The Housing Bubble

The Record Net reports from California. “Home prices in the Central Valley have started sagging year-to-year, just as they have in most San Joaquin County cities. Sales were down nearly 43 percent year-to-year as well.”

“Vince Malta, a San Francisco real estate broker who is president of (CAR), said the market is slowing as sellers often hold to unrealistic pricing expectations while buyers have more properties to choose from. ‘With inventory levels double that of a year ago,..some regions of the state prices are down from a year ago,’ he said.”

“Meanwhile, local homeowners say it’s a bleak housing market these days, even with some price slashing going by some motivated sellers. Jim Coan put his north Stockton home on the market in May. He has cut the price twice, from an initial $459,000 to $424,500. There have been only nine viewings and not a single offer, he said.”

“‘I think house prices shot up too fast the past few years, and we are going through a cooling off period that the Fed anticipated when they started raising interest rates,’ Coan said. ‘But compounding the situation here in Stockton is that more and more folks keep putting their houses on an already glutted market, thus impacting the old supply-and-demand scenario. We have an oversupply of houses and few buyers out there, for whatever reasons.’”

From the Reporter. “The real estate industry has seen rosier days. Last month, a real estate information service reported that Bay Area home sales hit their lowest level in 10 years, with Solano leading the slump. Sales were down more than 41 percent in the county compared to the previous year, DataQuick reported.”

“‘The experienced agents are telling me this is one of the worst markets they’ve seen,’ remarked Sue Kappel, who has operated since 1972.”

“And what of the thousands of people who only recently got into real estate or related industries to capitalize on the boom? ‘We’ve probably had 300-400 people quit in the last few months. We’ve had a lot of Realtors and loan officers quit,’ said Jim Porter, Solano Mortgage’s owner and senior loan officer.”

“‘It used to be get listings, get listings, get listings,’ Kappel said. ‘Now it’s find buyers, find buyers, find buyers. The paradigm has shifted.’”

The Press Enterprise. “A cooling housing market caused manufacturing growth in the Inland region to dip over the past two months to its lowest level in recent years, according to a report. The Institute of Applied Research and Policy Analysis at Cal State San Bernardino called the latest manufacturing levels ’somewhat worrisome.’”

“‘It’s rare in economics that you see dramatic shifts,’ Redlands-based economist John Husing said. ‘We’ve had one in housing.’ He said manufacturers that produce items for the housing market, like doors and hinges, have probably been the hardest hit.”

“Jack Kyser, chief economist at the Los Angeles County Economic Development Corp., said he thinks there’s anxiety in the business community with the slowdown in the economy and increased energy costs. ‘Anyone looking at what’s going on in the housing industry is probably getting a little nervous,’ he said.”

Readers suggested a topic on weakness in different price ranges. “I think the lower end houses will remain more stable in the upcoming downturn. That’s what I have observed in prior downturns, (except if its in a area were major job loses take place ). The upper middle takes a major bath in downturns in the past that I have witnessed, that would now be the $700k to $1.5 mil range. Who knows what’s going to happen with this market this time. It stands to reason that all price ranges are going to be going down.”

Another added. “I am out of the market now (obviously), but for at least 5 years I have been trying to tell people how housing downturns work. The stuff at the bottom is always more stable, because there are more people who can afford those homes.”

“Its the stuff that is now priced above $300,000 that is going to get ugly. Especially as you mentioned the stuff in the $750K range. These people can’t really afford their homes (for the most part), as they would need to make upwards of $200,000 under traditional lending standards.”

“Oftentimes people say to me ‘but we can afford the payments.’ What these people fail to realize is that their home is only worth what a similar income-level family can pay. So if rates go up (or the ARM stuff goes away) prospective buyers have to qualify at the current rates/guidelines. If they cant, then by definition the home is worth less money.”

“Similar principle when you look at FB’s who bought homes above $500,000 to rent out. How many people can actually afford to pay over $2,000 in rent. Here’s a clue for these FB’s - not many. So when they are unable to secure tenants for their homes, then ‘walla’ the lightbulb turns on in their head: ‘I’m *ucked aren’t I?”

And another. “Beg to differ…”

a) Job losses hit the low end first and hardest.

b) Low end households tend to have little or no savings.

c) Low end households have little or no assets to liquidate.

“Watch ‘Cinderella Man’ for a good take on what’s coming.”

A reader from Australia. “The Australian experience over the last couple of years is quite complex and doesn’t fully support either (of) you (first two posters). I will post at greater length if this is used as a topic.”

