The Housing Bubble

A California report from Dataquick. “Bay Area home prices fell on a year-over-year basis for the first time in more than four years last month. Sales were at their lowest level in five years, a real estate information service reported. The median price paid for a home in the nine-county Bay Area was $611,000 in September. That was down from $620,000 for the month before, and down from $616,000 for September last year, according to DataQuick.”

“‘The last time prices dropped in the Bay Area was after the dotcom bust. ‘It simply looks like the real estate market’s momentum last year and earlier this year pushed prices beyond their equilibrium point and the market is reestablishing its balance,’ said Marshall Prentice, DataQuick president.”

“A total of 7,907 new and resale houses and condos were sold in the region last month. That was down 13.4 percent from 9,128 for August, and down 29.4 percent from 11,205 for September last year.”

The San Francisco Chronicle. “A build up of inventory and an increase in the supply of low-priced condos in the East Bay dragged down prices, said John Karevoll, an analyst at DataQuick. The price of new homes fell 12.3 percent in September, which pulled down the Bay Area median.”

“‘It doesn’t mean that they’ve lost value, it means that there’s a bunch of cheap stuff selling,’ Karevoll said.”

The Sacramento Bee. “Three months after Sacramento, Placer and San Diego counties topped California for falling home prices, the malaise has spread across the entire capital region and parts of the Bay Area and Southern California, new September sales figures show.”

“All eight Sacramento-area counties reported lower median sales prices in September than September 2005, according to DataQuick. September marked the first time El Dorado County joined the list.”

“The dips were especially pronounced in Placer County, where prices of all new and existing homes and condominiums were 14.3 percent lower than September 2005. Median prices were down 12.2 percent in Yolo County and 7 percent lower in Sacramento County.”

“That means many people who bought houses during the summer and early fall of 2005, the last months of the region’s unprecedented five-year housing boom, own homes that at the moment are worth less than they paid for them.”

“September sales activity also spread the phenomenon for the first time to a majority of Bay Area counties and to Ventura County in Southern California.”

The Press Democrat. “Sonoma County home sales hit a 10-year low in September and the median price declined for a third consecutive month. Homes are taking longer to sell and price cuts are accelerating, with the median dropping to $567,500 in September, a 7.7 percent decline from a year ago. It was the first three-month price drop in 12 years.”

“More buyers are continuing to wait for the market to hit bottom, frustrating sellers who must increasingly compete for offers. ‘It’s a tough market, no doubt about it,’ said Sandy Geary, broker in Rohnert Park.”

“The supply of homes for sale continues to exceed demand. There were 2,516 homes on the market at the end of September, up from 1,487 a year ago. ‘The higher the inventory the better the deal you’re going to get. There’s good deals out there,’ Geary said.”

“Prices are $80,000 to $100,000 below last year’s prices, Geary said. Sellers should list their homes under the most recent sale price for a comparable home, she said. ‘I’m telling my clients that if you want your house sold, you need to be in front of the market,’ Geary said.”

“Then be prepared for buyers to seek further price cuts. ‘And the buyers are still going to come in and ask for concessions,’ Geary said. ‘You have to be honest with your clients about what’s really going on.’”

“Prices have fallen the most in Windsor, the Cotati-Rohnert Park area and west Petaluma. The greatest increases in inventory, by percent, were in Petaluma, northwest Santa Rosa and Cotati-Rohnert Park.”

“Buyers don’t want to pay more than a home might be worth a month or two later. ‘The buyers don’t want to overpay, and that’s understandable,’ said Rick Laws, Santa Rosa manager for Coldwell Banker.”

The Detroit News reports from Michigan. “When James and Gabriela Rudin bought their 3,100-square-foot Tudor on a cul-de-sac in the well-manicured subdivision last year, they expected to spend the rest of their lives there. The housing market was healthy at the time, and they figured they were spending $375,000 on a solid, long-term investment.”

“But over the last year, the ailing automotive industry pulled Michigan’s economy down. They want to move quickly. So they’re taking the bold approach of putting the three-bedroom, two-and-a-half bath home up for auction with a starting bid of $1.”

