The Housing Bubble

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

Please consider signing the Shadow Inventory petition.

The Daily Journal of Commerce reports from Oregon. “After listing a modest Portland home for $175,000 in a neighborhood with no other homes for sale, Keller Williams principal broker Nick Krautter thought he might have an easy sale. But only days later, a bank-owned sign popped up in front of an almost-identical house next door with a price of $100,000. Krautter knew, however, that the house hadn’t materialized from nowhere. It was part of what he and other real estate brokers have started calling shadow inventory.”

“Their concerns are based mainly on hunches and intuition, but finding concrete data is difficult. ‘…there’s no way to get the true numbers until the banks open their books,’ Krautter said.”

“He has tried to track shadow inventory, and has counted nearly 1,000 homes in Portland that are currently in foreclosure. But there are only 518 active and pending foreclosed properties on the Regional Multiple Listing Service. ‘There are two homes owned by (banks) to every home that is actually listed by them,’ Krautter said. ‘There are lots of theories on why it is taking so long for these homes to get to the market, and whether it’s purposeful or not, people need to be more aware that it’s affecting the market.’”

“Those who believe in the existence of shadow inventory offer several reasons as to how it started and why it’s flourishing. One theory, Krautter said, is that banks and other lenders are holding onto foreclosed properties and doling them out slowly, in an attempt to keep home prices stable by not flooding the market. But brokers like Krautter fear that strategy, if it’s actually happening, could end up backfiring on lenders. Robert McKean, CEO of Albina Community Bank, agrees that some lenders may be carefully timing when they reveal foreclosed properties to potential buyers, but he doubts they would ever be forced to flood the market with them.”

“‘Regulatory stress usually develops over time, so I can’t see an instance where a lender would have to put all (its) property on the market at once,’ McKean said. ‘Plus, regulated lenders are penalized if we hold a foreclosed asset on our books. Lenders don’t have an incentive to do this.’”

“Krautter, meanwhile, is continuing to track Portland’s shadow inventory. He has seen the number of actual defaults increase even as the number of mortgages that are 30-days delinquent has gone up, which he said is a sign that lenders may indeed be avoiding short sales and letting shadow inventories grow.”

The Washington Post. “Douglas Duncan, vice president and chief economist for Fannie Mae, raised a provocative idea this morning at a meeting of real estate journalists in Austin: Some of the misconceived housing developments built during the boom years might have to be torn down because they don’t make financial sense. Duncan agreed with Stan Humphries, chief economist at Zillow, who warned that a ‘tremendous shadow inventory’ of homes is poised to come on the market.”

“Said Duncan: ‘Some of that shadow investment could have to be torn down. It was not economically viable when it was put in place.’ That include some boom-time developments in California’s Inland Empire and central Florida.”

“Who would pay for tear-downs? What would happen to people who’ve hung on to their homes despite the foreclosures all around them? All unanswered questions. The idea is being discussed by economists, but Duncan said he doesn’t know of any policymakers who are considering it. ‘It’s un-American to think about tearing down housing,’ he said. ‘But we have a long history of ghost towns.’”

The Palm Beach Post in Florida. “Stan Humphries, chief economist for housing research firm Zillow, said today that Florida will take longer to recover from the real estate recession than other states hit similarly hard by the crash. The reason; the number of foreclosures mired in the court system. With an estimated half-a-million foreclosures bogged down in Florida’s courts and more home loans defaulting every day, Humphries said Florida’s improvement has stalemated.”

“‘Florida is still such a challenging market because foreclosures are not being processed very quickly,’ Humphries said. ‘Florida is still seeing monthly depreciation rates.’”

“‘The bottom is going to be a long and flat affair,’ said Humphries, who called consumers ‘overly optimistic’ in their beliefs on the economic recovery. ‘The myth out there is the housing slump is over.’”

“Real estate experts predicted this week that 3.5 million homes nationally will go into foreclosure this year as risky adjustable-rate mortgages written in 2005 reset and unemployment continues. That’s up from 2.8 million homeowners who faced foreclosure in 2009, and sets a pace that isn’t likely to plateau until late 2011, said RealtyTrac Senior VP Rick Sharga. ‘The second wave of toxic loans is about to hit,’ said Sharga.”

