The Housing Bubble

It’s Friday desk clearing time for this blogger. “Chris and Candice Basso would like to move up to a larger home this spring. But even a big tax credit won’t be enough to lift them into a bigger, better home. The Centreville, Va., couple are trapped in a two-bedroom townhouse that’s worth less than their unpaid mortgage. They face the same predicament with a condo that they own and rent out. Unable to sell either property for what they owe and with their equity wiped out, a new mortgage is out of the question. ‘I’ll have a teenager by the time housing values come back up and I can get out of my house,’ says Basso. ‘We still scour the home listings every day just to see what we could afford now. It’s heartbreaking to seewhat we could get today with our housing dollar now, but we’re stuck.’”

“A triple-digit, year-over-year increase in statewide foreclosures in January left Hawaii with the highest back-to-back monthly total since 2005. Five of the state’s worst ZIP codes for January foreclosures were on Oahu, including Kapolei, Ewa Beach, Waianae, Waipahu and Mililani. ‘These communities represent our resort and affordable-housing markets,’ said John Riggins, owner of John Riggins Real Estate in Leeward Oahu. ‘Liar and no-asset, no-income loans were rampant in these ZIP codes during the last boom.’”

“After the market turned, Riggins said, some second-home/investor owners walked away from rising interest rates. Locals in affordable communities were hit hard by the downturn in tourism, construction and state cuts, he said. ‘Some have simply given up,’ Riggins said.”

“Shasta County will likely see more foreclosures this year into next as higher-end homeowners default on their payments or walk away from homes worth far less than what is owed on them, said Wayne Martin, broker in Redding. ‘This is basically a construction-based economy,’ Martin said. ‘Now the jobs are gone. People have drawn down their reserves, they are tired, or they are just going to walk away and come back in four years and buy it at a low.’”

“Foreclosures continued to rattle New Yorkers in January, with Brooklyn residents bearing much of the pain. ‘We are seeing a huge uptick in Sunset Park and other places we never heard from in the past,’ said Meghan Faux, director of the Foreclosure Prevention Project at South Brooklyn Legal Services, partly blaming high unemployment. ‘But the majority of what we are seeing are loans that were never affordable.’”

“The fourth-largest mortgage servicer in the country is offering homeowners in New Jersey who are 90-days late on their payments a chance to walk away with cash. CitiMortgage, a unit of Citigroup, will announce a trial program that lets borrowers remain in their homes for six months after signing a deed-in-lieu of foreclosure contract. Real estate agents also said the program could have an adverse effect on New Jersey’s already troubled housing market by driving down prices.”

“‘They’re going to have to be at a lower price than everyone else,’ said Sal Poliandro, a Saddle River-based real estate agent, of the homes that will eventually go up for sale. ‘Not only are they going to have these houses on the market, they are going to be encouraged to sell them quickly.’”

“The number of homes sold at foreclosure auctions fell in Essex and Middlesex counties last year, but petitions to foreclose continue to rise. And in a clear sign that the mortgage meltdown is spreading, foreclosure filing rates are climbing in suburban towns, which previously had been spared the brunt of the state’s housing crisis, real estate specialists said. ‘It isn’t just confined to the working-class communities,’ said Timothy Warren, CEO of The Warren Group. ‘We’re seeing more and more, in vacation home areas and in white-collar suburban communities.’”

“‘They’re not all credit-blemished borrowers,’ said Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association. ‘A lot are high-income earners, with high credit scores. They leveraged everything to get a bigger, better home. . . . Then they lost their job . . . and they can’t make their mortgage payments.’”

“A year ago, Laurie Souza started a company called Gold to Green Parties. She’s hired 20 people, many of them former mortgage brokers. ‘We’re basically riding a gold bubble that came after a housing bubble,’ Souza says, ‘and when this is done, I have no idea what’s going to be next. But I’m riding the wave.’”

“Souza used to ride the sub-prime wave as a mortgage wholesale representative. She was good at it, and she made a good living — $800,000 in her best year during the housing boom. ‘I miss it,’ she says.”

“Nowadays, former mortgage broker Craig Good sells apples. Back when he sold mortgages, Good used to make up to $400,000 per year. He opened offices all over Massachusetts and was expanding into Florida. ‘I was greedy,’ Good remembers. ‘Boy, I was greedy. And when I came to that conclusion — you know what? — it wasn’t awesome.’”

“‘For a long period of time I was glad-handing, rubbing elbows, saying hi, smiling — and there wasn’t a lot of people that trusted the authenticity,’ Good says. ‘Now I wear four-year-old sneakers instead of four-day-old sneakers.’”

“Souza says it’s not fair to blame brokers for the housing mess. She says buyers were either fraudulent or lazy. ‘I wish some of these borrowers would be held responsible,’ Souza says. ‘I don’t feel bad for those people. I’m sorry, I don’t. You bought the biggest thing in your life and you had all this time to understand it, and you didn’t! You know, how is that our fault?’”

“The median home sales price in 2009 for the Chicagoland Primary Metropolitan Statistical Area was $196,000, down 18.3 percent from $240,000 in 2008, according to the Illinois Association of Realtors. Illinois is one of the markets likely to see a double dip. In Chicago, ‘Stability is eluding the market,’ said Genie Birch, president of the Chicago Association of Realtors. ‘Without revisions in lending regulations targeting urban areas, designed to reasonably accommodate purchasers looking to buy and especially to move up, Chicagoans will witness declining homeownership, loss of tax revenues and erosion of the equity they have placed and created in their homes.’”

“Duane Mathes, President of Valley Board of Realtors said Alaska MLS data show a 3.5 percent drop in the average residential sales price of houses sold in the Wasilla and Palmer area between 2009 and 2008. ‘It depends on the price of the house,’ he said. Buyers are still eager to buy houses in the $220,000 price range, he said. But luxury or high-end houses might stay on the market for more than a year before selling.”

