The Housing Bubble

The Desert Sun reports from California. “Ernie Vincent sees plenty of lookers, but not so many home buyers. ‘The notion that consumers are in a ‘wait-and-see mode’ is true,’ said Vincent, VP of Palm Springs Modern Homes. Home builders across the Coachella Valley have their pulse on the slowing new-home market, and they’re reacting by constructing fewer homes, bolstering incentives and scrutinizing construction costs.”

“As jittery home buyers abandon sales contracts or balk at buying amid uncertainties in the housing market, builders in the valley and across Southern California have cut back on construction. There were 2,782 homes being built at the end of September across the valley, down from 3,748 at the same time last year, according Metrostudy.”

“In the Riverside County/San Bernardino/Ontario area, 1,691 building permits were issued in September, down from 5,101 in September 2005, according to the California Building Industry Association.”

“The slowdown in new-home building permits is in direct response to growing new-home inventory. Some 1,511 new homes sat vacant at the end of the third quarter in the Coachella Valley, compared with 537 at the same time during 2005, said Steve Johnson, of Metrostudy.”

“‘The builders are taking the initiative to slow down their construction starts to deal with this inventory,’ he said. Home builders are reacting in other ways, too. They’re beefing up home-buyer incentives, reigning in escalating construction costs wherever possible and analyzing land deals.”

“Ashbrook Communities, with developments in Cathedral City, Palm Springs and Indio, is watching its spending on everything from construction materials and marketing to payroll, while at the same time aggressively introducing new incentives to attract pensive buyers.”

The San Francisco Chronicle. “Toll Bros. Inc., the luxury home builder with projects in San Ramon, Dublin and Sunnyvale, said Tuesday that it will report a 10 percent drop in quarterly home-building revenue in another sign of a weakening housing market.”

“Citing a higher-than-usual rate of home sale cancellations in Northern California, the company said the number of contracts it signed throughout the country fell 55 percent in its fiscal fourth quarter, which ended Oct. 31. Northern California accounted for 11 percent of the canceled sales nationwide.”

“‘You had a high level of speculative activity, more flexible down-payment rules, and you’re coming off a period of very rapid home price increases,’ Toll Bros. spokesman Fred Cooper said.”

“The company closed sales on just 167 units in California during the quarter, less than half of the 362 home sales completed in the same period a year earlier. Revenue from home building in California for the full year dropped 34 percent.”

“The company said it expects the softness to continue in Northern California and other former hot spots in the country.”

The Orange County Register. “These are not happy days in the odd home-loan game that Orange County all but perfected. Subprime lending was a true gravy train when real estate was hot and folks rushed to buy homes. Today, though, nobody’s getting rich making mortgages, traditional or subprime deals. Too many lenders are chasing an ever-shrinking pool of willing borrowers.”

“The slowdown across the county creates a flood of bad news that shows little hope of ebbing soon: On Monday, Option One from Irvine was put up for sale by owner. H&R Block is closing one-third of Option One’s loan offices.”

“At Impac Mortgage in Newport Beach, second-quarter profits were 25 percent smaller than last year as its loan business shrunk by 60 percent in what was called a ‘challenging environment.’”

“ECC Capital in Irvine, started two years ago by former execs from cross-town competitor New Century, is basically liquidating itself. It’s selling its lending operations after investors who had bought ECC mortgages returned many of the loans. ECC lost $16 million when it resold the returned loans at much lower prices.”

“In May, industry pioneer Ameriquest from Orange cut 3,800 positions and closed most of its branch operations after agreeing to a huge settlement with regulators over its lending practices. In November 2005, Ameriquest cut 1,500 spots.”

“For Orange County, the risk isn’t the loss of a key lender. Rather, the county risks losing a job-creation machine. Orange County lenders of all stripes grew payrolls between 1996 and last year by 25,000, a 13 percent annual pace.”

“In the year just ended in September, local lender payrolls were flat. This recent housing boom nudged subprime lending into the mainstream mortgage spectrum. Now with the real estate game in reversal, both cyclical and systemic pressures will test the managerial mettle of subprime lenders.”

