Virtual Open Houses

The lead story in USA Today suggests we may never again see housing prices as high as they were two years ago. That may be an overstatement.

Here's the newspaper's logic:

"Existing homes grew in value by less than 0.5% per year, after adjusting for inflation, from 1950 to 2000. From 2000 to 2006, home prices rose at an average annualized rate of 8.2% above inflation and peaked with a 12.3% jump in 2005." In other words, we could again see five decades with very modest real price appreciation.

And prices still may have a way to fall.

"So far, home values nationally have tumbled an average of 19% from their peak. As bad as that is, prices would need to fall as least 17% more to reach their traditional relationship to household income," according to a USA TODAY analysis of home prices since 1950. "In that scenario, a $300,000 house in 2006 could be worth about $200,000 when real estate prices hit bottom."

I'm not saying I support this dour thesis, just reporting it.

A four-building, 790,000-square-foot warehouse/distribution portfolio in Visalia, Calif., has been acquired by A&B Properties, the real estate subsidiary of Alexander & Baldwin Inc.

Settling a dispute over construction conditions at Manhattan’s World Trade Center, an arbitration panel has ruled that the public agency that owns the site has not finished preparatory work necessary for construction of two office towers. The decision will require the Port Authority of New York and New Jersey to pay developer Silverstein Properties Inc. millions of dollars in additional penalties because progress on the towers is being hampered. But both the agency and the developer also won high marks from the panel for their willingness to work together.

Foreclosure filings dropped 7% from October to November, according a report released Thursday. But don't break out the bubbly. The tide of foreclosures may be ebbing now, but the flood isn't over yet according to analysts.

More than 259,000 homes received at least one foreclosure-related notice in November, down 7% from October, but 28% higher than a year ago, according to the research firm RealtyTrac. Some 78,000 folks actually had their home repossessed.

The falling month-over-month number doesn't mean there's a bottom to the crisis. Many lenders have initiated foreclosure freezes for the holidays. And some state laws have made it more difficult for lenders to take back homes.

Indeed many experts expect a spike in foreclosure filings in the new year. Some homeowners are deliberately not making their payments to try to qualify for loan modification programs. Other homeowners who entered into payment plans with lenders earlier in the year may still find themselves unable to cover their expenses.

The Federal Reserve predicts that new foreclosures this year will reach about 2.25 million, more than double pre-crisis levels.

In RealtyTrac's report, Nevada, Florida and Arizona had the nation's top foreclosure rates.

Guest blog from BusinessWeek Banking Editor Mara Der Hovanesian:

Bill Frey, an avid investor in mortgage securities, seems to put his money where his mouth is. This summer, he vowed to sue banks over forced mortgage modifications, arguing that they would bilk bondholders like him out of promised income. Indeed, on Dec. 1, he lodged a class action lawsuit against Bank of America for its plans to change the terms on some 400,000 home loans. Frey believes that if these contracts are broken they will forever damage the secondary market for mortgages, which has been the financing engine for funding home purchases in America for decades. See our story on Frey's lawsuit here.
But that’s not the end of Frey’s radical ideas. He’s been writing Congress about some ways to fix the housing market. He’s certainly not going to win any popularity contests with these suggestions, but the ideas seem to be grounded in common sense. A Dec. 2007 article in the Atlantic broached the subject of eliminating the mortgage-interest deduction. Maybe these other ideas will also gain traction.

Read on for an edited version of Frey’s ideas:

1. Eliminate the 30-year fixed rate loan
Frey says that the 30-year mortgage, a mainstay in home lending, should be eliminated because the time line is far too long and poses far too much risk for investors. Banks and investors must hedge their bets against prepayments (which are rampant in refinance booms for one) and as a result often stretch and take risks or use accounting gimmickry to do so. His solution is to introduce loans with 30-year amortization, but that are renegotiated every five years. These types of loans are common in Canada and other countries.

2. Set underwriting standards for loans that are securitized
Creating a maximum loan-to-value (LTV) underwriting standard for securitizations would raise the quality of loans across the board. This standard LTV, while subjective, should probably be 80%. Loans originated above this threshold should stay on banks’ books. This would force a more careful credit review by originators of such loans.

