The Housing Bubble

The New York Times reports on flippers buying sight unseen. “For the last few years, real estate transactions over the Internet, where buyers need never set eyes on the property they purchase, have become increasingly common. But now, with plenty of buyers eager to get in on the real estate boom, such online sites have become perfect places for unscrupulous sellers.”

“Buffalo has been particularly hard hit by online flipping, as the city’s persistent population decline and high foreclosure rates have created a glut of some 20,000 vacant houses. Said Tracy Krug, a building inspector in Buffalo, ‘They paint a nice rosy picture: ‘on a bus line, near a nice market.’ They don’t tell you you’re going to be across the street from a crack house.’”

“Greg Tanner, who says he has a knack for ‘turning one dollar into two dollars,’ is now more than $30,000 in debt. Three years ago, Mr. Tanner, a pawnbroker in Salida, Colo., hoping to make money in real estate, went to eBay and found low-price houses for sale in Buffalo. One ad, for a house at 173 Paderewski Drive on the city’s East Side, read: ‘Attractive, warm, two-story home has great potential.’ Forty years ago, that might have been true.”

“Although Mr. Tanner had never set foot in Buffalo, he called the seller, a real estate investor named Scott Burton, who had paid $1,000 for the house a few months earlier. Mr. Tanner and his business partner paid Mr. Burton $3,000 for the house on Paderewski Drive, and $10,000 for two other houses in the same area, on Lombard Street. They paid with a credit card, using PayPal.”

“Two of the houses were considerably run-down, Mr. Tanner said, but it was the 130-year-old two-story house at 173 Paderewski that was to become his albatross. Over the next few months, he paid nearly $7,000 to a Buffalo contractor, recommended by Mr. Burton, who told him that all that was needed were a few thousand dollars in repairs. After a while, the contractor reported to him that the work had been completed, Mr. Tanner said, and the house was ready to be rented.”

“Counting on a profit, several months after buying the Paderewski Drive house Mr. Tanner advertised it for sale on eBay. He quickly found a buyer in Britain: Claire Fennelly. Ms. Fennelly paid $14,900 to Mr. Tanner and his business partner, and $2,500 more to the same contractor for further repairs.”

“Then Ms. Fennelly decided to do what Mr. Tanner had not: she and her husband got on a plane and flew to Buffalo in November 2003. When they took a cab to Paderewski Drive and arrived at the house, the cab driver refused to let them out. The neighborhood was just too dangerous, he said. When she saw the house, Ms. Fennelly said, it had missing windows, holes in the roof and the siding was gone. ‘You’ve never seen anything like it,’ she said. ‘We sat there in the cab thinking, ‘What have we done.’”

“Ms. Fennelly called Mr. Tanner immediately. He said hers was the first true description of the house he had heard. He promised to pay her back and called the county clerk’s office to make sure that the title would not be transferred to her. A few months later, Mr. Tanner received a Housing Court summons for a lengthy list of code violations, so he drove the 1,600 miles from Colorado to Buffalo. He said he received little sympathy from the Housing Court judge. Mr. Tanner called Mr. Burton to demand his money back, but could reach only Mr. Burton’s business partner, who, Mr. Tanner said, hung up on him.”

“Representatives of eBay say the company has few legal obligations to buyers of real estate on the site. ‘The people responsible for house flipping,’ an eBay spokesman, Hani Durzy, said, ‘are the people selling these houses and the people buying them sight unseen..The buyers are not doing the proper due diligence when buying a property.’”

“The house at 173 Paderewski, which was claimed by the city for back taxes Mr. Tanner had not paid, was deemed a safety hazard and razed several weeks ago. The cost of the demolition, which Buffalo expects Mr. Tanner to pay, is $9,000. Mr. Tanner’s two houses on Lombard Street were also taken by the city. They, too, are in line for demolition. Mr. Tanner, whose business partner has declared bankruptcy, said he lay in bed at night, wondering where he went wrong.”

The Wall Street Journal has this report on mortgage loan resets. “Millions of Americans who stretched themselves financially to buy homes face a painful adjustment, some could even lose their houses, as monthly payments on adjustable-rate mortgages are reset higher. More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007.”

“A recent study projects that about one in eight households with adjustable-rate mortgages that originated in 2004 and 2005 will default on those loans.”

“A barrage of negative trends is making things tougher for already-strained borrowers. Interest rates are rising, which can increase the size of each mortgage reset and make refinancing more expensive. The housing market is cooling, making it harder to sell homes or build up a cushion of home equity. Regulators are pressing lenders to tighten their lending standards, which probably will make it more difficult for some people to qualify for refinancing.”

