The Housing Bubble

Some reports on the California housing bubble. “Lancaster home-sale prices hit another record in April while Palmdale home prices retreated for a second month, narrowing the Palmdale price advantage that has persisted since the late 1980s. In Palmdale, the median price dipped to $357,000, down from $365,000 in March and the record $375,000 set in February.”

“Total housing starts in the first four months of 2006 dropped compared to the same period a year earlier in most Central Valley cities. Bakersfield, Madera and Visalia-Porterville were the only exceptions. Modesto had drops in both categories for a total decrease of 45.8 percent year-over-year, one of the largest of any Central Valley area. It was surpassed only by Hanford’s 48.1 percent total drop.”

“Builders statewide obtained 20.6% fewer permits in April compared with a year earlier. In April, permits were pulled for 11,119 single-family homes, down 25% from the year before. Meanwhile, permits for condominiums and apartments totaled 3,476, down 37.6% from the previous month. Most of the declines were seen in Central and Northern California counties.”

And a television station had this report on Sacramento. “Developers are not ignoring the housing glut and the rising interest rates. According to a national housing consultant, they’re renegotiating land and lot purchases and in some cases even walking away from deals.”

“Builders like Centex and D.R. Horton are not just cutting prices they’re cutting personnel.”

“David Garibaldi knows the buying power of patience. ‘By waiting a year we could have saved tens of thousands of dollars,’ he says.”

“He and his wife might pay more in interest but that was offset by the enormity of the incentives and price cuts. ‘We really waited until prices went down to have a little leeway in the buying department,’ says Garibaldi.”

“Now, builders are not just lowering prices. They’re slashing them. At the Landing at Riverdale North, Beazer lopped $16,000 dollars off $425,000 dollar houses. In Folsom, more than $55,000 dollars off homes selling at $586,000 dollars.”

“But national housing consultant John Schleimer says now is the time to buy. In April, 2005 4,423 homes were for sale. By April 2006 that number hit 11,344. That’s an increase of 156 percent. The combination of housing glut, higher interest rates and slow sales means good deals ahead.”

Holden Lewis has an update on lending reforms. “Imagine that mortgages were automobiles, and you had the power to witness every sale. Every day, you would watch, dumbfounded, as pizza deliverers passed up Priuses and bought Hummers instead. You would cringe as 16-year-olds screeched off the lot in souped-up cars, destined to die young.”

“If mortgages were cars, you would see people making these mistakes all the time. Too often, consumers get home loans that are inappropriate or too risky. Regulators are wrestling with the question of what to do about it. Whose job is it to decide that a particular loan is unsuitable for a specific customer?”

“‘Who am I to tell you that you’re eligible for this kind of loan, but you’re not suitable for it?’ banker Robert Broeksmit asked at a recent Federal Trade Commission workshop. A consumer advocate retorted in an interview, ‘It can be boiled down to this: Don’t offer things that people can’t pay and really are rip-offs.’”

“The argument is about what federal regulators call ‘nontraditional’ mortgages, home loans in which the borrower is required to pay only interest, and not principal, for the first few years.”

“Regulators have proposed a ‘guidance’ asking lenders to step cautiously when underwriting nontraditional loans. The proposed guidance says lenders should avoid loans ‘that may result in the borrower having to rely on the sale or refinancing of the property,’ once the borrower has to start paying principal as well as interest.”

“In other words, don’t give a mortgage to someone who can’t afford to pay principal and interest, even if it’s an interest-only loan.”

“Consumer advocates said lenders should subject applicants for nontraditional mortgages to a suitability test, ’some duty to the borrower to make sure they’re not put in a loan that’s not appropriate,’ says Stella Adams, executive director of the North Carolina Fair Housing Center. ‘I tell you, three-page disclosures with ‘wherefores’ and ‘therefores’ don’t cut it.’”

“A suitability standard ‘would put some obligation on some part of mortgage lenders and mortgage brokers to not squeeze people into loans where they have no reasonable prospect of being able to repay them,’ says Allen Fishbein, of the Consumer Federation of America.”

