The Housing Bubble

An editorial from Las Vegas on housing costs. “We find that the residential market has been turned upside down. Once scarcity was the watchword; now we have a glut of properties, and the beginning of the employment sector’s softening. Everyone is talking about unemployed real estate agents, mortgage brokers and appraisers.”

“The Las Vegas residential market has been driven by money earned elsewhere and brought here. Outside dollars set prices here. The local wage scale had little to do with the cost of housing.”

“This is more than a tortured explanation for California colonialism. We have been caught in a conundrum. Las Vegas was an ideal destination when our housing prices were less than 80 percent of the cost in Southern California. For a long time, Las Vegas had coastal amenities and Midwestern prices. That was an important part of our allure. Now we have coastal amenities and prices that are darn close to the coast. It did not take an earthquake to give Las Vegas beachfront property, at least in cost.”

The Review Journal. “Add to April’s existing-home inventory a sizable number of new homes. About 7,000 converted condominiums sat on the market in April, and 4,000 new single-family homes and traditional condominiums were also for sale.”

“That brings the total backlog of properties for sale in Southern Nevada in April to 31,000.”

“Broker Bob Hamrick said the local MLS has added about 300 single-family homes a week in recent weeks. ‘Unless we see a downward change in those growing numbers, that will start to be concerning,’ Hamrick said.”

“Builders are offering steep incentives that can range from $10,000 to $100,000 in value, Murphy said. A handful of local builders is preparing to drop prices on homes as well, he added. And once new-home builders begin slashing prices, sellers of resale homes may have to follow with price breaks of their own, he said.”

“Homeowners who don’t have to sell now could pull their homes off the market or avoid listing altogether to wait for a tighter, more seller-friendly environment.”

“Linda Rheinberger, president of the Greater Las Vegas Association of Realtors, did just that herself, delisting an investment property this spring and repositioning it as a rental property. She said she’s advised clients who don’t absolutely have to sell to wait at least three months, when she believes local inventory will begin to drop.”

The Christian Science Monitor. “What’s most enticing about James Deans’ five-bedroom house is his willingness to deal on the price. ‘It’s $950,000, but a serious buyer can have it for $900,000,’ says Mr. Dean, who built the custom house himself.”

“Yes, some of the most torrid real estate markets in the country have become much friendlier for buyers. In cities like Las Vegas, sellers like Dean are now more than willing to negotiate. Real estate developers, when they aren’t dropping prices, are offering to help with closing costs or give buyers free upgrades such as large-screen televisions. Despite these plums, sales are slumping.”

“A record 20,515 unsold homes and condos are on the market. Despite the glut, however, developers are continuing to build. Almost 500 subdivisions in Las Vegas have active sales offices, according to Larry Murphy, president of a Las Vegas-based housing research company.”

“But after three years of steadily increasing home prices, developers are shrinking their profit margins by dropping prices, Mr. Murphy says. At a D.R. Horton development in a suburb of Las Vegas, a salesperson shows off a model home. It’s listed at $269,900. But for a ’serious’ buyer, it can be purchased for $249,900 or less, says the sales representative.”

“In April, Murphy found that KB Home, one of the largest builders in the city, lowered prices between $8,000 and $34,000 at 16 of its 38 subdivisions with sales offices.”

“The slower real estate market has hit almost all price levels in Las Vegas. In February, retiree Hank Franz put his home on the market for $275,000. Nearby, another seven homes have also been for sale. Last week, Mr. Franz lowered his price by $25,000. ‘The market is extremely sluggish,’ he says.”

“On the luxury side of the market, sales aren’t much better. Dean, the custom home builder, has five homes for sale, at close to $1 million apiece. Once he sells these houses, he says, his company, Triangle Construction, has the property to build another 18 homes.”

“Are there that many people who can afford million-dollar properties? ‘People with two incomes, or someone who sells their house in California for $1.5 million, can pay cash for the house and have $500,000 to live on,’ answers the builder.”

“Two years ago, new housing developments sold out six months in advance. Busloads of investors from other parts of the country toured construction sites and snapped up town houses and unfinished homes. Now, signs are up around town for those who need to sell their homes in a hurry to avoid foreclosure.”

“Says Murphy: ‘People speculating in the market, those who came to the party late, are finding that if they bought in 2005, by the time you get through with closing costs and brokerage fees, they are probably losing money.’”

