The Housing Bubble

A trio of reports from Colorado. “Like many other cities in the region and nation, Loveland is seeing residential construction come to a screeching slowdown. Through June of this year, the city issued 243 residential building permits for single-family homes. That’s a 40 percent drop from the first six months of 2005.”

“Loveland City Manager Don Williams said..residential has ‘dropped way down.’ ‘Interest rates are up; the market is saturated for residential,’ Williams said. ‘It’s slowed down, so we’ll be watching it. It’s just a cycle; we’ll outgrow it.’”

“Alan Jones, president of the Loveland/Berthoud Association of Realtors, said low interest rates during the past several years created a hot real estate market. A hot real estate market meant developers bought up land and builders put up houses. Now, Loveland has a ‘huge supply’ of new and older houses on the market, Jones said. ‘Builders are not seeing the profit margins they once did, and neither are sellers of resale houses,’ he said.”

“Local developer John Giuliano normally has two or three developments going at once. Now, he has only one (’Thank God,’ he said). ‘Things are slower; we’re not starting another one,’ he said.”

The Denver Post. “Frank Finn Jr. thought his family was getting a great deal. He borrowed $102,500, the cost of the land, home and installation. The appraisal showed his home in West Valley Estates would be worth $130,000. ‘I was like, ‘Right on,’ he said. I’m really making out on this. I’ve already got $28,000 in equity.’”

“Six years later, Finn is a foreclosed homeowner with ruined credit and monthly rent bills. So are his old neighbors. Of 65 homes in West Valley Estates, 28 were foreclosed from 2002 to 2006. The sale price of Finn’s home after his foreclosure: $57,700.”

“In Colorado, mortgage fraud is ‘a significant factor’ in the rising number of foreclosures, and ‘bogus appraisals are a big, big part of it,’ said Colorado Attorney General John Suthers.”

“Lenders estimate ‘as much as 15 percent of all appraisals are overvalued’ though not necessarily fraudulent, said David Berenbaum, of the national Center for Responsible Appraisals and Valuations. ‘We’re questioning a large volume of the loans today.’”

“Nationally, appraisers are feeling so much pressure to justify questionable home loans that nearly 10,000 have signed a petition calling on Congress to protect their independence. In a recent poll, they were asked how often they felt their peers succumbed to pressure. The leading response: 41 percent to 50 percent of the time.”

“Some appraisers say corrupt mortgage brokers and loan officers have compromised the appraisal industry, which has long been considered the primary check against fraud. ‘I am battling against appraisers who are on steroids; guys who are saying, ‘What number do you want?” said Matt George, a Littleton appraiser.”

“Colorado banks have concentrated more of their assets in real estate loans and securities during the past five years, leaving them vulnerable if rising interest rates kick the legs out from under the market. Since 2001, Colorado banks have seen their real estate holdings as a percentage of total assets increase from 48.8 percent to 59 percent, according to a Denver Post analysis.”

“‘It’s probably the highest that I’ve seen,’ said Richard Fulkerson, the commissioner of Colorado’s Division of Banking. ‘I can certainly appreciate the concerns in (too much) real estate concentration.’”

“Foreclosures in Colorado have tripled since 2000, and three out of 10 homeowners have home equity of 5 percent or less, the FDIC reports. Homebuilders in Colorado aren’t buying as much land as in the past because demand for new homes has softened. In addition, a record 31,900 existing homes were on the market in the Denver metro area in June.”

“‘That means homebuilders will need less raw land,’ said Wesley Brown of a Denver-based investment bank. ‘They (banks) are holding an asset that could string out over a long time.’”

Some Wall Street and Washington reports, starting with Paul Muolo. “At least five Wall Street firms are actively in the hunt to buy mortgage banking franchises, hoping to take advantage of profit-margin-challenged lenders that want to exit the business as the ‘cycle’ winds down.”

“A new report by Morgan Stanley suggests that the love affair between brokerage firms and mortgages may be short lived. The report notes that some stockbrokers likely will ‘experience frustration with cyclical, operational and regulatory frictions.’”

“We understand that loan ‘buybacks’ (whereby secondary market investors request that originators purchase back early payment defaults) continue to be a problem for many. One CEO of a small shop in Southern California told us he’s had six buyback requests so far this year compared to just three in 2004.”

“The OFHEO has directed Fannie Mae to suspend purchases of acquisition, development and construction loans until it fixes certain operational and control problems. In an interview with National Mortgage News last week, Fannie CEO Daniel Mudd said..he agreed that improvements are needed.”

The Washington Post. “Senior executives at Fannie Mae are heading for the exits two years into a $10.6 billion accounting scandal that has no end in sight. Since the end of 2004, 44 of the top 55 executive positions at Fannie Mae have changed hands, spokesman Brian Faith said.”

