The Housing Bubble

It’s Friday desk clearing time for this blogger. “Construction hasn’t begun, but buyers are already signing the dotted line and claiming their spots in Ottawa’s largest condo project ever. A spot in the Tribeca high-rise isn’t exactly cheap: $650,000 is what it will cost for the largest unit – a 1,145-square-foot penthouse. The smallest unit, a 551-square-foot studio, is the most affordable of the Tribeca units at almost a third the cost of the penthouse at $241,000. But at least one real estate seller – and a future Tribeca condo owner – says she thinks that those prices are a steal given the good location. Anna Kiefl purchased a unit in the Tribeca condo as an investment purchase, she says. When construction is complete in 2013 she plans to rent out her unit.”

“‘Where else in the world can you buy a condo for $300,000, six blocks from the Parliament Buildings? You couldn’t do it in Rome, you couldn’t do it in London from Downing Street, you couldn’t do it anywhere else,’ says Kiefl, sales representative for Royal Lepage Performance Reality.”

“The city’s building boom resulted in 170,000 new housing units between 2000 and 2008, according to a new report from NYU’s Furman Center for Real Estate. ‘There was pent-up demand for housing resulting from the low rates of building in the 1990s, and from the city’s increasing popularity, so this high level of building was necessary and important for the city,’ said Vicki Been, faculty director at the Furman Center. However, she added, ‘much of the building was targeted at the higher end of the market, and is unlikely to sell at the prices originally expected.’”

“FHA loans have been particularly popular among Florida’s condo buyers. The agency has backed more of these mortgages in the Sunshine State than anywhere else in the country, insuring more than 11,000 loans valued at nearly $1.7 billion over the past five years. After losing his trucking job in October 2008, Darryl Gary struggled to keep up with the $1,400 monthly payment on his Sarasota home. Though he soon landed a post as a termite technician, it paid him $5.50 less an hour and only lasted for a year.”

“Though his wife continues to work, the couple ran through their savings and then fell behind on their mortgage in the middle of 2009. He’s trying to negotiate a loan modification with his servicer to help him get back on his financial feet, but he’s finding that the job market is pretty weak right now. ‘If I hadn’t lost my job, none of this would be happening,’ Gary said.”

“More homeowners are walking away from their mortgages, even if they can keep up the payments. Shelby and Scott Robinson, from Manteca, Calif., married in 2006 and purchased a starter home about a year later for $310,000. It plummeted in value. They realized they would have to stay in the home for far longer than expected to gain any value back. The area also did not hold much job flexibility for Scott, a restaurant chef. The couple spoke with financial advisers and considered a strategic default.”

“‘It’s not about not having money,’ says Shelby. ‘It’s about not throwing money away.’”

“Gone are the days when households relied on their homes’ ever-rising values as family piggy banks that would pay for everything from new cars to college tuition. Tage Woehl, of Eastlake, Calif., is about $80,000 underwater on a home he and his wife, Imelda, bought for $430,000 in 2003. He’s locked into a 5.99% fixed-rate mortgage that no bank will refinance.”

“To hold down other expenses, the Woehls go without cable TV, and he’s holding onto his 1999 Dodge Intrepid, which has 188,000 miles on the odometer. The Woehls’ daughter, Nika, is only 4, but Woehl, an accountant, already is worrying about how he’ll afford college tuition in 13 years. He says it sometimes feels unfair that other homeowners who don’t pay their mortgages on time get federal bailout assistance in the form of mortgage modifications and lower monthly payments.”

“‘I’m the one who’s paying every month, and when all is said and done, I’m scraping by,’ he says. ‘We can’t refinance. We’re upside-down now.’”

“Vicky Dicristo bought her home in Soquel, Calif., in 2006 for $535,000 with plans to fix it up, live in it awhile, then sell and buy a nice retirement home in Arizona. She bought the home with a five-year, interest-only, adjustable-rate mortgage at a 5.9% interest rate. Her home is now worth $350,000, according to the local assessor’s office. And Dicristo, who was laid off nearly two years ago from her job as a mortgage loan underwriter, has lost the $135,000 she put down on the house as well as the more than $15,000 she put into renovating the home with new floors.”

“‘I lost $150,000,’ Dicristo says. ‘I haven’t been able to make payments, either. I thought I was going to be able to sell it and move to a less expensive area. That had been my plan when I bought it, to move to someplace like Arizona and pay all cash. But that whole plan fell apart.’”

