The Housing Bubble

It’s Friday desk clearing time for this blogger. “Housing clearance rates remained soft across the country over the weekend, particularly in the nation’s biggest markets of Melbourne and Sydney, which showed no signs of recovering from their torpor. The Australian reported many homes continue to sell for well under what their owners had hoped to get. When Melbourne grandmother Jennifer Webbe put her home of 15 years on the market, she thought she would get $740,000 for her house in the city’s sought-after southern suburbs.”

“But reality came crashing down - in concert with the world’s financial markets - and Ms Webbe sold her McKinnon house on the weekend for about $100,000 less than she wanted, one week before her scheduled auction next Sunday. ‘Each week the market has got worse and worse,’ she said. ‘Last week when the stock market crashed, I wasn’t looking good. I felt my timing wasn’t great. I didn’t have a great number of people coming through the house.’”

“Although she didn’t get the price she wanted, Ms Webbe didn’t have to look far to find cautionary tales. Just a few doors down another house was auctioned yesterday. The 40-strong crowd remained silent and the house was passed in without anyone making a single bid.”

“Virginia Washington, a 64-year-old medical secretary from California, bought her retirement home in the town of Tolleson, Arizona, in 1996. ‘It was supposed to be my dream home, but it has turned out to be a nightmare,’ said Washington, who owes $207,000 on a house that is worth about $150,000.”

‘Washington is haunted by the fear of losing the $65,000 in savings she put down as her deposit. ‘Many people did not put any money down on a home and they feel free to walk away. But $65,000, there’s no money tree that grows that kind of money,’ she said.”

“Sisters Annette and Karlene Parker said they broke down when their lender told them last week it was foreclosing on the Miramar home they have shared since 2006. They had been paying $1,800 each month, but an interest rate adjustment raised their payment by almost $400. ‘It was just too much, with everything going on,’ said Annette Parker.”

“Karlene Parker said borrowers needed help hanging on to homes that were ‘overvalued in the first place.’ ‘I don’t think the government needs to pay off our house. They need to come reassess the value of the home and then lower our mortgage and . . . interest rate,’ said Parker.”

“Take a drive around the Hamptons and all the For Sale signs littering the landscaped lawns might suggest that the East End of Long Island is finally joining the rest of the country in a real estate slump. Gerald Madigan, a financial professional, put his five-bedroom East Hampton home on the market for $2 million last spring, when he purchased a house in nearby Water Mill. Late in the summer, he lowered the price to $1.75 million, but he plans to rent the property rather than accept a rock-bottom offer.”

“‘If I wanted to price it at a giveaway price, I could get rid of it,’ he said. ‘My intent right now is to ride it out.’”

“Oliver Fisk and his girlfriend have been hunting for a one-bedroom apartment in London over the last four years and they’re further away than ever from getting onto the property ladder. ‘We’re definitely holding out for a bit longer, especially with the things that are going on with the banks,’ the 28-year- old information-technology specialist said.”

“If the U.K. government’s 500 billion-pound package, presented Oct. 8, fails to revive mortgage-lending in time, Oliver Fisk and his partner may find themselves back where they were a year ago. ‘It got to the point we thought we had to get on the ladder and buy a pokey flat for a ridiculous multiple so we can start thinking about starting a family,’ he said.”

“Home builders hoped for good news from their top economist on Wednesday —- and got nothing. ‘Things are a lot worse than anyone anticipated,’ said David Seiders, chief economist for the National Association of Home Builders. ‘The key word is risk,’ he warned. ‘The momentum is still definitely downward.’”

“He offered chart after chart to back up his pessimism. By last September, the rate had crashed to just 530,000 permits. ‘The numbers go off the edge of the cliff,’ Seiders said. The decline is ‘world-class in terms of the degree of contraction and the speed of contraction.’”

“Once upon a time, the World Economic Forum was the ultimate Wall Street jamboree. Now, in the riptide of the worst financial crisis since the Great Depression, WEF officials and delegates say many of the chief executive officers who gathered in Davos, Switzerland, over the last five years didn’t listen to warnings from their peers.”

“‘The partying crept in,’ says Klaus Schwab, the 70-year- old WEF founder and executive chairman. ‘We let it get out of control, and attention was taken away from the speed and complexity of how the world’s challenges built up.”’

“The fallout has left the WEF riddled in buyer’s remorse, with officials throughout the organization asking what they have wrought and, like Wall Street, whether they offered too much of a good thing. Schwab says the delegates treated him like ‘Cassandra’ whenever he questioned the logic of their wisdom on asset-price bubbles in housing, stocks and other financial instruments.”

