The Sound of a Bubble Bursting
November 24, 2016
On November 24th the New York Times ran a cover story that quoted South Florida Mayor Phillip Stoddard as saying, “Coastal mortgages are growing into as big a bubble as the housing market of 2007. But this time there will be no rebound because the water wont recede and properties will eventually lose their value.”
And I thought it would be a major storm that would wake everyone up, not the sound of a bubble bursting. Silly me, I forgot that most people don’t think of storms all the time. They use what Alan Greenspan called irrational exuberance to make economic decisions.
The article included graphics that showed county- by-county that housing sales had declined by 4 percent in the last five years on the East Coast, while sales of inland homes had risen seven percent. He quoted a Miami Beach resident who planned to move inland in anticipation of higher king tides and wrote that people’s concerns had taken on a new urgency since the election of Donald Trump. In 2012 Trump had famously said, “Global warming is just a concept created by the Chinese in order to make U.S. manufacturing non-competitive.”
Frankly I think the writer was wrong to politicize his argument and conflate king tides with sea level rise because we know that king tides will actually be declining during the four or eight years that Trump will be in office.
But his economic analysis was spot on. Potential homebuyers are becoming leery of being tied into having to pay thousands of dollars for federal flood insurance and tens of thousands of dollars to rebuild collapsed seawalls and raise their homes on pilings.
But will the coastal housing bubble burst or deflate mysteriously like the Patriots’ footballs during the half? Plum Island supports the deflationary model.
After a March storm destroyed eight houses and made twenty uninhabitable on Plum Island in 2013, the cost of the lots plummeted. But two years later the price of the empty lots had risen back to about what they had been before the storm.
A few sharp developers and homebuyers bought the lots right after the storm when their prices were still rock bottom. Then a game of hot potato began.
Developers rushed to build homes and sell them before the next major storm. Banks earned commissions on these risky mortgages then sold them as bundled securities to unsuspecting pension funds, insurers or other buyers. The strategy of the game was to not be left holding the bag.
Efforts to ensure that real estate agents disclose the erosional history of oceanfront homes have run into stiff opposition. One law in Virginia ended up explicitly stating that the seller of a house was not obligated to disclose whether the house was in a high risk FEMA zone. The head of the Virginia Association of Realtors said they were “immensely satisfied” with the law—no doubt!
Measures to require that investors be told what portion of their bundled mortgages included houses in areas at risk from storms, canyon fires, earthquakes, tsunamis and tornadoes have fared equally well.
Most interestingly Robert Meyer, the co-director of the Risk management and Design Processes Center at the Wharton School of Economics has found that people living in places like Miami would be willing to pay billions of dollars in extra taxes in order to pay for infrastructure so they could continue living on that unpredictable coast.
But that is another economic analysis also based on irrational exuberance. A geological analysis would say that there are no infrastructural changes that will allow people to continue living on barrier beaches for the next 30 to 50 years.
William Sargent’s latest book, Plum Island; 2016, is available in local bookstores and at http://www.ingramcontent.com.