The Housing Bubble

The Daily Breeze has this update from California. “In June, 3,160 homes were on sale in the South Bay, up 180 percent from June 2005, when 1,127 homes were on the market.” “Shorewood co-owners Arnold Goldstein and Larry Wolf said, ‘there is no longer any doubt that buyers in the current market enjoy a good deal more leverage than they have had for the past several years, and that people who really want or need to sell in the short term may need to work with their real estate agent to rethink their pricing strategy.’”

“‘It’s certainly not the soft landing that we envisioned nine months ago,’ said Leslie Appleton-Young, chief economist of the California Association of Realtors. ‘As I look at the statistics of inventory and year-over-year price appreciation, I think it would be accurate to call it a return to normal.’”

“In the South Bay’s four main beach cities, 183 homes were sold last month, down 18.7 percent compared with a year earlier, the Shorewood report says. These cities include El Segundo, Hermosa Beach, Manhattan Beach and Redondo Beach.”

The LA Daily News. “After nearly two years of limited inventory and rising home prices, it’s a buyer’s market. Housing sales in June dropped substantially compared to a year ago. In fact, it was the slowest June in years, according to the Southland Regional Association of Realtors.”

“The association’s Santa Clarita Valley Division reported 253 homes sold in June, compared to 405 in the previous year and 400 in June 2004.”

“The number of homes on the market nearly tripled in June, in time for the traditionally busy summer sales season. The median price of a resale home was $610,000, a drop from April’s record high of $643,000.”

The Orange County Register. “One of Orange County’s most optimistic real estate prognosticators concedes that the local housing market is weathering tough times. ‘Things are OK, but we have a lot of inventory of wishers and hopers,’ (said) Gary Watts, a Mission Viejo broker and economist, referring to sellers he considers to be unrealistic.”

“The number of home listings reached nearly 15,500 this past week, Watts said, almost triple the number for sale 1½ years ago. Sales have been below last year’s levels for eight straight months.”

“‘I really think that we are pretty close to the bottom of our real estate prices,’ Watts said. ‘August ought to be the last month of weak appreciation numbers.’”

Several readers suggested the topic of foreclosures. “We know foreclosures are on the rise, but how many will it take before lenders say 6.48% is not enough return to cover the risk we’re taking? As a personal investor, I wouldn’t loan anyone money to a home right now unless I was getting at least 10%. Nothing against the borrower, it’s just the market.”

“When/If the institution loan-pool buyers come to the same conclusion, the IR curve will steepen drastically and things will get even uglier.”

Another said, “Lenders aren’t generally ‘afraid’ of foreclosures in a rising market. They can foreclose the property, take it back if nobody wants it, then often times resell it for a profit. They aren’t afraid of foreclosures if the buyer put 20% down because there is a substantial equity cushion. Lenders are only afraid of foreclosures on loans made at a market top with the market headed south or if there is no equity cushion for them.”

“Those are the only scenarios where lenders face any meaningful risk. Even then, if the lender is adequately capitalized, they can simply hold the property through the downturn, and sell on the next upswing.”

“The structure of the MBSs is interesting in this respect. Most of the mortgages have been structured so there is an 80% first (with equity cushion) and a 20% second. It will take a market decline of more than 20% to jeopardize the first trust paper.”

And another added, “One of my big worries is knowing who holds all of this paper. I suspect lots has been sucked up into pension /annuity plans, etc. Anyone have good info on that?”

A reply, “Banks don’t hold the property for years, it’s not their policy to hold vacant properties for years. Banks and savings & loans sell as quick as possible for the market value, or whatever they can get.”

And another, “The first mortgage holder will slide from 80% to 100% very quickly. accrued interest, costs of foreclosure close the gap quickly. The second mortgage is vaporware, always has been. Then the first mortgage holder has to sell into a sagging market, a 15-20% discount is a must. and no, the lenders will not hold onto the real estate, they have to capitalize that.”

And lastly, “The 2nd mortgage will get eaten up not just by the equity slide, but by missed payments, property taxes, insurance, legal fees, and foreclosure fees. So the 20% equity cushion there is not really 20%. It will not take long to eat into the first mortgage.”

