The Housing Bubble

It’s Friday desk clearing time for this blogger. “It’s the first stretch of increased buying since 2005, a frenzied time with fast-rising prices and go-go lending. Those unusual conditions - repeated in communities across the country - started a domino effect of economic woe, from foreclosures to bank failures to recession. Even with the recent upturn, sales in the Baltimore area are still less than half what they were at their peak in 2005. While the number of home sales has risen, prices are still falling. The average last month, just over $295,000, is 7 percent less than a year ago. And it’s $14,000 less than the average seller got in August 2005.”

“‘The fact is, if it’s priced right, it will sell,’ said Joseph T. “Jody” Landers III, executive vice president of the Greater Baltimore Board of Realtors. ‘It may take a little longer than it did two years ago, but it will sell. And if it’s priced wrong, it’ll sit forever.’”

“Emily and Bryan Brown purchased their Brewers Hill house, newly built with a garage, for $475,000 in 2006. Now they’re trying to sell because Bryan Brown was transferred to Florida in July. Asking price: $384,000 - $91,000 less than they bought it for. So far, no offers. Because their down payment was substantial, their asking price would allow them to walk away without bringing money to the settlement table. But not if they lower it further.”

“‘It’s very tight,’ said Emily Brown. If they get no takers, ‘we’re going to put it up for rent next month. … From there, I’m not sure what we’ll do. If we rent, we’ll take a loss monthly - that’s definite.’”

“Carolyn Capalbo, a real estate agent in Manassas who works in Prince William, Loudoun, Fairfax and Fauquier counties, said she has noticed a ’sharp shift’ in the past six months, as a swell of buyers, many looking to purchase their first home, have been jockeying for a smaller pool of houses. ‘It’s a seller’s market,’ Capalbo said. ‘We have a lot of relocation people who they feel like can come in and get the deal of the century but find themselves in competition over property, and they’re shocked.’”

“The market for luxury homes, concentrated in areas like Great Falls, has nearly ground to a halt. ‘There is an enormous inventory of upper-end houses on the market right now, by the market kind of speaking through its silence,’ said Vivian Lyons, a longtime real estate agent who is based in Great Falls but buys and sells homes from Leesburg to Bethesda to Arlington.”

“The problem with the high-end market, Lyons said, is with asking prices. With a small pool of buyers on the highest end of the market and an abundance of inventory, the only way to bring demand in line with the supply is by lowering prices, she said. ‘But sellers don’t want to hear it…There are very few buyers at the high end and the buyers that there are, are looking for value,’ she said, adding that sellers must price accordingly. ‘What sellers need to understand is that they don’t establish the price for a property, their agent doesn’t establish the price of a property, the market establishes the price.’”

“Mike Aubrey…spoke recently to Your Business about real estate and lowering one’s expectations. Q: What is it like telling someone their home isn’t worth what they think it is? A: People are very emotional about their homes. They have a lot of memories tied up. People respond very dramatically. Sometimes it comes with an awkward silence.”

“Q: What are the weird things people say about their homes? A: When I hear somebody say something that just doesn’t make great logical sense to me, I always respond with, ‘Really?’ People get very delusional about their own homes. People think their house is better than anything out there. With one couple, one of the comparable homes I showed was priced quite a bit less than their house. Same builder, same townhouse, had two very dramatic differences: Their basement was below grade and was not a walk-up; this house did have a walk-up. The comp house had a fireplace and theirs didn’t.”

“You know what they said? Fireplaces were dangerous, that people could get burned with them and, hence, they were probably a detriment to the sale of the home. That’s just kind of crazy, right?”

“New York City landlords used to drive a hard bargain. But the luxury condo glut means buyers are now in the driver’s seat - sometimes literally. At One Brooklyn Bridge Park, the 14-story complex in Brooklyn Heights, developers are trying to lure buyers by throwing in a free car with an apartment purchase. The first 10 people to drop $2 million or more on a condo in the $550 million waterfront project before Sept. 30 will get a free 2010 Audi A4 - with parking.”

“The building broke all price records for Brooklyn when real estate mogul Elizabeth Stribling bought a $6 million penthouse in March 2008. Then Wall Street crashed, and took the market for swanky condos with it. Despite slashing prices and opening its door to renters, the 449-unit building is still only 30% full, said developer Ian Levine. He insisted the unusual promotion isn’t a sign of desperation but a tactic to remind consumers the building offers much-sought-after parking.”

“Strollers on the nearby Brooklyn Heights Promenade were skeptical of the cars-for-condos program. ‘For $2 million, you’ve got to give me something nice like a BMW 650i,’ said Alonzo Pollack, 24, of Flatbush. ‘That would sell me.’”