The Sacramento Bee. “Faced with a sluggish home construction market, Sacramento-based Beutler Heating and Air Conditioning announced Monday it will merge business operations with its Air Design Inc. affiliate to reduce overhead costs. Beutler will lay off about 45 employees at facilities in Sacramento and five other Central Valley and Bay Area locations.”

“‘We’ve been in a red-hot market. It was unsustainable,’ Beutler President Rick Wylie said. ‘New construction can go only so far,’ said Mark Skaer, a senior editor at ACHR News. In California, the number of permits issued for new home construction in September fell 47 percent from a year ago.”

The North County Times. “With the huge run-up in local real estate prices in recent years, a house has become much more than a home, some economists tell us, an incentive to spend, the ‘wealth effect.’”

“The signs are clearly visible, or I should say, not visible. A year ago, you couldn’t drive through a neighborhood without having to run a gauntlet of home-improvement equipment: cement mixers, roofing trucks and painters’ ladders. Now it’s a straight shot.”

“Robert Brown, a Cal State San Marcos economics professor says it’s no surprise that homeowner spending is falling. With rising interest rates, those holding adjustable-rate mortgages or home-equity loans must spend more just to stay in place.”

The News Tribune reports from Washington. “Home buyers take heart. New figures show Pierce County’s hot home market is continuing to cool off. A dramatic increase in the number of homes being offered for sale could bring a better balance to the supply-demand equation, say real estate experts.”

“The total number of homes and condominiums on the market in Pierce County increased by more than 52 percent in October compared with October 2005, according to new figures from the Northwest MLS. At the same time, pending sales dropped 16.5 percent to 1,369 compared with 1,640 during October last year.”

“‘The evidence looks pretty convincing that the market has corrected itself, and we are experiencing a tilt to the buyers’ side in negotiations,’ said Tacoma Realtor Dick Beeson.”

“Prices fell slightly from September’s median price of $276,670. That decline isn’t worrying agents. The prices and types of houses vary from month to month.”

The Herald Net. “Home sales in Snohomish County continued to slip in October. ‘Housing sales are down, but this has created a greater balance in the market between buyers and sellers,’ said (broker) Lennox Scott. ‘Since we’ve come off of the frenzy market of the past year, buyers have more selection, there’s less competition for homes.’”

“Snohomish County fit the mold of most home sales trends in the Puget Sound area this fall. Listings rose significantly, by 27.5 percent in October; pending sales dipped, slipping 7.5 percent; and closed sales also fell, by 13.7 percent.”

The Seattle Times. “Prospective homebuyers who’ve been frustrated by too much competition for too few homes, your time is now. The number of houses and condominiums for sale in the central Puget Sound region — King, Snohomish, Pierce and Kitsap counties, was up from 27 to 59 percent last month, compared with a year earlier, according to statistics released Tuesday.”

“Increasing inventory is giving buyers more clout, said (broker) Lennox Scott. ‘We’re adjusting from a frenzied market back down to a strong market,’ Scott said. ‘Buyers have selection.’”

“‘I’m amazed the market was basically on steroids for as long as it was,’ said Bob Melvey, a 30-year sales veteran. ‘It makes sense it’s going to have to take a rest. But even with this absorption rate, it’s not as if the market has tanked and the sky is falling.’”

The Seattle PI. “More and more home sellers are chasing fewer and fewer buyers. The median home price in the city was $420,000, the same as July’s price after two consecutive months of declines and represented the largest year-to-year increase since July. King County as a whole showed a similar trend.”

“‘They keep saying it’s a buyers market,’ Dariush Zand said while looking over a Montlake home. ‘Prices haven’t changed. I don’t see any reduction.’”

“Zand, who is planning to move back to the area from San Jose, Calif., said prices have declined there. ‘California’s starting to look like a pretty good deal now,’ he said.”

“While looking at homes in Mount Baker, Hanni and Enrico Perella said selection, not price, was the problem. Having sold a San Francisco Bay Area home for a good profit, ‘I could afford to buy some house,’ Hanni Perella said. ‘I’m just not finding what we need.’”

“The statistics show the market is returning to normal, said Glenn Crellin, at Washington State University. ‘Yes, the inventory is going up,’ he said. ‘It’s still sitting lower than it was three years ago.’”

