The Housing Bubble

The Cincinatti Enquirer. “Home sales are slumping, prices are falling, and construction is ebbing in Greater Cincinnati and Northern Kentucky. For buyers, it means they can play harder-to-get. For builders, it means they have to work harder to sell.”

“Throughout the country, builders are starting to sound like car dealers - offering rebates, markdowns and financing. In some cases, builders are offering the cars themselves. SMI has 14 houses sitting unsold in subdivisions such as Hopeful Trails in Florence and Bristow Lakes in Independence. To spur sales, Wheatley is offering a new Chevrolet Cobalt to the buyer of a house.”

“‘If they don’t want a car, we’ll give them a morning room, an extra 12-by-14 room off the kitchen or dining room with a lot of windows and a high ceiling. It’s actually part of the house, not an aluminum structure,’ said SMI president Mark Wheatley.”

“Dan Dressman, executive VP of the Northern Kentucky Home Builders Association, said builders are offering more incentives as sales slow down. ‘They have a lot of inventory to move so they’re trying to be creative,’ he said.”

“The national use of incentives suggests the housing market downturn could be even more pronounced than has been reported. For example, Pulte Homes Inc. has recruited recent buyers to offer $500 referral discounts to prospective buyers near Austin, Texas. A Web site, iNest, offered $1,540 off homes in another Pulte development in the area.”

“The deals also aren’t limited to new-home sales. In fact, in some cases, owners of existing homes are offering their own inducements. A homeowner in Tampa, Fla., recently posted a sign in the front yard, with an offer to subsidize closing costs and pay the first few months of mortgage payments.”

“Giving cash back allows a seller to sweeten the offer without having to lower the actual stated value of the home. But economists say the practice could be inflating reported prices and distorting a market already suffering from higher mortgage rates, and a sense that the market is enduring a major correction.”

The Twin Cities Pioneer Press. “Rising foreclosures around the Twin Cities may be slamming particular neighborhoods and rattling others, but the impact of those foreclosures on the folks who made the loans or who now hold them is negligible, so far.”

“How bad would the national wave of foreclosures have to get before bond investors and other players down the chain feel real financial pain? ‘I think we’re about to find out,’ said Allen Fishbein, director of housing policy for the Consumer Federation of America.”

The Detroit Free Press. “Nearly half of Michigan homeowners are worried about the price they’d get for their house if they had to sell, according to a recent Detroit Free Press-Local 4 Michigan Poll.”

“Mark Hand, a builder and remodeler from Grand Rapids, said he has builder friends who can’t sell new houses they have built. Other friends trying to sell their own homes are also having a tough time. ‘I’m not planning on selling my home, but if I were I’d be very worried,’ Hand said Thursday. ‘For people who need to move or sell, I’m glad I’m not in their shoes, I’ll put it that way.’”

“Sales of existing single-family houses were down 14.35% in Michigan through September of this year, compared to the same period last year, according to the Michigan Association of Realtors. That drop makes 2006 the worst year since at least the 1980s.”

“Prices are down 1.6% statewide so far this year, but in some markets, such as northern Oakland and Macomb counties, sale prices on existing houses have dropped closer to 10%, the association said.”

“David Lereah, chief economist for the National Association of Realtors, blames the declines on inflated housing prices. In a recent analysis, Lereah wrote that housing prices simply got too high, cutting into affordability. ‘Sellers need to abandon unreasonable expectations about the value of their homes,’ he wrote.”

The Detroit News. “Risky from the start, a live auction of a house that started at $1 ended in a sale of $332,000, more than $40,000 less than a couple paid for it last year.”

“James and Gabriele Rudin said they knew they wouldn’t get the $389,900 they had previously sought for the 3,100 square-foot Tudor through traditional means, but hoped they’d sell it for about $350,000. The bidding never made it that high. Real estate broker Joel Ervin of Auburn Hills outlasted other bidders and bought the house for an investor in the investment division of his company.”

