Throwing Out All Rational Home-Buying Practices
It’s Friday desk clearing time for this blogger. “Despite a devastating housing crash and a persistent recession, house flipping is back. So too may be the housing bubble. It looks like people haven’t learned much in the last seven years. Back in May, NPR reported on the return of house flippers, noting, ‘Flipping is up in some parts of Southern California by as much as 45% over last year. And in April, the region reached a milestone: Home sales hit their fastest pace in seven years.’ Most economists are applauding the growth, citing the boon it’s been to recovery of the broader economy.”
“Of course, that was the opinion back in 2002 as well. Back around the time Paul Krugman famously blogged: ‘To fight this recession, the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that… Alan Greenspan needs to create a housing bubble…’ Mission accomplished. And we’re still not done paying the price.”
“In March, Rudy Dvorak, the founder of ReInhabit, sold a three-bedroom, two-bath bungalow in Echo Park, a low-income neighborhood in central L.A., for $922,000 after a bidding war. The firm had paid $300,000 a year earlier, renovated the property, and hung a chain saw on the wall as art. On the popular real estate site Curbed, one commenter wrote of the sale, ‘The 1968 RCA console TV just shows that they have vision. You can sell anything to hipsters as long as you make them believe it’s hip.’”
“‘People are making all-cash offers of 10 percent over asking with no contingencies,’ Dvorak says. ‘They’re throwing out all rational home-buying practices and saying, ‘Here’s a suitcase of money.’”
“When most people think of the Katy of Sugar Land areas’ real estate market, flipping houses isn’t usually the first thing that comes to mind. But the practice has begun to gain popularity in Greater Houston’s outlying areas. Scott McClellan, president of NetWorth Realty of Houston, said that the practice has seen a resurgence due to a combination of an improving economy, a loosening of lender guidelines, and this country’s often short memory.”
“‘We quickly forget here in America,’ McClellan said. ‘And I think we’re far enough removed [from the 2008 financial crisis] that everything’s kind of coming together. We’re seeing the stock market doing great, people are making money, job growth — this is a culmination of everything. And then you’re seeing all these big money people up in Washington and California coming in and buying this real estate, so it makes sense. It’s just becoming more popular. It’s never gone away.’”
“‘There are neighborhoods where a week on the market is a long time now,’ McClellan said. ‘There are a lot of neighborhoods where if it’s not gone in a week, something’s wrong.”’
“Armando Montelongo Seminars offers long weekends of questionable advice, raucous showmanship and tours of foreclosed homes in some of America’s poorest sections. His secret formula: Go deeply into debt to buy distressed properties, fix them up minimally and sell them quickly. ‘People throw money at me to become multimillionaires,’ Montelongo, a large, stocky guy with shoulder-length black hair, tells the crowd. ‘This is the means to your end.’”
“The seminar company rates an F from the Better Business Bureau. ‘You don’t get anything substantive,’ complains Lori Jakubowski, a Realtor from near Pebble Beach, Calif., who paid $1,500 for two sessions. ‘There were a lot of people who were unemployed just looking for some easy way to make money. And I felt like an idiot because I was right in there with them.”
“American Homes has quietly amassed a still-growing portfolio of more than 650 houses from Clarksville to Spring Hill, becoming one of Middle Tennessee’s largest single-family landlords in just a year’s time, public records show. In all, the company invested more than $140 million in the Nashville area in that time frame. The company is among several large investment firms — backed by billions from Wall Street — buying houses nationwide and turning them into long-term rentals.”
“But Colony withdrew its IPO earlier this month, citing rising interest rates and market volatility, as American Residential and Silver Bay’s stock have fallen and remain below their initial offering prices. That has some housing experts questioning how long the buy-to-rent strategy can last, especially on such a large scale. ‘For now, it seems to be working for several companies,’ said Karen Gibler, a real estate associate professor at Georgia State University in Atlanta. ‘Long term, five to 10 years from now, I’m not so sure.’”
