The Housing Bubble

The Arizona Republic reports on a bill to back-up condo escrows. “Ken Cheuvront thought he saw his $20,000 deposit going out a high-rise window when ownership of a condominium project changed hands. Fortunately, the new owner honored the deposit. But his jitters over the fate of the got Cheuvront, a state lawmaker, thinking.”

“Cheuvront said the cooling real estate market, and the tenuous status of many projects, create a situation ripe for buyers to lose their down payments. ‘I assume there’s going to be a situation where it’s (the deposit) not going to be honored,’ he said.”

“He is pushing legislation that would create a recovery fund for any would-be buyer of a new multifamily project, such as the high-rise condo and loft projects proliferating in the central city. Originally, the Phoenix Democrat set out to create an escrow fund where a neutral party could hold deposits, as is done with existing-home sales.”

“But developers opposed the idea, which put his legislation in jeopardy. So Cheuvront began to work with builders and developers and came up with the recovery-fund concept. With a recovery fund, the industry, not a specific developer, would cover losses incurred by failed projects. Developers, Cheuvront said, don’t want money tied up in escrow accounts, where they can’t touch it. They need access to buyers’ earnest money to fuel their projects.”

“Developers would pay $10 per unit into the fund. Buyers who lost their earnest money could collect up to 20 percent of the base price of the unit they intended to buy. However, payouts from the fund would be capped at $1 million per project.”

“Attorney J. Robert Eckley said at the hearing that a change in state real estate rules enacted more than 15 years ago gives condo builders, and home builders, the chance to opt out of escrow requirements. And they do, using the argument that they need the funds to build their projects.”

“Eckley, who has represented clients who have lost their earnest money, said the argument should be a warning bell to anyone looking to buy. ‘If you need my $5,000 to operate, before you even perform, well..the restaurant makes you pay after the meal,’ he said.”

“The need for some relief is clear, and getting more pronounced as many high-rise projects remain little more than a picture on a sign. ‘I see a burst coming to the real estate bubble,’ Eckley said.”

And from the LA Times. “Just when investors thought they knew everything about vacation home purchases, along comes a brand-new way to spend lots more money. Hybrid condo-hotels..are on their way to California, with 22 projects already announced and more planned. Nationwide, 228 U.S. condo-hotels are in the pipeline.”

“The hotel owns and maintains the common spaces, such as pools, restaurants and spas, to which condo owners have full access. Unit owners pay monthly fees, which vary according to the number and quality of amenities. Under most condo-hotel plans, rents are split 50-50 with the hotel owners, who often, but not always, manage the rentals.”

“San Diego’s Hard Rock Hotel began taking deposits Thursday. This spring, when units hit the market, real estate-investment consultant Jeff Gregersen said he will select a condo in the $600,000-to-$800,000 range.”

“‘I’m buying a good investment and a lifestyle.’ He projects a 13% annual appreciation on his purchase and expects to break even from rental revenue. ‘I view this as a long-term investment,’ he added. ‘I think I can’t go wrong in San Diego.’”

With a writer from the Orange County Register due to reply to this blogs’ readers tomorrow, one topic suggestion may prove useful in that discussion. “I think I’d like a topic about Sources.”

“It occured to me yesterday that the media thinks the only Real Estate sources they can use for news articles are those people who have a vested interest in Real Estate.”

“What are these people going to say, when asked about the bubble? It’s predictable. So, my question- for all of us on the board is…”

“‘How Do We Help The Local & National Media Find Sources For News Stories Who Do Not Have Vested Interests In Real Estate?’”

Here’s a weekend challenge for you bloggers. We need your digital housing bubble pictures for the new slideshow! You know, the shots of a forest of for-sale signs, or how about that dark and empty condo tower in Florida, or even the cranes? Some shots of the empty streets in Queens Creek around Phoenix or what those expensive houses in Bakersfield look like.

We ask that you keep the pixels down to 1600×1200 or less. Also, we had a capacity issue, so please keep each photo file under 2.5 megs. Any type of file is fine.

One common problem is the email arrives with no attachment, even though the author obviously intended to do so. So feel free to resubmit anything you’ve previously mailed. Also, we can’t use photos from a MLS or website. And sorry, the same goes for charts from newspapers, etc.

