The Housing Bubble

A pair of reports on high risk loans. “Millions of Americans who have financed their homes with adjustable-rate short-term mortgages, some of which require interest-only payments, are starting to see their monthly payments rise as low introductory rates expire and market rates kick in.”

“‘I just cringe every time I get that bill,’ said Mindi Davis in Brandon, FL. The bill, which was $100 a month in May 2004, is now $219 a month and climbing. ‘I anticipated an increase,” Mrs. Davis said, ‘just not this much that quickly.’”

“Brian Wrage, who lives in Tampa, said he had begun to unload his investment properties in part because of the adjustable-rate mortgages attached to them. ‘My second mortgage on one property started at 5.7, and by the time we sold it three years later it was 9.9,’ Mr. Wrage said. ‘It was eye-opening: adjustable rate means up.’”

“‘Normally, nothing is a better predictor of foreclosures than high unemployment and credit card delinquencies,’ said Rick Sharga, of RealtyTrac. ‘But what most people are talking about isn’t any of that now. We think adjustable-rate increases coupled with a slowdown in the price appreciation and the demand of houses is why we are starting to see a fairly significant increase in the foreclosure rates generally now.’”

The Sacramento Bee. “Last year Janice Pierini fell in love with a two-bedroom condominium in Natomas and rushed into an adjustable-rate mortgage. She said it was the only way she could get into a place that cost her more than $200,000.”

“Now she’s struggling, like a growing number of homebuyers who face the risks that come with the loan that has become the leading way for Californians to buy a residence.”

“Pierini’s troubles occurred just months into her interest-only mortgage, when she saw her income fall because of sickness and fell behind on payments. Though she’s worked out a repayment plan, her next hurdle is less than a year away when she must start paying principal, too. ‘Down the road a little way I find I am really struggling with this mortgage,’ said Pierini.”

“Mortgage rates, which are tied to other interest rates, rise at designated intervals. That leaves many people who barely qualified for the homes in the first place paying higher monthly mortgages than they planned on. But Michael McGee said the industry’s array of adjustable mortgage products has opened homeownership to thousands who otherwise could never afford today’s prices.”

“Though there are risks with adjustable rate mortgages, many homeowners successfully use them to their benefit. Retired state employee Mark Stuart recently refinanced from one interest-only loan to another on his house in Carmichael. The new loan raised money for a son’s college expenses.”

“Stuart’s plan is to sell the house and downsize before the principal becomes due in three years. ‘We’ll be out of the house here before we have to pay more,’ he said.”

“Experts say adjustable rate loans generally work well in markets where values are rising and best when they’re rising quickly. That’s no longer the case in Sacramento and much of California. Yet buyers still get swept up in emotion while buying a house and often don’t adequately think through their loan decisions, said Pam Canada, executive director of a nonprofit homeownership center in Sacramento.”

“‘My guess is there’s a large percentage of people going in blind,’ Canada said. First-time buyers are especially vulnerable, she said, to a hurry-up atmosphere in which loan officers often say ‘just get this loan now and in a couple of years you can refinance.’”

Many readers see anecdotal evidence of the collapsing housing bubble at the mall. “If you look at graphs in the SD Union Tribune article, it appears that the housing market tanked just before/at the same time unemployment went up. The poor job market DID NOT cause the housing bubble to collapse; it exacerbated it, IMHO. I believe this will happen again.”

“Speaking of jobs…My family and I went to a local mall (North County Fair in Escondido) tonight. There were closed stores EVERYWHERE. Three (or more) restaurants in the food court, and **at least** 15 to 20 stores have closed that were open just a month or two ago, from what I can tell. In one mall.”

“Also, heard from more than a few people in the last three weeks (in LA and SD) that traffic seems lighter. Anyone else seeing the same?”

Another added, “It is happening around here in SE MA as well. The two malls closest to me have multiple stores that are empty, including some pretty big spots. One of them is an outlet that had over several years worth of waiting lists to get in.”

“One thing to keep in mind with many of the malls in San Diego is that they are owned by the same group. Rents have been pushed up agressively in the past couple of years from everything I’ve heard. Many of the smaller, unique local stores have been pushed out by larger chain prestige brand stores coming in who can pay higher rents and have much deeper pockets. When even these places start folding, it’s definite that people’s spending habits are switching gears.”

Another, “The Gap employees have been murderously following me around while I’m shopping to tell me about their new pants or sales lately. It is really quite frightening!”

One from Phoenix added. “See today’s jobs report: Retail lost 43,000 (I think). I’ve noticed less traffic in Phoenix. Also, a bit of anectodal evidence: my neighbor is part owner of a large mortgage company in Phoenix, and they’ve dropped from 70 to 50 MB’s since the beginning of the year. I also know guy that quit his bartending job early last year to become a MB. Bet he’s back at the bar.”

