The Housing Bubble

The Tribune reports from California. “San Luis Obispo County real estate agents should not expect a return of the sizzling housing market anytime soon. ‘Prices aren’t falling off a cliff, but they definitely are taking a breather, said Leslie Appleton-Young, chief economist for the California Association of Realtors.”

“‘I don’t see a slowdown lasting two or three months,’ she said. ‘It may be a couple of years.’”

The LA Times. “The anti-depressants said it all. In the mostly empty house, wires hung from ceilings, gaps yawned beneath kitchen counters where appliances had been removed and apparently sold and, most heartbreakingly, paintings done by the owner hung on the walls with price tags by their sides.”

“This was not a scene from ransacked New Orleans. This was what I saw Sunday in a hilly Los Angeles neighborhood in a house that was facing imminent foreclosure by the bank. The owner had purchased it with a five-year, low-interest loan for more than $100,000 over what the real estate agent was now trying to get.”

“So I guess it’s official: The real estate market is tanking. If you’re a renter, you now have permission to be as self-satisfied as the homeowners who once taunted you with their dizzying appreciation rates. As for us owners, we can just cover our ears and sing ‘Correction! Correction! I can’t hear you!’ until things start looking up again. Call it a correction or call it a crash. Either way, the party’s over.”

The Desert Sun. “Continuing a trend of the past several months, the number of homes sold was down 41.2 percent from a year ago. That’s the biggest drop seen so far this year in the monthly data. Ginny Becker, an executive with (a) real estate firm in La Quinta, noted that there were at least 117 price reductions posted Friday on the MLS, well up from past months.”

“The real estate market is one of the most important segments of the Coachella Valley economy. Thousands are employed as agents, brokers, bankers and escrow handlers. Experts note there will likely need to be more price reductions to move the current unsold inventory, which at more than 7,000 properties is at twice the level of a year ago.”

“‘Agents need to educate sellers, and sellers need to be realistic,’ Becker said. ‘It’s very much a buyer’s market right now.’”

The Merced Sun Star. “At the height of Merced’s real estate frenzy last year, Bay Area Realtors drove vanloads of clients through town on the hunt for investment properties. Now the out-of-town speculators are gone, leaving behind streets lined with For Sale signs and new subdivisions filled with freshly built houses standing empty.”

“Clearly the real estate party is over, and in Merced the hangover is bad. ‘I knew it was going to soften, but I didn’t know it was going to slide this quickly,’ said (realtor) Mike Salvadori.”

“The boom was fueled mostly by the out-of-town investors, creating what Realtor Kay Flanagan calls a ‘false market.’ Now, the market is shifting back to reality. It’s time for what people in the real estate industry optimistically refer to as a ‘correction.’ The question is, how long will it last and how bad will it be?”

“The downturn brings back memories of 1995 when Castle Air Force Base closed and 6,500 military personnel left town. Home prices fell dramatically, said Andy Krotik, a Realtor and Atwater city councilman. There’s one key difference between the current market correction and what happened after Castle closed, said Realtor Gail McCullough.”

“‘We didn’t have all the new homes (after Castle closed),’ said McCullough. ‘We’ve never had this many new homes. In order to sell now, one has to be quite motivated and realistic.’”

“In 2005, developers pulled a record number of permits to build houses in the city of Merced. The building spurt created jobs, a record 3,800 construction jobs in August 2005, that helped swell the number of people working in Merced to an all-time high.”

“When the dust cleared, Merced was left with more housing inventory than ever. Now developers looking to move new units are offering slashed prices. Salvadori said he’s seen $100,000 discounts on some new houses.”

“Ranchwood Homes, the county’s biggest developer, is offering $25,000 incentive packages and advertising $1,500 referral fees. Ranchwood is even listing some new houses as rentals.”

“With more than 1,000 houses on the market right now, sellers are working harder to make their houses an attractive buy, said McCullough. McCullough, who’s worked in the real estate business for 36 years, said she’s confident the pendulum will swing the other way.”

“‘I’ve seen a lot of different turn of events in real estate,’ said McCullough. ‘I still feel Merced and Merced County is the new frontier. There’s more opportunity here than anywhere else in California.’”

Several readers suggested the new lending guidelines as a topic. “Holy moly! If true, KABOOM! POP! Quote, ‘kept intact a proposal that says banks must qualify borrowers for popular payment-option and interest-only loans at a ‘fully-indexed’ rate — the highest rate that they could incur over the life of the loan.’”

