An Elaborate Monument To The Folly Of The Boom Years
It’s Friday desk clearing time for this blogger. “Sales in the decimated housing market may finally be bottoming, but don’t expect home prices to stop dropping before mid-2010 at the earliest, analysts and economists say. Losses from the housing meltdown totaled $3.6 trillion at the end of 2008, and will likely approach $5 trillion by the time the crisis ends, predicts Lawrence Yun, chief economist with the National Association of Realtors. Nevertheless, there have been signs in recent months that the industry may be stabilizing. ‘We are at or near bottom in terms of sales,’ says Yun. ‘We are seeing strong buying activity, particularly in those boom and bust markets, where prices have declined significantly. Buyers are coming in and fighting over properties — there is multiple bidding in California and Florida.’”
“Analysts said foreclosure activity is down because lenders have foreclosed on fewer properties in recent months – either because they could not cope with the volume of distressed homes or because they were working with owners to modify the mortgages. Leslie Appleton-Young, chief economist of the California Association of Realtors, said the slowdown has led to multiple and overbid offers by investors and first-time buyers, eager for deals.”
“‘It looks like to me the low-and moderate-end of the distressed market is starting to show signs of bottoming,’ Appleton-Young said. ‘There’s just no inventory.’”
“Hank Howard, a real estate speculator who felt the market presented few opportunities during the last two years, said he is ready to jump back into the business. The El Cerrito resident is searching for single-family homes in Hillsborough or Belvedere that could be bought, rehabbed and resold within about a year.”
“‘We may not quite be at the bottom yet, but if not, we’re awfully close,’ he said.”
“The California Foreclosure Prevention Act, which took effect Monday, is expected to make lenders put more effort to keep borrowers in their homes. For Rocklin Re/Max Realtor Ed Kittle, he’s doubtful the measure will have a positive result. ‘The last time they did this, the NOD’s (Notices of Default) went way down,’ said Kittle, ‘But after the ban was over they increased dramatically.’”
“When times were good a few years ago, Mike Menas opened a second mortgage on his Roseville home to buy a second home as an investment property. When the housing market crashed, Menas was forced into bankruptcy and now lives in a rental property. ‘My second home is still in foreclosure and I bought it after the first one,’ Menas said. ‘I don’t know what the bank is waiting for.’”
“Kittle said the housing market in Rocklin and Roseville has reached bottom and home prices are stabilizing and in some cases increasing. He said the market will sort itself out. ‘We need to go through it and take our medicine and get it over instead of delaying everything,’ Kittle said.”
“A subdued and sparse group of home builders gathered at San Francisco’s Moscone Center this week for the annual PCBC show. At the peak of the housing boom in 2006, it drew 35,000 attendees. Last year there were about 19,000. This year only 14,000 people came to Moscone. Even with a smaller exhibit floor, the aisles were noticeably underpopulated. ‘It’s like a ghost town,’ said Andy Mihaylo, president of a Laguna Niguel (Orange County) firm that works in real estate financing.”
“The dismal theme extended to conference sessions with titles like ‘Crisis of Confidence,’ ‘After the Downturn,’ ‘How to Support a Development Company When There Is No Development,’ and ‘So You Can’t Flip It … Now What?’”
“At a session on the capital markets called ‘Meet the Money,’ the moderator joked: ‘This isn’t ‘Meet the Money’; this is ‘Need the Money.’”
“Drive down Federal Highway or Sunrise Boulevard in Fort Lauderdale or Okeechobee Boulevard in West Palm Beach and the ‘For Sale’ signs seem inescapable. Every lonely strip-mall storefront and empty condominium complex pleads to become someone else’s problem. Consider them the artifacts of a gilded age.”
“During the past decade, South Florida’s landscape was transformed by a real estate frenzy, part of the biggest home-price boom in American history. The only thing more stunning than the housing market’s steep climb was its precipitous fall. Of the empty homes and storefronts that dot the current landscape, high-rise condos are perhaps the most depressing. During the boom years, an endless parade of concrete towers competed for space on South Florida’s skyline, but now only a sprinkling of their windows light up at night.”
“Miami alone has produced 23,000 new condo units since 2003 and is now experiencing the worst condo meltdown of any city in the country, according to Jack McCabe, a Deerfield Beach real estate analyst. Broward and Palm Beach counties built or permitted more than 18,000 condos. ‘I think our population growth is about zero right now, and we’re not creating any jobs,’ says McCabe. ‘Who is going to live in these things?’”
“In black pants, black tie, and dark shades, he mops the sweat from his forehead as he questions every car that approaches the twin Tao Sawgrass condos in Sunrise. The guard, who says his name is Hugo, has only been on the job a month or so, but already he understands the routine.”
