The Housing Bubble

The Voice of San Diego reports from California. “Mark Dykstra knows short sales well. He finished two last year, and is working on his third. He’d bought the Escondido house in 2001 for $630,000. When it was eventually valued at more than $1.4 million, he’d taken bad advice to take cash out to buy investment real estate at the top of the market in 2006. At the same time in 2008, he sustained a severe cut in salary at the law firm he worked at. His wife got cancer. Dykstra declared bankruptcy. But Dykstra didn’t want to leave the Escondido home in a cloud of smoke. ‘It’s a little embarrassing, to say the least, to have to short sell a property,’ he said. ‘We didn’t just want to walk away and leave everything.’”

“After about a year of negotiating with his lender and finding a buyer willing to pay about $700,000 for the home, Dykstra completed the short sale. The Eastlake investment home he’d paid about $600,000 for also sold short, to a buyer willing to pay about $300,000. Dykstra’s still waiting on one last sale for a condo in La Jolla he’s been trying to sell short for over a year and a half. The bank has threatened to sell the home at a foreclosure auction five or six times — and has postponed it each time.”

The LA Times. “Brenda Duchemin and her husband, Mohammad Ashraf (have) gone through foreclosures on two homes and are in danger of losing a third. Duchemin and Ashraf say they are anything but flippers. Had not both their health and the economy taken bad turns, they say, their finances would have been able to support their real estate investments.”

“The couple bought their Diamond Bar house for $550,000 in 2006, hoping to finance the purchase by selling their town home in Brea — a sale that never materialized, they say, because of the housing crash. The year before, they’d also bought a $340,000 home in Las Vegas as a retirement property, which they rented to a tenant until last year. At the time of the purchases, their only sources of income were workers’ compensation insurance payments and Social Security, but that wasn’t a problem for the lender.”

“They informed Washington Mutual in March 2008 that they were in trouble and asked for a modification on the Diamond Bar home, but tried to pay the mortgages on all three of their houses, missing a payment here, a payment there. They eventually lost the Brea town house and Las Vegas home to foreclosure, and both properties went up for auction last month. Duchemin and Ashraf say they are doing everything they can to keep their Diamond Bar house. If they are forced to move, the two don’t know where they’ll come up with a deposit for a new place — filing for bankruptcy has ruined their credit.”

“‘We can’t afford to stay in our home, but we can’t afford to move,’ Duchemin said.”

“‘It wasn’t unusual to allow folks to buy not only two homes but three, four or five,’ said Sean O’Toole, founder of data-tracking firm ForeclosureRadar. Because people thought the price of real estate would keep climbing, O’Toole said, they figured that the more homes they bought, the more they’d earn eventually.”

“‘In a lot of cases, you had folks in this gold rush mentality: ‘Real estate is going up, the more houses I buy, the more money I’ll make.’”

The Mercury News. “Foreclosures dropped 8 percent to 402 homes in Santa Clara County from January to February, reaching their lowest level in nearly a year. The trend was the same in San Mateo County, where foreclosures dropped 13 percent from January. In San Mateo County, 138 homes were foreclosed.”

“Nearly 1,000 people in Santa Clara County received notices of default from their lenders in February, a 25 percent jump and the biggest monthly increase in a year. San Mateo County saw a 32 percent increase in these notices. Notices of default were up nearly 20 percent in California, foreclosures down almost 12 percent and homes in the foreclosure process at near record levels. ‘The disconnect between delinquencies and foreclosure sales continues to widen,’ said O’Toole of ForeclosureRadar.”

“Dustin Hobbs, spokesman for the California Mortgage Bankers Association, said that when lenders take months and months to foreclose, it’s better for the housing market. ‘If all the properties that were delinquent went to foreclosure on expedited or even a normal timeline, that would cause massive damage to the economy and the housing market. It’s much better that lenders take advantage of every program available to them and give the borrower every chance to work something out.’”

