The Housing Bubble

It’s Friday desk clearing time for this blogger. “Record numbers of Sonoma County homeowners are seeing property taxes fall, softening the blow from plummeting values. Steven James and Judy O’Brien bought their Windsor home in February 2005 for $670,000. While the couple recognized the county’s housing boom would eventually end, they didn’t think the subsequent decline would be so steep — the county’s median home price is down nearly 50 percent from the market’s high. ‘I thought there’s no way that would happen. We’re staring at that in the face right now,’ James said.”

“Easing the pain was the $2,600 property tax reduction. ‘It was wonderful,’ James said. ‘Spending $8,000 in taxes on a devaluing asset would have been a little hard to swallow.’”

“Bob DeKeulenaere says junk cars in his neighbor’s yard prevented him from selling his house last year. DeKeulenaere is among hundreds of North Port residents who call on city code enforcement to clean up their neighborhoods. The real estate market has only grown worse since then, leaving him with little choice but to stay put and wait for a turnaround.”

“‘This problem cost me a couple hundred thousand dollars,’ said DeKeulenaere. ‘Do I have any recourse? No.’”

“Pasquotank County has accepted $6.7 million for Outer Banks land worth nearly $10 million during the real estate boom. Pasquotank County accepted a bid of $7.25 million in March, but the group could not borrow that amount. Last week, the county accepted its lower bid of $6.7 million for the property.”

“‘He was the only bidder at the time,’ said Pasquotank County Commissioner Marshall Stevenson. ‘We felt we needed to take it.’”

“Marshall & Ilsley Corp. is foreclosing on a suburban Chicago condominium development and is seeking to collect nearly $19 million of unpaid loans connected to the project. The building was used for many years by Mallinckrodt College, and then Loyola University, before being sold and converted into condos.”

“Most of the units had listed selling prices ranging from the upper $300,000s to $1.4 million, according to the Chicago-based Metropolitan Planning Council. But those condos became available around the same time that the housing market began its rapid decline.”

“Denver businessman Jerrold Hauptman turned his father’s title insurance agency into a behemoth by betting big in the nation’s hottest real estate market. But when California’s housing boom turned bust and the Mercury Cos.’ bank called its loan last summer, Hauptman’s $1 billion empire collapsed.”

“‘I don’t know where it all went. A lot of people are going to lose a lot of money,’ said Calvin Schmidt, 61, of Parker, who is owed $38,500 in back pay and retirement savings kept by the company in the form of deferred compensation. ‘It totally amazes me. It was a good, strong business up until sometime last year.’”

“The dream is quintessential Arizona: Buying that new house in a new community, surrounded by people making a new start in life. The nightmare is becoming quintessential, too: In dozens of developments caught half-built in the real-estate downturn, homeowners are finding themselves trapped in a financial and legal mess. In one case, owners of homes in the half-built San Tan Heights development in Pinal County are staring at a special assessment of $750 per home in addition to the monthly assessment of $125.”

“Arizona has long encouraged construction of big developments. This is the ‘planned community’ state. Now some of those communities are turning on residents. Effectively, they are lost in a sea of stark, empty houses and vacant lots.”

“Mortgage and interest rates are down once again — way down. And, ask any lender, they will tell you there is plenty of money to be lent. So what’s up? ‘There is a huge misconception that it is difficult to get loans. It’s not true,’ says Mark Miskiel of Lighthouse Mortgage in Cottonwood. ‘What’s different is that in the recent past all you needed to do to qualify for a loan was to be able to stand on two feet.’”

“‘For the most part, the market is back to the core basics. It is still easy money, just not as easy as before. It’s cheap money. It’s just not funny money,’ Miskiel says.”

“Miskiel warns there are likely more foreclosures on the horizon, in part because the loan market is too segmented to settle its own problems. ‘Since most mortgages are now owned by more than one investor, it has been difficult for investors to agree to any restructuring of many bad loans,’ Miskiel says, ‘It is unlikely that will change in time to save many marginal mortgages.’”

“Stephanie Hanna, a loan officer with Platinum First Mortgage of Reno, said refinancing loans and regular mortgages not only have picked up, but for those in the right circumstances she can even undercut the national rate cited in the latest weekly report. Yet some other Nevadans still can’t catch a break on mortgage matters.”

“What gives? According to Hanna, refinancing can’t be done with dicey credit or on homes in which the owner owes more than the market indicates the house is worth. ‘A lot of people coming to us want to refinance right now,’ she said, ‘but they don’t have the equity – they’re under water.’”

“One of the long-held beliefs about subprime mortgages is that they had a positive side, extending credit to non-traditional buyers and increasing minority homeownership rates. But in a new research paper, the Boston Federal Reserve takes a closer look at foreclosures in Massachusetts. In a remarkable finding, researchers say that widely-held assumption simply isn’t true. In fact, subprime lending led instead to a churning of properties that only left minority homeowners and neighborhoods worse off.”

“From the Boston Fed: ‘We show that much of the subprime lending in the state was concentrated in urban neighborhoods and that minority homeownerships created with subprime mortgages have proven exceptionally unstable in the face of rapid price declines. The evidence from Massachusetts suggests that subprime lending did not, as is commonly believed, lead to a substantial increase in homeownership by minorities, but instead generated turnover in properties owned by minority residents.’”

