The Housing Bubble

It’s Friday desk clearing time for this blogger. “Eleven condo buyers at Vancouver’s controversial Olympic Village want to back out of their pre-sale deals. The buyers put down deposits of between $60,000 and $300,000 for False Creek condos priced from a low of $550,000 to units that sold in the millions of dollars. They’re being asked to close their deals by the end of the month. The unhappy buyers say washers and dryers haven’t been installed in their units, and the $5,000 electric fireplaces aren’t working properly. Lawyer Bryan Baynham said his clients don’t want to move into the suites any more — and they want their deposits back. ‘Once you lose faith in a project, people say ‘I just don’t want to be there’,’ Baynham told The Province. ‘It’s a whole series of things. Nothing seems to go right with this project.’”

“Only one lot has sold in a controversial Winona subdivision, two years after the parcels went on sale. Thirteen of 14 lots remain empty in the first phase of Cobblestone Creek, a development in Pleasant Valley. The first phase of lots went on the market in the fall of 2008 — just as it was plunging, developer Jason Phillips said. ‘It’s been a bit of a long haul,’ he said. ‘Either the market turns around or the the world completely ends, so it’s got to turn around.’”

“Scott Katzer owes about $200,000 more than his Fort Lauderdale home is worth. Unable to sell anytime soon, he wants to reduce his monthly mortgage payment by refinancing to a lower interest rate. Katzer doesn’t qualify under a government refinancing program because the value of his home is so much lower than what he owes. Private lenders turn him down for the same reason. Katzer bought his home for $460,000 in 2006, but he estimates it’s now worth in the $250,000 range.”

“The Mortgage Intervention Strategy could help neighborhoods like Dave Rakszawski’s near Lantana, Fla. At least two houses on his block alone have fallen into foreclosure in recent months. He’d like to see owners get the aid they need so the community of split-level homes can recover. But he questions whether borrowers qualifying for the state mortgage payments will be motivated to find jobs that allow them to leave the program after 18 months.”

“‘Is that person going to benefit by it, or a year and a half from now are they going to say, ‘I still can’t afford it anyway’?’ he asked. ‘Even if they’re given more time, some people really will have no intention of making it work. It’ll just be a free place to live for 18 months.’”

“President Barack Obama says that no matter how much the government spends, some people still won’t be able to afford their mortgages and will lose their homes. There are still underlying problems in the housing market, the president said, in part because ’some people just got too much house for their salary.’”

“Congress, at the eleventh hour, passes an extension of the closing date on the home buyer tax credit. It was supposed to expire at midnight last night. The powerful troika of Realtors, builders and mortgage bankers pushed full speed ahead, rallying the troops. I can’t tell you how many calls we got here in the CNBC DC bureau from Realtors claiming there would be ‘rioting in the streets’ (I’m not kidding, and that was a Connecticut Realtor…), and PR reps for industry types offering endless ‘experts’ to discuss the ‘vital’ need for the extension. You can imagine what was going on a block up from my office on Capitol Hill.”

“‘Certainly we have been talking to more people in the past number of years than ever before,’ admits NAR’s chief economist Lawrence Yun. ‘We are fortunate in terms of members of Congress willing to listen to our members.’ ‘We have worked for over a year on a model [for Fannie and Freddie] that we introduced late last year, and its gotten really a very good reception,’ says the Mortgage Bankers Association’s CEO John Courson. ‘We have been with the administration, we have been to the hill, other trade associations, consumer groups, in fact, I must say not to be too immodest, but there have been a number of plans that have come out since then, that look very similar to ours.’”

“U.S. Rep. James P. McGovern, D-Worcester, said minutes after he voted for the stand-alone bill yesterday that extending the tax credit deadline for those who were in a contract by the end of April will help stabilize a long-suffering estate market. ‘We have a soft real estate market. Extending it can boost sales of homes, and it makes it more affordable,’ he said.”

“Barry Bluestone, dean of Northeastern University’s Dukakis Center for Urban and Regional Policy, said the tax credits helped stabilize the slumping housing market and brought some buyers into the market who would otherwise not have participated. ‘I’ve been arguing that we need something to prop up the housing market that’s not expensive for the government,’ he said.”

“‘Extending the deadline would be beneficial to those homebuyers caught up in the long short-sale process, but it’s not going to sell more homes,’ said Nick Krautter, principal broker with the Keller Williams Realty office in central Portland.”

“Krautter believes extending the deadline has more to do with the upcoming midterm elections than anything else. ‘It seems more like electioneering than a solution to fixing the housing market.’”

“Nearly 27 percent of all Manatee homes sold during the first quarter were foreclosures, RealtyTrac said in a quarterly report. In Sarasota County, foreclosures accounted for 36 percent of all first-quarter 2010 sales. The Florida average was 38.7 percent, the sixth-highest rate nationally. The U.S. rate was 31 percent, led by three states — Arizona, California and Nevada — where foreclosures were more than half of all sales.”

“Kathy Marlowe, whose Kathy Marlowe & Associates Realty in Sarasota specializes in foreclosures, said foreclosure prices are falling partly because of the properties’ deteriorated conditions. ‘Some of these homes have been sitting for one, two, or three years vacant and no one is taking care of them,’ she said.”

“For years, the 8,000-square-foot mansion in suburban Seattle sat vacant and for sale, the price gradually coming down from $5.8 million to $3.3 million. One day in June, a 30-year-old woman, a man and two children took down the for-sale signs, changed the locks, moved in and declared it their home. They didn’t actually buy the house, or even rent it. They just moved in and declared it their house.”

