The World Changed When Housing Wealth Disappeared
It’s Friday desk clearing time for this blogger. “As property values began to appreciate rapidly in the early 2000s, Phoenix-based Right Place Properties developed an aggressive new sales strategy that included mass-marketing its investments. When the housing bubble burst in 2007, Right Place co-founders Rob Porter and Earl Ricker continued to take in millions of dollars from an expanding network of investors. In November 2008, Right Place abruptly ceased all monthly investor payments and laid off the bulk of its sales organization. The company ceased operations in February 2009, leaving behind at least 42 unfinished condo-conversion projects. Many of the units were uninhabitable, investors said, and several were in pre-foreclosure because of unpaid property taxes.”
“Al Blitz, a 70-year-old resident of Plano, Texas, is among those who invested in the months leading up to Right Place’s demise. ‘Our total retirement income is in jeopardy of being lost because of Right Place Properties’ actions,’ Blitz said. ‘Adding insult to injury, we found out that the two properties for which we paid $74,000 each are only worth about $30,000 each.’”
“Foreclosures are taking a toll on some Las Vegas homeowner associations, some of which are closing pools and deferring maintenance as they deal with a drop in revenue. The financial woes faced by the associations come as they are locked in legal and legislative battles with investors in foreclosed homes who complain they are overcharged for fines and fees by the associations and their collection agencies.”
“David Stone, president of collection company Nevada Association Services, blames investors in part for creating financial strain for the homeowner associations. Many aren’t paying the monthly assessments once they take possession of homes and are instead waiting for the properties to be sold again before the liens are satisfied, he said. ‘Their goal is to hold onto these properties and pay as little as possible,’ Stone said. ‘They are hurting the HOAs’ budgets and their neighbors are picking up the slack for their speculation because they don’t want to pay association dues.’”
“In 2005, the builders of the John Ross tower captured Portland’s condo craze when would-be buyers reserved 80 percent of the building’s units in six days. Five years, one recession and dozens of cancelled sales later, the tower is headed for the auction block. The minimum bids, on average, will be 47 percent below the current list prices and 70 percent below the highest listed prices, said Patrick Clark, a Portland real estate broker working on the sales.”
“With just an e-mail alert in July 2005, brokers at Realty Trust City attracted about 225 potential buyers willing to put down deposits within just six days. ‘This level of sales is unprecedented in Portland, and very rare anywhere in the United States,’ Clark of Realty Trust City said at the time. ‘In the past, it has taken other projects months if not years to reach the same level of sales.’”
“The proverbial sirens started wailing during 2007, warning of the pending collapse of the Northern Colorado housing market. The number of home mortgage failures was rising so fast that the public trustees in northern counties could hardly keep up with them, reaching a crescendo in fall 2008. But even as the housing market now shows signs of recovery, a new crisis is unfolding, according to national media reports. Prominent outlets have said commercial real estate foreclosures will be the next big wave.”
“Office, retail and industrial property owners, with vacancy rates climbing steeply during the past two years, are in fire-sale mode in some quarters, said Michael Ehler, managing broker of the region’s largest commercial brokerage. Before the crash, prime office space on Harmony Road was leasing for $20 per square foot or more. ‘A lot of people are at their wits’ end trying to hold things together,’ Ehler said. ‘We’re doing leases for $10 per square foot. It’s like we’ve traveled back 15 years.’”
“A federal judge Thursday denied a move by developers Steve and Art Sandler to have a $21 million lawsuit against them thrown out of court. Travelers Casualty and Surety Co. of America sued the Sandler and their company for payment on bonds issued to ensure the completion of public infrastructure work on a number of developments. Travelers filed the suit in January after a number of municipalities, including Virginia Beach, called the bonds after development halted because of the depressed housing market.”
“The Sandlers asked the court to dismiss the suit, arguing they have no obligation under their contract with Travelers to pay. The judge ordered the Sandlers to respond to the suit within one week and ordered another hearing in two weeks to address how much collateral the Sandlers should post to cover the bonds. ‘I don’t want to waste any more time,’ the judge said.”
“Thomas Metzold, the co-director of municipal investments for Eaton Vance Corp., sold all his defaulted bonds of Tison’s Landing, an unfinished housing development in Jacksonville, as the debt fell to a third of face value last year. Dumping the so-called dirt bonds at a discount was a better bet, Metzold said, than taking over 218 empty acres from the project’s builder and waiting for a real-estate rebound that may not come until the early 2030s, according to a Moody’s forecast.”
