I could be mean I could be angry You know I could be just like you
I could be fake I could be stupid You know I could be just like you
I could be cold I could be ruthless You know I could be just like you
I could be weak I could be senseless You know I could be just like you
Three Days Grace -- Just Like You
The problems associated with the inflation and deflation of a housing bubble are universal. Many countries in Europe experienced a housing bubble in parallel to ours in the United States. Just like us, they have witnessed utter collapse of the low end, lenders permitting squatting at the high end, and rumors of foreign cash buyers coming to save the day.
Back in March I wrote Ireland’s housing bubble: like ours, only worse. And back in December I commented on how Spain shows how to keep house prices inflated. Both of those countries inflated enormous housing bubbles that caused a massive mis-allocation of resources and the construction of 20 years worth of housing product, much of which may be abandoned. Thinks weren't quite as bad in Great Britain, but the fallout there is very similar to our experience here in California.
By Jeremy Warner, Assistant Editor 6:00AM BST 21 Apr 2011
An apartment on London's Hyde Park recently changed hands at an astonishing £136m.
Even the row of terraced houses in North West London where I live has managed to put the housing crash behind it; these relatively modest late Victorian properties again sell at record prices.
Yet stray beyond London and the South East, and you see an altogether different picture, one that goes largely unrecorded by the established indices for measuring the UK housing market – Halifax, Nationwide, Rightmove and so on.
The prime areas of London, similar to our coastal communities, continue to trade at or near the height of the bubble (when they sell at all). The subprime areas like Riverside County have been knocked back 60%, and they show no signs of improvement. There is a parallel between Great Britain's experience and our own.
To see this "other" housing market, I've been to Newcastle and its surrounding areas in the North East, the region that gave birth to the folly of Northern Rock.
Like all property markets, prices in the region are highly calibrated. There remain sizeable pockets of prosperity, where values, though still significantly off, have held up reasonably well. As in many parts of London, it's easy to imagine from these relatively well to do districts that there never was much of a housing crash.
It's impossible for me to say what is causing Britain's high end to hold firm. Ours is held up by shadow inventory, low transaction volumes, and large down payments. The same is likely true in Great Britain.
Unfortunately, they are more the exception than the rule. Little more than a stone's throw from these posher areas lies a tale of catastrophic decline and value destruction to match the very worst the sub-prime crisis has managed to produce in the US. Tens of thousands of houses in the North East alone will have fallen in value by 30-60pc since the peak, and by the look of it, still have further to go.
Many can neither be sold nor let. You've heard about Britain's chronic shortage of housing stock, one of the factors which allegedly underpins the value of domestic property in the UK. Well, there's little sign of it here in Newcastle and the rest of the North East. Row upon row of properties that used to house workers in the region's once proud industrial tradition of shipbuilding, coal and steel lie half boarded up or otherwise derelict.
Does that conjure up images in your mind of some of the high desert communities in California?
Yet believe it or not, these very same houses and flats were until three years ago as much a part of the British property bubble as everywhere else – perhaps more so in some cases.
Over a seven year period, prices for a typical two to three bed house or flat were chased all the way up from the low teens to well in excess of £60,000. New build subject to mortgage fraud would fetch £125,000 or more. Today you'd be lucky to get half. Prices are fast regressing all the way back to where they came from before the bubble began.
Just like California's bubble, prices went up 250% in a very short period of time, and crashed nearly back to their starting point.
Typical of this phenomenon is Benwell, located on the hillside that tumbles down to the Tyne in Newcastle's West end. A scene of grim degradation, it stands as a lasting reminder of the policy failures and illusory prosperity of Brown's Britain. Pumped up on a sea of credit, make work public expenditure and benefit payments, prices rocketed from 2000 onwards.
Many of these investors will already be in substantial negative equity, but still they refuse to adjust their price expectations to the all too dire reality. So they hold on in the hope they can find the tenants to pay the mortgage and that prices will eventually recover. Denial is the order of the day.
Sound familiar?
London is always first in and out of any housing market downturn. The trend then ripples out from the capital, with regions such as the North East lagging London by a year or two. If that relationship holds, then you would indeed expect prices in the regions soon to be chasing London higher again. Regrettably, it's more than likely broken. Even if the banks were prepared to fund another rip-roaring property boom – they are still scarcely in any condition to do so – the fundamentals in regions such as the North East are most unlikely to support it.
Our banks aren't limited like Britain's banks are. With the direct government backing of mortgage-backed securities and the ability to sell them to investors, we are fully capable of inflating another housing bubble. That's one of the reasons the debate over the qualified residential mortgage in Washington is so important. If we get that legislation wrong, we will inflate another housing bubble at taxpayer expense.
