Housing Is Bad Enough, but Wait - It'll Get Worse

by: Kevin G. Hall, McClatchy Newspapers

Washington - If you think the housing slump can't get much worse, Martin Feldstein thinks that both home prices and the broader economy can - and very likely will - get a whole le lot worse.

The Harvard University professor and former chief economic adviser to Ronald Reagan isn't part of the crowd that continually forecasts doom. For two decades, he's headed the National Bureau of Economic Research, which officially determines when U.S. recessions begin and end.

So when he spoke on Monday night at the annual dinner of the National Economists Club, a gathering of like-minded wonks, Feldstein's grim calculations were noteworthy.

"There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That's one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages - mortgages with negative equity  " the median loan-to-value ratio is 120 percent."

That means about 25 percent of all U.S. mortgages are exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that's now 20 percent higher than the value of the home.

That's bad - but it's likely to get worse.

A recent rreport by First American Core Logic, a real-estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater.

Together, these two categories account for 23 percent of all properties with a mortgage. Nevada led all states with 48 percent of homes with negative equity. Florida and Arizona each had 29 percent of homes with underwater mortgages, while 27 percent of mortgages in California were upside-down, the group said.

If home prices fall another 10 to 15 percent, as measured by the Case/Shiller Home Price Index, then four out of every 10 mortgages in the U.S. could be underwater, Feldstein said.

"At those levels, it's hard to see how many people are going to be willing to keep up with their mortgages," Feldstein said.

The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation.

That means that for homeowners who owe 35 percent more than their homes' value, it would take, at historical averages, about 15 years just to break even on their home investment. They won't build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing.

Not all real estate experts buy Feldstein's stark numbers.

"That's the highest percentage I've heard from anybody, by quite a bit," said Rick Sharga, senior vice president for Realtytrac, an Irvine, Calif., company that publishes foreclosure data.

More conservative forecasts, though still dismal, point to a smaller drop in home prices of 5 percent to 7 percent, he said.

Added Jay Brinkmann, chief economist for the Mortgage Bankers Association in the nation's capital, "If you generalize the numbers too far, I think it leads to some incorrect conclusions."

The Case/Shiller Index is driven by home sales that have taken place. It doesn't reflect the stability in older, established neighborhoods, Brinkmann said. The vacant and for-sale rates nationwide for homes built before 2000 - that is, pre-boom - is js just 2 percent. The delinquency and foreclosure problems are concentrated mostly in a handful of states, such as California, Florida, Arizona and Nevada, which had overbuilding and weak lending standards.

"Those states have about 25 percent of the mortgages and 50 percent of the foreclosure starts" in the latest association survey, Brinkmann said. Nationwide, 6.4 percent of all mortgages were delinquent through June, but the number of delinquencies and foreclosure starts are breaking records every quarter, the most recent MBA survey said.

Brinkmann's own rough guess is that somewhere between 6 million and 8 million mortgages are underwater, still a very high number. He doesn't see the national outlook getting better any time soon, framing his estimate of when that happens in the form of a question: "When does the influence of these massive declines in California and Florida go away?"

Realtytrac's forecast isn't any brighter.

"The best-case scenario in terms of the real estate market is we probably bottom out between mid-year and the end of 2009. And that's the best case from where we're sitting," Sharga said. "The only reason it could happen that soon is because of how rapidly and how severe the downturn has been in the housing market."

A lot would have to go right to reach that best-case scenario. Government and industry efforts would have to step up efforts to forgive or make up the difference between the value of the mortgage and the value of the home.

The final batch of subprime mortgages scheduled to reset to a higher interest rate will have done so by the end of the first quarter of 2009.

In a rare bit of relief for one segment of the housing market, the interest rates that determine the monthly payments for some adjustable-rate mortgages are falling.

Sharga said, however, that the next problem is the $60 billion of adjustable-rate Alt-A mortgages, which fall between subprime and prime loans. Millions of these loans are scheduled to reset next year to higher interest rates. That could bring monthly mortgage payment increases of $1,000 or more if the loans aren't modified or refinanced.

