An Egregious Error
It’s Friday desk clearing time for this blogger. “Chicago’s bungalows and brick Georgians are selling, but woe to the owner of a city condo. Phil Sammarco didn’t think it’d be so hard to sell his two-bedroom, two-bathroom condo in the city’s DePaul neighborhood when he put it on the market in March for $449,000. Now priced at $435,000, he has fielded — and rejected — a few low-ball offers and showed the unit to a lot of first-time buyers who have indicated they have a wealth of properties to look at. Now he’s thinking of turning it into a rental instead of lowering the price again.”
“‘You’ve got a lot of choices,’ Sammarco said. ‘Right now nobody is really comfortable that the worst is behind us. If you don’t think the market is stable and you don’t think it’s going to be as good or better, why wouldn’t you rent?’”
“A few years ago, few people in the housing market had ever heard of a short sale. Mention the term today and people, whether they are homeowners or real estate agents, just roll their eyes. The Obama administration is aware of the frustrations. In mid-May, Treasury Secretary Tim Geithner announced plans to streamline the process by offering financial incentives to mortgage servicers and investors that accept short sales.”
“Meanwhile, homeowners like Dallas O’Day are in limbo. O’Day, a Chicago attorney, and his family relocated from California in June 2004 and bought a Mediterranean-style home in Chicago’s Beverly neighborhood for $395,000. They rewired the house, stripped and refinished the wood floors and the woodwork, and did other work to restore its charm.”
“Last year, personal circumstances prompted them to list the home for sale just as the housing industry’s meltdown was picking up steam. With no takers and no longer even expecting to break even on his investment, O’Day relisted the 2,700-square-foot home in January as a short sale. Four months and three price reductions brought the house down to $384,900, at which point a potential buyer made an offer in late May. O’Day accepted it and submitted the paperwork to the lenders holding first and second mortgages on the home. He has yet to receive a response.”
“Meanwhile, the family has moved into an apartment, the refrigerator has broken in the home and there’s evidence of mold in the basement.”
“‘What has astonished me is that in the presence of one of the softest housing markets I can remember, we’re hitting up on four months and they’ve just had a person assigned to look at it, that they would move at such a glacial pace,’ O’Day said. ‘My expectation is I’ll be renting until whatever blemish is gone. I’ve just accepted the fact that at some point it’ll be foreclosed upon because I just don’t think the banks will pull it together. I feel like I’ve done everything I can do.’”
“A slowdown in the local housing market is reflected in assessed values for homes in Yakima County this year, the Yakima County Assessor’s Office said. .Certainly, King County has suffered from a bursting of the housing bubble. Stan Roe, assessment unit supervisor in the King County Assessor’s Office, said Monday market values in King County fell by an average of 15 percent this year.”
“‘I don’t think I’ve seen this big a drop before’ said Roe, who has worked for the King County Assessor’s Office for 19 years.”
“The spectacular fall of WaMu has left a hole in the heart of Seattle. To mark the anniversary of WaMu’s collapse, The Seattle Times caught up with former employees…who saw problems behind the scenes before the final days. James Meacham was at ground zero for some of Washington Mutual’s most questionable home loans. He wasn’t a typical banking executive — he had a master’s degree in theology and had spent time as a minister. He was hired in Seattle in 2000 and rose to become a vice president of business strategy at WaMu’s Long Beach Mortgage division. Based in California, the division specialized in subprime mortgages, made to those with flawed credit histories.”
“On a gut level, Meacham says, the packages of loans that Long Beach and WaMu began bundling and selling to investment banks didn’t make sense. But those loans held the lure of bigger profits for everyone, and the investment banks couldn’t seem to get enough of them. Meacham says he could see the housing crash coming, and sold his California home in 2006 at the peak of the market: ‘It didn’t take a financial genius to work out that blue-collar workers can’t be paying $3,000 a month for their houses,’ he says.”
