Housing: "Nationwide Crisis" or Speculative Fallout?

[...] further proof that this “crisis” was largely the result of real estate speculation, the lion’s share of the “crisis” is occurring in just five states: California, Florida, Arizona, Nevada, and Illinois.  And those five states match the states with [...]

I looked at this data differently than some of your readers. Not in terms of who is to blame. But in terms of the geographic concentration. The real estate market is down in most of the country. But if you've never been to the Inland Empire or Las Vegas, you really have no idea of what a really bad real estate market looks like. In IE and LV, there are subdivisions upon subdivisions of new homes, and probably a quarter to a half are vacant / in foreclosure. My point is that I think we have some extremely bad real estate markets, but the worst areas are localized. I think the media does the U.S. consumer a disservice by promoting the idea that real estate is absolutely awful EVERYWHERE. It feeds on consumer fears, and it makes the real estate market worse. I live in LA (Glendale), and I'm not in the real estate business. I bought my house in 1997 (so my house is still worth a lot more than I paid for it). And I know that prices were too much high in LA over the past 2-3 years. But I still see LA as being a vibrant business community. Lots of businesses and jobs and people who make pretty good money. In contrast, the Inland Empire and Las Vegas could never support those population explosions and inflated housing prices. There isn't enough business there. The Inland Empire is mostly warehouse and service businesses. Las Vegas is also service-oriented with moderate/low incomes. I'm rambling... But the point is that the Inland Empire and Las Vegas need to be "scrubbed." Because these are real estate fiascos. And they need professionals to come in and work it out. RTC style. (I lived in Houston in the 1980's after the oil bust. A lot of foreclosures, and and a lot of people walked on their mortgages. There were S&L problem loans all over, but most was in Texas. My impression is that the RTC did a really good job of buying up S&L's and dealing with the mortgage loan fiasco.) I'd just like us to get on with it. To assume that the real estate market will "adjust" on its own in places like the Inland Empire and Las Vegas seems very naive to me. Yes, it might adjust in places like Atlanta or Denver. But not in the Inland Empire or Las Vegas. Those markets need professional help.

Why not end the speculation and flipping by taxing the profit on sales of homes except for once in a taxpayers lifetime? I think it used to be this way. Suppose the steeep rise in home prices had anything to do with the elimination of the one time profit rule?

Personal responsibility. For professional reason we have moved a few times, and each time most of the realtor discussion focused on why we weren't looking at a higher price point and then told we weren't borrowing enough and were kind of ridiculed for not taking advantage of special programs. There's lots of things we want too, BUT, we will wait for the right time. How is it that less than 10% of the mortgage market is causing all of this. Listening in Texas - so because the government says it's OK all sense of reality doesn't apply anymore. Sorry, but I don't blame just Fannie and Freddie. They were the "crack" dealers feeding the users who needed an intervention. And how did the appraisal system go so nuts? Seems like noone involved in the real estate industry stood up and said enough! And in the end, the public created this crazyness.

I'd say it's not Nation Wide problem Brian it's CountryWide

Texas: Nowhere in my reply did I say that borrowers should have “perfect” credit. What I referred to as the “old standards” never required perfect credit. Also, I don’t know where you were in the 80’s, but the assumable, non-qualifying feature of VA and FHA loans was an unmitigated disaster (especially when combined with ARM’s). I was there. In Phoenix and throughout the nation, abandoned and empty “HUD homes” were in every neighborhood! It took a long time for the market to absorb those homes and residential real estate values flatlined for several years, not completely recovering until the mid-1990’s. When I think of that period, and of more recent events like Enron, it makes me realize just how little regard we have for history. We have incredibly short memories and we keep paying the price!

Wow, you must be a postal worker! (Sorry if I offended any postal workers!)

I really like the aspect that the REALTORS are the problem. What do you believe our JOB is? We (the real estate agents and brokers) are the bad guys? What is it exactly that Fanny Mae and Freddy Mac purchased and ENCOURAGED? Did they ACCIDENTLY obtain these LOANS or did someone line BILL CLINTON and BARNEY FRANK ORDER them to MAKE these LOANS to people overall. It is the SUDDEN CUTTING OFF of these programs and NOT a weaning OFF of the programs is WHY we are in this MESS TODAY. NOT what the real estate agents and brokers have done. WHO IN CONGRESS DEMANDED AND AUTHORIZED THE LOAN PROGRAMS!! There is your culprit. If it is OUR fault; then WHY would Fanny and Freddy purchase these loans? Believe it or NOT they MUST have MET THEIR CRITERIA! Else they would simply REFUSE to have purchased them. Now ALL the tax payers are on the hook; even ME! At least ONE of us is offering a solution! What is YOUR solutions to these problems; simply going back to a "way it was" after opening Pandora's box will NOT solve the problem. It will only MAKE IT WORSE!

Placing a substantial downpayment on one's home as a condition of receiving mortgage approval is a traditional cornerstone of the lending rationale. It's exactly what B.O. claims he believes in, everyone having "skin in the game." If lenders had not been pressured by politicians to abandon this precept, this mess would not have happened. And B.O.'s plan won't work. The One cannot repeal the Law of Supply and Demand any more than He can repeal the Law of Gravity.

