EconomyBeat.org » housing and real estate

Global financial collapse timeline

Jon Brooks — Thu, 29 Apr 2010 20:28:39 +0000

From the Real-World Economics Review Blog, a timeline of warnings and events going back to 1995 and leading up to the financial crisis of the last few years. Some early warnings from various economists:

Sept, 2001

“the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled the stock market bubble.”

Aug, 2002

“While the short-term effects of a housing bubble appear very beneficial—just as was the case with the stock bubble and the dollar bubble—the long-term effects from its eventual deflation can be extremely harmful, both to the economy as a whole, and to tens of millions of families that will see much of their equity disappear unexpectedly. The economy will lose an important source of demand as housing construction plummets and the wealth effect goes into reverse. This will slow an economy already reeling from the effects of the collapse of the stock bubble of 1999, … Unfortunately, most of the nation’s political and economic leadership remained oblivious to the dangers of the stock market and dollar bubbles until they began to deflate. This failure created the basis for the economic uncertainty the country currently faces … [which] will be aggravated further by the deflation of the housing bubble. This process will prove even more painful if the housing bubble is allowed to expand still further before collapsing.”

2003

“I am very pessimistic. We are heading into something in the world which is worse than what we experienced in 1982. It will be the worst recession since the Second World War.”

“The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided . . . only by serious efforts to bring regulation and balance to the international economy.”

“There will be a collapse in the credit system in the rich world, led by the United States.”

Ice House Detroit

Jon Brooks — Tue, 13 Apr 2010 18:17:15 +0000

Completed in February, Ice House Detroit is an abandoned house in Detroit sprayed with water and frozen by two artists seeking to dramatize the foreclosure crisis. The project was funded through Kickstarter, an arts-funding web site that we wrote about last September. Here is the Flickr pool of photos of the house, and below is the Kickstarter video explaining the project.

And a rather arty video of the result:

Ice House Detroit from gregory holm on Vimeo.

Warding off foreclosure – one story

Jon Brooks — Wed, 07 Apr 2010 10:00:03 +0000

Blog post from How To Be Poor In America, by Susan Kemp, who has “gone from being a teenage welfare mother to being appointed Assistant Welfare Commissioner for my State.” Now, due to her health and ‘bad business decisions,” she has fallen on hard times.

Foreclosure – Finding the Federal Mortgage Money

…The day the foreclosure papers arrived in the mail I went (as they used to say) wang dang doodle nuts! I dropped to my knees because I couldn’t support my own weight and on the other hand I’m not a fainter. I had a vision of my furniture being hauled out on to the front lawn. I’ve lived in neighborhoods where people actually watched for eviction notices to be posted on doors so they could raid some stranger’s belongings. I’ve watched people frantically trying to hang onto their belongs while people darted in and out stealing away bits and pieces of their life. The woman would cry while the man yelled and threatened and their children watched like those wide eyes paintings. Did I mention these things never seem to happen on bright sunny days? So anyway, the process server handed me a thick envelope that basically boiled down to “GET OUT,” said in legal language. One of the few things that has helped me get through the last three years of my woman-made financial nightmare is facing almost everything as if I’m doing it for someone else. In this case I was working to help someone save their home. But the gravity of what was happening, the possibility of having nowhere to live made it impossible to pretend it wasn’t actually happening to me.

From 1995 to 2006 I was privileged to be appointed by then Governor George E. Pataki and my primary responsibility was research… I’d been hearing a lot about how some portion of the Federal bailout money had been set aside to help people like me who’d fallen behind on their mortgages. In my case I’d had to make some hard choices. It takes up to six months for review of your application for disability. While the review is ongoing you cannot make any money. Some friends have speculated that the idea is to force you into bankruptcy while you wait for a decision. I still had bills to pay while I was waiting. Electricity to keep on, fuel oil to keep me warm and medical bills, lots and lots of medical bills and co-pays to cover. Let’s not even talk about the cost of medications. So I used what would have been mortgage money and I’m willing to bet I’m far from alone. It’s called robbing Peter to pay Paul and if Paul’s up in heaven waiting for his cash he’s going to be a very rich man when I die.

