A Belief That Values Were Always Going To Rise
It’s Friday desk clearing time for this blogger. “The Birmingham-Hoover area suffered a greater level of job losses than all but five of the nation’s 100 biggest metros in last three months of 2009, according to a Brookings Institution report. Jobs have disappeared in the Birmingham metro area for eight consecutive quarters dating back to the beginning of the recession in December 2007, worse than the downturn in 1981, which is remembered as brutal. Howard Wial, a fellow with the public policy think tank, said Birmingham’s deep misery is not easy to understand.”
“‘Birmingham is one of the hardest hit metro areas in the South that didn’t experience a housing bubble,’ said Wial, a co-author of the report. ‘Quite frankly, it is a bit puzzling to me why Birmingham is faring so bad.’”
“Things in Hartford and its suburbs aren’t so bad compared to metro areas around the country. That’s what The Brookings Institution think-tank analysts say after weighing Hartford’s job losses, unemployment, salary trends and housing prices. Hartford — and Connecticut — are hurting, of course. Unemployment, at 9 percent in January, hasn’t been this high since 1976.”
“According to data compiled by Moody’s Economy.com, the Hartford region has never recovered from the recession of the early ’90s. ‘We’ve been here a long time, and we compare to what we once were,’ said Ron Van Winkle, an economist who is now West Hartford’s city manager. “The Connecticut economy has been in awful shape for some time.’”
“That the state didn’t have a housing bubble like Las Vegas, Stockton, Calif., and Orlando is nothing to be proud of, he said. Van Winkle said he believes the problem is the shift to low-paying jobs. ‘They flew closer to the sun than we did. We didn’t fly so high because we were already in trouble,’ Van Winkle said.”
“According to Alan Greenspan, Alan Greenspan did not create the housing bubble and could not have prevented the economic calamity that followed the bubble’s collapse.He suggests there’s no good way for a central bank to prick a bubble while it’s inflating without creating major economic problems. ‘At some rate, monetary policy can crush any bubble. If not 6 1/2%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim. … Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible.’”
“Canada’s real estate market showed no sign of losing steam in February, with housing starts rising faster than expected and a new survey showing 10% of Canadians expect to buy a home in the next two years. According to the RBC poll, younger Canadians between the ages of 18 to 24 are likely to lead the market. About 15% said they were likely to buy, almost double the number in 2009.”
“About 60% also believe housing prices will continue to rise this year, up from just 25% this time a year ago.”
“Water-cooler gatherings and locker-room chatter has been alive with irresistible real-estate deals beckoning from warmer climes south of the border. And it is not difficult to see why as we are inundated with regular news stories revealing that entire housing developments and condo towers now sit virtually empty and are begging for buyers. It has most certainly become a buyers’ market with prices seemingly at bottom-fishing levels.”
“There is one neat tax angle you can implement when buying this property in the U.S. (or anywhere else for that matter). Even though it’s located outside of Canada, it could still qualify as your principle residence for the purpose of using the principle residence exemption as long as the usual criteria are met. This means that if you do end up selling it at a profit down the line, the resulting capital gain tax might be reduced or eliminated in Canada. Cool. Where do I sign?”
“The real estate industry, in general, is encouraged by some new rules being introduced with regards to mortgage qualification, reports Kevin Grimes, the president of the Rideau-St. Lawrence Real Estate Board. The one that will likely have the strongest effect is the requirement for mortgage applicants to be able to meet the five-year fixed rate, even if they ultimately choose a variable rate mortgage with a shorter term. This is designed to ensure that those looking to purchase have the means of covering their payments if or when interest rates climb.”
“Other federal rule changes include: - anyone looking to purchase an investment property will have to put 20 per cent down rather than the previous five per cent, and anyone looking to refinance their homes can only pull out 90 per cent of the equity, down from 95 per cent.”
“‘From a real estate point of view, it’s a subtle change that won’t affect our market,’ Grimes explained. ‘It just means people will have to buy a less expensive house than in the past.’”
