If you want to know what a housing bubble is, you only need look at Maricopa, AZ:
In 2005, her husband, Zachary Campbell, accepted a transfer from San Diego to Phoenix to manage a recreational-vehicle store. For the first time, the Campbells figured, they could afford their own home, though that meant moving to Maricopa, about 20 miles from Mr. Campbell's store. They scraped together a $50,000 down payment to buy a new four-bedroom home in Maricopa, for $250,000. It came with black granite countertops, cherry kitchen cabinets and a pool in back.Today, Ms. Campbell figures, the home is worth perhaps half what they paid in 2005.
Even that might be optimistic. Along a nearby highway, young men hired by a local real estate brokerage wave red signs touting "Homes From $69.9 K."
And:
Zillow.com, a real-estate information provider, estimates that 75% of all homeowners in Maricopa, including those with no mortgage debt, owe more on their mortgages than the current value of their homes. For the nation as a whole, the estimate is 18%....
One of the hardest-hit areas is Maricopa Meadows, a cookie-cutter housing development at the southern end of Maricopa. "We got in on the ground floor," Christian Price says ruefully.
Mr. Price, a financial adviser with an office in Phoenix, and his wife, Cindy, a photographer, liked the small-town feel. They paid about $180,000 for a four-bedroom home in early 2005. By late 2006, Mr. Price figures, the value had rocketed to about $270,000 amid a "frenzy" of speculation. Now, with foreclosure sales dragging down values, he thinks the home would sell for only around $50,000....
Rudy Dominguez, who administrates computer networks, will have to think that over. On a recent Saturday morning, he was hanging out in a white T-shirt and beige shorts at a garage sale being held by a neighbor who is moving away. Mr. Dominguez believes his Maricopa house now is worth about half the $213,000 he paid in 2006. He can afford the mortgage, but thinks the lender should reduce his payments. "If they're not going to help me," he says, "they can have it."
This is why Geithner's plan (although it seems to be evolving. Maybe) is so crazy: there's no magic pixie dust that's going to solve this. Someone--probably multiple someones--is going to have to take the hit. The question is who takes the most damage: the owner, the lender, the loan bundler, and so on (and let's not forget the U.S. Treasury--that would be you). The music has stopped and there are not enough chairs (or perhaps any chairs)
And consider this about Maricopa:
The town of Maricopa, which isn't part of the nearby county of the same name, is about 30 miles south of downtown Phoenix and is separated from the city by an Indian reservation that remains mostly desert.
Thirty miles in the middle of fucking nowhere. And a bank was willing to lend $200-250 thousand for this? Utterly insane.
What's worse is that this will represent trillions of lost earnings that could be used for something productive--hell, using that money to dig holes and fill them up again might be more productive than overpaying for a house.
- Log in to post comments
*"It came with black granite countertops, cherry kitchen cabinets and a pool in back."*
Why, precisely is the quality of a home 2/3 defined by *the kitchen countertops* and *the specific type of wood the kitchen cabinets are made out of*?
It also enraged me that these things are considered oh so special - they are cheap, really. Anyone who pays the REAL cost of them should be able to have them.
In case you didn't notice, this also applies to housing in general.
The root cause of mortgage defaults is that housing prices were TOO HIGH to begin with. You can't blame the banks or the buyers nearly as much - a place to live is not optional.
The buyers probably made the best choice they could, and it still sucked this much. The real problem is the way prices were so out of line, which is really the result of insufficient regulation.
Excuse my language, but... Fuck.
There's no other word, I'm afraid. That level of negative equity is, AFAIK, unprecedented.
It used to be that the rule of thumb was that your housing payment should be no more than 1/4 to 1/3 of your income. Both bankers and home buyers have been all too willing to ignore this guideline, and the housing bubble popping is a result. While there is plenty of blame to go around to bankers, home buyers, and regulators, what is an individual to do? Loan officers need to find people to make loans to, home buyers need to find houses and often have specific requirements. I think that nearly everyone was making choices that seemed correct for them as individuals but ignored the bigger picture and led to this disaster.
At the risk of being flamed, I can't help but ask: Why on earth should the bank help Dominguez if he can afford his mortgage payments? It's not the banks' fault he bought a house that plummeted in value, nor is it the bank's responsibility to reduce his payments if his house has plummeted in value, and the bank lent on the basis of what homes there were considered to be worth when the loans were made. There's no evidence that the banks were irresponsible about whom they loaned to in this case. His attitude that the bank should help him out or he'll just walk even though he can still afford the mortgage reeks of an attitude of entitlement.