One reader wants to hear what you see in the for-sale classifieds. “How about some funny/illiterate descriptions written of houses for sale?”

“I read this week that a house in my area is ‘the very personification of everything we love about the Northwest.’”

“Imagine that!”

This United Features Syndicate article has the latest twist on interest only loans. “A relatively benign form of interest-only mortgage is gaining popularity as the loan of choice among buyers who have affordability issues. The newer type comes with fixed rates that can never change. Borrowers pay only interest for the first five, seven or even 10 years. When the initial term expires, the payment increases to an amount that allows the borrower to pay off the balance over the loan’s remaining years.”

“‘It’s a very low-risk mortgage,’ says Doug Duncan, chief economist at the Mortgage Bankers Assn. ‘It’s essentially tax-deductible rent’ for the first few years, Duncan said. And by the end of the interest-only period, household income should have grown enough that ‘if the borrower has been reasonably prudent, he should be well-prepared’ for the big jump coming in his or her house payment.”

“If you stretched to get into the house and were betting on appreciation to keep you afloat, you could run into a serious problem.”

“‘Even with your eyes wide open, you can still get hammered,’ Keith Gumbinger, VP at a mortgage information firm warns. He suspects that most interest-only borrowers anticipate either selling their homes or refinancing them before the interest-only period expires.”

The Orange County Register. “ECC Capital has bet everything on borrowers with a history of bad credit. And it worked, for a while. Now, the company is doing everything conceivable to stem losses. The real estate investment trust has laid off 40 percent of its workers, canceled dividend payments to shareholders, and its top managers said they are working without pay.”

“ECC’s public filings show a pattern of lending that appears to ignore whether its borrowers can repay their loans.”

“Nearly half of ECC’s loans last year were made to people who did not demonstrate their income, traditionally a key measure of a borrower’s ability to repay a loan. And it said one-third of its loans made last year were exceptions to its own underwriting standards.”

“By comparison, 43.7 percent of New Century’s borrowers last year did not prove their income. The company also made loans with low introductory rates. ECC sells its loans to investors as bonds, a common industry practice. Until last year, such bond sales were highly profitable for lenders.”

“But the ability to sell most loans at a profit encouraged lenders to stop worrying about whether borrowers could repay them, critics say.”

“Another factor: banks and mortgage companies wanted to keep the lending boom going even as interest rates began rising in 2004. Critics say lenders responded by lowering their underwriting standards. They also pushed loans with low introductory payments that spike later. All designed to keep people buying homes.”

“‘For several years there has been no standard for loan underwriting,’ said Jeff Lazerson, president of a Laguna Niguel-based mortgage brokerage. ‘Every lender liked every loan.’”

“Subprime lenders also do a lot of home loan refinancing. Their borrowers tend to do ‘cash-out refis,’ in which a homeowner refinances for a greater amount of their loan balance, pocketing the difference as cash. Essentially, subprime lenders want owners to view their homes as cash machines.”

“ECC’s gamble backfired. The company lost $64 million last year and $6 million early this year. It got hit by investor panic.’ “Investors who buy bonds backed by mortgages got worried last year about credit risks in the market, said Scott Valentin, an analyst with Friedman, Billings, Ramsey & Co. ‘It happened very quickly in the fourth quarter,’ Valentin said of the investor shift. He said ECC had to sell loans at a loss.”

“Valentin said ECC is taking the right steps to become profitable again, but it’s too early to say if more cost-cutting measures are necessary. The company needs fewer workers because it won’t be doing as many loans to very low credit borrowers, he said.”

“‘That’s the right decision to make,’ Valentin said. ‘Why originate loans at a loss?’”

One reader wants to hear your vote for the housing bubble ‘ground zero.’ “Which city/region has bragging rights to being the ground central of the bubble? I claim Sacramento, CA.”

“And this juicy tid-bit as anectodal evidence: just down the street from me there are actually 7 houses in a cul-de-sac are now for sale! TOP THAT!!”

One responded, “Give me the addresses please…I want to Suzanne it.”

Some housing bubble reports from the Fresno Bee. “Fresno’s soaring housing prices, which outpaced the rest of the nation over the last five years, are floating back to Earth. The number of homes for sale in Fresno and Clovis has more than tripled since May 2005 and the number of transactions is down 24% from a year ago. That puts a lid on price hikes, real estate agents say, and means that sellers cannot set unrealistic objectives.”

