The Housing Bubble

Post off-topic ideas, links and Craigslist finds here. The DC meetup link at the forum is here. Click here for the shadow inventory thread.

The Houston Chronicle reports from Texas. “In 2007, Pulte Homes announced its first Del Webb age-restricted community in the Houston area. Even though the local housing market was already seeing signs of stress, the Bloomfield Hills, Mich.-based builder was anticipating a spring 2009 opening. Now, the company is conducting a market study to determine when the community can be restarted. ‘There was a considerable amount of interest, but what we were finding was that people want to shop but are still in situations where they’re struggling to sell their existing home,’ said Valerie Dolenga, a spokeswoman for Pulte, which owns the Del Webb brand.”

From KTRK. “Homeowners who want to lower their tax burden have some important deadlines facing them. This year, most property values are either down or unchanged. Harris County Appraisal District officials say most homeowners will see their appraisals lowered or stay the same this year. Changes in the law could help you get that appraisal even lower. ‘For the first time, foreclosures can be used as evidence in a hearing, and there is not a neighborhood in this town that does not have at least one foreclosure in it,’ said property tax advisor Paul Bettencourt.”

“He says foreclosed properties generally sell for 30 to 40 percent less than a typical home’s value. Using that information in your protest could result in big reductions in assessed value. ‘If you get an offer on i-Settle, know that it does not use the foreclosure information that you can get from your Realtor or tax agent,’ said Bettencourt.”

The Austin American Statesman. “The average value of single-family homes has dipped in Travis County, probably for the first time since the recession of the 1980s, Chief Appraiser Patrick Brown said. The average value of a single-family home in 2010 fell 2.8 percent to $279,763, Brown said. Last year’s average was $287,732. That’s a small drop compared with what’s happened in many other areas, particularly once-hot real estate markets in California, Nevada and Florida, where home values have fallen sharply. ‘Our bubble didn’t burst to the same degree as theirs did,’ Brown said.”

“Commercial foreclosures in Central Texas are running 16 percent ahead of last year, according to Foreclosure Listing Service Inc. George Roddy Sr., president of Foreclosure Listing Service, said land speculators and developers ‘were on the front line of battle during this economic crisis.’ As money to develop the land dried up, they were left with no way to generate income to pay off debt.”

“Real estate experts said it’s too early to tell whether that signals a new wave of postings or a one-time blip.”

The Austin Business Journal. “The number of homes foreclosed in Austin last quarter was also about 20 percent higher than the fourth quarter 2009. A total 2,908 Central Texas homeowners filed last quarter. ‘That’s the bad news, but the good news is that we think we have hit bottom and are coming out of a horrible standpoint,’ Texas Mortgage Bankers Association VP W. Scott Norman said.”

The Hays Free Press. “According to preliminary numbers, average single-family home values decreased in nearly every jurisdiction, the first time most home­owners will see a drop in property value in a decade. In the city of Kyle, the average home value is expected to decrease 3.67 percent since this time last year to $127,305 for 2010. In the city of Buda, the decline is projected at about 0.6 percent since 2009 to $158,876. Dripping Springs ISD decreased about 2.79 percent to $267,899 for 2010.”

“The city of Kyle is seeing higher rates of home value decline because the market here was overbuilt and became even more saturated with a high number of foreclosures in young neighborhoods, said Steve Flynn, a San Marcos-based appraiser who teaches on the subject at Texas State University. ‘A lot of those builders had their own mortgage companies and they were getting these people into homes and qualifying them for a loan without any regard for whether these people could afford those mortgages. That’s kind of coming back to haunt them,’ Flynn said.”

The Brenham Banner Press. “Brenham home prices have held steady throughout the housing crisis and the market is not overbuilt or overpriced, Coldwell Banker owner Lindi Braddock said. ‘Texas is one of the best places to be in the real estate market,’ Braddock said. ‘We have some areas that are over built like in North Dallas, but on the whole the housing market is stable.’”

“Braddock thinks Brenham is a buyers market, but there are few houses available. ‘There are 176 active homes for sale in Washington County, and the buyer has few to select from,’ Braddock said. ‘The price will narrow the pool even more, but it is still a buyer’s market.’”

“‘The interest rates are the best in 30 years, and Uncle Sam will let you write off the mortgage interest,’ Braddock said. ‘Any one who doesn’t own a home should own a home. If you put a good down payment on it and get in while the interest rates are low, then the mortgage will be lower than what you can rent the house for. And the appreciation value in homes have gone up over the years.’”

The Dallas Morning News. “Homebuilder D.R. Horton Inc. reported its second quarterly profit in a row Friday. The strongest activity was in the builder’s South Central region, which includes Texas. Horton CEO Donald Tomnitz warned that the U.S. housing industry – which is recovering from the worst downturn in decades – still faces challenges. He cited the growing number of foreclosures, high inventories in some markets and tougher mortgage qualification standards.”