“Here’s more: ‘Altogether, the data seem to paint a somewhat bleak picture of the role of subprime lending in Massachusetts urban neighborhoods. Rather than increasing the share of homes owned by members of the community, it appears that subprime lending allowed one set of minority homeowners to replace another…these new homeowners, with greater debt burdens and less equity (and likely poorer credit to begin with), were poorly suited to handle the collapse in house prices that followed.’”

“In another surprising conclusion, researchers found it may do little good for lenders to reduce the loan principal on multi-family properties in particular to avoid foreclosures. Those properties are especially vulnerable to foreclosure, but reducing the loan amount only leaves a marginal homeowner still in place - and one who still may not be able to handle the mortgage.”

“What began as a bad year for real estate turned into one of the worst on record, driven by an unprecedented drop in home prices, a tide of foreclosures and a credit crisis whose magnitude few anticipated. Regions that had been booming were hit especially hard by the bursting of the real-estate bubble. In the Southwest and Florida, homes lie vacant along the winding streets and cul-de-sacs of brand-new subdivisions. In Phoenix, home values have fallen 41% from their peak in June 2006.”

“‘Boomers who we counted on coming down here when they retire can’t sell their homes in Chicago or Michigan or other places, so they’re not coming,’ said Betsy Kurasch, a local real-estate agent.”

“‘For economists now to make forecasts is a pretty difficult thing,’ said Ray Torto, chief global economist at real-estate firm CB Richard Ellis. ‘All of our models are outside the territory in which they’ve been built.’”

“‘I thought it would be a bad year,’ said Mark Zandi, chief economist at Moody’s Economy.com. ‘I didn’t think it was going to be a complete washout.’”

“So begins a new year in the Sacramento real estate market, remarkably making its case as the fourth straight year of a downturn. From the files, here are memories of what the pros said as the market started – slowly at first, then faster and faster – to fall back to earth. October 2005. As housing values had already started to roll back down the hill, a National Association of Realtors report pronounced Sacramento’s real estate market in ‘excellent shape with a potential for significant equity gains.’”

“What happened: In a year, median sales prices fell 8 percent in Sacramento County.”

“July 2006: ‘The evidence of a cool-down is everywhere, but I don’t think there’s evidence of a collapse. I think barring any major macroeconomic shock, like a real spike in interest rates or unemployment, things are going to remain pretty flat.’ – Sean Snaith, then director of the Business Forecasting Center at Stockton’s University of the Pacific.”

“What happened: The next year in Sacramento County, home sales fell 23 percent and prices fell 10 percent.”

“October 2006: ‘I think by next spring the residential market will reach a plateau. … If my scenario holds up, you may be under water 10 percent for a while. I don’t know if you’d call it a soft landing, maybe slightly hard, or hard light or something, but you’ll still be fine.’ – Richard Kovacevich, then chairman and CEO of Wells Fargo & Co., in a Bee interview.”

“What happened: Sacramento County median sales prices fell another $24,500 by June. In July, year-over-year depreciation went into double-digit percentages and has accelerated ever since.”

“November 2006: ‘It’s not like we’re seeing a huge erosion in home prices, and really do not expect to see that going forward.’ – Robert Kleinhenz, deputy chief economist, California Association of Realtors, giving a 2007 real estate forecast to Sacramento Realtors.”

“What happened: In 2007, Sacramento County sales prices fell 20 percent. In 2008, they’ve fallen again by a third.”

“January 2007: ‘We don’t expect any significant decline unless there’s some major economic shock, and we don’t anticipate that.’ – Alan Nevin, chief economist, California Building Industry Association, unveiling his 2007 forecast.”

‘What happened: In 2007, California’s new-home sales fell 31 percent. This year, they fell almost twice that much.”

“June 2007: ‘I think right now, we’re probably bouncing around the bottom.’ – Sid Dunmore, then chief executive officer of Granite Bay-based Dunmore Homes. What happened: Five months later, Dunmore Homes filed for bankruptcy protection.”

“March 2008: ‘I think California has maybe two more quarters of tough sledding and things are going to get better. … It’s just a 36-year gut feeling kind of thing.’ – John Robbins, a San Diego mortgage banker, and 2007 chairman of the Mortgage Bankers Association. What happened: That was three quarters ago.”

“San Diego was one of six metropolitan areas measured with an annual decline of more than 25 percent — coming behind Phoenix, Las Vegas, San Francisco, Miami and Los Angeles. Three new markets broke the double-digit barrier for the first time in October — Seattle, Atlanta and Portland, each with year-over-year drops of more than 10 percent for the first time.”

“Alan Gin, economics professor at the University of San Diego, searched for a suitable saying for the coming year and came up with ‘Things will be not-so-fine in ‘09,’ a slogan he delivered during his outlook on the local economy at USD’s recent annual real estate market gathering.’

“At the end of 2007, Gin started to expect the trouble in housing would seep into the rest of the economy. But its extent this year still surprised him, he said. ‘Last year’s problems were like termites,’ he said. ‘This year, the house collapsed.’”

“Unlike Sweden, in France sellers take the appliances with them when they move. An 86-year-old woman, however, was so eager to unload her Riviera apartment and return to Paris that she offered to throw her kitchen appliances into the deal. Speaking of popping bubbles, as housing woes deepen, approaches to selling are changing. In Stockholm there were only two people at a recent showing and the price had dropped by twenty percent.”

“Florida is holding a buy-one-get-one-free sale: two houses for the price of one. Hesitate and they’ll throw in a Lexus as an incentive. And in the most alarming sign of the meltdown yet, the French are considering Home-Staging.”