The Housing Bubble

It’s Friday desk clearing time for this blogger. “Hundreds of miles inland from the booming real estate markets of Beijing and Shanghai, an unlikely property fever is gripping this middling industrial outpost. Taxi drivers boast of owning multiple flats for investment. Billboards hawk developments with names such as Villa Glorious and Rich Country. Frenzied crowds pack sales events with bags of cash, buying units that exist only on blueprints. Average home values in Hefei soared 50 percent last year. Xi Zhou, a cameraman for a local news channel, paid $50,000 for his 900-square-foot unit in December. He figures it’s now worth $80,000. He’s so anxious to take possession that he visited Binhu’s sales office on a recent weekday to gaze at his property in a plastic diorama of the complex. ‘For people of my generation, property is all we talk about,’ said Xi, 27, who will share the new home with his wife and parents. ‘I felt a lot of pressure to buy because the longer I didn’t, the more likely I wouldn’t be able to afford anything.’”

“As the real-estate market in Canada continues its record-setting recovery, the market for high-end homes is surging. The country’s richest residents – as well as millionaires from countries such as China and the United Kingdom – are turning to property to provide a safe haven for their money. ‘There is no doubt a great deal of the demand is coming from mainland China,’ said Ross McCredie, president of Sotheby’s International Realty Canada. ‘The Chinese are the people shopping at above $5-million.’”

“Phil Soper, CEO of Brookfield Real Estate Services, said there’s also no rush to buy because the homes are no longer looked at for their investment value. ‘Those buying these homes are typically financially sophisticated and there aren’t too many who will believe we’re in for several years of highly appreciating values,’ he said. ‘They see today’s prices as reasonable, and don’t really think prices will fall very much.’”

“The Canadian Real Estate Association lists Victoria house prices as the second most expensive in the country. Taking in a tenant is the only way for many young homebuyers to keep their heads above water. ‘If you don’t mind the loss of privacy, renting a downstairs suite is the easiest way to augment your income,’ says Ted Jones, an accredited mortgage professional. ‘It enables you to buy up — to afford more of a mortgage than one just based on personal income.’”

“In Vancouver, based on RBC’s data, nearly 80 per cent of all median pre-tax household income was needed just to pay the cost of a typical mortgage on a standard two-storey home. That figure almost certainly increased again in the first quarter of 2010, as house prices continued to skyrocket. If that’s not a bubble, I don’t know what is. In fact, it makes one wonder how homeowners have enough money left to buy food and keep the lights on.”

“When U.S. house prices got to their most extreme levels during the U.S. housing bubble, the ratio of average household income levels to average local house prices got to 10 times or more in overheated markets like Los Angeles and Phoenix. In Vancouver, the average detached bungalow now costs roughly 11 times the typical average local household income level, based on the data above. So just who can afford to buy these homes?”

“Everybody lists location among their top priorities when shopping for a home. But Hilary and Gareth Baxendale had a different item on their wish list: FHA approval. ‘We were thinking we were only going to get something where we had to put 10 percent down,’ says Hilary, who works as a nanny. This would have meant a small apartment in the $300,000 range. ‘But [FHA status] made a whole new set of apartments available for us,’ she says.”

“‘Most people haven’t been saving for 10 years,’ says David Burks, who just bought a one-bedroom at the Residences at Dixon Mills in Jersey City, which got FHA approval last month. ‘But they could easily make that monthly [mortgage] payment.’”

“An $8,000 federal homebuyer tax credit ends Friday, after months of helping fuel sales among first-time customers. But despite concerns that the buyer frenzy will diminish as the credit goes away, Realtors and observers say the market will continue strengthening and prices will rise. ‘We didn’t see (prices) getting any lower,’ said Rudy Quinonez, who with his wife recently bought a condo in Claremont. ‘From what I read, the market kind of bottomed out. So, it was kind of the right time. Looking around, the prices were lower than we’d expected. But it kind of bottomed out. So we said, `Do we wait?’ We didn’t think they would lower any more, if any.’”

