The Housing Bubble

It’s Friday desk clearing time. “There numbers aren’t pretty, 20.7 percent of housing speculators in the Baltimore region reportedly lost money in the second quarter of 2006. ‘Speculators are taking a bath,’ said David Martz, a Realtor in Baltimore. ‘Rehabbed [houses] and new construction are hitting the market, and there is a glut of that inventory.’”

From Virginia. “‘You don’t want to get too greedy. When you get high appreciation like we have had and like other markets, you will fall off the cliff and it will hurt,’ said Wes Atiyeh, who is president of the Richmond Association of Realtors. ‘There’s more inventory than we’ve had in a long time,’ Atiyeh said.”

The Chicago Tribune. “There is no denying that the slowdown is taking a toll. Chicago-area sales in August were down nearly 21 percent from last year, while condo sales were off 11 percent. During the lull the inventory of homes for sale has grown about 40 percent from last August.”

“‘Too many sellers got greedy,” (realtor) James Merrion said in Elgin. ‘Prices have to come down.’”

“Not so, said Tommy Gentile, who has been trying to sell his five-bedroom home in west suburban Montgomery for about six months. He has reduced the price by $20,000, to about $380,000. ‘That price is pretty close to rock-bottom, as far as money we’ve put into it,’ he said of the house, bought two years ago. ‘We have to get our money back because we’ve bought another house, and we’re remodeling that one. We have two mortgages.’”

From Michigan. “Statistics show that the housing market has cooled across the United States. But that news doesn’t shake Lisa Damron, president of the Battle Creek Area Association of Realtors.”

“‘We do not accept the philosophy that the market is down,’ Damron said. ‘The more sellers keep a negative perception, the worse our outlook will be.’”

The Denver Post. “‘The national media would have people believe that the housing market is getting creamed, and that’s really not the case,’ said economist Jeff Thredgold. ‘Yes, there is a housing bubble on both coasts, but it is an issue somewhat exclusive to both coasts.’”

From Texas. “New subdivisions are popping up all over town in Austin. ‘There are just the right amount of homes on the market, so we are not like the rest of the country,’ Realtor Amy McDonald said. ‘I get sticker shock on both sides. I get people who can’t believe how inexpensive housing is. They come from big cities,’ McDonald said.”

“While many buyers are living their dreams of home ownership in Austin many have had those dreams shattered. ‘[There's] one foreclosure for every 142 households,’ Sally Borie of Consumer Credit Counseling Service said. Austin is now fifth in the nation for home foreclosures during the second quarter of this year. People move into homes that seem affordable at the time but they end up breaking the bank.”

The Arizona Republic. “New-home permits have been falling for months as builders try to sell their inventory of new homes. Valley housing analyst RL Brown said the housing market in the West had the steepest decline because it had been the most robust region. ‘Every place that was hot is cold now,’ he said.”

The Mail Tribune in Oregon. “Short-term real estate investors looking for a quick profit may now find themselves stranded in the slowing market. And that has contributed to a big increase in the number of homes for sale locally. Jackson County’s inventory of homes for sale crested at more than 2,000 in August. In the year 2000, it was typical countywide for no more than 900 homes to be on the market.”

“‘I think one reason for the increase of inventory is those investors trying to sell,’ says Bob Forest of Bob Forrest Loans. ‘The supply of new houses has competition from investors (trying to sell their properties), so there are excess lots and houses.’”

“One investment adviser says he’s not surprised by the burst of activity. ‘Most everybody is late to the dance,’ says financial planner Al Densmore. ‘They chase stock when the market is high and then they hear real estate is hot and get trapped. They’re sort of lemmings following the crowd.’”

From California. “‘There’s so many houses for sale on my street that I felt I needed to do something to get mine noticed,’ said Jean Simon, a of Corona, Calif. Since Doug found a new job on the East Coast, they want to sell fast so they can move.”

“After four months of trying to sell the house with no solid offers, the couple put the house up for auction on eBay. Simon says the $400,000 reserve price is a tad below the house’s fair market value.”

“‘We built up a lot of equity since we bought it, so it’s not like we’re losing money,’ she said. ‘But we’re motivated sellers who don’t have the time to find renters, and who don’t want to be saddled with property taxes and a mortgage for a house we no longer live in.’”

A report from the LA Times. “Mortgage fraud continues to escalate in Southern California, FBI figures show, raising concerns of increased defaults and foreclosures as the housing market cools down. The FBI and industry experts say the trend reflects growing deceit by average borrowers who overstated their income, exaggerated their assets or hid their debts simply to qualify for a mortgage in the region’s sky-high housing market.”

