Real Estate

I have an ongoing project in which “expected relocations” is a variable.  So I’ve been trying to keep tabs on word about just how bad the real estate market has become in certain portions of the country.

One influence on my variable is easy enough to understand: how many people are underwater on their mortgages?  Even if they’re keeping up with the mortgage payments, there is a certain amount of distress in the market brought about by folks who cannot sell their houses because they owe more than the property is worth.

So, this article at Bloomberg caught my eye:

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.[…]

The highest percentages of homeowners with negative equity were located in California. In four of the state’s metropolitan areas — Stockton, Modesto, Merced and Vallejo-Fairfield — the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said.

In five more California areas — the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera — the percentages were more than 80 percent.

With so many home-owers underwater…is it time to rename California as “Atlantis”?

In today’s New York Times, Paul Krugman has an interesting op-ed challenging the idea that homeownership should be a goal for Americans:

Listening to politicians, you’d think that every family should own its home — in fact, that you’re not a real American unless you’re a homeowner. “If you own something,” Mr. Bush once declared, “you have a vital stake in the future of our country.” Presumably, then, citizens who live in rented housing, and therefore lack that “vital stake,” can’t be properly patriotic. Bring back property qualifications for voting![…]

O.K., I know how some people will respond: anyone who questions the ideal of homeownership must want the population “confined to Soviet-style concrete-block high-rises” (as a Bloomberg columnist recently put it). Um, no. All I’m suggesting is that we drop the obsession with ownership, and try to level the playing field that, at the moment, is hugely tilted against renting.

And while we’re at it, let’s try to open our minds to the possibility that those who choose to rent rather than buy can still share in the American dream — and still have a stake in the nation’s future.

In his monologue, Krugman gives three disadvantages to the institutionalization of homeownership –

• Financial risk
• Immobility of the workforce
• Increase in commuting / suburban sprawl

Before we bought our current home – or more correctly, contracted with a bank to let us live in our current home – I was rather rabid about not subscribing to the hype of owning one’s home.  Part of my reaction was due to my witnessing the real estate bubble inflating (and knowing it was a bubble), but a fair amount of my thinking was in line with Krugman’s.

Then my wife was disabled in a car accident.  I couldn’t find anyplace to rent which would be acceptable to her needs (extremely limited mobility, noise-sensitive), and we very quickly joined the ranks of “home-owers”.

Since that time, I’ve revised my opinion against home-buying hype.  Yes, I still think it’s hype, but there are some advantages to owning a home which justify somewhat the support provided the concept by the government.  These include:

• Acquiring real property, even if via a mortgage, is a means to build some measure of wealth.  True, it’s not the most efficient means of wealth-building around, and there are likely better investments available for those of us who try to save with an eye towards retiring in 30-40 years.   However, it seems that too many Americans are short-sighted in that regard.  
   
  I’d love to see the government strongly encourage citizens to save for a rainy day, preferably simplifying the process so that folks of limited means don’t have to go through the complexity of allocating their limited disposable income to specific savings goals.  
   
  If we aren’t going to have “mandatory” or “very strongly encouraged” saving programs, the institutionalization of home ownership is a tolerable alternative, I think.
   
• There is, I think, something to be said for the sense of stability that comes from owning your own home.  It’s mine.  It’s a little piece of the earth where I have extra freedom to live as I wish.  I don’t have to worry about a landlord kicking me out or raising my rent to ridiculous levels.  And, while I am at risk from the spectre of property tax hikes, at least that’s a threat I get a say in, thanks to municipal elections and referenda.
   
• Also on the stability front – haven’t I heard pundits bemoan the seeming death of “community” in some parts of the country?  Doesn’t “community” require some stability to form?  If “community” is seen as desirable for society, then shouldn’t society promote stability to help foster community-building?
   
• We have a heckuva lot of inertia behind the American dream of homeownership.   Recall that quite a bit of the foundation for our republic comes from the propertied interests seeking freedom to enjoy and profit from their property, and therefore needing protection from the tyranny of the property-less rabble.   True, the republic could be democratized by removing all of those protections…but isn’t it almost as democratizing to assist the rabble in becoming propertied?
   
• A more practical inertia argument could be made by observing that quite a bit of our economy is tied in supporting homeownership.  If some of the supports for that goal were removed, I’m not sure that the disruption would be any less than what we’re feeling from the credit crunch, and the real estate bubble’s deflation. 

  Surely, my wife and I aren’t alone in our budget relying quite a bit on the mortgage-interest tax deductions in the Internal Revenue code.   Remove that, and we could have a problem.  If enough homeowners develop such a problem…well, home values would presumably decline as the real estate market further imploded, and the resulting economic mess would presumably be extremely ugly.
   