“‘If there are 5,000 on the market like that, being 5,001 doesn’t really matter,’ said Gabriela Rudin. ‘We just want to get it sold. It’s going to go to the highest bidder no matter what it is.’”

“The Rudins aren’t alone in going the auction route. Chicago-based Neumann Homes plans to auction 47 Metro Detroit homes and 40 undeveloped home sites in November as part of an effort to reduce its inventory.”

“The Rudins are confident. ‘If we have to lose money, whatever,’ Gabriela Rudin said, adding that part of the motive for selling the house at auction is to avoid paying real estate agent fees she estimates would total about $25,000. ‘We’d rather see that money go to somebody else than an agent.’”

The Minot Daily News from North Dakota. “The inflation in housing prices in Minot over the past several years appears to be slowing slightly, possibly indicating that home valuations could be on the way to stabilizing, according to figures from the city assessor’s office.”

“‘The values are still up from last year,’ said Mike McEown of Minot Multiple Listing. ‘I can’t actually say that prices are coming down.’ McEown said he doesn’t expect the housing market to crash as it has in some parts of the country.”

“However, the appreciation appears a bit more modest heading into the later part of this year. ‘We are hearing that there’s a little bit more inventory out there and that the time on the market is probably a little longer than what we have had for a while,’ city assessor Kevin Ternes said. ‘As we get into the winter season, it’s possible things might slow down a little bit.’”

“There were 335 houses listed this past September, compared to 293 in September a year ago. Although homeowners have had the benefit of an asset appreciating in value, many taxpayers won’t mind seeing valuations stabilize.”

The Daily Inter Lake from Montana. “The Flathead Valley’s real-estate market may be beginning to level out, a shift from the red-hot business it’s been in recent years. ‘I think it’s definitely done some adjusting, there’s no question about that,’ said Dave Gawe, a Realtor in Whitefish. ‘Maybe even a little correcting.’”

“Broker Mike Osler in Bigfork, agreed. ‘I think it has softened a little bit, but I don’t see it having the turnaround like some of the other places,’ he said.” “The change is the result of having so many houses on the market, said Realtor Lee Denmark. ‘We’re seeing a lot of inventory,’ Denmark said. ‘It’s shifting from a seller’s market to a buyer’s market, because we have a lot on the market.’”

“These are the times when many people buy vacation homes, or, when the market is extremely hot, buy property with the intention of ‘flipping’ it, immediately reselling it for a profit. A couple of things happen to cause the market to cool, Denmark said.”

“‘It’s a common economic deal where if anybody fears that the interest rates are rising, people hold a little bit tighter to their money,’ he said. ‘But the market doesn’t change really until the media says there’s going to be a change.’ Because media across the nation have been talking about a rapidly decelerating housing market, would-be home buyers are considering their purchases more carefully, he said.”

“‘When times get a little bit rougher, we do see a big change in speculative buying,’ he said. ‘What we’re seeing right now is not so much a burst in any bubble,’ he said. ‘A lot of homes that were overpriced before because there was a feeding frenzy aren’t selling.’”

Some housing bubble reports from Wall Street and Washington. “Home-building and mortgage-banking company NVR Inc. Tuesday said net income dropped 32% from the previous year and lowered its outlook on continued deterioration in the U.S. housing market. The company said its gross margins continue to suffer from pricing pressure in many of its markets. Citing lot deposit impairments and the continued deterioration of the housing market.”

“‘We expect margins to continue to fall based on land deposit impairments in the coming quarters and continued weakness on pricing,’ wrote Banc of America Securities analyst Daniel Oppenheim.”

“New orders in the third quarter decreased 18 percent from last year. Meanwhile, the cancellation rate jumped to 27 percent from 15 percent last year and 13 percent in the second quarter of 2006. NVR warned that pricing pressure in many of its markets, which include Washington and Baltimore, will weigh on profits.”

From Reuters. “Wells Fargo, the No. 2 U.S. mortgage lender after Countrywide, said fee income from mortgages fell 35 percent to $484 million. Applications fell 18 percent to $95 billion, and unclosed mortgages as of Sept. 30 fell 17 percent to $55 billion from a year earlier.”

