The Housing Bubble: The Pain Intensifies

Home ownership is a wonderful thing — if you can afford it. Given the lax lending standards the prevailed during the housing bubble, however, a lot of people wound up with houses they couldn’t afford. It’s not just the known expenses like principle and interest payments that kill you, it’s the unanticipated expenses — the rising tax rates, the termite infestations, the fallen branches, the broken furnace, the leaky roof, the broken furnace — that breaks the bank.

Now that housing prices are falling, and people are finding it harder to borrow against their equity to raise cash, foreclosure rates are climbing. Dennis Gartman, a Suffolk resident and author of the Gartman Letter newsletter, has been warning of the consequences of the real estate bubble for quite some time. A friend forwarded this quote from a recent commentary — with scary numbers of foreclosure rates in Hampton Roads — by e-mail:

Last year, even we began to be concerned about real estate prices that were too strong, and were more and more concerned about the over-extended nature of late home buyers who seemed intent upon buying in panic, pushing bids right past the offers on homes that were badly built. Those homes now are a burden, not a joy; they are held by buyers incapable of paying for them, with loans made under circumstances that only a decade or so ago would have been considered ludicrous and “un-bankerly” in nature. But made they were, and now collapsing they are.

We note that here in usually protected, conservative, laid-back southern Virginia the numbers of “seriously troubled loans” on homes are rising at a frightening pace. In Chesapeake, a quintessential suburb, near the Atlantic Ocean and nestled against the N. Carolina border, with quick access to the Outer Banks, foreclosures are up 46% [year over year]. In Norfolk, the navy’s home, and a place that has enjoyed inordinately strong economic growth for years, foreclosures are up 45% vs. a year ago. In Virginia Beach, hard upon the Atlantic Ocean and also facing north into the Chesapeake Bay, they are up 54%… and across Virginia generally foreclosures are up 49%. Thankfully, here in “surprising” Suffolk, foreclosures are actually down [year over year]; but that may only be because of the very small number this year and last and because Suffolk is the fastest growing city in Virginia due to the huge amount of land and the still small population.

“The point here is that even in Virginia the problem of foreclosures is now hard upon us, and that is in an environment where unemployment is at its lowest level in history. What then shall happen when unemployment begins to rise… even slightly. “

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8 responses to “The Housing Bubble: The Pain Intensifies”

  1. Anonymous Avatar

    Check out some of these numbers….

    The worst ain’t over yet folks.

  2. Ray Hyde Avatar
    Ray Hyde

    I can’t feel too sorry for people who overextend themselves, or the bankers who let them. Whether it is houses, cars, kids,or colleges, the answer is the same.

    At the same time, houses here cost entirely too much, and it is because of the anti-development sentiment that allows and encourages restrictive zoning. When you study house costs in other areas you realise they are basically giving the houses away in order to sell the lots. Since the lots are controlled by the government, we can’t very well blame the builders for what is going on.

    Today the Post reported that Fairfax has more jobs than it has housing to support them. Our favorate GMU professor points out that this means more traffic congestion unless people opt for smaller homes closer in.

    I have two problems with that. In the first place it is nonsense. More people closer in may mean less miles travelled, but it also means more people closer in trying to travel at more nearly the same time: more congestion not less.

    In the second place, people pulling down big dollars don’t want to live in a cubicle for $600k. What is the point? Who wants to live that way so they can ride standing up to work on the subway, jammed cheek to jowl, without even adequate hand-holds, and then run the gauntlet of homelss people and panhandlers on their pedestrian friendly hike to work?

    The real problem is too many jobs in one place, plain and simple. We need more places, more decent places, including places for homeless people.

  3. Anonymous Avatar

    No one held guns to anyones heads. Plain greed was apparent on all sides of the housing mess. If people gamble and win, well hey, that’s great. However, they gamble and lose, so let’s ask the public to pick the tab for their risk? I think not.

  4. Anonymous Avatar

    The market is still working Ray

    New businesses wont locate in DC becuase of the congestion and its too expensive

    Fairfax is starting to face the same issues. So businesses are creating more places in Manassas and out the tech corridor into Loudoun.

    Of course DC and Fairfax are offering incentives to try and go against the market but all of these efforts are a losing battle against the larger backdrop of less congestion and costs in other areas

    This region is unique that the federal government and highly educated workforce are two drivers that still keep business here when there are plenty of other locations that are chepaer and less congested


  5. Larry Gross Avatar
    Larry Gross

    re: “…houses here cost entirely too much, and it is because of the anti-development sentiment that allows and encourages restrictive zoning.”

    hmmm.. is this the same problem in New York and LA .. Houston.. etc?

    a grand conspiracy against development and property rights?

    I think not….

    Let’s suppose for a minute that housing in the NoVa area was dirt cheap.. the cheapest place in the nation… what do you think would happen? Would jobs accelerate even more .. because housing is cheaper?

    Also… does anyone think that ….say Homeland Security is going to move to Podunk, Miss because housing is dirt cheap there?

    Ray… doesn’t like the idea of the government being involved in restrictive zoning .. but his thought that we need more “places” for employers .. leaves me wondering how that would be achieved .. by market forces alone.

