The Housing Bubble

The Press Telegram reports from California. “Home sales across California jumped nearly 18 percent during June compared with a year earlier as discounted foreclosures lured buyers back into the real-estate market, a trade association said Friday. However, the median resale price plunged in every region of the state from year-ago levels, falling 38 percent statewide and 32 percent in Los Angeles, said the California Association of Realtors.”

“Sales surged in areas hit hard by foreclosures, soaring 71 percent in the High Desert, which includes the Antelope Valley, 75 percent in the Inland Empire and 96 percent in Sacramento. Those areas have also seen big price drops and more are expected because foreclosures continue to mount.”

“For example, DataQuick said that foreclosures accounted for 41 percent of Los Angeles County sales in June. In Los Angeles County, the median price sank to $396,560, the same level as in the first quarter of 2004 and 35 percent under the record high of $605,300 set last August.”

“The median price of an existing, single-family detached home in California during June 2008 was $368,250, a level not seen since 2003, the association said.”

The Daily Breeze. “Even with rising statewide sales, the South Bay’s housing market continued its pricing slump in June. The median price of all South Bay homes sold in June dropped 10.2 percent to $617,500, compared with the same month a year ago, CAR says.”

“The drop in South Bay home prices was nearly across the board and mostly in double digits. Torrance was an exception, since its median home price fell only 5 percent to $570,000.”

“San Pedro was more representative of the local communities hit by the housing slump. The port area saw its median price drop 17.8 percent to $411,000.”

“Carson, Hawthorne, Inglewood and Gardena all saw respective percentage drops in the 20s as those cities continued to struggle with fallout from subprime loans.”

“June was busier in part because the summer months usually see more real estate activity, said Adolph James of Shorewood Realtors in Manhattan Beach. The other major component that usually drives sales is optimism, ‘which we don’t have,’ James said.”

The Ventura County Star. “The county’s median price for an existing, single-family detached home sold in June was $480,430, a 1.5 percent decline from $487,790 in May and a 30.6 percent drop from $692,730 in June 2007, the California Association of Realtors reported Friday.”

“Peppy accounts from Realtors who say buyers are returning to the market, paired with hope that the housing bill could provide help for distressed homeowners, have been overshadowed by news of rising foreclosures. In Ventura County, there were 3,177 total properties with foreclosure filings, according to RealtyTrac’s second-quarter numbers.”

“‘A year ago, there was no hope in sight - we didn’t know what it would take to recover,’ said Kay Wilson-Bolton, owner- broker of Century 21 Buena Vista in Santa Paula. Now, ‘I don’t see anybody depressed. Realtors are able to exercise their craft again.’”

The Mercury News. “This month, nearing $1 million in debt, the veteran real estate agent and San Jose father of three filed for Chapter 13 bankruptcy. ‘I have taken upward of 25 phone calls a day from creditors,’ he said. ‘When you have 25 people grinding on you day after day, it takes a toll.’”

“Arthur can add himself to the list of 5,941 people who filed for bankruptcy in the San Jose division of U.S. Bankruptcy Court from July 2007 through June 2008. Of the four Bay Area bankruptcy courts, San Jose’s - which oversees Santa Clara, Santa Cruz, San Benito and Monterey counties - posted the highest increase in bankruptcies - 69.7 percent - over the 12 previous months.”

“For people like Arthur, who asked not to be fully identified, it started with a home he bought 10 years ago for about $450,000. As its value rose to $900,000, he used the equity to start his own business. Along the way, the home’s value dropped to $600,000, and business expenses rose. To make his mortgage payments, Arthur began relying on credit cards - at least 20 - for living expenses.”

“‘What’s different about this new wave is the number of people who are simply walking away from their houses,’ said the Northern District of California’s Chief Bankruptcy Judge Randall Newsome, who has overseen bankruptcy filings for two decades. ‘It’s unlike anything I’ve ever seen in my career.’”

“‘People know there’s no hope’ of holding onto their homes, said San Jose bankruptcy Judge Marilyn Morgan. In fact, 90 percent of today’s debtors facing foreclosure don’t even contest it, she said.”

The Recordnet. “Pablo Flores has been unemployed since being laid off from a construction cleanup company in January. The Stockton man has turned in applications since but hasn’t received a response from any potential employers. ‘Unfortunately, right now there is no work,’ said Flores, who has been doing side jobs to earn money since January.”

“‘Right now, there is only work in the fields, but those contractors already have their people. The fields are already full of workers,’ Flores said.”

“Stockton is in a familiar position - No. 1 in foreclosure activity nationally, according to second-quarter data released Friday by Realty-Trac.”

“In the April through June period of this year, there were 9,066 foreclosure filings in the Stockton metro area, up nearly 20 percent from the first quarter and up 171 percent from 3,350 filings in the second quarter of last year, the report said.”

