The Housing Bubble

It’s Friday desk clearing time. NovaStar was part of a crop of new lenders that had sprung up in the 1990s. Promotional memos NovaStar sent to its 16,400 unsupervised mortgage brokers across the country told the tale of easy credit terms. ‘Did You Know NovaStar Offers to Completely Ignore Consumer Credit!’ one screamed. Patricia and Ricardo had bought their three-bedroom home in a middle-class section of southwestern Atlanta in 1983 for $30,000. In 2004, she had a 9 percent adjustable-rate mortgage that she wanted to change to a fixed-rate loan. She received an offer in the mail from NovaStar and called the toll-free number.”

“‘I told them I wanted to come out of the adjustable and they said they would give me the fixed rate if I would accept it at 10 percent,’ Patricia said. ‘I could have stayed where I was but I told them definitely a 30-year fixed rate.’”

“Even the initial monthly housing payment, including taxes and insurance, was barely affordable: $1,215.33. As documented in their loan file, the Jordans’ total monthly net income was only $2,697. Their monthly housing and other debt costs totaled $1,642, so after they paid their debts each month, the Jordans had only $1,055 to live on. Two years after signing up for the loan, its interest rate was set to ratchet up. Only then did Ms. Jordan learn that NovaStar had put her into an adjustable loan, not the fixed rate she had been promised. ‘I got duped,’ she contended.”

“At the end of May 2007, Jorge Sanchez loaded his cousin’s pickup truck and moved his young family from an apartment into a house in Fitchburg. That was six years after Sanchez and his wife, Minerva Abrajan, natives of Puebla, Mexico, arrived in Madison. They’re not citizens, but, as permanent residents who pay U.S. taxes, the UW-Madison janitors obtained a mortgage under a new loan program aimed at extending home ownership to people who previously couldn’t qualify.”

“‘We wanted a house because we had two kids already,’ Sanchez said. ‘We wanted something better for them.’”

“The new program opened a door to home loans to non-citizens, helping usher in a sharp increase in homeownership among local Latinos in the second half of the last decade — shortly before a corresponding increase in foreclosure filings against the same group a few years later.”

“Ellen Bernards, a foreclosure prevention counselor for Greenpath Debt Solutions and co-chair of the Dane County Foreclosure Prevention Task Force, said at least three-quarters of her Latino clients facing foreclosure had taken out ITIN loans and that many, like Sanchez, were issued subprime mortgages with adjustable rates by private lenders.”

“She stressed that many of the ITIN loans failed for the same reasons other mortgage loans failed: the recession, which was especially cruel to Latinos. And they suffered from bad timing — a large group of Latinos for the first time became eligible for home loans just when the subprime loan crisis hit its peak. ‘It was a nuts lending time across the board,’ Bernards said.”

“Sanchez said that even if his wife hadn’t had to quit work for six months the family likely would have lost the house after five years, when the payments could have ballooned. He said he often felt confused by the process and acknowledged he should have done more to understand the loan before he signed. Much has changed for the family, and the more than $30,000 they spent on the house is gone. But their perspective has not.”

“‘We lost our house but we kept our jobs,’ Sanchez said.”

“The office condo deals are getting even better in downtown Wichita. Prices on two bank-owned floors at the Broadway Plaza building were reduced last week to just $59,000 apiece. The fifth and 10th floors of the structure are mostly vacant. They are just two of a handful office condo floors that originally were developed by Minnesota-based Real Development Corp. Most of them were sold to California investors, and many of them subsequently landed in foreclosure. Prices since then have plummeted.”

“‘You have to remember a lot of these had mortgages on them in 2006 of more than $400,000,’ says Royce Jantz, a broker with J.P. Weigand & Sons Inc., who is listing the floors at Broadway Plaza, along with foreclosed floors in the Petroleum Building, Sutton Place and the Orpheum Office Center.”

