The Housing Bubble

It’s Friday desk clearing time for this blogger. “For four years the Neal family called a two-family house in New Haven, home. The Neals have had their house on the market for a year and a half. They’re frustrated but patient. They understand this is a tough time to sell. ‘You’re seeing more and more houses that are in the inventory — I mean there’s tons and tons of inventory,’ Neal said. ‘Everywhere you look there’s a house for sale.’”

“Neal is trying to stay positive and hoping the housing slide is coming to an end. ‘There was an obvious need for a correction,’ Neal said. ‘And it seems like it bottomed out and there’s a lot of good houses, so I think it’s gonna start going back up.’”

“Like many house hunters and homeowners, Walter Stevens and his fiancee Mindy Weiss hang in limbo as banks and mortgage lenders crumble, and the national economic woes weigh heavy on local real estate markets. ‘We really didn’t think we would move this fast and get married, but we bought a dog, so we have a growing family now,’ Weiss said. ‘We’ve had a lot of interest in our house, but I think it’s the financial end that really hurts people. We’ve had a lot of people say ‘We love the house,’’ but they just can’t find the financing to buy.’”

“‘Right now, with the housing market the way it is and the restrictions of the banks and the mortgage situation, I’m sure that fewer sales do affect our town more than other communities,’ said borough Mayor Bill Goldsworthy. ‘I’m sure it (housing market) will come back, we’ve just got to be patient.’”

“So, how is the housing slump affecting everyday Hoosiers? If you’re trying to sell a home, hunker down. For 40 years, Mary Moore has lived in her Butler-Tarkington home, but rising taxes, healthcare and housing costs along with her declining health means she’s desperately trying to sell her home. ‘It’s hard to find people who can get financing,’ said Moore. ‘It’s getting really, really to the edge. That’s the reason I wanted to get out before I’m sitting out on the porch wondering which way to go.’”

“John Elzinga is also trying to sell his Butler-Tarkington home. He said he feels pretty confidant he’ll sell his home in the next six months. ‘If not, I’ll turn it back into a rental,’ said Elzinga.”

“Counsellors who help people through the foreclosure process say that many families just aren’t making holiday plans. Virginia Washington, a 64-year-old grandmother to 10, is already planning a more frugal holiday as she struggles to make payments on the $207,000 loan on her dream retirement home in Tolleson, Arizona, which is now worth about $150,000. ‘The spirit will be there, though many of the things you’ve gotten used to over the years may not be,’ she said.”

“Ann Neukomm, a receptionist from Cape Coral, Florida, filed for bankruptcy in May and now faces foreclosure on a mortgage she took out about two years ago. She’s thinking about using a small inheritance from her father to take her 17-year-old son on a holiday cruise. ‘I’d like to do something with him because it’s probably going to be the last time,’ Neukomm said, referring to her son’s 18th birthday.”

“Jon Falen put his four-bedroom house in Olathe, Kan., with high-end appliances, granite kitchen countertops and a landscaped lot, on the market more than two years ago after health problems forced him to leave his job. Falen and his wife, now delinquent on their two home loans, are finally scheduled to sell their house next month.”

“But there’s a big catch: The buyer has agreed to pay only $490,000, which is $70,000 less than what the couple paid for it in 2002. Making matters worse, Falen and his wife owe $675,000 to two lenders because they used their home equity — which soared during the housing boom — to pay off student loans and remodeling expenses.”

“He is chastened by the drawn-out experience. ‘Any debt right now scares me to death,’ he said.”

“The median sale price for a single-family home in Grand Junction fell by $8,100 from the second quarter to the third quarter, according to Bob Reece, president of Advanced Title Technology in Grand Junction. ‘Some of those people that could have qualified for a loan a year ago or two years ago,’ Reece said, ‘can’t qualify today because they enjoyed, perhaps, zero down payment.’”

“‘When the demand goes down the price goes down,’ he said. “The market eventually finds where it should go. In all the price segments we’ll see a readjustment of the price points in every market range. That’s actually good for the market.’”

“In Chicago last month, Donald Trump stood atop his new, 92-story condo-hotel tower just off this city’s most prominent boulevard, Michigan Avenue. ‘There’s an economic disaster going on in the country,’ Trump dryly acknowledged. ‘A lot of things you think will be built in Chicago and elsewhere will never be built. The banks are shut down. But we got this one built, and we’re proud of it.’”

