There are many aspects to the foreclosure crisis. Initially, the crisis was seen as limited to cities with severe economic problems and declining population, such as Cleveland and Detroit. More recently, the crisis often has been characterized as resulting from speculative excess in rapidly growing areas, such as Las Vegas, Phoenix, Southern California and Florida.
The St. Louis metropolitan area has ranked close to national averages in the severity of the foreclosure problem for the last year. Problems were noticed in 2006 in the City of St. Louis and St. Louis County, but have spread throughout the metropolitan area. In December 2007, the number of subprime loans delinquent 30 days or more was between 35 percent and 40 percent for each of the large counties (Jefferson, Franklin, St. Charles and St. Louis counties) and the city of St. Louis in the Missouri side of the metro area.
In St. Louis County, the largest county in the St. Louis area, the epicenter of the foreclosure crisis is found in neither rapidly growing nor rapidly declining areas. Rather, it is the ordinary, unremarkable postwar suburbs of northeast St. Louis County that have the highest concentration of foreclosures. The concept of "First Suburbs" has become popular in recent years, referring to suburbs that were developed in the immediate postwar years and that have now undergone demographic and economic transitions. My focus will be on a paradigmatic First Suburb that has undergone considerable stress from the foreclosure crisis, the northeast St. Louis County suburbs.
St. Louis County is notoriously fragmented into clusters of small municipalities and unincorporated areas. The northeast county study area is bounded by Interstate 270 on the north, Interstate 70 on the south, West Florissant Road on the west and on the east by the city of St. Louis and the cities of Jennings, Dellwood, Bellefontaine Neighbors, Moline Acres and Riverview Gardens as well as unincorporated neighborhoods and contains ZIP codes 63136 and 63137.
Row upon row of modest brick and frame houses took shape in the late 1940s and early 1950s, often on curving, tree-shaded lanes. The first inhabitants were working-class families who had jobs at the GM plant in nearby north St. Louis or at Emerson Electric. They were moving out of the crowded city of St. Louis to live the American dream in their fresh new suburban homes. The northeast county population peaked in 1970, with 76,959 residents, of whom 97 percent were white. The first generation grew older, children moved out, and the population declined to 65,142 in 1990. Landmarks such as the River Roads and Northland shopping centers, the first suburban shopping centers in St. Louis, declined and were eventually abandoned. The Emerson Electric world headquarters, an employment bastion, held on as some nearby employers, such as the large GM assembly plant in St. Louis, left the area.
During the 1990s, a sweeping generational turnover took place, and a new class of moderate-income, black homeowners moved into these neighborhoods. The population stabilized at 65,011 in 2000. The number of children increased 20 percent and the population over 55 years of age decreased 25 percent between 1990 and 2000. Children comprised 32 percent of the population, compared to 25 percent for the entire county. Predominantly white in racial composition in 1990 (61 percent), the population became largely black by 2000 (69 percent). The area grew dramatically younger, with two-thirds of working-age adults under the age of 45 in 2000, and the percentage of adults with some college increased from 36 percent to 44 percent from 1990 to 2000. Homeownership remained strong, with 70 percent of homes owner-occupied in 2000, above the national average. Blacks now made up 59 percent of all homeowners.
In recent years, several major development projects began. Buzz Westfall Plaza in Jennings replaced the abandoned Northland Shopping Center, with a contemporary development anchored by a Target department store and a Schnucks grocery store. A former drive-in movie theater became Alexandria Place, the first major infill market-rate new residential project for miles around. Just to the west, a major redevelopment project, NorthPark, will offer a modern office mixed-use center that is anticipated to be the most significant new employment center in the St. Louis metro area. And Express Scripts is building a new corporate campus, closely integrated with the University of Missouri-St. Louis. The area remains one of promise for the future of St. Louis.
What was the housing stock that these young families inherited? It is remarkably homogeneous, with the average home in northeast county built in 1950, having 1,056 square feet of living space and being appraised at $76,000 in 2007. St. Louis County has many such small-house communities with more than 100,000 homes that were built before 1960 and are under 1,200 square feet in size.
