May 7, 2010

More Oppressive Than Any Feudal Arrangement

It’s Friday desk clearing time for this blogger. “In 2004, the Federal Reserve began a slow and steady march toward higher interest rates, a quarter-point at a time. Many economists have questioned whether the Fed’s deliberate approach to tightening monetary policy, from exceptionally low rates in the aftermath of the dot-com bust in 2000, allowed a dangerous housing bubble to develop, The New York Times’s Sewell Chan writes. At the March 2004 meeting, the transcripts show, several Fed officials expressed strong concerns about housing.”

“‘A number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida,’ said Jack Guynn, then the president of the Federal Reserve Bank of Atlanta. ‘Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties — selling them quickly at higher prices.’”

“Later in that meeting, Mr. Bernanke said the Fed was ill-equipped to try to identify asset bubbles, much less prick them. ‘The history of using the monetary policy instrument rate for correcting financial imbalances is a very checkered one, to say the least,’ he said.”

‘By November 2004, with the tightening several months under way, policy makers were still uncertain about how to interpret the run-up in the housing market. Gary H. Stern, then president of the Minneapolis Fed, said that at a meeting the bank sponsored on housing activity, ‘there was little overall concern about a bubble in house prices and little anticipation of a major correction in house prices in the near term.’”

“It’s a uniquely American phenomenon, this house lust, this fantasy of the perfect life in the perfect environment. In her new memoir of travels through real estate heaven and hell, L.A. Times columnist…Meghan Daum believes your home is a ‘repository for every ambition and anxiety… It’s a container for all your goals and your tastes and what you want out of life.’

“‘I bought a house in 2004. So I was climbing up the sides of the housing bubble. Things hadn’t reached the absolute apex of frenzy that they would the following year, but it was pretty intense. Open houses were jammed with buyers, and you almost always had multiple buyers competing for the same property, and the result was that you had to decide within about five minutes if you were going to try to buy something.’”

“I’ve always likened it to a form of speed dating, wherein you have, like, five minutes to decide not only if you want to date the person but if you want to marry them.’”

“A transfer in 2005 landed Air Force major Richard Hallbeck, his wife, and two kids in Southern California smack in the middle of the real estate bubble. Home prices in the area had doubled in the past five years and were still climbing. So the Hallbecks swallowed hard and bought an $845,000 four-bedroom in a suburb of Long Beach.”

“The recession cost Laurie her job, and the payment on the couple’s adjustable-rate mortgage will jump $800 in July. Next year Richard will face mandatory retirement, and his pension will be a third of his current $117,000 income. A similar home down the street lists for $655,000, $21,000 less than the Hallbecks’ outstanding mortgage. At that price, the couple would be out $231,000, including their down payment and closing costs.”

“Since Money first spoke to the Hallbecks, they have listed their home and attracted an offer of $655,000. That would’ve meant shelling out the $21,000 difference, plus some $40,000 in commissions and closing costs. So, the couple decided to hold out for more. ‘Hopefully,’ says Richard, ‘our expectations aren’t too high.’”

“This new bedroom community near the Altamont Pass windmills once seemed like an ideal investment for the California Public Employees’ Retirement System. Then the real estate bubble burst. Mountain House became the most ‘underwater’ community in America. The pension fund’s $1.12 billion investment in Mountain House shrank to just under $200 million in five years, Cal-PERS records show.”

“The study briefly put Mountain House in the national spotlight – unfairly, some residents say. ‘No community is exempt from what we’re going through,’ said resident Celeste Farron, who estimates her $825,000 home has lost half its value. ‘We’re just getting hit harder because we’re so new.’”

“Two years ago, Grace Murphy’s 401(k) savings collapsed. But the Gainesville, Fla., school teacher, 53, still liked her odds of an early retirement. Thanks to Florida’s robust housing market at the time, she envisioned eventually tapping into her home equity to help make a fruitful retirement a reality. ‘At that time, I really thought the real estate market down here would hold just fine,’ Murphy says. ‘I guess I was wrong about that.’”

“A few years ago, Randy Klein, 63, thought he’d retire in ‘a couple of years,’ he says. But the value of his home in Cleveland has dropped about $40,000 since then, forcing him to drop plans to sell his three bedroom house and downsize, because the savings won’t be substantial enough. He has also seen his 401(k) lose value.”

“Now Klein, a hardware store owner, says he will likely work into his early 70s to compensate. ‘I wouldn’t have considered even thinking about this a year ago,’ he says.”

“Marjorie Feldman of suburban St. Louis, retired three years ago as a systems analyst for a utility company. The stock investments in her retirement account have sunk 15 percent from 2007. The value of her home is down 20 percent. ‘I had retired assuming I’d make money’ off the investments, said Feldman, who’s in her early 60’s. ‘I just don’t feel as confident in the economy, and I never will again.’”

“Feldman’s husband works full time in academia. She has a part time job preparing tax returns at H&R Block. But her prime earning years are behind her. ‘I don’t think it will ever get back to where it was before,’ she said of her nest egg. ‘I won’t spend money the way I used to.’”