“Marianne Gentry, 66, lives with her disabled husband and desperately ill son. And they’re about to get kicked out of their home. Gentry, a customer-service representative for Home Depot, faces foreclosure on the four-bedroom house in Fountain Valley, Calif., that her family has occupied since 1996. Between her Home Depot salary and husband’s benefits, they pull in roughly $4,000 a month before taxes. Cutting their mortgage to $1,800 a month, the level it was at before they refinanced in 2007, would stabilize their financial situation enough to resume making house payments, Gentry said. ‘It would be tight, but we could make it.’”
“Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her California home, even though she could afford the payments. Bloch paid $385,000 for the two-bedroom in 2006, when prices were surging. Comparable homes are now selling in the low-$200,000s. The retired psychologist doubted she’d see her investment rebound in her lifetime. Plus, she claims she was duped into an expensive loan.”
“‘There was not a chance that house was ever going to be worth anywhere near what my mortgage was,’ said Bloch, who is renting a few miles away after defaulting on the $310,000 loan. ‘I haven’t cheated or stolen.’”
“This week RealtyTrac said more than 300,000 mortgage holders received a foreclosure notice last month. Even more mortgages holders aren’t waiting around for a notice. They’re seeing their property value scrape bottom. And they’re calculating that maybe it’s time to just walk away. Paul Buck in Las Vegas ‘By some calculations, the house may be worth $175,000 instead of what we owe on it, which is $295,000. It will cost us $140,000 or $150,000 more over the next 10 years to keep paying our mortgage on the house than if we made a strategic default and just walked away.’”
“Just look at the investors that recently walked away from their $6 billion obligation at the Stuyvesant Town apartment complex in New York City, he says. Buck: ‘And they just said, ‘Well, it’s only worth $1.8 billion, so now we’re bailing out,’ and left the lender holding the bag. So you know, nobody cried about that and said, ‘Oh, you’re bad people, what an immoral decision.’ They just said, ‘Well, that’s business. Right? That’s business.’ So that’s kind of the attitude we have to take, too, I think.’”
“Negative equity is one of the defining features of the still-unfolding mortgage crisis. Las Vegas was ground zero for the housing market’s historic boom and bust. ‘We all knew in our hearts it was unsustainable and there had to be a correction,’ says Larry Murphy, the president of SalesTraq. ‘If you bought a home in Las Vegas since 2004 up to about 2007, whatever you bought—I don’t care if you bought a big house or a little house, in a great neighborhood or a crummy neighborhood—it’s worth about half what you paid for it,’ Murphy says.”
“‘A number of people said, ‘Hey, I have got a couple of choices: I can get a 1,000-foot condo in San Francisco, or I can move east and I can get myself a fairly significant home for the same price,’ says John Walsh, the president of DataQuick. Although this trend increased real estate demand in Merced, prices appreciated even faster as exotic mortgage products and investor interest hit the market. But after the euphoria subsided, home prices crashed more than 72 percent through the third quarter of 2009.”
“Jay Butler, an associate professor of real estate at Arizona State University, says many people who purchased property in Phoenix during the boom felt pressure to get in on the action. ‘You had [real estate] seminars all over the place, you had ‘flip this’ shows,’ Butler says. ‘You were constantly being fed a barrage that if you weren’t actively participating in this thing, you were not only denying yourself a great bit of wealth but your kids [and] your grandkids.’”
“But once the music stopped, the housing market in Phoenix was clobbered. Home prices dropped more than 52 percent from their peaks through the third quarter of 2009.”
“Like other cities in Florida, the Orlando market saw tremendous demand from investors during the first half of the previous decade. Although the market attracted interest from buyers in the Midwest and Northeast, condo developers also marketed developments specifically to foreign buyers, particularly in the United Kingdom, says Jack McCabe, CEO of McCabe Research & Consulting. ‘It’s almost like [the British] were setting up another colony in the United States,’ McCabe says.”