“Bankers countered that the lending industry has built-in suitability standards. Riskier borrowers pay higher interest rates and sometimes must buy mortgage insurance. Mortgages are bundled together and sold on the secondary market to investors, who have powerful analytical tools to gauge just how risky a particular pool of loans is.”

“‘If loans are being underwritten that will inevitably fail, there will be no buyers for those loans on the secondary market,’ says Robert McKew, general counsel for the American Financial Services Association. ‘The secondary market acts as a regulator in addition to government regulation.’”

“But consumer advocates argue that the secondary market allows the mortgage industry to view foreclosures as just another cost of doing business. One foreclosure in a package of hundreds of loans is a blip on an investor’s computer screen, but it’s long-lasting trauma to the family that loses a house.”

“Michael Williams, VP for legislative affairs for The Bond Market Association, agrees that ‘you have to put the burden on the consumer to be educated.’”

“On the other hand, he says, people don’t want to be educated. They just want the loan.”

The Idaho Statesman reports on the continued speculation in housing. “The number of landowners with proposed planned communities in the works south and southeast of Boise has nearly doubled in the past few months as word spreads that this area is Ada County’s next hot spot for growth.”

“Landowners and developers are working on 11 planned communities covering about 23,000 acres south of Boise. Land prices have doubled in the past year or two.”

“I’ve done more business there in 2006 than in the last five years,’ said broker Jerry Van Engen. The area has been stagnant for years, ‘until we ran out of dirt in the west,’ said Van Engen.”

“Buyers are both local and out of state, and Boise’s boomtown buzz is still going strong. Van Engen’s office gets about a call a day from someone outside the area who heard about Boise and ‘wants to get in on it,’ he said.”

And Investment News has some financial advisors who think it’s a bad idea. “For years, advisers have warned their clients not to rely on the equity in their homes to make up the bulk of their retirement portfolio.”

“Many have not heeded those warnings. Investors with investible assets of between $100,000 and $1 million have 37% of their total assets tied up in real estate, 23% in principal residences and 14% in investments, according to a recently conducted survey.”

“Now, in the face of a widely anticipated real estate collapse in some regions of the country, advisers have no choice but to craft strategies to help their clients cope if home values crash.”

“‘There’s no question [a downturn] is going to hurt people’s retirement,” said Neil Hackman, an adviser (at) a Stamford, Conn. firm with $180 million in assets. ‘People are banking on the equity of their home. If that $1.6 million home goes down to $1.1 million, then they’re in trouble.’”

“Those boomers who are counting on snagging quick cash from their homes anytime soon could end up in trouble, said George Walper. He said that the key is to try to wait out any real estate problems.”

“But that may take patience on the investor’s part. ‘We think the U.S. real estate is dead money for the next 17 years,’ Mr. Hackman said.”

The Shrewsbury Chronicle looks at the affordable housing confusion in Massachusetts. “In many communities, there are double and triple the number of properties for sale now than a year ago, which is driving sellers crazy, but the demand for housing in Greater Boston still far outweighs its supply. The Commonwealth needs to build in excess of 30,000 new housing units to keep everything from child care providers to corporate headquarters from leaving the state.”

“Harvard economist Edward Glaeser, Freddie Mac CEO Richard Syron and Barry Bluestone, professor of political economy at Northeastern, all pointed to expensive permitting processes for builders, stringent land-use regulations and a ‘not-in-my-backyard’ attitude for the state’s failure to provide housing for the people it needs most.”

“Employment in Greater Boston declined 4.9 percent between 2000 and 2004, Bluestone reported and the state lost 5.2 percent of its population.”

“Housing cycles, where prices go up and then go down, occur everywhere, Glaeser said, but the volatility is far greater in metropolitan areas with restricted housing supply, such as California, where prices have dropped sharply.”

“‘At every low vacancy rates, below 1.5 to 2 percent, housing prices accelerate rapidly,’ Bluestone said. ‘With few homes on the market, sellers have an edge over buyers. At higher vacancy rates, prices begin to moderate and may even fall slightly as buyers begin to gain some bargaining power.’”