The Greeley Tribune in Colorado. “Last fall, Weld County was coming off its worst foreclosure year ever. It’s getting worse, and those in the industry expect the number of foreclosures to continue to climb. ‘We haven’t seen anything this ugly in easily 15 years in the sheer anemic nature of this market,’ said Matt Revitte, a broker wwho specializes in foreclosures.”

“As of this week, there were 1,086 foreclosures in Weld County, a 42 percent jump from the same time last year. In all, 2005 registered 1,500 foreclosures. There is one foreclosure for every 71 residences in Weld. Adams County, with 2,450 foreclosures as of June 30, with a foreclosure for every 50 homes. Arapahoe County tops the heap in volume with 2,570 foreclosures as of Thursday, but it comes out to one foreclosure per 77 residences.”

“Revitte said the Weld market is in a major correction at present. There’s an oversupply on the market. It also doesn’t help that the foreclosed homes are competing with homes that are on the regular market. Northern Colorado economist John Green added that such competition may keep sellers in limbo longer, making them walk way from loans they can’t service. ‘It becomes a self-fulfilling prophecy.’”

“Revitte agreed, adding, ‘This could be a house of cards that continues to implode.’”

A pair of reports on age and homeownership. “Earlier this year, Clay Weiner 29, and Rachel Comey, 31, a fashion designer, bought a piece of the American dream in Greenport for $640,000. The couple, who split their time between Manhattan and Greenport, use two of the three floors of the converted industrial loft space and rent out the first floor to help cover their mortgage.”

“If that sounds like a whole lot of house for someone in his 20s, think again. The number of 20-something home buyers has been on the rise, thanks to creative little-or-no-money-down financing options, historically low mortgage rates, and the desire to not be priced out of the market. The homeownership rate for people under age 25 jumped from 19.3 percent in 1982 to 23.6 percent as of the first quarter 2006. For buyers between the ages of 25 and 29, the homeownership rate rose from 38.6 percent to 41.0 percent for the same time period.”

“Jamie Lombardo, 29, who last August bought a $382,500 home in Bellmore with fiance, David Nordstrom, 33. The couple put no money down and did 100 percent financing, she says, noting that they took the jump into homeownership when they realized there was only a $1,000 difference in monthly payments between owning a home or staying in their Oceanside basement apartment.”

“‘When it’s your own home, you do what you have to do,’ says Lombardo, an elementary school teacher. ‘Even if it means working a few extra hours.’”

“The one bright spot, say 20-something house hunters Christopher and Melissa Mancuso, is that at least home prices appear to be stabilizing. ‘We’ve been hearing the market is changing into a buyer’s market,’ says Mancuso, 26, a physical therapist who with her husband, 29, is working to find a home under $500,000 in West Islip, Wantagh, Merrick, Seaford or somewhere else on the South Shore. The couple now rents in a complex in Levittown.”

“Even so, Mancuso recognizes that switching from renting to homeownership may require a little bit of a lifestyle change. ‘Things will definitely be tighter,’ says Mancuso, who quips, ‘I told him it’s going to be a lot of tuna fish in the beginning.’”

“Among factors contributing to growth in homeownership among young buyers was the explosion of the subprime market in the 1990s, adds Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School.A federal policy push on banks to increase access to mortgages also helped, she notes.”

“It’s only recently that the climate has become less favorable with rising interest rates, she says, noting, ‘I would suspect this amazing shift to change.’”

From the LA Times. “Ask Norm Edelen how old he’ll be when his last mortgage payment is due, and he doesn’t miss a beat. The answer: 100. Not that he’s troubled by the likelihood that his housing debt will last longer than he will: ‘It doesn’t bother me at all,’ the 74-year-old San Bernardino resident said. ‘It’s not something I ever thought I would live to complete.’”

“Welcome to a new era in home borrowing, where long-term mortgages and home equity loans are taking their place alongside AARP cards and pension checks as never before. About 25% of all Americans over age 65 have yet to pay off their home loans, up from 11% in 1983.”

“For many older homeowners, the decision to carry housing debt deeper into their twilight years is by choice. They see their homes, rather than savings accounts, as piggy banks that can be tapped through home equity loans or refinancings to provide ready cash. But the trend also reflects sober realities, including lifestyle changes from an earlier, more debt-averse era.”

