The Housing Bubble

Inman News reports on California. “Luxury home values posted slight gains in Los Angeles, San Diego and San Francisco in the third quarter of 2006, as housing markets overall continued to see a slip in sales, according to an index released by First Republic Bank.”

“‘This trend is due to growing inventory, longer sales time, and greater caution among buyers because of the uncertainty in the market,’ said Katherine August-deWilde, COO of First Republic.”

“In Beverly Hills, buyers are more cautious than they have been in several years. ‘There is some hesitation in all price ranges,” said (realtor) Steve Frankel in Beverly Hills. ‘Buyers are being sensitive. They’re saying, ‘I am willing to pay, but I’m not willing to overpay.’ Two years ago, they would overpay and wait for the market to catch up.’”

“In San Francisco, prices and sales appear to be falling. ‘I see price reductions, and homes selling below the asking price,’ said (realtor) Naomi Glass. ‘Few things are moving. People are hesitant because they see an uncertain market.’”

From the report. “Wendy Ramp in Del Mar said the mid-tier has clearly softened. ‘We have too much for sale.’ She said that some sellers are reducing prices and noted that transactions are falling out of escrow at a higher rate.”

“In the high end of the (San Francisco) market, Caroline Kahn Werboff said there have been some price reductions. She said some buyers are reluctant because they believe prices will decline.”

A commentary at the North County Times. “It’s too delicious to pass up Tom Beckmier’s invitation to offer some ‘insight’ into the ’spike’ of trustee sales that have recently appeared (Letters, Nov. 15).”

“All things being relative, we would argue that 38 trustee sales advertised over five days does not a panic make, let alone a ’spike,’ and we certainly hope Mr. Beckmier’s invitation is not a veiled inference that either lenders or real estate brokers are primarily responsible for this market ‘adjustment.’”

“In the early 1980s, runaway adjustable-rate mortgages and the savings and loan industry collapse fed that decade-long recession, and lenders learned from that mistake to impose caps on how high adjustable loan rates could escalate over any given time period.”

“Fortunately, only a small minority of homeowners are trapped in these loans and the majority of those will ride the wave. But the sky is not falling. The market is adjusting.”

The Press Enterprise. “Throughout Southern California and the nation, homeowners who have benefited from creative financing, pushed by the lending industry to make housing initially more affordable, are awakening to its downside.”

“While listening to the radio in the summer of 2005, Mike Spanos heard a commercial for a mortgage promising a 1 percent interest rate for three years. ‘I thought it was a great deal,’ said Spanos, who had lost his job and was looking for a way to cash out money from his home to live on.”

“So Spanos refinanced his house in Montclair, he said, without understanding that the 1 percent interest rate…did not cover the actual interest charged on the adjustable-rate mortgage which changed monthly, recently reaching almost 9 percent.”

“In Riverside and San Bernardino counties, adjustable-rate mortgages or ARMs accounted for 72 percent of homes purchased in the first nine months of 2006.”

“Christopher Cagan, director of research for a Santa Ana-based property information service, said falling home prices will hurt those who bought homes in the past couple of years with 100 percent financing or maxed out home-equity lines of credit. Such homeowners are likely to discover they owe more than their homes are worth.”

“Cagan…estimated that 35,541 Inland households are likely to default on their loans.”

“‘Underwriting standards have gone down because everyone was trying to get their share of the market,’ RealtyTrac’s Rick Sharga said. ‘You can’t absolve the home buyer from all guilt either. If this is the biggest investment you will ever make, shouldn’t you understand what you are signing?’”

“Pete Nyiri, owner of Corona-based Top Producer Realty and REO, said he already has seen many homes going into foreclosure that were financed to the hilt with adjustable-rate mortgages. Nyiri said this month he was marketing 100 properties taken back by banks in Riverside and San Bernardino counties. A year ago he had none.”

“George Guerrero, a real-estate broker and housing commissioner for San Bernardino County, said he has seen people with option ARMs lose up to $55,000 of equity in a year. He said some of his clients who are selling their homes to escape option ARMs ‘will walk away with almost nothing’ after they pay off the mortgage and commissions and sometimes penalties for paying off the mortgage early.”

