The Housing Bubble

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It’s Friday desk clearing time for this blogger. “It’s the eternal question for real estate obsessed New Yorkers: should you rent or buy? Now, we might finally have an answer. The New York Times created this awesome, interactive graph that calculates common expenses of buying and renting, spitting out precisely at what year you would be better off buying your apartment. Economist David Leonhardt says that in these troubled times, most New Yorkers are actually better off buying. Home prices are still low enough that it’s still a bargain in places like New York and L.A., which Leonhardt calls ‘microcosms of today’s more nuanced real estate market.’ So, will you ever be buying your place, or are you a die-hard (bitter) renter?”

“Homeownership is in most cases a highly leveraged, undiversified, relatively illiquid bet, with a return that is highly correlated to local labour market conditions. But Mr Leonhardt sets most of that aside and suggests that, hey, maybe you should play around with the New York Times’ mortgage calculator, and think about buying. Problem one is that said calculator asks you to fill in the about by which ‘you expect home prices to go up each year.’”

“The correct assumption should be zero. Strikingly, the calculator gives you the option to estimate annual appreciation as high as 30%. It doesn’t let you enter an annual decline of value of greater than 10%, despite the fact that over the past year, several markets have seen price declines of at least that much.”

“What is the value of having the option to pick up and leave these metropolitan areas at no cost? Should we be encouraging people to chain themselves to labour markets like this for at least five to seven years? I would hope that most Americans would have more sense than to look at the enormous declines in home prices over the past few years and see a buying opportunity, rather than a cautionary tale.”

“The party’s over at the A Building, an East Village condominium built by mini-mogul Ben Shaoul and his partner, Rob Kaliner. Beneath the two-year-old building’s reputation for hosting raucous rooftop pool parties lies a reality worse than the most killer hangover — flooding, crumbling balconies, alleged mismanagement of the condo board’s funds and two unresponsive developers who have left owners banging their heads against mold-ridden walls, claim several residents who forwarded dozens of documents detailing these issues to The Real Deal.”

“‘This is dangerous for my daughter to be in, and we now have no running water in the kitchen as the island has been disconnected … I feel like I am squatting in my own home,’ resident Kim D’Amato wrote in an e-mail on March 25 to the building’s management company. Her $1.9 million garden-level apartment flooded after the heavy rainstorms in early March.”

“In 2006, Harry Penny thought he was living the dream. He and his wife bought a house in Coventry, Chenango County, and settled in to enjoy retirement. The $2,600 total tax bill seemed reasonable for three bedrooms and seven acres of land. Four years and two reassessments later, Penny has put the house up for sale. Taxes have virtually tripled, making it difficult for the couple to afford. ‘It’s been on the market three weeks, but we haven’t seen a soul,’ said Penny, who turns 72 this year. ‘I think I’m going to be here until I die, because I can’t sell it. Maybe I should just let the outside go to hell and hope my assessment goes down.’”

“New York’s taxpayers pay property-tax bills that are 79 percent above the national average, a 2008 state report found. Property-tax levies grew 60 percent between 1995 and 2005, more than twice the inflation rate, the state Comptroller’s Office said. The situation has become so unbearable for Todd Feuerstein, a 45-year-old sales manager from New City, that he has thought about moving to Arizona.”

“‘What are they telling me — that if I can’t afford these taxes I have to leave my home?’ Feuerstein said. ‘But who’s going to buy it? No one’s going to be able to afford moving to Clarkstown.’”

“Housing starts stayed strong through March in the Tucson area as builders pushed to take advantage of the first-time home-buyers tax credit before it expires. Once that tax credit goes away, local business consultant John L. Strobeck said, he anticipates housing starts will again drop off. Meantime, the median price of a home is the lowest it’s been since January 2004, Strobeck’s report says. ‘Builders are trying to meet the competition of resale and foreclosure homes so they’re pushing their prices way down,’ Strobeck said.”

