The Housing Bubble

It’s Friday desk clearing time for this blogger. “As City Manager Penelope Culbreth-Graft grapples with the biggest financial crisis to hit Colorado Springs in decades, she faces a financial quagmire of her own, brought on by the impending foreclosure of her $1.25 million California beachfront property. She’s also delinquent on that home’s property taxes and is being sued over its second mortgage. Their problems began in September 2004, when the couple bought the beachfront property four months after Culbreth-Graft was named Huntington Beach’s city administrator. They paid $1,259,000 for the gated-community home.”

“The couple took out two loans on the 2,456-square-foot house: a 30-year loan for $990,000 at 5.875 percent interest, which could reset and cap in 10 years at 10.875 percent, and a $143,100 revolving line of credit. About a year later, the couple refinanced, taking out a 40-year loan for $1,141,000 and paying off the original two loans. In July 2006, the couple got another loan, borrowing $250,000. By April 2009, things were looking bleak. She and her husband failed to pay $7,070 in property taxes on the Huntington Beach house and by August owed $8,133 with interest charges. On Aug. 21, San Diego County Credit Union began foreclosure proceedings, noting the couple was behind $36,659 in payments on the $1,141,000 loan.”

“In the only interview Culbreth-Graft has given on her financial situation, she said by phone last week, ‘My husband and I have basically lost everything for coming here. If we’d known the global economy was going to collapse, we would have done a lot of things differently, no question about it. I don’t like being cagey and nontransparent, and I wish I could scream from the top of the hills why this is going on, but I can’t do that yet.’”

“Andrew Wilkinson’s Oakland Park home is an oasis. With lush landscaping and private hedges, Wilkinson transformed a house that needed some work into a home. But it might not be his home for much longer. In February, Wilkinson lost his job as a tax accountant when the major corporation he worked for downsized.”

“‘It gives you sort of a feeling of helplessness, sometimes you feel worthless,’ Wilkinson told CBS4’s Carey Codd. ‘I have been depressed. Up and down. It’s been a hard, hard time.’”

“Wilkinson has not paid his mortgage since he was laid-off. He has tried to negotiate with his lender to work out a loan modification but he said he’s been unsuccessful. ‘I think the lenders need to be held more accountable,’ Wilkinson said.”

“The Federal Housing Administration’s financial cushion has fallen to a dangerously low level. About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association. Since the collapse of the subprime lending market, the government has taken up the slack. The FHA has insured nearly a quarter of all new loans made this year, and about half of all loans to first-time homebuyers this year.”

“‘If we didn’t have FHA out there, it would be a very different landscape,’ said Peter Thompson, a loan officer with Wintrust Mortgage in Downers Grove, Ill. ‘Most of these first-time homebuyers who are really the ones keeping things going right now wouldn’t qualify at all.’”

“Since he was a young boy, Ricardo Velasco was told by his parents that he needed to own a home. For Velasco, a 25-year-old Toppenish resident, it was tough to find an affordable home in the right area. But when he heard about the federal tax credit for first-time homebuyers, he decided to start looking. Velasco and his wife, America, and their three daughters, expect to close on their first home later this month and move in just in time for the holidays.”

“Velasco ended up finding a two-bedroom, one bathroom house for $74,000. Velasco plans to use the money he gained from the tax credit to do some remodeling on the house . ‘he $8,000 did really push us to get the house,’ he said.”

“For several years, sales activity for Yakima County’s higher-priced homes was partially driven by buyers from areas like Seattle or California. Those buyers could buy higher-end homes in the Yakima area because they sold a modest home for much higher prices at their previous residence. ‘That has stopped,’ said Chris Nass of Rose & Associates. ‘Because of the economic climate, (out-of-town buyers) can’t sell those homes for big bucks in the communities where they’re coming from.’”

“In Gold Beach, on the south Oregon coast, there are 18 pending sales this November compared to zero pending sales a year ago. ‘Since the middle of September the real estate market has just exploded,’ said a local Realtor. ‘Most of the summer the homes that were being looked at were the homes around $200,000 where first-time buyers finally felt that the prices were low enough that they could finally afford a home.’”

“Trisha Peters said it was a mixture of reasons - from family to a desire to change home styles - that prompted her to put her Des Moines home on the market. The tax credits made the decision easier. Peters expects her home will appeal to first-time buyers, and her $6,500 credit will help if she’s unable to get what she paid for her condo.”