“Spanos said until recently he had no idea how his option ARM worked or that the payment he was making was piling more debt on his house. He said he wants to refinance into another loan but is having difficulty because of the equity he lost and because he must pay a penalty if he refinances before three years.”

“The bachelor, who has landed a new job with an annual salary of about $68,000, said he doesn’t want to sell the four-bedroom house he calls his ‘dream home.’ But he said even with a roommate, he can’t afford to boost his monthly payment from $3,034 to $4,985 to cover the interest or to $5,334 to start paying interest and principal.”

“After getting the latest rejection from a lender for refinancing, Spanos said, ‘It doesn’t look good. It looks like I am stuck in this loan.’”

An editorial from the Arizona Republic. “Thousands of tract houses are being built within the 10-mile emergency zone of the Palo Verde Nuclear Generating Station, the nation’s largest. As my colleague Mark Shaffer reported, developers have filed plans for 107,000 houses on 33,000 acres in eight so-called master-planned communities.”

“The houses aren’t being built there out of necessity. With the housing slowdown continuing to grind away, central Arizona is stuck with a huge surplus of developable land. But that hasn’t stopped the land-speculation ‘players.’ Land near the nuke plant now fetches $60,000 an acre.”

“More giant subdivisions are going up in Mohave County. Here the sprawl enterprise is to create even-farther-flung suburbs for Las Vegas. Unfortunately they don’t face even the limited water restrictions, such as a requirement of a 100-year water supply, that are in force in parts of the state. And Mohave County is notoriously lacking in groundwater. Officials say they are powerless to stop the building.”

“What baffles me is why the real estate industry retains such a united front in the face of the obvious perils Arizona faces. Civic-minded developers are loath to break ranks with the bottom-feeders. I hear: ‘People will come here no matter what. You can’t stop them.’ Then, ‘Any restrictions will cause a recession!’”

“Well, which is it? If people will come here no matter what, then they will come for projects within the existing urban boundaries and safest watersheds. If any restrictions will cause the sky to fall, then we need to change course to something less risky.”

“Yet we motor on in a grand Ponzi scheme, which tends to last as long as there are new suckers coming. The ‘players’ make a killing, and who wouldn’t with taxpayers paying for water, freeways, flood control and other assets needed to make the deals worthwhile.”

The East Valley Tribune. “Roszak/ADC, an Evanston, Ill.-based developer, has announced plans to build a condo complex called Fiesta Towers, which would be composed of four towers up to 25 stories containing 540 to 850 units.”

“Broker Bert Kempfert said completion of the property sale is an indicator that Roszak is serious about moving forward. ‘I doubt they would buy it if they didn’t intend to build it,’ he said. ‘There is a 100 percent probability they will get it built.’”

“The Mesa City Council unanimously approved zoning for the property in April, allowing construction of buildings up to 25 stories. At that time, the firm said it intended to sell condos in the $200,000 to $700,000 price range.”

“Teri Killgore, Fiesta District program manager for the city of Mesa, said the developer plans to open the office in a nearby strip shopping center. That could happen early next year, although she said the schedule could change based on conditions in the housing market.”

“‘Everyone knows what is happening in the housing industry,’ she said. ‘I doubt that they would launch sales in the low point of the market.’”

“A year ago, Phoenix was one of the hottest markets in the country, with sales and prices running at record highs. The median home price hit $263,000. But up to a quarter of the sales were to investors, who began selling their properties wholesale when it became harder to flip them for a fast profit.”

“Now, existing home sales are down 34 percent, and new-home starts are off 18 percent from last year. Phoenix remains expensive. In 2005, first-time buyers could expect to pay as much as $230,000 for a new house. These days, the figure is closer to $200,000. Some builders are piling on incentives.”

“Before the market started cooling, there were few homes valued at less than $200,000, said Ben Sage, Phoenix office director for Metrostudy, which tracks new home markets around the country. ‘As the market has been adjusting, home builders have been lowering prices,’ Sage said.”

The Las Vegas Sun. “At 2:30 in the afternoon, Remedios Bernal opens the door of his mobile home with his right hand, rubbing his eyes with his left. Bernal had been dozing off after running out of places to look for construction work. He was laid off three weeks ago, an apparent casualty of the valley’s 13th consecutive month of declining year-to-year home sales.”

