The Housing Bubble

It’s Friday desk clearing time for this blogger. “U.S. homeowners have lost about $5.9 trillion in value since the housing market’s peak in March 2006, according to Zillow. LaVonna Gottschall paid $260,000 for her Merced, California, home in September 2007. She put down more than half the price and financed the rest with a 30-year fixed loan. Today, houses in her neighborhood are worth 59 percent less. ‘I almost wiped out all my savings,’ Gottschall, 64, a retired insurance-company clerical worker, said in an interview. ‘I did the right thing. I didn’t get in over my head. Now I’m living month-to-month.’”

“Under President Barack Obama’s program to reduce foreclosures, fewer than 35,000 troubled South Floridians have had their mortgages modified, less than 5 percent of those who qualify for help. Homeowners have to make timely payments and show that they still qualify for the loan after a three-month trial period ends. Banks say few homeowners make it over both hurdles.”

“Homeowners say the real problem is that lenders are disorganized and difficult to work with. ‘I have submitted all the papers three times. I’ve been going through hell, with a promised modification and then the bank said no, really I don’t qualify,’ said Claudia LeCompte of Boynton Beach.”

“When Renee Penny of Columbia, Tenn., heard about the federal government’s ‘Making Home Affordable’ loan modification program last spring, she thought she had found welcome relief. But a few weeks ago, Bank of America mailed a response to the laid-off auto parts worker’s request for mortgage help: The bank told her it would reduce her mortgage by $6 a month, to about $1,176 per payment.”

“She fears the bank will foreclose on her property unless she can pay her newly modified loan. ‘I feel like they’re just waiting to snatch my house from me,’ said Penny.”

“Michael Heller of Salinas, Calif., said he and his wife have submitted all the required documents and have made six months of $1,800 payments to their lender — but have yet to receive an answer. ‘Every time we send them documents, they send us a form letter that says your modification is at risk, you screwed up, you didn’t send us the necessary documents,’ said Heller, whose landscaping business has taken a severe hit due to the recession.”

“He figures the house he bought for $640,000 in 2006 is now worth $250,000.”

“‘You never talk to he same person twice,’ Heller said. ‘It makes you a little bit kooky. This has been extremely stressful.’”

“Illinois had the third highest number of foreclosure filings in the nation in November. Only California and Florida had more. In the Chicago metro area, DeKalb and Kane counties saw the biggest percentage jumps. Foreclosure filings tripled in both of those places compared with a year ago. Steve Hovany is president of a housing research company based in Schaumburg. Hovany says the big driver is the drop in home prices. He says prices in the region have slipped 20 percent from a peak in late 2006. That’s left many people with homes worth less than they owe on them, prompting some to just walk away.”

“Hovany: ‘New developments are pockmarked with foreclosures simply because the people bought and for whatever reason, then they can’t sell it for anywhere near what the mortgage is, so foreclosure is a real option to them.’”

“‘I’m starting to picture President Barack Obama and his economic team as a group of shade-tree mechanics tinkering with an old jalopy. They never run out of quick-fix ideas, but they never quite get the thing running right, either.”

“Instead of a coherent policy to put the nation on a sustainable growth path, we’re getting the economic equivalent of duct tape and baling wire. Bribing people to buy cars and houses — as we’ve done with cash-for-clunkers and the first-time home-buyer tax credit — may have helped the auto and housing industries for a while, but it didn’t address their underlying problems.”

“The problem with duct tape and baling wire is that it doesn’t last very long. Auto sales fell sharply when cash-for-clunkers ended, and home sales will do the same after the first-time buyer credit expires. ‘It’s exactly what you would expect the political system to do, not looking long term but looking short term to the next election cycle,’ says R.W. Hafer, professor of economics at Southern Illinois University Edwardsville.”

“Modest recovery is on the horizon for the real estate market, the president of the California Association of Realtors said at a Visalia Convention Center luncheon. Liptak warned his peers that the flaws of deregulation brought to light in the housing-market crash will change the real estate business dramatically in the next few years. As for whether new regulation will help or harm, Liptak said it could go either way.”

