The Housing Bubble

It’s Friday desk clearing time for this blogger. “Joshua Hamann jokingly compares himself to the last human in a city overrun by zombies. He’s not suggesting his neighbors are zombies. The problem is, he has no neighbors.Hamann occupies one of only about 50 sold condos in his 49-story tower, out of 409 units. A couple miles north at Midtown Miami, Alisha Marks knows the same feeling. ‘It was pretty much a ghost town when I got here,’ she says.”

“On a recent Friday morning, Hamann encountered exactly three people over the course of several hours — two security guards, and a concierge. ‘This is how it goes every day,’ Hamann said, adding that he interacted with more neighbors growing up in rural Kentucky, where farms were spaced a mile apart.”

“Chris Cooley bought a 19th-century farmhouse last year on nearly 11 acres in Williamson County that was going to be his dream home. He hired Chris Parker, a custom homebuilder in Nashville, to preserve the look of the old house. Now, Cooley wishes he had put off his dream a bit longer. His appraisal for the construction loan for the remodel project came back saying the house will be worth less than what the work will cost. And his financial institution, Reliant Bank, wanted him to pay the difference.”

“‘It definitely has been possibly the worst timing ever,’ Cooley said, adding that he is worried about being able to sell his existing home in Franklin.”

“Jim Tew, senior vice president over mortgages in Tennessee for Fifth Third Bank, said it’s not uncommon to reappraise homebuilders’ properties. He said bank regulators are encouraging banks to re-evaluate the values and collateral positions of their loan portfolios. ‘What we have found is the value isn’t there,’ Tew said. ‘When we try to sell it, we’re stuck with a value problem.’”

“Appraisals that overvalued homes — often at the urging of lenders looking to close deals — were one factor in the housing bubble that popped last year. In response, lenders have gotten more picky about the criteria appraisers use to back up the values they assign to home. Before, there was some “wiggle room” in such cases, said Steve Stiloski, the president of the Wisconsin Chapter of the Appraisal Institute. Now, ‘there is no putting a square peg in a round hole.’”

“William Malkasian, president of the Wisconsin Realtors Association, said efforts to tighten the mortgage industry have ‘gone absurdly too far.’ Rules like those for appraisals and for measuring a borrower’s credit worthiness are being implemented nationally, he said, but ‘real estate is local’ and Wisconsin is different from California and Florida, for instance.”

“Massachusetts housing prices continued to fall at a double-digit rate last month as foreclosure sales put downward pressure on the market, according to new data released today by Warren Group. ‘Prices are still declining,’ said Timothy M. Warren Jr., CEO of Warren Group, and sales volume won’t increase significantly ‘unless the employment outlook improves dramatically and the tight mortgage lending standards are loosened.”’

“Valerie McGillivray, president of the greater Newburyport Association of Realtors, says the problem with the Warren Report figures is that they are average numbers for the state as a whole. McGillivray says in the cities the market is tough. ‘The big cities are faced with hundreds and hundreds of foreclosures,’ she says.”

“‘Prices are at an all-time low,’ she says. ‘There are some great deals in Amesbury and some really great deals in Newburyport.’”

“Charles McMillan, who this year is leading the 1.1 million-member National Association of Realtors, returned to his home turf Friday to speak to the Dallas-Fort Worth Chapter of the National Association of Hispanic Real Estate Professionals. McMillan spoke with the Star-Telegram following his address.”

“As the housing market was going bad, was there anything that real estate agents could have done back then to help?”

“Neither the real estate industry nor its allied folks and regulators knew the huge tsunami that was about to hit us. One of the things we did, and do, as Realtors, is we would bring to the attention of authorities when we saw abuses going on at the closing table; fraud going on at the closing table. As far as us forecasting and foreseeing the great decline, we did not, nor should we be faulted for it.”

“Alma and Adolfo Vasquez might not appear to be prime candidates for foreclosure. Their 3,100-square-foot home near two golf courses is appraised at nearly half a million dollars. They were far from irresponsible buyers, making a 20 percent down payment after selling their California home in 2006, just before the housing bubble burst.”

“But by early April, the Vasquez family, slammed by a double whammy of rising property taxes and tough times for Adolfo’s home-renovation business, were three days from losing their home at a foreclosure auction. ‘It’s an emotional torture,’ Alma Vasquez said. ‘We never thought we could end up in this situation, but it happened. It’s kind of embarrassing; you don’t want to let your friends or anyone know.’”

“Another reason might be an influx of out-of-town investors from places like California, who scooped up hundreds of properties in upscale subdivisions. Now they’re having a hard time keeping up with mortgage payments, according to experts in Central Texas. ‘Steiner Ranch was the place,’ said Kelly Diamond, who moved there with her husband from California in 2005, when she says builders were offering all manner of incentives to lure buyers.’”

