Flying Blind
It’s Friday desk clearing time for this blogger. “When Congress voted overwhelmingly Thursday to expand the first-time homebuyer tax credit to include repeat buyers, it brought a ray of hope to segments of the Triangle housing market that have not had much to cheer about of late. The bill, which awaits President Barack Obama’s signature, adds a credit worth up to $6,500 for repeat buyers who have lived in their houses at least five years. The legislation also significantly raises the annual income limits required to be eligible to qualify for the tax credits.”
“Laurie Kelly, whose North Raleigh house is on the market for $430,000, is optimistic that the new credit will help her both sell her house and buy one in Virginia. Kelly’s husband recently started a new job in Washington, and the family’s house has been for sale since the summer. The Triangle housing market has a glut of houses priced above $400,000.”
“‘We have a beautiful home,’ she said. ‘We just have so much other beautiful competition.’”
“In Washoe County, strong activity at the lower end of the market has helped area home sales consistently beat last year’s numbers each month. Many attribute the sales pick up for entry-level homes to the tax credit, including some folks who admit to normally being leery about such federal programs. ‘I don’t necessarily agree with (the tax credit),’ said Ken Wiseman, broker-owner of Reno Rancho Realty. ‘But I must admit that it’s been very important for us here.’”
“‘I don’t think the market would be able to function on a normal scale without it. The whole market is essentially being propped up by the tax credit.’”
“Congress delivered an early Christmas present to the real-estate industry yesterday. Local real estate agents said the congressional action could lead to a busier-than-normal winter for home sales in Massachusetts. ‘I know it sounds self-serving, but I truly see this as a great stimulus (for the economy),’ said Gary Rogers, president of the Massachusetts Association of Realtors.”
“Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies, said the nation’s housing market is now on ‘government life support,’ so it’s important that the credit program was extended until next spring. But he said that, sooner or later, the housing market has to stand on its own two feet.”
“‘Tax credits borrow demand from the future,’ he said. ‘At some point, the government has to exit the subsidies business.’”
“Not everyone likes the idea of new tax credits for housing, including University of Wisconsin-Madison economics professor Morris Davis. He said home prices were stabilizing without further intervention and that extending the first-time buyer credit will cost the government more money and only move up home sales that would have taken place anyway over time.”
“‘There’s just a fixed pool of potential first-time homebuyers. So that means if you incent them to buy today, they are not going to be available to buy tomorrow,’ said Davis, whose specialty is real estate and urban land economics. ‘It’s basically the homeowner equivalent of ‘cash for clunkers.’”
“Becky Bowles, president of the Palm Springs Regional Association of Realtors, said it was fabulous that Congress extended the credit opportunities. ‘The credit makes a big difference to first-time homebuyers with limited funds available,’ she said, citing a recent survey from the California Association of Realtors that said 39 percent of those buyers would not be in a home in 2009 if the credit did not exist.”
“‘I think it’ll make a big difference in the people who are sitting on the fence,’ she said. ‘Everyone has figured out that we’ve reached a bottom, and there are incredible opportunities for buyers.’”
“Patrick Veling, president and founder of Brea-based Real Data Strategies, said the action by Congress holds potential to improve the lot of sellers trying to sell their mid-priced homes. On the other hand, Veling said one could argue that the overall economic strategy of artificially boosting the demand primarily through government insertion into the process is delaying the natural bottoming of the market.”
“‘Time will tell,’ he said.”
“Over the past few weeks, Michael Groendyk has raced against the clock. He’s scrambled to close on a home in Laurel Lakes, hoping to take advantage of an $8,000 federal tax credit. Now, it looks like the credit will be extended until next year. But Groendyk and his wife, Rebecca, who are in the their 20s, didn’t want to take any chances, with the original deadline looming later this month. They are scheduled to close on their new home in North Naples on Friday.”
“The Groendyks recently graduated from Western Kentucky University. They married in December and moved to the Naples area from New Jersey in May. The couple searched for a house for five months. They visited more than 60 and put in four offers before finally getting a contract. Two times they were outbid by other buyers, and another time they walked away in search of a better deal.”
“They are buying a foreclosure. The home has three bedrooms and two bathrooms and they are paying $249,000 — the list price. ‘We were pushing everything as hard as we could to get it closed in November — as soon as possible, really,’ he said. ‘We snuck it in.’”
“It is difficult to generalize about any group because there are always readily identifiable exceptions to the rule. Even so, the old saw about a Democrat seeing a man drowning seventy five feet offshore throws him both ends of a fifty foot rope and hurries off to ‘rescue’ someone else, while a Republican throws him a fifty foot rope and tells him to swim for it, appears to be relatively accurate.”
