Housing gridlock: Trapped in Suburbia

The Chicago Tribune is telling a story that's happening about 60 minutes from where I live, in booming Will County Illinois where miles and miles of cornfields were turned into miles and miles of houses. It had to end and so it did. Now many are Trapped in a troubled real estate market.

One of the nation's fastest-growing counties in recent years, Will County now has the highest foreclosure rate in Illinois and its housing market has come to a standstill. Yet where California or Florida can blame out-of-sight prices, and Ohio or Michigan their shrinking economies, Will County remains affordable and growing even as its residential for-sale signs multiply.

My Comment: Obviously Will County is not affordable. Evidence is twofold. Will County has the highest foreclosure rate in Illinois and for sales sign are multiplying like rabbits.

Growth of houses exceeded growth in jobs. Wages did not keep up. It was an artificial boom. Driving around I have been wondering for years "How can everyone afford to live like this?" Here is the answer. They can't. That shiny new SUV parked in the driveway may signal trouble, not prosperity.

Will has such economic advantages, including a new Interstate Highway 355 extension and a long list of business expansions, that its housing trouble defies easy explanations. Some believe the area grew too fast to sustain the pace under any circumstances. Others blame media reports of falling home prices for scaring off buyers.

My Comment: Anyone who blames the media has holes in their head. Unless of course media means housing shills like Lereah at the NAR, and/or real estate agents that have been singing the same tune for years: "There is never a better time to buy", "It's different here", and "Real estate always goes up".

But to many, this once-rural patch of land southwest of Chicago has become a textbook example of a market in gridlock. In recent years, first-time buyers poured in from the big city and closer-in suburbs. Now, many first-time buyers can't get financing under today's stricter terms. Without those newcomers moving in, buyers who want to move up can't sell their homes. And for those who bought recently, with little money down and mortgage rates climbing, just hanging on has become ever-tougher, even if they're fully employed.

My comment: This is the suburbia trap in action. People are trapped in a gridlock of homes, a gridlock of roads, and a gridlock of false prosperity. Things appear to be booming. It's an artificial boom that's now collapsing.

In the 1990s Will County's image evolved, and in recent years the area boomed. Between 2000 and 2006, it was among the nation's fastest-growing counties. Home construction and job creation far exceeded the norm.

Affordable housing and new jobs drew families on a beeline down I-55 from the Southwest Side of Chicago and the suburbs along the way. In many cases, they traded rental apartments for new homes priced well under $200,000. In 2006, of 21,350 households moving in, half hailed from Cook County, and nearly one-fourth from DuPage, according to IRS data.

My Comment: Why does the Tribune keep saying affordable? To someone living in California Will County prices sure "look" affordable. However, people here cannot afford the interest rates, the property taxes, the upkeep on a house compared to an apartment, rising gasoline prices, energy prices and a whole bunch of other things. Affordability is a mirage. Foreclosures are proof.

Since 2005, permit issuance in Will County has plunged 65 percent, including 54 percent in New Lenox, 61 percent in Joliet and 74 percent in Bolingbrook. Crest Hill reported a 95 percent drop, he said, indicating that new home construction "just stopped."

At the same time, foreclosures accelerated. Speaking by cell phone as she shuttled between Chicago courtrooms for auction proceedings, foreclosure specialist Dee Villegas said she has noticed a sharp uptick in Will County homes on the block, and she expects more to come.

My Comment: Artificial booms are followed by very real busts.

"It's a booming county. They all headed out there for these brand-spanking-new houses. They were going after the American Dream," said Villegas, president of Foreclosure Ltd. "The jobs are there. It's just a shame you need several jobs to hold on."

For the first time in memory, fully employed Will County residents are falling behind on their home payments, and local social-service agencies are fielding inquiries from middle-class homeowners who need help but have no idea what's available. "They just don't see people with a nice car and nice clothes coming in for assistance, until recently," said Ron Pullman, community development director at the Will County Land Use department.

My Comment: As stated earlier, it was an artificial boom, not a real one. Artificial booms eventually collapse when the pool of greater fools dries up. Things Are Going To Get Worse. Much worse.

"People are forced to stay because they don't have the equity to move up," said Karges, the veteran Joliet real estate agent.

My Comment: This is the equity trap. And collapsing prices will keep folks trapped for much longer than anyone thinks.

Weaving through the curving streets of a subdivision in the village of Shorewood, Karges parks his red Jeep in the driveway of a big, empty home.

Built by a contractor when the market was hot, the brick-and-stone house on Forrest View Drive has sat for more than 600 days, its granite kitchen counters never used, its basement ready for a custom buildout that may not come for a long time. It is listed at $579,900, steep for Will County, though lower than several other vacant houses in the same upscale subdivision.