“The moment the credit crisis claimed an entire country, even if it was Iceland, which is smaller than Canberra and I daresay colder, we were in trouble. Stone the krona, as one headline put it. What next? Well, there’s a recession in the US that could turn nasty and commodity prices are plunging.”

“But getting back to Iceland for a moment. Its banks collapsed because they borrowed too much from the rest of the world to lend on inflated housing prices and finished up owing more than the country’s GDP. Um, sound familiar?”

“U.S. lawmakers have accused major credit rating agencies of serious failures in how they assessed mortgage-backed securities and other investments. Executives of major firms, and former employees testified at a congressional hearing. Sean Egan, Managing Director of the Egan-Jones credit ranging agency, asserts that major credit agencies knowingly issued grossly inflated and possibly fraudulent ratings.”

“‘Issuers paid huge amounts to these rating companies for not just significant rating fees, but in many cases very significant consulting fees for advising the issuers on how to structure the bonds to achieve maximum AAA ratings. This egregious conflict of interest may be the single greatest cause of the present global economic crisis,’ he said.”

“Richard J. Rosen, a senior economist and economic adviser at the Chicago Federal Reserve: ‘Mortgage-backed securities had historically been a fairly safe investment offering a better return than even safer U.S. Treasury debt. With interest rates near historic lows from 2001 to 2004, investors around the world were trying to earn more on their investments. At the time, mortgage-backed securities, which had been heavily promoted abroad by the U.S. government, seemed like a fairly safe option.’”

“‘As global investors demanded more mortgage-backed securities, banks began looking for more mortgages to buy, repackage and resell. This was one of the reasons lending standards loosened. By the time it became clear that many home loans had gone to people who wouldn’t be able to repay them, the market had grown large enough to shake investors all over the world - from community banks in California to multi-billion-dollar banks in Germany.’”

“Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted yesterday that he ‘made a mistake’ in trusting that free markets could regulate themselves without government oversight.”

“Greenspan, who stepped down in 2006, denied that the nation’s economic crisis was his fault but he conceded that the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a ’state of shocked disbelief.’”

“Greenspan acknowledged under questioning that he had made a ‘mistake’ in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan said, ‘I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.’”

“Greenspan was asked to defend a variety of actions he took as Federal Reserve chairman — resisting recommendations to use the Fed’s powers to crack down on subprime mortgages, for one. And opposing efforts to impose regulations on derivatives.”

“As for firms that package mortgages into securities, he said, ‘As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue.’”

“He acknowledged that he had also been wrong in rejecting fears that the five-year housing boom was turning into an unsustainable speculative bubble that could harm the economy when it burst. Greenspan maintained during that period that home prices were unlikely to post a significant decline nationally because housing was a local market.”

“He said yesterday that he held to that belief because until the current housing slump there had never been such a significant decline in prices nationwide. He said the current financial crisis had ‘turned out to be much broader than anything that I could have imagined.’”

“Recessions come around at a pace of a little more than once a decade, and there is little that government can do or should try to do to prevent them. Recessions are as necessary to prosperity as are recoveries.”

“That might seem like a harsh thing to say. Recessions extract their own degree of pain. The reality is, however, that they are medicine required to purge the economy of excesses and to lay the groundwork for future robust growth.”

“The excesses go way beyond subprime housing. At all levels and in all ways, the U.S. economy is built on borrowing and consuming. American households are $14 trillion in debt, up from $680 billion in 1974. The U.S. government is nearly $10 trillion in debt, up from $5.7 trillion at the beginning of the Bush presidency.”

“The question isn’t whether the nation is going to pay for all the years of excess, but how. Not only do home prices need to bottom out, but America needs to focus more on investing and producing, and less on borrowing and consuming. That won’t be easy. There is, however, one tool for accomplishing this, and it’s called a recession.”

The News Journal reports from Delaware. “For Delaware in particular, key industries are sensitive to national economic conditions. That point has been hammered home in recent weeks with employers dumping bad news on workers. ‘”If you look at the major industries in Delaware, they all do seem to be exposed to recessionary conditions,’ said Robert Dye, an economist for PNC Financial Services Group in Pittsburgh. ‘Delaware is definitely going to be feeling the effects of the downturn, and we do expect that to get worse before it gets better.’”

“As incomes have dropped relative to the rest of the country, Delawareans also have watched median home prices in the state fall 9 percent after peaking in late 2006. John Stapleford, an economist who covers Delaware for Economy.com., said housing sales are not likely to match the pace of earlier this decade, when a housing bubble inflated and helped spark the current economic crisis. ‘We’re never going to go back to the heyday,’ Stapleford said.”

