The Housing Bubble

The East Valley Tribune reports from Arizona. “In the first quarter of 2008, there were 310 resales of homes in Maricopa at a median price of $170,000, according to a real estate report issued by Arizona State University. In the same quarter of 2007, there were 90 resales with a median value of $246,500. Paul Jepson, an assistant to Maricopa’s city manager, said that about 31 to 34 percent of resales in the city have been of such underwater, or ‘distressed’ as he called them, homes.”

“One of the market casualties is Daryl Fox, a recently unemployed cosmetics salesman. After his divorce several years back, Fox and his ex-wife sold their home in Chandler. It took a while to sell the house, and they had to reduce the price to find a buyer in the already-slumping Valley real-estate market, he said.”

“In April 2006, Fox took his half of the equity from the Chandler home and whatever other savings he had scraped up through the years and used them to pay 15 percent down on a three-bedroom home in Rancho El Dorado. The $212,000 purchase price was down from the home’s highest value.”

“He thought he was hitting the market at the right time, getting the most bang for his buck. ‘I thought the market had bottomed out when I bought it,’ Fox said. That’s why he was willing to take out a 2/28 adjustable rate mortgage from Chase Bank.”

“He did refinance right after closing, drawing the equity of that 15 percent down out of the house to finance a few renovations, he said. He owed the full $212,000 now. ‘My intention was to live in that house as my primary residence, that’s why I remodeled it,’ Fox said.”

“In June 2006, Fox met Teri Parks, his future wife, at the Native New Yorker. Parks soon moved from Minnesota to Maricopa, buying a home in Acacia Crossings. Parks’ house was the larger of the two, so it made sense for Fox to move in there and sell his place.”

“But the short market downturn Fox had expected turned into a free fall. ‘The median housing price in Pinal County ‘has steadily eroded from $220,000 in fourth quarter 2005 to $193,000 in third quarter 2007 and $156,160 for the current quarter,’ stated a report released by Jay Butler, director of Realty Studies t Arizona State University.”

“After spending thousands trying to hang on, Fox was staring down the barrel at foreclosure. A lawyer advised him just to walk away from the home, but he decided that he would try to sell the property in a short sale. Fox has a buyer willing to pay $90,000 as of early May…if the bank accepts that offer.”

“Fox said the bank told him that the house would be foreclosed upon on May 19. Even if the short-sale offer was on the table? He referred me to his real estate agent, Rita Weiss, broker in Maricopa.”

“‘I’ve spoken to Chase but they won’t tell me,’ Weiss said. ‘If there’s an offer on the table, they’re going to try to make it work. There’s a flood of homes on the market. They don’t want to take back the houses.’”

“‘Forty-two percent of all houses that are actively on the market in Pinal County are either foreclosures or short sales,’ she said. ‘There are 56,000 listings in the MLS right now. When we were in the big boom in 2005, there were only 8,000 houses on the market.’”

The Tucson Citizen. in Arizona. “Between 2003 and 2005, the Tucson real estate market went gangbusters - homes sold within days of being listed and values kept going up. Thousands of homeowners cashed in on rising values, refinancing their home loans, sometimes repeatedly, and taking out the increase in value in cash.”

“When ARM interest rates began resetting to higher rates in 2006…they began defaulting on the loans, the housing bubble burst. In 2007 there were nearly 4,500 foreclosure filings in Pima County, according to RealtyTrac. Foreclosed homes can be found in every neighborhood in the metro area.”

“When Ricardo Heredia signed the loan agreement for the home he and Claudia Estrada live in, the assistant tile setter and native Spanish speaker didn’t know what a teaser rate was or even understand the language the contract was printed in - English.”

“Now the couple face…loan resets every six months and the loan servicer they are working with is threatening foreclosure. Their teaser rate was set at 7.5 percent in 2005, which was relatively high then. Now the loan carries an 11.5 percent rate and could increase to as much as 13 percent.”

“The difference is about $200 a month, enough to keep the young couple from dining out, renting movies or fixing up their house, which they say is overvalued at $73,000.”

“Claudia Estrada said her mother took out a loan on the home they have lived in for seven years in order to fix up the place. Increasing interest rates have forced them to put it on the market to avoid foreclosure.”

“‘We thought about our kids, we thought about getting the best things for our house, and it’s just going down the drain like nothing,’ Estrada said. ‘There’s nothing we can do about it. This is the consequences of what we’ve done but we did it because they assured us everything was going to be fine.’”

“Cris Poor, director of homebuyer programs at the local non-profit Family Housing Resources, said that there is more than enough blame to go around for effects of the spike in subprime loans and the spate of home purchases by underqualified buyers in 2005 and 2006.”

