The Housing Bubble

The LA Times takes us back to California. “For the first time since the latest housing boom started six years ago, home price appreciation for each of the six Southern California counties has fallen to single-digit levels or worse, data released Tuesday showed.”

“‘People have become scared about home prices because they think prices are going to fall,’ said Michael Carney, an economist with the at Cal Poly Pomona. ‘They’re waiting and staying out of the market.’”

“Mira Loma resident Louis Martinez and his wife spend most weekends touring models at new-home communities in the Corona Valley. But the couple are in no hurry. ‘I feel more confident now than I was six months ago that prices will come down,’ he said.”

“In the early 1990s, the downturn had a clear-cut cause: widespread job losses that led to an economic recession. One thing common in both real estate cycles, said Edward Leamer, director of the UCLA Anderson Forecast, was ‘inappropriate appreciation.’”

From KGET in Bakersfield. “Many Kern County homeowners have been waiting for weeks without an offer on their property for sale. Escrow officer Yessina Castillo said appraisers are re-adjusting that formula on a daily basis because homes are now priced at about two-thirds of what they were a few months ago.”

“‘There’s a lot of new competition because we have a lot of new construction in Bakersfield so a lot of older homes are not selling like they used to before,’ she said.”

“Older homes with an asking price of $350,000 just couldn’t compete with new ones carrying the same price tag. ‘The older homes are tending to lower their prices 10 percent, 20 percent,’ Castillo said.”

“Several U.S. real estate markets including Fresno and Stockton in the Central Valley are facing a bust, says a company which buys and sells distressed properties. California saw a 196 percent increase in motivated sellers since August but unlike Florida and Arizona, the bust in California has been more widespread with a full seven counties seeing motivated sellers triple or more.”

“‘We’re seeing some trends that lead us to call certain markets literally a ‘bust’ market,’ says Duane LeGate. ‘The San Joaquin Valley area is a bubble spot. He says the current California market reminds him of the depressed home market of the mid 1990s.”

“‘You’ve got the makings here of the perfect storm,’ Mr. LeGate says. ‘I can see prices going down by a good 20 percent in the markets we’re calling ‘bust.’”

The Tracy Press. “Central Valley Association of Realtors director Karl Enzmann said the number of houses for sale in Tracy peaked eight weeks ago as interstate speculators dumped their homes on a market short of buyers.”

“Enzmann also said some sellers have pulled their homes off the market to wait until spring. ‘People that are looking to buy bigger homes are finding that they can’t sell their house,’ Lynda Mendoza from Countrywide Home Loans said she sold a lot more refinancing packages than mortgages recently.Mendoza said. ‘So they just take it off the market and go ahead and try to refinance.’”

“A report from a Bay Area mortgage insurance company says local homeowners should be very worried about a possible decline in prices. ‘No one should be surprised by the slowdown we’re seeing,’ Mark Milner, chief risk officer of PMI, said in a release. ‘Over the past five years, home prices appreciated much faster than incomes, and that can’t continue forever.’”

“The housing slump continues as Bay Area home sales last month dipped to the lowest level in nine years while appreciation was flat in the region, with prices falling in some counties, according to a report released today.”

“Bay Area home sales for August declined 24.9 percent from a year ago while the median price of $620,000 was just 0.2 percent higher, said DataQuick. From August 2005 to August 2006, the median home price dropped 6.7 percent in San Mateo County to $721,000 and dropped 1.5 percent in Alameda County to $577,000, while it was unchanged in Contra Costa County at $567,000.”

“The slowdown in homes sales began in spring 2005 as interest rates started to rise and inventory levels, the number of homes for sale, increased. ‘Several things are going on. Many homes are being offered for sale at unrealistically high prices as sellers try to game the peak of the market. Buyers appear to be taking a wait-and-see approach as sellers get real with their asking price. ‘The market seems to be going into a lull, until this all shakes out,’ said Marshall Prentice, DataQuick president.”

The Daily Breeze. “A total of 25,628 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month, according to DataQuick. That figure was down 25.3 percent from August 2005 and marked the lowest total for the month since 1997.”

“August was also the ninth-straight month that sales declined on a year-over-year basis. DataQuick previously said the median price for a home in San Diego County fell 2.7 percent in August and the county saw a 32 percent drop in sales compared with the same month last year. In Los Angeles County, sales dropped 21 percent.”

The Ventura County Star. “The end of the real estate market boom is forcing one of Ventura County’s largest employers to cut 5 percent to 10 percent of its work force over the next few months, a top executive told workers Tuesday.”

“Countrywide Financial Corp., the country’s largest mortgage lender with about 5,700 workers in Simi Valley, Thousand Oaks and Westlake Village, instituted a 60-day hiring freeze and plans to reduce staffing in several areas, Dave Sambol, president and chief operating officer, said.”

