Housing industry holding ‘pity party’
By Rachel Beck
AP Business Writer
NEW YORK — Century 21 Real Estate’s CEO Thomas Kunz may have unintentionally hit the nail on the head when he declared that a “pity party” is gripping the housing industry right now.
Many recent home buyers are expressing shock that their properties may be worth a lot less than when they bought them. CEOs like Countrywide Financial Corp.’s Angelo Mozilo are claiming that “nobody saw” the deterioration of real estate values coming, and are pointing fingers at others for causing this mess. And Wall Street seems to only now be waking up to the implications of mortgage securities imploding.
They all need an education in how markets work. In a perfect world, everyone keeps making money on their investments because values never drop. This is the real world. Things just don’t work that way.
Everyone in the industry who claims they didn’t see the housing market collapse coming at them like an out-of-control subway train, seems to have forgotten the lessons from the dot-com stock crash in 2000.
Once-soaring technology share prices suddenly tumbled from record highs. It took some indices more than six years to regain those losses, and there are plenty that still haven’t bounced back yet.
They also chose to ignore past housing recessions, like in the early 1990s when prices slumped in an economic downturn and didn’t recover in some parts of the country for almost a decade.
They thought the housing-market climb would never end. Interest rates were relatively low, especially by historical standards. Jobs were plentiful. Income levels were rising. There was a good balance between supply and demand.
Many of those conditions still exist, but for a variety of reasons the housing market showed that it couldn’t defy gravity. In early 2006, home prices began to retreat from their peak. Then, starting late last year, borrowers who have weak credit began to default on their mortgages at alarming rates. Now, just about everything related to housing is in a funk.
As this punishing, steep decline has taken hold, everyone from home builder CEOs to real-estate agents to mortgage lenders can’t get over the turn of events.
At an auction of townhouses near Fort Myers, Fla., last month, homeowners who had bought into a development built by Levitt and Sons for $300,000 watched as neighboring properties sold for $145,000.
“They promised us that they were not going to go below the market value,” said one of the homeowners, in a newscast on the CBS affiliate there, WINK.
“This is not fair,” said another.
Their frustration is easy to comprehend. When you pay a lot for something, and it drops in value, it can be disturbing. What they fail to understand: The auction represents market value. What you pay one day for something doesn’t mean that you will get the same amount for it the next.
Recent buyers, however, deserve at least some sympathy for swallowing the industry hype. For much of this decade, they were repeatedly told that home values were headed up so if they didn’t buy, they risked being priced out of the market forever.
It’s harder to show pity for those in the industry who seem shocked by what’s going on. Among them is Countrywide’s Mozilo. He held a three-hour conference call Tuesday with financial analysts and described how the terrible housing conditions would continue to batter Countrywide’s earnings this year.
The Calabasas, Calif.-based mortgage lender said its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults among even the most creditworthy borrowers.
“I do think it’s important to observe what happens going forward because we are experiencing home price depreciation almost like never before with the exception of the Great Depression,” Mozilo said. “This is a huge battleship and it’s headed in the wrong direction.”
Mozilo still tried to blame others. Don’t fault companies like his for loaning money to borrowers with shaky credit — they had to do it to stay competitive.
Really, he said, the Federal Reserve had lots to do with all that is going on because it raised short-term borrowing rates 17 times from 2004 to 2006, a move that made home equity loans and all other variable-rate borrowing more expensive.
And don’t think that Countrywide was alone in not being prepared for this downturn to hit. “Nobody saw this coming,” Mozilo said, not the credit-rating agencies and not investment banks like Bear Stearns, which just had two of its hedge funds tied to the subprime market become nearly worthless.
Rachel Beck is the national business columnist for The Associated Press. Write to her at firstname.lastname@example.org.
Copyright 2005 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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