The Housing Bubble

The Contra Costa Times looks at some reports on borrowing in California. “Instead of building a nest egg for retirement, a growing number of homeowners are putting themselves in a debt trap. Economists and investment advisers say that more Americans are relying on their homes as their primary asset for retirement.”

“Two new studies confirm the trend. One, by the Securities Industry Association, found that the declining savings rate in America in recent years has coincided with an increase in mortgage debt. Another study, by a San Francisco-based economist with the Federal Reserve Bank, found that the level of property-debt burden, compared with income, has risen in recent years.”

“The reasoning goes something like this: Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.”

“‘People are making the mistake of thinking they live inside a big piggy bank,’ said Libby Mihalka, president of Altamont Capital. ‘They don’t realize it can all snowball out of control very quickly. Their house is not an ATM.’”

“‘This is a form of financial insanity,’ said Frank Fernandez, chief economist with the Securities Industry Association. ‘You are digging yourselves deeper into debt using an asset that could decline in value.’”

“This phenomenon extends to the East Bay. One individual, who is in his late 40s, has refinanced his primary residence seven times in six years, each time at a higher level of debt. ‘He has all the latest goodies and toys,’ said John Valentine of Valentine Capital Management. ‘He uses it for other investments. He just keeps increasing the mortgage. The debt-to-equity ratio on his house is at the maximum level.’”

“From 2004 to 2005, a year when the American savings rate turned negative, the mortgage debt on homes increased 15 percent to reach $1.14 trillion, the SIA found. ‘People started saving less in the late 1990s during the stock-market bubble,’ Fernandez said. ‘I suspected the same thing was occurring with regard to the housing bubble, and that is what appears to be happening. As the value of your financial assets increases, people save less money.’”

“The trend to tap equity seems especially prevalent in the East Bay. ‘Among my East Bay clients, I often see a person’s retirement plan and equity in their home comprise well over 90 percent of their net worth,’ Valentine said. ‘Among Peninsula clients, it’s only about 50 percent.’”

“Mihalka says the financial pressures will catch up to more people. She recounts the stories of two clients: One couple in their 30s, each with a good income, decided to buy their dream home in Pleasanton. They mortgaged themselves to the hilt with an interest-only loan. But they also became saddled with dramatically higher property taxes, which forced them to begin paying the dreaded alternative minimum tax. ‘They are cash-poor,’ Mihalka said.”

“Another couple in their 50s had begun to spend beyond their means. They took out a line of credit on their home and used it to buy a car and take a vacation. Now it looks as if they could be stuck with big mortgage payments in retirement.”

From the Daily Pilot. “The number of defaults on Newport-Mesa home loans jumped dramatically in the second quarter of the year compared to 2005, a rise some experts say could be the result of the sluggish real estate market. According to DataQuick, in Newport Beach the number of defaults skyrocketed, showing a 118% jump from the periods in 2005 to 2006. The number of defaults in Costa Mesa went up more than 50%.”

“‘The real story is not just the number of defaults going crazy, but the number of properties that are actually making it to auction, and that has increased dramatically,’ said Kurt DeMeire, CEO of a Huntington Beach corporation that researches and processes foreclosures.”

“In today’s market, more homes are making it to auction and going back to the lender because the home no longer has equity, DeMeire said. ‘Most people think it’s just junkie properties that go into foreclosure,’ he said. ‘Every neighborhood in the county has foreclosures every day.’”

“Keith Cotarelo, president of Signature Loan Group, said he expects to see more bank-owned homes after the auction process is complete. ‘Personally I think you’re going to see a lot more bank-owned properties, and in turn they will have to change some of the lending practices,’ he said. ‘I see it coming around to eliminating some products.’”

“In particular, Cotarelo said, the practice of 100% financing has hurt homeowners in the long run.”

“‘A lot of them have been caught in the crux of creative financing and the reality of what the rates have done. A lot of lenders selling the product were not explaining it very well,’ he said.”

Some housing bubble reports from Wall Street. “We know how D.R. Horton deals with success. Now we’ll see how the Fort Worth company handles adversity. It won’t be pretty, it won’t be subtle, and it won’t be alone.”

“CEO Don Tomnitz laid out Horton’s strategy for retrenchment after the company reported its first-ever decline in business. Some Horton plans are standard-issue, like laying off workers and cutting overhead by $200 million. Others are industry-specific, including a major reduction in speculative homes and land lots.”

“It has also anticipated the housing bubble bursting, saying a downturn could work to its advantage. The company expects to pick up market share and perhaps some distressed competitors during a prolonged slump. Those plans are being tested.”

“Tomnitz said, ‘June absolutely fell off the Richter scale for us.’ Horton responded by canceling option contracts for more land, eating the earnest money and other fees. Now the division presidents are pushing land sellers, who had agreed to an option price, to reduce it. ‘It doesn’t make any difference whether we’re short [of] land in that market or not,’ he said. ‘We’re basically using the excuse that the market is softer across the U.S. Across the board, we’re asking for decreases in our land prices.’”