    If the Feds .. decreed that DOD and Homeland Security would be moved … to say.. Fort Picket… or Fort A.P. Hill, in a earthshaking BRAC decision.. what would happen to NoVa (besides thousands of heart attacks?).

    What is missing from the WaPo stories about job growth in Fairfax.. is exact what Fed Agencies are associated with what contractor jobs.

    One you knew that info.. then I would assert we’d all know the real truth with respec to the “awesome” economy in Fairfax.

    It’s not a “market” economy at all, it’s a Fed taxpayer phenomena…

    WVA’s Byrd .. knows this all too well.. that’s why he wanted some of the FBI in WVA.

    Anyhow.. if we want “more places” in the DC area.. all we need to do is get the Feds to move some of their functions further afield.

    or… we get Wolf.. Webb.. et all to sponsor a bill in Congress called the “NoVA Congestion Relief Act” where money from taxpayers nationwide is collected to upgrade the roads in NoVa to mitigate the impact of all those Fed jobs.

  6. Anonymous Avatar

    Larry as usual you hit the nail on the head

    The federal government increasingly relies on NoVa based contractors.

    These contractors only exist because of the federal government

    The tech corridor is somewhat self sufficient but even many of the tech companies support the federal government or support the contractors who support the federal government

    As for finding real data that shows how relient NoVa is on the feds good luck with that :-p


  7. Ray Hyde Avatar
    Ray Hyde

    New York is in a class by itself. LA is srrounded by mountains and hemmed in by lack of water. But an equivalent home in Houston is much cheaper than a similar one here.

    The cost of constructing a 2500 sq ft structure varies only a little across the nation, but as much as 30% of the differences in the prices they sell for is attributable to government imposed intereference and bureaucracy.

    “Ray… doesn’t like the idea of the government being involved in restrictive zoning .. but his thought that we need more “places” for employers .. leaves me wondering how that would be achieved .. by market forces alone.”

    Exactly right. There is an apparent and probably real dichotomy. But let’s not kid ourselves, we didn’t get into this mess through anything that vaguely resembles a free market, and we can’t very well expect it to get us out.

    My attitude is that I am (generally) in favor of incentives and opposed to restrictions because that is the only way we can guarantee that we are willing to pay for what we get, rather than simply stealing it from someone we can overpower with votes.

    Therefore, if we believe the answer is more urban living, then we need to incentivise people to do that, since it is otherwise obvious they won’t. If we believe the answer is more exurban work centers, then we need to incentivise them to do that, just as we have previously incentivised them to locate in Fairfax.

    More importantly, we need to incentivize local bureaucrats such that they cease to believe that residential housing equates to a net loss.

    Most of us already live in urban areas. Therefore, who exactly, are we going to tax in order to raise the money to provide incentives to get more people to live where we claim we want them to live? It is obvious that this can’t work, so we have resorted to restricting people from living elsewhere.

    On the other hand, if you accept the idea that congestion is primarily the result of an overconcentration of jobs, then it isn’t too hard to find a source of funds to provide the incentives for businesses to move: charge the businesses that are causing our congestion problems rather than charging the individuals that participate in the congestion problem through no fault of their own.

    There is nothing restrictive in this. Businesses that wish to locate in the central areas can do so, but it costs money which is used to incentivize their more rural competitiors.

    I would favor the same approach to residential building: if you want to build, go ahead, here is what it will cost you.

    So, you use a tax on urban businesses to subsidise rural businesses, and you use a tax on rural housing to subsidise urban housing. set the differential tax rates according to the relative imbalance tapering to zero when you solve the problem.

  8. Anonymous Avatar

    “Also… does anyone think that ….say Homeland Security is going to move to Podunk, Miss because housing is dirt cheap there?

    Maybe. Maybe not. There are other reasons federal agencies choose to relocate. The FBI and FEMA are relocating to Frederick County, VA because it is located out of the blast zone of a nuclear explosion. The Post had an article on the subject a few months ago so I would say anything is possible.

    After the tech bubble burst in NOVA the region switched to a wartime economy. Historically, these have generally been good for business and industries (how many security consultants do you know?) because of all the money being spent by the government.

    Government contractors have been making out like bandits and there is no doubt that the federal government increasingly relies on NoVa based contractors, but I think things have changed.

    The Dem’s are in control and it appears that war spending is going to be cut drastically. If the fed cuts spending what does that mean for NOVA? The problem as I see it is twofold. One, prices are still too high in the region. Two, you simply don’t have as many buyers.

    Most “experts” are now saying the fallout from the housing bubble will last several years….yes prices might continue to rise but it will not be at the rate they did in the past few years… could take 7-10 years for prices to get back to 2005 peaks.

    NOVA is a dream come true for people who bought say 10-20 years ago. But, if you have to get into the market today the equation is different. It makes more sense to rent a McMansion as opposed to buying it.

    The best prediction I have heard in say the last month was on Mad Money…..he predicted the dow would be at 14,000 by November but the economy would be in a recession. Why? Most of the growth is in overseas economies……not our domestic economy.

    I guess we will see soon enough.

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