The Housing Bubble

It’s Friday desk clearing time for this blogger. “‘Consumers held the least favorable home-buying plans since the low point in the 1990 recession, which indicates continued declines in sales of new and existing homes during the year ahead,’ according to Richard Curtin, of the University of Michigan’s Survey of Consumers.”

The Arizona Republic. “There is a three-year supply of homes on the market in Johnson Ranch near Queen Creek, a real-estate agent told reporter Betty Beard. Agents are encouraging sellers to, gasp, lower their prices, sometimes below appraisal. Throughout the craziness last year, a few moderating voices warned of the inevitable ‘bubble,’ but there was no sense that it would burst so soon.”

“A stabilized, more realistic market seems like a good thing all around.”

From Massachusetts. “Nearly twice as many Fitchburg homeowners have lost their homes to foreclosure during the last 12 months compared to the previous year. Foreclosures will most likely continue to rise for at least the next year, Jeremy Shapiro said. ‘A lot of people haven’t even been hit by rate increases yet,’ he said. ‘We’re definitely going to be seeing an increase down the road.’”

“Housing in Russia has been growing in value ahead of inflation ever since a housing market appeared in the country, but the prices have made a particularly impressive leap only recently. (Broker) Natalia Kirpichenko laughed at the official figures. She said the Moscow market ‘is poised for housing costs of six or six and a half thousand dollars per square meter.’ The fact is that well-to-do people in Moscow and Russia have nowhere else to invest their extra money.”

“There is a reason to be cautious when it comes to Dubai property - the boom in prices is a bubble waiting to burst, fed principally by speculative purchases. Media reported that 85% of off-plan flats and 50% of off-plan villas were bought by speculators. In other words, the majority of those buying have no intention of living there.”

“Kevin Fleury, a mortgage broker specialising in overseas loans (says) an exit strategy is needed. With Dubai, though, there isn’t one. ‘There is a severe danger that there will be an oversupply because so much is being built. This will suppress rents and capital growth, and I think many people will find it difficult to sell.”

From Seattle. “A local developer is betting Seattle urbanites are primed to carve out their own two-truck chunks of Belltown. The moda condos promise ‘New York-style living,’ with units as small as 296 square feet. ‘I like having everything in just one room,” Debra Smith said.”

“Erin Stines, one of the first Montreux buyers, said, ‘It was easy to clean. I didn’t really have money for furniture.’”

From Berkeley. “Last month a total of 7,941 houses and condominiums sold in the Bay Area region, the lowest July numbers since 1996. ‘Housing prices are falling, but I believe in real estate cycles,’ said agent Judy Glick, ‘We have entered a cycle where there was abnormal inflation in the past five years and now there is a market adjustment.’”

“Sam Behtash, a in Albany, said, ‘There is no change other than what is expected,’ he said. ‘It’s nothing to worry about, scare the kids or get paparazzi about.’”

“Glenna Breslan said her friends in Berkeley have taken the opposite approach. ‘They are feeling more hopeful,’ she said. ‘They have decided to look for a bigger house instead of adding on because there is an indicator that housing prices are going down.’”

The Capital Times in Wisconsin. “To hear the real estate agents tell it, the housing market has ‘lost steam.’ What they really mean, of course, is that it’s hit a wall, though you won’t get them to admit that publicly. And from all indications it’s not going to improve any time soon.”

“But then, to anyone who’s gone house shopping in Madison recently, this is hardly a revelation. The only surprise is that the market didn’t hit a wall long ago.”

“How ludicrous has it gotten? Two weekends ago, my wife and I stopped at an open house on the near west side to check out a home that a real estate agent might refer to as a ‘charmer.’ But there was nothing charming about the price: $425,000.”

“So, after a quick tour, we thanked the agent for her time and then chuckled out loud as we drove home.’

The Pasadena Star has this report from California. “Jim and Gerry Balazs’ La Habra home has been on the market for eight months, so they agreed to spice up the offer by throwing in a new car or truck. Their broker, Mark Tacconelli, got the idea from a similar offer in Virginia. Tacconelli suggested a pickup truck to keep with the fixer-upper theme.”

“‘We were thinking of a truck. You have a truck to go back and forth to Home Depot, Tacconelli said.”

“He had tried lowering the price or taking the home off the market, but other home prices in the neighborhood were adjusted accordingly, he said. ‘Buyers are much more picky now,’ he said. ‘They take a lot longer. You’re competing against more houses.’”

“Including a car as a sales incentive is done more often with builders who don’t want to devalue the price of their subdivisions and who want to show some level of sales activity, said Vince Malta, 2006 president of the California Association of Realtors.”

“‘I think you look at it both ways,’ Malta said of the car offer. ‘It attracts interest in the listing, but the downside is it may be counterproductive in some instances in that it might be masking an overpriced property.’”

“Jim and Gerry Balazs are living at a retirement center in Irvine and hoping they get a good return on their investment. ‘We have to live off of something and our money is tied up here,’ Jim Balazs said. ‘We don’t sing the blues, but it gets a little frustrating. The money we get out of the house we would put in the bank, and we would feel more comfortable.’”

