The Housing Bubble

A report from Southwest Texas Live. “Is the national lending and foreclosure crisis harming real estate values in Del Rio and Eagle Pass? As with most controversies, it depends on who you talk to. Eagle Pass Realtor® Charlotte Banks is nervous. Her market share of foreclosed homes to sell has increased significantly. ‘I used to have one or two a year, but really have about 15 at any given time now—where they’ve been foreclosed, or they have already moved out and we’re still waiting to get the value on them,’ said Banks. ‘The problem is, you have people moving in with nothing, didn’t even pay their closing costs, they have absolutely no equity.’”

“‘As long as there are these loopholes [allowing borrowers to move into a new home with no down payment and associated costs incurred], and until they stop these programs, this will just keep happening all over again,’ Banks said.”

“John Sontag, VP for title operations, Southwest Abstract Company, (in) Del Rio, elaborated. ‘Not a lot of older people are losing their homes,’ Sontag said. ‘Most of them [foreclosures] are on loans that are only two to four years old, with almost no equity built up in them.’”

“‘In general it’s correct, that we’re not in a crisis here,’ said Sid Cauthorn, CEO of The Bank & Trust. ‘but there has been some softening of the real estate market. There have been more homes going on the market, and, yes, I think there are more homes on the market now than there were last year this time.’”

The Houston Chronicle. “The slip in monthly home sales has hit the top — houses priced at half a million dollars or more that had helped bolster the Houston-area real estate market. Sales of homes at that level reversed course last month, falling almost 16 percent compared with March 2007, the Houston Association of Realtors reported.”

“Sales of homes priced between $80,000 and $150,000, which made up the highest number of transactions last month, fell almost 20 percent. The next-biggest decline took place in the $150,000 to $250,000 price range, where sales dipped 18 percent.”

“Some attribute the decline in sales of more expensive homes to tightening lending standards. ‘For a $500,000 house, somebody now has to put a substantial amount more down to get to the conforming loan size of $417,000 or is subjected to a higher interest rate, and apparently it’s starting to weigh on the market,’ said David Zugheri of First Houston Mortgage.”

“To be sure, there are more homes on the market than at this time last year, and it’s taking longer to sell them. And a 19 percent decline in month-end pending sales — those listings expected to close in the next 30 days — signals another drop in sales this month.”

“Some espouse the idea that housing activity is just returning to a more normal pace after setting sales and price records in 2006. ‘A year ago it was an unusually fast market for what we had been seeing,’ said Mike Livingston of Keller Williams Metropolitan.”

The American Statesman. “Central Texas home sales continued to slide in March, falling 21 percent from a year earlier, according to the most recent report by the Austin Board of Realtors.”

“March, which had 1,832 sales of existing homes, was the ninth consecutive month that home sales dropped. And pending sales — sales expected to close in April or May — show that the slowdown could continue. Those sales fell 54 percent — the highest percentage on record — to 1,349, the report shows.”

“Austin-area homes also are taking longer to sell. This has led to an increase in active listings, up 24 percent to 9,638. Since January, sales for the year are down 16 percent from the same period a year ago.”

“Jim Gaines, research economist at the Real Estate Center at Texas A&M University, said the numbers are softer than he predicted.”

“‘We expected the market to be down and to be slower’ than 2007, Gaines said. ‘That’s a little more than I expected. We had a sales bubble. So what we’re seeing is we’re getting back to the norm, but we’re seeing that happen real fast.’”

“‘I think what we’re finally seeing is the national slowdown affecting Austin,’ with the effects hitting most aggressively in the past 90 days, said Mark Sprague, Austin partner for Residential Strategies Inc., which tracks the housing market.”

“‘The consumer confidence index has dropped to its lowest level since 1983,’ Sprague said. ‘Everybody is scared to death to make a decision to sell their home.’”

“Homes sales in 2006 and 2007 were the two strongest years the region has seen, with 27,223 and 25,237 sales, respectively. Gaines and other real estate experts predicted that homes sales in 2008 would be fewer and would fall closer to 2005, which had 24,544 sales and also broke records at the time.”

“Troubles with foreclosures continue to mount in the Austin area. The postings for the May 6 foreclosure auction in the four-county Austin metro area jumped 32 percent, compared with May 2007, according to Foreclosure Listing Service.”

“Other Texas areas are experiencing similar troubles. In the Dallas-Fort Worth area, foreclosure postings were up 40 percent in May from a year ago. In Comal County, home of New Braunfels, postings were up 126 percent, from 27 to 61.”

“A total of 795 homes are scheduled to be sold at the May 6 auctions in Travis, Williamson, Hays and Bastrop counties, Foreclosure Listing Service said. The biggest increases in foreclosure postings were in Williamson County, up 35 percent, and Travis County, up 33 percent.”

