The Housing Bubble

The Orange County register looks at reporting and the housing bubble. “Gary Watts cites news coverage as a major, depressing market force in his latest outlook. ‘I think the media, in general, needs fear-driven articles to keep readers interested or viewership up,’ Watts told me. A bold headline highlighting what Watts sees as minor market trends ‘makes everybody’s think is this the beginning of the end.’”

“By any measure, the housing market is struggling. So what should this columnist do when, say, my proprietary economic index shows local housing suffering its worst quarter since 1995?”

“‘Isn’t it important for the skepticism to take place?’ says investment adviser Charles Rother from Los Alamitos. ‘Housing prices in many areas of California are no longer supported by income, rents or likely employment growth. Maybe we should ask, ‘Did the media do enough?’”

“Paul McCulley, the top Fed watcher at Pimco bond traders in Newport Beach, summed up the media’s housing pickle best: ‘If some broker is blaming you now, he should also thank you for two years ago. Can’t have it both ways!’”

“Nobody complained in 2003 or 2004 about frequent reports of all-but-instant real estate wealth.”

The Palm Beach Post. “As the housing cheerleaders constantly reminded us, a plethora of fundamental factors drove the historic housing boom of the past few years. Now that the boom is over, the same cheerleaders point to a single reason prices have fallen: the media.”

The Herald Tribune. “Some Reader Advocate callers aren’t happy with the way the Herald-Tribune is covering the downturn in the real estate market in the area. One woman said that we were killing the housing market by continuing to publish stories about how bad the market is.”

“Another caller agreed, suggesting that we’re perpetuating the problem by reporting on the decline in median prices.”

The New York Times. “A report today showing that sales of new homes rose for the first time since March was — at first glance — a welcome respite. But economists warned that underneath the headline numbers, signs of a weakening housing market were more prevalent than ever.”

“Sales figures for July were revised to show that fewer homes were sold than the government first reported. As a result, the August sales data probably exaggerates the resiliency of the market. Economist Stuart Hoffman called the August increase a ‘dead cat bounce.’”

“The August numbers could also be inflated. Because new home sales are recorded when the contract is signed, not when the deal is closed, the data do not factor in cancellations. Yet builders have said recently that cancellation rates are running as high as 30 percent, suggesting that the Commerce Department’s numbers make the housing market appear healthier than it actually is.”

“‘It certainly is possible that for a variety of reasons you could have a one-month upturn, but I doubt that will reverse the trend that seems to be occurring,’ said Kenneth Simonson, chief economist for the Associated General Contractors of America.”

“Mr. Simonson noted the possibility that the August sales numbers could be revised downward, just like the July numbers were. ‘I think we could still wind up seeing that this month is a continuation of the downturn.’”

The Associated Press. “Analysts were unimpressed with the August rise in new home sales, noting that it followed a sharp 7.5 percent drop in July and still left sales 17.4 percent below the pace of a year ago.”

“‘August is just a blip. Housing is still headed down,’ said economist Mark Zandi. ‘Everything still points to continued weakness in sales, construction and home prices.’”

“Many analysts said the government statistics understated the drop in new home prices because they don’t pick up heavy discounting that is under way as builders offer incentives to move unsold homes.”

“The inventory of unsold homes did decline slightly to 568,000 houses, but that was still the second highest level on record after July’s backlog of 570,000 unsold homes.”

“‘Many builders still have large inventories of unsold homes and we expect to see aggressive use of sales incentives over the balance of the year,’ said David Seiders, chief economist at the National Association of Home Builders.”

The Amherst Times. “Home prices fell in August compared with a year earlier, the first such decline in more than a decade. David A. Lereah, chief economist for the Realtors association, said the price drop was a taste of what the market should expect in the coming months.”

“‘We’re in for a ride right now,’ Mr. Lereah said. ‘This is the first of many price corrections for the remaining months of the year — for at least the next three or four months.’”