The San Francisco Gate. “Most recent numbers suggest that the Bay Area (is) no longer a market in which sellers can set their price according to comparable properties in the neighborhood and then wait for the bidding war to send the price over the moon.”

“According to DataQuick, Bay Area home sales slowed in July to their lowest levels in 10 years, while prices increased at their slowest pace since 2003. Translation: It’s not a seller’s market anymore. The only problem? Many sellers don’t want to hear that.”

“Indeed, as the real estate market comes to a screeching halt, agents are finding themselves in the unfamiliar role of dietitians for sellers whose eyes bigger than their buildings. ‘It’s a classic dilemma in the changing dynamics of real estate,’ explains (realtor) John Asdourian.”

“Of course, real estate agents have a vested interest in bringing sellers up to speed as quickly as possible. The more homes languish on the market, the worse their bottom line in commissions.”

“Some agents are less politic about the frustrations of dealing with unrealistic sellers. ‘She’s in for an education, all right,’ one agent, who asked to remain nameless, told me after dishing the dirt on a prospective client. ‘She thinks her condo is worth more than it is, she wants to live there while it’s up for sale, she doesn’t want to stage it and she doesn’t want to do a speck of work on it. Not even painting!’ He pauses. ‘Well, she’s gonna learn the hard way, and it’s not going to be pretty.’”

“Indeed, one of the only generalizations about the current Bay Area market is that although prices may be headed south, at this moment it’s more of a micro market than ever. Some houses get many offers, while others don’t get a single one, even after multiple price reductions. And this is a hard lesson to learn for sellers ready to take the money and run and buyers willing to only play lowball.”

Some housing bubble news from Wall Street and Washington. “The dollar’s early afternoon recovery, in the wake of a solid US jobs report for August, came to an abrupt halt on mounting concerns that the US housing market is teetering on the verge of collapse. The National Association of Realtors revealed that pending home sales slumped by 7 pct in July to their lowest level in three years.”

“Paul Ashworth, senior US economist at Capital Economics, said outright falls in house prices would appear to be unavoidable if this trend continues. ‘Housing is in freefall and that is the key to the economic outlook,’ he said.”

“David Lereah, NAR’s chief economist, said psychological factors account for much of the decline in July home sales. ‘Psychological factors are causing some buyers to remain on the sidelines, waiting for prices to stabilize or for more favorable news about the market and the economy. Contributing to this hesitancy is a lot of negative news stories, but in the end we believe that underlying market fundamentals will prevail.’”

“UBS on Thursday downgraded New Century Financial Corp. and Impac Mortgage Holdings Inc. to ‘reduce’ from ‘neutral’ on increasing risk of a credit downturn. The brokerage sees early signs of worsening credit, noting several nonprime mortgage lenders increasing their repurchase reserves mainly due to early payment defaults.”

“H&R Block Inc. on Thursday reported a first-quarter loss of $131.4 million, citing trouble in its mortgage business. Thursday’s report came one week after Block announced it was setting aside $102.1 million to cover possible losses from having to buy back mortgages. CEO Mark Ernst expressed confidence that the expanded reserve is large enough to cover additional, foreseeable losses from forced buybacks of delinquent mortgages.”

“‘We are assuming that any loan that could come back will come back,’ he said. Ernst said..Wall Street firms and other loan buyers in the secondary market ‘have become much more stringent in their enforcement of the requirements to buy back loans.’”

“Construction spending plunged by the largest amount in nearly five years, reflecting spreading weakness in the housing industry. It was the fourth consecutive decline in residential construction and the biggest drop since January 2002, providing dramatic evidence that the nation’s five-year housing boom has come to an end.”

The Baltimore Sun. “Home sellers aren’t the only ones pained by the sharp housing market slowdown: So are people who build houses. U.S. homebuilders and residential specialty trade employers cut 21,200 jobs in May, June and July, usually the peak building months, according to the most recent preliminary numbers from the Labor Department. The statistics, adjusted for seasonal variations, also showed a significant job loss in March.”

“‘Some of the larger builders have laid off as many as 30 percent of their total staff in this area,’ said John Kortecamp, of the Home Builders Association of Maryland. (Builder) Chris Rachuba in Eldersburg has been getting calls from subcontractors hoping that he has more work for them, a turnaround from the days when there weren’t enough subcontractors to go around. Suppliers that used to be too busy to bother with sales cold calls are descending on him, too.”

A Motley Fool. “It turns out that the anecdotal evidence for falling prices may be exactly right, because a large number of housing sale prices may be based on fudged numbers. That’s right, the last leg of Greenspan’s bubble may be collapsing under the weight of farcical accounting.”

“Many economists and commentators have begun to point out that housing prices are inflated to an unknown degree by seller concessions. These expensive sweeteners are now par for the course as desperate sellers try anything to move their houses.”

“I think we’re only at the tip of the iceberg when it comes to seeing other forms of mild and wild financial shenanigans that pumped this bubble to the bursting point. I’ve been saying for some time that I thought the appraisal business was a funky racket, and it appears to be giving some folks big problems when they want to refinance.”