  I could accept an assertion that federal support for homeownership is not justified in theory.  However, so much of our economy is built on the notion that Americans “should” own property, I think attempting to unwind it would cause more harm than good.

A post I saw at CL&P Blog, which mentioned that Minnesota is seriously considering a moratorium on foreclosures, got me thinking.

Isn’t a simple moratorium just a postponing of the inevitable?   After all, unless something else happens, in all likelihood many of the potential “foreclosees” will be unlikely to catch up with their payments, the potential resale value of the potentially-foreclosed property dwindles due to lack of debtor incentive to maintain the property, and the lenders suffer a certain amount of balance sheet pain from having to keep bad debt on the books for that much longer.

I can empathize with the sentiment that something needs to be done to stop a flood of foreclosures.   Yes, I am a little disgruntled with the sentiment — my wife and I accepted a higher interest rate and bought less of a house than some of our peers, because we saw the potential downside of going with an ARM; therefore it’s tough accepting the apparent unfairness of folks being bailed out of their bad bets while those of us who made more responsible decisions are left to indirectly pick up the slack.  But I accept that a hard crash of the real estate market is not a good thing for the country, and I can definitely empathize with how life can suck when luck goes against you.

As part of bankruptcy reform a couple of years ago, Congress sought to make it tougher for individuals to seek bankruptcy protection, or to limit such protection, under the premise that there were too many folks abusing the system.  The pros and cons of the changes can be a subject of debate, but the fact remains — our leaders thought bankruptcy should be a measure of last resort, and therefore put a couple of extra hoops in the process, to attempt to get others to perceive it as a last choice and to be aware of potential, less extreme alternatives.

I wonder if those states and localities that are pushing for moratoria shouldn’t adopt a similar stance.

Rather than simply stop foreclosure actions for a time, perhaps legislators and regulators should be attempting to introduce new hoops, with an eye towards making sure that every other alternative has been exhausted.

For example, I could imagine lenders being obliged to seek to work out some form of alternative financing arrangements, or facilitating access to third-party counselors to provide guidance to delinquent homeowners.  

I could also imagine a rejiggering of laws or regulations to facilitate real estate transactions whereby a delinquent homeowner can sell a property to a qualified buyer, who would assume the outstanding mortgage as part of the deal.

Heck, I could also tolerate new laws/regs adopted to incent banks to flip foreclosed as quickly as possible, even if the house sells at a low price.   (A 900% property tax surcharge on foreclosed properties not reoccupied within 6 months, anybody?)  Structured properly, such measures should alter the banks’ side of the foreclosure equation enough to provided added incentive to seek alternative, less drastic solutions…as well as providing municipalities extra revenue to support the strain on services arising from having a large number of vacant properties.

I realize that several lenders already have become rather proactive about helping their clients avoid foreclosure, and that those lenders also routinely face challenges of customer avoidance, confusion, or unwillingness to seek to save themselves.   But I do question whether such practices are the exception rather than the rule, or that consumers are adequately aware of such alternatives.

However, if consumers have to go through extra hoops to seek any sort of relief from debt issues, why shouldn’t the lenders be similarly constrained?

Ever since childhood, I’ve had a fascination with architecture.  I never had sufficient artistry to justify studying it in college or choosing it as a profession, but I enjoy doodling floor plans and looking at how different buildings are designed.

One manifestation of that interest is a dream house project.  When my wife is having a good day, it’s sometimes enjoyable to sit with her and play with the layout and features of a mythical house.  And, for all the conservation minded features I throw in (rainwater capture, greywater usage, solar & wind power discreetly installed), I do have to admit that our dream house has such a large square footage that I ought to be ashamed of myself for even conceiving such a monstrosity.

However, it sounds like our 15,000 square foot cottage might not be quite as ostentatious as some residences in Connecticut.   Consider this post in the WSJ’s Wealth Report blog (free link):

Greenwich, Conn., is a small town of big houses. Like Steve Cohen’s 32,000-square-foot home with its own ice rink. Or Paul Tudor Jones’ 13,000 square-footer.

So when Greenwichers complain about a house being too big, that counts as news. According to an article in Greenwich Time by Hoa Nguyen, Russian billionaire Valery Kogan and his wife Olga are planning to build a 30,000 square-foot home on Simmons Lane.  [...]

The house would have the usual Russian-billionaire amenities: eight bedrooms, a gym, theater, lockers, wine cellar, staff quarters, game rooms, a Turkish bath, a Finnish bath and a special room in the basement for grooming dogs. The home also features a grand total of 26 toilets.

Twenty-six toilets?!   There probably is some method to that madness (one per bedroom, plus an extra one to provide jack-and-jill facilities in the master suite, a couple in dressing rooms for the gym, ….), but even so, uttering the phrase “my house has 26 toilets” just don’t seem right.

