The Housing Bubble

The Appeal Democrat reports from California. “It was standing room-only at a Behind on House Payments workshop in Marysville that reviewed ‘cash for keys,’ the hope hotline and ‘all those things going on behind the curtain’ when homeowners face foreclosure. Lincoln resident Lexie Karsch, and her husband, Pete, who have three daughters, worked for builders before the housing boom ended and owe $4,500 after falling three months’ behind on mortgage payments. ‘Everybody sounds so confused,’ she said of people who deal with her about the loan.”

“Karsch said she’ll follow up on workshop advice that includes trying again if the first effort to modify loans and lower housing payments isn’t successful.”

“A homeowner in the Edgewater development in Linda, who asked not to be identified, said after the event that she and her husband face possible foreclosure on the house they bought for $348,000 in 2005. The couple had their house on the market for a year but no buyers came forward. Other comparable sales in the area have brought between $179,000 to $200,000 for houses, the woman said. Their lender wouldn’t work with the couple in Linda until they were in default on mortgage payments, the woman said.”

“A Loma Rica resident who attended the workshop said she was surprised to see neighbors there. She said a March 9 trustee sale looms on the home and five acres she bought in 2006 for $489,000 — and whose loan terms she seeks to modify.”

“Difficulty reaching and dealing with lenders was a common workshop theme — as were changing regulations involving loans, foreclosure and government assistance. ‘The ground is shifting constantly,’ said Lee Pliscou, directing attorney at the Marysville office of the nonprofit California Rural Legal Assistance.”

The San Gabriel Valley News. “California’s housing market has weathered a sobering downturn in recent years, and figures released Thursday show how far things have fallen. In January, the state’s median home price for an existing single-family home topped out at $254,350. That was off 9.5 percent from the previous month but down a whopping 40.5 percent from a year earlier, according to the California Association of Realtors.”

“Locally, Rowland Heights showed the biggest year-over-year decline, with its January median home price falling 42.9 percent to $374,000. Other big declines included Pomona (-41 percent), El Monte (-40 percent), Pasadena (-35.9 percent) and La Puente (-35.4 percent).”

“With favorable home prices and historically low mortgage rates, affordability in the California housing market is now at its highest since the start of the decade. And that is a good thing, according to Tom Adams, owner of Century 21 Adams & Barnes in Monrovia and Glendora. ‘The flipside to everything you hear on the news is that all of these opportunities have opened up,’ he said. ‘I have someone who is buying a home for $450,000, and two years ago that home was $700,000.’”

The San Francisco Chronicle. “President Obama has grabbed what the real estate industry considers the third rail of tax reform: mortgage-interest deductions. Among the many tax increases on the affluent laid out in his budget proposal Thursday was a plan to reduce the itemized deduction rate for families with incomes over $250,000 to 28 percent, down from 33 or 35 percent.”

“The National Association of Realtors quickly responded with a strongly worded letter to the president, arguing the change could ‘trigger yet another crisis in home values…Mary Trupo, the Realtor group’s public issues director, said the impact would be particularly widespread in expensive housing markets like the Bay Area, where a large portion of home buyers are well-to-do.”

“The California Association of Realtors ‘will vigorously fight this provision in the halls of Congress,’ said James Liptak, president of the Los Angeles trade group, in a prepared statement.”

“Christopher Thornberg, principal at Los Angeles research firm Beacon Economics, said the reduced deductions could slightly weigh down home prices, by 2 to 3 percent, but only on higher-priced properties that have been less affected by the housing downturn. ‘It’s like I’m standing in the middle of a forest fire and they say, ‘Don’t light that match,’ he said, noting prices across the state are already down more than 40 percent.”

The Ventura County Star. “If you’re planning to buy a home in the coming months, state lawmakers and residential developers hope you consider a newly constructed home. To sweeten the deal, if you buy one between this Sunday and March 1, 2010, you could get up to a $10,000 tax credit from the state. And if the purchase is before Dec. 1, you may be able to pair it with the $8,000 federal tax credit in President Obama’s stimulus package, provided you’re a first-time buyer and meet other requirements.”

