The Housing Bubble

The Union Tribune reports from California. “After a sharp decline in foreclosure activity that began in September, San Diego County default notices bounced back last month. DataQuick also reported 1,045 foreclosures in the the county last month, a decrease of nearly 9 percent from October but a year-over-year increase of nearly 119 percent. In October, foreclosures had declined 37 percent from the previous month. Some homeowners are reluctant to go into foreclosure, even when they’re overwhelmed by debt. In Chula Vista, Gustavo Diaz de Leon recently negotiated a short sale, in which his lender agreed to accept less than the amount due so he could avoid default.’

“Diaz de Leon, who fell behind on his payments several months ago, continued to negotiate, even after his attorney told him that the wise business move would have been to go into foreclosure, erase the debt and begin rebuilding his damaged credit. The disabled gas-and electrical-line locator refused. ‘I didn’t want to just walk away,’ Diaz de Leon said.”

“He said he used an adjustable loan to buy the home for about $500,000 in 2005. It will be sold for about $330,000. Under the short-sale agreement, the proceeds will be used to pay off a first mortgage and Diaz de Leon will continue to pay off the home’s second mortgage.”

The LA Times. “We’ve pretty much blown through the first couple of stages of grief with regard to the Southern California housing bust. There’s no room left for denial now that home prices in the Southland are down 44% from their peak in 2007, and there’s not much use for anger. Now we’re bargaining.”

“Pretty typical is a one-bedroom, one-bathroom house on East 98th Street in South Los Angeles, near the intersection of the Harbor Freeway and Century Boulevard. Its listing calls the 738-square-foot house ‘great for a growing family.’ The seller wants $85,000 for the house, which sold in 2006 for . . . $365,000.”

“Throughout Southern California, real estate agents say and sales records confirm that attractively priced foreclosed houses sell quickly. Which doesn’t mean prices will go back up any time soon. ‘I am absolutely positive it’s still going down,’ said Dennis Findly, 18-year veteran of Inland Empire real estate. ‘If you’re looking at a house like this for $250,000, it looks like a good deal, but a year from now it could be $220,000 or $230,000,’ he said.”

The Press Enterprise. “The potential for a giant closeout sale seems enormous in Inland Southern California. Riverside and San Bernardino counties recently contained 30,465 lots ready for construction, complete with utilities, streets, curbs and gutters, and much more residential land is in the approval pipeline, according to Metro Study.”

“Bargain hunters have been disappointed that banks have been generally unwilling to drop prices enough to attract buyers. ‘The spread between what is offered and what financial institutions want is huge,’ said Randall Lewis, executive vice president of a major Inland land developer.”

“Lenders are overwhelmed by the sheer volume of construction loans that have gone bad, said Tom Reimers, president of a land broker in Irvine. ‘They are like the crocodile that ate a gazelle. It takes them a while to digest it all,’ Reimers said.”

“Economist Chris Thornberg said he believes banks also fear that by marking their land portfolios to market value they would be forced to acknowledge they are insolvent. Another discouragement for some would-be buyers is that most of the land that has become available has been in remote Inland areas such as Victorville, Hemet-San Jacinto and Banning-Beaumont.”

“In transactions that have occurred in the Inland counties this year, lots ready for building were discounted 50 percent to 75 percent from their peak in 2004-2005, said Tom Doyle, a principal with land brokerage Whittlesey Doyle. Park Place Partners reports that between 2005 and 2008 the cost of a finished residential lot in Temecula plummeted from $270,000 to $125,000.”

“Industry sources said in some cases finished lots in the Inland region have been sold for just a fraction of the cost of the seller’s investment in utility lines and other infrastructure.”

“Highpointe Communities aims to acquire distressed projects that can be sold early in the next home building upcycle, said the Aliso Viejo firm’s chief executive, Steven Vliss. But when a housing rebound will occur is a moving target, Vliss said. ‘We entered into 2008 believing the recovery was about 24 to 36 months away,’ he said, ‘and we end the year thinking it will be between 42 months and 48 months.’”

The Desert Sun. “This corner of Southern California had the highest unemployment rate of any area with 1million or more people in the United States — including metropolitan Detroit. ‘We are the epicenter of the economic crisis in this country,’ said John Husing of Economics and Politics Inc., a leading regional economist.”

“The major culprit is one struggling valley residents know all too well: a plummeting housing market and the resulting lack of construction work. Riverside and San Bernardino counties had $12.5 billion in private-sector construction activity in 2005, Husing said. This year it’s $3.8 billion. ‘This area is very, very dependent upon construction,’ Husing said. ‘With that sector in the tank, it’s blown a hole in our economy that’s very large.’”

“Riding a sizzling housing market of just a few years ago has left all of California, and the Inland Empire in particular, bearing a disproportionate burden of the burst housing bubble’s pain, said Sylvia Allegretto, an economist with UC Berkeley’s Institute for Research on Labor and Employment. ‘We were overbuilding, overinvesting and people were moving here,’ she said.”

“A significant amount of industrial, retail and office construction has continued through the housing development standstill, said Fred Bell, executive officer of the Building Industry Association’s Desert Chapter. ‘Whatever is in the pipe is going to finish, and there’s nothing behind it at this point,’ he said.”

