EAST STROUDSBURG, Pa., 2018 (Reuters) – School bus driver Michael Payne was renting an apartment on the 30th floor of a New York City high-rise, where the landlord’s idea of fixing broken windows was to cover them with boards.
So when Payne and his wife Gail saw ads in the tabloids for brand-new houses in the Pennsylvania mountains for under $200,000, they saw an escape. The middle-aged couple took out a mortgage on a $168,000, four-bedroom home in a gated community with swimming pools, tennis courts and a clubhouse.
“It was going for the American Dream,” Payne, now 61, said recently as he sat in his living room. “We felt rich.”
Today the powder-blue split-level is worth less than half of what they paid for it 12 years ago at the peak of the nation’s housing bubble.
Located about 80 miles northwest of New York City in Monroe County, Pennsylvania, their home resides in one of the sickest real estate markets in the United States, according to a Reuters analysis of data provided by a leading realty tracking firm. More than one-quarter of homeowners in Monroe County are deeply “underwater,” meaning they still owe more to their lenders than their houses are worth.
The world has moved on from the global financial crisis. Hard-hit areas such as Las Vegas and the Rust Belt cities of Pittsburgh and Cleveland have seen their fortunes improve.
But the Paynes and about 5.1 million other U.S. homeowners are still living with the fallout from the real estate bust that triggered the epic downturn.
As of June 30, nearly one in 10 American homes with mortgages were “seriously” underwater, according to Irvine, California-based ATTOM Data Solutions, meaning that their market values were at least 25 percent lower than the balance remaining on their mortgages.
It is an improvement from 2012, when average prices hit bottom and properties with severe negative equity topped out at 29 percent, or 12.8 million homes. Still, it is double the rate considered healthy by real estate analysts.
“These are the housing markets that the recovery forgot,” said Daren Blomquist, a senior vice president at ATTOM.
Lingering pain from the crash is deep. But it has fallen disproportionately on commuter towns and distant exurbs in the eastern half of the United States, a Reuters analysis of county real estate data shows. Among the hardest hit are bedroom communities in the Midwest, mid-Atlantic and Southeast regions, where income and job growth have been weaker than the national norm.
Developments in outlying communities typically suffer in downturns. But a comeback has been harder this time around, analysts say, because the home-price run-ups were so extreme, and the economies of many of these Midwestern and Eastern metro areas have lagged those of more vibrant areas of the country.
“The markets that came roaring back are the coastal markets,” said Mark Zandi, chief economist at Moody’s Analytics. He said land restrictions and sales to international buyers have helped buoy demand in those areas. “In the middle of the country, you have more flat-lined economies. There’s no supply constraints. All of these things have weighed on prices.”
In addition to exurbs, military communities showed high concentrations of underwater homes, the Reuters analysis showed. Five of the Top 10 underwater counties are near military bases and boast large populations of active-duty soldiers and veterans.
Many of these families obtained financing through the U.S. Department of Veterans Affairs. The VA makes it easy for service members to qualify for mortgages, but goes to great lengths to prevent defaults. It is a big reason many military borrowers have held on to their negative-equity homes even as millions of civilians walked away.
A poor credit history can threaten a soldier’s security clearance. And those who default risk never getting another VA loan, said Jackie Haliburton, a Veterans Service Officer in Hoke County, North Carolina, home to part of the giant Fort Bragg military installation and one of the most underwater counties in the country.
“You will keep paying, no matter what, because you want to make sure you can hang on to that benefit,” Haliburton said.
These and other casualties of the real estate meltdown are easy to overlook as homes in much of the country are again fetching record prices.
But in Underwater America, homeowners face painful choices. To sell at current prices would mean accepting huge losses and laying out cash to pay off mortgage debt. Leasing these properties often won’t cover the owners’ monthly costs. Those who default will trash their credit scores for years to come.
Special education teacher Gail Payne noses her Toyota Rav 4 out of the driveway most workdays by 5 a.m. for the two-hour ride to her job in New York City’s Bronx borough.
“I hate the commute, I really, really do,” Payne said. “I’m tired.”
Now 66, she and husband Michael were counting on equity from the sale of their house to fund their retirement in Florida. For now, that remains a dream.
The Paynes’ gated community of Penn Estates, in East Stroudsburg, Pennsylvania, is among scores that sprang up in Monroe County during the housing boom.
Prices looked appealing to city dwellers suffering from urban sticker shock. But newcomers didn’t grasp how irrational things had become: At the peak, prices on some homes ballooned by more than 25 percent within months.
Slideshow (19 Images)
Today, homes that once fetched north of $300,000 now sell for as little as $72,000. But even at those prices, empty houses languish on the market. When the easy credit vanished, so did a huge pool of potential buyers.
