The Housing Bubble

MSN Money reports on California. “The mortgage industry calls it ‘jingle mail’ — keys that arrive in envelopes from homeowners who’ve decided they’d rather walk away than fight to make impossible payments. The median first-time buyer put down less than 2% to buy a house in 2007, according to the National Association of Realtors. Many put down nothing, even borrowing to cover closing costs. ‘If you didn’t put anything down, it’s much easier to walk away,’ said John Mechem, a spokesman for the Mortgage Bankers Association.”

“In California, Ismael still lives in his four-bedroom house in Menifee, Calif., for now. But he is ready to leave. ‘The situation I am in is really ugly,’ said Ismael, who asked that his last name be omitted. ‘It’s better for me to walk away and leave the stress and everything that is involved in this home. I am about 95% sure I am walking away.’”

“Ismael bought his $370,000 home in 2005 for no money down, qualifying on his mid-$40,000s salary. He was paying $2,700 a month for an adjustable 8.25% loan.”

“Then he and his girlfriend split up, reducing his household income to a single paycheck at the same time the mortgage was adjusting upward. To add to his struggles, the value of his house dropped by $145,000.”

“Yadira Magaña in Oxnard, Calif., has a similar story. She walked away from her $585,000 home in June 2007. When she bought it, Magaña thought she had gotten a great deal. She made a $16,000 down payment on the house. But she lived there only eight months before her marriage collapsed.”

“She couldn’t afford to pay the $4,500 monthly interest-only mortgage, plus taxes and insurance separately, on her own $50,000 income. So she and her two children moved into her mother’s house.”

“In Magaña’s case, the bank declined to do a short sale. ‘I told the bank I was leaving. I couldn’t afford the home. The bank was not trying to help me or suggest different options. The only thing to do was let the home go,’ said Magaña.”

“Meanwhile, her credit rating drops every month. It’s now in the 500s, when an excellent score is 750 to 800. Her decision to walk away will be on her record for years to come. ‘I left the keys on the counter. I felt like a failure,’ she said.”

“Federal Reserve Chairman Ben Bernanke recently estimated that about 45% of foreclosures in 2007 were on private, near-prime or government-backed mortgages. And that means plenty of people who thought they were fine are facing catastrophe, never expecting that their homes would be worth less than the purchase price.”

The LA Times. “The depressed housing market appears to have another target in its sights: Irvine’s would-be Great Park.”

“Nearly three years after the city approved a massive residential and commercial development at the closed El Toro Marine base in exchange for a grand park in the heart of suburban Orange County, Irvine officials and struggling home builder Lennar Corp. are in talks about revising the landmark agreement.”

“No homes or businesses have been built. No grassy fields have been planted. In a mailer in 2003, city officials boasted that ‘children will be playing in the county’s largest sports park’ by summer 2008.”

“Most of the future park’s 1,347 acres remain off limits to the public, with a balloon ride and a visitor’s center being the only public facilities. ‘To have nothing more than a balloon and the possibility of a 27-acre park is disappointing,’ said county Supervisor Bill Campbell.”

“The key was a plan that would trade home building for parks money. Lennar would get the right to build thousands of homes as well as millions of square feet of commercial, industrial and office space on the former base. It would pay $200 million in development fees and donate the land for the park.”

“Lennar has built no homes at El Toro, despite plans to have hundreds ready this summer. And the amount of money available is only $104 million.”

“‘Some of us have felt we’ve needed a Plan B all along,’ said Don Dressler, an Irvine finance commissioner. ‘If Lennar’s position is sustained, then we’ll have to rethink the sources of funding for the park.’”

“State Assemblyman Todd Spitzer , who as an Orange County supervisor was one of the chief architects of the deal to turn El Toro into a park…blasted the city for not building recreation facilities that could be used by the public, while wasting money on ‘a ridiculous, oversized balloon and free rides.’”

“Irvine Councilwoman Christina Shea said that she was concerned about Lennar’s dedication. ‘If they cannot move forward, they need to tell us that,’ she said. ‘Negotiating terms of deals needs to stop until we know what they’re up to.’”

The Orange County Register. “Oh, how we, the once mighty, have fallen. Orange County, dead last in the jobs game. Worse than Michigan’s shattered auto-factory towns. Worse than Florida’s fizzled new villages. Worse than overbuilt, inland California.”

“The federal government’s latest local job count…found Orange County’s job market down 19,100 positions in the year ended in the third quarter. That was the biggest decline of any of the 328 large U.S. counties tracked by the Bureau of Labor Statistics.”