“‘People came in eager to get the incentives, and they ended up getting in over their heads,’ said Diamond, who lives on a block near three homes listed for foreclosure. ‘They were not in a place that if something happened they could stay in this neighborhood. There was no room for error.’”

“During the big housing boom a couple of years back, I can remember driving through the El Centro area and seeing all the new homes sprouting on once-vacant land. It was impressive, but I couldn’t understand where all those new home buyers were coming from since El Centro is smaller in population than Yuma. I was eventually told that buyers were being drawn to El Centro by the relatively low cost of housing there in comparison to other California cities.”

“Some of the new homes were being bought by people who - believe it or not - commuted to San Diego and other distant cities. Other buyers were simply speculators. They were grabbing up what they considered ‘cheap’ homes on easy credit terms in the expectation they would quickly appreciate in the booming housing market and then they could sell them for a big profit or rent them out for income.”

“One in 10 families faces home foreclosure there, and Mayor Ben Solomon thinks even worse is to come. In addition to the loss of homes, the article noted that El Centro has the highest unemployment rate of any metropolitan area in the nation at over 26 percent.”

“Day in and day out since 2007, callers who struggle with mortgages throughout the Sacramento region, those who can’t sleep for worrying, who want to stay with houses that have lost $150,000 in value, have phoned Home Front to fret and express a common sentiment. ‘My lender,’ they say, is ‘difficult.’”

“Callers complain about long waits, bureaucratic snafus and a sense of not being helped. These calls have kept coming through every government program unveiled to help borrowers, despite every statistical release saying more loans are being modified.”

“Now, as the state has unveiled a law making lenders prove they have comprehensive loan-modification programs, a new round of callers have weighed in with their problems. Two told of modifications that raised their monthly payments instead of lowering them. One, regretfully, paid $3,800 up front to a loan modification company for that outcome. Another, sheepishly, told how a new-home sales agent told him – in 2007, no less – that his house would appreciate enough to refinance the adjustable-rate loan now taking him under.”

“There’s been a lot of talk about how lax lending standards helped blow up the housing bubble. Talk about short memories and logic disconnects, though; apparently Massachusetts Congressman Barney Frank and New York Representative Anthony Weiner are trying to pressure Fannie Mae and Freddie Mac to lighten up a little and relax condo lending practices. Um … I think we’ve seen this disaster flick before.”

“Given the nature of the beast we’ve created, banks need to be a lot more prudent about who they lend to. Otherwise, we’ll end up right back in the danger zone. But the word on the desire to lower some standards hints that forces at work may tempt us all back into the same black hole.”

“Recent reminders that often-quoted economist Paul Krugman was OK with the ’solution’ to the previous recession that led to the housing bubble, and that Fannie and Freddie were both major parts of our disaster and were highly regulated, political entities can make you question some of the assumptions right now. And of course, Barney Frank was a force in some of the loose mortgage lending practices to begin with; the quote going around at the moment is how he said Fannie and Freddie should ‘roll the dice’ for ‘affordable’ housing back when the housing bubble was starting to take on some air.”

“President Barack Obama’s proposal for a regulatory overhaul of the financial industry vastly expands the reach of the Federal Reserve, yet fails to make policy-makers more accountable for their actions. Critics argue that the new legislation fundamentally misses the problems that led to the financial crisis. It was a lack of enforcement by supervisors, they say, not insufficient rules, that fostered a cowboy culture of rampant risk-taking on Wall Street.”

“‘Obama is letting the Fed and everyone else off the hook by saying that the problem was with the regulations and not the regulators,’ said Dean Baker, co-director of the Center for Economic Policy Research in Washington.”

“‘If regulators know that even if they totally fail on the job, they will face no career consequences, then at some future point, when there is a choice between confronting the financial industry or just going along, the regulators will just go along,’ said Baker.”

“Some feel uncomfortable with a broader role for the Fed primarily because of the Fed’s closeness to the banking sector. The Fed is not technically a public entity. Each of the Fed’s 12 branches are overseen by a nine-member board of directors, two-thirds of whom are elected by the bankers in the district.”

“‘The Federal Reserve has massive conflicts of interest that make it ill-suited for its present regulatory functions and certainly for an expanded regulatory reach,’ said Robert Auerbach, a professor of public affairs at the University of Texas at Austin. ‘The officials leading the Fed today preside over an organization that is run in substantial part by the bankers they regulate.’”

“Central bankers largely ignored mounting evidence of fraud in the housing arena and touted the benefits of ‘financial innovations’ such as derivatives instruments — the very securities that would bring the banking system to its knees. Baker, who long warned of a looming housing crisis, said the central bank’s meek reaction was a primary cause of the crisis: ‘The Fed had all the authority it needed to burst the housing bubble and prevent this disaster. They opted not to do it. This was a disastrous failure.’”