“In the mean time, he said, the Realtors’ association must stay strong for when ‘the state comes knocking on our door asking for money.’ So far it’s done its job, Liptak said. ‘For the first time in history, the budget wanted to tinker with mortgage deductibility,’ he said. ‘We killed that fast, but [the fact] that they even included it tells me that they’ll bring it back again.’”

“He encouraged members to donate to the state association to maintain ‘one of the most powerful lobbies in Sacramento.’”

“Milwaukee-area home sales soared 75% in November compared with the same month last year, an increase attributed mostly to efforts to close purchases before a tax credit for first-time homebuyers was set to expire. The chief economist of the National Association of Realtors, Lawrence Yun, who was in Waukesha to address members of the Wisconsin Realtors Association, said he thinks the housing market is ‘turning for the better.’ Yun said he expects modest price increases for homes by the middle of next year.”

“Yun said federal tax credits that now will last through mid-2010 will lure potential buyers who have been holding off entering the market. That, and a rebounding economy, should help stabilize prices, he said. Yun said he believes the spring buying season will be strong nationwide as first-time buyers continue to take advantage of the tax credit of up to $8,000 and previous homeowners are drawn into the market by a new tax credit of as much as $6,500.”

“‘I think at that point we really will have stable prices and, in fact, some modest price increases,’ Yun said.”

“William Malkasian, president of the Wisconsin Realtors Association, said home sellers no longer are holding out for prices that became obsolete when the housing market began its slide more that three years ago. ‘The sellers, at least in this state, finally psychologically realized that their castle isn’t worth a half million dollars anymore,’ Malkasian said.”

“The December market appears to have some life, still driven by first-time buyers and conditions that, for people with job security, offer some attractive features, real estate professionals said. ‘You’ve got homes that are reasonably priced - the best prices we’ve seen in years and probably ever will see again’ said John Flor, who is the chairman of the Wisconsin Realtors Association.”

“If you walk down any given street in the U.S., odds are that one in every four homes you pass is worth less than what the owner owes on his or her mortgage. In Idaho it’s almost as bad, with one in five homes under water, according to a real estate information company. Median home prices in Ada County have been falling pretty steadily since mid-2006. This autumn they were down 37 percent since the peak in July 2006.”

“I talked to a real estate agent this week who thinks the market doesn’t have to be this way. If the community’s homebuyers would agree to stop approaching home sales with an eye to hack the price down to a fraction of its original size (I know another agent who calls this ‘raping’ the seller), values would stop falling. Nearby homes would be able to be listed at prices more in tune with what the owner owes and with what the house is worth, according to some.”

“And he said others have a role to play as well: sellers should try to keep homes off the market, appraisers should give a property credit for every dollar of its worth, banks should start prices higher, and brokers and agents should stop accepting low-ball offers.”

‘He talked about a home in Meridian that was purchased for $300,000 a few years ago, but is now listed at $190,000. He said he knows the listing agent would accept an offer as low as $170,000.”

“If we want to see an end to the real estate carnage and short-sale fever, that’s got to stop, he said.”

“Joe Lagana says living Downtown is ‘like a vacation every day.’ But satisfaction is not universal. Downtown resident and restaurateur John Valentine says he doesn’t ’see the Downtown’ he imagined six years ago, when he moved Downtown in the early stages of the urban living movement.”

“Natalie Schmid, 26, a financial adviser, moved into The Carlyle at Fourth and Wood streets from Charlotte, N.C., in October. She had been watching the changes in life Downtown for several years when she would visit with her parents in Mt. Lebanon. ‘Right now, it is not a neighborhood,’ she says. ‘But it is in the process.’”

“Investors who bought condo-hotel rooms at downtown San Diego’s Hard Rock Hotel and now claim to have lost millions have sued the developer and operator, saying federal and state laws were broken because the investment contracts were never properly registered. Investors ‘have suffered tens of millions of dollars in damages,’ the lawsuit states. ‘(Hard Rock Hotel San Diego) is paying plaintiffs only a fraction of what plaintiffs would need to break even on their … investment contracts.’”

