The Housing Bubble

It’s Friday desk clearing time for this blogger. “Every morning Joyce Reedstrom, 82, struggles to the stair lift that carries her from her second-floor bedroom downstairs for the day. At night, helped by her husband, Kermit, 86, she reverses the trip. Last summer, it looked like the couple had a solution: move from their New Brighton, Minn., townhouse to a one-story apartment for seniors. Then reality hit: A 20-percent drop in what they could get for their townhouse of 27 years has left them feeling houselocked.”

“Instead of eating a $45,000 loss on their townhouse, the Reedstroms chose to stay and pay $7,000 for the stair lift a month ago. They may try again next summer to sell, or they might invest another $7,000 in a second lift gliding to the basement garage - then wait until their declining health forces them to move to an assisted-living facility. ‘It’s not working out the way we wanted,’ said Kermit Reedstrom.”

“When John Stanley and his family moved here from Virginia last year, they bought a lot in a new Concord master-planned community. The Stanleys now live among a sea of red clay and empty streets. Only seven of 1,200 homes planned in The Mills at Rocky River were completed before the project collapsed.”

“The half-built amenity center is a daily reminder of how things went so wrong. ‘It looked like it was going to be such a beautiful thing,’ Stanley says. ‘But it has been such a disappointment.’”

“Reinaldo and Edith Gonzalez got their first taste of the Canyon Ranch Living brand while vacationing aboard the Queen Mary II. They made a $236,000 deposit and signed a contract for a $1.18 million unit. But as the project neared completion, the couple began receiving letters from the developer and soon realized they hadn’t bought a condo at a Canyon Ranch resort. Instead, they had bought a unit at the Carillon North Beach tower, which had an agreement with Canyon Ranch to provide spa services.”

“‘These [purchase] contracts are so grossly overly one-sided,’ said Robert Cooper, the Aventura attorney representing the Trump Tower buyers. ‘Contracts said that whatever the developer promised doesn’t matter and you can’t rely on it and he can do whatever he wants. Buyers thought they were going to make giant profits and everybody was so excited that they basically ignored what they were signing.’”

“The median sales price for homes in Maine fell by roughly 7 percent last year, from $194,000 in 2007 to $180,000. At the 2008 conference, Anne Weigel of Coldwell Banker Residential Brokerage in Portland, predicted prices would bottom out by last summer. That hasn’t happened. Weigel was on target in 2008, though, when she warned sellers to be realistic about pricing their homes in a buyer’s market. Referring to last year’s 7 percent statewide price decline, though, Weigel alluded to the drop in average stock values to offer some perspective for real estate developers.

“‘The good news is it’s less than the drop in the Dow,’ she said.”

“The entire state of South Carolina, like the nation, suffered greatly in the housing market in 2008. The credit crunch…was meddlesome for many potential home buyers, agents said. ‘Anybody that had a pulse before could get a loan. Now you actually have to have good credit,’ said Kellar Lawrence, of ReMax.”

“A large pool of homes on the market and low interest rates make this a great time to buy a house, agents said. ‘This is a freaking great time to buy a house,’ Lawrence said.”

“Driven mostly by the Salinas foreclosure market, home prices in Monterey County took a dramatic plunge last month, with the median sale price down 48.89 percent from the previous year. Carmel was down 40.21 percent. In Marina, the median price dropped by 32.38 percent year to year; in Soledad, prices were down 44.76.”

“‘Despite the economy, there is optimism out there,’ said Monterey County Association of Realtors CEO Sandy Haney. ‘If you don’t buy at this price, when are you going to buy?’”

“Was 2008 a good year for real estate? What a loaded question you might ask! However, I am talking about Louisiana and in particular, our Acadiana region. Remember the flurry of sales and rentals immediately after Hurricane Katrina in August of 2005 and then again in September, one month later? It was a crazy time in real estate and if you were a seller, there were people sometimes begging to buy your house. It was both a good time and bad time but primarily it was unrealistic to think it could continue at that pace.”

“Back to my original question and the answer is yes, it was a good year for those of us lucky enough to live in Acadiana. Prices are still good and interest rates are low. Now may be the time to consider investing in real estate. Ask you local Realtor…Of course, it all depends which viewpoint you choose. If you live in or have investments in California, Nevada, Michigan, Florida or some other states, you might think I was making a poor joke.”

“New home sales plummeted by nearly 15 percent last month as builders struggled to unload a glut of homes on the market, according to new government data. That month-over-month drop caps one of the worst years on record. ‘Resales prices are so low in a lot of markets, it is below the cost of what it costs the builder to build it,’ said Kenneth Wenhold, director of the Mid-Atlantic region for Metrostudy.”

