The Housing Bubble

From Bloomberg. “Kara Homes Inc., the New Jersey builder known for so-called McMansions, filed for bankruptcy after $250,000 discounts failed to lure buyers. The closely held East Brunswick, New Jersey-based company sought Chapter 11 protection in U.S. Bankruptcy Court, saying it owes $296.84 million to lumber, concrete, electrical, plumbing and woodwork companies while holding $350.18 million in assets, primarily unsold houses and land.”

“One property for sale is a 6,319-square-foot, five-bedroom model with a three-car garage, listed for $1.5 million in Freehold, New Jersey.”

“U.S. housing demand is flagging after five record years, swelling the inventory of unsold homes. Almost half the people who sign contracts with builders are canceling before the house is finished, forcing companies to sacrifice profit margins by offering freebies to attract new buyers, according to James Hughes of Rutgers University.”

“‘There could be many similar filings in markets glutted with single family homes,’ said Gerard Cassidy, managing director of bank equity research for RBC Capital Markets. ‘Kara is already at the table. We expect more people to come to dinner, the question is, how many more?’”

“Kara began advertising in 2005 that it would pay the first year of mortgage bills for buyers, and said in January it would continue the offer this year. In August, Kara began advertising discounts of $20,000 to $246,000 for so-called ’spec,’ or speculative houses built without a buyer under contract.”

“More than half of U.S. homebuilders, 55 percent, are offering incentives such as free mortgage payments, fireplaces, hardwood floors or garages, up from 37 percent a year earlier, said Gopal Ahluwalia, director of research at the National Association of Home Builders. Four percent are giving away cars and another 4 percent are handing out vacations, Ahluwalia said.”

“Sales of new homes in August fell 17.4 percent from the same month last year. There were 568,000 new homes for sale in August, the second-highest on record after July’s 570,000.”

The Wall Street Journal. “As the housing sector cools, the mortgage market faces an awkward question: Who takes the hit when loans go bad?”

“A generation ago, nobody asked. Banks made loans and suffered the consequences when borrowers didn’t pay. Today, a complex Wall Street machine buys and sells mortgages and packages the loans into securities that are diced and sliced and sold again to investors world-wide.”

“Players on Wall Street and beyond are starting to grapple over bad loans, especially in the market for borrowers with scuffed credit, so-called subprime customers. ‘In a rising market, even a bad loan is a good loan,’ said Nate Redleaf, a research analyst with a Beverly Hills, Calif., investment bank. ‘You could be sloppy and it didn’t matter. Now people really have to do their jobs. They have to be more vigilant.’”

“Mortgage repurchases aren’t always reported, so it is unclear how many loans are being sent back to their lenders, or their total value. A study by Credit Suisse Group found evidence of a jump in the subprime market. It examined 208 bond deals involving pools of subprime mortgages totaling $234 billion. The study found nearly half of these mortgage pools had some loans repurchased in the first quarter of 2006, up from less than a third that faced repurchases in 2005.”

“The buybacks are the first real test of the modern mortgage market, said Christopher Mayer, at Columbia Business School. ‘This will continue to be an issue even in the case of a soft landing’ in real estate, he said.”

“Of the $3.1 trillion in mortgages originated last year, 68 percent were packaged into securities, Bear Stearns said.”

“‘You had a well-oiled machine,’ said Thomas Lawler, a former Fannie Mae economist. As loan volume declined in 2005, lenders got ‘a little more creative’ and loan quality declined. Credit Suisse estimates early defaults more than doubled on subprime loans that didn’t require income documentation between the first quarter of 2004 and the first quarter of 2006.”

“Investment banks and others are showing an unwillingness to wait for loans to default before taking action. Some are turning to companies such as Clayton Holdings Inc., which uses computer-driven risk models to find troubling patterns, such as brokers that sold lots of bad loans.”

“Mortgage investors and lenders are ’sharpening their pencils and using a thicker magnifying glass,’ said Keith Johnson, Clayton’s president.”

“In a lawsuit, Bear Stearns’s EMC Mortgage Corp. unit is suing MortgageIT Holdings Inc., New York, in an attempt to force it to buy back at least 587 loans totaling $70 million. MortgageIT denies the allegations in court papers.”

“EMC was among 11 lenders that unsuccessfully sought more than $20 million in loan repurchases from a Belleville, N.J., lender, D&M Financial Corp., which is in bankruptcy-court proceedings. A lawsuit filed by EMC in federal court in Brooklyn accused D&M of a wide-ranging scheme involving ‘vastly inflated’ appraisals and altered or forged down-payment checks.”

“Saul Berkman, an attorney for D&M, said its executives denied the fraud allegations. He added the company has little or no assets left to fund repurchases.”