“Getting it built and getting it sold are two different things, however. Many of the gleaming building’s units remain on the market. Roughly 75% of the 4,900 condominium units under construction in Chicago’s downtown are already sold. But it’s not out of the woods just yet — next year, the number of new units coming onto the market is expected to drop to 4,600, but only 60% are sold, according to Appraisal Research Counselors, a consulting firm that tracks downtown Chicago real estate. Developers are considering alternatives like offering rentals, establishing rent-to-own plans and dropping sales prices. Talk of new projects has ceased.”

“If you build it, they will come. One housing economist says the same phrase applies to home building here. For years now, East Texas has been told our housing market is doing very well. Dr. Elliot Eisenberg of the National Association of Home Builders had positive news for a group of Tyler builders. ‘If Eastern Texas was the national housing market there wouldn’t be a problem,’ he said.”

“Eisenberg says…’Home building pays its way.’ ‘These homes are extremely expensive homes, they are big, they are fancy. These are great new homes for the community,’ said Eisenberg. ‘They are going to pay 3 times as more in property taxes. These homes collectively pay their way and more and they subsidized existing homes.’”

“Tonight as we conclude our series, ‘Anatomy of a Financial Crisis,’ we look in the mirror, at ourselves. How did the greed of American consumers contribute to the mess? As Suzanne Pratt explains, our bad behavior is now forcing us to face the music.”

“Pratt: ‘Our need for things has gravely injured our household finances. Just look at the stats. Between 1990 and 2007, credit card debt more than quadrupled from $214 billion to $937 billion. At less than 1 percent, our nation’s savings rate is the lowest in the developed world. Much of Europe is saving in double digits while China is at a whopping 24 percent. Nobel Prize winning economist and Princeton Professor Paul Krugman says we’re bad savers partly because of easy credit.’”

“Pratt: ‘Still, others say blame stretches well beyond U.S. households or busy suburban shopping malls. Krugman questions why we expect the public to have seen the folly when our leaders did not.’”

“Krugman: ‘It’s not up to John Smith in the street or Joe the plumber or whatever to say, hey, this is a housing bubble, look at the price-rent ratio. You expect, you expect responsible people in Washington and New York to be saying that and they didn’t.’”

“A simplistic myth is increasingly voiced - that everything would be hunky-dory if the federal government had not forced otherwise unwilling lenders to make risky loans to poor people. There are several problems with this argument. First, the Community Reinvestment Act includes no provisions for fines, and no bank ever has been fined for a violation. More generally, the law is clear that compliance does not require any bank to make any loan that does not meet usual standards of safety and soundness.”

“A second problem with blaming the Community Reinvestment Act for subprime lending is that the law applies only to depository institutions insured by the FDIC. The vast number of subprime loans, including virtually all ‘Alt-A,’ ’stated-income,’ ‘liar loans’ and those with ‘negative amortization,’ were made by lenders exempt from the Community Reinvestment Act and other federal bank regulations.”

“In 2006, at the height of the boom, lenders subject to the Community Reinvestment Act made only 15 percent of all subprime loans, and their share of all such loans made to low-income households was about the same.”

“Thousands of banks passed Community Reinvestment Act examinations without ever making a subprime mortgage. Western Bank, a family-owned, state-chartered bank in St. Paul, Minn., is a prime example. Steve Erdall, its CEO for the past two decades, said on his recent retirement: ‘I’m really proud that we’re a high-performing bank, that we get the highest grades under the Community Reinvestment Act and that we proved that you could be profitable in the inner city. We’ve been lucky, but you didn’t have to be smart to stay away from subprime mortgages. That was mortgage-broker and investment-banker greed.’”

“Lawmakers and consumer advocacy groups have pushed a plethora of state and federal legislation - everything from laws on predatory lending to programs where lenders rewrite loan principals - through the pipelines in Sacramento and Washington. ‘I’m not confident this legislation deals with the bottom rung of the pyramid (that needs help),’ said Timothy Canova, international monetary policy expert at Chapman University in Orange. ‘It doesn’t deal with the mortgage-backed security issues, which leaves a fear of litigation among loan servicers. That fear of litigation … and the uncertainty out there could be a disincentive to modify loans.’”