“What a mess we are in. On one side we have the Republicans who pretty much have a tin ear when it comes to recognizing human suffering and whose general response to someone else raising the issue is ‘get a job you dirty hippie.’ And on the other side are the Democrats who have such acute antennae that they perceive a problem even before it exists and who are institutionally and intellectually incapable of finding an actual workable solution. Not only are they incapable of providing a workable solution, most often their solutions make the problems even worse. ”
“A large part of the current economic downturn is due to the fact that the Congress required financial institutions to lend money to people who had neither the means nor the intention to repay it. Congressional Democrats engaged in years of hand wringing that the nation’s poor were being left behind in the surge of home ownership – the American dream. (It is the moral equivalent about worrying about the fact that fish cannot play the piano – they have no hands and the poor have no money. Sewing gloves on the fish will not work any better than giving loans to those who cannot repay them.)”
“But the Democrats never learn from a ‘failed solution.’ In the name of ‘economic recovery’ the Democrat Congress is right back with the same solution. This time it is the Federal Housing Administration. Committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to ‘keep prices from falling too fast.’”
“Just as a reminder that is the same Rep. Barney Frank who, along with the Sen. Chris Dodd, buried an investigation into identical lending practices at FannieMae and FreddieMac, declaring them to be sound institutions.”
“Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the US government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market. The initiative also would allow Fannie to keep inventory off already-saturated housing markets, and amounts to a bet the housing market would be stronger one year from now.”
“‘I’m sure Fannie is hoping that when they sell the properties, the values will be higher,’ said David Berson, chief economist for PMI Group, a mortgage insurer. ‘A year from now, we should be a year further into the economic recovery, and housing demand will be stronger.’”
“Japan is drifting towards a dramatic fiscal crisis. For 20 years the world’s second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending - and allowing it to push public debt beyond the point of no return. The rocketing cost of insuring against bankruptcy of the Japanese state is telling us the model has smashed into the buffers. Credit default swaps on five-year Japanese debt have risen from 35 to 63 basis points since September. Japan has decoupled from Germany (21 basis points), the US (22), and even Britain (47).”
“The IMF expects Japan’s gross public debt to reach 218 per cent of gross domestic product this year, 227 per cent next year and 246 per cent by 2014. This has been manageable so far only because Japanese savers have been willing - or coerced - into lending for almost nothing. The yield on 10-year government bonds has been about 1.30 per cent this year. The savings rate has crashed from 15 per cent in 1990 to near 2 per cent, half America’s rate. Japan’s $US1.5 trillion state pension fund (the world’s biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.”
“Japan’s terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future. It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. The quantitative easing was too little, too late, and this is the lesson for the West.”
“Builder KB Homes falsely inflated appraisals by an average of $30,000 on each of the 20,000 homes it sold nationwide from 2006 through 2008, according to a lawsuit filed in U.S. District Court in Orlando on behalf of a Clermont homebuyer. The lawsuit alleges that the national builder worked exclusively with a Plano, Texas, appraisal company that handpicked appraisers who would ‘play ball’ and base their values on contract prices rather than the actual sales — a practice that helped KB Homes inflate home values at a time when they were actually falling.”
“The buyer who filed suit, Stephanie Sullivan, was unavailable for comment. She and her husband purchased a four-bedroom pool home in Clermont’s Southern Fields subdivision for $421,400 in October 2006. At the time, the house was appraised at $425,000, but a forensic appraisal performed later concluded it had been worth $360,000 at the time of the sale, the lawyer said.”
“Sullivan’s husband lost his job six months after the purchase and they were unable to make payments on the inflated mortgage, forcing them into foreclosure and bankruptcy, according to the lawsuit.”
“Frank Gregoire, former chairman of the Florida Real Estate Appraisal Board, said that, while he had not reviewed the lawsuit, he was aware of it. Some of the issues raised in the complaint were commonplace during the housing boom earlier this decade, the longtime Tampa-area appraiser said.”
“‘It was common practice for builders and subdivision developers to have pet appraisers,’ Gregoire said. ‘That was true not only for subdivisions but also for builders with a subdivision or development — and, in particular, for condo converters.’”
“As promised, federal authorities have amped up criminal mortgage fraud prosecutions. During the last week alone, cases were filed in U.S. District Court in Tampa against at least 11 people accused of lying to lenders and property appraisers to obtain millions in mortgage loans during the property boom that ended last year.”
“”Thirty of the defendants were charged in Tampa. The defendants include mortgage brokers, straw buyers and an unemployed day trader. The FBI sought an arrest warrant for Richard Likane, an unemployed day trader who authorities say had no income but managed to obtain two loans totaling more than $300,000.”
“According to court papers, he lied about his monthly income in obtaining a mortgage of $161,000 for 10808 Dragonwood Drive in Tampa in February 2006, a year in which he actually lost $3,000 trading stocks and had no salary or wages. In March 2007, he obtained a home equity line of credit for $195,000 on a property at 3857 Mariner Drive in St. Petersburg, falsely representing his annual income as $75,000 when it was zero.”