Another said, “I have heard this new rule mentioned a few times, but I had no idea how strict the proposal would be! Unfortunately, there will probably be many loopholes to get around this rule.”

“For example, the borrower could state they plan to refinance the loan in a year; therefore, they only need qualify for the teaser rate.”

And another, “I understand this board’s general skepticism of the new OCC lending guidelines, but please, read the darn things first. The amazing thing about the guidelines is that they address almost every loophole you can think of. It’s good stuff.”

One looks at the lenders role. “If you ever had any notion that the banks/lenders are less adept at screwing with logic than the NAR: The ‘biggest US lenders,’ according to the article, are against the rules because they will make homes ‘LESS affordable’ for people!”

“The big lenders are on your side, little guy! I think everyone knows that, in the real world, the best way to make housing affordable is to put in place the strictest lending rules possible. And get rid of all the government ‘help’ with buying homes. The price of homes would crash overnight.”

Another has questions, “A) Does anyone think this will be effective? B) Does anyone think this is closing the barn door after the animals have all fled? C) Does anyone think this late bit of work will accelerate the downturn?”

One reader added, “‘The new guidance was issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration.’”

“D) Does anyone think this guidance just amounts to cheap CYA talk with no teeth?”

From MarketWatch. “More than a year after Alan Greenspan warned of the “potential for individual disaster” from a new breed of mortgages that were helping to fuel the housing boom, federal regulators finally are trying to do something about it.”

“On Friday, in a jointly crafted message, multiple government agencies warned banks in strong terms to make sure borrowers can pay back the full amount of what they borrow and that homeowners know that a low monthly payment today could be shockingly high later.”

“In the meantime, the runaway writing of these mortgages went on unchecked, and the fact that nobody in government stood in the way highlights the fact that a patchwork of government bureaucracies was ill-equipped to bring the practice under control, lawmakers and regulators say.”

“‘We saw the potential for problems occurring,’ said John Dugan, the comptroller of the currency, a Treasury Department unit that regulates nationally chartered banks. ‘There have been some very abusive problems’ by institutions not covered by the guidelines. ‘We just don’t have jurisdiction,’ Dugan added, expressing hope that state regulators would follow with strong guidelines soon.”

“‘The housing credit bubble led to the growth of exotic loans, which, in a vicious spiral, drove prices even higher, said economist Dean Baker. In a bubble, ‘the financing gets progressively worse. At the end, you get nuttiness.’”

“‘The guidelines will likely have a chilling effect on option ARM lending at regulated institutions,’ said Frederick Cannon, a banking analyst. However, unregulated lenders such as investment banks and real estate investment trusts, could have a competitive advantage because they aren’t covered by the new federal guidelines, he said.”

“Regulators have to be wary of overregulation. ‘You heap disclosure upon disclosure, and at some point they have negative consequences,’ said Ned Gramlich, a former Fed governor. Baker says the Fed wasn’t shy about extending its authority into a new realm when needed to protect investors, such as the stock market crash of 1987 or the hedge-fund collapse in 1998.”

“‘At a time of a speculative boom in real estate, market participants find themselves in a moral dilemma: lenders cannot easily maintain their high lending standards and stay competitive when other lenders are weakening standards,’ said Robert Shiller, an economics professor at Yale. ‘At this time, regulators of lending institutions have some of their most important work to do, and, at the same time, it is especially difficult for them to do it.’”

From Kenneth Harney. “Starting Monday, it’s going to get much riskier to fib about your income when you apply for a home mortgage. That’s because the Internal Revenue Service is overhauling a key income verification tool used by lenders, making it faster and easier to pull up electronically the confidential income tax information of borrowers.”

“Some popular mortgage products themselves open the door to bogus assertions about income. Many lenders in recent years have offered ’stated income’” and other limited documentation mortgages aimed especially at self-employed applicants.”

“But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing, even on loans to applicants who are not self-employed or using stated-income programs.”

From Newsday in New York. “As housing boomed, real estate agents, furniture sellers, mortgage bankers, construction workers and a host of others reaped the rewards. Now cracks are emerging in those key sectors of the region’s economy. Data and anecdotes alike are signaling the potential for job losses, closed offices and fewer new real estate licenses.”

“‘Real estate is about a third of the economy,’ when accounting for related industries, said Martin Cantor, chief economist for Sustainable Long Island. ‘It’s going to ripple all the way through.’”

