The Housing Bubble

The Daily Sun reports from cal. “Step 1 in dealing with today’s Coachella Valley real estate market: Don’t panic. Bill Powers may have summarized sentiments of local real estate veterans best at this morning’s annual ‘State of Real Estate in the Coachella Valley’ forum at the Doral Palm Springs Resort in Cathedral City.”

“‘Really, my message is, ‘No hard hat necessary. The sky is not falling,’ said Powers, president of Pacific Western Bank. Although the meeting was dubbed ‘I Survived 2007: How to Make It Through Next Year,’ real estate and business experts were upbeat and said they believe the downturn in overall valley home sales compared with recent years and a slowing of annual home-price appreciation is a cyclical adjustment.”

The Press Telegram. “About 12,000 Realtors gathered in Long Beach for three days last week to hear the fate of the market at the California Realtor Expo 2006 at the convention center. It was hard to find anyone at the conference who was down on housing.”

“Christopher Cagan, director of researchfor First American Real Estate Solutions, said foreclosures will have some effect on the market, but it won’t be anything like the gloom and doom scenario of a bursting real estate bubble.”

“‘Reset will affect the market, but not break it,’ he said. Cagan’s estimates show Los Angeles County will experience 46,000 defaults in a five-year period from 2007 through 2001. Those defaults will result in an $8.2 billion hit on the area’s economy. That’s minor when you consider the county is one of the biggest economies in the nation, Cagan said.”

“Orange County is expected to see 18,000 defaults for a $3.9 billion loss during that period, he said.”

“The individuals who should have some worries are the people who purchased a home at the peak of the market, from 2004 to early 2006, with little down and an adjustable mortgage that’s due to reset to a much larger rate. With no equity to refinance, and a ballooning monthly payment, they may be faced with nowhere to go but into default, he said.”

“All three speakers also agreed that those reporting on housing have not given an even account of the good and bad in today’s market. ‘You have a lot of media wanting to put a negative spin on the numbers,’ said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.”

The Marin Independent Journal. “Home foreclosures in Marin County were up nearly 60 percent in the third quarter compared with the same period last year, Dataquick reported. Eighty-nine foreclosures were reported in the quarter ending Sept. 30, up 58.9 percent over last year, when there were 56.”

“The foreclosure numbers were also a steep jump from the second quarter, when 58 were reported. But Marin’s foreclosure picture was still rosier than most of the other eight counties in the Bay Area, where overall foreclosures surged 89.2 percent in the third quarter.”

“‘I’m not surprised by those numbers because of all the products that have come out - no down (payment), interest-only loans,’ said Russell Colombo, chief of Bank of Marin, which does not offer residential loans. ‘A lot of these people go in with the expectations of appreciation, but in Marin County that has not happened recently.’”

“According to DataQuick figures released this month, Marin’s median single-family home price declined 3.3 from September 2005 to September 2006.”

“‘But in this type of market, with the adjustable rates out there, I’m not surprised that the foreclosures would jump,’ said Kathy Schlegel, president of Marin Association of Realtors. ‘And they probably will in the next quarter.’”

The Washington Times. “Cher is quietly trying to unload her gothic Pacific Coast Highway mansion in Malibu. Actor Nicolas Cage wants $35 million for his Bel-Air home. But even in the land of $2 million ‘tear downs,’ housing prices are dropping faster than Jamie Foxx’s Lamborghini.”

“‘It’s a buyer’s market,’ said real estate agent Ben Young Mason, who works with upper echelon clients. ‘Houses which sold within 60 to 90 days last year are now sitting on the market for four to six months.’”

“Los Angeles is in the midst of a housing market slowdown, just a year after sellers were enjoying giddy times of bidding wars and multiple offers. Prices in Southern California rose in September at their slowest pace in nearly a decade. Realtors say there are several causes, but none more than greed.”

“‘Unfortunately, there’s a discrepancy now between sellers’ expectations and a realistic view of the market,’ Mr. Mason said.”

“Real estate is the L.A. topic du jour. Homes are simply worth less than they were a year ago, and many sellers are pulling their homes off the market. ‘The problem is people are not reducing the prices. They’re following a falling market. Sellers need to be realistic,’ Mr. Mason said.”

