The Housing Bubble

It’s Friday desk clearing time for this blogger. “The house across the street from Hartnell College wasn’t Daniel Eyde’s dream home. When he bought it in 2005, the Salinas house was a place to live and an investment. But it was also the place where he grew up. It was part of his retirement plan, a way to get a ‘toehold’ in the juggernaut real estate market. You’d never be able to tell by looking at it, but now the house is Eyde’s albatross. Its value has dropped 48 percent since he bought it. ‘Does it make sense to keep spending on an investment that is losing money every week?’ he asks with frustration in his voice. ‘”We’re facing the real prospect of walking away from the house instead of simply continuing to lose money.’”

“Back in Eyde’s office, a graph shows a big bell curve of local housing prices, reaching its zenith around 2005 and then dropping down, down, down. ‘This is a classic bubble,’ Eyde said. ‘It’s turned out to be the most calamitous investment decision ever.’”

“It wasn’t the way things were supposed to work. The American dream of home ownership, the idea that a house should be a nest egg where money is stashed for growth, isn’t there anymore. It’s a dream that’s changing.”

“Five years after launching sales at San Diego’s largest condominium high-rise, the project’s Canadian developer is back to square one as it seeks state approval for a new marketing strategy that it hopes will finally bring residents to the still unoccupied building. Pointe of View’s challenges are daunting given a still-slumping real estate market in which newly built condos in downtown San Diego are competing with deeply discounted distressed properties that are priced to move quickly.”

“‘In the meantime, Pointe of View is facing a deadline this fall for paying off its construction loan. But with no sales, the developer is negotiating with its lender to extend the loan, said Brian Stoddard, president of Pointe of View. ‘We have to deal with the environment we’re all in right now, and we still feel strongly about the project’s ultimate success,’ he said. ‘But no one could have predicted the entire collapse of the real estate markets.’”

“Marin foreclosures dropped 18 percent in the second quarter of this year compared with 2008 as lending institutions took a step back in the current economic climate, a real estate tracking firm reported this week. Realtor Leland Spelman of Coldwell Banker in San Rafael… who only has been dealing with foreclosures and short sales recently, said, however, he has been swamped. ‘I’ve never been busier in my entire life,’ he said. ‘It only comes and goes in these times. We had probably 10 or 11 years without any foreclosures to speak of. It’s very interesting times with all that’s going on.’”

“(As) strategic director of Think Big Work Small, (in) Bill Hillestad’s online poll of industry professionals, about two-thirds of respondents said they had had at least one appraisal come in under the purchase price since the new rules took effect. Hillestad said the code has the potential to kill the country’s budding real estate recovery by depressing prices even more than the foreclosure crisis.”

“A Santa Cruz appraiser who used to have about 10 jobs a month says she is now lucky to get just one, as the management companies change the way work is doled out. And instead of being paid between $350 and $500, she might get just $200. The management company pockets the difference. ‘I’m sure there were a lot of crooked appraisals. But to put every appraiser basically out of business is not OK,’ said the appraiser, who didn’t want her name used for fear that she would jeopardize future work. ‘After having my business for 20 years, I’m about to lose my house.’”

“Five years ago, Brett Webber felt confident in his finances, and borrowed against his home equity accordingly. ‘We had tapped out every ounce of equity in our home, as many people had,’ Webber said. ‘We used it like an ATM.’”

“But complications arose with his business. Then the recession hit, further damaging his bottom line. And looming on the horizon was an interest rate reset that was going to make his mortgage payments unaffordable. That was when he went to the Housing Assistance Corp. in Hyannis, or HAC, which offers free foreclosure prevention counseling.”

“‘We pressed on and on and on, and finally, on June 5 of this year, I got my modification,’ he said. ‘My payments are basically cut in half for the first couple of years.’”

“There were 50 more foreclosures in Barnstable County last month than there were the previous month, an increase of 25 percent. And the 143 petitions last month are up from 130 in May. It is also possible that some lenders and borrowers that have been working together since the beginning of the Making Home Affordable Program are now starting to realize that a modification or refinancing is unlikely to work out.”