“A sure-bet housing market has limited the downside risk. Soaring home prices have boosted the equity people have in their homes, and low interest rates have often allowed them to tap this equity without raising their monthly payments.”

“‘As long as you can still find a job at an older age, as long as the housing market remains strong, it’s not a terrible thing,’ said Zhu Xiao Di, a senior research analyst at Harvard University. ‘But if bad things happen [economically], it could be a problem.’”

“He added: ‘Whether this is alarming, or people are just smarter than we thought, I don’t know.’”

“If home values plunge or interest rates soar, for example, many homeowners could be faced with a squeeze. They would find it difficult to unload the property and shift into something smaller and cheaper, as older homeowners often seek to do. Older workers could be forced to delay retirement, if they are able.”

“Christopher Cruise, a former mortgage broker who now trains people who write home loans, recalled the fading tradition of the ‘mortgage-burning’ party, in which newly debt-free homeowners invited their friends over and ignited the old mortgage in a joyous blaze of freedom. Younger loan agents often have never heard of the tradition, he said.”

“‘One hundred percent of the people I teach in their late 20s or 30s have no idea what a mortgage burning is,’ Cruise said. ‘This whole attitude of paying off the mortgage and owning the home free and clear is disappearing from the country .’”

Some housing bubble reports from Florida. The Bradenton Herald, “52 percent-fewer single-family homes were sold in Manatee County in June than a year ago. ‘Definitely I think the bubble burst. If it hasn’t, it’s leaking badly,’ said (realtor) Helen Robinson.”

“One area where the downturn is more pronounced is condo sales, which produced few sales and a lower median price. Robinson is worried that if real estate taxes and insurance rates continue rising, it could discourage snowbirds and second-home buyers from investing in the market.”

“‘If taxes and insurance rates go up, the second-home buyers are going to be hurt,’ she said. ‘We’re really killing the goose that lays the golden egg.’”

“In June, 560 homes were sold compared to 1,025 in June 2005, Dale Friedley of the Manatee County Property Appraiser’s office said. Likewise, the sales of condos continued to tumble, falling 41 percent from last June’s sales.”

“Forty-two single-family residences were sold versus 117 last year, down 64 percent, according to the Anna Maria Island Property Sales Report. Anna Maria condo sales plummeted 78 percent with 26 sold in the first half of 2006 compared to 116 last year. Four condos were sold in June 2006 versus 19 last June.’

“It’s a sign that Polk County is no longer owned by the sellers. ‘Our incentives are in response to the market slow down,’ said Callie Neslund, Southern Homes’ marketing assistant. ‘It seems like it is a nationwide trend.’”

“Southern Homes in Lakeland is now offering a buy-down incentive. ‘That ends up being over $70,000 in savings,’ Neslund said.”

“‘We have three times the listings that we had at this time last year,’ said Jan Bellamy, a Realtor in Lakeland. ‘We have fewer buyers, too, and the investors are all gone. Most homeowners only have one home to sell,’ she said. ‘These builders have millions (of dollars) in inventory and hundreds of employees to protect.’”

The Palm Beach Post. “Mark Vitner, economist at Wachovia Corp, said he has begun to temper his once-bullish outlook on Florida. He warned that fault lines have begun to appear in the state’s solid economy.”

“The housing market has slowed dramatically, Vitner said. In addition, he said Florida employers are starting to leave the state because of the rising costs of insurance and real estate, and the tight labor market.”

“‘We’ve gone from a situation where everything was so positive to a situation where we’re victims of our own success,’ Vitner said. ‘Florida is beginning to choke on its growth a little bit.’”

“Vitner, who once was the cheeriest of cheerleaders for Florida’s economy, is feeling a little less sunny about the Sunshine State. Among the economic clouds he points to: The end of Florida’s wave of real estate speculation. Many people who signed contracts on new homes never planned to close, instead hoping to flip for big bucks, he says. Now they’re backing out or taking title to homes they had hoped to sell.’”

“To put Vitner’s sober outlook in perspective, understand that he was the picture of optimism during last year’s boom. Here’s how Vitner sized up Florida back in November: ‘It’s hard to come up with the correct superlatives. We have the best economy by far in the nation. I don’t want to say it’s an embarrassment of riches, but the economy is so strong in Florida from coast to coast.’”