The Housing Bubble

The North County Times reports from California. “While most of the nation appears mired in the middle of a severe housing slump, the southwest corner of Riverside County may be showing signs of recovery. In April, the number of houses sold was higher than the year before for the fourth straight month, leaping 73 percent last month from a year ago. And, for the first time since the housing market took a dive, house sales in the Temecula-Murrieta region were higher than sales in 2006, near the peak of the housing boom.”

“Southwest Riverside’s data had enough strong points for at least one real estate agent to warn clients that the region’s housing market will soon see prices rise.”

“‘For example, I have a couple in their late 40s. They have never owned a home and have always rented,’ said Barbara Baker, a real estate agent in Murrieta. ‘And I told them, ‘If you don’t do it (buy a home) now, you’ll always be a renter.’”

“To be sure, not all housing data in Southwest Riverside point to recovery. Sellers have already been slashing prices, setting the stage for the recent surge in buying.”

“The median home price in the region sank to $265,000 in April, a mammoth 36 percent off the $415,000 median in 2007 and 40 percent below the $439,900 level of 2006, according to an analysis by The Californian and North County Times of data from the Multi-Regional MLS.”

“Meanwhile, North San Diego County’s housing market is not showing similar signs of recovery. Its median price has fallen about 25 percent from its peak to $490,000, but house sales for the last 28 months have been lower than the same month the year before, according to a monthly real estate association report.”

“And foreclosures keep rising: Notices of default, the first step in the foreclosure process, in Southwest Riverside doubled from a year ago to 3,700 during the first quarter, according to a tracking service.”

“A booming increase in the number of notices of default suggests more bank-owned homes over the next six months, which tend to depress prices, analysts said.”

“‘There’s no bottom in sight,’ said Christopher Thornberg, an economist with Beacon Economics. ‘There’s nothing more pernicious to prices than supply, and what you have building up right now is a massive amount of foreclosures. And nobody is more motivated to sell than banks.’”

“Thornberg said he thought home prices in the Inland Empire could fall as much as 55 percent from the peak, which would mean an additional 20 percent drop in Southwest Riverside, sending the median to $200,000.”

“Thornberg’s argument is underpinned by income levels that suggest many homeowners cannot afford the typical mortgage payment.”

“For George Farraye, it was Southwest Riverside County’s falling prices that spurred him to buy. He bought a home in Murrieta earlier this month at a 43 percent discount off its previous sales price. ‘This housing market is unbelievable,’ he said. ‘There are some real dumps, and there are some real great buys. And I think we got a great buy —- we got it for less than $100 a square foot, and we’re in a gated community.’”

The Tribune. “Freddie Wright has been living for years in San Luis Obispo in an old orange Ford van, a choice he makes to save money.”

“In 2006, a longtime friend told Wright about the thousands of dollars he had earned by investing through Estate Financial Inc., a Paso Robles lender that pools investors’ money to make high-interest loans to real estate projects.”

“Based on his friend’s experience, and after meeting with the firm’s president, Karen Guth, Wright invested his life savings of $38,000 in Estate Financial’s lending fund that September. But today, Wright is among many Estate Financial investors who worry they might have lost some or all of the money they trusted to the lender.”

“Drawn by the promise of making money in a booming real estate market, Wright is now worried that he’s lost everything he saved in a deal he never really understood.”

“‘I was ignorant of the risk,’ Wright said. ‘I just didn’t know. I thought in my brain, ‘You can’t lose in real estate.’”

“Judith Baron, a home interior designer from Templeton, said she invested about $400,000. Baron said she thought she had a sophisticated background on investments and met the net worth and income minimums.”

“Ultimately Baron decided to put her money in Estate Financial’s real estate-backed loans ‘because I had a bad experience with the stock market where I lost a lot of money (in the six figures),’ she said.”

“Because she is over 60, she believes she will never be able to earn that much money again.”

“‘I thought the company had an extremely good track record (after 15 years of doing business with no investor losses),’ she said. ‘Now my savings are gone, I think, for good. I’ll never trust anyone again.’”

“In San Luis Obispo County, new-home construction is in the midst of a significant downturn… and developers are putting their projects on hold, or like Texas-based Centex Homes, have pulled out of the area.”

“‘The residential construction market: It’s dead,’ said Leslie Halls, executive director of the San Luis Obispo County Builders Exchange. ‘We’ve seen a lot of contractors lay people off. It has a ripple effect through the marketplace. They’re not buying anything but the bare necessities.’”

