The Housing Bubble

The LA Times. “Southern California’s housing market continued to cool last month as Los Angeles County’s home prices rose at their lowest rate in six years while San Diego County’s price declines worsened, data showed. ‘It’s clear that a price correction is underway, but it’s a matter of magnitude,’ said Andrew LePage, an analyst with DataQuick.”

“In Los Angeles County, 9,193 homes were sold last month, the fewest since August 1997 and a 21% drop from year-earlier volumes. August was the county’s ninth straight month of plunging year-over-year sales rates.”

“In San Diego County, the situation was worse for sales and prices. The region saw a 32% plunge in sales and a 2.2% decline in home prices compared with a year earlier. San Diego’s median price for all types of housing is now back to where it was in April 2005. It was the third straight month that San Diego prices depreciated and the 26th consecutive month that sales dropped from year-earlier levels.”

The Daily Bulletin. “Riverside County has the highest foreclosure rate in California. ‘There are a lot of people who are very nervous about the Riverside market,’ said Jack Kyser, chief economist with the L.A. County Economic Development Corp. ‘They have been checking on housing tracts to see if speculators were being kept out, and they were not. There is a big increase in unsold inventory in Riverside, and with the market slowing, that may be a problem.”

“Since the beginning of 2003, 83,275 new homes have been built in Riverside County. That’s almost as many as San Diego (48,225) and Los Angeles (36,075) combined.”

The USA Today. “‘It’s alarming. It really is,’ says Pam Canada, executive director of the NeighborWorks Homeownership Center in Sacramento. Her non-profit counseling center used to receive two or three calls a week from homeowners in financial quicksand; now, it’s 20 a week.”

“‘It’s remarkable,’ Canada says. ‘We used to take walk-in (clients), but we don’t do that anymore. We just can’t.’”

The Central Valley Business Times. “A softening home market is not by itself to blame for the jump in California home foreclosures says a San Diego attorney who specializes in helping those faced with losing their homes. ‘I’ve had a number of people in this last month, this is completely unbelievable and so foreign, their mortgage payments are more than their income,’ Mr. Brady says.”

“‘I think some of these lenders are so anxious to get their money loaned out that they do what they call ‘stated income,’ he says. ‘The lenders don’t care. You’ve got janitors that are out there with $450,000 loans,’ he says. ‘The lenders should know that janitors don’t make enough to support that kind of loan.’”

“‘I’ve had a number of clients that have..pulled all their equity out of it and they’ve used their house kind of like a credit card. Now there’s nothing left. Some of those are choosing just to let it get foreclosed on,’ Mr. Brady says.”

The Voice of San Diego. “As prices have declined, sales have slowed, and inventory levels have risen in recent months, the get-rich-quick, house-flipping days seem to be over for a while. The flippers are the type of investors that skewed the market during the red-hot days, said Peter Dennehy, vice president of Sullivan Group Real Estate Advisors. The flipping fever drove people to buy, buy, buy, regardless of location, and to bid each other up so that eventually, prices spun into a realm almost completely detached from the home’s ‘actual’ value.”

“‘They were very prevalent,’ he said, referring to flippers in the boom of a few years ago. ‘They’re the ones who are gone.’”

“‘You do not need to get on a bus and go to Phoenix with 40 people to buy condos,’ he said. ‘That skews markets. It’s not real demand. When everybody does it, it’s over,’ he added. ‘They had a good time until 2005 or so.’”

“Many homeowners tapped the soaring equity of their primary homes during the boom in order to finance their purchase of another property. The worry that comes now, in San Diego’s cooling market, is that some people may be caught with two or more mortgages due to reset.”

“Dennis Balagtas has used adjustable-rate mortgages on all of his properties. He said the payment options allow him some breathing room if another of his mortgages adjusts. ‘You have to ask, ‘Do you have enough cash reserve to make the payments?’ he said. ‘The reason I’m not as worried about it is because I have expanded to other markets.’”

“Dennehy said he thinks the dramatic boom left many people counting on the fact that they’d always be able to sell their homes for more than they paid, no matter how quickly they sold again. ‘There’s a gradual realization now that they can’t sell their home,’ he said. ‘That train has left the station.’”

