The Housing Bubble

The Daily Bulletin reports from California. “Builders are cutting back in pulling permits in both San Diego and the Inland Empire. ‘It’s actually a very sharp pullback,’ said Jack Kyser, chief economist with the L.A. County Economic Development Corp. ‘But in Los Angeles and in Orange County, permits are ahead of last year. The increase is most significant in Orange County.’”

“Kyser said much of the new construction in both counties is in condominiums. ‘There’s a lot of multi-family construction being started and that has some folks getting nervous,’ he said. ‘There are 30 high rises proposed in Orange County, and that market has not been tested with that kind of construction.’”

“Kyser said there are numerous high rises, 10 stories or more, that have been permitted in L.A.”

“‘The entire housing market, resale and new, is evolving as it attempts to establish a balance between supply and demand and a more sustainable rate of absorption,’ said Steve Johnson, director of the Metrostudy’s Southern California division. ‘Increasingly, reports of resale price adjustments are becoming the norm.’”

“‘There is sufficient uncertainty surrounding the economy, the upcoming elections and inflation expectations,’ Metrostudy’s president Mike Inselmann said. ‘All that leaves us with a less-than-clear vision of the housing picture in the next year.’”

The Orange County Register. “(Realtor) Steve Thomas at Re/Max Real Estate Services in Aliso Viejo notes: ‘We have experienced a recent surge in homes pulled off the market, it is concerning that not enough sellers are ready to throw in the towel. Our offices have been buzzing with agents discussing the number of sellers still unwilling to do what it takes to get their home sold and price their homes according to comparable sales and escrows.’”

The Union Tribune. “Writing about the real estate market in San Diego is a no-win situation. Now that we’re in a cooling period, reporters are hearing from homeowners who accuse the newspaper of trying to frighten them with ’scary headlines.’ A story last month prompted a reader to accuse the newspaper of being irresponsible, of trying to cripple the real estate market.”

“A story in the Home section yesterday may have added to his suspicions. It said that since January 2004, single-family home prices are down countywide on a year-over-year basis and that prices in all but three ZIP codes in the county have dropped from their all-time-high median prices.”

“Carl Larsen, editor of the Sunday Home section, notes there is no doubt that the market is declining and that even trade associations representing realtors and home builders acknowledge it’s the case.”

“But the housing market is news for other reasons. Those following it are not just homeowners worried that their equity is slipping, Larsen said. ‘There are broader ramifications for San Diego and the entire national economy,’ he said.”

“‘It could be argued that anyone in mortgage banking, in construction or those who sell appliances at Home Depot or Best Buy depends on the newspaper to report the direction of an industry that directly affects their livelihood. That’s a consideration far different than those who monitor prices to gauge rising or falling equity of their homes,’ he said.”

“Larsen said he understands why people are concerned about negative stories. ‘But at the same time, it would be unfair and irresponsible not to report fully the sudden about-face of a housing market in a city that many experts have said led the national run-up in prices.’”

“QUESTION: My house has been for sale more than 18 months. Despite scores of open houses and showings by agents, no offers. We can’t figure out any ideas to sell it without a dramatic drop in price.”

“ANSWER: The primary reason a home doesn’t sell is it is overpriced. It’s time to bite the bullet and slash your asking price. Ask your listing agent to prepare a new comparative marketing analysis showing recent sales prices of nearby comparable homes, asking prices of neighborhood homes (your competition), and recently expired listing prices of nearby residences (usually overpriced).”

“Then withdraw your MLS listing for a week or two and relist at a reasonable asking price.”

A housing report from the Christian Science Monitor. “Six months ago, the 1920s-era Southern bungalow in Atlanta’s Kirkwood neighborhood probably would have sold at its full price asking price of $325,000. But after playing hardball with the seller in the past few months, Phil Hagedorn and his fiancée got the price down by $25,000. And the seller paid the closing costs.”

“‘I had a gut feeling that [the price drop] was going to happen,’ said Mr. Hagedorn.”

“To make houses more affordable, developers are agreeing to upgrade kitchens free of charge, make the first year of mortgage payments, and pay closing costs. Incentives and deals vary around the nation, says Michael Lerner, president a national builder based in Chicago.”

“‘In Sarasota, buyers are looking for the best price. In Miami, it’s upgrades to the kitchen and bathroom and help on closing costs. In Phoenix, prices have been rolled back to 2002 levels to clear out inventory,’ he says.”

