Housing Doom

BREAK OUT THE POPCORN AND WATCH THIS MOVIE by John McLeod

Debt In The Afternoon (2005)

starring GSE guru Peter Wallison as THE MATADOR
costarring S&P bond analyst Mike DeStefano as THE BULL
with special guest Bert Ely as THE PICADOR

Kidding aside, the 2 hour 8 minute long February 3, 2005 panel discussion with real title Receivership Powers: What Are They and Should Fannie and Freddie’s Regulator Have Them? remained for several weeks after the event the American Enterprise Institute’s most popular video download. It featured an all-star cast of academics and financial policy analysts. Considering the venue, keep in mind the possibility of a right wing slant. The panelists were aware of a huge concentration of US mortgage risk in the two biggest US housing GSEs, Fannie Mae and Freddie Mac. They exchanged views on how these monster enterprises might be wound up should they ever fail. Several explored prospects for the US Government evading the implicit guarantee that the two companies will always be bailed out by Congress, especially with regard to their senior agency debt.

The bursting housing bubble is threatening to send a wave of defaults toward the mortgage finance system. This video gives us an inside look at how some of the best experts in the field were preparing for the impact a year and a half ago.

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On June 29, the Arizona Republic asked, "What’s up with the Elevation Chandler project?"

In a city bustling with construction, there is one site notable for its silence: Elevation Chandler, just south of Chandler Fashion Center. No construction workers, no trucks, no buzz of saws or slam of air hammers are in evidence. Just a chain-link fence and a high-rise concrete shell. (all emphasis mine)

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According to Larry Murphy, President of SalesTraq, in the In Business Las Vegas, "There never was a bubble, and there isn’t a bubble now. We don’t see a bubble in the future." "In Business" describes SalesTraq as monitoring real estate trends. However, on the Salestraq website, the company describes itself as follows: "It’s like an MLS for new homes!"

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Housingdoom has not put a lot of emphasis on condominiums in the Phoenix area, so it’s time to look at condo sales in the Valley.  There is a lot to look at.  (Condos, that is. Not sales.)

According to the Arizona Real Estate Center, the condominium market has cooled, along with the rest of the Phoenix market:

(Condominiums saw) a decrease from 1,470 sales for May 2006 to 1,035 sales for June, which is below last year’s 2,125 sales.  Further, the median price declined slightly from $175,000 in May to $174,700 in June.

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Every now and then, I find a straight talking Realtor (Let’s be kind here folks- it’s not necessarily an oxymoron) who describes the world of real estate I live in, instead of properties listed "Somewhere Over the Rainbow."

One of these Realtors is Tom Doyle, a Realtor from Naples, FL, who recently wrote an insightful article in his Naples Real Estate Market Report. For virtually the entire article, you could do a "global search and replace" - replacing Phoenix for Naples. Some of the statistics are not the same, but the market sounds remarkably similar. Here’s how he describes the current Naples’ market:

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Housingdoom wants to know what’s on your mind.  Did you read an article you liked?  Is there a topic you think we should cover?  Have a question either we or the readers can answer?  Please post here.

Twist

My apologies for all the numbers today.  If you have an ARM (Adjustible Rate Mortgage), or are thinking about using an ARM, hang with me here.  If you don’t do the math now, you could end up in bad financial shape later.

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In the Saturday Arizona Republic, Shea Homes had a two page ad in the Home section.  With the numbers a bold 3 1/2" tall, the ad proclaimed, 3.99% 5-Year Fixed Financing.*

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New Homes for sale in Surrey Linden Homes in Surrey, Buckinghamshire, Bristol

You are walking through a property, the listing agent is pointing out the features.  You think the price is a little high.  The agent says, "Oh no.  I can show you the appraisal on this property- the owner is asking $20,000 under the appraised value!" Are you impressed?  You shouldn’t be.

You are thinking about a HELOC, and talking to a loan officer.  You are wondering about your chances, since you figure you owe what the place is worth.  But the loan officer says, "Oh I can get an appraisal for $25,000 over that figure."  Is she doing you a favor?  Don’t count on it.

In a market with escalating appreciation, there was generally a limit to how much trouble a homeowner could get into.  According to today’s AZ Republic, Inflated appraisals didn’t matter much when home prices were rising at double-digit rates, since market values would quickly catch up. Now, however, prices are leveling off in many places and falling in some. Some homeowners are finding that the market value is below what past appraisals led them to believe.

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THERE’S EVEN A HERO  by John McLeod, 21Jul06

“A potential financial disaster that could have shaken the housing market was averted because regulators discovered accounting failures at Fannie Mae and Freddie Mac, the new head [James Lockhart] of the agency that oversees the mortgage giants [OFHEO] said Monday [July 10, 2006].” (my emphasis)

That was the opening of the widely repeated AP wire story Mortgage Giants Avert Potential Disaster by seasoned GSE reporter Marcy Gordon. Gordon goes on to chronicle how Freddie Mac and then Fannie Mae paid enormous fines ($125m and $400m) and had to fire much of their top managements over accounting scandals measured in the billions. He quotes Lockhart as saying “[t]here’s still some arrogance in the culture. … There are certainly people in both organizations that have retained and will retain some of that arrogance.” and points to the OFHEO Annual Report to Congress (June 15, 2006) that “found that current and former executives of Fannie Mae reaped hundreds of millions of dollars in bonuses in a deceptive accounting scheme from 1998 to 2004.”

It sound’s like a tale of unrelieved greed and stupidity, but as usual it’s not quite that simple. There are many good people caught in the mix, and perhaps the most important of all is a true hero, Fannie Mae whistle-blower Roger Barnes. Despite what Lockart implies about institutional checks and balances, we have this single mid-level former accounting executive to thank for much of what we know now about how this GSE, America’s second largest financial institution behind only CitiBank, was operating over the last several years.

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"We don’t have a housing bubble here- the economy’s good, lots of people coming in, prices are going up like crazy.  We don’t have an overheated market like San Francisco or Phoenix."

You could be hearing that, you could be saying that- I was hearing that kind of talk in San Diego as recently as April.  But remember, bubbles can fly under the radar, undetected, if you don’t know what to look for. Read the rest of this entry »