“‘But,’ he continued, ‘as vacancy rates for single-family homes rise much above 4 percent, housing prices begin to plummet. The sellers’ market turns into a buyers’ market. In the worst case scenario, prices can fall by 20 percent or more and not recover to their peaks for 12 years or more.’”

“Doesn’t the high increase in single-family home inventory fit into that category?”

“Yes, but that doesn’t show the whole picture. ‘If housing prices do not moderate as a result of greater housing supply, the resulting decrease in employment and increase in out-migration could lead to a housing price roller coaster with housing prices tumbling in the process,’ he said.”

“‘Paradoxical as it may seem, this suggests that a modest increase in housing supply now, leading to a moderation in housing price appreciation could help inoculate homeowners against a much larger loss in their property values in the future,’ Bluestone said.”

“Moderating housing prices, however, might not sit well with the thousands of home sellers out there, hoping to get top dollar for their highly appreciated homes. But in this case, what’s good for the goose is good for the gander, the economists said.”

The Rocky Mountain News reports on a related paradox in Colorado. “Rising foreclosure and interest rates, as well as an improving economy, drove the vacancy rate for rental houses in the Denver area to 4.9 percent, the lowest rate since professor Gordon Von Stroh began tracking small rental units in 2003.”

“The vacancy rate in the Denver area for traditional apartments stood at 7.7 percent in the first quarter.”

“‘Since we created this survey in the third quarter of 2003, this is the lowest vacancy rate the residential sector has seen,’ Von Stroh said. ‘I think it suggests that rental housing is improving as part of the overall momentum of the Denver economy.’”

“But despite job growth in the metro area , a trouble spot has been rising home foreclosures. But that has actually helped the rental market. ‘I think foreclosures are a factor,’ improving rental occupancies, Von Stroh said. ‘People who had been in an ownership mode are now in a rental mode.’”

“Bob Alldredge, a member of the National Association of Property Managers, agreed with Von Stroh’s assessment. ‘Most everyone who is involved in a foreclosure moves into a rental somewhere,’ Alldredge said. ‘But it is an interesting situation. Adams County has the highest rental vacancy rates, and that is where most of the foreclosures are.’”

The most forward looking indicator of home sales is out. “Pending home sales, the leading indicator for the housing sector, are continuing to ease, according to the National Association of Realtors. The index, based on contracts signed in April, fell 3.7 percent to a level of 111.8 from an index of 116.1 in March, and is 11.7 percent below April 2005. This marks the third consecutive monthly decline.”

“The index is based on pending sales of existing homes. A sale is listed as pending when the contract has been signed and the transaction has not closed, but the sale usually is finalized within one or two months of signing.”

“David Lereah, NAR’s chief economist, said various housing and economic indicators have been moving in different directions. ‘When some measures are up and others are down, it tells us that we’re in a period of transition. Pending homes sales probably give us the best measure for the overall direction of the housing market, which is falling from historical highs,’ he said. ‘I see this time of adjustment as being a trough in home sales that will more or less level out toward the end of the year.’”

“Overall construction activity suffered the first setback in 10 months in April as residential homebuilding dropped by the largest amount in more than two years, the government reported Thursday.”

“The Commerce Department said that total construction spending dipped by 0.1 percent in April, the first setback since June 2005, with much of the weakness coming from a 1.1 percent fall in residential construction, the biggest drop in this sector since January 2004.”

“Average U.S. home prices rose 12.54 percent over the 12 months to March 31, but gains in the most recent quarter indicate easing in the market, the U.S. Office of Federal Housing Enterprise Oversight said on Thursday.”

“Home prices rose 2.03 percent from the fourth quarter of 2005 to the first quarter of 2006, or at an annualized rate of 8.12 percent. That quarterly rate is the lowest since the first quarter of 2004, the government agency said.”

“While house prices continued to climb in many areas, some states saw price declines in the first quarter for the first time since the fourth quarter of 2002, the report said.”

From the OFHEO sites PDF file. “An important factor that has affected the HPI in some recent quarters is the influence of refinancings on the overall index. Valuations derived from refinance appraisals are constructed under different circumstances than those surrounding purchase prices; appraisers operate under specific types of pressures and may employ different ‘comparable’ properties in estimating value than were (implicitly) used in the formation of a purchase price.”