“In other economic downturns of the recent past, people continued to spend through borrowing and using their home equity, Allegretto said. ‘All of these traditional avenues that have helped families smooth consumption, the spigot has been turned off,’ she said. ‘You can’t get credit, you can’t get money out of your house, and your wages have gone nowhere. You have no ability to continue to consume the way we have. And 70 percent of our economy is consumer spending.’”

The San Francisco Chronicle. “In these times, when some plummeting markets have vaporized half of the value of their single largest asset, putting together a traditional deal to sell has become an ordeal sometimes bordering on the impossible. For some, it’s time to get creative: Enter the lease-option deal, otherwise known as rent-to-own.”

“As the name implies, a lease-option or rent-to-own transaction involves a potential buyer locking in an option to acquire a home at a later date at a fixed price. The buyer usually makes a nonrefundable deposit and moves in immediately as a renter. Part of each month’s rent may go toward a down payment, depending on the contract.”

“At the end of the rental period, the buyer must come up with a balloon payment for the balance owed on the dwelling, or walk away from the deal.”

“‘I did it because I couldn’t sell my house’ in Rocklin (Placer County) using conventional methods, said Leo Stewart, who now lives in Auburn. Putting his 15-year-old 3-bedroom, 2-bath home on the market in 2006, he found himself cutting his asking price as the market began to tank. After several months with no offers, he decided to try a lease-option sale using a Sacramento firm that specializes in such deals.”

“Another compelling reason to change tactics was that he didn’t want to pay the sales commission and fees associated with a traditional sale through a licensed agent, he said.”

“So far, Stewart’s sale remains unconsummated, but he remains convinced that he’s on the right track. After one would-be buyer moved out without completing the purchase, OptionPlus found a second candidate who is currently renting the home for about $1,700 a month under a contract that calls for him to buy the place for $450,000 next year, Stewart said.”

“‘I don’t expect him to buy,’ Stewart said, because the home has continued to lose value and may be only worth $350,000 now. He is unsure what the prospective buyer will do once the rental period has run its course next year. Nevertheless, he says he’s happy with the arrangement.”

“Caroline Hegarty of Vallejo has done 15 lease-option deals but agrees that buyers need to be very careful because of the significant amount of fraud associated with rent-to-buy schemes. ‘I’ve heard stories where (purported owners) don’t even own the property’ they’re trying to sell, she said.”

The Sacramento Bee. “There are big years when the bottom drops out, the unimaginable occurs and minds reel from it all. That was 2008. So farewell to a year that jointly shredded our home values and our 401(k) accounts. So long to its economic free fall that pushed 19,000 area homes into foreclosure from January through October.”

“Home builders went bankrupt, calling 2008 the worst year in half a century. Banks failed, dying of unpaid mortgages.”

“The Bee recently gathered housing market watchers to assess the departing year in real estate and see where we’re going. Michael McGee, a mortgage lender. Lori McGuire, a home-building industry consultant. Ruben Ramos, the broker-owner of Ruben Ramos Realty in Marysville. He also trains the region’s real estate agents by teaching real estate classes at Yuba City.”

“McGuire: ‘I’m not saying we’re at the bottom. But I have a lot of friends who are professionals in the REO (repo) field. There are multiple offers on the REOs. That’s a bright spot.’”

“McGee: ‘Oh, let me tell you about that real quick. Let’s get that straight. The banks have become privy to this. What they’re doing is taking a quality piece of property that might be valued at $260,000. They’ll put a list price of $220,000 and they’ll get multiple offers, 20 or 30 offers. And then they’ll go back to every one of those 20, 30 offers and say, ‘OK, make your best shot.’ They turn it into a bidding war for buyers rather than a sale.’”

“We shouldn’t read too much into multiple bidding? Ramos: ‘Don’t read a lot into it.’ McGee: ‘It’s a ploy. It’s another one of these cottage industries working very well.’”

“McGee: ‘One in three people I talk to who are interested in buying a home in this market are saying, ‘No, we haven’t hit the bottom yet. There’s still more to come and rates are going to get better.’”

“Many in this market owe more than the house is worth. Are walkaways something we should worry about? Ramos: ‘There are a number of instances where that is the only option available. I’ll be frank with you. I meet with couples and families on a daily basis. And probably better than 60 percent or 75 percent, I tell them: Milk it for all it’s worth. Walk away.’”

“‘Let me give you the precise advice I give them. I say when the lender contacts you, lead them on the primrose path. Tell them you’re going to give them a payment in the not too distant future. Lead them further, further, further. Ultimately, they will send you a notice of default. Fine. Continue to occupy the home. Pocket the money you’re saving.’”

“‘And then at the end, if you’re still in contact, I’m going to show you how to get even more money from the lender. Get it and walk away from it. Call me 25 months later. I’ll put you into a nice home.’”

“Thank you all for coming. McGee: ‘It’s a sorry state of events. I’m sorry to meet you all under these circumstances. But it’s reality. There’s going to be a lot of people hurt and it’s not over yet.’”