“The housing market slowdown also has led to a sharp rise in mortgage defaults. Foreclosures among Californians more than doubled in the three months ending in September, according to DataQuick. Higher payments on adjustable rate mortgages are being blamed for the rise in loan defaults.”

“Realtors admit that they were putting more people in homes they eventually would not be able to afford. ‘In the inflated market, they paid top dollar,’ said real estate agent Alison Mitchell. ‘Now, they’re in trouble.’”

“Which leaves jittery Los Angeles homeowners with the question: Is it time to panic? ‘Absolutely not, it’s not time to panic,’ Mrs. Mitchell said. ‘All it has done is to return to a normal market as opposed to an exaggerated, overinflated market.’”

A housing report from the Washington Post. “At a recent meeting with her Las Vegas real estate firm’s 200 agents, Joanne Levy told them they needed to deliver a stark message to clients. They would tell them that unsold homes are at a record level and sellers need to lower their prices.”

“In other words: the boom is over. ‘They want the 2004, 2005 market,’ Levy said of today’s clients. ‘We don’t have that.’”

“With stubborn sellers refusing to relent on asking prices, many prospective buyers have kept their hands in their pockets. Some industry observers fear that bull-headed home sellers could worsen a downturn by driving up the inventory of homes for sale and running off would-be buyers.”

“‘Sellers have not caught up with the reality of the marketplace despite the proliferation of ‘For Sale’ signs,’ said Howard Glaser, a mortgage industry analyst in Washington, D.C. ‘There is a lag period between sellers’ expectations and the reality of the marketplace,’ he said, and shaking them out of their high-price fantasy ‘is more psychology than science.’”

“Las Vegas had 20,800 single-family homes on the market in September, a 57 percent jump from a year earlier. It’s the same story in once-booming regions like California, where home prices in eight major markets declined in September compared with a year earlier.”

“Despite these truths, real estate agents say, many sellers continue to overreach on their asking prices. ‘I try not to list those properties,’ California Association of Realtors President Vince Malta said of the overpriced homes. ‘You could do that last year and someone would still come in and make an offer,’ he said. ‘Back then, we were all marketing geniuses.’”

“A homeowner’s blind faith in the price of his or her home could be costly if it flies in the face of reality and prices continue to drop, said Stephanie Madon, a psychology professor at Iowa State University. ‘If the homeowner believes the house is worth a lot and refuses to budge, it could become a self-defeating prophesy,’ she said.”

“In the end, stubborn sellers could lose more home value the longer they delay.”

From CNN Money. “An Austin couple, Richard Morrisett and Regina Maldve, had a lot to learn about selling a home. That education is costing them big money. They had put their three-bedroom, two-bath house on the market in April for $419,000, then dropped it to $399,000. In June, just as they were moving to their new home, they finished negotiating a verbal offer of $393,000.”

“Eight hours later, they had another bid - at $399,000. That’s where the trouble began. They failed to land either buyer and the couple is still trying to move the property.”

“When the couple finally changed brokers, they discovered they had overpriced the house, with comparables in the neighborhood about 25 percent lower. They repriced it for $365,000 but still had no bites. They dropped it to $359,000 with the same results.”

“Meanwhile, they were now over-extended with two mortgages. They had counted on proceeds from the sale of the old house to pay for some upgrades on the new one. They borrowed to make their payments - and worried a lot. ‘We can’t carry two mortgages and other bills and credit cards,’ says Maldve.”

“Their salvation may be at hand. They have accepted an offer of $350,000 and took a down payment. But the new buyers have asked to delay closing until they can sell their own house. ‘But we need to close before Oct. 31,’ says Maldve.”

“They feel they must close before the end of the month. The brinksmanship is nerve wracking. Says Morrisett. ‘Even if the deal goes through, we’ve still lost more than $40,000, because of bad advice. Not to mention the loss of six months sleep and fights over where to get the money to tide us over.’”

Some housing bubble reports from Wall Street and Washington. “M.D.C. Holdings Inc. reported third-quarter net income fell 60% as profit margins narrowed in more competitive markets and home orders plunged 40% from a year earlier. The ‘operating environment in most markets became increasingly competitive in the face of continued expansion of unsold new and existing home inventories,’ said CEO Larry A. Mizel.”

“Margins thinned particularly in California, Nevada and Virginia, M.D.C. said. In the third quarter the company said it booked pre-tax charges of $29.4 million for inventory impairments and project cost write-offs.”