“Leslie Martin, a meter reader for the city of San Jose, told the Mercury News last month that she was expecting to get a loan modification after a year of negotiations with Chase Bank, her primary lender. But a couple of weeks ago, the bank turned down her request. Now she’s thinking of joining the ranks of people in foreclosure limbo, not making mortgage payments and living in her condo until the bank actually sells it at auction. That may be a while. She has yet to receive a notice of default.”

“‘I’m guessing I have six months, minimum,’ Martin said.”

The Recordnet. “Short sales accounted for 40 percent of all San Joaquin County home sales in February. ‘Short sales are really big right now. We are seeing short sales approved in a shorter time,’ broker Stephanie Rodriguez said. ‘It’s nice to see short sales being encouraged, because it’s always a case where people just feel defeated to think they are going to spend years making payments on their house that isn’t worth it,’ Rodriguez said. ‘It was a bad investment, and they just want to get out from under it.’”

“Sales could increase if banks begin to release foreclosed properties on the market. The Wall Street Journal reported that banks were holding on to 645,800 foreclosed homes in January, a 4.6 percent increase from a month earlier. The industry calls this ’shadow inventory.’ ‘We are all still waiting on the banks to release their shadow inventory. The homes are there; they are just still releasing them in fits and spurts,’ Stockton PMZ Real Estate manager Ben Balsbaugh said.”

The Bakersfield Californian. “The Bakersfield area was the fifth worst residential real estate market in the nation in January based on mortgage delinquency rates, foreclosures and other signs of a deeply troubled housing market. Robert Savage, a broker with Bakersfield Property Solutions, said the ranking was probably inevitable with so much negative equity in town.”

“‘The bulk of the homes here, people owe more than their homes are worth,’ he said. ‘I’m regularly seeing homes selling for as little as a third of the last sale price. Not half. A third.’”

“The good news, Savage said, is banks seem to be loosening up a little on negotiating loan modifications and short sales. ‘They’re getting better about it,’ Savage said. ‘A short sale is not hopeless. I’d really rather see loan modifications than short sales, though. What needs to happen is something that will let people who are upside down, and will be for the next 20 years, stay in their homes.’”

The Union. “New building construction declined in Nevada County in 2009 and continued to plunge for the first 10 weeks of 2010. Building permits for construction in the unincorporated areas and Nevada City have been falling off steadily since the beginning of 2008, Building Department Director Brian Washko said. As in the rest of the United States, bank foreclosures are depressing both sale prices of existing houses and the incentive to build new, Washko added.”

“‘We have mostly (speculative) homes here and not a lot of tract building,’ Washko said. ‘If you can buy a nice, foreclosed home for $400,000, why would you pay $600,000 for a new one?’”

“‘You can’t build a house for what you can pick it up for right now,’ agreed Executive Director Barbara Bashall of the Nevada County Contractors Association. ‘There are some nice houses out there for sale.’”

The Record Searchlight. “Unemployment today is nearly 18 percent - a 20-year high - as roughly 3,000 construction jobs have been sucked from the area since the summer of 2006, when unemployment in Shasta County stood at 6.5 percent. Four years ago, 1,000 Shasta County residents worked in real estate. Today, that number has dwindled to about 600.”

“Shasta County bankruptcy filings jumped 31 percent to 1,111 in 2009 from 846 in 2008. Contractors and laborers who have gone bust because of the lack of jobs have fueled the spike in filings. ‘People say there is no industry here, but building was our industry, and the people doing the building were our middle class, our blue-collar workers,’ Redding real estate agent Skip Murphy said. ‘So to that extent, it (the housing bust) has been devastating here; it has rippled out to our service sector, which includes restaurants and waiters, our car dealers.’”

“‘It has never been more evident that we must revive the housing industry in order to revive California’s economy,’ California Building Industry Association CEO Liz Snow said in a statement that accompanied the trade group’s report.”

“Snow’s group has lobbied hard to bring back a state home buyers’ tax credit. Last year, California offered a $10,000 new home purchase credit to buyers, setting aside $100 million to fund the program. But demand was so great that the funds were exhausted in July, roughly eight months before the credit was scheduled to expire.”

