The Housing Bubble

The LA Times reports from California. “Despite the housing downturn, the California and U.S. economies are headed for a ’soft landing’ because trouble in one sector alone is not enough to trigger a recession, UCLA economists said in a quarterly forecast to be released today.”

“A national recession is also unlikely, UCLA Anderson Forecast director Edward Leamer said. ‘If you are a builder or a broker, it will feel like a deep depression,’ he said. ‘But the rest of us will hardly notice.’”

“Many models say that a recession in the next 12 months is a virtual certainty,” though Leamer’s Anderson Forecast report, ‘Models or Minds?’ states that ‘this time, unlike every other time, the problems in housing will stay in housing.’

The Union Tribune. “‘The only debate you hear among economists right now is whether next year’s slowdown will be modest or severe,’ said Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. ‘The UCLA people have it right in saying that the depth of the slowdown depends on how weak the housing market gets.’”

“During the first 10 months of this year, weakness in the real estate sector pushed the state’s rate of job creation 36 percent lower than in the same period of 2005. Construction companies in San Diego County, for instance, have cut at least 3,400 jobs since hitting a peak in June.”

“Economist Ryan Ratcliff compares the state’s current reliance on property taxes to its reliance on income taxes and taxable sales during the dot-com boom of the late 1990s. Both the state and federal governments enjoyed budget surpluses during that period. But once the boom ended, those surpluses turned into massive deficits. ‘Six years later, our circumstances sound eerily familiar,’ Ratcliff said.”

“‘Depending on the timing and the severity, this budget crunch could be the second half of the double whammy that turns a California housing slowdown into a housing recession,’ he said.”

The Pasadena Star. “A housing slowdown affects construction, loan agents, landscapers and many other related businesses, said Michael Carney, executive director of the Real Estate Research Council of Southern California. ‘Concern for the housing market as a whole may spill over into consumer spending,’ Carney said.”

“Builders are reacting to sales declines by not getting permits to build new homes. California’s total units in permits is expected to decline 16 percent in 2006, and that number could be closer to 26 percent, Carney said. ‘Developers are clearly adjusting as fast as they can,’ Carney said.”

The Fresno Bee. “Fresno County could lose 1,400 construction jobs over the next three years. More than half of those jobs, a 3.6% decline, will be lost next year, University of the Pacific researchers said in a statewide housing forecast.”

“Some of those jobs have already been lost as home builders in the central San Joaquin Valley, coping with sharp reductions in housing starts, have begun cutting staff.”

“A 3.6% reduction is not that bad considering housing starts have fallen more than 40% in Fresno County and considering the glut of houses for sale, said Chuck Williams, dean of the Eberhardt School of Business at UOP. ‘The news could be much worse,’ he said.”

“It also said housing prices in some areas could slip up to 20% in a worst-case scenario. ‘A bubble bursting? Hardly. If Nasdaq had fallen 10 to 20% in 2001 from its high point, would we still refer to it as the dot.com bubble?’ the report asked.”

The Contra Costa Times. “Sean Snaith, a consultant for the University of the Pacific’s Business Forecasting Center, said he does not believe the slowdown will be that severe in part because he never believed the housing market would evaporate in a bubble style.”

“‘We have always been the anti-bubble, pro-soufflé proponents all along,’ Snaith said.”

“Mortgage brokers in California have developed a new worksheet checklist to help borrowers better understand the complicated world of home loans, including the pitfalls of interest-only and other exotic loans.”

“‘These exotic mortgages have kind of taken over,’ said Mike Tacconi, president of the East Bay chapter of the brokers’ association. In the Bay Area, 43 percent of loans taken out in 2005 were interest-only loans. Another 28.3 percent were payment-option, which can lead to a growing loan balance known as negative amortization.”

“In the three-month period ending in September, default notices sent to homeowners for several missed payments increased 89 percent compared with a year ago, according to DataQuick.”