“Even in some of the hottest markets, such as New York, prices are falling. They’re now at the same level as 1-1/2 years ago, estimates real estate broker Christopher Mathieson, a principal at JC DeNiro & Associates.”

“On the other hand, the market has turned quite difficult for people who bought homes to renovate and resell, or ‘flip.’ ‘You see a lot of houses where they do renovations that are the least expensive: They use builder-grade everything, and then they find out they can’t sell them because they’re not what people are looking for,’ says Sara Jane Klingaman, part owner of Ten Fingers Unique Restoration in Atlanta. ‘So the houses sit and sit and sit until the price drops enough that somebody’s willing to buy it despite the renovation.’”

“‘No offer is ridiculous. There are a lot of ‘For Sale’ signs along with a lot of new construction, and we think that’s … making sellers nervous,’ says Maria Azuri in Atlanta. ‘So we’re seeing sellers doing more to make it possible to sell, including lowering the price, and even offering to do a 1 percent buy-down on the mortgage interest.’”

“‘There are now deals where, if people qualify for a 6 percent loan, they get a little freebie because the seller comes to the party and brings in some extra money to supplement the buyer’s payments for the first two years,’ says John Baen, a real estate expert at the University of North Texas. ‘For the buyer right now, it’s win, win, win all over the place.’”

“However, even falling prices may not be enough to stabilize some markets that have seen skyrocketing appreciation and development. For example, in Palm Beach County, Fla., the median home price has appreciated 148 percent since 2000.”

“But the biggest damper on the Palm Beach market, Jack McCabe says, is a 47-month supply of houses based on the current selling rate. ‘It’s the highest level in our history,’ he says.”

The New York Times. “Credit counselors are finding that mortgage debt is playing a bigger role in the deteriorating financial health of consumers contemplating bankruptcy.” “‘Consumers are upside down financially,’ said Susan C. Keating, chief executive of the National Foundation for Credit Counseling. ‘Those who are considering bankruptcy have unsecured debt well in excess of their annual income.’”

“She said many counselors reported that their clients were delinquent on their mortgages, with some reporting that 100 percent of their clients were delinquent.”

“The organization’s counselors had reported a brisk increase in the number of clients who are concerned about the rising costs of their adjustable-rate mortgages in particular, she said. Rates have climbed in recent years, leaving borrowers with ARM loans vulnerable to sharply higher monthly mortgage payments.”

“‘Mortgage debt is coming out as much more significant than we expected,’ Keating said. ‘Pull this all together with the other unsecured debt people have, and this is really problematic.’”

“‘People have literally picked up their house at the foundations and shook it upside down like a piggy bank,’ said Ed Smith, CEO of a a mortgage brokerage firm in La Mesa, Calif.”

“Since January 1999, according to figures compiled by Alan Greenspan and James Kennedy, a Fed staff economist, more than $2.62 trillion has been extracted by homeowners through refinancing and home equity loans.”

“But as rates have gone up, the extraction has continued. In the first six months of this year, even with interest rates rising, more than $511 billion was extracted from homes through cash-out refinancing and home equity loans, and that was more than the amount taken out for all of 2005, a record year for mortgage equity extraction.”

“There is another change in the market that could block a homeowner’s desire to borrow against the increased value of the home. ‘Lenders are being very cautious today as they do appraisals,’ said Patty McGill, president of a mortgage brokerage in Frederick, Md. ‘They are scrutinizing appraisals so they are not lending on phantom equity.’”

Some housing bubble news from Wall Street and Washington. “On Monday, Comstock Homebuilding Cos. said it swung to a quarterly loss of $5.8 million, from profit of $11.5 million in the year-ago quarter. The company said in the third quarter ended Sept. 30 it recorded a non-cash pre-tax charge of $1.8 million as a result of impairments to its real-estate inventory.”

“Total quarterly revenue fell to $35.3 million from $78.4 million a year earlier, as net new orders dropped 21%. The company said home-building gross margin for the quarter decreased to 6.8% from 30%.”

“Investors are looking to home builder Toll Brothers Inc. to provide an update on the health of the luxury housing market later this week when it reports preliminary quarterly results before the market opens on Tuesday, with a conference call later in the day to discuss its outlook.”

“‘We expect orders to fall 34% year-over-year in the fourth quarter despite slightly easier comparisons, an anticipated 30% increase in communities and more attractive incentives,’ wrote Banc of America Securities analyst Daniel Oppenheim in a research note.”

