The Housing Bubble

It’s Friday desk clearing time for this blogger. “Heather Anderson ruefully admits that she should have known better. A veteran of nearly two decades in the credit-union industry, she had spent her career warning would-be borrowers about the perils lurking in home-equity loans, bells-and-whistles mortgages, and the seductive fantasy that debt was interchangeable with wealth. But the housing boom was roaring ahead, and ‘I started to feel left out,’ Anderson recalled. So in 2005, she and her boyfriend bought a house in San Diego with a no-money-down, interest-only mortgage and a home-equity loan.”

“Less than a year after the couple moved in, they broke up. Unable to sell the house, even at a loss, and ground down by the strain of living with her ex, Anderson moved out, although she kept up her share of the mortgage payments. ‘I had to,’ she said. ‘My credit score was my safety.’ But her sacrifice was in vain. Her former boyfriend moved out as well, leaving no forwarding address for the mortgage company. Unable to persuade her lender to renegotiate, Anderson watched helplessly as the house slipped into foreclosure, dragging her credit score down with it.”

“When Sven Gustafson and his wife bought a home in the Oakland County community of Ferndale in 2005, it looked like a smart move. Property values had been rising steadily. But then came the Great Recession in 2007. Since then, Ferndale has seen its state equalized residential property values fall 36 percent. The Gustafsons experienced an even larger drop in the value of their home.”

“Gustafson said his mortgage is underwater ‘big time.’ He said it seems fruitless to keep making the monthly payments when he might never catch up. ‘It could be years before we recover the value of our home,’ he said. ‘You feel like you’re just giving money to the bank when you make your mortgage payment.’”

“Bob Baschoff used to work for a bank, commanding a corner office and a six-figure salary that allowed his family to enjoy a comfortable life in the wealthy lakefront village of Lake Bluff, Ill. All of that is gone now. Eight months after Baschoff arrived in Illinois in a move to the home office, the bank eliminated his position. He thought he would quickly find another job, but with the financial crisis reaching full boil, banks were shedding people, not hiring them.”

“Not even their New Jersey house, which they had rented out and was once estimated to be worth close to $300,000, could save them. Their tenants lost their jobs and stopped paying rent, and the Baschoffs couldn’t make the mortgage. The house went into foreclosure and was sold last year for $186,000, according to public records. ‘When I’m around the parents of my kids’ friends or teammates, every guy I look at, it’s like, ‘I wonder what he does? What does he make? Why can’t I do it?’ said Baschoff. ‘I feel so out of place. I feel like a misfit.’”

“Many residents throughout Hampton Roads are dealing with financial problems resulting from Chinese drywall contamination. Eric Bailey said the home in the Hollymeade subdivision in Newport News was his ‘dream home’ when he purchased it for more than $250,000 in 2006. Now, it’s in the process of a short sale. Bailey is selling his property for $80,000 to an investor, but his credit rating will still be damaged.”

“‘I had $80,000 of my own money invested in this home,’ said Bailey. ‘I don’t expect to get any of that money back.’”

“But Bailey’s situation is less dire than that of Juanita Smith, whose Hollymeade home was foreclosed upon this summer. She’s now $200,000 in debt, and the bank could seek to recover about $140,000, the difference between what she purchased the house for, and what it sold for at auction. She doesn’t know if the bank will try to recover the $140,000, but if it does, she said she would have difficulty making the payment. ‘All I know is, the train is coming,’ Smith said, worrying about having her wages garnished or other financial problems that could push her into bankruptcy. ‘I have hit rock bottom. My finances are ruined. I don’t think I’ll ever purchase a house again.’”

“In ZIP code 85032 in northeast Phoenix, prices dropped 57.7 percent from 2006. In 85027 in north Phoenix, the decline is 62.9 percent. In 85017 in central Phoenix, prices are down a staggering 81.3 percent. In other words, someone buying a house for $100,000 in 2006 can now resell it for $18,700. ‘You could have purchased a home in the late 1990s and now be underwater,’ according to Artur Ciesielski of the Phoenix Realty Group.”