“More than 100 people came to the auction, many with hopes of getting the home at the end of a cul-de-sac in a manicured subdivision for a steal. But the bidding quickly escalated, going from $1 to $175,000 in one bid, knocking many hopefuls out of contention. Dozens more walked away quietly as the bidding cleared $300,000.”

“The Rudins remained hopeful as bids reached $330,000, but bidding suddenly stalled. Gabriela Rudin chewed her gum nervously as she sought a $335,000 bid. There were no takers.”

“After reminding bidders of the $390,000 appraisal on the three-bedroom house on a wooded lot, she asked for a $331,000 bid. There was a long silence before a couple met the bid, but was quickly countered by Ervin’s $332,000 offer. Another long pause followed, but not any bids.”

“‘I’m a bit disappointed for what it went for. But that’s the risk we took,’ said James Rudin. “I don’t think we would have had any better luck had we done it any other way. It’s the market.’”

“Real estate agent Bill Maliszewski said the couple got about what the market would bear in the economy. In Metro Detroit, home sales dipped 8 percent in the second quarter of this year, its biggest drop in nearly two decades.”

“‘It sold for probably what that market value was,’ Maliszewski said. He added that there was no way the Rudins were going to get what they paid for the house. ‘Not in this market.’”

“Despite their disappointment in the final selling price, the Rudins said the auction..helped them unload the home quicker than if they had let the market run its course. Plus, by auctioning the house they avoided selling any Realtor fees.”

“‘I don’t think we would have gotten more (money) and it would have been on the market at least another six months,’ James Rudin said. ‘It’s good that it’s done.’”

The Massachusetts realtors have the September numbers out. “Massachusetts home sales fell for the sixth consecutive month in September, the Massachusetts Association of Realtors reported today. Sales of detached single-family homes fell 24 percent from September 2005 to 3,435, and median selling price declined 5 percent to $341,000, the group said.”

“September condo sales fell 28 percent to 1,546 units, and the median selling price was unchanged at $270,000.”

“Residential listings are at their fifth highest level on record, having increased 14 percent over the past year from 56,016 homes and condos for sale in September 2005 to 63,956 homes and condos on the market this past September.”

From the talking points. “Single-family home sales have now decreased for 11 of the last 12 months compared to the same period a year earlier. Last month’s sales total also represents the lowest volume for home sales in the month of September in a decade, dating back to September 1996 when 3,388 homes were sold.”

“The 23.9 percent decline in single-family home sales in September follows annual sales declines of 21.6 percent in August, 25.3 percent in July, and 16.6 percent in June, thus marking the first time there has been four consecutive months of double-digit sales declines on a year-to-year basis since November 1994-February 1995.”

“The slower sales pace reflects the fact that large numbers of buyers remain cautious and are attempting to ‘time the ‘market.’ Many continue to hold out for lower prices, believing a more significant market correction may occur. Many sellers also have stopped looking for homes until they reach agreement on the sale of their own home, which has led to softer demand.”

“The supply of single-family homes on the market increased for a 19th consecutive month in September, climbing 12.8 percent in the past year from 38,319 homes for sale in September 2005 to 43,227 this September. Inventory, as stated in months of supply, also rose from 8.5 months last September to 12.6 months of supply in September 2006.”

“Condominium sales fell for a sixth consecutive month in September from one year earlier. Sales declined 27.8 percent. The last time condo sales decreased for six consecutive months on an annual basis was January-June 2001, and the last drop in condo sales greater than 27.8 percent occurred in April 1995, when sales fell 30 percent from April 1994.”

“The number of condos for sale has increased 17.1 percent in the past year, from 17,697 units last September to 20,729 in September 2006. Inventory, as stated in months of supply, also has risen this past year, climbing to 13.4 months this September from 8.3 months in September 2005.”

“The statewide median selling price for detached homes declined 5.3 percent over the past year to $341,000 in September, its lowest level since February when the median price was $339,000. On an annual basis, the median price has been flat or declined for eight consecutive months, the longest such period since prices fell for 13 months from March 1992-March 1993. The median price is now 9 percent below its peak of $375,000 set in July and August 2005.”