“Similarly, appraisals conducted for ‘rate-term’ refinances can in fact look different from appraisals for ‘cash-out’ refinances. In areas where the cash-out refinancing has grown the most, the divergence between the HPI appreciation rate and the purchase-only rate is the greatest.”

“In conclusion, the empirical evidence suggests that the growing prevalence of cash-out refinances over the last year has had the effect of increasing measured appreciation rates for the HPI. Homes with cash-out refinances likely are disproportionately those that have experienced the most appreciation. Thus the HPI dataset, which includes appraisals used for cash-out refinances, may have relatively more rapidly appreciating houses than the purchase-only index.”

The Las Vegas News press has the latest on that housing bubble. “As the foreclosure rate creeps up in the Las Vegas Valley, the options for homeowners in financial trouble may be dwindling. A rise in interest-only and adjustable-rate mortgages have left even the distressed-property buyers saying ‘no thanks’ to many homes a few steps away from auction.”

“Despite a recent increase in signs around town promising such things as ‘CASH FOR YOUR HOUSE in 48 HOURS,’ the market for mortgage defaults isn’t that good right now, lamented some in the foreclosure-buying industry.”

“‘We get a lot of phone calls, but only so many of those phone calls are good phone calls. Most have no equity or are upside-down,’ said Doug Kupertman, who buys properties in danger of foreclosure. He has seen the number of inquiries from his Yellow Pages ad increase over the past six months, but few are qualified leads.”

“Rising rates, interest-only loans and ARMs with balloon payments have now made a lot of deals simply unworkable, according to Kupertman. ‘In that kind of business, there is no money in it for me,’ he said. Investors often end up with unmanageable payments on non-amortizing mortgages. ‘There are a bunch of people who don’t have money but read a book about flipping houses. They find a house and want to turn it around for a profit.’”

“Non-amortizing mortgages are common deal-killers when homeowners seek fast-sell, fast-cash foreclosure buyers, according to one operator in the distressed-property buying business. ‘The market is going down and you have people in a property that is worth less than they owe,’ said the man, who asked not to be identified. ‘We get five calls a day from people we can’t help. They are stuck in their homes with no equity.’”

“Federal Deposit Insurance Corporation’s most recent numbers show 61.3 percent of Nevada mortgage loans are interest-only and ARMs, making it second only to California.”

“Affordable Housing Solutions owner Janis Rounds gets a lot of calls on buying homes with two-year, adjustable-rate loans that are about to reprice. Homeowners know they can’t the pay the rate increases, but are often subject to early repayment penalties if they sell.”

“‘Very few of the people who call have any equity to be concerned about,’ she said, recalling a California investor who offered to sell 26 Nevada homes to her. ‘He was upside down in 19 of them.’”

“Suspect appraisals on the original loan often come into play in defaults. ‘There’s no way some of these properties could sell for what they were (appraised at being) worth,’ Rounds contended. ‘Without these people knowing it, they are getting a loan in excess of 100 percent of the value of their homes.’”

“Overinflated appraisals are a common problem in the home loan industry, agreed Bill Apgar, at Harvard University. ‘Often, it was the mortgage broker that got them into a house that was overpriced,’ he said, adding that this often leaves the troubled home owner angry at the wrong people. ‘These guys are long gone now, and the person on the phone (with the home owner) is the one who purchased the contract.’”

“To make matters worse, potential homebuyers may be advised to borrow beyond their means, Debra March of UNLV surmised. ‘What I had heard is that people were being encouraged to buy as much home as they could afford by the brokers.’”

“Apgar concurred that it can be a vicious cycle for homeowners trapped in bad loans, and he cautioned against selling for quick cash. ‘People being foreclosed on are in a state of ether, then some quick-talking person comes along.’ As a result, he added, the homeowner can often end up ‘victimized twice,’ first by the broker and then by the buyer.”

“‘Most people in foreclosure don’t have a great sad story. Most people in foreclosure just bit off more than they could chew,’ Rounds said. ‘One woman refinanced her home and bought three motorcycles with cash and now can’t pay her mortgage.’”