“Arizona Attorney General Terry Goddard was in Yuma Wednesday to share some of his concerns about the already plummeting state housing market. ‘The reason I am so concerned is because of something called a payment option ARM,’ Goddard said. ‘Arizona has something like 128,000 loans that are payment options. That means the home owners have been making a minimum payment for the life of the loan, and are now facing a reset provision. If they are making a $200 payment when the normal payment would be $2000, the $1800 they are not paying every month gets added on to the principal, which keeps growing in a market that is declining. If the payment is $2,000 when the person was used to paying $200, and the bank comes and drops the hammer, the homeowner will probably default and go into foreclosure the next day.’”

“Goddard said many loans now cost more than the property is worth, using Maricopa County as an example. ‘This is shocking. Over 70 percent of the homes in the Phoenix area are under water because the loan is greater than the value of the property. ..Now we are faced with abandoned and stripped properties where the people who got foreclosed on usually take everything of value out with them whether it is legal or not.’”

“Goddard said when the housing market was still booming, lenders had a slew of extra money they were throwing at consumers. ‘(Those with an ARM) were mostly people who tried to take advantage of the free money offered on a hot market where the lenders really pushed their product. For many who used the loans to refinance their homes, it sounded like all they had to do was sign their name on the dotted line and they could put money right in their pockets. They have probably burned up their money and now they can’t sell their houses. Those people are facing a very serious financial situation.’”

“The pace of foreclosures in Lane County showed little sign of relenting as 222 more homeowners received legal notices in August. A new wave of foreclosures will crest in the next two or three years as borrowers who took out ‘interest-only’ or ‘pick-a-payment’ loans reach either a reset or a trigger that boost monthly payments by two-thirds or three-quarters, experts said.”

“About one in five borrowers in Oregon in 2007 took out interest-only or pick-a-payment loans, according to the Oregon Division of Finance and Corporate Securities. ‘It’s amazing how many people just desperately wanted to be in a house and would sign off on a product like this,’ University of Oregon economist Tim Duy said. ‘They are making a leveraged financial bet’ that didn’t pay off as home prices dropped, Duy said.”

“Many of the borrowers using interest-only or pick-a-payment loans were probably buying more house than they really could afford, experts said. ‘There isn’t a mortgage modification program that’s going to help you if you fundamentally overreached your capacity to finance a home purchase,’ Duy said.”

“Real estate experts say buyers are encouraged by lower home prices throughout the Clark County market, a function of numerous short sales. Real estate transactions are taking longer to close because of more complex short sale transactions and foreclosures, said Bill Kinkade, owner of Century 21 Cascade Pacific in Vancouver. ‘Problem is, people get impatient. They get apprehensive and then they walk away,’ he said.”

“He is encouraged by recent reports that California’s housing market is showing signs of recovery, an incentive for home owners there to sell, cash out their home’s equity and buy a lower-priced, upgraded home in the Clark County market. ‘California’s fiscal problems may stimulate that even more,’ Kinkade said.”

“Housing is at its most affordable level since the National Association of Home Builders/Wells Fargo Housing Opportunity Index began tracking affordability in 1991. Dennis Torres, Executive Director of Real Estate Operations at Pepperdine University, said the housing crash and low interest rates have combined to create a once-in-a-generation opportunity for buyers. ‘People are going to talk about this as ‘I could have, I should have’ for decades,’ he said. ‘If you’re confident that you’ll stay in the location for seven years and you’re confident of your income, don’t walk, run.’”

“Resident Barbara Koltweit played her best round of golf ever on the course of Palm Desert Country Club on Monday afternoon. Then the club closed. ‘I posted my score at 2 p.m. and no one said anything to me,’ said Koltweit, who lives on the fairway. ‘I’m kind of in shock.’”

“Larry Kosmont, Randy Case, another developer, and Dahoon Investment filed for Chapter 11 bankruptcy on June 19 in Central District Court in Riverside, hoping to restructure debts of more than $1 million. Robert M. Yaspan, the lawyer handling the bankruptcy, was not immediately available for comment today.”

“‘That’s going to kill the property values,’ said Paul Sturwold, who has lived at the club for more than 20 years.”

“Orange County Sheriff’s Deputy Ramona Figueroa says nothing surprises her any more but the job is getting worse. One common task these days is serving eviction notices to people who have done nothing wrong — who rent properties that have fallen into foreclosure, or are repossessed to recover unpaid debts. ‘They are shocked and surprised,’ Figueroa said as she went on her rounds. ‘And here I am giving them a five-day notice and they explain that just five days earlier the homeowner was at the home collecting rent.’”

“With 17,000 homes going into foreclosure in this Southern California county in the first half of 2009, Figueroa has found her caseload in the last year getting heavier and harder to bear. Homeowners forced into difficulty often take out their frustration on her when she comes knocking on the door to tell them it is time to leave. ‘With the financial situation the way it is, people didn’t get into buying a home with the intentions of losing it,’ said Figueroa. ‘They are disappointed, they are angry.’”