“There were foreclosure filings last quarter on 202,599 California properties, the highest total among states and a rate of one in every 65 households, which was the nation’s second-highest foreclosure activity rate among states.”

“That was up from 169,831 foreclosure filings in California during the first quarter.”

“A year ago, houses priced less than $500,000 accounted for 40 percent of sales, said Leslie Appleton-Young, chief economist of the Realtors association, but as of last month, that segment of the market accounted to 67 percent of all sales.”

The LA Daily News. “Foreclosures across the San Fernando Valley shattered records for the second quarter, soaring 230 percent from a year earlier as the housing crisis intensified, a research center said.”

“A total of 2,084 Valley families lost their homes from April to June after defaulting on their loans, up from 632 households a year earlier, according to the San Fernando Valley Economic Research Center at California State University, Northridge.”

“The previous second-quarter record of 1,818 foreclosures was set in 1996, amid another real-estate market collapse.

“The dismal housing situation was reflected throughout Los Angeles County, where 3,676 homes were lost - nearly 260 percent higher than in the second quarter of 2007.”

“Center Director Daniel Blake said he expects the bad news to continue into 2009. ‘This quarter’s record number of foreclosures could be surpassed next quarter, given the current trend in foreclosures and the still-high numbers of notices of default,’ said Blake, an economics professor at CSUN.”

“Jack Kyser, chief economist at the Los Angeles County Economic Development Corp., concurred that the real estate market will worsen before getting better. ‘Get used to it,’ he said. ‘You will see bad news for the rest of this year and into 2009.’”

“The median home price in the Valley in June 2007 was $654,750. It had plummeted last month to $472,500, a drop of $182,250. A total of 1,155 transactions closed in June, the lowest number for the month since the start of record-keeping in 1988. Only the 1,444 transactions recorded in June 1993 come close.”

The Merced Sun Star. “The signs dotting Montage Drive in North Merced promise contemporary living amidst agriculture. Innovative, one reads. Responsible, says another. Vibrant.”

“Surrounding these signs are 136 vacant lots with weeds and electrical wires sprouting from the ground. Dusty black mailboxes, home to wasp nests, are cemented next to the street. Six model homes with lamps in the windows are protected by chain-link fence. A jackrabbit prances about as if it’s the prairie.”

“Welcome to Paseo, just one of the subdivisions stalled mid-development since the housing market began tanking in late 2005. It’s a familiar scene for anyone who’s driven across the county. Now this project, launched by Summerton Homes in early 2007, is in danger of going belly-up.”

“Merced County had a record 449 foreclosures last month, bringing 2008’s total to 2,185. In other words, one out of 20.5 Merced homes has been lost to the housing market’s crash. In the second quarter, another 1,900 Merced County homes neared foreclosure, based on the number of loan default notices sent out by lenders.”

“Filing a case is one of the ways to get stubborn developers to rework and pay down a loan, bank spokesman Thomas Smith said.”

“Only two years ago, he said, some of them were making millions and have sheltered their assets that only the court’s pry-bar can access. ‘You can only feel sorry for them so long,’ Smith said. ‘Pity only goes so far.’”

“Coldwell Banker Gonella Realty, where Kielty works, sold 168 homes in May and 163 more in June. Of homes sold, 75 percent of them were foreclosures.”

“One 1,368-square-foot home off West Highway 140, sold in 2005 for about $300,000, agent Roselin Charitar said. Citi Mortgage took it back when it was worth $240,000 and now lists it for sale at $109,000. ‘It’s an extra nice deal,’ she said.”

“The possible collapse of Paseo, along with recently released data, suggest the county may not have hit rock-bottom with the foreclosure crisis. One house sold three years ago for $300,000, for example, was just listed for roughly one-third that price. Incredibly, some houses are going for five-digit tags.”

“Someday, homes will fill the vacant lots in Paseo, and the long-promised community near UC Merced will become a reality. Until then, the signs along Montage Drive — Innovative, Responsible, Vibrant — loom as testaments to failed promises.”

The Orange County Register. “A year ago, the house at 920 W. Camile St. in Santa Ana was bank-owned, deserted and tagged with gang graffiti, a symbol of how the subprime lending bonanza had blighted a city block.”

“In October, the house sold at auction for $304,500, little more than half what a buyer using 100-percent subprime financing paid in 2006.”

‘Today, 920 W. Camile has been renovated, repainted and floored with faux marble. It resold in January for $625,000, according to county records - a $125,000 down payment and a $500,000 mortgage from Wells Fargo Bank. The owners and residents are Mario and Paula Gomez, both garment workers in Irvine and parents of three sons.”

“But why would the price of a troubled property on a blighted street double between October and January? In November, Wells Fargo issued a $289,275 mortgage for 920 W. Camile to an investor who had purchased the home at a foreclosure auction. In January, after the house was spruced up, Wells Fargo issued a $500,000 mortgage to the new owners.”

