The Housing Bubble

The Bay Area Newsgroup reports from California. “Over the year that ended in July, the decline in home prices in the East Bay was about five times worse than what happened nationwide. The East Bay is losing jobs at a much faster pace than the rest of the state or the country. The problems seem particularly pronounced in the East Bay, San Joaquin County and Solano County. ‘It’s a lot worse in the East Bay, which is the weakest part of the Bay Area economy,’ said Scott Anderson, a senior economist with San Francisco-based Wells Fargo Bank.”

“The fall of a once high-flying housing market in the East Bay and nearby regions unleashed many of the problems. ‘I’m trying to hang on here, but I’m afraid I’m going to lose my house,’ said Louis Tornillo, a Richmond resident and retired teacher who faces foreclosure.”

“His monthly mortgage payment went from $1,400 to $3,200. His home, once valued at $600,000, might now be worth less than its $400,000 mortgage.”

“‘In my part of Richmond, a lot of homes have had a devastating loss in value,’ Tornillo said. He hopes to find a rental in the Albany or El Cerrito area before the bank seizes his house.”

“Zillow reports that of the houses sold in 2005, 2006 and 2007, negative equity afflicts 59 percent of the homes in Alameda County, 76 percent in Contra Costa County, 85 percent in Solano County, and 93 percent in San Joaquin County. Nationwide, 52 percent of the homes sold during those three years suffer from negative equity.”

“Livermore resident Russell LaClair and his wife have watched their home values sag. The erosion weighs on their minds. ‘The problems with home prices diminishes our sense of wealth,’ said Russell LaClair.”

The Mercury News. “‘This is a storm the likes of which almost none of us have ever lived through before,’ said James A. Wilcox, professor of banking and finance at the Haas School of Business at University of California-Berkeley. ‘It is clearly the worst since the 1930s.’”

“Financial institutions are already tightening up on terms, conditions, rates and amounts of credit to businesses large and small, as well as to consumers. ‘Any number of us have gotten letters from our banks lately that have said the line of credit we thought we had for $20,000 has been reduced to $10,000,’ Wilcox said.”

“Now the wealth effect is running in reverse. ‘The headline I have been saying to people is that today we learned we are a lot less wealthy as a country than we thought we were,’ said Stephen Levy of the Center for Continuing Study of the California Economy.”

The Marin Independent Journal. “Bill Osher, chief economist with Tamalpais Bancorp, parent of Tamalpais Wealth Management in San Rafael, said Bank of America’s acquisition of Merrill Lynch & Co. and the bankruptcy filing of Lehman Bros. are part of a huge leverage bubble burst that followed the burst of a housing bubble caused by lenders making loans to unqualified buyers and selling the mortgages in the secondary market.”

“‘In the economy, the creation of money helps us grow,’ Osher said. ‘Money is created through leverage. If it creates a lot of growth, everybody is happy - the downside is we went too far.’”

The Sacramento Bee. “Wall Street’s meltdown is fast becoming Sacramento’s problem, too. It’s not just a psychological problem. The housing market crash has erased billions of dollars in wealth throughout Sacramento and the state. ‘A couple of years ago everybody thought they were rich,’ said Chris Thornberg, head of Beacon Economics consulting firm in Los Angeles.”

“Michael McGee, president of Winchester McGee Real Estate & Loans in Rancho Cordova, and others said they could feel credit markets tighten as underwriters become increasingly stingy. ‘It’s getting harder and harder by the day to qualify (for a loan),’ McGee said.”

“Victoria Benbow, an agent with Coldwell Banker in Sacramento, said one of her clients has a healthy credit score and employment history but is getting bombarded with requests for documentation from a nervous lender.”

“‘If there’s anything so slightly off-kilter, it requires at least one and two supervisors approving it,’ she said. ‘You can get approval and think you’re approved, and then you have to wait 10 days to get approval up the line.’”

From News 10. “San Joaquin County may be at the center of the nation’s foreclosure crisis, but that hasn’t stopped builders from putting up new homes. The Meritage Company continues to build in Lathrop, in a neighborhood called Riverstone.”

