The Housing Bubble

The Reporter from California. “Economic growth in the Vallejo-Fairfield metropolitan area will be among the strongest in the region, says a recently released study. ‘Part of the story,’ said professor of business economics Sean Snaith, ‘is housing and the larger trend of this demographic shift from the coastal areas of California, inland.’”

“Much of that migration was driven by the real estate boom in recent years, and though Snaith admits ‘that party is coming to an end,’ he said, ‘by no means is this going to be a bubble crashing.’”

“In fact, the business school likens the housing market not to a bubble, but a souffle. ‘A bubble is something that’s driven by speculation,’ Snaith explained. In terms of the housing market, he said, ’speculation wasn’t the key driver.’”

The LA Daily News. “It had to happen sometime. The median price of a San Fernando Valley house had to fall. Last month it finally did, by just less than 1 percent. And, just maybe, November brought us a glimpse of what the residential real estate landscape is going to look like for months to come.”

“‘We’re kind of right at the price point now that we’re going to have to get used to,’ said John Karevoll, an analyst at DataQuick. He’s neither a cheerleader nor a market basher. He simply interprets the numbers. ‘We’re way ahead of the game. It just depends on how much of the gains we made in the past four years we get to keep. Is it 95 percent, 90 percent or all of it?’”

The Orange County Register. “With the housing boom over, its dark side is coming to light, including fraud. Pam Houchen, the former mayor of Huntington Beach who helped dupe lenders and borrowers in a real estate scam, is a good example of a national phenomenon.”

“Mortgage fraud, ballooned as the housing market heated up, according to government data and industry experts. That’s bad news to the many mortgage companies based in Orange County, because they face losses when fraud involves inflated home prices.”

“Peter Norell, who leads a Santa Ana-based white-collar crime unit of the FBI, said fraud is being fueled by the volatile housing market, an increase in loans available to consumers and the widespread use of automated lending systems. ‘The market is riper than ever before’ for fraud, Norell said.”

“For a seven-county area that includes Orange County, 4,326 suspicious banking activity reports were filed in fiscal 2006, nearly double from 2005, according to the FBI. And the 2005 total was up 30 percent from the prior year.”

“Don Currie, founder of HighTechLending Inc. in Newport Beach, said loan volume is falling with the market, and people who work on commission are struggling to keep up their incomes. ‘A lot of people go to desperate measures to keep their production and lifestyles up,’ Currie said.”

“And more consumers stretch the truth when home prices or interest rates are high, Currie and others said. They exaggerate their income and assets to qualify for loans.”

“Sometimes customers lie when buying a second home; borrowers falsely say they will live there in order to qualify for better interest rates, he said. Currie said the second-home lie contributes to defaults and foreclosures, which hurt the market. In tough times, an owner will default on a second home before his own home, he said.”

“‘It’s probably one of the most rampant misrepresentations that you have,’ Currie said.”

The Contra Costa Times. “Christopher George, (founder of) a San Ramon-based mortgage firm, is on the front lines of the housing market in the Bay Area. The once-muscular realty sector has turned flabby lately. And some home owners are getting unpleasant surprises from their adjustable-rate mortgages as bigger payments kick in.”

“Q What’s your assessment of the housing market in the Bay Area? A ‘We are still in a flat and, in most cases, a declining market. There seems to be more inventory on the market. Most folks are still questioning whether they need to be aggressive in reducing their prices so they can sell their home.’”

“Q Are sellers still in denial? A ‘Those people who do not think they are in denial are still in denial. I think a lot of people have seen the market soften before and have seen it correct itself very quickly. They figure that in a couple of months the market will come back and surge again. But this is different. This is very different.’”

“Q How is it so different? The difference in the housing decline is far deeper this time than it has ever been. Interest rates have gone up. Folks have stopped making multiple offers. This time we see a lot of things that are problematic for the industry. Foreclosures are up, not just in Northern California, but also above the nation. In some cases foreclosure rates here have doubled, tripled, even quadrupled. But the big change is early payment defaults on mortgages.’”

