An Unsustainable Dreamland
It’s Friday desk clearing time for this blogger. “The median price for a home in the area that includes Monmouth and Ocean counties rose 1.5 percent in the first quarter. What’s behind the increase in the market? The $8,000 tax credit for first-time homebuyers, which expired on April 30, and low mortgage interest rates helped fuel sales. ‘We had transactions that were literally put together in a day or two to meet that deadline of April 30 to be under contract,’ said Louis Redbord, branch manager at Coldwell Banker Residential Brokerage in Holmdel. Simi Bhatnagar and her husband, Piyush, were renting in Woodbridge before they bought a house in Marlboro in January. They purchased the four-bedroom farmhouse for $589,000, negotiating the price down from about $630,000. ‘It was a buyer’s market,’ Bhatnagar said. ‘We thought prices are quite competitive. They are good and this might be the right time to buy a house.’”
“Median home prices in southern New Jersey in the first quarter of 2010 were down 2.6 percent from the same period the year before. Judith Saylor, with Prudential Fox & Roach Realtors in Northfield, said home prices might fall a bit more in the area, depending on the location. ‘I think we went so high so fast that there’s probably room for some more lowering of prices,’ Saylor said.”
‘One of her listings with a reduced-price sign on it — a 3,300-square-foot historic home on an acre in Linwood — was listed at $849,000 in June and has now been reduced to $719,000, she said. ‘Sellers are still under the illusion that properties are worth so much money, and we’re under the illusion that we can get more than we really can,’ she said.”
“Jim and Joyce Reyes found a three-bedroom house that met their needs and entered into a contract with the seller at a mutually agreed price. But when the appraisal came in for less, the sellers wouldn’t drop the price because they owed more on the house than it was worth. The Reyeses, who began house-hunting in September to take advantage of the first-time homebuyer tax credit, kept looking. They found another house, signed a contract but, after paying for an appraisal and a home inspection, that deal fell through as well. ‘I kind of hate to miss out on the tax credit,’ says Jim Reyes, of Farmington. ‘But I didn’t want to just roll over and buy a house based on that.’”
“‘Right now, I’m very frustrated,’ Reyes says. He still wants to buy a house, even without the tax credit. ‘To me, real estate is a very good investment. I’m spending money on rent that I could be paying the mortgage with. I’d love to be a homeowner.’”
“Clark County’s high-end home buyers are testing the market once again after a two-year hiatus sustained by the recession. Sellers are now willing to accept a loss, as was the case for Kenn and Marie Bartley. The Bartleys have a sale pending on their sprawling mini mansion, which offers majestic views, was listed for about $700,000, down significantly from $795,000, which the Bartleys paid for the property in 2006.”
“Mike Lamb, a longtime broker in Vancouver, says he’s already seeing evidence that market-savvy buyers believe that time has come. He said investors are interested in real estate to hedge their bets against the predicted period of inflation that could follow recession. ‘At this point, there’s a growing sense that real estate is a good investment,’ Lamb said. ‘At least once a week, someone will come up to me and say, ‘I think real estate is where I need to put my money.’”
“The hope of a bustling urban lifestyle in north Arlington also fell short with the collapse of Tom Hicks’ planned Glorypark just a couple of blocks away. Some Chelsea Park residents said they’re disappointed with the lack of development but still don’t regret their purchases. Kennetha Caldwell said she and her husband bought a townhouse right away because they worried the development would sell out. ‘We didn’t want to be one of the people who, down the road, wished that we would have done this,’ said Caldwell, who lives in Edmond, Okla.”
“She said she and her husband planned to sell in about five years. Now, she looks at it as a place for her husband to stay and a fun getaway for the future.”
“Another owner, Mark Glasmire, said he would like more development around the entertainment district, but he sees other benefits. It’s convenient to the airport and his girlfriend’s home, and the Philadelphia Eagles fan enjoys his early-morning jogs around Cowboys Stadium. The one negative, Glasmire said, is that he also expected this to be a good investment, but it might take a while.”
“‘Right now, it’s not looking like I made the right choice,’ he said about the short-term investment. ‘But I would still make the same decision.’”
“After 30-years of working in Florida real estate not much surprises Barbara Watt, yet she has noticed a new trend of late. ‘We were fortunate that one Canadian gentlemen came in recently and got such a good price he brought two more clients in, in the next two weeks,’ she said. ‘Bam, bam, bam, one after the other, it was lovely.’”
“Watt says houses that were selling for more than $1.5 million a couple of years ago can now be bought for $800,000 to $900,000. Watt said the window of opportunity for bargain-basement prices may be closing in Florida. ‘It’s so exciting to see the market coming back,’ she said ‘We’re not there yet in dollar terms but we are in units. It’s turning.’”
“Only about 40 of the 253 condominiums at Regent Park in downtown Hollywood are occupied by people who own them. The rest are vacant or being rented by investors to tenants. They don’t have a stake in the pet-friendly development, so keeping it clean and appealing isn’t necessarily their top priority, said Mitch Anton, the board president.”
