All the housing talk right now is about the subprime homebuyers who could barely afford their homes and are now facing foreclosure or about how homebuyers can no longer even get loans.

The subprime buyers (or those who simply took out 100% financing loans) are seen as those who were first time homebuyers who were simply trying to get into the game. This New York Times article on Stockton California’s plight is what the mainstream media has been writing about in the last few days.

A sun-baked city of about 285,000 some 90 miles east of San Francisco, Stockton has seen its population swell over the last decade as commuters have continued to push away from the bay in search of more affordable houses. Average single-family houses here can still be had for $350,000.

Stockton is NOT what you think of when you think of the California dream. It is largely agricultural and doesn’t have the jobs to support high priced housing.

It’s not surprising, then, that Stockton’s homeowners are in financial trouble. From the article:

While hundreds of thousands of people nationwide are being affected by troubles in the lending market, Stockton has the highest foreclosure rate of any city in the country, according to RealtyTrac, a real estate data firm.

The story, then, is that poor little Joe Schmoe, with no financial experience and little income, got in over his head.

Only the problems go deeper than that. If you poke around in some of the richest counties in America, you will see the foreclosure demon alive and well there as well.

Let’s first examine one example in the suburbs of Washington DC.

The DC area has been in a boom for the last 10 years. It is glowing from all the new construction, the new ballpark, gentrification of urban neighborhoods, condos, Starbucks, Whole Foods…you name it and DC is doing it. The prices have also skyrocketed. When I lived in Arlington, Virginia in 1994, you could buy a cute 1940s bungalow for $125,000. The same house would sell for $700,000 or more today.

The price boom has spread from DC to Arlington to the far-out suburbs (even to suburbs two hours away.) Alexandria, Virginia also benefitted. Old Town was spruced up. The Highway 1 corridor saw new condos. And McMansion houses flourished. The $1 million, 6 bedroom brick colonial became pretty common place.

Such was the story of 5997 Crown Royal Drive in Alexandria (zip code 22310.) Only minutes from the Van Dorn metro stop, it was one of three new construction brick colonial houses to be built in 2005 on that stretch of Crown Royal Drive. I don’t have the original listing price in 2005, but tipsters say it sold for over $1.1 million and Zillow lists its value at $1.2 million today.

Here is the lovely Alexandria McMansion:

Yes, the landscaping leaves something to be desired.

The house is now listed for $985,000. The listing from Coldwell Banker says the following:

Very spacious colonial with many rooms: den, library, recreation room, family room, sitting room, separate dining room, 6 bedrooms, sitting room, 2 car garage on 1/4 acre in prime location. Brazilian cherry floors on main level. Fixer upper. Some damage. Sold “as is”.

I wondered, just what could be the “damage” on a house that is only two years old? Water damage? Or something in the original construction?

I e-mailed the agent and asked her what the “damage” was. She was nice enough to respond. She told me that the kitchen had some appliances and cabinets removed. Same with the bathrooms.

It could only mean one thing. Foreclosure.

I asked her if it was bank owned.

She replied that it was.

Bought in 2005 for over a million dollars. Two years later, weeds are growing in the front yard and the kitchen cabinets are missing.

Let’s look at example #2.

This second McMansion is a seven bedroom, 3.5 bath house in Downers Grove, Illinois, which is a very nice and somewhat expensive suburb west of Chicago. The bubble wasn’t supposed to have struck here, but prices have nearly doubled in only three years in Downers Grove and other nearby suburbs.

Here is a picture of the Downers Grove custom built McMansion which is only a few years old:
It has been on the market for over two years. It was originally listed for sale in May 2005 for $979,000. Has been for sale ever since- with numerous price reductions.

Somewhere in the last few months, the bank took it. The house was last for sale in December of 2006 for $825,000 before being pulled. It reappeared in May 2007 for $768,900.

The bank is being aggressive now. They have reduced several times over the summer. Just recently, they reduced from $743,900 to $712,900.

The house has essentially seen a 30% reduction and it isn’t sold yet.

