The Housing Bubble

The Wall Street Journal reports on pricing a home. “As the housing market cools, one of the hardest decisions facing home sellers is how to price their properties. Bigger inventories of unsold homes also are making it harder for sellers to figure out how to make their house stand out amid the competition.”

“Some brokers are telling customers they need to underprice the competition. Sharon Baum, a with the Corcoran Group in New York, recently listed a two-bedroom, two-bathroom apartment for $3.7 million.”

“That was $100,000 less than the asking price for a similar unit five floors below, even though apartments on higher floors typically carry bigger price tags. ‘As buyers have more choices, you’ve got to make your apartment stand out,’ she says.”

“Sellers are also being told to cut prices aggressively if their house isn’t moving, or risk chasing the market downward. If a home doesn’t get any showings in 21 days or gets 10 showings but no offers, Ned Redpath, in Hanover, N.H., often advises the seller to slice the asking price by 10%.”

“‘We don’t like to see $2,000 or $5,000 price adjustments,’ he says. ‘We want to see a real whack’ that attracts attention.”

“Another approach is a personal plea. Traci Smith in San Antonio, encourages clients to court prospective buyers with a letter explaining the intangibles that make their home and neighborhood so appealing. During the height of the housing boom, some brokers were encouraging the same type of personal notes, but from buyers eager to get their bid accepted.”

From CNN Money . “Home price increases have slowed nationwide and even reversed in many markets. Inventories are up and new home builders are cutting back. More and more sellers are having difficulty selling their properties. We’ve profiled some of these sellers and that has produced a flood of reader emails from other troubled sellers. Sellers have reacted to the quickly changing market almost with disbelief.”

“K. Gordon, Amarillo, Texas: ‘I bought a brand new house in Amarillo. Unexpectedly, 4 months later I had to move back to south Florida. 14 months and 3 agents later, the house has not sold. I’ve tapped out my credit making payments on that house as well as my current rent.”

“My latest agent is an investor. He has never failed to sell a house. Recently, he told me that it appears that this house will break his perfect record.”

“For some sellers selling their old home quickly is critical: They’ve already made other plans. Tom Shipp, Seattle: ‘My partner and I purchased a new home in Seattle, before we listed our current home on the Eastside. Our agents were confident that our current home would sell in 2 weeks and advised that we not make a contingent offer on the new house..[the bid] was quickly accepted.”

“Ninety plus days, a second mortgage, and a bridge loan later we are still trying to sell our Eastside property! We just made our first double mortgage payment and are feeling desperate and depressed. We are supposedly still in a ‘hot’ market.”

“Pat Berry, Virginia: ‘Our house has been on the market in North Springfield [near Washington, DC] since July 15. In that time, only two people suggested any interest by taking time to tour the property. My husband is due to retire on Sept. 30 and at that time, we will be carrying two mortgages on 1 and 1/2 incomes. Needless to say, my fingernails are chewed to the quick.’”

“A reader in Central Florida: ‘We put our house on the market at the beginning of July 2006 for $289,900. Since then we have dropped the price to $267,000 and have only had 2 showings. Our agent keeps telling us that there is a lot of inventory in our neighborhood and that price will be the thing that makes our house stand out. Our problems is that having only owned the home 1 year there is very little equity so dropping the price much lower will result in us actually having to pay to sell our home!”

“Jerrod Leder, St. Paul, Minnesota: In late April 2006 we put our condo on the market. We almost had an offer within the first week, but the buyer wanted west-facing windows, of which we have none. Since then it has been difficult to get as much as a showing let alone an offer. From Memorial Day through Aug. 15 we had 2 showings and one was by mistake.’”

“One group of e-mailers provided a genuine surprise because they were inordinately unsympathetic to the plight of some sellers. An anonymous submission: ‘how can you folks at money use these two idiots in fla. as an exaple of a slowing housing market???? They’re very overpriced (greedy)..and should really knowbetter than to hold two mortage commitments at one time..they deserve what the’ve gotten themselves into….they have only themselves to blame…(wonder who they’ll blame for their impending divorce).’”