“Q What is happening with these defaults? A ‘They involve people who have defaulted on their mortgage in the first six to 24 months of their mortgage. They can’t pay their mortgage because they did not state their income properly, or their payments have gone up because they had option ARM mortgages.’”

“Q How have all the foreclosures affected the Bay Area housing market? A ‘You have created a whole new reason to depress the market by flooding it with more inventory. This inventory largely is coming from lenders who have these homes that have defaulted. In some cases they aren’t even in foreclosure yet. There s a lot of pressure on home prices right now.’”

The North County Times. “A cooling housing market and recently higher inventories for new homes have caused many new home sellers throughout North County to offer incentives, such as lower prices and fancy vacations, to increase home sales.”

“Incentives aren’t going to matter much to the Silvius family. David Silvius said he knows that he won’t be able to afford a home in North County on his potential salary without significant struggles. David and his wife, Brianna, said they would rather pay $200,000 for a 3,400-square-foot home in Texas now than save for a 3,000-square-foot home worth $700,000 in Carlsbad, regardless of incentives.”

“‘We don’t want to struggle for 10 to 15 years to give our kids a yard,’ said Brianna Silvius.”

The Providence Journal reports from Rhode Island. “The Villages on Mount Hope Bay is a 55-plus residential development nestled along a stretch of waterfront. The project, which is more than halfway completed, will include a total of 290 condominiums.”

“The decision to auction the 33 lowest-priced condominiums was inspired by lagging sales of the units, said Robert Cole, managing director of Velocity Marketing of Boston, which represents the owner. The minimum bid prices for the units being auctioned ranged from $240,000 to $380,000, prices that, if not bid up, were not even enough to cover the developer’s costs, Cole had said.”

“About 85 bidders registered for yesterday’s auction but were stopped short when, around noon, bidding was halted after the sale of only 17 units…with 16 units unsold. The smallest unit, a one-bedroom, went for $342,000. The original asking price on the unit was $460,000. The largest unit, a two-bedroom condo, went for $510,000; the original price was $690,000.”

“As the auction wore on, the prices continued to decline, said Robert Gaudreau, of Cranston, who was sitting in the audience tracking every sale. Gaudreau, a developer, wasn’t at the auction to bid, but rather to gauge how the market responded to the condos.”

“‘[The Villages’ developers] were following the trend, too, and it was going down, down, down,’ Gaudreau said. ‘They started at about $300 per square foot, and the last sale was around $265 per square foot.’”

“Condo sales in Rhode Island have substantially declined this year, dipping by 22.6 percent in the second quarter and 13.4 percent in the third, compared with the same periods in 2005. At the same time, inventory has increased by 76 percent, according to the Rhode Island Association of Realtors.”

“Gail Whitfield and her husband, Jeff, bought the 1,492-square-foot, two-bedroom unit they’d come to the auction to snag. The stressful sale was more than worth it, said Jeff Whitfield, though they’ll probablybe paying for their extravagancy for years to come.”

“‘We finally have a retirement home we can come to on the weekends,’ he said with a smile. ‘But we might not be able to afford furniture for a couple of years.’”

The Boston Globe. “After they returned to Long Island from their Cape Cod vacation this summer, Julius and Jody Rao just couldn’t get back into a groove. The Raos decided to buy on the Cape. Even with retirement a few years off, the couple decided to look now, to see if the soft Massachusetts real estate market offered any bargains.”

“But a funny thing happened on the way to the fire sale: ‘We found prices were a little high,’ Jody Rao said. So they’ll wait.”

“As will James and Rose Mulligan , who are at the other end of the sales spectrum. The Mulligans have listed the house they built for $980,000. The house has been on the market since June, and if it doesn’t sell for the price the Mulligans want, no big deal.”

“‘The market is quiet. We understand it’s quiet. So we’ll patiently wait,’ said James Mulligan, who lives in Lady Lake, Fla.”

“Welcome to the vacation market on Cape Cod, where the vexing standoff between sellers and buyers that is bedeviling the broader real estate arena is especially pronounced.”