“It’s surprising to University of the Pacific Prof. Dr. John Knight who teaches finance and real estate. ‘It’s hard to understand, how the new homes can compete on a price basis, with the existing homes that are empty. It’s very hard to understand,’ said Knight.”

“‘Builders tend to want to build. When there’s inactivity, they get impatient to start building again. If they hit the market just right, they can get good profits,’ said Knight.”

The Recordnet. “A six-month-long streak of increasing existing-home sales in San Joaquin County ended last month - but not by much. Foreclosure homes continue to dominate a hot market, and closed sales slipped from 1,083 in July to 1,037 last month, according to figures from the latest Grupe Real Estate-TrendGraphix monthly sales report.”

“Foreclosures accounted for four out of 10 of the 4,419 single-family homes on the market last month and made up eight out of 10 of the closed home sales, the report said.”

“The median selling price last month of $205,000 slid by $10,000 from July. The monthly median hasn’t been that low since January 2002, when it stood at $200,000 countywide.”

“Ben Balsbaugh, residential sales manager for PMZ Real Estate in Stockton, said banks are looking to clear their stock of foreclosure properties, so they price them below market at times ‘to get them off their books.’”

“With most of the sales being foreclosures, ‘traditional sellers’ homes are just sitting there with no buyers, because they cannot compete with the bank-owned homes on price - so they have to lower their price,’ he said.”

“The number of foreclosures in the area is still on the rise; nearly 1,500 houses were foreclosed in San Joaquin County last month, according to the county Recorder’s Office.”

The Fresno Bee. “Sales of new houses continued to tumble in July as homebuilders struggled to compete with the popularity and low prices of foreclosures and a tightening credit crunch, experts said Monday.”

“In Fresno County, 158 new houses were sold, a 46.3% decline from July 2007 and 17.3% down from June. The median price fell 8.1% to $265,990 over the 12-month period, but was up 7.5% from June.”

“The monthly gain in price was likely temporary, said Jonathan Dienhart, director of published research at Costa Mesa-based real estate research firm Hanley Wood Market Intelligence, which released the report with the California Building Industry Association.”

“New-home sales in Tulare County fell 70.1% year-over-year and 26.5% for the month. Prices fell 22.1% to a median of $218,999 from a year earlier. Statewide, housing production is the lowest since World War II.”

“Robert Rivinius, California Building Industry Association president, said policymakers need to make it easier for home buyers to get loans.’

“‘Those who have good credit and verifiable income should be encouraged and able to buy a home,’ he said.”

The Tribune. “The residential real estate downturn has slowed bold development plans for areas on the edges of San Luis Obispo that were added to the city both this summer and in recent years. ‘We have just got it on hold right now until the economic climate gets better,’ said Richard DeBlauw of Deblauw Construction.”

“While some planning issues still appear on agendas for the residential projects, officials report the hurry-up-and-build momentum of just a few years ago has dissipated as other developers around the county are seeing homes go unsold.”

“‘That’s the big difference now as opposed to three years ago - the residential market has cooled off so there’s not absolute purchasers out there like there was then,’ said Tim Bochum, the city’s deputy director of public works.”

The Press Enterprise. “The Fed started lowering its federal funds rate about a year ago and had dropped it from 5.25 percent to 2 percent in an attempt to stimulate an economy battered by bad housing loans. Its meeting today has some economists suggesting that the bankruptcy of venerable investment broker Lehman Brothers Holdings and Bank of America’s buyout of Merrill Lynch might put another rate cut on the table.”

“Southern California economists and other financial experts, however, say it would not only be unlikely but probably not helpful to Inland Southern California or any of the other regions that are staggering under a huge number of foreclosures. There are doubts a lower interest rate would make it easier to refinance out of difficult loans.”

“‘My guess is they won’t’ drop the rate any lower, said Andy Montgomery, CEO of Palm Desert-based El Paseo Bank. ‘We’re already at 2 percent, and the rates being too high are not the issue. There’s just no one extending credit.’”

“The Inland area saw more than 21,000 foreclosure-related filings last month, according to RealtyTrac.”

“Redlands-based economist John Husing said there have been enough bad decisions to go around. But Husing agreed the Fed will not try to fix anything by changing the interest rates, nor does he think the Fed should make a move.”

