Housing Limbo: How Low Will Prices Go?

by Joshua Brockman

NPR.org, August 21, 2008 · These days, many homeowners — and those looking to buy — are nervous. Home sales are also well below what they were during the peak of the housing market. With transportation, food costs and unemployment on the rise, making a decision about one of the largest purchases of your life — a house — is far from simple.

Unfortunately, there's no crystal ball to consult. But there are housing market experts. Here, some weigh in with factors to consider if you're thinking of buying.

How do I judge whether a house is overvalued?

You need to compare the market price to a theoretical price based on current economic and demographic trends, says Celia Chen, director of housing economics for Moody's Economy.com. "Nationally, prices are probably pretty overvalued — by about 10 percent," she says. At the peak of the housing market, when prices were rising rapidly, houses were 20 percent to 25 percent overvalued, she adds.

It's helpful to remember that housing prices don't behave like stocks — they're not going to change overnight, says Dean Baker, co-director of the Center for Economic and Policy Research. In other words, it's going to take time for overvalued houses to reach their true price.

Is the current economic slowdown making the housing market worse?

Yes. But it's important to note that nationwide housing prices started to decline after peaking in the summer of 2006 — before the rest of the U.S. economy began sputtering. Indeed, the bursting of the housing bubble was a major factor in the country's economic slowdown.

Now that the slowdown is in full swing, it's likely to further weigh down the housing market. Baker says that larger-than-average job losses in any region will "further weaken the housing market and prolong the downturn there."

Mike Shedlock, an investment adviser for SitkaPacific Capital Management and the blogger behind Mish's Global Economic Trend Analysis, says he, too, is concerned about negative job reports: "More people out of work is going to put more pressure on people being able to pay their mortgages. So, that's going to lead to more foreclosures [and] more people walking away from their houses."

How do I know when the market has hit bottom?

"Nationally, we're very, very far from any bottom," says Baker, who believes the lowest point may arrive between the middle of 2009 and the start of 2010. He notes the nationwide glut of housing inventory, with the number of new and existing homes on the market at near-record levels and vacancy rates for ownership units at record highs.

Shedlock sees the bottom further out: 2012. He says foreclosures and inventory have to stop rising — and sales figures have to start increasing — before the market can reach its bottom. Even then, consumers shouldn't expect prices to shoot back up. Instead, he says, they'll remain "stagnant or stable," rising slowly in the decade after the bottom. "There's no rush for anyone to buy in now, or even when we see the signs of a housing bottom," he adds.

Moody's Celia Chen adds that housing remains "a better value now than it was a year ago." She predicts home prices will hit "absolute bottom" in the spring of 2009. Chen and other housing experts remain concerned that problems in the credit market as a whole will disrupt funding for home mortgages.

When will prices stop falling?

Inventory has to decline in order for prices to stop falling, says Chen. And right now, "there's too much supply versus demand" around the country, she says.

Some areas of the U.S. with "drastic" price declines include Las Vegas, Miami and San Diego, says Baker. Washington, D.C., has had larger price declines than Boston and New York City, two cities that Baker says have had "moderate" ones. Meanwhile, Baker says the latest housing data suggest that Cleveland and Detroit have "bottomed already."

Chen says certain metro areas in Florida remain "the most overvalued" in the nation, as are certain cities in Arizona and California. All three states have an oversupply of residential real estate. The South and Midwest, however, are regions where houses have remained affordable. And home prices in Columbus, Cincinnati and Indianapolis remain in line with where they should be, because these cities did not experience a "price bubble," she says.

Why is it important to compare the sales price of a house to rental prices before buying?

Comparing the sales price of a house to annual rent for a comparable property gives consumers a good yardstick to know whether it's a financially sound decision to become a homeowner.

One simple way to measure this is by calculating an own-to-rent ratio: Take the sale price of a house and divide it by the annual rent for a similar property or apartment. For example, take a house selling for $180,000, and a comparable house that rents for $1,000 a month ($12,000 annually). The own-versus-rent ratio is 15:1. This number indicates that you have a "balance" between ownership costs and rental costs, says Baker. (One can also do more complicated calculations that factor in additional home ownership costs, including property taxes.)

The ratio is not a magic number, but consumers may want to think twice before purchasing a house once that ratio creeps toward 18:1 or higher. During the peak of the housing bubble, there were ratios greater than 25:1, particularly in parts of California, Baker says. The 15-year average ratio in the U.S. is 11.4, according to Moody's Economy.com.