“Prices now hover around $100,000 after climbing close to $380,000 during the boom years. Still, Anton said he’s looking forward to the community becoming a desirable destination for first-time buyers getting mortgages backed by Fannie Mae. ‘In the long run, it doesn’t help to have renters in there,’ Anton said.”
“Unemployed? Owe more on your mortgage than your home is worth? Your state might one day pay your mortgage. Giving people free money to cover their home loans is just one of the radical ways that four states — Florida, Michigan, California and Arizona — plan to use $1.4 billion the Obama administration is sending their way to help the unemployed and underwater avoid foreclosure.”
“These proposals may irk Americans who are keeping up with their mortgage payments or don’t want tax dollars used to help their neighbors. But Alan White, a law professor at Valparaiso University, said all homeowners will suffer if neighboring properties fall into foreclosure. ‘There are benefits for all of us for stopping foreclosures any way we can,’ White said.”
“Delinquent homeowners aren’t the only ones who would benefit from these subsidies. In fact, the banks would come away with a huge win, said Mark Calabria, director of financial regulation studies at The Cato Institute. Not only would they have government money securely in hand, but they’d avoid the time and expense of the foreclosure process. ‘This is a lot more than they would have collected otherwise,’ Calabria said. ‘The lenders should bear the losses for this. They are the one who made the loans.’”
“Another concern is that these proposals will dissuade the unemployed from finding work or from relocating to an area with better job prospects, said Casey Mulligan, an economics professor at the University of Chicago. ‘Why should anybody work if you are going to be in your house either way?’ he said.”
“The precentage of homeowners willing to default when the value of a mortgage exceeds the home value — even if they can afford the monthly payment — jumped to 31 percent in March, up from 22 percent a year earlier, according to the Northwestern and the University of Chicago researchers.”
“Paola Sapienza, finance professor at Northwestern’s Kellogg School of Management, says the figure may indicate a decline in the social stigma associated with default, as well as more familiarity with the process. ‘The more people we know who have done strategic default, the more likely we are to do that ourselves,’ she says. ‘I learn from you how to do it and what the consequences are.’”
“The researchers found that the probability of strategic default increases by 23 percent when homeowners learn that a neighbor received partial loan forgiveness. One homeowner Sapienza interviewed ’said he realized he was paying about $2,500 a month on his mortgage and there was a much nicer rental apartment next door for $1,800 with a nice swimming pool,’ she says. ‘He contacted the lender a couple times asking to renegotiate the terms and the third time he walked away and rented next door. He was a senior and had enough cash that he could survive without borrowing and didn’t need ownership of the house because he didn’t care about that.’”
“Ultra-low interest rates fueled the housing bubble, thanks to former Fed chairman Alan Greenspan’s direction. And Americans should brace for another crash because that practice has continued. In retrospect, a growing number of economists and financial analysts believe that Greenspan simply kicked the can down the road and set up the U.S. economy for an even greater recession.”
“Of course, the housing boom occurred not just in the United States, but in many countries. Something so large and widespread was not due to any single cause. Even so, Greenspan’s ultra-low interest rates — fueled by the injection of newly created money into the credit markets — were a necessary condition for the mania that swept the financial world in the mid-2000s.”
“Tragically, Bernanke has decided to one-up Greenspan. Bernanke has brought interest rates down to almost zero and held them there for 15 months. And that’s expected to continue.”
“It is now obvious that housing prices during the mid-2000s were completely divorced from reality and that the U.S. economy was in an unsustainable dreamland. Five years from now, Americans may look back and think the same was true of 2010. Printing money to keep zero percent interest rates has never worked long term, will only postpone the inevitable correction, and indeed make another crash more likely.”
“Over his two decades as chairman of the Federal Reserve, Alan Greenspan repeatedly trekked to Capitol Hill to deliver testimony that developed an unlikely sense of majesty. News networks carried Greenspan’s remarks live, showing deferential senators transfixed by the chairman’s gnomic utterances. For nearly a century, the Federal Reserve—with piles of cash and little public accountability—sat astride the hypothetical juncture of Wall Street and Pennsylvania Avenue. As the U.S. reached monetary policy’s holy grail of low inflation and low unemployment in the late 1990s, Greenspan was exalted as a sort of secular saint.”
“Allan Meltzer, an economist at Carnegie Mellon University and author of a three-part history of the Fed, called the bank ‘one of the most prestigious institutions in Washington, a pillar of strength and a symbol of stability.’ But the Fed’s decision to bail out financial firms after the collapse of Lehman Bros. in the fall of 2008 soured many who had previously held the Fed in awe. ‘No previous Fed ever came close to buying a trillion dollars of mortgages. No central bank in any civilized country does that,’ says Meltzer. ‘The Fed has used its ability to print money to perform a lot of tasks that should be performed by the administration and Congress. That is a breach of its independence.’”