“‘There’s a need to let the markets do what they’re going to do,’ Husing said. ‘Between (Fed Chairman) Ben Bernanke and (Treasury Secretary) Henry Paulson, there’s been a lot done to shore this up. But at some point they have to step up and say the federal government can’t take over the economy.”

“It will be harder for businesses to borrow, said Chapman University economist Esmael Adibi, but he doesn’t think an interest rate below 2 percent would help. ‘If you take it below 2 percent the Fed starts to run out of ammunition,’ Adibi said. ‘How much lower can it go?’”

“‘There’s no one lending anyway, so why change the rate?’ said Rancho Santa Fe-based Pacific Western Bank President William Powers, whose office is in Indian Wells.”

The Boston Herald reports from Massachusetts. “Call it the return of the $100,000 home. Real estate observers are seeing a spike in the number of single-family houses and condominiums available in certain areas of the state for $100,000 or less. Real estate agents say they’re seeing some eye-popping retro-like prices for some homes and condos in lower-income areas, often sold off by banks at bargain-basement deals just to get them off their books.”

“Gregory Burton said he recently sold a Dorchester two-bedroom condo on Jacob Street, just outside Codman Square, for $55,000. The same condo sold for about $179,000 three years ago.”

“A similar apartment in the same building was on the market this spring at $129,000 - and sold late last month for $50,000, according to listings.”

“Adam Day, an agent in Watertown, said he recently sold a newly renovated three-bedroom condo in Chelsea, originally listed at about $200,000, for only $152,000. ‘I do see the $200,000 barrier cracked more,’ said Day.”

“Boston workers were bracing yesterday for hundreds of job losses as the financial world reeled from the bankruptcy filing of Lehman Brothers and the planned $50 billion takeover of Merrill Lynch by Bank of America.”

“Merrill Lynch and Bank of America spokesmen said yesterday there would be some Boston job- and real estate-holdings cuts where overlaps occur, but declined to give specifics. Both companies have significant wealth-management businesses in Boston.”

“In Greater Boston alone, Merrill has 11 branches in mostly affluent towns, employing hundreds of workers.”

The Boston Globe. “‘No one ever thought they’d see a day like this,’ said Michael A. Greeley, managing general partner at IDG Ventures in Boston, who worked on Wall Street early in his career. ‘To think that two of our largest investment banks are now history is unfathomable.’”

“‘When the dust settles, there are going to be some people let go,’ said Scott M. Black, president of Boston investment firm Delphi Management Inc. ‘The real impact will be a shrinkage in available credit. Borrowing rates for individuals and corporations are going up.’”

“‘This contagion continues to spread,’ said Peter Falvey, cofounder of a Boston investment bank that had a deal-sharing arrangement with Lehman. Falvey said he didn’t expect his company would be financially hurt by Lehman’s demise but was more concerned about the overall financial environment. ‘We can’t see the bottom right now,’ he said. ‘That’s the most worrisome thing.’”

USA Today on Massachusetts. “‘It’s like a multiple-car accident on the highway - just a collision of things,’ says Robert Forrant, a professor at the University of Massachusetts-Lowell. ‘There’s disappearing jobs over a long period of time, then the home foreclosure crisis and obviously high energy costs. All of that has made people feel a great deal of economic anxiety.’”

“Roger Nascimento, owner of a small house-painting business may close off the second floor of his home and move his family downstairs this winter to save on heating costs.”

“‘People are getting laid off because businesses are closing down, and I’ve got two friends who are losing their houses,’ Roberts says. The town has one of the highest foreclosure rates in the state. Even tips are down as locals count their pennies. ‘The banks are nervous, and people are scared.’”

The Providence Journal from Rhode Island. “Many of the problems vexing financial markets relate to the run-up in housing prices earlier in the decade, said Willis H. Riccio, a Providence lawyer and former regulator with the U.S. Securities and Exchange Commission.”

“In essence, lenders made mortgage loans to people who could not afford them. These loans, in turn, were put together as packages and sold as investments. In time, the system began to unravel.”

