The U.S. homeownership rate, already down two percentage points from its 2006 peak of 69%, could fall by another five percentage points over the coming years to levels last seen in the mid-1990s, says a staff report from the Federal Reserve Bank of New York.
The study looks at the number of homeowners who are underwater, owing more than their homes are worth, and excludes them from the official homeownership rate calculated every quarter by the Census Bureau.
While the official figure stood at 67.2% at the end of last year, the authors produce their own estimate of an “effective” homeownership rate. The difference between the official and effective homeownership rates, or what the authors dub the “homeownership gap,” is around 5.6 percentage points for the nation as a whole, which means the effective rate of homeownership is closer to 62%.
newyorkfed.org
That homeownership gap is much bigger in cities that have seen big home-price declines. In Las Vegas, for example, the gap stands at more than 40 percentage points. So while Sin City’s official homeownership rate stood at 58.6% as of August 2009, the effective homeownership rate was closer to a paltry 14.7%. (That estimate uses the Case-Shiller home-price index to predict the number of underwater borrowers; estimates from the Federal Housing Finance Agency’s price index, which have less-severe price declines, produces an effective rate of 19.3%.)
In Phoenix, the effective homeownership rate stands at 40.6%, compared to an official rate of 68.8%. Las Vegas and Phoenix had peak homeownership rates of 65% and 74.7%, respectively, during the middle of the last decade. That means Phoenix, in less than five years, has gone from having one of the highest homeownership rates in the country to having one of the lowest effective rates of homeownership.
newyorkfed.org
Other cities with double-digit homeownership gaps include San Diego, Los Angeles, San Francisco, Miami, Tampa, Detroit, and Washington, D.C.
The effective rate of homeownership doesn’t imply that all underwater borrowers will lose their homes; instead, it suggests that they won’t act as traditional homeowners do. Government policy over the past two decades focused on growing the rate of homeownership for public policy reasons: Homeowners, the argument went, were more invested in maintaining not only their properties, but also their communities.
The effective homeownership rate serves as a “good guide to the future path of the official rate” because many underwater homeowners are simply renters-in-waiting, write authors Andrew Haughwout, Richard Peach and Joseph Tracy of the New York Fed. “Unless house prices increase substantially, many negative equity homeowners will in fact convert to renters in the years ahead, and the measured rate of homeownership will decline toward the effective rate.”
Some underwater borrowers, of course, will return to positive equity simply through the scheduled debt pay-down process. The study estimates that 36% of negative equity borrowers will recover their equity within three years, while 51% will be back “above water” within five years. That will speed up or slow down depending on what happens to home prices.
But homeowners will need to build up equity in order to move, which requires cash both for paying transaction costs associated with selling the old home and for a down payment for the new home. Absent any increase in home prices, it would take at least five years for 90% of borrowers who are underwater today return to a 94% loan-to-value. Moreover, the median mortgage in that group of borrowers would take 12 years to reach a 94% loan-to-value, without any home-price appreciation.
Peak buyers who lost it all
Today's featured property was purchased on 1/27/2006 for $1,315,000. The owners used a $951,750 first mortgage and a $363,250 down payment.
These owners lost $363,250 of their own money, and their credit is trashed.
Plan 3 Alexandria. This is the largest and finist model in Columbus Grove. Coupled with the Irvine School District. Every conceivable upgrate. Over $100k in landscaping. This is absolutely spectacular.
You're kidding yourself if you think prices are going to drop even more. We have already hit the bottom. I don't understand why "potential homebuyers" are under the assumption that there is going to be some sort of "correction." Get it through your thick skulls people…..right now is seriously the time to buy. I am not saying this as a Realtor but as a person with common sense.
Don't get me wrong, many areas of the US will continue to face declining RE markets, but not Orange County.
Helping out our friends
"We want to give a shout out to our buddy Harry who opened a deli in Irvine a few months back. Harry's Deli has quite the followingalready and received a very favorable review in the OC Weekly. If you are in the area during the week, it is definitely worth checking out!"
By request…
If someone can find a better image, perhaps one where the person getting punched is in more pain, I can create another version.
Writer's Corner
From Friday's post it is clear that I am looking forward to my vacation in Wisconsin. I am planning to take my voice recorder and spend a few days alone on the lake, and I hope some meaningful writing becomes of it. I was planning to write about my old home town back in December, but I thought I would wait until I could spend some time there and clear my head. That time is now.
Raw land deals historically have not been highly leveraged because land values are notoriously volatile. Lenders forgot that fact during the housing bubble and extended large loans on raw land deals many of which are blowing up now.