“‘Builder concessions and incentives continue to rise,’ said CEO Mizel. ‘Confronted with expanding inventories and increased uncertainty, many buyers displayed a wait-and-see approach to purchasing a new home.’”

“‘M.D.C. said home orders in the third quarter fell 40% to 2,120 from 3,551 in the year-earlier period. The cancellation rate jumped to 48.5% from 25.7%.”

“‘We expect cancellations to remain high as long as home prices deteriorate,’ wrote Banc of America Securities analyst Daniel Oppenheim. ‘We believe land impairments will likely continue and increase from the $19.9 million charge in [the third quarter] due to the relatively young age and geographic concentration in stretched markets of the company’s lots supply,’ he added.”

“Homebuilder Technical Olympic USA, Inc. reported consolidated net sales orders of 1,470 for the quarter ended September 30, 2006, a 19% decrease from the.. quarter ended September 30, 2005. Joint venture net sales orders for the third quarter of 2006 were 125, an 86% decrease the third quarter of 2005.”

“TOUSA’s consolidated cancellation rate was 33% for the third quarter of 2006 compared to 20% for the third quarter of 2005. TOUSA’s combined cancellation rate for the third quarter of 2006 was 44% compared to 18% for the third quarter of 2005.”

“The Company anticipates a pre-tax charge in the range of $35 million to $48 million for the third quarter of 2006 related to land deposit write-offs and asset impairment charges.”

“HomeBanc Corp., which invests in and originates residential mortgage loans, on Friday forecast a wider-than-expected loss for its third quarter, saying rising interest rates hurt loan originations.”

“The company, which saw a 28 percent decline in loan originations from a year ago, said its HomeBanc Mortgage Corp. unit cut general and administrative staff by 8 percent, or total associates by 4 percent. ‘The by-product of the industry downturn is overcapacity, margin compression and aggressive credit practices,’ HomeBanc CEO Patrick Flood said.”

“Countrywide Financial Corp., the largest U.S. mortgage lender, on Tuesday said..loans fell 22 percent from a year earlier to $115.1 billion, as rising home prices and higher interest rates led to a drop in borrowing demand.”

“It may buy back up to $2.5 billion of stock, and intends to buy back $1 billion to $2 billion this quarter by issuing hybrid securities. Countrywide is cutting jobs and expenses to reduce its cost base by more than $500 million annually by year end. ”

“‘The mortgage market is on track for pretty significant year-on-year declines, and that’s sharply at odds with the capacity that Countrywide has built up,’ Robert Lacoursiere, an analyst at Banc of America Securities in New York, said. ‘They’ve signaled they’re in a relative retreat.’ Countrywide’s mortgage-banking profit declined 40 percent.”

“Popular new mortgage products that have helped fuel the U.S. housing boom will soon lead to more delinquencies and foreclosures as rates are reset, the chiefs of Fannie Mae and Freddie Mac said Monday. Next year, a trillion dollars worth of mortgages will have their rates reset, said Dan Mudd, CEO of Fannie Mae. That’s a significant share of $9 trillion in mortgages outstanding, he said.”

“The danger of mortgage rate resets have emerged along with ‘all of the innovation that has gone on in the market,’ Mudd said. ‘I would be the first to argue for that innovation,’ Mudd said, but he cautioned that a wave of mortgage resets could be disruptive.”

“One excess of the housing boom has been a glut of financing filtered through new mortgage products, said Richard Syron, Freddie Mac’s CEO. ‘There is too much capital chasing too little profit,’ he said. ‘We’re all getting squeezed out on the risk curve.’”

“Syron foresaw ‘a pretty tough correction’ for housing after ‘coming off probably the best 10, 15 years in the mortgage industry in the world.’”

The Milwaukee Journal Sentinel. “Up to 4% of America’s mortgaged homeowners might lose their homes to foreclosure in coming months, one of the nation’s largest lenders predicted Monday, as those homeowners find themselves trapped by heavy debt and the housing slump.”

“‘This downturn is going to be tougher because we’ve been though an unprecedented period’ of good times, Michael Perry, CEO of Indymac Bank of California. told about 6,000 Mortgage Bankers Association conventioneers.”

“A media firestorm is ahead, he warned, and one target is the newer, more aggressive lending practices that lenders call ‘exotic’ or ‘non-traditional.’”