“At least 29 senior executives, including 15 who have left Fannie Mae, are under scrutiny for their possible roles in the accounting manipulation. Some may be forced to return bonus payments based on the faulty bookkeeping.”

“OFHEO found that CEO Mudd attended a 2003 meeting at which earnings management appeared to have been discussed and that he didn’t sufficiently look into an employee’s complaints about the company’s bookkeeping.”

And Stephen Roach at Newsweek. “We draw a false sense of comfort by thinking of economics as science. We risk an equally false sense of security by relying on central bankers who claim they can guide economies with mechanistic policy rules. Inflation targeting is one of those rules. It’s the rage in central-banking circles these days.”

“Newly appointed chairman Ben Bernanke was one of academia’s leading inflation targeters. Frederic Mishkin, a new Fed governor, is another luminary of this sect. They could well be a formidable team in pushing the Fed to adopt a price rule. This could be a big mistake.”

“On the communications front, (Bernake) has committed a number of flip-flops that have left financial markets in confusion. If this record is indicative of Bernanke’s communication skills, a shift to inflation targeting could backfire.”

“Inflation targeting ignores the elephant in the room—the excesses of the global liquidity cycle and the related profusion of asset bubbles that has surfaced since the late 1990s. A CPI-type price rule could compound the negligence of bubble-prone central banks.”

“America can’t afford to have the Fed slip up right now. With chairman Bernanke waffling, the relative credibility factor could swing away from the Fed. That could lead to a loss of confidence in dollar-based assets, with serious consequences.”

“On July 19, Bernanke will appear before the U.S. Congress to discuss the Fed’s policy strategy. This is a time for discipline and consistency. A dollar crisis would be a steep price to pay for the folly of inflation targeting.”

The Ottawa Citizen reports on the housing bubble in Canada. “We Canadians love our shelter, and like many others around the globe, we’re increasingly willing to pay a whole lot of money for it. But in many hotspots, prices have started to slide, as has the number of home sales. Australia is well into a slump. Closer to home, the U.S. Northeast had 4.2 per cent fewer sales so far this year, the Midwest 3.8. In parts of California, home sales are down by more than 20 per cent. In Ottawa, there’s a definite cooling under way.”

“So even as we shake our heads at the exorbitant price paid for the dump down the street or calculate what our own fixer-upper might fetch, there’s a nagging sense that what goes up must come down here, too. The question is when, and how far? The question is when, and how far?”

“A housing market is considered to be in a bubble when prices increase rapidly to an unsustainable level relative to incomes. When do you know that has happened? After the bubble has burst, and people start selling because they can no longer afford their homes. Listings flood the market and prices take a dive.”

“Analysts also watch for signs of speculation in the market. ‘The minute people start saying ‘I’ll never get in if I don’t go now,’ that smacks of a little bit of speculation, a little bit of panic,’ says Carl Gomez, an economist who has tracked real estate for the major banks. ‘It’s like saying ‘If I don’t buy those tech stocks now,’ just before the crash.’”

“So far, little of that seems to happening in Ottawa and most of the rest of the country, with the exception of B.C. and Alberta, the only places where Gomez and others are willing to throw around the B-word.”

“‘In Vancouver, particularly the condo market, prices are not reflecting economic fundamentals whatsoever,’ says Gomez. ‘In the case of some condos, it’s simply not a rational choice to buy, renting is now cheaper than owning. You also hear anecdotally about the fear factor. Add those parts together and you’ve got the symptoms of a bubble.’”

“Another sign that the western markets are in dangerous territory is their score on the affordability index. The industry rule of thumb is that most households can handle spending up to 32 per cent of before-tax income on the cost of home ownership. Anything more than that, and decades of data suggest the likelihood of defaulting on the mortgage increases (even so, some lenders will go up to 40 and 50 per cent).”

“Market-watchers look at ‘the fundamentals,’ general indicators such as unemployment levels, inflation rates and interest rates. If any one of them starts to rise, talk of a bubble rises, too. A weak job market means fewer buyers will be on the hunt, while rising inflation means our money simply doesn’t go as far and climbing interest rates make mortgages more expensive; any of which can create an oversupply of houses.”

“That’s what happened in the last bubble market, in 1989-90. In 1989-90, the affordability index was more than 60 per cent in many parts of Canada, exactly where it is right now in Vancouver.”

The LA Times has this report on the San Diego housing market. “Finally, the seemingly unstoppable ascent of real estate here has stopped. Sellers are chopping prices to get deals done. Buyers worry that values will continue to fall, putting their investment at risk. There’s widespread uncertainty, and some anxiety, about what happens next.”

“San Diego had the wildest run-up among major California cities. The boom was stoked by cheap loans, changes in tax law, creative financing and a generalized mania that fed upon itself. The market also began to fade first in San Diego. Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.”