An update on the mortgage business. “Ameriquest Mortgage Co.’s decision to close all 229 of its retail branches and eliminate 3,800 jobs follows a steep decline in its lending volume. The Orange-based lender said loan volume plunged 46% to $2.6 billion in the first quarter from $4.8 billion a year earlier.”

“With interest rates rising, fewer people are looking to refinance, triggering a wave of layoffs in the industry and leading to predictions that weaker lenders would be acquired or shut down. Competitors such as Saxon Mortgage in Glen Allen, Va., and ECC Capital Corp. in Irvine have closed retail offices to save money.”

“The 3,800 job cuts announced Tuesday, from a staff of 11,000 people, did not include reductions at Ameriquest Mortgage’s biggest sister company, Argent. In addition to employees at Ameriquest’s branches, about 400 at the company’s headquarters were handed pink slips.”

The Idaho Statesman reports on where the speculators went. “For the first time, the average sale price of Ada County houses is more than a quarter-million dollars, real-estate industry data show. You can thank, or blame, job growth and Californians.”

“Yet the boom contains the seeds of a slowdown, real-estate executives say. They say high prices and rising vacancy rates among rental homes are scaring off some investors, while rising interest rates and the increasing difficulty Californians have selling their homes could slow the pace of residential purchases.”

“The average sale price of a home in Ada County reached up 24 percent from the same quarter in 2005. 4,114 new and existing homes sold in Ada and Canyon counties during the first quarter, a 39 percent increase over the same period a year ago.”

“One-fifth of all home loans in the first nine months of 2005 went to investors, according to LoanPerformance. One such investor is Rob Rose, who calls himself a genuine residential real-estate investor, not a speculator who goes into a market with the idea of flipping a property for a quick profit.”

“‘What I found was that Idaho was an undiscovered treasure,’ said Rose, who owns seven investment rental properties in the Boise area.”

“But Tony Drost, owner of a Boise-based firm that handles single-family rentals for investors, said clouds may be forming. Drost said a quarterly survey of 1,237 investor-owned single-family rental homes managed by 51 local property managers found that 11 percent of the units are vacant.”

“The immediate concern is that the owners, having concluded that the Idaho market is slowing, will begin selling hundreds of single-family homes at reduced prices, driving down home values.”

“Rose, the California investor, agrees the investor market is beginning to cool. ‘Most of the money going into Idaho is from California,’ he says. ‘But the California market is slowing big time. People are having a hard time selling, so the investment money going into Idaho is going to slow.’”

“J.J. Suitter, who manages some of Rose’s properties, said price and the number of homes on the market is becoming a factor for investors. ‘Some are losing interest because prices have gone up so much,’ she said. ‘Some are seeing their rentals sit empty for as many as four months.’”

“Suitter said the survey covered only rentals handled by association members and may not truly indicate market conditions. ‘There are thousands of them (investment properties) out there, and nobody really knows how many are sitting empty.’”

A housing bubble update on Las Vegas. “Valley home sales took an across-the-board shellacking in April. There were only 2,230 new homes sold last month, an 11.5 percent drop from March and 28.7 percent lower than a year ago, reports the Greater Las Vegas Association of Realtors.”

“Median home sale prices also softened to $310,000 in April, which is 1.7 percent less than the prior month, but still 5.1 percent higher than a year ago.”

“Condo/townhomes saw similar dismal results in April with only 522 sales, which is 19.2 fewer than in March and 29.2 percent less than in 2005. And median condo/townhome sale prices dipped to $202,000, a 1.5 percent drop from March, but still 11 percent higher than a year ago.”

“The inventory of homes for sale in Las Vegas reached an all-time high of 18,467 in April, a 29.3 percent increase from a year ago and nearly double the number from two years ago. Available condominiums and townhomes have increased nearly 50 percent to 3,971, largely a result of the trend in apartment conversions.”

“‘I don’t get worried about monthly bites of information,’ association President Linda Rheinberger said. ‘Knowing that we have record new-home inventory, everything will even out over time. We’re still expecting 5 percent to 10 percent appreciation overall this year.’”

“Housing analyst Rick Murray said inventory levels, generally speaking on a local market basis, began to rise fairly sharply and noticeably in the past six months. ‘Current market conditions relative to supply and demand would suggest that the housing market will go through a more difficult period,’ he said. ‘Certainly, fewer people are buying than a year ago.’”

“Rheinberger said Realtors are selling 80 percent of the inventory within 90 days, an indication that people are still buying.”

“Statistics from the Realtors’ association are based on records from the Multiple Listing Service and do not account for newly constructed homes sold by builders and other transactions not involving a Realtor.”

Several readers are interested in post housing bubble rents. “What will happen to rental rates in a real-estate bust. Will rents go up as more people decide to rent rather than buy, or will they go down as the number of vacant homes balloons and investors resort to renting to get some sort of return?”