“Single-family home sales through October were down 22 percent from a year earlier, compared to a statewide decline of 15 percent, according to Warren Group,. There are also 51 percent more homes available for sale now than a year ago this time.”

“And Barnstable County had the steepest increase in the number of foreclosures, 84 percent, among Massachusetts counties for the 12 months ended Sept. 30.”

“Real estate brokers said some sellers are reluctant to acknowledge that their homes, the setting for countless cherished memories, may not fetch the price they expect. ‘If your neighbor sold his house 18 to 24 months ago for a fair bit more than you’re going to get, that’s really, really hard to accept,’ Robert Wilkinson said.”

“As sanguine as they might be, sellers of some long-idle Cape homes may one day be forced to adjust expectations to market realities. For example, sellers of a post-and-beam home on 1 1/3 acres in Yarmouth Port relisted the house in October for $829,000 after first putting it on the market in July 2005 for $50,000 more.”

“And for three years, the owner of a 3-acre spread overlooking Nantucket Sound in Harwich Port stuck to a $4.3 million asking price, until dropping it to $3.75 million during the summer.”

“‘Buyers right now are cautious because of what they’re seeing on TV and reading,’ said Steve Perry, the Osterville buyer broker. ‘They think that the theoretical bottom hasn’t hit yet.’”

Readers suggested a topic about who is buying houses these days. “Flippers, move-up and subprime buyers would appear to all have been recently knocked out of the demand queue by flat or falling prices. And anyone who was ridiculed for sitting on their hands while all the financial geniuses were cashing in on an ever-rising market certainly has little reason to change his mind at the moment. So who is left to buy now?”

“Let’s at least agree there is less move-up demand when prices are flat or falling than when they are going up 23% per year. Especially when cashout home equity ATM loans were such a big source of consumption spending money in the past three years.”

One replied, “People who change jobs or extend their families and haven’t educated themselves about the housing bubble. They think the market is what it is and it is now necessary to put 50% of their income into housing, because renting is not an approved way of life.”

“If you count them in the move-up category, many of them have not yet been knocked out of the demand queue by flat or falling prices. I have one extended family relation in DC and one coworker here in MN who belong in this category, but it’s their money they throw away by buying. The appearance that you are talking about is still different where I live, but, and there I concur, it appears the appearance is changing slowly towards less demand.”

Another said, “In L.A., there are reams of affluent Asian buyers, especially in the San Gabriel Valley. Whether they realize the pot has gone off the boil, is another question, altogether.”

“David Lereah, chief economist for the National Association of Realtors, said 2006 was a different market because past declines were associated with the traditional factors of employment losses and rapidly increasing interest rates.”

“‘The 2006 declines came from affordability problems because prices were too high, forcing consumers to borrow too much,’ Lereah said. ‘We also experienced investors leaving the market, the perception that real estate was no longer a favorable investment, and the scare provided by some members of the media that a national bubble was bursting.’”

“The percentage of first-time buyers in California able to afford a median-priced home stood at 24 percent in the third quarter of 2006, compared with 28 percent for the same period a year ago, according to a report released today by the California Association of Realtors.”

“The deeper freeze scenario? There’s less hard evidence in the latest federal statistics, but there certainly are some sobering trends under way in two categories of real estate markets: First, those areas where the regional economy has been struggling, corporate layoffs and plant closings have pushed unemployment higher, and there is little in the way of immediate relief in sight.”

“In the second category are the boom-era shooting stars where excess appreciation has burned itself out and prices are now flat at best.”

The New York Times. “In the last five months, single women spent more than $30 million out of the $100 million or so in sales in the 299-unit condominium. In fact, single women bought 72 of the first 165 apartments sold. Spending by these women far surpassed that of single men, who accounted for $19 million. Married couples accounted for about $45 million in sales, and investors $5 million.”

