An Investment That Went Bad
It’s Friday desk clearing time for this blogger. “Amid the housing market bust, developers are abandoning unfinished subdivisions, leaving hundreds of homeowners with the mess. The city of Nashville is at the center of some of the thorniest problems, both because it has dozens of stalled subdivisions and because city planners allowed the bank guarantees that would have paid for completion to expire on 27 now-abandoned developments.”
“Bril Peete was promised finished streets around her Cane Ridge home in 2007. Instead, manholes now stick up inches out of the rough pavement. They’re frustrated by never getting updates from Metro. ‘I like where I’m living, I like my neighborhood, it’s very quiet and safe,’ Bril Peete said with a weary sigh. ‘But if it takes years? Well, I guess this is where I’ll be, waiting.’”
“In a region where house prices have been cut in half in two years, a handful of investor-driven developments lost much more. Bermuda Dunes condominiums plummeted from an average sales price of $312,000 a unit in 2008 to $62,925 a year later — an 80 percent drop in one year. The 304-unit Cascades complex in Kissimmee has experienced the biggest price drops in Osceola County, according to the property appraiser there. Sales last year ranged from $140,000 to $185,000 a unit, but so far this year they range from $16,000 to $48,000 each — a drop of more than 70 percent in one year.”
“With sales in recent years driven mostly by out-of-state investors, fewer than 10 percent of the units are owner-occupied. Residents have complained that maintenance has been neglected as a result. ‘The homeowner fees are not getting paid, [and] the existing homeowners can’t make up the difference,’ Osceola County Property Appraiser Katrina Scarborough said.”
“‘Maybe, initially, they just had a higher price point, to be kind,’ said Seminole County Property Appraiser David Johnson. ‘Some have called it ‘creative financing,’ with investors putting no money down. … To be cliché, you had no skin in the game.’”
“Values in Bella Collina have dropped faster than a golf ball hit into Lake Apopka. Lots that fetched more than a million dollars each four years ago are selling for about $125,000 — a drop of more than 80 percent from their ‘06 peak. ‘I bought this lot for $700,000,’ said builder Keith Clarke of his hilltop model home. ‘Now I could buy the one next door for $25,000.’”
“With high-end furnishings inside and views of the Steamboat Springs ski resort outside, The Highmark sold the first of its 23 luxury condos for $3.17 million in 2008 and planned to wrap up sales that year. It didn’t happen. The developer’s lender failed in August 2008, and credit markets froze following the collapse of Lehman Brothers a month later.”
“Under pressure from the new lender, The Highmark’s developer will auction off 15 units next month with minimum bids as low as $630,000 — or $407 per square foot, down from $1,185 per square foot two years ago. ‘I kick myself, but what can you do,’ said Atlanta-area businesswoman Sharon Habibi, who with a friend bought a four-bedroom penthouse at The Highmark for about $3.1 million in 2008.”
“Wayne B and his wife are about to do something odd. The couple, with a pristine credit history, have decided to default on their $500,000 mortgage on a townhouse in Livermore. It is not that they are unable to afford the $4,600 monthly mortgage outgoings: they have never missed a payment. But the house they bought for $582,000 in May 2006 — at the peak of the US housing boom — is now not likely to be worth more than $315,000.”
“‘The process towards a default has started,’ says Wayne, whose lender does not yet know it will soon be left nursing losses on yet another foreclosed house. ‘We plan to retire in four years and will not be able to afford the mortgage payments then,’ he explains. ‘The loss if we sell will be so large that, after doing a lot of research, we have made a business decision to walk away.’”
“A few weeks ago, Shasta Gaughen, who works with a Native American tribe in California, stopped paying her mortgage. The one-bedroom condominium she bought for $196,000 in October 2005 is now worth just $60,000 and she has decided to default, ‘after two years of agonising.’ ‘The biggest problem is trying to convince myself it is not morally wrong to walk away,’ she says.”
“‘I’m approaching my home as an investment that went bad. I’m not stealing anything, the bank will get the property. But my parents raised me to be responsible.’ She has decided the ‘responsible’ thing for her to do is get out of the flat and rent somewhere else for less than the $1,200 monthly mortgage payments.”
“Rep. Dennis Kucinich and other members of Congress from Ohio on Thursday called the Obama administration on the carpet for excluding Ohio from a new $1.5 billion program to fight mortgage foreclosures. The program announced last week will redirect money from the bank bailout to state housing agencies in California, Nevada, Florida, Arizona and Michigan. Ohio gets nothing.”
“Gov. Ted Strickland and U.S. Sen Sherrod Brown say it’s unfair to limit aid to states where average prices fell by more than 20 percent from their peak. ‘If Ohio doesn’t meet the criteria in the President’s plan, the criteria are wrong,’ said Brown.”
“Decline in home prices should not be a deciding factor, as that seems to tilt relief to the states with the most speculation.”
