The Housing Bubble

It’s Friday desk clearing time for this blogger. “When presidential candidates John McCain and Barack Obama used ‘Joe the Plumber’ as a symbol of working-class Americans during Wednesday’s debate…they might as well have been talking about…Joe Torres. He’s worried that if banks don’t open up lines of credit for people to remodel their homes, he won’t have enough income to survive. But he also knows that many people have no equity left to tap in their homes. Already, his house is worth less than his mortgage, and he’s in danger of foreclosure.”

“Torres was grateful to have a job at a Los Gatos remodel project Thursday. Two months ago, ‘I was sitting in my house; there were no jobs.’”

“Mortgage woes were among the top causes for concern, according to the professionals assembled for the call-in by the San Joaquin County chapter of the Financial Planning Association. Hank Klor, a Stockton-based tax and financial adviser, spoke to a 49-year-old single mother who owes nearly $250,000 on two mortgage loans, recently had her income drop by a third and can’t make her paycheck stretch over all the necessities anymore. With her home worth only $140,000 to $150,000 because of falling prices, refinancing seems impossible.”

“She might seek to have her loans modified, get the lender to agree take a loss on a short sale or, Klor said he told her, ‘You need to look at the possibility you may have to walk away from your home.’”

“Facing debilitating health problems, Joey Goldner refinanced his Highland Park home repeatedly only to wind up with a $729,000 mortgage on a house that eventually sold for $450,000. ‘I kept refinancing it to pay the mortgage,’ he said. ‘I kept hoping the market would level off. I never imagined this would happen.’”

“Matt Bender and Susan Flynn of Chicago’s West Ridge neighborhood are expecting a baby in January, but Bender’s nicely rehabbed third-floor condo is too small and the stairs are too numerous to regularly cart a newborn—and the equipment he or she will require—up and down. They need a house, desperately, but to get one they must first sell the condo. It has been on the market for a while at $6,000 less than what Bender paid for it three years ago. They’ve had nary a nibble.”

“If and when they sell the place, Bender will have to tap into his savings to pay off the rest of his mortgage. ‘You’ve got to feel lucky to have a place to live and a job, I suppose,’ said Bender. ‘But this is pretty humbling. And we’re kind of stuck.’”

“‘We just never thought we’d be faced with this,’ Flynn said. ‘Real estate was supposed to be the one investment you could really count on.’”

“That’s certainly what Goldner believed. Now at 55, he wonders if he’ll ever own a piece of property again. ‘I loved property,’ he said, wistfully. ‘Wicker Park. Bucktown. Logan Square. Wrigleyville. I had property everywhere. Now I just want to survive.’”

“Almost two years ago, Tracy and Michelle Miller were among the first families to move into Yorkville’s Grande Reserve. Now the Millers want out. They put their house up for sale seven months ago at the same price they paid to have it built. But they are competing with discounted models in their own subdivision as well as others offered at reduced prices after foreclosures. Only two people viewed the Miller property in the first six months.”

“‘We pictured it would be almost filled [by now],’ said Tracy Miller, who occasionally mows weeds on nearby lots. ‘No one’s really come out and told us anything. No one knows what’s going on.’”

“The total number of single-family sales in North Idaho during the last six-month period has nearly dropped to 1999 levels during the same six months, according to statistics released by the Coeur d’Alene MLS.”

“Joel Pearl, a real estate agent with Century 21 Beutler & Associates, said some potential buyers aren’t getting in the game even though there are some great bargains. ‘It appears to me people would rather buy on the upswing than on the downswing,’ Pearl said. ‘They don’t want to gamble.’”

“The spiraling crunch is threatening to curb access to a popular state-sponsored first-time homebuyer program. The Minnesota Housing Finance Agency said the deepening freeze in the credit markets forced it to scrap a $100 million bond issue late last month.”

“Minnesota Housing’s bonds are highly rated — AA1 by Moody’s and AA+ by Standard & Poor’s — meaning there is very little chance of default. That makes little difference these days, says Gerry Kraut, CEO of a Minneapolis investment bank. ‘Now nobody trusts the ratings anymore,’ he said.”