Today's featured property was purchased by Baldwin Investment and Development in 2007. It was picked up at auction on 4/6/2010 or $500,000 by the lender. If you believe this property is worth $2,000,000, it was quite a profitable foreclosure for the lender. This lot is worth whatever the final product could be sold for minus the cost of construction and profit.
Buildable lots in Irvine are very rare. Since the Irvine Company builds all of its own product, a foreclosure on pre-build like this one is the only way such a lot would enter the market. How would you value such a unique property?
* * * $1 MILLION PRICE REDUCTION !! * * * Prime custom lot with front row canyon / city lights / sunset views set amongst the hillsides embracing Shady Canyon. Take advantage of the rare opportunity to build your dream home. Long, estate-style private driveway set back from the road for complete privacy, with only one neighbor adjoining. The lot size is over 33,000 sq ft. There are architectural plans to build a grand-scale custom home up to 18,000 sq ft. secluded in the hills. A truly prestigious enclave.
I am planning a vacation to Central Wisconsin in late June. It got me thinking about my life and times there, and Kid Rock came quickly to mind.
After writing about real estate for more than three years, I have covered much ground (pun intended). What I find as I build a library layer upon layer is that I find new richness and new connections within the subject matter. I have half a dozen or more ideas for posts floating around in my mind at one time or another. I rarely run out of ideas.
I have become attuned to my own writing process. The posts where I am reacting to a news story or commentary can be written as a train of thought, but I have to think about more complex posts for a few days before I start writing it. I have a major post in my mind on Las Vegas that I hope to birth this week. I am never quite sure when I will get it done. The more complex posts take more time to write, and they take some time to age.
Lately, I have been enjoying the time I spend with images and comics the most. I still enjoy writing the posts, but I am most entertained when I am working on a silly graphic. Don't know why, that's just the way it is.
I get a great deal of creative release from writing this blog. I get to explore funny ideas and interesting themes more completely than I would ever do on my own if others didn't read it. The fact that so many of you stop by each day to read is very motivating. Nobody wants to leave the stage.
During the week, often while I am driving, I have these profoundly meaningless insights that I want to share in the writer's corner. I lose most of these ideas, and many are better off lost. I may share a few more next week as I plan to do a better job at capturing them.
Strange encounter
Friday night I was walking with my son through the Irvine Spectrum. We were following twenty feet behind two women talking. I saw some papers fall out of one woman's pocket, so I called out to her. She didn't hear me, so I sped up, still holding hands with my son, and as I closed in on the papers on the ground, I was still ten feet behind these women who didn't acknowledge me.
When I was almost there, I realized the papers were cash. I grabbed the cash and raised my voice enough to get the women's attention, and I gave her the money — But for a moment, I didn't want to. The thought goes through my mind, "are you stupid? This is cash. It's found money. If you wouldn't have seen her drop the money, you would keep it. Forget what you saw!" Funny how the mind works, isn't it? She's lucky she didn't drop any big bills….
Monday morning, President Obama makes his way to the podium to give a very important message to citizens everywhere after last week's mini market crash. It will probably go something like this:
My Fellow Americans, as you know, my administration inherited an economy on the brink of an economic depression. And we took quick and decisive action to repair a global financial system that was on the verge of collapse. After spending trillions of dollars getting this economy going, it appears that a new crisis is developing in Europe with Greece leading the way. Unfortunately, this crisis is now spreading to Portugal, Ireland, Italy, and Spain (the PIIGS). Unlike the previous administration, my administration will take speedy steps to prevent another financial crisis like that of 2008. In order to prevent this new economic disease from spreading to our markets, I've sent an urgent request to Congress. A new law should immediately be passed by both the house and the Senate: Prices of stocks and homes will no longer be allowed to fall, they can only rise.
My fellow Americans, let me make this clear so there's no confusion: It's okay if the stock market goes sideways as long as stocks don't fall. We're going to set 10,000 Dow Jones as our new floor. I want Americans to feel very confident that they can invest their money into the stock market without ever losing another dime again. Also, every 1,000-point rise in the DJIA will become a new floor so that all investors will be protected and feel confident that they can secure their retirement by investing in the market.