The real story going forward is how over-extended even the upper middle class is. Those pundits on tv who believe that the mortgage mess will be “contained” to the lower class and lower middle class who simply wanted to get into their first home are wrong.

These are but two houses in very nice suburbs. Both are empty. One has been stripped of its appliances and cabinets. The other has seen a 30% cut in price.

Watch the McMansions. They really tell the tale of how big the credit finance bubble has become. Their fate will determine the future of the housing bust and the US economy.

Sorry about all the housing posts lately- but it’s too darn fascinating right now. Besides, I think most people are interested in what is happening in housing right now (as most of us own our homes so we have a vested interest.)

The housing data keeps coming in and most of it is, how do I say it delicately, not good. Housing sales numbers for June for existing homes were recently released and most of them were much lower than a year ago. The national numbers showed sales slowing to their lowest level since November 2002. From the Chicago Tribune:

June’s 11.4 percent year-over-year sales drop was the fourth consecutive month of decline, according to data released Wednesday by the National Association of Realtors.

But if we’re back to 2002 sales data- what’s wrong with that? Isn’t that just returning to a “normal” market?

Yes and no. The problem with returning to 2002 sales levels is that the builders are still building like it’s 2005. Inventory is soaring. Take Chicago, for example. From the Chicago Tribune:

“There seems to be a disconnect now,” said Terry Semmens, Chicago district director for ZipRealty Inc. “We’re showing lots of homes and our agents are busy, but it hasn’t correlated [with transactions] as it has in the past.”

Semmens said the supply of homes for sale in the Chicago region rose 3.6 percent in June, reaching a level 30.6 percent higher than the year before. He also said 37 percent of homes for sale had reduced their price at least once, up from 35.4 percent at the end of May.

Chicago home sales were down 20% in June from a year ago. June is the end of the “peak” selling season in the Chicago area.

The new home developers are only just beginning to see the fallout. In the suburbs of Chicago, developers are trying to move new home inventory to no avail. I personally have been following a new construction McMansion home in west suburban Downers Grove that has been on the market for two summers now. It’s had a slight price reduction from $889,000 to $859,000. It was built by a local developer (the kind that builds maybe two or three homes a year.) Not sure how long that guy is going to be in business if he’s carrying the McMansion house for two years. We’re going to see bankruptcies going forward.

He’s not the only one who his hurting. This housing bust is beginning to take out long established real estate developers- including those who should have known better. From Crain’s Chicago Business:

The slump so far has landed at least one homebuilder in Bankruptcy Court: Burnside Construction Co., a Downers Grove-based company that has built more than 28,000 homes since it was founded in 1911. In early May, Burnside filed a Chapter 7 petition in U.S. Bankruptcy Court in Chicago.

“Projects didn’t go as anticipated. Nobody was buying,” says Kent Gaertner, the company’s attorney. “It’s as simple as that.”

Yep. It’s as simple as that. No buyers- no sales.

Sad for a company that is nearly 100 years old. Think about all of the housing markets that company has survived - including the Great Depression. But not this one.

Take a look at some of the new housing numbers coming out of Chicago. Does this seem “normal” to you? Also from Crain’s:

Developers sold 1,192 homes in the quarter, a 24% drop from second-quarter 2006, according to Tracy Cross. Still, on a seasonally adjusted annual basis, city sales are roughly equal to 2003 levels.

A growing glut of condominiums, however, could delay any recovery. Tracy Cross is tracking 172 active condo and townhome projects in the greater downtown area with a combined 7,814 unsold units. Mr. Cross estimates that two-thirds of the projects are under construction and will open up in the next 12 to 18 months.

Unless demand picks up, some developers could get caught with unsold units, eating into their profit or even preventing them from paying off their construction loans.

“It’s going to bring the strongest (developers) to the fore, and the weakest will really drop,” Mr. Cross says.

Right now, Chicago and many other markets have fallen back to 2002 or 2003 levels. The real truth about a “bust” will be revealed in the next few months. There are going to be lots of frustrated homeowners come this fall and winter (who cannot sell.)

Stay tuned.