The Housing Bubble

A housing report from the Arizona Republic. “This is a good time for first-time homebuyers to get into the market, real estate agents say, but Gilbert may still be a tough place for new buyers. ‘Mesa has a little more variety, more options for first-time buyers,’ said Nelda McClaskey, a Realtor in Gilbert. ‘Queen Creek has some great opportunities. If people are willing to drive a little bit, you can get a newer, larger, nicer home in that area for a lot less than in Mesa, Chandler or Gilbert.’”

“‘I really don’t think people should wait too long, because I think things are going to change,’ she said. This month, Keller Williams Realty Southeast Valley in Gilbert hosted free seminars for first-time homebuyers, events they plan to offer again Jan. 3 and Jan. 6. No one showed up to the December seminars.”

“First-time buyers may not know how good the timing is, McClaskey said. ‘I do believe a lot of people are scared off by what they hear about the market,’ she said. ‘The average person that’s not deeply entrenched in it, they have no idea. They think everything’s come to a screeching halt, because that’s all they’ve heard.’”

“Jeff and Sarah Mashaw, a married couple attending Arizona State University, are looking to move out of their Tempe apartment and into a home in May, when Jeff will graduate. Before then, they have to save $2,000 for a down payment.”

“They already are learning about purchasing a home through the Mesa-based Housing our Communities program. ‘We’ve learned stuff we didn’t even know we didn’t know,’ Jeff Mashaw said.”

“The process of buying a home can be confusing, Sarah Mashaw said. She said she’s glad there’s someone there to guide them through it. ‘The most surprising thing, I think, is how much of a home we can actually afford,’ she said.”

“‘Prices, closing costs, amenities, all those are negotiable,’ said said Vic Rochelieux, a real estate agent in Gilbert. ‘The people that want to sell are willing to negotiate all the aforementioned, or contribute to closing costs.’”

“The Southeast Valley, like greater Phoenix, has about an eight-month inventory of available homes, Rochelieux said. Normally, a healthy inventory is three to four months, he said. Prices dropped this year, a trend Rochelieux thinks will continue.”

“Give us more time before raising development fees, builders are telling Avondale leaders. The plea to delay the vote and to consider a phased rollout of the new fees did not seem to have much council support.”

“‘I find your argument to be hypocritical and weak on this matter,’ Councilman Ken Weise told the home builders’ representatives.”

“He said builders were raising prices up to $5,000 every couple of weeks during the recent housing boom. And they looked the other way when investors bought several houses, despite rules that required owners to live in the house for a period of time, he said.”

“Now, he said, developers are dropping prices substantially, hurting buyers who paid more when the demand was high.”

The Arizona Daily News. “University of Arizona economists see slower growth ahead, but no recession in the local economy. The real-estate market and consumers are the keys to the economy’s health, said UA economic forecaster Marshall Vest.”

“Some weakness is apparent in consumer spending, he said, and that is likely tied to slowdowns in home-improvement centers and furniture outlets, both tied to the slowing housing sector.”

“A sharp fall in the number of houses sold, along with an increasing inventory of units, will lead to additional price declines, he predicted. Buyers are convinced prices will decline further, he said, and there is no longer any urgency to buy in the market.”

“The average price of homes sold through the Tucson Association of Realtors Multiple Listing Service has declined 5 percent since the end of 2005, Vest said.”

“The national economy is ‘in good shape,’ UA economics professor Gerald Swanson said, and no recession is likely. “Everybody is betting on a soft landing,’ he said.”

Readers suggested a topic surrounding the subprime news this week, starting with some quotes from an article. “Let’s talk about complacency for a moment. Ownit Mortgage Solutions, a California-based home lender, closed this week and told more than 800 workers not to bother coming back to work. The Los Angeles Times reported that Ownit simply ran out of cash needed to meet obligations.”

“Here’s where the complacency enters the picture. Michael Youngblood, a research managing director for Friedman, Billings, Ramsey Group, noted that key aspects of subprime loans, combined loan-to-value ratio, debt-to-income ratio, and credit score, did not diverge from long-run averages.”

A reader asks, “Wait a minute…so they have ALWAYS been doing 100%, no doc, no closing cost, stated income/NINA loans to sub-prime borrowers in the percentage and volume that they have been recently? I fond that highly unlikely. Anyone in the sub-prime biz care to comment?”

Another remarked, “The reason it’s changed is that prices stopped going up. When you can simply refinance into an I/O loan you don’t foreclose, rates now are higher than when most of these toxic loans where written.”

“Add in the fact that houses bought last year won’t appraise for what they have outstanding on the loan (since everyone went I/O they haven’t paid down a dime of the loan balance) - and even if they can appraise they can’t afford to refi as rates will be higher. The endgame is here.”

