The Housing Bubble

A housing report from the Arizona Republic. “Home prices are a touchy subject in the Valley. People aren’t bragging about how much their home appreciated in a single month. There are no bidding wars for homes. No one is talking about how they’re going to spend their equity.”

“No, homeowners today are watching every sale in their neighborhood, cringing if they see ‘For Sale’ signs lingering too long and losing their tempers when neighbors drop prices.”

“‘The housing market hasn’t cooled as much in central Valley neighborhoods,’ said real estate agent P.J. Dean. ‘But if you are trying to sell a home in Surprise now, good luck, because that’s where speculators snatched up homes, and builders are offering the best deals.’”

“In the Surprise ZIP code of 85374, home prices hit a low for the year in August. Home prices in the Buckeye ZIP 85396 hit a high in February and have been yo-yoing since. In the Gilbert ZIP 85297, prices have been falling since June. In the north Valley, prices in Anthem fell to a 2006 low in August.”

“‘Most people who bought on the fringes last year are likely going to have to hold on for at least three years or sell for a loss,’ said real estate agent Margie O’Campo.”

“In January, when the Valley’s housing market started to come down from last year’s wild run-ups, about one-third of metro Phoenix’s ZIP codes experienced small price dips. Now it’s more than half. ‘The Valley’s housing market is going through a definite and obvious correction,’ said O’Campo de Castillo. ‘Homes are selling, but they have to be priced right. No one is paying last year’s inflated prices.’”

“The Valley’s price dips are a result of supply and demand. There are 45,000 homes on the market across metro Phoenix now, compared to fewer than 20,000 last October.”

“‘What was Phoenix’s asset last year has become its liability this year: available land,’ said Tim Sullivan of (a) San Diego-based real estate consulting firm. ‘The investor-driven new-home buying frenzy came because the Valley had land.’”

“He said now all those new homes that investors are trying to flip, as well as the ones builders can’t sell, are dragging down the area’s housing market and some home prices.”

The Review Journal from Las Vegas. “In Nevada, 6,523 homes entered some phase of foreclosure in the third quarter, an increase of about 80 percent from 3,499 homes in the second quarter and roughly double the rate of foreclosure activity in the third quarter of 2005, said Tom Adams.”

“Broker Bob Hamrick (said) that Southern Nevada’s higher foreclosure rate isn’t based on overall economic fundamentals. Rather, Hamrick blames the higher rate of defaults on homeowners who borrowed more than they could afford, and the lenders who allowed buyers to overextend themselves.”

“‘There were purchasers who bought real estate and did not truly have the ability to make the payments they knew they would have to make,’ Hamrick said. ‘They bought based on the absolute expectation that real estate would continue to go up. Those people are getting caught.’”

“Robert Klausmeier, a sales agent in Las Vegas, said competition in the mortgage industry also contributed to the home-buying binge. As some banks loosened underwriting criteria and offered interest-only plans, other lenders followed along to retain business.”

“‘It got to the point where people needed to show very little to get a loan,’ Klausmeier said. ‘Now, the interest-only periods on some of those loans are over, and with some bad luck (for buyers), problems are starting to come to fruition.’”

“At the same time, a glut of housing inventory is suppressing price increases and hurting sales prospects for homeowners seeking a way out of mortgages they can no longer afford. The Greater Las Vegas Association of Realtors reported a record 20,815 homes for sale in September, an increase of 57.4 percent over the number of homes on the market in September 2005.”

“Sheldon Klain accepted a job with the city of Dallas in the spring. So he and his wife listed their Las Vegas home for sale in April and prepared to move. The Klains had an offer on their property, a 2,200-square-foot home on a third of an acre with a pool, at the full listing price of $475,000 by May.”

“But the sale fell apart when the buyers backed out at the last minute. Now, in addition to the $1,400 a month the Klains are shelling out for their Texas home, they’re carrying about $2,800 in monthly mortgage payments on their Las Vegas property.”

“It’s a burden that Klain, who took a $10,000 pay cut when he moved to Dallas, and his homemaker wife can’t swing. They’ve been unable to make payments on their local home since July, and their mortgage lender says they’re in default.”