“‘It’s not surprising to anybody that the housing market has slowed,’ CFO Howard Atkins said.”

“Downey Financial Corp. reported net income for the third quarter of 2006 totaled $57.2 million, down 4.3%. Daniel Rosenthal, CEO, commented, ‘Back in March of this year, we increased the start rate on option ARMs originated for portfolio to reduce the potential for negative amortization. We also indicated that we would continue to closely monitor trends in the residential housing and lending markets and would make further pricing adjustments as deemed appropriate.’”

“Provision for credit losses totaled $9.6 million in the third quarter of 2006, compared with a reversal of $0.8 million a year ago. During the current quarter, the California residential real estate market continued to show signs of weakening, with a decline in prices beginning to emerge in certain segments for the first time.”

“Other income totaled $30.7 million in the current quarter, down $14.9 million from a year ago. Contributing to the decline between third quarters was a $14.7 million decline in net gains from sales of loans and mortgage-backed securities due to a lower volume of loans sold.”

“Loan originations (including purchases) totaled $1.605 billion in the current quarter, down $2.039 billion or 56.0% from $3.644 billion a year ago. Loans originated for sale declined $876 million or 51.5% to $824 million, while single family loans originated for portfolio declined $1.147 billion or 60.0% to $765 million.”

“National City Corp., the No. 8 U.S. bank, set aside $73 million for bad loans, up 30 percent. Net charge-offs rose 41 percent to $117 million, including $10 million of ‘fraud-related mortgage loan losses,’ while nonperforming assets rose 16 percent to $689 million, in part because of real estate foreclosures.”

The New York Sun. “Don’t get relaxed about the housing industry, because it’s going to get much, much worse. That’s the message from Gary Gordon at Annaly Capital Management, a firm which invests in mortgage-backed securities.”

“Bears argue that the consumer has used his home ownership as a piggybank that is now ominously empty. They point out that mortgage equity withdrawals have climbed almost without pause since the early 1990s. Today, these borrowings are plummeting, a development that the folks at economics consultancy ISI call ‘unprecedented.’ Equally without precedent is that existing home prices may actually decline this year.”

“Further gumming up the works is that confidence in rising home prices turned lenders into enthusiastic coconspirators. Mortgage lenders have required less information about borrowers and less regular payments on loans than ever before.”

“As an example, 62% of non-agency loans made last year had low or no income verification, up from 24% in 1998. Also,52% of such loans made in 2005 had zero or negative amortization requirements. In 1998 there were no such loans.”

“Mr. Gordon says that affordability is key. Home prices have increased at the second fastest rate in over a century. This rapid cost increase means that many people are simply priced out of the market.”

The Star Telegram. “Real-estate lending is coming under increasing scrutiny from federal regulators. ‘You’re beginning to hear conversations that it’s getting harder’ to arrange bank financing for real estate, said Tony Landrum, developer of The Tower high-rise condo in downtown Fort Worth.”

“One threshold would be when all commercial real-estate loans, with some exceptions, amount to more than three times, or 300 percent, of a bank’s capital. John Dugan, chairman of the Office of the Comptroller of the Currency said 35 percent of the banks it oversees exceed the 300 percent guideline. In 2000, real estate accounted for 28 percent of the loans at U.S. banks with less than $1 billion in assets, Federal Deposit Insurance Corp. Chairman Sheila Bair said. She said that as of March that had risen to 42 percent.”

From Bloomberg. “Most U.S. home markets are in bear mode as anxious sellers growl and buyers are scarce. All of the leading indicators now painfully confirm that. To all the existing indexes, I’d like to add one more: The Donald Trump Index.”

“Last year, when the home market peaked, the Real Estate Wealth Expo, featuring Trump and 70 other money mavens, charged as much as $499 per person and attracted more than 60,000 participants.”

“Recent ads for the event offered a price as low as $99 for similar seminars that are scheduled in cities such as New York, Chicago, Boston, Los Angeles and Toronto. Is there any connection between the 80 percent drop in the Trump Index and the measurable decline in the market?”

“Mass psychology often trails economic reality. Academic studies show that amateur investors consistently lose interest after having bought at the top of most market cycles. This time won’t be much different.”

