bubble.
But there are two key reasons that most Americans still haven’t recovered their wealth or position from a decade earlier, and that most young adults find themselves starting the race far behind: slow wage growth across the nation and increasingly unaffordable housing prices in the most expensive and often most desired markets.
Wages for working and middle class people, at least until this year, have stagnated. Overall, only upper-income households have recovered financially from the Great Recession, while the vast majority of middle-income and lower-income households have yet to recover their pre-recession wealth, according to Pew.
In the meantime, housings costs have kept climbing, driven by conscious but misguided policies, particularly in coastal states, that have restricting new building. National Association of Realtors second quarter data shows median house prices in many deep blue enclaves areas have shot past their 2008 bubble peaks. In Portland, Seattle and San Francisco, prices are up 30 percent over the decade. In Denver, prices are up more than 80 percent. They have risen 60 percent in San Jose, where the median price for houses is now a staggering $1.4 million.
Rents are also rising substantially in some coastal markets, leaving many Americans in markets including Los Angeles. New York and Miami doubling up, retreating to family homes or struggling to just make each month’s payment. The biggest losers have been millennials and African Americans. A recent St. Louis Fed survey titled A Lost Generation? (PDF) found that the lingering effects of the Great Recession has been greatest on people in their thirties, who have the highest indebtedness of any age cohort and who may never recover the financial ground they lost.
The double hit of high rents and college debt has put home ownership out of reach for too many Americans just entering their prime marriage and home-buying years. The problem is particularly pronounced in California, where barely 25 percent of people 25 to 34 own their own home, compared to 37 percent of their peers nationally.
The percentage of African-American homeowners nationally fell by more than 10 points between 2000 and 2016, by far the largest drop of any racial group. Far fewer African-Americans now own homes in Los Angeles, San Francisco or San Diego than in Dallas, Houston or Atlanta.
It may have been a tragedy for most Americans, but the recession was a blessing for many in the planning, media and academic clerisy who saw the vast numbers of suburban foreclosures—they tended to ignore the equally bad numbers in inner cities—as a sign that the century-old American shift to the suburbs was over. Rather than home to dreams of upward mobility, new urbanists like the Atlantic’s Paul Leinberger now proclaimed that suburbs were destined instead to become ”the next slums.”
That, in turn, was supposed to usher in a new urban golden age. In his book The Great Inversion, Alan Ehrenhalt predicted that educated and skilled workers would finally wise up and leave supposed suburban dystopias and return to core cities. That hasn’t happened,at least to the extent predicted, but the narrative continues to enjoy strong support in the national media centered in New York City.
In this first phase of the Recessionary period—2009 to 2011—big cities also had a big friend in the White House in Barack Obama. His recovery policies were tilted, not unexpectedly, towards the urban interests that elected him. Obama bailed out the big banks, also linchpins of the core city economy, as well as governments; four dollars in new subsidies flowed to big banks for each dollar that flowed to Main Street. The first urban president since the nation became majority suburban, Obama’s vision, and increasingly that of his party, embraced urban containment and densification, while seeking (unsuccessfully) to convert drivers to transit users.
Although the president could reasonably claim he took the economy “out the ditch” the Republicans had sent it into, Obama’s recovery was arguably the most unequal in American history, with 95 percent of all gains through 2013 going to the top one percent. Silicon Valley, Hollywood and Wall Street prospered, and cheered on the president as ultra-low interest rates and a massive fiscal stimulus buoyed capital markets and inflated venture capital pools.
The big banks that caused the recession have increased their share of deposits by 50 percent since 2007. Not a single big banker went to jail for nearly collapsing the world economy.
Generally pleased with Obama, few progressives noted that while the elites loved these policies, much of the hoi polloi generally did not—even as voters deserted Democrats in droves in 2010 and 2014 and again in 2016, leaving Republican with decisive control on Washington as well as an unprecedented number of state offices.
The Tea Party-led 2010 revolt may have been associated with opposition to Obamacare, but its cultural and economic roots were far deeper. For large parts of the country—including Texas, the Great Plains and the Intermountain West—Obama’s “green” economic policies threatened key local industries like energy, manufacturing and home-building. As Democrats left their labor and working-class roots to become the party of the coastal elites, blue-collar workers had genuine reasons to fear Democratic dominance.
Equally important were new demographic trends that paralleled long-standing patterns progressives had insisted no longer applied. As millennials began to hit their 30s, the “back to the city” movement started to slow as early as 2011. Even with the improved performance of core cities, domestic migration continued to favor the suburbs as Americans left expensive coastal core cities for more affordable metro areas including Houston, Dallas-Fort Worth, Orlando, Nashville, Charlotte and Raleigh.
By 2017, New York’s population growth rate had dropped from its 2010 level. In that same span, a million net residents moved out of metropolitan Los Angeles. In San Francisco, nearly half of respondents now tell pollsters they want to leave.
