The Housing Bubble

The North County Times reports from California. “Business bankruptcies in San Diego County have doubled from a year ago as the housing downturn has depleted real estate companies’ assets. Real estate-related companies appear to represent the majority of the bankruptcies in San Diego, according to court records. Likewise, Chapter 7 filings, where all assets are liquidated, have jumped by 85 percent from a year ago.”

“‘There’s been a tremendous upswing in Chapter 11s,’ said John Smaha, a bankruptcy attorney in San Diego. ‘In the last 10 years, Chapter 11s were almost unheard of in San Diego.’”

“Some of those Chapter 11 filings could turn from bad to worse. ‘Sometimes people file Chapter 11 because they don’t want to give up. That’s a human response,’ said Michael T. O’Halloran, a bankruptcy attorney in San Diego. ‘But if you’re on the Titanic, it’s not going to be fun.’”

The Union Tribune. “With so much equity built up in his Imperial Beach home, Michael Ortiz thought he and his family could rent out their place and buy a new, bigger, better house. That was 2004. Four years later, Ortiz’s family, like so many others, is feeling the pinch of falling home prices, plus rising gas and food costs.”

“He asked county officials to reassess the value of his property and lower his taxes. In Ortiz’s case, he asked in October that his home - with an assessed value of $628,320 - be reduced to $553,000. County assessors reduced it even further, to $535,000. ‘I was content with $553,000, but when I saw their figure I was like, ‘Sold!’ he said.”

“He said he doesn’t regret buying his new home despite the sudden $93,000 drop in value, and he’s certainly glad he applied for a reassessment. ‘It took a lot of legwork, but the payoff is worth it,’ he said. ‘If I don’t do this, I’m basically throwing this (money) away.’”

The Orange County Register. “Remodeling contractor Eddie Kesky had a backlog of customers three years ago. Today, however, ‘tear downs’ are few and far between. After 33 months of falling home sales, a credit crunch and a 23-percent drop in home prices, owners aren’t spending so freely anymore. Plus, it’s no longer easy to get loans as home values tumble.”

“Anaheim-based Ganahl Lumber, which derives a large portion of its income from remodeling contractors, saw its sales numbers fall 7 percent in 2007, said CEO Peter Ganahl. This year so far, sales are off 15 percent from last year, he said.”

“In 2005 and 2006, remodeling contractors would be lined up outside the chain’s stores at opening time. ‘It was a madhouse,’ he said. ‘Now, it’s not such a madhouse.’”

The LA Times. “Southern California median home sale prices are down about 30% from their peak. That’s about as far as they fell in the 1990s real estate downturn, and enough of a decline to have many asking: Is it time to buy?”

“The ratio of home prices to annual rents in the Los Angeles area was 20 as of March 31, meaning the median home sale price was 20 times a year’s rent for a comparable property, according to Moody’s Economy.com. The 15-year average ratio in Los Angeles is 16.4.”

“Margaret Smith, a Claremont financial planner and former university economist, and her husband, Gary Smith, a Pomona College economist, say buying is practically a sure bet when you would pay less for a monthly mortgage and other home costs than what it would cost to rent the home.”

“They call that monthly savings the ‘home dividend’ and say it will offset a short-term decline in a home’s value. Even if your mortgage payment and expenses start out higher than comparable rent, the payment becomes relatively cheaper as rents increase — provided it is a fixed-rate loan. ‘You can certainly turn a negative into a positive over time,’ Margaret Smith said.”

“‘Stop fixating on short-term price moves; think about long-term rent savings,’ Gary Smith said.”

“If someone delays buying a house that would produce rent savings to hold out for a better price, the delay would mean losing those savings — and the loss could be compounded if prices went up instead.”

“‘Buying a house is risky, but waiting is risky too,’ Gary Smith said.”

The Monterey County Herald. “Unemployment in Monterey County, heavily reliant on the highly seasonal industries of tourism and agriculture, hit 6.6 percent in June, up from 5.5 percent for June 2007. The median selling price for a single-family home in Monterey County in June was $359,900, down 49.9 percent from the June 2007 median price of $719,000.”

“Foreclosures keep climbing at record pace: 847 homes were lost to foreclosure in the second quarter of this year, up 443 percent over the same quarter last year.”

“But market adjustments have created opportunity: Would-be buyers, long priced out of the real estate market, are finding themselves more likely to be able to afford homes in Monterey County.”

“Becky D’Addea Jones, an agent in Monterey, received more than 35 offers in nine days on a bank-owned property in Seaside - a record for her company. Most, she suspects, are from first-time home buyers. The house, which its previous owner bought for $600,000, is listed for $190,000.”

The Times Herald. “The bill signed Wednesday by President Bush, designed to rescue homeowners facing foreclosure, may do more harm than good, local real estate experts said Thursday.”

“‘It made the extended FHA loan limits permanent, and that’s good, especially in California where homes are more expensive, but a bunch of things were tacked on to the bill that made it not such a great deal,’ said Solano Association of Realtors President Lori Collins. Those permanent limits will be lower than the temporary higher limits that expire in January.”

“‘I have no clients that will be helped by this, and some will be hurt,’ she said. ‘One of the provisions in the bill does away with the down payment assistance programs, so it actually seems to make matters worse.’”

“The ‘tax credit’ of up to $7,500 offered by the bill to first-time homebuyers is actually a no-interest loan, Collins said. ‘So, about two years after taking this credit, homeowners will have to start paying it back, which could add another $500 a year to their property tax bill,’ she said.”