“Business is bad. Prices are up. Houses aren’t selling. Retirement savings are up in smoke. And last month, the entire city of Nashville ran out of gas. ‘I guess we’re going to be working for a while,’ said Harold Skelton of Franklin, who bought a new home last year, just before the crash, when housing prices and values were at their peak.”

“The only thing more depressing than thinking about the mortgage is thinking about the stock portfolio. ‘My stocks haven’t done anything in the last 10 years, and everything I’ve put in this year is gone,’ Skelton said.”

“Bob and Wanda O’Donoghue, retirees from Lafayette, are finding it’s no easy thing to live on a fixed income, when the price of everything from groceries to gasoline keeps rising. ‘The hard part for us is the increasing cost of everything. You feel it in your cash flow,’ Bob O’Donoghue said. ‘We had a great money party in this country, and now the party’s over.’”

“Elon faculty financial experts gathered to discuss the origins, implications and issues surrounding the credit crunch Wednesday night. Kevin Kelly, former analyst and trader for Bear Stearns, was critical of regulators for not taking action sooner, citing many indicators of an upcoming problem.”

“He said the issue first became apparent with Bear Sterns and that the market did not pay attention to the impact derivatives – a transfer of risk in which companies buy protection – would have on the economy. ‘The colossal error was falling under political pressure and letting Lehman Brothers go,’ he said. ‘The regulators were asleep at the switch and I lost my firm because of it.’”

“Kelly said while there is plenty of blame to go around for this crisis, he believes the worst of it is over. All the panelists agreed that what was most important at this point is that housing prices stop declining.”

“Speaking to 400 Crye-Leike agents, National Association of Realtors’ chief economist Lawrence Yun said the nation will be in an economic recession for the next three quarters; however, the current climate will not translate into a further downturn in home sales and values.”

“‘While the economy will be sluggish for the next three quarters, we can already see recovery out west in California, Nevada and Arizona and we’re also starting to see an increase in home buying in South Florida,’ he said.”

“He said the $7,500 first-time homebuyer tax credit doesn’t go far enough to spur more buying. ‘Myself and the NAR leadership are strongly encouraging the U.S. Congress and the President to support the homebuyer tax credit with no repayment,’ he said, according to the statement. ‘In its present form, a first-time buyer must repay the tax credit over a 15-year period. While in its current form it is a tremendous benefit, I believe if the repayment feature was removed many more first-time buyers would jump into the market.’”

“Leigh Sogoloff, who spends her evenings lap-dancing at Rick’s Cabaret Vegas, says she’s making half her income of a year ago. She has postponed buying a house and is reading Deepak Chopra. ‘I know how to save money. I’m not a dumb stripper.’”

“Sogoloff’s put her plans to buy a house on hold while she watches her money. ‘That’s why I don’t own a home right now.”’

“Vegas workers may see their pay continue to shrink as tourists, turned off by the casino-style wagers they placed on their homes and retirement funds, stay away, said Faith Popcorn, who tracks cultural trends and spending habits. ‘When we talk about gambling, that’s a word we don’t want in our vocabulary.”’

“The Buffalo Niagara Realtors Association reported Wednesday that 963 homes were sold last month, down two percent from the 985 residences sold in September 2007. Realty USA President Merle Whitehead has already seen fallout from the national economic upheaval. ‘We have had buyers who have called to say ‘Hey, we’ve decided to sit tight for a while.’ I don’t think it’s surprising given Wall Street’s extreme swings,’ Whitehead said.”

“However, he’s not concerned buyers and sellers will stay on the sidelines for long given Buffalo’s relatively steady economy. ‘I’ve always always been jealous of real estate people in California and Las Vegas doing big deals for big dollars, but now they’re jealous of me,’ Whitehead said.”