“Buyers now can take time to search out the house they really want, rather than jumping at something that will do, Crellin said. ‘Because of the period of frenzied activity, we sort of lost sight of what a normal market looks like and feels like.’”

“Not far from the house the Perellas were touring, Rob Mintz was wondering when his Mount Baker home would sell. ‘It’s really hard, I think, as a home seller to have any sense of what you’re supposed to do,’ he said. Mintz, who is moving to Baltimore, had put his house on the market several weeks earlier and had dropped the price from $625,000 to $599,000.”

“‘We bought a house (in Baltimore). Now we own two,’ he said. ‘That’s a little bit stressful.’”

“Mintz cut the price again to $575,000 at the end of October, got an offer soon after and had a sales agreement Tuesday.” “(Broker) J. Lennox Scott said sellers will need to focus more on price, presentation and marketing, he said. ‘What’s great about this market is buyers have selection.’”

Some housing bubble news from Wall Street and Washington. “Hovnanian Enterprises said it expects to recognize impairment charges and report a fourth-quarter loss. ‘Our financial results for the fourth quarter continued to be negatively impacted by high cancellation rates and increased use of concessions and incentives, particularly on the resale of those homes which experienced contract cancellations,’ said CEO Ara Hovnanian.”

“The Red Bank, N.J.-based company said it expects to take about $300 million in quarterly impairment and land-option write-off charges. ‘ Like other builders, Hovnanian’s walking away from deposits placed on options for land as the housing market pulls back. ‘Although it is painful to incur these non-cash charges, we believe it is much better than proceeding to build out these communities at very low returns or losses over the coming years,’ said CEO Hovnanian.”

“‘One reason cancellations are so high is that people think they can get the same house cheaper if they just wait a week or two,’ said M.D.C. Holdings CEO Larry Mizel.”

“Dominion Homes Inc continues to struggle amid the housing market slump, posting another quarterly loss. The company, which builds single-family units in Central Ohio, and Louisville and Lexington, Ky., lost $5.9 million in the third quarter. ‘Home sales conditions remain challenging across the country and our markets have been especially hard hit,’ CEO Douglas G. Borror said.”

“To cut costs, Borror said the company is reducing its land development and acquisition activity. Dominion also has cut its workforce so far this year by about a third.”

“A day after luxury home-builder Toll Brothers Inc. said quarterly revenue took a 10 percent hit amid a weakened housing market, Orleans Homebuilders Inc. Wednesday revised its outlook downward for its fiscal year.”

“The Bensalem, Pa., homebuilder reduced its guidance on earnings and revenue and said that it has turned to, among other initiatives, sales incentives to cut inventory levels. The company believes the ‘negative’ residential market is expected to continue.”

“The company saw new orders plunge by 55 percent, backlog drop by 56 percent and net income fall by 50 percent to $3.9 million, compared to the same period a year ago.”

“Toll Brothers chief executive said the economic trends are leading customers, even those in the high income bracket that his company serves, to take a wait-and-see approach. ‘Nobody wants to buy something that they think will cost less two weeks or two months later,’ said Toll Brothers CEO Robert Toll.”

“The ailing housing industry is beginning to infect related businesses, such as those that make and sell wallboard, carpet, paint, cabinets, faucets and tools. It also is hurting mortgage lenders.”

“‘I had someone tell me at dinner the other night that people ordering [PVC] pipe were ordering it by the hundreds of feet rather than truckloads,’ said Paul Carrico, VP at Atlanta-based Georgia Gulf Corp. ‘So whenever that sort of thing happens, everybody is really going on fumes,’ he told analysts.”

“Issuance of U.S. asset backed securities is seen declining in the year ahead, led by a drop in home equity volume, as further signs of a weaker housing market emerge, issuers and investors said during a conference in Florida.”

“Home equity has been the driver of issuance in the ABS market this year, as consumers facing higher monthly payments moved out of adjustable-rate mortgages and into fixed-rate loans as interest rates rose. ‘The home equity cycle has really played itself out and 2007 will be much different,’ said Paul Colonna, VP at GE Asset Management.”