“The lawsuit, which names San Diego County businessman Tamer Salameh as one of the plaintiffs, argues that investors were led to believe the hotel’s rental program was not mandatory and that they could manage the rental of their suites or studios themselves. Salameh bought 10 units for roughly $350,000 each in December 2007, said attorney Maria Severson. In a 2005 interview with The San Diego Union-Tribune, Tarsadia Hotels President Greg Casserly sought to explain the factors driving the mushrooming popularity of condo hotels at that time.”

“‘One reason why we like them is there’s a huge, burgeoning accumulation of wealth through baby boomers and Gen-Xers, who are lifestyle-driven,’ Casserly said. ‘They like second, third, fourth, fifth homes but don’t like the hassle of private ownership and having them sit empty while they’re not there. So the condo-hotel model allows them to have the lifestyle they want but not have the incredible carrying costs, because they can put their unit in the rental pool.’”

“‘These lawsuits are cropping up more and will continue to do so as condo- unit owners are asked to fund more and more losses of the hotels,’ said Chicago attorney Charles Neff, who at one time represented developers of condo hotels. ‘It’s a recipe for disaster because of how bad the hotel industry is now. The condo-hotel owners own nothing more than a hotel room, so they’re feeling the pain, and there’s no market for them to even sell their unit, and it would be at a fraction of what it cost them.’”

“China’s economy is the envy of the world. Take a close look, however, and you may come away thinking China resembles nothing so much as Japan shortly before its stock and property markets melted down two decades ago. A speculative frenzy of borrowing and bidding up is at work. If and when prices crash, there will be hell to pay.”

“‘It’s a Ponzi scheme whose head is the central bank, and it can print money,’ says Victor Shih, a China expert at Northwestern University.”

“Like the U.S. housing industry a few years ago, China’s big developers are highly leveraged and dependent on low interest rates and rising prices. Municipal governments are knee-deep in this asset swamp. They use land sales as a means of funding themselves. Shunyi County, in the capital’s suburbs, sold a residential plot last month for $400 per square foot, a new national record. The bidders were mostly state-owned companies and the winner none other than a developer owned by Shunyi County.”

“As is typical in the later stages of property booms, many investors in China appear to have discarded rental yields as a measure of how much a building is worth in favor of greater-fool pricing. In downtown Beijing office towers sold this year for $400 per square foot, despite the fact that many were unleased and many more are under construction. The leading buyers: state-owned enterprises, including banks and insurers.”

“‘It’s a pure debt game,’ says Andy Xie, an economist who advises private investors and sees the current bubble as ‘much worse than previous ones.’”

“Question: What do you call a couple who bought their Tampa Bay dream home in 2006? Answer: Renters.”

“An exaggeration, to be sure. But the housing crash has thinned the herd of Florida homesteaders. If you weren’t convinced that renting is the new owning, the Mercedeses and Cadillac Escalades parked in front of four-bedroom rental houses should prove it beyond a doubt. Square foot for square foot, it’s even cheaper to lease houses, if you don’t mind being bounced in the event the landlord loses the house to foreclosure.”

“So many real estate investors bought unwisely from 2004 to 2007 that thousands of houses clamor for tenants in places like central Pasco and southeastern Hillsborough counties.”

“Despite record-low interest rates of about 5 percent and billions of dollars in government subsidies for home buyers, Tampa Bay residents continue to abandon their houses with abandon. In November alone, lenders sued 4,200 Tampa Bay properties for foreclosure, according to RealtyTrac.”

“Not all of these foreclosure victims are down-and-outs. A small percentage are engaged in strategic foreclosures. These homeowners can afford their mortgages but figure it’s pointless to cling to a house worth $100,000 less than they paid for it. Better to walk away from a $1,800-per-month payment if you can rent the same house for $1,000. Or so they argue.”

“Stabilizing the housing market will require getting a handle on rentals. Don’t look for improvement soon. The recent rise in Tampa Bay home sales was born on the backs of investors scouting out foreclosure bargains. The only Christmas decorations most of these investors will place in their front lawns will be single signs: For Rent.”