The Housing Bubble

The Desert Sun reports from California. “Raul Vargas earns about a third of what he used to make before the recession. The husband and father of four’s entire take-home income, about $2,000 a month, goes to cover the $1,300 mortgage on their Coachella home and hundreds of dollars in utilities. ‘It all goes to house and bills,’ said Vargas, a Realtor-turned wind turbine repairman. If it wasn’t for the money his wife brings home, roughly another $2,000 a month, they would lose their house.”

“More than half of Indio residents, 57 percent, paid more than 35 percent of their income for housing. Many residents of La Quinta, Palm Desert and Indio are also paying more than $2,000 a month on their mortgages, an amount that reflects higher interest rates and houses purchased at the height of the market in the mid-2000s.”

“‘This market is suffering from people who bought homes they couldn’t afford,’ said Greg Berkemer, executive vice president of the California Desert Association of Realtors.”

“Palm Desert resident Bruce Domes, an automotive technician, and his wife net about $4,000 a month and pay a $1,500 for housing. Domes said he’s making $7 less per hour than he earned last year. ‘I have lost tools and my car due to a lower income,’ he wrote in an email. ‘We have nearly lost the roof over our heads. I ride my bike eight miles each way to and from work.’”

“Vargas said he used to earn nearly six figures as a Realtor. The family enjoyed vacations to Hawaii and Cancun. Then, the housing bubble burst in 2008. His in-laws — also a family of six — moved into their four-bedroom, two-bathroom home in 2010 after his brother-in-law’s construction company collapsed. Despite the difficult times, Vargas considers himself lucky, mainly because of his four kids.”

“‘Not one of them has said, ‘Mom, I miss my room,’ Vargas said Friday. “These kids teach me a lesson in humility. In a year and a half, no one has complained.’”

The Union Tribune. “Has the foreclosure crisis in San Diego peaked? We asked the U-T Housing Huddle, our group of real estate experts.”

“Kurt Branstetter, loan officer and mortgage manager at W.J. Bradley Mortgage in San Diego: Yes, but unfortunately there are many more to come. Foreclosures will only subside significantly when housing prices stabilize. Many homebuyers who purchased in 2004-2007 did so at the worst possible time at inflated prices with no money down and no income qualification loan programs that were readily available at that time (unfortunately.) Hopefully, a majority of those troubled properties have already thrown in the towel. Inventory levels and home prices have stabilized in some areas of the county and many homes are now selling at prices below the replacement cost.”

“Clemente Casillas, broker at South County Real Estate in Chula Vista.: No. I don’t believe the foreclosure crisis has peaked. At least not in South County. I recently did a BPO (broker price opinion) for a bank in the 91913 ZIP code. Of the 30 active listings in the area of similar type and model, 22 were short sales and three were bank-owned. This made up 70 percent of homes in pre-foreclosure. In addition, more than 50 percent of the market in South County continues to be a short sale. This is inventory currently on the market. I’m sure there are plenty of homes in pre-foreclosure status that are not even on the market. With continued unemployment not getting better, weak consumer confidence and expected government cutbacks, it is not going to get better tomorrow.”

The Tribune. “You all know the familiar gospel, ‘It’s the economy, stupid.’ But there is another level to the comprehension of our national problems that still is not being as fully addressed as it should be. It’s not only the economy. That’s far too broad a statement. It’s the housing market.”

“The president, members of Congress and the slate of Republican presidential hopefuls are obviously fully aware of the former, but they’re practically clueless about the latter. In what amounts to bailing water with a thimble, President Obama last week unveiled yet another attempt to right our economic ship, but it’s still too meager an effort.”

“One of the biggest problems with the latest program is it only applies to loans owned or backed by Fannie Mae and Freddie Mac. Everyone else — who lack the assistance of government muscle attached to their loans — is out of luck. Here’s my proposal: If you’re current on your payments and have not missed more than one in the last year and your loan is no more than 25 percent above the current value of your home, you qualify for refinancing — across the board.”

“For the banks, if there ever were a financial moment crystallized around ‘ask not what your country can do for you — ask what you can do for your country,’ it is now. So guys, are you with us, or against us?”

