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Part II: Exurban Buyers Abandon Depreciating Homes    [

    Part I: Mortgage Crisis Triggers Walk-Aways
    By Mary Kane
    The Washington Independent

    Thursday 21 February 2008

Desperate decisions mark a shift in home ownership attitudes.

    To understand why the next phase of the nation's housing crisis might mean financially troubled owners just give up and walk away from their homes, look no further than the winding roads and carefully tended lawns of the Piedmont subdivision in the once-booming exurbs of Washington.

    Here, in Virginia farmland 40 miles south of the nation's capital, builders in the last decade carved out development after development - hundreds of homes in gated communities that sold in a snap. At Piedmont, people camped out in line to get a contract, buying into plans for 2,000 spacious, traditional-style brick homes with decorative lamp posts on every lawn. The prices - at $600,000 and up - might seem high in softer markets elsewhere in the country. But in this expensive area, they felt affordable to people willing to trade a long and trying commute for a much larger home, adjacent golf course and community pool. Helped, of course, by interest-only loans, little or no down payments, and adjustable-rate mortgages.

    But Piedmont's amenities don't mean as much to many of its homeowners these days. Housing prices haven't just dropped - they've tanked, falling by as much as $200,000 to $250,000. By one estimate, some 80 percent of new listings here are either foreclosures or short sales, in which owners give their houses back to the bank at a fire-sale price, leaving their credit intact. Should the bank accept the short sale, it forgives the remainder of the mortgage. But banks often reject short sales. If owners can't wrangle one, and they still want from under their loan, they might have to bring $200,000 in cash to closing, just to sell their house at a rock-bottom price.

    Think, for a moment, about the likelihood of that actually happening.

    Across the country, more than 30 percent of homeowners who bought in the last two years are now saddled with negative equity, meaning they owe more on their mortgages than their homes are worth, the research firm Zillow reported recently. Those homeowners can't easily sell or refinance their way out of those loans, especially with house prices still falling. The Wall Street Journal described this as a vicious cycle, giving borrowers "an incentive to walk away from their mortgages."

    It's more fodder for a blogosphere already inflamed by the prospect of widespread walkaways, prompted by Bank of America CEO Kenneth Lewis' observation that social attitudes toward default have changed, making walkaways culturally acceptable. Fear of walkways also motivated a recent plan to delay foreclosures for some borrowers. Although walkaway reports remain anecdotal so far, "I think there is a real tendency to move in that direction," Susan Wachter, a real estate professor at The Wharton School at the University of Pennsylvania, told the Orange County Register recently.

    In the meantime, short sales, or at least attempts at them, are climbing as the next best thing, boosted by a Bush administration move late last year to let homeowners off the hook for taxes on the forgiven mortgage debt. Word on the cul-de-sac at Piedmont is that behind closed doors, many people haven't paid their mortgages in months, sometimes many months, but banks aren't foreclosing right away, as had been the norm. They're moving slowly, the whole system clogged by other foreclosures. In California, it takes so long for banks to foreclose that attorneys advise people simply to stay in their homes, go on with their lives, pay down credit debt and wait for the notice - a modern, upscale version of squatting. As they wait for to hear from the bank, some Piedmont owners try to pull off a short sale, work out a repayment plan or just sit tight, playing a financial game of cat and mouse that doesn't always end well for either side.

    Trina Arce, 30, much to her dismay, is playing that game.

    She stirs her tea while leaning on a granite countertop in the gourmet kitchen of her Piedmont home, the one she and her husband can no longer afford, the one they've listed for three months now as a short sale: "When we moved in we thought we'd spend the rest of our lives here," she said, pointing to the expansive rooms with gleaming wood floors."I used to say, 'I love our house. It's so wonderful. We're going to live here forever.''' Now I just say, 'God, I hate this place. I just want to get out of here.'"

    The fact that owners here and in other overpriced markets around the country are willing and even eager to give their homes to the bank at a huge loss, or that they might consider walking away, is proof that the mortgage crisis has altered in significant ways the long-held American dream of home ownership. It's cast a pall on the once-reverent relationship between buyer and house, a shift in attitude likely to have effects for years to come, even after the housing market eventually shakes off its excess inventories and returns to normal, whatever that might come to encompass.

    People once valued their homes above all. In studying consumers who filed for bankruptcy, experts found that they'd hand over their credit cards, their cars, their savings, whatever else they had, even if it made no financial sense, just to keep their homes. There was shame, or sadness, the pain of losing a long-treasured home, the embarrassment of failing on a mortgage, the melancholy of older couples leaving behind the homes where they'd raised their families. Losing a home conjured images of the Great Depression, memories of hard times shared by grandparents around the kitchen table.

    Now there's just relief.

    Arce and her husband, Pablo, bought their five-bedroom house in 2004 for $605,000 with an interest-only loan, watched it climb in value quickly to $750,000, and then witnessed its steep decline, beginning last year. Panicked, and worried about mortgage payments that are only going to rise, they put it on the market last summer for $550,000. No takers. Lowered it to $525,000. Then $500,000. Nothing. For the past three months, it's been at $450,000, and offered as a short sale. It's not moving.