“A shocking comeuppance for a county that not too long ago – second quarter of 2004, to be exact – topped this very same list as the national champ in job creation.”

“You remember mid-2004, no? Local homes were appreciating at a 30 percent-a-year clip. Ameriquest, then the subprime loan king from O.C., had the cash and marketing sizzle to smack its name on a major league ballpark in Texas. ‘The O.C.’ was one of TV’s hottest shows.”

“Fast forward to early 2008. News that last year was a stinker should be, in many ways, no stunner. Who hasn’t heard of the economic pain that slumping real estate’s dished out?”

“Yet what’s so stunning with this federal jobs ranking is just how bad we now look vs. the rest of the nation’s big job markets. The powerful symbolism of the last-place finish wasn’t lost on Chapman U. econ professor Essie Adibi.”

“Our dead-last ranking, Adibi says, ’shows two things. First, we’re not what we used to be. We have to learn this. Given our costs of living here, we are becoming more like the rest of California,’ a reference to the traditionally more modest statewide economic growth.”

“Adibi continues, ‘Second, because of our proportional dependence on mortgages and construction in the boom, we’re going to get hurt more than others.’”

“Local finance bosses cut 13,000 jobs (9.8 percent loss) in a year; construction employment fell by 6,000 (5.5 percent.) Worse, this is good-paying work gone away.”

“As the slowdown simmers, Adibi hears of retailers – and landlords who house retailers – suffering whether it is directly, or indirectly, from the fallout from housing’s decline.”

“No source knows more about shopper psyche – a key local economic barometer – better than the merchant’s cash register. And retailing weakness tells Adibi that real estate’s ‘putting a damper on the entire market.’”

“The economists at Chapman got lots of grief from what now looks like an early call on this local economic reversal. Adibi notes that more than a few of his past critics, who insisted in boom times that ‘Orange County is different,’ now ask him ‘Where is the bottom?’”

“Orange County auto dealers sold $8.5 billion worth of cars in 2007, down almost $1 billion from a year ago, a new economic impact report by the Orange County Automobile Dealers said.”

“Through February, the latest figures available, new vehicle registrations in Orange County were down 24.3 percent compared to the first two months of 2007. Auto sales have been hammered by a barrage of negative news: falling home values, tightening credit, rising gasoline prices.”

“‘A lot of people want to downsize,’ said John Riashi, sales manager at Toyota of San Juan Capistrano. ‘I’ve seen people trading in an Escalade for a Prius. People traded in a Hummer for a Prius. It’s all economics.’”

Readers suggested a topic on proximity and the housing bubble. “I’m in Washington, DC. I’ve been watching the local market here since 2004. In the past year, I’ve noticed the exurbs and suburbs getting hit really hard. Parts of Prince William County are down 50+% since the peak, and the county as a whole is currently down 30% YOY. PWC had a lot of subprime lending and they were one of the first areas to start buckling under pressure.”

“Close-in desirable neighborhoods in the District are still faring fairly well. They are down 5-10% since the peak, but seem to be holding fairly steady. During the boom, these areas rose just as much as everywhere else. These neighborhoods are still running with 6 months supply or less of inventory. Foreclosures are non-existent.”

“My question is, when will these areas drop? Will they ever drop like the suburbs/exurbs? How does the increased desirablilty of living in the city (improved city amenities compared to pre-bubble times, walkable communities, high price of petrol making mass transit more desirable) play into the downturn? Will these city areas remain expensive in this post-bubble world?”

A reply, “I believe there has been a structural shift favoring close-in areas in major metro areas where the close in areas are not social landfills. The demand for such areas now exceeds the supply, while for McMansion exurbs the opposite is true — there is plenty to go around.”

“Cyclically, however, the prices are still too high close in, just like everywhere else.” “Let’s take the NYC case. When we were looking to buy a house in the early 1990s, a 1915 rowhouse without parking in Windsor Terrace Brooklyn, a 1940s rowhouse with a rear garage and front garden in further out (but still in NYC) Forest Hills Queens, and an early 1960s Levit ranch in the suburbs of Long Island, all cost the same — about $200 K.”

“I expect the Brooklyn house I live in to sell for more than the other two in the other two unless the state really succeeds in destroying NYC (they’ll try). But it sure as hell won’t sell for $1 million in todays’ dollars, the recent price.”