I wonder if I can score some floor plans.  I’m dying to know how one comes to need 26 toilets in a house.

I am plagued with having too many interests (hence the lack of focus on this blog).   Two of my older interests have been architecture and conservation.   If I had come of age either a little bit earlier or later, and if architecture paid a bit better, I could be designing many of the green properties that I just settle for reading about.

Over the weekend, the New York Times asked the question, “How ‘Green’ Can a Huge House Be?“, framed with the context of a 7,000 square foot home recently built as a model for a new “green” subdivision in North Stamford, CT.   It’s seeking LEED certification to confirm its “greenness”.

This leads to the interesting question of whether large homes can, by their nature, be considered “green”.

On the one hand, it’s definitely possible to design and build a mansion that is far more energy-efficient, and significantly less environmentally destructive than your average McMansion.

On the other hand, there is a large, and seemingly increasingly vocal movement which argues that large homes are symptomatic of an environmentally destructive consumption-driven culture.  The thinking goes that “we” want big homes to store and show off all our “stuff”.  The material required to build and maintain those big homes, and to acquire and assemble that stuff is destructive…and gee wouldn’t the world be a better place if we were less attached to our stuff, and therefore were comfortable in much smaller, more sustainable Ikea-furnished homes.    Under this school of thought, “big” and “green” are mutually exclusive.

The New York Times story mentions the compromise that LEED tries to strike:

The standards released in December settled on a “home size adjustment” formula that makes it progressively harder for homes larger than the designated average (2,850 square feet for a five-bedroom house) to meet LEED thresholds in categories like energy efficiency, indoor air quality and minimization of construction waste. Smaller houses, on the other hand, are rewarded with lower thresholds.

So, for example, a 2,500-square-foot three-bedroom house would have to earn about 30 points to qualify for the basic level of LEED certification (higher thresholds are called silver, gold and platinum), while the Windermere model home has to earn closer to 60 points to compensate for its size, said Matthew Nielsen, the project’s development manager.

Personally, I agree with the sentiment that “big” probably isn’t “green”….in principle.   However, I think that green supporters ought to take a more pragmatic approach.

Right now, one of the bigger challenges facing the “greening” of America is, I think, the fact that “green” also means “expensive”.   Until conservation becomes second-nature enough to Americans to move beyond “green” being mostly limited to trendy, boutique marketplaces, that’s the way it will remain.

One of the ways to promote that trend is to increase demand to the point where supply ramps up, and marginal costs decline.   And, one of the ways to do that is to let the trendsetters set the trend with their larger disposable incomes, and watch the benefits trickle down eventually to the hoi-polloi.

Given current attitudes, those trendsetters are likely going to buy a big house when house-shopping.  If their mega-house is trendily “green” (ignoring its size), great!   However, I’d be surprised if too many folks in that market would opt for a smaller footprint in the name of greenness.

If demand for green features at the high end of the real estate market means that green features eventually start becoming standard in more of the real estate market…that’d be a net gain for all of us.

In that context, I think it’s best to somewhat overlook the fact that “big” isn’t very green.

Getting folks to think about how to make their current lifestyles a bit greener, is probably a better recipe for success than seeking to convert Americans en masse to asceticism in the name of the environment.

Seen at Insurance Journal:

No less a figure than AIG’s former head Maurice “Hank” Greenberg, who now heads CV Starr, sounded a similar warning. In his keynote speech to the delegates at the International Union of Marine Insurance (IUMI) Conference in Copenhagen he essentially described the subprime market as a house of cards, built on models for a market that didn’t exist. He also faulted the rating agencies for doing a very “poor job” of analyzing these financial products.

Nor does Greenberg share the I.I.I.’s optimism as to the extent of the insurance industry’s exposure. He thinks it will take the biggest hit, not only from direct losses – when the hedge funds can’t pay their debts – but also from the D&O and E&O claims that inevitably follow any financial melt down.

Considering how soft pricing has been in certain segments of the professional liability market, I imagine a few wise underwriters wouldn’t mind seeing a little blood in the streets in that regard.

Seen in the AJC:

Curt and Christine Mann are renovating their Grant Park house to make it green to the nth degree. They’re recycling wood, installing airtight foam insulation and solar lighting, and capturing gray water to flush toilets.

But what sets the Manns apart from other enviro-conscious families is their plan to install a device not seen in any other Atlanta neighborhood ? a 45-foot wind turbine.[...]

Opponents say the tower, which received a permit from the city, will be nothing more than a giant yard ornament on a street where old houses have been lovingly preserved.

“Do we want to turn historic Grant Park into a proving ground for residential wind energy?” asked tower opponent Scott Herzinger in an e-mail to neighbors. “Is this an experiment we want to be part of?”

The opponents have started themselves a website: treesyestowersno.org.