All this is happening amid what now clearly is a deepening recession, with the highest job losses and deepest drops in consumer spending in decades. The Labor Department reported on Thursday that weekly jobless claims jumped to 542,000, a 16-year high, last week. That suggests a fast-deepening recession.

The White House Thursday acknowledged for the first time that it now supports efforts in Congress to extend unemployment benefits for longer periods to the millions of Americans who can't find work in the downturn.

Consumer spending drives about two-thirds of U.S. economic activity, and as unemployment mounts and consumers retrench, that leads to even more unemployment, mortgage delinquencies and foreclosures.

"The problem now is what will be happening with jobs," Brinkmann said.

Condo owners and the homeless co-exist in Bellingham

From THE BELLINGHAM HERALD November 12, 2008

BELLINGHAM -- With a fierce stare, Pastor Chuck Sargent describes how homeless people he's feeding have slashed his tires, only to come back later and apologize. He says one is threatening to kill him. The rules prevent sleeping on the property, but drunks still pass out on the front porch.

From the log-cabin-style building in Old Town, Sargent and his Church on the Street Bellingham practice tough love for the homeless. But he's first to admit it's not easy.

That's why he doubts the city's plan to transform the industrial area -- Bellingham's Skid Row, as one neighbor calls it -- into an urban village with commercial-residential buildings and a mix of people. He doesn't believe the homeless and condo owners will blend.

"If they can't co-exist with the people ministering to them, how are they going to co-exist with the people who give them nothing?" he asked. "You're asking for trouble if you develop this into high-rises."

The city's plan calls for redeveloping Old Town, which is between and includes parts of the Lettered Streets neighborhood and downtown.

Will the homeless and condo owners mix like peanut butter and jelly, or oil and water? Will their presence slow redevelopment? Or will redevelopment simply push them out?

Opinions vary. But city officials and a New York-based group specializing in public spaces say successful redevelopment has been done elsewhere and can work in Old Town.

"Design for your hopes, not your fears," said Ethan Kent, a vice president at New York-based Project for Public Spaces, which in 2006 advised leaders in Whatcom County. "Building a city out of fear of that population is not going to create a great city."

The City Council in March approved the Old Town plan, which calls for adding between 860 and 1,120 housing units and up to 400,000 square feet of commercial space by 2022.

The city already has invested about $8 million in local, state and federal money in Old Town, and it has committed to millions more. Money has been spent on environmental restoration of Whatcom Creek and improvements to Maritime Heritage Park and Holly and Central streets.

The city is now waiting for redevelopment to happen.

Stakeholders disagree on how a visible homeless population will affect those efforts.

Developer Fred Bovenkamp is optimistic that redevelopment can happen with the homeless there. He owns land and is planning projects in or near Old Town. "I would walk that area any time of the day or night and not feel unsafe," he said.

One of his projects includes 63 housing units and 5,000 square feet of retail/office space at the former site of Hempler's meat company at F and Astor streets. That's across from the Lighthouse Mission, which provided nearly 9,000 meals in August. But in the more than three years Bovenkamp has owned the site, he's never had vandalism.

Bovenkamp said the city erred in letting Lighthouse Mission Ministries take over three corners of F and Holly streets -- the gateway to Old Town. Lighthouse is now building that third part -- a $1.5 million, 25-bed shelter opposite its main facility.

Still, he said, the mission provides crucial services in the community, and redevelopment could co-exist with the homeless.

Lighthouse Executive Director Ron Buchinski hung up on a Bellingham Herald reporter and didn't respond to several follow-up messages. He did not comment to the city during creation of the Old Town plan, said Tara Sundin, who managed forming the plan.

Bovenkamp points to Seattle's Belltown as an example where condominiums successfully moved in next to homeless services. Belltown has more than 8,600 housing units, at a density of about 40 per acre, and the city of Seattle wants 4,700 more units there by 2024.

Bellingham officials hope redevelopment will attract more people to what some people have nicknamed "Maritime Homeless Park."