“Before the worksheet was developed, association members, who connect borrowers with mortgage lenders, were on their own when it came to explaining the pros and cons of different mortgages to borrowers. ‘Some brokers might not have been as detailed (about different options) as this list is,’ Tacconi said.”

The Modesto Bee. “A Salida couple is suing a group that offers real estate deals at a Ceres flea market, claiming that the company didn’t deliver on promises to sell their home and get them a better one.”

“Instead, say Manuel and Marbella Salas, they have a new house with construction defects, haven’t sold their old home and have learned that the man who arranged the deals doesn’t have a real estate license.”

“‘I want people to know what they’re doing,’ Marbella Salas said. ‘We had good credit, and now we’re getting notices from the electric company.’”

“The couple’s mortgage payment was $2,200 a month; they bring home about $6,600 per month. VJ Singh followed up with phone calls saying he could help them sell or rent their home and buy a bigger one elsewhere, and only increase their mortgage payment by $200 a month, the couple said.”

“After they agreed to buy another house in Salida in December 2005 for about $500,000, they learned that the new mortgage would be $4,200 a month.”

“Marbella Salas said she’s afraid that others are getting questionable real estate deals with Singh and the company, adding that he still was set up at the flea market as recently as a few weeks ago. ‘He didn’t care about us,’ she said. ‘He only cared about his commission.’”

The Review Journal reports from Nevada. “The inventory of homes for sale on the Multiple Listing Service in Las Vegas declined to 19,729 in November, down 16 percent from the previous month, the Greater Las Vegas Association of Realtors reported Wednesday. It’s still up nearly 34 percent from a year ago.”

“‘I think people are finally starting to listen and read the news,’ said Linda Rheinberger, president of the Realtors association. ‘They understand that market conditions are not what they were yesterday and who knows what they’ll be like tomorrow. It’s a different environment. They’re not going to attain the results of 2004. The market has changed.’”

“Sales continue to decline dramatically. Realtors sold 1,547 single-family home sales in November, down 36.6 percent from a year ago. Median prices are stable at $308,000, off by less than 1 percent.”

“‘We’ve been saying for months that sellers should be realistic in listing and pricing their homes for sale,’ Rheinberger said. ‘It looks like our message is taking hold.’”

“(Realtor) Kurt Lehman has noticed that inventory of rental homes on the MLS has dropped. ‘This seems not surprising, given the prices which still have a ways to go to come down, the pressure on the home lending industry to clean up their act and the tentative attitude of buyers, who sense that prices are still needing to drop,’ Lehman said.”

“Larry Murphy, president of housing research firm SalesTraq, said he gets calls and messages almost daily from people telling him the real estate bubble has exploded and prices are collapsing. ‘Exactly when did that happen? The fact is, it didn’t happen,’ Murphy said.”

“Construction crews are pouring the third and fourth floors of the parking structure and residential building for Juhl, a $170 million mixed-use condominium development in downtown Las Vegas.”

“With 214 “hard contracts,” or binding purchase agreements, Juhl is about 60 percent sold, CityMark President Rich Gustafson said. A large percentage will be primary residents in the building. ‘That’s one of our goals,’ he said. ‘We’re looking for a lights-on building.’”

The East Valley Tribune. “The good news: Arizona’s economy will continue to grow next year. The bad news: The growth rate will be slower than in 2006 as the economy downshifts for the third consecutive year. That’s the consensus outlook of 18 economists who contribute to the Arizona Blue Chip Economic Forecast.”

“Scottsdale economist Elliott Pollack said the Valley real estate market also has its good news-bad news aspects. The good news is commercial and institutional construction is strong. The bad news is single-family housing permits are being issued at less than half the pace of a year ago, even though sales have remained strong, he said.”

“‘What happened is builders overbuilt in 2004 and 2005, and about 15,000 to 25,000 excess units are now on the market,’ he said. ‘We’re basically going through an inventory correction.’”