“A year ago, Angelita Albarran, owner of 919 W. Camile, said people on her street were endrogados - Spanish slang for ‘addicted’ - to debt. Now the garden where she nursed jasmine and roses has gone to weeds. Albarran has vanished and could not be reached for this story.”

“In April, the bank repossessed her house, because she was unable to pay or refinance the $600,000 subprime loan. It’s now on the market for $295,000.”

“The bungalow at 937, which was purchased by another person for $591,000 in early 2006, foreclosed in October. This month, it was listed as ’sale pending’ with a price of $314,900. The house at 1033 sold at auction in June for $270,000, less than half its value in a late 2006 refinance deal.”

“Ray Braun took his house at 1011 W. Camile off the market after steadily dropping the asking price from $560,000 to $425,000. ‘I’m afraid I still don’t know where the bottom is,’ Braun said. A renter pays him $1,600 a month to live in the house - $200 less than Braun’s mortgage payments.”

“Jose Ramos, a real estate agent who lives at 1052 W. Camile, said he wants to unload his second home at 1042 W. Camile in a ’short sale,’ because he can’t make money on rent and can’t sell it for more than the $417,000 loan he arranged in November.”

“Ramos got his mortgage from IndyMac Bank. ‘I tried a loan modification, but they didn’t agree,’ Ramos said.”

“What makes the Gomezes’ house such a red flag…how could a property in such a distressed neighborhood, at a time of tight credit and falling real estate prices, double in value in a few months?”

“Orange County property records show that on Oct. 29, Jose Castro bought 920 W. Camile from the Bank of New York, which took title to the home after it was foreclosed last year. On Nov. 16, Wells Fargo lent Castro $289,275 for the property.”

“On Dec. 3, Castro transferred title of the house to Asset Disposition Venture Capital LLC, a West Covina company managed by Sergio Praslin, who signed documents on behalf of the company. Praslin did not return calls requesting comment that were left on his answering machine daily for the past two weeks.”

“On Jan. 15, Praslin signed the deed selling the property to the Gomezes. Mario Gomez said he was surprised when it came time to sign the papers. ‘They lied to us,’ he said of the sellers. ‘They said the house was really $500,000, but when I bought it, the papers said $625,000.’”

“Gomez said someone else - he’s not sure exactly who - paid the $125,000 down payment. Documents examined by the Register, including papers in the Gomezes’ loan packet, did not show who paid the down payment.”

“Ted Faravelli, managing director of the California Association of Real Estate Appraisers, said his profession is as much art as science. He said appraisers might not be accurate, but they need to be credible. And, given today’s market, paying $625,000 for a home on Santa Ana’s Camile Street sounds incredible.”

“‘It doesn’t pass the smell test,’ he said.”

“Emily Ralles, who served as escrow officer in the sale of 920, said she didn’t know or care who paid the down payment - as long as the check was good and the parties agreed to the terms of the deal.”

“‘It sounds to me like the seller helped out,’ she said. ‘If someone gave them $125,000, what’s the problem? That’s a beautiful thing, if you ask me.’”

I suggest a topic on what the collapse of the housing bubble means for the future global financial order. The US mortgage securitization model has failed, and faith in the titans of Wall Street and government has been shaken. What does this mean for macro trends like globalism? What can we learn from past real estate busts, and will the price decline continue to steamroll everything in its path?

From The Star. “The world economy has seen globalization collapse once already. The gold standard era - with its free capital mobility and open trade - came to an abrupt end in 1914 and could not be resuscitated after World War I. Are we about to witness a similar global economic breakdown?”

“There was a time when global elites could comfort themselves with the thought that opposition to the world trading regime consisted of violent anarchists, self-serving protectionists, trade unionists and ignorant, if idealistic youth. Meanwhile, they regarded themselves as the true progressives.”

“But that self-assured attitude has all but disappeared, replaced by doubts, questions and skepticism.”

“The subprime mortgage crisis has shown how lack of international co-ordination and regulation can exacerbate the inherent fragility of financial markets. Even those who have not lost heart often disagree vehemently about the direction in which they would like to see globalization go.”

“The first three decades after 1945 were governed by the Bretton Woods consensus - a shallow multilateralism that permitted policy-makers to focus on domestic social and employment needs while enabling global trade to recover and flourish.”

“This regime was superseded in the 1980s and 1990s by an agenda of deeper liberalization and economic integration. That model, we have learned, is unsustainable.”

The Nation. “The US Congress on Wednesday passed a wide-ranging housing rescue plan to help ease the downward spiral in the property market that is weighing heavily on the US economy. Mortgage finance giants Fannie Mae and Freddie Mac account for about half of the $12 trillion US housing market. They have issued some $5 trillion in mortgage-backed securities. Of this, $1.5 trillion is subscribed by foreign institutions such as the central banks of China and Japan.”