“The day when Florida’s new-resident influx is sufficient to reflate property values may not come soon, a March 2 University of Florida report said. The state won’t return to the 300,000-a-year population gains it averaged over the last 30 to 40 years until 2014 or 2015, said Stan Smith, director of the school’s Bureau of Economic and Business Research in Gainesville. ‘Florida’s gone through numerous booms and busts, but it’s always been bailed out by the fact population was growing rapidly,’ said Richard Lehmann, publisher of a Miami Lakes, Fla., newsletter. ‘That’s stopped.’”
“California’s two big public pension funds took fresh hits to their troubled real estate portfolios this week, suggesting the fallout from the real estate bubble hasn’t completely run its course. First up was CalPERS, which Wednesday walked away from a controversial Boston investment that cost it about $91 million. Then came CalSTRS. A New York skyscraper it co-owns is about to go into default, a credit-rating agency warned Thursday.”
“Cal-PERS this week notified Massachusetts officials that it’s abandoning a massive mixed-use project called Columbus Center. The project, a six-building condo-hotel complex to be built over the Massachusetts Turnpike near downtown Boston, had been stalled for years. ‘With the deterioration in the market, the project’s no longer viable,’ said Steve Sugerman, a spokesman for Cal-PERS real estate consultant Wilson Meany Sullivan.”
“Toxic assets — home mortgages packaged into complicated bonds that no one wanted to touch when the housing bubble collapsed — are starting to trade again. There’s no store where you can buy toxic assets; you have to know a guy. We know Wit Solberg, a former Wall Street trader. Solberg finds a bond he likes for us. It’s called an Option One Mortgage Loan Trust. Solberg thinks we should offer to buy the bond for “half a cent” on the dollar. That means that, for every $1,000 of the bond’s original value, we’ll offer $5.”
“But it turns out the guy who’s selling the bond wants 17 or 18 cents on the dollar — more than 30 times what we bid. Solberg says these kind of huge spreads are pretty common in the toxic asset business. People just radically disagree about what things are worth.”
“We spend two days with Solberg looking for the right toxic asset. One, full of what appear to be California McMansions, seems promising. We find a beautiful, totally toxic asset at what Solberg thinks is a good price: $36,000. Back in the bubble, somebody paid $2.7 million for this thing.”
“Warren Buffett said last week that the U.S. housing market will bounce back next year, but the truth is, even before the billionaire’s forecast, Korean investors have already begun pinpointing where to buy. ‘People are fast,’ says Choi Yong-il, manager at a California-based real estate consultancy. ‘We’re already seeing increased activity among keen investors who aren’t afraid to be the first to move.’”
“Some properties have lost as much as 70 percent of their value when prices peaked in 2006, experts say. ‘It’s extremely rare to see prices go down this much,’ says Kelly Choi, a Miami-based realtor, who bet that the downward spiral will last longer.”
“While the larger metropolitan areas of the country might still be stuck in a housing rut, that hasn’t really been the case in southern Illinois, according to a few area real estate agents. ‘This year it’s not just the weather, but the incentive for the home buyer,’ said Wanda Miller of Coldwell Banker . ‘It’s a buyer’s market right now. Waiting is a bad idea now because they are going to lose the incentive.’”
“A long-idled plan to create an old-fashioned neighborhood near downtown Libertyville has been rekindled. Despite a weak market for new homes, developer John McLinden and partners want to complete what the Hummel Group started on School Street. A foreclosure stalled the original project in June 2008 after one building of luxury brownstones was erected and the first residents moved in. Hummel’s plan offered connected row houses in the $850,000 range. In the revised plan, the houses would start at about $495,000.”
“StreetScape is proposing 15 lofts, up from the 12 originally approved. Eight of those would be work force housing at an ‘attainable’ starting price not to exceed $230,000. However, because of the difficulty financing condos, developers are suggesting the lofts be offered as rental units for several years before being converted.”
“Randy Fernandez, Port Huron’s assessor, said the city’s average decline is about 13% this year, but some neighborhoods have seen bigger drops. He said this year’s board session was slow because ‘most people have gone down double digits.’ Shawn Gearhart of Port Huron isn’t planning to protest his value. The taxable value of his home dropped to $47,800 from $52,100. Gearhart…in the process of selling the house, said he is OK with the value. ‘I’m fine with it,’ he said. ‘I don’t really think it is a big issue. We should be able to get what we owe even in this market.’”