Well there was no doubt about it – being three months behind on your mortgage pretty much guaranteed foreclosure. I once referred to my house as “home crap home.” 20 years later I would have fought like a pit bull to keep it. I put the word out on several listservs that I wanted to know “where the cash is.” Any number of non-profits were openly available to help people figure out how to create a budget or save to buy a house but where was the actual cash and why wasn’t anyone talking about it openly? I’ve got this real problem with secrecy. The more you try to hide something from me the harder I’ll search for it. Childhood issues and all that. Well a wonderful woman on one of my listservs got in touch with me and gave me the website for something called PHASES (Preserving Homeownership and Savings Education Strategy (PHASES) program.) This is not easy money but I will tell you its fair money. I’ve worked in the grants field for 25+ years and what has often pushed me to the edge is when you hear about an “available” grant when the truth is they already know who they’re going to give the money to. PHASES is fair. They look at everything from your debt to income ratio, the reason(s) you fell behind on your mortgage payments, the application you have to complete as well as the online finance course. This is not easy money to obtain but it is obtainable.

I received a foreclosure notice a week before I was approved by PHASES. They understood the urgency of my situation. Sometimes I felt like a jockey riding a house instead of a horse to the finish line. But they did get me to the finish line. I had to make a commitment to pay the mortgage on time from that point on and check in on a quarterly basis with my budget to show I’m keeping on the straight and narrow. I was approved for social security disability just before Christmas and got my pension check started. My husband found a job that meets our need for him to be available during the day to take care of me. I’ve been reading a lot about the good people who don’t get the happy ending. Believe me I know how lucky I am. I’m trying to make myself as available as possible to help people facing possible foreclosure.

Having just emerged from the foreclosure process I know how truly desperate you can get to find a way to keep your home. It seems like there are signs everywhere – in the ground and on telephone poles – telling you that, if you call the phone number they could help you keep your home. In New York State such “help” requires entering into a contract including details of services and fees. This may be true of other States also. Look carefully into each individual business’s offer of assistance. Check them out with the Better Business Bureau and/or the local Chamber of Commerce or your State’s Attorney General’s website or office. Protect yourself. Your already going through one of the toughest times of your life. Don’t let someone compound that for their own personal gain.

Detroit demolition

Jon Brooks — Tue, 06 Apr 2010 17:06:00 +0000

Spotted on Facebook, two photos from Detroit, by Dan Haddad.

Dismantling consumer protection – a history

Jon Brooks — Mon, 05 Apr 2010 17:38:06 +0000

“Federal regulatory functions all had become dominated by political pressure from the providers of services promulgating ‘free markets’ and ‘lifting the regulatory burden’, greased by millions of dollars of campaign contributions and lobbying.”

One of the sticking points in the Senate in enacting the financial reform bill is the creation of a new consumer financial protection agency, which Republicans have ardently opposed.

This post by former World Bank and Federal Reserve economist Barbara N. Opper, on the financial sector policy blog Finance: Facts and Follies, summarizes the dismantling of consumer protections in the mortgage and credit card industries in the 2000s.

Many of the steps violating unsophisticated consumers’ protections against predatory lending came from a cascade of federal, not state, regulatory actions and legislation.

The financial industry’s influence on Washington, evident in the late 1980s when Alan Greenspan went to Chair the Fed, gained momentum between 2000 and 2008 when the industry ‘captured’ the administration and Congress. Investors sophisticated or not lost protection, as did consumers, especially the unsophisticated. As the famous post-Napoleon expression goes, this was “worse than a crime it was a blunder” because US financial institutions’ ability to attract profitable business worldwide rested on the trust that had been the outcome of our once-effective regulation.

To set the stage, in the 1970s a lot of consumer protection came into place. States enacted “Truth in Lending Laws” and the Fed was to handle consumer protections related to bank lending. By then, 64% of residents owned their homes, financed by self-amortizing home mortgages most of which carried fixed rates. With regulators enforcing strict underwriting standards, delinquency and foreclosure rates were very low. Credit cards were issued only to those with very strong credit records.

So when we started hearing about consumers being lured into very disadvantageous credit card and mortgage loans, it was reasonable to ask how so much predatory lending could prevail against Truth in Lending and other consumer protection in place. The answer is two rulings from the Office of the Comptroller of the Currency (OCC). One in 2003 prohibited states from enforcing their own truth in lending laws. Eliot Spitzer, former NY State Attorney General, said “Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye … all 50 state attorneys general and all 50 state banking superintendents actively fought the new rules.” It took until June 29, 2009 for the U.S. Supreme Court to rule in favor of the states. The other, in 2004, prohibited state bank supervisors from inspecting, supervising and overseeing national banks located in their state.

