The Housing Bubble

The Union Tribune reports from California. “ABA Recovery Service owner Marcelle Egley-Sparks said that in the past year, high-end repossessions have swelled from about 15 percent of the 350 items taken by her company each month to about 50 percent. ‘People are finding themselves overextended now that the economy is failing,’ Egley-Sparks said.”

“Leisure-time toys reflect the excesses facilitated by the fat economy and booming real estate values of a few years ago. Now that the economy is in decline and the real estate bubble has burst, people are losing or unloading their wants for the sake of their needs.”

“It does hurt, and Alex Ochoa knows how much. He’s being forced to give up his 25-foot travel trailer because he can’t afford to keep it. Ochoa, like tens of thousands of others caught in the real estate collapse, is upside-down on his La Mesa house. He paid more than it’s worth now, and he wants to minimize his losses with a new mortgage. ”

“Ochoa is willing to give up the item to anyone qualified to take over the $136 monthly payments. ‘Take advantage of this great deal,’ Ochoa pleads in an Internet ad for the trailer.”

“‘It’s time to cut back,’ he said.”

“Robert Manning, director of the Center for Consumer Financial Services at E. Philip Saunders College of Business in Rochester, N.Y., cautions that the next year or so could be even worse for those who overindulged during the high times.”

“‘They are the ones who are really going to be hurting,’ he said.”

“They’ve already lost equity in their homes, and now they may be facing the loss of jobs - further shaking the foundations that once supported discretionary splurges. ‘It is a question: What is the American dream?’ Manning said. ‘And does it mean just because you could, should you have? We’re seeing the answers now.’”

“During its first 73 years, San Diego Metropolitan Credit Union never lost money on a real estate loan. That ended last year, when it wrote off $527,681 in bad real estate debt. The credit union also took a paper loss in 2007 as it bulked up reserves by more than $1 million.”

“Across the state and country, credit unions - generally considered the most conservative of lenders - are seeing a rise in delinquent mortgages, late credit card payments and late auto loan payments.”

“Marla Shepard, CEO of California Coast Credit Union, is also seeing fallout from overextended consumers. ‘About 40 percent of our repos in the last couple of months are from members who brought in their cars keys,’ Shepard said. ‘They’re saying, ‘You take the gas guzzler. I’ll keep the Toyota.’”

“‘We also are seeing - and I’m hearing this elsewhere, too - a significant increase in the number of bankruptcies. What’s a little concerning is some of these members filing for bankruptcy are not delinquent yet’ on their loans with California Coast.”

‘Shepard is in the process of merging First Future Credit Union, which had a lot of auto loans, with California Coast, which focused on real estate and home equity lines of credit. Because of the merger, the credit union is still evaluating how much more it will need to set aside in reserves.”

“‘We’re having a tough time identifying how bad it’s going to be,’ Shepard said. ‘You have people who are not delinquent filing for bankruptcy and people who are not delinquent turning in their car keys.’”

“Before August 2007, nearly 40 percent of Southern California sales were financed with jumbo loans, according to DataQuick Information Systems. In July, jumbos accounted for only about 16 percent of the region’s sales. Sales of high-end homes that require jumbo loans ‘have really dropped off’ in recent months, said Delores Conway, director, Casden Real Estate Economics Forecast at the University of Southern California.”

“During the recent housing boom, thousands of adjustable-rate mortgages were issued without verifying the borrower’s ability to repay them.”

“To get home loans today, consumers need to have ’skin in the game,’ said Ed Smith Jr., chairman of government affairs and industry relations for the association of mortgage brokers.”

“‘In the heyday, we were giving 100 percent financing to people one day out of bankruptcy,’ said Smith. ‘No wonder people walked away from their houses.’”

The LA Daily News. “Falling prices sent housing affordability soaring across California in the second quarter, the California Association of Realtors reported last week.”

“But this jump in affordability isn’t translating into a sales boom because the credit crunch that erupted a year ago is still with us. So while prices appear affordable, they really are not.”

“‘The lack of investor appetite for mortgage securities has forced the (home loan) originators to be a lot more conservative in their underwriting standards and that’s led to the drying up of credit despite the fact that interest rates are still at very low levels,’ said Nima Nattagh, an analyst at Lender Processing Services, a provider of mortgage services. ‘It’s more difficult to qualify for a mortgage.’”

“Robert Kleinhenz, the association’s deputy chief economist, said affordability and housing prices have retreated to levels last seen in 2003. What’s different? Sales.”

“For all of 2003, there were 601,770 sales. But in 2008, if the market matches the second-quarter pace for the entire year, there would be just 403,660 sales.”

“‘Getting their hands on a loan though the second quarter continued to be quite difficult,’ he said of the situation facing creditworthy buyers. ‘We typically take for granted that our financial sector is going to work smoothly and that money is going to be there for someone who is qualified to get a loan. That hasn’t been the case.’”

“The association’s index is based on first-time buyers getting a home equal to 85percent of the median price in their area and assumes a 10 percent down payment.”

“In Los Angeles County, the entry-level house cost $355,130 in the second quarter. To buy it, a family would need an annual income of $67,840. The monthly mortgage payment, including taxes and insurance, would be $2,260.”

“A year earlier, that house cost $504,080, the qualifying income level was $101,550 and the monthly payment was $3,380.”

“‘The whole mess in the financial sector is, in my view, an unusual constraint,’ Kleinhenz said. ‘It happens every 10 or 20 years but it’s atypical.’”