“‘My home is worth less than it was two or three years ago, but the homes I’m looking at are priced lower, too. So, things even out. It’s really a perfect storm for buyers,’ said Peters.”

“In Bakersfield, Calif., where more than half of mortgages are upside down, there is a limit to what the new tax credit can do for existing homeowners who want to step up, said Raul Rodriguez, a mortgage broker in Bakersfield. ‘Obviously they’d have to sell their old house before they could buy a new one, and a lot of people can’t sell their homes right now,’ Rodriguez told the Bakersfield Californian.”

“To get a sense of where foreclosures may head from here, economist Patrick Newport points to Fannie Mae’s serious delinquency rates, which track loans mostly made to well-qualified borrowers. The serious delinquency rate hit 4.45 percent for single-family-home loans in August, up sharply from 4.17 percent in July and just 1.57 a year earlier. ‘That number keeps on growing, and the monthly increments keep getting bigger,’ Newport says. ‘I am almost sure that the foreclosure rate is going to continue to rise.”"

“These days, the primary driver of home foreclosures isn’t exotic mortgage products but the nation’s dismal labor market. And with the unemployment rate hitting 10.2 percent last month, job losses will continue sending homeowners into foreclosure. ‘I don’t think that foreclosures are going to peak until the unemployment rate does,’ Newport says.”

“Rising unemployment also highlights a gaping hole in the Obama administration’s housing rescue. Homeowners need an income stream in order to qualify for a modification, which makes anyone who can’t pay their mortgage because of a job loss ineligible. But borrowers facing foreclosure after losing a job are increasingly at the heart of today’s housing crisis. The administration’s initiative ‘was not designed to address foreclosures caused by unemployment, which now appears to be a central cause of nonpayment,’ a congressional oversight panel said in an October 9 report. ‘It increasingly appears that [the Obama administration's housing rescue] is targeted at the housing crisis as it existed six months ago, rather than as it exists right now.’”

“Two weeks ago, the owners of 5 Spice Fusion and Sushi, a restaurant scheduled to open in December in downtown Bend, advertised that they were hiring for 25 positions. The response? More than 500 applications streamed in, and the owners believe many more would have arrived had they not set a cutoff.”

“Co-owner Lilian Chu said people with dozens of years experience in the industry applied, as well as people who are merely looking for any job they can find. As Chu sorted through the applications and interviewed people, she said she asked them what they wanted to be paid.”

“‘They all said, ‘It doesn’t matter,’ she said, adding that the number of applications amazed her.”

“Commercial real estate — including shopping centers, office buildings and industrial property — will hit a low point in 2010 not seen since the Great Depression, according to a national survey of real estate executives. Values and rents will plunge, and vacancies and defaults will soar across all types of commercial property before the market rebounds slowly, according to the survey and forecast compiled by the Urban Land Institute and PricewaterhouseCoopers LLC.”

“‘2010 looks like an unavoidable bloodbath for a multitude of borrowers, investors and lenders,’ the report said. ‘The shake-out period may extend several years as even some conservative owners with well-underwritten loans from the early 2000s see their equity destroyed.’”

“By the end of next year, the study predicts commercial real estate values nationwide will have fallen an average of 40 percent from their peak in mid-2007. That eclipses the 1990s savings-and-loan crisis. Retail and office properties are likely to undergo the most wrenching problems among commercial properties. While top-tier malls and shopping centers with grocery stores will still attract customers, many struggling malls in secondary markets will not survive, the survey predicts.”

“‘It’s triage time with retail,’ said Jonathon Miller, the report’s author.”

“Strolling down University Avenue, shoppers can easily see there aren’t as many places to shop as there were a year ago. ‘For rent’ signs seem to be multiplying like bunnies — and staying up for months and months. All told, about 16 percent of the 600,000 square feet of space is vacant in the downtown ‘core,’ said Jonathan Goldman, senior vice president of Premier Properties Management, Palo Alto.”

“Sam Arsan of Arsan Realty, which partners with Premier Properties on some downtown listings, has never seen downtown so empty. ‘What we’re going through is unprecedented, in terms of the economy everywhere,’ he said. ‘The level of interest has dropped by a good 70 percent from a year ago.’”

“Goldman said vacancies sometimes occur because businesses become obsolete or marginalized. ‘The Bead Shop is a perfect example,’ he said, noting that much of the bead business is conducted online today.”

“Pointing to downtown vacant storefronts, Goldman said, ‘Some were victims of the economy, others of a changing world. The problem is there’s no new trend.’ In 2001, it was nail salons and yoga studios.”