“Some land sellers are still in denial, and he wants the big write-off to send a message: ‘The first loss is the best loss, and we’re going to walk away if we can’t get the land price correct,’ Tomnitz said. Horton had 396,000 home lots, 43 percent of them secured through options. It plans to reduce that to 340,000 and get a 50-50 mix of lots owned and optioned.”

“Subcontractors will get similar treatment, as Horton tries to drive down costs everywhere.”

From Danielle DiMartino. “Many apologists for the housing industry remain insistent that because house prices have never fallen on a national level, they never will. Actually, they already have. Since the fourth quarter, median home prices have fallen about 1 percent, according to data Goldman Sachs mined from the National Association of Realtors.”

“The numbers are even worse for condos. The median price of a condo nationwide has been falling at a 9 percent annual rate since the fourth quarter of 2005, according to Goldman Sachs.”

“The average mortgage loan size is declining on an annual basis for the first time since 2001. And over the last year, the housing vacancy rate has risen at its fastest pace since data collection began in 1956. ‘Since excess supply is perhaps the most ‘leading’ indicator of market weakness, we would strongly caution against the assumption that the housing downturn is already entering the end game,’ Goldman added.”

The Chicago Tribune. “A summer swoon for the housing industry is creating some restless nights. The struggle to sell a home, even after cutting the price, provides a ready explanation for the Federal Reserve”s decision last week to hold interest rates steady. The glut of unsold houses has hit historic highs, with mortgage rates near a 4-year peak.’

“As the nation’s No. 1 driver of job creation, the construction industry can’t afford to fall much further before other sectors of the economy feel a pinch.”

“‘Home building continues to decline, amid slowing sales and rising inventories. The overheated parts of the country, which include California, Las Vegas, Phoenix, parts of Florida and the Northeast, are seeing the biggest drops,’ said economist Lynn Reaser, of Bank of America.”

And a fund had these comments in their third quarter report. “The real estate bubble, whose existence had been denied for some time, primarily by those who stood to and did profit mightily from it, has clearly popped. Around the country, inventories of both new and existing unsold homes have hit five-year highs. Builders have adopted any number of ‘incentives’ to clear out inventory and batten down the hatches.”

“Falling house prices, coupled with the increase in interest rates, have deprived many consumers of their last source of ready liquidity; the home equity and mortgage refinancing combination that many used as a giant piggy bank.”

“In addition, a considerable number of home buyers opted for once-attractive adjustable rate mortgages, which are now adjusting upwards rather dramatically. Given these factors, it is easy to see that discretionary consumer spending is at risk.”

The Honolulu Advertiser has this update from Hawaii. “The housing market trend of higher prices but fewer sales continued on Maui, the Big Island and Kaua’i last month. There were 30 percent fewer single-family home sales on the Valley Isle: 88 in July compared with 125 a year earlier.”

“Maui condominium sales fell even further, dropping 66 percent to 78 in July from 228 a year earlier. The 78 July sales were the fewest in any month since January 2002, according to the Realtors Association of Maui. The median Maui condo price last month was $525,000, which was off the record $645,000 set in June but up from $380,000 in July 2005.”

“Keone Ball, Realtors Association of Maui president, said July sales reflect what he predicts will be a low point for the year. ‘A couple of months ago, the market was just dead,’ he said, referring to sales agreements that typically take two months to close and would be recorded as completed sales in July.”

“For July, however, Maui’s higher prices and fewer sales for homes largely mirrored activity on the Big Island and Kaua’i. A big swing occurred in Big Island condo sales, which fell 63 percent. The number of single-family homes sold in July on the Big Island declined 42 percent from a year earlier.”

“On Kaua’i, condo sales declined 46 percenth, compared with a year earlier. Kaua’i single-family sales were down 38 percent.”

“Ball said prices more recently are softening and spurring more sales, a trend he expects to show up in September and October sale statistics. ‘There’s a correction going on,’ he said, noting that he’s witnessed deals where sellers accept offers $100,000 below asking price. ‘There’s price reductions all over the place.’”

The Olympian has this update from Washington. “As the South Sound real estate market cools from overheated to warm, sellers are increasingly offering price reductions in order to speed up sales. Real estate agents say the recent appearance of homes marked as ‘Price Reduced’ indicates that this summer’s housing market is cooler compared with a year ago.”

“Inventory levels and interest rates are higher, and newly constructed homes continue to come onto the market, contributing to longer selling times. In July, there were 1,633 active listings, compared with 1,031 for the same period last year, according to the Olympic MLS.”

“Some agents, though, speculate that because builders don’t always list all of their new homes, inventory levels could be much higher, in the range of 2,200 to 2,500 homes.”

“Given the extra time needed to sell a home, real estate agents and their clients have been more aggressive in this market, according to Lacey-based broker Jeff Crandell. ‘I am noticing price reductions coming across my desk, and I think we’re seeing more homes marketed that way than in the past,’ he said.”

