The Housing Bubble

The Orange County Register reports from California. “A taskforce of attorneys general analyzed the number of subprime borrowers getting help from their lender. The study found that as of October 2007 about 70 percent of seriously delinquent subprime loans were not in any kind of workout with the lender. An update to the study found that as of January 2008 little had changed.”

“The update found that while loan servicers are doing more modifications, delinquencies are rising so quickly that the ratio of those not getting help remains the same: 7 out of 10 seriously delinquent loans are not in any kind of workout.”

“In Orange County, DataQuick reported banks took possession of 898 houses and condos in April, the highest monthly total in the company’s records going back to 1988.”

“Deborah Wilmoth, of Rancho Santa Margarita, is struggling with an option adjustable-rate mortgage. She has been making the minimum payment, with deferred interest adding up each month. She refinanced in February 2006, and after more than two years of making minimum payments she now owes about $43,000 more to the bank than we she started, for a total of around $400,000.”

“Wilmoth has taken on a second job at a youth shelter to pay her first loan with Wachovia and a second mortgage for about $100,000 with Wells Fargo, she said.”

“She said Wachovia didn’t explain how the option ARM loan would change over time if she kept making the minimum payment. Wilmoth also blames herself. After buying her two-bedroom condo for $216,500 in 2000, she refinanced and took out a second mortgage to remodel it.”

“‘I am not going to say I have this finance thing under control because I don’t, which is why I am in this mess,’ Wilmoth said.”

The North County Times. “Foreclosures have flooded North County’s housing market, and indicators show that the waters will be rising, not receding through the rest of the year. Of all North County foreclosed homes that went back to the bank within the last 120 days, 60 percent have not been listed on the market, according to a North County Times analysis.”

“And there have been more finalized foreclosures, 1,800 homes, over the last four months than the previous seven months.”

“Many housing analysts said they think option-adjustable rate mortgages will further exacerbate the foreclosure problem. Eventually, the mortgage balance becomes so large the lender forces the homeowner to pay all interest and some of the principal each month to start drawing down the balance.”

“For Diane Goodwin of Oceanside, that move would force her to lose two of her investment properties. And if the market does not improve, she said she could lose her other three homes, including her primary residence, over the next year and a half.”

“All five properties she owns carry the option mortgages, also known as negative amortization loans.”

“‘Yup, big mistake,’ she said. ‘However, we wouldn’t have any of them except the original house if we didn’t use neg-am, so it was a gamble. And at the time, it seemed like a good one. Obviously, we didn’t know what was going to happen to the market,’ she said.”

“Goodwin said she does not fit the speculator-investor prototype.”

“‘I just wanted to make sure I wasn’t a burden to my family when I get old. It was not to be rich, but to have something so that my kids wouldn’t have to worry about me when I’m 90,’ Goodwin said. ‘So now, instead of being able to retire when I’m 65 or 62-and-a-half, now, realistically, I’ll have to work until I’m 75.’”

“Of the 1,300 North County homes to be seized by banks over the last 120 days, 750 are still not on the market, according to ForeclosureRadar.”

“‘I think that the banks are in an analysis paralysis,’ said Norm Miller, a real estate professor with University of San Diego. ‘They’re trying to figure out whether to put it on now and bite the bullet or wait because they think we’re at the bottom. But everyone else is thinking the same way and there’s no way to avoid the rash of foreclosures.’”

“Some analysts, like Miller, think that current inventory numbers, though high, are artificially low because of foreclosure properties not on the market and regular homeowners who do not want to sell in a struggling market.”

“Some areas, such as parts of Oceanside and Escondido, have been so wracked by foreclosures that prices have dipped to $160,000 and most analysts do not expect further declines.”

“‘You look at 10 homes for sale, one is aggressively priced and another is priced at the same price as a year-and-a-half ago. … They’re going to be on the market for a long, long, long time,’ Miller said. ‘So this home is close to bottoming out, and the other one is in la-la land with the assumption that real estate never goes down.’”

The Press Democrat. “Mark and Rusti Lindsey are starting over, leaving behind an empty home they no longer can afford. On Saturday, they sold off pieces of their former lives on the driveway of the Petaluma house they once called home.”

“Even though the Lindseys stopped paying their mortgage seven months ago, it remains difficult to leave behind dreams permeating the home they purchased in 2003.”

“‘We’re going to be OK, but it’s going to be tough,’ Mark Lindsey said. ‘We wanted to try and move on. But we had so much emotionally wrapped up in this house.’”