Eight hundred miles to the west, in an unincorporated area of Boone County, Illinois, the Candlewick Lake Homeowners Association begins its monthly board meeting with the Pledge of Allegiance and a prayer.
Nearly 40 percent of the 9,800 homes with mortgages in this county about 80 miles northwest of Chicago are underwater, according to the ATTOM data. Some houses that went for $225,000 during the boom are now worth about $85,000, property records show.
By early 2010, unemployment topped 18 percent after a local auto assembly plant laid off hundreds of workers. At Candlewick Lake, so many people walked away from their homes that as many as a third of its houses were vacant, said Karl Johnson, chairman of the Boone County board of supervisors.
“It just got ugly, real ugly, and we are still battling to come back from it,” Johnson said.
While the local job market has recovered, signs of financial strain are still evident at Candlewick Lake.
The community’s roads are beat up. The entryway, meeting center and fence could all use a facelift, residents say. The lake has become a weed-choked “mess,” “a cesspool,” according to residents who spoke out at an association meeting earlier this year. Association manager Theresa Balk says a recent chemical treatment is helping.
“A gated community like this, with our rules and fees, it may be just less attractive now to the general public,” he said.
Source: Reuters.com – Reporting by Michelle Conlin and Robin Respaut; Editing by Marla Dickerson SEPTEMBER 14, 2018
Young Canadian homeowners are in for some tough times if the housing market comes crashing down around them, a new study suggests, but realtors and economists say there’s no reason to panic.
A report released last week by the Canadian Centre for Policy Alternatives suggests that one in 10 homeowners under 40 will be underwater on their mortgages — meaning their debts will be greater than their assets — if real estate prices crash as expected at some point in the near future.
Right now, real estate prices are overvalued by anywhere from 10 to 30 per cent, according to Bank of Canada estimates. Eventually, most analysts say, the market will correct itself and prices will go down, either due to declining incomes, rising interest rates, or a combination of both.
When that happens, homeowners under 40 will be disproportionately affected — not because they stand to lose more actual dollars, but because they are debt-strapped and will see a bigger drop in their net worth, the study argues.
“Their entire net worth is wrapped up in their home when they’re in their twenties and thirties. They’re early on in a mortgage, so … almost everything they’ve paid has gone into interest,” John Andrew, a real estate professor from Queen’s University in Kingston, Ont., said.
“And the other thing is that they’ve leveraged this to the hilt. So it’s a triple whammy, those three factors.”
Families in their thirties could lose an average of $60,000 if there is a correction of 20 per cent, and that would represent an average of 39 per cent of their net worth. People in their twenties would see their net worth reduced by 45 per cent in the same situation.
It all sounds scary, but young homeowners do have one thing their older counterparts do not — time.
“Even if you’re underwater, it’s not a big deal, because as long as you live in this house and you pay your mortgage, that’s fine,” Benjamin Tal, deputy chief of CIBC’s World Markets, told CBC News.
“Of course, it’s difficult to be underwater. It’s not a very good thing to experience. But from a practical perspective, as long as you have a job and you have income, I really don’t see a situation in which you should panic.”
Andrew agrees. Asked what advice he has for young homeowners, he said: “Don’t panic. Yes, your net worth may have declined significantly, but until you go and sell your house, if you’re in the market, you’re in the market.”
Both Tal and Andrew say the bigger issue at play here is the possibility that interest rates on mortgages will rise, triggering the anticipated drop in housing prices.
“I’m pretty sure we’re not going see a collapse in home prices until we see a rise in interest rates,” Andrew said.
And while most young homeowners can withstand a housing market crash by staying put and waiting it out, not everyone can afford to pay a bigger monthly mortgage.
“If you can’t keep the house because you can’t afford the extra $350-$400 a month in mortgage payments, now you’ve got a really serious and urgent issue,” he said.
Soaring interest rates and declining housing prices can also impact the economy at large.
“You have a situation in which more young people, young families, spend more money on their housing as opposed to anything else. So you don’t go to restaurants, you don’t take vacations — you just finance your mortgage,” said Tal.
“And if you don’t [spend money], the economy will slow down, and that will make things even worse because it means that unemployment starts to rise, and therefore some people actually won’t be able to pay at all.”
That’s particularly bad news in Canada, said economist David Macdonald, who authored the Centre for Policy Alternatives study.
“We’re already seeing weak growth in Canada,” he said, “and this would add to that slow growth.”
In his study, Macdonald recommends the government look at adopting U.S.-style policies to help young Canadians weather the storm.
That could mean giving unemployed homeowners some leeway on their mortgages, or allowing those in extreme circumstances to walk away from their mortgages without taking a huge hit to their credit scores.
But these are solutions for later down the road, when prices start dropping, he says.
In the meantime, Tal said young and prospective homeowners should make sure they have enough wiggle room in their budgets to comfortably make monthly mortgage payments even if rates rise by a couple of percentage points.