Some housing reports from the Nevada Appeal. “There aren’t many people looking to buy homes during this typically slow season in late summer/early fall, but those who do are spending about 6 percent less than a month before, according to city assessor records. Residential sales are also being brought down by higher interest rates and sellers overestimating what their property is worth, said Bob Fredlund, an agent Carson City.”

“Sellers are shocked because of the decrease in the value of their property over a year ago when all real property was inflated, Fredlund said. Many sellers are making reductions in asking prices. He believes this trend will continue until Carson City gets a population influx. ‘The reality is we’ve got fewer buyers now,’ he said. ‘Everybody purchased in the last year.’”

“The South Lake Tahoe real estate market closes off a slow summer for sales with a glut of inventory, but prices remain strong despite what many deem a market correction from the spiraling heyday of previous years.”

“Dee Hackleman is one seller who took her house off the market recently because she and her husband didn’t get what they were asking for. At last count, it was listed for $29,000 less than what the originally requested, down to $395,500. ‘The market is flat right now. It’s glutted,’ she said.”

“But a correction in price and availability might not be a bad thing, according to the state’s leading economist. ‘Absolutely not. That’s just the way the market works. At some point, housing affordability will be impacted by rapid appreciation. We call it an ‘adjustment of expectation,’ California Association of Realtors chief economist Leslie Appleton Young said.”

“The median price for South Shore homes from July to August dipped by $40,000 to $435,000. One listing from Coldwell Banker indicates the ’seller will carry a second to qualified buyers with no payments for three years.’”

The Pahrump Valley Times. “A buildup of housing inventory for sale in the neighboring giant of Las Vegas is one of the reasons blamed for a slowdown in the Pahrump real estate market this year, local real estate professionals say. Some local real estate representatives said the problem is that sellers can no longer expect to get they prices they were able to demand during the boom.”

“Agent Fely Quitevos said she’s read on the Internet about new home developers like Beazer Homes offering 8 percent commissions and giving $10,000 to $20,000 to home buyers, incentives that are difficult for existing home sellers to compete with. Quitevos said some of her listings have expired after six months, and she’s had to renew them. But she added, ‘If the property is priced right, we could sell.’”

The Review Journal. “The luxury rental market in Las Vegas has been limited to custom executive homes in upscale master-planned communities, a few midrise apartments such as Vegas Towers and the 30-year-old Regency at Las Vegas Country Club. That’s changing as more high-rise and midrise condo projects are completed and investors dump their units onto the rental market.”

“A two-bedroom, second-floor condo at Manhattan is offered for six-month or one-year lease at $1,600 a month plus deposits. The owner is a licensed real estate agent in Nevada. ‘People that bought in the initial phases of midrises and high-rises bought as speculators and never had any intentions of occupying the place,’ (analyst) Larry Murphy said. ‘They bought with the intention to flip it. It’s just adding to the already huge inventory.’”

“‘There’s not an open market of people willing to pay $2,500 to $3,000 a month. That’s not typical here in Las Vegas. That’s still a lot of money,’ said Carl Sims of Hendricks & Partners. Investors who lease a unit for $3,000 a month, or $36,000 a year, would get a 10 percent return on a $360,000 unit, and to get those kind of rents, they’re going to have to pay a lot more than $360,000 for the unit, Sims said.”

“After expenses such as mortgage, homeowners association fees, taxes and insurance, owners could end up with a negative cash flow, he said.”

“Murphy said a lot of Realtors bought at SoHo and Manhattan, hoping to flip the units for a profit. ‘I don’t think they’ll be so lucky this time,’ Murphy said. ‘We’re in chapter two of the high-rise story and some of the people that bought them may be in Chapter 11 (bankruptcy) before we’re through.’”

The Dallas News reports on foreclosures. “The number of mortgage defaults in the Dallas-Fort Worth area is up 30 percent this year. In North Texas, rising property taxes and increasing mortgage rates on adjustable loans are also taking a toll.”

“Kemisha Jones doesn’t want to leave her 2-year-old southeast Dallas home. But the single mother may not have a choice. She’s one of more than 28,000 North Texans whose homes have been posted for foreclosure this year.”

“‘My house payments went from $871 to $1,385 a month,’ said Ms. Jones, whose house is valued at about $106,000. ‘For a while I was making it, I was rocking and rolling,’ she said. ‘But now I realize that I can’t afford this house.’”