“‘Sales of single-family homes for the year through July were down 27 percent, condos are down 60,’ said economist Mark Schniepp in Goleta. ‘These are bloodbath levels of declines. There are direct casualties from this downturn.’”

The Santa Rosa Press Democrat. “Sonoma County home prices dropped for a second consecutive month in August as buyers sought bargains and sellers cut prices to make houses stand out in a crowded market. August’s median price was $577,250, a 6.7 percent drop from $619,000 a year ago when prices peaked.”

“‘The buyers are just waiting to see if sellers are adjusting their price downward, if they can get an even better deal on a house. Last year, they were paying asking price or more, and now they’re actually coming in at $5,000 to $10,000 less than what sellers originally had their prices at,’ said Bob Buhman, a broker in Santa Rosa.”

“‘This thing is much deeper and has happened much faster than people realize,’ said Marty McCormick, a Santa Rosa lender. ‘There’s going to be a better time to buy. But they’re going to be real tentative and driving hard bargains.’”

The Myrtle Beach Online from South Carolina. “Sales for homes and condominiums fell again in August on the Grand Strand. Home sales dropped 22 percent and condo sales dropped 52 percent compared to August 2005. ‘Believe it or not, prices have not gone down. It’s just that inventories have gone crazy,’ said Bill Barrett, who spoke during the S.C. Association of Realtors annual convention in Myrtle Beach on Tuesday.”

“On the Strand, there’s about a year’s worth of inventory on the market, said market analyst Tom Maeser. Maeser expects inventory to be absorbed once the market gets more permanent home and second home purchasers. That’s because the market has lost the rental income investor as its main buyer, Maeser said.”

“Barrett told agents it’s better to call a buyer’s market a ‘corrected market,’ because the market is experiencing a correction.”

From the Ledger in Florida. “Polk County’s building permit numbers dropped a record 62 percent last month to 373. Richard Greenwood, Haines City’s community development director, is making plans to accommodate possibly 1,400 homes into the city. ‘It won’t be slow for long,’ he said. ‘I’ve got a lot in the pipeline.’”

“‘I think the market retracted,’ said Mike Hickman, president of Hickman Homes in Lakeland. ‘The frenzy last year couldn’t sustain. There is a lot of inventory out there.’”

“Builders are pushing sales and offering many incentives to new home buyers to rid themselves of the excess inventory. When fall and winter come, the market takes an even cooler turn. ‘We are really trying to push sales right now,’ said Callie Neslund with Southern Homes. ‘When November comes, no one wants to go anywhere.’”

The Daytona Beach News Journal reports from Florida. “Rising interest rates, coupled with surging property taxes and insurance bills, are making it impossible for hundreds of area families to keep up with their mortgage payments, housing counselors say. As a result, growing numbers of new homeowners are in danger of losing their homes through foreclosure.”

“Banks and other lenders have filed 2,354 foreclosure lawsuits against property owners in Volusia and Flagler counties over the past 12 months. That’s 26 percent more than the 1,868 that were filed the previous 12 months. Filings grew markedly higher last month, 199 in Volusia compared to 115 the previous August, and 56 in Flagler, up from 19 a year earlier.”

“Credit counselor Greg Kiefer said the seeds of today’s foreclosure surge were sown about three years ago when home buyers rushed into adjustable-rate mortgages, trying to meet soaring housing prices on stretched budgets. ‘They had a fixed low rate for two or three years and that got them into a house,’ Kiefer said. ‘Then the mortgage became adjustable just as rates started to rise, and their monthly payments have gone up substantially. We would anticipate that as rates continue to rise, it’s just going to get worse.’”

“Mid-Florida Housing Partnership points a finger at lenders specializing in mortgages for high-risk clients. ‘Their methods are borderline predatory,’ said Fran Gordon, the partnership’s executive director. ‘They say ‘Come on in and we’ll do whatever it takes to get you a mortgage.’ They don’t care what the applicant’s credit score is or what their income is. These lenders are going to pick up their fees at the closing, so they don’t care what happens afterward.’”

“In many cases, Kiefer said, the homeowner facing foreclosure obtained a mortgage by just giving a rough estimate of his or her income on the loan application. Some lenders don’t bother to verify an income figure if it seems reasonable for the person’s occupation and the person has satisfactory credit.”

“Kiefer described the plight of a Deltona couple who had recently started a landscaping business moved into a home with a $1,000-a-month interest-only mortgage payment. After one year, the interest-only period ended, and the loan became an adjustable-rate mortgage. The monthly payment shot up past $1,600, but their business is clearing only about $2,000 a month. Even though relatives have lent them money, they have missed four mortgage payments.”

“Kiefer said foreclosure seems inevitable. ‘Even if they filed a Chapter 13 bankruptcy, that process still requires them to make their mortgage payments, and there’s no way they can do that on their income,’ he said.”