“‘There’s more of the little guy running around — people committing fraud for housing,’ said Ronda Heilig, the bureau’s mortgage fraud program manager. A seven-county region from Orange County to San Luis Obispo County has seen a fourfold increase in suspicious loan activity since 2003.”

“With prices flattening out or declining, those without sufficient equity could be forced to sell for a loss or even default on payments. That could accelerate any downturn in the market by swamping it with foreclosed and bargain-priced properties. ‘This is the calm before the storm,’ said Steve Smith, a Redlands appraiser.”

“One lender recently compared 100 stated-income loans with the borrowers’ tax returns and found that only 10 of the borrowers were telling the truth about their wages, according to a data firm. Sixty of the borrowers had exaggerated their incomes by more than 50%, according to the institute.”

“In what might be a sign of trouble ahead, the HUD’s Office of Inspector General said that it had audited 41 loans that had gone into default. All of the loans had been made by National City Corp., one of the biggest lenders in the country, and had been insured by HUD”

“In 20 of the loans, or just about half, the inspector general found ‘errors and documentation omissions clearly contrary to prudent lending practices.’ On one loan, for example, the borrower’s previous address turned out to be nonexistent.”

“On another, the borrower submitted two bank statements. The first month’s closing balance didn’t match the second month’s opening balance, an indication that the documents might have been faked. A third borrower overstated his income, a fourth his assets.”

From the Daily Democrat. “An increase in housing options and steady home prices have caused the tables to turn in the real estate industry. After nearly a decade of booming home prices and fast selling times in Yolo County, the market has quickly slowed down.”

“‘In terms of the market, we peaked in fall of 2005,’ said (broker) Don Sharp in Woodland. ‘Looking back it continued to escalate and escalate. But then prices started to suffer in 2006.’”

“Sharp said currently, there are 356 houses available in Woodland, that’s more than three times the amount in 2004. Furthermore, the availability has caused builders and home owners to compete for buyers, which means better deals for those looking to buy.”

“BG Tacket, a Woodland home seller, put his home up for sale earlier this month and since then has had a few people inquiring about it. He’s not worried about the market because he priced his home competitively and feels it has enough character to stand out.”

“‘The market’s back to normal and everyone is freaking out about it,’ he said.’ He said some of the biggest reasons why some houses aren’t selling is because there’s nothing in the house that stands out and its over priced. ‘People are over-pricing to pay for the high Realtor commissions,’ he said.”

The Tracy Press. “For the first time in 15 years, the price of a home in Tracy fell from one year to the next. And with ‘For Sale’ signs spinging up all over the valley, buyers are feeling the market shift in their favor.” “September figures show the median price for a single-family home in Tracy during the last six months has retreated from $546,000 to $538,000, and at least one real estate professional thinks prices could drop even further.”

“‘The last time this happened was in the early 1990s, right after the 1989 San Francisco earthquake,’ said said Larry Rumbeck, president of the Central Valley Association of Realtors. ‘We’re a bit late with the drop.’”

“He said sellers today are being more realistic with asking prices, while investors have left the market altogether.”

“Rumbeck said factors such as lower gas prices and market-savvy buyers have conspired to limit Central Valley home sellers’ tendency to inflate prices. ‘Negative press about housing prices, along with the fact that buyers are much more educated today, have contributed to a bubble burst,’ he said.”

“Today, many buyers are sitting back and holding on a month or two before purchasing a home, Rumbeck said. They’ve got a lot of options. The MLS shows there are 745 homes on the Tracy market, along with 259 foreclosures in the works and 113 repossessions. The glut has forced many homeowners wanting to sell to put their homes on the rental market and wait out the lull.”

“Rents for a single-family house in Tracy are down far below $1,500, said (property manager) Barbara Johnson in Tracy, and renters paying that much right now opt to stay in the Bay Area and avoid the expense and time of a commute.”

“‘Prices were inflated drastically,’ Rumbeck said. ‘A house in Turlock that went for $180,000 in 2001 went for $380,000 in 2005.’”

A housing report from the Washington Post. “And so the great real estate boom has ended. Signs of a deteriorating market are everywhere, even in Prince George’s County, where the housing market conditions had remained close to boom levels even as other neighborhoods cooled dramatically.”

“‘The downturn in the Washington housing market is in full swing,’ said economist Mark Zandi. ‘The market is weak and getting weaker.’”

“Sales have plunged in every jurisdiction; in August, the latest figures available, 8,300 homes changed hands in the region. That’s down by a third from a year ago, according to the area’s MLS. As of the end of last month, 46,000 homes were on the market, up from 21,000 the same time last year.”

