The Housing Bubble

The LA Daily News from California. “In a declining real estate market, condo sales were on the downswing last month, with fewer units changing hands than in any September since 1998. Young potential first-time buyers are waiting, perhaps expecting prices to plummet, said Realtor Mike Lebecki.”

“‘They’re very cautious, and I don’t think they’re thinking their caution through necessarily,’ he said. ‘If all their friends are being cautious and not thinking it through, then they’re all doing the same thing, and they’re going to continue to … buy BMWs and pay rent.’”

“In all, only 109 condos were sold last month in the Santa Clarita Valley, compared with 173 in September 2005, according to the Southland Regional Association of Realtors. There were 178 new listings and 679 active listings. The active listings outnumbered those of September 2005 by 423, a change of 165.2 percent.”

“‘This is not the market for anybody to buy something and then expect to sell it next year for more,’ Lebecki said. ‘It’s a traditional market: You buy something and you hold it for five years and sell it for more.’”

The Press Democrat. “The rush to convert apartments into condominiums has slowed to a crawl in Santa Rosa, where a downturn in home sales and a tightening rental market have prompted landlords to put the brakes on conversion projects.”

“In Santa Rosa, apartment owners submitted plans to convert more than 1,000 units in about 15 complexes. Home sales are down 25 percent and condominium sales are down 35 percent compared with a year ago. Prices for resale houses have fallen 6.7 percent and condominium prices are down 3.6 percent, compared with a year ago, according to The Press Democrat’s monthly real estate report.”

“A 74-unit complex in southwest Santa Rosa won approval from city officials to convert to condominiums a year ago. But the units won’t go on the market until home prices rebound, said Jim Wilson, who is overseeing the conversion project. If put on the market today, the 1,100-square-foot units might sell for $325,000, down $50,000 or so from a year ago when the city approved the proposal, Wilson said.”

“‘The story has changed quite a bit. There’s a glut on the market,’ Wilson said of the home sales outlook. ‘But it’s going to be back, let’s face it. It’s just a matter of time.’”

“In Santa Rosa, more than a half-dozen downtown projects totaling about 600 dwellings are planned or under construction. City officials are so committed to the concept that they eased Santa Rosa’s 10-story height limit on buildings.”

“A $50,000 study commissioned by the city and issued last year found the market could support about 50 to 100 units a year of downtown housing.”

“‘It can probably be quickly overbuilt,’ said developer Hugh Futrell. ‘No one knows how deep the market is. Developers and the city will find out very quickly.’”

“But developers and real estate agents said sales are slower than they would like for the new downtown units coming on the market. Stan Paule, marketing sales director for The Burbank, acknowledged the sluggish real estate market is having an effect on potential buyers.”

“‘I do see some hesitancy,’ he said. ‘Everyone wants value for their money. As resale homes are more available on the market and prices drop, there are other affordable alternatives.’”

“Dan Rumrill, a co-developer of two small downtown ‘live-work’ projects that came on the market in May, said ‘it was just in time for the market to go bad on us.’”

“Billed as ‘San Francisco loft-style living,’ the 1,500-square-foot units are selling for $595,000, with about $150 more tacked on per month for homeowner’s fees. So far, four units have sold, including the one townhouse Rumrill is buying for himself. Three others are in escrow.”

“As an inducement for buyers, the developer is offering to pay the first year’s house payments, which amounts to about $20,000 off the sales price. While there has been plenty of foot traffic, many potential buyers are waiting for prices to go down even more.”

“‘People think it’s going to go lower. They’re maybe waiting for a better deal,’ Rumrill said.”

MarketWatch reports on a Federal presidents speech. “The housing slowdown has turned some areas of Phoenix and Las Vegas into ‘ghost towns,’ where many unsold homes stand empty, Janet Yellen, president of the San Francisco Federal Reserve Bank, said Monday.”

“Yellen said that she heard the ominous description from a ‘major home builder,’ who told her that the share of unsold homes in some subdivisions around the two Western cities has topped 80%.”

“‘Though the situation isn’t that bad everywhere, a significant buildup of home inventory implies that permits and [housing] starts may continue to fall, and the market may not recover for several years,’ she warned, according to the text of a speech.”

“‘We have yet to see the full effects of the series of 17 federal funds rate increases — some are probably still in the pipeline,’ the Fed president added.”

The Arizona Republic. “While the Valley is in the throes of a cold housing market, Casa Grande is flirting with a trio of megadevelopments that individually would have more residents than the city’s current population.”

“The three developments are all planned for northwest of Pinal County’s largest city, along the Casa Grande-Maricopa Highway. The three developments would encompass more than 30 square miles, about 74,000 houses, according to city officials and developers.”

