The Housing Bubble

KGW reports from Oregon. “Many unscrupulous companies continue to target desperate homeowners desperate for an easy out. It’s a problem that’s exploded in foreclosure filled Oregon in the past year. One television infomercials says it’s no problem to be upside down on your mortgage. USMAC Law Group, the company behind that infomercial, can no longer do loan remodification work in the state of Oregon. Steve Anderson bought a house at the height of the real estate market and now he’s upside down. ‘So many companies are getting creative in this strange housing environment, but that makes it even scarier because you really don’t know what you’re getting into,’ said Anderson who chose not to remodify his loan.’”

“Instead, he’s doing his best to hang on and is now crossing his fingers that the housing market will recover quickly. ‘It’s scary, it puts you in a quandry. You can’t unload it,’ said Anderson.”

The News Register in Oregon. “The Housing Authority of Yamhill County is offering foreclosure counseling with no strings attached - including fee strings. Not all homeowners will be able to obtain a modification, and not all will be advised to even make the attempt. ‘It’s important to be realistic with people about what their options are,’ said Coordinator Megan Ramos. ‘We’ve actually had some pretty good counseling sessions with people, where we’ve decided at the end that this house just isn’t affordable for them.’”

“There are a variety of options, she noted, from selling through what is called a ’short sale’ to trying to obtain enough to pay off the remaining debt to simply signing the house over to the bank in a deed of forfeiture. ‘We talk about what each of those processes looks like,’ she said. ‘Foreclosure is something some people want avoid at all costs, but sometimes in the long term, financially, it makes more sense to let the house go.’”

The Oregonian. “The Portland-area housing market closed out 2009 with a December fizzle, an apt end for a downpour of a year in real estate. The 2009 real estate market shows what happens when you take an overbuilt housing market, a tight mortgage market and festering foreclosures, and layer on layoffs and pay cuts to homeowners.”

“‘In the fire, someone threw a bucket of grease,’ said Portland housing consultant Jerry Johnson.”

Oregon Public Broadcasting. “Oregon’s housing market has suffered over the last couple of years, but the local commercial real estate market is enduring a similar fate. Jeff Borlaug the president of the Commercial Association of Realtors, says the market has been unravelling for the last couple of years.”

“Jeff Borlaug: ‘We have seen a decrease in values of almost 40 percent from this point in time back to 2007, which is probably the biggest reversal in value since the Great Depression, even eclipsing the trouble in the early 1990’s.’”

The Mail Tribune in Oregon. “Economist John Mitchell said it may take decades before we truly understand the current recession. Mitchell said it may take years for treasury secretaries and Federal Reserve chairmen to shed light on what has happened during the recession.”

“‘We think we know what happened,’ he said. ‘But we are not going to know the full story for decades. I’m waiting for the memoirs of (Henry) Paulson, of (Ben) Bernanke, of (Timothy) Geithner and other various players. Then we’ll have some additional insights. We continue to learn things, it comes out almost on a daily basis, just in the past couple of years and we’re just getting started. It’s just like (the Battle of the Little Big Horn), we’re still learning about this battle 134 years after it happened.’”

“When it comes to credit, ‘we’re not going back to 2004, ‘05 and ‘06,’ he said. ‘It’s going to be a different world — you might have to do tough things, document income, that sort of thing.’”

The Register Guard in Oregon. “While the homebuilding industry has suffered its biggest slump in a half century, Oregon-based Hayden Homes enjoyed its best years ever in 2008 and 2009. Hayden Homes had sufficient financing to buy the foreclosed Westwind Estates subdivision in a year-end deal with LibertyBank. When the former owner of the property, Brent Anderson, ran into financial difficulty in mid-2008, he was in the process of installing the underground utilities, streets and curbs on the 29-acre property.”

“Anderson had paid $3.8 million for the property in 2006, county records show. He took out a $5.4 million construction line of credit from LibertyBank in 2007. When he defaulted in 2008, he owed $5.2 million, court records show. LibertyBank claimed the property in a sheriff’s foreclosure sale in 2009 for $3.4 million. A Hayden Homes-related limited liability company paid $2.1 million for the property on Dec. 31, county land records show.”