One senses a cash crunch. “I suspect that there are a number of financial players that are discovering a sudden need for cash and that this is the beginning of a selloff in everything. Gold, commodities, bonds, stocks.”

“Once the fly-by-night subprimes start going belly up it can’t be long until those Credit Default Swaps start being called in and certain people discover a pressing need to sell anything they have to generate cash to cover them.”

The New York Times. “Much of the growth of the United States in recent years has been financed by homeowners’ rising wealth. But now the growth in that wealth has almost vanished.”

“The government reported this month that it estimated the equity of Americans in their homes rose a scant 0.1 percent in the third quarter. At an annual rate, that was just 0.5 percent, the smallest gain in more than a decade.”

From Bloomberg. “Sub-prime mortgage bonds had their worst week of the year on concern about the failure of two lenders, the slowing housing market and the ability of borrowers to repay the loans, derivatives based on the securities suggest.”

“An index of credit-default swaps based on bonds rated BBB- and consisting of sub-prime mortgages made this year fell 2.6 percent, to 95.36 today.”

“‘The information that has been released about the state of the U.S. mortgage market is not dramatically different than it was one month ago, two month ago or three months ago,’ said Paul Ullman, CEO of a New York hedge fund specializing in mortgage bonds. ‘What is different is the state of the industry.’”

“When sub-prime mortgage companies who service, or collect payments, on loans are shuttered, their failure is a bigger risk to bondholders than if a company that only lends shuts down, Ullman said. Ownit, which last year made more than $8 billion in sub-prime mortgages, was not a servicer.”

“The reaction this week may be too severe, said Andrew Chow, who manages $5.5 billion of asset-backed bonds and credit derivatives, since ‘investors are looking to the homeowners for the repayment of those loans; they’re not looking to Ownit.’”

“This year ‘is turning out to be a doozy of a year’ in terms of sub-prime loan quality and ’slowing home prices are no longer allowing borrowers to hide behind the covers of a rising housing market,’ wrote Gyan Sinha, a senior managing director at Bear Stearns.”

“There is a risk that sub-prime loans from this year will experience higher cumulative losses than the 2000 vintage, the worst-performing ever, which as of today are around 5.5 percent, said FBR’s Michael Youngblood. Poised to hurt the loans are weakening California job markets and the extent of ‘payment shocks’ when the loans’ rates begin to adjust, he said.”

“With concerns rising in recent months, investors have discriminated more among different issuers, ‘a long overdue change in behavior,’ Youngblood said.”

The Financial Times. “The failure of a small Californian mortgage lender on Thursrday increased nervousness in the credit derivatives market about the large number of US ’subprime’ mortgages extended this year.”

“In recent years, this area has been one of the fastest-growing parts of the market for mortgage-backed bonds. So far in 2006, $437bn of such securities have been issued in the US.”

“As measured by the ABX index, the implied price for bonds backed by 2006 subprime mortgages has fallen dramatically in recent weeks. ‘Market opinion is clearly grounded on a fairly negative view regarding the fortunes of the bonds backing the ABX [index],’ said Gyan Sinha, at Bear Stearns.”

“He said problems are pronounced for bonds backed by 2006 mortgages, which cost almost 100 basis points more to insure than bonds that are backed by 2005 mortgages. Other signs of weakness include higher delinquency and foreclosure rates for 2006 vintage bonds.”

“Moody’s put a handful of 2006 subprime deals on watch for downgrade, the first negative ratings activity for bonds originated in these years.”

The Daily News reports from California. “Home sales and prices in the Santa Clarita Valley continued to plunge. Sales of single-family homes fell by 22.1 percent, which amounts to the lowest number of November resales since 1999, according to the monthly report issued Friday by the Southland Regional Association of Realtors.”

“The median price was $580,000 down $15,000 from November 2005. Condominium sales, and prices, also were on the decline. Eighty-eight condos sold in the region with a median price of $365,000. That compares with the 100 that sold a year ago with a median of $385,000.”

“Sales peaked in March 2005 when 662 houses sold. The highest median price, $643,000, was recorded in April of this year. The best month for condo sales was in January when the median hit $397,000.”

“‘I’m happy with the market,’ said Peggy Mueller, president of the association’s Santa Clarita Valley division. ‘The people who are buying really need to buy and those who are selling really need to sell. It’s the most normal market we’ve had in a long time.’”

The Signal. “The market in Santa Clarita is gradually adapting to other regions in Southern California, the Southland Association of Realtors reported. The 1,560 single-family resale homes listed for sale is 77.5 percent more than the same period last year.”

“Active listings for condominiums doubled to 624 since last year. Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., said condominium developers have canceled their developments, and have been looking to rent condominiums rather than sell them.”

“However, he said that for resale, ‘It’s definitely a buyer’s market. The speculators have left the market, which is good news,’ he said.”