“‘Developers are swarming us every day,’ said Casa Grande Mayor Chuck Walton.”

“In April, the Casa Grande council approved the 10.7 square mile Grande Valley annexation, which will include up to 16,000 single-family houses as well as denser multifamily housing, said Larry Yount, president of developer LKY Development Co. Groundbreaking is expected in about 18 months once the housing market stabilizes, Yount said.”

The Las Vegas Business Press. “Although the developer of the old Klondike Hotel & Casino site is busy acquiring use permits from Clark County for a hotel-condo-casino project, don’t expect to see any activity in the near future.”

“Citing changes in the Florida real estate market and rising construction costs in Las Vegas, Royal Palm CEO Daniel Kodsi said that the project will move forward but at a slower, cautious pace. ‘This is a big project for us,’ Kodsi said. ‘We are still cleaning up deals we have down here in Florida. We’re taking our time.’”

“Centra Properties, a local developer responsible for $3 billion worth of projects, is liquidating many of its assets, a victim of shifting market conditions and tougher lending criteria. The six-year-old firm recently put Centra Point, the crown jewel of its real estate holdings, up for sale.”

“Last May, Centra also sold 25 acres. The site was the location of another Centra/Related project, Las Ramblas, a $3 billion condo-hotel-casino complex that was canceled earlier this year. The company further streamlined assets by selling its construction division in May.”

“‘We are opportunists,’ explained Jim Stuart, Centra’s founding partner.”

“‘Realistically, you cannot buy property at today’s retail prices and still build things, unless your have a competitive advantage,’ said Jeremy Aguero, principal of a Las Vegas-based business-advisory firm.”

“‘Developers must now have cash on hand in order to make projects happen. Banks and Wall Street are tightening lending requirements. As a result, we’re dealing with a new reality that’s going to be around for a while,’ he said.”

Some housing reports from Wall Street and Washington. Paul Muolo, “Some industry executives are telling us there’s a growing wave of refinancings sweeping certain segments of the business. Which segment? Servicers of payment-option ARMs, watch out. Apparently, all the negative publicity surrounding POAs is starting to hit home with consumers and they’re opting to get out of their ARMs. A recent report by Sandler O’Neill notes, ‘We recently heard from one mortgage REIT that ARM prepayments are surging.’”

“Also, in Monday’s NMN, a story about POA volumes dropping dramatically at Countrywide.”

From Bloomberg. “Countrywide Financial Corp., the largest U.S. mortgage lender, is getting buffeted by bondholders as it prepares to sell as much as $4.5 billion of new debt in a slumping housing market. Investors are concerned that Countrywide, based in Calabasas, California, is expanding into the riskiest parts of the mortgage business just as the housing market slows.”

“‘Bondholders have to ask themselves if it’s worth taking the risk’ of more bad news about the housing market, said Scott MacDonald, director of research at (a) hedge fund.”

“Last month, 4.5 percent of all Countrywide loans had delinquent payments, up from 4.15 percent in August. The increase was caused in part by loans to people with bad credit, and missed payments are likely to continue rising, JPMorgan analysts said.”

“Countrywide’s banking unit had $34.2 billion of pay-option loans at the end of June. ‘They’ve enabled people to borrow who probably shouldn’t have mortgages,’ said analyst David Hendler.”

From MarketWatch. “With loan loss provisions at the nation’s banks at 21-year lows and a cooling real estate market putting some customers in default, certain regional banks may have to boost the amount they put aside to cover bad loans in the third quarter.”

“But loan loss allowances, the SEC has argued, can be used by banks to ‘manage’ earnings as bank managers see fit and, since the Sarbanes-Oxley reforms, the commission has actually encouraged banks not to boost their reserves until a loss becomes inherent in a loan portfolio.”

“While pressure from the SEC may be postponing the time of rising reserves, when charge- offs do start rising the impact might be felt faster and more acutely. ‘It appears that the SEC believes that actual loan losses should flow through to earnings directly as they occur,’ said Punk Ziegel’s Dick Bove.”

“Banks can sell as asset-backed or mortgage-backed securities and have thus ditched a large part of their portfolio, keeping on average only about 20% of the loans they originate. In the case of supbrime mortgages, where most of the risk is expected to lie, the percentage of loans sold to the market is even larger.”

“Moreover, banks can, for a minor charge, move doubtful loans out of their portfolio and put them indefinitely in a ‘loan-for-sale’ category. ‘In there, when you sell it to an investor [at a lower price than the loan was originally worth], you won’t take a loan loss but a trading loss, which you can easily offset in other ways,’ said David Hendler, analyst at CreditSights.”

“The result is that ‘it’s very hard to predict credit quality’ because banks ‘give you a managed loan-loss picture,’ Hendler added. ‘You don’t see the true picture.’”