“At a sales office in the Ocean Beach neighborhood, broker David Davis said the market had already bottomed out. ‘Our No. 1 industry is now tourism,’ Davis said. ‘Unless they take away the sun, we’ll be fine.’”

“If Davis radiates cheer, the fliers taped to the window outside the office door tell a different story. ‘Huge Price Reduction,’ one says. Another says both ‘Reduced’ and ‘$15,000 Credit.’”

“In some cases, the prices are dropping faster than the fliers can be reprinted. A two-bedroom town home has its price of $324,900 crossed out with a marking pen, replaced by $309,900. Another house, a four-bedroom in suburban La Mesa, has a printed price of $575,000. Below that is handwritten $549,000. Scribbled below that is a new minimum: $499,000.”

“‘Houses really need to fall by 50% to become affordable again,’ said Tom Scott, executive director of the San Diego Housing Federation. ‘It would be better for everyone if the price of housing fell.’”

“‘We’ve built a whole economy based on selling each other homes,’ Rich Toscano said. ‘That’s not sustainable.’ To illustrate his point, he offered a tour of downtown. Around every corner, it seemed, was another crane putting up another massive condo building. Many will have hundreds of units.”

“‘I’m surprised we haven’t covered all of San Diego with granite countertops by now,’ he said.”

“The housing category dropping the most in value here, DataQuick says, are newly built single-family homes and new condos. Median prices of these are down 8% since June 2005. Condos for resale are down much less, 2.1%, but sales volume has slumped by about a third. ‘There’s an 11-month supply on the market downtown,’ Toscano said.”

“Toscano says that the decline he is forecasting won’t happen overnight. When he extends the tour through a number of residential neighborhoods, what’s most striking is not the presence of ‘For Sale’ signs but their absence. ‘We’re at the very, very beginning of this,’ he said.”

A pair of reports from the northeastern US. “Fairfield County’s housing market is getting a little squishy around the edges, but it’s nothing to be alarmed about, real estate agents say. The market should settle into a buyer’s market stretching into next spring.”

“Right now, however, things are in a bit of flux. Inventories are starting to build throughout the county as sales soften, houses are staying on the market longer, and some sellers are being forced to reduce their asking price to market value in order to sell their property.”

“‘Sellers have begun to realize they have to be competitive with their asking prices, that they can’t reach beyond what’s market value,’ said George Schneider in Danbury. ‘It’s taken a better part of a year to realize we’re in a trend of reduced demand, increased inventory and the need for sellers to be more realistic in their pricing.’”

“The housing market ‘is definitely in transition to a buyer’s market,’ which is a month or two away, Schneider said. ‘The market is about to turn, but it won’t happen until the mindset of the sellers change, where sellers begin to welcome any interest in their property, when a buyer makes any kind of an offer and the seller begins to welcome that.’”

“As buyers become more cautious, ‘deals are becoming tougher to put together,’ said Todd Debek in the town of Fairfield, as potential home buyers bring more considerations into their equations than location, price and condition. ‘People don’t want to buy something they think is going to be a depreciating asset.’”

“Not that depreciation is on the horizon, ‘but no question about it, some markets haven’t seen appreciation since August,’ Debek said, especially in new construction in the $1 million to $1.5 million range in the Fairfield area.”

“‘The market has really changed around here,’ Peggy Nye said. ‘We’re back to a normal market, but people aren’t used to a normal market. People are panicked; they don’t know what to do.’”

The Boston Globe. “Home sellers are learning what any retailer already knows: Low prices are one of the surest ways to beat the competition. Coldwell Banker is coaching agents on how to persuade clients to list their homes at an asking price that undercuts those of comparable ones on the market.”

“The hope is low prices will attract more prospective buyers, leading to faster sales. Other real estate agents in the Boston area report success with similar strategies in a housing market with an unprecedented glut of properties for sale.”

“Buyers are ‘overloaded’ with options and ‘only respond when they see a perception of value,’ said Angela Stamoulos, who teaches Coldwell Banker’s course on this pricing technique, which the firm rolled out this spring in Connecticut and last month in Massachusetts. By grabbing buyers’ attention, she said, ‘the true market value of the property comes to fruition.’”

“Coldwell Banker’s efforts reflect a sea change in the market’s psychology. Today, what’s important is what is not selling. Drama pricing focuses on what buyers see on the market, forcing sellers to look at the prices of active listings.”

“‘It’s another indication that it’s clearly a buyers’ market,’ said Timothy Warren Jr., CEO of The Warren Group. ‘There’s a lot of stuff on the market, and it’s going to have downward pressure on prices.’”

Please post off-topic ideas, links and Craigslist finds here.