“There was the pressure from his superiors at WaMu to grow the business rapidly, he says. There were the mathematical formulas and financial projections that showed bundling all those risky mortgages would turn out just fine. And there was a sense that the rules of the game had changed. He has wrestled with the question of who was primarily to blame for the mess. Was it lenders like WaMu? The investment banks? The global housing boom? He wonders if there is a point where credulity, and belief in a system, become culpability.”
“‘The basic problem was the assumption that housing prices would always go up,’ Meacham says. ‘It was an egregious error.’”
“No state has fallen as far as California has in the current global recession. James Doti, president of Chapman University in Orange County and a member of Mr. Schwarzenegger’s council of economic advisors, was in Toronto to discuss the many issues plaguing the state. Here is an edited conversation with the Financial Post’s Eric Lam.”
“Q. What was it about Southern California that made it such a target? A. Zoning, environmental regulations, real estate controls are all greater in California than other parts of the nation. This led to more rapid housing appreciation in Orange County than elsewhere because it was more difficult and costly to build there. Since the construction industry could not respond as rapidly as it could in other parts of the country, it led to a severe supply-demand imbalance.”
“Q. What kind of price appreciation are we talking about?”
“A. At one point average prices in Orange County hit US$750,000, roughly ten times the household income. This could not be supported and that’s when the drop occurred. But houses are affordable again: the average house price is about US$400,000. There were small 100-year-old units close to Chapman that were two room bungalows, maybe 900 square feet, going for US$900,000. Now they’re down to US$300,000, and still people look at them and say, ‘My goodness that should be no more than US $75,000.’ But in Orange County that’s affordable.”
“The real-estate bust that has pummeled San Diego’s downtown condo market and wreaked havoc in its outlying suburbs has hit its once-impregnable beach communities. Beachfront property has come down as much 30 percent in some areas from 2006 highs, with much greater savings possible on foreclosure properties or short sales.”
“Even the crown jewel, Coronado, hasn’t escaped the downturn. ‘Four years ago, you couldn’t find anything in Coronado for under $1 million,’ said Maureen Kerley, a real-estate agent who works in Coronado and Scottsdale. ‘Now, there are dozens.’”
“Please, keep those tax credits rolling. That, not surprisingly, is what the battered real estate industry is arguing as it lobbies for an extension of the $8,000 first-time homebuyer tax credit. Zillow is rolling out a new survey of homebuyers that finds that extending the tax credit would bring an additional 334,000 buyers into the market over the next year starting in December. Overall, that estimate is based on a nationwide survey of prospective homebuyers in which 18 percent cited an extension of $8,000 tax credit as the ‘primary’ influence on whether to jump into the market.”
“Still, extending the tax credit could prove costly to the rest of us who have either already bought homes are renting now. Obviously, at some point the market will have to stand or fall on its own without Uncle Sam’s help. But is it time to go cold turkey now?”
“The Florida housing market is struggling because of a declining population, tight credit, high unemployment rates and a lengthening of the home-buying process, economists said. ‘I think we have a tougher path to get (out of the housing slump) than the nation as a whole,’ said Dr. Sean Snaith of the University of Central Florida’s Institute for Economic Competitiveness.”
“Tax credits won’t solve the main problem of limited credit, Snaith said. ‘Most people cannot get financing right now — that to me is the bigger problem,’ Snaith said.”
“First-time house buyers in Australia this summer took out bigger loans than the same period a year ago, writes Nick Gibson. The Australian Bureau of Statistics says that the average loan size for first home owners increased from $246,500 in 2008 to $269,100 in July 2009. This compares with the average mortgage for a new house of $266,900.”
“The trend suggests that first-time home buyers have been contributing less of their own savings while taking advantage of the $21,000 in government housing grants introduced this year as as part of a national stimulus package.”
“‘The housing grants have helped to incentivise a property market that shows no sign of stalling and is forecast to grow consitently over the next decade,’ says Darrell Todd, ceo of thinkingaustralia.”