“‘It was not whether or not you can get a loan, it was which loan you can get,’ she said. Borrowers ‘went on the goodwill of what someone was telling them or what someone was not telling them. They share a part (of the blame), but I think a majority of them were misinformed.’”

“It is possible to work out a solution and stop the process right up until the home is on the auction block. ‘It just depends on what you want to do,’ Poor said. ‘Do you want to keep your home or do you want to walk out?’”

“David Guthrie, a real estate agent specializing in foreclosures, said that although inventory may be overstocked, that doesn’t mean homes aren’t selling.”

“‘I see it as a natural correction in our market, which has been needing to happen for the last couple of years,’ Guthrie said. ‘Average people with regular jobs and regular families just had trouble buying a home to live in before. Now there’s plenty of homes.’”

The Arizona Republic. “Home sellers in the West Valley have slashed their asking prices up to 30 percent since February, and the price cuts are spurring sales in Surprise, El Mirage and Goodyear, according to a report from ASU.”

“‘You really got two sets of communities: Glendale and Peoria are older, more mature communities. And then, there are the new ones under development like Surprise, El Mirage to some degree, and Goodyear . . . those are the ones that really got hit hard (by the housing slowdown),’ said Jay Butler.”

“The number of Phoenix-area bankruptcy filings more than doubled in April as the soft economy and lingering housing ills came home to roost.”

“‘Housing is really the main thing right now,’ said Ericka Young, a personal-finance coach in Mesa. ‘Most of my clients having money problems are at least a month or two behind on their mortgage payments.’”

“Gilbert attorney Chris Dutkiewicz says many people have been trying to save their homes by racking up credit-card bills or borrowing from retirement accounts to meet other payments, with rising gas and food prices making things worse.”

“‘Eventually, some will realize they still can’t make it,’ he said. ‘They now have high housing payments and high credit-card payments’ and turn to bankruptcy as a last resort.”

“While a new national survey says Arizona’s economy is in a recession, a leading economist here says our problems go even deeper — into a depression.”

“Pete Ewen forecasts state growth for Arizona Public Service, the state’s largest utility, and he says this is the worst stretch for Arizona’s economy since World War II. ‘If you’re in the construction industry it’s going to feel like a depression,’ Ewen, chief economist at APS, said in an interview.”

“The housing market is choking on a year’s supply of unsold homes, the state is losing jobs for the first time in a 25 years and governments are starving for the tax revenue generated by the Arizona growth machine.”

“Even if you have no direct connection to the industry, you might feel the housing depression. Take the example of the Power Ranch neighborhood in Gilbert. Homes there that sold for $875,000 less than two years ago are now selling at a $400,000-plus discount.”

“Most have good incomes, says Ericka Young, a financial advisor in Gilbert, but they’re desperate to save their homes. ‘If we’re going to be in this state for three years, a lot of people won’t be able to make three years,’ Young says. ‘Six months is a long time.’”

The Las Vegas Sun from Nevada. “In a sign of how the mortgage crisis is rippling through Nevada and across the national political landscape, the state’s two Republican House members broke ranks with their party Thursday and defied President Bush’s veto threat to vote for the main provisions of a Democratic housing rescue package.”

“‘My constituents who have met their payment schedules and my constituents who are seeking assistance are all negatively impacted by the crash in housing prices,’ said Republican Rep. Jon Porter. ‘The subprime mortgage crisis has been a major catalyst in triggering the economic challenges Nevada is facing.’”

“Democratic Rep. Shelley Berkley, who voted for all provisions of the package, said the bills are designed ‘to help ordinary working families who are in danger of losing their homes so they can keep a roof over their head.’”

“‘You cannot have row after row of unoccupied homes in neighborhoods,’ Berkley said in an interview. ‘It drives down values.’”

“Elliott Parker, an economics professor at the University of Nevada, Reno, said he understands the complaints of those who say taxpayers should not help buyers who overreached for homes they could not afford. But he said the package could aid Nevada, where home prices are continuing to drop, affecting the housing market and the state treasury.”

“‘What people tend to forget about bubbles is they can happen downward, too,’ Parker said, explaining the need to avoid letting prices dip so low that homes are undervalued. ‘The Great Depression was a great example’ of a downward bubble, he said.”

In Business Las Vegas from Nevada. “As home prices and interest rates keep falling in the Las Vegas Valley, more and more buyers are snatching up houses. The Greater Las Vegas Association of Realtors reported May 6 that 1,794 homes were sold in April, a 21 percent jump over March’s 1,478 home sales. The sales are 30 percent higher than April 2007.”