“The statewide median selling price for condos is 6.2 percent below the record high median price of $287,900 set in July 2005.”

“Numbers released Monday from The Warren Group, a Boston-based real estate information firm, mirrored the MAR findings. The group also found single-family homes sales were down 24 percent and condo sales were down 28 percent from the same period year ago.”

The Boston Globe. “James Corbett and his wife put their five-bedroom home in Danvers on the market in March for $539,900. Six months later it is still for sale, for $40,000 less.”

“The former manufacturing-plant engineer and former nurse, eager to move into a retirement community, didn’t wait long to begin reducing their asking price as the housing market slumped. They dropped the price to $529,900 in April and to $519,900 in May. In September they reduced it to $499,900, and now are considering whether to lower it another $10,000.”

“In this house market, he said, ‘You don’t know where the bottom is.’”

“But a recent detailed study by Moody’s Economy.com, says that while home prices are falling nationally, the worst may be over for Boston area homeowners. Boston ‘is very close to the bottom,’ said Mark Zandi, chief economist for Moody’s Economy.com. ‘If the price declines aren’t over, they’re pretty close to over.’”

“Sellers once reluctant to cut prices are relenting. Some who had put their homes on the market to test the waters and attempt to cash in on Boston’s record-high prices have taken them off, reducing the surplus and the competition for buyers.”

“Still, some agents, who have been grappling with a declining market for 18 months, are not ready to declare the worst is over.”

“‘What worries me is we don’t have the buyers,’ said Hingham agent Carol Pagliccia. With entry-level houses costing around $400,000, ‘that’s still a hefty entry level,’ she said. Buyers are waiting to make offers because they ‘have in their heads’ that prices will go down further.”

Some housing bubble news from Wall Street and Washington. Paul Muolo, “You know loan volumes must be slow when lenders start doing stuff like this: Ditech.com said it is offering homeowners the opportunity to win a year’s worth of mortgage payments (up to $25,000) in its 2006 ditech.com ‘Home Mortgage Sweepstakes.’ Ditech.com is part of the GMAC Mortgage family of companies…’”

“Friedman Billings Ramsey on Washington Mutual’s third-quarter numbers: ‘Earnings were clearly a disappointment. However, our primary concern is the fact that the expected margin expansion did not materialize while net charge-offs moved higher.’”

The Wall Street Journal. “Mortgage lenders are making it easier to get loans even as the housing market cools, and as the number of borrowers struggling to make their payments continues to rise, new studies show.”

“‘We’re seeing rises in delinquencies and loan losses that are unrelated to what’s going on in the job market,’ says economist Mark Zandi. Among the areas that saw the biggest jump in the delinquency rate since the end of last year were Stockton and Merced, Calif., and Las Vegas-Paradise, Nev. Delinquency rates were highest in McAllen-Edinburg-Mission, Texas; Brownsville-Harlingen, Texas; and Detroit-Livonia-Dearborn, Mich.”

“David M. Crosby, a Las Vegas bankruptcy attorney, says he has seen a ’surge’ in borrowers with mortgage problems. ‘Most of it is [tied to] the end of the housing boom, but I do see a good percentage of clients who got caught by a change in their mortgage rates.’ In addition, some clients ‘bought a number of speculative homes,’ he says. ‘The market turned on them, and now they are in a real financial mess.’”

“Some homeowners are calling it quits. ‘A surprising number of people are walking away from their homes rather than trying to save them,’ says Mr. Crosby, either because the rate on their loan has jumped or because they owe more than the home is worth.”

From Bloomberg. “The slumping U.S. housing market is about to get a lot worse, according to traders of mortgage-backed securities and the so-called derivatives on which they are based.”

“The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding.”

“‘Delinquency trends and home prices’ show a weakening real estate market, said Scott Eichel, head of credit trading for New York-based Bear Stearns & Co., the biggest underwriter of bonds backed by mortgages. ‘A lot of investors that have concerns about the housing market’are using the ABX index to speculate on a continued drop, he said.”

