The Housing Bubble

It’s Friday desk clearing time for this blogger. “Sales of single-family houses rose 6.6 percent in July, compared with the same month a year ago, according to a report from the Greater Hartford Association of Realtors, which covers 57 towns stretching from north central Connecticut to Middletown. The increase is modest compared with the double-digit increases of four years ago, but a sign, experts said, that the worst might be over for the state’s housing recession. ‘It was like a snowball rolling down a hill and we’d stopped it from rolling. It will be a little while before we push it back up,’ said Curt Clemens Sr., owner of Century 21 Clemens & Sons in Hartford.”

“For home buyers John and Gina Gallivan, this spring was the right time to buy a raised ranch in Wethersfield, where the couple both teach at the high school. They closed on their new home in July for a price of $285,000. John Gallivan said that he and his wife must still sell the condominium in Glastonbury where they lived until they bought their new house. Earlier this week, they dropped the price to $194,500 from an original asking price of $204,500. The couple could end up renting the condominium if they don’t find a buyer, Gallivan said.”

“He said that they are ‘motivated’ sellers because ‘carrying two mortgages can get old fast.’ But he added, ‘We don’t want to give it away, either.’”

“Taylor, Bean & Whitaker Mortgage Corp. was, until this week, one of the top 10 wholesale mortgage lenders in the country. During its heyday, the firm was awash in cash with $3 billion in assets and hundreds of banks knocking on its doors wanting to sell their mortgages to the wholesaler. Now the company is in dire straits. On Wednesday, the company ceased all new loan business and announced an intention to restructure. One day earlier, the FHA publicly announced it was turning off the taps and banned the company from doing business with the federal agency.”

“Auditors told HUD they found ‘irregular transactions that raised concerns of fraud.’ On Tuesday, Ginnie Mae stopped Taylor Bean from issuing its mortgage-backed securities. Ginnie Mae guarantees investors the payment on federally insured mortgage-backed securities. Those loans are mostly insured by the FHA or guaranteed by the Department of Veterans Affairs.”

“‘That means they (TBW) couldn’t bundle (FHA) loans and sell them as securities any more…and that turned off the tap at both ends,’ said the HUD official.”

“Borrowers scheduled for a closing should ask their brokers or lenders if their loan is affected, said Realtor Ryan Hukill, an agent in Oklahoma City. ‘The effects of this will be widespread and are tough to predict, but if you’re a homebuyer, I’d suggest that you do some checking into whether or not the mortgage you’re approved for is related to this company. If it is, get busy now and get it moved because this company is gone and its subsidiaries aren’t going to be able to get your deal done!’ Hukill wrote.”

“Taylor, Bean’s collapse ‘just blew ’safe’ as far out of the world as you can,’ said Cody McCollom, branch manager of Grandmark Mortgage in Edmond. ‘Their quick, easy, most efficient (credit source) just blew up. People are scrambling right now.’”

“In Colorado…Taylor Bean has nearly 5 percent of the FHA loan market. Boulder mortgage lender Lou Barnes said it’s unusual to see such a large mortgage lender under a fraud investigation. Just what happened at the Colorado level probably won’t be known until the forensic analysis is done. ‘That’s what a forensic analysis is supposed to do: walk the dog backwards to attempt to find what happened,’ Barnes said.”

“Three Southern Nevada banks have already disappeared in the last year. ‘On the positive side, a lot of our irrational competitors have been taken out,’ said Dale Gibbons, chief financial officer of $5.7 billion-asset Western Alliance Bancorporation of Las Vegas. ‘You had pressure to underwrite too loosely’ to make loans, Gibbons said.”

“Observers point to two key problems facing the banking industry — the recession and the revenge of the regulators. Federal bank regulators drew criticism for lax oversight during the boom days. So examiners are getting overly strict, observers say. Politicians, meanwhile, often take the opposite position of regulators.”

“‘Bankers are being publicly urged by Washington to be cooperative, to assist borrowers and businesses to make it through these tough times,’ one insider said. ‘But the banking regulators who bought into the economic prosperity just like everyone else and never criticized lending practices are now correcting those errors in an attempt to restore their names through overzealous exams,’ the insider said.’

“Bankers generally have not stopped lending, but the ’shadow banking system’ or nonbank institutions, has, said John Guedry, who recently resigned as executive vice president of City National Bank to consider a run for Congress”.

“He referred to life insurance companies, mortgage bankers, leasing companies and Wall Street firms that arranged conduit loans, such as mortgage-backed securities. ‘At the peak, they were doing 70 percent of the lending actually in Nevada,’ Guedry said. He estimated that four or five dozen conduit lenders were making hundreds of millions, if not billions of loans in Las Vegas, during the boom days.”

“In feverish times, when spinmeisters hyped the ‘Manhattanization’ of Las Vegas, grand plans were announced for some 75 high-rise towers that would deliver 47,500 luxury condominium units to a market saturated with single-family stucco homes in sprawling suburbs. The fireworks have fizzled now, though.”

