The Housing Bubble

It’s Friday desk clearing time for this blogger. “Is New York in the midst of a new real-estate bubble? It can appear that way. In early March, my friend Ellen asked me to come with her to see a co-op she was hoping to buy. She’d already lost one bidding war, and we met the broker at a two-bedroom in the West 100s. The kitchen needed a redo, the walls a once-over. The asking price was $1.2 million, the kind of number buyers used to go past 100th Street to avoid. Ellen and her husband offered $25,000 over the asking and pledged to cover the difference if the apartment didn’t appraise for the sale price. They lost to bidders willing to pay more than $150,000 over the asking price.”

“In late March in Windsor Terrace, more than 60 house-hunters converged on a showing of a sweet little house—two stories, nothing grand—priced at nearly $1.5 million. Within days, six buyers had put in offers. A week earlier in Park Slope, 90 people converged on a duplex asking over $1.5 million, double what it sold for in 2011. And on a recent Sunday, at least a dozen people passed through a $795,000 Morningside Heights two-bedroom fixer-upper, its walls gutted to the studs, within the first ten minutes of its open house. Daniel, a banker looking in the West Village, told me he’s lost five bidding wars in the past year. ‘The last apartment, every person who saw it made a bid,’ he said.”

“Jon Maddux, a San Diego-based house flipper, found luck in Atlanta, Georgia. Last year, Maddux and a business partner bought two single-family homes. The first they bought for $62,900, put in about $28,000 of renovations, and sold for $139,000. The second house they purchased for $79,000, chipped in $25,000 to rehab, and sold for $149,000.”

“‘In some ways, this is a dream environment,’ says Andy Heller, author of ‘Buy Low, Rent Smart, Sell High: Real Estate Investing for the Long Run’. ‘You would be crazy to be on the sidelines.’”

“In Westminster, Colo., broker Chris George reports listing prices that seem ‘almost egotistical.’ In Denver, Andrea Lard says homes are selling within a few days, and ‘I have heard of two listings selling within hours.’ In Grand Haven, Mich., ‘We list them and they’re gone,’ says Realtor Lisa Franklin. In San Francisco, Coldwell Banker Real Estate agent Herb Alston said every agent in his office is worried that the market’s in a mini-bubble. One home in San Francisco’s Marina District that Alston recently wrote an offer on for clients received 15 offers and closed for $2.02 million, about 20 percent over asking, Alston said.”

“Charles Roberts, co-owner of Your Castle Real Estate, said that, given ’skyrocketing prices,’ he’s starting to get questions from buyers about whether there’s a bubble. Roberts tells them yes, Denver is in a bubble, but he thinks it will be at least two years before prices start to go down again. ‘In Denver, we’re four years past our bottom. We’re almost certainly going to surpass our highs from 2006-2007 this year,’ Roberts said. ‘Clearly the market’s going up, but given the record low inventory, we think we’re at least a couple years away’ from price declines.”

“Florida Realtors Chief Economist John Tuccillo told a gathering of Gainesville Realtors that the opportunity to sell a home in Florida real estate is now. Tuccillo joked that new Realtors are required to learn to say ‘it’s a great time to buy.’ ‘Once you can say that with a straight face, you can get your license,’ he said.”

“Unlike the investor flipping with fast-paced buying and selling at the height of the market, today’s investors are fixing up the properties and renting them out so they can sell them when the market value returns in five to 10 years, Tuccillo said. ‘This is a sort of sleeping issue,’ he said. ‘Ultimately the investors are going to go away, even if they last 10 years. If by that time we haven’t restored the access to financing to owner-occupants, there is going to be a problem in the marketplace.’”

“Foreclosure activity in Fairfield County jumped 52 percent in a single month in March and was up 40 percent from 2013. Foreclosure activity was high throughout the state and was up 48 percent in New Haven County in March. It’s affecting ‘people with jobs, people with homes that are underwater: Some people who have been struggling for years and just realize they’re not going to make it,’ said Tim McLaughlin, VP of Weichert Financial Services.”

“Daren Blomquist, VP at RealtyTrac, said there is something jarring in the Connecticut and Fairfield County numbers. Blomquist said the bulk of home reposession is centered on mortgages originated between 2003 and 2008, during the real estate boom. Only about 14 percent of all foreclosures nationally, were for loans originated after 2008, he said. In Connecticut, 22 percent of the foreclosures are on loans originated after 2008. ‘That’s a little bit scary, because presumably, the lending industry and lending standards were much improved,’ he said. ‘Seeing that high of a percentage is a little scary.’”