The Sacramento Bee. “When you examine President Barack Obama’s most recent plan to help underwater homeowners you can’t help but ask: Why is the federal government in the mortgage business? Hasn’t the loss of nearly half the value of our homes – thanks in large part to the federal scheme to make sure everyone owns a house whether they can afford it or not – been a lesson enough?”

“The federal government’s role in financing residential housing ‘has increased dramatically since the outset of the crisis,’ according to a report by the inspector general for the Troubled Asset Relief Program, with the federal government and the organizations it backs ‘now guaranteeing or insuring almost all net new borrowings for mortgages and mortgage-backed securities.’”

“In other words, it states, the government ‘has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.’Absent meaningful reform, it states, ‘we are still driving on the same winding mountain road, but this time in a faster car.’”

The Record Searchlight. “The federal government’s involvement in the mortgage business is the reason California homes have lost half their value? Well, that’s an argument to be made — and certainly the official blessing of looser mortgage credit helped pump up the housing bubble, leading to the subsequent bust. At the same time, since we’re talking about the federal government, it’s hard to see why the boom and bust was so selective. Some states saw neither run-up nor crash over the past decade.”

“In any case, back to the question: Why is the federal government in the mortgage business? Here’s the nickel version from a couple of finance professors in a 2005 paper, ‘The American Mortgage in Historical and International Context’: ‘Before the Great Depression, the single-family home mortgage was a very different instrument. Until the 1930s, residential mortgages in the United States were available only for a short term (typically 5-10 years) and featured ‘bullet’ payments of principal at term. Unless borrowers could find means to refinance these loans when they came due, they would have to pay off the outstanding loan balance. In addition, most loans carried a variable rate of interest. Bartlett (1989) presents a fine historical overview of the origins of the modern U.S. mortgage.’”

“‘Home mortgages typically had very low loan-to-value ratios of 50 percent or less and thus did not, by themselves, place substantial stress on lenders, because when borrowers were short of cash, their property could be sold if necessary to redeem their loan. But during the Great Depression in the early 1930s, property values in the United States declined by 50 percent relative to peak values. Holders of these mortgages, knowing their positions were insecure, refused to refinance loans that came due; as a result, borrowers defaulted, having neither the cash nor the home equity necessary to pay the loans back. A wave of foreclosures resulted–typically 250,000 per year between 1931 and 1935. At the worst of the Depression, nearly 10 percent of homes were in foreclosure. Financial institutions would in turn attempt to resell the properties that they repossessed, which placed even further downward pressure on the housing market.’”

“‘In response to these calamities, the federal government began intervening in the housing finance market. It created three particularly important institutions: the Home Owner’s Loan Corporation, the Federal Housing Administration and the Federal National Mortgage Association.’”

“In short, there was massive price deflation and a foreclosure death spiral — eerily like today’s — before the federal government ever got involved in the mortgage business.’

The Santa Cruz Sentinel. “Bruce Arthur is a former Capitola city councilman: ‘So more houses equals more opportunity to raise more revenue for the state. That, as far as I can see, is the only justification for the state of California to periodically require cities to adjust their housing numbers to accommodate more sardines in the can. Capitola is, for all intents and purposes, built out. There are just not enough vacant properties to accommodate even the amount of houses that they were required to plan for 15 years ago. Still the state wants more residents [taxpayers].”

“Never mind any more density would drastically impact our older neighborhoods. Secondary Dwelling Units seem to be the soup du jour that is going to save the cities. Not so fast. Capitola tried it two housing number allocations ago and found that not many people were interested in investing in the construction of the units. So now the state has told [not asked, but told] the city the Secondary Dwelling Unit ordinance isn’t working and we need to modify the lot square footage minimum from 5,000 square feet to 4,000 square feet. Oh, and reduce the rear- and side-yard setbacks for detached units. And, oh yeah, increase the height from one story to two stories.”

“At what point will the residents declare war on the politicians and demand a stop to this nonsense? Where are all these new residents going to work? Where are all these residents going to park? How is this increase in new commuters [see where are these residents going to work] going to make our air and traffic quality better?”

The Lompoc Record. “Lompoc will return $147,322 to the federal government that the city loaned in 2003 to the now-financially strapped Lompoc Housing and Community Development Corp. to buy property in the 500 block of North T Street. The location was to be the site of a five-unit condo complex for first-time homeowners, but the project never evolved because of a downturn in the economy, according to a city staff report.”

