The Housing Bubble

Time to wrap the week up. “The cost of second-hand housing in Shanghai is dropping rapidly. ‘Investors can hardly be found for those transactions,’ said Huang Weiwei. A wave of speculators flooded the real-estate market from the second half of 2004 to the first half of last year, driving housing prices to an unprecedented high. ‘Speculators who feel more financial constraint are struggling to find buyers prepared to open their pockets at this moment,’ said Huang.”

“Arguably the Fed’s most important single indicator is the bond market itself, and that indicator is busted. Today it is clear that bond-buying by our trading partners, recycling their export winnings, has downwardly distorted long-term yields. So, what to watch? Sez here: watch mortgage delinquency rates.”

“Pimco’s mortgage-watcher says the last three years have been the lowest delinquency interval in modern times; a mere return to mean will be a shock. Perhaps the best way to measure delinquencies will be changes in mortgage underwriting standards, as I expect that Fannie and the credit derivative market behind all the modern bad ideas (sub-prime and 100 percent adjustables) will be very quick to back away at signs of real trouble.”

Some foreclosure news from three states. “More Bay State homeowners are behind in their mortgages than at any point since 2003, while loan-foreclosure rates remain at an eight-year high. MBA Chief Economist Doug Duncan said borrower woes include.. greater use of risky adjustable-rate and interest-only loans.”

“Indiana led the nation with the highest rate of mortgage foreclosures for the final three months of 2005, according to the MBA. Nearly 1 percent of all Indiana mortgages tipped into foreclosure for the quarter.”

In Texas. “Foreclosures are up more than 5 percent for 2006. There have been 3,825 homes posted so far this year. Foreclosures have grown dramatically in recent years, propelled by..people overextending their credit. The average number of monthly foreclosures in Tarrant County has steadily risen in recent years. 2000: 365, 2001: 448, 2002: 559, 2003: 728, 2004: 826, 2005: 866.”

“You can call it another sign of the real estate market coming back to earth: Refinancing is slowing down as well. In Modesto and nationwide, mortgage companies are reporting a downturn in refinancing. The drop in refinancing is being felt by area remodeling contractors, who report less business than a year ago.”

“Melinda Williams, office manager in Turlock, said her company’s business is about half of what it was in March 2005. ‘Usually, when real estate slows down, we do well because people decide to remodel rather than buy a house,’ she said. ‘But it seems with the latest trend that we’re with everyone else at a standstill.’”

“(Mortgage broker) Robert Ivan said with too many brokerages and too little business, it will take a shakeout to bring balance back to the industry. The other is the perceptions of homeowners. When they hear about a softening housing market, they pull back on their plans, and the market softens, he said.”

“‘There’s a lot of negative press out there on where housing is going,’ he said. ‘And there’s definitely something to that in how homeowners react.’”

“After a few years of real estate boom, which spread dramatically higher prices to many (though not all) parts of the U.S., the market has recently seemed to change course. That made us wonder: What would it take to make things really go off the rails?”

“Robert Shiller believes that the biggest potential market shifter is far less tangible than a tsunami, interest rate spike or other newsworthy event. ‘I think that most likely what would cause a big drop in real estate would be a change in public thinking,’ he says.”

Some housing bubble news from Washington and Wall Street. “‘Congress and the American people were misled by the former leadership’ of Fannie Mae and Freddie Mac, Rep. Michael Oxley, chairman of the House Financial Services Committee, said at a hearing. Oxley said the report underscored the need for a tough new regulator of Fannie Mae and Freddie Mac, according to accounts.”

“Fannie Mae disclosed Monday that it had found more errors in its accounting review. The House in October passed legislation written by Oxley that would bring stricter federal oversight of the two government-sponsored companies, reports said. But the White House opposes that bill because it would not force the two mortgage giants to reduce their mortgage investment holdings, reports said.”

“‘We are focused on doing what is right for the taxpayer,’ Emil Henry, assistant Treasury secretary. ‘While many of the issues in the report are in the process of repair, I think it’s clear that the elephant in the corner, the legacy of that era, is the extensive retained portfolio which..in our judgment is something that presents systemic risks.’”

“The American Bankers Association’s Economic Advisory Committee said it expects the Fed to raise overnight interest rates by a quarter percentage point to 4.75 percent at its meeting on March 27-28. It said another increase at the next policy meeting in May was likely.”

“One economic risk the group cited was the slowdown in the U.S. housing market. While the group said it expects housing to moderate, not take a nose dive, many uncertainties remain, including the impact of a push by federal bank regulators to make lenders tighten up underwriting standards on risky, alternative mortgage products. (Economist) Robert McGee, echoing other economists, said house prices are unlikely to decline nationwide, but some areas that experienced more significant gains could see prices drop.”