“NovaStar Financial Inc. reported lower third-quarter earnings on Tuesday. The company attributed the slide to steps taken to prepare for a worsening credit market. The Kansas City-based company reported a 27 percent decrease from earnings (from) the same quarter last year.”

“NovaStar CEO Scott Hartman said that third-quarter earnings were impacted by increased reserves for its on-balance sheet transactions and loan repurchases. Earnings also were affected by increased loss assumptions in its mortgage securities portfolio.”

“The company recorded mortgage securities impairments for the quarter of $6 million, because of more pessimistic loan value assumptions as interest rates rise and the housing market slows.”

“Mortgage finance giant Fannie Mae said Wednesday it will not file its 2006 third-quarter report on time, due to a pending restatement of past financial statements.”

“In a filing with the Securities and Exchange Commission, Fannie Mae said it determined financial statements from January 2001 through the second quarter of 2004 should no longer be relied upon, due to issues with accounting practices and material weaknesses in internal controls over financial reporting.”

“The Federal Reserve has failed to communicate its determination to bring down inflation in a forceful enough fashion, raising the risk that price increases will become entrenched, according to Jeff Lacker, president of the Richmond Fed.”

“He added the Fed sometimes talked about pass-through ‘as if it is a force of nature rather than a product of policy expectations.’”

“His remarks are likely to be seen by some Fed watchers as critical of Ben Bernanke, the Fed chairman, even though Mr Lacker was careful not to mention him by name.”

The Review Journal reports from Las Vegas. “Looking for an affordable home? Your chance to buy a foreclosed home at below-market value in Las Vegas comes Nov. 19 at the JW Marriott. Hudson & Marshall is offering nine Las Vegas homes valued from $275,000 to $460,000. They’re among more than 100 homes on the block in the foreclosure-battered states of Colorado and Nevada.”

“The homes are ‘real estate owned,’ or REO, property taken back by national lending institutions and asset management companies after every effort was made to work with the borrower. ‘Posting a foreclosure doesn’t necessarily mean foreclosure,’ principal Dave Webb said. ‘These homes are in foreclosure, not default. Realtors have already had their shot at (selling) them.’”

“Rising interest rates have forced many homeowners with adjustable-rate mortgages to default on their loans because they no longer can afford the rising mortgage payments, Webb said.”

“‘We’ve had some large sales in Las Vegas. I’d say we did two to three (auctions) a year in Vegas from 1999 to about 2003 with a big inventory, 40 to 50 homes,’ he said. ‘Then the market took off. You were building like crazy. There were very few foreclosures from then until about the last six months.’”

The Las Vegas Business Press. “There are currently 92 mid- and high-rise residential projects planned in Southern Nevada, totaling 50,252 units, consultant John Restrepo reports. Yet only 12 projects (or 14.5 percent) have broken ground thus far, due to rising construction, land and financing costs.”

“That’s an even lower batting average than the one forecast by MGM Mirage CEO J. Terrence Lanni at the 2005 Global Gaming Expo, when he predicted that 80 percent of the condo projects announced for Vegas would fail to materialize.”

“‘Developers increasingly face the realities of the depth of demand, plus high land, labor and material costs,’ said Restrepo. ‘There have been notable cancellations and delays, including Aqua Blue, Ivana, Liberty Tower and Icon.’”

“Winter came early for the the Las Vegas Valley housing market, which suffered a seasonal chill in October with just 1,689 sales. That represented a 34.4 percent drop from October 2005, reports the Greater Las Vegas Association of Realtors.”

“‘What we are seeing are continued signs of what is referred to as a ’soft landing,’ or a market correction,’ said Linda Rheinberger, GLVAR president.”

“Home listings climbed to a record 23,475 units in October, which is 53.8 percent higher than a year ago, while condo/townhome listings skyrocketed to 6,261 units last month, 128 percent more than in 2005. There were a scant 357 condo/townhome sales in October, a precipitous 45.2 percent drop from last year.”

“In total, October saw $623.5 million worth of home sales activity, 33.2 percent less than in 2005. Condo/townhome sales saw similarly frosty results with $78.7 million last month, which was 46.2 percent below last year’s numbers.”

