The Housing Bubble

The North County Times reports from California. “Prices of individual homes and in individual neighborhoods have already fallen in the last 12 months. Declines among newly built homes are likely to be more dramatic, the realtor association’s chief economist, Leslie Appleton-Young, said in an interview. That’s because the glut of new homes is larger, she said; many builders have been unable to find enough buyers to fill entire tracts.”

“That glut could have a particularly strong effect in Riverside County, driving down median prices here more than 2 percent expected statewide, Appleton said. Empty new houses are particularly common in areas with lots of new construction, such as Riverside County, Appleton said.”

“The forecast and Appleton’s comments struck the most cautionary tone to date from a group that has been notably bullish on real estate’s value as an investment.”

The Ventura County Star. “In desirable coastal areas, the slowdown has been startling. Ventura County sales were down 41 percent in August from the same month a year earlier, the second sharpest monthly decline in the state.”

“Real estate investor David Russian has had a house for sale in Oak View for nearly six months, much longer than what he had budgeted. He said his current asking price of $589,000 for the four-bedroom, two-bath home might have sparked an immediate sale if that is what he had asked at the beginning. But he lowered the price in step with the market. Now, he is hoping to break even on his investment.”

“‘It looks like we are going to have to just change up the game plan a little bit and expect the houses to be on the market for a while,’ Russian said. ‘The profit margin gets eaten away very quickly,’ he said.”

The LA Times. “The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30. ‘We were putting buyers in homes with loans they could not afford to sustain over the long haul,’ said Bob Casagrand, a San Diego real estate agent.”

“‘Whereas a year ago, people could have put their house on the market and sold their way out of the problem, now they’re stuck with the house,’ said Richard Pittman, credit counselor in Los Angeles. ‘I’ve talked to two in the last week who thought they had a done deal, and when it came to putting the loan together, they came up short’ and their house went to auction, he said.”

The Contra Costa Times. “Lenders sent 803 default notices to Alameda County homeowners, 1,012 to Contra Costa and 510 to Solano County, causing foreclosure activity to almost double in Alameda and Contra Costa counties and jump 171 percent in Solano County in the third quarter since last year.”

“Ed Jeffry, a mortgage specialist in Walnut Creek who has several clients fighting foreclosure through alternative loans, agreed that most of the foreclosure activity could have been avoided. ‘I attribute a lot of the foreclosure activity to really bad planning,’ Jeffry said. ‘They were more than likely in limited documentation loans and didn’t have to provide proof of income, and then stretched themselves beyond their means.’”

The Press Democrat. “Foreclosure activity accelerated this summer in Sonoma County, rising to a seven-year high. ‘Some of these people are stupid, and others got caught by unscrupulous lenders,’ said Amy Crews Cutts, deputy chief economist with Freddie Mac. ‘And others just had bad luck and couldn’t make their payments.’”

“Negative amortization and interest-only loans have the highest default rates, nearly double the rate of traditional loans, Cutts said. ‘They are performing much worse,’ she said. The number of people falling behind on loans opened in the first six months of 2006 has increased nearly sixfold compared to the same period in 2004 and 2005.”

“‘There is something going on with the ‘06 vintage,’ said Mark Carrington, product manager for First American. ‘The ‘06 vintage, compared to loans of the same period from previous years, are performing much worse.’”

“Vacant apartments are becoming harder to find in Sonoma County, in part because of the downturn in the housing market. More households are staying in apartments rather than buying a home, a decision that reflects their concern over falling home prices. In addition, many renters find it is considerably cheaper to pay rent instead of a monthly mortgage note.”

“That affordability gap is significant between rent and a mortgage payment, they’re happy to stay where they are,’ said Scott Gerber for Meridian Commercial Real Estate. A renter would save about $2,300 a month by renting a typical apartment in Sonoma County instead of paying the mortgage on a typical home, Gerber said.”

The San Francisco Chronicle. “‘Renting is still cheap relative to home owning,’ said Stephen Levy, director of the Center for the Continuing Study of the California Economy. ‘Now that people are realizing that there is going to be no appreciation in the near future, they’re renting.’”