“Troubled homeowners, in Canova’s opinion, need a ‘reduced monthly debt burden,’ along with higher incomes. ‘I don’t see troubled homeowners getting any of those,’ he said.”

“As Southland economist Christopher Thornberg put it, the housing market is choking because home prices have been artificially inflated, putting them well beyond the reach of average buyers. Prices have plummeted over the past year, he said, but they still have a ways to go. ‘Falling prices will create liquidity and then a lot more people will qualify,’ Thornberg said. ‘But in terms of a recovery, we’re halfway there.’”

“As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge. Countrywide says it will write down pay-option mortgages to as low as 95 percent of the current value of the home. The borrowers must either be in default or ‘reasonably likely’ to default. ‘I guess they are forcing me to deliberately stop paying to look worse than I am,’ said one borrower with a Countrywide pay-option loan. ‘Crazy, don’t you think?’”

“The borrower, who lives in suburban Los Angeles, took nearly $200,000 in cash out of his house and then paid less than the monthly interest due on his new loan. He now owes about $350,000 on a house that is worth only $150,000. He asked not to be identified for fear he would not get a modification, which could reduce his mortgage to $142,500.”

“Todd Lawrence, an airline pilot who lives outside Norwich, Conn., has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.”

“If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.”

“‘Why am I being punished for having bought a house I could afford?’ he asked. ‘I am beginning to think I would have rocks in my head if I keep paying my mortgage.’”

“It was a hint of the nightmare to come, but they chose to ignore it. Who could blame them? Mary Lou Rosato and Gregory Walker were head-over-heels for a 100-year-old Victorian. Finally, at ages 40- and 50-something, the longtime Los Angeles residents were ready to tie the knot with the bank and become proud homeowners. ‘We had no built-up capital, or anything like that. We had no experience. But everyone told us, ‘Go on, buy the house. It’s fine. It’s time,’ said Rosato.’”

“This was back in 2003, as the housing bubble was starting to soar. Prices were blood-hot, and buyers were acting like zombies, hungry for the next bargain kill. ‘It felt like it was the height of the insanity, but it was only the fifth rung of the insanity of the housing market,’ Rosato recalls. ‘Who knew it was going to exponentially explode?’”

“In L.A., they could never afford much more than a chicken coop. And then in Lincoln Heights, a supposedly up-and-coming neighborhood close to downtown — they found it: a three bedroom charmer for just $240,000 — more than $100,000 less than similar houses nearby. They knew very little about the property.”

“The couple spent many days over the coming weeks at the house, raking leaves and imagining how they would decorate. On one of these visits, while chatting with their sweet elderly neighbors, a man appeared seemingly from nowhere. ‘Do you know what kind of neighborhood this is?’ Rosato recalls the man asking. ‘Well, yes, but this kind of question was a smash in my face.’”

“Why hadn’t anyone told them their house was haunted by violence? Because in California and many other states, when one buys a property from the bank, the bank is not required to submit a disclosure form. ‘We would have needed flak jackets to leave our home,’ says Rosato. ‘Who do you think lives there now? Poor people,’ she sighs and makes the sound of a doorbell. ‘Ding dong. Boom!’”

“Josefina Guzman…lives there with her husband, kids and brother-in-law. I tell them about the violent ghosts of their home’s past. ‘No, no, no,’ Senor Guzman says, ‘these are things of the past.’ ‘It’s a dream, with housing being so expensive,’ adds his brother.”

“I take this ‘dream’ back to Rosato and Walker, adding the information that if the house next door is any indication, their property value would have been way up. Despite the economic chaos and violence, it’s selling for $390,000 — that’s $150,000 more than the house they almost bought. And it’s only half the size.”

“‘That’s like saying that lotto ticket that guy in front of you bought won, and you could have bought that ticket. If it was a gamble like that, that’s really not what we were looking for anyway,’ Rosato says.”

A report from Metro New York. “Mayor Michael Bloomberg outlined a local stimulus plan Thursday intended to ease the burdens of the economic crisis. The mayor proposed 18 initiatives, including a Web site for laid-off financial workers and a schedule of smaller quarterly tax payments for properties valued at or below $250,000 instead of larger, biannual payments. The city plans to use $24 million in federal funds to buy foreclosed properties and turn them into roughly 250 affordable housing units. ‘We have an increased obligation to New Yorkers who face harsh, short-term problems,’ Bloomberg said.”