“‘The unequivocally bad housing data we’ve seen’ is prompting investors to seek to profit from potential declines in mortgage-backed securities, said Greg Lippmann, the head of asset-backed trading at Deutsche Bank in New York who helped create the ABX indexes in January.”

“The default rate for subprime loans rose to 7.35 percent in July from 5.51 percent a year earlier, according to investment bank Friedman Billings Ramsey Group Inc. in Arlington Virginia. Nine percent of all subprime loans made in 2006 may default within five years, the worst performance since at least 1998, said Glenn Schultz, head of asset-backed securities at Wachovia Corp.”

From Money Magazine. “How would you like a $10,000 gift certificate for Pottery Barn? A $30,000 in-ground swimming pool, installed? These and many other fabulous prizes can be yours if…you buy a house!”

“That’s right, Bob Barker. After years of soaring prices, in the past few months the real estate market has dropped faster than most people thought it would, even in markets where most people thought it wouldn’t.”

“Home inventories have gone skyward in the past year. In August there were 4 million homes on the market in the United States, a million more than at the same point in 2005. Combine that with the boost in interest rates and you have a lot of nervous sellers.”

“‘Until now sellers didn’t want to cut their prices. They were much more willing to provide an incentive, anything but cut the price,” says Zandi. That’s because incentives are cheaper for the seller in most cases. Right now, however, there’s enough inventory that sellers are starting to do both: lower prices and provide incentives.”

“Another finding from the NAHB survey: In order to help move inventory, more than a third of today’s home builders have increased their use of brokers over a year ago, often paying them higher-than-average commissions.”

“And there’s more. ‘Owners and builders are inviting us to cocktail parties, and they’re giving bonuses and increased commissions,’ says Diane Saatchi of the Corcoran Group. Most buyers don’t realize that the agent is getting an incentive, and there’s no legal obligation to tell them. ‘But you can flat out ask a broker, ‘Are you getting an incentive?’ Then the broker has to tell,’ says Saatchi.”

“If a broker is getting an extra 2%, you will know that her ‘This house is perfect for you!’ declarations might not be heartfelt. You’ll also know that the seller is desperate, so ask for a lower price. These days you just might get it.”

The Naples News reports from Florida. “Mary Mack, like many residents in Spring Creek Village, returned home after Hurricane Wilma to mangled metal and broken windows. Though most of the damage has been repaired, empty plots and rows of For Sale signs reveal the long-term impact of the storm. Many snowbirds haven’t flocked south yet, and permanent residents speculate some might never return.”

“Joanne Staupe would like to move farther north, but she pulled her For Sale sign in September after her home in Imperial Harbor sat untouched for five months. Dozens of homes have sprouted Realtor signs, often a reflection of who was hit twice and doesn’t want to try for a third.”

“‘My insurance went up, but they did renew me, which surprised me,’ said Staupe. ‘I can’t afford to stay, I can’t afford to move.’”

“A neighbor who lives behind Staupe, Steve Sallee, said he’s also looking to move but the frozen market has done him few favors. There are six For Sale signs before the first stop on Imperial Harbor Boulevard; 12 by the end of the half-mile road. Few homes are moving.”

“Sallee said his insurance tripled in the past three years, hiking to $1,200, a payment too pricey to afford. ‘We can’t do it,’ said Sallee. ‘They want the poor man out? Well, this one is leaving.’”

The Times Picayune from Louisiana. “Judy D’Alfonso thought her Slidell area home would sell within 30 days when she put it on the market. That was about three months ago. The four-bedroom, two-bathroom house was not among the approximately 10,000 Slidell homes that flooded during Hurricane Katrina last year.”

“D’Alfonso listed the house for $235,000 in mid-July, when it was widely considered a seller’s market. But after several disappointing weeks, she lowered the asking price to $229,000.”

“Before the school year started, D’Alfonso got several calls a week. As they slowed to a trickle, she began to make more improvements, painting and installing new flooring. ‘We had a lot of activity at first, a lot more than we have now,’ she said. ‘Now it’s just dead.’”

“D’Alfonso’s experience isn’t unusual in St. Tammany Parish. The market thrived amid fierce demand in the wake of Katrina, which pushed up prices and fueled strong competition among buyers. But that intensity has been fading.”