The St Petersburg Times reports from Florida. “Nearly half of the people who bought homes in the Tampa Bay area in the last five years owe more than their home is worth. The story is even worse for those who bought at the market’s peak in 2006. More than 70 percent of those buyers in Tampa and St. Petersburg now have negative equity, according to Zillow. ‘We don’t have anything left,’ said Darryl Outlaw, who estimates that he and his wife owe at least $50,000 more than their Dover home is worth.”

“The couple have burned through their savings and a second mortgage they took out to pay bills. They figure it’s only a matter of time before they lose their home. ‘I never thought I’d be in this position. We’ve always made good financial decisions. My mortgage is at 5 percent, and we’ve never lived beyond our means. I just can’t find work. Our only options now are to sell or walk away,’ he said.’”

“Mike Kelly has a front-row seat to the crisis. As a mortgage broker, it’s his job to get people the money they need to buy houses. These days, Kelly spends most of his time trying to get people money so they can keep their houses. He understands their plight; he also owes more on his Seminole home than it’s worth. ‘We’re way upside down,’ said Kelly. ‘But not quite as bad as others.’”

“He blames his situation on greed. Kelly bought his home in 2002. Two years later, the 3-bedroom, 2-bath with a pool was appraised at $310,000, he said. Its current market value is $240,000, about $50,000 less than he owes. A few years ago, he and a partner decided to play the flipping game using his home equity. The pair did well with a couple of properties. But the last one —- a condo conversion at Lake Seminole — bombed. They got $105,000 less than they paid.”

“But Kelly said he’s not giving up yet. ‘I’m not walking away,’ he said. ‘I’m not going anywhere.’”

The Palm Beach Post. “Warrants have been issued for the arrest and detention of Merco Group executives Tony Castro and Homero Meruelo Jr. after the two men failed to appear at depositions linked to the failed Palladio Terrace condo project. The luxury condominium in West Palm Beach was never built.”

“For the past two years, though, Miami-based Merco Group has refused to return $10 million in buyer deposits. Earlier this year, Merco consented to a $1.9 million judgment in a case filed by several Palladio buyers. Despite the judgment, the would-be buyers have not been able to collect, said Greg Pill, a San Francisco man who says he’s owed $166,500 in deposits on two Palladio Terrace units.”

“But Palm City residents Leonard and Dianna Rosenblatt aren’t giving up on seeing their $400,000 again. They are among 26 Palladio buyers suing the Gunster Yoakley law firm for failing to protect deposit money it held in escrow for Merco.”

“Others say Gunster knew, or should have known, construction hadn’t really started, especially since the firm ‘has two offices within three miles of the property,’ Rosenblatt said. Tracy Sundlun of San Diego agrees. Sundlun, who says he still hasn’t received a refund on his $91,400 deposit, has joined the Palm Beach County Circuit Court lawsuit against Gunster Yoakley.”

“‘Somebody has to say, ‘I think we ought to check this out a bit. We’re about to release how many millions of dollars on an empty lot,’ he said.”

“How low can the price of downtown real estate go? Wood Partners is about to find out. The developer of The Edge condominium will hold a bargain-basement auction next month on 41 unsold units - with some listed at a 70 percent discount from their regular asking prices.”

“The Edge is a 15-story, 307-unit building. Despite the location and amenities, only half the units have sold, at prices ranging from $200,000 to $600,000-plus. A one-bedroom unit that was priced at $337,000 will have a minimum selling price of $95,000, or $142-per-square-foot, a 72 percent discount. A two-bedroom, two-bath unit that was going for $560,000 will be offered for $160,000, or $163 a square foot, a 71 percent discount. Other units are being offered at discounts ranging from 42 percent to 70 percent.”

“‘It’s impossible to believe prices could go lower,’ said Gollinger, of Accelerated Marketing Partners, which is conducting the auction. ‘How can anyone go wrong?’”

“After a five-year building boom, downtown West Palm Beach is dotted with empty condo towers from Flagler Drive to Australian - with more than 1,000 units still in the pipeline. Most buyers who purchased units in the past few years have seen their values plummet as sales have all but stalled.”