The Review Journal reports from Las Vegas. “Loan officer Bob Charles has worked eight months trying to find construction financing for a luxury condo project in Las Vegas that may be ‘caught in the same mud’ as Club Renaissance, a 60-story downtown tower that was announced in January 2005 but has yet to break ground.”

“‘Of the 80-plus lenders that would have thrown their money at this project last year with the frivolousness that Paris Hilton shows when she throws money at her next party, only two lenders are left that will even take a call on a condo project in Vegas,’ Charles said. ‘Well, Paris Hilton came out last month to say that she’s not partying anymore and lenders have mostly done the same.’”

“Banks have tightened their purse strings on construction financing for high-rise condo projects in Las Vegas, especially after projects such as Krystal Sands, Aqua Blue and Icon were canceled, leaving buyers high and dry and Las Vegas with a black eye on Wall Street.”

“Demand for housing has cooled, so builders are looking to unload their inventory and are not as aggressive as they had been in building new units, said Paul Engler, for Chase commercial real estate banking in Phoenix. ‘It’s been interesting times all over the country,’ he said. ‘We’ve been picky about condo projects we’ve invested with. What we’re all watching is affordability of housing, which bleeds all the way down to land prices.’”

“‘What is somewhat unique to Vegas is the number of deals brought forward by completely inexperienced developers and often on unremarkable sites, and we’re talking about $100 million-plus proposed developments,’ said Jeff Teetsel (with) Fremont Investment and Loan.”

“Las Vegas has next to no primary occupant demand to supplement the demand from second-, third- or fourth-home buyers for the very high-end units,’ Teetsel said. ‘In a market with not much more than 1,000 high-rise units ever completed before the last couple years, it was absurd to see 40,000 to 50,000 proposed units announced in the space of two to three years. It’s not surprising to see a number never get out of the ground.’”

“Until recently, all a developer needed to obtain high-rise entitlements in Las Vegas was a mock-up of a possible project, so hundreds of ‘wannabe developers jumped into the pool,’ Charles said. Developers who failed to lock in their construction costs are just buying time now and it doesn’t look as if they’re going to make it, Charles said.”

“‘So, are things bad? Well, I just saw an ad to try to entice people to buy from a certain Vegas condo under construction that said, ‘Free one-year mortgage, free one-year HOAs, no down payments,’ so I’d say it looks bad,’ he said.”

The Nevada Appeal. “Nothing can illustrate the area housing market better than the tale of a newlywed couple with dreams of equity. About a year before Sara and Cory married, they had a dream of the perfect career in house flipping.”

“After a five-year national housing boom the market had started to slow over the year into a hot pool of uncertainty, she’s cautious about house flipping here. ‘The market here, it is too late. It’s too expensive,’ she says.”

“Boom areas of Nevada could have the most dismal price slump in the nation. Carson City is on the list of metropolitan areas projected to have the largest decline in median housing prices. One sign of a scare: seller incentives. Local real estate agent Bob Fredlund said sellers are getting competitive to sweeten the deal. They are giving higher commissions to the buyer’s agent, cash awards of $10,000, trips to Hawaii.”

“‘The people really in trouble are the speculators,’ says Gil Yanuck, assistant state director for the AARP’s Tax-Aide program. ‘They went and refinanced their house to speculate and buy another piece of property that they thought they were going to hold on for two to three months and flip it. Now they have two mortgage payments to make.’”

From the LA Times. “Federal regulators are casting a disapproving eye on mortgages that give borrowers low introductory rates but let them pile up more debt over the long run, a loan feature favored by hundreds of thousands of Californians.”

“Starting this month, federally chartered lenders are being discouraged from qualifying buyers based on the low starter rates, when only the interest or a portion of the interest is due. Instead, they are being urged to evaluate the borrower’s ability to pay for the loan at the full rate.”

“Regulators are trying ‘to add some discipline to the lending process,’ said Richard Wohl, president of Pasadena-based Indymac Bank. ‘Whenever you do that, you’re going to have some [borrowers] that won’t have the product available to them.’”

“The regulators say they will ‘carefully scrutinize’ lenders to see whether they are following the new rules. Those who fail to do so, the guidance summary warns, ‘will be asked to take remedial action.’”

“The guidance applies only to federally chartered lenders, including Indymac, Countrywide Financial Corp., Washington Mutual Inc. and other behemoths. State-chartered banks, which are smaller but more numerous than federal banks, are not affected.”

“Indymac’s option ARM business is shrinking anyway, Wohl said, as interest rates fall and customers move to the certainty of fixed-rate loans. Even so, interest-only and option ARM loans accounted for more than half of first-time mortgages and refinancings in the state in July, according to First American LoanPerformance.”

“Kathy Dick, deputy U.S. comptroller for credit and market risk, said interest-only loans and option ARMs originally were for a minority of savvy, well-off people whose income was variable, the self-employed and those who worked on commission or were paid intermittently.”