“Homeowners who bought in 2005 who had ‘interest only’ mortgages will see their rates reset in 2010. Those loans were viable only if property values continued to rise, which they didn’t, so homeowners will see their monthly payments increasing, leading to more financially distressed properties, Strobeck said. ‘This verifies my concern that we are just at the height of the foreclosure problem and will not be out of the situation until 2013,’ Strobeck said.”

“Jim Watters, his wife and children were living the dream in their Gilbert house but with the current economy they found themselves needing to modify their loan and that is when they woke up to a nightmare. With their modified loan, the Watters started making their new mortgage payments. Jim explains, ‘Here are all my cancelled checks from September, October, November, December, February, March…right up until last week when we were told our home was being auctioned off.’”

“The director of the Arizona Department of Housing, Michael Trailor, says loan modifications are not going well in our state. ‘Most of the modification efforts today are ending in foreclosure,’ Trailor explains.”

“Democratic Rep. Dina Titus did not set out to create a housing counseling center in her Las Vegas office. Five staffers in Titus’ district office in Las Vegas now handle housing problems, in addition to the jobs they were hired to do. Critics may scoff, and some have, at Titus helping homeowners who had no business buying homes they couldn’t afford in the first place. Indeed, one family acknowledged they could afford no more than $800 a month when they bought their home in a gated community in Las Vegas with a loan that would cost them $1,200 monthly. The homeowners believed they could eventually refinance to a better rate.”

“With so many homeowners facing foreclosure in Southern Nevada, the economic damage that would come to entire swaths of the community if such a high volume of homes are vacated would be worse than the cost of helping keep families in houses they could ill afford, said Julia Gordon, a senior policy counsel at the Center for Responsible Lending in Washington. ‘Everyone’s in trouble: The borrower’s in trouble; the lender’s in trouble. How do we go through this with the least amount of damage?’ she said. ‘Yes, that does mean that some families that should have never been in that house are going to stay in that house.’”

“Titus will likely face a difficult re-election this fall, as she seeks to keep her seat in a district she won in 2008 with less than 50 percent of the vote.”

“Starting this month, the Treasury Department is paying companies that collect mortgage payments and examine pleas for assistance a $1,500 stipend for approving the sale of homes for less than the loan balance, known as a short sale. The servicers also get $1,000 for each completion under the government’s year- old mortgage modification program, and additional stipends over three years if borrowers stay current on their payments.”

“‘The incentives being offered by the government are small compared to the counter-incentive of foreclosure,’ said Diane Swonk, chief economist of Chicago-based Mesirow Financial. ‘The service industry has its own set of incentives, and you can’t tell people to do what’s not in their financial best interest, especially in an economy that is still struggling.’”

“About 7 million homes may end up in foreclosure in the next three to four years even with the government programs, according to Laurie Goodman, senior managing director at Amherst Securities Group LP in New York. Some of those properties will be homes owned by borrowers who re-defaulted after getting modifications, she said. ‘Clearly the program hasn’t been effective enough so far,’ Goodman said. ‘What it’s succeeded in doing is kicking the can down the road.’”

“A growing number of North Texas home foreclosure filings have nothing to do with the usual late mortgage payments. About 350 Dallas-Fort Worth area homes are facing a forced sale because the owners owe money to homeowners associations or home equity loan holders, local foreclosure filings show. The same factors that have contributed to record home foreclosures and late payments have also caused a jump in foreclosure postings for home equity loans.”

“‘We knew when those loans first came into vogue that it was just a matter of time before this happened,’ said George Roddy, president of Addison-based Foreclosure Listing Service. ‘People were borrowing to pay for a boat or a trip and putting the debt on their house.’”

“Hedge-fund king John Paulson didn’t have any direct involvement in the mortgages contained in the Goldman deal under scrutiny by the Securities and Exchange Commission. And the bets that Mr. Paulson placed on Abacus didn’t affect whether or not homeowners defaulted. Rather, he used Wall Street to help structure hugely lucrative side bets that homeowners couldn’t make their monthly mortgage payments.”