“Downward pressure on prices also is likely to continue until the inventory is worked off, he said. ‘If all goes well, it will be a lousy year in 2007,’ he said. ‘If it’s not a lousy year, this (slow housing market) will just drag out.’”

The Arizona Republic. “Desert Communities, Inc. of Las Vegas placed the winning bid of $58.6 (million) this morning to buy the first nugget of the 275-square-mile Superstition Vistas area, a spawling, undeveloped desert area near Apache Junction held for decades by the state.”

“The Arizona State Land Department set a minimum bid of $45.25 million for about 1,000 acres out of 7,000 acres of the so-called called Lost Dutchman Heights south of Apache Junction.”

“The state had held the land beyond a previously set auction date last summer in hopes of a price rise after August auction of 325 acres at Desert Ridge, near Arizona 51 and Loop101, flopped when no one made the minimum bid of $150 million.”

“The state says the Superstition Vistas area could hold 1 million people in the future.”

A housing report from the Arkansas Times. “Northwest Arkansas has grown faster than anyone could have anticipated. Sleepy pastureland overnight became subdivisions, office parks and strip malls. The lure of easy money proved irresistible to would-be developers.”

“‘There were a lot of people who jumped on the bandwagon,’ said Tom Terminella, a familiar name in Northwest Arkansas real estate for almost two decades. ‘Every hairdresser and fireman and a lot of people who were in banking got in.’”

“Ambitious developers joined with start-up bank executives to unveil high-profile projects at glitzy functions. Now, the hangover from the big party has set in. Despite a steady population increase of about 1,100 people a month, there’s a serious oversupply of residential and commercial property.”

“One economist estimates 112.9 months of housing inventory, more than nine years’ worth, at the current rates of absorption.”

“‘Houses were being built at such a pace that even the fantastic growth of Northwest Arkansas couldn’t keep up with it,’said Kathy Deck, at the University of Arkansas in Fayetteville.”

“That reality has sobered everyone. Formerly eager developers are scaling back their plans, and their once-trigger-happy bankers are re-evaluating lending practices. ‘I got the opportunity to see people jumping in the speculative market, more on the residential side,’ Brandon Barber says. ‘I jumped out there and built spec homes which sold at the time, just like everything else was.’”

“In early 2006, the residential market began to flatline, especially at the higher price points, as the supply of new housing stock outpaced the demand.”

“‘We were spread out too much,’ Barber acknowledges. ‘Now, as opposed to 50 projects, we can focus on seven or eight projects. … We’re definitely not as greedy, for lack of a better word.’”

“As for his existing properties that aren’t selling as well as he hoped, Barber says, ‘We have set up some more creative financing and we’re going to wait for the market to come back and let the grass grow.’”

“Tom Terminella is a little more circumspect. ‘In the last 24 months it’s been rather entertaining to watch this unfold,’ he says. ‘I watched a lot of development that didn’t make sense at the time it was happening. Now, with the correction in the market, it makes absolutely no sense.’”

“The problems are worse in Benton County than in Washington County. ‘I feel like the multi-family and the single-family residential home sites, pretty much at all price points across Benton County, are oversaturated with inventory,’ Terminella said.”

“The biggest problem, in retrospect, was the rush to build luxury homes priced at $200,000 and above. Part of that was due to the boom mentality, but developers also became entangled in market pressures that sent land prices up. Once they acquired an expensive lot, it seemed the only way to profit was to try to sell an expensive house there.”

“‘When we first decided to do it, there was zero availability,’ relates Travis Kershner, who started his development company two years ago, as the market took off. ‘Land prices went so high so fast, and people were buying lots like crazy. The more they would sell, the more prices went up. The homes needed to be at $250,000 or above to make a profit because of the price of land. People would pay too much for land, in my opinion.’”

“Betty’s Homes, based in Bella Vista, became the most prominent casualty of the recent market slowdown when it filed for bankruptcy on Oct. 20. Then, in late November, First Federal Bank of Arkansas foreclosed on another home builder, Calloway Investments, which defaulted on $4.93 million worth of construction and mortgage loans.”