“One couple that faces a reset this summer is Ruth and Magdi Fadlalla, who two years ago bought a three-bedroom house for about $294,000 in the New York borough of Queens. Their loan carries an interest rate of 7.46% for the first two years. This summer, at the first reset, the rate will jump to 9.46%, they have been advised, and the rate could rise further in the future unless interest rates generally decline. Already, the Fadlallas have fallen behind on their monthly payments of about $1,950 and have been put on notice that their home could soon be lost to foreclosure.”

“Mrs. Fadlalla, a special-education teacher, says her property taxes have risen sharply and other costs of home ownership proved higher than she expected. ‘This is killing me,’ Mrs. Fadlalla says, though she adds that ‘I’m going to work it out.’”

“The Fadlallas got their loan through a branch of Southern Star Mortgage Corp, acting as a broker. Like most mortgages, the loan later was sold to a financial firm that put it into a pool of loans that back mortgage securities owned by a variety of investors. Gary Shusterhoff, president of Southern Star, says the Fadlallas qualified for the loan when they applied. A unit of Wells Fargo & Co., acting as a trustee for the investors that now own the loan, has initiated legal action to collect overdue payments.”

“Debt counselors are bracing for many more such cases. ‘We have just begun to see what I fear is going to be quite a flood’ of people seeking help in coping with resets, says Sarah Gerecke.”

“Lenders and the economy as a whole could easily cope with such losses, Christopher Cagan says, though it would be devastating for some families and painful for some investors who bought securities backed by the riskiest loans. ‘It won’t happen all at once,’ Dr. Cagan says. ‘It will be spread out over several years.’”

“Rather than face those big jumps, many borrowers will refinance into new 2/28 loans, Grant Bailey, a director at Fitch Ratings believes. Currently, they could get an initial rate of about 8% to 8.5% on a new loan. But that won’t be possible for some borrowers who have taken on lots more credit-card debt and whose homes haven’t appreciated as much as expected. Because their debt costs would be so high in relation to their income and because they can’t extract cash from their home equity, they may not qualify for refinancing. That means meeting the higher payments on the original loan or facing foreclosure.”

“‘The ones who get stuck are probably going to be the ones who needed to refinance the most,’ Mr. Bailey says.”

“Even those who do refinance into a new 2/28 loan won’t necessarily be in the clear because they still face an eventual reset, and refinancing typically costs thousands of dollars in fees, which often are rolled into the new loan. A common sales pitch for 2/28 loans is that the borrower can use those first two years before the reset to improve his or her credit score and then qualify for a cheaper prime loan.”

“‘But that goal is rarely realized,’ says (mortgage broker) Daniel H. Jacobs. As the housing market cools, it probably will get harder for marginal borrowers to refinance on attractive terms, he notes, adding: ‘At some point, people are going to have to pay the piper.’”

The Capital reports on the housing bubble in Maryland. “February home sales presented fresh evidence that the five-year housing boom is losing steam in Anne Arundel County. While the median price of homes sold in the county last month reached $324,500, a 13 percent jump from the same period a year ago, that figure fell from $330,000 in January, and was significantly off from December’s record-setting $350,000.”

“Other key measurements, including the annual rate of growth, number of homes sold and time on the market, all dipped as well, appearing to paint a picture of a slowing market.”

“Here, one of the most startling figures in February was the number of homes sold: 484, a 12 percent drop from the same month a year ago. Not only did the volume continue to shrink last month, so did the pace of sales.”

And the Washington Post reports on nearby condo promotions. “Marketers have unveiled their secret weapons in the fight against a suddenly cooling condo-buying market: chips and guacamole. Or a laptop. Or a Vespa scooter. Or just about anything else.”

“To offset the recent slowdown in sales, condominium developers across the region are offering a range of goodies to attract buyers. sales agents have good reason to step up their efforts. More than 51,000 condo units are planned or marketed for delivery in the region within the next three years.”

“The current trend is noteworthy because it marks a shift in tenor. The most popular giveaways are assistance with closing costs and several months of prepaid condo fees, said Gregory H. Leisch.”

“But flashier promos are on the rise. ‘Once in a while, cars are being offered. Plasma TVs are somewhat common,’ he said. And then there are the parties. Those who attended a sales event for a new condo building at 555 Massachusetts Ave. NW on Wednesday evening got the royal treatment. A line of valet parking attendants stood at the ready. Waiters in bowties served pasta hors d’oeuvres and pomegranate margaritas inside a white tent pitched at the entrance.”

“The event, dubbed ‘Massive Party, MassHysteria,’ came just a week after another party at 1010 Massachusetts Ave. NW. That one featured cocktails and DJ Tom B. Those interested in one-bedrooms above the seventh floor were informed of a $5,000 credit, something not available at a similar sales party last fall.”

“Party planners made sure everyone left a winner. On the way out, each potential buyer was handed a plastic tube of candy, stamped with the building logo.”

Some readers want to know what you think about interest rates. “I think a good topic would be on intrest rates. Long term rates are finally starting to rise. Many are proably going to blame this for the RE slow down. Predictions of where long term rates are headed (including time frame). Fed predictions and short term rates would also be intresting to go over.”