“Countrywide Financial Corporation is filing this Current Report on Form 8-K to provide a summary of pay-option loans held for investment at December 31, 2005.”

Total pay-option loan portfolio

2004..$4,701,795,000

2005..$26,122,952,000

Accumulated negative amortization (from original loan balance)

2004..$29,000

2005..$74,815,000

The CFC insiders are still at it.

And Reuters reports on a planned IPO. “Clayton Holdings Inc., a provider of services to the mortgage-backed securities market, plans an IPO worth about $100 million. The company provides automated back-office services for mortgage processing. However, analysts noted widespread concerns that the U.S. housing market is cooling could spook investors.”

“‘When you’re in an industry that’s out of favor, a lot of times it doesn’t matter what you do, just the fact that you’re in that sector is a concern,’ Tom Taulli said. ‘This is an IPO they should have taken out last year when the market was hot.’”

The California press is focused on the buyer/seller stand-off. “After five straight months of falling sales prices for Sacramento County homes, values edged up slightly in February. The county’s median price climbed nearly 1 percent from January levels, reaching $355,000. Sacramento County’s median home sale prices remain below an August peak of $372,000.”

“‘The receding of the market we saw for three or four months is in large part a function of Bay Area buyers taking a pause,’ said DataQuick analyst John Karevoll. ‘Sacramento will now generate its own demand to a greater degree.’”

“The Bay Area real estate market eased off the brakes slightly in February, but sales remained at their lowest level in five years and prices continued to flatten. ‘Obviously, the air is leaking,’ said Ken Rosen at UC Berkeley, ‘but it’s not looking anything like a collapse yet.’”

“‘We’re at the peak and what happens next is a matter of great uncertainty,’ said Edward Leamer, director of UCLA Anderson Forecast. He said the sales decline will continue and likely translate into a price drop.”

“In Alameda County, 1,422 homes sold, down 19.2 percent from February 2005. The median price was $579,000, up 13.1 percent from a year ago, and flat compared with six months ago. In Contra Costa, 1,456 homes changed hands, down 10.4 percent from the previous February. The median price was $569,000, up 16.6 percent from February 2005, down 0.2 percent from January and down 1.4 percent from September 2005.”

“That may be bad news for sellers, but it’s a welcome change for buyers. ‘We’re seeing a little bit of negotiating now and some price reductions,’ said Paul Ward, a broker associate.”

“Deborah Granelli had her eye on one property that needed about $40,000 worth of work. On the offer date, the listing agent called to say there was a buyer offering $50,000 over the asking price. Granelli told the agent she wasn’t interested in bidding. ‘Things are sitting on the market longer,’ Granelli said. ‘I’m more comfortable saying I’m not comfortable going for this or that property.’”

“A 1,000-square-foot condo on Hermann Street in San Francisco has been sitting on the market for about two months. A few weeks ago, listing agent Steven Bragg reduced the price from $679,000 to $649,000. Despite dozens of open houses, and the fact that the property is priced markedly below the $690 average per square foot sale price for condos in the city, there have been no offers. ‘People believe that house values are going to drop so they’re sitting on the fence waiting,’ said Bragg, an agent in San Francisco.”

“‘What I’m seeing is both buyers and sellers digging their heels in, buyers saying ‘I’m not ready to buy’ and sellers going ‘I’m not going to lower the price,’ said (realtor) David Kerr. ‘A lot of sellers are still pricing to the higher-end and their properties are still sitting there, and they’re not considering realistic offers,’ said Kerr, whose territory includes Oakland and Berkeley.”

“‘Sellers do not recognize what’s going on in terms of the market transitioning,’ Kerr said. ‘They still think that because the house across the street sold for like $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some. And what’s happening is, it’s not happening.’”

“Mathew Moses from Berkeley, has been searching for a home in the $500,000 to $600,000 range since December but hasn’t found anything to compel him to make an offer. ‘The stuff that I’m looking at is way overpriced,’ said Moses. ‘I think it could be helpful if I don’t find anything ideal for me and wait another six months,’ he said. ‘I’m willing to do that.’”

Some updates on the Florida housing market. “No signs point to a housing bubble in the Tallahassee market. At least that’s the thought from local appraiser Clay Ketcham. ‘If I knew if there was a bubble, I wouldn’t be here,’ Ketcham quipped. ‘I don’t think anyone knows that.’”

“The market here is doing well, he said. While there is a large inventory of homes costing $500,000 or more, there is still an active market for homes $350,000 and below. ‘I think there are some areas where you see some softening, but Tallahassee is strategically poised to grow.’”

The January median for Tallahassee was reported to be $175,500.

