The Housing Bubble

The Burbank Leader reports from California. “Housing sales in Burbank were down slightly in August compared to the same month in 2005 and the number of homes on the market has quadrupled, the Burbank Board of Realtors reported.”

“With more than 400 homes, condominiums and town houses listed for sale in Burbank, the market contains many offerings for buyers, he said. ‘We’re into a buyer’s market now,’ said Larry Auzene, president of the Burbank Assn. of Realtors. ‘The buyer has the ability to come in and bargain a little. It’s part of the concept of supply and demand. We have a large supply … this time last year there probably wasn’t more than 100.’”

“Recent fluctuations in housing inventory can be partly attributed to limits that the Federal Reserve imposed on so-called exotic mortgages, said Jack Kyser, Los Angeles County Development Corp.’s chief economist. Regulators put restrictions on these aggressive packages not only to protect potential home buyers, but to preserve the viability of lenders themselves, he said.”

“‘For a while you had sort of a buying frenzy because mortgage rates were extremely low,’ Kyser said. ‘And then it’s like somebody flipped the switch, and mortgages started to go up. All of a sudden it’s like rational behavior has returned to the market.’”

“The result is a filtering-out of buyers who were only eligible for ownership as a result of exotic mortgage packages, he said. And in some cases, eager buyers bit off more than they could chew, he said. ‘People now who are in the market probably are qualified financially to buy a home,’ he said. ‘Probably over the last year you had a lot of people who got in on these exotic mortgages.’”

The Press Democrat. “Falling home prices will likely hit bottom early next year, but it may not be a soft landing and housing likely won’t rebound for five years, an economist told Sonoma County business leaders Friday.”

“‘It was a bubble. And the bubble is popping. The real debate is whether this is going to be a soft or hard landing,’ economist Chris Thornberg said.”

“The correction was expected, with Thornberg and other economists saying it was overdue, but it has been quicker and stronger than many anticipated. Many builders, brokers and lenders have become resigned to the housing slowdown, yet hope Thornberg was wrong when he predicted the market won’t regain strength until 2011.”

“‘I think he was confirming what we have been watching. We’ve been there before. It’s going to be a little longer than I would like to see,’ said Phil Trowbridge, a longtime home builder who noted sales have slowed at his Vintage Greens development in Windsor.”

“Sonoma County home sales are down more than 27 percent so far this year. The median price has fallen 7.7 percent over the last year to $567,000 in September. Sales and prices also have fallen across the Bay Area and nationwide, leaving two questions, when will it end, and can the economy survive the hit?”

“What is going on in housing remains troubling, Thornberg said. The market’s annual double-digit price increases the last several years drew buyers who figured the gains would never end, setting up a painful correction, he said.”

“Falling prices already have led to rising loan defaults for many more homeowners across Sonoma County and state. Others could feel the pinch when it comes to spending decisions because they feel less wealthy. ‘How consumers respond, that waits to be seen,’ he said. ‘This might all blow over. On the other hand, there is the potential for a true catastrophe.’”

The LA Times. “Tired of the drumbeat of negative news about the housing market, the nation’s real estate brokers are trying to change the tune. This weekend and next, the National Assn. of Realtors is spending $40 million on full-page ads in the nation’s biggest newspapers, including The Times, to convince people that the market is A-OK.”

“But at least one marketer isn’t buying it. ‘It’s preaching to the choir and goes in the face of objective reality,’ said Peter Sealey, who runs consulting firm Sausalito Group Inc. ‘I predict it will have zero effect on the marketplace.’”

“A year ago, the Realtors’ chief economist, David Lereah, chastised ‘the Chicken Littles’ who warned of a pending bust in housing, about the same time he was promoting his book ‘Are You Missing the Real Estate Boom?’ It claimed that property values would continue to climb through the end of the decade.”

“In this month’s Realtor magazine, Lereah wrote he now favored ‘price softening.’ ‘The housing sector and the U.S. economy need home-sale transactions more than home-price appreciation,’ he said.”

“Behavioral economist say that those involved in real estate are not immune to the same pressures and need for conformity as, say, high school students sporting pompadours in the ’50s, love beads in the ’60s and platform shoes in the ’70s.”

“Real estate elation, too, inevitably faded, and fear now drives people’s actions instead. In this new era, nobody, it seems, wants to be the first on the block to lower their price, to be first among their friends to leap into a purchase. It’s in real estate, psychiatrists and economists say, that interesting psychological dynamics come into play. Terms such as ‘denial’ and ‘loss aversion’ begin to fill the notebooks of industry watchers and shrinks alike.”

“‘In a changing real estate market, buyers and sellers freak out and come up with their own strategies, which actually affect the market,’ said Christopher J. Mayer, a Columbia Business School economist. ‘Buyers waiting for prices to bottom out can cause prices to drop, and in the ’90s that led to a recession.’”

“So far, there is no recession, economists say, but there are signs of buyers and sellers slipping into well-worn psychological patterns, following their neighbors’ advice instead of solid economic fundamentals.”