“‘This is a very difficult situation to be in. It’s very emotional,’ Klain said. ‘We tried to cover all the bases. If we hadn’t sold our house right away, we wouldn’t have bought a new house. We’d have rented an inexpensive apartment. It’s been tough on us.’”

“Klain believes the slower market cost him his home sale. The buyers who backed away from purchasing his home also canceled the sale of their house and decided not to move at all.”

“‘I think they saw what was happening in the market,’ said Klain, who bought his home in 2002. ‘They thought the market was going down and they thought they were paying too much.’”

“Klain said his bank has given him until mid-December to pay off the mortgage on his Las Vegas property. If he doesn’t, they’ll repossess his home. He’s had two offers since the initial sale fell through. One buyer didn’t accept Klain’s counteroffer; the second dropped out of the deal after Klain’s lender failed to respond quickly enough to his offer.”

“The home, now reduced to $419,000, is still in the MLS. ‘This has really been a roller-coaster ride for us,’ Klain said. ‘We’ve never been in a situation like this in our entire lives, so this is rough. We’re just waiting.’”

“‘I think we’re just scraping the tip of the iceberg as to what we’re going to see in foreclosures,’ said Klain’s Realtor, John Izzo, who has worked in real estate sales for 20 years, five of them in Las Vegas.”

The Press Enterprise reports from California. “Plenty of consumers are still finding themselves in financial hot water. And bankruptcy lawyers across Southern California reported an uptick in filings this past summer, and most expect the numbers to eventually climb back to previously high levels.”

“In addition to higher minimum payments and out-of-control consumer spending, increasing foreclosures and mortgage defaults are expected to swell the number of bankruptcies. ‘Variable-rate mortgages are just starting to bring people in. Over the next 18 months, it will continue to climb,’ said (attorney) Stuart Price.”

“‘With the adjustable-rate mortgages adjusting in the next year, people’s mortgage payments are going to go from $2,000 to $3,000 - those are big numbers,’ said (attorney) Barry Borowitz.”

“Bankruptcy attorney Leon Bayer said he spoke to a man last week who borrowed on his home a year ago using a ‘negative amortization’ loan. ‘His house is worth $500,000, and the balance is about $525,000 because of the amortization,’ Bayer said. ‘He’s a pensioner, retired from city of L.A. He’s going to have to let the house go.’”

“Such exotic loans are part of the problem, compounded by homeowners who have sucked all the equity out of their homes.”

“‘People have been using the house as a piggybank,’ Bayer said. ‘When the real estate market stops accommodating them, there’s no value increasing, they can’t (refinance) again and there’s no more equity in the house, and now they have $50,000 in credit card debt.’”

The Union Tribune. “Twenty people went to an auction of new model homes yesterday looking for a bargain. They were joined by about 80 ‘looky-loos.’ In the end, the potential buyers wanted too much of a good thing, and the auctioneer’s hammer never fell.”

“Sixteen upscale homes in the Bressi Ranch development were advertised as up for auction at La Costa Resort and Spa. Buyers were willing to pay about $1 million for a home listed at $1.4 million or $1.5 million, and as little as $650,000 for houses priced near $1 million.”

“None was accepted on-site, though auctioneer Mark Weitz told some of the high bidders that he would take their offers to the homeowners. ‘The good news from the auction is that the investors did not lower the price and kept the value up for people who live there,’ said real estate agent Kelly McLaughlin.”

“Indeed, some of the looky-loos were local residents who wanted to see how much people would pay for homes in their neighborhood. They weren’t happy with the offers.”

“But Amanda Pion-Goureau, a Bressi Ranch resident, wasn’t buoyed by the auction results, saying a house ‘ultimately is only worth what someone is willing to pay for it.’ She thought the prices being offered by the bidders ‘reflect the true market value.’”

“‘They’re beautiful homes,’ Ed Andrews of Long Beach said as he sized up the model homes with his wife. But he said he wouldn’t pay more than two-thirds of the asking price.”

“And a few people were simply sightseers. ‘I just wanted to see what kind of a fool would buy these overpriced homes,’ Bruce Azimi of Oceanside said.”

