April 17, 2006

Housing Heaven Takes A Breather In Massachusetts

A pair of reports on smaller housing markets in Massachusetts. “Homes are sitting on the North Central Massachusetts market for longer than they have the past three years, local real-estate agents said. ‘We’ve had a very, very brisk market for several years and it just sort of plateaued a little, and now it’s coming back at a nice, normal comfortable pace,’ said Ellen Daly.”

“Realtors acknowledge, however, that the market had faded from its most robust seasons. Barry Cunningham, the North Central Massachusetts Association of Realtors’ president, said the plateau is to be expected. ‘The market has been hot for a number of years, but it’s making an adjustment right now,’ said Cunningham. ‘The market needed a breather.’”

“The median price of a single-family home in North Central Massachusetts has increased more than $30,000 during the past three years. The median price of all residential sales in Leominster so far this year has fallen nearly $20,000 compared to the same time period last year, according to the Warren Group ‘The prices aren’t so much coming down, it’s the sellers’ expectations coming down,’ (realtor) Rick Healey said.”

The South Coast Today. “The way the housing market is headed, with prices flat and lending rates up, bankruptcy lawyers might want to put on another pot of coffee, because company is coming. Maybe lots of it. Almost 30 percent of all of the adjustable-rate mortgages in this region will come up for adjustment this year or next, said (banker) Patrick J. Sullivan.”

“As it looks today, those mortgages will jump perhaps 2 percentage points, from about 4.5 percent to 6.2 percent or 6.5 percent, he said. For a $200,000 mortgage, that might mean about $4,000 a year in additional mortgage payments. ‘That 2 percent adjustment could kill. Four grand a year out of pocket, that’s a lot of money,’ he said.”

“Mr. Sullivan said that Bristol County has seen 263 foreclosures in the past two months, up 50 percent from six months ago. In New Bedford alone there were 64 foreclosures in the first quarter of 2006, a sharp increase, he said. At the same time, housing sales slumped badly starting last August as buyers hold back, become choosier or even start renting for a while.”

“Across America, warning flags are flying about the impending storm of foreclosures and bankruptcies, and the early signs are present in SouthCoast, bankers and lawyers say.”

“(Columnist) Richard Benson observed that for a decade Americans have been in ‘housing heaven,’ using their ever-more-valuable property as a magical ATM. Now consumer debt is up to $2 trillion, and people take out $600 billion in equity extraction each year. ‘Homeowners have basically received and spent in excess of $2 trillion that they never earned,’ he writes.”

“Roger Stanford, an attorney in New Bedford who handles some bankruptcies, said that there has been a definite upswing in cases following a lull caused by last October’s rewrite of the federal bankruptcy law. He said he is seeing the same pattern as in the last housing recession in the early 1990s: first-time homebuyers who stretched to the limit and now cannot manage an upward rate adjustment, and frequent refinancers who ‘pull the money out to pay credit cards down and the credit card goes back up again for whatever reason.’”

“Now that it is harder to declare bankruptcy, Mr. Sanford said, some homeowners see flattening prices and decide to ‘get the equity out by living three, five, six, nine months without making mortgage payments,’ then walking away from the house.”




Bankers ‘Don’t Want The Bottom To Fall Out’

Some housing bubble news on the lending front. “Acoustic Home Loans, a nonprime wholesale lender based in Orange, Calif., has gone out of business. Acoustic, founded in 2002, said in a statement posted on its website that it was ‘no longer in business’ as of April 14. The company’s website says Acoustic was the 27th-largest nonprime wholesale originator in the nation.”

“Reliant Home Warranty Corporation (announced today underwriting approval to offer North America’s first 50-Year Amortization program for non-prime high-ratio mortgages. An investment in the Company’s common stock is speculative in nature and involves a high degree of risk. The Company had a net loss of $938,752 for the year ended December 31, 2005(2004-8,455), and working capital deficiency of $161,531(2004-($832)). This raises doubt as to the Company’s ability to continue as a going concern.”

“ECC Capital Corporation, a real estate investment trust (REIT), operates as a subprime mortgage finance company. It primarily originates and invests in residential mortgage loans. ECC Capital was founded in 2004 and is headquartered in Irvine, California. On April 10, 2006, the registrant (announced) that members of its executive management team have offered to take significant reductions in their compensation to help the registrant in its efforts to cut costs.”

“Co-founders Chairman and Co-CEO Steven Holder and President and Co-CEO Shabi Asghar have volunteered to work without salary or bonus for the next twelve months, and other members of the registrant’s senior management team have agreed to significant percentage reductions in their base salaries and/or to return some of their previously granted options to purchase the registrant’s common stock.”

“Fannie Mae has loosened its mortgage approval standards for lower-income borrowers as it strives to meet its government mandated affordable housing goals.”