Nationwide, the ratio of housing prices to rents is "still above the historic average, which means that houses are expensive relative to apartments," says Chen.

How have consumer attitudes toward housing changed?

This market is forcing consumers to embrace the idea that a house is first and foremost a place to live, not a sure-thing investment. Not long ago, investing frenzy fueled the real estate market in "hot" cities like Miami, where investors snapped up condos as if they were going out of style.

"We've had boomers accumulating multiple housing or rental houses on the expectation that housing was a one-way ticket up. And that belief has been shattered," says Shedlock.

"If you're buying to live in a house, it's probably OK to purchase a house now," says Chen. "It's probably better if you wait a little longer."

Baker cautions in a research note that the "failure to recognize declining home prices can cause homeowners to be overly optimistic about their financial situation." As a result, we have an oversupply of houses on the market — and sellers who are "unwilling to drop their price to the market level," he says. The economy would improve, he says, if home sellers recognized their house just isn't worth what it used to be.

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Why Not Just Walk Away from a Home?

Economy
by Eric Weiner

NPR.org, February 13, 2008 · The Web site for You Walk Away is cheery and reassuring. There's a photo of a happy family in a park, smiling. Another family, also smiling, is packing up boxes.

"Are you stressed out about mortgage payments?" asks the site rhetorically. "Is foreclosure right for you?" it queries, but doesn't wait for an answer. "You are not alone — over 2.9 million homes have foreclosed in the last three years," it says. The not-so-subtle message: Foreclosure need not be a shameful, life-ruining experience. In fact, the company will gladly hold your hand through the foreclosure process—for a fee, of course.

Foreclosure, we're told, is a last resort, an option that no responsible homeowner would ever choose. But some distressed homeowners — no one knows exactly how many — are doing just that. They're voluntarily walking away from their mortgages, engaging in a practice the mortgage industry calls "ruthless default."

But is it really ruthless — or just good businesses sense? Some economists argue it's definitely the latter.

Sometimes, they say, walking away from your mortgage makes economic sense, especially for homeowners who find themselves "upside down" — that is, they owe more on their mortgage than their house is worth. In those cases, "voluntary foreclosures are not by themselves evidence of a newfound irresponsibility on Americans' part," says Nicole Gelinas, writing in The Wall Street Journal .

Separating the economics of foreclosure from the morality (and the stigma) is not easy, though.

"We need a culture of responsible consumers and homeowners," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, echoing a deep-seated American belief that one should always honor financial obligations.

The current housing crisis is different, argue some economists: Since some financial institutions sold these loans in a deceptive manner — for example, by approving people for loans they couldn't really afford — then why should homeowners feel obliged to honor their commitments?

The Virtues of Self-Interest

Most homeowners avoid foreclosure for selfish, and not necessarily moral, reasons. Foreclosure leaves a large black mark on a homeowner's credit rating. It might be as long as 10 years before they can qualify for another mortgage.

But Gelinas — a financial analyst and contributing editor of City Journal — argues that if enough people walk away from their homes, then banks won't blacklist all of them.

"Many walkers are going to want to buy houses again some ay; and when they do, lenders are going to want to make money lending them money to do so (hopefully requiring a good down payment)," she says.

One thing that is certain: Foreclosures are on the rise. The Mortgage Bankers Association estimates that roughly 900,000 Americans were in the foreclosure process as of Sept. 30, 2007 — the most recent data available. That's an increase of 72 percent from the same period a year ago. Cities in California, Ohio, Florida and Michigan posted the highest foreclosure rates in the U.S., according to RealtyTrac, a private firm.

Traditionally, most people who foreclose on their homes do so because they lost their jobs or were hit with unexpected medical expenses. But the subprime mortgage crisis is different. Seven out of 10 people foreclosing on their homes are healthy and gainfully employed, according to John Taylor, president of the National Community Reinvestment Coalition. They simply can't afford to make their monthly payments.

Helping Others Walk Away

The spurt in foreclosures has spawned a cottage industry of firms who smell a business opportunity amid the misery. You Walk Away is getting the most attention, with some 25,000 daily hits to its Web site. (The firm won't disclose how many customers it has.)

For a fee of $995, the company offers services such as a "protection kit." For instance, they'll send a letter that "stops lenders from harassing the homeowner." They'll also put distressed homeowners in touch with a lawyer and an accountant to discuss their options. They'll advise people in the midst of foreclosure how long they can legally live in their homes, tempting people with the prospect that, "You WILL be able to stay in your home for up to 8 months or more without having to pay anything to your lender!"