“For Dicristo, losing equity in her home has meant losing the cash she sank into it and losing much of her retirement dream. ‘Emotionally, this has had a very big impact on me,’ she says. ‘It’s changed how I view housing.’”

“Scores of blighted and foreclosed houses in Lucas County could be transformed into community assets under a new land banking program authorized this week by the state legislature, County Treasurer Wade Kapszukiewicz announced. The California owner of the modest one-story house where the county treasurer spoke yesterday said in a phone interview that he welcomes Lucas County’s land bank because it could help him wash his hands of the property.”

“Peter Biata, of San Mateo County, said his bank foreclosed on the property last year after he stopped making mortgage payments in March, 2009. He’s no longer on the hook for the payments, but the bank won’t take possession of it, Mr. Biata said. He said he put $20,000 in the house to fix it up, yet it didn’t work out long term as a rental property and the value dropped more than he expected. Mr. Biata said he bought the house more than four years ago from a wholesaler’s Web site and was immediately displeased - ‘She totally lied about the condition of the property.’”

“‘We just decided with the way the economy was going and everything that it was prudent to stop paying on it, and we thought we would just let it go to foreclosure,’ he said.”

“The uncertain line between hope and despair divides this exurb of Phoenix, Arizona, where the trim stucco houses used to sell so briskly. Ms. Carter said that she felt guilty about leaving. With her short sale, the price of the home went down, for the benefit of the new homeowner. But it dragged down prices in the neighborhood, she said. Ms. Carter, a mother of two and a real estate agent who poses as an angel with wings on her Web site, has been through hard times before. Years ago, she considered filing for bankruptcy but she then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.”

“‘I had to take emotion out of it,’ Ms. Carter said. ‘If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.’”

“Mr. Setbacken said that he had warned his neighbors not to get in over their heads but that they had not listened. He and his wife might have stepped up to a bigger house if they, like so many of their neighbors, had gambled recklessly on the housing market, he said. ‘Everybody that I know that got themselves in trouble was because of one word: greed,’ said Mr. Setbacken. ‘I have no sympathy for any of them, on the financial end. When I hear about dropping the amount you actually owe, I could stick my finger down my throat.’”

“More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months. The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.”

“Modifications are ‘clearly not working well and it’s not a surprise,’ said Sam Khater, a senior economist at First American CoreLogic. It’s pointless to rewrite these loans because they’re underwater.’”

“President Barack Obama’s administration is pressuring lenders to alter loans to reduce the number of properties lost to foreclosure. ‘The program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway,’ said the report by the Special Inspector General for the Troubled Asset Relief Program, prepared for a Congressional hearing.”

“‘The program risks helping few, and for the rest, merely spreading out the foreclosure crisis over the course of several years’ at significant expense for taxpayers and borrowers, the Inspector General’s Office wrote. If too many participants redefault, the modification plan ‘will have done little to achieve the goal of assisting homeowners who would still find themselves losing their homes.’”

“Treasury’s focus on trial modifications ‘raises issues for how the program was justified and how Treasury is not measuring progress,’ the report reads.”

“Massachusetts foreclosure petitions dropped 6.1 percent over the first two months of the year, compared to the same period in 2009, according to new numbers released by The Warren Group Thursday. A petition represents the first step in the foreclosure process. Foreclosure deeds — the last steps, which indicate completed foreclosures — rose 13.8 percent during the same time.”

“The group’s CEO, Timothy Warren, added that the number of petitions is a better leading indicator of the housing market’s direction, but again there are mixed results. ‘People are still having trouble paying the mortgages,’ Warren said.”

“He noted that foreclosed properties can also push housing prices down, putting even more homeowners underwater. But that cycle of decline could be broken by public perception that home prices — especially those in neighborhoods with many foreclosures and a sense of stagnation — are trending upwards. ‘A rising tide lifts all ships,’ Warren said. ‘If the sense of the consumer is that real estate prices are rising, prices will eventually rise in all neighborhoods.’”

“Lawrence Yun, chief economist for the National Association of Realtors, will be in Memphis next week to discuss all things housing. Yun, who will deliver the keynote address, spoke with The Daily News about the real estate market’s woes and future.”

“Q: What were the main reasons for the housing slump? A: Without a doubt very lax underwriting standards; just trying to give out mortgages for anyone who had a heartbeat. That brought on too many people who were not financially capable. We can clearly see that in hindsight.”