“Boulder County is on track to have one of the largest percentage increases in foreclosures this year among a dozen Colorado counties surveyed by the state’s Division of Housing. Becky DeGrossa, a Boulder businesswoman who writes hardship letters to banks on behalf of families facing foreclosure, finds herself writing a new kind of letter, asking banks to lower payments on loans that have already been modified.”

“‘(Homeowners are) in a repayment period and they’re still not able to make that’ new payment, she said. ‘It’s really getting people.’”

“Individual homeowners purchased houses in new developments constructed by eight national home-builders between 2004 and 2006 — financed by the developers’ financing entities. In a subsequently filed class action lawsuit, the plaintiff-homeowners claimed the developers represented they were building ’stable, family neighborhoods occupied by owners of the homes’ and that they ‘discouraged speculation … and intended to sell homes only to people who will occupy them.’”

“And by marketing homes to high-risk buyers and financing those buyers, defendants created a ‘buying frenzy’ that artificially increased demand in home prices, even beyond the hot market at the time. According to the plaintiffs’ pleadings, the developers marketed the houses to ‘unqualified buyers who posed an abnormally high risk of foreclosure and sold homes to investors who had no intent to reside in homes and were more likely to walk away in times of economic hardship.’”

“Last week I met with clients who had purchased a home from a large subdivider in Reno. Their home is upside-down with a loan much higher than the present value of the home, yet the same developer continues to build new homes, further driving down prices. That developer owes a duty of good faith and fair dealing to its homebuyers. Building identical new homes in the same neighborhood where there are currently dozens of short sales and foreclosures is unconscionable.”

“There was a time when Jerry Howard and his lobbyists at the National Association of Home Builders would buttonhole lawmakers to ask for a favor or policy fix.Today, Howard and his remaining allies are asking for something new. ‘Shut up,’ Howard said, paraphrasing his message to lawmakers. ‘Stop saying we’re going to eliminate the mortgage interest deduction. Stop saying we’re going to require everyone to put 20 percent down on a house. Stop saying there’s no role for the federal government.’”

“The National Association of Realtors is undertaking its own grassroots effort with an eight-month bus tour across the U.S., part of its ‘Home Ownership Matters’ campaign to educate consumers about protecting the ‘American dream of homeownership.’”

“‘In Washington, the challenge is you have a lot of well- intentioned people who don’t understand the impact of decisions,’ said Ron Phipps, NAR’s president. ‘We’re better off with those well-intentioned people stepping back instead of coming up with solutions that have unintended consequences.’”

“Lila Wagner, a senior loan officer for Mortgage Associates in Ketchum, said the economic downturn has resulted in the best buyer’s real estate market in years. Wagner still processes 100 percent, 30-year fixed Rural Development loans based on income restrictions, as do other lending institutions.”

“Such loans have been criticized in the past for allowing unqualified buyers to buy homes with no money down, only to go into foreclosure several years later if the owners’ financial circumstances drop further. But Wagner said the loans are an ‘important factor’ in allowing interested buyers to buy homes, which in turn will help the market. ‘There is definitely more interest now,’ she said. ‘If you are a qualified buyer, that dream home you couldn’t afford a few years ago now might be in reach.’”

“For example, in 2004, a ‘charming log home’ with Baldy views in Ketchum was listed at $895,000—this, for a home described as having ‘great remodel possibilities.’ A similar property in the September 2011 guide, described as an ‘affordable home,’ is listed for less—$659,000—but that price may be more than many Blaine County residents would consider affordable, as incomes are still down nationwide. In Blaine County, adjusted per-capita income fell from $41,238 to $31,626 between 2000 and 2010, or 23 percent.”

“Michelle Griffith, executive director of the ARCH Community Housing Trust, contended that falling housing prices mean little to residents whose incomes are also falling due to the faltering economy. ‘That doesn’t make homes more affordable for our community,’ she said. ‘It just makes them less unaffordable.’”