“‘Now they’re used to get someone into a home without a real analysis of their ability to pay,’ Dick said. ‘Lenders are qualifying people for homes they can’t afford. We felt that wasn’t consistent with prudent lending principles.’”

“‘Just as the loosening of credit standards made the housing bubble go higher and last longer, the tightening of standards is going to make it deflate further and faster,’ said Michael Calhoun, president of the Center for Responsible Lending. As borrowers find they qualify only for smaller loans, Calhoun predicted, sellers will have to cut their prices.”

“‘There’s some pain coming,’ he said, noting that California ‘is at ground zero on this.’”

“‘There will be fewer leveraged loans of this kind, and it will depress some home prices,’ said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.”

From CNN Money. “Mortgage rates have been trending down, but that won’t do much to benefit those who signed up for low-teaser-rate adjustable-rate mortgages in the past few years. The jump in payments could be even bigger for some people. They could have a loan balance that’s larger today than it was when they got their mortgage, a situation called negative amortization. And it’s common with what are called ‘payment option’ ARMs.”

“There may be a trigger ceiling, meaning when the balance reaches a certain level, say 120 percent of the original balance, the introductory terms will end and the rate will reset upward, according to (researcher) Christopher Cagan. In the past two years, homeowners took out 1.3 million ARMs with teaser rates below 2 percent, according to Cagan’s research. Of those, 21.5 percent have negative equity.”

“Certified financial planner Mari Adam knows of a couple who has experienced this mortgage nightmare first hand. With two kids in college, the two-earner couple thought they could lighten their load by refinancing their fixed rate mortgage into a low-rate ARM.”

“They got a 1.2 percent ARM in February with a monthly minimum payment of $1,372. By April, the loan rate had reset, jumping to 8.375 percent and their balance had ballooned by $3,000 in two months’ time.”

“Their new monthly payment: $2,216 if they want to pay interest-only or $2,300 if they want to start paying down principal as well. ‘I’d call this an obscene loan,’ Adam said.”

“The couple who have lived in their home for several years, still have some equity left, less than before but at least they have some. Others aren’t so lucky. A lot end up with negative equity. That makes it very tough to refinance to a better mortgage, putting them at risk of foreclosure. And selling may not be an option to cure the financial headache given the recent downturn in home prices.”

“Next time you want to buy a home with a mortgage, be sure to read all the documentation (footnotes included), ask lots of questions and, Adam said, remember, ‘when someone offers you a below-market or above-market rate, something is wrong.’”

The Staten Island Advance reports from New York. “Need more proof it’s a buyer’s market? How about getting a new car, money to pay closing costs or free home furnishings to go with your new house. They are not prizes in a game show, but the perks some new home builders are offering in the let’s-make-a-deal atmosphere that’s come with a softening real estate market and rising inventory.”

“A free $15,000 Saturn Ion might be the most unique inducement as of late. Brokers marketing a 72-unit townhouse development in New Dorp thought giving a free new Saturn with each new house might attract ambivalent buyers. Some buyers didn’t even take the car, opting instead for $15,000 in closing costs or money toward home furnishings, said broker james Prendamano.”

“Sweetening the pot is what a lot of builders who are trying to sell multiple units are doing in a changed market. Last summer, home builders also lost what had been a standard marketing tool over the years, the ability to offer buyers an eight-year tax abatement on new homes.”

“‘Builders are trying to make up for the [loss of the] tax abatement program, which didn’t exist for resale homes,’ said (realtor) Neil Litvin in Dongan Hills. ‘If one builder has some homes that have a tax abatement and another doesn’t, the second builder has to do something to make his homes more appealing to the buyer.’”

“Litvin said builders such as Dora Homes and the Biadon Group are offering to pay down the interest rate on mortgages, or paying $15,000 in closing costs and throwing in upgrades such as more expensive granite countertops when it comes to marketing the custom detached colonials.”

“The Advance reported last month that home sales dropped 16 percent and housing inventory rose 25 percent, according to figures from the Staten Island Board of Realtors.”

The Boston Globe. “Morning, noon, and night, on workdays, holidays, and weekends, the whir and grind of buzz saws echo through South Boston. Some of the noise comes out of the old three-deckers that are being converted into fancy condominiums.”

“Some comes from housing complexes sprouting up on previously vacant lots. The rest is from the new towers soaring over the neighborhood, altering the cityscape.”

“‘We’ve got 5,531 condominiums coming on line in the next couple of years,’ said state Representative Brian Wallace, who has spent months researching development plans. ‘The amount of development going on in the town is astronomical, and people are saying, `Enough is enough.’”

“Tomorrow, Wallace will meet with residents to discuss the building boom, and ways to stop it. He said many of his constituents want a moratorium.”