“Hayden Homes can cater to families of ordinary means because the company sticks within a price range — $140,000 to $250,000 — that average salaries in a given community can sustain, while many other builders followed the rapidly inflating housing prices up, up, up between 2004 and 2007. ‘Even people who really couldn’t afford (higher-priced houses), the mortgage companies could somehow get them qualified. That was a huge disservice because you end up having to short sale or foreclose, and that’s never pleasant,’ said Hayden Homes President Dennis Murphy.”

“‘You drive through a majority of our neighborhoods here in the Northwest, it’s hard to find a foreclosure sign because most people’s payment is very similar to the rental of the house — that’s a $750-a-month up to $1,500-a-month mortgage,’ he said.”

The Idaho Statesman. “Median home prices in Ada and Canyon counties remained well below their 2007 peaks of close to $250,000 for Ada and close to $170,000 for Canyon. The Valley started 2010 with more than 4,000 distressed properties on the books, according to IdahoDataProviders.”

“Meridian, once one of the hottest real estate markets in the country, saw a 19 percent decline in residential permits last year. That was at least a slowdown from 2008, when year-end statistics showed permit activity that was 94 percent below 2007. Eagle took the hardest hit in Ada County last year, with just 35 new home permits with a total value of $13 million, compared with 90 permits worth $30 million in 2008.”

‘In Canyon County, Nampa saw declines near 70 percent in permits and valuation. Caldwell saw slightly more permits but a 40 percent decline in the value of new homes - a change Caldwell building official Brett Clark attributed to the fact that builders in the area were putting up homes in the $60,000 to $70,000 range last year, compared to $170,000 to $180,000 in 2008.”

“‘Now they’re building mostly these 1,200-square-foot entry-level homes,’ Clark said.”

The Missoulian from Montana. “Smurfit-Stone Container Corp.’s recent decision to close its Frenchtown linerboard plant has resulted in 46 layoffs at Montana Rail Link. The Missoula-based railroad company announced Wednesday that it has been forced to let go some of its employees and realign its business model because of the loss of its top forest products customer.”

“The 46 MRL employees affected by Wednesday’s announcement include administrators, train crews, mechanics and railroad maintenance experts, who on average earned a $50,000 salary, said Tom Walsh, MRL president. ‘The reductions are not a reflection on any individual’s performance, but rather on our new business needs,’ Walsh said. ‘This has been a very difficult thing for our company to do, and we don’t normally have these kinds of things happen.’”

“‘But the events around us are so real and so stark and so massive, they have a significant effect on our business, and unfortunately, it’s forced us to take some serious action.’”

The Columbian in Washington. “Thanks in part to a late-year tax-credit boost, Clark County homes sales last year topped sales in 2008. Buyers also were encouraged by falling prices and historically low mortgage loan rates. Sharry McNeel, an associate of Coldwell Banker Barbara Sue Seal Properties in Vancouver, said a groundswell of move-up buyers entered the market in November, just after Congress issued a $6,500 tax credit to buyers who have owned their home for five years or longer.”

“‘That’s spurring them on, but I think people are also feeling more confident. They feel now’s the time to move before prices go up,’ McNeel said.”

“‘I think people are really feeling the crunch of the first-time buyer money,’ said Linda McClellan, president of the 1,495-member Clark County Association of Realtors. ‘If they’re going to get on the band wagon, they’ve got to get going.’”

“Others say they are warning clients that it’s also the best time to take advantage of low mortgage loan interest rates, hovering near 5 percent. ‘It’s all creating a sense that now is the best opportunity,’ said Mike Lamb, an associate broker with the Vancouver office of Windermere Real Estate/Stellar Group.”

The Vancouver Sun in Canada. “A strong wave of property sales through British Columbia’s southern and coastal property markets in December helped lift the province to a strong finish in 2009, the B.C. Real Estate Association reported. And the sales boost should give markets enough momentum to push sales growth into the first part of 2010, or until rising prices again start pushing more buyers out of the market, according to association chief economist Cameron Muir.”