I give a hat-tip to the Manns for trying to make a difference, rather than just talking the talk.  Not many folks have actually taken steps to reduce their environmental footprint among those for whom global warming angst is trendy.  These folks are doing things that I’d love to do…if only my wife would let me.

As someone who’s in the second year of a three-year experience of having a neighboring lot turned into a 55-unit development, I can appreciate some of the disgruntlement that folks in that neighborhood feel.  However, if there is going to be a cultural shift away from dependence on nonrenewable energy, changes like turbines in yards and PV cells on roofs are going to eventually be happy.

I guess this one liberal neighborhood isn’t quite ready to be progressive.

Seen on the newswires:

The Arizona Board of Appraisal issued two cease-and-desist letters to the company that operates the popular real estate Web site Zillow, saying it needs an appraiser license to offer its “zestimates” in Arizona.[.]

The site has been criticized by real estate professionals and others concerned about its accuracy.

A complaint was filed in October with the Federal Trade Commission by the non-profit National Community Reinvestment Coalition, alleging Zillow was misleading consumers and others with its estimates.

Zillow issued a statement Saturday saying it disagreed with the board’s view, and pointed to an opinion issued by a national appraisers standards group that said online estimates aren’t formal appraisals.

I’m going to have to side with Zillow here and say that the Arizona bureaucrats need to get a life.

Perhaps Zillow could do a better job in disclaiming that their “zestimates” are not formal appraisals, and that they’re simply the product of a modeling algorithm that looks at transactions in the local market. However, it is a nifty tool to play with, and something handy for a homeowner or someone looking at potentially relocating to play with, to get a feel for the market and to fuel some planning, without needing to go through the hassle and expense of getting a full, formal appraisal.

It’s a good conversation tool. When you get close to refinancing, selling, or purchasing a property, clearly a more detailed appraisal, one that takes into account information that can’t be gleaned from modeling based on public databases, is called for.

Let’s just chalk this up as another lesson that perhaps needs to be taught in school: models are potentially powerful tools, but they shouldn’t be abused by overriding common sense.

I encountered the following video on a mailing list I subscribe to:

Housing Prices 1890-1997, Adjusted For Inflation….Plotted as a Roller Coaster

I so need to get a copy of the software used to create that video. I know how I want to liven up a graph or two in my next Powerpoint presentation.

The media have been full of stories in the past couple of weeks about an increase in defaults in mortgages and the apparent collapse of the subprime mortgage market. A couple of days ago, the New York Times ran an article on another aspect of the real estate market’s illness:

Here in Ohio, there are more than 200 vacant houses in Euclid, a suburb of Cleveland north of here. In the last two years more than 600 houses in Euclid have gone through foreclosure or started the process, many of them the homes of elderly people who refinanced with low two-year teaser rates, then saw their payments grow by 50 percent or more.

Euclid has installed alarm systems in some vacant houses to keep out people hoping to steal lights and other fixtures, drug users and squatters. The city has hired three new building inspectors, bringing the total to nine, to deal with troubled properties and is getting a $1 million loan from the county to cover the costs of rehabilitation, demolition and lawn care at the foreclosed houses. (When the properties are sold, such direct maintenance costs will be recovered through tax assessments.)

The Euclid mayor, Bill Cervenik, said the city, with a population of 53,000, was losing $750,000 a year in property taxes from the empty houses.

The article includes the story of an elderly woman, who was talked into an ARM, but wasn’t aware that taxes and insurance weren’t included in the quoted monthly payment…not to mention having been hit with a nasty surprise when the teaser rate wore off.

My inner capitalist is trying to convince my typing hands to simply write, “caveat emptor”, but then I think back to the circus surrounding my wife’s and my first mortgage, where the broker was a bit weaselly when it came to handling of the closing costs, and who kept trying to assure me that the quoted monthly payment included escrow and PMI (it didn’t).

Also a concern is that, to the extent that the increase in foreclosures is predominantly a subprime market phenomenon, there is a risk of certain neighborhoods being more affected than others with multiple foreclosures. The strategy mentioned in the article — local officials taking measures to limit squatting and to maintain vacant houses, then billing the titleholder for their services — doesn’t seem too unreasonable, on the surface at least.

Thursday, I listened to a couple of talking heads on Bloomberg who were discussing the epidemic of subprime mortgage defaults. One of them pointed at the bankruptcy reform legislation of a few years ago as being a contributing factor in the severity of the foreclosure rate. His thesis was that when bankruptcy law permitted easy abandonment of debt, lenders had an economic incentive to not make bad loans, and to exercise creativity to avoid a borrower seeking discharge of liabilities in bankruptcy court.

I’m not enough of an economist to be able to issue an expert opinion on that belief, but it does seem like a reasonable belief.