The New York Times. “Ellie Wooten, the likable mayor of this likable Central Valley city, is on her way to the office when her cellphone rings. A constituent wants her mortgage payments reduced, and is hoping that the mayor has some clout with her lender.”

“Although Merced has one of the highest foreclosure rates in the country, this borrower isn’t in such dire straits. She’s not even behind on her mortgage. But her oldest daughter is turning 18, which means an end to $500 a month in child support. She just wants a better deal.”

“The mayor hangs up and shrugs: ‘It’s a surprise her daughter is turning 18? You’d think she could have planned ahead.’”

“But hardly anyone in Merced planned very far ahead. Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth.”

“Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.”

“And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed - because who was telling them differently? - that the good times would be endless.”

“‘Owning a home is the American dream,’ says Jamie Schrole, a Merced real estate agent. ‘Everybody was just trying to live out their dream.’”

“In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. But almost no homeowner can afford to sell. If you cannot go as low as ‘the foreclosure price’ - the cost of a comparable bank-owned house - real estate agents say you might as well not even bother listing your home.”

“The boom here allowed some people to become rich overnight and gave many more the idea that they could do it, too. Ms. Schrole, a single mother of four, succumbed to temptation too late: she bought a home as an investment, sold her own home, bought a much more expensive one, and lost both. ‘I was stupid,’ she says. ‘I didn’t get in until things started to tank.’”

The San Francisco Chronicle. “It’s about the size of seven ping-pong tables - and all yours starting at $279,000. A San Francisco design and development firm has begun marketing 98 tiny condominiums - ranging from 250 to 350 square feet - at the Cubix Yerba Buena building in SoMa.”

“Architect George Hauser is the first to say the studios are too small for many people, families in particular. He and local planning groups, however, believe the so-called micro units represent one means of providing more first-time home-buying opportunities in a city where most prices outstrip most incomes.”

“‘It’s not the last place a person might own, but a great place to spend three to five years as a young single … to build equity and move up,”‘ said Hauser.”

“The kitchen area includes a mini sink, two-burner electric cooktop, half fridge and microwave-convection oven. The appliances are stainless steel; the countertop synthetic brown stone. There isn’t room for a bed and a sofa, so each studio is staged with a sofa-bed. They come with a wardrobe but no closets.”

“The units cost $279,000 to $330,000. (Monthly homeowners’ association dues are around $270.) By comparison, the median price for all homes in San Francisco was $749,000 in July, according to MDA DataQuick. Given the generally high cost, only 39.3 percent of city residents own their homes, the lowest level among the state’s counties, according to a California Budget Project report.”

“Projects like the Cubix aren’t the end-all solution to San Francisco’s affordability challenges, but do offer one answer for one part of the market, said Sarah Karlinksy, policy director at the San Francisco Planning and Urban Research Association.”

“‘What it’s doing is providing middle-income housing without a subsidy,’ she said. ‘It gives them a toehold.’”

The Marin Independent Journal. “When writing his recent book, ‘House Lust: America’s Obsession with Our Homes’, Dan McGinn sought real-life examples to combine with research to reveal why so many of us have turned a basic need - shelter - into an arms race for square footage and eye-popping digs.”

“I could have been his poster girl. Seriously, if I went to a 12-Step meeting for Home Improvers Anonymous, I would sound like this: Yes, I have over improved for the neighborhood. Yes, I’ve poured money into my home that I should have put it into a retirement account. Yes, I’ve gotten caught up in remodel fever and blown the construction budget to add something I really, really wanted even though I did not get that money back in the resale. Yes, in the face of home renovation, I am as powerless as a gambler at the track.”

“But McGinn didn’t need me. He found no shortage of subjects. Fortunately, McGinn doesn’t condemn people like me, but rather comments and commiserates. He’s one of us, which is why I kept turning the pages. I also wanted to know why Amazon kept partnering my book with his: ‘People who bought ‘The House Always Wins’ also bought ‘ Lust.’ I learned why.”

“He, being much deeper than I am, also ponders why yesterday’s luxuries - two dishwashers, home gyms, nanny rooms, massage rooms, rooms for potting plants and gift wrapping, stereo systems for swimming pools, life-size stages for kids’ theater productions - have become today’s necessities.”

“(Answer: ego, ‘I’ve arrived and deserve it’; competition, ‘I must keep up with the Joneses’; and greed, ‘I’ll get the investment back and more on the resale.’) Which begins to explain why some people would sell a kidney to get granite countertops.”

“When I called him at his Newsweek office, he said, ‘During the boom, we got into the trading up mentality. People thought, ‘Our house is up 30 percent; let’s cash in and move up.’”

“I squirmed recalling how five years ago, I sold my Southern California house, which had appreciated nicely in the seven years I’d owned it, and bought a bigger house on more land in Colorado for less money. ‘We lived through a housing period where it was raining money. Only an idiot wouldn’t have put a bucket outside to catch some.’ (At least he doesn’t think I’m an idiot.)”

“‘Are you saying we need to stop lusting?’ I asked nervously. Absolutely not, he assured. (Whew!) We just need to lust more intelligently.”

“A healthier attitude, McGinn says: ‘Living through an era when we thought our homes may make us rich has resulted in a permanent shift in thinking - one that will leave many of us happily obsessed with houses for years to come.’”

“All the wiser, McGinn concedes, ‘As for me, my obsession remains largely intact.’ Ditto.”