“One thing is clear: Buyers are overwhelmingly in control now. Year-over-year median prices were down 4 percent in August in Prince William and Loudoun counties, whose share of unsold homes account for roughly a quarter of the homes on the market in the region. Prices were also down in Arlington (14 percent), the District (9 percent), Fairfax County (6 percent) and Alexandria (2 percent).”

“Condo sales have been hit particularly hard. In Arlington, the District and Alexandria, condos account for more than half of the homes on the market. In Fairfax County, they account for a quarter.”

“Those who really do want to sell ‘need to recognize that they need to be the best house at the best price this week,’ broker David Hawkins said. ‘What the neighbor got a year or two ago has no bearing on the market now.’”

“Arlington renter James Cave is still waiting to buy. In the spring, he said he thought the housing market was overpriced and headed for a fall, so he is feeling quite smug these days about his decision not to plunge in.”

“‘There was no way I was going to jump into the real estate market that wasn’t grounded in reality,’ he said recently. ‘But what’ll happen to all these people who bought?’”

“Cave felt a lot of pressure from his friends and acquaintances to buy a home. He has been socking away half of his salary into savings for several years, and could have easily produced a substantial down payment. Instead, he spends $1,400 a month to rent a condo in a new building in Arlington.”

“‘I’m totally happy,’ the Washington-area native said. ‘All the people who were bragging about prices going up are suddenly silent and worried about what their properties are worth.’”

“Cave continues saving his money, waiting for what he thinks will be a flood of foreclosures when people are faced with escalating payments and can’t sell for enough to cover their mortgages. ‘What I’m waiting for is when the housing market is at its bottom,’ he said. ‘I think we’re a long way from there. I personally think it’s going to get really bad. It’s like the Internet craze.’”

“It seems to him that the investors who own units in the building, like his own landlord, are becoming more anxious to sell. He frequently visits open houses for new condominium complexes in the area. He has been noticing how many are offering generous incentives, and there are still several new buildings under construction.”

“Now he thinks he will wait for the market to drop enough so he can afford to buy a single-family house. He thinks he would be willing to pay $300,000 for such a house, not the $600,000 many owners are now asking. He said, ‘I believe my patience will work for me.’”

Some housing bubble reports from Wall Street and Washington. “Cracking down on exotic mortgages that have exploded in popularity in recent years, U.S. regulators told banks Friday that they’ve got to make sure that borrowers can actually pay back the full amount of the mortgage.”

“‘The agencies are concerned that some borrowers may not fully understand the risks of these products,’ the five banking regulators said in a statement Friday. In particular, banks were told not to offer loans that would require the borrower to sell the home or to refinance the loan in order to make the full payment. Such ‘collateral-dependent’ loans are typically prohibited as unfair or deceptive.”

“Exotic loans should generally not be offered to borrowers with limited or no down payment, the regulators said.”

“‘The agencies expect a borrower to demonstrate the capacity to repay the full loan amount that may be advanced,’ the regulators said, including any additional interest or principal that may accrue.”

“Wall Street analysts ahead of final guidance warned that the rules would temper consumer demand for the ‘affordability products’ that are also favored by investors in the $6.5 trillion market for mortgage-related securities.”

“‘It seems likely the rules will have sufficient bite to cause some adjustments in the types of loans being offered in the mortgage marketplace,’ analysts at UBS Securities LLC said in a Tuesday note. ‘That could have some serious repercussions for lenders, as well as for homeowners seeking to refinance their affordability loans.’”

The Christian Science Monitor. “The biggest trouble lies with the adjustable loans that begin with artificially low interest rates. An analysis estimated that $368 billion in adjustable-rate mortgages originated in 2004 and 2005 are at risk of default because of this pattern.”

“‘This translates into 1.8 million families that are at risk as a result of the possibility of default and another 500,000 that are likely to go into foreclosure,’ Allen Fishbein of the Consumer Federation of America said last week at a Senate hearing on nontraditional mortgages.”

“Experts on both the pessimistic side and the optimistic side agree on one thing: The impact of the ARM adjustments will occur over several years. ‘It’s a time release,’ says Christopher Cagan, who did the risk analysis at First American Real Estate Solutions. ‘It’s not a single impact like Pearl Harbor.’”

From Bloomberg. “Consider the bloated inventory of homes for sale and compare the performance to previous housing slumps, says Joe Carson, director of global economic research at AllianceBernstein.”

“‘Since the start of 2005, the inventory of unsold new homes has climbed 29 percent, while the stock of unsold existing homes is up a staggering 82 percent,’ Carson says. ‘During the sharp, protracted housing downturn of the early 1990s, these inventories actually declined, helping to cushion prices.’”