“‘This crisis was borne of a simple excess of greed and speculation in one sector - real estate - by borrowers, lenders and financial middlemen,’ said Robert E. Cusack, chief investment officer at a money management firm in Providence. ‘Now that the collateral for all this borrowing has fallen in value, the stresses are enough to break those with enough exposure to it. Since this is as much a crisis of confidence as it is of money, there are no buyers of mortgage-backed paper in the markets. This makes things worse.’”

“Because lenders are tightening their standards, and for other reasons, ‘there’s just less liquidity in the marketplace,’ said Jordan E. Goodman, former Wall Street correspondent for Money magazine who was raised in Cranston. ‘It’s already hard to get a mortgage. It’s about to get harder. It’s already hard to get small-business loans. It’s going to get harder.’”

The New Haven Register on Connecticut. “Wall Street may be in New York City, but the descent of the mammoth investment firm Lehman Brothers Holdings Inc. into Chapter 11 bankruptcy protection Monday, along with Bank of America’s acquisition of the Merrill Lynch & Co. investment bank, will be felt in Connecticut, experts say.”

“The state’s Fairfield County area is linked to Metropolitan New York, with many of its residents commuting into the Big Apple to work. Due to layoffs, primarily in the financial sector, approximately 36,000 to 40,000 jobs have been lost, said Donald Klepper-Smith, chief economist at DataCore Partners LLC in New Haven and economic adviser to Gov. M. Jodi Rell.”

“‘Institutions must be allowed to fail in order for capitalism to survive,’ said Paul Schatz, a wealth manager in Woodbridge. ‘Certainly, this is the continuation of the lesson we should all learn from the housing crisis: There’s no free lunch.’”

From The Day in Connecticut. “Financial experts said the difference between then and now is that people who invested in Internet firms knew they were taking a risk, whereas today’s unpleasantness has spilled over to people who thought they were making conservative investments.”

“Glenn Hamler, a financial adviser in New London, said he heard of one local investor whose $800,000 investment in Lehman Brothers now may well be worthless. Others, according to economists, have had to delay retirement because of sudden losses of 20 to 30 percent in their 401(k) plans.”

“‘It’s a cruel animal, capitalism,’ Hamler said. ‘When things change in the market, there are no prisoners.’”

“‘The market is brutally punishing bad decisions over time,’ added Middleton.”

“Bill Middleton, an investment adviser in Mystic, said the current crisis can be looked at as similar to periods in which other industries - notably Internet firms in the late 1990s and biotech operations in the ’80s - experienced overcapacity.”

“‘There were too many banks chasing too few dollars,’ Middleton said. ‘When we got rid of excess capacity in Internet companies, we didn’t look at it as a social crisis. But for people in the Internet business that was a pretty unpleasant time.’”

The Times Union from New York. “As has been widely noted, it was the easy availability of mortgages that contributed to rising numbers of foreclosures and a roiling of Wall Street.”

“But Lawrence Yun, the chief economist for the National Association of Realtors, said the foreclosure crisis has been hyped, pointing out that only one of every 100 American households has been foreclosed upon. ‘It’s very high from a historical point of view, but it’s not as if people are falling apart right and left,’ he said. ‘It’s important to put that in perspective.’”

“In fact, Yun said he sees the housing market, both nationally and in New York, as ‘out of whack.’”

“Mortgage rates are very low and the federal government has just launched a $7,500 tax credit designed to spur home purchases. Yet even in places with rapid job growth — such as in Indianapolis or Texas metropolitan areas — homes sales are lagging.”

“The reason for that gap, in Yun’s view, is eroding consumer confidence largely caused by negativity, both in the media and elsewhere, about the market. Yun, by contrast, is more optimistic, believing the housing slump is nearly over.”

“‘The winter months are always weaker (for home sales), but this winter will be better than last winter,’ he said. ‘There is this great pent-up demand that cannot be held back any further.’”

“Events of the last few days might make such economic optimism seem far-fetched. And even Federal Reserve Chairman Ben Bernanke has predicted continuing housing market weakness. Yun, in fact, on Monday rebuked Bernanke for such predictions, saying if it’s inappropriate to forecast stock or oil prices, ‘it is inappropriate to comment on home prices, because people react to that.’”