“Sharga spoke Wednesday in Austin, Texas, during the 44th annual National Association of Real Estate Editors conference. Sharga’s panel of speakers, which included a Bank of America representative and Arizona-based mortgage modification executive, painted a bleak picture for anyone who thought the worst of the real estate meltdown is over. Not only will unemployment and rate resets drive foreclosures, but the panel said more people may decide that strategic defaults are ‘hip.’”

“Starting this year or next, a new class of Floridians is expected to face foreclosure, said Brad Hunter, chief economist of MetroStudy in Palm Beach Gardens. ‘The new story is going to become it’s no longer people from the lower echelon of society that are having trouble keeping up with their adjustable-rate mortgages. It’s now people who might have prime mortgages that are middle class or upper middle class or even upper class members of society who are having trouble paying their mortgages,’ Hunter said.”

“Adding to the problem, Hunter points to something called a negatively amortizing loan. Florida is home to $97.5 billion worth of those option adjustable rate mortgages, Hunter said. Some borrowers are saying the risks are worth it to get out of a bad investment, said Travis Olsen, COO of Scottsdale, Ariz.-based Loan Resolution, LLC. ‘As those option ARMS adjust, people are going to realize it’s just not worth it,’ Olson said. ‘This has been an economic ice age.’”

From St Louis Today. “From where he sits, sifting through the reams of data and opinion out there on housing, Humphries thinks most consumers are ‘a little overly optimistic,’ thinking that the worst is over and that things are on the upswing. That thinking, he says, is based on four ‘myths’ that he’s hearing repeated a lot these days.”

“‘The first myth is that the housing recession is over.’ It’s not, says Humphrey. The second myth is that prices will rebound after they hit bottom, climbing back to historical appreciation rates of 3 to 5 to maybe even 7 or 10 percent a year. ‘We don’t think that’s going to happen,’ he said, predicting three to five years of basically no price gains. Why? Three reasons: The huge ’shadow inventory’ of more than 7 million mortgages that are seriously delinquent or worse but aren’t yet on the market. The nearly one-fourth of borrowers who owe more than their house is worth. And millions of homeowners who have put off selling their house until the market improves. There’s just too much supply to work through.”

“Myth #3: The foreclosure crisis has peaked. ‘That’s not true,’ says Humphrey. And, number four: The tax credits helped. Nope. Not that either. Maybe they drove some sales last fall, but even then research has shown that 80 percent of the people who used them would have bought anyway.”

“So, take that for what’s it’s worth. And for what it’s worth, sitting next to Humphries in this panel talk was Doug Duncan, chief economist for Fannie Mae. He pretty much agreed with everything Humphries said, predicting another 1 to 3 percent drop in prices nationally and another three years before things return to ‘normal,’ whatever that means.”

News 2 in Florida. “There is good news for Lee County’s housing market. Foreclosure numbers are the lowest they’ve been in years. And experts we spoke to say it could a sign of things to come. For Lee County, 830 foreclosures for the month of May is good news. ‘No, this is really good,’ said Marc Joseph, of Marc Joseph Realty.”

“It’s the lowest the county has seen in three years. Even areas like Lehigh Acres - an area that was hit hardest by the real estate bust. Southwest Florida’s real estate experts say the positive trend should continue. Foreclosure numbers are dropping and housing prices are climbing. ‘The magic number is zero. Everybody wants to see zero foreclosures and then we get back to normal - normal buyers, normal sellers,’ said Joseph.”

“But the numbers show Lee County is not out of the woods just yet. Lee County courts still have more than 21,000 foreclosure cases in the system - waiting to be worked out. ‘The biggest question everybody is going to have - what happens to the shadow inventory, the backlog of cases,’ said Joseph.”

“Joseph says buyers looking for foreclosures should make a move now. And sellers who are competing with foreclosure prices should hold a little longer. ‘I hope they all go so we don’t have any more foreclosures,’ said said Lehigh resident Dee Lalsiew.”