“In January 2008, Likane filed for bankruptcy and testified under oath that he had not been employed since 2000, and had been a day trader of stocks and a house flipper since then.”
“A group of at least 20 disgruntled former Trump Tower Tampa buyers plans to sue Donald Trump, accusing the New York tycoon of falsifying his role in the $300-million project that went bankrupt last year. Trump misrepresented himself as a tower investor when he was only lending his name to the project in a licensing deal with Tampa Bay developer SimDag Robel LLC, said Kenneth Turkel, a Tampa attorney hired by some of the condo buyers.”
“Scores of buyers plunked down 20 percent deposits on units that ranged in price from $700,000 to $6 million. Developers didn’t refund half the deposit money, and buyers aim to recoup losses from Trump though the courts.”
“During the Tampa unveiling in 2005, Trump told the St. Petersburg Times that he had a ’substantial stake’ in the condo tower. ‘I recently said I’d like to increase my stake but when they’re selling that well, they don’t let you do that,’ Trump told the newspaper.”
“Richard Golod, executive director for Van Kampen Investments said…’If the economy is going to get back on track, consumers are going to have to spend savings, or equity in their homes, or borrow.’”
“Golod was keynote speaker at the Economic Forum 2009 in Nampa Nov. 5. Golod said the turnaround has begun. In fact, it began in June and July, but few people recognized it, he said, noting that the federal government has been working hard to make certain the economy continues to move forward with few hiccups.”
“He said the housing and construction industry may never hit its norms. While some parts of the country are seeing a bottom, others are still in freefall. In the Treasure Valley there may be a 15-month supply of homes on the market, but places like Tampa, Fla., Las Vegas, Nev., Scottsdale, Ariz., and parts of California are seeing a five-year supply of homes.”
“Unemployment in Mohave County where Bullhead City is located is around 10 percent. The median house price here has fallen from nearly $190,000 in January 2006 to less than $93,000 now, a drop of more than 50 percent. Not so long ago this town on the Nevada border was in full boom mode. It was a magnet for people coming to work in the casinos across the Colorado River in Laughlin, plus Californians looking to retire here or have a second home at a fraction of the cost in their own state. Construction workers flocked here to build homes and roads. All told, successive booms turned Bullhead City from a fishing village just a few decades ago to being a city of more than 40,000 people.”
“John McCormick of McCormick Development helps run a number of family businesses – a water company, a construction company, a land development company and a real estate broker’s office – and says that many of the people walking away from homes here are either speculators or Californians who bought a second home here.”
“‘If they end up in trouble, it’s so much easier to walk away from a second home than a primary residence,’ he said.”
“Millions of American homeowners are ‘underwater’ on their mortgages - owing more than the value of their homes - and would be better off walking away. That is the suggestion Brent T. White, a University of Arizona associate professor of law, makes in his newly released working paper, ‘Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.’”
“White, whose article will be published in this month’s issue of Arizona Legal Studies, said fear, guilt and shame are what keep many homeowners from making rational economic decisions. ‘These emotional constraints are deliberately cultivated by the government and lenders who self-servingly tell borrowers that they have a moral and social obligation to pay their underwater mortgages,’ said White.”
“‘Meanwhile, lenders ruthlessly seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility,’ he added.”
“A federal judge rejected a request by Angelo Mozilo, the former chief executive of mortgage lender Countrywide Financial Corp, to dismiss a U.S. Securities and Exchange Commission lawsuit accusing him of securities fraud and insider trading. In a Tuesday court filing, U.S. District Judge John Walter in Los Angeles also rejected requests by David Sambol and Eric Sieracki, respectively Countrywide’s former chief operating officer and former chief financial officer, to dismiss related SEC fraud charges.”
“Countrywide had been the largest U.S. mortgage lender before liquidity dried up in summer of 2007. The insider trading charge concerned Mozilo’s alleged exercise in 2006 and 2007 of more than 5.1 million stock options and sale of the resulting shares, leading to more than $139 million of profit.”
“According to the complaint, Mozilo set up the plan shortly after admitting in an email to colleagues that Countrywide was ‘flying blind’ as to the quality of its loans.”
“Real estate investor Barry Sternlicht is betting the Greenwich housing market is making a comeback. Sternlicht raised the asking price of his 5.8-acre estate on Round Hill Road to $5.95 million, although the town is headed for its worst year for property sales in more than three decades.”
“It was first listed for sale in June 2008 for $8.25 million, according to the Greenwich Multiple Listing Service and his broker. The price was reduced three times from September 2008 to April of this year. Sternlicht bought the place in November 1994 for $2.93 million, according to the Greenwich Assessor’s office.”
“‘We increased it because we felt like we were giving it away,’ and there was interest in the property, Sternlicht’s broker, Jean Ruggiero, said in an interview. ‘Just because people are lowering their price doesn’t mean it’s right, because he’s not a desperate seller.’”
