The Housing Bubble

A report from the Los Angeles Times in California. “For decades, the ability to deduct the interest on a home mortgage has been one of the most untouchable sacred cows of the tax code. It is particularly revered in Los Angeles and other areas with high real estate prices, where the annual tax savings can be the difference between being able to afford a house or continuing to rent. Now, Republicans crafting legislation to overhaul the federal tax system and cut rates are considering placing new limits on the home mortgage interest deduction. And thousands of Californians could feel the pain.”

“The move comes as GOP lawmakers and Trump administration officials already have proposed killing another break — the deductibility of state and local taxes — that benefits California residents more than those in any other state. The housing industry strongly opposes efforts to place new restrictions on the deduction, arguing that would lead to lower housing prices because there would be less of a financial incentive to buy instead of rent. At the same time, Democrats from California and other states with high housing prices are gearing up to fight any change.”

“‘I think that harming the ability for Americans to own their home is like attacking motherhood and apple pie,’ said Rep. Judy Chu (D-Monterey Park), whose district includes Pasadena and much of the San Gabriel Valley. ‘I represent a district with homes that are very high-cost, so they have even more reason to be concerned about it,’ Chu said.”

“Diane Yentel, president of the National Low Income Housing Coalition, which advocates for more affordable housing, said the ability to deduct interest on mortgages as large as $1 million means the provision benefits mostly upper-income households. ‘We’re paying about $10.5 billion a year to subsidize the homes of some of the wealthiest people in the world at the same time that we have hundreds of thousands of people with no homes at all,’ she said.”

The Northport Patch. “Three senior executives at a Long Island mortgage lender were arrested for their role in committing a $8.9 million fraud, according to the U.S. Attorney’s Office. Edward E. Bohm, 39, of Nissequogue, Edward J. Sypher, Jr., 40, of Scarsdale and Matthew T. Voss, 42, of Norhtport, all senior executives at Vanguard Funding, LLC (Vanguard), were charged with conspiracy to commit wire and bank fraud by using millions of dollars in warehouse loans for Vanguard to fund mortgages, according to the U.S. Attorney.”

“The trio misused the loans to pay personal expenses and compensation, as well as to repay earlier fraudulently obtained loans, the U.S. Attorney said. Between August 2016 and March 2017, Voss, Vanguard’s COO, Sypher, the CFO, and Bohm, the president of sales, engaged in a scheme in which they obtained warehouse loans, or short-term loans, for the company by falsely representing that Vanguard would use the proceeds of those loans to fund mortgages or mortgage refinancing for clients, the U.S. Attorney said. ‘At the end of the day, the s— we did wasn’t to the public,’ Bohm said in part, according to the complaint.”

“‘As alleged, the defendants – executives of a mortgage lender – defrauded banks into lending them money by stating that the money would fund new mortgages or refinance existing ones,’ Acting United States Attorney Bridget Rohde said. ‘We will continue to address dishonesty in the mortgage industry whether the victims are financial institutions, investors, or homeowners, as it ultimately hurts all of us as a community.’”

The Ambler Gazette in Pennsylvania. “A Blue Bell man was indicted Aug. 23 for carrying out an alleged scheme to defraud the federal government by providing inflated appraisals of properties seeking to obtain Home Equity Conversion Mortgages. Eugene Peter Kenworthy Jr., 50, was indicted on charges of wire fraud, false statements for the purpose of influencing the Federal Housing Administration, aggravated identity theft, and failure to file a tax return, according to the U.S. Attorney’s Office.”

“HECM loans, commonly referred to as reverse mortgages, are insured by the Federal Housing Authority, the indictment states. When a borrower, or estate, sells a property on which an HECM loan was taken, if the proceeds of the sale are insufficient to repay the loan, the FHA pays the lender the deficit. Kenworthy allegedly inflated the appraisals of properties for which he submitted reports to certify the HECM loans, resulting in the payment of more than $3 million by the FHA to cover loans that went into default. The charges against him grew out of a grand jury investigation, according to the indictment.”

“From 2010 to 2016, Kenworthy appraised approximately 714 properties, which were the subject of applications for reverse mortgages, using the electronic signatures of five certified real estate appraisers, without their knowledge, to certify 294 appraisal reports he wrote for the HECM loans, the indictment says. He used his own signature to certify the other 420 appraisal reports he wrote, it says.”