“Some New Yorkers were comforted by his suggestions; others said the billionaire mayor was out-of-touch with everyday struggles. ‘I don’t know any homes in our area valued at [less than $250,000],’ said Joan Bachet, a homeowner in Richmond Hill, Queens. Homes in her neighborhood’s least expensive part go for at least $400,000, she estimated.”

From Reuters. “Luxury home builder Toll Brothers Inc, finding fewer takers for its pricey condos in a market slump, is playing landlord in a bid to lure skittish buyers.

The builder, whose average home price of $672,000 is almost twice that of its nearest rival Standard Pacific Corp, is even trying this tactic in in New York City, where condominium prices seemed immune to a downturn until recently. ‘The market was different,’ said Toll Vice President David Von Spreckelsen. ‘This is new territory.’”

“At Toll’s Northside Piers in New York City…10 one-year leases are available through a local broker instead of the sales office. Rents are in the range of $4,000 to $5,000 per month and prices for the two- and three-bedroom units range from the low $800,000s to about $1.2 million. In that building, the company credits more rent toward the purchase price the earlier a renter decides to buy, Toll’s Von Spreckelsen said.”

From Crain’s New York. “Home prices in the tony beach enclave of the Hamptons have been hit even harder by the sinking economy and credit crisis than their counterparts in New York City. The average price of a house plunged 23.3% to a still expensive $1.5 million in the third quarter from the year-ago period, according to a Prudential Douglas Elliman report prepared by Jonathan Miller, CEO of real estate appraisal firm Miller Samuel Inc.”

“However that decline is far steeper than the 7% dip in Manhattan, the 11% slip in Queens, or the 5.6% slide in Brooklyn over the same time period.”

“In another sign of just how dire the market has become, the number of sales in the Hamptons fell 29% to 257 during the quarter from the year-ago period, while the number of days a house remained on the market grew 16% to 175. The price of a house that is south of Route 27, the most exclusive part of the Hamptons, rose 18% to $1.1 million in the third quarter from the year-ago period. However, even the prices of those typically sought after homes appear to be falling victim to the crisis. The average price fell 29% from the second to the third quarter.”

“‘There isn’t going to be a fire sale at the Hamptons,’ said Rick Hoffman, regional senior VP of the East End for the Corcoran Group. While Mr. Hoffman concedes that the market has slowed, he said it remains insulated because supply is limited.”

From Bloomberg. “The median price for a home on the eastern tip of New York’s Long Island fell to $830,000 from $1.03 million, the biggest drop in at least five years, according to a report by New York based appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.”

“‘The Hamptons market is driven by Wall Street,’ Miller said in an interview. ‘There’s so much financial turmoil right now that even the most affluent people are putting plans on hold.’”

“‘When the stock market crashed everybody put the brakes on,’ said Judi Desiderio, owner of Town & Country Real Estate in East Hampton. ‘It’s just emotion. It’s not even logical anymore.”’

“More than third of the deals that were scheduled to close in the last week of September and the first week of October were put on hold, she said. While most of the transactions were rescheduled and eventually closed, about one in seven of them were called off, she said. ‘It doesn’t matter if you are buying a piece of jewelry or a car or a vacation home — people go into survival mode,’ Desiderio said.”

From Newsday. “Up until this year, Wall Street has had record-high or near-record bonus compensations,” said Jonathan Miller. ‘Prices are really at 2006 levels. The double-digit drops here are certainly a concern, but they’re matched against records that were set in the middle of last year, when we had a flurry of higher-end property selling.’”

“‘With so many less sales and the market kind of at a stalemate, what’s more likely to be trading are the lower-end prices . . . not that last year’s $1-million house is now at $720,000,’ said Hamptons agent Diane Saatchi, senior vice president at The Corcoran Group.”

“Even though pundits and buyers predicted a fire sale of homes and foreclosures owned by troubled Wall Street executives, Saatchi hasn’t seen that. Many of those tycoons bought their second homes with cash, she said.

“‘A lot of people, instead of lowering their prices, are hoping they can turn their vacation home into a rental property to get through this market,’ she said. ‘They’re not lowering their prices so much as looking at another way to get income from the house.’”