“Scenes like this are occurring with increasing frequency. Every week, lenders seize nearly 60 houses in Sonoma County from borrowers who have fallen behind on mortgage payments.”

“As the toll mounts, the face of foreclosure is changing. Once viewed as a distressing downfall, losing a home is losing some of its stigma as foreclosures become more pervasive.”

“Fewer and fewer are fighting to hold onto their homes, said Chris Smith, a CPS agent in Santa Rosa who sells foreclosed houses for Countrywide Home Loans. When the final day comes, most are eager to take a lender’s check — from $1,000 to $4,000 — to leave so the house can be cleaned and put up for sale.”

“‘For the most part they’re amazingly cooperative. They’ve accepted the inevitable and they’re moving on,’ Smith said. ‘They’ve had time to get used to the fact that their home is going bye-bye.’”

“It is increasingly difficult to escape. Today, more than 60 percent of homeowners in default lose their homes to foreclosure, up from 5 to 7 percent historically, according to DataQuick.”

“Most are homeowners who purchased homes two or three years ago, around the peak of the housing boom. Many were drawn by both the easy financing and the seemingly endless ascent in home values. Some owners refinanced loans to tap equity, turning homes into piggy banks.”

“The result: foreclosures have soared to record highs in Sonoma County, and will likely continue to rise over the next six months, if not longer. Last month, lenders sent 509 default notices to delinquent borrowers, the first step in the foreclosure process.”

“‘Some people will just walk away,’ said David Rendino, a Rohnert Park agent who sells lender-owned homes. ‘It’s a tragedy for people on an individual level.’”

“Still others leave the county. ‘A lot of my Hispanic clients have gone back to Mexico,” said Rigzin Vassallo, an agent in Santa Rosa. ‘Their credit is thrashed. They have to start over.’”

“For the Lindseys, the joy of buying their first home has been displaced by anguish over financial difficulties that forced them out. ‘We’re just stretched,’ Mark Lindsey said. ‘With rising food prices and gas prices and everything else, it’s a double whammy.’”

“Paying the mortgage was not a problem in 2003 when the Lindseys bought their six-bedroom, 2,600-square-foot home in east Petaluma. They later refinanced to take out cash for a new furnace and hardwood floors, but regained that equity thanks to rising home values.”

“‘There were indications that the market would keep going up and the income was good at the time,’ he said.”

“A job loss was the beginning of the Lindseys’ financial undoing. Mark Lindsey was laid off in November 2006 shortly after surviving a bout with bladder cancer. His job was the family’s sole source of income while Rusti Lindsey home-schooled their daughter.”

“He attempted to build up what had been a side business. The couple also took in two renters. ‘It definitely helped, but it wasn’t quite enough,’ he said. ‘There’s only so much you can do.’”

“Desperate to buy time and stay in the house, the couple refinanced again, tapping equity to pay the mortgage and other living expenses. Their monthly loan payment, which started at $2,600 when they purchased the house, jumped to more than $3,700.”

“They started falling behind on the mortgage payments and, in November, stopped making payments. The default notice arrived in February.”

“The Lindseys hope to sell their home. But they are counting on the lender to accept an offer of $499,000 when the couple owes $680,000. If the so-called short sale is rejected, the bank would take back the home and attempt to sell it.”

“Whatever the outcome, the Lindseys’ credit will take a severe hit for 5 to 7 years. Still, they managed to rent a home, though it’s smaller and more expensive than they hoped.”

“In sacrificing space, the Lindseys also cut their housing costs. They now pay $2,200 in monthly rent.”

The Sacramento Bee. “From the lazy byways of the Delta to the shores of Lake Tahoe, a soggy economy and stratospheric fuel prices are hurting Northern California’s boating industry.”

“With Memorial Day weekend launching the summer boating season, boat sales are down, and marina operators say they’re noticing a drop in business. Analysts say the economic downturn is the No. 1 problem.”

“David Mayne, a used-boat broker from the East Bay who frequently plies the Sacramento-San Joaquin Delta, said he’s run into people with upside-down mortgages who are trying to unload their boats in order to save their homes. But falling prices are making sales difficult.”

“‘It’s a bad time to be a seller and a good time to be a buyer, just like the housing market,’ Mayne said.”

“He recently received an offer of just $200,000 for a 42-footer docked at Lake Tahoe that he says is worth nearly $300,000.”

“The lazy start to the season was evident Friday afternoon at Cliff’s Marina, a ramshackle collection of buildings near Freeport at the northern end of the Delta. A handful of pleasure boats were trickling by on the Sacramento River as co-owner Alvin Stults talked about the economy, the price of gas and other problems.”