Um, you're a Realtor, nuff' said.

Yes, and I presume that a client who has paid their bills on time and their rent over a period of years and has overall acceptable credit with the exception of a down payment and closing costs and if the seller wishes to assist them to home ownership is a BAD thing? Really?! WOW! Yes, there are people out there with high FICO scores and always paid their bills on time who do purchase second homes and the banks are now denying them as well. I am NOT advocating a person who filed a Chapter 7 BK in the last 6 months or someone who has been totally irresponsible on their bills with say a 550 FICO score be offered a zero down loan to purchase any house he or she desires; but there are numerous people out there that are getting shut out. You have also a client type out there who has a high debt ratio and has ALWAYS met their obligations; now those clients are also being cut off. The simple black and white cloud put on this has gone beyond reasonable and is now causing MORE severe problems than should be taken to resolve the issue. What you have advocated is that no one with under perfect credit should be a home owner... really? Had the OLD qualifications BEEN USED ALL THE TIME; then I could then defend your position; however as a DIRECT RESULT of CUTTING off these markets to ALL non-perfect buyers; you are now realizing the unintended consequence of current market prices FALLING. Where do you want them to wind up 50% below where they are even now? How much harder do you want to see the real estate market fall? My solution, granted is NOT perfect; however it IS better than what the current solution is resulting in LOSS of homes. If you will also do some research prior to 1988 homes could be purchased with ASSUMABLE NO QUALIFICATIONS. Now, with that the DEFAULT RATE was LESS than 1%. It was the banking industry that terminated that condition. Which solution would you prefer? Continued defaults or some attempt at saving an entire industry. Yes, I earn my living by the housing market and we still continue to sell houses and pay our bills; however the markets are tumbling world wide as a result; do you REALLY want to CORRECT IT ALL AT ONCE? If so, the continued actions we are on will have by far worse reach than you realize.

Far from claiming that the foreclosure problem was caused entirely by speculators, Brian carefully presented the statistics (15% to 20% in the states with the high foreclosure rates). Try actually reading the blog before commenting. “Listening in Texas” illustrates everything that was (and probably still is) wrong with the marketing–sales–loan origination components of the housing debacle. When did home ownership become a national entitlement? A grateful nation wanted to help returning veterans finance homes in which to raise their families. As expected, default rates were extremely low. Over time, more government programs emerged to “encourage” home ownership among all citizens. Somehow, home ownership (not just housing) has morphed into some kind of pseudo right, with few responsibilities attached. Not surprisingly, along the way, politicians, bankers, real estate brokers, homebuilders and, yes, speculators, have been enriched beyond their wildest expectations. Now that the risk side of the equation has reared its ugly head, all of the aforementioned want to pass the consequences along to the U.S. taxpayers (who, as Brian pointed out, have already been hit hard with dramatic reductions in the value of their retirement assets). Perhaps worst of all, children who are still years away from entering the workforce will spend their ENTIRE WORKING LIVES paying for all of this. (Remember when we used to care about stuff like that?) I appreciate that “Listening in Texas” makes his living through the buying and selling of homes. However, it is not the job of his fellow citizens to bring him commissions. “Putting a buyer into a house” or “getting a buyer into a property” should not be a government function, and it CERTAINLY isn’t a taxpayer responsibility. There were very, very good reasons for the “old” qualification and down payment standards. Those reasons are obvious to everyone except, it would seem, the folks who gained financially while the good times were rolling. If “Texas” wants his clients to have access to more relaxed lending criteria, I would suggest that he consider personally making those loans. I doubt he would.

My Observations for the disparity found in the Hardest Hit Areas are: •Heavier minority population. (It has been well documented that a large portion of minorities were victims of predatory loans.) •Lower incomes. •Lots of new construction during boom years. •High use of non conforming loans. •For many the trade off for buying in the outskirts was the lower price of their home, but the rising cost of gasoline has made it impossible for to families to afford the long commutes compounded by the most severe property value drops. Active Listings vs. Distressed Properties This week I pulled numbers from MLS to see how many of the active listings are marked short sale & foreclosure properties. These are the numbers: Tolleson 489 Active Listings/393 are Foreclosed or Short sale properties (489/393) * Mesa 4172/1945 * Laveen 519/356 * Chandler 2028/885 Observation: Many people living near their employment. Higher incomes & concentration of professionals. * Scottsdale 5971/1109 & Paradise Valley 607/40 Observation: Higher incomes & concentration of wealth * Sun City 1704/137 Observation: Income stability (retirement areas)

What do I think of Obamas plan? What President Obama said was music to my ears. After trying to work the present chaotic system; void of common sense, guidelines, and oversight, I look forward to learning of the clear and consistent guidelines that will be required for these loan modification. Unfortunately, I believe that as victims of the greatest American heist, homeowners should have received more, if not the bulk of the aide. Not the perpetrators. What has to be strengthened & made whole is the foundation and soul of our country, families. When people aren’t loosing homes; when home values are not slashed in half; neighborhoods and communities can begin to stabilize and this is the positive ripple effect that will bring a restoration to our economy.