“Weitz would not disclose the minimum bid for the houses. But the owners, a group of Los Angeles-area lawyers, apparently would need about 80 percent of the asking price in order to clear their own debt with the banks holding the mortgages.”

Several readers suggested a topic about which markets will fall the most. “Wouldn’t it just make sense that the martkets that went up the most will go down the most? It’s the law of gravity!”

One reader disagrees, “No. The ones that ‘go up’ the most are the ones that will also hold more of the appreciation. Places like LA, SF, NYC, etc. It’s like stocks. I’ll bet that Dallas, Atlanta, Houston, et al will decline far more in actual dollars and percentagewise from top to bottom than any coastal California city or NYC.”

Another said, “There were some bubbly areas that are truly nice places to live: San Francisco, Manhattan, San Diego. You would expect these places to always be worth more than, say, Gilbert Arizona, Las Vegas suburbs, or a Boise ex-urb…”

And another, “San Francisco, Manhattan, San Diego, these areas were likely among the most overrun by speculative fervor which drove prices up to a non-permanently-high pinnacle.”

“Speaking for San Diego, speculation, overbuilding of tract homes and luxury condos, toxic lending to unqualified buyers and appraisal fraud have worked together to push prices to a level where fundamental demand cannot touch them. My prediction: 1) Larger absolute $ loss in the coastal bubble zones. 2) Larger relative % loss in flyover country, where reinvestmen of liberated coastal equity drove prices bubbleliciously high.”

One from Texas, “I’m in Dallas. I don’t see Dallas being worse or crashing earlier. We never saw the run-up in valuations bubbly parts of the country have — so we won’t see the corresponding ‘pop’ those areas are currently starting to experience. Yes, sales are down and inventory is up and prices have been reduced a bit; but we don’t have a California or Florida situation. And while Texas is one of the worst states for foreclosure rates, I think that’s due more to the overall economic climate in Texas than bubble factors.”

“I think this time next year Dallas will look better than the bubble-markets. Of course, that’s a relative term; I define it as ‘not as awful.’”

One added, “I would agree that strong areas in Dallas, Atlanta, Houston will fare far better than SD, NJ, LV, Phoenix, FLA. However, areas of these metroplexes with monstrous commutes will get hit hard and never recover. I don’t believe one can generalize and say ‘Dallas’ will get hard equally across its metro area.”

“No bust has worked that way before…prime areas hold value better and recover faster. Condos will get hit hard in these cities, but some will recover over time. In Austin, homes close in that are in prime areas held up much better and recovered much faster and to greater heights than those further out in 1980s ‘boom’ neighborhoods.”

One from Georgia, “Will we look back in a few years and see that the housing bubble gave Atlanta a major edge in attracting new industry and people? Many of the Florida articles tell of people moving to Atlanta, a market with a large unsold housing inventory (I think Housing tracker.net says it is the second biggest after Chicago).”

“From what I have heard, Atlanta peaked in somewhere in 2002/2003 and prices have been declining because of the huge inventory. I find it interesting that the huge inventory there seems to have made it impossible for flippers to corner the market. Even with the housing bubble on the verge of bursting, people on the eastcoast will keep moving there on the next few years because of the continuing price advantage.”

The Austim American Statesman. “Chris Kostecka and his wife, both real estate developers, recently sold their home in Murrieta, the ‘last small town area of Southern California.’”

“They purchased a home in the River Crossing community of Cedar Creek, near Bastrop, that sits on 2 acres, with horse trails and a boat dock. Lured by Central Texas’ natural beauty, similar climate and cultural diversity, Californians are heading southeast of the Golden State. What’s driving the exodus? The sky-high cost of real estate.”

“While Austin residents grouse about rising real-estate values and property taxes, Central Texas looks like Bargain City to someone moving from California.”

“Austin-area real-estate agents credit the steady influx of Californians to Central Texas with keeping the market here strong, even as other parts of the country cool off. ‘They are sure helping to keep our prices stabilized. In some neighborhoods, the prices might be actually being driven up,’ said (realtor) Lynda Conway.”