“Allure put some of its units up for auction earlier this year. Buyers had forfeited their nonrefundable deposits on the units. Even at 20 percent discounts, the developer’s minimum bids were not met. Robert Daniels experienced a bit of buyer’s remorse. He had already reserved a condo at Juhl, which was delayed by more than a year in its opening, when he saw prices being reduced at nearby SoHo and Newport Lofts. He could have bought a 1,600-square-foot unit at Newport for roughly the same $440,000 he paid for a 910-square-foot unit at Juhl.”

“The number of people who can afford and justify a second home has been grossly overstated for years, said Chet Nichols, former executive at Amland Development, developer of One Las Vegas.. Contrary to what some market observers maintain, the fundamentals that drove Las Vegas’ growth are no longer in place, Nichols said. ‘Ignoring reality is what got us here in the first place,’ he said. ‘I don’t want to be a doomsayer, but the sooner people start behaving rationally the better off we will all be. Success on any other basis is always going to be temporary.’”

“Las Vegas is at greater risk than other cities that its homeowners will walk away from their mortgages even though they could afford them, according to a study by two Chicago universities. Jeremy Aguero, principal of the research firm Applied Analysis, said it’s not unusual for Las Vegas homes to have fallen from $400,000 to $200,000, and people are going to make the best economic decision for themselves.”

“‘If people look at walking away for purely an economic decision, we are going to have a lot more people walking away from their homes,’ Aguero said. ‘It would create a huge wave of problems and ramifications for the banks if a mass of people walked away from their mortgage obligations all together. It would be huge and a disaster.’”

“Richard Plaster, founder of Signature Homes, said the social constraints of walking away are lessened when people see people like the Fertitta family filing for bankruptcy protection for Station Casinos ‘I do believe we are going to see a lot more people as time goes on realize their first responsibility is to theirself and their family,’ Plaster said. ‘They are moving in that direction because it is in their best interest. They are paying an anonymous investor on their home loan, and the problem was caused by malfeasance to some extent. They wonder why they should be buried unless they believe home prices are coming back. And when they see more people walk way, they won’t feel so bad. It could be a contagion where everybody does it.’”

“The percentage of homeowners with conforming loans who will be ‘underwater’ is projected to double to 48 percent in 2011, Deutsche Bank says. And, 89 percent who have adjustable-rate mortgages also will owe more than their home is worth that year, up from 77 percent. More housing price declines are expected through the first quarter of 2011. As home prices fall, homeowner equity drops and more borrowers consider walking away from their mortgages. Add unemployment, divorce, disability or other financial challenges to the picture and the analysts write that ‘borrowers may also ‘ruthlessly’ or strategically default even without such life events.”

“The report says Las Vegas and parts of Florida and California will see 90 percent or more of their loans ‘underwater’ by 2011.”

“Drive through a neighborhood in any area of the Tucson region and it isn’t difficult to find a handful of empty homes. T’What we are seeing is people give up hope as they try doing a loan modification,’ said Long Realty Senior Associate Broker Rebecca Patsch.”

“More foreclosures are on the horizon thanks to the risky mortgages types that were taken out when home sales shot upward a few years ago. ‘So we’re looking at next year seeing the five-year resets from the boom sales,’ Patsch said. ‘A lot of times the people’s properties have gone down in value so much that they can’t refinance out of those adjustable (rate mortgages).’”

“Bank asset managers are telling real estate professionals the wave of foreclosures expected to begin in July won’t hit until somewhere between late August and October, according to Brian Russell, designated broker of Pinal County Properties in Casa Grande. Russell said we aren’t likely to see the crush of investors playing the market that we saw a few years ago, and which many people blame as one of the major causes of the crash.”

“‘It starts at the top,’ Russell said. ‘The lending institutions have really cracked down on the process. There’s no more no-doc[umentation] loans. There’s a lot of underwriting requirements that investors have to meet. Investors typically have to put 25 percent down. There’s not a lot of investors out there now - a lot of them got burned.’”

“Unemployment in recession-hit Ireland has risen to a 14-year high of 12.2 percent, the country’s Central Statistics Office reported Friday. The Irish economy has suffered a spectacular fall over the past year as the global credit crunch burst Ireland’s long-galloping property market and saddled the nation’s banks with euro90 billion ($135 billion) in defaulting loans to developers and construction firms. Scores of office blocks and apartment developments now lie empty as the number of residential mortgage-holders trapped in negative equity rises above 150,000.”

“The report said the number of job-hunters signing up for welfare benefits has surged 83 percent over the past year to an unprecedented 435,735 in this country of 4.2 million. ‘Ireland has never witnessed a job implosion on this scale,’ said lawmaker Deirdre Clune of the opposition Fine Gael party.”

“Deschutes County was the only Oregon MSA in the report that recorded a decline in per capita personal income in 2008. Timothy Duy, a University of Oregon economist who tracks Central Oregon’s economy, attributed Deschutes County’s decline in personal income to the housing market’s collapse.”