“Meanwhile, investors are already questioning the validity of banks booking as earnings the so-called ‘negative amortization’ of many mortgages, as banks have little evidence that borrowers will ever be able to pay back the full amount.”

“Yet, according to Bove, the Office of the Comptroller of the Currency is also looking into whether booking negative amortization as earnings is valid. An adverse finding could eventually force banks to boost reserves and take charges.”

The Orange County Register. “Is it time to refinance? ‘It’s an incredibly attractive time,’ said Al Hensling, head of mortgage brokerage United American Mortgage in Irvine. Hensling said lenders competing aggressively for borrowers amid a cooling housing market are partly responsible for the drop in mortgage rates.”

“‘They need to originate loans,’ Hensling said. ‘They have built these operations.’”

“Companies like Countrywide, Wells Fargo and Washington Mutual are calling borrowers whose loans are automatically switching from a fixed rate to an adjustable rate, Pimco’s Scott Simon said.”

“Lenders expanded staff and facilities during the boom years and need to keep producing, he said. ‘In the old days, nobody would call you,’ Simon said. He added, ‘There is money to be made every time a transaction occurs.’”

“Payment-option loans, which were rarely used before 2003, have become popular amid high home prices. They accounted for 23.6 percent of all home loans for purchases in the county in the first seven months of this year and 37.9 percent of refinancings, according to First American LoanPerformance.”

“Yet Hensling and other brokers say homeowners are growing concerned about the loans’ risks. Among their pitfalls, the loans generally offer a low starter rate but have a higher adjustable rate behind the scenes, Hensling said. He said owners with option ARMs want to ’step off the roller coaster.’”

The Chicago Tribune reports from Illinois. “Bankruptcies have started to move back upward after an unusual roller-coaster ride over the past year. Though the numbers of new filings were low during the first three months of this year, each month was higher than the one before. Chicago bankruptcy attorney Melvin Kaplan says filings are starting to pick up again locally. ‘It seems more people are in trouble than before,’ he notes.”

“There is a significant increase in late mortgage payments among sub-prime borrowers. Nationwide, just over 10 percent of sub-prime borrowers are at least 30 days late on their mortgage payments.”

“What causes a person to fall into unmanageable debt? Sometimes there’s one dramatic event that upends a household’s finances. But often these are the final blow to a budget that was teetering on the edge. ‘They’re the frosting on the cake. The money troubles have been there,” says Catherine Williams, VP for the parent company of Consumer Credit Counseling Services of Greater Chicago.”

“One of the ways consumers coped with the rapidly rising cost of homes in the early part of the decade was by relying on new types of adjustable-rate mortgage loans that shrunk their payments-at least in the early years-to rock bottom. There are also ‘interest-only’ loans. According to LoanPerformance, interest-only mortgages made up nearly 20 percent of all new loans in the Chicago area in 2005 and 2006, and option mortgages accounted for another 4 to 5 percent.”

“‘Within another year we will probably start to see a large number of those loans being recast,’ predicts Bill Schwers, Chicago-area mortgage manager for Bank of America. Most borrowers facing the big payment jump that comes with a recast will try to refinance into a more affordable loan, if their employment and credit standing allow them to qualify.”

“Williams says she thinks problems with such loans are ‘the boogeyman that will come out about next February. There’s a little wiggle room, about four or five months, for this discomfort factor to work its way through the checkbook,’ she says.”

“Tessa Thouma of Carol Stream, didn’t wait for increased interest payments to hit and recently refinanced out of an interest-only mortgage and into a fixed-rate loan. When she bought her one-bedroom condo in Carol Stream in 2005, she avoided making a cash down payment by taking out an interest-only mortgage at a relatively high rate of 7.8 percent and a second mortgage at an even higher 10.9 percent to cover what traditionally would have been the down payment. ‘It’s just a horrible loan,’ Thouma says.”

“Think twice, however, before you call one of those phone numbers broadcast on late-night television promising to help you wipe out credit card debts. Often they’re pitching a home-equity loan that you would use to pay off the credit card debt. ‘In theory, wrapping high-interest credit card debt into a home-equity loan works,’ says Williams. ‘But you only do it once!’”

“Instead, she says consumers often come to counseling after refinancing their home-equity loans two or three times, often borrowing more of their home equity in the process.”

The Chicago Sun Times. “The South Side neighborhoods affected by a controversial mortgage law designed to protect would-be homeowners from being gouged have seen a 45 percent drop in home sales in the law’s first month.”

“‘This law is like a thief in the night,’ said Julie Santos, a McKinley Park Realtor who is collecting signatures in an attempt to repeal the law. ‘I think it’s discriminatory. It’s ridiculous.’”