“Recent statistics indicate the market is shifting as supply begins to outstrip demand. The number of homes for sale in the parish is climbing monthly, and they are taking longer to sell. ‘The perception here with agents is the market has slowed down,’ said Sandy Sandusky, a Realtor in Mandeville. But that perception, he said, is partly the result of a letdown from the post-Katrina frenzy.”

“‘Our office, for a month after the storm, sounded like the New York Stock Exchange,’ he said. ‘It was a madhouse. Supply is probably higher than demand right now than at any time we have seen in the past 14 months,’ he said. ‘We are trending toward a buyer’s market.’”

“Katrina’s impact was more devastating on the eastern side of St. Tammany, especially in Slidell. Storm damage depleted the available housing stock, driving up demand for homes in usable condition. As a result, many houses sold for more than their appraised value, said (broker) Helene Nunez in Slidell.”

“‘We had nothing then,’ she said of the city’s post-Katrina housing stock. But over the past year, supply gradually outstripped demand. ‘Now you’ve got to really have that house in pristine, walk-in condition,’ Nunez said. ‘Buyers have options galore. We have tons of active listings in Slidell alone. The prices have come down to a more realistic level now.’ Buyers can pick and choose, she added, and ‘they are really bargain-shopping now.’”

“Nunez and other brokers say many storm-damaged homes have been repaired or renovated by homeowners as well as investors, increasing supply.”

“‘Basically, we’re building inventory,’ said Ken Levy, Latter and Blum’s Slidell branch manager. Levy cited the rising cost of homeowners insurance as another factor contributing to increasing buyer ‘resistance.’”

“According to the parish, 1,662 single-family residential building permits have been issued this year through September. Nearly 4,000 approved residential lots are in the pipeline, according to Marty Mayer, president of Stirling Properties. ‘We’re beginning to see a wave of new construction,’ he said. ‘You will start seeing the effect of new construction that began post-Katrina in the fourth quarter and in 2007.’”

“The number of houses for sale in St. Tammany has risen steadily this year since a brief surge in February. According to Prudential, it rose from 949 in March to 1,678 in August.”

“Ann Earhart was convinced her 2,800-square-foot, two-story home near Covington would sell within three months. She moved out after listing it for $499,000 in December. She has since lowered the price to $439,000. ‘It doesn’t seem to be appealing to people,’ she said.”

“Brokers and agents say the market’s broader trend is toward a balance disrupted by Katrina, though recent figures show a slowdown. ‘It’s emphasized more because we’ve been on such a wild ride,’ said (realtor) Rick Roberts in Mandeville. ‘If anything, it’s going to plateau.’”

“‘We’ve kind of returned to a normal market,’ said Margi Inman, of Coldwell Banker in Mandeville. ‘The gold rush is over,’ said Jeff Breland, president of Century 21 Investment Realty in Slidell.”

The Daily Times reports from Maryland. “Ask condominium developers in the city about sales, and while most speak cautiously with a smile, Jim Dodson belts out a laugh. Dodson laughs because his Captain’s Quarters condo units are sold, snatched up before last year when a slump in the housing market stalled developers nationwide.”

“‘I built 16 and mine are sold out,’ he said with a cackle. ‘Yes, I’m glad I sold them before the slump.’”

“More than a year ago, (a) partnership constructed three buildings in the Harbour Light high-rise condominium on the shoreline overlooking Tangier Sound. At least 70 of a total of 91 units were sold before interest rates rose, forcing up prices that turned off prospective buyers. The resulting bubble, a market glut of high-priced homes nobody would buy, fueled a housing slump that sent some developers packing.”

“Two years ago, Dodson sunk $4 million into the condominium where his restaurant business once stood. ‘I was the first one to do it,’ he said. ‘Now, a lot of speculators are out of the market; everything is slow.’”

“‘We were selling as fast as we were building a year and a half ago,’ Phil Johnson said. ‘The (Federal Reserve) raised interest rates and that started the housing bubble; it took a lot of speculators out of the market.’”