“Inventory levels are substantially higher and the market is not as feverish as it has been, Crandell said. ‘Listings are coming in at a far greater rate than we’ve seen in the past few years, and home sellers and agents have more work cut out for them,’ he said.”

“At Van Dorm Realty of Olympia, marketing expenses are rising as real estate agents spend more on advertising and fliers to help their clients sell their homes, said General Manager Jeff Pust. Pust said he also has seen price reductions he hadn’t seen for at least a few years.”

“He said the Thurston County housing market peaked last summer. The ‘frenzy’ has come out of the market, Pust said. ‘Accepting offers that are less than full price is becoming more normal,’ he said. ‘When you start seeing prices reduced, (home price) appreciation is leveling off.’”

“Educating sellers about the change in the market has become a new priority for real estate agents, said agent Jackie Tosland. ‘Homes aren’t selling as quickly, and sellers don’t realize it isn’t as hot,’ she said. ‘They remember last year.’”

“Tosland client Jennifer Huber of Lacey cut the price of her 1,635-square-foot home by $10,000 after she feared it wouldn’t sell as quickly at the higher price. Huber said her home eventually would have sold at a higher price, but she wasn’t willing to wait because she and her partner are in the market for another home.”

“‘When I saw other people lowering their prices, we couldn’t wait for an offer,’ Huber said.”

The Tallahassee Democrat reports from Florida. “The downturn in Florida’s real-estate market hit home Friday when The St. Joe Co. laid off employees in three divisions statewide. ‘We’re responding to the business cycle,’ spokesman Chris Corr said. ‘There’s been a slowdown in the Florida real-estate market. We believe it’s cyclical.’”

“‘We have had a work-force reduction, but I can’t give you exact numbers,’ Corr said. ‘There are employees who have not yet heard about it.’ Teary-eyed workers carrying office boxes outside the company’s Tallahassee office on Esplanade Way about 1 p.m. declined to comment.”

“Two men climbing into a pickup truck in the company’s parking lot said they’d been laid off but declined further comment. ‘Do I work for St. Joe’s? Not any more,’ one of the men said. ‘I got a good severance package, though.’”

“St. Joe owns 825,000 acres, mostly in Northwest Florida. It is seeking approval to build 44,000 homes. The company recently announced that its net income was nearly half of what it was during the same quarter in 2005.”

“St. Joe is not the first developer in Florida to lay off employees this year. The South Florida Sun-Sentineloted that G.L. Homes in Sunrise laid off 68 workers in June. In addition, WCI Communities, a Bonita Springs-based builder, cut jobs in July but would not disclose the number.”

The Miami Herald. “Kevin Kilpatrick he moved to Tennessee from Plantation. Kilpatrick had a new career (that) meant he was free to relocate. The home price differences made the decision a no-brainer. In Broward, the median home price is more than $377,000. In southern Tennessee, he has 10 acres and a 4,000-square-foot home built two years ago. The price: $280,000.”

“‘We just felt we could have a better quality of life,’ by moving, he said.” “There are always people moving in and out of South Florida, but in the last year experts are seeing powerful anecdotal evidence of an outbound migration trend. Indeed, South Florida is once again losing its allure for the middle class.”

“Lisa Kirkham is an example. She recently left Cutler Ridge for Maryland. Her mortgage payment kept rising because of windstorm insurance. ‘I don’t know how people can afford it.’”

“In 2001, the Florida Association of Realtors estimated that the median South Florida home cost $158,000. That was about 7 percent more than the national median. With 10 percent down, that would have meant a monthly payment of $898.80 for principal and interest at prevailing mortgage rates then.”

“Today’s median home price of $378,000 locally is 73 percent above the U.S. average. It also means that principal and interest total $2,150 monthly. And that’s after a 10 percent down payment, $37,800.”

“‘The hardest thing for them is coming up with a down payment,’ said Kimberly August, a mortgage planner.”

“Could housing prices deflate? ‘In most cases, it takes significant job losses, or a combination of overbuilding, modest job losses and population outflow, to drive house prices down substantially,’ a Harvard study concluded.”

“Although there is growing evidence of overbuilding in condos, it isn’t clear whether that is the answer to the housing affordability problem. In fact, even as the new buildings soar, sales of existing condos were down more than 30 percent in June in both Miami-Dade and Broward.”

“Scott Leidel took another approach. He drove off. A native of Miami, he found himself priced out of his hometown. ‘It was either move to another place and pay off all our debts, or stay in Miami and get further in debt,’ he said. Leidel sold his Sweetwater condo for $190,000, and decamped to a Chicago suburb. His new abode is twice as big as his old condo and cost $20,000 less.”

“Certainly, South Florida remains an immensely appealing location. And some professionals think the problem may be overestimated. ‘I personally don’t know anyone who has left,’ said John Beauchamp, (at) Fort Lauderdale’s Intercoastal Realty. Beauchamp does think high real estate taxes are a growing issue, but of home prices, he said: ‘I’m a positive person, and my answer is, there’s a price to paradise.’”

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