“‘Other than yogurt, we’re not seeing any growth industry…It’s been bleak,’ he said.”

“Hachette Filipacchi Media announced this week it will cease publishing home décor shelter magazine Metropolitan Home following the December issue…the most recent of several décor magazines to shut down. Unfortunately, the end of these…home décor magazines is part of a distressing trend. As marketing budgets have been cut and competition has increased from online media, magazine owners have been forced to cut costs and close unprofitable titles.”

“For these reasons plus a poor housing market and reduced spending on home décor, we can expect publishers of home magazines to take an increasingly closer look at the future of their décor magazines. Other decorating magazines to close within the last two years include Oprah’s O at Home, Country Home, Cottage Living, House & Garden, Blueprint and Domino.”

“Kai Ryssdal: ‘Back in the boom days of real estate, investors saw potential profits almost every place they looked. Forget houses and commercial real estate. Even apartment buildings where rents were regulated looked like gold mines. Developers paid luxury prices for those buildings, hoping to turn them into cash cows. Now though, those properties aren’t worth near what they sold for.”

“Benjamin Dulchin’s advocacy group has been analyzing data from the SEC and from loan servicers. And they found that many of the developers of rent-regulated buildings in New York — including Vantage — just aren’t making enough money to keep paying their mortgages. Dulchin: ‘This is sort of not just a disaster in the making. This is a disaster that has already happened. And it clearly shows that these buildings are really grossly distressed.’”

“San Joaquin County’s median home price hit a 2009 high point of $170,000 in October. Competition is the driving force behind the 6 percent median home price increase from September’s $160,000 to October’s $170,000, according to Chris Hake, a broker in Stockton. Hake said that as long as banks that own foreclosed homes continue to slowly and methodically release their properties on the market, prices will climb.”

“‘But if we see a flood of foreclosures coming onto the market - and I’m hearing we have anywhere between 6,000 and 10,000 foreclosed homes waiting to be released here - we won’t have enough buyers to absorb all of them,’ Hake said.”

“An expert in the housing industry said Tuesday that the market in this region is turning around. Ken Wenhold, who heads the Chantilly, Va., office for the largest housing industry data firm in the nation, addressed the Frederick County Builders Association. He said the extension of a tax credit for first-time buyers, now including some who have previously owned homes, will improve the industry even more.”

“Wenhold described houses with declining value as ‘the falling knives that no one wants to catch,’ but said the turnaround will end that. ‘People will be getting off the fence,’ he said.”

“Homeowners who are significantly underwater with their mortgages should consider walking away from those, according to Brent T. White, an associate professor at the University of Arizona’s James E. Rogers College of Law.”

“Unlike lenders, individual homeowners have generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse. ‘It is a double standard in our financial world,’ he said. ‘If a corporation was heavily upside-down on a home they would walk in a New-York-second. But then we expect homeowners to stay and honor a contract.’”

“Almost every asset category is up except for long-term U.S. Treasurys and housing. While this widespread rally is a relief to investors and has some fundamental underpinnings many see it as another bubble being inflated by cheap money from the Federal Reserve and other central banks. They also fear it will end like all bubbles - badly.”

“In a healthy capitalistic economy, you have what’s known as creative destruction. Good ideas, companies and industries survive and the bad ones fail. Some asset prices go up, others go down. ‘You are supposed to be rewarded for doing your homework and picking the winners,’ says Axel Merk, president of Merk Mutual Funds. ‘You are not supposed to be rewarded for putting your money into anything and waiting for the prices to go up.’”

“In recent years, that process has been compromised. When the economy sputtered in 2001, the Fed turned on the money spigots. By mid-2003, it had reduced the federal funds rate to 1 percent and kept it there for a year. But when it finally started raising rates in 2004, the economy kept going. Consumers used their houses as piggy banks. Hedge funds leveraged themselves to the hilt to buy assets. Banks created off-balance-sheet vehicles to do business without regulation.”

“When the bust happened, the Fed’s old tools weren’t enough. When lowering the federal funds rate to essentially zero in December didn’t revive the economy, the Fed found new ways to pump money into the system, such as buying $300 billion of Treasury bonds. Other central banks tried similar tactics.”

“Howard Simons, a strategist with Bianco Research, says, ‘It’s idiotic to solve the problem created by one bubble bursting by creating another one.’ But ‘the only tool the Fed knows how to use is credit.’”