Monday, August 4, 2008

The ominous sound of jingle mail: The death of the American suburbs

For some US homeowners, the simplest way out of worsening disaster is to put the keys through the mailbox and walk away. Rupert Cornwell reports

Monday, 4 August 2008

At first everything looks reassuringly normal. After all, aren't peace, quiet and order what suburban America is supposed to be all about? But then you notice them – the weeds sprouting in once-mulched flowerbeds, the lawns that haven't been mown in this most lawn-conscious of universes, and the blue plastic key boxes for agents showing the house to allow themselves and their clients in. And then there are the For Sale signs, two three or four on every block, some with the dreaded word, "foreclosure", appended.

Two such empty houses stand on the small circle in which the cul-de-sac of Quell Court, in Dale City, Northern Virginia, comes to an end. "I think the guy opposite got in trouble after a divorce, the other one I'm not sure what happened," says Munawar Khan, who can see both of them from his front room window. "But I'm pretty sure both are in short sale now." Mr Khan, who moved into Quell Court in January, should know. He's a realtor (as estate agents are known here) himself.

Dale City, in Prince William County, 30 miles south of Washington DC, is quintessential outer suburb America: a township of 60,000, notable for huge shopping malls, vast churches, and sprawling parking lots and – until recently, a home building boom that it seemed would never end.

The place was largely the creation of a property developer called Cecil Don Hylton, who named it because of the wooded hills and dales in this corner of Greater Washington. "The friendliest little city around," Dale City likes to call itself. Right now however, it is an epicentre of the housing crisis that is shaking the US and global economy to its core, a case study of the American Dream gone wrong.

Hylton's conceit was to give every neighbourhood a name that ended in "dale" and then have every road in it starting with the same letter. Thus Queensdale, with local thoroughfares called Quinn Lane, Queensdale Drive, Quate Road, Qualls lane and logically enough, Quell Court.

The street is very much the upmarket end of Dale City. The houses don't quite fall into the "McMansion" category, but come close. Typically they have four or five bedrooms and as many bathrooms, two- or three-car garages, and stand on an acre or more of land. Many have those "baronial" style double storey entrance halls that Americans so love. At the height of the boom they would go for over $650,000 (£330,000). Now you can pick one up for $450,000 or so.

Tom Morcom, vice president of the Dale City branch of real estate brokerage colossus Coldwell Banker, is a 30-year veteran of the business. He's seen three or four such cycles, but never, he says, a boom and bust like this. "This used to be the top selling area in Northern Virginia," he explains. "It was once a blue collar area, but moved upmarket, offering good dollar value."

At the peak of the boom, in late 2005 and early 2006, the sky seemed the limit. Everyone – young professionals, middle class families with kids, and property investors – sought to buy in places like Dale City, close but not too close to Washington, offering every modern convenience in a suitably rural environment.

And everyone wanted a piece of the action. The builders had a field day. "Sometimes they would add $60,000 to the price for $10,000 worth of extras," says Munawar Khan. But nobody cared. Lenders too were awash with money. Caveat emptor, one may say. Should not borrowers have read the fine print and known what they were getting into? But for Mr Morcom, the prime culprits were the mortgage operators and other greedy lenders who made the risky loans, before passing the risks on to greedy Wall Street investors, with the disastrous consequences of which the world is now only too well aware.

"Even at the height of the boom, we never showed properties unless the client had a letter of pre-qualification from a lender, saying funds would be available," Mr Morcom says. "We only saw the terms of the loan at settlement, right at the end of the buying process. Some would make your blood run cold, three month adjustable mortgages and that sort of thing. As long as credit was cheap and house prices kept rising, the party could continue."

In Dale City, prices rocketed over 130 per cent between 2000 and 2006. Since then they have plunged 30 to 40 per cent, and foreclosures – forced repossessions – hit one of the highest rates in the country.

There are alternatives. One is the short sale, taking place in Quell Court, whereby the lender agrees with the distressed homeowner to buy back the property at the current market price. For example, you might owe $300,000 on your mortgage, when your home now fetches only $260,000. The bank says fine, and closes out the mortgage, forgiving the unpaid $40,000 difference.

For a bank, it's not a great arrangement – but much better than foreclosure. The homeowner also has a stake in the process, keeping his credit rating clean. In a foreclosure, a bank typically loses 40 per cent of the value of the property, double that of a short sale. The process is costly and time-consuming – and can get very ugly indeed. "I've seen foreclosed homes where the evicted owner has trashed the place, and ripped out the kitchen, bathroom fixtures, even the air conditioning," Mr Khan says.

Such is the distressed state of the modern American suburb – its problems made worse still by the sky-high price of petrol that has turned the daily commute into another drain on income and increased the appeal of living as close as possible to work.

If anything, America's housing crisis is deepening. President Bush may have signed into law last week a bill that shores up Fannie Mae and Freddie Mac, the two giant entities that underwrite almost half the country's mortgage debt, and enables borrowers trapped in unaffordable mortgages to replace them with cheaper fix rate loans backed by the government. But house prices are still falling, sucking ever more people into the negative equity quagmire even as their monthly payments are soaring.

Some warn of an even more perilous trend – of "jingle mail", when home owners who can afford their mortgages decide there's no point throwing good money after bad, when they already owe more than their house is worth, and the monthly payment jumps yet again. They simply put the keys through the letterbox and walk away. The result is foreclosure and a temporary hit to their credit rating. But US law makes it difficult for a bank to chase borrowers for an unpaid mortgage loan. In the end, the slate is wiped clean.

For its part however, the bank has no choice but to repossess and sell the property, but for far less than the value of the loan. The risk thus is of further capital write-downs and more curbs on lending that will only make the present credit crunch even more painful.

But in Dale City, the first sprouts of hope may be poking up through the rubble of the bust of 2007/2008. Markets bring recovery as well as ruin, and prices have now fallen so low that buyers are flocking in. In June, bargain hunters pushed home sales up by 83 per cent from a year earlier.

The median home price here has dropped to $225,000 from $400,000-plus in just two years. "$300,000 row houses are selling for less than half that," Mr Khan says. "Amazingly there are properties here, 30 miles from Washington, for under $100,000." The new trend does not mean the end of the US housing crisis, or even the beginning of the end. But it's a sign that bad times, like good times, do not last for ever.

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