“Nearly everyone involved in the industry believes the banks deserve some of the blame. ‘Credit has been easier than it should have been to get,’ said Brian Glenn, the chief lending officer at Legacy Bank. ‘There was a lack of what we would call solid pre-lending analysis. The market had been so good for so long, decisions were made to continue to make loans because of the assumption that things will continue to keep working.’”

“‘No doubt when you go from 10 bank charters to 30 in a two-year period of time, those institutions have to lend money to justify their existence,’ Terminella said. ‘Just to provide credit to anyone who has a reasonable idea is what got us into trouble.’”

“‘It was definitely not hard to get 100 percent financing,’ Kershner said. ‘Anybody could buy a spec home and get financing from a bank. Then the banks started getting stung and that slowed down.’”

“Glenn makes no apologies, however. ‘Really, if you want to play in the game up here, you have to be involved in real estate,’ he says. ‘We’ve done some speculative residential house loans for builders. ’05 did its thing, and in the first quarter of ’06, we felt the faucet starting to turn off. By summer it was off.’”

“As a result, there is speculation about more bankruptcies among land developers, which could set off a chain reaction that affects contractors, suppliers, and ultimately the banks.”

“‘It can’t be Mardi Gras every day,’ Terminella said.”

Some housing bubble reports from Wall Street and Washington, the LA Times. “Is the Ameriquest empire assembled by Roland E. Arnall about to be dismantled? The Los Angeles billionaire’s financial lending business has declined sharply since his appointment as ambassador to the Netherlands in February.”

“(Consultant) David Olson is among those who think a sale or outright closure of Ameriquest and Argent is increasingly likely. The sub-prime market ‘has been a disaster for the past six months,’ he said.”

“Olson said the company still faced the threat of lawsuits by aggrieved borrowers. ‘I can’t imagine who would want to buy them as a firm since there would be huge potential legal liability,’ Olson said.”

“Ownit Mortgage Solutions, an Agoura Hills-based wholesale lender, has ceased operations and laid off 800 employees nationwide, part of the shakeout in the sub-prime lending business.”

“‘The small and mid-sized lenders that specialize in those loans have been facing a lot of pressure lately,’ said John Bancroft, managing editor of Inside Mortgage Finance Publications Inc. in New York. ‘These are companies that depend almost exclusively on new loans. That market grew rapidly in the last 10 years, but it couldn’t last forever,’ he said. ‘Eventually you reach just about every marginally qualified borrower you can.’”

“In its statement, Ownit blamed Merrill Lynch & Co. for the closure, saying the company was one of its primary lenders and had cut off its funding Tuesday.”

From MarketWatch. “The end came quickly for Ownit. ‘We were all working yesterday, assuming we were fine,’ Dave Hanthorn, a New Jersey-based employee who sells the firm’s loans to mortgage brokers, said Wednesday evening. ‘At 5:15 last night we got the call that we were ceasing operations.’”

“Ownit laid off all its staff, according to a headhunter, who received an email that was reviewed by Dow Jones from a friend who worked at the firm.”

The National Post. “Economist Benjamin Tal said he had expected to see the earnings of major mortgage lenders, which were quick to lend the money, get hit as the number of defaults began to increase. ‘It’s payback time,’ he said.”

“Mortgage giant Fannie Mae has…completed a restatement of past earnings but still faces tough work to make its financial reporting current. The restatement for 2001 through June 30, 2004, wiped out $6.3 billion in profit for the government-sponsored company, which finances one of every five home loans in the United States.”

“Analyst Jim Vogel said that for Wall Street, the concern is ‘if there’s a pattern of sustained quarterly losses that appear to reflect more difficulties in risk management than the market had thought.’”

The Chicago Sun Times. “Executives of several of the largest home builders predicted that inventories would decline, and prices and home starts would rise, in the latter half of 2007, as they spoke at the 10th annual Homebuilding Conference.”

