Some of the "victims" of the housing market implosion

From a recent article in the San Francisco Chronicle:

More than one-fifth of 6,557 Bay Area properties that fell into foreclosure from January through September this year were owned by investors, according to a Chronicle analysis of public records compiled by DataQuick Information Systems. Of properties repossessed by lenders, 1 in 6 had been owned by people who had two or more foreclosures in their names. Eighteen Bay Area investors had five or more foreclosures.

"During the frenzied period, you got people rolling the dice and buying as many properties as they could," said Andrew LePage, an analyst with DataQuick of La Jolla, San Diego County.

Easy money through no-questions-asked subprime mortgages allowed almost anyone to become a real estate speculator. The flood of investors and first-time home buyers into the market helped to fuel the Bay Area's double-digit price appreciation in recent years.

And 20+% is relatively low compared to some other places:

It's widely known that get-rich-quick real estate speculators flooded markets such as Las Vegas or Miami over the past few years. The Bay Area was presumed to have been relatively free of speculation because real estate here is so expensive. Indeed, the percentage of Bay Area speculators is modest compared with Las Vegas, where a Las Vegas Sun analysis found that 74 percent of single-family homes in foreclosure during a six-month period this year were owned by investors who did not live there.

The article only classifies "speculators" as people who owned more than one property that went into foreclosure, but that definition is too narrow.  In the Bay Area it got to the point where nearly everyone buying a house was a speculator.  The feeling was that no matter how high the price of a property might be, it was only going to go higher—and so people kept buying no matter how inflated the prices became.  And of course it became a self-fulfilling prophecy, as those who were willing to sign up for any kind of loan for properties at any price kept driving the prices to yet more insane heights.

There's a big push underway on the left to heap all of the blame for this orgy of greed on the banks and lenders, and absolve the buyers of their responsibility.  But while it's true that people who shouldn't have been buying homes at those prices were in some cases only able to do so because of the lending practices of the banks, it was still their decision to sign the mortgages.  There's a huge difference between being forced to go to a payday loan store because you need money right away to feed your family, and buying a $750K house you can't afford just because you were offered terms that would let you get away with it (for a few years, anyway).  I have a lot of sympathy for the former, but not much for the latter.

In another story on the housing market, the Chronicle ran a survey asking readers what they thought should be done about the problem, and to my surprise—given the flood of stories about "predatory lenders", bailouts, and so on—89% said "Let the foreclosures happen."  My feelings exactly.  I don't see why I should pay to bail out subprime borrowers, when the main effect it will have is to reward bad behavior, keep housing prices artificially high, and therefore do even more long-term damage to the very working class people that the left is supposed to represent.

Comments

[Save the Oocytes]

I dunno, John. Whether the government, um, encourages bad behavior shouldn't, I suppose, really depend on whether or not the folks were being jerks or not, but I have a hard time not feeling for all the people who are getting foreclosed on. It's possible this is just because I don't know much about this issue though.

Did you ever see this surprisingly prescient cartoon from March? I tend to have more sympathy with the "victims" than you seem to; I figure they're mostly not the amateur speculators you think of, but like Blinky the Very Nice Dog in the Tom Tomorrow cartoon: just trying to get a place to live, not knowing what the hell they were getting into. Most of the U.S. isn't after all major metropolitan areas like S.F., Vegas, or Miami. People in rural and semi-rural areas will probably be hit harder, maybe people who thought they'd found a good deal that'd let them get their first house and stretched themselves thin.

As for the proposed bailout, I don't have any clue what's right. I'm not about protecting people from the consequences of their own actions (now I sound like a Republican), but the situation seems really bad all around. Encouraging people not to do risky things with their money (now I sound like I'm their parent) is always good, but in the meantime, won't there be a lot of new homeless people? Possibly because I'm a softy or a moron, this whole deal, as respects the borrowers, sounds less like "learning responsibility" and more like just more suffering for the lower middle class.

[John Caruso]

No, I agree with a lot of what you're saying. It's definitely not a black-and-white issue, and everyone's situation is different, and I've heard some real horror stories (I meant to at least include a gloss about that, but it didn't make it in before I posted). To be clear, I didn't mean that everyone seemed to be a speculator in a literal sense—just looking to flip their house and make a buck. I meant it more in the sense that people here were talking about houses the same way they talked about stocks in the late 90's. They weren't buying houses because they had to, they were doing it because they wanted to, and the sense was that if you weren't buying a home that cost 10 times your own income you must be soft in the head.

The thing about the horror stories I've read is that they rarely include that question: so why did you buy this house? When you knew it cost over half a million dollars, but you only made $45K a year—what possessed you to commit to that big a loan? When you knew that interest rates were at near-historic lows and could only go up, why did you commit to a loan that would almost certainly reset to a higher rate in two years? When you were told you could get an "interest-only loan", why didn't that phrase strike mortal terror into your heart? It's like the "you'd think I would have anticipated this moment" line in the cartoon (yep, I'd seen it).

And it's easy to feel sorry for the people who're losing that beautiful house they could never afford and should never have bought, but I also think about the millions of others for whom home ownership is now out of reach thanks to those same people. A lot of the cities around where I live have commute-only unskilled workforces, and that's because those people can't afford to buy a house where they work anymore, and that's in large part because of buyers who were willing to pay any price for housing no matter how ridiculously high it might be. They're victims, too, and blameless victims to boot, but nobody seems to think about their side of it. And a bailout will only hurt them, by keeping prices at or near these artificial highs.