“To applause from his Realtor audience, Yun said he had made that point in a letter to Bernanke. And he rued that former Fed Chairman Alan Greenspan is also issuing more negative housing market predictions.”

“‘But there’s little that can be done about that,’ Yun said.”

The Post Standard from New York. “The law shows up with one hand on their holstered pistols. Two Onondaga County sheriff’s deputies bring a hard reality. The inhabitants of 4692 Beef St., in Onondaga, can’t live here anymore.”

“‘Sheriff! Anyone here?’ shouts Sgt. Bob Burns as he slides open an unlocked door after his knock goes unanswered.”

“The former owners of the home, Andrew and Roxanna Crysler, hadn’t made a mortgage payment in 17 months, according to court records. The lending company that held the mortgage, GMAC Mortgage LLC, exhausted its efforts in court to get its money. GMAC persuaded a judge to issue an order in April to have deputies evict the Cryslers and their possessions.”

“The empty home was the deputies’ second eviction in a week. Two days earlier, they went through the same routine at a $500,000 home in Clay. In both cases, the residents had moved out in advance of the deputies.”

“‘They never talked about it,’ neighbor Marie Temara said of the Cryslers. ‘They just left.’”

The Star Ledger from New Jersey. “Much has been written about how easy credit fueled a housing bubble. Six years ago, owning a home — the American Dream — seemed to be in everyone’s reach. And not just owning one home, but several. Don’t have the cash to put 20 percent down? No problem. The rules went out the window. Money was lent freely.”

“People who could never afford a home suddenly could. And people who could afford a $250,000 Cape Cod were lent enough to buy $500,000 McMansions.”

“Here are some of the factors experts said led to the debacle. Alan Greenspan, former Federal Reserve chairman, has been taking the heat for driving interest rates so low after the internet bubble and 9/11 terrorist attacks led to a mild recession.”

“‘With the benefit of hindsight, it does look like interest rates were too low for too long, and it does look like it contributed to the housing bubble,’ said Robert Dye, senior economist for the PNC Financial Services Group. ‘But that wasn’t the only thing. The risk in the mortgage industry became a hot potato — it was passed on and passed on.’”

“‘We had a home ownership rate that went from 40 percent in the Great Depression to approaching 70 percent a year or so ago,’ Dye said. ‘The big lesson we learned is that simply is too high.’”

“‘I have a theory — it’s called the marginal moron theory — which says that wrong people get into the markets for the wrong reasons at the wrong times,’ said Scott Rothbort, a finance professor at Seton Hall University. ‘You had people who all of a sudden thought the housing market was an open casino — no money down.’”

The Asbury Park Press from New Jersey. “The meltdown on Wall Street capped a tumultuous 24 hours. During the one-day sell-off, about $700 billion evaporated from retirement plans, government pension funds and other investment portfolios.”

“The uncertainty can be traced to the housing market’s collapse. Lenders, emboldened by soaring home prices earlier in the decade, loosened their underwriting standards and approved home loans to consumers who couldn’t afford them. They then bundled the loans and sold them to investors worldwide, experts said.”

“‘”I think what we are witnessing is the end of the phase in which (easy) debt was made available,’ said Patrick J. O’Keefe, former CEO of the New Jersey Builders Association. ‘What America is going to have to come to grips with is our addition to debt is at an end.’”

“Meanwhile, the state’s housing market continues to be weighed down by rising foreclosures, falling home prices and stricter credit standards, said Joan Martinez, a mortgage loan officer in Berkeley.”

“‘It’s very difficult to get a mortgage these days,’ she said. ‘This is the worst I’ve ever seen it.’”

“Harold Olsen, 72, of Tinton Falls, has been unable to sell his home, despite lowering the price almost 25 percent. ‘Everybody is up against the same situation,’ he said.”

“Olsen moved into his home in 2001 and put it on the market two years ago, asking $680,000. He has lowered the price to $520,000. But still, no one has come close to the price; one recent buyer offered $390,000.”

“‘I’m going to be a little above breaking even - if I sell it at this price,’ Olsen said.”

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