“He said the builder’s houses are priced to compete with resales of foreclosed properties. He said the builder has invested $200 million in additional home lots. ‘We have been actively contracting for finished lots to supplement our existing land positions,’ Tomnitz said.”

From D Magazine. “If you’ve been perusing the listings of commercial real estate transactions in recent months, though, you will have noticed that deals are not being done. Despite the fact that many market indicators point towards a period of rapid sell-off, it’s extremely quiet in the marketplace. This has to do, in part, with tight debt markets. But stingy banks only tell part of the story. What we’re really experiencing is an artificial market, says Sam Kartalis, president at Henry S. Miller Realty Services.”

“Good deals are out there, but until distressed real estate owners are forced to sell at discounts, properties will not be put on the market. Banks will force owners to sell if they slip into foreclosure, but many banks are softening their loan requirements just so owners don’t go down that path.”

“‘There is an artificial market in that so long as properties are meeting debt service, lenders are not foreclosing, even though the properties are not meeting debt service requirements’ Kartalis says. ‘For example, according to a bank’s loan agreement, debt service coverage may call for 1.25 of net operating income. But if it’s only actually 1.0 of NOI, lenders are satisfied for the moment.’”

“The result is a stalemate. Property owners who don’t have to sell, won’t. ‘This can’t go on forever,’ Kartalis says. At some point banks will not be able to shore up all the distressed properties in their portfolios. ‘When that happens, foreclosures will increase and make more properties available for sale at current values.’”

The Associated Press. “Real estate agents are working seven days a week, builders are staying open late and homebuyers are scrambling to get their offers in as they rush to take advantage of tax credits that expire at midnight Friday. In Houston, transit mechanic Stan Henderson, 51, is buying his first home, a three-bedroom, $104,995 house from builder KB Home that is still under construction. Affordable prices and low mortgage rates were part of the draw, he said, but the tax credit ‘was the straw that stirred the drink.’”

“Still, the housing market seems finally to be regaining its footing after the worst downturn since the Depression. Numerous government measures have helped. They include: the tax credit, the Obama administration’s $75 billion foreclosure prevention plan, the Federal Reserve’s $1.25 trillion program to drive down mortgage rates, and about $126 billion in taxpayer spending to stabilize mortgage finance companies Fannie Mae and Freddie Mac.”

“The Obama administration touts its efforts to stabilize the market as a success. ‘For most Americans, their house is their most important financial asset,’ Treasury Secretary Timothy Geithner told lawmakers on Thursday. ‘As the financial crisis wreaked havoc on household wealth, the administration moved to protect this critical component of stability.’”

“Skeptics say that these measures are an attempt to manipulate market forces and that they are leaving housing vulnerable to a dangerous double dip. And many economists say the main effect of the first-time buyer tax credit was to bring would-be homeowners into the market sooner. ‘Most of the benefits went to people who would have bought a home anyway,’ said Patrick Newport, an economist at IHS Global Insight.”

North Texas E-News. “Dr. Kimberly Winson-Geideman, an assistant professor in the University of North Texas’ Department of Finance, Insurance, Real Estate and Law, has been studying the impact of the tax credit on the real estate market and the possible repercussions that might result after the credit expires this week.”

“Winson-Geideman says that the credit has stimulated the market by providing potential homebuyers additional financial incentives to purchase homes, but she also emphasizes that the credit can be dangerous to the economy, especially in cases where homebuyers are allowed to monetize the tax credit to cover the down payment and closing costs for their new home.”

“‘There are significant dangers to allowing consumers to mortgage 100 percent of the cost of their home. Buyers with no equity stake are more likely to default on their loan. This was one of many problems that helped contribute to the market collapse in 2007, so it is rather unusual that the government should allow the credit to be used in that way,’ says Winson-Geideman.”

“She also warns that demand for real estate may suffer after the credit expires on Friday, just as the demand for cars decreased upon the conclusion of the ‘Cash for Clunkers’ promotion. ‘The month following the ‘Cash for Clunkers’ program was one of the worst in the history of the auto industry. Credits, be it for cars or homes, effectively cannibalize future sales,’ says Winson-Geideman.”

The Star Telegram. “Troy Pickering had all but given up trying to land a house before Friday’s deadline for an $8,000 federal tax credit for first-time home buyers. Then his iPhone lit up. A deal he had been working on for weeks had fallen through that morning, and he was en route to Joe T. Garcia’s to celebrate his 23rd birthday. But real estate agent Ruth Story told him to postpone the party and drive to her office pronto.”

“Another house, one he had originally been keen on, became available Thursday afternoon when a buyer pulled out over an inspection-related squabble, said Story. After frantic e-mailing of documents back and forth during the night, the deal was ‘receipted’ at a title company Friday morning, making the deadline. ‘It was like a whirlwind,’ said Pickering.”

“With his parents’ help, Pickering is putting down at least 10 percent and may use the tax credit toward a second bathroom in an otherwise well-kept and updated, three-bedroom, 1,600-square foot house in the TCU area. He plans to have one or two roommates whose rent will go toward the mortgage payments, although he says he could conceivably squeeze by on his own if necessary.”