“Properties owned by banks and other lenders accounted for more than half of the homes sold in April and that has created bargains since those homes are being sold below market prices, said association president, Patty Kelley.”

“The increase in sales comes as prices continue to fall. The median price of single-family homes sold in April was $235,875, down 3 percent from $243,169 in March. Prices are down 23 percent from April 2007.”

“Las Vegas housing analyst Steve Bottfeld said the valley will have to deal with thousands of foreclosures in 2008, but the increase in sales is a good sign. The Federal Reserve’s reduction in interest rates has been the difference, he added.”

“‘It is not about price, not about floor plan and not about design or location,’ Bottfeld said. ‘It is about the monthly payment.’”

“The increase in sales, however, has prompted an increase in the housing inventory, which had been dropping in previous months. There were 22,942 homes listed for sales in April…3 percent higher than it was in April 2007. Of those new listings, the median price was 3.6 percent lower than March and 23 percent below April 2007.”

Business Week on Nevada. “Banks—particularly in hard-hit real estate markets such as Arizona, California, Florida, Michigan, and Nevada—are slashing prices to entice buyers and clear away rising inventories of homes. The banks are competing with desperate builders and sellers facing foreclosure and, as a result, bargains are abundant.”

“At the end of 2006 a new 4,000-square-foot home with a three-car garage in a small gated subdivision in Las Vegas sold for $1 million. On May 6 the bank that owns the now foreclosed property at 7604 Noche Oscura Circle agreed to sell it for $500,000 ($32,900 below the already discounted asking price).”

“‘It’s an exceptionally good deal,’ agent Dillon England, said of the house, which is listed with his company. ‘What holds a lot of people back is when they walk into a small, 20-home subdivision like this one that has eight foreclosed houses.… It would scare you, wouldn’t it?’”

The Deseret News from Utah. “Most Utah homeowners are coping in the current housing market, but some people who have adjustable-rate mortgages say they are having difficulty making their house payments, according to a recent poll.”

“Results from the Deseret News/KSL TV survey of 404 Utah residents…showed that nearly 60 percent of respondents said they have fixed-rate mortgages on their homes, while 3 percent said they have adjustable-rate home loans. The poll had a margin of error of 5.2 percent.”

“Among those surveyed, 87 percent said they were current homeowners or in the process of purchasing a home, while 10 percent said they were renters. Of those with adjustable-rate mortgages, 45 percent of those people said it was not difficult to meet their house payment, while 45 percent said it was somewhat or very difficult to do so.”

“The number of respondents identifying themselves as having adjustable-rate mortgages was small — just 11 people — so the margin of error for the question was high, at 20 percent, making the statistic less reliable, said Dan Jones and Associates research director Diane Meppen.”

“The number of foreclosures in the Beehive State increased 34 percent from the fourth quarter 2007 to the first quarter of this year, according to RealtyTrac.”

“Brian Miller said he and his wife purchased their Herriman home in 2005 using an adjustable-rate mortgage. At the time, it made the most sense, he said, because it was their first house and they were newlyweds.”

“When they initially took out the adjustable-rate loan, it had a lower interest rate for the first five years of the loan, and they believed that the lower payment would allow them to strengthen their financial circumstances as the adjusted to married life and paid off wedding expenses.”

“Since then, Miller said, they have watched the housing market change and believe it is time to pursue a more stable financial option.”

“‘We did a five-year ARM thinking we weren’t certain we were going to be there longer than five years,’ he said. ‘We were kind of looking at it as a possible investment opportunity, but we’ve loved it out there and decided we’ll be there awhile.’”

Readers suggested a topic on subprime lenders. “Are Mozilo and the other subprime lenders the Devil, and has the loss of folk wisdom by Americans gotten them into the HELOC/cash out refi mess? I refer to the old idea that the Devil isn’t a powerful being who can coerce people into giving up their souls (like the government), but rather someone who has to trick them into doing it (like a businessman).”

“The devil will give you worldly goods, power or knowledge now but later…well, we’ll worry about that later.”

“Stories of this type demonstrated an age-old skepticism by Americans of those offering something for nothing, and asking people to sign a contract. Americans expected to have to work for things, or give something up to get something else.”

“Very different from ‘genie’ cultures where three wishes are offered with nothing in exchange. Of course, in many countries like that poverty borne of years of low effort was suddently reversed (for some) by oil popping out of the ground.”

“The argument for Mozilo being the Devil: in each case a person has an illiquid asset with a temporarily inflated value — houses with values puffed up the housing bubble, or the souls of the greedy. Both the Devil and the subprime lenders offered a way to monetize the inflated value of that asset before it depreciated back to a realistic level.”

