Six Degrees of a Spreading Cancer

It's all well and good for academics, pundits, and Wall Street wonders to wax on about the "modest" impact the bursting housing bubble seems to be having on the overall economy.

However, it's not just about recent statistics and short-term trends. It's about people's lives, their emotions, and their outlook for the future. It's about those who are connected to them in some way -- family, friends, neighbors, coworkers, shopkeepers, bankers, etc. -- and the ripple effect the spreading cancer will have on their attitudes and behavior. It's about an entire society, growing more anxious and pessimistic and responding in ways that are increasingly self-reinforcing.

How could anyone read the following report from the Associated Press, "Easy Credit, Bust Create a Modern Ghost Town," and not see the potential for this rising red tide to spread from person to person to person, a la six degrees of separation, and eventually come crashing down all around us?

Phoenix suburb shows what can happen when gambling on housing boom

Out on Phoenix’s suburban fringes, where cement mixers are fast colonizing hay and cotton fields, the day is winding to a close. The home hour has arrived.

But sundown gives away a troubling secret: Behind dark windows and unanswered doors, it’s clear nobody is coming home.

The ranch home on Via del Palo where the newspaper in the driveway has been sitting unclaimed since April. The house at the corner of 223rd Court with faded fliers stuck in the door.

They’re empty, left behind by a rising tide of foreclosures.

This neighborhood has a still-unfolding story to tell. It’s not always a comfortable one to hear.

Not long ago, builders were raising home prices here thousands of dollars week after week. Families camped out for lotteries to win the right to buy. Buyers gambled with loans whose risks were obscured by euphoria.

This is the tale of how America’s real estate boom came to a seemingly ordinary subdivision called the Villages at Queen Creek, where the whipsaw of easy credit has led to some extraordinary times. They were the best of times, for a while. The empty homes, though, raise serious doubts about what comes next.

As the nation confronts skyrocketing foreclosures, what is happening here and in scores of similar neighborhoods is worth considering.

Because while the pressures at work in Queen Creek were extreme, the choices people made — and the consequences — are not so different from those faced by thousands of other homeowners and their neighbors.

“Honestly,” says Joy Kessler, standing on the doorstep of the house she and her husband are surrendering to foreclosure, “if you were in this situation, what would you do?”

Optimistic outlook — at first
In 2004, Dave Gustafson and his family headed to Arizona to visit relatives. The buzz of construction convinced them to have a look around.

Back in California, they had less than 1,100 square feet. But salesmen here offered 2½ times the space for half the price.

The place they liked the best was the Villages, a warren of streets cradling a golf course, quickly filling with sand-colored, stucco homes.

“The sales person was saying that they (homes) were going up $1,000 a week,” Dave Gustafson recalls. “So ... we signed right away.”

Builders made it easy. A downpayment of $2,000 to $5,000 was all it took. Buyers could borrow at low teaser rates, requiring payments of nothing more than interest.

As promised, prices were going up faster than the houses themselves.

By the time the family’s new home was completed, the $179,000 base price had climbed to $220,000.

The Gustafsons opted for Corian counters, a pool and whirlpool, adding more than $50,000 to their loan. Payments were fixed for only two years, but they didn’t worry. With prices rising, they’d refinance. In five or six years, the Gustafsons figured, they’d sell for $500,000.

They were hardly the only ones feeling optimistic.

Kris Rowberry, ecstatic when the value of his home in nearby Gilbert took off, bought a second one in the Villages as an investment.

“I was thinking, man, if I could have 10 properties, I could just kind of retire ... and kick back and live off the income,” he says.

But the speculative mind-set confounded retiree David Pickering, who’d never even heard of interest-only loans. The Pickerings were simply buying a place to live.

Around them, though, such notions began to look very old-fashioned.

Home seen as investment
The American Dream is overdue for revision.

“There’s been a huge shift in the way people view their houses,” says John Karevoll of DataQuick Information Systems. “Your house now can basically be used as an ATM.”

A generation ago, families celebrated getting a mortgage and again when they retired the loan. A home meant security. Financial commitment promoted pride and neighborhood roots.

But Americans have become much more mobile, and looser lending has made it easier to buy a home and borrow against its value.

Now a home is not just a place to live. It is an investment — a way to make money and finance a lifestyle, says Robert Manning, an expert in consumer credit at the Rochester Institute of Technology.

The lending industry encouraged that transformation, promoting not just subprime loans but mortgages requiring little or no documentation of income, no money down, and interest-only payments.

When easy borrowing combined with a run-up in prices, speculators joined the fray.

But rising interest rates and falling home prices put particular pressure on people who live in the homes they own.

When people who bought almost entirely with borrowed money see appreciated worth disappear, there’s little incentive to hold on. Few players, though, seemed to appreciate the chance they might get caught.

“Lenders never said no,” says Jay Butler, director of realty studies at Arizona State University. “Nobody expected this to continue, but they hoped it would just long enough to get out of it — and they were caught up in the whirlpool.”

Roaring real estate market
By late 2004, the Phoenix real estate market was roaring.

The euphoria reached Queen Creek, though the freeway hadn’t arrived yet. “Drive until you qualify,” agents told buyers.

Buyers lined up to make a downpayment in the new subdivisions. Rowberry joined 200 people one Saturday morning for a chance at 15 lots.

Meanwhile, California and Nevada investors came to greater Phoenix looking for the next great deal.

“I’m just one guy and it wasn’t unusual to get three (calls) a day” from speculators, says John Wake, a real estate agent. “A lot of them weren’t sophisticated. They’d never invested before.”