Although some price increases might have been a natural occurrence given the boom, for example in San Francisco, local policies have made things worse. Strong opposition by the Brown administration to suburban development shifted construction, where allowed, towards small, usually expensive apartments that rarely appeal to older people, particularly those with children, and are generally not affordable for lower income households. The kind of natural outward movement that created the original Silicon Valley in the 1960s and 1970s and affordable suburbs around the world was stopped in its tracks.
The restrictive approach to development in California and some other states—including Washington, Colorado, Oregon, New York and Massachusetts—has greatly raised prices. Since 1970, California’s major metropolitan area housing prices, relative to incomes, have increased at three times the national average. An entire generation of young adults has been encouraged to leave for somewhere else or accept lifetime rent-serf status.
Just as they did in 2010 and 2014, the urban and coastal dominated media are failing to register changing opinions elsewhere. Convinced that we are on our way to a “green” urban future, progressives still have not recognized that many industrial workers, suburban homeowners, small business people and others didn’t want to emulate the urban elites but to get away from them in suburbia.
Herein lies the true secret of Trumpism. Many Americans did not want to see the continued erosion of industries that offered decent wages to middle and working-class people. Trump promised to reverse this, and, to date, his policies have ignited broad-based domestic growth in an otherwise struggling global economy. Small business, for example, now enjoys the highest confidence level on record.
For now, at least, the economy of Middle America is making a major comeback, a sharp contrast to the period right after the housing bust. Industrial employment reversed declines that were hitting at the end of the Obama years, growing by 327,000 jobs over the past year, the best performance since 1995. The sector has reported the strongest output in August in fourteen years. Retailers, home-builders, business service firms are all hiring, and, for the first time, in over a decade, wages for the lower half of the labor force are actually rising and even the long-term unemployed are returning to the workforce.
Perhaps most important, Trump may have shifted the geography of economic growth. The share of growth now taking place in non-metropolitan area America has increased fourfold. The most recent data from the Bureau of Economic Analysis shows that state GDP growth is highest in Washington state, but most of the other leaders are in the Intermountain West (Utah, Colorado and Wyoming), states in the middle of the country (Iowa and South Dakota) and Texas. New York and California aren’t leaders in either category.
Much of this comes growth from a revived industrial and energy sector. Meanwhile the states of the Resistance, New York and California, are now experiencing increasing domestic out-migration. The rate of population growth in California is among the country’s lowest—less than half that of Texas.
Despite the good news, we are a long way from correcting the displacement caused by the Great Recession. Housing production remains well below historic norms—a full one-third below the 1980 to 2000 rate, population adjusted, as state and local government policies continue o discourage suburban growth in favor of dense inner-city housing have helped limit supply and drive up prices.
To fix that problem, state and local governments are returning to policies like rent control and “inclusionary zoning”mandates sure to raise prices for everyone else while slowing the rate of construction. California’s mandate for “zero emissions” houses is expected to raise prices, already high, by at least $20,000 — and without doing much for the environment, warns environmentalist Mike Shellenberger.
While prices are rising nationally, it’s highly regulated markets like California are seeing home sales fall—down over 12 percent in the largest market, Los Angeles-Orange County.
This urban-centric focus could prove costly. Retail space in big cities, once hot, is now seeing a erosion of rents. Office and industrial space rents are also falling, according to CBRE.
Another potentially damaging trend for many cities, particularly on the coasts, may be the retreat of the foreign investors—most notably the Chinese who invested $40 billion in foreign real estate in 2017—that helped keep prices high, particularly in California, where they’ve sent a third of their money here, Washington State and New York. Chinese investors have placed millions in luxury apartments in New York and downtown L.A., some hardly marketed to locals but instead offered to buyers in China.
Other Chinese investors have also bought single-family homes, particularly in heavily Asian suburbs in the Bay Area, Orange and suburban LA. Now, for the first time in recent memory, there are more sellers than buyers as sales falter. Worried about financial problems looming over its own domestic real estate market, and battling a trade war, China’s government is working to send strong signals to both individual investors and companies to tamp down on new real-estate projects.
That money river may dry up even as the higher interest rates we’re finally seeing will mean rapid increases in mortgage costs for buyers. Higher interest rates tend to undermine the viability of high-priced markets in particular—such as New York, which hardly saw a little recession, let alone a great one, as artificially low interest rates kept the banks the city relies on humming and massive foreign investment propped up real-estate prices. As investment slows and interest rates rise, New York’s financial sector could suffer, dragging the city’s economy down.
Nationally, we could be setting the stage for a new kind of housing debacle, a reprise no one much wants to see. There are already disturbing signs, such as the rising percentage of buyers paying 45 percent of their income or more on mortgages, up four-fold from 2010. Then there’s the return of the home-equity loan market back to its pre-recession level.
As we begin to recover from the damage done a decade ago, a new housing crisis may be bubbling just under the surface.