“May is the fourth consecutive month that Travis foreclosure postings have topped 300, said George Roddy Sr., CEO of Foreclosure Listing Service. ‘The last time monthly foreclosure postings in Travis County increased in four or more consecutive months was four years ago in the early part of 2004,’ he said.”

The Dallas Morning News. “The housing downturn is hitting almost every neighborhood in the Dallas area. Even affluent close-in residential areas that had previously avoided declines, including the Park Cities and North Dallas, are seeing falling prices and significant drops in home sales.”

“And sales of high-end homes no matter where they are – until recently a bright spot – are sliding, too. Economists and other experts blame a large inventory of recently built speculative homes, higher interest rates for large mortgages and sellers who have not lowered unrealistically high prices.”

“‘We are definitely seeing a deterioration in sales across price ranges,’ said D’Ann Petersen, business economist with the Federal Reserve Bank of Dallas. ‘The high end did hold up quite well until recently.’”

“Preowned home sales dropped 25 percent in the Park Cities. And prices were down 1 percent from a year ago – the first such decline in more than five years, according to North Texas Real Estate Information Systems.”

“In North Dallas, sales in the first quarter were down a staggering 40 percent. Prices were also off by 1 percent from a year ago. Median home sales prices dropped by 4 percent in Far North Dallas, and sales in that area fell by 26 percent.”

“Sales prices fell in almost two dozen of the 46 residential districts The Dallas Morning News tracks each quarter.”

“Even the most blue chip neighborhoods are having some problems. ‘I talked with a leading appraiser who said he was working on 16 or 17 foreclosures in Preston Hollow – they were all builders,’ said longtime Dallas residential agent David Nichols. He said there are ‘plenty of buyers out there,’ but with so much to look at, they are taking longer to decide on a house.”

“Across the close-in markets, he said ‘the price point between $1.5 million and $2 million is where a lot of the inventory is.’”

“Sales of $1 million-plus homes fell by 19 percent in the first quarter in North Texas. The sharp decline follows several years of double-digit gains at the top of the local market. Sales of homes priced between $600,000 and $1 million fell by between 20 and 38 percent in the first three months of 2008 compared with the same period last year.”

“‘Some lenders cut back on making the loans’ because they could no longer sell them to investors, said economist Dr. James Gaines. ‘Also, the interest rate on jumbos jumped to more than 100 basis points [a full percentage point] higher than conforming loans.’”

“‘People who have a lot of money and are looking to buy the very expensive properties aren’t stupid with their money – they don’t like paying the higher cost and may be waiting for the market to respond,’ Mr. Gaines said.”

“Veteran Dallas appraiser D.W. Skelton isn’t surprised to hear that the first-quarter preowned home sales statistics look a bit bleak. ‘We’ve seen it for a while,’ he said. ‘The numbers are not as optimistic as some would lead you to believe.’”

“‘Most of it is the result of builders running up values in some neighborhoods and now they have come down,’ Mr. Skelton said. ‘It’s more a problem of price point – no matter what the location. They need to come off those prices. Their expectations were unrealistic because our market was so robust for so long.’”

“All the publicity about so-called rescue plans to help troubled homeowners isn’t having an impact so far on Dallas-Fort Worth foreclosures. The number of homes facing foreclosure in the area next month is up almost 40 percent from a year ago.”

“‘All these plans and different things the government and others are talking about evidently are still in the pipeline because it certainly hasn’t helped,’ said George Roddy, president of the firm that tracks foreclosures in almost a dozen counties.”

“Mr. Roddy said the number of D-FW foreclosure postings is the second-highest on record. ‘Back in February, we were over 5,000,’ he said. ‘But the percentage gain this year is unbelievable when you consider that last year was unbelievable.’”

“Almost 43,000 homes were posted for foreclosure here in 2007 – a record and up 10 percent from 2006. The number of home foreclosure postings has risen by 24 percent from the first five months of 2007.”

“‘There is no one silver bullet to take care of the problems,’ said Todd Mark, VP of education at Consumer Credit Counseling Service of Greater Dallas. ‘We are getting a lot of people calling who are many months behind in their mortgages.’”

“Many of the borrowers have just stretched too far, Mr. Mark said. ‘Somebody is always living beyond their means – maybe only by $100 or $200 a month,’ he said. ‘We see people already stretched to the limit, and they can’t handle that 25-cent jump in gas prices. And it’s cheaper to drink gasoline than it is milk right now.’”

“He said he doesn’t expect to see much change in home foreclosures over the next 18 to 24 months.”