“Fort Gratiot’s William Staples, said his taxable value also decreased, about $5,000. ‘I was very happy with it going down,’ he said. ‘I figure it should with the way the economy is.’”
“Jeff Catlin is growing weary of treading water to keep his modest three-bedroom home in Pfafftown. He owes more on the house than it’s worth, and he’s been waiting nearly 10 months for a life preserver — final approval of a home-modification mortgage plan. They owe a combined $112,000 for a first and second mortgage on the house, which is valued at $82,000. ‘All it would take is one more mishap, one more piece of bad luck, to put us out,’ Catlin said. ‘We’re just holding our breath that the mortgage company doesn’t come back to us and say, ‘We’re sorry, but we can’t work with you anymore.’ In that case, the home goes back to the adjustable rate interest that we can’t afford.’”
“Carol Newman said they struggled to qualify for a loan-modification program that is providing a $60 monthly reduction in their mortgage. In the past week, however, the Newmans received notice from the bank that it is raising their payment by $20 a month to build up their escrow account for taxes. ‘Our house is not worth what we owe on it due to the housing market,’ Newman said. ‘Our credit counselor has advised us to try again for another modification. We do have that on the back burner at this time. We’re looking at all our options.’”
“Victoria Harris of Chesterfield County had her house foreclosed on Oct. 13, but she is still in the house and hopes to have the foreclosure rescinded. Harris has lived in the house for nearly 14 years. She told the new owners that she hadn’t sold her house and she was in the middle of a loan modification. ‘President Obama said he had a plan to help homeowners lower their mortgages,’ Harris said. ‘That is all I was going on.’”
“‘This is not just something happening to my mother—it is happening to a lot of people,’ said Berneatha Terrell, Harris’ daughter. ‘People get tired, worn out. They are weary. They give up.’”
“The Obama administration’s housing relief plan…was designed to help keep up to 4 million Americans in their homes by preventing avoidable foreclosures. To date, about 116,000 borrowers have had their monthly payments permanently reduced. Nearly 1.3 million borrowers have received offers for trial modifications. ‘With the Obama stimulus package, we are seeing a huge increase in the number of customers who think they are automatically entitled to a loan modification,’ said Sandy Case, default administration manager for Virginia Housing Development Authority. ‘It’s a big downfall when they find out they are not eligible.’”
“Since the end of World War II, Americans have enjoyed rising rates of homeownership, expanded access to credit, and improved living standards by many measures. But now consumers are spending less because, it seems, they have no alternative…Home equity – a reliable source of borrowed capital for homeowners through the mid-2000s – has utterly vanished for millions in a coast-to-coast housing downturn.”
“Call it the new age of the tightened belt. Some observers wonder whether, in fact, a 60-year party has come to a close.”
“For most of the 20th century. Americans saved when they could and spent down savings in hard times, says Martha Olney, an economist at the University of California, Berkeley. When two-income families became more commonplace in the 1980s, Americans were on average saving 8 percent or more of what they earned. Saving was a sign of doing well. The mid-1990s, however, began to invert these behavioral principles.”
“Asset bubbles, first in the stock market and then in the housing market, made Americans feel richer and led them to borrow at attractive rates, so they had less incentive to save. Then as Americans saw their finances take a hit in late 2008, they began saving at dramatically higher rates. In a novel twist, saving became a sign not of doing well, but of financial strain.”
“‘The world changed when housing wealth disappeared,’ says Dean Baker, codirector of the Center for Economic and Policy Research. ‘Now we’re getting savings rates of about 5 percent, which is still relatively low by historic standards. If you go back to the ’50s, ’60s, and ’70s, savings rates were 8, 9, sometimes more than 10 percent. So my expectation is that we are in a permanently different world [in terms of spending] because ’95 to 2007, when savings rates dropped to almost zero, was the aberration.’”
“‘It’s not that people have decided to become thrifty,’ says Steve Weisbart, chief economist for the Insurance Information Institute. ‘It’s that they’re going to become bankrupt if they don’t repay their loans.’”
“Rosemary Hughes of Andover, Mass., lives in a home large enough for 30 family members to dine together at the holidays, and she vacations twice a year. But her investments took a hit when markets crashed, and she now finds it difficult to pay her property taxes, which exceed $11,000 a year. Hence this fall for the first time, she began volunteering at Town Hall to earn credits toward her tax bill. She’s also increasingly vigilant about spending, looking for discounts wherever she can find them.”
“‘I can stay in my house for a while longer,’ she says. ‘I just don’t know how much longer before I’m forced to, you know, sell and go into something smaller.’”