Chad Ruyle, the company's co-founder, says they are not encouraging people to pursue foreclosure but merely helping them through the process once they have made that decision.

"We're not causing the foreclosure problem," he says. "The problem was already there." Or, as his business partner Jon Maddux puts it, "You can't blame a divorce lawyer for a divorce."

Red Flags

Firms like You Walk Away, though, have raised red flags with credit counselor and consumer watchdogs. Ellen Schloemer, director of research at the Center for Responsible Lending, says borrowers would be better off hiring their own attorneys and accountants, rather than relying on those provided by You Walk Away.

"Just look at the picture [on the company's Web site]," Schloemer says. "It shows people enjoying a day in the park. But foreclosure is no day in the park."

It takes a decade to recover from a foreclosure, she says, and there's not much anyone can do about that. The company, she says, paints a misleading picture of the foreclosure process.

"The real solution is to help people before they're forced into foreclosure," she says.

John Taylor, of the National Community Reinvestment Coalition, says he's concerned that the company might not help customers explore all of their alternatives before going into foreclosure.

"I would rather see people who are facing foreclosure fighting to keep their home, and keep it as long as possible, because help is on the way," he says.

On Tuesday, in fact, the Bush administration announced a new initiative aimed at helping homeowners about to lose their homes. For qualified homeowners, it will freeze the foreclosure process for 30 days. Dubbed "Project Lifeline," the new program will be available to people who have taken out all types of mortgages, not just the high-cost subprime loans that have been the focus of previous relief efforts.

Those efforts, of course, are about avoiding foreclosures, not facilitating them.

"Walking away from one's home should be the absolute last resort," says Gail Cunningham of the National Foundation for Credit Counseling. "However desperate a situation might become for a homeowner, that does not relieve us of our responsibilities."

But there is one category of homeowner, she says, where foreclosure does make sense: people who bought their homes "with their hearts and not their heads."

"For people who may never be able to afford their home, then walking away is a viable option," she says. "If long term, you're not going to be able to sustain the mortgage payment, then you're fooling yourself and should get out of that situation and move on to life after foreclosure."

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SUBPRIME LOANS AND MORE

It's a Bull Market for Financial Fraud
U.S. Department of Justice
01/31/08

Imagine landing your dream home. Your credit is a bit shaky, but you manage to get a subprime loan with an adjustable rate mortgage. A few years later the interest rates jump and you can no longer afford to pay. You see an ad for a business that will to help pay your mortgage for a modest monthly fee while you get back on your feet.

But here’s the heartbreak: it’s a scam. The con artists just takes your money and runs…

It’s just one of the latest schemes and frauds we’re seeing these days across the financial services industry, our senior criminal investigators said during a briefing Tuesday with the news media in Washington.

These scams—which include plenty of shenanigans with mortgages and subprime loans—are costing the nation tens of billions of dollars a year.

“Greed is definitely not good for our economy right now,” said our top criminal investigative exec Ken Kaiser following the briefing. “It’s hurting homeowners. It’s hurting honest businesses. And it’s hurting investors and markets around the world.”

All good reasons why we’re squarely focused on cracking down on the largest of these financial crimes, launching proactive initiatives and shifting resources as trends emerge, all the while working hand-in-hand with a host of government and private sector partners.

Among the specifics discussed at the briefing:

Subprime mortgage loans:

We're investigating 14 corporations involved in subprime lending as part of our Subprime Mortgage Industry Fraud Initiative launched last year.
The companies come from across the financial services industry, from mortgage lenders to investment banks that bundle loans into securities sold to investors. We’re also looking at insider trading by some executives.

Traditional mortgage fraud:

We have more than 1,200 cases open today (up about 40 percent from last year), mostly involving fraud for profit, where groups of straw buyers, realtors, etc. rig schemes to buy properties that are flipped or allowed to go into foreclosure.
Hotspots include California, Texas, Arizona, Florida, Ohio, Michigan, and Utah.
Suspicious activity reports that we review for potential mortgage fraud have grown from 3,000 in fiscal year 2003 to 48,000 in fiscal year 2007. This year, we’re on pace to receive more than 60,000 such reports.

A recent case: In November, the owners of a long-time Minnesota homebuilder called Parish Marketing—along with a bank officer, a closing agent, and others—pled guilty to a $100 million mortgage scheme involving some 200 homes.

Right now, we’re seeing no links to organized crime syndicates, street gangs, or terrorist groups in our cases.