“The proportion of housing units in which the owners live fell 2 percentage points from 2000 to 2010 in Lucas, Fulton, Ottawa, and Wood counties in Ohio and Monroe and Lenawee counties in Michigan. ‘You’re comparing a low point, then a very high point, and then a low point,’ said Dave Browning, a longtime local real estate observer and principal of Wells Bowen Realty. ‘An argument could be made that the economic conditions in 2000 aren’t all that different than they were in 2010.’”

“‘We saw the first four or five years of the new millennium of good solid productive real estate; the end of 2004 through 2006 was crazy, with people doing things that didn’t make any logical sense, and from 2007 on, we’ve seen the other side of that knife.’”

“The IDI Group Cos. auctioned off more than a tenth of its 242-unit Riverview residential building in Lansdowne on Sunday. Out of the 33 units up for auction, 27 sold at prices as high as $350,000. About a third of the auctioned off condo units, which include one-, two-, and three-bedroom residences, had rock bottom minimum bids starting at $95,000, or a whopping 69 percent of the original asking price. Arlington-based IDI delivered the high-rise in mid-2008 — a devastating point in the local real estate market — with one-bedrooms priced in the high $200,000s to three-bedrooms priced from the mid-$400,000s.”

“IDI teamed up with RCC Inc. of California to originally build 10 high-rise buildings and four low-rise buildings at Leisure World of Virginia. Instead, just four high-rise and three low-rise buildings stand there today.”

“House property values fell in all Australia’s capital cities in April. Sydney’s fell 0.3 per cent to a $667,500 median, the third lowest fall. The city had a 0.6 per cent drop during March. ”The magnitude of the corrections are not extreme, and is not a cause for alarm at this stage,’ a Residex forecaster, John Edwards, said. ‘But it is very unusual to see the total market in a correction phase.”’

“The last time all the capital cities were in a downturn was June 2008, during the global financial crisis. Before that it was June 1990, when Australia was heading into recession. ‘Both times before, the reasons for the downturn were much more obvious,’ Mr Edwards said. ”In a situation like this, given other weak economic indicators, considerable care will need to be exercised by the Reserve Bank in regards to interest rates until the market regains some level of confidence,” Mr Edwards said.”

“A chorus of economists and labor market observers say that the ‘natural’ or ’structural’ rate of unemployment has shifted up, meaning that Americans looking for work should get used to having a harder time finding it. The unemployment rate is currently 9% and could take until 2016 to reach the natural rate.”

“A boom in the construction industry in the 2000s, an expansion of credit and gains in productivity through technology disguised the significant structural changes in the economy. ‘We delayed the pain and papered-over the problem,’ said Diane Swonk, chief economist and senior managing director at Mesirow Financial. ‘The recession washed that away.’”

“Just as busts follow booms, booms are supposed to follow busts. But there has been no boom, not even a boomlet, to light a candle in the gloom of the housing collapse. Many economists thought that a recovery from the real-estate meltdown that started in 2007 would be well on its way by 2011. The unhappiness is understandable. But some extension of this pain would not be a terrible thing in the long run.”

“Negative reinforcement is a principle of behavioral psychology whereby repeated punishment reduces the likelihood that a human or rat will continue doing something. A parade of shocks on the housing front is delivering Americans much negative reinforcement. And they need it. In the recent real estate bubble, consumers who couldn’t afford it desired far grander digs than a simple nest with room for the chicks. They wanted media rooms, wine cellars and hotel-sized kitchens opening onto three-car garages.”

“And they had the federal government cheering them on.”

“Only constant negative reinforcement will change a society that never seems to learn that home ownership is not the low-risk path to wealth and happiness. In the 1920s, Americans gorged on Florida real estate, some of it underwater. The Depression came and – ka-boom! – property values fell like a rock in the Everglades.”

“Then as now, scams and the collusion of government had created a market of glass, leaving taxpayers to pick up the shards. Then as now, a busted housing sector hurt the larger economy. Only it’s worse now.”

“But the Feds are eyeing the beginning of the end for subsidies that help feed real-estate frenzies. In the meantime, let the pounding bad news on housing change American attitudes toward homebuying – and start moving the government out of the business of egging on the worst behavior.”