“Jill Lane, who was arrested on a charge of trespassing after two weeks in the house, is not contrite, The Seattle Times’ Danny Westneat reports. Not only did she try to take over the mansion, with its wine cellar, home theater, six bedrooms and nine baths, she has staked a claim to 10 other bank-owned houses in the Seattle area.”

“‘Banks do whatever they want and nobody holds them accountable,’ Lane told Westneat by phone from Disneyland, where she went on vacation after she was released by the police. ‘It makes me ill to see what the banks are doing. They aren’t using their bailout money to help anyone. So I’m standing up for the people who are being brutalized by banks every day.’”

“While Dallas-Fort Worth foreclosure filing volumes have declined in recent months from 2009 levels, they are still at near-record highs. More distressed properties could still come onto the market and lower values. ‘The market may be able to sustain reasonably well without credit – we’ll have to wait and see on that one,’ said economist James Gaines of the Real Estate Center at Texas A&M University. ‘Market inventory is in reasonably good shape, but we don’t have any data on hidden or shadow inventory in the market.’”

“Redlands-based economist John Husing said there are plenty of positive indicators suggesting the Inland economy is starting to pull itself out of a freefall that led to one of the worst unemployment rates in the nation. The problem is, all the good news comes with a ‘but’, he said during an event organized by the Temecula Valley Chamber of Commerce. One ‘but’ concerns the housing market. While the number of default notices issued to homeowners behind on their mortgages is declining, a ’shadow inventory’ of potential foreclosures is blunting the recovery, Husing said.”

“More than two of every three Merced County homes sold this year have been either bank owned or ’short sales’ to avoid foreclosure, just-released statistics show. e numbers, and at substantial discounts,” said James Saccacio, RealtyTrac’s CEO, said lenders this year have been repossessing record levels of American homes. ‘It will be interesting to watch how they will manage the inventory levels of distressed properties on the market in order to prevent more dramatic price deterioration,’ Saccacio said.”

“New and completed foreclosures in Chesterfield County are at high points, yet real-estate and mortgage professionals remain optimistic that a turnaround is coming soon, but not in the immediate future. A Chesterfield official who logs completed foreclosures into the county books reports numbers are mirroring figures not seen since the early 1980s. ‘“It’s going to get worse before it gets better,’ said Mary Virginia Harris, owner of Harris Realty in Chester.”

“Harris and Jerry Mabry, president of Village Bank Mortgage Co., both point to the loss of jobs by homeowners as a leading cause of foreclosures. Mabry noted that was not the case three years ago, when a faltering economy hit the housing industry quite hard. Back then, he said, people were buying houses for which they were not financially qualified.”

“‘They were using so many exotic types of loans,’ Mabry said, citing stated-asset loans as an example. With a stated-asset loan, the lender asks the customer how much money he or she has saved, then makes the loan based on that amount. ‘Back then, just about anyone could get a loan,’ Mabry said.”

“A real estate investment trust, last week purchased Annapolis Roads, a 282-unit apartment complex off Edgewood Road. Economist Anirban Basu of Sage Policy Group Inc. in Baltimore said deals like these may foreshadow an emerging trend. ‘Many are being forced to sell their assets because of short-term financial considerations. They really don’t want to sell at low prices,’ Basu said. ‘But in a situation where there is no buyer, that project would lose its value even more quickly and the losses from financiers would be even greater.’”

“At The Landing at Spa Creek, Lexin Capital will take over where Triton Real Estate Partners left off, converting the apartments to condominiums. In 2005, Triton bought the property for $36 million. The developer, however, ran out of money before the conversion of all the units to condos could be completed. Triton filed for bankruptcy in February 2007. Fidelity Real Estate Growth Fund, the primary lender, foreclosed a few months later.”

“More recently AmTrust Bank, another creditor, acquired the property, but last December the Office of Thrift Supervision closed the bank. ‘It’s so sad, really,’ Metin Negrin, president of Lexin Capital said of the property’s past. ‘So many people with so many losses.’”

“Jeremy Grantham pricked, if not the housing bubble itself, then at least the bubble that property market spruikers live in, with the quip that: ‘Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.’”

“How true that is. Before Japan’s bubble burst in 1990, we heard that Japan was different: the ‘Rising Sun’ was eclipsing the USA and house prices reflected this growing wealth (and—didn’t you know? —there was a land shortage in Tokyo!). Before the USA’s bubble burst, there were land shortages in all the States with price bubbles—especially California. There were probably even Tulip shortages in Amsterdam, four centuries ago.”

“Those other bubbles duly burst, despite their ‘unique’ characteristics, under the weight of the same force: too much debt was taken on by speculators seduced by the groupthink that house prices always rise. When the rise in house prices made the entry costs for new players prohibitive, debt stopped growing and house prices collapsed.”

“Any doubt that borrowed money is what has driven house prices into the stratosphere in Australia is dispelled by the data: despite all the hooey about Australian lenders being more responsible than those in the USA, mortgage debt in Australia rose three times faster since 1990. Having started with a mortgage debt to GDP ratio that was just 40 per cent of America’s, we now have a higher ratio than the USA — and ours is still increasing while theirs is clearly falling.”

“Notice however that our ratio was lower than the USA’s—and was falling too—before the government brought in the First Home Vendors Boost. As it has always done, that government intervention in the market set off a price bubble—the government in this sense is as responsible for the house price bubble as the banks are.”

“The boost caused the number of buyers to explode last year, and now the number is fizzing. Actual demand (and that’s people with cash in their hands to buy now, not the hypothetical future demand concepts touted by the property spruikers) is therefore falling below actual supply. As the stock of unsold houses mounts up, it is only a matter of time before the bubble bursts.”