“‘I find it completely unsurprising, given that the Bend region had such a disproportionate amount of economic activity in what was revealed to be a housing bubble,’ said Duy, director of the Oregon Economic Forum at the university.”

“When Lucas Miller bought his first property in June, he decided it was no time to splurge. He opted for laminate rather than granite kitchen countertops in his $127,000 two-bedroom townhouse in Fishers, Indiana. ‘Spending another $20,000 on upgrades just didn’t make sense to me,’ said Miller, 30, a chef at Ball State University in Muncie, who bought from Pulte Homes Inc.”

“The average size of new homes is down to 2,065 square feet, the smallest since 2000, and the median price this year has yet to rise above 2004 levels, according to the Census Bureau. Builders, who lured customers in the housing boom with everything from granite countertops to Sub-Zero refrigerators, are modifying floor plans and options in response to homebuyers’ emphasis on frugality, said Brian Bethune, an economist at IHS Global Insight.”

..The high end isn’t moving, so builders have got to dumb- down their designs and put in Formica kitchens and the bare- bones carpeting,. Bethune said in an interview. ‘New-home buyers are being conservative — they’re not willing to pay for the extras because they’re worried about the economy.’”

“A Walnut Creek commercial lender that has repossessed two troubled golf course communities near Auburn has filed a claim against Nevada County, alleging a failing sewage treatment plant at DarkHorse Golf Club has halted home building at the upscale development. ‘This has gone on for two years. We can’t build any more houses,’ said Bob Bridge, vice president of real estate assets at Owens Financial Group.”

“Now, stuck with lots that are losing value and unable to build on them, Owens is paying nearly $14,000 a month to haul DarkHorse wastewater two miles to a treatment plant at the nearby Lake of the Pines community. ‘This golf course is like most golf courses,’ said Bridge. ‘If you lose only a little bit, you’re doing good.’”

“In case no one ever says it again, I am going to restate for the record exactly what Gold Rush Ranch is proposed to be - by its developer, on official planning documents. I promise to do that fairly shortly. But first, I caution readers to be unsurprised when this description does not match any of the following: - a savior for the Sutter Creek Fire Department. - a savior for the Sutter Creek Police Department. - a way to solve Sutter Creek wastewater problems.”

“I’m surprised at the length of this list of common failures to call a spade a spade. What these failures obscure, perhaps intentionally in some cases, is the question of what the need is or isn’t for Gold Rush Ranch as precisely what it is proposed to be - a group of houses for people to live in.’

“The premise - obscured as I said - is that people will need to, or want to and in fact will buy these houses in great numbers to live in. Unquestionably, a need exists for inexpensive housing. Does one exist for luxury housing? Not currently.”

“But it’s worthwhile to suggest that even though there’s no reason to suppose California forever will be stuck in an economic crash, there’s equally little reason to suppose that things in California will eventually become just as they were up to 2005 - unabashed consumerism, value placed on luxury, real-estate booms, etc. After all, to suppose that would presuppose that no lesson is being learned by just about all of us from these unexpected, yet gruelingly tough times. And, as tough to teach as people might be, I doubt that no one is learning anything.”

“Maybe there’s a couple of more metaphors for Gold Rush Ranch that need to be added to the list. One might be, ‘An idea whose time has come.’ But another might be, ‘An idea whose time has come, and gone.’”

“A recent University of Utah study projects that homeownership rates, which have declined slightly since their 2004 peak, will drop to 1980’s levels within the next year. This study, as it currently stands, is much ado about nothing. According to the U.S. Census bureau, homeownership rates are currently pegged at 67.4 percent…The much-touted homeownership rate is actually a drop of only 1.8 percentage points from the 2004 peak of 69.2 percent — while this reduction is notable, it is hardly apocalyptic.”

“Still, end-of-the-world scenarios are fun to write about and, the total massive destruction of homeownership is too big a story to ignore — even if it isn’t really happening. Rather than focus on the question of whether or not homeownership is on its way out, it might be worthwhile to consider whether or not reduced homeownership is a bad thing. Homeownership is often cited for its ability to create stable neighborhoods; this, in turn, presumably translates into stable tax bases, as well as healthy businesses, public parks, big shaggy dogs, and apple pie. On a broader context, however, all these benefits are largely the outgrowth of sufficient jobs.”

“To a certain extent, homeownership and a stable job market don’t necessarily go hand-in-hand. As homeowners in Detroit, Buffalo, Youngstown, and many of America’s other rust belt cities can certainly attest, homeownership can often keep workers from going to where the jobs are.”

“As the recent housing boom demonstrated, the American homeowner mythos has not always served its adherents all that well. This is not to say, of course, that homeownership is always a bad thing. However, it is clearly not for everybody, and the one-size-fits-all American dream of being a member of the landed gentry is more likely to serve construction companies and housing contractors than the vast majority of potential homeowners.”

“If homeownership is actually declining, perhaps we need to embrace it as a move toward sanity, flexibility, and stability.”