The Housing Bubble

The Mat-Su Valley Frontiersman reports from Alaska. “For Roger Purcell, when it rains it pours. The embattled Houston mayor is facing a recall election slated for sometime in June on allegations he abused his power using police lights driving a police vehicle to Fairbanks to deliver a grant applications. He denies those allegations. Second on his list of recent headaches: He was ordered on March 4 to leave his home after the bank foreclosed. And last, but certainly not least, came March 16 when he filed for bankruptcy in federal court. ‘The business went under two years ago when Vanguard went down,’ Purcell said, referring to Vanguard Mortgage and Title, the company he did business through. He said now was the time to finally clean out the books and officially admit it was over. His business is not the only one that’s had to shut his doors, he said.”

“‘I don’t think there’s a mortgage company left that’s not associated with a bank in the Valley,’ he said.”

The Billings Gazette in Montana. “Tight credit, depressed real estate markets and the dark cloud of pending legal appeals have brought lot sales to a near standstill at Copperleaf, the upscale subdivision in a scenic valley between Cody and Yellowstone National Park. After numerous court challenges by opponents and a total of $12 million invested by developers, all signs point to an imminent foreclosure on the 155-unit gated subdivision on 553 acres of former hay pastures in Wapiti.”

“Gale Pooley, president of Analytix Appraisal Group in Boise, Idaho, said most of the early lot sales, about three dozen, were ’speculation plays.’ Only two residential structures have been built. About 100 lots remain unsold, and for the past two years, there have ‘only been one or two sales each year,’ he said. ‘At that rate, there’s a 50-year-supply of lots out there. And right now, we basically see no interest at any price,’ Pooley said.”

“Jeff Darragh, CEO of the Tennessee-based Worthington Group, said that poor sales have left Worthington Group of Wyoming unable to pay Park County property taxes or fund a local sales office, making foreclosure a possibility. ‘If we don’t start selling lots, yes, that’s what will happen. It’s not an endless pit that you can continue to throw money in. It doesn’t make good business sense to do it,’ he said.”

The Cody Enterprise in Wyoming. “Unemployment in Park County is hovering at about 9 percent. Diane DiJenno, director of the Wyoming Department of Workforce Services’ Cody center, says the picture is ‘getting worse each day,’ with an average of about ‘50 or more’ people coming into the employment office daily in search of work that likely is not there for them.”

“In DiJenno’s 28 years with the service, the situation is the ‘worst since the 1980s, when the bust happened,’ she said.”

From Oregon Business. “The rusting rebar at the stalled Park Avenue West construction site in the middle of downtown Portland tells only part of the story. To really get a sense of the depths of the Portland Metro area’s commercial real estate economy…you need to drive west of the city along the Sunset Corridor on Highway 26. Soon, the for-sale and for-lease billboards sprout like weeds in front of sleek, glass-fronted, and empty, office buildings. Weeds that have been around for a while. Weeds that likely will be around for a while.”

“‘Take my empty building — please,’ the signs seem to be saying. In this economy, you might be able to buy it for half of what somebody paid for it two or three years ago.”

Oregon Public Broadcasting. “A small rebound in Oregon’s house prices appears to be fading, according to a study released from the Case Schiller Housing Index. The last time there was a boom and bust in Oregon real estate was in the early 1990’s. Prices dropped, rebounded a little - in what’s known as a dead-cat bounce - and then stagnated for about three years.”

“David Blitzer of Standard & Poor’s says that appears to be what’s happening now, except that the boom and the bust were a lot larger this time - and the stagnant period may be, too. ‘We’ve got too many houses for sale and not enough people out looking for them, not only in Portland but most of the country,’ he said.”

The Herald in Washington. “The roadside signs advertise village life, a quiet hamlet painted in muted shades of gray, green and brown. The driveways slope down from two-car garages, and basketball hoops and satellite dishes show that people call this place home. Just not enough people.”