“The state program is capped at $100 million, meaning about 10,000 buyers could secure the $10,000 credits. The program potentially could be over within the first few months. It helps that there is some impetus to take advantage of the credit early. ‘It puts urgency into the system,’ said Layne Marceau, president of the Northern California division of Shea Homes.”

“The sale of 10,000 homes with the tax credit would put a 15 to 20 percent dent in what home builders were planning for this year, Marceau said, citing 66,000 new home starts last year. Clearing inventory from the market could spur more construction and drive the economy, he said.”

“Mark Schniepp, director of the California Economic Forecast in Goleta…said the tax credit would act more as an incentive to get those already interested in buying to consider a new home over an existing home, but he questioned whether it would be enough to push someone who is undecided into the market. That’s because $10,000 still isn’t a lot on a home that costs $300,000 or $400,000. It may drive sales in lower-priced parts of the state more than higher-priced areas like Ventura County, Schniepp said.”

“He believes lower interest rates would provide a bigger boost in sales because it would produce more savings over the long run. ‘This in combination with lower rates would provide a pretty important stimulus,’ Schniepp said. ‘Without the lower rates, which we really need, I don’t know how much of a big lift this is going to provide.’”

The Press Enterprise. “Some analysts said they think the programs could create some excitement and provide a financial boost for some homebuyers. But they contend the help is too little to turn around the housing market or replace the hundreds of thousands of jobs the state has lost in homebuilding and related sectors. ‘The magnitude of the problem is so great that this is not going to solve it,’ said Chapman University economist Esmael Adibi.”

“Chris Thornberg, an economist with Los Angeles-based Beacon Economics, complained that the state tax credit ‘will bail out homebuilders who built homes no one wanted.’ Thornberg and other economists said before the homebuilding industry can regain its health, the first priority is to sweep away the flood of foreclosed properties that are selling at distress prices.”

“Local Building Industry Association officials say there is a limit to how much good the tax credits will do. Frank Williams, chief executive of the association’s Baldy View chapter, which includes San Bernardino County, said the programs are ‘well meaning but not near enough.’”

“He said the federal credit needs to be twice as large and not a credit but cash that a buyer could use as a down payment. Also, he called the state program ‘window dressing’ that probably will run out of money within six months.”

The Union Tribune. “Rising job losses at retail stores, construction companies and movie studios helped push California’s unemployment rate above the 10 percent mark last month for the first time in 26 years, according to data released yesterday. ‘We started the downturn bad. It turned worse. Now it’s gotten ugly. And unfortunately, employment is the last thing that improves in a recession,’ said Esmael Adibi, economist with Chapman University in Orange.”

“Over the past year, construction firms in California shed 130,800 jobs, or 15.5 percent of their work force. Real estate and financial firms lost 48,200 workers, or 5.5 percent of their work force. Adibi blamed the housing sector. ‘We were disproportionately exposed to the construction sector and the mortgage industry,’ Adibi said. ‘When you see that these sectors are losing jobs as much as 15 percent per year, you can see how this could affect us.’”

“In addition to cuts from company payrolls, the jobless included a large spike in nonsalaried workers, such as independent contractors, freelance construction crews and cleaning workers. ‘A lot of the self-employed people were very exposed to the housing troubles, such as independent real estate agents or home-repair workers,’ Adibi said. ‘Some of them may have tried to survive through the new year and then decided that things just weren’t getting better.’”

“Jerry Nickelsburg, economist with the UCLA Anderson Forecast, said that other than the high unemployment rate, there are few parallels between the recession of the 1980s and the current decline…The current downturn, Nickelsburg said, has been driven by the crisis in the financial system. ‘We’re really in uncharted waters here,’ he said. ‘I don’t see anything on the horizon that will lower unemployment this year. It will probably go higher before it goes lower.’”