“Kenworthy wrote most of the appraisals for one mortgage broker, which paid him, or his appraisal company, approximately $450 per appraisal, the indictment says. In some of the appraisal reports he wrote for the reverse mortgages, he falsely inflated valuations for the properties, which, in turn, fraudulently inflated the loan amount, it says. Numerous properties he wrote appraisal reports for went into foreclosure, the indictment says.”

The Palm Beach Post in Florida. “After a scorching June, Palm Beach County’s housing market cooled a bit in July. Housing statistics continued to send mixed signals. The houses that did sell moved briskly, needing a median of just 37 days to go under contract. That was down from 43 days a year ago. Meanwhile, sellers of entry-level houses command strong interest in their properties. The typical home priced at $200,000 to $250,000 found a buyer in just 23 days. ‘Those still are flying off the shelf, but not everything is,’ said Jackie Ellis, owner of Keller Williams Realty offices in Boynton Beach and Boca Raton.”

“Homes priced at more than $1 million needed 113 days to sell. The July slowdown — which came despite low mortgage rates and a strong job market in Palm Beach County — was a bit of a head-scratcher. Typically June and July are the busiest months of the year for house sales, as families try to get settled in before school starts. ‘Usually this is our big summer season,’ Ellis said.”

“Realtors see a slight uptick in choices for buyers. The inventory of active listings rose 7,086, up 1.9 percent from a year ago. ‘The recent statistics indicate signs of a more balanced market, which includes a slight increase in inventory. This is something we have not seen in a while,’ said Jeffrey Levine, first vice president of the Realtors of the Palm Beaches and Greater Fort Lauderdale.”

The Aspen Daily News in Colorado. “With the current economic expansion in its eighth year, are there early warning signs that the real estate market, particularly for high-end luxury homes, may be in for a correction? This economic expansion is one of the longest on record. Since the Great Recession bottomed in 2009, luxury real estate around the world has experienced a phenomenal increase in value, setting all-time records for volume, price per square foot and overall size of transactions. We’ve experienced this in Aspen as prices are again at record levels.”

“By studying patterns prior to past real estate downturns, we might see signs that are replaying in the current market. Leading up to the Great Recession, the country experienced seven years of economic growth after the dot.com crash and recession of the early 2000s. Real estate markets that don’t fare well in a downturn have one thing in common; there is generally no constraint on supply leading up to the point where the demand ceases. This led to a huge inventory overhang as the market slowed. The supply and demand equation took over when the demand side of the equation slowed dramatically and real estate prices plummeted.”

“In the current Aspen luxury home market are we starting to see a similar pattern? There have been roughly 27 sales of luxury homes in the Aspen-Snowmass market over $10 million in value in the past 18 months. Of those sales roughly eight were spec homes delivered to the market in 2016 and the first half of 2017. Currently, about 120 homes priced over $10 million are listed for sale of which about 29 are new spec homes.”

“If we stopped delivering new homes to the market right now and absorption continues at its current pace, it could take three or more years for all new spec homes to be sold and four-plus years for all homes listed over $10 million to be sold. If for some unforeseen reason, the absorption rate was to decline dramatically like it did in 2008-2009, those time frames could easily double. That could lead to significant downward pressure on prices at least for the over- $10 million segment of the market.”

From The Real Deal on New York. “For some who’ve opted to sell, the results have been grim — particularly in buildings that debuted at the top of the cycle. Financial losses have spanned the borough and have spared few. Leonardo DiCaprio, for example, paid $10 million in 2014 for a unit in Delos at 66 East 11th Street — a green condo with ‘wellness’ amenities like purified air, posture-supportive flooring and Vitamin C-infused showers — only to resell it for $8 million late last year.”

“And the list goes on. Two owners at One57 TRData LogoTINY — Nigerian oil magnate Kola Aluko and business executive Sheri Izadpanah — are facing foreclosure. Even 15 Central Park West, the so-called Limestone Jesus, which has been largely immune from losses, hasn’t been unscathed. Late last year, an owner who bought a three-bedroom under the name Westside RE Properties LLC sold for $20.6 million, about $3 million less than the 2012 purchase price.”

“Compass’s Leonard Steinberg, who brokered the Charles Street deal, said while it may seem nonsensical for wealthy owners to sell for a loss, in some cases it makes more economic sense than holding on to a property. ‘When you pay an extreme price in an extreme market and you don’t hold on to that property for a long time, you can hit the market when it’s not extreme,’ he said. ‘You have to be patient. For some people, taking a loss is better than having to pay debt service.’”