"That will, I think, really help the comfort of the park and will bring more people down there," Sundin said. A planned playground there will also draw families with children, she said.

Others aren't so confident.

Old Town property owner John Lemperes last year told city staff he was concerned about the impact to the homeless and that redevelopment might be limited by their presence.

Michael McAuley, vice chairman of the Lettered Streets Neighborhood Association, said the homeless create "a redevelopment challenge for that part of town."

The Lighthouse Mission has done a fantastic job of helping homeless, he said, but the more it expands the less businesses will want to locate in what he called "Bellingham's Skid Row." He suggested the city help the mission relocate.

"The city is optimistic, I think, in glossing over some of the problems," he said, "because they just don't know how to deal with it."

What will happen to the homeless amid redevelopment?

Developer Ken Imus remembers when Fairhaven was empty lots, stray animals, taverns and drugs. In the early 1970s, he bought his first building and spruced it up. He's also constructed new buildings. It took years, he said, but he eventually helped create a new atmosphere.

Redeveloping and cleaning up Old Town means the homeless have to go, he said. But he doesn't have a solution.

"You can't have it both ways. You can't have transients and homeless and expect grandma to bring the grandkids and come shopping," he said. "It's been proven around the country. It just doesn't work."

Chris Grabber, a homeless man who volunteers at Church on the Street Bellingham, fears the homeless will be pushed out.

"What the city will do is put the high-rises in, and that will be the reason to boot the homeless out of here," he said.

Others say a blending of demographics will benefit everyone.

In successful redevelopments, no one demographic dominates the public space, said Kent, of the Project for Public Spaces. The best way to handle areas with homeless is to bring in other people with new developments designed to create attractive, vibrant shared public spaces, he said.

Using those spaces actively -- with outdoor concerts, vendors and outdoor cafe seating -- also helps make the area feel safer, he added.

NY Times: Affordable Housing Deals Are Stalling

By TERRY PRISTIN November 12, 2008

At a time when projects all over New York are being canceled or postponed, a development team that plans to transform a weedy site in East Harlem into a 12-story rental apartment building had cause to celebrate last week. Despite the economic downturn, the partners were able to complete the financing for the $65 million building and schedule a groundbreaking for next Tuesday.

The building, which is to rise on a site at 124th Street and Second Avenue that is a patchwork of 10 city-owned and private lots, will be known as the Tapestry. Half of its 184 apartments will rent at the market rate, while 30 percent will be set aside for people whose household income is less than 130 percent of the New York area median income, which is currently $74,600, and 20 percent for people who earn only 50 percent of the median income.

Getting a project like this under way is usually a time-consuming exercise. The developers — Jonathan F. P. Rose and Nicholas and Gerard Lettire — had to stitch together a daunting array of tax credits, tax-exempt bonds, loans and grants.

But even these days, money is available for well-structured projects, said Mr. Rose, who has been developing affordable housing around the country for 19 years. “The developer has to have a good track record, and financial strength, and the project has to be well thought-out,” he said in an interview in his Fifth Avenue office.

He said he hoped to close the financing next month for two more income-restricted projects — one in Albuquerque and another in Harlem, on 140th Street and Riverside Drive, to be developed in partnership with the Fortune Society, a nonprofit organization that provides services to ex-convicts.

Affordable housing is said to do better than other real estate sectors in a bad economy because government subsidies are available, land and construction costs fall and demand for the apartments rises.

But because of the toll that the credit squeeze has taken on financial institutions, busy developers like Mr. Rose may be more the exception than the rule. Though the need for affordable housing is likely to grow as unemployment worsens, specialists in mixed-income rental housing say that many developers — especially outside of New York, Los Angeles, San Francisco and Chicago — are finding it difficult or even impossible to put their deals together.

“We think there is an enormous slowdown in the production of affordable housing that’s happening right now,” said Richard Paul Richman, the chairman of the Richman Group, a company based in Greenwich, Conn., that develops affordable housing nationwide. “We believe that the shortage of equity is so severe that even qualified developers won’t get funded.”

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