My fellow Americans, I want to make something very clear. This country, along with all major industrial countries around the world, are fighting a debilitating war. This is an economic war and the enemy is deflation. As you know, I reappointed Ben Bernanke to be the commander and chief to fight this war. Mr. Bernanke not only has an unlimited supply of ammunition (dollars) to fight this war but also to win it. He has the willingness along with the full backing of my administration to deploy all monetary ammunition against this very powerful and dangerous enemy. I'm highly confident that Mr. Bernanke will create as much money, out of thin air, to defeat falling prices. My administration will no longer tolerate falling prices and I believe I have the right man at the right time to win this historic battle. And remember, they don’t call him “helicopter Ben” for nothing.
Next, I have also urged Congress to lift the debt ceiling of the United States from 14 trillion to infinity. I will no longer put up with any hindrances to fighting this war on deflation. This will provide my administration an unlimited amount of fiscal ammunition to continue battling falling prices. To stop the decline of falling prices of homes everywhere, we'll buy 95% of the remaining supply of homes to stabilize the very weak housing market. The US government is already backing 95% of all mortgages from our first phase in this economic war. Make no mistake, this administration — and really every administration — is built upon one word: BAILOUT.
I want every person and every company to know that there's no such thing as “too big too fail." I also want every country around the globe to know that their will be no nation “too big to bail” and that, of course, includes Greece and the other PIIG nations that will soon get slaughtered. I've instructed my commander and chief to immediately deploy a fleet of government helicopters filled with bales of newly minted $100 bills. We'll soon have thousands of those government helicopters dropping dollar bills all over the globe, so please don't worry. Greece, Portugal, Ireland, Italy, and Spain — we'll be there to bail you out right along with California and all the other bankrupt US states. This great nation has an arsenal of unlimited amount of dollar bills so there are plenty of them to go around.
In summary, I know that many of you will worry that a victory in this global battle will bring on a new enemy — inflation. I want to reassure any detractors of my new plan that we've already taken decisive actions to make sure inflation doesn’t result in rising interest rates. The Federal Reserve has been ordered “to keep rates low for an extended period of time,” and that extended period of time is forever. Any government bonds that aren't purchased by investors or nations will simply be bought by my great Fed Chairman. Don't for a second doubt that this great and powerful nation will use all means at its disposal to win this global war on deflation. My mission is clear: This country — in fact, no country — should ever tolerate falling asset prices again.
Remodeled Plan 4 with extra large floorplan. Custom kitchen features: Large granite island with gas stove, kitchen dining area viewing the back garden, solarium, huge double-doored walk-in pantry. Wet bar off the kitchen overlooking the family room. Gorgeous hardwood flooring throughout most of downstairs. Formal dining and living rooms. Large custom indoor laundry room. Two water heaters. Located at end of cul-de-sac… and much more! Must see!
It is a shame this property earned the gorgeous graphic. I really do like it. I am partial to Deerfield anyway, and the kitchen in this place is awesome. That atrium effect is really cool.
Today's featured property uncovered a subtle error in my post calculations. Properties where the loan is in excess of $1,000,000 cause the income tax deduction to be larger than it really is. I modified the formula to catch that and cap the interest deduction.
I find multi-million dollar properties amusing from a financing standpoint because you quickly realize that owning a property like this does not come from obtaining an 80% loan. Can you imagine spending more than $50,000 a month on housing? I don't spend in housing costs each year what the owner of this house will pay in property taxes. In other words, I couldn't even own this property free-and-clear because I couldn't afford the taxes.
This weekend, we will be updating our graphics to incorporate the new IHB logo. We are keeping the current colors.
Chart of Alt-A and Option-ARM resets – Chart showing upcoming 2nd wave of mortgage resets could be worse than the subprime nightmare. Courtesy of Credit Suisse
Dynamic Map of Non-Prime Mortgages – Dynamic map of the United States showing the rate of high-risk mortgages per state. Courtesy of Federal Reserve Bank of New York
Home Prices in Selected Cities – Dynamic chart of home prices in 20 U.S. cities, historical to present. Courtesy of New York Times
In Deep: Underwater Borrowers – Dynamic map of the U.S. showing the percentage of borrowers with negative equity in the 3rd quarter of 2009. Courtesy of Wall Street Journal
With panoramic views of the canyon and the golf course, Villa Monticello may well be the finest estate on the market in Shady Canyon. This three-level, 5 bedroom grand villa, masterfully built on a large private lot is breathtaking. The front exterior highlights are courtyards, beautiful stonework and red terra cotta colored walls, an elevated terraced garden, petite vineyard with citrus trees and 500 white roses flowering as hedges. The side/rear grounds offer covered loggias, water features, fountains, fire pit and an exquisite pool & spa with full kitchen and bath under the cabana's roof. The interior offers 5 full bedroom suites including a private guest quarters, a chef's dream kitchen, theater, gym & sauna with private massage suite, a grand elevator & 5 fireplaces. Special touches are hand laid antique demi tile mosaics in the entry, ceiling murals done by European Artisans, beam and vaulted ceilings, custom cabinetry, seasonal closets and designer lighting fixtures.