“‘There is probably about $150,000 in sales taxes generated from building one house,’ said Jerry Wagar, managing partner of Ochoa & Shehan Builders Inc. in Redding. Ochoa & Shehan is building subdivisions like Summerfield Meadows, Bel Air Estates and Crown Meadows in Redding. ‘I think the industry needs to stabilize,’ Wagar said. ‘We overbuilt and oversold and now you have this incredible downturn. … I think if we have a reasonable growth rate, the economy will be more stable.’”

“In Redding, housing starts in 2009 fell to a 35-year low as a mere 94 single-family homes were permitted - an 87 percent plunge from the 720 permitted in 2005, which was the height of the boom. Allison Barnett, a legislative advocate for the California Building Industry Association, acknowledged that the number of vacant lots and abandoned housing projects are conspicuous across California.”

“‘It’s not that there isn’t any demand. It’s that people are hesitant. They are unsure about the economy,’ Barnett said. ‘I wouldn’t agree there is not a demand. I think people are just sitting on the sidelines, still a little fearful.’”

“However, Chico State University economist David Gallo questions the call for more building. ‘Are they saying we want to go back to 2005 and 2006 levels? … The question is whether the demand would support that,’ Gallo said. ‘If you’re just building houses that nobody needs, where is the economic benefit? You can’t sell them, so there is no income.’”

“Moreover, Gallo says, as housing values rise, equity goes up, people spend more, which creates the wealth effect - each $100 drop in housing values reduces annual retail spending by $6. ‘So the wealth effect doesn’t exist if prices don’t go up. And if you keep building, prices will go down,’ Gallo said.”

“Redding real estate agent Murphy also is dubious about the need for more new homes. ‘I think the bubble illustrated that we were building based on an unsustainable level. … You can’t return to that,’ Murphy said.”

“And the Great Recession has forced people to adjust and reassess their priorities. ‘Families have moved in together; they live with grandma; they have combined their income,’ Murphy said. ‘While there are probably more people moving into California than ever, they are living in fewer houses. So a lot of this projected demand seems really flawed.’”

From NPR. “One of the nuttier elements of the real estate boom has returned. Tess Vigeland explains. ‘Kelly Frambach and her husband, Andy, moved into their first home just a few months ago. She’s a 32-year-old office manager for a construction company; he’s 29 and works in tire repair. This California ranch-style home in Chino Hills, just east of Los Angeles, boasts three bedrooms and two baths, 1,200 square feet for them and their seven and nine-year-old kids. They started going to open houses back in mid-2008, just as the market was collapsing.”

“They paid $285,000 for it — ten grand over the asking price — with an FHA-backed 30-year mortgage. Kelly: ‘And we thought it would be easy, because there were sooo many houses for sale. That’s what everybody thinks, but every house we put an offer on, there were so many offers.’”

“Real estate bidding wars are back. Not to the point where buyers are literally throwing ever-higher checks at sellers — like they did five years ago. But in the state of California, 55 percent of all home sales last year were the result of multiple bids. The average number of bids on each home sale? Five, according to the California Association of Realtors.”

“Steve Goddard is their president. ‘People are seeing that the values are going up, and they want to, you know, jump on the bandwagon again.’”

“What we hear is that there are a gazillion homes out there with low prices. Buyer’s market! So what’s with the bidding wars? Chris Thornberg: ‘You might think to yourself, ‘Gee this seems almost paradoxical, what’s driving the show?’ The answer is government policy. The housing markets are being driven really by four things: Low interest rates, FHA lending, the Hope for Homeowners program and, of course last, but not least, is tax credit.’”

“Thornberg: ‘Those all conspired to create a frenzy in the market. In part by boosting demand, artificially, and in part by constraining supply, artificially.’”

“The constrained supply part of that equation, according to Thornberg, is that many lenders are taking their time putting foreclosed homes back on the market. And the government’s rescue programs are keeping people in homes that they’re never really going to be able to afford. So all that troubled housing stock that’s supposedly waiting to be snapped up? Not on the market. And that means fewer properties out there for buyers to fall in love with.”