“Toll Brothers Inc. CFO Joel Rassman declined to predict when the market would hit bottom. ‘Nobody can know when the bottom is,’ Rassman said. ‘I think there’s a reason to believe that when the big builders control 50 percent to 60 percent of a market, they’ll probably have to eat each other,’ he said.”

The New York Times. “The broadest government measure of house prices is calculated by the Office of Federal Housing Enterprise Oversight, the agency that oversees Fannie Mae and Freddie Mac. But it has three big weaknesses that end up making it much less useful than it could be. First, it excludes any mortgage over $417,000, because Fannie Mae and Freddie Mac, the two big mortgage buyers, don’t own loans so large.”

“Second, the data for individual metropolitan areas includes not just house sales but also appraisals done for a mortgage refinancing. Appraisal values, as many people know, tend to be inflated.”

“Finally, and by necessity, the index includes only houses that have actually sold lately. In a falling market, with an enormous number of properties for sale, the houses that are selling tend to be more appealing than the average house. ‘We’re dependent on houses that are actually transacting,’ said Patrick Lawler, the chief economist at the oversight agency. ‘It’s true that may not evenly reflect the market.’”

From USA Today. “Dozens of sawmills around the country are laying off workers, shutting down temporarily or trimming hours, as a steep drop in home building hits demand and prices. ‘In lumber, basic economic rules apply: supply and demand. The demand dropped off quickly, and so did the price,” says Joe Kusar, VP of Tolleson Lumber, the largest lumber maker in Georgia.”

“In Northern California, Pacific Lumber said Dec. 1 that it was laying off 90 people, or 19% of workers. ‘A (price) decline of this magnitude is virtually unprecedented in the last 20 years,’ says Pacific Lumber spokeswoman Andrea Arnot.”

“Tim Cochran of an independent newsletter specializing in softwood lumber, calls the current downturn the longest bear market since 1990. ‘(Prices) went up so high with the housing boom … and so when they go up hard they just go down that much harder,’ Cochran says.”

The Arbutus Times. “With a cooling housing market in the state, the Maryland Association of Realtors recently launched a lobbying group that plans to advocate for lower home prices. Despite its name, the League of Maryland Homeowners’ 34,000 members are almost all Realtors, though Kessler said she hopes to recruit more homeowners.”

“Ilene Kessler, president of the Maryland Association of Realtors, said the lobbying group is necessary because there is a ‘gap’ between what the average buyer can afford to pay for a home and the actual prices of homes on the market. The group plans to push for tax credits for first-time homebuyers and employers that donate money to nonprofit organizations that help build homes.”

“The move comes at a time when home prices are falling nationwide and growing more slowly in the state. In Maryland this summer, home sales fell at least 20 percent in every jurisdiction. ‘Some say the (housing) bubble is bursting, but the market is just adjusting,’ Kessler said.”

The Tampa Tribune reports from Florida. “J.P. King, the real estate auction house known for selling off luxury properties across the country, is gearing up to sell 100 condominiums this weekend in Tampa, and is predicting many more condo auctions in Florida next year.”

“‘Frankly, they overbuilt the market,’ he said. As a result, many developers now have surplus condominium units that they couldn’t sell, he said. The Hamptons auction ‘is the first of a lot of what you’re going to see in 2007,’ he said. ‘There will be more in Florida probably than anywhere else.’”

“Of the 100 units Bay Communities will auction off, 40 will have no reserve price, which means there’s no minimum price for bidders. The Hamptons has sold only about 56 units, which means about 260 remain on the market.”

“Carter said developers must cover taxes, interest and maintenance costs on unsold properties, which is a strong incentive to sell them off. ‘When you factor in getting out from under those carrying costs, you probably come out ahead,’ he said.”