“‘I came here (to the United States) to work, not to rest,’ he said with a slight smile. Monica Caruso, spokeswoman for the Southern Nevada Home Builders Association, said thousands of workers may have been laid off in recent months.”

“Though analysts have debated the meaning of the home-sales figures for months, little attention has been paid to what it means for workers such as Bernal, often in the country illegally. Unemployment claims in the construction industry were up 32 percent statewide in October compared with last year, rising from 3,119 to 4,128.”

“In the last three weeks, he has visited 10 friends and relatives who have worked in construction and have their own contacts. He has also visited construction sites cold. Nothing came of any of the visits.”

“Erasmo Badillo, without work after 12 years laying shingles on rooftops across the valley, not only stopped sending money back to an uncle in Veracruz, Mexico, but started asking him to send some of that money back.”

“Bernal said friends have left their families behind and gone to Phoenix for work. Others interviewed for this story knew people who had done the same.”

Some housing bubble reports from Wall Street and Washington. “Sales of existing homes fell in 38 states during the summer, led by steep declines in Nevada, Arizona, Florida and California, as the once-booming housing market showed further signs of a steep slowdown. The declines were the largest in once-booming areas of the country. Sales fell by 38 percent in Nevada, 36 percent in Arizona; 34.2 percent in Florida and 28.6 percent in California.”

“The price survey showed that the median price for an existing home sold in the third quarter dipped to $224,900, down 1.2 percent from a year earlier.”

“But David Lereah, the Realtors’ chief economist, said he believed the decline in prices in formerly red-hot areas of the country was setting the stage for a rebound next year. ‘With the market in full transition, buyers now have choices and sellers are more willing to negotiate,’ he said. ‘Under these circumstances, it’s no surprise that overall home prices are slightly below a year ago.’”

From National Mortgage News. “Here’s a telling sign about subprime delinquencies: at the end of September, Accredited Home Loans had a 30-plus day delinquency ratio of 5.44%. A year earlier the ratio was just 1.95%. Accredited is based in San Diego, one of the hottest housing markets of the past few years.”

“Look in your local newspaper, in the real estate section, and behold all the deals builders are cutting on new construction. In The Washington Post, Centex Homes is willing to provide 100% financing on all its properties. In one ad I viewed, the builder wasn’t even listing the price of homes. Instead, it was highlighting only the monthly payments.”

“What does all this mean for mortgage bankers? For the next six months the industry can survive off of refinancings. After that, and if the flat or negative yield curve persists, look out below.”

From CNN Money. “Lowe’s Cos., the No. 2 home improvement retailer behind Home Depot, on Monday warned it would miss forecasts for the current period. The company blamed the weak sales comparison on the combined effects of a slowing housing market, significant deflation in certain commodity categories, and a difficult comparison to last year.”

“‘We believe many external headwinds will exist through the balance of the year and the first half of fiscal 2007,’ said a statement from Lowe’s CEO Robert Niblock.”

Caroline Baum at Bloomberg. “Alan Greenspan didn’t go quietly from the global stage when he retired as chairman of the Federal Reserve in January. His latest ‘forecast,’ that the worst of the housing slump is over, was rudely challenged Friday when the Commerce Department said October housing starts plunged 14.6 percent from the prior month to a six-year low.”

“Starts were down 27.4 percent in October from a year earlier; single-family starts have fallen by more than a third since the start of the year. Housing permits declined for the ninth consecutive month, a record.”

“Having presided over the late 1990s stock-market bubble…if the residential real-estate boom ends badly, as all bubbles do, he could go down in history as a ‘DBCB,’ or double-bubble central banker.”

“‘Among the consequences of the policy of maintaining interest rates at an inappropriate low level were credit and mortgage-market distortions, discouragement of personal savings, incipient inflation, and depreciation of the dollar foreign exchange rate,’ said economist Anna Schwartz.”

“Schwartz, who co-authored ‘A Monetary History of the United States, 1867-1960,’ with the late Nobel Laureate Milton Friedman, was referring to the Fed’s decision to leave the funds rate at 1 percent from July 2003 to June 2004, ‘a policy unjustified in view of the economy’s growth rate,’ and to raise it ever so slowly during the next two years.”

“‘Did the Greenspan Fed err by providing too much liquidity in 2001-2004?,’ Harvard University’s Jeffrey Frankel said. ‘My answer is ‘probably yes.’”