A housing report from Oregon. “At Northwest Crossing, construction crews are working at a torrid pace and literally laying a foundation for the future of Bend. with Brooks Resources Corporation describes Northwest Crossing. Already, 350 homes in Northwest Crossing have been sold, with another 100 expected to be snatched by buyers in the next year. Developer Mike Holleren says the master-planned community will have more than 700 new homes.”

“Builders are cashing in, too. The Central Oregon Association of Realtors reports the median sale price for a home in Bend is $343,950 for the first half of 2006, a 33-percent jump from last year. Compared to Portland, the median home price in Bend is nearly $80,000 higher. In fact, Money Magazine listed Bend as the fifth most overpriced housing market in the country.”

“‘Prices have gotten a little higher maybe (than) they should have,’ said Holleren. Holleren said the red-hot housing market was showing signs of slowing down. ‘Right now the housing market is cooling,’ he said.”

The Columbian from Washington. “Clark County’s housing market continued to cool in August with home sales down nearly 30 percent from sales in the same month last year. According to an appraisal firm in Vancouver, 944 new and existing homes sold last month compared with 1,331 homes in August 2005.”

“Last month’s sales decline continues to signal the end of the red-hot real estate market of the past three years and the ­return of a more normal market, said (broker) Scott Mikel in Vancouver. He said market conditions call for more patience on the part of sellers.”

“The decline could reflect fewer buyers purchasing homes as investments, said Randy Hunzeker, president-elect of the 2,200-member Clark County Association of Realtors. ‘The average buyer is still out there, but those who invested last year are now trying to sell and they’re flooding the market,’ said Hunzeker, an agent in Vancouver.”

“While the median selling prices remained firm at $271,000, experts say prices could soften as the number of houses for sale climbs. ‘Perhaps sellers have an unrealistic sense of what their house is really worth,’ said broker Kathy Rylander. ‘The higher prices have slowed, there’s no question,’ Rylander said.”

“Mikel..agreed buying has cooled here and nationwide. ‘We’re doing OK,’ Mikel said. ‘Most of the people we sell houses to are people from outside the area coming here. I believe that will continue.’”

Some housing bubble reports from Wall Street and Washington. “Countrywide Financial said Thursday that August mortgage fundings fell 24% to $40 billion. ‘Total mortgage loan fundings..declined year over year as a result of the expected industry slowdown,’ CEO Angelo R. Mozilo said.”

The LA Times. “Countrywide Financial regularly warns customers about the risks of paying less than the interest due on loans offering that option. Now Chief Executive Angelo Mozilo is calling some of them personally. Mozilo reached out to borrowers as part of a ‘little experiment’ to understand the reasoning behind making only minimum payments on so-called pay-option loans.”

“Mozilo said he wanted to know why customers were paying only the minimum. ‘The answer was, ‘I’m doing it because the rate of negative amortization is less than the increased value in my house each month,’ Mozilo said. ‘The average age of our borrower is about 38 years old. They have never in their adult lives seen values going down. The concept is alien to them.’”

“‘What we’re finding out is that they’re pretty smart,’ Mozilo said. ‘It’s like voters: Individually they’re sort of idiots, but collectively they seem to make the right decisions.’”

“The U.S. housing market is just returning to normal and is not poised to crash, several economists and industry leaders told lawmakers on Wednesday. ‘Markets in Florida, California, Arizona, Nevada, Virginia and Maryland have exhibited trends far above the local historical norm,’ said National Association of Realtors President Tom Stevens.”

“‘Because of these exceptional trends, it would not be surprising for these markets to experience a price adjustment,’ Stevens added.”

From Reuters. “The two executives who led Fannie Mae to an $11 billion accounting scandal can expect federal regulators to file lawsuits against them, the head of the Office of Federal Housing Enterprise Oversight said Wednesday. When asked if legal action was likely against Fannie Mae’s former CFO Timothy Howard and former CEO Franklin Raines OFHEO director James Lockhart did say ‘they are the top two.’”

The Associated Press. “The U.S. economy is headed for a slowdown caused by a cooling housing market, the International Monetary Fund warned Thursday. ‘The forecasted (U.S.) housing slowdown is well and truly here,’ Raghuram Rajan, the fund’s chief economist said. ‘Indeed, rising inventories of unsold houses suggest things will get worse before they get better.’”