“The impact of female buyers may be most pronounced in the Brooklyn condominium market. Brooklyn developers are beginning to see the same troubling market conditions that are hitting Manhattan and the rest of the country. Brooklyn has 5,888 condominiums under construction and another 11,634 units planned, according to data gathered by Halstead Property.”

“Apartments are taking far longer to sell. Apartments in Dumbo, Williamsburg and Brooklyn Heights sat on the market for an average of 111 days last quarter, compared with 62 days in the corresponding period in 2005.”

“Erica Besikof said that her husband would have been happy to postpone buying an apartment. But she convinced him that they could stop paying a lot in rent and live closer to their favorite beer bar, and their favorite restaurant.”

“‘He’s more nervous about the market and if we’re going to make a profit,’ she said. If the couple hadn’t found an apartment at 110 Livingston, ‘he would have been fine renting,’ she added.”

A housing report from the Washington Post. “Lisa and Reggie Starr thought they were getting a good deal when they signed a contract to buy a new six-bedroom house in Woodbridge almost a year ago. But after they had trouble selling their own house and wanted to get out of the deal, the fine print in their contract became a very big obstacle.”

“‘There’s no contingency for the sale of your home. There’s no contingency for financing. ‘No refund will be due to you’ — it’s clearly written in the contract,’ said Lisa Starr, who admits that she did not fully understand the document when she signed it.”

“The Starrs and many other would-be new-home buyers are finding that the sales agreements they so enthusiastically signed just a year or two ago have left them little wiggle room as settlement day approaches. Indeed, some consumer advocates and real estate lawyers who have been fielding calls from remorseful buyers in recent months say few contracts are as rigid and one-sided as those for new home sales.”

“The contracts are ‘written in a way to give every possible edge to the home builder,’ said Allen J. Fishbein, at the Consumer Federation of America. Some developers have added certain provisions that further strengthen the contracts, bit by bit, over the past decade, some attorneys said.”

“As a result, contracts became more prevalent during the frenzied real estate boom that block consumers from getting any ‘remedy’ beyond reimbursement of their earnest money, or that prevent them from taking the dispute to court but instead force them into arbitration, when differences of opinion arise.”

“But some buyers are trying to get back their deposits just the same, and at times are finding that persistence can prevail. There have not yet been judgments or verdicts in these cases, but some would-be buyers are getting settlements instead. In one case settled recently in Fairfax County Circuit Court, 16 home buyers in a McLean subdivision sued to get back deposits on homes contracted for a collective $20 million.”

“Robert M. Diamond, a real estate lawyer in Falls Church, said some buyers are grabbing at straws, even protesting changes favorable to them, such as when the developer added extra parking in a condominium complex. Buyers and their attorneys have alleged that these adjustments are ‘material adverse changes,’ even though the contracts clearly permit developers to make certain changes as needed to their projects.”

“‘It didn’t matter what the change was; these are excuses,’ said Diamond, adding that many of the buyers who want out are speculators who decided their investments had turned sour or buyers worried that they had overpaid.”

“The Starrs said they are hardly trying to slither out of the deal just because they were having second thoughts. They say their backs are against the wall: They couldn’t get good enough financing terms, and the builder had lowered the price of nearby homes.”

“The Starrs finally got a contract on the home they were selling, but at a price that is $150,000 less than they expected when they bought the new house. Reggie Starr marveled at just how quickly the real estate market had turned. ‘It was not even like a slight decline,’ he said. ‘It was like a big curve.’”

“‘You need to have legal representation, and you need a real estate agent,’ Lisa Starr said.”

“No matter how reputable the builder may be, buyers should seek out a lawyer before signing the deal because new-home sales agreements can be ‘loaded with all sorts of hidden land mines,’ Fishbein said.”

“During the boom, however, many builders refused to pay sales commissions to real estate agents representing buyers because builders could sell the houses without any help. And buyers risked losing out on a coveted contract if they took it to a lawyer rather than signing right then and there.”