“Federal regulators are moving toward their potentially final review of proposed guidelines that may restrict some banks’ commercial real estate lending. Bankers are concerned that regulators might require, or perhaps scare, some banks into reducing real estate lending to an extent that it could lead to an economic slowdown.”

“‘We told them we understand that they are concerned about excessive risk,’ Alex Sanchez, president and CEO of the Florida Bankers Association, said of meetings with regulators in Washington, D.C. ‘We also said we don’t want the bottom to fall out of the market.’”




Builder Confidence Slumps On ‘Wave Of Uncertainty’

The homebuilder numbers are out. “Rising mortgage rates, continued affordability issues and subsiding demand from investors/speculators are prompting single-family home builders to adjust their perspectives on the new-home market, according to the National Association of Home Builders.”

“All three component indexes slipped this month, with the largest decline registered for current single-family sales. That component declined five points to 54 in April, while the component for sales expectations in the next six months was down four points to 58 and the component gauging traffic of prospective buyers declined a single point to 39.”

“The 50-mark is a key level for the index, as it indicates that the number of positive or good responses received from the builders is about the same as the number of negative or poor responses. Monday’s reading was the lowest level for the index since November of 2001, when the measure reached a level of 48. Prior to 2001, the index last moved below the 50 mark in 1996, when it ticked to 49 in February.”

“Some builders are taking a cautious approach to the changing real estate market by monitoring their growth strategies and taking wait-and-see approaches. Other builders, however, are gobbling up every piece of dirt they can get their hands on.”

“The latter is true for Coral Springs-based Centerline Homes, which recently opened six communities in seven weeks, including four of the company’s first Central Florida projects. ‘Some builders are looking at the slowing housing market as an opportunity to build market share like Centerline Homes is doing,’ Brad Hunter says. ‘And others want to decrease their exposure and wait out this wave of uncertainty in the market right now.’”

The Phoenix Business Journal. “The region’s housing market has gone from red-hot to lukewarm in just a few quarters, stirring worries about the Valley’s all-important real estate sector. Industry insiders and boosters hope the current slowdown is a market correction, a short-term hiccup and not a more serious slump.”

“Home builders are offering incentives and extras such as pools and tile floors at discounted costs to lure buyers. ‘The current slowdown in the market is a short-term imbalance caused by excessive investor activity, rapid price runups in a short period of time and, in some cases, poor market analysis by builders that, collectively, have led to an oversupply of housing in certain price ranges, in certain areas,’ said Rebecca Burnham, a real estate attorney.”

“Investors, some local, some from California, who swooped in on Phoenix during the hot market, buying and flipping homes at higher prices. ‘The new housing starts are still going well, but the waiting lists and overall new housing traffic have slowed down,’ said Steve Prokopek, economic development director for the city of Peoria.”




Excess Inventory Bursts Speculative Bubble In Ft. Myers

The Charleston Post and Courier looks at nearby bubble markets. “In Fort Myers, the raging real estate market came to a screeching halt late last year. The growing pains in Fort Myers bear striking similarities to those in the Lowcountry.”

“‘The brakes went on, boom!, it stopped,’ said local builder Bart DeRosso. ‘It’s definitely, definitely dried up.’”

“DeRosso called Florida ‘the next California,’ a state grappling with high taxes, insurance rates and medical costs, immigration issues and natural disasters. He and other Realtors and investors said rising interest rates, higher construction costs and an excess of housing inventory burst the speculative bubble.”

“In Fort Myers last month, nearly 12,000 condos and houses were on the market. Too many, DeRosso said. ‘If you want to know where the market’s going, you look at inventory,’ said Denny Grimes, a Realtor in Fort Myers. ‘We don’t have a demand problem, we have a supply problem. We had a market binge and now we’re going to suffer a little bit.’”

“In the Lowcountry, some say the housing market has started to soften. Homes that recently sold within weeks now might sit on the market for months, and prices are starting to come down, said (realtor) Sandy Stone. The long-term rental market in Charleston is showing some signs of a slowdown, Stone said.”

“The Charleston Trident Association of Realtors reports that the average area home price has slipped from about $305,000 in October to about $296,000 in February. The number of homes sold also decreased, from 1,365 in October to 998 in February.”




‘We’ve Outsourced The Speculation’: NAHB

Bloomberg looks at the exposure banks have to risky financing. “Every time the subject of banks making risky home loans to bad credit risks, no money down, no questions asked, the usual retort is that banks sell the mortgages. That’s not exactly true. Mortgages accounted for 32 percent of commercial banks’ financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent.”

“If enough of these loans go bad, as they did in the late 1980s and early 1990s, it could impair the banking system’s ability to extend credit, with all that implies for the economy. If history is any guide, if this time isn’t different, when the banking system is broken, the economy doesn’t work.”

