Boom and Bust: A Decade of Misadventures in Real Estate

From homeowners to investors, many would just as soon forget the past 10 years when the subject turns to housing. The decade that began with a stupefying run-up in home prices has ended with the government sorting through the wreckage of the worst housing collapse since the Great Depression.

For those who want to relive it, we offer here our list of 10 stories from The Wall Street Journal that chronicled the real-estate adventures and misadventures that characterized the 2000s.

Loan Stars: Why Calls Are Rising To Clip Fannie Mae’s, Freddie Mac’s Wings (07/14/2000)

First, Fannie Mae and Freddie Mac have loosened loan standards to capture more subprime and other higher-risk loans. Second, they’ve begun buying up staggering amounts of their own mortgage securities. While both practices juice their profits, they’re also potentially dangerous, and no one knows whether the methods used to manage those risks would hold up in a severe recession. And because the two companies have become such integral players in the nation’s financial system, there is concern that even a small setback could quickly cascade through the economy, setting off financial fires at other companies, or even lead to a taxpayer-financed bailout.

Shaky Foundation: Rising Home Prices Cast Appraisers In a Harsh Light (12/13/2002)

To many in the real-estate business, unreliable appraisals expose the shaky foundations of today’s hot housing market. Spurred by low interest rates, mortgages and refinancings are expected to rise 19% to a record $2.4 trillion this year. But with the economy stuck in low gear and sales slowing, many experts fear home prices could soon drop. If so, substantial blame may fall on the nation’s 40,000 residential appraisers — much as Wall Street securities analysts are being criticized for hyping overpriced stocks before the Internet bubble burst.

Acres and Pains: Growing Scarcity of Land Alters Home Economics (04/15/2003)

One of the fastest-growing cities in America, Las Vegas embodies a problem cropping up across the country. The nation has seen a rapid increase in demand for new housing in recent years, fed by fast population growth, new immigration and easier credit. But the land available for home building has grown increasingly scarce. Builders eager to capitalize on a historic building boom have already gobbled up many of the most desirable parcels and bid up the prices of remaining land close to urban areas, adding to recent fears of a painful housing-market correction. A backlash against builders by city councils and neighborhood groups, fed by worries about the effects of rapid development, has further restricted builders’ options.

As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate (05/23/2005)

Five years into a housing boom that has boosted U.S. home values an average of 50% and added an estimated $5.5 trillion to the total market value of residential real estate, many Americans no longer think of their home as just a place to live. Instead, it’s a cash machine that can be used to rapidly build wealth. To that end, a growing number of people are tapping into their home equity to invest in more real estate.

After the Boom: Housing Slump Proves Painful For Some Owners and Builders (08/23/2006)

For years, real-estate brokers and home builders promised that the soaring property market eventually would glide to a soft landing. These optimists predicted that home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5% or 6% a year. It isn’t working out that way.

Risk Management: As Home Owners Face Strains, Market Bets on Loan Defaults (10/30/2006)

Subprime lending has put as many as two million families into homes over the past decade, helping push the U.S. homeownership rate up to 69% from 65% — a major shift toward an “ownership society” that politicians of all stripes have touted as one of the nation’s economic successes. As the bets play out, they will show how much of that success is permanent, and how much a temporary phenomenon fueled by overly aggressive lending.

‘Subprime’ Aftermath: Losing the Family Home (05/30/2007)

Over the past several years, seven of the 26 households on the 5100 block of Detroit’s Outer West Drive have taken out subprime loans, typically aimed at folks with poor or patchy credit. Some used the money to buy their houses. But most already owned their homes and used the proceeds to pay off credit cards, do renovations and maintain an appearance of middle-class fortitude amid a declining local economy. Three now face eviction because they couldn’t meet rising monthly payments. Two more are showing signs of distress.

The United States of Subprime — Data Show Bad Loans Permeate the Nation (10/11/2007)

As America’s mortgage markets began unraveling this year, economists seeking explanations pointed to “subprime” mortgages issued to low-income, minority and urban borrowers. But an analysis of more than 130 million home loans made over the past decade reveals that risky mortgages were made in nearly every corner of the nation, from small towns in the middle of nowhere to inner cities to affluent suburbs.

Housing Bust Fuels Blame Game (03/19/2008)

As the falling housing market shakes financial institutions and pummels Americans in an election year, the nation’s economic woes have surged to the top of voters’ minds. The timely question: To what extent are politicians and regulators at fault?