“‘Some of those people who I rent to have hundreds of thousands of dollars in savings and I ask them, ‘Why aren’t you buying?’ And they say, ‘We’re waiting to see what happens with the market,’ said Laura McNabb Gray, a rental agent in San Francisco.”

The Sacramento Bee. “Sacramento-area renters continue to pay some of California’s slowest-rising rents. ‘I’ve actually seen rents go down,’ said Sheri Lutrrell (who) leases houses. ‘Even my real strong markets like Gold River, I’m lowering them $200 or $300.’”

“Janet Regan, a broker and president of the Sacramento chapter of the National Association of Residential Property Managers, said some home sellers are giving up. ‘We use to have all these different reasons why people put up their houses for rent. Now it’s, ‘I can’t sell my house,’ she said. ‘These are people who have moved to other cities and other states. They’re stressing.’”

The Record.net. “Lenders sent out 898 default notices in San Joaquin County last quarter. That was a 178 percent jump year to year from 323 notices in the third quarter of 2005.”

“The last foreclosures cycle in the area ended in 2000, said Stephen Howard, a broker who specializes in foreclosure sales. ‘We’ve gone from pretty much no activity at the first of the year to the busiest we’ve been since the end of the last cycle,’ he said.”

“(Broker) Bob Riggs said sales activity is getting a boost from falling interest rates as well as an increasing number of buyers willing to lower their sales prices in today’s competitive market. ‘If you need a home, there are values out there right now,’ he said. ‘They’re being pretty brutal about what they offer, but they’re seeing opportunities to buy.’”

The Ledger reports from Florida. “Polk County builders must be getting that sinking feeling. The county’s building permit total fell a record 82.6 percent in September as the housing market continued to falter in the wake of last year’s boom. ‘Pretty dismal, huh?’ said Joel Adams, executive VP of Lakeland-based Highland Homes. ‘No doubt, the slowdown has filtered through.’”

“September’s percentage decline beat the previous record of 62 percent in August, when permits fell to 373 from 980 a year earlier.”

“Permits in unincorporated Polk, which accounts for the bulk of local permitting activity, fell to 180 last month, a whopping 85.7 percent drop from 1,256 the year before. Winter Haven’s 24 permits were down 84.9 percent from 159 last year.”

“Elsewhere, permits fell from 50 to 6 in Lake Alfred; 48 to 4 in Lake Wales; and 35 to 6 in Bartow. The only city to register an increase was Lakeland, where permits climbed to 58 from 46 last year, up about 26 percent.”

“‘I think we’re seeing a market adjustment,’ said Mike Hickman, president of Lakeland-based Hickman Homes. ‘We had a couple years in 2004 and 2005 where it skyrocketed disproportionately with the population coming into the county. That’s a speculative market.’”

“Now that investors have fled the market, home inventories are piling up and potential buyers are ‘on the sidelines’ waiting for builders to offer their best incentives, Adams said.”

“‘I really think we’re at the bottom of the trough in Polk County,’ Adams said. ‘Now how long we stay at the bottom is the question.’”

From Ocala.com. “A once-frenzied housing market in Marion County has cooled substantially, and sellers are getting creative in order to strike a deal. ‘There are quite a few incentives being offered, now that we have more inventory here,’ said Wilbur Van Wyck, president of the Ocala-Marion County Association of Realtors. ‘Negotiability is back.’”

“(Broker) Bert Meadows said that paying off a buyer’s closing costs has become a common practice. He said it’s an enticer that’s become more prevalent as home sales continue to wane. ‘It’s definitely a buyer’s market,’ Meadows said.”

“Heath Fleming, owner of Fleming Mortgage Services, agreed that the buyer now holds all the cards. ‘A year ago, a seller could name his price and say ‘That’s it. I’m not going to go one dollar less,’ Fleming said. ‘That’s not the case anymore: Now you see signs all over saying reduced, reduced, reduced.’”