“Abetted by easy credit, such demand helped send home prices surging by more than 102 percent from 2002 to the market’s peak in 2006. But the subsequent crash has been painful. The nearly 48 percent drop from the peak through the third quarter of 2009 has pulled 58 percent of single-family home mortgages in Orlando underwater, according to Zillow. And McCabe isn’t optimistic about a quick rebound. ‘For the condo or condo conversion owner, literally they may carry them out feet first before they ever see that property reach 2006 values,’ he says.”
“Ten Louisville developers hoping to overcome a tough credit market and get their stalled condominium projects back on track have come up with a novel approach for getting around tight national lending rules: They’re not calling their properties condominiums.”
“The developers hope to use a zoning loophole to avoid a recent crackdown in financing for condominium mortgages issued by mortgage giants Fannie Mae and Freddie Mac. The developers defend the tactic as a way around tough scrutiny imposed in response to the housing bust that devastated real estate markets in other parts of the country. The limitations, they say, are too restrictive for more stable places such as Louisville.”
“‘There are high-rises in Florida that are sitting empty, but they (mortgage underwriters) never had a problem with what we are doing here,’ said Chuck Kavanaugh, executive vice president of the Home Builders Association of Louisville.”
“The wheels are turning, slowly, on the proposed redevelopment project at the old Cotton Mill site, the owner said. Mark Bellin, president of Fieldstone Development Group of Newark, said that while the plans are in motion, he is hesitant about moving forward with the redevelopment due to the economic conditions. ‘We came up with this site plan which, frankly, we’re about ready to file,’ said Bellin, adding that the only thing holding them back is that they aren’t sure they want to file.”
“‘There’s no economy for anything right now,’ he said.”
“Larimer County saw the largest decline in foreclosure filings in the state in February compared to February 2009, according to the Colorado Department of Local Affairs Division of Housing. ‘The critical thing for Larimer is for jobs to hold steady,’ said Billie Jo Downing, chairwoman of the Larimer County Foreclosure Prevention Task Force. ‘The economy is really the main factor for the foreclosures. We’ve worked through the bad loans, and now it is the jobs.’”
“Mesa County had the greatest leap in foreclosure filings and sales year-over-year among the state’s 12 most populous counties. Tim Powers, spokesman for the Colorado Bankers’ Association, said the state has enacted several laws in recent years designed to help homeowners deal with adjustable mortgages they couldn’t keep up with. Those new programs, however, aren’t going to do much good for homeowners in Mesa County, he said.”
“‘With the lack of income and unemployment, people are just not able to pay any mortgages,’ Powers said. ‘You guys on the Western Slope are feeling the exaggerated amount of foreclosures because of the unemployment, and the only fix to that is to get more jobs.’”
“The current economic crisis nationally has been dubbed the Great Recession, going down in history as the worst downturn Americans have endured since the Great Depression. But in Nebraska and Iowa, at least, that label rates as the Great Overstatement.”
“We’ve seen worse — arguably much worse. The downturn of the early 1980s, a double-dipping disaster with deep roots in agriculture, slammed the heartland much harder than this downturn, taking a heavier employment toll. This crisis, driven by reckless lending practices and the collapse of a speculative hot-market housing bubble, has without a doubt lived up to all the superlatives in the nation as a whole.”
“Job losses are indeed the worst since the Great Depression. The job losses nationally are almost twice as severe as the peak ’80s recession losses. Some of the other ways this recession tops any since the Great Depression: longest downturn; worst long-term unemployment; biggest housing slump; biggest loss of household wealth. Nationally, at least, all are true. But Nebraska and Iowa, with less risky banking activity and more stable housing prices, have weathered this downturn in much better shape.”
“‘Every national recession is an average, with some regions above average and some below,’ said economist Murray Weidenbaum, who during the ’80s served as chairman of President Ronald Reagan’s Council of Economic Advisers. ‘The Midwest didn’t go overboard with (housing) speculation like California, Florida and Nevada, so it’s not nearly as bad now.”’