Did WSJ really say "administrates"?
As I understand it there is no real reason for the community to exist there. The intersection of needs, wants, and the resources to make it all happen are artifacts of a time that had passed before the foundations to those homes were laid.
It is an overflow from larger communities fifty miles, or more away, and but for cheap gas and a heavy investment in infrastructure, the area is largely free of water, it wouldn't exist at all. As the economic turn causes families to collect into tighter units near work and services, and the real price of water, car ownership and gasoline rise the shine comes off these communities.
The homes there are like handing a drowning man a bottle of Perrier. It doesn't matter how fine the water, or the house is, it isn't an appropriate placement of resources. They could have been built on the dark side of the moon for all the good it does.
Yes, there is a market for quasi-luxury houses in the desert. But not many people can really afford such a house, the cost of transportation to and from, and bringing infrastructure and resources to it.
Built in the thousands there is only need for a few hundred. Supply and demand. A large supply sits idle courting few customers. It is natural that prices would fall.
People were sold a dream. An impractical and frivolous dream. Now it is Christmas mourning and the presents are open. The new has worn off and it is clear to everyone that it simply isn't as nice, and fun, and joy bringing as the advertisement showed. In the end the fine, happy family on TV that sold you the dream are just actors working as carnival barkers tricking rubes into trading their hard earned money for a cheap thrill and empty package.
The carnival has left town, the builders and bankers have left out the back way with their bags of cash and the starry eyed dupes are left standing in an empty desert, surrounded by abandoned houses, fifty miles from anywhere, with their granite counter tops, antique bronze doorknobs, hardwood floors, and a mortgage they can't afford. Steinbeck would write a novel.
If y'all think it's bad where you sit, the people I work with live in Maricopa. They didn't choose to buy houses there because it was trendy, they did it because it was the most affordable housing within a 40-minute drive from work.
Queen Creek (where I was born, FWIW) is worse both in terms of housing prices and traffic congestion. Never mind that the "100-year water supply" certification for Maricopa is pure fiction -- it's in the middle of a freaking desert and every gallon of groundwater is just as oversubscribed as the mortgages.
I know people who are so sick of the whole mess that they're planning to walk away and let the banks deal with it. While I approve of their decision to leave Arizona, I really wish they could find a better way to manage the details.
Man, I was thinking, "What I wouldn't give to be able to buy a single family home in my area for $250K." But yeah, bad call on the banks' part.
Orac,
I tend to agree with you on an ethical/emotional level. The house was worth $250K to you when you bought it, so it should be worth $250K to you now. Eat it. At the same time, if you loaned money to the bank for a bad venture and they had the opportunity to walk away from it and stick you with most of the loss, you can bet your bottom dollar that they would. It's the economically rational thing to do.
This may just be a case of the end consumer acting as ruthlessly toward businesses as businesses act toward each other all the time.
"Queen Creek (where I was born, FWIW) is worse"
I can believe it--when I first started "bubble watching" back in 2004-5, Queen Creek had already achieved legendary status as a bubble epicenter.
Yep, a lot of these developments that sprang up in the southwest, the Inland Empire of CA, and like places, are just going to get wiped off the map. Ghost towns of the future.
When any property is worth less than your outstanding loan AND you can afford to walk away from it, then it is in your best interest to do so. That is a legal (although somewhat unethical) option.
And when the bank puts the property on the market at 1/4 the original value, you could always buy it back with a much reduced mortgage.
So, it is in the bank's and borrower's best interest to cut out all these shenanigans and to accept the walk-out/rebuy as a fait accompli and renegotiate from that point.
--
Martin
An idea for more than just Maricopa:
The banks and the borrowers need to revalue the mortgages based on current property rates. If it was worth 100k when you bought it and you put down 10k, but is now worth 50k, your equity drops in half and the bank's equity drops in half. Your down plus equity are cut in half but what you owe the bank is also cut requiring far lower monthly payments. This is re-evaluated quarterly until either the house is sold or it's value reaches it's original basis. This spreads the loss and keeps folks in their homes.
thanks.
very thanks for article