“‘After that length of time, you come to a decision point on both sides,’ said said Mary Miller, vice president for residential lending at Cape Cod Cooperative Bank. ‘Either it’s going to work or not.’”

“According to a report…in the second quarter markets from Westhampton Beach to Montauk saw a 58-percent drop in the number of houses sold since the same quarter last year, and the total sales volume dropped by more than 50 percent. ‘We are in a holding pattern — we’re waiting for the sellers to get with the program and lower the prices,’ said Peter Turino of Brown Harris Stevens in East Hampton.”

“As for where the prices should be, there have been so few sales that ‘no one knows what is unreasonable yet, all we know is they’re not buying yet,’ he said. With potential buyers beginning to check in, ‘we’re showing houses, but there are very few sales.’ Still, ‘at least we have live bodies in the car. The first quarter we were just sitting at the desks and we had nothing to talk about.’”

“After seven consecutive quarters of decline, the market for previously owned homes in the eight-county Philadelphia region remains woefully short of sales but is holding the line on prices. Who’s buying these days? Not first-timers, said Wharton research fellow Kevin Gillen, not even with the lure of an $8,000 tax break, because credit remains tight.”

“In Center City, ‘it’s people already here trading up,’ said Realtor/developer Allan Domb. ‘You sell for $500,000 and buy for $1 million. What was $600,000 is now $500,000, and what was $1.2 million is now $1 million.’”

“‘We’re still looking pretty good,’ Gillen said. ‘We’re just not a bubble market - our prices just doubled [during the real estate boom], while small cities quadrupled or more. We added just 11,000 new units in 10 years, while smaller cities built 20,000 to 40,000.’”

“July’s more than half gone. School starts in just about a month. Oh, and if you were hoping to catch the summer home-selling season, you can just about forget it. Almost a third of the houses still on the market in North Texas are sporting ‘price reduced’ signs in the hope of luring a late-season buyer. The latest housing market gauge by Altos Research found that the average sales time of a Dallas-area home was 115 days in June, up from 86 days a year ago. Maybe it’s time for another price cut.”

“Average list prices have actually gone up by about $20,000 in the last year. Maybe not all the sellers have gotten the message about the local home market. If the ‘for sale’ sign is still out front by Christmas, sellers should learn what it takes these days to sell a house – move-in condition and realistic pricing. Otherwise, they’ll have to wait. There’s always next summer.”

“Las Vegas is on pace for 40,000 existing-home sales and 5,000 new-home sales in 2009, but a second wave of foreclosures will continue to put downward pressure on pricing through the end of the year, housing analyst Larry Murphy said. Prices dropped 16 percent in the second quarter, same as the first quarter, he said. Murphy suggested earlier this year that median resale prices could drop to $100,000 in Las Vegas. He’s not saying it will happen, but it’s possible.”

“The worst overall performance was the 680-unit Meridian apartment conversion. Chicago-based American Invesco sold units new at $539,000, or $604 a square foot. The average resale is $87,600, or $121 a square foot, and 30 percent of the units went to foreclosure. ‘So if you made an investment you’re not happy with, at least you can say it did better than this,’ Murphy said.”

“John Beardsley is Portland’s first major commercial developer to see his properties move toward foreclosure. Beardsley’s defaults and developer Tom Moyer’s recent decision to halt construction of his 32-story office and condo tower, Park Avenue West, show Portland is following the same trajectory in commercial real estate as it did in the housing market: tracking national trends but arriving later to the recession.”

“‘The bottom fell out of the market,’ Beardsley said. ‘I’m a reality of it. Tom Moyer’s a reality of it. It’s a very sobering time. … This is significantly worse than the 1980s.’”

“Federal Reserve Chairman Ben Bernanke faced his second day of grilling Wednesday from members of Congress. Under questioning, Bernanke said many signs point to improvement in the housing sector, although he warned that ‘we’ve had false dawns before.’”

“‘We were not quick enough, we were not aggressive enough to address consumer issues earlier in this decade,’ Bernanke said in response to a question from Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee.”