For more information on financial frauds:
- Financial Crimes Report to the Public, Fiscal Year 2006
- Mortgage Fraud overview


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U.S. News & World Report Editor Compares Credit Crisis to the Great Depression

By Jeff Poor | January 21, 2008 - 17:06 ET

It's no longer enough to say the economy is heading into or already is in a recession. Invoking the memory of the Great Depression has become the latest way to dramatize the economic turmoil caused by the credit markets.

"[I] think we are facing the worst financial crunch and crisis since the Great Depression," Mort Zuckerman, editor-in-chief of U.S. News & World Report, said on the January 20 "McLaughlin Group."

Zuckerman told viewers we're heading into uncharted territory with this current credit freeze-up.

"You have the entire banking system now that is virtually frozen. And there are, not just this subprime mortgage thing, there are other things called credit default swaps where they will lose as much money, $250 billion on. The banks are frozen. They are not making loans because they have such huge debts that they have to take on to their balance sheets and nobody knows how to deal with that," he continued.

While the financial sector is seeing problems with tightened credit, Zuckerman's reference to the Great Depression could lead viewers to think that the economy is heading toward a depression.

The U.S. economy overall does not appear to be headed for another Great Depression. For the last two quarters, gross domestic produce (GDP) has grown at a rate of 3.8 percent in the second quarter of 2007 and 4.9 percent in the third quarter. Fourth-quarter GDP numbers for 2007 will not be released until March.

Unemployment in the U.S. is also relatively low at 5 percent.

Even the somewhat gloomy forecast from Goldman Sachs Group, Inc. (NYSE:GS), a Wall Street investment bank that has avoided the worst of the subprime mortgage losses, said on January 9 the recession they are predicting would be brief - certainly a far cry from a depression.

"One silver lining is that the recession is likely to be relatively mild by historical standards, with a cumulative contraction in real gross domestic product of only about 0.5%," said a Dow Jones report about Goldman Sach's prediction. "And the economy will eventually walk out of the recession and gradually recover in the course of 2009."

Despite that, strong bearish opinions on the economy as well as parallels to the Great Depression have been cropping up recently in media reports including a January 16 "CBS Evening News" story. That night CBS correspondent Anthony Mason compared problems in the financial sector to banking problems around the Great Depression.

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A Video Message about Current Market Conditions

A Video Message about Current Market Conditions from Peter Schiff, President of Euro Pacific Capital.



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Bargain houses largely unsold

By J.N. SBRANTI
jnsbranti@modbee.com
last updated: December 15, 2007 04:23:07 PM

Courthouse-step auctions offer 1,336 properties in foreclosure -- 17 are sold

Another foreclosure record was set in November as 1,336 properties were offered to the highest bidder on the courthouse steps in Modesto, Merced and Stockton.

Now here's the real surprise: Only 17 of them sold, despite lenders offering deeply discounted prices.

Every weekday, starting about noon, auctioneers seek buyers for foreclosed properties of all shapes and sizes. But more times than not, no one bids.

That's because foreclosed homes typically have unpaid mortgage debt far in excess of their current value. When no bidder is willing to pay off that debt, lenders usually get stuck owning the homes.

That happened 411 times in Stanislaus County last month, sticking lenders with more than $139 million in unpaid mortgages, according to ForeclosureRadar, which tracks mortgage defaults.

Of the 419 Stanislaus County homes that went to foreclosure auctions in November, only eight attracted bidders.

Those who do bid are getting increasingly sweet deals, however, as lenders have begun slashing the prices they're willing to accept for foreclosed homes. To lure potential buyers, lenders have begun accepting starting bids far below the outstanding debt on foreclosed properties.

"Investors at auctions typically will buy at a 30 percent discount to market," explained Sean O'Toole, who owns ForeclosureRadar. "So lenders are trying to give as much of a discount as possible to entice investors to buy."

On Friday, O'Toole said, a foreclosed five-bedroom Modesto home on Hemstead Avenue went up for auction with a starting bid of $301,500, even though the lender was owed $537,000 from a delinquent mortgage.

But that $235,500 discount apparently wasn't enough. O'Toole said no one bid, so the lender now owns the house.

Lenders get more desperate

O'Toole said the size of these discounts continues to grow as lenders get more and more desperate to unload properties.

Early in 2007, O'Toole said, discounts were offered on about one-third of the homes in foreclosure auctions statewide, and those discounts averaged about $9,000. By November, he said, two-thirds of the state's homes in foreclosure auctions were discounted, with discounts averaging $48,000.