“And another not quite as angry example: ‘They have a 2,861 sqft house and they want more and more and more and a pool too - boo hoo. Suck it up folks, a 2800 sqft more than big enough to ’start a family’ in. Perhaps they should take stock in the expensive lesson they are learning, do not count your chickens before they hatch.’”

A report from the Wall Street Journal. “Federal and state authorities are investigating allegations of an elaborate mortgage fraud involving about 100 people living in or near Martinsville, VA. who say they unwittingly took out loans to buy houses at inflated prices in Indiana. Now, many of the loans are in default, the borrowers’ credit ratings are in ruins, and lenders are pursuing the organizers of the purported investment group in court.”

“Companies stuck with the defaulting loans include Countrywide Financial Corp., the nation’s largest home lender, and Argent Mortgage Co., another big lender. Representatives of the borrowers put the total value of loans involved at about $80 million, which would make it one of the largest mortgage-fraud cases ever.”

“Part of the problem, say critics inside and outside the industry, is that, in their haste to earn commissions and fees, loan officers and brokers are asking fewer probing questions. ‘We aren’t asking questions, and we aren’t verifying like we used to,’ says Bob Simpson, (who) helps lenders recover losses from fraud. ‘For legitimate, honest consumers, that’s a good thing,’ but it creates opportunities for crooks, Mr. Simpson says.”

“Kurt Pfotenhauer, a senior vice president at the Mortgage Bankers Association in Washington, says the pursuit of efficiency in making loans has made the industry more vulnerable to fraud.”

“Nancy Muse heard about the group from a friend. Months later, Ms. Muse found out she was in trouble when she inquired about buying a modular home for herself. A representative of the home-building company checked her credit and told her she already owned four homes.”

“One church secretary, who says she heard about the investment group from her pastor, says she and her husband, a building-maintenance worker, learned that they were the owners of 14 homes in Indiana, a state they had never visited.”

“Fannie Mae acquired some of the loans from Countywide and has reported its findings in the case to law-enforcement officials and regulators, a spokeswoman said.”

“Fraud has proliferated as lenders increasingly deal with borrowers through brokers and other intermediaries rather than having face-to-face relationships. ‘Lending is becoming more anonymous,’ says Rachel M. Dollar, a Santa Rosa, Calif., attorney.”

“Borrowers’ attorneys and other consumer advocates say many problems arise simply from greed or haste on the part of loan officers and brokers motivated by commissions to push for high volumes. ‘The red flags were as strong as you can get,’ says Jessica Attie, a staff attorney with the clinic’s Foreclosure Prevention Project.”

“Other lenders also appear to have overlooked some suspicious borrowing patterns. According to a mortgage-fraud indictment..one borrower, identified in the court filing only as Justin Z, obtained loans from National City Corp.’s mortgage arm to finance purchases of 20 condominiums in the Atlanta area between Feb. 1 and March 26, 2001.”

The Sentinel and Enterprise from Massachusetts. “The state Division of Banks is cracking down this month on what it sees as abusive business practices by mortgage lenders and brokers.”

“The mortgage industry’s climate is somewhat muddled, Commissioner of Banks Steven Antonakes and some local lenders acknowledged. Some brokers and lenders offered many more atypical products during the recently concluded real-estate boom, according to Thomas J. Gray, senior vice president of lending at Workers’ Credit Union.”

“‘In the mortgage business, because it’s cyclical, when the real-estate market is going up, there are some mortgage companies and brokers that would make loans they might not normally make and (then sell the loans to other lenders),’ he said. The real-estate market’s slowdown negatively impacts homeowners struggling to keep up with a loan’s payments because they can’t quickly sell their home to avoid foreclosure, Gray explained.”

“But the slowdown has also put lenders in a tough position, said Christopher J. Iosua, president of the Mortgage Connection Inc. ‘When business slows down the way it has in the past six to nine months, new loan originators and those without a strong base of customers do things they probably wouldn’t normally do,’ he said.”