“Developer James Shaw plans to lease a dozen unsold properties in the 23-unit Captain’s Galley condominium facing the city dock. ‘Every project has its own risk,’ Shaw said.”

“Tangier resident Gary Pruitt judges sales by the number of vehicles in parking garages. ‘There are a few cars parked there, but a lot of slots are empty and have been,’ he observed. ‘I don’t think condos are selling too good. I don’t want one.’”

“Robert Tawes, a businessman and native, said some property listings are by homeowners rushing from the sidelines hoping to get rich. ‘There are as many for-sale signs as they are political signs,’ joked Tawes. ‘Everybody thinks land is worth a lot of money.’”

The Virginia Pilot. “Auctions of homes in foreclosure have become familiar sights at courthouses throughout Hampton Roads. John J. Allen warns that many more are in the works. At Child & Family Services of Eastern Virginia, the number of cash-strapped homeowners seeking help to avoid foreclosure has jumped sharply during the past six months, said Allen, vice president of the agency.”

“During the frenzied pursuit of homeownership in 2004 and 2005, many Hampton Roads home buyers used adjustable-rate mortgages as a way to buy a home that they could not otherwise afford, Allen said. ‘There will be a continued increase in foreclosures during the next two to five years,’ Allen predicted, because ‘ARMs are not going to be adjusting downward any time soon.’”

“Earlier, many homes at risk were concentrated in neighborhoods with modest household incomes, such as the Portlock section of Chesapeake and the Lafayette Manor neighborhood of Norfolk. More recently, homes in several sections of Virginia Beach, including the affluent Wolfsnare area, have become seriously delinquent and risk foreclosure.”

“It isn’t clear what triggered the foreclosure on a year-old second mortgage at 8700 Tidewater Drive, and the owner could not be reached for comment last week. The home, with a ‘No Trespassing’ sign in one window, appeared vacant, and the owner’s phone number has been disconnected.”

“Like this mortgage, many in Hampton Roads that are seriously delinquent or in foreclosure were taken out within the past two years.”

“Individuals determined to get into a house often failed to plan for the higher monthly payments that would begin once the ‘teaser’ rates on their adjustable-rate mortgages expired, Allen said.”

“Meanwhile, homeowners tapped the sudden increase in their home equity by taking out second mortgages to repay credit-card debt. Some, however, failed to curb their use of credit cards and ran up their debt a second time, said Sharon Neuhaus, for (a) credit-counseling service. ‘Now they have a second mortgage on top of their credit-card debt’ and find it difficult to make their mortgage payments, Neuhaus said.”

“Another notable change in mortgage lending has been the availability of costly home loans to borrowers with a tarnished credit history. Some individuals seeking help rushed to buy a home and relied on these subprime mortgages to do it, said Luxmy Panzardi, a housing counselor.”

“Borrowers of subprime loans would have been much better off had they improved their credit scores first and then shopped for less costly mortgages, Panzardi said.”

“Throughout Virginia, fewer investors are showing up at foreclosure auctions, and more homes end up in the hands of lenders, said Eric White, VP of a Virginia Beach law firm. That trend may be taking hold in Hampton Roads as well, where investors are known to be especially aggressive at courting homeowners who default on their mortgages.”

“Dean Taylor, who buys homes to renovate and resell, arrived at the auction with a deposit check in hand. He said he decided against bidding because there might not have been any profit available after paying at least $57,738 for the foreclosed second mortgage, another $78,000 for the first mortgage and an unknown amount for repairs to the house.”

“The auction was over in minutes. Standing outside the Norfolk Circuit Court on Tuesday, attorney Richard A. Knee quickly read a description of the property and asked for bids.”

“He was selling the modest, 64-year-old house on behalf of a lender owed $57,738. When two prospective bidders didn’t respond, Knee declared that the lender, CitiFinancial Inc., was the successful bidder and made note of the sale.”

“After the auction, Taylor described investors’ reduced appetite for foreclosed homes this way: ‘A year ago, there would have been 30 or 40 people here.’”

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