The Reno Gazette Journal. “The National Association of Realtors thinks its a good time to a buy a home and it wants the nation to know about it. ‘We feel that there are a lot of positive factors in play that need to be emphasized as well as the negative ones that are out there,’ said Stephen Haley, president of the Reno-Sparks Association of Realtors.”

“According to the University of Nevada, Reno’s Bureau of Business & Economic Research’s last report, units sold dropped 38 percent in the third quarter compared with the third quarter of 2005.”

“But will the NAR’s campaign be enough to stoke interest in the real estate market? Bob Felten, associate professor of advertising at UNR, said the ads will have a tough time attracting sellers to the market, adding that the ads offer little evidence that this is a good time to sell.”

“‘This kind of advertising will support local Realtors’ efforts to sell homes,’ Felten said. ‘The problem is, of course, for many homeowners they have to sell to buy. If you are in a situation where you have to sell a house to buy a house, I don’t know that this is a particularly good time to do that. That is the sort of the shoe that isn’t dropped here (in the ads).’”

“Still, Felten said, the ads do make a compelling case for buyers, and could bring some potential buyers into the market that are currently on the fence. ‘It is likely to have results for those people who may be sort of hesitant to leap into the home market because of all of the noise around the issue of the collapsing real estate market,’ Felten said.”

The Arizona Republic. “A subcontractor that worked on the idle Elevation Chandler has filed a foreclosure lawsuit against the developer in an attempt to force the sale of the property. Construction stopped in April on the hotel-condo tower being developed south of Chandler Fashion Center.”

“The defendants listed on the lawsuit are the developer; the general contractor, Weitz Co.; the mortgage lender, Mortgages Ltd. of Phoenix; and seven subcontractors.”

The Palm Beach Post reports from Florida. “From 2000 to 2005, the bookends of the boom, the median price of an existing home in Palm Beach County and the Treasure Coast shot up close to 200 percent. The result was that a number of first-time home buyers resorted to interest-only loans, no-down-payment loans, adjustable-rate mortgages and option ARMs to stretch their buying power.”

“Now those ARMs are beginning to reset, which means higher monthly payments.’As ARMs adjust higher, and as tax and insurance bills surge, more homeowners can’t afford to live in their houses,’ said Mike Larson, an analyst for Weiss Research.”

“However, don’t be so quick to point a finger at ARMs, says Jim Sahnger of Palm Beach Financial Network in Sewall’s Point. ‘The majority of those in trouble now aren’t buyers who took out ARMS,’ Sahnger said, ‘but rather those who bought investment homes they meant to flip and have been unable to do so. They never anticipated they’d be competing with the builder who’s selling homes for less than the mortgage they have on their house.’”

“In build-happy St. Lucie County, foreclosures in the third quarter of this year soared 68 percent compared with the third quarter of last year, 2.5 times the rate in Palm Beach County, records show.”

“Weary of waiting for condos to come out of the ground, 24 would-be buyers of Palladio Terrace have sued the project’s Miami developers for the return of their deposits.”

“This spring, with no building permit in sight, several buyers were ready to take their deposit money off the table. ‘We have had virtually no response except an offer to transfer our deposits to one of their properties in Miami,’ said Jack McGregor, one of the people suing Merco.”

“Both Meruelo and Merco CFO Tony Castro have said they are hoping that the season, with its influx of out-of-town buyers, will help Merco push past the sales threshold needed to meet key construction loan criteria.”

“In the meantime, money demands are stacking up. The company that sold the Flagler property to Merco is suing Meruelo over a $5 million bonus linked to the sale. Delinquent property taxes now total more than $700,000, according to Palm Beach County tax collection records.”

The Sun Sentinel. “Shares of Technical Olympic, based in Hollywood, dropped 35 percent. The shares had fallen 49 percent this year before Tuesday’s decline. Technical Olympic said it had received a demand for payment from Deutsche Bank Trust Company America related to financing it provided in connection with its Transeastern Joint Venture.”

“In a letter to Deutsche Bank dated Monday, Technical Olympic said the venture’s ‘problems” are a result of its highly leveraged capital structure and ‘adverse market conditions.’”