“Conversely, during the 1980s, Nebraska, Iowa and other agricultural states found themselves right at the epicenter of the nation’s economic quake. Ironically, it was the bursting of another real estate bubble — this one based on agricultural land — that contributed mightily to the Midlands’ troubles. Agricultural producers enjoyed some boom years during the 1970s, and those led many farmers, rural banks and investors to sharply bid up the price of farmland. There was a belief that values were always going to rise.”
“‘Does this sound familiar?’ said Iowa State University economist Peter Orazem. ‘It’s exactly what happened in the housing markets in the places that have seen the worst of this recession.’”
“Commodity prices also plummeted. Thousands of producers were left with land worth less than what they owed on their loans and reduced income to make their payments. ‘Wealth eroded pretty severely,’ said Bruce Johnson, an agricultural economist at the University of Nebraska-Lincoln. ‘We took ag land to 40 cents on the dollar from its peak.”’
“The housing markets in Nebraska and Iowa also were hit harder during the 1980s recession than now. Peak housing value declines in Nebraska were almost three times greater than they have been so far in this recession; Iowa’s were almost six times greater than now. ‘It was just one body blow after another,’ said Don Leuenberger, who at the time served as Nebraska’s top budget administrator and as state tax commissioner. ‘The slide was precipitous, and we didn’t come out of it for quite a while.”’
“Indeed, even when the job losses finally ended, Nebraska and Iowa had almost no net job growth between 1984 and 1986, even while the nation raced ahead at a healthy clip. ‘We were in a bad fix, financially and psychologically,’ said Vard Johnson, a former state legislator from Omaha. ‘People were questioning whether there was a future here.”’
“As painful as the 1980s were for the region, in those years you can find the roots of change that would help the states fare so much better during this downturn. The surviving farmers learned a lesson. Even during recent boom times in agriculture that were reminiscent of the 1970s, farmers avoided getting overleveraged and kept their books in line. In fact, farmers’ debt-to-asset ratios are the lowest on record.”
“Weidenbaum, now an economics professor at Washington University in St. Louis, said he’s happy to hear Nebraska and Iowa are faring so much better this time around. ‘You served your penance in the 1980s.”’
“I did something sort of wacky last week. Or maybe not so wacky. I paid off my mortgage. And why not? I don’t have a large income, not at all, but I only paid $78,500 for my house back in 1996. I started with a conventional 30-year mortgage at something like 7.5%, but refinanced in 1998 to a 15-year mortgage at 6.375%. (Remember when a rate like that seemed low?)”
“I paid down the principal sort of aggressively, so I shaved about 45 months off the note. I’m not going to say that was easy, but it wasn’t particularly hard. While I spend money more extravagantly than most on some things - art, food, drink, cats - I’m pretty cheap.”
“The van has 142,000 miles on it. I lived for several years without health insurance (although I would have gladly paid for it if a plan had made financial sense for me). I don’t have a working dishwasher or microwave. I haven’t paid for a haircut since 1982.”
“I know, I know, mortgage interest is deductible, which leads some to think that it’s never worth it to pay off a house. But I paid less than $700 in interest in 2009. Our tax system encourages mortgage debt, but it only adds up to real money for those who have a lot of debt and pay a lot of interest. About 30 percent of owner-occupied homes in America have no mortgage, so I’m hardly part of an elite club.”
“During the housing boom, we saw a change in the way Americans think about their homes. Too many believed real estate is always a good investment (it’s not), and that it always increases in value (it doesn’t). And now we’re all paying for the really bad bets by a relatively small number of investors and by the lenders who didn’t do their homework.”
“With more than a quarter of residential mortgages with negative equity, Georgia ranks behind only Nevada, Arizona, Florida, Michigan and California, according to data from First American CoreLogic. It’s going to take a few years to work through this problem. Part of the solution might lie in turning us frugal folks into investors in rental properties or buyers of second homes.”
“But we’re cheap. We’ll need to know our jobs and income are secure, that real estate has hit bottom and that those rental properties will actually create cash flow. And we’re not so sure about any of those things right now.”