The Philadelphia Inquirer. “Economist Patrick Newport recently described home sales as riding ‘a two-hill roller coaster’ because of the now-expired tax credits. He and other economists, both in and outside the housing industry, say they believe that sales will lag awhile as a result of the federal credits’ pushing back to March and April transactions that might otherwise have occurred in May and through the summer.”

“So far, their assessment appears correct. Appointments to look at houses are down at many real estate offices - 44 percent lower, according to Long & Foster regional vice president Art Herling. ‘It sure made a mess of May,’ said Long & Foster agent Cheryl Miller. ‘Things just about ground to a halt.’”

“Among the results of the rush for the tax credits: competition for more-desirable homes, which helped accelerate median-price recovery. Though the national median is nowhere near the heady levels of 2004-06, prices have been slowly rebounding to what industry experts like to call ‘normal.’ The fact that prices have been rising means, according to Newport, a reduction in ‘the number of homes that will fall into foreclosure.’”

“The four-year price free fall pushed about 25 percent of U.S. houses ‘under water,’ meaning that more money is owed on them than they are worth.”

“‘Now that the tax credit is over, we are seeing record price reductions’ by sellers, Herling said. ‘These price reductions are three to four times more than the tax credit’ - $8,000 for qualified first-time buyers; $6,500 maximum for some repeat buyers.”

“Buyers who waited until after the tax-credit deadline might gain from these reductions. Sellers who held out for higher prices while the tax credits were in place are much more willing to negotiate now or lower their prices. ‘We are seeing hundreds of 5 percent to 20 percent price reductions,’ Herling said. ‘The buyers who waited until now may get the best deals of all.’”

From Bloomberg. “When Richard J. Bailes and his family paid $4.1 million in March for a four-bedroom apartment in the glass and steel Georgica on Manhattan’s Upper East Side, just eight of the building’s 58 units were occupied, he said.”

“Bailes and his family had plenty of places to choose from. About 8,700 new condos sit empty in Manhattan, with 75 percent not even listed for sale yet, said appraiser Miller Samuel Inc. Priced at levels the market no longer supports, they’re selling so slowly it would take as long as seven years to find buyers for them all, said Jonathan Miller, president of Miller Samuel.”

“‘On one side of the building at nighttime, ours are the only lights on,’ Bailes, a director at the Americas division of the architectural firm RMJM who moved to Manhattan with his family from Short Hills, New Jersey, said in April. ‘You have all the facilities and staff to yourself.’”

“Bailes, who didn’t need financing for his purchase at the Georgica, said he was attracted to the building in part because it hadn’t yet secured enough sales to meet Fannie Mae approval. It made the developers more willing to negotiate on price in exchange for a cash offer. ‘You get more of a deal,’ said Bailes, who purchased the unit at a 17 percent discount off the asking price. ‘The market is still not back,’ he said. ‘But we’re in it at least three years. We’re not looking to make any money any time soon on where we live.’”

“‘Most investors would be happy to buy apartments for operation as rentals, but most sellers and their lenders would not,’ said Susan Hewitt, president of a New York real estate investment and development firm that bought unsold condos in the last property downturn. ‘The original developer isn’t interested in any price below the value of his interest and the lender isn’t interested in writing it down until they’re forced to for regulatory reasons,’ she said. ‘That accounts for the paralysis right now.’”

“So long as regulators don’t force lenders to write down the value of their condo loans, they won’t, said Alexander Goldfarb, an analyst at Sandler O’Neill & Partners LP in New York. ‘Here’s the challenge,’ Goldfarb said in an interview. ‘At the peak, a for-sale condo in New York cost, let’s say $1,000 a square foot to build. To make it work as a rental — conceptually you need a pretty big haircut.’”

“The 8,700 unsold new condos in Manhattan exceed all residential sales in the borough in 2009, according to Miller. About 6,500 of those units are ’shadow inventory’ and have not yet been listed for sale, he said. ‘If you flush that all into the market you tank the market,’ said Daniel Alpert, managing partner of New York-based Westwood Capital. ‘So the only way you can effectively push that into the market is to bleed it out very slowly. Well, the lenders don’t really have the option to bleed it out slowly because they can’t hold onto it for six years.’”