Specifically, will the persons who mailed the ‘Oxnard, CA in Ventura county’ and the Fort Worth sign pics please resend those files. Thanks for your contributions!

Send to: photos@thehousingbubbleblog.com

The Detroit Free Press has a report on home prices in a glutted market. “As the temperature warms, the grass greens and the trees bud, colorful for sale signs announcing the availability of housing in metro Detroit neighborhoods will pop up with new life as well. But in some communities, those new signs will be competing with the for sale signs that cropped up last spring, or in some cases the spring before.”

“The existing housing market in southeast Michigan is saturated, and that glut of homes at the start of this spring housing season could indicate that houses will sit unsold longer than ever.”

“In Oakland, Macomb and Wayne counties, there were 37,393 homes on the market as of March 1, compared with 11,078 at the same time in 2001, a 238% increase. Housing sales are suffering everywhere, from Shelby Township, where 554 homes sold last year while 1,779 were listed, to Detroit, where 22,350 houses were listed and 6,814 sold.”

“Realtors acknowledge that homes do eventually sell, though the time can vary greatly. ‘Unfortunately, a year or two on the market is not a big deal anymore because of the large number of properties available,’ said Jane Denning, a broker in Grosse Ile.”

“‘It’s a mystery to us why we haven’t been able to sell the house, even though the economy is suffering,’ said retiree Nancy Cunningham, a West Bloomfield resident with a 4,263-square-foot home on Pine Lake that has been on the market for 2 1/2 years. ‘We’ve done just about everything we could in an effort to sell it.’”

“Cunningham and her husband, Tom, started with putting the West Bloomfield house they’ve lived in for 25 years up for sale. Meanwhile, they snagged a 3,600-square-foot house near Palm Springs on a golf course with mountains in the distance. But this winter, someone else is enjoying the sunny view. The Cunninghams had to rent out the house to offset some of the burden of two mortgages. If they don’t manage to sell here by the end of the summer, they may end up selling there.”

“‘We never thought it would take so long to sell this house,’ said Tom Cunningham. ‘We were never going to buy until we sold this one, but homes are appreciating so quickly out there. The longer we waited, the less we were going to get.’”

“Another snag: Sellers who can’t fathom pricing homes at what the market will bear, especially when hearing of double-digit appreciation rates across much of the country. Gordon McCann, an associate broker in Plymouth, said many sellers have determined a dollar amount they need to make from the sale of their home to get into another one comfortably. Often, that amount is more than the house is worth in this area, he said.”

“‘You can price a house at what the market wants and it can move in 30 days, or you can price it at what the seller wants and it will sit for nine months,’ McCann said. Added Keith Weber, an agent in Royal Oak: ‘In this market it’s not location, location, location as much as it is price, price, price.’”

“It’s most frustrating to watch, said David Kaner, a mortgage loan officer who owns a two-bedroom condominium in Walled Lake that won’t sell, even though it’s priced at $132,000. He and his wife, have had the condo on the market for seven months. They’ve already moved into a newly built house in Commerce Township and are carrying two mortgages.”

“‘Most of our savings is being used up on a monthly basis. We’re not going out to expensive dinners. I’m working longer hours trying to keep the income levels up,’ Kaner said. ‘It’s mostly been mentally tough..when you see a significant portion of your income going out for a second mortgage, it’s frustrating.’”

Please post your housing market observations here! One reader started off in the topics thread. “Local radio station has a real estate guru on the air waves on Thursday, plus he appears on a nightly tv program. He was beside himself promoting a new mortgage product to keep the high priced real estate going. Next week he is going to talk about the 40 year mortgage.”

“Yesterday he announced that they just released the 50 year I/O loan and he had the owner of CMG Mortgage on promoting his home ownership accelerator mortgage. His cohort suggested that 40,45,50 year mortgages make sense because people will be living to be 100. When is the madness going to stop? If this keeps going homeowners will be paying more for houses and their monthly tax bill will be higher than their monthly P/I payment.”

Another recalled a nervous flipper. “I posted a couple weeks ago on one thread about about an open house and discussion with a ‘desperate flipper’ in Phoenix area. How ’bout having other post their similar experiences just to get an idea of the level of concern/fear/panic that is starting to set-in the flipper mentality?”