“Jeffrey Silverstein, a real estate lawyer based in Burke, said he recently had two buyers bring him their contracts before signing. ‘When the real estate market was hot, everybody thought they had to sign right now or they’d lose the place. And that was probably true. Lawyers just weren’t in the loop anymore,’ Silverstein said. ‘Now, it’s coming back a little. They [builders] listen now. If you have reasonable changes to make the contracts more equal-handed, they’re willing to listen.’”

What do you see in your housing market this weekend? Price reductions? “In Somerville, just outside of Boston, a condominium developer trying to sell the last of 18 units slashed prices, dropping the price for the three-bedroom condo to $599,000, nearly 17 percent below what a comparable unit sold for three years in the same project.”

“In downtown Boston, the developer of a 14-story condo project held an auction. Bidders snapped up 31 luxury units at an average price of $778,000, about 20 percent below the average asking price before the auction.”

“The head of the firm that ran the event expects the market slump will lead to more such sales in Boston and elsewhere. ‘You’ve had some exuberance, you’ve had some overbuilding, and you’ve had some price declines, and people are going to need to move product quickly,’ said Jon Gollinger of Velocity Marketing.”

The Naperville Sun from Illinois. “This October, home sales in Naperville fell 28 percent, according to the Realtor Association of West/South Suburban Chicagoland. Year-to-date home sales experienced a 21 percent drop.”

“(Realtor) Chris Read said that the cooling housing market has hit Naperville homes priced over $800,000 the hardest, leaving a large inventory and increased competition to attract buyers. She said the sales are made when sellers drop their prices. ‘Sellers are being more realistic,’ Read said.”

From WLBT in Mississippi. “New homes are springing up daily in the metro- area. Each city has building codes. Official says things went awry in one Madison neighborhood, leaving several high-priced houses on the block. The City of Madison is dealing with mortgage fraud, foreclosures, and homes abandoned by builders in upscale neighborhoods.”

“One city inspector says some builders often change plans, cutting corners putting in less expensive doors and windows than original blueprints specified. We found something a little out of the ordinary. Construction been shut down on 11 house in Woods Crossing subdivision of Madison.”

The World Link from Oregon. “John W. Mitchell, an economist with U S Bancorp, dismissed talk of an impending recession at the national and state levels. He did concede 2007 would probably see slower economic growth as a result of a weakening real estate market.”

“‘People are borrowing against their house, which means, with housing prices going down, presumably it will have an impact on consumer spending,’ he said.”

The News Press reports from Florida. “Condo sales have slowed during the past few months. In September, 61 existing condos were sold, compared to 126 during the same month a year ago. The median price dropped, from $316,800 in September 2005 to $305,600 this year.”

“‘The residential market, I wouldn’t bet on that,’ Fort Myers-based real estate broker Ed Bonkowski said. ‘I don’t think you’re going to see that many people as full-time residents living down there. There are no services.’”

“Housing-market analyst Jack McCabe said his firm has seen a statewide drop of sales in condominium towers in 2006. Downtown Fort Myers is no exception, he said. ‘There is some concern about the viability of these projects in the future. There just aren’t that many people buying.’”

“Meanwhile, downtown’s developers are pressing ahead. As more condos come on the market, there’s no way to know how many owners will try to sell their units as soon as they’re built. Adam Palmer, a commercial real estate agent , said ‘the overall perception of the residential market as a whole certainly isn’t helping it’ with prices and sales down in recent months.”

The St Petersburg Times. “As Miles Development finishes one project and fleshes out another, its principals are adapting to St. Petersburg’s changing market as they prepare other developments. ‘St. Petersburg hasn’t been overbuilt,’ said COO Ken Doble. ‘But it has been overpromised.’”

“The same dynamics that affect individual home buyers are driving Miles’ decisions. Sellers think their land is worth more than it is and buyers are waiting for a drop in prices, so nothing happens. ‘There’s this disconnect,’ Doble said. ‘People are just sitting there looking at each other.’”

“J. Jason Perry, Miles’ VP of development, said Miles is actively shopping for more land downtown but is running into inflated prices. Some owners cling to dreams of instant wealth and tout their own project approvals as though they increase the land’s value. Perry said for Miles, it doesn’t work that way.”