The Sun Sentinel. “The Florida Hurricane Catastrophe Fund is facing a shortfall and needs a rapid cash infusion to ensure there’s enough money for insurers to pay property damage claims from last year’s storms and replenish the account for next hurricane season, a state catastrophe fund advisory board recommended.”

“Whatever is decided, all of the state’s homeowners will ultimately pick up part of the tab because insurance companies are expected to pass on the additional costs to their customers. Already, Florida homeowners are paying down a $516 million deficit state-backed Citizens Property Insurance Corp. incurred from the 2004 hurricane season.”

“Owners of Florida vacation properties and second homes insured by Citizens Property Insurance Corp. would face a 25 percent surcharge under an insurance overhaul outlined by Florida Senate leaders.”

“The move to help keep the state’s beleaguered insurer of last resort from going broke after future hurricanes shifts a big portion of insurance costs to nonvoting, seasonal residents. Sen. Rudy Garcia defended the idea of charging owners of non-homestead properties higher rates. ‘We’re very interested in keeping our welcome sign up for the people who have vacation homes here,’ he said. ‘But should the people of Florida subsidize [nonresidents'] insurance costs?’”

“It’s unclear what portion of Citizens’ accounts are for non-homestead properties. Property records reviewed by the South Florida Sun-Sentinel indicate a substantial number of South Floridians could pay more under the Senate plan.”

“Of the 156,533 residential properties in Broward County east of Interstate 95, about 43 percent do not have homestead exemptions, property appraiser records show. In Palm Beach County, looking only at single-family homes east of Interstate 95, there are 74,506 properties, of which 25 percent are non-homestead.”

“The Senate proposal, similar to the House version, forbids Citizens from covering homes worth more than $1 million in order to reduce the company’s risk and the need for future surcharges. In September, Citizens covered about 5,500 homes valued at $1 million or more.”

Some reports that Wall Street got it wrong yesterday. “Better-than-expected housing start numbers and a tickdown in interest rates appeared to drive homebuilding stocks Thursday. However, some market experts believe investors may be misreading the housing start numbers and caution them on the sector’s outlook.”

“U.S. housing starts fell 7.9% in February from January to a seasonally adjusted rate of 2.12 million starts, which was slightly higher that the 2.04 million starts that economists had been projecting. Although the numbers are higher than economists’ had expected, Barron cautioned investors not to assume the data automatically means housing demand is robust.”

“‘They (housing start and permit numbers) represent supply, not demand,’ said Alex Barron. ‘The data means builders are still building houses, but it doesn’t tell us anything really about demand.’”

“Indeed, he said he’s noticed an increase in speculative building among homebuilders in the last 12 to 18 months. Barron said feverishly-high demand for housing from both homebuyers and speculative buyers (or flippers) over the past few years led to labor shortages, which created long waiting periods for a home to be delivered, in some cases stretching out more 12 months. To combat this, some builders applied for permits and began construction on homes before sales were made.”

“‘The high level of construction may worsen the supply-demand balance,’ concurred Banc of America analyst Daniel Oppenheim. Oppenheim said recent trends show that traffic and pricing are weakening, cancellations are increasing, and the length of time needed to sell a home is increasing. He said inventories of both new and existing single-family homes for sale reached a record 3.03 million units in January.”

“While the slowdown seems sharp, the pace of groundbreaking was well above Wall Street forecasts for a 2.03 million unit pace, and January construction was revised up to show the fastest rate of housing starts in 33 years. Single-family starts were down just 2.3 percent after a 14.3 percent gain in January.”

“‘Doubtless these numbers will be followed by a rash of commentary to the effect that rumors of the death of the housing market are greatly exaggerated. This would be the wrong conclusion to draw,’ said (economist) Ian Shepherdson. ‘It is not possible for sales to trend down and starts to trend up.’”

“‘Housing starts “have been so affected by unusual weather conditions as to make them almost useless as a measure of what is truly happening to housing demand,’ said David Seiders, chief economist at the National Association of Home Builders. ‘It’s likely that in coming months we’ll see a pretty decisive downshift,’ he said. ‘When you see how sales have been going, these are not starts levels that we could sustain.’”

And a mortgage REIT had an announcement last night. “Home loan provider Aames Investment Corp. on Thursday said it will shed its structure as a real estate investment trust to give it more flexibility and bolster its ability to generate more capital.”

“Aames, which doles out family and residential mortgage loans, said it will delay filing its 2005 annual report with the Securities and Exchange Commission due to the pending completion of a corporate cost reduction initiative. The company’s board signed off on a restructuring plan aimed at consolidating wholesale operations in response to ‘current challenging market conditions.’”

“Aames will also introduce a more stringent loan pricing and eliminate loan products that have become unprofitable.”

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