“The case against the subprime lenders being the Devil is this…in none of the ‘deal with the Devil’ stories was Satan ever accused of disguising the eventual cost of the up-front benefit.”

A reply, “People (vast majority) can be brainwashed and one can create a culture that makes people very susceptible to, or easy victims of, propaganda. Maybe we have that condition whereby people are very easy to brainwash in the areas of politics, economics (finance) and investments.”

One noted, “Many Americans have evolved into people manipulated by soundbites. Whoever applies the sound bite with the strongest emotional power wins the dollars from these people.”

“People who can think past sound bites become immune to the manipulation and end up with the dollars.”

One said, “I don’t believe anyone needs ‘coercion’ to enter into the arena of ‘the devil.’ Man is lead of his own lusts–innate. It takes power to resist ‘the devil.’”

The San Francisco Chronicle from California. “Roger Abraham stands in his driveway, one hand holding the newspaper, the other sweeping across the homes on Brentwood’s Solitude Street. ‘This one,’ he points, ‘this one, this one.’ All empty.”

“Hundreds of families have lost their homes to foreclosure since the beginning of last year, and in a sign of more to come, at least 1 out of every 16 households has received default notices.”

“‘Brentwood is kind of the poster child for what’s going on in the housing market,’ said Howard Sword, the former community development director. ‘We were so active in the years where the subprime finance creative tools got rolled out, we were issuing like 1,400 to 1,600 building permits a year.’”

“Dave Myers, was the first buyer at Trilogy at the Vineyards by Shea Homes, closing in October 2006 for around $750,000. The unfinished amenities and housing downturn have chopped 40 percent off the value of his home, he said.”

“‘Trilogy was advertised as the place ‘where dreams take flight,’ he said. ‘Well, pretty much they’ve flown away. We’re now the house on the dirty hill that doesn’t have any trees, and doesn’t have any vineyard, and doesn’t have a clubhouse.’”

“On the horseshoe formed by Margaret Lane and Handel Way, about 15 homes have been resold, foreclosed or traded for less than the value of the outstanding loan, said Dave Thornton, who bought on the block two years ago.”

“In the struggle against blight, he had taken to mowing the patch of lawn between his driveway and his erstwhile neighbor’s. He recently gave up, deciding it was less trouble to let it die. The line where green turns to tan now marks the property line.”

“Thorton and his wife moved to Brentwood in 2006, thinking they’d found the quintessential little-town neighborhood for their three children. ‘When we first moved in, there were a lot of good people, neighborhood watch types,’ he said. ‘They’re all gone. There is no sense of community here.’”

The Daily Page from Wisconsin. “Alicia Emerson always dreamed about owning her own home. But what she bought was a house of cards.”

“Looking back on her experience, Emerson realizes she was too trusting of promises made by the Minnesota-based mortgage company that approved a $248,000 loan for her and her boyfriend even though their joint income was less than $50,000 a year. Now she gets it — she signed up for a subprime mortgage.”

“‘They told us we could refinance when the construction was finished with a negative amortization mortgage, which would make our payments between $800 and $900 a month,’ says Emerson. ‘But when the time came, they told us that kind of loan was no longer available, and our payments were going to be $1,700 a month. There was no way we could afford that.’”

“The hot housing market fueled an explosion of high-risk subprime mortgage loans. People with no down payment and an income too low to qualify for a standard ‘prime’ mortgage found they could get a home loan with a low introductory interest rate and the promise that they could refinance when that rate expired.”

“Underlying this whole scheme was the assumption that the housing boom would never end and houses would continue to increase in value. It was a bad bet.”

“Last year, many subprime borrowers discovered they couldn’t refinance because their houses had lost value, so now they owed more than their properties were worth. This caused a nationwide spike in foreclosures — nearly 1.3 million in 2007, an increase of 79% over 2006.”

“Emerson and her boyfriend moved into their new Mount Horeb house in August 2006. Faced with payments they couldn’t afford, they tried and failed to find a house mate. They also tried selling the house, and found they couldn’t do that either. They were trying to refinance to a loan with lower payments when Alicia’s boyfriend lost his job.”

“She ended up taking out a new mortgage in her name alone, from a different lender, with payments of $1,100 a month. She also took out a second mortgage for $28,000 to help her catch up on other financial obligations. Then, Emerson and her boyfriend spilt up. She was left with a house and a mortgage she could not afford.”

“‘It was awful,’ she recalls. ‘I was living in the biggest mistake of my entire life, and I didn’t know what to do about it.’”