“Huntington real estate broker Katy Anastasio has already cut one administrative staffer. Of the 14 licensed agents on her staff now, she plans to cut six before year’s end. ‘I decided to clean up the house,’ said Anastasio, who had 17 agents at the market’s height. ‘I don’t need people who are not producing.’”

“Brokers like Richard Dallow in Levittown, whose business is down 10 percent from a year ago, are readying themselves to trim agents who aren’t producing. Dallow estimates that 20 percent of his 120 licenses ’should not be licensed with us any longer,’ because they are either inactive or unproductive.”

“‘Some of the things that we just let go because the market was going off the wall, we pay more attention to now,’ said Dorothy Herman, who heads Prudential Douglas Elliman, which has offices throughout the region. ‘You’re judged by your weakest link.’”

“It’s not just real estate companies that are impacted. Construction and mortgage companies are already making job cuts, too, experts said. And retailers may not be far behind. ‘There’s been a lot of contraction and a lot of layoffs,’ said Hauppauge mortgage banker Jonathan Pinard, who heads the Empire State Mortgage Bankers Association. ‘Most people are finding it very difficult.’”

“Garden City home builder Alec Ornstein is trying to ride out the slowdown by offering incentives to lure buyers. His subcontractors, however, are already making cuts. ‘The effects of the softening of the market are going to be tremendous, and potentially recessionary in that field,’ Ornstein said.”

The Boston Herald. “It’s hard times for Hub business tycoons and sports stars trying to unload multimillion-dollar mansions and condos. Dodgers owner Frank McCourt has dropped the price of his Brookline mansion - again - this time to $15.7 million. He put it on the market for a whopping $22 million nearly three years ago, and previously dropped it to about $18 million.”

“Some brokers warn of a newly emerging tycoon shortage as some of the Boston area’s top companies move out or are acquired by out-of-state competitors. ‘It has narrowed the pool of tycoons, which is decreasing the demand for these palatial mansions in such areas as Brookline,’ said top Boston residential real estate executive John Ford.”

“Convicted Tyco looter Dennis Kozlowski appears to have missed the memo about the market downturn. Kozlowski tried unsuccessfuly to spark a bidding war for his Nantucket mansion in hopes of scoring a $23 million deal.”

“Instead, Kozlowski, now serving time in federal prison, recently missed a court deadline to pay $167 million in fines and restitution. Lawyers blamed his inability to sell several homes.”

From New Jersey. “Buyers have been scarce lately as the once-booming shore real estate market has cooled, so sellers are resorting to some interesting tactics. Offering a Ford Mustang with a new condo or a furniture allowance are a few tactics being employed, but another seemingly new one is actually a very old one: It’s the good old-fashioned shore home auction.”

“One is set for this Sunday, where 13 Wildwood Crest properties will be auctioned. Doug Clemens, the chairman and CEO of Traiman Auction, said auction interest rises when properties aren’t moving.”

“‘They just have an overbuilt situation that has to be corrected in the next couple years. Sellers are looking for alternatives. A tremendous amount of real estate has come on the market and a number of auctions are coming,’ Clemens said.”

“Builders are complaining about a lack of buyers right now. It could be from too much new construction, but some also argue shore real estate is overpriced.”

“(Agent) Douglas Jewell said the market had slowed considerably. The slow-down, Jewell noted, is cutting into profit margins, but he doesn’t see buyers getting huge savings, because the cost of construction materials such as copper, plywood and petroleum-based building materials are up.”

“‘People think a $550,000 condo will be $350,000 if they wait long enough. Not on your life. Construction costs are too high,’ Jewell said. Those with construction loans continue to build to satisfy their commitments, but those building with cash are ’sitting and waiting,’ Jewell said.”

“Cape May County Tax Administrator George Brown III said property transfers are down 10 to 15 percent in the county over the past year. Brown is not yet sure whether a reduction in sales volume will result in a decline in property values. Foreclosures have gone from an average of about one per month to about eight, Brown said.”

The Star Ledger in New Jersey. “When (realtor) Ken Baris logged onto his computer yesterday morning, he found him self on the receiving end of an e- mail blast from Beazer Homes, a developer building 96 new condominium units in Passaic County. The message to brokers and agents was crystal clear: Sell a condo and you can pocket a meaty 4 percent commission, instead of the standard 3.”

“It’s a theme that is playing out across the country. Home builders, who have more wiggle room than private homeowners when it comes to reducing their prices, are offering prospective buyers a lot of sweeteners to stimulate the lethargic housing market.”