    Each morning, they say hello to neighbors out to pick up the morning paper or to enjoy a walk, who bought foreclosed homes at the bottom of the market, paying $420,000 or so for places just like theirs. So they deal with that, on top of the stress of trying each month to scrape together the mortgage payment, something they just can't manage anymore. They've got a lively two-year-old daughter and another on the way. It's either a short sale or… disaster.

    They don't want to walk away and ruin their credit. They don't know what to do. And that's the hardest part of the waiting game-not being sure what might happen next, with none of the alternatives looking particularly good.

    "It's crazy," said Arce, whose income as a mortgage broker took the same steep fall as housing prices. "We just want to get rid of it. It makes no sense to sit here and pay $4,000 every month for the same house that's selling down the street for $200,000 less."

    If the craziness incites people to give up and walk away, no one should be too surprised, said Joel Kotkin, author of "The City: A Global History" and an expert on social, economic and global trends. Just look around. "All you have to do is go to parts of the Midwest that are filled with farms that have been left behind and abandoned and that had been there for generations," Kotkin said. "This is a capitalist system. When things don't go well, we move on."

    And on. And on. Since Levittown rose from Long Island potato fields after World War II, the path to home ownership has led further and further out from the cities to new developments, with bigger and bigger homes. It's precisely those exurbs that are most vulnerable in the foreclosure crisis, Kotkin contends. Look at Stockton, Calif., or Modesto, hit especially hard by mortgage problems, far from jobs, cities, and schools. They are communities that don't really have a reason to be there, other than that's where they are. "You have places where people haven't lived for a long time and they don't have particularly strong roots," Kotkin said. "There's not a lot of reason for them to stay. It's why rootedness is becoming a very important thing."

    It's also why the relentless expansion into the exurbs might stall. Even before the mortgage crisis, exurbs were coming under closer scrutiny due to the high costs of maintaining the large homes and transportation expenses, said Kenneth T. Jackson, author of "Crabgrass Frontier," an influential history of the expansion of American suburbs. Now that houses there aren't exploding in value, it makes them an even less promising place. "As energy costs go up, the ability to move further and further off is going to be impeded," Jackson said. "I think there will be a slow change, an evolution over the next 15 to 20 years. It will be a movement not just back to the city, but to higher density, and to less of a tendency to move far out on the fringe."

 

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    Go to Original

    Part II: Exurban Buyers Abandon Depreciating Homes
    By Mary Kane
    The Washington Independent

    Friday 22 February 2008

Empty houses, rentals redefine new developments amid mortgage crisis.

    Since the mortgage crisis began, cities have been dealing with the problem of abandoned and vandalized homes that banks foreclosed on but cannot sell. It's different in the exurbs. There aren't boarded-up windows or trash-filled yards to give away the foreclosed status of bank-owned homes in Piedmont, a housing development some 40 miles south of Washington. There's just the quiet. On long S-shaped streets that meander throughout the development, enough houses stand empty that there's little noise one morning but the fluttering of the "for sale" signs. Orange stickers in some windows announce the home has been winterized, with warnings not to turn on the water - an indication that no one has lived there for a while, and no one plans to anytime soon.

    On a cold but bright day recently, Lisa Hilgenberg, 37, a trim, cheerful woman with light brown hair and an easy smile, sat at a table in her house beside a large window that lets the sun stream through. The window overlooks a grassy common area where neighborhood children can run and play while their parents watch, and socialize, from overhanging back decks or on lawn chairs. "It's really nice here for the kids," she said, pointing also to the pool, within walking distance. Hilgenberg explained that while her home value has also dropped, she's not particularly worried. Though their broker gently teased them about it at the time, she and her husband decided against an adjustable rate mortgage and stuck with the old-fashioned, 30-year-fixed loan. With two young children to raise, they're not planning to leave anytime soon, either. They're not at a crisis point, like some owners.

    But they can't control what's around them, the way real estate trends come home to roost, right in their backyard. Hilgenberg pointed to the houses that surround hers: "This is a rental, so is this one, and this one, and the one over here," she said.

    When the Hilgenberg family moved in three years ago, investors were flipping houses, and neighbors came and went, some of them renters, some investors, and some, well, who knows. Now that the market is falling, houses again sit empty for months, or turn over to a succession of renters. It hasn't done much for neighborhood stabilization. "So far, we've been lucky with the renters right in our block," Hilgenberg said. "But I've been hearing a lot of things that not all the renting is going so well." That's been the hard part: " You buy into a neighborhood," she said, " and you want it to maintain its quality of life."

    Already, someone vandalized the tot lot down the street, tearing down the fence around it. A house nearby sat empty so long some plantings died. Renters trashed a house and skipped out on a lease. These are not things you expect in the exurbs. This is not the Hilgenberg's dream of home ownership. "I don't think this neighborhood has ever really settled," she said.