“Commissioner Antonakes said, abusive lending practices can destabilize the entire real-estate market. ‘In the worst case, the home will be foreclosed upon, and that kind of activity could result in the home being sold for less than its value and before you know it, you have a domino effect.’”

The Oregonian. “It seems like every month, I’m running into people passing out a slick new business card that announces them as a real estate agent or mortgage broker. On certain Portland streets, housing prices are doubling in a matter of months. And when there’s this kind of temptation to make quick money, greed can’t be far behind.”

“Last week, Leanne Booth, a real-estate loan broker; Troy Martin, a real estate sales agent; and Ryan Bonneau, a former mortgage loan originator, were indicted on money laundering and wire fraud charges. They are accused of selling two Marine Drive homes at inflated prices so they could pocket the profits.”

“One house was sold at about $100,000 more than its $350,000 market value. The other, next door, sold for $50,000 more than its $350,000 value. The biggest loser is the Indianapolis bank that loaned the money. And once the real-estate market bottoms out, the dominoes of loan defaults that will likely result will reveal even more mortgage fraud cases, says Lance Caldwell, one of Portland’s assistant U.S. district attorneys.”

“‘It reminds me,’ Caldwell says, ‘of the savings and loan crisis.’”

Inman News reports on the latest UCLA forecast. “The housing market will not crash unless the job market weakens significantly, though home prices are expected to stagnate for at least five years during this down cycle, according to the latest Anderson Forecast.”

“The forecast calls for the market prices of homes to hold steady over the next five years, which equates to a drop of about 15 percent to 20 percent in real terms because of projected inflation.”

“It could take 6.3 years to 16.5 years to work off excess home-price appreciation in California, the report suggests. ‘In other words, these problems are likely to be with us for a long time,’ forecast director Edward Leamer states in the report.”

“Already, home prices have dipped in some markets. ‘There are some cities and some states that have experienced slight price declines so far this year, but we are very far from a Great Comeuppance in which the extraordinary appreciation of the last five years is taken away,’ the report states.”

The Union Tribune. “The California real estate market will remain sluggish through at least 2008 and spark widespread layoffs among construction and financial firms, according to the latest UCLA Anderson Forecast.”

“‘Real estate-related employment has moved from a major engine of growth in 2005 to a drag on growth in 2006,’ UCLA economist Ryan Ratcliff wrote. Ratcliff predicts that nearly 100,000 construction workers will lose their jobs over the next 2½ years.”

“‘A 100,000-job loss would be the outer limit of what I expect. It’s unlikely but not impossible,’ said Kenneth Simonson, chief economist with the Associated General Contractors of America.”

“‘San Diego gets all the bad press, but Sacramento is the story that nobody knows about,’ Ratcliff said. ‘Sacramento has gotten the most pummeled over the last year.’”

“Michael Pento, a strategist foran investment firm in Huntington Beach, said a slowdown in construction is needed, since the creation of new houses has outstripped population growth nationwide. ‘It will take years to work out all the excess supply of homes, especially since home builders are still adding fuel to the fire,’ Pento said.”

“‘For the real estate market to recover, you have to wait for incomes to catch up with the home prices, and growth in income has been negative after adjusting for inflation,’ he said.”

“‘Housing contribution to GDP (the gross domestic product) will be very weak, with building and finance and real estate commissions suffering significant declines,’ Leamer said.”

“Leamer cautioned that the outlook was based on data trumped by recent reports showing that housing sales and starts were sliding more rapidly than the group had projected. If the trend accelerates, he said, ‘then our forecast is too optimistic.’ Leamer said, ‘the unhappy home builder is not going to have anything to do.’”

“‘Since builders are much more willing to lower home prices than owners, the handful of areas where new homes account for an above-average share of total sales activity could see some price declines,’ Ratcliff said.”

“In recent months, local real estate brokers and agents have bemoaned the negative effects on the existing-home market because of some new-home price cuts and especially, incentives of up to $100,000 per home to lure buyers.”