“Richard Yamarone, the chief economist at Argus Research, is one of a handful of contrarians on Wall Street who be lieve the main culprit behind the housing market’s malaise is the media.”

“‘No doubt about it, there is some softening in the housing market. You can’t break records forever,’ he said. ‘But I really believe this has been fed by the left-wing press looking for a good story right before the elections.’”

Some housing reports from the Washington Post. “On Onion Patch Drive in Burke, neighbors are keeping an eye on each other. It’s not just because they’re neighborly. It’s also because, at a time when more and more for-sale signs are appearing on lawns around the region, what one family does to sell its house can have a big impact on the finances of the rest.”

“Seema Owais and her husband put their detached Colonial on the market several months ago for $619,000, about $100,000 less than others in the neighborhood got when they sold their houses last year. And now she worries that some of her neighbors are depressing real estate values even more.”

“‘They get scared and start reducing and reducing,’ she said. ‘For us, it’s disheartening, but you can’t do anything about it.’”

“Stephen Myers is planning his retirement and wants to sell. He and his wife have owned their house for almost two decades. He dropped the asking price for his house from $717,900 to $649,000 after the house across the street sold in June for $602,000. That owner was transferred, needed to leave town and accepted a low-ball offer.”

“‘I didn’t like it,’ Myers said, but he understood. ‘If I were in his shoes, I’d have done it, too. Did the people up the street like it? No. But we understood it.’”

“A couple of years ago, soaring real estate values kept the chatter at cocktail parties champagne-bubble bright. Now, when neighbors gather together, the talk is still real estate, but the tone can be somber. Instead of how high did it fly, they ask how low did it go. That’s because the competition to sell a house now can be cutthroat: In August, there were 40,870 houses on the market in the Washington area, up from 18,368 in August 2005.”

“And many have noticed that the house with the lowest price often moves first.”

“‘When there are for-sale signs all around you, you sort of watch and wonder, ‘What price is it?,’ ‘Did they finish their basement?’ and then, ‘Oh, they dropped their price again,’ Jenny Kelly said. On a recent warm afternoon, Kelly told the others she had heard that the house down the street sold in the mid-$600,000s, a far cry from the mid-$700,000s of the past.”

“‘That’s not good,’ Nicola Bullis said, shaking her head. ‘I heard they had an odd decor,’ Alyssa Hoard-Stewart said, adding that the owner of another nearby house for sale is adding a deck to attract potential buyers.”

“A similar conversation takes place frequently amid the big single-family houses on Tate Court in Oakton. Raghu Reddy combs Internet listings and online property transactions to keep abreast of prices. He thinks prices have fallen 10 to 15 percent in the past year, a decline of at least $100,000 on houses that cost $1 million.”

“Mack Dennis has plenty of negotiating room because he bought the unit during the last slump. Now the deciding factor can be the level of desperation, or the relative financial ease, of the seller. People who need to sell fast are the quickest to drop their prices. And people who bought long before the soaring prices of the past five years have a financial advantage.”

“Just a few doors away, John Palm has put his townhouse up for sale. He and his wife have moved to Leesburg, so he is eager to get out from under one of the mortgages. He bought when prices were low, in 1992, so he has been able to lower the price’.”

“‘The bottom line is, they’re in a different situation than us,’ Mark Bolt said. ‘If we keep dropping our prices, we can’t afford the place we want in Leesburg.’”

“How long will it take to sell your house these days? Longer than you might think, say real estate agents and some frustrated sellers. ‘I don’t know how long it should take now, but we’re still here,’ Charlene Hout said. She put her Georgetown townhouse on the market in March for $1.95 million as a ‘for sale by owner’ listing. In July, she hired veteran Georgetown agent Nancy Taylor Bubes. They recently dropped the asking price to $1.79 million.”

“With two to three times the inventory to choose from around the Washington area this year compared with a year ago, buyers are just not willing to jump anymore, agents said. They have to be convinced that they’re not paying above market, and they also are ‘demanding more’ in the terms of the contract, said Holly Worthington, president of the Greater Capital Area Association of Realtors.”

“Terry Belt, a Vienna agent, said, ‘People look at what their neighbor’s house did last year, and want that price or more. But in this market you can’t compare to last year. You can’t even do comparable sales from three to six months ago.’”

“A ‘good strategy,’ he said, is to look at similar homes that are on the market now and ‘to price your house at or about 3 percent below them.’”

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