Anyway, I'm rambling but not saying much. But I do agree with you much more than my posting would imply. I'll ask one question, though: would you be willing to pay, say, $1000 of your own money to bail out the people who decided, of their own free will, to buy these overpriced houses?

[Save the Oocytes]

I got a sick streak, trying to decide who the okay people are and who the bad people are. "Just how ignorant was this person? Okay, and how greedy were they? Plugging these values in, I blame you this much. And I, of all people, am fit to judge." I'm not inclined to give a thousand dollars of my money for most of these people, but somebody who's going to be homeless, and won't be able to afford another home period... yeah, I guess I'd fork over some money for their next apartment. I'm restricting my hypothetical largesse to people who've somehow managed to plunge below the financial security level of the commuting laborers you refer to, though.

Even if someone deliberately shoots themselves in the foot, I'm inclined to give them bandages. But they have to bleed in line until the legless people people in front of them are helped. (How they're all standing there in the line, I don't know.) "To each according to need." Somehow the words come into my head: "economic triage."

Posted yet another reply to the old post on corporate consolidation, but it looks like Don Bacon got tired of you. Or maybe of me.

[John Caruso]

Given those restrictions, I might toss in a few bucks too. And I really have heard some heartrending stories (immigrants who didn't understand the financial and legal intricacies, people refinancing homes to get money to care for sick parents...). But overall I have the same response in this case that I do to people who've run up tens of thousands of dollars of credit card debt and find themselves facing financial ruin because they couldn't stop buying designer clothes and plasma-screen TVs. I just have much more sympathy for wounds that aren't self-inflicted (and that don't hurt others as well).

I saw your last reply on the FCC thread, though I didn't say anything because it was between you and Don. I thought you made some great points throughout your comments, and I was disappointed that Don didn't really have a serious response for you. I was sorry to see him go, and especially to see him (seemingly) go away mad...c'est la vie.

[Sick of condos]

Well, both of you are making some great points here.
Let me add one thing . . . condos.
Have you noticed that rental units are virtually disappearing?
If you live in an urban environment you'll see plenty of buidings undergoing renovations.
Losing their "for rent" signs only to be replaced by "for sale" signs.
A 1 bedrooom apartment, formerly renting for $600 and now selling for $599,000 is pretty difficult to stomach.
Where is a low-income family or a single senior supposed to live if they do not qualify for a home loan? It's easy to see how people might end up signing something they shouldn't have.

[gfod]

I am one of those people, so let me tell you my two stories.

In the early eighties, in Oklahoma, I bought a house. The words "negative amortization" were never mentioned, but that's the kind of loan I got. In other words, the monthly payment I made did not cover even the interest payment (forget about principal), so that the balance of the loan actually increased each month. The realtor was very careful to word the terms of the loan so that was not obvious, or maybe she outright lied. I even took my Dad, who was in the financial business, and it didn't raise any red flags with him. So it can happen. But then, I was in my early twenties and very naive. I thought it was so sweet of the bank to lower the interest rate so I could buy a house :-) I was very lucky that I did not get laid off from my job and that I could actually afford that house. I refinanced as soon as I could.

In the early oughts, here in the bay area, when sellers were getting multiple offers, thousands of dollars over the asking price, I actually put a bid on a town house. I admit, I got caught up in the frenzy and made an offer, of course over the asking price. On my way home from the realtor's, after signing the offer papers, I had a panic attack and nearly had to pull over to the side of the road to recover. I could not believe what I had just done. I should be older and wiser, right? Luckily, my offer was rejected by the sellers. I was so relieved! Now, as John discussed, I'm probably priced out of the market altogether because I refuse to pay $600,000 for a townhouse that I bid $300,000 on, that's probably only "worth" $150,000. These numbers are not an exaggeration.

So while I feel sorry for people who got a loan they could not afford, I also know that I worked my way out of my mistake and they probably should too. Maybe they should get a little help, but there is no way the financial institutions should get any help or bail outs. But even that is a gray area when you consider that a lot of those loans were repackaged, bought and sold several times over and some institutions didn't know what they were buying.

[John Caruso]

Sick o' condos: I am, too. There's been an epidemic of condo conversions here in San Francisco over the past few years, fueled by evictions of existing tenants (often poor and/or elderly), and symbiotically joined to the expansion of the real estate bubble (since the inflated housing prices made it more attractive for real estate developers to convert rental properties into condos). Just more negative effects of the buying frenzy. A few doors down from me, two flats in a building were converted into condos and sold for nearly $800K each—and they sold within a few weeks of being listed! They were spacious and pretty nice-looking, but not $800K nice. Utterly insane.

Now, all the people who've realized they can't make a quick profit in the housing market anymore are driving up rents here, too:

The apartment rental market and the housing market have traded places.

As the promise of big gains from the purchase of a home has waned, more people are being driven to the rental market, said Stephen Levy, director of the Center for the Continuing Study of the California Economy. ...

"Renting is still cheap relative to home owning," Levy said. "Now that people are realizing that there is going to be no appreciation in the near future, they're renting. There is not a lot of apartment building going on, so they're competing for a restricted supply."

And of course supply is also limited because so many apartments have been turned into condos or TICs (the snake just keeps swallowing its tail). Note all the investment language in there, by the way: "the promise of big gains", "no appreciation in the near future."

gfod: Thanks very much for sharing your stories.