“For the 151 buyers who have units at The Edge, the auction is terrible news. ‘For most of them, this is going to wipe out their down payments and make the value of their units considerably lower than their mortgage amounts,’ said Jack McCabe, of McCabe Research and Consulting in Deerfield Beach. ‘Existing owners are going to be very upset. And if they’re trying to resell now, the builder just killed that possibility.’”

“‘They are marking down to where the bottom is and to where these units are now affordable for the majority of Palm Beach County’s workforce,’ McCabe said. Still, he said, ‘People are going to take a look at it and say, ‘My God. Is that really where the market has gone?’”

“Jay Jacobson, South Florida director of Wood Partners, admits Wood Partners considered postponing the event because of the ongoing credit crunch. With three new West Palm Beach condos dumping another 1,200 units on the market during the next 60 days, however, Wood Partners thought it best to try to beat the competition.”

“More than anything else, Jacobson and Gollinger said the auction’s outcome could be a crucial economic indicator. ‘We think the auction will be great gauge to see if consumer confidence is still out there, at any level,’ Jacobson said.”

The Tampa Tribune. “Luxury condos for about $128,000? Believe it. An unidentified company paid $21.9 million for 171 condos and 12,900 square feet of retail space at The Place at Channelside, said Lamar Fisher of Fisher Auction Co.”

“The units were originally marketed for about $200,000 to $1 million. The developer of the project, which filed for bankruptcy protection, owes the bank more than $47 million. ‘I think everyone involved is really happy with the result,’ Fisher said.”

The Miami Herald. “He frequents the pool at The Venetia condo building. He leaves his Jaguar with the valet. He uses the gym. He’s also behind on his mortgage and isn’t paying his condo association fees. Neither is his lender, and the association’s board worries the bank is delaying foreclosure to avoid paying dues as well.”

“Sharon Dodge, president of The Venetia’s association, angrily told a crowd of South Florida condo dwellers at a meeting this week that 134 units were not paying maintenance fees in the 382-unit building. Of those, at least 35 are in the hands of lenders who aren’t playing fair. ‘Something needs to change!’ Dodge said, drawing rowdy applause from the crowd in Miami Beach.”

“The unpaid accounts have resulted in higher association fees for everyone and crippling special assessments to cover large one-time expenses like roof repairs. Less than a year ago, The Venetia had to slap an $8,000 special assessment on homeowners because, at the time, roughly a quarter of them were delinquent.”

“‘We are in a death spiral,’ said Miami Beach Commissioner Jerry Libbin. ‘It’s the foreclosures that are not happening, the banks that are not taking the actions that they should be taking that are causing additional assessments to be foisted on good condo unit owners.’”

“At the root of the problem, Libbin and the condo boards say, is a state law that seems to give banks incentives not to foreclose on delinquent borrowers in their buildings. Upon taking title to a unit through foreclosure, a lender must pay condo associations 1 percent of the original mortgage amount or six months of unpaid maintenance fees, whichever is less. After the initial sum, the lender then starts making full monthly payments like other unit owners.”

“‘The association pays to preserve and protect the bank’s collateral while they sit on their hands for months or years without taking steps to foreclose,’ said Ken Direktor, an attorney with a firm representing condo associations. ‘We are providing services for the benefit of the bank. Why shouldn’t they pay for it? They are getting a free ride.’”

“In an interview, Marc Ben-Ezra, an attorney who files foreclosures statewide for lenders, said he was not aware of lenders deliberately stalling foreclosures to avoid condo fees and warned against enacting laws that could make lenders more averse to financing units to new buyers. ‘If the mortgage holder knows they could be wiped out due to a much smaller association lien, the lender wouldn’t lend in those buildings. If they make it too risky for lenders to lend, their property values are only going to go down further,’ Ben-Ezra said.”

“Anthony DiMarco, a lobbyist for the Florida Bankers Association, said banks have been put in almost a no-win situation when it comes to condos. ‘On the one hand, we are working with homeowners and also being encouraged by the government to keep them in their homes, and, on the other hand, we’re being told we’re not foreclosing fast enough. So what are we supposed to do?”’