A reply, “A record number of vacant homes in the USA (still increasing due to the final death throes of the HB construction bubble blowout) will put downward pressure on both rents and for-sale prices over the next 10-20 years, as the housing market adjusts to fundamental economic reality. The only wildcard is whether BB will turn into Heliben…”

Another, “If it were only this simple we could all be rich. Rents track inflation and not housing prices? Well that depends. As home prices crash why should rents follow if they haven’t been following in the past? Think musical chairs. The music stops everyone sits down. Except this time the music doesn’t ever start up again. Household formation is going to overwhelm any glut of available units in short order.”

“Now locally this will be a very messy process. Luxury $4000/mo rents in Orange County will crater to $2500. Rents will eventually go way up even as prices come way down, there’s no contradiction in that.”

And to that, “For as long as I can remember and I’ve been in the business for quite sometime in my area (Los Angeles) there has been at least a 15 yr shortage in Ca. based on permits taken out for rental housing. With that being said during the last downturn there was an average of 30% drop in rents. I don’t see a significant or any increase in rents in the near or present future.”

From LA. “I can tell you rents are way up here in LA. Simple fact is, there are jobs here, and not enough housing. Also, all these so-called investors who’ve been bidding up tear down 1920’s era 6- and 8- unit buildings for 1.3 million CANNOT rent the units out for less than the very high rents they’re asking, or they will have a serious negative cash flow situation.”

A skeptic, “Who will be able to pay higher rents? Are we not (mostly) predicting the end of this latest, ehem, ‘correction’ in the near future? We can’t simply project our personal situation on the broader population’s willingness or ability to pay higher rents.”

From Florida, “I have been checking my local rental listings (north Florida) for three years now and last week there was suddenly a FLOOD of new rentals (especially in new construction condos and subdivisions). Also, a lot of Realty companies who used to focus on vacation rentals and sales are opening up their long-term rental sections (or is it departments?) again. The overall prices of these rentals are again matching 2003 prices it seems.”

From San Diego, “In my area, Carlsbad-San Diego, rents have most definitely gone up in the past two years. In summer of 2004, we had LLs and prop managers begging us to rent from them (like a 5/3, blocks from the beach for $2,100 or our current house a few miles from the beach, 4/2 for $2,000). Currently, houses like ours are being rented for $2,500+ and the market is tightening. I think that is because people who can afford $2,000 rent are bubble-sitters who have enough money to be comfortable while waiting.”

“In the long run, though, the empty houses will come onto the market and will likely depress rents. Basically, I think rents will rise for the short-term (already are), but fall in the long-term.”

One sees an economic slowdown. “The housing bust will drag the economy downward, wages will fall as layed off workers take anything with a paycheck, and rents will follow the economy. In other words, don’t buy that duplex as an investment unless it’s going for a song.”

A reply, “I’d expect this to be true overall. But I’d like to juxtapose that thought with that recent FDIC report linked here just a few days ago. The report stated the population will economically ‘bifurcate,’ that while many would grow poorer there would be a portion of the economy that actually get richer. That portion of our society will also impact rents, values too. Remember photos of the super cars the well off were buying during the 30s? Super cars and soup lines I believe the caption read.”

One reader had a more specific question. “Speaking of rents, what do people think about possible different futures of SFH rental prices versus those of apartments?”

The Washington Post has this on cancellations. “As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits. Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship, more than double last year’s rate, and perhaps as high as one in three new-home buyers in some places.”

“And nationally, some big builders are beginning to report cancellation rates upward of 25 percent. A home-building research firm, this week said that its latest survey of builders showed that the cancellation rate for the Washington area in March more than doubled from a year earlier.”

“The survey shows the cancellation rate locally highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled, compared with no cancellations a year ago.”

“People who are buying for investments rather than residences are the most likely to bail out, experts said. They reason that it would be better to lose a deposit than to go ahead with an investment that could lose value, particularly if builders are cutting prices in the same or nearby projects.”

“Typically, buyers of new homes pay upfront deposits calculated either as flat amounts as low as $1,000 or as a percentage of the price, generally about 5 percent of the home price. Despite the pain of giving up that much money, some buyers are canceling to cut their losses because builders are pricing the same houses for so much less, Alexandria lawyer James Brincefield Jr. said.”

“‘I have seen people literally walk away from $125,000 deposits rather than go forward with the closing because the value of a house identical to their own was being sold by the builder for $100,000 less,’ said Brincefield, who is preparing litigation for buyers who want to sue builders to get their deposits back.”

“And builders are trying to make it harder for people to split, lawyers and real estate agents said. ‘It’s getting really kind of scary right now because builders are waving their sabers,’ said Christine Cormack, broker in Ashburn and a real estate investor. ‘They’re holding people to contracts.’ That can include going to court to force closings.’”

“Hanley Wood’s survey showed the Sacramento area with the highest cancellation rate, 28 percent, up from 2.6 percent in March 2005. Rates in Las Vegas, Denver, Phoenix and Orange County, Calif., also were higher than those in the Washington area”

“While some deals may have turned sour for the original buyers, that can be heartening to those looking for bargains. Builders are offering more incentives to buy, including price cuts and free upgrades.”