I'll have whatever your drinking- come to grips with the fact that not everyone in America should own a home.

I won't argue with the facts presented above, much of the problem is created by speculative fall-out. But what is missing is that ordinary people (not speculators) are still hit by this problem. The reason for this is because so many people during this speculative boom bought houses with bad mortgages under the assumption everything was going to keep going up (so they speculated in that way, taking the risk of an adjustable rate, no doc, no down etc. mortgage). So, when the market didn't keep going up, and their monthly payments went up on their poor mortgage choice, they had no where to turn. They owe more than the house is worth, and can't even make the payment. And it should be of no surprise that this is happening more in areas where speculation was also present. The two things are interdependent. And Listening in Texas, the fix to this problem is not to try and shove people into houses they can't afford, that was what created this problem. People need to put 10-20% down so that if the time comes when they need to sell, they have some equity to fall back on if the market has gone south on them. Getting a second loan to pay the down payment (those 80-20s) is not the answer, and even as a libertarian, that may even be something to make illegal. So you are right we need to buyers into houses, but we need to get the right buyers into houses with the right mortgages. To get out of this problem we need to look to the lending practices of the 1980's not of the early 2000's. Its going to be rough making the transition, but that's just what happens when bubble bursts. What we can't do is solve the bursting of one bubble with the creation of another bubble. Sadly that is what everyone that gets hurt by bursting bubble wants the government to make happen. Maybe if Brokers and Realtors where only payed based on the success of a mortgage (taking a cut from the payments say), instead of based on just creating one, we wouldn't even be in this situation.

Brian, there are a couple assumptions that I would take task with. As a real estate broker, I deal directly with the clients purchasing these houses. Not all are these "speculators" looking to only "flip" a property and get a quick profit in the markets. Many of these investors actually did purchase a dilapidated property and invested quite a bit of their OWN money rehabbing the property and then selling it. Most of those people had done fairly well. Every time you remove a financing program from the market; you eliminate a layer of buyers. Less than 1 year ago, we could put a buyer in a house with the assistance from the seller using an FHA program and accompanied that with a DAP or Down payment Assistance Program. We put people in houses who had decent credit to qualify, but little to no savings; however had paid their rental payments on time for at least the last two years and their other bills. Many of these buyers were paying less in their new mortgage than what they were paying in rent. Now, the last changes of this program eliminated the Down payment Assistance programs and also cap the closing costs the seller can pay. Buyers who could qualify are now eliminated from purchasing because they now have to come up with a 3.5% down payment as well as closing costs which are preventing them from being able to purchase a property they CAN qualify for by credit worthiness and it is NOT asking for the Government to pay these fees; the sellers were paying these fees and WITHOUT inflating the housing prices. This program should be brought back. Not all non-occupied property owners are contributing to the problem. Yes, there are a few; however there are many other factors that are contributing to this meltdown rather than this limited statement as above. Many investors also purchased for the purpose of RENTING the properties out -- which they HAVE done. Not just buying property with No Money down programs or other "gimmick" get rich quick programs. In 2005 we STILL had all the Sub Prime programs. IF we had those still even now; we COULD move the properties much faster and the crisis we face now would be EXCEPTIONALLY by far and away LESS. Buyers COULD get these properties OFF the market; not have to continue to hold for ONLY an "A" paper buyer. If we are discussing a REAL solution to the housing crisis; give us (the Realtors and Brokers) something to work with to GET buyers into the properties where they CAN make payments and not have this inventory staying on the market. We currently have 11.5 months of inventory; this is up from an average of 73 days back in 2005. The market is demonstrating the difference with and without these programs. Not all the buyers that bought on subprime are scumbags.

Brian what has been interesting about the Vicksburg Realty market is that some are trying to talk up real good deal on homes that could be true. In my own tracking how the housing market,I listened to some of the realtors on the local am station here and they denied at first the fact they weren't affected. Then in a furn around last year they admitted they were in a slump and the local hosts who aren't really local admitted the housing bubble has hit home. Now Vicksburg never made the national news on living the best. Jackson made the news for having the top ten best affordable homes. Honestly Brian I've heard a lof of horror stories about the homes here. Including the fact that future homeowners weren't told what the neighborhoods were affected by foreclosures.

Right on the mark Brian. It amazes me that these things either escape or are ignored by our policy makers (right now the Dem party). I often feel that I could hold my own in a debate with some of these people - oh, to have the chance. My wife and I are public school employees who bought a new home in 2003. We bought in the next county over (Jefferson County, WV instead of more expensive Loudoun County, VA). We made that sacrafice of longer commutes, less time at home with the kids, and further distance from our family members because we didn't want to be house poor and have a medical or job situation cause us to default on our mortgage or force us into selling. We took that extra money we saved on or mortgage payments and contributed to our retirement and continued living below our means. This new plan does nothing to reward responsible (but difficult) decisions my wife and I made - and I don't want a reward. But to take my tax dollars and my children's future tax dollars to pay for others who were irresponsible, ignorant, or both is downright wrong. My fear is that this is just the beginning - the tip of the socialism iceberg.