Housing and credit markets in turmoil, what next? by gimleteye

There is a very good report by Doug Hanks in Sunday’s Miami Herald, “Housing’s ills imperil condo deals”.

In telling how Cay Clubs has fallen on hard times in its rapid roll-up of the condo market in places like the Florida Keys, the report points to reasons why the collapse of speculative real estate markets like Florida's is triggering the most serious national economic crisis in two decades.

“Cay Clubs vaulted from a small start-up in late 2004 to a major developer whose 14 properties and marinas include eight in the Florida Keys. The firm, whose billboards dot the Overseas Highway, says it manages nearly 3,000 condominium units and more than 900 boat slips.”

Cay Clubs is the kind of development business whose influence on local county commissioners threw a deep, dark shadow over largely ineffectual efforts by citizens of the Florida Keys to use local legislatures to gain traction for “sustainability” and protecting the Keys fragile near shore waters and coral reef.

It is well documented how wetlands and fragile natural resources in Florida were devastated during the building boom now in cinders. Permitting agencies like the US Army Corps of Engineers and South Florida Water Management District rarely flinched from processing and approving wetland fill permits, responding to political pressure before any other guidance to their missions.

(As for the Florida Keys and its water quality, the lowest common denominator prevails-- notwithstanding Key West real estate values-- and begs a closer look of Denis Johnson's prescient 1995 novel, Fiskadoro.)

Today's Herald report is not about the cost to the environment of a building boom unmatched in Florida history, including the bubble of the early 1920’s when binder boys stood on Miami street corners and sold deeds to passerby’s for land, sight unseen, selling and re-selling the same property between speculators sometimes two or three times a day.

The Herald report captures the Parra family, Horacio and Patsy, “full-time landlords who have acquired 20 houses and apartments within a half-hour's drive of their Castle Rock, Colo., home.”

Now, perhaps the Parras represent the most aggressive slice of consumers who jumped into the real estate boom and used housing as a speculative investment tool.

With 20 mortgages to fund from cash flow, the couple is unable to cover the monthly expenses for its $300,000 Orlando condo, costs imposed on them by the inability of Cay Clubs to live up to its financial commitments to buyers like the Parras.

The poor and lower middle class always suffer first and are always most visible in whatever turmoil society throws their way: that is the case in the subprime meltdown.

But it is the middle class and, yes, the upper-middle class that has a lot to worry about in the event that their too-expensive homes revert to historical average, leaving them holding mortgages far in excess of their market value. That appears to be the Parras' story.

Because consumers of mortgages in untold numbers over-reached during the housing boom and bought more home than they could reasonably afford, credit markets have shut tighter than a sphincter under duress.

Already there are reports of foreclosure rates rising in prime-quality mortgages.

Here is why it is not just foreclosures that Wall Street and the Fed is worried about: if you own more house than you could reasonably afford, like one of the million and half dollar homes in Pinecrest or South Miami or Coral Gables, you only have a couple of choices: you can foreclose—the least likely for consumers who want to preserve their credit ratings. You can sell at a loss and absorb the hit to your net worth.

More likely than not, consumers will try to weather the storm by holding onto their too-expensive homes by cutting back on purchases. It's happening in the slowdown of auto sales across the nation. The pullback of equity markets from historic highs and turmoil in the credit markets are all indications that something big is afoot.

The Parras don’t need to be persuaded of that. Nor do Cay Clubs or the former Florida-based champion of suburban sprawl, WCI Communities, that apparently can’t sell its assets at any price, or the publicly traded national homebuilders or even major financial institutions like Bear Stearns or hedge funds like Sowood.

The over-riding question, from the civic point of view, is this: will anything change now that the development lobby looks like an ant colony disrupted by toxics? There is another question that policy makers in Washington will have to address: what to do?

So far, Congressional banking committees have picked out the easiest target: government sponsored entities, Fannie Mae and Freddie Mac, whose accounting irregularities and massive payola to key executives attracted the attention of regulators, belatedly, a couple of years ago. (In an open letter to Congressman Barney Frank, a few days ago, I appealed to the chairman of the House Financial Services Committee not to make the government sponsored entities the toxic waste dump for credit problems related to massive problems in the mortgage industry.)

The greater scrutiny should be put on government itself and politicians who bought into the building boom with both arms upraised and palms outstretched for campaign contributions from the building and development lobby.

It turns out that the building boom, as it manifested across the American landscape in the past decade, depended on Congress surrendering to Wall Street: there is no other way to explain how the proliferation of financial derivatives, or “weapons of mass financial destruction” according to Warren Buffett, were allowed to explode like an algae bloom.

The unprecedented building boom masked the impact of losses to the manufacuring sector. The multi-trillion dollar accumulation of dollars by China masks the extent to which the United States is indebted to a nation that lacks any sense of moral responsibility to worker safety or the environment.

In days ahead, Washington decision-makers are going to be desperately searching for simple fixes. For instance, builders and developers are clamoring for the Federal Reserve to lower its key interest rate.

But keep in mind the fixed financial geodetic markers of the housing boom and crash now unfolding.

Take a step backwards. Geodetic markers are used for survey purposes: they comprise a fixed point or benchmark for observation and, in navigation, are used to identify exactly where you are.

As the diversity of manufacturing and its jobs declined, the benchmark or financial geodetic marker for the American economy became the suburban, platted subdivision.

What turned the worm was the subprime sector of the mortgage industry, in places like California and Florida where platted subdivisions, often in wetlands, literally controlled the functions of local government.

Miami-Dade County public officials, for instance, were so welded to this financial geodetic marker—the forces arrayed to promote suburban sprawl—that it concealed the presence of benzene, a cancer-causing substance, in its drinking water aquifer.

When local government can hang the shingle on its window "We promote economic growth even if it kills people" you know that something is wrong in America.

Whatever Congress or the White House does in response to the national financial events now unfolding—and certainly, conservatives will clamor for doing “nothing”—it is clear that using suburban sprawl to define the US economy is a choice and a bad choice.

If the heart of the national economic difficulty is the explosion of financial derivatives, then the solution is putting walls and speed bumps in the way of the most toxic of these financial instruments, measured in the hundreds of billions and trillions of dollars, in an industry that is scarcely regulated.

We have gone through a most mis-guided era in which great confusion was sown about the appropriate use of federal authority. Tremendous damage to the economy has been done, during this time, under the rubric of opportunity. A pertinent and outstanding question is how long it will take for voters to reach the same conclusion.