“Keith Flowers of Manassas, Va., (has) decided that the hit he took in the housing slump requires him to continue to rein in spending. He’s cut off his landline phone and has become a regular at discount retailer Costco. He isn’t worried about losing his job in business development at an information technology company. What’s led him to cut back spending is the sunken value of his condominium. He bought it in 2005 for about $270,000.”

“‘I doubt right now it’s cracking $100,000,’ Flowers said.”

“As the housing market weakened in recent years, Eliseo Carrillo’s smiling face appeared on billboards throughout the city’s Mexican-American neighborhoods. Spanish-language TV commercials featuring Mexican music and Carrillo wearing a stylish cowboy hat promised that his real estate companies — all using the name ‘Protecta’ — were friends and guardians of immigrants in need.”

“But after signing what they believed were loan papers to save their homes from foreclosure, at least four of his struggling clients have filed lawsuits alleging that they were misled into surrendering the deeds to their homes in complex ‘mortgage rescue’ schemes they didn’t understand.”

“One investor, who spoke on the condition of anonymity because he’s in the country illegally, was a maintenance man who wound up owning four houses besides his own, according to closing documents naming Protecta as the broker. Though the man said he initially profited about $20,000, all four of the houses now are in foreclosure proceedings.”

“In loan documents recorded by a Protecta agent, the man’s monthly income was reported to be $7,200 — more than twice the $3,400 per month his pay stubs at the time say he earned — which made it easier for him to qualify for the loans. The second investor, Sergio Villegas, received a profit of $12,438 in one Protecta-arranged transaction, according to court documents. Several properties under his name now are in foreclosure proceedings or were taken over by a bank.”

“‘My credit is ruined,’ Villegas said. ‘All of this has been very bad.’”

“Soured mortgages ballooned last year even as new defaults eased as the Obama administration pushed loan servicers to consider debt modifications and states moved to slow foreclosures. The reworked debt that homeowners are left with under the federal Home Affordable Modification Program should be called ‘Liar Loans 2,’ John Burns, chairman of John Burns Real Estate Consulting, said today in a note to clients.”

“Borrowers remain saddled with monthly debt payments including home-equity loans and credit cards that exceed 60 percent of their pay on average, and still owe more than their homes are worth, wrote Burns. ‘The modification programs have helped stabilize home prices around the country,’ he said. ‘Mostly because they have created so much confusion that people can live in their home for free for one year or more and are buying time for thousands of banks to continue improving their balance sheets with earnings from good loans, while deferring the write-off of bad loans.’”

“While Las Vegas home prices have fallen to more affordable levels, prospective buyers who plan to live in the home are being edged out by investors with cash. ‘I think that’s going to change,’ Burns said. ‘There’s tremendous investor appetite because prices have overcorrected. That’s the reality of the market. There’s a thing called a shadow inventory of homes that have defaulted but are not for sale yet.’”

“‘The Obama administration and the Treasury have these programs that require mediation for loan modifications and don’t allow the bank to take the title. Banks are trying to restructure the loans and can’t, and the administration says, ‘Try this program. Try that program.’ You’re going to start seeing distressed homes on the market in the next year,’ the real estate consultant said.”

“California’s economic challenges can no longer be kicked down the road in hopes of things getting better, a panel of economists said Wednesday. John Husing, an Inland Empire economist said the region has more than 100,000 fewer wage and salary jobs than it had in 2000. Practically all new jobs were linked to the housing boom. When the boom went bust, the state had 5 million more people, Husing said, noting that building an economy on housing is not sound strategy.”

“Fewer immigrants have moved to Southern California since the bubble burst, said Dowell Myers, director of Population Dynamics Research Group. ‘We get fewer new arrivals than we did in 1975,’ he said, noting that the state population has started to shrink.”

“During the month of March, some 1,300 single detached homes were sold in Vancouver, for a total of $1.35 billion. This was the subject of news reports because it meant the average selling price of a home in that city hit $1 million.”

“The idealization of home ownership is both an American and Canadian phenomenon. Both countries had frontiers to settle and homesteading movements. Today our home-ownership rates are identical. About 69 per cent of Americans and Canadians are homeowners - or were homeowners, because those numbers are pre-recession and, at least in the U.S., many have lost their homes.”

‘Indeed, it was the recession that prompted critics to ask whether, after all these years, governments should continue to pursue policies designed to increase homeownership. Writing in the journal National Affairs, Vincent Cannato of the University of Massachusetts traces the increase in U.S. homeownership over the past 80 years, showing how the rise was orchestrated by government elites who believed that a citizenry of homeowners made for a more civilized nation.”

“The unintended but invidious consequence was to normalize personal debt. The most notorious pro-ownership policy is the one allowing Americans to deduct the interest on their mortgages, thereby encouraging them to borrow more money. ‘Saddling people on the economic margins of society with large mortgages turned out to be a bad idea for borrowers, lenders, and the country as a whole,’ writes Cannato.”

“As the waters of last year’s economic tsunami receded, they revealed the wreckage of all those homes bought by Americans who couldn’t afford them.”

“Home ownership has long been considered an act of responsible citizenship, associated with middle-class values such as independence and personal stability. But $1 million for a house? That’s hardly the road to independence or stability for anyone in the middle class. The weight of the mortgage would be more oppressive than any feudal arrangement between lord and serf.”




Bits Bucket For May 7, 2010

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