“The number of people in the Seattle-Tacoma-Bellevue metro area who lost their homes to foreclosure in March jumped 67 percent from a year ago. Statewide, the number was even higher – 88 percent, according to RealtyTrac. Even as the economy gets better, people who have slipped behind on their mortgages may have a hard time saving their homes, says Marc Cote, who heads the Washington Homeownership Resource Center, which runs the statewide foreclosure hotline.”

“‘If you can’t afford to reinstate the loan, you still have to be able to work out some solution with the lender,’ Cote said. ‘Even though the economy is picking up, (if) you’re already behind on your mortgage, how do you fix that problem?’”

“Analysts say the number of Nevada properties entering the foreclosure process has almost doubled compared with a year earlier. And while we often think of foreclosures leaving families on the street, realtors say this glut is more with homes sitting vacant. ‘But the reality of it is that we have a very transient workforce in Reno. We always have. And a lot of people have had to leave for legitimate reasons - a death in the family or a move to another state or a job transfer, they’ve stopped paying their mortgages and what that’s done is leave us with vacant houses all over town,’ says Marc Sykes.”

“According to a report from the Federal Housing Finance Agency, the northwest state is experiencing a boom in underwater homeowner refinances, as the average borrower from Oregon is saving more than $4,000 per year following the implementation of the revised HARP 2.0 program last year. According to Portland, Ore.’s Capital Hill Mortgage Branch Manager Douglas Jacobson, HARP has other advantages aside from helping families get out from under debt.”

“‘(HARP) also provides a financial incentive toward items like college funds, a new pool, or a family vacation, things that previously seemed like luxuries,’ said Jacobson, regarding the program’s other benefits for homeowners.”

“In a reckless gambit, FHA is asking lenders to relax lending standards, while assuring them it will back home loans down to a 580 FICO score with a minimal down payment and high debt-to-income ratio. In fact, loans purchased, insured or guaranteed by either Fannie Mae or Freddie Mac, as well as FHA, are automatically designated ‘qualified mortgages’ under new mortgage rules issued by the Consumer Financial Protection Bureau. The new rule offers some legal protection to lenders pressured to make junk mortgages. Although FHA is the government’s new anchor subprime program, Fannie and Freddie are still backing subprime mortgages.”

“What’s more, the biggest mortgage lenders in the country, including Wells Fargo and Bank of America, are under federal mandates to advertise in minority media and offer loans to people on ‘public assistance.’ The government is actually forcing them to target high-risk borrowers for 30-year debt under threat of prosecution. They have to adopt minority-friendly loan programs over the next several years or face investigation for discrimination.”

“Some of these programs include setting aside millions in prime mortgages for minorities who, according to government documents IBD has reviewed, would ordinarily not qualify for reasons including ‘the lack of required credit quality, income or down payment’. ‘The obligation that I have is to ensure lenders using the FHA program are lending to as full a spectrum of the credit box as possible,’ FHA Commissioner Carol Galante recently said.”

“The Wall Street Journal had an interesting story Thursday about signs of life in the housing market, applauding the good news that ‘the very long housing recession is finally over, and that prices in most of the country are rising again.’ But the Journal warns there is also ‘a less desirable side to this new boom’: ‘It is fueled by the same kind of government super-subsidy for housing that drove the boom and bust a decade ago. Through Fannie, Freddie and the Federal Housing Administration, the feds now underwrite some 90% of all mortgages. Meanwhile, the Fed’s rock-bottom interest rates and its QE policies are both intended to reflate the housing market. The Fed’s goal is also to keep rates so low that investors will dive back into real estate in a search for yield they can’t get from savings accounts or financial investments.”

“The current Administration seems to think a housing boom brings prosperity, rather than being a result of wealth creation. A large home (assuming the occupant can afford it) is a manifestation of wealth, not a creator of it. Every dollar of capital that policy makers drive into housing is a dollar that won’t be spent creating the next great innovation in software or medicine or something else. Housing does fine when people are employed and wages are rising. In other words, sustainable growth in real-estate values is a symptom of a vibrant economy, not a cause.”

“It really is the 2008 bubble all over again: loose, cheap money flooding the market – and not just for low-income housing or starter homes, because Fannie and Freddie are still dishing out mortgages of $600,000 and more. This is the ‘cargo cult’ approach to economics – build the symbols of prosperity, and prosperity will swoop down to take up residence. Are we really going to learn nothing from the last time this all happened?”