    To Barton Smith, an economics professor at the University of Houston, Hilgenberg exemplifies what he considers an overlooked aspect of the foreclosure crisis: The "good guy" who pays the mortgage, stays in the home, and watches his values fall by 25 percent or more. The one who lives everyday with the sometimes devastating effects of all the foreclosures, renters moving in and out, houses sitting empty and other disruptions; the people and neighborhoods left behind when others walk away.

    Smith should know. He lived in Texas during the 1980s oil and real estate bust. Thousands of houses in Houston were foreclosed on and a significant percentage involved people who walked away, Smith said, though no one has exact numbers. Neighborhoods that were once 100 percent owner occupied turned 60 percent rental. In Houston, with its lack of zoning laws, it meant that homeowner associations shrank in influence as well, and some neighborhoods began to deteriorate. At least "a couple of dozen" of Houston neighborhoods have never fully recovered, to this day, Smith said.

    To him, what went missing during the latest housing boom was any mention of the fact that homeownership costs more than the mortgage. There's maintenance, taxes, and utilities - all those high ceilings mean a house costs a lot more to heat. Home ownership rates climbed to record highs of nearly 70 percent by 2004 and politicians crowed about it, without anyone stopping to question whether that was an unqualified good thing.

    "We've oversold the notion of home ownership in this country," said Smith. "Not everyone should own a home. It makes for good political rhetoric. But it's nonsense."

    Like neighborhoods with foreclosures and owners stuck with negative equity, the economy faces a painful adjustment ahead.

    Most of the economic recovery from the bursting of the technology bubble in 2000 was overly dependent on housing, says Sherle Schwenninger, director of the Economic Growth Program at the New America Foundation, a Washington think tank. Jobs, incomes and spending grew hand-in-hand with the housing boom from 2002 to 2006. Some 70 percent of the increase in net worth during this period was tied directly to real estate appreciation.

    "What this means is that for a period of time the housing sector generally is no longer going to be a driver of economic growth and consumption," Schwenninger said. "It's going to be a major drag. The problem about the deflation of the housing bubble is that it's a long process."

    On the ground, that means owners will struggle for some time with too many houses built and sold at inflated prices. "In some blocks in places like Sacramento, every fourth house has for sale sign on it and none of them is moving," Schwenninger said. "Some people aren't going to be able to hold out."

    And some will take it harder than others, he said. An older generation of homeowners has lived through bubbles and their aftermath before. An entire younger generation has not. Instead they grew up on the idea that housing prices always go up, especially in brand new exurban developments.

    In 2002 the Arces bought their first house, in a development just down the road from Piedmont, for $277,000. In the few months it took to build the house, it appreciated by $60,000. Two years later, they sold it for $450,000. They figured this sort of thing could go on for quite a while. Plus, their fortunes were becoming tied up in housing in other ways. Trina became a mortgage broker, Pablo sold mortgage-related insurance, and they had a couple of years where each one brought home a six-figure income. When Piedmont came around, Trina recalled, she said, "Hey, let's do this one more time, and make a little more money."

    It was one time too many. "I just want to move somewhere and rent really cheaply for a long, long time," Trina said.

    Marie Black, a neighbor, agrees with that view. She and her family are renting a house that sold for $680,000 and now is appraised at $510,00. The owner wants them to buy, but they're not particularly interested, given those economics. Renting, these days, seems just fine. "We're just taking our time," Black said. "I don't want to move into a house and have it be worth less than what we paid for it a few months later."

    For homeowners with no such options, the question of how they'll handle their negative equity remains far less clear. During the housing boom, people began to view their house more as an asset, than as shelter, noted Nicholas Retsinas, director of Harvard University's Joint Center for Housing Studies. That may influence their choices.

    "People make business decisions, and business decisions don't necessarily get tied into the psychological connection to a home," Retsinas said. " If it's an asset allocation decision, it's easier to say, 'I'm not going to keep my home.'"

    Given all this, some think it's not wise to push off the inevitable day of reckoning with voluntary workout agreements and foreclosure "pauses," or lower interest rates and stimulus checks. It's a 10-year bubble, and it's not going to be pretty as it bursts. Maybe it's just time to get that over with. There's plenty of blame to go around. Schwenninger ascribes the current mess to "the economy running on hyper consumer spending made possible by government policies" stretching back to the Clinton years, with the push to lower deficits and bring down long- term interest rates, continuing through the Greenspan era and its support of non-traditional mortgage products, and including the Bush administration's stimulus package.

    But looking back won't do much for people trying to figure out what's ahead. Or how to end the torture of just waiting.

    One day last spring, the Arces threw a birthday party for their two-year-old daughter in their backyard. In the sunshine children gleefully jumped around in an inflatable moonbounce. Guests munched on salsa and chips. Barbecue smoke wafted across the patio, one happy memory, at least, to salvage from a home that's become just a house now, and a burden too heavy to carry for much longer.