“Still, even the California Association of Realtor’s own president said last month in a press release that while the loss of the federal credits would remove some urgency from the market, it’s ‘not likely to derail current market trends.’ ‘Maybe it’s wishful thinking,’ Mueller said. ‘But I don’t think demand will stop.’”

“Industry lobbyists have pushed leaders on Capitol Hill to extend the credit once again…but lawmakers instead seemed to be emphasizing ways to create jobs as a way to drive the home market. ‘A significant component of the housing market crisis is a jobs crisis, and that must be the top priority moving forward,’ said Rep. David Dreier, R-San Dimas. ‘I believe our focus must be on creating jobs in order to help get the economy back on track.’”

“After nearly 30 years of business in this city, Chino Hills Ford closed Wednesday. Business had declined precipitously in recent years due to the sluggish housing market, popularity of imports, decrease in discretionary spending and higher fuel costs, said Lenny Woods, manager and owner of the dealership. ‘We flourished until the recession,’ Woods said. ‘We peaked in 2003. Since then, it’s been downhill.’”

“‘I’ve never seen anything hit this hard in all my life,’ said body shop manager Michael Aiken. ‘I’ve been through gas shortages, but nothing like this. People with money are scared to spend it, which I don’t blame them.’”

“Woods said he put much of his money into keeping the family business alive. His family is now in danger of losing their homes, he said. ‘Everything I own is invested in this business, sadly, and I made a commitment to this,’ he said. ‘It’s like a runaway train. I put more and more into it to try and save it, and I don’t know what I’m going to do.’”

“The word on the street is that this is the strangest market most agents have ever worked. Even agents who have been through two or three of these cycles know this one’s a little different. Why? Probably the biggest reason is that the federal government has never been as involved in the market as they are right now. On the financial side, they are regulating banks, they are a direct lender (Fannie, Freddie, FHA), they are imposing moratoriums and delivering incentives and stimuli. You name it – they’re there along with their unintended consequences.”

“In some respects it has served to stabilize the market, but in a broader sense it has prevented the market from achieving its own balance, finding a real bottom and starting a real recovery. The market is being artificially manipulated right now and we just don’t know what’s next.”

“The state Senate is gearing up to debate a bill to protect renters and homeowners amid the rising number of foreclosures statewide. Many housing experts agreed that the Berkshires has been spared some of the worst of the foreclosure crisis that has surfaced in many parts of the state, but there is still concern locally. ‘[The national foreclosure rate] has to impact values and it has to impact everybody — there’s no getting away from it,’ said Jay Anderson, president of the Pittsfield Cooperative Bank. ‘We’re not immune.’”

“Saying that some properties would default on their mortgages no matter how they were restructured, Anderson said, ‘If they want to start changing that process … I’m not sure if it’s a wise thing to do, because it stalls what will eventually happen anyway.’”

“The U.S. housing market won’t recover for three to five years as mounting foreclosures hold down prices, according to mortgage-bond pioneer Lewis Ranieri. At least 3 million new properties will join 5 million already in a ‘cloud’ of distress in the next 18 months, Ranieri said.”

“‘There’s another big leg down and the question is how long does it stay,’ Ranieri said. ‘You can’t have much of a rally when you’ve got this big overhang.’”

“Salt Lake City had the largest percentage increase in foreclosure filings the past year among more than 50 communities hardest hit by the nation’s foreclosure crisis, a new report shows. RealtyTrac said Salt Lake’s growing foreclosure-filings rate demonstrates how the problem has spread in a big way from cities in California, Arizona and Nevada into other once-booming areas. As home sales and prices have fallen over the past two years, more and more homeowners are ‘underwater.’ Many of those in this situation are unable to sell their homes for enough money to cover their mortgages after they encounter financial trouble and can’t keep up with their payments.”