“In the West, prices have held steady there this summer, sales have fallen. ‘Something’s going to give in the West,’ Mr. Lereah said. ‘The correction has not occurred in the West yet. Sellers are stubborn there.’”

The Rocky Mountain News reports from Colorado. “Erin Toll’s top priority as the new director of the Division of Real Estate for Colorado is to shut down appraisers who are artificially inflating home values, contributing to the state’s escalating foreclosure crisis.”

“She agrees with many in the real estate industry who believe inflated appraisals are contributing to rising foreclosures in Colorado and nationwide. Toll said she expects to unveil an investigation next month of an appraiser she said has inflated the value of homes by as much as $100,000.”

“‘Overinflated appraisals hurt everybody,’ said Toll. ‘Consumers are hurt when their property values are artificially inflated in price when they go to sell them.’ Colorado has the highest foreclosure rate in the nation, according to national studies.”

“‘And lenders, who trust the appraisals, are often victims, too,’ Toll said. Others, however, say that lenders often pressure appraisers to artificially inflate properties so they can justify making loans and collecting fees.”

“A lot of fraud is committed by appraisers who want repeat business from lenders, said Ivor Hill, who heads Pueblo-based IJ Hill Appraisal Services. If the lenders don’t get the amount they want for the loan, they will ‘blackball’ the appraiser and hire someone who will provide that amount, he said. ‘They commit fraud to stay in business,’ Hill said.”

“When a house whose appraisal has been inflated is used as a comparable by other appraisers, those buyers will pay too much for homes, creating a domino effect, Hill said.”

“Demos, a New York City think tank, quoted an unidentified Denver appraiser who wrote on a Web site that ‘finding a mortgage broker client who wants a fair market value on one of their deals is like finding a needle in a haystack these days.’”

“The appraiser suggested that the ‘real estate market in Denver was artificially propped up by dishonest appraisal practices following the tech bust and the economic downturn of 2001, with homeowners now paying the price.’”

“Matt George noted he has completed more than 20,000 appraisals since 1974 and said that ‘fraud is rampant in our industry.’ He often reviews appraisals completed by other people for lenders. He said he has found that more than 50 percent are inflated.”

“In one case, a house that couldn’t sell for $500,000 was appraised at $550,000 for a refinance, George said. It later went into foreclosure. ‘The lender was furious,’ he said.”

The Denver Post. “Today’s lenders (are) moving to riskier loans as the housing market heads south. Things have gotten so bad that people now buy homes with monthly payments that don’t even cover the interest due.”

“‘Every case is different,’ said Boulder real estate lawyer Jon Goodman. ‘Some loans are explained by mortgage investors irrationally chasing high yields. In other situations, the loans are caused by people downstream in the money chain fooling people upstream.’”

“But with lenders packaging dog loans among huge portfolios that they sell to institutional investors, such as pension funds, the bad guys often get rich and leave the misery to retiring teachers and firefighters, former Securities Exchange Commission accounting chief Lynn Turner said.”

“‘Appreciation,’ Goodman said, ‘covers up a lot of bad lending. Depreciation reveals negligence and sometimes loan fraud.’ Turner’s SEC experience ‘is that bankers have been able to get away with murder before auditors call them on it.’”

“In their first months or years, option ARMs let homebuyers pick how much they want to pay on their mortgages. Lenders, meanwhile, book the maximum payment as revenue. According to Business Week magazine, three of the country’s big mortgage lenders; Countrywide Financial, Washington Mutual and Golden West, counted nearly $1.5 billion in ‘net deferred interest’ as revenue in fiscal 2006. ”

“If borrowers default on those loans, the lenders will never see the money. Still, Turner said, accounting rules let companies ‘record as interest income that you think you probably will collect.’ So for the time being, executives can pocket bonuses, then bail before the crunch comes.”