The Naples News. “More layoffs could be on the way at Bonita Springs-based WCI Communities Inc. CEO Jerry Starkey said work force costs would be reduced about 15 percent through the end of the year. ‘Times continue to be challenging with much lower aggregate demand resulting in lower growth,’ Starkey said, referring to the company’s sliding statistics.”

“The worst offender in the turn of WCI’s fortunes? Southwest Florida. ‘Southwest Florida … that’s the area (where) we see the biggest decline year to date,’ Starkey said. Sales in Southwest Florida are down about 60 percent for the year, while Tampa is down about 30 percent and the Panhandle about 7 percent.”

“Traffic through the sales centers, something the home-building industry looks at to predict future sales trends, was down 59.5 percent for the third quarter compared to a year ago. The weakest segment in sales and traffic was active adult communities in Southwest Florida.”

“The condo market in general is suffering, Starkey said. ‘We are seeing very low demand for buyers in the tower market so we did not start any new buildings this year,’ he said. Next year will likely be the same, unless market trends change.”

“Whether trends will change is hard to predict, said Jim Dietz, WCI’s COO. For the year, the company will have a negative cash flow of about $100 million. ‘That’s a bit of a change from prior periods and reflects continued slow sales and higher defaults,’ Dietz said.”

The News Press. “The 15 percent cut announced Tuesday amounts to about 570 workers based on the company’s listed roster of 3,800 employees. WCI spokesman Steve Zenker said the reduction is complete. The staff cuts, including payroll, incentive and benefit incentives, are expected to save the company $60 million annually.”

“A $14 million charge for walking away from land options for three projects. Most of that money came from options on land for the Sabal Bay golf course community in southern Collier County. ‘We walked away and left $11 to $12 million on the table because we didn’t think it would be prudent to market a golf course community at this time,’ Starkey said.”

The Herald Tribune. “Starkey said that for the next several quarters, WCI will focus on generating cash flow and reducing debt. Eight towers are expected to close in the fourth quarter of 2006, with another six expected to close in the first half of 2007.”

“‘We are carefully monitoring the tower closings, as collecting these tower receivables is a key driver of our cash flow and debt reduction during this slower demand period,’ Starkey said.”

The Orlando Sentinel. “Beazer Homes and Toll Brothers, major home builders both active in Central Florida, reported weaker financials on Tuesday with warnings of more softness to come.”

“CEO Ian McCarthy said that the company has taken steps to reduce overhead and capital spending as the company prepares for fewer closings in fiscal 2007. In September and October alone, the company pared about 1,000 jobs, or 25 percent of its work force, to brace for less work in the coming year.”

“In the Orlando area, the company recently laid off about 50 employees, about 40 percent of the staff, according to local employees affected by the job cuts. McCarthy said Beazer has not seen any evidence that a rebound is imminent in the nationwide new-home market, with excess inventory, orders falling, and contract cancellations rising.”

“Other builders with Central Florida operations have been trimming staffs in recent weeks in anticipation of a slower 2007, including Masterpiece Homes, a Volusia County-based builder, which cut 30 positions, or about a third of its work force.”

“Main Street USA, a bankrupt Kissimmee company whose majority owner has been arrested and jailed by the FBI, used appraisal fraud in selling condominiums in southwest Orlando to investors, attorneys said Tuesday in U.S. Bankruptcy Court in Orlando.” “Richard Epstein, lead attorney for a lender owed more than $13.5 million on The Villas at Waldengreen condos, said buyers ‘paid way too much. The unit values were fraudulently inflated. This, unfortunately, was a fraud.’”

“Attorney Frank Wolff, who is representing about 70 condo owners, said appraisals were put together falsely showing photographs of renovated apartments when the units being appraised had not been fixed up.”

“Chapter 11 trustee Lewis Freeman said the property isn’t even generating enough income to cover expenses and he urged the court to abandon the asset. Paul Singerman, Freeman’s legal adviser, said it’s doubtful the property could generate the amount projected by the appraisal.”

“Roy Kobert, also representing the lender, said the only way the property could generate $21 million ‘is if we get 176 more victims.’ More than 100 investors and condo buyers have money at risk. “”

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