A sign advertises available lots in front of a home under construction near the Kenai Golf Course.
Photo by M. Scott Moon
Across the nation, desperate homeowners facing increasing debt from expensive mortgages, often obtained through risky loans, are seeing their dreams evaporate in foreclosure.
Those personal crises are translating into fiscal crunches for many major markets in the Lower 48, according to the U.S. Housing and Urban Development and other housing market observers.
The trend, however, has not manifested on the Kenai Peninsula, where those familiar with the local housing market say prices have avoided the extraordinarily rapid price run-up seen in other parts of the country, while nevertheless enjoying modest population growth and relatively low unemployment, thus writing a recipe for stability.
The reasons behind the crisis Outside are many.
In a recent opinion piece, HUD Secretary Alphonso Jackson wrote that during the recent housing boom many homeowners bought into poorly designed adjustable rate mortgages.
"Now the bill is coming due," Jackson said. "More than $1 trillion in rate resets are expected during the next five years."
In other cases, he added, "unscrupulous lenders and brokers" pushed risky and unsafe products, including so-called "piggyback" or "liars" loans, often requiring no down payment or verification of borrowers' incomes.
"We're different," said Aaron Swanson, of Residential Mortgage in Soldotna. "So far, prices seem to be stable, based on what we are observing."
Markets in Florida and California, for instance, have seen "ridiculous" rates of appreciation, Swanson said.
Homes purchased for, say, $200,000 just five years ago may be worth $450,000 or more today. Such appreciation rates led many homeowners to re-mortgage more than once and assume loans they couldn't afford, in some cases extracting equity merely to finance their lifestyles, Swanson said.
Eventually, the bubble burst, housing prices stabilized, then fell, leaving many owners holding homes no longer commanding high prices. Facing payments beyond their means and unable to sell, foreclosure was the only out.
"There have been a massive amount of foreclosures," Swanson said.
As foreclosures grew, more homes hit the market, unbalancing supply and demand. Unavoidable ripple effects such as declining revenues from property and sales taxes began spreading across whole economies in many major markets.
Nationwide, property values are expected to fall by $1.2 trillion in 2008, according to a report by Global Insight written for the upcoming U.S. Conference of Mayors. That report, "The Mortgage Crises: Economic and Fiscal Implications for Metro Areas," said a salient feature of the bubble psychology was an expectation price appreciation would continue. Fearful of being priced out of the market or missing "phenomenal equity gains," many first-time home-buyers made questionable real estate investments.
There were, of course, many other factors driving the expanding real estate bubble, and when it burst, not all its victims were simply financing extravagant lifestyles.
Also driving the credit bubble was a marketplace bulging with offers for (artificially) low interest rates and easy payments that, coupled with skyrocketing valuations, made home ownership more attractive than ever. Perhaps more importantly, mortgage-backed securities lured Wall Street investors, making huge sums of cash available for loans and encouraging those easy credit terms, the report said.
Subprime rates and other "exotic mortgage instruments" led many to buy homes in 2004 and 2005 through loans "crucially dependent upon the continuation of the bubble in home prices," the report noted. An example: 2/28 adjustable rate mortgages offering low rates for the first two years, after which rates were "reset," often to levels that would have rendered those buyers ineligible had they sought them to begin with.
It was that readjustment in 2007 and the fact many of those mortgages were no longer held and serviced by the original lender (having been sold to investors who, recognizing their portfolios were threatened, quickly turned off the tap) that helped create the foreclosure calamity, the report said.
"When the bottom fell out, there was a liquidity crisis, and Wall Street quit buying loans," Swanson said.
That sort of thing was and is far less likely on the Kenai Peninsula, said Philip Alderfer, of the Alderfer Group, a real estate brokerage in Homer that moves properties primarily on the lower peninsula.
"We have not seen the same effect on the local market because of the subprime meltdown," he said. "We never saw that type of lending up here. Nor did we see the same type of buyers the 100-percent speculative buyers."
Folks investing in homes around Homer and other parts of the peninsula often are either young and moving into larger homes as their families grow, or older and downsizing to more manageable abodes when retiring. Some are buying property in anticipation of retirement. All see peninsula communities in terms of the long term.
Relatively few are buying merely to realize a quick profit, Alderfer said.
Another important difference is that on the peninsula, most mortgage seekers deal with well-known and stable local financial institutions that service their loans themselves, giving borrowers the confidence of knowing that if problems arise, they can be resolved by meeting face-to-face with lenders.
Other economic factors served to make foreclosures less likely on the peninsula.
Employment was one. Where it is stable and healthy, healthy real estate markets tend to exist. A modest but steady growth in population is another. Both of those apply to the peninsula and have for several years.
"Based on our experience, we have seen a reduction in delinquent mortgages," said Jason Carroll, with First National Bank in Kenai. "So far, prices seem to be stable, based on what we are observing."
Media coverage of the foreclosure crises Outside, however, has helped create a perception here that interest rates have jumped significantly, when in fact they remain fairly low, Carroll said, adding that a loan in the 6-percent range was "very doable right now."
Swanson agreed, saying interest rates on the peninsula have been good for some time. He also said the slow and steady rate of property appreciation (a few percent a year, generally, as opposed to the 20 to 30 percent annual rates seen in some locales Outside) makes peninsula property attractive.
"Real estate, in theory, should appreciate at roughly twice the inflation rate," Swanson said.
Hal Spence can be reached at firstname.lastname@example.org.
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