“Whatever provisions the bill contained aimed at saving homeowners facing foreclosure, appear to have vanished from the final version, Collins said.”

“‘It seems to put some pressure on lenders to restructure some of their adjustable rate loans, but it doesn’t require it,’ she said. ‘And if they do, and there’s appreciation in five years, you have to split it 50/50 with the government.’”

“Benicia mortgage broker Mitchell Chernock of Sky Valley Financial and mortgage banker John Murphy of Vallejo’s Metro Gold Financial, said no one yet knows all the law’s ramifications. They said, however, the new law appears to fall far short of the economic rescue many were seeking.”

“‘It’s a lot of political hogwash and rhetoric for election-year purposes only,’ Murphy said. ‘It won’t really help anybody and will probably hurt people, especially around here.’”

“‘They raised the amount of down payment needed for the FHA loans from 3 percent to 3.5 percent and the down payment assistance through nonprofit organizations, goes away,’ Murphy said. ‘Ninety percent of the loans we’ve done this year have been through these programs. So, those people wouldn’t be able to buy a home now.’”

“‘We’re keeping all our clients on the sidelines until we know what’s really going on,’ Chernock said. ‘It doesn’t look like the federal government will do what we were hoping and expecting they’d do and step in to help struggling homeowners.’”

“Murphy said he expects the bill will slow sales, which were just starting to pick up locally, and exert added downward pressure on home values. ‘I don’t see how this is going to help anybody, in California, anyway,’ Murphy said.”

“And the eventual outcome of one provision, which provides funds for cities and counties to rehab foreclosed-on homes to create affordable housing, is questionable, Murphy said. ‘I don’t know how I feel about cities and counties getting into the house-flipping business,’ he said.”

The San Francisco Business Times. “California Mortgage and Realty President David Choo is selling off nine properties in a bid to save his struggling private mortgage company. The properties listed for sale include an office tower development site at 524 Howard St.; a two-family building in Pacific Heights; a condo at the St. Regis; houses in Piedmont and St. Helena; a condo in New York; and the seven-parcel assemblage at First and Mission.”

“Starting in late 2007, CMR borrowers started running into problems. Delinquencies in CMR’s fund II portfolio increased $52.9 million from December 31, 2007 to May 31. As of May 31, 21 CMR loans worth $84.9 million were delinquent, of which $81.9 million was delinquent more than 90 days, according to the SEC filing. CMR says its borrowers have been ‘increasingly unable to make their loan payments, find equity partners, sell or refinance their properties in order to meet their obligations to our investors.’”

“For now, CMR investors have no choice but to be patient. The company suspended redemptions and cash distributions to investors on March 31. As of May 31, $29.9 million of redemption requests are currently outstanding.”

“Bill Wessels, who has $1.4 million invested in CMR funds and has been an investor with Choo for a decade, said he is willing to give the company time to work through the foreclosures and bankruptcies.”

“‘You’re either a doubting Thomas or you keep the faith,’ said Wessels. ‘The ones who get shaken out of the bowl are going to be the losers.’”

The Sacramento Bee. “In another marker on the economic misery scale, a 1.1 million-square-foot mall on tap for southern Sacramento County has stalled, officials confirmed Thursday. The Elk Grove Promenade, an open-air regional mall that repeatedly has pushed back an opening date, is among a number of retail projects nationally that General Growth Properties Inc. of Chicago will delay, several City Council members said.”

“Elk Grove has become an epicenter of the housing market downturn. And unemployment regionally is the highest in 12 years. ‘We’re just not seeing the retail sales we’d like to see in Elk Grove,’ said John Wallace, a strip mall developer with properties in Elk Grove.

“‘If retailers are saying we’re slow in Northern California … or in Miami, and we’re going to hold back, that’s the start of the dominoes,’ Wallace said.”

“The cutbacks have already started. Californians - spooked by negative economic news and the tens of billions of dollars they’ve lost to rising gas prices and disappearing home equity - are ratcheting down their spending. It’s true even for those who’ve avoided foreclosure or a pink slip.”

“Tim Einer, a software trainer in Lincoln, considers himself upper middle class but has seen his home equity fall by $225,000. He traded his Jaguar for a fuel-efficient Chevy, scrapped a European vacation and stocks up at Target whenever possible.”

“‘I have worries all the time - you just see how the economy is,’ Einer said. ‘I don’t think any of us are guaranteed anything anymore.’”

“In California, ‘equity extractions’ - the volume of cash homeowners generate through refinancing, home equity loans or outright sales - fell 20 percent last year, according to DataQuick.”

“That’s a loss of $25 billion, or nearly 2 percent of the state’s output - a figure economists regard as significant. Equity extractions fell 44 percent the first four months of this year, pulling an additional $15 billion out of the economy.”

“The falling real estate market has been doubly burdensome for Meredith Wharton, a Folsom real estate agent. Not only is she ‘working twice as hard for half the reward,’ she and her husband, Mark, have had to adjust to the decline in their own home equity.”

“Because they both live mainly on commission income, they frequently use their home equity line of credit to smooth out fluctuations in their paychecks. But their available credit was recently cut in half, to $50,000, reducing their financial cushion.”

“Though they haven’t seriously changed their standard of living, ‘we’re cutting back, we’re holding cash,’ she said. ‘We’re more nervous. Instead of taking a two-week vacation, flying to Hawaii or somewhere, we’re thinking of taking a driving trip or not going anywhere.’”