“Real estate investment trust Saxon Capital Inc. said it swung to a third-quarter loss on a higher short-term interest rates, continued price competition and an increase in delinquencies. The company said net interest income, or earnings from interest on deposits and loans, fell to $18 million from $47.3 million in the year-ago period.”

“The net mortgage loan portfolio grew to $6.8 billion at September 30, 2006, an increase of 9% from September 30, 2005.”

“The factors contributing to the net loss in the third quarter of 2006 were increased short-term interest rates, continued price competition, an increase in delinquencies, as well as a decrease in the 2/3 year part of the forward LIBOR curve, which negatively impacted the Company’s derivative valuations.”

“Accredited Home Lenders Holding Co., a nonprime residential mortgage lender, said Monday third-quarter earnings plunged 55 percent as the company booked a lower premium on loans sold and higher provisions for repurchases.”

“‘Our recent performance has been negatively impacted by fierce pricing competition, ongoing product contraction, anticipated higher delinquencies and losses, and activities associated with the acquisition of Aames Investment Corp.,’ the company said.”

“Lime Financial Services will hire most of Meritage Mortgage Corp.’s sales staff and some employees in operations as Meritage’s parent company, NetBank Inc., exits the nonconforming mortgage business.”

“NetBank CEO Steven F. Herbert said the company is ‘working aggressively’ to refocus on core banking and conforming mortgage competencies. NetBank’s nonconforming mortgage operations are expected to cease by year-end.”

“Irwin Financial Corporation IFC, a bank holding company focusing on small business and consumer mortgage lending, today announced the Corporation sold substantially all of its conforming, conventional mortgage segment operations, including the majority of the associated mortgage loans and mortgage servicing rights.”

“This discontinued segment reported a loss, including disposal costs, during the third quarter of $13.4 million. ‘In the home equity segment,’ CEO Will Miller said, ‘our results were well below our expectations earlier in the quarter, largely due to the effects of clean up calls on the last of the pre-2003 securitizations and the accounting for certain economic hedges.’”

“Senior mortgage banking executives recently delivered dour forecasts for the next year, according to coverage from MortgageDaily.com. The chairmen and CEOs of Freddie Mac, Fannie Mae and IndyMac predicted rising delinquency and a cooling mortgage market as rates reset.”

“‘Obviously we’re going to have a period where delinquencies and foreclosures are going to exponentially grow,’ one of the executives said. ‘It’s going to be a fairly tough correction,’ another added.”

“A UBS analyst downgraded Home Depot Inc. and Lowe’s Cos. amid expectations that the sluggish U.S. housing market will ‘weigh significantly’ on both companies. Noting that both stocks’ prices and earnings expectations have been bucking the broader trends of soft housing data and prospects for ‘continued weakness,’ UBS analyst Brian Nagel lowered his ratings.”

“By Nagel’s reckoning, as much as half of the same-store sales at home centers is linked to changes in the macroeconomic environment for housing. ‘The housing market in the United States continues to slow more than initially expected,’ Nagel said.”

“The U.S. housing market will weaken further, but the sharpest decline is over as inventories of unsold homes thin, Former Federal Reserve Chairman Alan Greenspan said on Monday.”

“‘This is not the bottom, but the worst is behind us,’ Greenspan said.”

“Greenspan also touched on the potential adjustment in loan costs for home buyers with nontraditional mortgage products. While some individual buyers may feel the pinch as their payments rise, Greenspan said those changes were ‘very unlikely to have a macroeconomic effect.’”

The Woodstock Independent reports from Illinois. “One year ago, the Parade of Homes trumpeted the opening of The Sanctuary in Bull Valley. ‘We love it,’ said Kristen Reyes of living in The Sanctuary. There is only one downside, according to Kristen. ‘It’s really lonely because no one lives here.’”

“One year later, only one house besides the Reyes’ home is occupied. Since the parade, construction is under way on seven additional homes. If sales were brisk or the economy was more robust, builders might put up a spec home and look for a buyer. ‘You won’t find too many of them building spec homes,’ developer Jack Porter said.”

“‘The market has slowed down across the country, especially for higher-priced homes,’ said Harding Real Estate agent Rick Bellairs. The problem is clearly illustrated in the neighboring Bull Valley Golf Club. ‘Normally, there are four or five homes on the market,’ said Bellairs. A recent drive through the subdivision revealed two homes with ‘Under Contract’ stickers and 19 ‘For Sale’ signs. The homes for sale range in price from $474,900 to $949,000.”

