The Housing Bubble

It’s a rare Saturday desk clearing for this blogger. “Record foreclosures hitting Orange County involve more than just newbie buyers who got in over their heads. Some housing watchers say evidence is mounting that even veteran homeowners got caught up in housing euphoria and now are paying for it. Michael LaCour-Little, a finance professor at Cal State Fullerton…is lead author of a new study which found that during the housing boom some long-time owners borrowed against all their property’s equity gain, or paper profits. They treated their houses like cash machines. One homeowner who cashed-out her equity is Rita Gillam, an 85-year-old widow in Orange.”

“When her baby store hit a rough patch, she borrowed money to keep it going, culminating in a $556,000 loan from Fremont Investment & Loan in 2006. And not expecting to live so long, she spent some money on non-necessities, including a vacation to Las Vegas, Gillam said. The $556,000 is gone and so is her business, Gillam said. Loan servicer HomEq Servicing is putting her home, which she has owned since 1957, up for auction on Aug. 4.”

“‘I am broke,’ she said.”

“‘The conventional view is that housing appreciation is good because it reduces (default) risk,’ LaCour-Little said. ‘Not according to my theory, which is housing appreciation is bad. It encourages junior-lien borrowing. When appreciation stops, somebody is going to be left in a bad position.’”

“Florida’s recession and foreclosure crisis is prompting people to take unusual steps in a desperate gambit to make mortgage payments, stay afloat financially and even avoid homelessness. People who once might have tapped into their home equity are instead parlaying empty rooms into much-needed cash.”

“Carol and Mark Tuttle may open their 1,100-square-foot Bradenton home to another roommate. The tenant renting from them left recently, leaving them without $600 a month in much-needed income. She refinanced during the boom and now owes $150,000 for a house that might be worth half that. ‘We don’t know what to do, and we’re living off of credit cards,’ said Carol Tuttle.”

“The Tuttles, who want a quiet male roommate to avoid getting a ’sleazy’ boarder, have considered trying to sell and move in with relatives, another trend that experts say is rising. But, owing more than the house is worth, they want to wait for a market turnaround. ‘The Realtor told me I could short sell it, but it’s going to hurt my credit,’ Tuttle said.”

“Real estate got just about everyone into trouble in Phoenix, and the thinking seems to be that real estate is going to get everyone out. The low end of the real-estate market here — and in some equally hard-hit places like inland California and coastal Florida — is becoming as wild as anything during the boom.”

“Just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses. ‘I bought too high a few years ago,’ said Jason Fischbeck. ‘It cost $225,000. Now it’s worth $110,000. So I just paid $80,000 cash for another.’”

“Last spring, he contracted for three new homes in the distant suburb of Copper Basin, convinced that real estate was bottoming. He was wrong. He managed to get out of two of the contracts but had to buy one of the houses, which is now substantially under water.”

“‘You need to buy when there’s blood in the streets,’ he said with a shrug. ‘Even if it’s your own blood.’”

“For home builders, foreclosures and distressed sales remain a problem even after they are sold. They become comparable sales to gauge value, reflecting decreased market values, forcing builders to shave prices or risk losing a deal. Back in the housing heyday, appraisers felt pressured by everyone from real-estate agents to consumers to inflate value estimates. But now, builders grumble appraisers are being conservative, or even, they fear, discounting the value to play it safe.”

“‘The lenders that are using these appraisals [for] the amount they will loan, they were just burned by appraisers being too optimistic and liberal in the boom times, so they’re going in the opposite direction,’ said David Ledford, senior vice president at the National Association of Home Builders. ‘It sort of contributes to a downward spiral in values.’”

“As interest rates climb and unemployment numbers remain escalated, more owners could be forced into short-sales or other desperate moves, prolonging the sector’s pain. ‘Everything’s driving values in one direction, there’s no counter-acting force,’ Ledford said.”

“After decades of leading the nation in growth, Georgia and the Southeast have stumbled. Ironically, it was some of the region’s signs of success —- primarily the housing boom, with its aggressive borrowing by consumers —- that made it vulnerable. Riding that boom, the region was actually slower to enter recession. But when it did, it did so with a vengeance.”