“Right now, most of the visitors are employees — the security guard at the front desk, the woman who sells the condos — because no one lives there. Not a single resident, in 396 units. ‘Not that I’m aware of,’ Hugo says.”
“Tao, which broke ground in January 2006, was supposed to attract wealthy new residents. The condos presold for $300,000 to $800,000, and buyers, including then-Sunrise Mayor David Feren, were wined and dined at the BankAtlantic Center. Today the complex is an elaborate monument to the folly of the boom years, when it seemed logical to sell half-a-million-dollar high-rise units on the edge of the Everglades. The whole place seems to be holding its breath, trying not to smear its makeup while it waits for a sugar daddy to arrive.”
“Oswaldo Mateus and his wife were among the first people to buy at Tao two years ago, putting down a 20 percent deposit on a $300,000 unit. Along with losing his equity, Mateus is worried that only a few people will be forced to shoulder all the maintenance fees. ‘Who’s gonna be the [homeowners] association? Thirty people?’ he says.”
“Besides, he’s not eager to be the lone resident of an empty building. ‘It’s kind of unsafe to move into a place like that,’ he says.”
“Despite his oversized ego, I’ve been a big fan of Donald Trump. So it was with some dismay as I watched him over the past few years try to carve his way through the world of condo hotels, now often advertised as ‘condotels.’ This product has been on my watch list as one of the worst real estate investments ever created for the simple reason that it is really just a financing mechanism for the developer and for all practical purposes, caveat emptor, which in today’s world means let the buyer be damned.”
“The sales pitch suggests the buyer will recoup investment costs and fees through the daily rental of the condo unit by the hotel, which, by the way, rarely ever happens.”
“It was near the height of the market when Trump jacked up the business even further with flamboyant, high-end projects in Honolulu, Chicago and Las Vegas. With the Trump name on the buildings, presales starting in 2006 and 2007 looked great. But, three years later, the closings on the presales haven’t happened, and Trump has been stalled on the highway to riches — including lawsuits with lenders on the Chicago project and reportedly turning the condotel units into straight apartment rentals in Las Vegas.”
“According to the local Las Vegas press, the Trump Tower here was 100 percent presold, but opened with less than 30 percent of sales closed. If buyers don’t close their deals, they forfeit deposits. (Think 20 percent on a $1 million unit!)”
“The number of commercial properties facing foreclosure is growing rapidly, and observers said a massive bank takeover of office and retail buildings is likely in the coming months. Since the first of the year, lenders have filed default notices against 323 properties in the valley, according to Nevada Title Co. Most of the bank takeovers have been undeveloped land — more than 90 percent by one estimate — but real estate brokerages say more lenders are starting to take possession of buildings as well.”
“‘For the first time in my 20 years in the business, clients are struggling to make mortgage payments,’ said Susan Collins, vice president of property management with Gatski Commercial. ‘Properties are going into receivership, and this is the tip of the iceberg. It is going to continue to escalate the rest of 2009. Foreclosures hit the residential market, and now it is happening to commercial. It is a whole new ballgame for everybody. We are all trying to feel our way through this. It is coming so rapidly.’”
“It’s an area with more residents than Flagstaff. And it uses the Queen Creek name for addresses, even though it’s not really in the town and has more than three times as many residents. Despite having 79,000 inhabitants, this area doesn’t have its own identity or city government. Incorporation talks aren’t new to the area, although they would be to most residents. Two incorporation efforts were pushed in 2004 and 2005. Newspaper reports from the time pegged the area at 20,000 residents.”
“The biggest question is how money would be generated. Tisha Castillo, president-elect for the San Tan Area Chamber of Commerce…has questions. ‘We don’t have any revenue. We don’t have any commercial. We are a ton of rooftops,’ Castillo said. ‘It’s scary to think how we would be able to support ourselves.’”
“Dallas-Fort Worth area home foreclosure postings are hitting new highs, with more than 6,000 properties set for sale next month. That’s a 62 percent jump from a year ago, according to Foreclosure Listing Service. This year, more than 35,000 D-FW home foreclosure filings have been recorded, a 20 percent rise from the first seven months of 2008, the listing service said.”
“‘This is the highest level of year-to-date home postings that I have seen in this foreclosure cycle, and it most likely surpasses the posting activity of the late 1980s,’ said George Roddy, president of the company that tracks foreclosures in more than a dozen Texas counties. ‘The high in ‘88 or ‘89 was averaging 2,000 a month.’”
“Experts warn that a new wave of mortgage foreclosures may be coming soon and could rival the default rates for subprime mortgages. The mortgages in question are $230 billion of option adjustable-rate mortgages, creative lending products that flourished at the height of the housing boom. Subprime mortgages caught the nation by surprise because of their short two-year resets to higher interest rates. Option ARMs reset over a longer horizon and thus are a slowly unfolding nightmare.”