“Some previous buyers say they’ve encountered unexpected liens and unpaid bills at The Hamptons. Nancy Alexander said she was looking for a little extra income a year ago when she bought two condominiums there. Instead, she said, she found unpaid tax bills, a growing list of liens, and the kinds of hassles she hasn’t seen before in her 20 years as a local real estate broker and investor.”

“Complications continue to mount, and bills and liens keep arriving, she said. ‘We still hate going to the mail,’ she said.”

The Herald Tribune. “As soon as Barbara Anson realized last summer that the market for raw land in the Myakka City area was dead, she called her clients and told them to slash prices.”

“‘People had to realize that the bubble had burst,’ said Anson. ‘If they wanted to sell, they needed to lower their prices.’”

“And not just by a little bit. ‘Prices have to come down to where they were five years ago,’ Anson said. ‘Five-acre parcels that were selling for $250,000 to $300,000 should now be priced at $130,000 to $150,000. Ten-acre parcels that were selling to $300,000 should now be $195,000 to $180,000.’”

“Anson ‘is one of a handful of very sharp Realtors who has been forward thinking,’ consultant Jack McCabe said. ‘No matter how many Realtors say that this is a great time to buy, buyers are more savvy now. They understand that it doesn’t make sense to buy into a falling market.’”

“Anson realizes that her conclusions about the market are not popular among fellow real estate agents, but she sees no other way to jump start the market. ‘Prices were 150 percent overvalued during the boom,’ she said.”

“Some observers think that the developer proposing one of the region’s largest retail destinations for Jones Loop Road, are banking on some dramatic demographic changes in southern Charlotte County that are by no means guaranteed.”

“West Palm Beach builder Syd Kitson’s giant Babcock Ranch proposal (is) expected to add another 50,000 households to the area around the Charlotte-Lee county line.”

“The customers that The Wilder Cos. is banking on are younger, wealthier and much more active than exist today. ‘They are not building to meet today’s needs, but what they expect to be tomorrow’s demands,’ Scott said. ‘They are expecting large numbers of baby boomers, many of which who will be coming into quite a bit of money.’”

From TC Palm. “KB Home’s Treasure Coast division had its second round of layoffs in less than six months and may be closing its Vero Beach design center on State Road 60.”

“Bill Glynn, a Realtor in Vero Beach, said through his contacts he learned KB Home will lay off up to 900 employees statewide. ‘I think they did away with a lot of their support staff in Brevard, St. Lucie and Indian River,’ Glynn said. ‘That’s what these big builders do when things slowdown, they lay off people.’”

“Don Santos, past president of the Treasure Coast Builders Association, said said another indicator the home building giant could be leaving the Treasure Coast is the unloading of vast parcels in Port St. Lucie.”

“Edie Ousley, spokeswoman for the Tallahassee-based Florida Home Builders Association, said, ‘There are a lot of layoffs in residential construction right now,’ Ousley said. ‘We soared to unsustainable highs in 2005 and now we’re experiencing a downward correction.’”

“Ousley added that she’s concerned Florida’s economy could suffer if the market continued to slump. ‘Construction is Florida’s second largest economic engine and we need this industry to thrive,’ Ousley said.”

The Florida Times Union. “In the wake of fewer home sales and increasing inventory, local home builders and Realtors are arming themselves with a weapon they hope will help turn the tide in the local market: Information.”

“Most speakers at the seminar hit the audience with a similar message: ‘Now is a great time to buy.’”

“Home building consultant Charlie Clark cited unrealistic expectations among sellers as one of the reasons the number of home sales has slowed in the past year. ‘Just because they think their home is worth something, it doesn’t mean somebody else does,’ he said.”

“Evidence of the strength in Jacksonville’s market seems to not be reaching home builders’ sales people, said Clockwork Marketing president Maxine McBride. When asked by mystery shoppers if it was a good time to buy, sales associates tended to cite strong incentives given by builders rather than strong aspects of the market, she said, emphasizing the need for builders to get the message across on the ground level.”

“‘It’s no longer business as usual,’ she said. ‘People want a magic bullet, but there is none.’”

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