The Associated Press reports on incentives. “Buyers are demanding cash payments and other incentives that may be artificially propping up sales prices, suggesting the market downturn could be even more pronounced than has been reported.”

“Gonzalo Sotelo, a licensed real estate agent in Salinas, Calif., said that three times in the past few months, buyers’ agents approached him about securing cash back at closing without informing the lender. An agent from the nearby San Francisco Bay Area proposed having a home with a $539,000 asking price reappraised and sold at $600,000, with Sotelo’s client paying back $60,000 in cash to the buyer.”

“Sotelo said he turned down the deal and hasn’t heard from the agent since. ‘Because the market is changing right now, I think people are trying to be a little bit more creative,’ Sotelo’s boss, Jose Palma said. ‘We tell our agents: ‘There’s a black area and a gray area.’ I tell them to stay away from the gray area.’”

“Offers abound from sellers; giving cash back allows a seller to sweeten the offer without having to lower the actual stated value of the home. Economists say the practice could be inflating reported prices and distorting our view of a market already suffering from higher mortgage rates and a sense that the market is enduring a significant correction.”

“Inflated prices potentially cause harm to banks, which could take a hit if the mortgage holder defaults and the home turns out to be worth less. It also could affect buyers of neighboring homes, who may be making decisions based on faulty data.”

“When sellers use incentives to reduce the actual price without cutting the reported price, ‘then the reported prices are an overstatement of the true net selling price,’ said Lawrence White, at the Stern School of Business at New York University. ‘So that very likely means that the real drop in home prices is greater than what the standard sources, like the National Association of Realtors, have been reporting.’”

“Noncash incentives also have an effect, but aren’t reflected in the prices, or for that matter, the statistics. ‘It’s simply not reflecting the pace of change in them,’ Mortgage Bankers Association Chief Economist Doug Duncan said.”

“‘If you look at the federal statistics on price, it’s not adjusted for the quality change,’ he said. ‘So if you take the house and list it for $250,000 and you add a finished basement and granite countertops, is it still the same house? Not really.’”

“Citigroup economist Steven Wieting said, ‘It’s possible the price statistics are not reflecting the incentives.’ Wieting wrote, ‘In August, the median new home sales price fell 1.3 percent. Building ‘incentives’ are probably much larger.’ D.R. Horton offered buyers $120,000 in savings last month at the Tuscan Estates in the Elk Grove area near Sacramento.”

Inman News reports on appraisals. “They aren’t about to replace experienced appraisers, but proponents of automated valuation models say they can give their human counterparts a run for their money as lenders look for numbers they can trust in a down market.”

“‘Not only are the properties tougher to appraise, but loan officers ‘are trying to push you on value,’ Dearborn, Mich-based appraiser Terry Hanning said. ‘But that’s true for every appraiser.’”

“If AVMs are vulnerable to faulty or old data, there are those who say human appraisers are too susceptible to influence by their clients, who may persuade them to value properties according to a predetermined loan size or sales price rather than market value.”

“If AVMs are picking up converts, Mark A. Cannon, South Florida residential division director for Integra Realty Resources, is not one of them. Cannon said AVMs are easily thrown off by details or circumstances that human appraisers are trained to spot.”

“‘I specialize in litigation, high-end residential valuations and mortgage fraud,’ Cannon said. ‘When the market slows down, our firm gets very, very busy with pre-foreclosures and fraud, going after other appraisals.’”

“An AVM, you push a button and pull up all these sales,’ he said. ‘They all look like arms-length transactions. You come up with a price per square foot, multiply by square footage, and conclude. But what happens if you have an investor going in and purchasing condos in bulk? Lets say there is mortgage fraud and they are selling them to themselves, to family and friends at 25 to 30 percent over market. An AVM is not going to be able to tell you that.’”

“‘The loan processor, the mortgage brokers, the loan originators are the ones who get paid the big bucks, because they are the ones charging all these major fees,’ Cannon said. ‘When the appraiser asks for his few hundred dollars, they say, ‘I can get somebody to do it for less.’ That’s why these AVMs have come about.’”