One points out the latest spin. “Here’s another topic: Data Holes; whether real estate data providers are holding back information that would show market declines, or if they are releasing it, are spinning the data to confuse readers.”

“My two candidates are NYSAR, for holding back their figures and now REBNY, which issued a fancy press release about how much prices went up in 2005, but do not include data for each quarter in their press release site- last quarter I see in their list of press releases is for 3rdQ 2005, which, oddly, indicated median co-op prices went down (tho condos went up) - and can’t see 4Q to determine whether they went down again.”

A reader from Oregon replied, “I wonder whether the number of listings at Realtor.com is accurate. They have dropped below last summer’s levels here in Portland, ME and have dropped rather dramatically in just the past week. Of course to artificially depress listings would mean some listed homes not being advertised. I suppose they could equitably rotate missing listings so as not to be noticed by sellers.”

One reader noticed a marketing change. “I would love to hear if there are any long time renters here who have only just recently been approached by realtors for the first time. We have been renting in this area for 11 years, and just this year for the first time, a realtor has left a calendar and business card on our doorstep.”

A similar tale, “I got a magazine sized solicitation from Countrywide looking for investors for loans I believe. I still see banner ads asking, ‘Do you know how much money is locked up in your home?’ Before it was hidden and you solved a puzzle to acquire the equity. Now it is being held hostage and you need to bust it out like a prisoner.”

And another, “How has your biz changed? The trades I sell to think it’s weather etc., wierd can’t they see the RE stall. I’m getting slow signals already selling to the service trades.”

Some readers suggested a topic surround some recently published books. “I used to like David Bach when he was teaching stuff that actually made sense (eg., save regularly, don’t spend more than you earn, automate your savings so you don’t miss the money, stay out of debt). I guess he has tossed that aside to support a greedy industry.”

Here’s a Bach related article: ” Renting is not the route to wealth. In fact, statistics from the Federal Reserve indicate it’s a good way to stay broke. ‘The argument is that it’s cheaper to rent. That’s the whole argument, and it’s simply not true,’ Bach said. ‘As long as you’re alive you have to live somewhere. The question is, will you pay someone else to live there, and make that person rich, or will you pay yourself to live there and make yourself rich?’”

One reader said, “I read that (SF Chronicle editorial) this morning and was completely disgusted. Then I decided maybe I should just move away from the Bay Area because it’s obvious that people here have gone insane.”

Another replied, “What I find strange about that article is that it was written by someone whose ‘beat’ is real estate and, theoretically, should know better. There doesn’t seem to be one iota of concern about what could happen if the market turns (or, hell, if it just goes flat and the ‘bank’ is no longer open). And all the stuff about how she’s glad her mother was able to pursue painting, travel to Europe, etc., rather than work and save. This article is a real sign of the times.”

“‘You me beat to posting that article from the SF Chronicle. I also had the ‘unbelievable’ reaction. That article shows the whole mentality of most people have changed from being debt averse to debt-wealth. This will not end well. I also just got a copy of Jim Talbotts new book.”

From a report on Talbots outlook. “When John Talbott gazes into his crystal ball to discern the future of America’s housing market, it isn’t a pretty picture he sees. ‘I don’t want to be a Chicken Little,’ he says, ‘but it’s gonna be bad for housing.’”

“A former visiting scholar at UCLA’s Anderson School, Talbott views the housing market as a house of cards on the verge of collapse. He predicts rising interest rates and plummeting property values, followed by widespread foreclosures that will not only affect the real estate industry, but almost every aspect of the economy. ‘It’s already started,’ says Talbott. ‘We’ve had 20 years of up, up, up with real estate. This spring will be brutal.’”

“Talbott regards the latest data on the Bay Area housing market as mounting evidence for his prediction: rising interest rates, decreasing appreciation, 10 straight months of declining sales and, in January, the lowest number of sales in five years.”

“The problem, he says, is that home prices are way overvalued. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property’s true value. RealFacts puts the average Bay Area apartment rent in the fourth quarter at $1,324; DataQuick calculates that the typical home buyer in December committed to a $2,867 mortgage payment.”

“‘It paints a very scary picture,’ Talbott says. ‘Something has economic value because it has cash flow. If you discount for general inflation and go back 120 years in history, you’ll discover that, in real terms, housing prices were relatively flat until 1997, then (they) shot up about 70 percent.’”