The Tampa Tribune reports from Florida. “The Bayshore Palms Apartments complex was supposed to make way this summer for the Merasol on South Bayshore town houses. Instead, developer Remmie Rann of American Design Homes decided to remodel the building and rent out 25 apartments.”

“‘We are putting it on hold right now because of the market conditions,’ Rann said.” “Plans called for 19 town houses priced from $620,000 to $710,000. The property’s Web site showed eight of the 19 reserved. ‘We had reservations,’ Rann said. “We just did not convert them into hard contracts. Then we had a bunch of cancellations.’”

“He said he’s following the advice of a longtime South Tampa real estate agent: ‘If you build right now, you’re digging your own grave. So we decided not to build.’”

“Brad Monroe, president of the Greater Tampa Association of Realtors, said developers are reassessing their plans until the market rebounds. ‘I do see certain ones that were selling that are not selling and have gone back to rentals,’ he said.”

“Association statistics show condominium sales countywide fell from 337 in September 2005 to 192 last month. ‘There’s a softness and a lot of folks anxious to sell,’ Monroe said. ‘There is a lot of selection, and things aren’t happening.’”

The Palm Beach Post. “The Opera Place condominium in West Palm Beach looks like a no-go. Opera Place could not secure a construction loan needed to start building the much-delayed project. That lender wanted more equity in the deal, said Seacoast President Jean Strickland.”

“Other Stillwater plans for the 3-acre parcel include ground floor retail, commercial showroom space, medical offices, Class A office space and a few condos, in that order as one ascends the tower. Real estate expert Neil Merin is skeptical: ‘It’s like they threw everything up against a wall.’”

Also from Tampa. “A year ago, Dawn L. Molen quit her job as a commercial loan officer and set out to become a real estate agent. With three months’ experience, the agent who had never listed a home closed her first sale Jan. 27 in a working-class neighborhood.”

“Her buyer paid $45,000 more than the asking price. It stunned her peers. From then on, Molen brought in contracts by the stack.”

“Molen found buyers willing to consistently pay $50,000 to $70,000 more than the original price, according to documents obtained by The Tampa Tribune. Collectively, the homes sold for at least $2 million more than originally listed.”

“But there was something her boss said he didn’t know: Some of the money wasn’t going to the sellers. It was going to a third party with ties to Molen, sometimes without the knowledge of the lenders or the sellers.”

“Molen’s deals have several similarities to cases that have surfaced recently across the nation, some of which have resulted in investigations or prosecution for illegal activity. As the torrid real estate market has cooled nationwide, more industry professionals may take chances to make a deal, experts say. Lenders say they are bracing for a fallout in which buyers ultimately default on their mortgages.”

“Local real estate agents fear future buyers in the neighborhoods involved in the transactions may not be able to afford homes or higher taxes as a result of inflated prices.”

“More than a dozen sellers and listing agents interviewed by the Tribune said they felt uneasy about the transactions but went along after employees at the title company assured them they were legal and not unusual. ‘As long as I got my $180,000, I didn’t care what they were doing,’ said John Dieumegarde.”

“Now, other appraisers are stumbling across Molen’s deals as they search for comparable home sales to help determine the value of nearby properties. On paper, the sales appreciation is astonishing, said appraiser Doug Nail.”

“‘This is not a $250,000 neighborhood,’ Nail said, referring to one in St. Petersburg.”

“Nail evaluated one of Molen’s sales for the Tribune, without relying on recent sales represented by Molen. He estimated the house’s value at about $145,000. One of Molen’s buyers paid $250,000 for the house in September.”

“Frank Gregoire, a Pinellas County appraiser and chairman of the Florida Real Estate Appraisal Board, said he has been getting phone calls about Molen’s sales in recent weeks. Appraisers are unsure how to evaluate property because the inflated sales are skewing their appraisals, he said.”

“‘A competent appraiser would say, ‘What in tarnation is going on?’ he said, ‘particularly in the market we have right now.’”

“One by one, the unsuspecting sellers are figuring out their transactions are stuck. Korri Prendergast, a broker in St. Petersburg, said the closing on her client’s St. Petersburg home was postponed twice.”