“U.S. bank regulators took few public enforcement actions during the housing boom to rein in lending practices that resulted in soaring delinquencies and defaults when home prices began to fall in 2006. The Fed ‘utterly failed the American people’ as a regulator of bank holding companies, Alabama Senator Richard Shelby, the top Republican on the banking panel, said in an interview with Bloomberg Television. He called for ‘exhaustive hearings’ in the committee to examine the Fed’s actions outside of monetary policy to determine which powers the central bank should keep.”

“It’s ‘very clear that the existing structure for consumer protection’ by the Fed and other bank regulators has ‘failed miserably,’ House Financial Services Chairman Barney Frank, a Massachusetts Democrat, said today at a news conference with consumer advocates and other lawmakers. The Fed ‘will be the biggest institutional loser when we set this up,’ he said.”

“The credit crisis ‘has dragged the Fed into the political arena I am sure more than Bernanke wants it to be,’ said Paul Kasriel, chief economist at Northern Trust Corp. ‘When you do make a lot of errors, and big errors, that erodes your case for independence.’”

“Allow me to share with you the observations of a mortgage market analyst who has been plying his trade for nearly 32 years. In 1996, I warned (at the Mortgage Bankers Association’s Annual Convention) that Fannie Mae and Freddie Mac were ‘out of control,’ siphoning off mortgage banking revenue and likely to end in ruination, seriously harming taxpayers. In 2005, my partners and I were hearing about the rapid growth of non-prime lending—namely alt-A and sub-prime—and we launched a study to measure the size of this market as of early 2005. We were shocked by the results.”

“In apportioning blame, I start with the Federal Reserve …After the central bank, next up in terms of culpability is the federal government—both the legislative and executive branches and both political parties. The next guilty group resided in Manhattan along Wall Street. The incentives were wrong. Standard & Poor’s, Moodys and Fitch Ratings were like prostitutes who sold their favors.”

“The next most culpable in my view were the lenders…Names like Argent, Ameriquest, New Century, First Franklin and Countrywide come to mind. Near the bottom of my hierarchy of blame rest the originators—the brokers, the real estate agents … the street level participants.”

“In reviewing this presentation, my friend Richard Garrigan, a retired professor of real estate finance at DePaul University in Chicago, noted that much of the housing speculation could be traced to the Federal tax law change that occurred in the late 1990s. This change permitted a married couple to avoid up to $500,000 in capital gains on a primary residence after owning it for a minimum two-year period. Furthermore, a second home could be acquired and become a primary residence after the first home was sold. Think of all the housing demand this tax law change stimulated. Free capital gains and tax write-offs to boot. Again, the law of unintended consequences surfaces.”

“And so it goes … we now live with the aftermath and consequences…The challenge ahead is to crawl out as quickly as possible, then fill in the hole so we can never again stumble into the perfect storm.”

“At 74, Earl Shelton is the most robust of a vanishing breed – one of the million-plus that scrambled out of the dust clouds of the American Midwest during the dirty thirties to seek salvation in California. Shelton too has been wondering about then versus now. Wondering whether this formidable country still has the stuffing his kind had. The sheer stick-to-it-ive spirit to crawl back.”

“‘Times were harder then. Way worse than now. That’s a fact,’ says Shelton, who claimed his share of the American dream the old-fashioned way. Decades of hard work that began at age 7 here in the San Joaquin Valley, filling 23-kilogram sacks of potatoes. He married, bought a house that is now his, not the bank’s, raised a family bound for what everyone thought was a better life. Until now.”

“The housing market has tanked, but consumer confidence is improving. Is America in recession, or not? ‘Something’s different this time,’ Shelton says. ‘Americans are different. I call it the ‘Instant Generation.’ All these years, people want something, they just go get it, even with no money to pay for it. And now look at the mess we’ve got.’”

“Shelton remembers the journey with his father and three brothers in the old Model A. Losing a wheel on the way to Needles. And pulling up short in Arizona, where his dad was down to his last nickel – only to be saved moments later with the offer of paid work as a ranch hand. The barriers eventually broke down, as they always do. The Okies spread out, married. ‘I don’t have any answers about where this country is going,’ says Shelton. ‘But I know this: you don’t need a lot to be happy in this world. And here at Weedpatch, we didn’t have much – but we were happy. That’s the thing I want to say most. This was a good place. It made me who I am.’”