The impact of this regulatory approach on the examination and supervision functions should not be ignored. Examiners used to look at samplings of loan underwriting that would have caught “liars’ loans”, no-down-payment loans, wishful thinking property valuations, and other abuses of the go-go-mortgage lending years from 2003 to 2008. Instead, they focused more on the way banks handled Bank Secrecy Act and Patriot Act laws monitoring customer transactions.

Between 2000 and 2008, the economy was stagnating. Encouraging consumption with ready access to debt evidently turned into a policy tool to maintain economic growth. Household debt doubled. That growth was fueled not just by mortgages but also by credit card use as federal regulators looked the other way while credit cards were issued to youth and other elements of the population ill-equipped to handle such ‘easy’ credit. By then, states could not effectively offset federal regulators’ inaction because of the OCC rulings and the domination of the banking industry by national banks. Also, interest-sensitive home building with its collateral durable goods purchases is always a standard Fed policy tool. With more-than-accommodative monetary policy and lax underwriting standards, home property values rose at a pace never before seen. This was the kind of bubble the Fed was created to prevent. It was possible to track GDP growth with and without consumption fueled by home-equity draws.

Securitization was once a reasonable approach to improving the marketability of a home mortgage portfolio but it became destructive. One reason is lenders’ eliminating the free prepayment option to improve predictability of the payment stream for the investor. That removed a long-standing valuable right of borrowers, especially those who woke up too late to the predatory terms of their mortgages.

Many criticize the patchwork of overlapping banking regulatory authority involving several federal agencies and the state where a bank did business. But these two OCC rulings show the value of that overlap. Federal regulatory functions all had become dominated by political pressure from the providers of services promulgating ‘free markets’ and ‘lifting the regulatory burden’, greased by millions of dollars of campaign contributions and lobbying. If it had not been for these two OCC rulings, state authorities could have prevented the predatory terms foisted on unwitting borrowers.

The United States system had been designed by people who understood the dangers of concentration of wealth and power, moral hazard, conflict of interest and self dealing. It was a lesson learned from the Pecora hearings, and is the lesson to be relearned by the Angelides Commission.

So quit complaining…

Jon Brooks — Thu, 01 Apr 2010 17:43:16 +0000

University of Michigan economist and American Enterprise Institute visiting scholar Mark J. Perry writes on his blog “Carpe Diem” that things really aren’t so bad.

Median priced existing single-family home in the Midwest (January 2010): $127,200

Monthly payment with 20% down payment and 5.1% mortgage: $553

Qualifying annual income required to buy a $127,200 home: $26,544

Median annual family income in Midwest: $59,961

Midwest Housing Affordability Index: 225.9%

I’m not sure if that’s a record high for Midwest home affordability, but it seems pretty amazing that: a) the typical Midwest family has more than twice the income necessary to purchase a median priced home, b) the median priced home in the Midwest is so low ($127,200), and c) it’s possible to purchase a median-priced Midwest home with less than $27,000 of household income (assuming a 20% down payment of $25,440).

That would mean that a married couple both working at Wal-Mart full-time (34 hours per week), at an average hourly wage of $9.68, would have household income of about $33,000, almost $6,000 more income than the $27,000 required to buy a median-priced house in the Midwest. Of course, the Wal-Mart couple very likely wouldn’t have the $25,000 down payment, but they wouldn’t necessarily have to buy the median priced home and they wouldn’t necessarily have to put 20% down.

With all of the talk about stagnant or declining wages, increasing income inequality, the disappearing middle class, etc. the fact that the typical household in the Midwest has more than twice the income necessary to buy a typical house suggests that it really can’t be all that bad. As I reported recently, clothing is cheaper than ever before in history (less than 3% of disposable income in 2009), and food is cheaper than ever before (9.6% of disposable income in 2008). With home prices and mortgage rates so low, it’s also likely that housing costs as a share of disposable income are also at historical lows (update to follow).