“For months, mortgage lenders have been backing away from borrowers with spotty credit, all but closing down the so-called subprime mortgage market. More surprisingly, they’ve also been increasingly loath to lend to high-end borrowers who might want to finance a home in tony Preston Hollow, say, or the Park Cities.”

“‘When the subprime mess came to full fruition, jumbo loans got thrown in with all the subprime loans,’ said Tom Parker, president of Home Team Mortgage, the in-house mortgage company of Ebby Halliday Realtors. ‘The liquidity not only for subprime loans dried up, but also for jumbo loans.’”

“Loans above $417,000 can generally be sold only to private investors, at least for mortgages made in Texas. But many investors now shy away from mortgage-backed securities, given the recent credit problems.”

“‘There’s no appetite on Wall Street to buy those notes anymore,’ said Mike Anderson, CEO of Reliance Mortgage Co. in Dallas. ‘I don’t care what the quality is.’”

The Marshall News Messenger. “Subprime mortgages. Housing crisis. Foreclosures. Those topics have dominated the national news for the last few months. However, that may not be the case here in East Texas.”

“‘What we’ve seen here in Marshall, Longview and all of East Texas is a leveling of the market, not a decline,’ said Clay Allen, a broker for the past 31 years. ‘The ’subprime’ is not getting us, it’s the lack of product. We don’t have enough variety of housing in varying price ranges.’”

“Allen said the reason the market has remained steady in this area is ‘we haven’t seen the rapid inflationary jumps that we’ve seen in California, Florida, Boston and other areas.’”

“While the price of housing was increasing by 25 percent a year in those areas, ‘ours was going up 7, 8 percent here,’ he said. ‘Conversely, while costs are dropping by 10, 20, 25 percent in other areas, our prices have remained steady. What we’ve seen is a leveling off of increase in value.’”

“In the 31 years he’s been in the real estate business, Allen said he remembers only one time that people in this area were losing money on their homes.”

“‘The oil market cratered and the real estate market cratered,’ Allen said. ‘That was about 1986 through 1990. Some people that had to move from this area for jobs had to take a loss. It was like that throughout the oil belt. We’re seeing an ebb and flow in the market today, but we’ve not seen losses since about 1991.’”

“Allen said the practice of offering subprime mortgages peaked around 2003 and 2004. Subprime loans are designed for people with weaker credit ratings, and Texas has the lowest average credit rating in the nation, according to Experian, a credit scoring company.”

“Such loans usually come with a higher interest rate — typically three percentage points higher or more — and often are adjustable.”

“‘Real estate was the engine running the country and nobody wanted to see it end, so lending practices got more and more lax,’ Allen said. ‘I remember when you needed 20 percent down to buy a home. Then it went to 15 percent, 10 percent, 5 percent, zero down, get-your-momma-to-cosign. The feeding frenzy took on a life of its own and nobody wanted to see it end.’”

“Home prices across Texas are considerably lower when compared to the remainder of the country. The national average home price is $227,500. In Texas, the average-priced home is in the range of $146,200.”

“So why, then, is Texas ranked seventh in mortgage delinquencies and 19th in actual foreclosures? Financial experts say aggressive lenders made loans to people who simply could not afford to repay them. Loans with no down payment, adjustable-rate mortgages with steep interest rate increases, limited income documentation and no escrow for property taxes and insurance are all listed as possible factors in the number of delinquencies and foreclosures in the Lone Star state.”

“The practice of subprime mortgages can be traced to Texas. Edward N. Jones, a former NASA engineer, looked at low-income home buyers nearly a decade ago and saw an unexplored frontier, according to a story published by The New York Times in March 2007.”

“Through his private software company in Austin, Jones and his son, Michael, designed a program that used the Internet to screen potential borrowers with weak credit histories in seconds. The software was among the first of its kind.”

“By early 1999, Jones’ company, Arc Systems, had its first big customer: First Franklin Financial, one of the biggest lenders to home buyers with weak, or subprime, credit.”

“The old way of processing mortgages involved a loan officer or broker collecting reams of income statements and ordering credit histories, typically over several weeks. But by retrieving real-time credit reports online, then using algorithms to gauge the risks of default, Jones’s software allowed subprime lenders like First Franklin to grow at warp speed.”

“By 2005, at the height of the housing boom, First Franklin had increased the number of subprime loan applications it processed sevenfold, to 50,000 every month. Since 1999, Jones’ software has been used to produce $450 billion in subprime loans.”

“The software itself cannot be blamed for lowered lending standards or lax controls. But critics say the push for speed influenced some lenders to take shortcuts, ignore warning signs or focus entirely on credit scores.”

“‘Used properly, automated underwriting is a wonderful thing,’ said Pat McCoy, a law professor at the University of Connecticut, who has written on real estate lending. The problem, she said, comes when lenders customize it to approve the wrong borrowers.”