“The buyer’s market continues for housing in the Northern San Joaquin Valley. That’s a nice way of saying home prices plunged again in January. There are plenty of buyers for distressed properties. ‘A lot of investors have an appetite to buy these homes, and they pay cash,’ said Larry Matos, president of Century 21 M&M and Associates. ‘Investors pick them up for 20 to 30 cents on the dollar. They fix them up and then flip them.’”
“‘We have double the number of buyers as we have inventory to sell them,’ said Matos. He said Stanislaus has half as many homes for sale now as there were a year ago.”
“Dallas-Fort Worth area home foreclosures for 2009 fell to their lowest level in three years. But the almost 12 percent drop doesn’t mean that fewer North Texans are threatened with losing their homes. Indeed, the number of D-FW homeowners with a loan in default is at a record high, and foreclosure filings continue to grow.”
“‘There are an awful lot of problem loans out there that should be foreclosed on and are not,’ said George Roddy, who heads Foreclosure Listing Service of Addison, which tracks foreclosures in 19 Texas counties. ‘Perhaps they think if they delay long enough, the situation will work itself out. Yes, foreclosures are down, but it’s artificial.’”
“Feelin’ lucky? A lot of regular Park City-area workers hope they are, judging from the flood of applications at City Hall for the ski town’s housing lottery. Thirteen lucky winners will qualify to buy — that’s right, buy — houses in Snow Creek with a nice view of ski runs and within spitting distance of the state wine store. Houses are in the mid $200,000-range, a far better deal than anything else around Utah’s glitterati stopover.”
“Mike Strachan is among the workers who keep Utah’s renowned ski town humming, but aren’t able to buy housing in its rarefied real estate market. ‘We’d both like to live here,’ Strachan said of long-term plans with his girlfriend. ‘But most things are too high for us.’”
“The lack of residential Canadian real estate listings is most acute in Toronto, contributing to upward pressure on pricing, according to ReMax Ontario Atlantic Canada. ‘The overall pressure on sales and price is significant across the board – and it’s not likely to subside until more inventory comes on stream,’ ReMax said.”
“There were 2,162 mew houses and condominiums sold last month, representing a stunning 237 per cent increase over January 2009. ‘The market is reasonably healthy, but certainly not frothy,’ said BILD president Stephen Dupuis.”
“With sales picking up in Calgary’s real estate market, realtor Claudia Walz has few doubts about what’s in store in the coming months. ‘It’s about ready to just go crazy,’ said Walz. ‘It’s almost like people want to spend now.’”
“‘Affordability is the catalyst for the vast majority of purchasers in today’s housing market,’ said Elton Ash, regional executive vice-president for Re/Max of Western Canada. ‘While home ownership is still within reach in many major centres, levels are slipping. There is a growing sense, on both sides of the fence, that the time to act is now.’”
“What happens to the cities that host the Olympics. This NY Times article is worried that Vancouver is going to suffer quite a hangover. Kennedy Stewart, a professor of public policy at Simon Fraser University in suburban Vancouver, remains unconvinced that showing potential investors a good time during the Olympics will resolve Vancouver’s long-term economic issues. ‘What’s the substantive thing Vancouver has to offer other than its nice mountains and vastly overpriced real estate?’ Professor Stewart asked.”
“A decade of cheap money and incredibly flexible loan programs offered by many lenders sparked overbuilding by developers, a flip-and-run mindset for speculators and unrealistic expectations for first-time home buyers blinded by the low payments of a short-term loan.”
“According to Edward Pinto, a consultant to the mortgage-finance industry and former chief credit officer at Fannie Mae, the over-stimulus provided by Fannie, Freddie, FHA and the Community Reinvestment Act created the housing boom that went bust. The response to the bust has been to provide yet more stimuli, which are serving to delay the market clearing process.”
“The ‘market clearing process’ means allowing the traditional housing forces to return to the scene.”
“Just what are traditional housing forces? In a nutshell, it means skin in the game: Make certain that those who can truly qualify to buy a home are also able to produce a down payment and an income that will allow the repayment of the mortgage, taxes, insurance and monthly essentials. ‘All we are doing is kicking the can down the street,’ Pinto said. ‘The loan modification programs that were designed to help people stay in their homes have been abject failures. The recent treasury action lifting the capital support caps did not help. It cleared the decks to use Fannie and Freddie as an open vessel for whatever the administration wants.’”
“The lending craziness of the 1990s and 2000s was not present in any other decade. Sixty years ago, the average home price in the United States was approximately $5,000 and the average debt against it was about $2,500. In the early 1950s, the prevailing loan-to-value (LTV) was 58 percent, while many of the loans made between 2004 and 2006 had an LTV of 97 percent to 100 percent. Some lenders, blinded by the 10-year run-up in home appreciation, were making 125 percent loans.”
“The housing road of the 1980s had its peaks and valleys, but it really took off in 1992-93 when homeownership became more of a priority and the government pushed for creative methods to get people into homes. The challenge is that housing is systemic. What helps you on the way up, pounds you on the way down. Inexpensive loans created demand and inflated prices. When rates adjusted, borrowers could not pay higher monthly obligations and the number of homes on the market (supply) soared.”
“It’s time to let the market correct itself. That means skin in the game for buyers.”