“Linda Jones, Volusia County’s deputy court clerk, said, ‘We’ve been having quite a few more homes come up for foreclosure in the last six months or so.’ About three to six properties are being scheduled for auction almost every weekday.”

“At a Sept. 15 auction, no one made any offers except a young man who submitted two $100 bids, the minimum allowed, and was declared the winner of the two houses put up for sale. Jones explained he was a process server who simply was entering bids on behalf of the mortgage companies to protect their interest in the properties. By taking ownership of the houses, the lenders could try to resell them later and get at least some of their money back.”

The Voice of San Diego reports on appraisals. “The warm security blanket of San Diego’s booming housing market has been tugged away by negative trends across the board: a 25 to 30 percent decline in sales, a $10,000-plus drop in prices and an inventory level that has swollen to more than 200 percent of last year’s stock.”

“There’s another group feeling somewhat exposed these days, the appraisers who estimate property values for lenders. As professionals in the lending industry have begun to call for a return to integrity in lending, so have leaders in the appraisal community begun to reevaluate some of the practices that became commonplace in the boom.”

“Some appraisers say the boom provided a temptation to cut corners and complete more appraisals in less time. ‘In a hot, rising market, you can make mistakes and the market bails you out of it,’ said Roger Lopez, a real estate appraiser and the local chapter president for the Appraisal Institute.”

“Lopez explained that during the period of rapid home price escalation, even if an appraiser overestimated a home’s value, the market would reach, and usually surpass, that estimate within a few months. That meant appraisers..were sometimes tempted to save time by just looking at the comparable sales and delivering a quick appraisal based on those records.”

“But even when the market’s hot, Lopez said, ‘there’s still a right and a wrong way to do it.’”

“It can be tricky to arrive at a valuation in a cooling market. In San Diego’s cooling market, the sales prices of the comparable properties may not account for the price drops some neighborhoods have seen. And those selling the homes may be throwing in incentives like cash-back rebates or electronic extras, meaning the effective sale price of the home could be considerably less than the recorded selling price.”

“‘Appraisers that are taking secondhand data without any verification could be producing erroneous appraisals,’ Lopez said.”

“Jim Klinge, a Realtor in North County who’s been watching the market for more than 20 years, said a lot of people blame appraisers for pushing mortgage values high to accommodate the mortgage broker and the buyer. He doesn’t think they should shoulder all of the responsibility, though. ‘It bugs me that everyone wants to bash the appraisers,’ he said. ‘If the buyer’s willing to pay it, that’s the value of the home. The whole boom that we had was because the buyers wanted to pay the money.’”

“During the boom, once a highest bidder was determined, the lender for that bidder’s mortgage would send an appraiser to complete a valuation on the property. The appraiser’s job in that situation is to make sure the buyer isn’t paying dramatically more than the home is worth, so that the lender can avoid lending more money than necessary. Klinge said he thinks the appraisers usually lined their estimates up with where the market was trending, up.”

“‘It’s a subjective science,’ Klinge said. ‘You could have 10 different appraisers appraise the same house, and get 10 different estimates.’”

“Lopez agreed that the market is subject to substantial variability. ‘We only interpret the market, we don’t create it,’ Lopez said. ‘If five or six buyers are willing to buy a home at a certain price, that’s the market.’”

“Sara Schwarzentraub in La Mesa, holds the Appraisal Institute’s esteemed SRA, senior residential appraiser, title. She said the best appraisers are those who don’t change their practices depending on the market. ‘Honestly, we should be doing the same job,’ she said.”

“Schwarzentraub said the boom stirred in a significant group of people a desire to get in the appraising game. ‘Everyone told them they could make tons of money,’ she said. ‘In order to make a lot of money, you have to do a lot of appraisals. You’re tempted to rush. And a rising market will cover that.’”

“The number of active appraisal licensees in the state is 19,944, almost double the 11,070 licensees at the beginning of 2001, according to the California Office of Real Estate Appraisers in Sacramento. A slump could flush the out-of-work appraisers back into the local labor pool, where they could ostensibly be joined by out-of-work real estate agents, residential construction workers and mortgage brokers. The ramifications of that scenario could strain the local economy, as well as those of cities and states across the country as similar market conditions persist.”

“Greg Harding, OREA’s chief of licensing and enforcement, said two thousand licensees have been added to California’s ranks in the last year, he said. ‘Things were already looking poor back then,’ he said of May 2005. ‘I do expect a dramatic downfall in licensing if we do get into a housing slump.’”

“Harding said when the licensing program began in California in the early 1990s, the number of licensees reached almost 19,000, close to the current level. But the mid-’90s were ‘kind of a disaster,’ Harding said, when work slowed and the level dropped dramatically to fewer than 10,500. ‘It wouldn’t surprise me if that happened again,’ he said.”

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