The Wall Street Journal. “Coming up with the money for a down payment on a new condominium may soon be as easy as charging it: American Express Co. is expected to announce today that it will allow some customers to use its cards to make condominium down payments.”

“Siva Tayi, a potential Manhattan condo buyer from Houston, plans to charge the 10% down payment on a $1.2 million two-bedroom unit on his Platinum card. ‘I thought it was a good idea to use the [card] and gain the points,’ says Mr. Tayi.”

Danielle DiMartino at the Dallas News. “So we know the housing market is melting down. What we don’t know is when it will stop. ‘The housing experience of 1999-2005 was a classic case, in our opinion, of how a boom (1999-2001) turns into a mania (2002-2003) and ultimately morphs into a bubble (2004-2005),’ Merrill Lynch chief economist David Rosenberg wrote in a recent report.”

“‘Unwinding the excesses of the past six years will undoubtedly take time, but the adjustment won’t likely be any less painful, and in the process will act as a lingering constraint on confidence and spending,’ he said.”

“Goldman Sachs’ chief eceonomist, Jan Hatzius, figures national home prices will decline 5 percent in 2007, further pressuring borrowers who are upside down. ‘If there is little or no equity, it will be hard for homeowners to sell their way out of trouble,’ he warned.”

“Although we don’t have nationwide data, it’s clear that universally lax lending standards have turned some homebuyers upside down from coast to coast.”

The Orlando realtors have their August numbers out. “The number of homes sold in August of 2006 dropped by 33.7 percent when compared to August of 2005. The inventory of available homes continued its upward trend in August with the addition of 7,039 new listings contributing to a total inventory tally of 21,077. A total of 2,077 existing homes changed hands in August through the MLS, for a year-to-date total of 19,404.”

The Naples News. “Luxury community developer WCI has pulled out of a deal to build the high-profile Sabal Bay project east of Naples. Steve Zenker wouldn’t comment on the reasons for the company’s decision, but the Bonita Springs-based developer has been buffeted by a declining Florida real estate market.”

“The company announced an unspecified number of layoffs in July and, in August, announced that its net income fell from $75.3 million in the second quarter of 2005 to $22.7 million in the second quarter of this year, a 70 percent drop.”

The Sun Sentinel. “The Boynton Beach Community Redevelopment Agency unanimously voted Tuesday to reconsider next month shelling out millions of dollars in cash incentives offered to developers of the Promenade and 500 Ocean, two defining projects for the city’s eastern front.”

“Neither developer has begun construction. Frustrated board members said they recognized the slumping real estate market but said it was no excuse for developers’ lack of response in updating the CRA on the status of their projects. ‘They just don’t respond,’ said board member Marie Horenburger. ‘I don’t care what the [real estate market is]. Tell us what you’re doing.’”

The Palm Beach Post. “In Palm Beach County, 2,241 homes entered some state of foreclosure in August, a 226 percent increase over the same month a year ago, when 688 homes entered foreclosure. Statewide, 16,533 homes entered some stage of foreclosure in August, more than any other state in the country and a jump of more than 50 percent over the previous month, RealtyTrac said.”

“Today’s foreclosure report comes on the heels of a Business Week investigation published in the current issue that shows 24 percent of all purchase and refinance mortgages in Palm Beach County are ‘option ARMs,’ or option adjustable-rate mortgages.”

“Only pricey Naples has a higher percentage of such mortgages, which Business Week calls the riskiest loan product ever created.”

The Bradenton Herald. “Homebuyers have been relying on a type of mortgage that gets them more house than they might typically be able to afford by offering them lower payments. But like all deals that seem too good to be true, the bill eventually comes due. A surge in foreclosures in Florida over the last two years suggests that time has come, experts say.”

“‘Since they’re paying less than interest only, they’re deferring interest which is tacked on to the bottom of their loan,’ said Catrina Foster, with SunTrust Mortgage in Bradenton. ‘So they typically can owe more than what they borrowed, particularly in a correcting market.’”

