The Housing Bubble

The Atlanta Journal Constitution reports from Georgia. “State regulators issued a prescient warning to Georgia banks three years ago. If they kept lending mostly to real estate developers, the banks were told, they risked huge losses, or even failure, if the housing bubble burst. The warning, however, was just that. Coming from the Georgia Department of Banking and Finance, it carried no weight. Many banks merely broadened their pool of borrowers to include more developers. Others disregarded the admonition altogether.”

“State officials say they knew that certain banks were vulnerable to failure. Some had devoted 80 percent or even more of their loans to real estate development, by its nature a speculative venture. Rob Braswell, the state banking commissioner attributes Georgia’s disproportionate number of bank failures to the explosion of new banks that accompanied the region’s housing boom.”

“Dozens of financial institutions formed in recent years —- 21 in 2006 alone —- as Georgia ended up with more banking companies than California, Florida or New York, among many other states. Many of these new banks were created by developers for developers. Few wrote mortgages for individual homeowners. Instead, their lending enabled the construction of entire new communities, many of them sprawling across the outer ring of Atlanta’s northern suburbs.”

“Braswell doesn’t fault the banks for following this business model. Housing prices, he said, were still increasing, despite nagging concerns about inflated values. ‘It was very difficult for many banks not to become overreliant on these loans,’ he said, ‘when there was so much money to be made.’”

The Pensacola News Journal from Florida. “From the devastation on Wall Street to the struggling mom-and-pop store on Main Street, the epitaph for 2008’s economic meltdown might well read: ‘They never saw it coming.’ Where were the politicians, the federal banking regulators and the jet-setting CEOs when Wall Street’s gravy train jumped the tracks?”

“‘Looking back at 2008, I think the speed with which it (the financial crisis) hit was maybe not shocking, but certainly the most surprising thing to me,’ Pensacola banker Tommy Tait said. ‘It made us look back and say, ‘Were we really asleep?’”

“University of West Florida economist Rick Harper, says that Pensacola’s housing inventory — like the nation’s — is fundamentally out of line with the underlying population dynamics. ‘We’ve had a huge overbuilding of the housing sector,’ Harper said. ‘There was just too much investment in residential structures. And the only way that’s going to get back into a demand-supply equilibrium so that prices can begin to appreciate, so that builders can begin to see there is a market out there, is when population catches up with the supply built. If we don’t stimulate population growth, based on our existing growth, it’s going to take 10 years or more to recover from this recession.’”

From Florida Today. “Melbourne officials estimate that one in every 10 homes is abandoned or has been foreclosed on. The properties are as diverse as a mobile home in Colony Park, which is on the north end of the island, to an unfinished $500,000 custom home less than a block from the barge canal. Its owners abandoned the unfinished house months ago, owing money to the building contractors as well as to the bank.”

“‘I’ve got a jungle surrounding my house,’ said Ed Hunter, who lives next door to an abandoned house on Merritt Island. ‘Could be a bobcat hiding back there.’”

The Naples News. “A few months ago, Park Shore beach was one of the only spots in Collier County that had showed resistance to price reductions over the past two years. ‘Park Shore was a bastion of price stickiness,’ said Ross McIntosh, founder of The Bidder’s Broker in Naples. The mantra, he said, seemed to be ‘if you want it you are going to have to pay my price because I’m not going to accept less.’”

“The median price for homes sold with the help of a Realtor in November fell to $194,000 in Collier County, excluding Marco Island, according to NABOR. That was down nearly 40 percent from $325,000 in the same month a year ago.”

“The seller of penthouse 102 paid the developer $4,350,000 for the unit and had nearly two years’ worth of carrying costs that he didn’t recover. ‘Effectively, the investors in that penthouse unit in Aria lost money,’ McIntosh said. ‘That is a new phenomenon on Park Shore beach. I think it’s a harbinger of future pricing behavior in Park Shore.’”

“Uncertainty remains for WCI Communities as the developer reaches the halfway point in its reorganization efforts. The Bonita Springs-based home builder, failing under the weight of about $2 billion in debt, filed for Chapter 11 bankruptcy protection in August.”

“Earlier this month, billionaire investor Carl Icahn and his affiliates dumped most of their WCI stock, about 6 million shares in exchange for two cents total. He had paid an average of about $16 a share in 2007. Also in 2007, Icahn had offered WCI $22 per share in a move to take over the builder. WCI rejected that offer.”

“‘I think it presented a tremendous loss for him and he decided to remove himself and look forward to taking a huge write-off on capital gains,’ Jack McCabe, CEO at Deerfield Beach-based McCabe Research and Consulting, said of the two-cent transaction.”

The St Petersburg Times. “High-profile developer Grady Pridgen and former NBA player Matt Geiger are delinquent in their property tax payments, both squeezed by the grinding recession. Three years ago, Geiger said, lots at his planned Bison Creek Estates project sold for $800,000. Now the former Miami Heat and Philadelphia 76ers player said there are no buyers, even though he has slashed prices by half.”

“‘It’s just tough on my company right now to make it,’ Geiger said. ‘I’m trying to bust my tail to do everything I can to move property.’”

The Sun Sentinel. “The lure of a big bargain continued to drive Broward County home sales in November. Buyers scooped up 507 existing homes, a 26 percent increase from a year ago, the Florida Association of Realtors said. Year-over-year sales have risen every month since July. Prices keep falling and now are what they were in 2003. The median price plummeted 34 percent last month, to $229,100 from $348,100 a year ago.”