“To buy these overvalued homes, he says, many consumers overextend themselves financially by borrowing more from banks. They end up paying an inordinately high percentage of their monthly income on mortgages. In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment.”

“Banks are lending more, he says, because they are sticking to their old qualifying formula of computing the ratio of the loan applicant’s salary to the mortgage payment. They’re doing this, he said, without adjusting for inflation. ‘So the banks are using the same stupid formula. They convince these young couples to borrow a million-dollar note that they’re never gonna get out from under.’”

“To make matters worse, Talbott says, an increasing number of borrowers are taking out variable-rate and interest-only loans. Half of all Bay Area home buyers used interest-only loans to make their purchases last year. With so much of their income already relegated to their mortgage payment, says Talbott, even a small rise in interest rates will push many to, and beyond, their limit.”

“People should protect themselves, Talbott says, by divesting themselves of any investments in real estate. They should sell their vacation homes. They should get out of any variable-rate or interest-only loans. They might even consider selling their primary residence, investing that money in something other than real estate, and renting for awhile. ‘And after this mess,’ he says, ‘cash will be king.’”

The Grand Rapids Press reports on appraisal fraud. “Not a week goes by that appraiser John Meyer does not get a request to ‘hit the number’ on a home’s value to ensure a loan goes through. ‘I had a guy from New Jersey last night call, and he wanted me to do the appraisal if I can assure him I would hit $800,000,’ Meyer said recently. ‘I told him I couldn’t do that.’”

“Walker appraiser Fred Vander Wal has similar stories. ‘I had two last week screaming at me about what they wanted me to do,’ Vander Wal said. ‘It was a 7-year-old home, and it was just trashed, holes in the walls, carpeting all ruined. They said, ‘They’re not going to loan on this if that’s the real condition. Can’t you tone it down a little bit?’”

“That would be appraisal fraud, and Meyer said it’s ‘one of the primary problems out there.’ A recent example is the $325 million settlement by lending giant Ameriquest for what 49 state prosecutors call deceptive lending. Many of those allegations included inflated appraisals.”

“Marge Eppes believes her Holland home was subject to an inflated appraisal. In 2002, she was trying to refinance the loan on her 3-year-old, three-bedroom home at a lower rate. The appraisal came in at $148,000. Eppes said the mortgage company told her it was not enough to cover the refinance.”

“‘Two months after that, they sent another person out,’ Eppes said. ‘They said it was worth $175,000.’ The closing fell through for other reasons, and Eppes has since refinanced with another organization, but she was troubled by the difference in values.”

“Appraisers across the country say they are asked to do it. A recent survey by Ohio-based October Research Corp. found 55 percent of appraisers reported being pressured to overstate home values. ‘We get the requests all the time,’ said Meyer in Kentwood. ‘They say, ‘Unless you can come up with another $20,000 more, we’re not going to pay you.’”

“‘We run into it all the time,’ said Fred Skidmore, an associate broker. ‘They’ve refinanced within the past year and a half, and the refinance appraisal came out higher than what we’re able to sell it for today.’ To settle with their lender, ‘they’d have to come to the table with money,’ he said.”

“Remember the savings and loan debacle of the late 1980s that required a $200 billion taxpayer funded bailout? ‘A lot of appraisers were complicit in that,’ Meyer said.”

“Vander Wal said much of his business is reviewing others’ appraisals, many of which are problematic. He declined to name companies requesting them or the original appraisers for fear of losing business. ‘Out of the reviews I’ve done in 10 years, easily 95 percent of them had serious problems,’ he said. ‘They would overvalue the properties by 20 or 30 percent.’”

“‘We’ve reviewed some in which we looked at the appraisal, and everything looked right,’ he said. ‘We pulled the listing cards (with the sale information) and every one of the sale prices was inflated by $20,000 over what they really sold for.’ He did not know the motive, but the extra money may have given the owners some extra spending money or allowed a buyer to have a 100 percent financing on the house without the mortgage lender realizing it.”

“Real estate lawyer Nyal Deems said some instances are egregious. ‘A really sad example is one where you find it was treated as a three-bedroom house and it turns out it was a mobile home parked on a lot,’ he said. As a result, the buyer took on significantly more debt than the property is worth.”