I was reading my July 7th issue of Business Week when I came across an article called “The Housing Abyss.” Of course, it caught my eye. Authors Peter Coy and Mara Der Hovanesian describe the current housing crisis as “entering a new and frightening stage.”
The article depicts how the drop in home values are fueling more foreclosures and more foreclosures are fueling lower home values… a vicious cycle of sorts. According to the article, “That process has already started in parts of Arizona, California, Florida, and Nevada. The drop in those markets ‘is being fueled with jet fuel,’ says James L. Smith, executive vice-president for portfolio services at Fiserv (FISY), a Brookfield (Wis.) company.” What’s more is a “survey of agents this year for Inside Mortgage Finance by Geosegment Systems and Campbell Communications found that about half of foreclosed properties have significant damage, which reduces a property’s value by about 25% (e.g., $100,000 on a $400,000 house). Ruined floors and carpets, holes in walls, and missing appliances lead the list.” We have all seen the affects of foreclosures in our neighborhoods, now just think about the affects on a large scale.
“The Housing Abyss” article also introduces the “buying and bailing” concept. A concept that makes me feel morally uncomfortable and yet, at the same time, jealous of those who are doing it. . .
“Steve Hawks, owner of RE/MAX Platinum real estate agency in Henderson, Nev., says he has been flooded with calls from people interested in ‘buying and bailing’—that is, buying an additional house while their credit is still good, then walking away from the old one unless they can cut a favorable deal with the lender. So far the number of people who have done so appears to be small. But Hawks says banks are receptive to lending for such purchases because they figure the buyer will be able to afford the new, cheaper place. Also, says Hawks, they know that, since the buyer’s credit will become damaged, he or she won’t pull the same trick on them, at least for a few years.”
As for a cure? The article does not paint any pretty pictures:
“Who can fix this mess? Certainly not lenders. They’re part of the problem. To repair their damaged balance sheets, they’re aggressively reducing lending. And they haven’t geared up for the wave of defaults. “The infrastructure is just not there,” says Joe Garrett, principal of Garrett Watts, a San Francisco-area advisory firm to mortgage bankers and brokers. . .
What more might government do? The Federal Reserve has already intervened heavily, of course. In addition to slashing short-term interest rates, it has extended more than $150 billion in secured loans to banks. Anything more from the Fed would leave it open to charges that it was subsidizing the banks and raising the risk of inflation.”
So, while this is a national (strike that… make that a global) problem, we are experiencing our own micro issues right here in Orange, Tustin, and Santa Ana. Just take a look at these ridiculous price reductions. If they don’t bring this problem home for you, I don’t know what will.
4 bed/2 bath house; 2,000 sq ft; built in 1961
Listed for $585,000 on Apr 10, 2008
Reduced to $575,500 on Apr 19, 2008
Reduced to $560,000 on Apr 23, 2008
Reduced to $525,000 on May 19, 2008
Reduced to $499,999 on May 30, 2008
Reduced to $427,000 on Jun 26, 2008
Reduced to $399,000 on Jun 27, 2008 (down 32% from original)
Details: Last sold for $615,000 on Dec 19, 2006.
4 bed/4 bath house; 3,300 sq ft; built in 2006
Listed for $1,399,999 on Sep 22, 2007
Reduced to $899,900 on Jun 23, 2008 (down 36% from original)
Details: Now short sale. Last sold for $1,165,000 on Mar 21, 2006.
4 bed/2 bath house; 1,595 sq ft; built in 1963
Listed for $561,000 on May 19, 2008
Reduced to $495,000 on Jun 9, 2008
Reduced to $339,900 on Jun 27, 2008 (down 39% from original)
Details: Last sale for $660,000 on Jul 31, 2006.
2 bed/2 bath house; 1,156 sq ft; built in 1948
Listed for $480,000 on May 4, 2008
Reduced to $270,000 on Jun 28, 2008 (down 44% from original)
Details: Last sale for $515,000 on Sep 27, 2005.