Many of the foreclosed houses in Stanislaus, San Joaquin and Merced counties, however, are being discounted by $100,000 or more, O'Toole said.

Dave Rhodes of Oakdale recently took advantage of one such deal. Two weeks ago, he bid $1 over the starting price for a 1,356-square-foot home on Poppy Patch Drive in Modesto. He was the only bidder and bought the house for $163,181, even though the lender had been owed about $264,000.

"I'm not a big spender. I'm a bottom feeder," said Rhodes, who has been a regular at Modesto's foreclosure auctions for more than a year. He researches many of the homes being foreclosed, but rarely bids at auctions. His last purchase was in January, when he bought a fixer-upper in Empire.

Hundreds receive no bids

Discounted starting bids "have become more and more prevalent the last three months" in Modesto, Rhodes said. That's why he comes prepared to bid on great deals.

Before potential buyers are allowed to bid, they must show the auctioneer a cashier's check for the full amount they're willing to bid. Rhodes said he had a cashier's check for $185,000 with him the day he bought the Poppy Patch home, so he could have gone higher had someone bid against him and he wanted to keep bidding.

Competitive bidding is rare, however, even with discounted starting prices.

Example: An Oakdale home on Ranger Street sold new in 2006 for $610,000. It went into default with an outstanding loan balance of $530,892. Last month at the foreclosure auction, the starting price was $395,000. No one bid.

Also last month, a Manteca home on South Sonora Avenue that had an outstanding loan balance of $487,956 was offered for a starting bid of $331,500. No one bid.

And in Merced, a home on West 22nd Street with an outstanding mortgage of $279,785 was offered at $153,000. No one bid.

"There are literally hundreds of examples in these counties," O'Toole said about discounted properties going unpurchased. "They ... represent good opportunities for folks to buy properties directly from the bank at a deep discount."

Lenders don't want the houses

In San Joaquin County last month, for instance, 664 foreclosed homes went to auction, but only eight were sold to bidders. Lenders took back 656 houses with unpaid debts of more than $245 million.

In Merced County last month, 253 homes went to auction, with only one receiving bids and being sold. Lenders took back the rest with unpaid debts of nearly $88.4 million.

Statewide, 12,282 properties went to foreclosure auctions, but only 321 were sold to bidders. Lenders took back the rest, which had unpaid debts of nearly $4.8 billion.

Those lender-owned foreclosed houses then typically are listed for sale with real estate agents or are privately auctioned off. Either way, lenders end up paying assorted commissions and fees to sell the property. While waiting for deals to close, the lenders must maintain the homes and pay taxes, insurance and assorted other ownership costs.

"They don't want to hang onto those homes, mow those laws and pay those Realtor fees," said Rhodes, explaining why lenders are willing to give foreclosure auction bidders such good deals.

Bee staff writer J.N. Sbranti can be reached at jnsbranti@modbee.com or 578-2196.

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Warsing used the United States mails to commit foreclosure fraud

December 12, 2007
U.S. Department of Justice
Northern District of Ohio

Gregory A. White, United States Attorney for the Northern District of Ohio, announced today that a federal grand jury in Cleveland, Ohio, charged James A. Warsing of Ashtabula, Ohio, with eight counts of Mail Fraud.

The indictment charges that between 2001 and 2005, James A. Warsing, using his company, WJW Enterprises, devised a scheme to defraud various homeowners threatened with foreclosures, by falsely promising he could save the homes from foreclosure. It was further alleged that Warsing fraudulently obtained large sums of monies from homeowners promising to use such monies to settle their accounts with lenders but used the money for other personal and business purposes.

As a further part of the fraud, Warsing used the United States mails to send advertisements for WJW Enterprises to prospective clients and to receive checks from homeowners. It was alleged that Warsing collected over $500,000 from homeowners during the period 2002 through 2004.
The actual sentence in this case, upon conviction, will be determined by the Court under the Federal Sentencing Guidelines which depend upon a number of factors unique to each case, including the defendant's prior criminal record, if any, the defendant's role in the offense and the unique characteristics of the violation. In all cases the sentence will not exceed the statutory maximum and in most cases it will be less than the maximum.

The case is being prosecuted by Assistant United States Attorney James C. Lynch, following an investigation by the Federal Bureau of Investigation, Painesville, Ohio.

An indictment is only a charge and is not evidence of guilt. A defendant is entitled to a fair trial in which it is the government’s burden to prove guilt beyond a reasonable doubt.

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