“Edie Ousley, public affairs director for the Florida Home Builders Association in Tallahassee, said builders statewide are looking to unload properties in a flooded market and are offering a smorgasbord of incentives. ‘They include complete appliances, trips being offered,’ Ousley said. ‘We’ve even seen some builders offer to put new cars in the garages.’”

“Because of the flooded market, many buyers in other areas of the country have demanded that cash be given back to them as part of the closing terms, according to an AP report this week. But Van Wyck and Meadows both said they haven’t seen the straight cash-back proposals being proffered in Marion County’s market.”

“‘I would think banks would have a big problem with that,’ Van Wyck said.”

“‘I always tell my buyers keep money aside for a rainy day; you don’t want to be real estate rich and cash poor,’ Fleming said. ‘To get the seller to pay closing costs is definitely an advantage to the buyer.’”

“But Fleming said if a builder or broker ever offered straight cash as part of the closing terms he would advise his client against taking the deal, especially if it meant an inflated value for the home. ‘I would never advise anyone to buy a house above the appraised value,’ he said.”

“As for the downturn in the county’s housing market, Fleming said he expects the lagging sales to continue locally at least for another year. Fleming said Central Florida is a different animal. ‘We have a tremendous growing baby-boomer population, so the market is going to adjust itself differently,’ Fleming said.”

Some housing news from Wall Street. “Home builder Ryland Group Inc. said Wednesday that its third-quarter profit fell 26% as sales incentives reduced earnings. Ryland said new orders fell 45.6% to 2,372 from 4,361 in the same period last year.”

“‘They’re willing to take a volume hit but maintain pricing and margins,’ said Josh Spencer, a research analyst.”

“Banc of America Securities analyst Daniel Oppenheim said he expects to see land write-downs once Ryland responds to market conditions with lower prices. ‘We expect weak 2007 earnings due to a sharply lower backlog at the end of the third quarter (down 35%) and lower margins as a result of price declines and a negative mix shift into lower margin regions (Texas) at the expense of the Southeast and West,’ the analyst said in a report.”

“Accredited Home Lenders Holding Co., a subprime mortgage lender, warned on Thursday that its earnings would lag its previous forecasts because of intense competition and rising loan delinquencies.”

“‘I think the outlook for the mortgage sector is not so good,’ said Anton Schutz, president of Mendon Capital, which manages $270 million in financial services stocks. Lenders like Accredited that focus on borrowers with weaker credit face the risk of much higher defaults as well.”

“‘That segment of the economy is the first to crack when things slow down. I worry about subprime lending,’ Schutz said.”

“Accredited, the San Diego mortgage lender, warned of weak 2006 profits because competitors are offering cheap mortgages and debt investors have lost their appetite for subprime loans.”

“The company cited several factors, suggesting ‘increasing turbulence’ and broad weakness in the subprime mortgage industry.”

“Firstly, Accredited Home Lenders hasn’t been able to issue as many mortgage loans as it thought it would. Secondly, investors who buy mortgage loans in the secondary market have grown skittish on risky debt, meaning the company earns less when it pools its mortgages into bonds.”

“The company blamed a mergers and acquisition wave. Accredited Home Lenders said a wave of acquisitions has spurred lenders to issue loans without proper regard to prices or credit risk because the lenders want to maintain a hefty portfolio to look attractive to a potential suitor. This trend has boosted the ‘ferocity of pricing competition’ in the subprime mortgage industry, the company said.”

“The company also warned more borrowers are defaulting on their mortgages, so Accredited Home Lenders will have to set aside more money than it expected to for loan loss reserves.”

“‘It will take some time for the industry to work through the current challenging environment, and it is more difficult than we thought,’ Piper Jaffray analyst Robert P. Napoli wrote.”

“Washington Mutual Inc., the largest U.S. savings and loan, said third-quarter profit declined 8.9%, as demand for home mortgages flagged and short-term interest rates climbed, the Seattle-based bank said.”