The Rockford Register Star. “Even with a healthy run up in property values this decade, Rockford’s housing market is more affordable than ever for mid-level executives. ‘I had a client come in from California and they were able to get quadruple the house they had before,’ said Michelle Lundsten, a relocation specialist in Rockford.”

“She added the prices differences also makes it tough to leave sometimes. ‘A client in Machesney Park had to relocate to Arizona for a couple of years because of work. They had to move into a house half as big as what they had here for twice the mortgage payment.’”

“Of course, this year the housing market has cooled both here and nationally. In fact, the dropping prices in major metropolitan markets actually is slowing the influx of Chicago residents. ‘There have been a number of people in Chicago who want to move here but can’t because they can’t sell their house for what they owe,’ said (realtor) Karl Gasbarra.”

The St Petersburg Times reports from Florida. “Port Richey is supposed to be bursting at the seams. In the spring, officials expected five condominium and townhouse complexes to break ground by year’s end, doubling the city’s population of 3,200.”

“But one of the largest projects, the 170-unit Bay Point townhouses, has stalled. And two mobile home parks, ripe for redevelopment, remain on the market.”

“That’s because a slowing housing market and skyrocketing insurance costs have left the city struggling to get developments off the ground. City officials now estimate just 700 new residents by year’s end’ a fraction of the roughly 3,000 predicted this year.”

The News Press. “Dear Bob: Due to the slow home sales market in our area, we are having difficulty selling our home. Our listing agent suggests we offer ’special incentives’ such as a monetary bonus and/or a vacation to the buyer’s agent who sells our house. She says this encourages other agents to show our house more often to their buyers. Is this ethical? It seems like blackmail to me, as we already signed a listing contract.”

“Dear Debra: To combat the slow ‘buyer’s market’ in many communities, home sellers frequently offer special incentives to buyer’s agents to show and sell their listed homes. Vacations, TVs, etc. are often given to buyer’s agents to sell homes.”

“However, before offering incentives to the selling agent, be sure your home’s asking price is correctly set. If necessary, reduce your asking price. There is nothing unethical, immoral or fattening about offering special incentives for buyer’s agents to sell your house instead of one down the street.”

The Herald Tribune. “For the lonely For Sale By Owner seller, putting a sign on the front lawn and waiting for the phone to ring is no longer the only option.”

“Donna and Gabe Boyer are a married couple who are would-be home sellers entering their fifth month of trying to sell their three-bedroom, two-bath home in North Port for $219,900. The Boyers’ first listing expired with no results.”

“They wrote in to say they interviewed numerous Realtors from ‘well-known companies to small local companies.’ ‘We are amazed by the mentality of the majority (of Realtors) that you throw a listing up on the MLS, do bare-minimum Web marketing, mail a few fliers, and HOPE that the inventory of builder spec homes will decrease enough, someday, to sell a property in North Port.’”

“‘Many Realtors appear stunned by the turn in market and other than price decreases, do not have many creative ideas for marketing an average priced home. We realize the importance of having a competitively priced home in this market, but we (the homeowners) are the ones calling and asking our Realtors for updated comparative market analysis, price reductions, etc.’”

“‘It seems as if many of the agents are still in a reactionary mode, rather than a creative, aggressive mode.’ The Boyers network with families that have only been shown spec homes by Realtors.”

Some letters to the editor. “Re: House values on the way down. Not all Floridians ‘fear’ an approaching decline in real-estate prices. True, homeowners may have to get used to the idea of their personal fortunes leveling off, or even declining, after astronomical increases in recent years. But there are plenty of us who see the so-called correction as relief.”

“My son, for example, who graduated from high school just a few years ago, has no chance for buying a home. None! From the growing number of us who have been alienated by investor-driven speculation in the real-estate market in the past decade (a quarter- million dollars as the median price for a new home in our state?), you might hear a rousing cheer. For us, it’s about time. RC.”

“The reality is that there are more buyers than three months ago and a flood of sellers has made it very easy for buyers to get more for their money. It would be nice to see an article focusing on the brighter side. RD.”

“‘Crash’ might be overstating the real estate market a bit. When did you, of all people, start thinking like a stockbroker? The boom is over..but a crash? I wish I only lost 18 percent in the stock market. That was a crash.”

“If you mean the speculators and flippers, you may be 100 percent on the money. Yes, the boom is over but your home and investment in well- managed real estate are not a piece of paper with a company name that can become worthless overnight. GM.”

“As developers, we see opportunities in this market to watch commodity prices normalize (land prices coming down to where they should be). Every retiree, speculator, flipper or investor isn’t going to make huge gains (particularly in many of the Gulf Coast areas). We just need to get all these speculators and third-tier developers driving prices up out of the market. This correction is the perfect medicine. BB.”

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