“Before a foreclosure sale was scheduled, her house was purchased from her mortgage company as a ’short sale.’ She thinks the buyer got it for about $100,000 less than its market value.”

“Emerson has moved to Georgia, where she hopes to make a fresh start. But her troubles are not quite over. Although the short sale satisfied the first mortgage, she still owes about $30,000 on the second mortgage. She’s consulted with a bankruptcy lawyer to try to get that debt reduced, but she may have to declare bankruptcy.”

“One thing’s for sure: Emerson has lost all interest in becoming a homeowner again. ‘After all that’s happened,’ she says, ‘I’ve decided that renting is not so bad.’”

What do you see in your local housing market this weekend? Defaults? “Our foreclosure rate is nowhere nearly as bad as parts of California and Vegas, but realtors say it is getting worse here. A five bedroom house in Kaimuki. A three bedroom fixer-upper in Waipahu. A two bedroom townhouse in Mililani. Another one in Kapahulu. And a four bedroom house in Kailua.”

“‘Foreclosures have doubled from last year to this year,’ said realtor Carlin Yamashita.”

“There are currently 422 homes in foreclosure on Oahu that are listed for sale, including this four bedroom, three bath house on Kaimake Loop in Kailua. ‘I was surprised to hear it was in foreclosure. The house has been empty for two years,’ said neighbor Nani Kauka.”

“Neighbors say a family from the mainland had purchased this house in 2005 for a little over a million dollars. ‘Which really surprised us because it’s a two-story house in a regular neighborhood,’ said Kauka. The asking price is now $875,900.”

“‘What the foreclosures is caused by is the value is declining and the homeowner having slight problems with the payment, but the value isn’t there so they’re more likely to walk away from the property,’ said Yamashita.”

Lower prices? “The average medium price of a single-family home in the state dropped by about 10 percent, from $272,000 in 2007 to $245,000 this year. ‘There was a feeding frenzy for investment properties from 2000 to 2005 which drove prices up,’ said Robert Scaralia, President of the Rhode Island Association of Realtors. ‘Now we’re seeing a correction of that market sector.’”

“According to University of Rhode Island Professor Leonard Lardaro, who is often interviewed by the Rhode Island news media, a downturn is a needed remedy for an overextension of the market.”

“‘We don’t operate under a profit system. We operate under a profit and loss system, and loss serves a purpose. Loss cleans out inefficiencies in both production and management methods, and it also better aligns production with consumer preferences,’ said Lardaro. ‘Our free market economy is cleaning house, and we’ll be a lot stronger going forward when it’s finished.’”

More inventory? “Calgary’s MLS listings are ‘totally out of whack,’ surpassing 10,000 in April and growing by the day while sales are slumping. Listings for single-family homes and condominiums have hit an all-time record.”

“April MLS sales of single-family homes (1,363) in Calgary metro were the lowest for the month since 2000 while condo activity (581 sales) was the slowest since 2003 — even before the years immediately leading up to the city housing market boom in 2006 and 2007.”

“If inventory were a 10th of what it is right now, overall sales would still be pretty good, said realtor Gary MacLean, ‘but we have an inventory that is way out of control.’”

“‘The other factor is a lot of people got in the market when it was peaked and paid a lot for their house. With the cost of living going through the roof, the first thing to go is the house because they’re overextended. They’re house-poor,’ MacLean said recent data showing declines in housing starts and residential building permits also have a ripple effect on the local real estate market, as do speculators.”

“‘Those are the people that went out and bought four, five, six, seven condos in a building that wasn’t going to be built for two years. All of those buildings are now being completed. Those people did not want to be landlords. They were going to buy the condo, hold it until the building came due and put it on the market,’ said MacLean. ‘Well, the problem is of course we have the highest number of condos in history for sale.’”

Desperate sellers? “St. Joseph is the patron of fathers, carpenters, the dying, social justice and the universal church. But this saint’s popularity surges when the housing market tanks. Longmont real estate agent Diane Stow said, ‘Whenever the market gets tough, there’s a run on those little statues, without question.’”

“Phil Cates, a mortgage banker for 22 years and a Lutheran, said he began the online business in the 1990s after hearing from a friend about the practice of burying the holy statue. After listening to the woman’s woes on the housing market, her mother asked, ‘Have you buried a Joe?’”

“Critics have told Cates that he was ‘going to hell’ with this promotion of devil worship or voodoo. But he dismisses those claims, adding that ‘most people have tremendous amount of fun with this.’ And, he quipped, ‘in this housing market, we’re all praying for a miracle.’”

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