The Housing Bubble

A weekend look at the housing bubble, starting with this MarketWatch opinion piece by Michael Brush. “Back when the 2005-07 housing bubble was brewing, photos of impossibly small houses selling for insanely high prices famously made the rounds. It was one of those signals that you look back on and say, ‘Hmmm … that was a clear indictor of trouble ahead.’ So in what feels like déjà vu, it’s worrying now to see a glorified ‘tool shed’ on the market in New York for a cool $500,000. In Brooklyn, no less. Not even in Manhattan.”

“Here are some other troubling anecdotal signals on the housing market: 1. A major financial website recently ran a guide to the best cities to ‘flip’ houses in. (I don’t want to encourage the behavior.) Real estate speculation via house ‘flipping’ was another early sign of trouble ahead. 2. A few days later, news arrived that home prices in the Bronx had shot up by an astonishing 30% in the first quarter. Crazy advances in home values were, a decade ago, also a signal of trouble ahead. 3. Ads, then as now, were running on TV for ‘quick mortgages.’”

“‘No money down’ was one of the big problems contributing to the housing bubble 10 years ago. Unlike the 20% down payment of yore, the availability of zero-money-down loans encourages people to buy homes beyond their means. It also means from Day 1, buyers are underwater, taking closing costs into account. So it’s disconcerting to see that first-time home buyers now put just 3.5% down on their homes, or $8,500, according to numbers from Stephen Oliner of the American Enterprise Institute.”

“A lot of people are taking out mortgages with dangerously high monthly payments relative to their incomes. And the problem is getting worse. Here’s how we know: Government regulators say the debt-to-income ratio (DTI) for home buyers can go up to 43% before they risk running into trouble. The DTI measures all monthly loan payments — for things like credit cards, cars and mortgages — against monthly income. Three years ago, 22% of home buyers were above this limit. In March, that number was up to 28%.”

“For context, back in the early 1990s, when the fear of housing-market blowups wasn’t yet a ‘thing’ thanks to more conservative lending standards, only about 5% to 10% of loans were at or above the 43% cutoff. ‘Many of the mortgages being taken out now don’t make sense in terms of the likelihood of people being able to repay the loans,’ observed Oliner.”

“Part of the problem here is that the various federal agencies tasked by Congress with promoting home ownership — the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp. and the Federal Housing Administration, for example — are competing with one another for business. This can contribute to a loosening of lending standards, said Tobias Peter of American Enterprise.”

“Another problem is that Dodd-Frank rules meant to encourage banks to better vet borrowers simply don’t apply to government-guaranteed loans. That’s a big loophole because those loans make up about 80% to 85% of the mortgage market.”

From Highlands Today in Florida. “Even though 6,716 forecloses followed the boom, Sebring and Avon Park are still among the most overleveraged cities in the nation, according to an analysis from WalletHub, an online financial advisor. Using information from the U.S. Census and TransUnion credit reporting agency, WalletHub identifies cities where mortgage debtors are most under water. WalletHub analysts compared the average mortgage debts to the median income and median home value in each of 2,521 U.S. cities.”

“The most overleveraged cities included Beverly Hills, Calif. and Brooksville, Fla. The least overleveraged cities included Scarsdale, N.Y. and Naples, Fla. Miami Beach, Stuart and North Fort Myers also appeared on the overleveraged top 15.”

“‘It is interesting that the debt-to-income ratio is above 100 percent for virtually every city,’ said David Leidel, a former banker who is now a financial management counselor in Sebring. ‘I believe the rule of thumb is to be below 38 percent. Cities like Sebring and Avon Park, which have 597 and 466 percent respectfully, illustrate the continuation of the financial crisis.’”

“‘Poorer areas will take longer to recover,’ Leidel said. ‘And I would think that real estate values would follow the recovery path. I am not sure how long one can survive financially where their debt payments exceed their income, but that could be a reflection of people who are awaiting foreclosure, have lost their job and have no income, or have bills they just are paying.’”

“Leidel’s principal work is with retirees and those working toward retirement. ‘The new trend that I see more now than I did 10 years ago are the number of retirees facing debt issues,’ Leidel said. ‘In the past, when people retired, they retired their debt and didn’t exceed their monthly income. Today, they are going into debt in retirement and facing many of the financial challenges they had when they were working.’”

“Leidel attributes that trend to retirement income remaining the same or less while prices have inflated. At the same time, their children need financial help, health care costs aren’t covered by insurance, and retirement savings aren’t working the way they planned.”

KRON 4 in California. “There is a construction boom happening in the Bay Area. New numbers from Dodge Data and Analytics suggest that housing construction is up 92 percent over last year. But it might not be enough to give the middle class some relief. You can forget about gridlock if you decide to move to the old naval yard in San Francisco. The streets are so empty that when Robert Knigge drives around he uses a golf cart.”

“Robert is one of the first people to buy a townhouse at the San Francisco Shipyard. It is one-half of a massive new development at the old naval yard and Candlestick Park that will create 12,000 homes when it’s finished. To put it in perspective, that’s the same number of new homes built in all of San Francisco in the last five years.”

“‘Developers have jumped back in, in a very big way,’ Patrick Carlisle of Paragon Real Estate said. Carlisle said there are 60,000 new homes in the pipeline right now in San Francisco alone. Even if they all get built, that falls short of the huge demand for housing. So, projects like the shipyard that start out as relatively affordable don’t stay that way for long. ‘If the supply and demand dynamic are out of whack, it jumps back up. So, the housing that was affordable is no longer affordable,’ Carlisle said.”

“The townhouse is actually Robert’s second property out there. Last year, he bought a two-bedroom for about $750,000. In April, he sold it for 14 percent more. ‘I didn’t think it would be this quick. But the time is right,’ Knigge said. “