“Cancellations are rising, and they aren’t being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated.”

“‘Once a sales contract is signed, there’s no way of recording the cancellation or putting the home back in inventory,’ says Dave Seiders, chief economist at the National Association of Homebuilders in Washington. ‘Builders keep track of gross and net sales; we don’t have a net sales number from Commerce.’”

“The Census Bureau, which is one of the Commerce Department’s statistical agencies, counts an initial new home sale: Sales go up and the ‘for sale’ inventory is reduced. If the sale is canceled, it isn’t reflected in revisions to previous months. What happens? When the home is ‘resold,’ statisticians ignore that transaction.”

“The effect of higher cancellations is ‘to overstate the overall level of sales and understate the level of inventories,’ Carson says. What makes the current situation so worrisome is the ‘unprecedented inventory overhang, encompassing new and existing markets and many of the largest metropolitan areas,’ Carson says. ‘Its sheer size raises the odds that prices will fall more and longer nationwide than they did in the 1990s.’”

From MarketWatch. “Banc of America Securities said Friday it expects pending home sales to decline between 3% and 4% in August from the previous month after its monthly survey of real estate agents revealed disappointing traffic trends.”

“‘Lower pending contracts in August should lead to weaker existing closings in September and October, as contracts precede closings by 30 to 60 days,’ wrote analyst Daniel Oppenheim.”

“A.G. Edwards analyst Gregory Gieber estimates the inventory overhang of new homes in the 190,000 area. ‘Hence, before one can even start to think about any improvement for home builders with regard to pricing and profitability, a large inventory drop is required and that in turn will likely require yet additional gross margin declines of a meaningful magnitude,’ Gieber said.”

“‘Residential construction is officially in recession, as the home-building stocks predicted long ago,’ wrote Merrill Lynch North American Economist David Rosenberg in a report Friday.”

The Long Island Business News from New York. “As Long Island’s housing market continues to soften, real estate executives refuse to utter the ‘b’ word: Bubble. But one area economist isn’t afraid to use it. ‘In the bubble areas, i.e. long island, things are really coming down quite quickly,’ said Irwin Kellner, a Hofstra University professor and North Fork Bank’s chief economist. ‘You don’t need me to tell you this.’”

“Inventory has soared by as much as 75 percent in some areas, Kellner told the group of Long Island’s key economic development players and real estate developers. ‘The housing market bubbled up in a way that it had not before,’ he said.”

The Boston Globe. “For Barry Bluestone, an encounter in an airport last spring crystallized the high cost of living in Massachusetts. The Northeastern University economist began chatting with the passenger next to him. She told Bluestone, ‘Even on our salaries, we can’t afford it here,’ Bluestone said. ‘If we can’t keep pediatric dental surgeons here, heaven help us.’”

The Boston Herald. “The increasingly troubled Bay State home and condo sales market is racing into a downturn that could take years, not months, to work itself out, experts said. ‘It could get very bad,’ said Bluestone of the impact of a recession on the housing market. ‘We already have a weaker economy (in Massachusetts) and we suffer from this terrible cost of living.’”

“A market that stabilizes this fall, while not impossible, is unlikely, said Chip Case, a Wellesley College economist and top real estate expert. ‘There are so many different scenarios,’ Case said. ‘I don’t expect this to be a long, drawn out thing, but it damn well could be,’ Case said.”

The Lowell Sun. “Marci Rossell, who has worked as chief economist at CNBC and now teaches at DePaul University in Chicago, said the current slowdown — she despises the term ‘bubble’ — had to happen.”

“‘It used to be that mortgage rates were only influenced by long-term (interest) rates, and that’s because the only mortgage you thought about was the fixed 30-year loan,’ she said. Now with all the innovations, adjustables, interest-only and option-pay mortgages, rates are far more susceptible to short-term rates, which are controlled by the Fed.”

“‘And what has the Fed been doing to interest rates?’ Rossell asked, egging on the crowd with an emphatic thumbs-up. Higher rates deplete demand, she said.”

“Rossell closed by hinting that too many homeowners are obsessed with real-estate values, anyway. ‘If it’s where you live, it’s ludicrous to take a short-term perspective,’ she said. ‘I mean, seriously: What do you care?’”

WBIR in Connecticut. “After years of going up, housing prices are now heading south in some places, so has the ‘bubble’ finally burst? Kate and Hans Koning have been trying to sell their Easton, Connecticut house for nearly a year. So far there are no takers, even though they cut their price not once, but twice.”