“If you want to understand what went wrong in the housing market, the case of Ruben Rojas is an important piece of the puzzle. Rojas, a real estate agent from Vienna Va., was sentenced to five years in prison in U.S. District Court for his role as the ringleader in a massive mortgage fraud scheme that ran amok in the booming Washington-area real estate market four years ago.”
“The scheme drew in family members, loan officers, other real estate agents, and straw buyers who falsified information about their finances to qualify loans. In still other cases, innocent home purchasers were pushed into mortgages they should not have received, and were left holding the bag when banks foreclosed.”
“And prosecutor Marla Tusk said at Friday’s sentencing hearing that the government brought formal charges for only a small fraction of the fraud that Rojas and his cohorts committed. When police arrested Rojas last year, they estimated that he and others fraudulently purchased as many as 200 properties collectively worth $100 million.”
“In the Eastern District of Virginia alone, which includes northern Virginia, prosecutors have brought more than 50 criminal cases since the beginning of last year, according to U.S. Attorney Neil MacBride, resulting in losses conservatively estimated at $100 million. MacBride said in a phone interview…that while his office continues to investigate mortgage fraud it has also started to pour resources into investigating potential fraud involving the bank bailouts and the federal stimulus legislation, programs that involve the exchange of hundreds of billions of dollars.”
“‘In real estate, there was a ready-made market involving lots of money, and some people took advantage of that,’ MacBride said.”
“The Rojas case, as big as it was, was not the largest mortgage fraud case prosecuted by MacBride’s office. Last year a judge sentenced well-known Bollywood film producer Vijay Taneja of Fairfax, Va., to seven years in prison for a mortgage fraud scheme that resulted in losses of $33 million. ‘He was putting people in homes they couldn’t afford. We’ve all seen the results of this type of behavior in the housing market,’ Tusk said. ‘This is the type of behavior that led to the downfall in the housing market.’”
“U.S. District Judge Gerald Bruce Lee agreed, imposing a five-year sentence that was even longer than what prosecutors sought. ‘Homeownership is part of the American dream. What you did was destroy that dream,’ Lee said.”
‘The sentence prompted no visible reaction from Rojas, but his defense attorney, Jerome Aquino, shook his head in disbelief. Rojas would have received an even longer sentence, but he is getting credit for cooperating with prosecutors, whose investigation is ongoing. The judge said he won’t be satisfied that justice has been served until the government has prosecuted at the highest levels.’
“‘I’m waiting for the government to bring in the CEO’s of these mortgage companies, who had to know what was going on,’ Lee said.”
“The successful frauds have had conspirators at all the levels in the transaction. The buyer is often a willing conspirator, along with the real estate agent, the loan officer and the settlement company. ‘It takes a village to pull these things off,’ MacBride said.”
“In 2006, just as the real estate market was nearing its sharp crest, California came marching into New York City. In deal after deal, the Golden State’s two main pension funds, ramped up their previously small New York portfolio. Aggressively bidding on properties. Perhaps offering a window into the funds’ larger troubles today—they are, by some estimates, being swallowed by a $425 billion shortfall for California pensions—the investments are a spectacular lesson in poor timing, and have left a legacy of distressed assets on the New York skyline.”
“A spokesman for Calstrs declined to comment. California’s governor, though, summed it up rather ominously-and accurately. ‘In California, we had the Internet bubble, then the housing bubble,’ Arnold Schwarzenegger said on April 14, in one of his weekly messages to the state. ‘Next is the pension bubble. And it’s starting to burst.’”
“Did you hear the one about the state where the housing market (supposedly) has rebounded after the economy had that near-miss-with-a-depression in 2008/9? Well, here in Massachusetts, the median selling price of a single family home dropped 19 percent from the first quarter of 2008 to the first quarter of 2009. The media is abuzz with an 11 percent ‘rebound’ in prices over last year’s first quarter.’
“Don’t fall into the trap of comparing a 19 percent drop with an 11 percent rebound, and thinking it’s only an 8 percent shortfall. This current rebound would’ve had to have reached 23 percent to bring prices back to where they were two years ago.”
“The repercussions go far beyond the obvious. I heard recently that before the current recession, 25 percent of college tuition bills were paid by home equity lines. Poof! The senior housing and continuing care retirement community (CCRC) industry has been hobbled. Mom and dad won’t move to the nice CCRC until they can sell their house for what they think it’s worth. Ha! Does the typical high school graduate today have a hope of buying their own home? How about the typical college graduate? What happened?”
“My grandmother dropped out of formal school at age 13. She and her husband were immigrants from Austria-Hungary. He was a tailor…she was a seamstress. Somehow they managed to purchase a two-family home with a nice yard and detached garage in central Connecticut. Their cousins from the old country also bought homes within a stone’s throw. My parents, when newlyweds, lived above my grandparents while they saved money to buy their own single family house in the suburbs.’
“How much has changed. Is owning your own home still central to the American Dream? Or were we sold a bill of goods and just witnessed a big wake up call?”