The Merced Sun Star. “In 2005 the city issued a record 1,382 permits for single family houses. This year the market is saturated with new inventory and builders slowing down. The slowdown’s effects can be felt at building-related businesses across the county.”

“Chuck Falkenstein, general manager of Central Valley Concrete, said new houses made up about 80 percent of his business last year. Today that part of his business has shrunk to less than 10 percent, he said.”

“Anthony Fragassi, manager of 84 Lumber building supply on Highway 59, described business as ‘nonexistent’ compared with last year. Fragassi said his employees made 20 to 30 deliveries a day in 2005. Now it’s down to half or less, he said.”

“In the summer of 2005, Centex was closing escrow on eight to 10 houses a month, Rodriques said. A year later, Carly Rodriques started hearing about layoffs in Centex’s marketing and accounting departments. The employees in Rodriques’ construction division figured their jobs were safe, she said.”

“‘(We) thought we were out here actually doing the work to make the rest of the company run,’ Rodriques said. ‘I don’t think the construction people had any concept that it would happen to them.’ Her job disappeared, the casualty of a ‘massive work force reduction’ at Centex, a letter from corporate headquarters told her.”

“The market is still adjusting. Builders are using price cuts or incentive packages up to $100,000 to move the new inventory clogging the market. ‘This is my fourth cycle like this so I knew it was coming, but I didn’t know it was going to be this bad,’ said Bob Rucker, owner of Rucker Construction. ‘This market is totally overbuilt right now. The national guys came in and swamped us with inventory.’”

“Summerton Homes’s Don Gray said builders are fighting a battle against the public perception that now is a bad time to buy. ‘We think that’s a misconception,’ Gray said. ‘Prices are down about as low as they can go, interest rates are very strong. We think houses should be flying off inventory.’”

The Union Tribune. “Frank Christopher arrived at the Manchester Grand Hyatt yesterday with his wife, intending to buy a million-dollar condo-hotel unit from Donald Trump. The semiretired custom-home developer from La Quinta and Jackson, Wyo., left with two, costing about $2 million and totaling 3,800 square feet. ‘One’s for speculation,’ said Christopher.”

“An estimated $120 million in sales was toted up at Trump’s latest project, Trump Ocean Resort Baja California, a three-tower, 570-unit development north of Rosarito. Some buyers acted through on-site agents who, with cell phones in hand, signed sales contracts and handed over cashier’s checks for 10 percent down.”

“Marc Penso, an Irvine real estate attorney, was blunter than most in expressing his motivation. ‘Everyone here is buying for speculation; there’s no one moving here on a permanent basis,’ Penso said, adding that he owns similar units in Aspen, Colo., and Mammoth and is buying one at The Residences coastal condo-hotel in Tijuana.”

“Penso is betting that Baja’s relatively low home prices, at least compared to Southern California, will continue to fuel the boom and give him a tidy profit. ‘Everyone in this room is doing this as an investment,’ he said. ‘There’s no one here who’s going to own these units in five years.’”

“The Donald did not show for the one-day sales event at a plush San Diego hotel, but his persona loomed large in the ballroom, where would-be buyers nibbled on biscotti and sipped espresso as they waited to make their bids and celebrated over sirloin tip and fish tacos after clinching the deal.”

“‘Trump is my idol when it comes to real-estate investments,’ said Med Sami, of Irvine, after forking over $431,000 for a one-bedroom.”

“Trump’s imprimatur was just what many needed to take the plunge, said Jason Grosfeld, a co-founder of Irongate. ‘When The Donald is willing to put his name on the site, that means a lot,’ he said.”

“Buyers in the predominantly Southern Californian crowd said Trump’s involvement eased concerns about owning land in a foreign country. They were undeterred by spiraling violence in the border city of Tijuana, and they paid no heed to protesters outside the hotel who said Trump’s property was on one of the most polluted beaches in North America, a charge the developer emphatically denied.”

“‘I’m sure he wouldn’t put his name on it if he hadn’t investigated northern Baja meticulously,’ said Tom Pfleider of Beaumont, who dropped $550,000 for a one-bedroom on the 11th floor.”

The Pensacola News Journal reports from Florida. “Housing prices continue their steady decline in the Pensacola Bay Area, accompanied by huge drops in sales volumes for new and existing single-family residences. Escambia County’s total single-family home sales volume plummeted 40 percent in November compared to the previous year. In Santa Rosa County, sales volume fell 46 percent.”

“‘I would call these significant declines,’ said Al Muller, co-owner of Metro Market Trends. ‘The volume of sales continues to slow and median home prices are declining,’ Muller said.”

“The median price of a home in Escambia in November was $125,000, a significant decline from the December 2005 peak of $139,000. Santa Rosa’s median price topped out in October 2005 at $225,000. Last month, the median price declined to just less than $170,000.”