“Once in, overextended buyers often become victims of ‘bubble thinking,’ said psychiatrist Richard Peterson. Buyers gamble that the value of their homes will increase, even if they’re losing money every month due to negative amortization loans and lack of equity actually accruing.”

“Sellers are another story. The word ‘denial’ must have been created for them, psychiatrist Peterson said. As applied to real estate, denial is a condition in which sellers cannot bear to part with their homes for less than what they believe they’re worth, experts say.”

A housing report from the Arizona Republic. “Sales have finally started at the long-anticipated Fulton Ranch housing development in south Chandler, just as the Valley is experiencing a significant slowdown in the real estate market.”

“Fulton Ranch was conceived several years ago when the market for new homes was red hot. A year ago, it boasted a waiting list of 14,000 potential buyers interested in the lake community, where houses will sell from the high $500,000s to more than $1 million. But market conditions have changed.”

“Dennis Webb, vice president of operations of Fulton Homes, said the waiting list has since been whittled down to about 1,800 people by prequalifying buyers and reconfirming interest. He said the biggest challenge now is that many potential buyers have to sell their existing homes first.”

“Bill Ryan, a real estate broker in Chandler, predicts predicts the developer probably won’t get the ‘rampage’ of sales it expects. ‘It takes pretty strong income to be able to afford homes in the $500,000 or $400,000-plus range,’ he said.”

“Houses are taking longer to sell due to the Valley’s housing market slump, and staging or giving them temporary new decor has become the strategy of choice for many sellers and investors.”

“‘You’re setting a mood, and you’re showcasing the lifestyle you could lead in this home,’ said Phoenix interior designer Patti Craze. ‘You’re trying to have the buyer imagine themselves in the space.’”

“Diane Neslund, a Scottsdale interior designer who also does staging, said that it gives the illusion that you’re not desperate to sell your home. ‘People will think that they had better hurry up and buy it or somebody else will,’ she said.”

“With the flood of homes on the market now, buyers have become more selective, said Neslund, owner of Distinctive Interiors and Design in Scottsdale. ‘There is so much competition you have to do something different than the others,” said (realtor) Claudia Michalson.”

“Realtor Pat Hune, who sold Kennedy’s house, said staging isn’t the solution for every for-sale home. ‘If you have a home that’s getting no showings, it’s a price problem,’ she said.”

The Prescott Daily Courier. “The red-hot Arizona housing market of two years ago has cooled considerably. Developers aren’t building new homes because people aren’t buying them.”

“‘We had that spike there for the past two-and-a-half years where everything went crazy,’ said Joe Contadino, developer of the Granville subdivision. ‘Now we’re back at that 2003 level. This notion set in that a house wasn’t a home, it was an investment vehicle. Then the bubble burst.’”

“The town is hoping for a new bubble or, at least, some market improvement by February.”

“‘It’s going to go up, this market that we’re concerned about,’ Councilmember Lora Lee Nye said. ‘Do I have bad dreams or trouble going to sleep sometimes? Sure I do.’”

Readers suggested mortgage fraud as a topic. “I’d like to see a discussion of how all the mortgage fraud and ‘price puffing’ will play out. I’m referring to the cases where buyer, seller, broker, and appraiser conspire to sell a property at an inflated value, with full intent of letting the home go into foreclosure and pocketing the money. Just a couple of months ago we didn’t really hear much about anything more than appraisal fraud (which seems rather innocent in comparison).”

“Recently there have been a number of news stories about large scale organized fraud (including Nightline, Denver Post, Rocky Mountain News, and OCFlipTrack deserves credit for uncovering an apparent scheme in OC). One story quoted a realtor asserting that there might be enough fraud of this sort to impact the median sales price for his area.”

“So my topic suggestion is - how much fraud of this sort is actually going on? And how will it affect the market long term? I assume that lenders will find a way to stop it eventually, but much damage has already been done - to lenders, MBS buyers, neighborhoods, the reliability of published data (not that the numbers were all that trustworthy anyway).”

A reply, “I am sure when it all comes out it will be shocking how much of this has gone on and how much it has helped drive prices.”

Another said, “It’s a very serious problem and the lenders have to do their duty. I’m concerned that some real estate seminar groups might be a front for sinister purposes. Watch who you give your social security number to. In fact, there is no reason for anybody to request your Social Security number at a seminar.”.

“Watch out for people that advertise that they are looking for someone to invest in real estate with them,(things like that). Beware of strangers that promise the world, beware of people you know that promise the world. Be careful of investment groups. I could go on and on.”

“Mortgage fraud has been a problem in Georgia. In May of 2005 the Governor signed the Georgia Residential Mortgage Fraud Act into law. Among other things, this law amends the Georgia RICO Act ‘to include residential mortgage fraud within the definition of racketeering activity.’”

“I have read that Georgia’s is one of the toughest residential mortgage fraud laws in the country. I would guess that as other states uncover similar levels of fraud, they will follow Georgia’s lead, and hopefully a lot of these criminals will be caught and brought to justice.’”

“The once booming housing market and rising popularity of nontraditional home loans have produced an unwanted byproduct: a 35 percent increase in suspected mortgage fraud.”

