Bubble Trouble

by MICK LLOYD-OWEN & r & & r & & lt;span class= & quot;dropcap & quot; & D & lt;/span & riving up knoll after knoll to the very top of Legacy Ridge in Liberty Lake, it's easy to see why the luxury home development was selected for the Street of Dreams Tour back in the summer of 2006. SUVs and other pricey cars line the cul-de-sac in front of enormous custom homes in the $1 million to $2 million range. A group of at least a hundred people are gathering inside one bodacious specimen, checking out the vaulted ceilings and heavy, exposed timbers, the billiard room in the basement and the spectacular view of the town and water below. Guests step through the front door and onto a glass floor that looks into the wine cellar below.





The crowd gathers in the voluminous garage as the auctioneer explains the rules and vaunts the features of the homes up for bid.





Formalities completed, he opens the bidding on the first of four homes with rapid-fire chanting into his microphone, calling for bids in increments of $5,000 to $10,000. Cards flash left and right as a team of assistants vocally acknowledges each bid.





In some parts of the country, auctions are used to unload properties that aren't selling in the marketplace -- or properties that have been repossessed by the bank. In this case, the developers say, it's more creative marketing than panic selling. Still, the auction took place in November, when housing sales in Spokane were at their lowest point in seven years.





The relative malaise of Eastern Washington's real estate market begins to look almost enviable, however, when viewed against a backdrop of bursting bubbles in various housing markets across the U.S. -- places where home values, like balloons, were over-inflated until they popped. While the Associated Press reported last month that "October Home Prices Post Record Decline" according to one national index -- noting that prices in Miami have plunged 12.4 percent since Oct. 2006 -- a press release from the National Association of Realtors in Washington, D.C., named Spokane as one of several areas nationally "showing healthy price gains." The appreciation is modest and sales are sleepy, but it would seem there are some advantages to being the slow and steady tortoise when the over-confident hare has crashed.





A Subprimer


& lt;span class= & quot;dropcap & quot; & A & lt;/span & mericans, who love to tread the thin ice of stretched credit, saw an unhappy convergence of market factors in the fall of 2006 that started a domino effect in the home financing industry. There is no simple explanation for such a complex phenomenon, but in a nutshell it involved unsound lending practices on a vast scale while certain housing markets were red hot, followed by severely declining property values in many parts of the country while the results of indiscriminate lending kicked in. It was a kind of worst-case scenario.





"I think we all realized there was a housing bubble coming," says Ken Hunt, a banker at American West. "Even [former Federal Reserve Chairman Alan] Greenspan was saying five years ago that housing was the next bubble that was going to happen, but I don't think any of us realized that the global credit market was going to seize up because of this. I've been doing this 20 years, and I've never seen anything like it."





The lure of easy money drove prices up, especially in places like San Diego and Miami. But as they say, what goes up must come down, and now those same places have experienced some of the worst drops in prices -- and increases in foreclosures.





By contrast, Hunt says, "Our fundamentals are very strong here. We didn't have that kind of accelerated pricing -- it accelerated nicely, but it wasn't out of the range of reality.





"You get into problems when your start range is unrealistic for homeowners. If it costs $400,000 to $500,000 to get into your first home and the market is accelerating away from you, you feel like you have to jump into the game if you're ever going to get in there, and so there's some panic buying," Hunt says of the more troubled markets. "There were guys that were putting people into those homes and companies were doing loans that were unrealistic. It's a recipe for failure."





"It's a bigger picture than people realize," says Vern Hare of Inland Mortgage in Spokane, noting that "subprime" has become a buzzword for alternative financing products that have been around for some 15 years. It is a reference to loans extended to people who can't qualify for traditional loans at prime rates. Because these loans are fraught with more risk for the lender, the interest rates are usually higher. "Some people, even with really good credit, were doing some funky things like option ARMs [adjustable rate mortgages] and investment purchases with zero down," he says.





A typical scenario is someone who took an ARM with a low "teaser" rate that offered low payments for the first couple of years, after which the loan resets to a higher rate. At that time the payments could double or even triple. If their home value has declined, refinancing becomes difficult or impossible.





"The other deal is that they're usually stuck with a prepayment penalty up to that two years, so getting out early has not been an option for them either," Hare says. "They'd have to pay six months of payments in penalty."