“In this last year, she has been troubled by the constant shifting of blame that came with the sharp rise in evictions. No one wants to be seen as responsible for this large scale breakdown of people’s lives and dreams. ‘I get the property people blaming the real estate people, the real estate people blaming the banks, the banks blaming the homeowners. It is just this vicious circle. I think everybody is to blame for getting into this whole mess. It has kind of snowballed.’”

“The poverty rate rose last year to 13.2%, the highest level since 1997, according to the annual Census Bureau report. The West had 9.6 million people living in poverty in 2008, which represents 13.5% of that region’s population, up from a rate of 12% in 2007. The Midwest had 8.1 million people living below the poverty line in 2008, which is a rate of 12.4%, up from 11.1% in 2007.”

“‘Unfortunately, the regional numbers make perfect sense,’ said Heidi Shierholz, labor market economist at the Economic Policy Institute. ‘The West was very hard hit by the housing bubble, and the industrial Midwest states are suffering in the manufacturing sector.’”

“Nearly 40 million Americans were living below the poverty line, the equivalent of a family of four living on about $22,000 or less a year. In Wesson, Miss., Denise Guidry’s life is upside-down. Once a stay-at-home mom, she’s now struggling to pay the bills after her husband lost his job paying six figures as a pipeline worker. Now, he looks for work out of state. Trying to avoid foreclosure, they’re renting out their five-bedroom home and living in an RV with five children. The most difficult part of the adjustment has been being apart from her children, Guidry said, sobbing.”

“‘I tried to take up the slack which was very hard,’ Guidry said. ‘I’m working three jobs and I can’t make it.’”

“Built in the mid-1960s, Georgetown was, for decades, a thriving, popular apartment complex. The 2005 sale of the 164-acre property to a South Florida developer planning an exclusive waterfront community on the site, however, led to eviction of the tenants of all 624 units. The Halloween 2007 deadline to vacate was perhaps prophetic; today the sprawling complex is a ghost town.”

“A plan to raze the apartments to make way for a mixed-use development of condominiums, town houses and single-family homes was abandoned. The property is under foreclosure, another victim of the slumping real estate market. The apartments were large and economically priced. Tenants forced out in October 2007 were paying $565 monthly for a two-bedroom apartment, with water and electricity still included.”

“One couple displaced from their two-bedroom Georgetown unit reported their new rent for a one-bedroom South Pointe Apartment on South Himes Avenue was $855, plus utilities.”

“Signs that FirstBank Financial Services was headed for trouble appeared long before the small McDonough bank failed last February. Regulatory examinations that took place almost every year since the bank opened its doors in 2002 found that it had grown too fast and took on too much risk related to the booming housing market.”

“But federal regulators took no action to force the bank to change its ways until October 2008, when the bank was already in free fall. The report said the Atlanta office of the Federal Deposit Insurance Corp. relies on ‘moral suasion’ rather than formal actions to prod changes at banks that have problems but are doing well financially.”

“Where do we go from here? A year after edging dangerously close to free fall, there are signs the economy is regaining a foothold. But Americans’ sense of financial security is badly shaken and the nation confronts questions that defy quick or comfortable answers. Without easy credit, what does life hold for a nation of consumers?”

“The hit to incomes has coincided with a painful blow to Americans’ wealth, not just in stocks but to the equity in their homes. While the dot-com bubble was somewhat larger in dollar terms, the collapse of the housing bubble has been much more far-reaching, and it has depleted public confidence as well as resources. As U.S. manufacturing has continued to move overseas in recent decades, consumer spending has sustained the economy, accounting for more than 70 percent of the gross domestic product.”

“That spending grew even as pay stagnated, because of increased reliance on credit and debt. At the same time, homes were touted not just as places to live, but as investments whose prices could only rise. That economic myth retains much of its power.”

“‘We are finding that most homeowners just think of this (the collapse of the bubble in home prices) as a temporary glitch,’ said Robert Shiller, a Yale University economist and a leading expert on the housing market and the dynamics of decision-making. ‘They seem to think it’s going to go up again. This idea that we’re running out of land and this is a good investment is still a popular view.’”

“The anxieties reach deeper than those stirred by all other recessions since World War II. The U.S. is at an unsettling economic moment, facing the possibility that some old expectations may no longer apply. After more than a decade of building dreams atop a bubble – first in technology stocks, then in housing – there is no clear route forward. Moving on, economists say, the country will have to redefine expectations, accepting that the bubble-fueled growth the country became accustomed to is neither something to aim for nor count on, but evidence of an economy that was out of balance.”

“‘The problem is we’re longing for something we shouldn’t have even wanted,’ said Joel Naroff of Naroff Economic Advisors in Holland, Pa.”