“Q: Did the real estate industry, and specifically NAR, respond properly to the downturn and is there anything that could have been done differently? A: From the real estate association and position as a chief economist, I think we need to be assured that we are promoting a successful homeownership policy, and not any homeownership where people buy and be foreclosed upon. That’s embarrassment for the association, it’s not good for the families involved, it hurts the community. Anything the association was either promoting or acquiescing in bringing about this frenzy, that needs to be re-examined.”

“Q: Is it difficult getting people to understand how their local market might differ from the national climate? A: All real estate is local. … In Middle America … there was no bubble. Maybe just a modest-level mini-bubble that was occurring, but no major bubbles like the California, Florida markets. Hence, there was very little to pop.”

“One of the Twin Cities’ largest home lenders faces a deadline of June 30 to sell itself unless it can raise more capital. Otherwise it risks a series of escalating enforcement actions. InterBank, a large and struggling Minnesota mortgage lender that grew rapidly during the housing boom, has been put on the auction block by federal regulators.”

“InterBank made nontraditional mortgage loans, including interest-only mortgages and so-called hybrid ‘ARMs,’ which offer an initial period at a fixed interest rate followed by a floating rate. InterBank kept many loans on its books rather than sell them. As foreclosures rose, losses on the mortgages wiped away much of InterBank’s capital.”

“Moody’s and the other bond rating agencies have featured prominently in the build-up to the financial crisis. These agencies gave investment grade ratings to complex financial instruments filled with subprime mortgages and other bad assets. These ratings allowed Goldman Sachs and other investment banks to sell this trash around the country and the world, ensuring that the effects of the collapse of the housing bubble would reverberate throughout the financial system.”

“It was not just incompetence that caused Moody’s to misunderstand the quality of the issues it was rating. Moody’s and the other bond-rating agencies were getting paid by the banks whose assets that they were rating. The bond-rating agencies knew that these companies wanted investment grade ratings for their issues.”

“As one examiner for Standard and Poor’s said in an email, they would give investment grade ratings to products ’structured by cows.’”

“Justin Kawa is the new face of the depressed real estate market. The young marketing executive’s two-bedroom condo in the upscale neighborhood of Lincoln Park, which he put on the market for $359,000 last month, is now offered at $349,000, and he may have to lower the price even more.”

“Kawa, 29, and a friend, purchased the condo in July 2005 for $333,0000. The two-bedroom, two-bathroom walk-up is in a vintage building and has a roof deck. They had thought they would be able to sell it for about $380,000 in 2008. Many people who looked at his condo put bids on nearby condos, many of which were priced less. ‘We’ve had tons of showings but no offers,’ said Kawa.”

“The number of foreclosures in swanky neighborhoods throughout Cook County last month drove the county’s foreclosures to highest level since the recession began. Quentin Green, real estate expert and owner of Lincoln Park Homes Ltd., said he recently saw a Lincoln Park home that would have sold for at least $1.5 million in a normal market, sell for $1.2 million in this economic downturn.”

“‘I would be terrified if I had to sell my house right now. I’m thankful that I don’t have to sell,’ said Green. ‘It’s an act of god to get some of these products sold.’”

“Christian Chase of Chase Real Estate, specializing in foreclosure investments, said he’s seen this scenario play out across the city, including the suburbs. He saw it up close with a foreclosed property in Naperville that he purchased from the bank that held the mortgage. ‘It was a property that might have sold at the height of the mark in 2007 for $563,000 that now the bank is letting it go at $371,000,’ said Chase. ‘That’s a substantial discount on a property that’s in good shape.’”

“The problem, experts say, is that sellers who are underwater on their homes—even in tony neighborhoods—are not spending the money on updating their homes to keep them in tip-top shape. ‘It’s like pouring perfume on a pig,’ said Chase.”

“Kawa and his friend have refinanced their Lincoln Park mortgage twice and are now paying only $1,720 in mortgage payments each month, compared with $1,940 previously. That’s given Kawa enough breathing room that if the condo doesn’t sell by April, he has decided to keep it and take on a new roommate to help cover costs. But he has learned a lesson about purchasing real estate.”

“‘Now after going through the experience, I wouldn’t buy a place as an investment. I’d buy because you want to stay,’ said Kawa.”