“Jamie Pastorelli and her husband used to hire a baby-sitter twice a week so they could catch a movie or share dinner at a favorite restaurant. Now their nights out together are down to twice a month. ‘We’re just cutting back as much as we can,’ Jamie Pastorelli of Northport, said yesterday. ‘Baby-sitters, holiday spending. That’s the plan.’”

“Jamie Pastorelli, a real-estate broker, said most of her family also has been spending less, eliminating any extras. ‘There are 16 nieces and nephews,’ she said, ‘Everyone says the same thing - it’s time to cut back.’”

“Mohammed Shaikh, 27, of Westbury, a stockbroker in Manhattan, said he’s spending, just not as much. ‘I will still go to the movies and still go out to dinner; I just won’t do it as much.’”

“New York Community Bancorp., the Westbury-based holding company for New York Community Bank and New York Commercial Bank, said Tuesday net income declined 48 percent in the third quarter, compared to the same period last year, largely the result of an investment with the now bankrupt Lehman Brothers Holdings Inc.”

“The company, a lender to real estate firms, said it earned $58.1 million in the quarter, compared to earnings of $110.9 million in the same period last year. The bank said that the third quarter included a charge of $44.2 million. Included in that charge was $35 million related to the bank’s investment in Lehman Brothers.”

“Aggrieved investors in Lehman Brothers Holdings Inc have added new legal claims in what is sure to be one of the most closely watched lawsuits of the mortgage crisis, accusing company insiders and others of misleading them before the firm collapsed.”

“New court papers filed this week by a group of public pension funds suing to try to recover money lost on Lehman’s fall include information gleaned from more than 20 former employees at the Wall Street firm and its mortgage lending subsidiaries.”

“These ‘confidential witnesses’ include a former Lehman vice president who is quoted as saying that employees were ’skeptical’ of the Wall Street firm’s own public statements that it was well-positioned to withstand a housing downturn.”

“‘Lehman assured investors, falsely, that its exposure to the real estate meltdown was well contained, due, in part, to its claimed excellence in ‘hedging’ against losses in that sector,’ the 182-page court filing contends. It says the company’s financial reports ‘lacked transparency, masking Lehman’s exposure to mortgage-related losses.’”

“Total damages sought by the plaintiffs are sure to be in the ‘many billions of dollars,’ said David Stickney, one of the lawyers for the funds. Defendants include Lehman Chief Executive Richard Fuld and other company insiders and board members.”

“The new complaint also adds claims against a group of other Wall Street banks that underwrote Lehman securities offerings, including Citigroup Inc and Bank of America Corp. In one instance, the complaint cites an unnamed former BNC (one of the company’s lending units) chief operating officer who characterizes the lender’s sales and underwriting practices as ’some of the things that were most egregious in terms of the mistakes the subprime mortgage industry made.’”

The Buffalo News. “When the good times were rolling in recent years, New York State, not unlike Wall Street speculators, rode the euphoria with big budgets that spread around the cash at double and triple the rate of inflation. Now, with the nation and Wall Street in economic chaos, the state faces the consequences: $14 billion in red ink over the next 17 months.”

“Wall Street…provides 20 percent of the state’s revenues. The result is likely to mean major cuts coming to schools, hospitals, local governments and the thousands of entities that rely on state aid each year. An assortment of services faces retrenchment after years of growth. And, depending on which cuts are made when state leaders get down to business, increases in income or property taxes are not being ruled out for next year.”

”There will be hard and painful cuts. There is no segment of this budget that will not be cut,’ Gov. David A. Paterson warned.”

“In a midyear update on the state’s finances, Paterson shocked Albany with word that not only had the current year’s deficit swelled to $1.5 billion, but the state is now staring at a $12.5 billion shortfall in the fiscal year beginning next April 1. Over four years, the gap is a staggering $47 billion — nearly double what was projected just before the recent Wall Street collapse.’

“Among the most troubling projections is that the state will be losing 160,000 private-sector jobs by the end of next year, with higher-paying financial-sector layoffs 50 percent higher than after the terrorist attacks of Sept. 11, 2001.”

“Fiscal watchdogs said past warnings that the state was not prepared in the event of a sudden slide in the economy are now coming true. Spending increases of triple the inflation rate in some recent years contributed to a culture in Albany of being unable to say no to popular spending programs. ‘We knew things were starting to get shaky,’ said Elizabeth Lynam of the nonpartisan Citizens Budget Commission.”

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