Monday, April 7, 2008

Housing Crisis Spreads into the McMansions

Many people thought subprime was "contained" thinking it was a pocket of high risk mortgages that were used by lifelong renters to buy homes. Well its now apparent that people making $300,000 got sucked into the same subprime loans that the family making $30,000 used to buy a home for the first time. It was just on a larger scale.

An article in Reuters reported a great example today of how the housing bust is hitting even the million dollar housing areas like Louden County Va.

An excerpt:

"Poor people weren't the only ones who took out risky, high-interest loans during the housing boom. The sharp increase in housing costs -- and the desire to live in brand-new, spacious houses with modern features -- led many affluent buyers to take out loans they couldn't afford.

"People had in their head, 'I need a mud room, I need giant columns, I need a media room, and I'm going to do anything to get it,'" said Robert Lang, co-director of Virginia Tech's Metropolitan Institute, a research organization that focuses on real estate and development.
The crisis has hit especially hard here in Loudoun County, Virginia, where upscale developments have supplanted horse farms over the past fifteen years.

About an hour's drive from Washington, Loudoun is one of the nation's most affluent counties, with a median household income of $98,000, more than double the national figure."

Between 1990 and 2005, the county's population tripled to 272,000. Many of those moving here relied on risky, high-interest loans to buy the house of their dreams.
"People pushed the limits to be able to buy. They couldn't afford to buy there otherwise," said Virginia Tech consumer-affairs professor Irene Leach."

My take:

This just shows you that the housing crisis will hit buyers from all different income levels. McMansion home buyers made the same mistakes that poorer first time buyers did. They just did it on a grander scale. They took out loans that they could never pay back. 16% of the loans in 2005 were high interest, subprime type loans on these palaces.

The mania here amazes me. BTW who decided that they HAD to have a "mud room" I think I can survive living without one. My prediction is in the future many of these mansions will end up being turned into duplexes that people can actually afford.

So whats the situation in Louden County as housing collapses?:

"Now the bill has come due. One out of every 69 households in the county was in foreclosure in the last three months of 2008, well above the national average of one filing for every 555 households, according to RealtyTrac.

Most of these have been concentrated in the county's poorer neighborhoods, but local realtor Danilo Bogdanovic says he is increasingly seeing more foreclosures on properties worth more than $800,000 as affluent borrowers burn through savings in a vain attempt to stay in houses they can't afford.

"They've just prolonged the pain," Bogdanovic said. "I don't think they're immune to it."
At the end of 2007, 20 of the 25 houses for sale for more than $850,000 in Loudoun County appeared to be foreclosures, according to Tony Arko, his partner.

My take:

Ok, these stats amazed me. So first these "highly educated " affluent buyers took out stupid loans that they could not afford. Then these educated buyers decided to burn through their savings in order to keep the house. What sense does this make? NONE

Burning through your savings will not assure that you will pay off the loan. It will only assure that you end up BROKE!!!

The smartest thing to do after you realized you can't afford the house, as any financial planner will tell you, is sell the house even at a small loss or walk away from it and take the credit hit if the loss is too large and you can't afford to short sell it. People with solid incomes will easily get their credit back after 5-7 years if they walk away.

The other stat that amazed me is 80% of the homes for sale in Loudon over $850,000 for are in foreclosure. To make matters worse they are still building in this area so the sellers trying to get out are competing against new homes.

When this is all said and done the housing time bomb will end up effecting all types of homeowners in all types of neighborhoods. Foreclosures effect neighborhood values when they are sold at a 50% discount. How do you think the affluent homeowners who can afford these homes feel when they see a McMansion for sale next door at half the price? I bet they are sick to their stomach.





3 comments:

Avl Guy said...

'Adaptive re-use' will be the buzz word in the post-deleverging era. We may grapple with new uses for previously over-inflated assets like gated communities of semi-empty McMansions and reams of semi-empty strip malls.
A huge opportunity for forward-thinking 'smart growth' advocates who resist freezing in fright like deer-in-the -headlights while the ugly, painful deleveraging unfolds.

Jeff, duplexing excess McMansions works if they’re well-built. It’s one thing to carve up bricks-n-morter-n-plaster over-sized mansions from the 1920s as done in my Chicago. Don’t know about all these new structurally-cheap-on-fly 4-and 5-thousand sq. ft. houses with fancy granite cladding over cheap construction. They and those too isolated from jobs & schools may face the massive razing proposal floated by Wall Street Journal columnist Holman Jenkins.

Avl Guy said...

Ironic that the Nordic nations offer an example of a way out of our banking crisis, while across the North Sea from them, Great Britain cuts ahead in line of the US on the path to the next phase of deleveraging. I look forward to reading how Gillian Tett at the FT covers her native crisis.

Jeff said...

avl

I promote what I call "Project Sweden" here in the US although it would be tough to do because its a much larger banking system here.

However, I do think we could nationalize a small group of investment banks and teach them a lesson. Maybe England needs to sail over to Sweden and learn a few things...lol

We need solutions to this housing nightmare. I am not someone who wants to yell the sky is falling.

I think Sweden is a great way to allow the taxpayers to get back some of the losses from the fraud that Wall St. created with the ponzi housing scheme. Shame on them for doing this to the middle class.

Its time Goldman Sachs and Co. learns a lesson about greed!!!

Passthe word on about "Project Sweden". I think its a great idea.