“Legacies come in all shapes and sizes. Public servants would like to be remembered for their own good deeds, as well as their contribution to the institution they serve. On the latter count, Greenspan comes up way short, according to Lawrence Wright, professor of economic history at the University of Missouri, St. Louis.”

“‘At his confirmation hearing, Ben Bernanke told the Senate Banking Committee: ‘With respect to monetary policy, I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority,” Wright said. ‘No doubt Bernanke meant to reassure us. Unfortunately, we never knew what Greenspan’s policy strategy was.’”

The Greenwich Time reports from Connecticut. “After years of frenetic activity, builders are starting to show signs of restraint even in Greenwich. ‘I’ve actually held off on pursuing new deals just to get a clearer picture of what’s going on longer than the next six months,’ Greenwich developer James Higgins said.”

“There are enough signs making institutions such as banks wary of the market, said Richard Muskus Jr., a senior VP at Greenwich Bank and Trust Co. Because some builders have not been able to sell their houses banks have become more careful about how many more new loans they will give, he said.”

“‘The lending practices have absolutely changed for us,’ Muskus said. ‘We are examining potential construction loans a little bit harder than we usually do. And this is pressure coming from government examiners and auditors and things like that.’”

“‘I’d shy away from spec housing right now,’ said Greenwich developer David Dall. ‘It’s really a gamble right now.’”

“Some real estate agents, such as Ali Granmayeh, a former appraiser who tracks sales history carefully, said he sees some vulnerability in the $3 million-plus listings. ‘There are too many houses in the market, 44 percent of the inventory is over 3 million,’ Granmayeh said. ‘The customers are scarce. It’s a very scary market for us.’”

The Eagle Tribune from Massachusetts. “After years of strong sales at high prices, developers are facing their first housing slump in more than 15 years. Builders are also lowering prices and offering incentives to lure buyers for the homes they have already built and those they hope to build.”

“‘We’re not seeing a lot of new projects coming through the pipe; that’s indicative of the economy,’ said William Pillsbury, Haverhill planning director. ‘Single-family homes and higher-end subdivisions have slowed down.’”

“Pillsbury is confident, however, that the almost 300 condominiums and apartments now under construction downtown will find buyers and renters and that construction will proceed on hundreds more that have been proposed.”

“In North Andover, a controversial development that was four years in the making has been put on hold, said Town Planner Lincoln Daley. The 96-home Boston Hill complex was scheduled to start construction this fall but likely won’t begin until next year, Daley said, because of the current slowdown in the market. ‘(The developer) decided to take a step back,’ Daley said.”

“Other major projects, there are about 470 new homes planned in North Andover, are going ahead. ‘Developers are anxious right now,’ Daley said. ‘There’s grumblings about the economy. There is still a lot of building and renovating going on.’”

“Real estate agent Blaise Coco said he believes home prices are leveling off after a decline. But, he said, ’supply is on the high side. They’re not selling as quickly as we like.’”

“One major project in the pipeline is a 240-home development proposed by the Toll Brothers, a national luxury-home builder. A year after the project was announced, city planners are still waiting for the company to apply for permits.”

“When sales started to drop, builder Stephen Doherty lowered the price of town houses under construction behind Bradford College in Haverhill. Prices were dropped from $359,000 to $334,000 for end units and to $324,000 for interior units.”

“‘We’ve had the flexibility (in financing) to roll back prices,’ Doherty said. ‘We’ve also included bonus incentives. We’re not building as fast or selling as fast as a year ago, it separates us a bit from the competition.’”

A housing report from the Tennessean. “Throughout much of what is considered the core of East Nashville, the rehabilitation market seems to have hit its peak. For the first time in five years, the area is experiencing a slowdown.”

“With rehabbers routinely asking for more than $300,000 for their homes, many first-time home buyers are passing up the market, real estate agents, residents and investors say. ‘It’s gotten so expensive, people that are making $30,000 or $40,000 and can’t pull the numbers,’ said Eric Quiram, chairman of an umbrella group for East Nashville neighborhood associations.”

“Investment groups are buying homes and renovating them on speculation. Many are pouring more money into the homes, with flourishes such as granite countertops and custom cabinetry.”