“If they cannot do it, they should buy a smaller house,” he said.
Or, not buy a house at all.
Studies like this one might put you off buying at all, and that’s a perfectly reasonable option, said Andrew, especially in high-cost cities like Toronto, Vancouver and Calgary, where a housing market crash would hit hardest.
“If you look at a lot of world-class cities around the globe, there’s nothing wrong with renting. If you lived in New York City, you could easily rent your entire life and you wouldn’t feel inadequate about it.
“We’ve got this kind of Canadian hang-up,” he said. “There’s this sense that if you don’t own your own home … you’re not a success. And I think that’s changing.”
Renting means avoiding the hidden costs of home ownership, like maintenance and property taxes. What’s more, you can up and leave whenever you want.
“Certainly for young people, as long as you’re saving some money, as long as you’re putting a significant amount away monthly and working toward that long-term goal, there’s absolutely nothing wrong with that.”
Source: CBC Sheena Goodyear, CBC News Posted: Nov 16, 2015 5:00 AM ET
There is little doubt that overseas money has had an impact on the high cost of Canadian real estate.
Even the Canada Mortgage and Housing Corporation appears to have conceded the fact. In a speech this week, CMHC president Evan Siddall said that despite having poor data on foreign ownership, it was likely pushing up the price of Canadian housing.
There are two things that are less clear that may be crucial to the value of your home. The first is the size and distribution of the effect. The second is what will happen when foreign ownership dries up or withdraws.
The fact that Canada does not have a good official estimate of how much foreign money is invested in Canadian housing is a scandal. Other countries assemble the information as a matter of course.
In Canada, even the head of the CMHC admits he is dependent on anecdotal information, partly because without making it a legal requirement, buyers may be unwilling to divulge their ownership status.
“Most of the available information is anecdotal. And the problem is that many foreign investors may prefer to hide their ownership,” Siddall said in his speech this week.
Without an official way of gathering the data, private studies can be based on uncertain methods. They may fail to distinguish between investment by foreigners and purchases by new Canadians.
Whether based on anecdote or private research, the conclusions are often unreliable or controversial. Most recently, a study using non-Anglicised Chinese names as an indicator of foreign money in the market was pilloried as racist.
The impact of Chinese investment in Vancouver’s red hot market is what most people imagine when they think of non-Canadian investment in domestic housing. Certainly the effect is clear in countries where they do collect that kind of data.
But anecdotal tales of foreign buyers purchasing blocks of condosmeans that overseas investors, especially those with family members in the country, would not necessarily restrict themselves to luxury homes, nor to the biggest cities.
In principle, there is absolutely nothing wrong with foreign money taking a stake in the Canadian real estate market. Domestic investors do the same thing. It helps support the construction sector. It provides homes for Canadians without investment capital and homes for those whose mobile lifestyle is better suited to renting.
But as Siddall said, the exact nature of that investment makes a big difference.
“While both domestic and foreign investment activity can be speculative, foreign investment may be more mobile and subject to capital flight,” Siddall said. “This would increase volatility in domestic housing markets.”
Even if the percentage of overseas investors is small, what economists call the “marginal effect” can be large.
As economist John Maynard Keynes said, “Everything happens at the margin.” A simplified way of thinking of the principle is that if people want just a little more of something, the price goes up; if they want just a little less, the price goes down.
As Siddall says, foreign speculative investment, sometimes called “hot money,” can definitely drive real estate prices up as it pushes its way into the market. And as author and portfolio manager Hilliard Macbeth told me earlier this week when I was interviewing him for another story, hot money can also have the opposite effect.
Macbeth says international hot money has the choice of any real estate market in the world. While Canada may have been the prime destination for that cash for the last several years, there is no guarantee the investment will continue.
“You could go from the best place to put your real estate money to the worse place, literally overnight,” Macbeth says. “They wouldn’t probably be able to sell, but they wouldn’t be putting any new money in.”
In the domestic real estate market, most of the buying and selling is among people trading one house for another, says Macbeth. Price rises, he says, happen at the margin, consisting of new Canadian (usually young) buyers entering the market and foreign investors bringing new money from overseas.
We seem to be in another one of those periods when everyone, including the CMHC, is worrying about overpriced Canadian real estate. Such worries have come and gone before without hurting the speculative value of Canadian houses.
It’s not yet clear what the trigger might be for a turn from rising prices to decline. It could be rising interest rates. It could be the effect of our aging population. It could be an anticipation of those things as potential investors think they see the writing on the wall.
But just as when markets were rising, the hot money effect of overseas investors will accentuate the fall. And without reliable statistics on how big that sector is, we have no idea how great the effect will be.
Source: Don Pittis, CBC News Posted: Nov 12, 2015 5:00 AM ET