“Scott Jarvis, director of the state’s Department of Financial Institutions, said the root of the banks’ trouble grows from two sources: residential and commercial real estate. Housing developments gone awry are just one part of the equation; the vacant office buildings in downtown Seattle and going-out-of-business signs in small towns also play a part. ‘If you go by the typical strip mall, you will see vacant stores where before there were occupancies,’ Jarvis said.”

“When Frontier CEO Pat Fahey came out of retirement in 2008 to run the bank, the community banking industry was in the early stages of upheaval. Though construction meant big returns for years, it was a boom-or-bust investment. And most bank officials across the country weren’t betting that a near-depression would flip the construction industry upside down. ‘It was just … a house of cards,’ Fahey said. ‘I think people were perhaps deluded by the fact that it was going so well. And it was very profitable.’”

The Seattle Times in Washington. “The reports are mixed from Thornton Place, the landmark residential and commercial development. Apartments: Get ‘em while you can. Retail: Doing OK, considering. Condos: Snakebit. No units have sold despite more than a year of marketing. A month ago developers Stellar Holdings and Lorig Associates suspended sales efforts indefinitely.”

“Stellar and Lorig had the misfortune to bring them to market in the midst of the worst housing downturn in decades. Even a much-publicized layoff-protection offer a year ago — you lose your job, we’ll pay your mortgage — didn’t attract any buyers. So Stellar and Lorig cut prices, and by late last year they had 18 of 34 condos in the project’s first phase under contract.”

“But in mid-December, says Tim Ainge, Stellar’s VP for real-estate operations, he noticed a suspicious half-inch gap between the wallboard and flooring in one unit. That touched off a chain of events that led engineers to conclude by mid-January that part of the project had a settling problem.”

“Ainge says the developers decided to give the buyers the opportunity to back out of their contracts. The FHA reversed itself and approved the project a few weeks later, but by then most of the buyers had rescinded their offers, Ainge says. He doesn’t know when sales will resume. First the settling problem must be fixed, he says, and he’s not sure how long that will take.”

“Is litigation a possibility? ‘I can’t answer that,’ Ainge said.”

The Yakima Herald in Washington. “Young professionals make up most of the residents who took advantage of a lease-to-own option offered earlier this year to get residents into the 27-unit development. Now the downtown condominium development at 17 N. Third St. is offering temporary price breaks of up to 50 percent off.”

“The price cuts are part of an aggressive campaign designed to spur more buyers in the next few weeks. The sales campaign also includes a waiver on condo fees. ‘We basically backed off when the market was so bad,’ said Gary Bodenstab of Seattle-based Bode Development, which built the $10 million project with JEM Development, owned by local developer Joe Morrier. ‘We were waiting for a return to normalcy.’”

“Only two units have been purchased so far, but 11 units are occupied by lease-to-own residents.”

The Kitsap Sun in Washington. “After spending almost six months at the island’s old dump, a pair of prototype prefab residences have finally found a piece Bainbridge that will welcome them. The sustainably-designed, stackable homes, which were donated for use as low-cost housing but were rejected at two sites, are now set move next door to a Winslow social service center by mid-May.”

“The homes were constructed in 2007 with the idea of creating earth-friendly homes for young Seattlites who enjoy urban living but can’t afford downtown condo prices. Plans for mass production were abandoned when the economy took a tumble. A planned move to the Johnson Farm, a city property on Fletcher Bay Road, also fell through when neighbors objected to the homes’ modern looks.”

“‘They’re very square, clean, condominium-like structures,’ said Bart Berg, board president of Friends of the Farms. ‘They were met with stiff resistance from farmers and neighbors for their appearance.’”

The Nanaimo Daily News in Canada. “The apparent demise of the controversial plan to build two condo towers, each about 20-storeys high has caught me completely by surprise. The towers were integral elements of the City of Nanaimo’s multi-faceted downtown revitalization plan, which also included the construction of the Vancouver Island Conference Centre and an adjacent hotel, that was put to a referendum (which passed with the slimmest of margins) which polarized the city in 2004.”

“That plan was terminated after Millennium failed to fulfill its contractual obligation to build the conference centre’s hotel due to financial difficulties the company continues to face. Mayor John Ruttan told the Daily News that he’s not interested in offering waterfront property owned by the city to entice developers for the city, and declared ‘it’s a new game now.’”