Highly dependent on public sector employment and handouts – which are being severely cut – there appears nothing to stop the free fall in prices. Ever optimistic, one estate agent in Blyth, on the coast south of Newcastle, insists that with the advent of the prime Easter selling season, things are picking up. Buy-to-let investors from London are back, he says, in part because low interest rates are driving them into riskier assets in the search for income and capital gain. "They know a bargain when they see one", he says, pointing to the recent sale of a property at half its bubble peak. In the real world, prices have in fact taken a further lurch downwards.
realtor bullshit also appears to be universal.
A little further south still, at Dean Bank, Ferryhill, it's the same depressing scene of boarded up housing and decline. Even the warm spring sunshine fails to make a dent in the oppressiveness of it all. A woman is grilling meat on a disposable barbecue in her front door porch. "I've been in this town a long time. It always was s*** and it still is. But my mortgage broker is a good man. He'll look after me", she says, generously offering a sausage sandwich. Somehow I doubt it.
Talk about misplaced trust. Yikes!
But let's not single out the North East. To a greater or lesser extent, you find much the same story around all the major regional cities of Northern England. It's still the same rubbish property with the same down at heel tenants, but in the past ten years the prices have been up like a rocket and now they are falling back down again like a spent stick.
It's hard to know what's going to rescue districts like these. With the anaesthetic of abundant credit and public money now largely gone, many areas of Britain are simply returning to the way they were before the New Labour boom began. It's as if it never happened at all.
It's hard to say what will happen to many of our subprime areas. There was no reason for prices to go up in many of these areas, so there is no reason to believe prices will recover in many of them. How long will it take prices to come back in Fresno. Forever is my guess.
George Osborne's hoped for private sector recovery threatens entirely to bypass areas like these. For the North East, the somewhat underwhelming programme of supply side reforms he announced in the Budget is unlikely to make any significant difference. Better education and training may lift things in time, but it all costs money, which is in short supply. Eventually, incomes might slip to levels that make the region competitive with emerging markets, but that's hardly an outcome to aspire to.
Everywhere's hurting right now, yet few places are hurting more than the North East. The collapse in low end property prices is only one outward sign of it. Public policy must focus like a lazer on these forgotten badlands, or risk permanently entrenching an ever more divided society.
Public policy is failing to address many downtrodden areas in California as well. Of course, with the wide range of very serious problems facing California, it isn't likely that much money or attention is going to be focused on the problems in rural areas. Most will be left to rot.
Just a little Ponzi
If there is a proper way to utilize the stupidity of lenders, it is demonstrated by the owner of today's featured property. He bought the property with a minimal down payment, he refinanced to get his money back out of the deal, then he left it alone to see what happened. By withdrawing his down payment, he eliminated his risk of loss, and by keeping the mortgage equity withdrawal to a minimum, he kept his cost of ownership as low as possible. He still gamed the system and left the bank to eat the losses, but he did it in the wisest way possible. His only real loss is his credit score.
This property was purchased for $436,000 on 8/23/2003. The current asking price makes this a 2003 rollback.
The owner used a $391,964 first mortgage, and a $44,036 down payment at purchase. On 11/4/2004 he refinanced with a $462,500 first mortgage and a $60,500 HELOC.
He didn't even manage to steal $100,000 from the lender. He is a lightweight by Irvine standards.
-$354 .......... Tax Savings (% of Interest and Property Tax) -$519 .......... Equity Hidden in Payment (Amortization) $27 .......... Lost Income to Down Payment (net of taxes) $74 .......... Maintenance and Replacement Reserves ============================================ $2,631 .......... Monthly Cost of Ownership
Cash Acquisition Demands ------------------------------------------------------------------------------ $4,300 .......... Furnishing and Move In @1% $4,300 .......... Closing Costs @1% $4,150 ............ Interest Points @1% of Loan $15,050 .......... Down Payment ============================================ $27,800 .......... Total Cash Costs $40,300 ............ Emergency Cash Reserves ============================================ $68,100 .......... Total Savings Needed
Property Details for 19 MOONSTONE #0 Irvine, CA 92606 ------------------------------------------------------------------------------ Beds: 3 Baths: 2 Sq. Ft.: 1500 $287/SF Property Type: Residential, Condominium Style: Two Level, Other Year Built: 2001 Community: 0 County: Orange MLS#: S653707 Source: SoCalMLS Status: Active On Redfin: 24 days ------------------------------------------------------------------------------ Lovely two story Home with elegant exterior stonework. Recessed lighting, Tiled flooring through out, Kitchen with Corian countertop Ceiling Fan Plantation Shutters, Upstairs Laundry hook-up, Roman tub and Dural sink in master bath, Walk-in closet. Fabulous amenities include assoc park. Close to school, shopping centers, Freeway 5 and Toll Road 261.
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