“To move the $949,900 property, agent Don Thurman is offering an incentive of a free Hummer H-3 or a five-year Bull Valley Golf Club golf membership.”

“In addition to a large inventory of homes on the market, The Sanctuary is a novelty in Woodstock: homes priced at $800,000 and up on 3 acres or less. A search of the MLS of Northern Illinois revealed that between 2001 and 2005, only six homes in the 60098 zip code sold for over $1 million, and all included more than 10 acres.”

“Currently, there are 14 properties for sale outside of The Sanctuary with price tags of $1 million. Three come with 2 to 5 acres; three more are set on 5 to 10 acres; and the remaining eight have more than 10 acres.”

“‘It’s hard to believe it hasn’t taken off more quickly,’ said builder Chic Martin of The Sanctuary. His Chic Martin Signature Homes still have The Richelieu on the market for $1.5 million. Martin saw one deal fall through with a prospect from Palatine who cited the high cost of commuting as the reason for not moving to The Sanctuary.”

“‘This type of land is much in demand,’ said developer Porter. ‘We always have cycles [in real estate],’ he said. ‘We think we have a great product.’ He laughed before adding, ‘We’re not in a fire sale.’”

The Grand Rapids Press from Michigan. “With ‘For Sale’ signs seemingly on every street, it may be surprising to hear bidding wars have broken out in the West Michigan real estate market. The bidding wars come most often with homes taken back by a bank, a result of the mounting number of foreclosures in the area.”

“Realtors say they see more of them, and the listing price is often below market value. ‘When I first started, foreclosures were one out of 10,’ said agent Ethan Dozeman, who has been in the business for five years. ‘Now they’re probably one out of four.’”

“Susan Kazma-Hilton, a (broker) in Grandville, said some homes are over priced for the market. ‘The homes are priced to get rid of debt, not priced to sell the house,’ she said. ‘I’ll bet you in 40 percent of the homes, the sellers owe more on the homes than they’re worth.’”

“Kazma-Hilton said it is a result of a combination of the unemployment rate depressing market values and mortgage deals that were too good to be true in the first place.”

“Agent Tami Vroma recently secured a buy-sell agreement with a first-time owner on more than two acres in the Rockford area. She did not reveal the price but said it was lower than the listing price of $235,000, which already reflected a $10,000 reduction.”

“‘I cannot even believe what we agreed to on a price,’ she said. ‘There are no buyers out there, and the sellers had to sell.’”

The Columbus Dispatch from Ohio. “The peculiar but tempting offers sometimes came a year or more after homeowners planted for-sale signs in their front yards. Interested buyers suddenly appeared, proposing to pay hundreds of thousands of dollars more than the asking price for houses in some of central Ohio’s elite neighborhoods.”

“The catch: the sellers must agree to immediately refund the difference between the asking price and the sale price. At least 14 such deals worth more than $11 million have closed since spring, and the offers continue.”

“‘We turned down five of them,’ said Bryan Wing, executive VP of CV Perry Builders. ‘Believe me, in this day and age, we could have used it.’ Others couldn’t resist.”

“A lawyer for the central Ohio chapter of the Building Industry Association warned group members in October to steer clear of such deals. Even sellers could be held liable if deals turn out to be fraudulent, he said, reminding builders of the danger of lawsuits or criminal racketeering charges.”

“‘This has been a really recent phenomenon,’ said David Martin, chief executive of Stewart Title, which refused some of the deals. ‘It’s like a whole new industry has formed overnight.’”

“It’s not unusual to borrow more than the price of a house to make improvements. But most of these houses are new, or nearly new, and the buyers in each case borrowed upward of $250,000 extra with little or no down payment, according to mortgages and deeds filed in Delaware and Franklin counties. Meanwhile, weeks or months later, the houses sat vacant.”

“‘Clearly, in times like this, when there’s a major shift in the market, people try to take advantage of situations,’ said Martin, the title agent. ‘Keep in mind, sellers will do anything. They’re desperate.’”