“A new report by federal regulators indicates the fraud is being perpetrated by people seeking to buy homes or others in cahoots with brokers and agents who cheat the system.”

“The Treasury Department’s Financial Crimes Enforcement Network, known as FinCen, undertook the review after seeing a significant rise in the number of so-called suspicious activity reports it received from U.S. banks that concerned mortgage loan fraud.”

“The highest incidences of suspected mortgage fraud in 2005 were in California, Florida, Georgia, Illinois and Texas.”

“Increasingly popular unconventional loans, which let borrowers obtain mortgages with less documentation of their income and assets can inadvertently facilitate fraud. And the growing use of the Internet and telephone to process mortgage loan applications means that lenders may never meet borrowers, enhancing the potential for fraud.”

“Although growth in the housing market appears to have cooled this year, ‘opportunities for fraud are still present,’ FinCen’s study says. Mortgage fraud poses a growing risk to banks and other lenders, it says. Federal banking regulators have said that mortgage fraud is growing because it can be very lucrative and fairly easy to perpetrate, especially in areas where home prices have been rising rapidly.”

A housing report from the Washington Post. “Sam LeBlanc tried to cushion the blow when he gave his wife, Karyn, the bad news. Her condominium isn’t worth nearly as much as she thought. ‘I was a little crushed,’ Karyn recalled.”

“Increasingly, though, research shows that emotions play as big a role as intellect. Sam did a lot of market research and decided they should ask $269,000. The number came as a blow to Karyn, because she knew similar units, including some she thinks weren’t as nice, sold last year for $280,000.”

“‘You want to believe it’s worth a lot more because you’ve invested your time and energy on it,’ Karyn said.”

“‘It’s classic loss aversion,’ said Christopher J. Mayer at Columbia Business School in New York. ‘You don’t want to realize the loss. It leads to housing markets that don’t function very well. You’ve got a lot of houses on the market and they aren’t selling.’”

“Mayer said that people allow their wishful thinking to overcome realistic perceptions because they don’t want to view themselves as having made a mistake.”

“David Laibson, who teaches psychology and economics at Harvard University, said a common error people make is believing that homes can’t drop in value below what they paid for them, and, in particular, that they can’t fall below their mortgage amounts.”

“‘There seems to be a psychological resistance to taking losses on the sale of a house,’ Laibson said. ‘People think they’ll make money on it. . . . That logic worked for a long time, and now anyone who bet on that logic is being burned.’”

“Of course, real estate agents say they haven’t needed research laboratories to teach them about buyer and seller behavior. ‘You always view your house as more valuable than the numbers will justify,’ said Owen Heine, an agent in Strasburg, Va. ‘Every person views his house as a castle. It’s human nature to love what you have.’”

The Wall Street Journal. “With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves. Economists report that contract-cancellation rates for big builders were running around 40 percent. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.”

“‘There are a whole lot of people running from contracts,’ says Alexandria, Va., real-estate attorney Beau Brincefield. He is currently representing more than 50 buyers who are seeking to get out of contracts on single-family homes, townhouses and condos, compared with none a year ago.”

“Even though it may mean losing a deposit that could run tens of thousands of dollars, many buyers are deciding that is less onerous than the alternative.”

“Sean Shallis, a real-estate strategist in Jersey City, N.J., says that roughly 22 percent of his sales have fallen apart before closing this year because the buyers backed out,. With the market cooling, buyers have decided they can buy a similar property for less. ‘The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change,’ he said.”

“Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer. ‘My exit strategy was if they didn’t move into it, we could sell it or rent it,’ Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. Mr. Shallis walked away from the contract and lost his $30,000 deposit.”

“Denis and Michael Budge put their two-bedroom house in Carson City, Nev., on the market a little more than a year ago at $495,000, so they could move to another home they had already bought in Waldport, Ore. After some nail-biting months with few showings and no offers, they finally landed a buyer, who signed a contract in June for $425,000.”

“But during the escrow period, as prices in their area continued to slide, the appraisal came in, at $395,000. The Budges were still willing to sell, even at that greatly reduced price, but the buyer backed out the day before the closing. Now they are stuck with two mortgages. ‘We thought we were going to relax and enjoy our retirement,’ says Ms. Budge. ‘Not any more.’”

“Amy Crews Cutts, deputy chief economist at Freddie Mac says the current jitters are largely a result of investors fleeing the housing market in the last few months, which ’slammed (it) into reverse,’ and consumers’ fears that the bubble had burst. The result: a huge backlog of unsold homes, which could further depress prices.”

“Glenn Nudell recently got $115,000 in concessions when he bought a 12-year-old five-bedroom home in Skillman, N.J., for almost $1.1 million. If the seller hadn’t agreed, he says, ‘I’d have backed away.’”

“But then he had to sell his eight-year-old, four-bedroom home in Princeton, N.J. But he couldn’t sell it until he had knocked $70,000 off of his original $630,000 asking price. Is he concerned that the buyer of his house might back away from the deal before it closes next month? ‘Of course,’ he says.”

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