“The total number of single-family homes sold in Escambia dropped 35 percent. In Santa Rosa, those year-to-year numbers fell from 457 in November 2005 to 283 last month, a decline of 38 percent. Muller said another worrisome sign is the uptick in foreclosures in both counties.”

“Doug Gooch, the incoming president of the Pensacola Association of Realtors, agrees in part with Muller’s assessment. ‘We had such a phenomenal two years that it could be expected that we would return to a normal market,’ Gooch said.”

“The record-high inventory of new and older homes for sale in the two-county area is largely the result of Ivan and the surge of investors and speculators who bought after the September 2004 storm, Gooch said.”

The Times Union. “There’s never been a better time to buy a house. There. The media said it. At least I said it, and that should start boosting Northeast Florida home sales. I’m doing my part to alleviate the media-induced fear that builders and sales agents allege is helping to keep prospective buyers at bay.”

“Clark, a Ponte Vedra-based speaker and consultant, titled his speech ‘It’s a Great Time to Buy.’ Clark referred to the recent hot, hot housing market as ‘the last few years of absolute delirium and euphoria.’ That attracted out-of-town investors by the bus load, he said, snapping up five, 10 and 20 properties at a time hoping to flip them for a profit.”

“Such markets can’t last forever. Now, sales are down and fewer construction permits are being issued. It’s a cycle.”

The Miami Herald. “Disputes over a real estate venture involving Hollywood-based Technical Olympic USA are heating up in court.”

“Debtholders for the joint venture sued to force repayment. TOUSA claims the actions of Deutsche Bank, the debtholders’ agent, have starved the joint venture of operating capital to the point where it couldn’t meet its goals. The joint venture was formed to acquire the assets of Transeastern Homes and was supposed to build 3,500, but has been unable to because of the housing market downturn.”

The Herald Tribune. “The Orlando owners of a nearly six-acre property at Fruitville and Beneva roads have decided the time’s right to try and unload. This time last year, LeCesse Development Corp. planned a 104-unit condo project on the land. And unlike scores of downtown condos proposed, the Villa Grande units were slated to be largely affordable, priced between $200,000 and $300,000.”

“LeCesse had the $33 million project on a fast track, too. It hoped to start work last spring, and complete the project sometime in mid-2007. But then the market crashed, more briskly and completely than nearly anyone could have predicted.”

“‘We think it’s a great project, but the problem is in obtaining the pre-construction contracts,’ said Mark Collier, an agent who is marketing the land. ‘The condo market in Sarasota is just soft right now.’”

“LeCesse is hoping to sell it, for $6.4 million, more than double the amount it paid in January 2005, sans building approvals, and let the new owner take advantage of a future market upturn.”

The First Coast news. “Now is time for both home buyers and sellers to enter the market, according to a new housing campaign underway on the First Coast. ‘There seems to be a lot of people out there just out looking not ready to purchase yet because they think the price may be less,’ builder Bryan Lendry said.”

“Lendry says the new home inventory currently stands at about seven months. A year ago, that number was almost half, and the market belonged to sellers. Now, Lendry says, it belongs to the buyers.”

From Bay News 9. “After months in the gutter, the Bay area’s home market is showing signs of recovery. ‘Lower interest rates certainly combined with the incredible amount of inventory out there are really creating a situation for homebuyers where there’s just great product out there,’ Tampa Bay Business Journal editor Alexis Muellner said.”

“Muellner said shopping for a home in the Bay area is getting easier. There are more homes available and even more loan opportunities. First time homebuyers are even looking at the home market in the Bay area, unlike this time last year when it was too expensive.”

“‘The mortgage industry is very fleet to foot at trying to create products that appeal to new homebuyers, first-time homebuyers, people who have refinanced and bought a home a couple times looking for ways to sell and be in a competitive market,’ Muellner said.”

The News Press. “The old saying is timeless: If it sounds too good to be true, it probably is. That’s especially true for home buyers who might receive mortgage loan offers in the mail for incredibly low monthly payments.”

“Some financial advisers warn consumers not to fall for the lure of those option adjustable rate mortgages, or Option ARMs.”

“‘I’m refinancing a customer right now who opened an Option ARM a year and a half ago,’ said Pat Gaver, incoming president of the Tallahassee Mortgage Bankers Association. ‘This customer chose the minimum payment option. Her loan balance increased $11,000 in the first year. She opted to pay a 3 percent prepayment penalty of her total loan balance, which came out to $8,000, just to get out of the loan,’ Gaver said.”

“‘It could have been much worse for her because most prepayment penalties are as much as 6 percent,’ Gaver said. ‘I tell people every day that (interest) rates aren’t everything.’”

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