“‘A lot of people got boats, but they’re not going out,’ he said.”

“Some people ‘had a bad home loan and then on top of that, they bought a boat,’ said Barry Paulsen Jr., owner of Barry Paulsen’s Boat Center, a dealership with locations in Rancho Cordova, Fairfield and Oakland. ‘Those are the people who are selling.’”

“Dublin resident Donald Meyer spent $100,000 on a Bayliner that sleeps six. He’s been struggling since January to sell the boat. His asking price, posted on the Internet, is $72,900.”

“‘Like the housing market, there’s sufficient inventory around,’ Meyer said. ‘With gas the way it is, with the uncertainty in the economy, the average person … is probably not going to be willing to shell out the expense for a luxury item like that.’”

The Redlands Daily Facts. “What’s cookin’ on your grill this Memorial Day? Better yet, what can you afford?”

“Shiny high-end barbecues aren’t the hot commodity they were last Memorial Day, and it’s not because of our recent nasty weather. The culprit: empty piggy banks.”

“Families feeling pinched by record-breaking gasoline prices may save a few bucks by skipping that trip to Aunt Marsha or Uncle Jerry’s house, but fuel prices are only the half of it. A bleeding real-estate market has robbed homeowners of their equity and shut the lid on credit.”

“That old, rusty, $200-dollar charcoal grill abandoned in the backyard is pretty dilapidated - maybe even shameful, you might say. But it’s looking pretty good right now.”

“‘People are replacing knobs, flavor grades, burners - all kinds of things,’ said Antonio Fernandez, sales manager at Thompson Building Materials in Fontana. ‘It’s about saving money.’”

“‘Most people come in, they look, we quote them, and they take the brochure,’ he said. ‘The situation is hard for everybody.’”

“Ontario barbecue-island retailer Pete Estrada cashed in on record barbecue sales last summer from homeowners flush with home-equity lines of credit. Carefree customers strolled in with $10,000 checks in hand.”

“But last year’s numbers make this year’s look depressing.”

“‘When the (home) foreclosures came, that just killed my market,’ said Estrada, the owner of Island BBQ World. ‘I’m getting a few people coming back. They’ve decided, `Well, we can’t move, so now we’ll do something in the backyard.’”

“He added: ‘Nowadays, people think they’re going to die in that house because they can’t afford to move. They’re investing more into their backyards.’”

“During the housing boom, barbecue sales made up 10 percent of San Bernardino Fireplace’s total sales figures. The store sells wood stoves and fireplaces. The shop is usually swamped with barbecue shoppers two weeks leading up to Memorial Day. Not this year.”

“‘”We’re so far off,’ said Noah Perry, manager of the San Bernardino store. ‘Not much is moving. People are patching together their old barbecues. We’re selling more parts than anything else.’”

“Perry reminisces about the golden days of record barbecue sales. ‘Back then there was no hesitation. People saw it and said, ‘I want that,’ Perry said. ‘Now people are trying to save a buck and going with charcoal instead of gas.’”

Readers suggested a topic on decision making. “Land of the biggie house, the biggie mortgage, the biggie vehicle, the biggie belly, and the biggie cereal box. Cereal box?”

“Yeah.. try this: Open a cereal box and remove the contents, squeeze the air out of the bag and look at what five bucks got you. Somewhere in this observation is a analogy for how we make many of our purchasing decisions. Guess what that analogy would be?”

A reply, “This morning’s Dow Jones Money Report (radio) mentioned that great rooms had fallen out of favor with consumers, because they ‘take up too much space.’ I’m wondering if McMansions will lose more value relative to normal 3 or 4 bedroom houses as real estate prices continue to slide.”

Another said, “And yet CNN is reporting today that house prices (they must mean median prices) have risen slightly!”

“Every month upbeat figures are released by this or that organization or agency, then then next month ‘revised’ downward. It’s so regular and predictable, it has to be deliberate. Why the Press bothers reporting anything positive NAR or homebuilders say is beyond me, since it ALWAYS proves wrong.’

“Even the sales figures are baloney, since they reflect banks and mortgage companies buying back their own foreclosed or abandoned properties, often at their fake original valuations, or even higher (thus boosting that tricky median price number).”

“When Fannie and Freddy can declare losses as temporary, and avoid factually writing them down, nothing related to real estate appears to be believable, except that it isn’t worth a fraction of what we’re told.”