“‘The biggest risks for WM include aggressive competitive pricing and the possibility that credit trends could weaken significantly,’ analysts Robert Napoli and Brian Hogan wrote, citing potential underwriting mistakes and falling home prices.”

“Washington Mutual blamed part of the 9 percent drop on lower home mortgage demand and costs for the elimination of nearly 5,200 jobs.”

“WaMu, as the thrift calls itself, eliminated 5,191 jobs in the quarter, and has cut 9,742 jobs, or 16 percent of its workforce, this year. The thrift is moving thousands of jobs outside the country.”

“Many cuts were in its home loans unit, where the No. 3 U.S. mortgage lender posted a $33 million loss, compared with a $302 million year-earlier gain. Loan volume fell 34 percent to $37.2 billion and margins on loans sold declined.”

“Net interest margin, the gap between what WaMu earns on loans and pays on deposits, fell to 2.53 percent from 2.65 percent in the second quarter. Many banks’ margins have shrunk because short-term rates are higher than long-term rates, raising borrowing and deposit costs.”

From Business Week. “Think of collateralized loan obligations as the next step of financial innovation that started with junk bonds and mortgage-backed securities. Unbeknownst to many, CLOs are pumping up the entire U.S. economy. By lowering borrowing costs and attracting foreign capital, they’re helping to keep a lid on interest rates. But while financial innovations fuel booms, they also tend to worsen busts.”

“The amount of leverage used in deals right now is greater than the previous record set in 1997, according to S&P. At the same time, loans are carrying lower ratings, with fewer safeguards, than at any time since the late 1990s. The worse mix suggests that in a recession on the order of the one in 1991, default rates would soar more than four percentage points beyond the record 12.8% set that year, says Martin Fridson of a research service.”

“Similarly, CLOs are accepting more so-called second-lien loans. Like second mortgages, these are backed by borrowers’ assets, but their claims on that collateral come second. ‘Second liens could be the potential Achilles’ heel of the current credit cycle,’ says Mark Gold, co-founder of a CLO manager.”

“‘You’ve got classic cyclical behavior happening right now.’ Gold, says: “If you look at the record issuance [of loans] that’s been done, clearly you’re setting the stage for record problems.’”

The Reno Gazette Journal reports from Nevada. “The housing market in the Reno metropolitan area continued to soften through the third quarter. During the third quarter ended Sept. 30, the median price of an existing single-family home in greater Reno-Sparks dropped 9 percent, to $324,500, compared with the third quarter of 2005, according to the University of Nevada.”

“According to the report, the median price has fallen every month since May when the price sat at $340,000. ‘During the first half of the year, the declining sales prices were noticeable but pretty moderate overall,’ said Brian Kaiser, analyst for UNR. ‘The third quarter’s 9 percent drop makes it clear that this market correction means business.’”

“The number of sales also dropped 38 percent, to 1,063, during the three-month period compared with the third quarter of 2005.”

“Agent Pat Martinez said newer areas with more competition from newly built homes present more challenges for sellers. That could reflect the steep discounts and incentives new-home developers are offering, making it more difficult for sellers of existing homes to compete, he said.”

“‘As long as there are those move-in homes that are brand new that prices keep going down on, they will affect the resale market much like the (high) amount of investors on the market,’ Martinez said.”

“The city of Reno fell the furthest during the quarter, dropping 10 percent from the third quarter of 2005. Sparks dropped 9 percent and the North Valleys fell 6 percent. The number of condo resales in the Reno area fell 39 percent to 184 during the third quarter while the median price dropped 9 percent to $178,000. In Carson City, the median price fell 5 percent.’

From Las Vegas Now. “Experts say there’s been a 21.5-percent decline in new home building permits in the past year. The housing market slow down is bringing back a wild, Wild West staple, the ghost town. There are valley neighborhoods where vacant homes seem to outnumber the homes where people are living.”

“Eyewitness News visited one of these ghost town neighborhoods near Cheyenne and Torrey Pines where there were ten vacant homes on one block alone. A nearby sign shows that the homebuilder is anxious to get those houses sold. The problem is buyers aren’t buying.”