“In 2001, with the economy sputtering, the Federal Reserve shoved interest rates down. Housing starts jumped, in spite of a recession. Mortgage rates were at near-record lows, and ‘teaser’ loans made the starting payments even lower. Four years later, the rate of monthly starts in the South for the first time rose above 1 million, once again accounting for half the nation’s new home building.”

“But those good times led to trouble. ‘We were just overbuilt,’ said Mike Chriszt, assistant vice president for research at the Federal Reserve Bank of Atlanta. ‘The thing that is different this time around is that the very large increase in construction in 2004, 2005 and 2006 was taking place faster than the pace of people moving to the area. When the music stopped, it was a big shock.’”

“Some companies are trying new approaches to deal with the mounting crisis. Tim Cabrera, chief operating officer of Atlanta-based Pride of Ownership Partners, recently eyed the unwanted artwork gracing the interior walls of the house his company just bought: Long streaks and swirls of red and blue spray paint. Associated Press reported that the graffiti, probably the work of neighborhood kids, stretched from the kitchen to the upstairs bathroom of the foreclosed home. Even the carpeted staircase had been tagged.”

“‘Unbelievable,’ said Cabrera. ‘They got into everything.’”

“It may be time to start thinking outside of the box, because U.S. housing prices are in the midst of a decline that may last for years, according to Robert J. Shiller, a finance professor at Yale University. Shiller wrote in a New York Times story this month that declines in real estate tend to be relatively long lasting. As an example, he mentioned land prices in Japan’s major cities, prices that fell for 15 straight years after a 1980s housing bubble burst.”

“Year over year, average metro prices have fallen 16 percent. ‘We see no evidence that a recovery in home prices has begun,’ said David M. Blitzer, chairman of the S&P/Case-Shiller index committee.”

“Forbes: The firm formerly known as AOL Time Warner is no more. Which brings me to the larger question. Many people held on to tech stocks, in retrospect, much longer than they should have, and have kept waiting for these names to come back (Time Warner being just one example). Cisco, for all the love it gets, is down 33% over the past decade, while the dowdy old S&P 500 is down just 30%. Microsoft is down 50% over the past decade, also another loser for long-term holders. This isn’t to say these stocks can’t come back, but so far, if you were long here, you were wrong. The tech bubble didn’t reinflate, know what I mean?”

“Tech stocks haven’t come back to their former glory in 10 years, post- bubble. Are financials and housing stocks in for a similar dispiriting ride?”

“There’s an important anniversary approaching this week. Two years ago a rumour went around financial markets that a couple of hedge funds that had invested in supposedly triple-A-rated securities had made heavy losses. Those securities were backed by sub-prime mortgages. The company was Bear Sterns.”

“Yep, the start of what was initially called the American mortgage crisis, then became the global financial crisis and is now the Great Recession is ‘celebrating’ its second birthday this week. Two years on, Bear Sterns is no longer with us. Other ‘victims’ include names such as Lehman Brothers in the US, Northern Rock in Britain, while in Australia we’ve lost firms such as Allco and Storm Financial.”

“Sub-prime mortgage (which have also disappeared) has become a term of ridicule. The companies — ratings agencies — that reckoned those sub-prime mortgages, when put together in a package and given a bright pink bow, were of the same investment quality as a blue-chip food retailer, are now much more circumspect and likely facing some heavy regulation to avoid a repeat of their blunders.”

“It had appeared that the world might have got by reasonably well until Lehmans bit the dust. That’s when the financial crisis became a global recession. “Reserve Bank governor Glenn Stevens, in a description quite un-banker like, said the months after the collapse of Lehmans were particularly worrying.”

“‘It was the most turbulent period in international finance any current banker, economist, market trader or policy-maker has lived through or, we hope, ever will,’ he said recently.”

“Longview-area houses are among the most overvalued in the nation, according to a new report that suggests buyers are paying pay 26.6 percent more than they should be. Although local real estate experts and economists dispute the finding, the study concludes Longview had the fourth highest ‘overpriced’ housing market in the nation late last year, according to an international economic data forecaster.”

“The report examined 330 metro areas nationwide. It factored in historic and median housing prices, interest rates, household income, population density and other variables to determine what prices in each market should be. The formula doesn’t favor Cowlitz County, where traditionally high unemployment and low wages make median and average home prices seem overvalued, said Gerry Flaskerud, broker/owner of Longview-based Coldwell Banker Flaskerud Realty.”