“Merced, situated in Central California’s San Joaquin Valley, is an extreme example of what’s happening across the country. As the economy tanks, foreclosures are soaring. Roughly one out of four subprime mortgages nationally is in trouble. Even so-called prime borrowers, who had good credit when they got their loans, now are having trouble keeping up; about 5% of these loans are in foreclosure, up from less than 1% in 2007, according to the Mortgage Bankers Assn. Rates are even higher in cities like Merced, Fort Myers, Fla., and Bakersfield, Calif., where the bust has been brutal.”

“The housing crisis is creating ghost towns of once-bustling communities like Merced. In largely abandoned neighborhoods, paved sidewalks and driveways lead to empty lots strewn with utility coils. Unfinished frames with rotting rafters and rusted hinges sit alongside occupied homes. Roughly 40% of the homes in Merced are considered distressed.”

“The University of California announced in 2001 that it would open its first new campus in more than 40 years on 84 acres in northern Merced. In anticipation of the potential demand, builders flocked to the area, and real estate investors bid up prices. But they were overly optimistic. Now the market lies in ruins, as unemployment tops 20%. Says Janet Young, assistant chancellor at UC Merced, which opened in 2005: ‘The housing boom was a huge surprise to us.’”

“The housing market has suffered a ‘massive shock’ and faces a difficult recovery in the face of job losses, foreclosures and tight credit, according to Harvard’s Joint Center for Housing Studies. The national homeownership rate has dropped to 67.3 percent, erasing all the gains since 2000. As of March, more than 14 million households owned homes that were worth less than their mortgages. Close to 4 million households have entered foreclosure since 2007.”

“Builders have reduced home construction to 60-year lows. But demand remains extremely low; it’s as if builders saw ‘two out of every three customers disappear,’ said Eric Belsky, executive director of the housing center.”

“The good news is that the bursting of the housing bubble has made real estate more affordable.”

“In the wake of a housing market melt down, many companies have had to diversify and reorganize to keep from going down. Advantage Homes, the largest retailed of manufactured homes in California has always specialized in mini-mansions and high-end vacation homes, until now.”

“The most inexpensive house with delivery is $43,642, with models up to $69,975. The switch to entry-level homes, and a decrease of the large up-scale home is market driven, said factory sales manager Eric Homan. People aren’t buying large houses right now and they want to keep Silvercrest buzzing. Advantage Homes president Thomas DaRosa said, ‘In order to keep my people working we needed to develop a product everyone could afford.’”

“Two friends of mine just moved back to Chicago from Philadelphia. I’m…jealous of the limitless possibilities that lay before them. They’ve got a six-month lease on an apartment in the city, and plan to find a new single-family home by New Year’s. So they’re just starting their second home-buying process. They’re dealing with real estate agents. They’re sifting through endless online listings. They’re coping with the financial headaches. They’re living with the relentless stress.”

“And I’m jealous. Really, I miss it. I miss the thrill of the chase. The excitement. Even the agita.”

“Our house hunt was short — the first house I liked was the one we wound up buying. All told, it took a little more than a month from the time we started thinking about buying a house until we were under contract. We visited fewer than 10 houses. But it was fun.”

“Come take a look at our TiVo ‘Now Playing’ list. I have season passes for HGTV’s ‘House Hunters,’ ‘Property Virgins,’ and ‘My First Place,’ as well as TLC’s Jon-and-Kate-free ‘My First Home.’ And I still watch them. A lot. It doesn’t even matter that I can’t stand the walking clichés that populate these shows — the family that sneers at gorgeous $250,000 homes despite a $25,000 salary and no pre-approval; the couple who invariably makes the ‘this airplane-hangar-sized walk-in closet might be enough for only the woman’s clothes’ joke; the gullible homebuyer who actually believes the real estate agent when told he or she should make an initial offer at asking price or higher.’

“I can’t stand these people. Yet I live vicariously through them, because I sometimes wish I were in their shoes.”

“Don’t get me wrong. I love our house…But that doesn’t mean I don’t wonder what could have been had we waited. We thought the housing market was hitting rock-bottom back then, that prices were as low as they would be, that a ‘dead-cat bounce’ was inevitable. Now? Heck, maybe we could have bought our house (or a bigger one, a newer one, a better one) for a $20 bill and a few coupons for half-price appetizers at Bennigan’s. Who knows?”

“That’s what my Philadelphia refugees are facing. The future is wide open. The possibilities are endless. The fun is just beginning. Then again, I just spent two hours helping to haul couches, loveseats and boxes of books into their new digs. And then I remembered — with house-hunting comes moving. So, um, never mind. I’m happy where I am.”