3. Phase out the home mortgage deduction
A tax subsidy encourages homeowners to take on too much debt, which places the risk on society in general. Better to give favorable tax treatment for the equity in the home, starting with the down payment. This credit would obviously need limits, but the concept of subsidizing equity, as opposed to the debt, would remove some of the systemic risk placed on society by high loan-to-value mortgages. Furthermore, additional periodic principal pay downs could trigger some sort of partial tax credit in the first few years of a loan’s existence. This period has historically been the time in which defaults have occurred.

4. Limit the use of home equity loans
The logical limit for the use of home equity loans would be to forbid their use in the purchase of a home. Instead of using home equity loans as down payments, prospective homeowners would have to actually save and place their savings into a house as a down payment. While this concept may seem logical, it was forgotten over the last several years. Furthermore, post-purchase limits based on home purchase price or current market value should also be in place. Large scale use of homes as piggy banks places the financial system at an unacceptable level of risk.

5. Force Wall Street firms or underwriters of mortgage securities to own a portion of what they sell off to investors
The issuer of mortgage securities should swallow the first 1% of losses on the mortgages it sells as securities. It should be required to hold this position for no less than three years. This would insure that any errors in packaging and underwriting would be taken as a loss by one of the parties that are best able to avoid the bad loan decision.

6. Wall Street issuers of mortgage-backed securities should not indemnify the trustee of the MBS from bondholder lawsuits that result from improper servicing or other servicing errors
Trustees of an MBS securitization are responsible for enforcing the contract rules as a fiduciary of the bondholders. Ironically, they themselves are protected, which is like the fox buying off the guard of the hen house. As a result, there is no one guarding the interests of the bondholders.

7. Homeowners should be penalized in the event of a foreclosure
Laws must prevent borrowers from avoiding personal liability in the event of foreclosure. Such laws would encourage homebuyers that run into trouble to not abandon their homes. Post-foreclosure liabilities are common in England and discourage homeowners from walking away from their obligations. Such liabilities could, of course, be dismissed in the event of bankruptcy. While these changes may sound radical, they are essential to reducing the probability of a systemic housing meltdown and in mitigating that downturn, should this type of housing problem recur in the future.

Serota Properties has submitted a proposal to develop a $300 million mixed-use community on 136 acres at the corner of Sunrise Highway and Veterans Memorial Highway in New York’s Islip, Long Island.

Newspapers and TV stations across the country have been having a field day with latest Census data. The bureau is reporting information every three years--rather than every ten. It includes such stats as the twenty fastest growing mid-sized counties. Lincoln County South Dakota, congrats. In addition to steller population growth, Lincoln County residents are getting smarter. The number of people 25 and over with a bachelor’s degree there increased 82%

Not the everyone in South Dakota is happy about the data. Bloggers at the Madville Times are noting what a disaster the Bush years have been for the country, including 77% of cities showing their median income drop since 2000.

Folks in Muskegon, Michigan (that's it in the photo) aren't too happy either. According to the census data, the City of Muskegon was the hardest hit in the country by job losses. Muskegon led the entire nation in unemployment in the period 2005 through 2007 with a jobless rate of 22.1% That was more than triple Muskegon's rate at the time of the 2000 census. Detroit came in a close second with 21.6% unemployment.

Locals say the census bureau results for Muskegon were more than double the official unemployment rates reported by the State of Michigan's Department of Labor and Economic Growth for the same years.

Two Ohio towns were listed amount the poorest in the nation. Folks in Oxford and Athens say they are unfairly ranked because of their large student populations.

And guess what, Long Island, N.Y. is more diverse. The Asian population of that original master planned community Levittown nearly doubling to 5%. Some cities on the island are seeing their Hispanic population top 60%. The white population of Harlem also doubled during the tracking period. That doesn't count former president Bill Clinton who merely offices there.

With the Bush administration refusing to enact FDIC Chairwoman Sheila Bair's controversial loan modification plan, lawmakers are taking matters into their own hands.

Mortgage applications fell last week, edging down after a surge in the week prior when the Federal Reserve's purchase of debt pushed down interest rates. That enticed many homeowners to refinance.