Post-2000 data are not available yet from the American Community Survey for the study area. For the larger northeast St. Louis County area (including areas north of I-270), however, the 2006 data show a stable population, continued growth in the population under 18 and in the black population, and most noteworthy, a rapid increase in homeownership costs. Median monthly homeowner costs rose 30 percent from 2000 to 2006, compared to a 20 percent increase for St. Louis County as a whole, one of the few indicators in census data of the impending mortgage crisis. Young homeowners (under age 35) were most affected.
The rapid growth of subprime lending nationwide after 2000 aroused both hopes of increased homeownership opportunity and fears over predatory and high-risk lending practices among observers such as Edward Gramlich, formerly of the Federal Reserve Board. Subprime lending had grown from 6 percent to 24 percent of first-lien loans nationwide between 2001 and 2006.
Subprime lending also became prevalent in the northeast county study area. Home Mortgage Disclosure Act (HMDA) data provide a census-tract-level view of the quantity of loans from subprime lenders and high-cost loans. The HMDA data for subprime lending in northeast county from 2000 through 2004 show an increasing share of subprime lending for both purchase loans and refinancing (from 28 percent to 42 percent) and a noteworthy increase in volume, from 689 subprime loans in 2001 to 1,523 in 2004. The high interest rate loan data from 2005 to 2006 show very high levels of high interest rate loans during 2005 (71 percent) and 2006 (75 percent) for purchase loans. The dramatic increases in share and volume of subprime lending are reflected in a significant increase in sales volume and prices during the same time period.
Subprime lending pumped up the housing market in northeast county and across the country, supporting a marked but unsustainable increase in property values. Average sales prices rose steadily throughout the decade, from an average of $58,000 in 2000 to $82,000 in 2005. Sales volume increased dramatically, almost doubling from 2004 to 2007 (no foreclosures or bank-owned property sales included). It didn't last. Market sales prices (excluding foreclosures) fell in 2006 and 2007, reaching $68,000 in 2007, just below 2003 values.
The consequences of the rapid increase in subprime lending were quickly seen. Between 2004 and 2008, the northeast suburbs had dramatically higher levels of foreclosure activity than St. Louis County as a whole. With only 6 percent of the housing units in the county, the area had 23 percent of the foreclosures (3,007). Put another way, county foreclosures between 2004 and 2008 amounted to 4 percent of the number of single-family homes and condos, while foreclosures in the study area were 14 percent of single-family homes and condos. The annual number of foreclosures hovered around 400 between 2000 and 2003, then increased to between 700 and 800 from 2006 through 2008.
In the first five months of 2008, the level of foreclosure activity stabilized in the northeast suburbs, although at very high levels, while foreclosures increased throughout St. Louis County and the St. Louis metro area.
While the upsurge of foreclosures in this area appears to have crested, a residue of bank-owned properties is left behind that will strain the capacity of the housing market. In June 2008, there were 594 lender-owned properties resulting from 2007-2008 foreclosures, in a market area where the number of sales averages around 1,100 per year. It will be an enormous challenge for lenders to maintain these properties and eventually sell them without causing a deflation of the overall market.
Looking back, we can see that the growth of subprime lending caused an unsustainable upsurge in property value, while ensuring that unprecedented numbers of failed loans would flood the market with lender-owned properties, thus causing the inevitable downturn in property values to accelerate. Actions such as the Federal Reserve Board imposition of enhanced Truth in Lending regulations on July 14, 2008, and the enactment of the Housing and Economic Recovery Act of 2008 on July 30, 2008, cannot undo the harm already done, but will restrict future abusive lending practices and offer support to housing markets. (See related story on p. 9.)
We know that 3,000 property owners in the northeast suburbs of St. Louis County lost homes through foreclosure between 2004 and June 2008. We don't know the individual details of how and why these loans failed. We don't know the mix between homeowners and investors or the impact on families and children or where former homeowners live now. All of these questions pose useful topics for researchers. We do know that failures within the lending industry and failures of regulation have had a destructive impact on a community that still has much promise for the future.
The First Suburbs were the cradle of the baby boomers. Many of us grew up in places like St. Louis County's northeast suburbs and have moved on to be decision-makers in most of society's institutions. In the worlds of mortgage lending, investment finance and government, we failed to stop practices that led to the foreclosure crisis and, in doing so, failed to help defend the neighborhoods that we grew up in and the families who inherited those neighborhoods.