“‘We in Florida were able to experience a wonderful appreciation of our property values over the last several years,’ Foster said. ‘Well now, values are coming down and the market is correcting itself. A lot of people select the very first option (less than interest) to keep their payments way down. Not advisable. If you know you’re going to be in this house for six, seven or eight years and you continue to pay that option one payment, it could sting a bit at the end.’”

“Patrice Yamato, president of the Florida Association of Mortgage Brokers, insists the dangers of option ARMs are overplayed in the media. She said borrowers are informed twice in detail during the home-buying process about the specifics of the loan. ‘What else do we need to do to make those borrowers understand? We go over it and they sign a disclosure and then it’s disclosed again at closing,’ Yamato said.”

“‘I agree that option ARMs are not for everyone but there are so many safety measures in place that that type of scenario that’s being described in (articles) can’t happen,’ she said.”

The Post and Courier reports from South Carolina. “Mount Pleasant has more than double the number of homes for sale than last year, and town leaders are worried. As of Sept. 6, Mount Pleasant had 1,399 homes on the market. On Sept. 5, 2005, the town had 645 homes for sale. ‘What the trend means is something that we don’t understand completely,’ said Councilman Joe Bustos.”

“In April, May and June, Berkeley, Charleston and Dorchester counties had 3,903 homes for sale compared with 2,798 homes on the market for the same period last year. ‘I think it’s a lending bubble. Lending is out of control. The way some people finance their homes is crazy,’ said Brad Rundbaken, a real estate appraiser.”

“Councilman Paul Gawrych also expressed concern at the committee meeting about houses that aren’t selling like they used to. ‘All of a sudden, there’s a flood of houses out there that are for sale. Why are there 1,300 houses on the market right now? Are we doing the right things?’ Gawrych said.”

“Amy Campbell Kelly wishes she had listed her $315,000 home for sale in Snee Farm three months ago when the market was better. ‘Everything was selling like crazy,’ Kelly said.”

“Now, things are different. ‘If I would have listed this in May, I have a feeling it would have sold in two weeks,’ she said. Instead, she’s shown her home only twice in three weeks.”

The Courier Journal from Kentucky. “Roger Burke was relying on recent history when he bought a house across the street from his in St. Matthews last year to remodel and sell. ‘Normally, in this neighborhood, properties sell in the first few days,’ said Burke, who has had the house on the market since June.”

“Henry Cochran is willing to wait for a bargain. ‘I look at the price of houses, I’m looking to knock $25,000 to $30,000 off the price,’ Cochran said.”

“When the Louisville real estate market was on its way to a third consecutive record in annual sales in the first half of last year, Cochran might have been more concerned about losing a good house and Burke probably would have sold his by now. But the balance has shifted this year.”

“Builders have gotten the message. They took out 41 percent fewer permits for one- and two-family residential buildings in July and 44 percent fewer in August than they did last year.”

“Real estate professionals are reluctant to call Louisville a buyer’s market, because they think the term suggests a decline in property values. Adam Hall, president of the Mortgage Bankers Association of Louisville, put it this way: ‘There’s going to be a lot more choices for the buyers out there and probably a lot more competition among sellers to get their properties sold.’”

“Burke has dropped his asking price from $275,000 to $259,500. ‘I’ve had an enormous amount of traffic,’ he said. ‘But I think everybody is being ultra-cautious right now.’”

“Cochran said he has seen about 20 houses, including Burke’s, and ‘probably half of them were empty.’ More houses are on the market in Louisville. Realtors took 589 listings and had about 300 sales during a typical week in August last year, Hall said.”

“Opinions vary on why so many homes are for sale. Hall said, ‘we’re all going to have to be a little more creative’ in using nontraditional lending tools: having sellers pay the upfront mortgage points; loans that require only interest payments in the first few years; and having sellers or builders pay some of the interest for the first few years.”

“But those mortgage products have critics who wonder whether they are responsible for some of the increase in homes on the market. ‘People are getting into loans that, for one reason or another, they cannot afford,’ assistant professor William Cahaney said. ‘And they’re getting into them because lenders are doing everything they can to get people into the loan.’”

“Burke figures he’ll find a buyer eventually. ‘I’m in hopes this house will be appealing to somebody who’s downsizing,’ he said. ‘But they’re stuck with not being able to sell their house, so it’s like a traffic jam on the interstate.’”

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