“But Cannon said that lenders who skimped on appraisals during the boom years set themselves up for a fall. ‘When things are good, nobody questions (the quality of appraisals),’ he said. ‘When people stop making the mortgage payments, and we have an increase in foreclosures, lenders are going to say what did we do? Why did we go to the AVMs? We should have been in control of this.’”

The Philly Burbs reports from Pennsylvania. “Area home prices dropped in September on a year-to-year basis, only the second time this year that has happened and just the latest sign of a cooling housing market. ‘Until the sellers who don’t understand it’s a longer market are off the market, they’ll keep dropping their prices,’ says Jeri Gutner, a Realtor in Doylestown.”

“The amount of time it took to sell a house skyrocketed 168 percent to 51 days from 19 days a year ago. The number of home sales fell 24 percent from 564 last September to 428 this year. And the local inventory of unsold homes was up 46 percent, to 3,848.”

“‘If you don’t prepare sellers for how long their house is going to be on the market, you’re doing an injustice,’ Gutner says.”

“Most real-estate professionals see the current slowdown as a ‘correction’ of an overheated market. ‘You’re not doing business on the hood of a car anymore,’ says Jeri’s partner, Henri Gutner, comparing today’s market to last year’s superheated market, where houses were selling as quickly as they’d be listed.”

The Portland Press Herald from Maine. “Last December, developers of a proposed Westin hotel/condominium complex in downtown Portland were confidently predicting that they’d quickly get deposits on the project’s 97 luxury units and break ground during the summer. By March, they now acknowledge, only a dozen hopeful buyers had put down money.”

“‘The timing was off,’ said Tom Niles, executive VP for development at The Procaccianti Group. ‘I think people were starting to pull back and wait on the sidelines.’”

“Timing. The widely repeated mantra in real estate is location. But market timing can be just as crucial, although not as easy to recognize. That’s especially true for the handful of major, mixed-use condominium development plans that have attracted so much publicity in Maine’s largest city. To date, none has been built.”

The New Jersey Biz. “Will Kara Homes’ Chapter 11 bankruptcy filing create a domino effect in the homebuilding industry? Kara hurt itself by building too much too soon, says Gary Griffin, CEO of a turnaround and business consulting firm. ‘It was actually their aggressiveness, not the housing market so much,’ says Griffin. ‘They built a whole lot of houses on spec [before a buyer orders it], assuming the market was going to be there.’”

“Kara fueled its growth by borrowing heavily to build properties that then proved hard to sell. ‘It seems like the cause of this filing was a buildup of inventory caused partially by the slowdown in the housing market,’ Albert Savastano said in a research report.”

“Savastano says aggressive homebuilders like Kara will continue to be at risk. ‘We do not believe Kara Homes will the be the last home building credit that will potentially go bad in New Jersey or in other parts of the nation,’ he says.”

“‘There will be casualties in the market,’ concurs John Caulfield, senior editor at Builder Magazine. ‘The companies which were highflying, depending on a lot of debt, relying on the industry to have the same level of demand as it’s had for the last five years—those are the companies which are going to be in trouble.’”

“For Kara, says turnaround consultant Griffin, ‘there’s nothing to do now except liquidate. Can they turn around? No, I doubt it. There’s too much inventory.’”

From Newsday in New York. “The number of bankruptcy filings are starting to creep up again as people in dire financial straits are forced to navigate through the complex new system. In this area, 4,326 people filed for Chapter 7 bankruptcy in the first nine months of 2006 in New York’s Eastern District, which covers Long Island, Brooklyn, Queens and Staten Island.”

“More people are heading to bankruptcy court these days. More than 600 people filed in September, three times the number in January. The crowds at the courthouse are likely to grow in coming months, in part because of higher interest rates and flattening housing prices. These combine to make it harder to refinance and pull money out of the house to pay off debts.”

“Also, people who had adjustable-rate mortgages are finding they can no longer meet the monthly payments on their homes under the new terms.”

“‘I’m getting calls from mortgage brokers about people not able to refinance, suggesting they explore bankruptcy,’ said Stuart Gelberg, a bankruptcy attorney in Garden City.”

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