“‘This one, everyone knows it’s worsening. Everyone sees it worsening,’ said Sandipan Deb, a credit analyst with Barclays Capital.”
“About half of house sales in Frederick County are foreclosures. Wayne Six, the owner of Six & Associates used several examples where a lender lost $154,500 on a property just to get it off the lender’s inventory. ‘I almost feel I have to have two prices when I appraise some homes,’ Six said, ‘one for the traditional sale and one for a foreclosure sale.’”
“Some Realtors said they have dealt with appraisers from not only outside Frederick County, but also from Pennsylvania and West Virginia. The appraisers know nothing about the county or municipalities they are working in, they said. One Realtor said an appraiser from Columbia wanted the Realtor to provide data, something the appraiser is supposed to do. Another noted that an out-of-town appraiser at a condo didn’t know how to do a floor plan.”
“Another said an appraiser from West Virginia was sent to look at a historic property in downtown Frederick , but knew nothing about the city. Another said an appraiser for a Middletown property used the opposite end of the street for price comparison, far from the house actually for sale.”
“‘Someone told me about an appraiser sent to do a Third Street house ended up using Fifth Street for his comparison,’ Six said. ‘I had one out-of-town appraiser who drove out of the office on Thomas Johnson Drive, got to the end of the street and called back asking how to get on U.S. 15.’”
“Q: Help me out here. I bought a condo in 2006. It’s way too small for me, and I didn’t really love it, but it had some things going for it. It’s in what was supposed to be an up-and-coming area, but it’s pretty industrial and commercial still and a number of the big businesses in the area have gone out of business, so there are lots of boarded-up buildings around. We just got word that one of them is being converted into almost 200 units of low-income housing — I’m not looking forward to that.”
“I thought I was making a very reasonable investment, even if my home didn’t appreciate at all. Now, all the people in my complex who overpaid, put nothing down and lied about their income are in foreclosure, and the value of my home has dropped by about 20 percent — plus the homeowners association (HOA) is going broke, so it is looking to the few responsible owners to cover all the bills. I don’t even like my place that much — it’s just all I thought I could afford.”
“I would really prefer to live somewhere where there is more shopping and more restaurants and homes but am upside down, so I can’t afford to move on unless I buy something else first and then walk away. Everyone else I know seems to be doing that. I thought I was being very smart when I bought my home, but apparently not. What did I do wrong?”
“A: Well, my dear, first off, I think you needed to get all that out. Venting is cathartic, and you have earned the right. You and I both know that you really didn’t do anything wrong. The fact that your neighbors’ poor decisions and financial habits are pulling down the value of your home is completely unfortunate and unfair, but there’s not really much you could have done to prevent it from happening — if I had the preventive for that, I would be the queen of the universe.”
“However, I do think your house-hunting strategy was, like that of most house hunters in the last decade (yours truly included), misguided. We all fell into the trap of overemphasizing the nature of our homes as investments or financial assets, rather than prioritizing their primary nature as a place to live our lives and house our families.”
“Optimism has been all but extinguished from the U.S. housing market. The number of Americans lining up for new home loans is shrinking again, according to Wednesday’s release from the Mortgage Bankers Association, and the best that can be said of homebuilding is that it has stabilized at almost 80 percent below its peak.”
“With no end in sight to falling prices, perhaps we should look on the bright side. Indeed, there are three good reasons why sliding prices are not such a bad thing. Falling house prices are usually seen as wealth destruction. But they can also be seen as wealth transfer. The next generation of homebuyers will benefit from our loss.”
“Americans may also reflect that much of their temporary housing wealth was illusory anyway. Since house prices in a given area tend to rise in tandem, the only way to cash out was to borrow against equity, or move to a cheaper area or smaller space, or die.”
“A second consolation is political. Tumbling prices have exposed the flaws in the American government’s efforts to subsidize housing.”
“The third source of solace is macroeconomic. For several years America borrowed money from abroad to make an investment that did nothing to expand its productive capacity or its ability to export.”
“An ever-growing number of U.S. homes were also vacant. Not only did houses become more numerous, they also got bigger. The average square footage of a U.S. family home expanded from 2,200 to 2,500 over the past eight years. ‘Mistaken beliefs about housing may have crowded out more productive investments,’ argues Harvard economics professor Edward Glaeser.”
“Since two-thirds of Americans own their homes, falling prices are never likely to inspire street parades…Even so, our loss is a hidden accounting gain for the next swath of homeowners. A more balanced economy and housing policy may now emerge. For more philosophically minded Americans, this is a cloud with a silver lining.”
