Casting blame has been easy during this year’s great and ongoing epidemic of home mortgage foreclosures.
Greedy bankers sought out suckers and foisted adjustable rate mortgages on them, with little emphasis on the fact that initial low monthly payments would rise within a few years to levels the borrowers probably could never pay.
Greedy homeowners and buyers sought out new loans because they figured the astronomical real estate price increases of the boom years early in this decade would continue forever. Even when they understood the terms of those loans, they still figured that if they couldn’t make the bumped-up payments, they could at least sell the properties at a profit, or refinance to another adjustable-rate mortgage with low start-up payments, while taking out cash for cars, boats, big-screen TVs, and other toys.
These portrayals of the foreclosure crisis have some validity. But there’s another economic force at work here, one that’s even more pernicious than old-fashioned greed.
For it turns out there’s a reason that the wealthy in California almost never become victims of foreclosure, while the vast middle class gets most of the eviction notices.
That reason: The rich are getting richer and can afford bumped-up payments, while the middle class is steadily losing purchasing power. And that’s without even figuring in the huge increases in the prices of gasoline and some foodstuffs.
This becomes clear from new information reported by the state’s tax-collecting Franchise Tax Board and analyzed by the non-partisan Sacramento-based California Budget Project.
It turns out that in the typical mid-decade fiscal year of 2005-2006 – the latest one for which information is complete – the wealthiest one percent of Californians saw their adjusted gross incomes (income after deductions for things like business expenses) rise by .3 percent. Meanwhile, the middle 40 percent of California families saw their adjusted gross incomes drop by about 1 percent.
Doesn’t sound like much, but it has meaning. For when the middle class represented by that middle 40 percent of taxpaying families loses ground, they begin to be overwhelmed when expenses rise while their incomes drop. Among the things that rose more than 5 percent in the 2005-2006 fiscal year were the price of gasoline, the average Catholic school tuition, state university and college tuitions and fees, and the cost of a new car.
Since then, even though later figures are not yet official, the middle class has done even worse, income-wise. Meanwhile, the prices of things like gasoline, milk, and even corn-based food products have risen significantly.
What’s more, middle class consumers increasingly found their wealth being transferred to corporations during the middle years of this decade. While the average adjusted gross income of people in the middle fifth of California taxpayers dropped by 2.6 percent during those apparent boom years, after adjusting for inflation, average corporate profits rose by 516 percent. This means the average California company was making six times as much profit in 2006 as five years earlier.
All that money came from somewhere, and the most likely source was the pockets of the great middle class. Companies in the transportation and utilities sectors saw their net income rise by an average of 2,514 percent during those same years. So firms dealing with basic needs for things like heat, cooking fuel, and getting to and from work increased their profits five times as much as companies in other businesses, like remodeling or furniture sales.
Any overview of this scene must surely reveal a middle class struggling harder and harder to pay for basics, while looking up to a wealthiest one percent with no worries at all.
When that struggle becomes impossible, something has to give. For many in the past year, house payments became the easiest thing to scrap. Especially when many middle class families found declining real estate prices evaporated all their equity, with home loan balances emerging as higher than home values. At the same time, these families often see comparable homes available for rent at prices far lower than their newly bumped-up loan payments.
The result has been a mass tendency to say, “To heck with our credit rating, let’s get out of here.”
So while it’s easy to blame defaulting homeowners and their bankers, a lot of the problem is simply a sign of people adjusting to new economic realities.