“‘It’s impossible to determine how much pent-up demand is left in the market,’ Muir said, ‘but certainly the trend of the last quarter of 2009 would be indicative of a fairly strong first quarter of 2010. Beyond that, sales will likely come down from their lofty heights.’”

“Muir estimated that from peak prices in February of 2008, the monthly carrying cost of an average Metro Vancouver home declined some 27 per cent by March of 2009. However, by December, Muir said monthly carrying costs on that average Metro home were only 15 per cent lower than the peak as the recovery of prices had eaten away much of the advantage.”

“‘Benchmark prices are getting close to record levels, and as mortgage rates edge higher that’s going to have an impact on affordability,’ Muir said.”

The Can West News Service. “Vancouver’s average house price should rise by 7.2 per cent this year following substantial increases at the end of 2009, according to Royal LePage’s latest house price survey. The year-over-year price of standard condos in Vancouver rose 11.8 per cent to an average of $452,750 in the fourth quarter, Royal LePage said.”

“Detached bungalows in Vancouver changed hands for an average of $828,750 in the fourth quarter, up 11.4 per cent from a year earlier. And Vancouver’s standard two-storey homes climbed 9.6 per cent year over year to an average of $917,500 in the quarter.”

“‘The stimulus effect of low borrowing costs has contributed to a sharp rise in demand that has driven activity levels to new highs. This demand, coupled with a typical seasonal under-supply of homes for sale, should cause home prices to continue to appreciate significantly during the early months of the year,’ Royal LePage Real Estate Services president-CEO Phil Soper said.”

“Metro Vancouver homeowners desperate to rent their properties to Olympic Games visitors have scaled back their golden expectations. An abundance of Games-time accommodation rental options has forced asking prices down and increased the likelihood that many properties won’t attract any Olympic renters.”

“‘Some people thought they’d be able to go to Maui every year for the rest of their lives on the money they’d make from renting their homes,’ said Ian Hamilton, director of sports services (for) Vancouver-based Prime Strategies. ‘Now they’re facing a reality check.’”

“Hanna Pankow, who owns Lighthouse Park Bed & Breakfast in West Vancouver, said most B&Bs on the North Shore are fully booked during the Games. But she couldn’t commit to operating her two-bedroom facility during the Games until three months ago and still has one bedroom available for the entire Olympic period.”

“‘It’s my own fault,’ she said. ‘I had inquiries all summer but I turned them away and now things have really slowed down.’”

“The pace of home construction for 2009 peaked as the year was coming to an end, closing out the first year in what is expected to be a markedly different era for the sector than the period that preceded it. Canada Mortgage and Housing Corp. said that housing starts were up 5. 9 per cent in December from the month before to an annual rate of 174,500 units, the most since October 2008.”

“Marco Lettieri, economist with National Bank Financial, noted that December housing starts were up almost 50 per cent from their April lows. He attributed this to low interest rates, strength in the Canadian job market, and a ‘wealth effect’ created from rising property values and stock-market gains. ‘This said, we are currently concerned over the elevated levels of inventory of new unoccupied multiple-family dwellings,’ Lettieri said in a research note. ‘This points to a current oversupply of inventories.’”

“Rising numbers for housing starts have lagged gains in the resale market, where sales levels and prices have rebounded to record highs after taking a hit during the recent recession. The faster-than-expected recovery in the housing market has some fearing a ‘bubble.’ However, in a speech in Edmonton on Monday, Bank of Canada adviser David Wolf said it is ‘premature’ to say Canada’s housing market is in a bubble.”

“‘Recent house-price increases do not appear to be out of line with the underlying supply-demand fundamentals,’ he said, hinting that the central bank is unlikely for the time being to use its policy to cool off the housing market.”

Daily Commercial News in Canada. “Wolf said the bank considers the current market to be a phenomenon based on temporary factors, such as pent-up demand from the recession, and low mortgage rates. Wolf said. ‘We see the housing market requiring vigilance, not alarm.’”