“Building permits issued for single-family homes in California dropped 41.8 percent in August compared to August 2005, the California Building Industry Association reported today.”

“CBIA chief economist Alan Nevin said that new-home construction in California is expected to continue to cool for the remainder of the year. Builders will continue to reduce their standing inventory of unsold homes that are under construction or completed, he said, and are now using aggressive marketing techniques to reduce their inventory.”

“Layne Marceau, 2006 CBIA chairman, said affordability is a major problem in the state. ‘For far too many California families, home prices today are simply not affordable, and even if the real estate naysayers’ predictions of a drastic market correction came true, housing would still be unaffordable for most first-time buyers,’ he said.”

The Honolulu Advertiser reports from Hawaii. “There’s been a dramatic turn in O’ahu’s residential real estate market in the last year. It’s as though value is evaporating into the salty air, $50,000 here, $150,000 there, $720,000 in Michael Choi’s case.”

“Choi thought he had a $1.8 million Hawai’i Kai house ready for a quick and easy sale last November, but following nearly a year with no offers, he has cut his price to under $1.1 million.”

“Not only are more sellers dropping their asking prices, but more properties are selling for below list price. The trend is clearly benefitting buyers and frustrating sellers.”

“‘The sellers are still a little bit out of touch with reality of where the market is,’ said agent Bryn Kaufman. ‘They’re pricing initially higher and they don’t get any offers, and then they lower their price. The buyers are in a mindset where they feel the market has peaked. There’s a lot of inventory, and they’re looking for deals. It’s a battle of two mindsets.’”

“According to Kaufman, about 70 percent of single-family homes this year sold for below their list price, compared with about 50 percent a year earlier.”

“According to O’ahu home sale data, there were 1,798 cases of sellers dropping their asking price last month, compared with only 633 a year earlier. The number of price drops for homes on the market, which includes more than one drop for the same property, has been steadily rising from 1,081 in January to 1,604 last week. The average drop for single-family homes was 7.6 percent.”

“Lowering an asking price can give sellers the depressing feeling that a good part of their home’s value has evaporated rather substantially.”

“About 18 months ago, a disability forced Dolores Martinez to retire and refinance her Punalu’u home, but higher mortgage payments became unaffordable. Martinez said she had to sell, and in April with a broker’s assistance listed the three-bedroom house ’steps from the ocean’ for $775,000.”

“There was little buyer interest. ‘One person looked, and that was in the door and out the door,’ Martinez said. In July, Martinez dropped her price to $675,000, and then to $550,000 last week, a collective 29 percent reduction.”

“If her home sells for $550,000, Martinez, who plans to move to the Mainland, said she can live with it. ‘It wouldn’t be good, but I’d be all right. I hope it sells soon.’”

“The median list price on O’ahu hit a peak in May 2005 at $850,000 and now stands at $770,000. Median list prices for single-family homes have been below their year-ago levels in each month this year except January.”

“Many sellers have been slow to accept that the top of the market has passed. ‘It’s taken them a while to agree that the heat has gone out of the market,’ (broker) Jim Wright said. ‘People are starting to realize it’s slowing down,’ added broker Rob Burns. ‘Prices are going down to where they ought to be.’”

“Choi, the Hawai’i Kai home seller, was one who got caught expecting buyers would keep bidding up values. Choi at the time had been a real estate agent for about two years and felt buyers would snap up the 1,668-square-foot house with three bedrooms, two-and-a-half bathrooms and a pool. List price on Nov. 8, 2005: $1.8 million.”

“‘It was pretty bad timing,’ he said. ‘The real-estate cycle was so good up to that time. Now I can say that that was the top of the market, but I couldn’t see that at that time.’”

“Choi in January reduced the price to $1.58 million. By May it was $1.38 million, and then $1.23 million in July. Still, no offers. Now Choi said he plans to bring the price down to $1.08 million and install new carpet and paint.”