‘Prices in the new home market can’t come down much more, said David Crowe, chief economist for the National Association of Home Builders. About 60 percent of builders surveyed by his association have said that they are no longer making a profit from home sales. ‘You’re paying people to take your house at that point,’ he said.”

“As many as 40 of the biggest 100 companies may collapse by 2011 as their debt- strapped assets default, according to a 2008 report which didn’t identify the firms in its study. ‘These guys had a sense they could do no wrong,’ says Paul Schaye, managing partner of New York-based Chestnut Hill Partners, which helps firms find deals. ‘They were the new masters of the universe. Now they’re going through a very sobering experience. They have to figure out how to survive this environment.’”

“‘The big fear for private equity is that the default rates go to an extraordinary level,’ says Roy Smith, a former Goldman, Sachs & Co. partner who now teaches at New York University. ‘The worst outcome is that we have such a high level of default that it makes the whole buyout scene a wasteland. This is part of the biggest bubble to burst in our history.’”

“There was no escaping the harsh realities of the nation’s deepest recession since the 1980s at the annual economic outlook presented Thursday by the Las Vegas Chamber of Commerce. Former Labor Secretary Robert Reich came down on Wall Street for using ‘easy money’ to invest in fancy derivatives, creating a speculative bubble and leverage that was beyond control.”

“‘Wall Street was like a big Ponzi scheme. It was Bernie Madoff tripled,’ he said. ‘They handed out bonuses over $18 billion for bank executives in 2008. Does that strike you as realistic?’”

“There are more than 8,000 hedge funds, all run by professed geniuses who claim they can charge exorbitant management fees and still beat the market. There are thousands more private investment managers and advisors making the same bold claims, despite history’s repeated lessons that they rarely hold true. What if just 1 percent of these people are Ponzi-scheming thieves? What if the percentage is higher? What if it’s 3 percent or 5 percent?”

“As the recession rages on, the ghost of 1920s swindler Charlie Ponzi is everywhere. We are, after all, a Ponzi nation, relying on new investors to pay off the old, building up fortunes on paper, pretending the market can only go up…It’s not just a few whack-job conspiracy theorists who say this, but real market participants, including renowned money manager Bill Gross of Pimco.”

“‘The U.S. and many of its G-7 counterparts over the past 25 years have become more and more dependent on asset appreciation,’ he wrote in his monthly investment outlook for January. ‘We became a nation that specialized in the making of paper instead of things. … We have met Mr. Ponzi and he is us — all of us.’”

“An audience of more than 300 concerned business people crammed into the Ritz-Carlton, Grand Cayman, ballroom for an in-depth, all-day financial seminar. Todd Buchholz, former Director of Economic Progress at the White House, a managing director of the $15 billion Tiger hedge fund, and an award-winning economics teacher at Harvard…stressed that much of the problem was self-inflicted.”

“‘Millions of people in America were saying ‘Even though I’ve never saved any money in my life, I want a four-bedroom house and a Jacuzzi’ and too often the lenders were willing to do that. People were not even asked to show their incomes,’ he said.”

“Author Barry Ritholtz told the audience, ‘We never took the full hit, and the full effect, of the burst IT bubble back in 2000, and what has been happening recently is really the residue of that whole mess.’”

“Buchholz didn’t sugar coat his view of the current economic mess. ‘Retail sales in the US have almost collapsed. If you walk though some stores, they’re empty,’ he noted. ‘In the UK, I recently read that the Tooth Fairy was slashing her rates; before, she used to leave a Pound-twenty for each tooth, now it’s down to just a Pound.’”

“Our foreclosures are an embarrassment, totaling 7,196 in the four-county Tampa Bay area in December alone. Home construction is floundering. Tampa scraped together a record-low 932 housing starts in the last quarter of 2008. Even local apartment owners have gone begging for tenants.”

“Real estate insiders are pleading with Washington for help. Home builders hit the federal government up for a new $22,000 maximum tax credit for new home purchases. Real estate organizations press for universal 4.5 percent mortgage rates. Antiforeclosure advocates seek massive loan forgiveness for homeowners drowning in debt. But that’s the wrong approach.”

“None of these measures will cure what ails us. As we learned during the latest credit meltdown, somebody’s free lunch becomes somebody else’s starvation diet. Squeeze one end of the proverbial balloon, and the other end sprouts a tail. What we need is a restoration of confidence that comes with a cleansed market neither hobbled nor helped by fly-by-night government intervention.”

“The market doesn’t need more hot wiring but a cold water cure.”