“That, I now understand, is the guiding principle in the increasingly ugly business of mortgage lending. The real trick as the housing market collapses under its own greed and suspension of disbelief is to leave someone else holding the bag.”

The new home sales numbers are out. “Sales of new homes are down 17.4% in the past year and are down 23% from the peak last July, the Commerce Department reported Wednesday. Sales in May, June and July were revised sharply lower. The median sales price of a new home fell 1.3% year-on-year to $237,000, the first year-on-year decline since 2003.”

“The reported sales price does not account for the massive incentives builders have been offering to close deals.”

“Inventories are up 19% year-on-year. The inventory overhang will put additional pressure on builders to cut prices, said Roger Kubarych, an economist for HVB.’The housing downturn is not about to end quickly and, by the time it does, public awareness of the associated loss of wealth will be far higher than now,’ said HVB’s Kubarych.”

“‘Builders are extremely pessimistic,’ eceonomists Brian Bethune and Nigel Gault said ahead of the report. The number of unsold completed homes rose to a record 148,000 in August.”

“TOUSA announced today that it met with the lenders to the Transeastern joint venture to update them on the financial position of the joint venture and the Florida housing market conditions.”

“‘Our discussions with the lenders focused on the current Florida housing market conditions and the joint venture’s inability to meet its original projections, said Antonio Mon, CEO of TOUSA. ‘The Florida housing market has become more challenging, characterized by weak demand, an over supply of new and existing inventory homes, increased competition, and an overall lack of buyer urgency. These well-documented conditions have caused elevated cancellation rates and downward pressure on margins, due to increased sales incentives and higher advertising and broker commissions.’”

“Blaming a nationwide housing slowdown, Pentair Inc., the water filtration giant based in Golden Valley, announced a spate of bad news. ‘This adjustment reflects the effect of the housing slowdown on spa and bath markets and on new pool starts,’ Hogan said. Particularly bad were its key pool markets of Florida and Southern California.”

The Miami Herald. “CEO Stuart Miller said Lennar will lower prices and continue building homes it has started. But Lennar is also renegotiating all contracts to buy land or even walking away from deposits, and in some cases, multimillion dollar deposits, on properties it previously planned to develop, he said.”

“‘We will be patient and wait for the market to redefine itself and then will look for opportunities to reload and reposition,’ Miller said. But when asked by an analyst if there are any buying opportunities right now, Miller responded: ‘No.’”

“Lennar, which primarily builds single-family homes, has operations across the country but is most concentrated in Florida, Texas and California.”

From Bloomberg. “U.S. homebuilders including Pulte Homes Inc., Lennar Corp. and D.R. Horton Inc. are cutting prices and throwing in a lot more than the kitchen sink to stem a record build-up of unsold houses, even as their profits and shares tumble.”

“Builders are paying closing costs and a year’s worth of monthly mortgage bills to lure buyers, says Joshua Cohen, an agent in Las Vegas. ‘We’ve seen a huge upswing in supply and a huge decrease in demand,’ Cohen says. ‘The builders will do whatever it takes to move a property.’”

“About 44 percent of U.S. homebuilders have reduced prices, says Gopal Ahluwalia, director of research at the National Association of Home Builders in Washington. The median price of a new home dropped 11 percent to $230,000 in July from a 2006 high of $257,000 in April, according to the Commerce Department.”

“More than half of builders, 55 percent, are offering free upgrades, up from 37 percent a year earlier, he says. Four percent are giving away cars and another 4 percent are handing out vacations, Ahluwalia says.”

“‘Builders have to sell their houses or pay the carrying costs,’ he says. ‘There’s more pressure to cut prices and offer incentives for new houses than in the existing-home market, where most people can wait if they don’t like the offers they’re getting.’”

“Much of the decline stems from an exodus of investors from the new-home market, says Ahluwalia. Daniel Rosenfield, a real estate investor, agreed last year to pay $204,800 for a house under construction in Kissimmee, Florida, with the expectation that he would sell it quickly in ‘the low $300,000s,’ he says.”