The Sun Sentinel reports from Florida. “School district figures show that 284 teachers stated in their May exit interviews they were moving out of Palm Beach County, up from 210 in 2005 and 140 in 2004. The information doesn’t specify where the teachers moved or why. But district officials say they’re hearing anecdotal evidence that many teachers find it’s too expensive to live here.”

“‘My data processor said that’s where she’s sending all her records to. They’re all fleeing to Georgia,’ said Bill Fay, principal in Delray Beach.”

The Orlando Sentinel. “Old-time swamp peddling has gone high-tech, thanks to Internet-auction sites such as eBay. The pitch, speculation on near-worthless Florida real estate, is decades old. But today, a new generation eyeing property for investment or retirement is buying land that’s miles from civilization, has no roads or utilities and sometimes is underwater.”

“‘You cannot do anything with the land,’ said Robert Derogene, a Coral Springs mortgage broker who paid $46,500 for three acre-and-a-quarter lots at a paper subdivision known as University Highlands in Volusia County. ‘A whole bunch of people were misled, and I didn’t like that.’”

“Not every buyer is unhappy, however. Even though hundreds have been offered state-mandated restitution, some want to hold on to their land. ‘It’s a gamble,’ said Robert Thompson of Palm Beach, who is one of the 187 University Highlands buyers being offered a refund. ‘I don’t know if I ever will be able to build. I believe it’s going to take off.’”

“South Florida’s condo market might be taking a fall, but that’s not stopping Hollywood officials from providing downtown developers with incentives to continue building. Just two years ago in July, potential condo buyers lined up around the block in hopes of snagging a unit at Young Circle’s luxurious Radius, now under construction in downtown Hollywood.”

“Today, it’s the condo developers who are lining up before City Hall.”

“Developers say the slowing condo market and rising construction costs are putting the project in peril. That is, unless the city’s Downtown Community Redevelopment Agency cuts them what essentially would be a $6 million tax break.”

“At a recent agency meeting, City Commissioner Sal Oliveri asked what would happen if there were no incentives. ‘We can’t build today,’ answered co-developer Cliff Findeiss.”

“Developers noted condo sales, largely fueled by investors, have dwindled. Throughout South Florida, as supply outpaces demand, prices are leveling off and could tumble by 30 percent or more by the time the market hits bottom, experts say.”

“As of June 30, almost 52,000 condo units in South Florida were under construction or finished and still vacant, according to Metrostudy, a West Palm Beach-based consulting firm. About 104,000 units are planned, although analysts doubt most will be built.”

The St Petersburg Times. “Frustrated by the failure of local developers to land financing for Trump Tower Tampa, the Trump Organization said it will take the lead in finding lenders for the proposed luxury condominium high- rise. ‘Everything about the project has been a total success. It would be a shame not to get it built,’ Donald Trump Jr. told the St. Petersburg Times.”

“But lenders have remained skeptical. Roughly 10,000 unsold condos clog Tampa Bay area real estate listings. Many were scooped up by investors who are struggling to find buyers in the relatively tepid housing market. Few of those units, however, approach the price and luxury touted by Trump.”

“Trump suggested his company, with its billions of dollars in assets, might have better luck approaching banks and lenders. But he made no promises of success. ‘If it can be done, it will be done,’ Trump Jr. said. At what point would the Trump Organization consider backing out of the project? ‘We don’t like to think that way,’ he said.”

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A schedule note; this blogger is taking the holiday off, so on Monday looks for a Bits Bucket and Labor Day predictions thread.

Business Week looks at exotic loans. “For cash-strapped homeowners, it was a pitch they couldn’t refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn’t even need to produce documentation, much less a downpayment. Those who took the bait are in for a nasty surprise.”

“Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules, often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can’t count on rising equity to bail them out.”

“What’s more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.”

“There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home.”

“The option ARM is ‘like the neutron bomb,’ says George McCarthy, a housing economist at New York’s Ford Foundation. ‘It’s going to kill all the people but leave the houses standing.’”

“Gordon Burger is among the first wave of option ARM casualties. The police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that’s making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years.”

“Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. ‘The payment schedule looked like what we talked about, so I just started signing away,’ says Burger. He didn’t read the fine print.”

“After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. ‘I’m not making any ground on this house; it’s a loss every month,’ he says. He says he was told by his lender that he’d have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he’s unhappy, he should take it up with his broker, the bank said.”

“‘They know they’re selling crap, and they’re doing it in a way that’s very deceiving,’ he says. ‘Unfortunately, I got sucked into it.’ Among Burger’s alternatives were one for $2,524, about what a standard fixed-rate mortgage would be on the new amount, and the $1,697 he pays. Why would his bank make the minimum so low? Thanks to a perfectly legal accounting practice, no matter how little Burger pays each month, the bank gets to record the full amount.”

“Most of the pain will be born by ordinary people. And it’s already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down, meaning borrowers’ homes are worth less than their debt. If home prices fall 10%, that number would double. ‘The number of houses for sale is tripling in some markets, so people are not going to get out of their debt,’ says the Ford Foundation’s McCarthy. ‘A lot are going to walk.’”

“After prolonging the boom, these exotic mortgages could worsen the bust. They also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking.”

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