“For Eric Fenton, who gave up his house in June, the loss of overtime income in his telecommunications job came at the same time his mortgage payments ratcheted up. ‘Since I had to get an adjustable rate loan, I watched my payments grow from $700 to $900,’ Mr. Fenton said. ‘And then utilities, they went from $200 to $400.’”

“Mr. Fenton tried to sell his Dallas house but had no luck. ‘My house was listed for over two years at its tax-appraised value, $113,000, with no lookers,’ he said.”

“North Texas’ low home appreciation rates make it difficult for many homeowners to get out of their house when they wind up in financial trouble. That adds to the foreclosure bubble, said George Roddy, president of Foreclosure Listing Service. ‘Especially if they are financing 110 percent of the property to begin with,’ Mr. Roddy said. ‘They finance all the closing costs and end up owing the mortgage company if they decide to sell.’”

“FLS has found that about 44 percent of homes posted for foreclosure each month actually sell at auction. Through the first six months of 2006, lenders had taken back 8,452 D-FW area homes. The average mortgage on the houses foreclosed on was $148,418.”

“And a look at the monthly foreclosure postings proves that hard times hit in all communities. Everything from million-dollar mansions in exclusive Plano neighborhoods to $32,000 condos in East Dallas are in foreclosure, county records show.”

“‘Customers have gotten themselves into loans they probably didn’t understand,’ said Bob Caruso, a mortgage servicing executive with Bank of America. ‘Loans with adjustable rates do actually adjust upward.’”

“Gordon Griffith and his family are leaving their Garland home at the end of the month. ‘We agreed to an adjustable rate mortgage when we refinanced the house, and now it is killing us,’ Mr. Griffith said. ‘The rate is going up every six months,’ he said.”

“Fort Worth mortgage originator Vernetta Wills blames some homebuilders for not correctly estimating taxes on the houses they sell. Sometimes property tax estimates are just for the lot and don’t include the new home being built. ‘If the builders in the area would stop putting people in houses that they cannot afford and qualify them with the correct taxes, this would not happen,’ she said.”

“Most troubling for North Texas homeowners, the flood of foreclosures could affect the overall housing market, industry analysts say. In the late 1980s and early 1990s, a frenzy of home foreclosures caused by the regional economic collapse contributed to more than a 25 percent decline in overall residential values.”

“‘We know that most of the foreclosures are going back to the lenders and then being offered for resale,’ economist James Gaines said. ‘We also know that historically, the lenders are generally forced to offer the properties at discounts in order to move them.’”

“Connie Zetterlund, a Dallas real estate agent who specializes in foreclosed-home resales, said the number of such listings is ballooning. So far, lenders have been unwilling to slash their prices, she said. ‘I don’t think they have gotten the news that the market is slowing and there is a glut of foreclosures,’ Ms. Zetterlund said.”

“The timing is bad for these distressed properties to land on the market. Overall home resales have been dropping in recent months. ‘Everyone of us needs to be heads-up about what this is saying about the stability of our economy,’ Ms. Cunningham said. ‘Housing has held up our economy for so long.’”

The Waco Tribune. “Forty-year fixed-rate mortgages are popping up in Waco, and whether that’s a good thing depends on who you ask. One local banker calls 40-year fixed-rate mortgages ‘a bad practice.’ Another voices excitement about offering such mortgages, saying more people can now afford homes.”

“Bill Nesbitt, CEO of Central National Bank, says he fears 40-year mortgages ‘can lure people into making bad financial decisions.’ If a buyer can afford a house only by spreading payments over 40 years, Nesbitt said, he or she may be knocked into financial difficulty by the ‘bumps of life.’”

“‘They are having to use so much income to make the mortgage payment that they could be backed into a corner if taxes go up, inflation goes up or utilities go up,’ Nesbitt said.”

“‘I’m not aware of any downside,’ said Brad German, a Freddie Mac spokesman, commenting on the 40-year product. ‘The advantage is that those looking for a lower monthly payment can get it, though it will require a longer payment schedule.’”

“‘If you’re going to be in your home for a short time, check it out,’ mortgage loan officer Pam Hebert said. ‘If you’re going to stay there long term, it’s not for you.’”

“Nesbitt said he believes 40-year mortgages arose out of the national housing and refinancing boom of recent years. ‘The euphoria of all that stirred the competitive spirit in lenders, who came up with more and more creative ways to get a share of that boom,’ Nesbitt said. ‘We always kind of go to excess; the pendulum swings a little too far.’”

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