“Loan defaults are now becoming common among those with good credit records. Bank and financial stocks have fallen by almost 70 per cent since last year.”

“It is a bit odd that the bill aims to help homeowners keep their homes. The question is if people can’t afford to pay for their homes, why bother? US mortgage lenders have been committing a grave financial sin by offering loans to Americans, who have poor credit and couldn’t afford to pay for their homes in the first place.”

“This reckless lending spree went on with the illusion that the prices of the US housing market would climb forever. It is an American dream to own a home. But the American dream can’t be realised by irregular wage or salary earners with poor credit records.”

The Dallas Morning News. “The economy collapsed after years of growth. Can’t-miss investments turned to dust. And banks, gorged on years of aggressive lending, careened toward the breach. A portrait of today’s U.S. economy? Time will tell.”

“But with analysts predicting as many as 300 U.S. bank failures in the next few years, many Texans will recall another banking crash. In the state’s 1980s collapse, an energy bust and a subsequent real-estate wreck leveled hundreds of Texas banks, including longtime pillars of the economy.”

“More than 1,600 U.S. banks - 9 percent - failed between 1980 and 1994, involving assets worth $200 billion, according to the Federal Deposit Insurance Corp. The even larger savings and loan debacle from the same period claimed more than 1,000 institutions with assets of more than $500 billion.”

“‘The good news is that I can talk to you about the ’80s without my shrink next to me,’ jokes Dick Evans, CEO of San Antonio-based Cullen/Frost Bankers Inc., the only one of the era’s top 10 Texas banks to survive the crisis. ‘It was tough getting over it.’”

“Gerard Cassidy recalls living through the 1980s Texas bust as a ‘young and naïve’ bank analyst with an insurance company that had a large exposure to Texas banks. ‘I believed them hook, line and sinker, everything the banks told me,’ says Mr. Cassidy. ‘And we went down with the ship.’”

“Out of the ruins, Mr. Cassidy developed his own way of gauging how likely a bank was to fail, dubbing it the ‘Texas Ratio.’ Two months ago, Mr. Cassidy told MarketWatch that IndyMac Bancorp Inc. had a worrisomely high Texas Ratio.”

“IndyMac went bust this month in one of the largest bank failures in U.S. history. Mr. Cassidy believes the situation is less dire than in the early ’90s. But a string of banking failures - even elsewhere - is sure to revive memories of the 1980s, when the state was today’s housing bust, subprime mortgage mess and economic downturn rolled into one.”

“Throughout much of the 1970s and early ’80s, the state thrived on rising energy prices and served as a beacon to opportunity-seekers nationwide.”

“‘The entire country was looking at Dallas in awe,’ recalls Jeff Chapman, a lawyer in Dallas with Vinson & Elkins LLP who started his career here in 1983. ‘There was no city like it.’”

“The state’s banks competed to finance energy and real-estate projects. Hundreds of new banks were chartered in Texas in the first half of the ’80s. It all came crashing down amid a sustained decline in oil prices, a real-estate glut, and changes to U.S. tax law that made investing in real estate less attractive.”

“‘The state lost its swagger,’ Mr. Chapman says. ‘You didn’t see many mansions being put up. The few-hundred-dollar bottles of wine remained in the restaurant inventories. I saw fewer brand new Porsches on the streets. And that’s just at the wealth level.’”

“Things were even worse for everyone else, with widespread foreclosures and job loss, note Mr. Chapman and others who lived through it. ‘Individuals’ spirits were broken, their confidence was shattered, and they sank into despair and depression,’ wrote Texas banker Joseph Grant, in his book The Great Texas Banking Crash: An Insider’s Account.”

“‘It was not uncommon for the borrower, facing financial ruin, to break down in tears in the lender’s office,’ wrote Mr. Grant, who headed Fort Worth-based Texas American Bancshares Inc. when it failed in 1989.”

“Texas banks recorded losses each year from 1986 to 1989, according to Bob Hankins, who oversees bank regulation at the Federal Reserve Bank of Dallas. The state accounted for two-thirds of bank failures in the U.S. in 1988 and ‘89. Nine of the 10 largest Texas banks failed.”

“‘It was as close to a depression as anyone has seen in this country since the 1930s,’ says Frank Anderson, a finance professor at the University of Texas at Dallas.”

“Last year, Richard W. Fisher, president of the Dallas Fed, reflected on some of the lessons from 1980s Texas in a speech to mortgage bankers in Austin. ‘The assumption of permanently high - or permanently rising - prices in an asset class, in this case oil, invariably leads to regrettable decisions,’ he said.”

“Today, the asset class that people once assumed to be ‘permanently rising’ is residential real estate.”

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