“Appraiser Caryn Blauser was astonished by what she found. Molen’s sales are not isolated. She has found many local homes selling for substantially more than the original price. ‘There’s some weird stuff going on,’ Blauser said. ‘The buyers may chalk it up to creative financing, but we may soon see a lot of mortgage foreclosures because everyone wanted to make a quick buck.’”

What do you see in your housing market this weekend? Reduced prices? How about builder incentives? “Know anyone in the market for a new home? If so, we have some great news for both of you. Now, when you refer someone to one of our neighborhoods and they purchase a home that closes by year end, not only will you get $5,000 at closing, but they will too!”

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Or a repartment. “Developer Steven Samuels told the Boston Redevelopment Authority (he) will press ahead with the 215-unit project located at 1330 Boylston St. in Boston’s Back Bay neighborhood. The residential and office project will break ground next week, but Samuels said it may turn out to be an apartment project rather than condominiums.”

“With financial backing from Samuel’s partner, JP Morgan & Co., and a plan to pursue rental units rather than for-sale condominiums as a ‘worse-case scenario’ the said the project will move ahead.”

From North Carolina. “Nearly a year after City Council approval, the $140 million tower is still in the design stage, none of the expensive condominiums needed to finance the project have been sold, and the groundbreaking originally scheduled this year has been pushed back to early 2007.”

“‘I heard this summer they’d be under way,’ said Mayor Charles Meeker. ‘There hasn’t been any progress on the construction.’”

“According to a report recently released by an Alexandria, Va., commercial real estate research company, buyers are less motivated to buy condos now. Some factors that contributed to the slowdown include: Prices are no longer moving up with last year’s drama. Incentives are low relative to the cost of condos. Buyers fear prices may drop and they do not want to buy at the peak.”

“As an incentive to get people to buy, The Chase, a condo conversion with units starting in the high $200,000s, this month began offering $5,000 toward closing costs on studios.”

The Auburn Pub reports from New York. “The ‘For Sale’ sign that still hangs in front of a home on North Marvine Avenue in Auburn has sat through this year’s spring rains, summer heat and fall foliage. Finally, five months after the three-story home went up for sale its sale price dropped between 10 and 12 percent.”

“‘It’s been hard to do comparative market analysis based on 2005 sky-high prices,’ agent Sandie Commesso said. ‘But falling prices are better for sellers and buyers because they are more realistic prices.’”

“While NYSAR’s numbers may indicate otherwise, some agents said they’ve noticed a dip in prices. Shawn Murphy, a real estate broker, explains that since 2005, house prices locally are slightly falling because home sale prices are beginning to exceed the average county income. ‘The reason for the house price slip is not economic,’ Murphy said. ‘House prices have outpaced the average person’s income for so long that there is now an affordability problem.’”

“‘If people want to make their houses available quickly, they are now dropping the prices,’ Murphy said. ‘Right now buyers are in stronger positions to negotiate because there are less people buying homes,’ he said.”

The Patriot News from Pennsylvania. “If the housing market nationwide is a bubble bursting, the picture in central Pennsylvania is of an oversized balloon slowly losing air. The region does feel the effects of falling house prices and sales elsewhere.”

“Bernie Campanella, sales manager in Swatara Twp., said the company’s 15 percent drop in sales of new homes compared with 2005 is partly because prospective buyers can’t sell the houses they own elsewhere. ‘I have had three buyers, one from California, one from Florida and one from Virginia, unable to sell their houses. All three had to cancel,’ Campanella said.”

“There’s also a psychological effect, said Doug Rebert, at Coldwell Banker. ‘Potential buyers could be misled by all the national media attention that home prices are dropping,’ Rebert said.”

The Star Ledger from New Jersey. “Leah Belverio purchased a $190,000 home 18 months ago along with her boyfriend. When the couple split up, Belverio, determined to hold on to her home, became a serial refinancer. She dropped a 6.5 percent fixed-rate mortgage in favor of a ridiculously cheap adjustable-rate loan with a low monthly payment.”

“To pay her bills, she cashed out nearly every dollar of equity in her Belleville, N.J., home. She was told, to wipe out nearly $50,000 in credit card debt, she could take out a new, bigger mortgage.”