The St Petersburg Times reports from Florida. “Jeanne Gavish met with clients Ed and Earlene Young last week to tell them the housing market would soon come back to life. ‘You’re staring daggers at me,’ said Gavish, sitting in the Youngs’ living room. ‘No I’m not,’ said Young. ‘It’s just that we had this great expectation of selling in a heartbeat and we can’t believe we’ve found ourselves in a market that’s bottomed out.’”

“Gavish knows how she feels. The ongoing depression in the real estate market has transformed the lives of brokers and agents, said Gavish, the former president of the Hernando County Association of Realtors. Many of Gavish’s own investment properties have lingered on the market without buyers or renters. Attendance in a beginning real estate class at her Nature Coast Real Estate School ‘dropped off a cliff’ in February, she said.”

“The median sale price of houses in the area did not begin to fall until June, but has since slid more than $10,000.”

“But she isn’t ready to drop the price of the Youngs’ house. They bought it for $145,000. Their asking price of $229,000 is still valid, Gavish said, based on recent sales in Wellington and the added benefit of being on a cul-de-sac. Neither were the Youngs ready to accept a long stay on the market. When she was asked when she needed to sell the house, Earlene Young had a ready answer: ‘Three months ago.’”

“By all accounts, the party is over for most condo developments in and around downtown Tampa. Weeds, not construction cranes, are spouting in more than one expensive empty tract. Tampa’s long-sought dream of a vibrant residential core, while not gone, appears to be seriously diminished.”

“All told, about a dozen projects with more than 4,100 planned units have either been delayed, put on hold or are simply dead. Banks have stopped lending money for condominium projects, said Mark Huey, manager of economic development for Tampa. ‘You see that happening throughout the state and the country,’ he said.”

“Frank DeBose, part of the group behind the defunct 02 at Pinnacle Place, said, ‘We’ve put too much housing in the higher end.’ Buildings with high-priced units now under construction will probably have to drop their prices, he said. ‘Five years from now, the discussion is going to be about all those $700,000 and $800,000 condos downtown that you can buy for $300,000,’ he said.”

The Tampa Tribune. “State agencies are investigating potential mortgage and title fraud involving 36 unorthodox real estate deals in the Bay area. The deals aren’t an anomaly. ‘The reports we’re getting are incredible,’ said Doug Pollock, (who) investigates problem mortgages. ‘This scheme is hitting every county in Florida. It’s like people are going to classes to learn how to do this.’”

“How widespread are the inflated deals? The answer, industry experts fear, is that they’re everywhere, but there’s no way to determine the extent. ‘This is prevalent in some areas,’ said Brad Monroe, president of the Greater Tampa Association of Realtors. ‘It just makes you wonder how many of these deals are going on that we don’t know about yet.’”

The Herald Tribune. “The J.P. King Auction Co. will auction 100 units in The Hamptons at Tampa Palms condominium conversion project. Forty of the units will sell at absolute auction, meaning they will go to the highest bidders with no minimum bid or reserve.”

“‘With the marketplace slowing down a bit,’ said King in the understatement of the year, ‘Bay Communities decided it was a good time to get more aggressive and sell a number of units in one day.’”

The Naples News. “Ruth Lundi and David Chadwick decided to give their home away in an essay contest. ‘I talked to a few Realtors who came out to look at the place and said it would be hard to even get people to come out for a showing,’ Lundi said. ‘Everyone’s selling now.’”

“They are soliciting 6,000, 250-word entries on the subject — ‘I believe you should give me your home because …’ Each entry is $100 so they stand to make about $600,000 which would cover the appraised price of their home as well as the cost of advertising and running the contest.”

“Skeptics will be skeptics, however, said (broker) Brett Ellis. ‘To me it sounds like an act of desperation … like someone who isn’t willing to price their home at today’s market and is trying to get more money for it,’ Ellis said. ‘If you price it right, anything will sell. If you want to overprice it you can try an essay contest.’”

“When Jan and Barbara Mueller put their 2,700-square-foot coach home in Mediterra on sale for $970,000, it didn’t move for months. So they took it off the market. Now it is back on the market for $840,000. But this time the home, which sits near the Lee-Collier county line, has been staged by a professional.”

“‘There are 10 other homes on the market that are essentially similar,’ said Jan Mueller.”

“In another instance, stager Sarah Stickney bought a $225,000 boat that will be given away with the house. In that house, the main focus was the back patio. ‘It’s what the house is all about so we emphasized that and put the boat in the back to really draw attention to it,’ Stickney said.”

“The house hasn’t sold yet, but she is confident it will.”

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