Variations of this phenomenon are occurring at an alarming rate nationally leading to record numbers of foreclosures.





"How those people are going to get affected I have no idea," Hare says, "because there's no way they are going to be able to handle their payment.





"The good news that we're seeing is that the values are still there," Hare continues, explaining why the subprime debacle has had little impact in Spokane, where property values rarely fall. "Even if we're not doing that many purchases, the values are still there or better than they were before. So it's an easier job for us."





Hare says he doesn't think that the credit squeeze will affect standard home buyers with good credit, but loans for investment properties will likely get tighter.





The supply side of credit has also been affected nationally and abroad by the subprime crisis, because mortgage payments from millions of American homeowners are packaged and sold to investors. Those were good investments until homeowners in large numbers -- in over their heads with bad loans -- defaulted on their mortgage payments, forcing banks to repossess and try to resell those homes. The problems came when banks couldn't recoup enough money to cover the loans they made. As a result of the subprime crisis, mortgage companies are taking huge losses, suffering declines in stock value; some have gone bankrupt. Some mortgage backed securities are held by foreign companies, too, which means waves in the United States' financial market are breaking upon foreign shores. It's a small world, after all.





No Place Like Home?


& lt;span class= & quot;dropcap & quot; & T & lt;/span & he housing crisis is making big news every day in places like San Diego and Las Vegas. Rob Higgins, executive vice president of the Spokane Association of Realtors, warns against interpreting their stories into a Spokane phenomenon.





"There is no such thing as a national housing market," Higgins says, "because what's going on in Spokane is not what's going on in Las Vegas, and what's going on in Bellingham is not what's going on in Florida."





But even though the news isn't as bad in this region, there are ripples, he says. Because markets are not separate things from the people who constitute them, psychology is always a factor: When consumer confidence is low, market activity is low.





Flyers in the lobby of Higgins' office admonish the reader to "GET THE FACTS STRAIGHT," announcing boldly that "the Washington real estate market is a stable and responsible marketplace for home buyers." Asked if this implies a faulty perception on the part of the public, Higgins cites national news on television showing row after row of houses in other areas -- such as Las Vegas -- with "for sale" signs in front while the voice-over laments plummeting values and a plague of foreclosures. He says that realtors in this area feel some frustration because those images dampen the confidence of potential home buyers here, where the vital signs of the market read quite differently.





Citing figures generated by the National Association of Realtors from of the third quarter of 2007, Higgins says that Spokane ranked ninth out of 156 metropolitan statistical areas in appreciation of median home prices.





"We're in the top 10, which is pretty good," he says. "I've been looking at these numbers for 25 years, and I can remember when Spokane was in the bottom 20 percent." According to Higgins, the value of residential real estate in Spokane has increased about 5 percent per year, on average, for the past 30 years. Some years there has been zero appreciation while others have seen gains as high as 15 percent, Higgins says, but values here almost never decline.





"That's the key ingredient to the foreclosure issue," Higgins says.





According to figures from the county auditor's office, foreclosures in Spokane were up about 10 percent from 2006, but they are still at relatively low levels when compared to foreclosure rates from five years ago and when compared to other regions. Higgins does not believe that the number of foreclosed properties in Spokane will contribute enough to inventory to make a dent in the market.





Then and Now


& lt;span class= & quot;dropcap & quot; & T & lt;/span & hat's not to say Spokane didn't have its own hot housing market, from 2001-05. Ron McIntire, founder of Owner Assist Realty and Family Foreclosure Solutions, recalled how one of his clients in 2005 received a full-price offer over the phone before he even realized that his house was listed. "It had been posted on the Internet for 15 minutes," McIntire says.





Spokane County issued 705 building permits for single-family residences and duplexes in 2005 -- the highest number since 1993, when 637 permits were issued.





The days of the 15-minute listing-to-sale time are over, for now. Sales began to stall significantly in the summer of 2007, falling about 8 percent from 2006. Inventory is up about 20 percent from last year. Spokane has an estimated six-month supply of houses for sale, but even that figure varies by region and price category. According to Higgins, a four- to six-month supply of homes is considered healthy.





Places like Florida, where the housing bubble popped with a sonic boom, are dealing with 20 months worth of housing inventory and more.





The general consensus among those who spoke to The Inlander for this story is that the Spokane area may see a seasonal bump in sales in the spring, but that 2008 will more than likely be a slow year.