“The Canadian Real Estate Association’s chief economist, Gregory Klump, said the year-over-year increase has been ‘turbocharged’ by a combination of today’s strong market and the weak year-ago market, which skews average prices. He added that the current increase is part of natural real estate cycle. ‘One would expect that when the worst of a recession is behind us and we’ve got emergency low interest rates, that would draw buyers back to the market,’ he said.”

“Bank of Canada governor Mark Carney has warned for months that Canadians are amassing too much consumer and mortgage debt and that could be a problem for the broader economic recovery if rates rise and debt payments begin to increase for millions of Canadian households. Finance Minister Jim Flaherty has also openly discussed policy measures to cool the housing market, including raising the minimum down payment requirement above five per cent, or reducing the maximum mortgage amortizations.”

The Montreal Gazette in Canada. “One of his sillier excesses has already been reined in, with Flaherty pulling back on the maximum mortgage amortization period from his original 40 years to 35. He might now be considering whether 30 is a better number. The old standard was 25. That opens up home ownership to middle-income people in very costly markets like Vancouver or Toronto, which might be good, but it also pushes prices still higher in all markets by enabling people to get even deeper into debt.”

“Does it really make sense to facilitate the kind of debt that stretches out for so many decades that it can’t be paid off in the lifetime of a middle-aged borrower?”

“Another dubious innovation, points out economist Derek Holt at Scotia Capital Markets, was the opening up of insured mortgages to folks who are buying a home, not to live in, but to speculate on. When you have an insured mortgage, you are allowed to provide a very small down payment - just five per cent instead of the typical 20 per cent - making it far easier to buy.”

“That made sense in a program originally intended to help those of modest means buy a first home. It’s a lot harder to justify using the same program to lure amateur investors into dangerous speculation in an overheating market.”

“Canadian William White, who is believed to be the only senior economist within the world of central bankers who warned publicly about pending economic disaster before the 2008 global meltdown, said Tuesday that new ‘bubbles’ in the financial system are emerging — and could burst. White says he shares the dire concerns highlighted in this week’s edition of the influential British newsmagazine The Economist, which boldly declared on its cover: ‘Bubble Warning: Why Assets are Overvalued.’”

“For more than a decade, White and one of his senior researchers warned in BIS annual reports and at public events that the global economy was facing growing risk because of speculative bubbles, particularly in areas, such as the overpriced U.S. housing market. They took the provocative position that central bankers should play a far more active role by raising interest rates to contain speculative excesses — even during periods of low inflation.”

“Among those who dismissed White’s concerns were Alan ‘The Maestro’ Greenspan — the once-revered chairman of the U.S. Federal Reserve who held the position from 1987 to 2006 — and current chair Ben Bernanke.”

“He also disagrees with recent arguments from Bernanke, who delivered a speech earlier this month that took aim at critics like White. Bernanke said a lax regulatory regime — not central bankers’ refusal to jack up rates to cool speculative excesses — was to blame for the U.S. housing market crisis. White said problems relating to poor supervision were a huge factor in the crisis.”

“But White said bubbles grew dangerously as a result of central bankers’ willingness to continue a low-interest rate policy, which left the world awash in cheap money that in turn, fuelled the motivation to discover new and increasingly dangerous ways to invest it. ‘The idea that the interest-rate environment had no role in fostering that kind of behaviour I think is just wholly implausible,’ White said.”

The Ottawa Citizen in Canada. “One year ago, home sales in Ottawa seemed headed for a chilly stretch. But bargain mortgage rates and a rising consumer confidence that took hold in the capital earlier than in some other cities turned 2009 into the market’s hottest year yet.”

“‘A year ago, we wouldn’t have written the script that way,’ admitted Pierre de Varennes, the new president of the Ottawa Real Estate Board.”

“De Varennes believes the change came when Canadians realized that this country didn’t share in the subprime mortgage woes of the U.S., and was in better shape than most when those problems helped trigger a global credit crisis. ‘The confidence factor came back faster and stronger in Ottawa than in some other markets,’ he added, ‘but the change in the marketplace was almost timed to the same period from coast to coast.’”