Sub-prime the Musical

Jon Brooks — Thu, 18 Mar 2010 19:32:14 +0000

Tip o’ the hat to Laura at EconomyStory for sending us Sub-prime the Musical. The site consists of a series of podcasts by a college student named Madison Koshy, who created them from research she did on the causes of the credit crisis. Naturally, she then wrote song parodies to illustrate the concepts she had learned. From the About page:

I was extremely upset about the state of the economy, but I found it very difficult to understand what was happening. So this summer, I pursued an independent project where I read and researched about what was going on, and then I attempted to re-explain it through podcasts as a means of better understanding the information. Wanting to make my blog a little more interesting, I incorporated song parodies that tied into the material.

Here is Act I, Scene I, called “How it All Began.”

And here is a song parody, based on “The Brady Bunch” theme, called accompanying song, called “The Credit Crunch.”

You can also follow “Sub-prime the Musical” on Twitter.

The 12 Months of Default

Jon Brooks — Fri, 12 Mar 2010 17:16:28 +0000

From the blog of You Walk Away, a company that helps homeowners “strategically default” and walk away from their property (and mortgages) when they have negative equity.

Real estate porn

Jon Brooks — Thu, 04 Mar 2010 17:17:33 +0000

As you struggle to pay your mortgage or break even on the sale of your home, does it help to take a gander at Big Time Listings? This blog by a Chicago-area real estate site focuses on the sales of celebrity homes. Considering the current state of the housing market for folks who don’t appear regularly on “Entertainment Tonight”, reveling in the purchase of a $35 million mansion by Dreamworks CEO Jeffrey Katzenberg might or might not be just the ticket. Or try this “exclusive”:

Brad and Angelina enlarge their Los Angeles compound further; long-goateed actor quietly pays $1.1M to buy a missing link for his estate in Los Angeles’ Los Feliz neighborhood — a two-bedroom, 3,232-square-foot house that his compound had bordered on three sides

Brad Pitt and Angelina Jolie have increased the size of their compound in Los Angeles’ Los Feliz neighborhood, with Pitt quietly paying $1,100,000 to buy a missing link for his property in the form of a 3,232-square-foot house that his estate largely had surrounded.

In a Big Time Listings exclusive, we can report on Pitt’s latest purchase, which like some other property of his was made through his Mondo Bongo Trust. Records show that Pitt purchased the property on August 6 from the estate of the late Anne Tyler Sherman.

Built in 1920, the two-bedroom, former Sherman house — whose property is shaped like a key — sits on a 0.25-acre (10,759-square-foot) lot in the Oaks area of Los Feliz. It helps Pitt round out his compound and means that Brad now owns close to 2 full acres in the Oaks…

Features in the house include two baths, a stone fireplace, a huge main room, a bonus room, and “a bar area and a secret cave,” according to the MLS.

Secret cave? Well, they gotta keep all those kids somewhere…

Other celebrity real estate items of note:

Artist David Hockney sells 1,908-square-foot house in Los Angeles’ Hollywood Hills to his former lover and now working partner and friend Gregory Evans for $600K

Retired tennis stud Pete Sampras pays $5.6M for a six-bedroom, newly built house in Los Angeles’ Brentwood neighborhood

Joan Rivers has her estate in New Milford, CT on the market for $6.5M

You know, when I was a kid, my best friend lived right down the block from that last listing, and I hung out there all the time. How grand it feels that Heidi Klum now trods the very ground where I used to play stoop ball, and where I couldn’t afford to live these days if I sold two of my most-functioning organs.

Housing declines by city

Jon Brooks — Tue, 02 Mar 2010 19:34:44 +0000

Last week the Commerce Department announced that new home sales had dropped to their lowest level in almost 50 years of tracking. Below is a chart of Case-Shiller-index price declines in real estate from 2007-9, by city. Posted on Dr. Housing Bubble.

Las Vegas has been the worst market for sellers, having dropped from 15% to 45% to a shocking 55% off the highest level, in 2007, 2008, and 2009, respectively. Phoenix, Miami, Detroit, and Tampa also continue to look just dreadful, while San Diego, San Francisco, Los Angeles, Washington, and Boston appear to have stabilized somewhat.

For an in-depth analysis of and/or more news about the real estate situation, check out Dr. Housing Bubble and The Housing Bubble Blog.