“BTW, with what may happen to mass transit and the price of gas, I’m glad I live close enough to bike the nine miles to work. But the ideal commute is one I heard about one guy having in DC. He bikes the Potomac, picks up a boat at a boathouse, rows to another boathouse, picks up another bike, and rides to work. People pay big bucks to go on vacation to do things like that. He gets to do it every day.”

To which was said. “By day three of this I’d be preparing to kill myself. A bit of this on vacation is one thing. Day after life-sucking day of this would get really old, really fast. At least on public transportation I could read or knit.”

Another said, “Although winter would be challenging….there are people who do that here (OR), no matter what. January must be interesting.”

One posted, “My take (from someone living in the exurbs, though not commuting to the city) is that the exurbs’ curve is more extreme, and ahead of the city areas by about a year or two. It’s more extreme because the exurbs see more expansion during boom times, and conversely more contraction during bust times.”

“Downtown DC is declining somewhat now I think. It’ll continue declining after the economy levels off (*if* if levels off). Eventually the exurbs will start to pick up again, then they city.”

“Generally it depends on the area, especially the case with DC which is so affected by government policy. Loudoun and Fairfax counties were the biggest boom this time due to military and security contracting. My guess is that MD will boom bigger than NoVA next time, due to health care being the next big government thing, and the decline of the military as we pull out of Iraq.”

And another, “Arguably we’ve had an oversupply of housing constructed. Nowhere near as bad as MIAMI, but it’s still there. Because bluefields developments are easier than infill or highrise construction, the supply of those relative to the the demand of those who would trade commuting time for grass yards and HOAs has risen more than the supply of ‘urban living’ or close in suburban developments.”

“I don’t think that we’re seeing what many here have posited, that there is decline in the relative demand for the (energy and time) inefficient exurban living. I’m sure that some have overestimated their ability to afford the time and money of a long commute. But I believe that relative price decline differentials between exurb and inner suburb/urban markets is mostly supply, not demand driven.”

One points to commutes. “It would be interesting to see a study on comute/travel/traffic in the various cities as this seems to directly affect housing prices.”

“I’ve spent a lot of time in the DC area and the traffic there has to be seen to be believed. Just horrible. But the same can be said for parts of Atlanta as well. NY is tough but traffic does move outside the city - at least it does on the NJ turnpike (survive that and you can make it anywhere). Boston is in a class of its own though, the worst place I’ve ever driven in, a nice city but …”

The Philadelphia Inquirer. “The view at sundown from the McCausland family home paints an unlikely picture of how high gasoline prices are deflating the modern-day American suburban dream.”

“When Brian and Dawn McCausland bought this Colonial on a half acre in Montgomery County in 2004, they made a deal with the devil during a sky-high housing market: They and their four daughters would live here, but Brian would commute 100 miles round-trip to his job as an insurance adjuster in Delaware County.”

“But now, with gas averaging $3.30 and rising, the McCausland dream is getting soaked at the pump to the tune of $300 a month, or $3,600 a year, double their cost four years ago. They are among many families of modest means who took on big commutes from exurbia for a taste of upward mobility.”

“‘My yearly increases in my salary and bonuses are only going to cover the increase in the cost of gas,’ said McCausland, who by now, he’d be more financially secure.”

“‘I’m really not making any more than I had been,’ said McCausland. ‘I’m not getting ahead.’”

“Regional highway statistics suggest super commutes grew in number during the recent real estate boom. An estimated 20,000 workers travel 40 miles or more each way to jobs in Southeastern Pennsylvania and South Jersey, said Don Shanis, deputy executive director of the Delaware Valley Regional Planning Commission.”

“In real estate parlance, families like the McCauslands ‘drive to qualify’ for a mortgage; the big house they want is affordable only in far-out communities.”

“Dawn McCausland reentered the workforce as gas began biting into the budget. The family spends $7,000 of gross income on school tuition, uniforms, books and activity fees. An additional $9,000 covers Brian’s employee contribution to health insurance coverage for the family.”

“‘We’re not living a lavish lifestyle, but it all goes to bills,’ McCausland said.”

“‘I did expect to have a beautiful house, a loving husband,’ she said. ‘But I wanted to be able to go to the store and buy school uniforms and not worry about ‘OK, how many years can I get out of this?’”

“Instead, she doesn’t even fill the minivan gas tank. ‘I just expected things to always be even keel,’ she said.”

“Seated beside her at their kitchen table, Brian shrugged his shoulders. ‘It’s America,’ he said. ‘You think you’re always going to work hard and get ahead. And it’s not always that way.’”

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