“And to tie it all together, the yield curve and if it will stay inverted, correct it self, or stay the same.”

Another said, “I agree about interest rates. How do the ARMs and 30-year rates affect the percentage of price that homes need to drop now, to make them as affordable as last year at this time, for example. I think late last summer the ARM speculators were priced out, and this year the long-term folks who want to simply buy a primary residence are going to find it much more expensive. Not to mention the ARM folks who were told they could ‘just refi.’ Argh.”

From a new reader, “The big unknown, that gets very little play, is how what happens in the international capital markets will affect interest rates in the U.S. The efforts of other nations to move away from trading in dollars could have incredible ramifications for interest rates in the U.S. And we all know what increases in interest rates will mean for a housing market that is already tipping.”

From a veteran of this blog. “The 10 year bond, now at 4.77, where does everyone think it’s going (how high).”

From the Wall Street Journal. “As interest rates rise and the housing market cools, there are hints that Americans are weaning themselves off the home-equity credit lines. The growth in home-equity credit lines has screeched to a halt. Many of the credit lines are tied to the prime interest rate, which has climbed to 7.5% from 4% three years ago.”

“(Mortgage broker) Steve Habetz says his firm has seen its volume of home-equity lines cut in half since 2004 as a result of higher rates. ‘When rates are dropping, I say ‘Honey, great news, we’re going to refinance our house and you’re going to get that new kitchen,’ Mr. Habetz said. ‘Now all of a sudden…If I refinance, it’s more expensive and I’m increasing my whole payment.’”

“Some homeowners still find the ease of home-equity lines irresistible, though. Neil Garfinkel, a real-estate attorney in New York, recently took out a home-equity line of credit which offers no-fee deals and other perks to entice consumers. ‘I’m bucking the trend,’ he said. ‘I do not recommend people go out and do that…But I can’t lie to you and tell you I didn’t just go out and do it.’”

“Other consumers are finding alternative ways to finance spending. Ed Crowell, a lobbyist for the trucking industry in Georgia, and his wife took out a $100,000 home-equity line when they purchased a $300,000 house in suburban Atlanta in 1999, and tapped it to buy a car in 2001. Now, they’re about to close on a weekend home in Pine Mountain, Ga.”

“But this time, Mr. Crowell says, they will decline the bank’s offer to set up a home-equity line. Rates have made them too expensive. ‘The bank will offer it again, but we won’t take it,’ he said. Instead, Mr. Crowell says, he and his wife will take advantage of no-interest financing at the local Rooms to Go store to furnish the new house with furniture.”

The Florida Today site has this housing bubble update. “Construction permits for new homes in Brevard County surged in January above the previous year and month. Area homebuilders agree there is a general slowing down in local real estate, with existing homes typically staying on the market for as long as three months, more than double the amount of time from a year ago.”

“Even so, many local firms that build production and custom homes say they aren’t scaling back projects, but instead are adding more perks, thousands of dollars in incentives and spending more on advertising to entice buyers. That follows a nationwide trend of cooling home sales, with the Commerce Department recently reporting that January sales of new single-family homes fell 5 percent, the fourth decline in seven months, and the backlog of unsold new homes hit a record.”

“Analysts say many of the large homebuilders have seen sales falter, which is affecting business nationwide. Toll Brothers and KB Home expected sales to not meet projections, while Centex is lowering prices for homes in some areas as much as $200,000.”

“New homes, though, are staying on the market longer, said Tony Ayala, a realtor in Melbourne. To shorten those times, builders are ‘offering incentives, in the amount of thousands of dollars or fancy’ extras that usually would cost extra, he said.”

“Palm Bay resident Karen Waite decided to sell her 1,300-square-foot house in South Florida for $175,000 and buy a bigger, 2,765-square-foot home in South Brevard. ‘South Florida is so crowded, and it’s unaffordable,’ Waite said. ‘What I got for my home here, I couldn’t find it anywhere in Broward’ for the same price.”

And the Sun Sentinel got another critical letter to the editor. “I agree with the recently published letter stating that the South Florida Sun-Sentinel is hurting the real estate market in South Florida. But it is not just the Sun-Sentinel, it is the entire media that are scaring potential buyers.”

“The 30 percent-plus appreciation of the last few years was clearly not sustainable. And property prices, taxes and insurance costs are unquestionably high. But there is no reason for so much doom and gloom. Long term demand is bound to continue driving prices higher.”

“Compared to some other highly desirable areas of the country, our prices are still low. Our economy is highly dependent on real estate and its related industries such as construction, investing, mortgage lending, appraising, inspections, etc. A long-lasting slowdown in real estate sales will eventually trickle down to harm much of the South Florida economy.”

“So the media should act responsibly and be positive. Promote our area’s property value, for everyone’s sake.”