“‘They have to put the ‘real’ back in real estate,’ said Joan Jolly, president of the Fresno Association of Realtors.”

“Meanwhile, sales activity has slowed so much that some lenders are ordering a second appraisal near the end of the transaction process, especially on 100% or other risky loans, said (realtor) Anthony Gamber. ‘There is more caution in the air,’ he said.”

“The Fresno-Clovis area, with nearly 5,000 housing starts, was among the state’s leading growth regions in 2005, according to figures from a trade association. Only San Diego, Bakersfield, Riverside County and Los Angeles ranked higher, according to statistics from the California Building Industry Association.”

“However, this year promises to bring a much-needed lull. ‘It’s a slower market with too much supply and prices too high,’ said Steve Lutton, division president of Lennar Homes.”

“‘Housing starts are off and cancellations are up,’ added Mitch Covington, this year’s president of the Building Industry Association of the San Joaquin Valley. ‘In 2005, developers in Fresno were handed 2,247 permits for single-family homes. In Clovis, 1,310 single-family home permits were approved. Add permits for 1,147 apartment units in Fresno and 184 units in Clovis, and the region had a building boom that was unprecedented in volume.”

“In fact, Fresno officials had a record year, issuing 10,210 permits for new construction, alterations and remodeling worth $773.5 million. That number was a 68% increase from 2001, said Nick Yovino, the city’s development director. ‘In the past, when the application volume has leveled off that has translated into a reduction of building activity,’ he said.”

“A cooling is what the market needed, Covington said. Prices skyrocketed over the past few years and could have climbed beyond people’s ability to pay. ‘The market could not have kept going up,’ he said. ‘It would have put us out of business.’”

“This year, builders are back to constructing houses for expanding families and changing households. Investors are in short supply, and a sluggish resale market is keeping many others on the sidelines. As a result, some national builders are paring down their land holdings and selling excess lots.”

“The San Joaquin Valley was in the middle of the fray. Bakersfield ranked second in home construction, with permits for a record 5,218 single-family houses. ‘We have a lot of new builders in town,’ said Stan Grady, development services director in Bakersfield. ‘And their style of building is different. It is more production-style housing. They build in groups and may pull 20 to 30 permits at once.’”

“But what a ride it was in 2005. California produced about 10% of the nation’s new housing, an estimated 208,804 houses, apartments and condominiums. And that number marked a decrease from 2004, the California Building Industry Association said.”

Post any off-topic links, ideas or Craigslist finds here! This thread will be forwarded throughout the weekend.

A pair of reports on the Arizona housing bubble. “Here’s a sure sign that too many high-end condominiums are going up in metropolitan Phoenix: Units at two pricey new developments are being auctioned off, and the minimum bids are half of what the homes originally cost.”

“Four condos in the Optima Biltmore Tower on Phoenix’s posh corner of 24th Street and Camelback Road are going on the block this month. The high-rise homes cost $949,000 last year. The opening bid for one of the condos now is $475,000.”

“In Tempe, three condos at the Vale development will go to the highest bidder this month as well. The units originally cost $429,000 to $699,000. The ’suggested opening bid’ starts at $240,000.”

“A growing number of real estate market watchers say there are just too many pricey condos being built or were recently built and not enough buyers. Almost 8,000 condos and lofts are planned or under construction across the Valley now, more than what went up in the Valley in all of the past 10 years.”

“Condo developer Reid Butler estimates that less than 20 percent of all the planned high-rise residential projects will be built.”

And in Tucson. “Foreclosures are increasing in Pima County as the housing market slows, inflation accelerates and creative financing plans mature, experts say.”

“The number of foreclosure proceedings in Pima County that were initiated by lenders reached 1,199 in the first three months of 2006, a 27 percent increase over the 943 filings in the first quarter of 2005.”

“One reason for the increase is the relative difficulty in selling homes, experts said. During the housing market’s recent glory days, creative financing and out-of-town investors made selling a home easy. But a cooler market has changed all that.”

“‘One of the issues facing Arizona might be overabundance of available properties. It extends the time properties are on the market and has a dampening effect on marketing,’ said Rick Sharga.”

“The trends in the local home market don’t bode well for financially strapped homeowners in the future, said William Anastopoulos, co-founder of Tucson Mortgage. ‘It has clearly turned into a buyer’s market and what’s astounding to me is it’s happened very quickly. I just think this is the beginning of a hangover,’ Anastopoulos said.”