“Rosenfield closed the deal in June, just as the new- home market was cooling, and listed it for sale at $300,000, resigning himself to a more modest profit. Today, the house is vacant. He’s reduced his asking price to $295,000 and still has no offers.”

“‘I bought at the wrong time,’ Rosenfield says. ‘My assumption was that I’d be able to sell within a month.’”

A housing report from the Washington Post. “The on-again, off-again effort to bring a luxury Canyon Ranch condominium community to North Bethesda is now officially off, making the high-profile development the region’s latest victim of a slumbering condo market that has claimed dozens of projects.”

“In the past six months, developers of 31 condo projects with a combined 5,700 units have abandoned their plans, according an Alexandria consulting firm. Condos are taking much longer to sell, as speculators have all but abandoned the market and buyers have become cautious.”

“Kevin Kelly, president of Canyon Ranch, said the deal fell apart because ‘the market had changed on us.’”

“The development had sold just 30 of 434 units, for $59 million. ‘I’m disappointed the market turned prior to us getting it out fully into the marketplace,’ Kelly said.”

“Most of the other canceled condo projects are being converted to rental buildings or reverting to apartments after unrealized condo conversions. About a third of the planned units were scrapped altogether. In Montgomery County, eight projects, not including Canyon Ranch, have been discarded or will become rentals.”

“Despite the scrapped condo plans, there are nearly 24,800 new condo units on the market, up from 19,400 a year ago. Another 25,700 units are scheduled to enter the market in the next three years. At the current estimated sales rate of 8,000 to 8,500 units a year, the 24,800 unsold condos represent about a three-year supply.”

“As the inventory rises above three years, there is a greater likelihood of price declines in some areas, Delta Associates said. ‘This is a supply-driven problem, not a demand-driven problem,’ said Greg Leisch, Delta’s chief executive.”

“Condo sales have been falling rapidly this year. In the past three months, 1,331 new units sold in the Washington region, the lowest quarterly figure in almost three years, according to Delta. About 2,600 units changed hands in the previous three months; 3,200 units were sold during the comparable period last year.”

“‘Prices are no longer rising. Buyers don’t feel any urge to beat the price clock,’ Leisch said. ‘On the back of their minds, there’s a fear that they might be the last fool to buy at the top of the market.’”

A housing report from the New York Sun. “Veteran real estate broker Deanne Esses said eight people in her Upper East Side office on Madison Avenue are leaving their jobs for alternative careers. Those eight represent 20% of the office’s sales staff.”

“That’s only the beginning. Ms. Esses said she thinks more New York City brokers will be leaving the scene. ‘Business here is just not quiet; it has dropped dead over the past few weeks,’ she said. ‘At the same time, there’s a flood of inventory on the market. We run open houses, we run advertisements, but nothing works. There are no buyers, and without buyers, there are no sales.’”

“Ms. Esses made these noteworthy observations: Everything now is negotiated downward from the initial asking price, by a minimum of 5% to 7%. Prices are down at least 10% from a year ago on practically everything.”

“The Upper West Side is moving very slowly. The Hamptons have turned especially soft. ‘We’re in a transition stage where sellers will have to come down in price, and right now it’s a waiting game to see what the buyer will do,’ Ms. Esses said. ‘Since there’s only one Manhattan, I don’t see a crash. But who knows?’”

“Real estate appraiser Jonathan Miller also cites a sharply slowing trend, with actual sales activity flat. There’s a big gap between buyers and the sellers, and more realism will be required by the sellers, he said. His reasoning: swelling inventories, especially condominiums.”

“Early in 2004, Mark Clemente left Detroit to go east and, hopefully, make his fortune in real estate. Shortly thereafter, he became a broker at a small firm in Newark, N.J. Over the past six months he has held a number of part-time jobs. ‘I’m going home; my real estate career is over,’ he said the other day.”