“That’s why Mark Knold, chief economist for the Utah Department of Workforce Services, isn’t surprised that Utah’s foreclosure rate is significantly higher than the national average. ‘We were late in to the housing bubble, we’ll be the last to get out,’ he said.”

“Kristen and Chuck Dvorscak of Midland Park, N.J., need to sell their 1929 three-bedroom Colonial now. The couple just had a second child, so the Dvorscaks, 33, want to upgrade to a bigger home nearby. Trouble is, their house’s value has plummeted about 7 percent from the $535,000 they paid four years ago. They’re resigned to taking a loss, but hope to save the traditional 6 percent real estate broker’s commission by having Kristen market the house herself. (Asking price: $499,900.)”

“‘Frankly, I don’t think a Realtor does much that I can’t do myself,’ she says.”

“Housing markets everywhere are fraught with market failures and there is no housing market in the world devoid of government intervention. I am stating the obvious, of course, but it bears repetition, especially in the light of the growing frenzy in the residential property market in Singapore. There are two schools of thought, diametrically opposed, on what should be done.”

“Would-be home buyers, especially first-timers, want the Government to ‘Do Something Drastic’ to control runaway prices. The other camp wants the Government to ‘Do Nothing’ about rising property prices. But if you take a long view, a lot is going right in housing, thanks to the Government’s refusal to treat housing as a free market.”

“Instead of pretending that the housing market is like any other market, the Government has explicitly turned housing into an object of social policy, making home ownership a national objective and tailoring policies accordingly. Market forces are allowed some free play to allow home-owners to realise the value of their assets - but with the Government retaining a watchful eye in case of wide swings.”

“Instead of ‘Doing Nothing’ or ‘Doing Something Drastic’, the best policy in an overheating market is precisely what the Government is doing now: Stay cool, watch the market and be prepared to ‘Do Something Judiciously.’”

“A few common human characteristics were shared by the Wall Street masters of the universe who packaged exotic financial instruments and the Main Street homeowners who purchased more house than they could afford: the insatiable lust for more, the need to impress, the desire for newer, shinier, bigger and ostensibly better. The consequences of allowing those common traits to metastasize across the economic landscape are in evidence in the current economy, edging back from the brink of collapse but still enfeebled by the housing bubble.”

“The homeowners who allowed their oversized dreams to swallow up their common sense are already paying for their mistakes with sullied credit and/or massive debt. From California and Florida, from three-bedroom bungalows to six-bedroom mini-mansions, houses are in foreclosure and neighborhoods are gloomy with abandonment.”

“As President Barack Obama said recently, Wall Street reform would prevent ‘a situation where people are allowed to take wild risks and all the downsides are socialized even as the profits are privatized.’ Just as there will always be homebuyers tempted by the vacation place they can’t really afford, there will always be bankers tempted to earn a sweet million on an obscure deal with an immediate payout. In other words, human frailty will always be a part of the human condition. Government regulations curb the excesses.”

“Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general.”

“It’s easy to see why this happened. People who make it into the establishment work and play well with others. They are part of the same overlapping social networks, and inevitably begin to perceive the world in similar, conventional ways. They thrive in institutions where people are not rewarded for being cantankerous intellectual bomb-throwers.”

“As is traditional in our culture, the elected leaders of the clueless establishment have summoned the leaders of Goldman Sachs to a hearing so they can have a post-hoc televised conniption fit on the amorality of Wall Street. The second big event in Washington this week is the jostling over a financial reform bill. The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.”

“If this were a Hollywood movie, the prescient outsiders would be good-looking, just and true, and we could all root for them as they outfoxed the smug establishment. But this is real life, so things are more complicated.”

“If this were a movie, everybody would learn the obvious lessons. The folks in the big investment banks would learn that it’s valuable to have an ethical culture, in which traders’ behavior is restricted by something other than the desire to find the next sucker. The folks in Washington would learn that centralized decision-making is often unimaginative decision-making, and that decentralized markets are often better at anticipating the future. But, again, this is not a Hollywood movie. Those lessons are not being learned.”