“”I don’t understand, personally, why the bank who lent somebody money is responsible for someone who didn’t uphold their end of the bargain,’ DiMarco said. ‘Once we take it over, that’s fine. We should pay going forward. I don’t know why if you lend money, you’re somehow responsible for something somebody else didn’t do.’”

“The state’s economy already was in trouble from the housing market bust when the national financial system meltdown added to our woes, University of Florida economist Dave Denslow told a statewide economic development agency, at its quarterly meeting. ‘Florida has been in a recession for about a year now,’ Denslow said. ‘It hasn’t been that severe a recession. Now we get the national recession on top of it.”’

“Population growth, which helped pull Florida out of past downturns, has slowed drastically. In fact, for the first time since UF researchers began keeping track 40 years ago, the number of electric hookups in the state actually fell slightly in September, Denslow said. ‘Population growth has slowed very dramatically in this state,’ Denslow said.”

“He predicted that the state will remain in recession through the 3rd quarter of next year. Tom Cunningham, an economist with the Federal Reserve Bank of Atlanta, gave a similar assessment. ‘Consumption, which accounts for two-thirds of the economy, is falling,’ he said.”

“Board member Tony Villamil, an economist and dean of the St. Thomas University business school, agreed with his colleagues’ prognosis, adding that Florida’s business connections with foreign countries — another major shield against past downturns — is weakening. ‘The international sector has been a key driver,’ he said. ‘That is starting to slow.’”

“Earlier in the meeting, Enterprise Florida president John A. Adams Jr. tried to reassure his board that things aren’t so bad. ‘The underpinning of our economy is basically good,’ he said. ‘We are still a growth state. It’s not as fast as it has been, but remember, we’re still a growth state.”’

“That prompted ridicule from economist Cunningham, who spoke next. ‘Evidently, from our last report, everything in Florida is hunky-dory,’ he said.”

The Pensacola News Journal. “With two teenagers soon headed to college, Shelley and Steve Black are ready to downsize, sell their Cottage Hill home north of Cantonment and move to Pensacola. But the Blacks, who put their rural 11-acre property on the market in July, have seen their plans stymied by a market flooded with thousands of homes and too few buyers.”

“Sandra and Bo Davis, both University of West Florida professors, are in the same boat. Davis said her husband is nearing retirement, and they want their Copper Ridge home to sell as soon as possible. Both couples are taking part in Coldwell Banker United’s 10-day, 10-percent off sale, which runs through Oct. 19.”

“The Blacks have lowered their asking price from $475,000 to $427,500, and the Davises lowered theirs from $210,000 to $189,000. Despite area homes languishing on the market an average of 136 days, the Davises are optimistic dropping their asking price by $20,000 will find them a buyer. ‘We believe our home will sell in a very short period of time at the highest price obtainable,’ said Sandra Davis.”

“Let’s distill the housing crisis down to its barest essence: The United States built millions more homes than there were families to fill them. Economists have dubbed this surplus the housing ‘overhang.’ And we in Florida — forgive the pun — have one of the nation’s worst hangovers.”

“Among major metros, the Tampa Bay area ranked second in home vacancies in 2007 at 5.1 percent, almost triple the empty homes just two years earlier. Orlando was tops at 7.4 percent. Two years after Tampa builders started applying the brakes, we’ve still got about 35,000 homes, new and used, jamming the ‘For Sale’ listings. That number has been almost impervious to improvement, thanks in part to all the foreclosures feeding the glut.”

“This is the year the first big wave of baby boomers are retiring. Unfortunately, these boomers’ departure from the work world coincided with a recession, credit crunch and stock market meltdown. Not exactly prime time to up and relocate to the sunny strands of St. Petersburg.”

“Home prices probably won’t rise substantially for another two or three years. It’s part of our continuing penance for overindulging in 2005. The real estate market will be ready to catch the next wave of boomer retirees in 2011, when they start turning 65. Maybe this time around we’ll build houses people actually need.”

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