“Elsewhere in Fort Worth, a 26-year-old real estate agent named Will Northern had brought to fruition a deal with a young couple that only began house hunting exactly a week before. Again, the tax credit was the motivation. There was no time to get an idea what they were after or for him to explain how the process works. It was done on the fly as they toured eight homes the first day, he recalled.”

“In the end, they settled for a three-bedroom house in the Arlington Heights neighborhood of Fort Worth — without a garage, but with a second living area. It will be used as the music and recording room for the husband, a member of a rock band. And the $8,000 tax credit will go toward its transformation, the agent said. ‘I’m a new agent, only 26, so this tax credit has helped me a lot,’ Northern said. But even without it, he added, ‘I believe the surge will continue.’”

“According to the Internal Revenue Service, some 1.9 million buyers had requested the credit by February. In September, the National Association of Realtors said the same number, 1.9 million, had qualified for the first-time credit, and estimated that 350,000 had entered the market because of it. With 1.9 million buyers getting $8,000 each, it works out to $15.2 billion.”

“But Kimberly Winson-Geideman, an assistant professor in the University of North Texas’ department of finance, insurance, real estate and law, figures that if you divide those billions by the 350,000 people she estimates were actually motivated by the tax credit, it ends up costing Washington a whopping $43,000 on each of their transactions.”

“She also expressed concern that some buyers will use the tax credit as their down payment — which is permitted under FHA mortgages. This means the market again will have buyers putting no down payment in the deal, like the 100 percent mortgages that were part of the mortgage meltdown, she said. ‘People with little stake are more likely to walk away than others.’”

The Arizona Republic. “During the real-estate boom, bubble, etc., mortgage down payments ranged from zero to 3 percent. Pick-a-Pay mortgages allowed borrowers to choose their monthly payments for the first three years of their loan. These creative mortgages financed granite countertops, 3,500 square feet, and shattered normal lending standards. Once the boom busted, mortgage risks emerged with a vengeance. Wall Street nearly collapsed. We clicked our tongues and blamed greed. Yet, where would we be if creative mortgages hadn’t happened? Better yet, where would we be if there had been responsible mortgage borrowers?”

“Ethical analysis looks at this question: How did you get in this situation in the first place? In the words of the not-so-great Bob Dylan, ‘When you got nothin’, you not nothin’ to lose.’ In the words of the great University of Texas-Austin economist Stan Liebowitz, ’skin in the game’ is the single most important factor in determining default. If you had a little down payment and no equity to speak of, as creative borrowers do, you walk when your mortgage is more than your property value.”

“USA Today headlines read as if innocents were robbed of their underwater homes by Bush, Bernanke, Barack, et al. Facts reveal otherwise. One underwater fellow, who was but one year from retirement, confessed that he took a second mortgage of $100,000 on his $642,000 home to put in a theater, fitness room and bathroom in his basement and expand his living room.”

“He now faces foreclosure because his payments are going up (he signed at a 3.25 percent rate that goes to 5.85 percent) and his house value has dropped to $590,000. He cannot get another second mortgage to pay off the first second mortgage for the remodeling lollapalooza.”

“One borrower, grinching about his ineligibility for government foreclosure aid, bought a $1 million home with $4,400 monthly payments, over 50 percent of the net income of this single-wage-earner family.”

“Of the foreclosures in the second half of 2008, only 183,447 resulted from the loss of employment. Other foreclosures? Negative net equity: 283,305; a 3 percent or less down payment: 130,014; low initial interest rate going higher: 60,942; and poor FICO score: 148, 697. So, 624,958 foreclosures for financial folly vs. 183,447 for loss of employment.”

“The 12 percent of the homes with negative equity are responsible for 47 percent of the foreclosures. Pick-a-Pay repeat default rates are 55 percent. If you refinance the mortgage-challenged, the default rate is 55 percent on their refinance.”

“Yet there are economists, largely those who still believe Keynes reigns, who say the walk-away is the smart thing to do because business does it all the time. What would things look like if everyone just walked away? Well, dear readers, you are living through what happens. The market is glutted as prices, even for the above-water mortgage folks, fall further. The drop is about 50 percent in Phoenix, Atlanta and even Chula Vista. Detroit has homes for sale for $7,000.”

“If you’ve raised a child, you know that consequences for poor choices modify behavior. Keep buying a new bike for your kids each time they leave it outside and it is stolen will find you mortgaging your home to buy replacement bikes. Make them earn the money to pay for their own new bike, and that bike will be inside and securely locked, probably to their wrists and beds. Moral hazard does result in economic sensibility and produces long-term prosperity.”

“So, howl about Wall Street and the failure of executives who walked away unscathed from their companies’ collapses. Apply the same standard to those who took out mortgages that put them in over the heads in even the best of economies. They have left messes in neighborhoods, cities and lenders with their abandoned homes and unpaid mortgages. Accountability and responsibility apply on Main Street, too.”