"I don't think it's so much the subprime thing that's affecting us as it's just a general cycle starting, ending, moving into its next phase," says Bill Fanning, a realtor with 28 years of expertise in lake-front real estate. "I think if you look at the last couple of cycles we had -- in the late '70s/early '80s and the early '90s, this cycle is virtually no different: A steep spike in values then a flattening out for years and years and years."





Slumps in the cycle, in other words, are inevitable -- even predictable -- phases where the forces of supply and demand seek equilibrium. Fanning sees it as an affordability gap that widens and shrinks in accordance with other economic factors. A growing family may hold off from selling the house it has outgrown if values are stagnant, and empty nesters might also be reluctant to sell in order to downsize.





Fanning says Spokane's housing cycles tend to last about eight years.





"I do think this cycle is going to be a little deeper and going to hurt a little more to certain segments of the market," Fanning says, "especially new construction. ... I know that a lot of the lenders out there on the commercial end are not wanting to get involved in new construction -- financing developments -- because there's just a lot of inventory sitting out there."





In Kootenai County, where the market peaked about a year before it did in Spokane, prices are "down pretty considerably," he says, noting that some builders there have faced foreclosure on entire developments.





Fanning also expects undercapitalized dabblers to feel the squeeze. "There are a lot of people flipping properties, a lot of developers that aren't developers, a lot of investors in that game over the last five years that ought not to have been there, from a financial standpoint. ... They're not sophisticated, they don't understand cycles, and they're doing things on short-term credit," he says. "All of that works great until the market turns and they have to sit on [their properties]."





Short-term credit is especially problematic, Fanning adds, because would-be wheelers and dealers must refinance their bank notes after three to five years. "I don't think lenders are going to be in the mood to refinance a lot of this stuff," he says.





A Good Time to Buy


& lt;span class= & quot;dropcap & quot; & L & lt;/span & ocal mortgage experts and veteran realtors are anxious to remind potential home buyers that interest rates are still at historic lows and increased inventory means more choices. "If you're a traditional buyer with good credit, now is a great time to be in the market buying," Higgins says. Slow sales may translate to a little more negotiating room for buyers, too.





"Spokane is being discovered -- we hear that more and more," Higgins adds.





According to Grant Forsyth, an economist at EWU, Spokane County's population increased by about 30,000 people between 2000-06. Almost half of that increase was due to net migration from other counties.





"Because of the in-migration and a relatively good economy," Higgins says, "I think we're going to see good employment and may see stronger activity."





Forsyth says that Spokane and Kootenai counties together are growing at a rate of close to 2 percent, which is twice the national average. Forsyth attributes it largely to strong employment growth. "People tend to migrate where the jobs are," he says.





"The market has clearly slowed," Forsyth says, "but robust population growth will prop up the real estate market because of increased demand."





A Mixed Legacy


& lt;span class= & quot;dropcap & quot; & B & lt;/span & idding on the first house at the Legacy Ridge auction stalls at $530,000 -- half the property's alleged value and not quite high enough to trigger a sale. Although this one and two others go unsold, attendees are promised that one of the houses up for auction at Black Rock's upscale development would go to the highest bidder, regardless of price.





"There is a perception that this [auction] is associated with distress, but that is not the case," says Chris Harmon, senior vice president of realty at Black Rock Development.





A perception of distress is likely the result of constant headlines in the national media. Last month NPR reported that 700 homes were on the auction block in Chicago in one week. This isn't that, Harmon says: "This isn't about the development -- just the desire of the builder to generate more activity in a flat market."





Still, high above Liberty Lake, the half-empty Legacy Ridge development stands as a high water mark for local real estate -- and a reminder that the laws of gravity are still in force.





MARKET'S IMPACT ON DEVELOPMENT MIXED


& lt;span class= & quot;dropcap & quot; & T & lt;/span & he fallout from tighter money and cooler markets is a mixed bag when it comes to mixed-use or specialty real estate projects in Spokane, developers tell The Inlander.





"Kendall Yards has been in the pipeline for so long it has its own momentum built up. We are not seeing any ripple yet," says Tom Reese, manager of Spokane's massive Kendall Yards project for Marshall Chesrown's Black Rock Development.





Smaller-scale projects, such as the plethora of condominium conversions announced in the last two years, require more caution to ride the bumps in the market, longtime developer Ron Wells says.