From WTOP in Maryland. “A Maryland woman is among the thousands of people losing their homes to foreclosure. But she’s actually using the situation to her advantage. While she foreclosed a couple of years ago, she’s still living in the home - and paying nothing. Deborah was renting a townhouse in Gaithersburg in the north Montgomery Village area in August 2005, when the owner decided to sell the home. ”

“Although Deborah was making less than $32,000 a year and had just been through a divorce, she decided to purchase the home. She was told she could qualify for a home in the $200,000 - $250,000 range, but the townhouse was $379,000 — and escalated to $405,000 at closing.”

‘In order to buy the home, Deborah got what’s called a No-Document Loan, meaning she did not have to document any income as long as she got a certain credit score. Deborah combined the No-Document Loan with another loan and was able to buy the townhouse.”

“Deborah knew she couldn’t afford it but says she planned on finding someone to rent the basement of the home. She never found someone to rent. Deborah tried to refinance in April, but didn’t qualify. She tried to sell the home in June 2006, but didn’t receive any offers. In September 2006, her home went to foreclosure auction.”

“‘It’s very hard to repossess a house and get someone out of it,’ Deborah says. ‘It just means I’m smart.’”

“It’s been 42 months since Deborah moved into the home, and she has not paid a single penny for her mortgage. She says her situation is fair. ‘I made my choice fully knowing what I was doing and knowing it was a gamble,’ Deborah says. Deborah plans to rent next, and says she has a deposit down on a building under construction.”

The Virginian Pilot. “When the dividend check he expected in April didn’t arrive, Tim Moore made repeated phone calls to WexTrust Capital’s offices in Norfolk and Chicago. The check eventually came, but it bounced. Moore’s trusted adviser, Paul Clemmons, said he expects to recover much of what he put into a warehouse, a hotel and other WexTrust real-estate deals. Clemmons, who recommended WexTrust to investors and helped some refinance their homes to raise investment funds, said he, too, borrowed on his home to invest. Because of the lost income, he sold his home in July and refinanced an investment property.”

“‘I’ve gone from home ownership to renting, and I got rid of my toys,’ including a $130,000 Mercedes-Benz and a boat, Clemmons said.”

“Moore figures that whatever he recovers will come too late to help save his house. Earlier this month, he and his wife put it on the market for $595,000 but have yet to hear from any prospective buyers. Moore said he already asked their mortgage lender, ‘Should I give it back now?’”

“Foreclosure activity in Hampton Roads continued to climb last month and has increased more than threefold since last year. Vinod B. Agarwal, an economist at Old Dominion University, predicted that the number of foreclosures would continue to rise in the coming months.’

“‘There’s anxiety right now in many households,’ he said. ‘The other problem is the credit conditions have tightened up so much. People with adjustable-rate mortgages they cannot afford cannot refinance that easily.’”

The Daily Press in Virginia. “The market in Hampton Roads, including the Peninsula, is righting itself, said Cliff Wells, managing broker of Century 21 Nachman Realty’s Norfolk office. Historically, real estate doubles in value every 10 years. For a long time, that didn’t happen in the Hampton Roads market, including the Peninsula. Prices only went up a few thousand dollars between 1980 and 2000, until the real estate boom hit, he said.”

“‘In a year’s period of time, in essence, the market picked up that double that had been missing the first 10 years,’ Wells said. ‘In the second or third year, it picked up that second double.’”

“Then, in some cases, values continued going up, but it’s now dropping down to the value where it should be, he said. ‘We’re back to a stable market, with prices holding,’ he said. ‘It has come back to the ‘real’ real estate market.’”

The Falls Church News Press. “One of the region’s foremost economic forecasters warned Tuesday that Northern Virginia may be ‘behind the curve’ in planning its next economic driver, once the defense contracts buoyed by the war in Iraq expire and the war winds down.”

“John McClain, senior fellow at George Mason University’s Center for Regional Analysis, said that the regional office market is ’softening’ as a follow-on to the housing downturn, with vacancy rates climbing from nine to 12 percent.”

“While housing values in the District of Columbia and inside the Beltway in Northern Virginia and Maryland have remained relatively stable, they’ve dropped dramatically in areas like Prince William County, McClain noted, making the D.C. Metropolitan Region the victim of the sixth-highest rate of housing foreclosures nationally, behind only Los Angeles, Phoenix, Miami, Las Vegas and San Francisco. This was after the region had the lowest rate of foreclosures in the entire U.S. only two years ago.”