” In the 1980s housing boom, the villain was speculative building. After the bust, regulators clipped builders’ wings. This time around, it’s been speculative buyers who have provided the tailwind to the housing boom. ‘We’ve outsourced the speculation,’ says economist Michael Carliner of the National Association of Home Builders in Washington. ‘The non-owner-occupied share of mortgages has been rising since the mid 1990s.’”

“When prices stop appreciating, the speculative tailwind behind the housing market will abate. At that point, the true measure of outright speculation versus good old-fashioned home ownership should become apparent. The Office of the Comptroller of the Currency, the Fed and the other financial regulatory agencies issued ‘guidance’ on ‘non-traditional mortgage products.’”

“It would certainly be a first if regulators got into the act before any fallout occurred.”

“Delinquency rates have started to rise. Instead of cutting back on the exotic mortgages they’ve leaned on throughout the boom, many lenders are charging ahead on such high-risk loans full tilt. ‘Mortgage lending standards show little sign of tightening,’ says Frederick Cannon, bank analyst. ‘[Lenders] should have dialed back the aggressive loans by now.’”

“The much-feared troubles may finally be arriving. Delinquency rates jumped more than 7%, to 4.7% in the fourth quarter of 2005. Home buyers are becoming over-extended. In California, where seven of the 10 most expensive U.S. cities are located, one in five buyers already spends more than half of pretax household income on housing.”

“It has happened before. In the mid-’90s some banks were so desperate to issue mortgages that they were lending as much as 125% of a home’s appraised value. When the economy weakened, several filed for Chapter 11 bankruptcy.”

“Rhonda is in a panic. The two-year introductory rate on her adjustable mortgage is about to expire and send her payments soaring. She thought she could refinance to a more-affordable loan, but the rates she’s being quoted are just as high.”

“‘So I then decided I would just sell the house and get out of it,’ Rhonda wrote. ‘WRONG! The houses in my area are selling for around $20,000 less than what I owe!’”

“Nearly one in 10 households with a mortgage had zero or negative equity in their homes as of September 2005. The study of 26 million homes in 36 states and the District of Columbia found that one in 20 home borrowers was upside-down by 10% or more. The situation is even grimmer for recent borrowers. Of those who bought or refinanced homes in 2005, 29% had zero or negative equity, and 15.2% were underwater by 10% or more.”

“Homeowners with no equity and adjustable-rate mortgages face additional risks from the loans themselves, since their payments could rise 50% or more in coming years as interest rates reset to higher levels.”




A Unique Opportunity For The Repeat Vacationer

The Orlando Sentinel reports on when an investment isn’t an investment. “After years bemoaning a lack of decent business-class hotels, Central Florida’s travel industry may finally get what it wants. But what makes this wave so unique are the hotels’ owners. These new projects would have hundreds of them, most with only a vague understanding of the hospitality industry.”

“Meet the condominium hotel. Developers plan to sell rooms and suites as condos, marketing them as vacation homes that generate a cash flow. Central Florida isn’t alone. Las Vegas, Chicago, Miami Beach and Palm Springs, Calif., are germinating condo-hotel projects of their own. ‘Construction costs have gone up so much that they have forced some developers out of the market,’ said Mark Lunt, a lodging-industry expert with Ernst & Young in Miami.”

“In many cases, condo-hotel developers move on after their projects are built and sold out.”

“Lodging-industry experts say a lot needs to be learned about condo hotels, including what will happen to owners’ units if the hotel doesn’t prove financially successful. Like any hotel project, condo hotels should be built to meet a need, (consultant) Pat Ford said. He advised buyers to consider how well the hotel is likely to perform once it is built.”

“‘There has to be a reason for the hotel to be built,’ he said. ‘There has to be sufficient demand from the market, and there has to be a desire on the part of the consumer to use the hotel for repeat vacations.’”

“‘I would call this a unique opportunity for people who want to use the property for 60 or 90 days a year,’ said Camilo Aguirre, a principal in CMA Development Group of Miami Beach, which announced plans for The Blue Rose, a 1,300-room condo hotel. ‘We’re finding all kinds of people who want a vacation home.’”

“Developers avoid depicting the hotel units as investments, saying that federal securities regulators restrict such pitches. Instead, they call them vacation residences. ‘They can’t be sold as investments,’ said Ford. ‘If you are looking to invest money and receive a normal rate of return, you would be better off putting your money elsewhere.’”

“Most hotel developers don’t expect owners to occupy their properties for long stretches. But there are exceptions. Victor Barrios of Clermont says he is interested in buying a condo-hotel suite as a residence. ‘My wife and I would want to live in the hotel,’ he said. ‘It has a certain appeal, though I guess after three or four years you might get tired of hotel living.’”

“Barrios said he thinks a hotel suite would be a good investment if he finds one offered at a reduced pre-construction price. ‘Mostly it’s an investment opportunity,’ he said. ‘If you can get in at a good price, you can make a hefty little profit after it is built.’”