“Broward’s condominium market is seeing a similar trend. November sales increased 3 percent from a year ago, while the median price slid 34 percent, to $109,400 from $166,700. Many of the homes and condos changing hands are distressed properties owned by lenders or desperate sellers.”

“‘At a certain point, prices get so low that people think they’re irresistible,’ said Brad Hunter, a housing analyst in West Palm Beach. ‘But in a sense, these increased sales is a sign of weakness in the housing market rather than a strength.’”

“Bob Tucker recently bought a five-bedroom South Florida house in foreclosure for $743,000, a $250,000 discount off market value in the neighborhood. Tucker said he spent $100,000 on renovations after the previous owners gutted the kitchen and damaged other parts of the home. Despite the hassle, including tough negotiations with the bank that owned the property, he’s glad he made the deal.”

“‘There were a lot of sleepless nights,’ said Tucker, a public relations director and the married father of four who moved here in April from Southern California. ‘But I think it’s a good investment because this is such a desirable area.’”

The Herald Tribune. “In 2007…Joe Long, a New Jersey entrepreneur, tried to raise $700 million to buy 1,500 homes from Southwest Florida builders and developers for about 70 cents on the dollar. But Long was unable to raise to the cash from hedge funds and other institutional investors. He got in the game much too early and was offering too much money for properties, real estate experts say.”

“In Southwest Florida, it is people like Elizabeth and Michael Thrasher, Michael Averbuch and Peter Arguelles who have started buying. The Thrashers have spent $11.6 million to buy seven properties on Anna Maria Island since April. Averbuch spent hundreds of thousands more to buy condos and raw land in North Port and Sarasota. Arguelles has paid $1.6 million to buy 19 houses in Sarasota and Manatee counties.”

“‘If you can buy houses where the cash flow more than covers the operating costs, why wouldn’t you buy?’ Arguelles said. ‘We are able to do this now. We can buy houses for less than the freakin’ cost of nails and wood. If you can buy dollars for dimes, then you should buy all you can.’”

” Joseph Kandel is eager to buy. The real estate firm he works for is seeing investors and end users close on 35 bank-owned properties every month and another 25 short sales, in which buyers negotiate with banks to buy properties for less than what banks are owed by the former owners. Kandel’s problem is money.”

“Though he bought and sold five properties for $440,000 more than he paid during the boom, his fortunes changed in the bust. He has defaulted on four loans totaling $2.4 million since the beginning of the year. But that apparently is not stopping him from going ahead with his public offering.”

“‘I was flipping and made a nice living for while, but I got caught with my pants down like everyone else,’ Kandel said. ‘The problem now is there is just too much inventory and not enough end users. So the same investors who were buying up properties during the boom are needed to help with the resurrection.’”

“In his registration statement, Kandel does not oversell his company’s prospects. He clearly points out there is a good chance 1st & 10 will have to punt. ‘Since the incorporation of 1st & 10 Properties, we have not generated revenues. With limited financial resources, we may not be able to continue as a going concern,’ the registration statement says.”

“Despite those very strong negatives, Kandel remains optimistic. ‘We’re at the bottom,’ he said. ‘Anyone who knows real estate knows this is a great time to get in.’”

“Four counties — Sarasota, Charlotte, Lee and Collier — are projected to account for more than 40 percent of the erosion in Florida’s tax base in 2007 and 2008. While the state’s tax base is projected to shrink by $120 billion, these four Southwest Florida counties will account for $52 billion of that hit.”

“The area relies on the more cyclical tourism and construction industries, which have sunk with the real estate market, said Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness. ‘So when the boom went bust, there was no safety net to fall back on,’ Snaith said.”

“While governments will struggle, it will be worse for homeowners, (consultant) Jack McCabe said. Southwest Florida suffered from ‘false appreciation’ during the boom, a mixture of speculation and real estate fraud, he said.”

“That led to the market being overbuilt and so many vacant or available properties that no one can predict when demand and supply will again be in balance. ‘People will be making high payments on values you may not see for years and years to come,’ McCabe said.”

“The historic drop in interest rates will help some people whose adjustable-rate mortgages are scheduled to reset in the near future, enabling them to remain in their homes and avoid foreclosure. John O’Neill, CEO of Sarasota-based Century Bank… and others noted that the rate drops have done nothing to address a fundamental stumbling block in the housing market: Most people who sought ARMs during the boom did so with the idea of refinancing or selling their homes before their mortgage rates reset to higher levels.”

“When the real estate market ended its historic climb with a swoon, many owners found they owed more on their houses than they were worth. They began to ask whether it made sense to keep making payments. ‘Half of the problem is interest rates and the other half is value,’ said Peter Lyddy, a mortgage broker with Gulf Coast Mortgages of Southwest Florida. ‘If people don’t have the wherewithal to stay with the market and wait for home values to rise, then a drop in interest rates is not going to help them.’”

“The problem with the adjustable rate mortgages offered during the boom is that they were issued to people with more of an investor mentality than a homeowner mentality, said Jack McCabe. Those people were expecting their homes to appreciate in value. When the opposite happened, they wanted out. ‘Many will default regardless of how low rates go,’ McCabe said.”

“The fundamental attitudes toward home ownership have changed and far more people are willing to default on their mortgages than they were ten years ago, O’Neill said. ‘There is not as much sentimental attachment to a home,’ he said. ‘People see it more as an investment, and if the investment has gone bad, they are willing to walk.’”