The Lowell Sun from Massachusetts. “There’s more bad news this week for the state’s flagging housing market. When will it end? Not anytime soon, according to economist Larissa Duzhansky.”

“‘It doesn’t seem like things are going to pick up in the next year or so,’ Duzhansky said. ‘I feel like the market is still overvalued, and you have..high mortgage rates. When you put all of that together, there’s no room for it to improve.’”

“Duzhansky said she expects median single-family home prices, which fell to $352,000 in August, according to MAR, will drop at least another 10 percent in the next year.”

“Compounding that pain is the fact that as prices plummet, buyers who find themselves in over their heads no longer have an escape valve. In Lowell, foreclosure proceedings were initiated on 379 properties from Sept. 1, 2005 to Aug. 31, 2006, up from 179 in the previous 12 months. That’s a 112 percent increase, as opposed to 45.6 percent statewide.”

“According to Duzhansky, the increase in foreclosure filings and the decline in prices could create a vicious cycle, prices could be driven down even further.”

From the Herald News in New Jersey. “Gerard Herard was able to finally purchase a home in 2003 through a $225,070 mortgage from Security Atlantic Mortgage. His payments on the quaint Totowa Avenue house in Paterson were a reasonable $1,300 a month. But Herard’s payments have since increased to $2,200 a month and the mortgage has grown, not shrunk, to roughly $300,000.”

“Herard is not entirely sure why his situation changed so dramatically and is struggling to deal with the increase. ‘I’m trying to climb a steep ladder,’ said Herard.”

“The sweet deal is ending for thousands of Americans who took out interest-only and payment-option adjustable rate mortgages, or ARMs. After that initial grace period, homeowners faced serious sticker shock.”

“‘I have had calls from people saying that their mortgage started at $300,000, and now it’s $315,000,’ said Tom Cosentino, a mortgage specialist.”

“Wendy Nastasi of Crossroads Finance Discount Mortgage, said that two out of six calls she’s received within the last six months have been from untraditional adjustable-rate mortgage-holders. ‘Anybody who has one of these now wants out it,’ Nastasi said. ‘They lie to people,’ Nastasi said. ‘They don’t explain the details to them.’”

“The Fed has promised to establish more guidance around the loans since last year, but they still have not provided a timeline for acting on this. But the beefed up regulations won’t save current loan-holders. ‘You have to cut your losses like it’s a bad stock,’ Cosentino said.

From Maine Today. “Corliss Chastain couldn’t understand why her house in Hallowell wasn’t selling. It went on the market in June with a price tag of $192,500. After a long line of buyers traipsed through without making any serious offers, she dropped $3,000 from her price. Still no takers.”

“Now, like many other homeowners in Maine, Chastain said she is probably going to drop her price yet again to see if it will sell in a crowded market. ‘I was shocked,’ she said. ‘My Realtors are, too. We thought it would go really fast, but it didn’t. I’ve had a lot of people look at it.’”

“Maine’s sagging housing market is just now catching up to a national trend in falling sales, according to Don Plourde, past president of the Maine Association of Realtors. ‘I think we follow the curve a little bit slower,’ he said.”

“The number of homes selling in Maine dropped 17.8 percent in August compared to 2005, according to Tuesday’s release from Maine Real Estate Information System.”

“For now, many homeowners are holding out for the best possible price, according to Sheryl Gregory, a broker in Winthrop. ‘Some people are ‘optimistic,’ shall we say, in their pricing, and have to come back to the real world,’ she said.” Gregory said this year is a good one to buy a house. With the market flooded with houses, potential buyers can afford to be choosy. Rick Sirois, an associate broker in Gardiner, affirms this.”

“‘From what I’ve seen, there is just a huge housing inventory on the market,’ he said. ‘People are still trying to ride that real estate wave where a lot of people were trying to sell their homes.’ Sirois said many houses on the market are seeing the expiration of their six-month listing agreements or a price discount.”

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