The Vancouver Sun in Canada. “Metro Vancouver’s cheap-mortgage-fuelled real estate market has overshot its previous peak for prices with indications it will keep going. February saw the average property price hit $662,741 in the area of Metro Vancouver within the Real Estate Board of Greater Vancouver. That is well above the previous $624,639 peak price, which the region saw in May 2008.”

“‘Even in Vancouver, we’ve gained back everything we lost,’ Simon Cote, an analyst at the National Bank of Canada said in an interview. ‘The pace might be slowing a bit, but they are still going up.’”

“The era of rock-bottom mortgage rates ended with a crush of work for mortgage brokers and bank-loan officers. It started Monday with a flood of homebuyers looking for last-minute approvals to sneak in under the wire before interest-rate increases went into effect the next morning — signalled in announcements by RBC and TD that they would raise their fiveyear posted rates 0.6 of a percentage point to 5.85 per cent, an 11-per-cent jump. Scotiabank, CIBC and BMO followed the moves with rate bumps of their own.”

“The immediate effect of the increase, along with impending changes to mortgage-qualification rules, will be to reduce the size of mortgage for which borrowers will be able to qualify, which market participants anticipate will put a damper on real-estate prices. ‘Now that we see the first phase of normalization [of interest rates], that’s further going to erode affordability and take a bite out of the purchasing power of Metro Vancouver households,’ Cameron Muir, chief economist for the B.C. Real Estate Association, said in an interview.”

“‘This is the beginning of the tightening,’ Benjamin Tal, a senior economist at CIBC World Markets said in an interview. ‘The era of extremely low interest rates is over.’”

The Canadian Press. “Buying a house in the hot housing markets of Vancouver, Toronto and other major cities in recent years has been a possible dream for some first-time homebuyers only because many of those houses had suites they could rent out. But new rules coming into effect April 19 will all but wipe out that advantage in the eyes of banks handing out mortgages.”

“The new regulations are designed to prevent speculation in the market, said Jack Aubrey, of the Canada Mortgage and Housing Corporation. But Vancouver mortgage agent Mike Averbach said the new rules will do little to prevent investors from gambling in the housing market. ‘They haven’t decreased risk,’ he said. “They’re just not allowing you to use the income.’”

“Currently, landlords can use 80 per cent of their rental income to offset monthly mortgage payments. That means, if they receive $1,000 per month in rental income, they can use $800 to offset a $1,200 mortgage payment, leaving only $400 to be debt financed. But under the new rule, only 50 per cent of a landlord’s rental income will be used. Even then, that money will not be used to offset their monthly mortgage payment. It will be added to their total income, forcing them to qualify for the entire monthly mortgage.”

“Rental income is essential for many of his clients, Averbach said. In cities like Vancouver, where the average home price in February was more than $662,000, rental offset is the only way many people can qualify for a mortgage and the new rules will keep many of his clients in condos rather than houses, he said.”

“‘Putting a renter in your basement is not speculative, it’s reality,’ he said. ‘It helps you pay your mortgage.’”

“With interest rates climbing and new rules that crack down on who qualifies for a mortgage, first-time homebuyers are having to look harder for their first mortgage, meaning brokers’ services are in demand, members of the profession say. Buyer Leslie Urquhart said buying her first home was a horrifying ordeal. Urquhart, 34, began her six-month home shopping odyssey with one goal-to get into the market. But she quickly realized that was easier said than done. Increasing budgets, pressure from her realtor to commit to a place and finding a mortgage made her wonder what she had got herself into.”

“Although she eventually found a condo in for $60,000 more than her original budget, she advised other first-timers to do their homework and prepare themselves for changes. In the end, Urquhart accomplished her goal of getting into the housing market, but she won’t be living in her new place as she had hoped. Instead, she will become a landlord, renting the place out while living in a basement suite at her parent’s house where rent is cheap.”

“‘At least I’m in the market and I’m learning,’ she said.”