“Some of the people whose mortgages underpinned Mr. Paulson’s wager were themselves taking a gamble—that U.S. housing prices would continue to march upward. One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.”

“Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55%—but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000. She defaulted in early 2008 and was evicted from the house in early 2009.”

“In May of 2006, a broker had approached Gheorghe Bledea, a Romanian immigrant, to pitch him a deal on a loan to refinance the existing mortgage on his Folsom, Calif., home. His broker told him the only one available was an adjustable-rate mortgage carrying an 8% interest rate, according his court filing. Mr. Bledea, who says he has limited English-speaking skills, was told that he’d be able to exit the risky loan in six months and refinance into yet another one carrying a lower 1% rate. Mr. Bledea agreed to take out the $531,000 loan on July 21, 2006.”

“The new loan never materialized. Within months, Mr. Bledea and his family were struggling under the weight of a $5,800 monthly note, says his son, Joe Bledea. ‘We were putting ourselves in a lot of debt,’ Joe Bledea says. By spring of 2009, the loan was in default.”

“Throughout my childhood, my grandmother Big Mama extolled the virtues of owning a home. When I dared to move out of her house and get a one-bedroom apartment a year after graduating from college, Big Mama harassed me about renting. When my lease was coming to an end, she declared that I had two choices: Move back in with her or buy my own home. I bought my first home - a two-bedroom, one-bath condominium.”

“Even though I was in my early 20s, I was ready for ownership. I had no debt. The monthly mortgage payment was well below 36 percent of my net monthly pay. My grandmother pushed homeownership, but not as an almighty way to increase my net worth. She taught me to view my home as a place to live and a way to stabilize my monthly housing expense. If your home appreciated in value, that was a bonus. When I sold my condo, it hadn’t appreciated in value. But I was OK with this. I lived in a great place for more than 10 years.”

“Homeownership in this country climbed for decades, peaking in 2004 at 69.2 percent, according to data pulled together by the Hoover Institution at Stanford University. Homeownership rates jumped significantly, according to census data, increasing from 43.6 percent in 1940 to 61.9 percent by 1960.”

“But as the number of homeowners increased, so did the belief - fueled by lenders and others working in the mortgage industry - that a home was a savings account. We were enticed by lenders to tap into our equity, secure in the belief that a house would always increase in value. We embraced the idea that draining the equity was a risk-free deal. We even took the Holy Grail of homeownership to a disastrous place by chastising people who didn’t have a mortgage. People were counseled to get a home loan for the mortgage-interest deduction.”

“However, that deduction was never intended to promote homeownership, wrote Dennis J. Ventry Jr., a University of California-Davis law professor, in the journal Law & Contemporary Problems. Ventry concluded that the mortgage deduction promoted overinvestment in residential real estate. We made renting seem so financially reckless that it surely encouraged people to jump into buying a home before they were ready.”

“The Fannie Mae National Housing Survey, conducted between December 2009 and January 2010, polled people with home loans and renters to gauge their feelings about the current state of homeownership, including whether they view a home as a safe investment. Turns out many still see owning a home as key to increasing their wealth. The Fannie Mae poll found that seven out of 10 respondents said buying a home is still one of the safest ways to invest.”

“However, the survey also uncovered a new trend regarding homeownership. Survey participants ranked a safe neighborhood and living near good schools ahead of making money on their home as a leading reason to become a homeowner. Twenty-three percent of renters said they have changed their plans and are putting off purchasing a new home. ‘Consumers are still committed to owning a home, but are showing increased cautiousness, regardless of whether they rent, own their homes outright or have a mortgage,’ said Doug Duncan, Fannie Mae’s chief economist.”

“It’s what Duncan said next that I think is a sign that maybe, just maybe, people now understand a home is not an ATM or a risk-free investment. It’s great that people are viewing homeownership with much more caution now. You are not a financial failure if you rent. It may be the smartest financial move you make until you are ready to handle a mortgage.”