“Other speakers agreed that the next year or two could be rough for borrowers and lenders alike. ‘It’s going to be a fairly tough correction,’ said Dick Syron, CEO of Freddie Mac. ‘There’s going to be a lot of heat about this, a lot of noise.’”

“That’s because the damages could be enormous, said Daniel H. Mudd, CEO of Fannie Mae in Washington, the nation’s largest mortgage financier. ‘Getting more people into homes is a good thing,’ Mudd said, ‘but it’s not entirely clear that everyone knew what they were getting into

From Forbes. “Two years ago, specialty mortgages were all the rage. Today, the financial grim reaper is at hand. Hundreds of billions of dollars in adjustable-rate mortgages that were underwritten in the first wave of the trend will get kicked up.”

“As credit counselor Suzanne Boas put it, ‘Instead of a homebuyer, you became a home speculator.’”

The Miami Herald. “The state-run insurance pool is getting ready to move second homes, vacation homes and most investment properties off its books. An insurance bill passed in May requires Citizens Property Insurance to stop offering windstorm coverage to non-homestead properties after March 1, 2007.”

“The one exception: Lower-value rental properties that are rented will be grandfathered in. These properties must be valued at under $200,000 and have a tenant with a signed lease for at least seven months.”

“If owners of non-homestead properties can’t find coverage from another insurer, they can stay with Citizens. However, they will be charged a 25 percent surcharge.”

“Nearly half of the 924,578 properties where Citizens provides hurricane insurance are in South Florida. It covers more than 1.2 million properties statewide.”

The News Press. “Snowbirds in Southwest Florida are viewing the dual lifestyle as more of a trick than a treat. ‘These taxes are killing me,’ said Louis A. Nitti, who divides his time between West Orange, N.J., and Cape Coral. Nitti has watched in dismay as his ‘little two-bedroom home, built in the ’60s,’ went from having a tax bill of less than $1,400 in the early ’80s, to $7,900 in 2006.’”

“‘A lot of people are going to North Carolina,’ Nitti said of fellow snowbirds. ‘I’ve been seriously thinking of that, also.’”

“Brad Hobbs, associate professor of economics at Florida Gulf Coast University, said a gradual attrition in snowbird residency here ‘is very likely.’ ‘There is still the draw of the environment, the Southwest Florida cachet,’ Hobbs said, ‘But people make choices based on what things cost.’”

“‘Middle-income people have second homes,’ Hobbs said. Those second homes comprise a significant chunk of Lee County’s tax base.”

From MarketWatch. “Baby boomers may not be as in love with second homes as once thought. The rate of second-home ownership among 50- to 60-year-olds has remained flat during the 12-year period between 1992 and 2004, according to a report sponsored by Radian Group Inc. and the Research Institute for Housing America of the Mortgage Bankers Association.”

“Early boomers were no more likely to own a second home than older generations of homeowners. Those who do have a second home are using the residence on a limited basis too: One-half spend two weeks or less and two-thirds spend four weeks or less per year in their second home, the report found.”

“Only 12% of second-home owners said they intended to sell their main home and eventually use their second home as their primary address, debunking speculation to the contrary.”

“‘There have been relatively few scientific studies on second-home ownership and mortgage activity,’ Doug Duncan, MBA’s chief economist said. ‘The report indicates that baby boomers are not acting differently than their parents when it comes to second-home ownership.’”

From Reuters. “Baby boomers are not flocking to cities from suburbia, defying some expectations and posing problems for some developers, according to a new study.”

“Condominium developers who had been counting on an exodus of baby boomers into cities seeking cultural and other services could suffer, said Gary Engelhardt, senior research director at Syracuse University, who conducted the study.”

“Flying in the face of other research showing suburbanites with a penchant for urban culture lured into buying second homes in cities, this study found just 2 percent of empty-nest retirement age suburbanites can be expected to make such a shift.”

“‘This is tremendously important because when you go to any metropolitan areas, you notice lots of condominiums being thrown up and substantial efforts to market these condominiums and townhouses to older individuals with the idea of them returning to the central cities,’ Engelhardt said.”

“‘It seems at this point there’s not a lot of evidence that its going to materialize,’ he said, noting that some condo markets are already overbuilt. ‘That’s probably not very good news for condominium developers who are placing big bets on these baby boomers returning in large numbers.’”