“‘It’s terrible out there right now,’ said George Silva, owner of Central Drywall Inc., which has operated as a family-owned business in Grover Beach for 16 years. ‘Two years ago we were doing 300 houses a month. Now, it’s roughly 20 to 30 houses a month.’”

“‘There are still people out there with money, but the typical person here is not having a good time financially,’ said Cortland Zoff, CEO of Cortland Landscape in Arroyo Grande. ‘Too many people were buying homes as short-term investments, thinking they would never go down.’”

The Lompoc Record. “With the highest crime rate in Santa Barbara County, the city of Santa Maria should be wary about the potential for that distinction to harm the local economy by scaring off tourists or retirees looking to visit or resettle, a prominent local economist said Friday.”

“Unlike other years, when Bill Watkins, executive director of the UCSB Economic Forecast has highlighted the North County as the county’s economic engine, he noted that the ‘engine is sputtering.’ However, he said he expects it to pick up in the long term.”

“Much of the weakness in the local economy - and much of Friday’s presentation - focused on the depressed housing market. The North County housing market is being affected by the high number of foreclosures, said Kirk Lesh, a real estate economist for the forecast project.”

“In the first quarter of 2008, Lesh told the crowd, 60 percent of single-family home sales were bank-owned properties, many of which are sold thousands of dollars below the price of non-bank-owned homes. That contributed to a roughly 16 percent drop in sales prices in 2007, he said.”

The Wall Street Journal. “In June 1995, Sherrie Floyd, a clerical assistant, and her husband, Kevin Floyd, a truck driver, bought a four bedroom, 2,100 square foot home in Vallejo at auction for $170,000. After refinancing several times, their monthly payments reached an unaffordable $5,600. They stopped paying in April 2007 and filed for bankruptcy in December 2007.”

“The Floyds owe $670,000 in credit card, mortgage and auto-loan debts, according to the claim estimate from bankruptcy court. Since 1995, Mrs. Floyd estimates that they pulled roughly $100,000 out of their mortgage to pay off credit-card bills, broker fees and penalties.”

“In 2005, just as their rate was about to go up, Mrs. Floyd got pregnant with her fifth child. They refinanced again through Option One Mortgage, a subsidiary of H&R Block. At the time, their house was appraised at $610,000. They took out a $505,000 loan — roughly $452,000 went to pay off their prior loan, about $15,600 went to other outstanding debts and fees and the Floyds took out almost $23,000 in cash. Their house was recently reappraised at $470,000.”

“Mrs. Floyd says that the broker misinformed them. ‘We take responsibility for our situation. But if you don’t understand loans, a lot of brokers take advantage of you,’ she says. ‘I think my husband was talked into a lot of bad things.’”

“Currently, they are trying to find a rental. So far, landlords have been turned off by their credit rating. The family of seven plans to split up and stay with different relatives until they can find a new home.”

“‘I want to pay my debt. I pay my federal and state taxes like I’m supposed to, I go to work, and I just can’t find any help,’ said Ms. Floyd. ‘It just isn’t fair.’”

From Reuters. “A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.”

“Shawn Forgaard, a 37-year-old software company project manager, bought one home for his family to live in and nine more as investments.”

“‘I knew I was sitting on time bombs,’ Forgaard said. ‘I knew the market was going to go soft and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance.’”

“‘I didn’t anticipate a downturn of epic proportions such that home values are 40 percent less than they were,’ he said.”

From Business Week. “Buying a bank-owned home requires on-the-ground research. Take, for example, the five-bedroom, four-bath, Granada Hills (Calif.) ranch house with two kitchens at the top of the BusinessWeek list of foreclosure discounts.”

“The $579,000 asking price for the 3,600-square-foot house on a pretty, tree-lined street north of Los Angeles is 43% below market value, according to RealtyTrac. But walk inside the one-story house and you’ll see that it’s a fixer-upper, said listing agent Ryan Trefry in Encino.”

“The bathroom and kitchens need updating, the paint is peeling, and the flooring is buckling. The bank that owns the property spent $2,000 just to remove trash left behind by the tenant who was evicted after the foreclosure. The house is in ‘poor to below-average shape’ and needs about $65,000 in repairs, Trefry said.”

“Still it’s a good deal even compared with other foreclosures, he said. ‘To buy a home that big in a desirable neighborhood for $500,000 is unheard of.’”