“‘Home prices have increased and the values have gotten so that there’s more money you can spend on it,’ said Lynn Taylor, owner of (a) East Nashville residential design firm. ‘If you bought it for two-hundred thousand and it’s valued at five-hundred thousand, there’s more you can do.’”

“But the higher prices have made some homes harder to sell. Price reductions have become commonplace, especially for homes in which renovators have not chosen top-quality materials, say agents.”

“‘If there’s a market that’s booming in value, a lot of people are going to put their house on the market with a projection of where they think the market is going to go,’ said agent Karen Hoff, who has worked in East Nashville for two decades. ‘It takes them a couple of months to figure out that maybe their house is not worth that.’”

“Chris Weigel and his wife have been house hunting since moving to East Nashville two years ago. ‘It’s a real estate bubble, like a fake bubble,’ he said of the housing market in the traditional East Nashville neighborhoods. ‘They’re trying to push the envelope so much that they’re driving up prices.’”

The News & Observer from North Carolina. “As the rest of the nation struggles with a housing slump, the Triangle appears a bit of a haven for those selling homes. But a closer look at the market data and conversations with local real estate agents and homeowners suggest a softening of the local market.”

“To sell their houses, homeowners and national builders alike are having to reduce prices, improve properties and offer incentives. The number of people in the Triangle who lowered the price of their homes in September so that they would sell surged 17.4 percent, compared with a year ago.”

“In September, 3,845 homes in the Triangle MLS had reduced prices, or 35 percent of all homes listed. The number of resales on the market at reduced prices has increased significantly every month since June, when they were up 3.6 percent from a year before.”

“‘If there is anything holding them back, they may need to lower prices,’ said Marti Hampton, (broker) in Raleigh. ‘A year ago we weren’t telling them that.”

“Potential buyers who have moved to the area from cities glutted with homes say they can’t buy here until they can sell their old houses.”

“Even older, more-established Triangle neighborhoods feel the heat from new projects. M. Ruth Little searched her 27607 zip code when she was selling her home in West Raleigh’s University Park this summer. The search turned up several dozen new homes priced at more than $500,000.”

“Little first offered her 2,750-square-foot home for $549,000 but ended up dropping the price twice before finally selling for $485,000. The architectural historian was eager to sell because she had bought a smaller house. But she also realized that the market had cooled.”

“‘I’d watched prices climb in the neighborhood, and, if the boom had continued, I might have gotten my [original] price,’ said Little, a former residential broker. ‘But I sensed it was slowing down.’”

“Ellen Dagenhart, a broker in Durham, said some sellers are doing more than reducing prices. ‘They’re also offering to pay buyers’ closing costs, offering to leave appliances or give appliances, and we’re seeing sellers offering a selling bonus to the selling agent,’ Dagenhart said. ‘We aren’t seeing as many bidding wars or multiple offers. It’s not the same market that it was, in many ways.’”

“Still, the only ones who might lose money are those who bought at the peak. The rest just need to adjust their expectations. Many saw neighboring homes fetch amazing prices and hoped to do the same.”

”A lot of people held their houses off the market, waiting for it to peak to maximize the price,’ said Bernard Helm, who tracks Triangle residential trends, but ‘they waited too long. Lots of property has come into the marketplace that has unrealistic price expectations.’”

“Agents helped boost buyers’ expectations because they could charge top dollar through this spring, and often got it, said Jill Flink, a top seller in Raleigh. ‘Now the agents that are pricing these homes are being more realistic.’”

“Dan Lucas knows full well how new homes can hurt a homeowner’s chances. Within five miles of his Cary home are 33 new homes priced from $150,000 to $250,000. Most offer some kind of incentive.”

“When Lucas put his 3,600-square-foot home on the market in April, he asked $305,000. With surrounding homes selling briskly and a renovated basement, he expected a quick profit. Now, four price reductions later, the house is down to $285,000.”

“Although Lucas doesn’t expect to lose money on the house, which he bought for $147,000 in 1987, he is wondering how many more times he’ll have to drop the price before the house sells. ‘I haven’t even had a bad offer yet,’ Lucas said.”

“Lucas has vowed not to cut his hair until he sells his home. It’s already below his collar. ‘I’d shave this mop in a New York minute if I could,’ Lucas said. ‘My mom sees me and says, ‘I see you haven’t sold your house yet.’”

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