“Scott Malone , a business executive who grew up in South Boston, said he is amazed at the development and its impact. ‘It’s almost comical when you hear the prices they’re asking for these condominiums,’ he said. ‘If you grew up here, you know what they used to be.’”

“He is concerned that pending development will flood the neighborhood’s housing market to an even greater degree. ‘They can’t even sell what’s out there now,’ he said.”

The Orlando Sentinel reports from Florida. “The cooling of the region’s red-hot housing market has turned the supply-and-demand equation on its head. Buyers, once frantic to find homes in the face of skyrocketing prices, now can shop at a leisurely pace, picking through thousands of homes while waiting for prices to fall.”

“Evidence of the shift can be seen in the growing use of the Multiple Listing Service, the Realtors’ giant database commonly referred to as the MLS. During the second half of last year, only 59.4 percent of homes sold in the area were listed on the MLS. During the first six months of this year, that number increased to 84.9 percent.”

“‘We are seeing more and more of that,’ said Alan Bloom, a Realtor in Longwood. ‘Those sellers are starting to get discouraged about how long it’s taking.’”

“Karen Cowie knows all about the changing market. Now that she and her husband want to move back to The Villages, they have run into a problem. Their three-bedroom Port Orange home, listed at just under $300,000, has been on the market for two months. They have had a couple of open houses and a few inquiries but nothing resembling an offer.”

“‘It almost makes you want to take the sign down and say forget it,’ Cowie said. ‘I’m not going to give my house away and sacrifice everything I’ve worked for.’”

“Homeowners, spoiled by several years of record gains, are loath to surrender their winnings. But there is a simple reality working against every seller, whether they are represented by a Realtor or not: There are many more homes than there are buyers.”

“In August, there were enough homes on the market, 21,000, to last more than 10 months at the current sales pace. A year ago, the inventory of 5,500 available homes was enough to last about seven weeks. That means there’s nothing to push prices higher or perhaps even maintain their current levels. Many sellers, however, refuse to accept that.”

“‘They are still holding out for 2005 prices in the 2006 market,’ said Beverly Pindling, president of the Orlando Regional Realtor Association. ‘We have to do a lot of educating,’ she said. ‘Unless you price it below the market, it is not going to sell.’”

“Alicia Wolfe has been trying to sell her Lake County home since April, when she first put a ‘For sale by owner’ sign in her front yard. With nearly a dozen neighborhood homes on the market, Wolfe has steadily lowered her asking price to compete: $229,000; $216,000; $209,000; and now $205,000.”

“‘Ours is the cheapest and the newest in the neighborhood. So I figured it would have sold by now,’ she said. ‘Nobody’s even made me an offer.’”

“There are many like Mitesh Gandhi, a self-employed consultant in New Jersey, who saw opportunity to make money in Florida’s red-hot housing market. He purchased a tract of land and had a house built. It was completed in April.”

“But with the market wobbling, he wants out. Gandhi is trying to sell a new four-bedroom home in Palm Bay, initially purchased as a rental property. He tried the Realtor route for six months before growing frustrated and deciding to go it alone. It’s now listed at $269,000, $40,000 below its starting point. And he’s offering a $5,000 bonus at closing.”

“If there is no sale by year’s end, he faces a decision: pay a little extra for a no-frills listing on the Realtors’ Multiple Listing Service or seek the full-service help of another Realtor. ‘I’m crossing my fingers that we won’t have to think about those options,’ Gandhi said.”

The Sun Sentinel. “South Floridians are stuck in a cash crunch that arrived just as the value of their homes began to drop. That drop in prices is happening at a faster rate than in the rest of the nation. While good news for buyers, that makes people feel less wealthy and can affect spending.”

“‘What I’m hearing is major exasperation,’ says real estate agent V. Elaine Stevens of Lauderhill. ‘People are being impacted. One of the really big ones is the FPL bill.’”

“Stevens says houses and condos may continue to be hard to sell even as prices drop because of other costs. ‘The whole thing is people can’t afford the insurance and they can’t afford the taxes,’ she said.’”

The Palm Beach Post. “When Jacquie Cofer launched her real estate career in June, she entertained visions of a six-figure income and plenty of time for her two children. The once-sizzling, now-fizzling housing market has jolted her back to reality. The Jupiter woman gave up a six-figure salary to chase real estate riches, but she hasn’t made a penny as an agent.”

“‘I thought real estate would be a perfect match for me,’ Cofer said last week. ‘But there’s just no buyers. Even if you can get a good deal on the house, the taxes just kill you.’”

“The number of home sales in Palm Beach County has fallen since 2001, according to the Florida Association of Realtors. Today, there are some 11,000 Realtors in a county that’s on pace to sell less than 10,000 existing single-family homes for the year. The Treasure Coast has seen a similar trend. ‘Some agents are starving,’ said Jerry Mabus, president of the Realtors Association of St. Lucie.”

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