“Just north of Interstate 10 and Varner Road are five unfinished houses. These Santa Fe style homes sit in the middle of a dirt lot, vacant and vandalized. Visible are open garages with cabinets on the ground, graffitti on the windows, holes on the walls. According to officials at Riverside County, the houses have gone into foreclosure in the last few months, and the ownership of the properties has changed. They say the damage to the houses began under the new owners; they are trying to locate them to start repairs soon. Property records show each house was originally valued at about $500,000.”
“‘I just want someone to buy them up and sell them,’ said Bob Miller who lives in Indio, ‘I’d like to buy one.’”
“In rich and poor areas, homeowners have walked away from homes after they could no longer make their mortgage payments and banks gave notices of foreclosure. Even though the homeowners moved out, the banks have not completed the foreclosures or put the properties up for sale. ‘The scope of this problem is enormous,’ said Buffalo Housing Court Judge Patrick M. Carney. ‘Trying to get something done with these properties before they’re worthless – it’s horrible.’”
“Experts warn of another wave of homes headed into this foreclosure abyss. And what of the homeowners who thought they walked away from it all? They often end up surprised they are still legally responsible for the house. For years, Patrick V. Occhino thought he was free and clear of his former home in South Buffalo. Occhino, 29, bought the house in 2006 but walked away six years ago when he could not pay the mortgage.”
“He sent Wells Fargo his bankruptcy filing and considered his connection to the property finally over. He did not hear from the bank again. ‘I’ve been trying to get out of this house,’ he said.”
“Jim Rokakis was the Cuyahoga County Treasure. Rokakis is now the VP of the Western Reserve Land Conservancy, and has been appealing to officials at the state and federal level to make money available. ‘If we don’t deal with these distressed properties, there are parts of Cleveland and Dayton and Toledo and Youngstown that will end up looking like Detroit. The only way you get ahead of this problem is by aggressively moving after these vacant structures. If you don’t, the structures that are not vacant in those neighborhoods will become vacant,’ he said. ‘That’s not even a ‘maybe’ – that’s a ‘for sure’. Why would you live in a neighborhood where every other house is vacant? You wouldn’t. You’d leave.’”
“Marshall Chesrown, who became the face of posh housing and gated golf course developments in the region but struggled as the economy soured, has filed a $72 million personal bankruptcy to complete the stunning collapse of his fortunes. His assets include $500,000 of equity in a $1 million Legacy Ridge mansion still in his name, along with $9,500 in a retirement fund; $450 cash in pocket; $580 in two bank accounts; and several thousand dollars in furnishings and personal items.”
“In 1999 he made a big local splash when he announced plans to build The Club at Black Rock, a luxury golf community overlooking Rockford Bay on Lake Coeur d’Alene. His plans and projects were foiled by the housing bust and economic collapse of 2008. Within three years, he had either lost most of his projects to foreclosure or sold them. He has been named in at least 16 lawsuits and other legal actions in the past several years.”
“In court documents, Chesrown disclosed that he earns about $13,500 a month – not enough to meet his monthly expenses of $24,131 that include a $4,000 monthly lease payment for a Mercedes and two mortgages that together exceed $8,600. And Chesrown is not immune from the problems plaguing many people: In 2011, a prowler broke into his car and stole computers, an iPad, his wallet, passport and a watch, according to court records. He also lost $30,000 gambling.”
“New data shows that home prices in 20 cities jumped 12% from a year ago. That’s the biggest annual rise since March of 2006 (i.e. - before the housing bubble burst). the housing market isn’t the only sector to benefit from the boost in home prices. As real estate value goes up, consumers become more confident and less fearful about spending their hard-earned cash in other areas, too.”
“As S&P Dow Jones Indices’ David Blitzer says, ‘Rising housing prices have increased wealth. More people own houses in this country than own stocks, and as home prices go up, people are richer, and they feel richer.’”