“‘I started at $875,000 and at the time I thought that was really a reasonable price for the house,’ says Date Koning. The Konings are not alone. Sellers across the country are struggling with a weakening housing market.”

“‘The people who bought at the top and sell out at the bottom can get really hurt and so there will be bankruptcies, foreclosures and people out of jobs, but we will recover from it…this is not nuclear war,’ says Economist Robert Shiller.”

The Times Argus. “Central Vermont’s real estate market is holding its own this year, despite national trends which continue to show a marked decline in new home construction, a swelling inventory of unsold homes, and stagnant prices. However, there is less urgency in the market, according to Nancy Gale, broker associate and president of the Vermont Association of Realtors.”

“‘There’s a lot more inventory available, but we’re not seeing prices coming down as much as we’re reading in the [national] news. It’s giving buyers more choices,’ she said.”

“Broker John Biondolillo said he hasn’t seen prices falling. ‘Except on houses that were overpriced to begin with,’ Biondolillo said.”

“Claire Duke, who has been selling real estate for 25 years, said ‘The thing that’s somewhat different is this extra lump sum that sellers have been adding to the price in hopes of it working is probably changing.”

“‘Some of that reaching is going to stop to a degree, at least for the more ordinary properties,’ Duke said. ‘Sellers need to come to terms with being more realistic about prices than they have been in the last three to four years.’”

The St Petersburg Times reports from Florida. “A year ago, Hillsborough County’s housing market was hyperventilating. Now it’s sighing. ‘The people who are selling are very fortunate,’ said Vince Arcuri, a real estate agent based in Odessa.”

“Why? Because everywhere Arcuri looks, he sees overpriced houses. One’s $50,000 too high here. Another’s 30 percent out of whack there. ‘They’re all overpriced,’ he said.”

“‘Inventory has quadrupled,’ said Brad Monroe, the New president of the Greater Tampa Association of Realtors. ‘Sales are off by 40 percent. There’s downward pressure on prices.’ ‘It’s getting very, very slow,’ said Yuly Vazquez, a Tampa real estate agent who has held four-hour open houses where only two or three people strolled in.”

“‘They’ve never had as much product to choose from,’ Monroe said. ‘Sellers are going to have to be more aggressive.’ The speculators are gone, yet the building boom they encouraged is still evident. ‘There’s a whole bunch of brand-new houses that have never been lived in that aren’t selling,’ Monroe said.”

“Arcuri and Monroe advise sellers not to peg their homes’ prices to sales during the past year. That was too high, they agree. ‘We need to go back to about mid-2004,’ Arcuri said. ‘That’s where the market is now.’”

“Monroe’s Realtors association predicted last week that it would lose 10 percent of its members next year. His statewide association reported Monday that August home sales in the Tampa Bay area had dropped 42 percent from the prior August. ‘The market was out of control,’ Arcuri said. ‘We needed this adjustment.’”

The Herald Tribune. “Leonard Sondheimer knows firsthand the perils of the real estate boom. The 68-year-oldm retired until he and his wife sought to diversify their investments into the Southwest Florida real estate rush, now finds himself working full time again in Bradenton.”

“The Sondheimers, who bought a house from Jade Homes that now stands unfinished with 75 others, also enticed more than a dozen neighbors and friends to buy investment homes from Jade. The Sondheimers and other Jade buyers are among the thousands who, during the booming 2003-05 cycle, saw a no-lose opportunity in the region’s real estate game.”

“Leonard Sondheimer just flunked a credit check at a time when he thought he would be enjoying his golden years. He deeply regrets involving friends and neighbors with Jade. They are now facing the same uphill prospects for recovering their investment. ‘I feel terrible,’ Sondheimer said.”

“Jade’s single largest customer is probably Ali Alshalkmi, a Tampa-based commercial investment broker who bought 10 homes from Jade for family and as investments. He figures he is at risk for more than $3 million. ‘I don’t think they’ve actually done anything,’ Alshalkmi said of Jade managers. ‘They’re buying time.’”

“Jade’s president, Andrew Coles, has lost weight since the Jade furor surfaced. He also has had a ‘lot of sleepless nights.’”

“Coles expected the real estate market to slow down, ‘but not so rapidly.’ Jade’s failure was a by-product of the ‘phenomenal growth’ of the past three years, Coles said. He said he built a business to handle high volume and found it ‘tough to readjust the scale’ in time to avert financial collapse.”

“When asked his greatest regret, Coles stared off into the distance for a full two minutes. ‘It’s a tough question,’ he said. ‘Not reacting quick enough to a change in the market. You always think next month it’ll get better.’”

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