“Mayor John Linn said the city did not make a mistake in putting its faith behind LHCDC to do the project. ‘There was a plan in place (by LHCDC); the plan made sense moving forward, then the economics changed and it didn’t make sense,’ Linn said. ”

“This is not the first time the city has taken action on LHCDC projects. In April, the city initiated foreclosure on one vacant South K Street lot purchased for $375,000 in redevelopment loan funds administered by the city to LHCDC.”

The Press Democrat. “The nation’s home builders are still singing the blues, but in Sonoma County the tune is now sung by a new set of builders. Several local builders have closed their doors. ‘There aren’t many locals left,’ said Chris Peterson, president of Rivendale Homes in Santa Rosa.”

“It’s quite a change from the days when smaller, local companies like Christopherson Homes and Pinnacle Homes oversaw the work of turning the county’s bare ground into brand-new communities with hundreds of homes. Eventually more home buyers will return and building will resume, Peterson said. But today construction loans are nearly impossible to get, foreclosures have pushed prices far too low and new home building still contains too much risk.”

“This year is on track to end as the worst in a half-century for single-family home construction. The National Association of Home Builders last week predicted the U.S. will add only 422,000 houses this year, down 10 percent from 2010. In 2006, that figure peaked at 1.7 million houses.”

“Similarly, the Research Board predicts that California builders will construct a record-low 21,500 single-family houses, down 16 percent from last year. In Sonoma County, the downturn forced the bankruptcies of prominent landowner Clem Carinalli and developers Wendell Nordby and Orrin Thiessen. Pinnacle Homes filed for bankruptcy protection earlier this year for two limited partnerships with homesites in Sonoma and Mendocino counties. And Christopherson Homes last year lost two partially completed subdivisions in southwest Santa Rosa to a foreclosure auction and a court-ordered sale.”

“‘We expected some improvement this year and it didn’t show up,’ said Ben Bartolotto, research director at the Construction Industry Research Board.”

“Miami-based Lennar paid $7 million for one Christopherson project, Linwood Village. The amount owed the lender was $12.7 million. Meritage Homes of Scottsdale, Ariz., bought the other, Ragle Ranch, for $12 million. Public records showed the lender was owed $22 million. Both builders now have homes for sale here, as does KB Homes of Los Angeles at its Quarry Heights Project in Petaluma. Observers say these builders have substantial capital for buying stalled projects and for building.”

“Eduardo Martinez, a senior economist who studies California for Moody’s Analytics predicted somewhat better days ahead for the county’s home construction industry. ‘It’s going to be a gradual increase,’ Martinez said. He expects to see ‘meaningful” growth in 2013, but he cautioned that it could take several more years for the county to get back to a rate of 1,500 new homes a year — about half the number built in 2005.’”

“Randy Waller, a broker/owner of W Real Estate, says most of the current housing projects pencil out because they were taken back by banks and later sold at steep discounts. In other cases, the builders took a tax write-off by slashing the stated value of land bought before home prices plunged. Waller said it’s still far from clear how the county’s home building industry expands after these ‘broken’ projects are completed. Experts aren’t predicting a big rise in home prices or a big drop in building costs, he said.”

“‘So why are we predicting an increase in construction?’ he asked.”

Southern California Public Radio. “A pair of creative video artists are using foreclosed homes in Riverside as the backdrops for their latest work. Jeff Foye and Gordon Winiemko created the show ‘Jeff and Gordon Play Against’ on display at Riverside’s Sweeney Art Gallery. Winiemko says the artists also use the game of squash, typically associated with wealthy people, to explore the tensions between competition and cooperation in today’s economy.”

“‘That tension that we’re playing, and there are rules that we agree on but we’re out to beat the other guy. Our exhibition is meant to look at the kind of underlying attitudes that give rise to a catastrophe like that, where there are so many people that end up losers,’ Winiemko explained. ‘These pieces also exemplify the desire of the 99 to be the 1 percent,” he added, referencing the Occupy movement.”

“Foye agreed. ‘Here we are maybe wearing the clothes or adopting the role of the 1 percenters. And the fact that we’re doing this at foreclosed homes is, we’re trying to carry on as if everything is just fine. We’re just temporarily embarrassed, you know?’ Winiemko said.”