“‘Our market in Cowlitz County, on that kind of measuring stick, always looks out of whack,’ Flaskerud said.”

“If home prices in Cowlitz County were truly overvalued, then the area should expect prices to drop further as a correction, said Scott Bailey, the state’s Southwest Washington regional economist. However, prices have already been dropping over the past two years, and signs indicate the market is hitting bottom, he said.”

“‘I would think it would have corrected by now’ if prices were overvalued, Bailey said.”

“He paid $91,000 (£58,000) for the home, compared with $269,900 (£162,000) the previous owner paid at the height of the property boom before falling behind on payments and seeing it repossessed. For his money, Mr Eliason, owner of a convenience store, acquired 1,458 sq feet of living space including three bedrooms and two bathrooms, a two-car garage and close to half an acre of land.”

“‘I had never believed I would be able to buy until prices dropped to the level they did,’ said Mr Eliason, who moved to Cape Coral from Dallas, Texas. ‘I had rented my whole life but I was astonished I could get that much home for that little money. It just made sense to buy before everyone else found out.’”

“The average house price in the area fell from a peak of $322,000 in early 2006 to $89,000, as cheap credit dried up and foreclosures began to strike. ‘It’s a frenzy,’ said Kip Martin of Century 21 Sunbelt Realty. ‘It reminds me of when the market was way up there, except the prices are different.’”

“For Tammy Hobbs, a housewife from Virginia and first time investor, the bargains on offer were irresistible. She has bought two houses in Cape Coral, one as a second home and one as a rental investment. She and her husband James only wish they could have afforded another. ‘I had been thinking about a home in Florida because I love the warm weather,’ she said. ‘It is just an excellent time to buy. And the beach is 45 minutes away.’”

“Foreclosures in Hawaii soared 397.6 percent last month to a record high and pushed the state to its highest national ranking since 2005. Rising unemployment and mass condominium defaults led to Hawaii leading the nation for growth in the rate of foreclosures in May. While Hawaii’s distressed real estate market is growing, it has not surpassed the collapse after the Japanese bubble, said Georgia Roberson, REO director for Coldwell Banker Pacific Properties.”

“‘Right now, I have 85 bank-owned properties,’ Roberson said, adding that she had around 300 properties in 1999 or 2000.”

“Hawaii’s declining real estate, loan recasts and rising unemployment have ramped up foreclosures. The state’s dependence on California and the large portion of condominiums in the real estate market have played a role, too. Hawaii’s lenders were still making subprime loans in 2007, said Nani Medeiros, the executive director of a nonprofit that creates and preserves affordable housing. ‘We are just starting to see the fallout in 2009 and it will continue into 2010,’ Medeiros said.”

“The collapse of California, which supplies many of Hawaii’s tourists, business investors and second-home owners, also has taken its toll, Roberson said. The softening condominium market, which saw sales fall by more than 45 percent on Oahu during the first quarter, as well as the difficulty in securing condominium financing, also contributed to the problem. ‘We usually follow California by two years,’ she said.”

“Dallas-Fort Worth has some of the most undervalued homes in the country, according to a new report. But don’t expect that finding to cause a jump in prices. Home prices in the Dallas area are almost 32 percent undervalued, according to the latest measure by IHS Global Insight. The Dallas area is one of a handful of Texas housing markets the research firm considers to be among the most undervalued in the country.”

“‘What it means when it is undervalued is the market could handle price increases,’ said Jeannine Cataldi, economist and one of the authors of the report. ‘It just means prices could go up in that market without any long-lasting damage to the market. Texas has always been in the undervalued category.’”

“Global Insight now estimates that the overall U.S. housing market is more than 10 percent undervalued. That compares with an overvaluation of more than 24 percent at the peak of the market in 2005. The analysts say that big markdowns in home values in many areas of the country have reset prices in most cities. The home markets Global Insight says are still the most overvalued are in New Jersey and Washington state.”

‘To make valuation determinations, ‘we have some metrics we look at, including population density, housing density, previous house prices, interest rates and income,’ Cataldi said.”

“Texas has customarily had undervalued housing because of the ease of building in the state, she said. ‘Even if there was a mad dash to Texas, there is enough room that housing could be built up without much of an issue,’ Cataldi said. ‘In California and Florida, they don’t have a whole lot of land left to build on.’”