Perhaps society's current relationship with debt has not changed, but for those with the courage to read today's gripping post, your feelings and attitudes toward debt certainly will transform.
Hang on, Alice, as we bolt through the rabbit hole on an adventure to financial Wonderland. Come with me on a fantastic journey to the Great Lakes to save fish falling prey to evil bloodsuckers, and along the way we will save borrowers from the evil of debt peddler, Louie the Lender Lamprey.
The Sea Lamprey and the Great Lakes
Prior to canals of the nineteenth century, the Great Lakes were a thriving fishery. With over fishing and the introduction of the sea lamprey through the canals, the fisheries of the Great Lakes were devastated. According to Wikipedia:
The Sea lamprey (Petromyzon marinus) is a parasiticlamprey (a kind of jawless fish) found on the Atlantic coasts of Europe and North America, in the western Mediterranean Sea, and in the Great Lakes. It is brown or gray on its back and white or gray on the underside and can grow to be up to 90 cm (35.5 in) long. Sea lampreys prey on a wide variety of fish. [Pictured right: Louie the Lender Lamprey] The lamprey uses its suction-cup like mouth to attach itself to the skin of a fish and rasps away tissue with its sharp probing tongue and teeth. Secretions in the lamprey's mouth prevent the victim's blood from clotting. Victims typically die from excessive blood loss or infection. [emphasis is mine]
The sea lamprey and the fish the lamprey scrapes and chugs is an allegory for the modern lender and the borrower the lender infests.
Lenders and the Sea Lamprey
The similarities between sea lampreys and lenders are as follows:
The sea lamprey's sole purpose is to attach itself to a productive organism and syphon a steady stream nutrients from the host's bloodstream. A lender's sole purpose is to attach itself to a borrower and obtain a steady stream of cashflow from the borrower's productive financial life. [Pictured right: Louie's courtship dance]
The sea lamprey provides no value to the fish, and once attached it remains attached. The value of lending to borrowers is debatable (mortgage debt is tolerable, but consumer debt is not); however, with the "sophisticated" borrowers of today who believe debt is something serviced and not retired, once a lender becomes attached to a borrower, they stay attached for life.
Sea lampreys were not a problem in the past, and fish populations had to adapt or die when the sea lamprey was introduced. Modern credit cards were introduced in 1958, and with the explosion of debt availability over the last 50 years, our population has come to accept borrowing — and its associated lending sea lampreys.
If the sea lamprey were eliminated, nutrients diverted to its existence would instead remain with the fish resulting in stronger fish populations. If lenders were eliminated, particularly those focused on providing consumer debt, billions of dollars flowing in to lending would be spent by a stronger, debt-free population on more productive economic uses. Consumer credit only benefits lenders.
Sea lampreys tend to seek out juvenile fish because the young have fewer defenses, the young are stronger and more resilient and thereby less likely to die, and the young fish can nourish the lamprey indefinitely. Lenders indiscriminately target 18 to 21 year-olds through credit card offers and mountains of student loan debt in order to acclimate teens to debt and assist them in sustaining debt through their funeral pyre.
If a sea lamprey causes the death of its host, it detaches itself and moves on to another. If a lender bankrupts a borrower — causes a financial death — the lender detaches itself and moves on to another borrower. No emotion when pulling out.
Mortgage Debt
Most home buyers allow lenders to suckle financial excretions through a home mortgage. If the cost of the mortgage is offset by saving on housing expenses, the debt is actually beneficial, and the relationship is symbiotic, like a clownfish (Nemo) and its protective sea anemone, or perhaps the Trill from Star Trek. However, if mortgage interest exceeds comparable rents, the excess lender slurp is parasitic and the borrower loses life force to the lender lamprey.
A typical borrower during the Great Housing Bubble looked like a fish with the two implanted sea lampreys [Pictured right: Big and Little Louie after borrower attachment]. The first mortgage is like the lamprey attached at the throat, and the second mortgage is like the one attached at the nether regions.
Do you know that sensitive spot on the soft tissues of your throat about an inch above your collarbone? Taking on mortgage debt is akin to allowing Louie the Lender Lamprey to drive his dagger teeth deeply into your epiglottis with a cartilage-cracking crunch; let him rasp a gaping gash, ply you with salivary siphon grease, and deflect your financial food toward his gullet.