Sometime, maybe soon, "the logjam" will break, Karges said. Renters unencumbered by the need to sell homes of their own will snap up distressed entry-level properties. Then move-up buyers emboldened by the renewed activity will take the plunge into bigger homes. New businesses paying good wages will hire executives who will then step into ready-made homes like the one on Forrest View Drive.

Karges, for one, can hardly wait: "It will just be a beautiful circle."

My comment: Karges, I have news for you. You are going to be waiting a long time. Look at the reality of the situation. The boom is not coming back anytime soon. Rising foreclosures are going to keep putting on home prices. Will county is still overbuilding commercial real estate right now. What happens when the last remnants of that commercial real estate boom fade away? What happens to traffic at all those restaurants and shopping malls when consumers cut back even more than they have?

Here is the answer to both questions. Jobs are going to vanish into thin air. They are starting to already: Unemployment Soars as Private Sector Jobs Contract. Those stores, malls and restaurants you see are going to start sporting "For Rent" signs in the not too distant future.

People are trapped in their homes, with nowhere to go, struggling to pay bills. In the meantime foreclosures keep adding to supply. Soon, foreclosure may be seen as an easy way out of the trap. Certainly it is a good option for anyone who bought with no money down and is now $50,000 or more in the hole.

Heaven help us if the masses decide that walking away from a home is a socially acceptable thing for someone with a job to do. Even if that doesn't happen, banks will eventually be forced to dump the properties they own. This will further suppress prices.

When Will Housing Bottom? I am looking for a possible bottom in 2012. I can easily be an optimist.

Happy Valley Foreclosed

The suburbia trap is also playing out in the Portland Oregon area as Bust turns developers' dreams to dust.

The housing slowdown has landed with a thud in once popular subdivisions across the region, and it's not likely to let up this year. Developers carved out thousands of new home lots on the premise that they'd enjoy the same tidy profits produced in recent boom times.

Developer Corey Harris said his company, Landmark Development, paid $7.2 million for about 60 acres on the peak in summer 2005. The deal seemed like a safe bet. The project fell behind schedule in the spring of 2006. The housing market sputtered that summer. And by September 2006, his buyer wasn't interested.

Harris had missed the market. He said his company was stuck with a $140,000 monthly loan payment, and he stopped making the payments last year. The Reserve's contractors have filed more than $500,000 in liens for unpaid bills.

In November, Bay Bank filed papers to foreclose on the subdivision to get its money back. Ed Cameron, Happy Valley's building official, says it's the first time in his nine years that he's seen an entire subdivision fall into foreclosure.

My Comment: Happy Valley, Oregon like Will County, Illinois no doubt thought "It's different here." Seattle and Vancouver still feel the same way now. Their turn will come. One by one by one, every city, county, and state are finding out "It's NOT different here."

Tim Gray, 42, former chief financial officer of national builder D.R. Horton's Oregon operation, was among developers who bid up land prices. "Tim was paying top dollar for the land," said Scott Combs, a Vancouver real estate broker. "But it made sense. Tim was trying to buy land so that someone else wouldn't buy it."

My Comment: Truth is funnier than fiction. You cannot make this kind of stuff up: "But it made sense. Tim was trying to buy land so that someone else wouldn't buy it." The only sense it makes is in explaining the foolishness and greed of it all.

The first sign that the boom was waning came early for Gray: In April 2006, seven of eight scheduled home sales fell through within days. From there, things just got worse as demand fell further and Gray slashed prices. As Zephyr [Gray's company] struggled to pay its bills, its creditors, owed about $45 million, grew restless. That debt load became crushing. Last June, an unpaid creditor forced Zephyr into bankruptcy.

My Comment: A cascade of defaults are coming. How many of Gray's subcontractors are now facing default?

St. Helens-based Decal Custom Homes, an active Portland-area builder, is scrambling to remain afloat amid dozens of creditors clamoring for money. Bank of America, for example, sued Decal and its principals in November, seeking repayment of $8.2 million. Decal has stayed alive only because of financial backing from John Schleining, a successful Ashland developer.

"Now it's a question of whether (Decal) can sell the land for half" its original asking price, said Al Kennedy, a Portland lawyer representing Schleining.

My Comment: One weak domino was propped up by another. Now Schleining appears to be investigating his options.

"The multibillion-dollar question is when will the cycle turn," said Worthy, the bank CEO. "I don't know when that will come. I expect to be hunkered down through 2008."

My Comment: Anyone who thinks this blows over in 2008 is in fantasy land. Payback for the unsupported boom we experienced is just in the second inning. A severe recession is coming that has not yet hit full force.

This post is not really about Will County Illinois, Portland Oregon, or (ya gotta love the name) Happy Valley. There are thousands of "Happy Valley USA" suburbia stories out there.

"Happy Valley" is not so happy. Many are trapped. Many more will be trapped as the recession worsens. Unfortunately, foreclosure may be the only viable way out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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