American Dream 2: Default, Then Rent (12/16/2009)

Thanks to a rare confluence of factors — mortgages that far exceed home values and bargain-basement rents — a growing number of families are concluding that the new American dream home is a rental. Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That’s freeing up cash to use in other ways.

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Obama’s Pay Czar Defends Fannie, Freddie Compensation Deals

The Obama administration’s pay czar said Wednesday that he was “sympathetic” to the “unique problems” that Fannie Mae and Freddie Mac face and that don’t exist at other financial firms in defending the government’s approval last week of multi-million dollar pay packages to the companies’ senior executives.

Kenneth Feinberg, the Treasury official who’s overseeing the government’s effort to rein in big paydays on Wall Street, wasn’t in charge of approving the compensation deals at Fannie and Freddie, though he was consulted by the government regulators that made the decision.

“I’m somewhat sympathetic to the notion that there are unique problems at Fannie and Freddie that don’t exist at the companies that are before my mandatory jurisdiction,” Mr. Feinberg told CNBC.

Fannie and Freddie’s chief executives will be eligible to take home up to $6 million annually in cash, and the top five executives for each companies are also eligible for hefty cash payouts. The companies can’t pay executives in stock without Treasury’s approval, and analysts who cover the company don’t think the stock has any value. (Still, that didn’t stop investors from buying up Fannie and Freddie stock on Monday after the government last week promised to absorb unlimited losses over the next three years.)

The companies also face an uncertain future because Congress and the White House are set to begin considering in 2010 the fate of the U.S. housing-finance structure and what roles, if any, Fannie, Freddie, or successor entities will play.

“One, there is no stock, so all of the compensation needs to be in cash,” Mr. Feinberg said.  “You can try to limit the cash and tie it to performance, but it’s a little hard to do that more than a year ahead because there may not be a Fannie and Freddie.” He said that uncertainty over the companies’ long-term prospects makes it “difficult to convince people to come to work” for the companies.

The government, which had pledged up to $200 billion to each company to keep them afloat, last week said it would erase limits on that lifeline over the next three years. The Treasury also eased restrictions on the companies’ investment portfolios that will give them more flexibility to buy delinquent loans over the next year.

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Is Housing a Steal?

Is housing a steal? WSJ.com columnist Brett Arends argues that despite worries over a so-called “double-dip” real estate in many pockets of the country is “cheap.” WSJ colleague Evan Newmark says it’s still cheaper to rent.

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Fan, Fred Stock Up But Company Execs Avoid It

Fannie Mae and Freddie Mac stocks became hot commodities earlier this week. But before jumping on that bandwagon, consider: The companies’ own executives aren’t being paid with their companies’ stock.

Fannie and Freddie shares rose earlier this week on the Treasury’s decision last Thursday to hand a blank check for any losses the companies may take over the next three years.

Treasury made its Christmas Eve gift the same day that it signed off on multimillion dollar compensation deals to Fannie and Freddie’s senior executives. Those deals, which offer pay packages worth up to $6 million to chief executives of Fannie and Freddie, are being paid in cash.

As the WSJ reported last week, government overseers wouldn’t force the executives to take stock because it doesn’t have much value, and they didn’t tie pay to long-term performance because, well, no one knows if Fannie and Freddie are here for the long term.

“They’re fully aware the stock is not worth anything down the road,” says Bose George, an analyst who covers the companies for Keefe, Bruyette & Woods Inc. “This acknowledges from all sides that the stock is not worth anything in the long term.”

It’s not unusual to see big jumps–driven mostly by small investors and day traders–in Fannie and Freddie stock whenever news filters out about what the government may or may not be doing to the companies. Freddie gained around 33% to a mid-day high of $1.68 on Tuesday from last Thursday before closing at $1.42 on Wednesday. Fannie posted a similar jump to a mid-day high of $1.38 on Tuesday before closing Wednesday at $1.16.

Investors cheered the Treasury’s decision to uncap the government’s bailout of the two companies because rising losses alone won’t be enough now to push the companies into receivership, a form of bankruptcy restructuring. The government had previously pledged up to $200 billion to each company to keep them afloat and out of receivership. (This WSJ story today looks at some questions that those decisions have raised among analysts).

Some investors and pundits have argued that the companies could one day have value, but most analysts who still cover the companies think their common stock is worthless because the companies won’t ever be able to fully repay the government, which has taken preferred shares in the companies that pay 10% dividends in exchange for pumping $112 billion into the companies.

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