“The Reserve Bank warned yesterday that the super-sized loans were an ‘unusual outcome’ given that loans to first home buyers were normally smaller than loans to other home buyers. However, figures compiled by the Australian Bureau of Statistics show the average loan size for first home owners was up from $246,500 a year ago to $269,100 in July. This compares with the average loan size for all owner-occupied housing commitments of $266,900.”
“First home buyers have also helped to push up new home sales, according to the latest Housing Industry Association report. According to analysts, the growing loan size suggests first home buyers have been relying heavily on government grants of up to $21,000 rather than putting their own savings into it.”
“The International Monetary Fund has urged central banks to be prepared to lift interest rates to head off the sort of asset price bubbles that produced the global crisis. But don’t expect the Reserve Bank to start targeting Australian housing prices. Yet still be prepared for the central bank to lift interest rates more aggressively if house price rises start getting out of hand. And expect governor Glenn Stevens to complain more about other policy bottlenecks that appear to be pushing up house prices.”
“Stevens has long been uneasy with the orthodoxy — promoted by former US Federal Reserve Board chairman Alan Greenspan — that monetary policy should not aim to dampen asset prices, except to the extent needed to keep goods and services inflation low.”
“‘I personally would not want to commit to saying, ‘we’re definitely never going to pay attention to asset prices and totally ignore them,’ he said. ‘That has been shown to be a mistake, basically.’ But neither would the Reserve Bank ‘aggressively chase down’ asset prices that “pop up here and there”, even if they didn’t seem to make sense.”
“Today’s rising housing prices, however puzzling, are not a bubble now because credit growth remains subdued. But Stevens admitted to not understanding why Australia’s housing prices are so high given we have so much spare land.”
“Agents are expecting a flood of first-home buyers this weekend. Figures from Australian Property Monitors show there are 4054 metropolitan properties priced under $400,000 on the market - 58 per cent of the total 6997 listings. This compares to the 3921 properties under $400,000 that were on the market at the same time last year and 6412 for total listings.”
“‘It’s the last weekend before the grant changes,’ said Toop & Toop agent Kay Morris. I would imagine there would be more people this weekend looking.’”
“Century 21 Central agent Rosalyn Marker said there was a sense of urgency, which was evident at a Melrose Park sale this week. ‘To have an open with 88 people over the last Saturday and Sunday was a very rewarding result for us,’ she said. ‘We had 11 offers on that property, most of them were young couples … and I would be expecting them (those who missed out) to be looking again this weekend.’”
“Sang Ah Lee, 25, signed a contract for the Melrose Park home on Tuesday after searching the property market for about four months. ‘Because of the grant I tried harder to find a property I liked because that was a deadline for me,’ she said. ‘So I was very lucky.’”
“The Australian dream of home ownership is slipping away, leaving a threat of a US-style collapse in house prices, according to a team of university researchers. Analysis by researchers from South Australia’s Flinders University has revealed home ownership in the 10 years from 1996 rose only 0.8 per cent despite strong economic growth and low interest rates in that period.”
“Other findings included large gains in national income from the resources boom were ‘wasted’ by increasing house prices and accumulating debt to unreasonable levels.”
“Dr Joe Flood, the Institute’s adjunct professor, said the ‘the writing is on the wall for the ‘Australian dream.’ Dr Flood and his team assessed Census data to conclude that Australia’s housing market is in “a very dangerous and unstable situation which has received little adverse attention.’ The researchers found that after 1996, average house prices increased by three times on average - to around 6.8 times medium household income - and debt levels surged.”
“‘On the one hand Australia is vulnerable to a collapse like the United States, where prices fell by a half during the sub-prime collapse … or to a long slow decline as in Japan since 1988,’ Dr Flood said.”
”’The country that promised limitless land, cheap housing and near universal home ownership to all comers now has the most expensive housing in the world amid very tight housing and land markets and little prospect of restoring the balance,’ Dr Flood said. ‘As long as the Government, the public and the media remain in denial, and self-congratulatory rhetoric continues that Australia has cleverly avoided the housing market correction it needed to have, there is little chance that matters will improve.’”