“In the middle of Las Vegas lies a neighborhood where all you’ll hear is silence because most of these homes are vacant. ‘This property is about 2,600-square feet and we’re on large lots,’ Real estate broker Thomas Love says. It sports four bedrooms sitting on about 7,000-square feet of land nestled in a very quiet neighborhood. ‘All of them come standard with granite,’ Love points out.”

“‘The trend is there’s a supply that exceeds the demand and it’s Economics 101. When the supply exceeds the demand, a couple of things happen. Prices are starting to come down and we just have more inventory than we have buyers right now,’ Love explains.”

“Right now there are about 22,000 existing homes on the market across the valley and 9,800 of them are vacant.”

“Love has sold houses in Las Vegas market for 20 years and says one thing that’s added to this trend is the buyer’s mentality. ‘They’re not buying. These investors that own all these vacant properties they can’t sell are turning to rental markets. So they’re renting them out at actual rents that are much less than what these people would pay if they were owning them,’ he said.”

The Las Vegas Review Journal. “Dennis Smith of Home Builders Research has suggested for several months that prices would be flat at best and possibly turn negative toward the end of the year. ‘We’ve reached the flat part, and now we’ve got three months to see if it’s going to stay that way or get worse,’ he said. ‘Get ready for some negatives, but probably not more than a negative 4 (percent) to 5 percent.’”

“Home Builders Research reported 2,847 new home closings in September, a 22.3 percent slide from 3,665 in September 2005. Existing home sales fell to 3,069, down 40.7 percent from 5,179. The median price of a new home was $321,160, a 7.7 percent increase from a year ago.”

“Smith said there was a big change in consumer demand between the first and second quarters. Net sales in new subdivisions, or new contracts for homes, were down in every area of the valley, from 26 percent in the east submarket to 38 percent in North Las Vegas.”

“‘We expect the fourth quarter will be a continuation of the bad numbers before some improvement appears during the first quarter of 2007,’ Smith said.”

“Barbara Lee said her home in the Seven Hills community has been sitting on the market for 2 1/2 years, first listed at $625,000 when the market was bubbling. The problem, she said, is other people in the neighborhood who had to sell undermined her by listing at $600,000 to $610,000.”

“‘Now the market’s bad and I’m just disgusted with the Realtors in this town. My agent told me, ‘Give me six months, and I can sell your house.’ That was four months ago and he hasn’t brought one single person. I’ve taken the sign down. I just give up,’ Lee said. ‘I’m going to try to sell it myself after my contract ends. My whole point is Realtors just put their signs up all over town and hope somebody’ll pick it up in the MLS or drive by and see the sign, and they make a nice crisp commission without lifting a little finger.’”

The Asbury Park Press from New Jersey. “A boom in townhouse and condominium construction has been a vital part of oceanfront redevelopment in the city, but the market here is not immune from the slowdown affecting the rest of the real estate industry.”

“‘That construction (along the ocean) was in reaction to the renaissance of Long Branch, coupled with an overheated..residential real estate market and the beachfront locations,’ said (appraiser) Jeffrey Otteau in East Brunswick. Those units helped to meet a demand for condos and townhouses in Long Branch, Otteau said.”

“Now there are signs that the city’s real estate market is slowing down. As of Oct. 1, there was a 12-month supply of condos and townhouses on the market, compared with a nine-month supply a year ago, Otteau said. ‘Today, because of the large increase in home prices for many of those properties, coupled with the deterioration of the overall housing market, what we’re finding is that demand there is less, and the vacation market has gone dormant for now,’ Otteau said.”

“More new projects, such as the second phase of Beachfront North, a 185-unit luxury condo-minium development, are on the drawing board. Diamond Beach, a condominium project across from Seven Presidents Oceanfront Park, which will have 96 units, also has city approval.”

“West Long Branch real estate agent Dot Schulze said there are 18 condominiums for sale at the Grand Resorts. Priced at between $600,000 and $1 million, depending on the ocean view, the community consists mostly of people who have purchased second homes. ‘Because of the whole market, we are slow no matter where we are,’ Schulze said.”