“‘The zoning’s already flexible here so someone else’s approvals aren’t an asset,’ he said. Miles paid $25 per square foot for 1010 Central’s land but now turns down prices of $200 to $300. ‘That market came and went.’”

The Herald Tribune. “A massive drop in the number of permits for Southwest Florida home builders is providing the most disturbing evidence yet that Florida’s all-important housing industry will face tough times in the year ahead.”

“A Herald-Tribune analysis of U.S. Census data shows that home builders only got 426 permits in the unincorporated parts of Manatee, Sarasota and Charlotte counties during October. That is a whopping 66 percent decline from the 1,239 during the same month in 2005.”

“The driving force is the tremendous number of homes already built in the region. They were constructed under the apparent notion that the boom of 2004-05 would never stop. It has left Southwest Florida with, by some experts’ estimation, an oversupply of perhaps several thousand new homes.”

“Looking to take advantage of the sharp rise in real estate prices, investors plunged into the market for new construction, placing orders for homes in the hope that they would be able to resell them at a significant profit after receiving the title.”

“Builders themselves contributed to the madness by building ’spec’ homes ahead of demand.”

“‘The problem is that the level of speculative buying was much higher than people were thinking at the time,’ said Tom Danahy, the president of LWR Communities. ‘It drove volume and prices artificially high.’”

“In the summer of 2005, the bubble burst in Southwest Florida. Speculators started dumping their properties on the market, and inventories of unsold homes began to rise. By November, home builders noticed a slowdown in orders. They responded by dropping prices and stepping up advertisements for discounted product.”

“In the meantime, home builders and their suppliers have been cutting staff and expenses. ‘If sales are down 50 percent, you can pretty much bet that companies will reduce overhead by something similar,’ said Larry Kemick, an Ellenton-based home builder who has cut his staff from 14 to eight people during the past year. ‘I know for a fact that other companies in the area are cutting employment significantly.’ Suppliers say the same thing.”

“Gary Newell, the owner of Central Florida Truss in Bartow, said demand for trusses has fallen so sharply that he has had to cut staff by 60 percent.”

“Kemick thinks that the next few months will affect home builders differently. ‘A year is a long time. Some people will be just fine. For others, a year will be too long,’ he said.”

The Palm Beach Post. “Think you can get out of buying a condominium by walking away from your deal? Better think again.”

“The developer of two Boca Raton condos has a new tactic for dealing with skittish home buyers with balking on their mind: Sue them to force them to close. At least eight buyers at the Bocar condo and one buyer at the Eden condo have been hit with ’specific performance’ lawsuits by entities owned by developer Ceebraid-Signal of West Palm Beach.”

“Up until now, the usual remedy for developers with uncooperative buyers was to simply keep their deposits if they failed to close. These lawsuits ‘are unusual, but I think we’ll see more of these as time goes by,’ said Boca Raton attorney Gordon Dieterle, who represents Bocar buyer Vincent Troise.”

“Buyers who signed sales contracts months or even years ago have seen their unbuilt properties decline in value in the current condo market slump. That’s especially true for these two condo projects, which were completed well past the dates first promised.”

“So between the delays and market doldrums, some buyers now say they can’t afford to go through with their deals to purchase units. That’s the case with attorney Marvin Moss’ client, Marie Guillaume. In January, she signed a contract to buy a $379,000 Bocar condo, putting down $37,900 as a deposit. ‘The property is worth less than the contract price, and she’s willing to forfeit her deposit,’ Moss said.”

“Developers stuck with unsold inventory are reluctant to let live buyers off the hook. The lawsuits are a message to other Ceebraid buyers thinking of walking away, said attorney Cristofer Bennardo, who represents John Press, the Eden buyer being sued.”

“The message got through to at least one Bocar buyer. Troise has decided to close on the Bocar unit rather than spend thousands of dollars fighting the lawsuit in court, said Dieterle, his lawyer. Troise plans to rent the unit for a while and hope for a buyer next year, Dieterle added.”

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