The pain is necessary evil perhaps, but one to be minimized to the degree possible and removed at the earliest convenience. Unfortunately, most borrowers want to secure the largest toothy leech available and nourish the sponger's growth until the borrower's death. ~Gulp~
The second mortgage — the lamprey biting the borrower's butt — is usually a non-lethal pain in the a$$. In fact, this biting flesh wound is similar to any consumer borrowing like home equity lines of credit, car loans, credit cards, and other payment liabilities like forgotten subscriptions to magazines, websites, or software. Taking on debt may have delivered a fleeting pleasure, but like gonorrhea, debt plagues borrowers until the debt-disease is treated and ultimately banished forever for optimum financial health.
As our foreclosure crisis illustrates, many borrowers who take on excessive debt and hope to manage their parasites underestimate the tissue damage and succumb to the vampiric excess. Like Louie's former customers [pictured to right], many people bought McMansions, they took out multiple mortgages, and they used financing terms requiring accelerating home price appreciation in order to function. The collapse of hundreds of thousands of personal Ponzi Schemes litters America with of rotting financial carcasses — a pungent and painful reminder. Renting-former-owners spend their hours in fear or denial of the collection call yet to come from a long-forgotten mortgage debt holder.
Like most others, I will select a lender lamprey and hope my self discipline prevents him from growing out of control. Images like the ones from this post should ensure I remain focused on his removal.
[seven seconds you will enjoy]
The lamprey earings are a nice adornment, aren't they?
Private Shady Canyon estate evokes the relaxed elegance of the Italian countryside. Nestled on a large lot with only one neighbor and bordered by a nature preserve, the home creates an ambiance evocative of the Italian countryside – with romantic Tuscan architecture and a floorplan designed for effortless indoor/outdoor living and entertaining in all seasons. Lovely Tuscan architecture, interiors with 4 bedrooms, 5 and 3 half baths, in-law suite. Secluded courtyards, loggias, stone cabana, outdoor fireplaces and kitchen, putting green. Adorned in the finest custom finishes of exotic artisan stonework, rich millwork and trompe l'oeil paint finishes, as well as Albertini doors and windows from Italy, the main level offers generously scaled rooms suited for casual everyday living or more formal entertaining, including living and dining rooms, a massive family room, and a large chef's kitchen with catering/prep area and butler's pantry.
The photography is breathtaking.
Everything about these photos is perfect. Top-notch photographic work.
The title of this post is Feelings and Attitudes Toward Debt Transform in Housing Bubble Aftermath, but in fact, this post is the transformation. It is an active agent making this transformation happen.
Some people will undoubtedly react negatively to my overtly manipulative use of powerful images and evocative language; the edge is always a perilous dance. I purposefully went guttural to create a very strong negative association to debt. If you like debt, if you find value in it and want to keep it, I told you how I influenced you. If you want to override the effect, go out and spend some money on your credit card — procure something vacuous that provides immediate gratification, perhaps a massage — make sure you provide direct, positive reinforcement for credit spending, and you will counteract any impact of reading this post. Will that be a happy ending?
The purposes of this post are (1) to entertain, (2) to get you to think about your relationship to debt, (3) to persuade you that debt dependency is a bad thing, and (4) to provide ongoing debt-free reinforcement to those who bookmark this post and return to it when needed. Giving up a debt-dependant lifestyle is overcoming vice, never an easy task. Writing like this helps break down the positive associations of instant gratification and replaces it with negative associations that will make you revile debt. I think that is a great thing, and anyone looking for help putting away the credit cards will agree with me.
This post is not to be taken literally or interpreted as my nuanced opinion on the subject. It was fun to write, it serves a purpose, and I even if you disagree with my attitude about debt, and perhaps you feel my images and references a bit too harsh, I hope you enjoyed the craft of the post. Blogging is a unique art form, and I am enjoying its exploration.
[Artist's Rendering above: Louie the Lender Lamprey — next CEO of Goldman Sachs]
I want to extend special thanks to Sean O'Daniels for his last-minute drawing of Louie. Sean and I are discussing a collaboration on the Monsters of Debt. I look forward to seeing what his creative mind conjures up.
If a sea lamprey causes the death of its host, it detaches itself and moves on to another. If a lender bankrupts a borrower — causes a financial death — the lender detaches itself and moves on to another borrower. No emotion when pulling out.