The Seattle Times. “Sue Wilson was among the 3,000 laid off by Washington Mutual in December. She’s had no success finding a job since.”

“‘It’s a little scary,’ she admits. ‘I had recently gone part time, so I felt more vulnerable. It’s worse for a lot of my friends there. … These are people who felt they were very secure and making good money. Now they’re faced with being laid off. There’s not a lot out there to go after.’”

“The state lost 1,800 nonfarm payroll jobs in April, and nearly 159,000 residents are seeking work.”

“Some observers to speculate that the worst of the credit crisis is over and the recession will be mild. That would bear out the ‘incurable optimism’ of Patsy Carmichael. Even so, in a recent interview she says with a rueful laugh, ‘I’m a Realtor without clients. … There’s a bunch of buyers waiting. I say, ‘What are you waiting for? It’s a buyer’s market.’”

“Carmichael is 75 and has been selling houses here for 20 years. With a good year in 2007 and three closings earlier this year, Carmichael considers herself fortunate.”

“‘A lot of agents are hurting,’ she says, adding that she’s grateful for her frugality.”

The Philadelphia Inquirer. “We thrifty Americans should all take a bow. Our national savings rate just crept above zero, clocking in at 0.2 percent of income in the first quarter of this year, up from a goose egg at the end of last year!”

“OK, so we’re not a nation of savers; at least, not anymore. Our long-term savings decline is worrisome in and of itself; many economically stressed households currently have little to fall back on. But of even greater concern are (a) our continuing dependence on debt, and (b) the sources of our more recent borrowing.”

“Debt became a much larger driver of growth in the 2000s than before. Now that the main channels that financed all of that borrowing are closed, we’ve got some tough lessons to absorb.”

“Consider this. Forever in American economics, the mantra was that “consumer spending is two-thirds of the economy.” Yet, during the last decade, that share climbed to 71 percent, the highest on record, a shift equivalent to $575 billion today.”

“At the same time, real incomes for most families were flat. Even though the 2000s have been a period of fast productivity growth, the nation’s real median income - the income of the family smack dab in the middle of the income scale - was actually a bit lower in 2007 than in 2000.”

“As incomes stagnated for many yet consumption soared, we made up the difference with borrowing. Household debt, including mortgages, just about doubled in seven short years (2000-07), from $7.4 trillion to $14.4 trillion.”

“Now, with home prices once again obeying the law of gravity, millions of homes are worth less than their mortgages. At the same time, we have a fading job market and paychecks that have lagged behind inflation for the last seven months.”

“In this climate, it’s no surprise we’re stuck borrowing from our retirement funds and our credit cards. We (not all of us, of course, but enough of us to bring down the house) bought into a bubble, felt a lot wealthier than we were, got hooked on debt, and our consumption grew untethered from our incomes.”

The Dallas Morning News. “Henry Potter: Have you put any real pressure on these people of yours to pay those mortgages?”

“Peter Bailey: Times are bad, Mr. Potter. A lot of these people are out of work.”

“Potter: Then foreclose!”

“Bailey: I can’t do that. These families have children.”

“Potter: They’re not my children.”

“Bailey: But they’re somebody’s children, Mr. Potter.”

“Potter: Are you running a business or a charity ward?”

“Our current crisis was a product of the new century, a fairly conventional speculative bubble involving legislators, regulators, lenders, great financial houses and borrowers in roughly equal culpability. Under the mantra that ‘housing prices in America have never gone down,’ modest eligibility standards for taking out mortgages were essentially scrapped.”

“Risk was ’shared’ - i.e. hidden - by the relatively new process of bundling mortgages for resale to investors. As housing prices soared, the rush to get into the game produced all the usual assurances from the financial talking heads, until the inevitable collapse.”

“How many of the imperiled homebuyers are actually young families with children? How many are singletons who used this speculative opportunity to jump onto the housing escalator? How many are empty-nesters who rode the bubble to move into a McMansion? How many are would-be investors looking for quick turnarounds?”

“George Bailey would surely marvel at the stupidity and greed of our current crop of great financiers, who make Mr. Potter look like a genius - even a humanitarian. He would want to see the sham geniuses and their boards of directors held personally liable to stockholders and investors. He would expect criminal fraud to be vigorously investigated as well.”

“Over the long haul, George Bailey would probably try to return the housing and mortgage industries to their real purpose: providing homes to families. He would support limiting the tax deduction on home-mortgage interest to one principal residence per family.”

“He might even favor a cap on the amount that could be deducted, so that only good shelter - not princely luxury - enjoyed favored tax treatment.”

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