The LA Daily News. “For the first time since 1993, the unemployment rate hit 10.5 percent in Los Angeles County in January as thousands of workers lost jobs in nearly all occupations in the economic downturn. The increase from 9.2 percent in December represents a record one-month jump in the number of unemployed people in the county. ‘There are huge problems,’ said Stuart Waldman, president of a San Fernando Valley business group. ‘I can’t tell you how many people I know who don’t have a job right now. Business is scared.’”

“Meanwhile, the unemployment rate in California hit 10.1 percent, up from 8.7 percent in December, the largest one-month jump since the California Employment Development Department began tracking the data in its current form in 1976 — and probably the largest ever. ‘It’s the largest jump in history,’ EDD spokesman Patrick Joyce said. ‘Employment peaked in December of 2007. And it’s basically been going down ever since.’”

“Jerry Nickelsburg, a senior economist at the UCLA Anderson Forecast, said he believes the county is still in the middle of a contraction. ‘Although there are signs in the housing market that the adjustments that needed to be made have been made, the fly in the ointment is foreclosures, and that means the housing market is not going to stabilize until the labor markets do,’ Nickelsburg said.”

“Federal regulators identified significant problems with IndyMac Bancorp but failed to take action to avert its collapse - a collapse that cost the Federal Deposit Insurance Corp. $10.7 billion, according to a report released this week. An audit report, released Thursday by the Treasury Department’s inspector general, says the Office of Thrift Supervision identified a host of problems and risks with the Pasadena-based mortgage lender, including the quantity and poor quality of nontraditional mortgage products.”

“But the OTS ‘did not take aggressive action to stop those practices from continuing to proliferate,’ the report says. As many of the bank’s Alt-A loans began to reset at higher interest rates, the defaults began ramping up and the bank’s stock plummeted.”

“Sven Arndt, a professor of economics at Claremont McKenna College, said the results of the audit report on IndyMac aren’t surprising. ‘Lending had became increasingly casual and there was a huge amount of laxity as far as risk assessment,’ he said. ‘And supervisory agencies were aware of that. They thought all this stuff would work itself out.’”

The Marin Independent Journal. “Mill Valley-based Redwood Trust Friday announced a loss of $116 million, or $3.46 per share, for the fourth quarter of 2008. The fourth-quarter loss was slightly greater than the $110 million loss Redwood officials predicted earlier this year when the company raised $284 million with a public stock offering. Redwood plans to use the public offering cash to buy residential mortgage-backed securities at what it considers to be deeply discounted prices.”

“In a letter to shareholders, George Bull, Redwood’s chief executive, wrote, ‘While we were not surprised by the downturn, we underestimated the extraordinary level and complexity of the financial risks that market participants had taken, the extreme level of leverage employed, and the degree to which the fates of most financial institutions and markets were intertwined.’”

‘Bull added, ‘With the clarity of hindsight, we were too early with some of the investments we made in the first half of 2008, although we believe these investments will ultimately yield acceptable returns.’”

The Monterey County Herald. “A Nevada County peace officer-turned-real estate broker suspected of bilking hundreds of investors out of $20 million was arrested by local authorities Thursday morning. Inspectors from the Santa Cruz County District Attorney’s Office arrested Thomas John Hastert, 53, at his daughter’s Westside home around 10:30 a.m., according to County Jail records. He is being held on a $540,000 arrest warrant.”

‘Hastert is a hard-money real estate broker who ‘brazenly deceived’ 123 investors and borrowers in six counties, embezzled fees and filed false paperwork, the Attorney General’s Office reported.”

“Hastert allegedly brokered more than 270 hard-money loans in Nevada, Sacramento, Sutter, Butte, Placer and Yolo counties between September 2004 and September 2007 for real estate development projects. Hard-money loans typically provide high returns for private investors and are secured through collateral such as real estate, according to the Attorney General’s Office. The scheme collapsed when many of the loans, which were not properly backed with property, failed, the Attorney General’s Office reported.”