Out of all those announced projects, "How many have been built?" he asks. "The national market started to turn around two years ago. Spokane and the whole Northwest have held out against the market real well. I think all we are doing is being more prudent of not getting ahead of the sales curve."





Work on Kendall Yards, which stretches across the north bank of the Spokane River west of Monroe Street, began last summer with grading and blasting to place utilities and relocate existing ones.





The project is approved for one million square feet of commercial space and as many as 2,600 residences. The sheer size of the proposed development "gives us flexibility to absorb and respond to" market forces, Reese says.





Also, actual building construction may be as much as a year away as the Kendall Yards master plan is shared with potential developers or investors, Reese says. This gives some shielding to what is expected to be a slow year in real estate.





"We have taken the master plan out into the market and shopped it around to a couple hundred people and the response has been profound," Reese says. "Spokane is an emerging market and people are not only responding to Kendall Yards, but also are interested in investing in Spokane."





Wells sees several threads to the condo market. One, it's still hot: Several hundred apartments in central parts of the city have been converted to condos and sold in the last year. Second, prices remain robust. Third, the condo craze is creating a market for apartments.





"The bad news is, it's taking longer to sell the product, because there are fewer qualified buyers out there and money is tighter," Wells says. "There's a direct reflection in the amount of condo projects you see [that] have not been started."





The tightrope, Wells adds, is that developers don't want to put too many high-end projects on a soft market at once, guarding against price wars and financial baths.





"If you overbuild a market in apartments, you just look at it as a long-term investment. Too many condos and it's a different issue -- if prices adjust, everybody suffers," Wells says.





-- KEVIN TAYLOR





BETWEEN A ROCK AND A HARD PAYMENT


& lt;span class= & quot;dropcap & quot; & D & lt;/span & ue to declining home values in some regions of the U.S., large numbers of homeowners now find themselves in an almost hopeless "negative equity" situation. The problem arises, for example, when someone borrows $400,000 on a house that suddenly depreciates to $300,000. The borrower now owes more on his property than it is worth. If this borrower cannot make a mortgage payment that is increasing because his adjustable rate loan is resetting -- or for any other reason -- refinancing becomes nearly impossible. The property is the collateral for the loan, and most lenders cannot or will not refinance beyond the value of that property.





Foreclosures are at record levels nationally; plummeting markets in Florida, California, Nevada and Arizona are the primary drivers of that. Still, because the mortgage market is national, repercussions are being felt everywhere.





Vern Hare of Inland Mortgage picks up a file from his desk that belongs to a client he was bailing out from a mortgage deal originated by another company. The borrower was paying $367 per month at an introductory rate of less than 2 percent on a loan that had an effective rate of almost 8.5 percent.





"They were going in about $5,000 per year in interest into the negative," Hare says. They weren't paying down their principal -- it was growing. Furthermore, when the rates reset, the borrower was unprepared for the jump to almost $750 per month. Fortunately -- because their home had retained its value -- they were able to refinance.





"A strong word of caution is to steer clear of potentially unscrupulous real estate investors who don't have a successful track record of assisting borrowers in trouble," says Realtor Ron McIntire, founder of Owner Assist Realty and Family Foreclosure Solutions.





Foreclosures are a matter of public record, and people forced into that situation can feel desperate and humiliated. One of McIntire's clients, buried in junk mail from dubious parties offering assistance, complained that "even the mailman knows."





McIntire advises home owners who are facing difficulty to keep accurate records of their loan and payments in a single file, to organize their financial information as if they were applying for a loan all over again, and to talk to a specialist whose primary goal is to determine if you can afford to keep the home.





"Anyone who isn't looking to see if you can afford to keep your home as the first step isn't looking to do you any favors," he says. "Whatever you do, don't move out of the home. If the lender assumes you've abandoned the property, they are only going to be looking to take the property back and sell it for whatever they can get."





There are ways to avoid foreclosures -- such as the "short sale," in which a lender accepts partial payment for the full outstanding balance. It can keep a foreclosure off your credit record. In a worst-case scenario, there may be ways to simply buy time. If a homeowner must develop an exit strategy due to job loss, divorce, or pending foreclosure, according to McIntire, they will be best served by a credentialed professional such as an attorney, experienced realtor or licensed loan officer.





-- MICK LLOYD-OWEN