The Boston Herald. “Massachusetts is facing what looks like its worst autumn real estate market since 1996, with no clear signs that prices are bottoming out. ‘I think we still have some more to go on the downside,’ economist John Bitner of Boston-based Eastern Bank said yesterday after the Massachusetts Association of Realtors reported housing’s weakest September in a decade.”

“MAR said just 3,435 Massachusetts houses changed hands last month, a 23.9 percent plunge from September 2005 and the lowest September volume since 1996. The group also said the median house fetched $341,000, down 5.3 percent from a year earlier and 9 percent below the market’s $375,000 August 2005 peak.”

“The condo market recorded an even sharper slowdown, with the number of units changing hands declining 27.8 percent, the biggest annual drop since April 1995.”

“At the same time, the number of unsold houses and condos listed for sale hit 63,956. That’s up 14 percent from year-ago levels, and trails only April, May, June and August as the highest unsold inventory on record. ‘The larger selection of homes to choose from, combined with the extra time it now takes to sell a home, should keep downward pressure on prices for the next several months,’ MAR President David Wluka said.”

“Tim Warren of market-tracker The Warren Group said a ‘market correction is taking hold, and we expect it to continue into 2007.’ Warren yesterday reported that third-quarter Massachusetts house sales posted their steepest quarterly drop since 1987.”

“Bitner said he expects Massachusetts prices to fall another 4 percent or so going forward. Bitner said the Bay State lacks two key ingredients needed for a housing turnaround: population growth and a local economy that’s expanding more quickly than the national average. ‘We don’t have the wind behind us of a rising population, nor do we have a stronger-than-average economy,’ he said.”

The Milford Daily News. “‘Buyers are driving hard bargains, and owners who have to sell are being forced to lower their prices,’ said Tim Warren.”

“‘Today’s market reflects the more relaxed, even guarded, approach adopted by many buyers who are waiting to see if prices have bottomed out,’ said David Wluka. ‘Sellers also have become more cautious, with many opting to delay their home search until they’ve reached agreement on the sale of their own home.’”

The Worcester Telegram. “In Worcester County, home sales slid 24.63 percent, to 2,084 units sold in the third quarter this year, while the county’s median sales price fell a little more than 9 percent, to $256,574, said The Warren Group. Condominium sales in Worcester County dropped 17.3 percent, to 763 units, while the median sale price fell 17.3 percent, to $201,500.”

“Terry Egan, editor of Banker & Tradesman, said the softening market is a correction that will likely extend into the next year. Massachusetts saw a decade of record housing appreciation before the market slowed early this year.”

“‘That’s not peering into a crystal ball,’ he said. ‘We’re extrapolating numbers that we’ve extracted so far. That’s what the statistics are showing us. It’s accelerating rather than receding. We don’t expect it to end in the near future.’”

“The largest percentage drop in sales was in Nantucket County, down nearly 57 percent. The county, which comprises only the island community of Nantucket, the smallest market of the state’s 14 counties, had 80 home sales in the third quarter of 2005 and 35 in the same time period this year, according to The Warren Group.”

“The second-highest sales drop was in Suffolk County, down 34.4 percent. ‘You are seeing some regional variances in numbers,’ Mr. Egan said. ‘Overall, we’re seeing some market corrections across the board in Massachusetts to varying degrees. Some areas are seeing home sales and prices dip to greater extent, where the run-up was greatest, around Metro Boston, especially.”

“Mr. Egan said the recession in the early part of the decade was mitigated by a robust housing market. The question now is whether the strong economy will help pull the housing market out of its downturn, he said.”

“‘During the first part of this decade, housing was the bulwark of the economy, and kept the recession short and mild,’ he said. ‘The question is if a strong economy can keep the housing market correction shallow. If the job market remains strong, incomes remain strong and stable, more than likely, this will remain a correction rather than something deeper.’”

The Boston Globe. “Wluka said buyers, sensing an opportunity, are ‘negotiating hard.’ One of his clients looking at condos in various projects ‘wanted to know the selling price of every condo sold in the past two years’ in each project. ‘I gave it to him,’ he said.”

“Real estate specialists said the market can’t fully rebound until the excess supply of homes is reduced, a process that could take months or years.”

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