“Average housing prices have declined 31 percent in Northern Virginia, and the number of homes on sale for less than $400,000 has tripled. In Prince William County, which he called ‘the eye of the storm’ in the region, the average housing price has dipped from $415,000 to $285,000.”

“In the last four months in Northern Virginia, he said, 4,500 construction jobs have been lost, mostly due to the housing slowdown, along with another 1,500 in the retail trade and 2,000 in financial services. Nationally, McClain said, ‘2009 will be worse than 2008,’ noting that (Former Federal Reserve Chairman) Alan Greenspan’s ‘irrational exuberance’ between 2002 and 2006 created the current crisis. Job growth turned from two million annually to a net loss of 600,000 jobs in 2008. ‘In this national environment, I wouldn’t want to be anywhere by the D.C. region,’ he said.”

From Bloomberg. “Home sales are booming once again in Prince William County, Virginia, an area hit hard by the housing bust. Foreclosures are responsible. Lenders are modifying some mortgages to prevent defaults and keep loans on their books. But because each mortgage-and-borrower pairing is different, there’s no one-size-fits-all solution.”

“‘If a borrower has no job, or other income, we can’t help,’ said Evan Wagner, an IndyMac spokesman. Nor is the bank accepting offers from investors to pay off a loan at a big discount. ‘We’re not erasing principal,’ he said.”

The News Record from North Carolina. “One thing is sure: The number of foreclosure filings against Guilford County homeowners has increased since this time last year. There were 1,106 foreclosures in Guilford County’s two major cities during the third quarter. That’s an increase of 192 percent compared with the third quarter of 2007 and a 10 percent increase from the second quarter of this year.”

“The rise in foreclosures continues a trend that dates back a decade but has accelerated recently, said local economist Don Jud. ‘Beginning about 10 years ago, the banks started making weak loans, weaker loans than they had ever made before,’ he said. ‘What we’re seeing now is the weaker loans are being foreclosed on.’”

The Times News from North Carolina. “The number of foreclosures in Henderson, Polk and Transylvania counties continues to rise as the effects of bad loans, job losses and a sagging housing market set in. They are worrisome numbers that have only gone up in recent memory, said Wanda Sizemore of the Henderson County Clerk of Court’s office.”

“‘Where we used to have one or two a week, now we have between five and seven a week,’ she said.”

The News & Observer from North Carolina. “The global economic crisis has struck indiscriminately at North Carolina’s most resilient industries. In the past few weeks alone, the roiling economy has taken out several thousand jobs in the state as businesses reduce production and close facilities.”

“Because its arrival lagged in this state and because real estate values here never overheated and didn’t crash, some had hoped we might be spared the worst. ‘It’s here,’ said Harry Davis, an Appalachian State University economist. ‘We’ve got to admit it. It’s in the room.’”

The Star News from North Carolina. “If you heard a builder singing Friday, it must have been the blues. Gathered for a general membership meeting, the local builders heard the sober reality of the Wilmington market: ‘The marketplace is ugly,’ researcher Bernard Helm told the Wilmington-Cape Fear Home Builders Association Thursday. ‘The outlook is dismal.’”

“Sales of new-construction homes were down nearly 40 percent in New Hanover, 37 percent in Brunswick and more than 56 percent in Pender, according to data from Helms. The local sales declines came on top of figures for 2007 that showed a more than 25 percent decline from 2006.”

“But fish gotta swim, birds gotta fly, and builders have to build if they’re going to make money. (Apologies to Oscar Hammerstein and Jerome Kern.) Two subdivisions with certified green-built homes are newly open in Brunswick County, and sales have begun for a planned for 4,500 homes on 2,000 acres in (where else?) Leland.”

“All aboard the foreclosure bus tour of Carolina Beach. In a sign of the depressed housing market on Pleasure Island and in other beach towns, Century 21 Brock has signed up 30 people so far to tour 20 properties Saturday that range in asking price from $112,900 for a 500-square-foot condo to more than $400,000.”

“‘It’s very unusual for this area. This is our first one,’ said Faye Brock, owner of the agency at 265 Racine Drive in Wilmington. ‘Every three months we’re going to have a foreclosure preview for our clients.’”

“‘Values at Carolina Beach and Kure Beach were driven up by speculators,’ said Clinton Howlett of Century 21 Brock, ‘and the problems with foreclosures in these two beaches is probably as bad as some parts of California and Nevada.’”

Please visit the HBB Forum. Post off-topic ideas, links and Craigslist finds here.