Pop Goes The LIBOR

I’ve been skeptical about the much-discussed housing bubble in the past. I’m getting less skeptical when I read things like this:

As recently as 2002, only 11% of the new mortgages in the [San Francisco Bay] area were interest-only mortgages. But today 66% of new mortgages in the area are financed that way. While such mortgages are not as common nationwide, the upward trend extends across the country. Fewer than 10% of new mortgages nationwide were interest-only mortgages in 2002 but that has now risen to 31%.

That’s from a pithy and rather scary WSJ column by Thomas Sowell, and I’m sorry to say that it tracks with what I’ve been hearing about in two regions I’m familiar with, namely metro Atlanta and the north Gulf Coast of Florida.

Atlanta first. Driving around here and seeing signs for houses ranging from “upper $400’s” to “$750’s” and up–and this is not in the fancier sections, mind you–I’ve been asking for years, “Who the hell buys these places, and what do they do for a living? How can that many people afford the mortgage on a house like that?” The answer may be, “They can’t–unless it’s floating on a cheap ARM or LIBOR.”

I was talking with a friend a couple of weeks ago, whose next-door neighbor is indebted about as deeply as you can possibly imagine: interest-only main mortgage on a very pricey home, a home-equity loan based on its appreciation (meaning he owns absolutely nothing), and various auto loans and personal lines of credit. According to my friend, this guy and his wife are obsessed with ‘keeping up with the Joneses,’ and have spent every penny of that credit on lavish home improvements, furnishings, electronics and such. Here’s the kicker: they’re trying to sell off their house to buy a bigger and more expensive one in a supposedly more-desireable subdivision, but they’re asking so much (they have to, they’re upside down on the house), they aren’t getting any bites. And balloon payments on those loans are getting closer every day.

No, wait, that wasn’t the kicker. That’s just a random data point about one couple who’re making spectacularly stupid decisions. Here’s the kicker: the neighborhood they’re in has a 29% foreclosure rate, according to a local realtor my friend also talked to. This isn’t what you’d think of as a high-risk area, either. This is one of the toniest suburbs in the state. There are an awful lot of trailer parks that don’t have 29% foreclosure rates.

Second, north Florida. For the last four years or so–beginning roughly fifteen minutes after I sold the house I used to own in Panama City–real estate in the Florida Panhandle has been on a jaw-dropping boom. Lots within smelling distance of the water began to flip at multiples of their original selling prices, and construction has exploded. Panama City Beach alone has over thirty new high-rise condo complexes in various stages of construction–forget the old “Redneck Riviera” scene, it looks like South Beach down there today.

You’ve heard of “doing land-office business?” That’s what’s been going on in the Panhandle since roughly 2002. Lots, condos, and houses have flipped and flipped and flipped, from one speculating owner to another, with the price just about doubling every time in many cases–and almost all of them are on interest-only or ARM loans. Housing has gotten so expensive along the once-sleepy coast, home values are being forced up well to the north, as people look to once-backwater burgs like Ponce De Leon and Defuniak Springs for an affordable house.

“So what?” you ask. “Coastal property always appreciates, this is just a previously little-known area that’s been discovered and is being bought up.” And that’s true–except that according to a construction foreman I know in Destin, housing sales plummeted by 28% in April, and May is looking just as bad. He’s working on a large project in Destin where five “flips” backed out on deals in just the last two weeks. He also tells me that multitudes of “for sale” signs have popped up all along the coastal roads in the last couple of months, where previously the properties were being snapped up within days or even hours of going on the market.

All anecdotal, to be sure, and Neal Cavuto would argue that we’re talking about three particularly distorted markets where speculation is rampant, not the whole country. But all of the above, plus Sowell’s numbers certainly suggests to me that there are going to be an awful lot of high-dollar properties defaulting into the hand of lenders over the next couple of years. Opportunities for some, and disasters for others.