The Wall Street Journal reports on Florida. “In Florida, school principals, real-estate developers and economic-development officials are scrambling to solve a troubling mystery: Where did the kids go? The reason: School officials say that even though it has cooled in recent weeks, Florida’s overheated housing market is pricing young families out of the state.”

“In Tampa, principle Shari Beaubien blames her school’s 10 percent enrollment dip on the conversion of four nearby apartment buildings to upscale condominiums. When the principal called the property managers last month, she was told 515 units were empty.”

“‘In some new-home neighborhoods in Florida, there are more ‘for sale’ or ‘for rent’ signs than there are drapes in the windows,’ adds Jack McCabe, a real-estate consultant in Deerfield Beach, Fla.”

“Debbie Terry, director of recruitment for the Collier County school system in Naples, says the district is suffering a ‘double whammy’ from steep real-estate prices. About 25 new teachers hired this summer later rescinded their contracts because they felt home prices in Naples were too high.”

“Meanwhile, a growing number of more-experienced teachers have been selling their homes to lock in big profits made during the boom, and then moving to less-expensive places like south Georgia.”

“Despite recent housing-price declines, including August decreases in 12 of 20 metro areas, economic-development officials worry that real-estate costs remain high enough to make it hard for at least some employers to recruit workers and expand their businesses.”

The St Petersburg Times. “With new homes sales down about 20 percent and industry confidence at a 15-year low, builders and developers are sloughing off property they may no longer need. ‘Many of the large builders have basically entered a no-buy phase,’ said Beat Kahli, developer in Pasco County.”

“A series of busted land deals reflect the new reality: Undisclosed developers bailed from plans to buy the 2,000-acre Cannon Ranch in Pasco County for more than $100-million. The land’s California owners were left in the lurch, having paid $31-million for the State Road 52 property in 2004.”

“Farther north, in Hernando County, Mercedes Homes pulled out of a contract in August to buy 416 acres near State Road 50. Up in smoke went a planned 900-home subdivision. Landowners’ representatives said Mercedes cited slumping home sales.”

“A contract for the 1,700-acre Kirkland Ranch near Wesley Chapel disintegrated in the summer. Diversified Property Group LLC would have paid the ranching family nearly $60-million but folded the deal in light of an uncertain home market.”

“KB Home, active in about 20 projects in Pasco, Hillsborough and Pinellas counties, is negotiating to shed land in the Tampa Bay area. For national home builders like KB and Lennar, Wall Street looms large. Land sales can raise cash and restore investor confidence. Divestment lurks in corporate reports behind such jargon as ‘managing our land portfolio.’”

“Kahli’s experience illustrates the changing fortunes of land sellers. Last year he tried to buy land between Tampa and Orlando and was told to get in line. His was the 27th offer. He recently got a sheepish call from the same sellers. Would he still be interested in buying the land?” “‘I said, ‘What happened to the other 26?’ Kahli said.”

“Tampa Bay area housing analyst Marvin Rose figures it could take six to 18 months for prices to tumble. From the prospect of developers, asking prices reached ridiculous heights, leaving little room for profit. At market peak, some landowners, after discounting for wetlands, were demanding close to $100,000 per acre. ‘We’re still at last year’s prices,’ Rose said.”

From MarketWatch. “People camped out for the chance to buy a unit in Radius, a condominium development in Hollywood, Fla. But that was in the summer of 2004, when the red-hot condo market was peaking.”

“‘You see some of these communities that investors purchased … there are no lights on at night,’ said Bill Donges, CEO of the developer of Radius.”

“The lack of post-dusk illumination in some South Florida condo communities is a sign that many buyers never planned to move into the units they bought, he said. Their plans now: sweat.”

“According to the NAR, inventory of existing condos and co-op homes rose to about an 8.6-month supply in August. ‘The market is clearly oversupplied in many places,’ said David Seiders, chief economist for the National Association of Home Builders. ‘The key symptom of that has been on the price front. Prices have taken a hit.’”

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