“She is optimistic. ‘I feel very strongly that when you are along the ocean, there is always a need for condos,’ Schulze said.”

“‘I think there is an awful lot out there available,’ broker Liz Scott said. ‘There is a lot more inventory than there are buyers.’”

The Boston Herald. “With Boston home foreclosures up 10-fold since 2004, Citizens, Eastern, Mount Washington and Sovereign banks are joining Bank of America and Boston Private Bank & Trust in setting aside $100 million to help people refinance out of bad loans.”

“The banks also signed a code of conduct aimed at banning abuses, such as steering unsophisticated customers with good credit into costly subprime loans. City officials also plan to contact 6,000 residents with mortgages from questionable lenders, offering help to those in jams.”

“Market watchers also see some weaknesses in the effort. For instance, some conduct rules only require banks’ ‘best efforts’ to halt bad practices.”

The Pittsburg Tribune Review. “The Pittsburgh region finally is experiencing the effects of the national slump in home building, according to a report. Single-family home construction for the six-county area declined about 8.8 percent for the nine-month period that ended Sept. 30, according to a Ross-based market tracking and research firm.”

“Tall Timber’s report showed there were 1,991 single-family housing starts through the first nine months of 2006, down from 2,183 units for the comparable period in 2005. The company bases its figures on building permits issued in Allegheny, Beaver, Butler, Fayette, Washington and Westmoreland counties.”

“The local market is better for buyers, with some price breaks possible, said John Auciello, of the Builders Association of Metropolitan Pittsburgh. ‘Houses priced in the $450,000 to $650,000 range have been very slow,’ he said.”

The Souderton Independent from Pennsylvania. “Local housing proposals are filtering through the pipeline and new homes continue to be built, but sales are lower than they used to be.”

“‘From what we’re hearing, this year it’s starting to slow down,’ said Brian O’Leary, of county planning for Montgomery County Planning Commission. ‘But there’s still a lot of activity going on. Unless the market were to really go south, it’s not as if people aren’t going to see a lot going on around them.’”

“Real estate broker Beth Hershey said that residential real estate sales were extremely slow over the summer. There are a lot of houses on the market right now, but for some reason, not a lot of buyers, she said. Compared to how the market was 18 months ago, the change might seem dramatic.”

“‘I think we’re seeing a correction after the hot market that we’ve had for the past few years,’ Hershey said. ‘It’s not that the current market is bad. It’s just, given the past market, it seems that way.’”

“Broker Lisa Collins said that prices are not dropping, but rather flattening out. THP Properties’s pricing has held firm, dropping only a couple percent in the last year, Todd Hendricks said.”

“‘People are afraid that if they buy now and sign a contract, prices will go down and they’ll have to pay a higher price,’ said Greg Lentine, director of sales for Heritage, which so far has sold 51 of 137 planned homes at Lederach Golf Club. ‘If that happens, we’ll give it to them at the lower price. That’s how sure we are we’re not lowering prices anymore.’”

“It seems that potential homebuyers need that kind of reassurance, because while the number of actual sales has decreased, Lentine said. ‘What we’re seeing is there are people that want to buy. But the media is putting out so much negative information, it’s putting them off,’ Lentine said.”

“‘The issue is more [about] the public psyche,’ Hendricks said. ‘With all the media frenzy over the housing ‘bubble,’ it scares people. That’s the dynamic that we have to deal with.’ But as prices come back down to ‘normal,’ the time to buy is now, Lentine said.”

“‘The building industry is prepared for a softening of the market,’ Hendricks said. ‘We all knew that conditions that existed a year-and-a-half ago were not sustainable.’”

“Hershey said she thinks the market is correcting itself following the surge of the past three years. She doesn’t expect a crash. ‘I think there’s going to be a period of correction,’ she said. ‘You’re seeing sellers maybe having to reduce their price before they get a buyer … It’s not the end of the world.’”

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