“Today, her initial $185,000 mortgage has ballooned to $247,000, perhaps more than her home would fetch on the market. And her monthly payment has skyrocketed from $1,375 to almost $2,000, and might go up even further in two years when her 10 percent ‘teaser rate’ adjusts higher.”

“‘I’m trying to keep my head above water with everything, my mortgage and bills,’ Belverio said. ‘I’m the type of person, I don’t look that far into the future.’”

“All those Cinderella loans that enticed home buyers with the promise of low monthly payments during the housing boom are starting to turn into pumpkins. Financial experts now fear the same loans that helped many home buyers realize the American dream are going to land some of them on the street.”

“What worries experts like Christopher Cagan of a California-based mortgage research firm, are all the adjustable-rate loans made in 2004 and 2005, at the tail end of the housing boom. ‘This will fall on a slice of people and a slice of lenders and investors, and that slice of people will get stung badly,’ Cagan said.”

“Oftentimes, borrowers end up digging themselves deeper. Both times Belverio refinanced her home, for example, she sucked more equity out and racked up tens of thousands of dollars in credit card debt, hurting her chances of qualifying for a better loan down the road.”

“As the housing market was beginning to boom a few years back, contractors working for Kara Homes were impressed by the developer’s ‘gold punch list.’ The marching orders came from the top, as the company’s founder, Zuhdi Karagjozi, was often on the scene at Kara building sites across New Jersey, making sure the work was done right.”

“That same year, Kara Homes was recognized by Builder magazine as the fastest-growing homebuilder in the country, and Karagjozi was predicting his company, which had barely $1 million in revenue in 1999, would hit $1 billion by 2006. Then the bottom fell out.”

“Suddenly, contractors working for Kara saw their payments go from weekly to bi-weekly, until they had to go to Kara’s offices in East Brunswick to get paid. Work at 21 developments across the state stalled, then stopped altogether. The company, which once employed hundreds, had shrunk to a skeleton staff.”

“And the ‘golden punch list’ was no longer so golden, contractors said. ‘It was get them up, throw them up,’ one contractor said. ‘I don’t care if the punch list is 100′ things wrong.’”

“By late August, even the Porta Johns started disappearing from construction sites, a sure sign, the contractor said, the company was about to hit the wall. And so it did. Kara filed for Chapter 11 bankruptcy protection this month, becoming the biggest casualty so far of the dramatic change of fortune in the state’s housing market.”

“‘The bankruptcy filing may suggest that the times were so good that Kara got way ahead of the game and took too much risk,’ said James Hughes, at Rutgers University. But, he added, ‘The situation with Kara probably reveals that there are more problems ahead.’”

“Even giant publicly held homebuilders such as Hovnanian Enterprises, based in Red Bank, and Toll Bros., which has put up numerous developments across New Jersey, have been squeezed by the market downturn.”

“‘They were very aggressive in acquiring some of the better land in New Jersey,’ said Carl Goldberg, president of another large privately held homebuilder. ‘But when you acquire those land assets aggressively and pay top dollar … (and) the market begins to diminish, you don’t have as much flexibility to cut price points to move inventory.’”

“Kara’s general counsel, Patrick Turner, said rapidly changing market conditions were the main reason the company fell behind. ‘It’s hard to react instantaneously to market conditions when you get to be a certain size,’ Turner said.”

“For now, however, work at the developments, from Mount Arlington in Morris County to Mays Landing in Atlantic County, has ground to a halt, leaving communities half built and new home buyers wondering what will happen to their deposits.”

“Mike Izzolo and his wife began to notice problems at their Kara Homes development this past summer. They had put $125,000 down on a single-family home in Mount Arlington. Izzolo noticed construction slowing at the development. He called Kara Homes and said they gave him ‘all these excuses — the contractors are some place else or we had to reschedule them.’”

“Izzolo contacted his lawyer to see if he could get out of the contract. But the lawyer told him he would have to wait until the November closing date passed. ‘They have $125,000 of our money, which is a big part of our savings,’ he said. ‘And I have a hole in the ground.’”

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