“Anchorage, meanwhile, lost 1 percent of its jobs according to preliminary state estimates. It could be worse, said state economist Neal Fried. ‘California lost a million jobs. That’s three times the size of our Alaska labor force,’ Fried said. Fried said there’s one other positive trend happening in real estate: Housing is becoming more affordable. ‘Wages are not increasing in Alaska dramatically, but housing prices are coming down some,’ Fried said.”

“The Valley’s’s unemployment rate of 11 percent stands above that of the state and nation. But by nearly every other economic measure, Silicon Valley’s skilled workforce is considerably better off than California’s or the nation’s as a whole, according to the 2010 Index of Silicon Valley. ‘Evidence of increasing pressure on the region’s households can be observed in rising personal bankruptcy rates and residents receiving food stamps,’ the report said.”

“The recession’s silver lining for many families has come in housing costs. Average rents declined 6 percent from 2008 to 2009 — the first drop since 2005. And last year, 54 percent of first-time home buyers could afford to buy a median-priced single-family home, up from just 22 percent in 2007.”

“Ventura County’s unemployment is 10.9 percent, more than a point higher than the national average. The bleak employment picture ‘blows away anything from the ’70s and ’80s,’ said Wells Fargo senior economist Scott Anderson, who also spoke at the event.”

“With new residential construction at its lowest point in 50 years and job losses continuing to mount, Ventura County’s economy will continue to sputter this year before finally showing true signs of recovering in 2011, industry forecasters are saying. ‘Job contraction has been horrific,’ said Mark Schniepp, director of the California Economic Forecast.”

“The county’s median home price, which is now $427,900, or more than 15 percent higher than last year at this time. Still, the median home price in Ventura County remains some 35 percent below the peak of 2006. ‘The affordability is great here in Ventura County right now,’ said Schniepp, who added, ‘After this quarter and next, the defaults really start to fall.’”

“Many homeowners on the edge are wondering whether they should just walk away from their mortgages and get off the ‘hamster wheel’ of making costly payments on a home deep underwater. ‘There’s a lot of justified fear about walking away from your mortgage. A lot of this fear is cultivated by banks…and the government,’ said Brent White, an associate professor of law at the University of Arizona.”

“Heather B. feels conflicted about her decision to walk away. ‘I’m feeling hurt. I’m feeling sad. I’m feeling regretful. I’m feeling like I wish I could do it all over,’ she said. ‘However, at the end of the day, I had to make a decision. I just don’t see myself being able to recover here. It’s like throwing good money at bad money. I looked at the pros and cons. And it tipped toward the pro of me leaving. So that’s what I’m doing.’”

“Uncovering a financial bubble before it pops is a difficult task. Alan Greenspan, former chairman of the Federal Reserve, remarked that predicting a bubble cannot be done — only in retrospect are the causes and effects clear.”

“Easy access to credit in China has been a boon to residential construction activity and the real estate market. These construction projects have boosted GDP numbers while increasing the paper wealth of many Chinese government officials. Affordability ratios suggest that these real estate prices are unsustainable, and that we could see a mortgage meltdown in China on even larger proportions to that of the US. Indeed, since 2003, residential construction has far surpassed household formation. International Monetary Fund statistics note that home ownership is at 86 percent in China, compared to 69 percent in the U.S. at the peak of the U.S. housing bubble.”

“The China story starts to look more like that of Japan shortly before its stock and real estate markets collapsed almost two decades ago. The growth of the Chinese economy during the past decade largely was the result of Americans borrowing from the Chinese to buy Chinese goods. Now that the United States is pulling back on credit-based spending, the cycle may stop, leaving China with bad loans and fewer exports.”

“With the Shanghai stock market up more than 60 percent since the start of last year, investors around the world are looking to China to bring us out of a global recession. The country’s recent GDP numbers that suggest 8 percent growth for the year give signs of hope. Closer scrutiny, however, reveals the Chinese economy is in the midst of a debt-fueled asset bubble likely to burst within the next five years.”

“Bubbles remain hard to define, difficult to measure and, like recessions, can only be accurately assessed after they have burst. Economists have wrestled with bubbles for generations, but have yet to devise an adequate scientific means of analyzing them, comparing them or providing us with an early warning system that would safeguard from their worst effects. But lately, bubbles – or bubble fears – seem to be everywhere. From Chinese real estate to U.S. Treasury bills to global commodities, analysts point to a flood of easy credit that has helped to inflate values.”

“Now, soaring prices are triggering bubble fright on the Canadian housing front. ‘If it walks like a duck and quacks like a duck … ‘ said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto.”

“‘If price increases come down and we see the sales numbers moderating, then I won’t be so worried,’ said Tsur Somerville, an associate professor of real estate finance at the University of British Columbia. ‘If things continue at the pace they’ve been at the last six months, that’s a lot of cause for worry.’”

“While much of the focus is placed on national housing data, Mr. Somerville noted that only a handful of U.S. states, led by California and Florida, truly had housing bubbles. But the damage they did spread everywhere by way of mortgage-backed securities and other financial products.”

“‘Another element is that the [Canadian] government is driving this,’ he added. ‘CMHC has been buying so much product. Functionally you’ve had this huge liquidity dump from the government into housing finance.’”

“Just don’t expect any policy maker to acknowledge that misguided government policy typically aids and abets bubble formation. Nor will they ever agree publicly with the notion that a bubble mentality has taken root and that it has to be nipped in the bud. ‘Imagine the political backlash if a politician or central banker told people their house is worth 20 per cent less than they think it is – and they’re prepared to do everything in their power to ensure that it is worth less,’ said Arthur Heinmaa of Toron Capital Markets in Toronto.”