“Hastert, who had been a sheriff’s deputy in Los Angeles and Nevada counties before he got a law degree and went into real estate, was arrested without incident.”

“The numbers are grim in the Monterey County housing market. More than 5,200 homes are in or near foreclosure since October, and median home prices have dropped by nearly 50 percent since 2007. Credit scores of 750 or more and down payments up to 30 percent are now required to buy a home, leaving many out of the market. Home building permits are down by more than half, and new residential construction is nearly nonexistent.”

“But there is some hope, according to the 2009 Annual Housing Report presented to the Board of Supervisors. That’s because the report…suggests that newly available federal and state funding can do plenty to help boost homeownership and the rental market, keep people in their homes and improve living conditions.”

“County Housing and Redevelopment Agency director Jim Cook acknowledged the huge challenge facing the county’s housing market, but he expressed some optimism. ‘It would be easy to say the problem is so big that we’re spinning our wheels,’ he said. ‘But I believe we can bring the resources to the table to complement state and federal efforts to help address the problems.’”

The Neighborhood Stabilization Program, which is supposed to receive federal and state stimulus funding…takes aim at buying, fixing up and reselling foreclosed homes to low- and moderate-income homebuyers, and the county is expecting about $2.1 million in funding for the effort. ‘The fact is for the first time in years, home prices are within reach and we can help people bridge the credit gap,’ Cook said. ‘For the first time in years, the stars are lining up.’”

“County housing officials are also backing a so-called “soft landing” initiative aimed at providing temporary housing for people displaced by more aggressive code enforcement efforts, which Cook indicated is partly in response to an increase of illegal housing and overcrowding as a result of a tightening housing market. Also Tuesday, the supervisors reviewed a schedule for budget talks aimed at addressing a shortfall that could reach $100 million by the end of fiscal year 2010-11 without significant cutbacks.”

The Milpitas Post. “City officials last week loosened legal restrictions regarding nearly 70 unsold housing units within KB Home’s Terra Serena community on South Abel Street. Milpitas City Council, convening as the city’s redevelopment agency, unanimously voted Feb. 17 to adopt a resolution authorizing the city manager to execute amendments to affordable housing agreements at Terra Serena’s 683-unit complex, which completed construction in September.”

“‘We’re taking restrictions off (the affordable housing units) due to the bad economy,’ Milpitas Principal Housing Planner Felix Reliford said.”

“Milpitas requires 15 percent of all residential units in the redevelopment project area to be off price: 6 percent for very-low income households and 9 percent for low- and moderate-income households. Reliford said by having the city remove restrictions normally placed on affordable housing units such as those regarding resale of those units, they may be easier to sell. The amendments would also allow the developer to lower the selling prices of many one- and two-bedroom condo units at Terra Serena.”

“‘We’re dropping the prices to attract more buyers,’ he added.”

“The current housing market and stricter lending requirements have created ‘unforeseen challenges in finding qualified buyers for these affordable units,’ according to a city report. Those challenges have left 67 of the 85 affordable condo units on the east side of Terra Serena unsold.”

“According to Relfiord, the reduction of housing prices resulted in market prices being similar to minimum sales prices for affordable units.”

‘This situation provided little or no incentive for buyers to purchase the off-price units, which come with 45-year resale restrictions that limit equity growth. ‘People ask themselves ‘Why get tied up for 45 years when you can get a market rate (unit) with no restrictions?’ Reliford said.”

“He added that over the last two and half years city staffers and KB Home have advertised on five different occasions (June 2006 to November 2008) to attract homebuyers for the purchase of the affordable units. He said approximately 580 applications were reviewed after the first four rounds of advertising. He claimed the scope of advertising these units was increased last November to include the entire Bay Area in regional newspapers.”

“‘For the entire Bay Area, we got only nine applications,’ Reliford said.”