The Villages, already half completed, looked too good to pass up. One Southern California investor, Alan Jullien, bought three homes.

The market spike turned the Gustafsons’ $235,000 home into one worth $380,000.

Across the Valley, homeowners watching values shoot up, borrowed against those gains.

“Everyone was doing the same thing — taking out lines of credit, milking it for all it’s worth,” says Matthew Berends of Surprise, another Phoenix suburb where prices soared. His home is in foreclosure. “In one year for a house to go up $80,000, it’s like too easy.”

But some relatively modest purchases would prove to be risky gambles.

Greg Giniel and his wife moved into a home on East Sanoque Drive bought by a friend, with Giniel as a silent partner. What Giniel hadn’t counted on was that the friend had bought three other homes with adjustable rate loans that were bound to rise.

One street over, the Kesslers paid $279,000 for a house in the fall of 2005.

With $25,000 down and an interest-only loan, it seemed wiser than their old rental.

There was a problem, though, obvious only in hindsight. A market that had skyrocketed was about to plunge.

Falling into foreclosure
It takes time for a homeowner to get into trouble, but sometimes not that long.

Last year, the Gustafsons fell behind on their mortgage. In August, their lender started foreclosure.

Problems began to snowball. High gas prices prompted people to rethink living on the outskirts. Investors rushed to sell.

In 2005 — a record-best year for Phoenix real estate — just five homes in the ZIP code containing the Villages were lost to foreclosure, according to Information Market, a Phoenix research firm.

So far this year, 75 homes have been claimed by lenders. It could be just the beginning.

In the Villages, many homes where foreclosure is pending are already empty, a sign owners have given up.

The problems aren’t always obvious. The golf course remains carefully watered, playgrounds neatly swept. Many streets, particularly in areas built before prices spiked, are filled with families who grill burgers in their backyards and take evening strolls.

But on other streets, homes without curtains in the windows, with dirt and cobwebs collecting in doorways, are eerie.

Even when the market was good, some Villagers were troubled by investor-owned homes, empty or filled with renters. Then moving vans began pulling up to some homes at odd hours. Auction notices were posted on front doors.

In May, the house to the left of the Pickerings’ went to foreclosure. The one on the right followed. It made David Pickering uneasy.

“The weeds in the back are getting so tall now that they are growing over the separating wall into my yard,” he e-mailed, alerting the homeowners association. “Something must be done about this.”

On Via del Rancho, Christelle Palmire saw the home next door abandoned to foreclosure.

This Halloween, Palmire plans to take her son trick-or-treating in a friend’s subdivision where she knows doors will be answered.

“You drive around this subdivision and there are ’For Sale’ signs everywhere,” she says.

Researchers say foreclosures chip away at neighbors’ property values. Here they compound a larger problem.

Builders continue adding homes at reduced prices. Investors are trying to sell. Lenders are seeking buyers for foreclosures. Homeowners whose financial troubles might be solved by selling can’t compete.

In many ways, the Villages is lucky because much was built before the market soared, says Amanda Shaw, president of Associated Asset Management, which administers it and 300 other Arizona subdivisions.

But it can be difficult to know when homeowners are in trouble.

“There are people who think they don’t have an alternative ... other than to turn the lights off at 1 in the morning, hop in the U-Haul and just leave,” Shaw says.

Leaving home
It’s worth less than it used to be, but it’s home, Dave and Maryann Gustafson decided.

In May, their lender agreed, temporarily trimming the $1,000 a month increase in their payment to $400. It should keep the Gustafsons in their home.

Greg Giniel is not so sure. His home is scheduled for auction in November.

“I’ve got to figure out how to buy my own home back,” Giniel says. “If God doesn’t pull me out of this one, I don’t know where else I’m going to go.”

Things looked just as uncertain to Joy and Paul Kessler, until they did the math.

They could fight for their house. But why? It’s worth at least $40,000 less than they paid.

“It’s sad to say but honestly, we don’t feel like there’s anything worth saving in this house,” Joy says.

So the couple decided to let the place go. Everyone said it was the right thing to do.

Still, it doesn’t sit right with her husband. When times were good they made a commitment, Paul tells Joy. Somehow, it doesn’t feel right to walk away.

Nonethless, many more will eventually be forced to make the same choice. And growing numbers of Americans will soon discover just how closely tied they are to each other.

Comments

[TSmith]

I work for http://www.CurrentForeclosures.com a foreclosures site, and our company has been aware of the impending foreclosure issues for months. In my opinon the contributers to the failing real estate market are subprime mortgages and ARM's that are causing homeowners that should not have qualified for a home loan in the first place to face foreclosure, the depreciation in housing prices (especially as foreclosures flood the market!) and the fact that so many are unable to sell their homes. More and more research shows that the housing market will not recover until at least next year, and it will most likely take years to get us back to where we were before the bottom fell out. The Fed interest rate cut helped some, but if they truly want to help struggling homeowners they need to make further cuts and write legislation that prevents borrowers from being taken advantage of by shady lenders.

[Real Estate Innovator]

Just read your interesting article on foreclosures and it is certainly a dynamic market right now. For any of the readers, if you are interested to find out what is going on in the California distressed property market, you can get a detailed analysis of foreclose-related properties and of the market trends in the various counties in California. Existing homes for sale inventory rose in 10 out of the 13 California counties we covered. There are more distressed properties in the market in 11 counties out of these 13 counties. Contra Costa County has the highest proportion (25%) of their listed properties related to distressed properties. You can find the report at:
http://realestateandhomes.blogspot.com

Henry