The Housing Bubble

The Union Tribune reports from California. “In a sign that San Diego County’s once-soaring housing market has returned to earth, analysts say the number of homeowners seeking mortgage debt forgiveness is on the rise.”

“Such transactions, designed to prevent defaults, often are called ’short sales.’ They occur when home prices fall and mortgage debt exceeds the value of the property.”

“Short sales are ’something new and, to be honest with you, something kind of scary,’ said Erik Weichelt, a San Diego real estate broker who specializes in foreclosures. ‘If a short sale doesn’t work, it becomes a foreclosure. When prices went up, people got in over their heads.’”

“One of those people was José Padilla, who used an adjustable loan to become a first-time homeowner last year. He recently decided he no longer could afford to pay his mortgage or the homeowner fees on his three-bedroom condo in Paradise Hills. Facing foreclosure, he views a short sale as his ‘best option.’ ‘I do know it will impact my credit score,’ Padilla said.”

“Sandicor CEO Ray Ewing said only five listings in 2005 contained the words ’short sale,’ out of 41,492 sales of attached and detached homes in the county. As of Nov. 20, short sales were noted for 55 listings, out of 27,571 total sales.”

“‘We’re doing a whole lot more loan modifications,’ said Robert Padgett, whose job is loss mitigation director at Freddie Mac. ‘We are starting to hear the same sort of rumblings you already may have heard, that it is not very far off,’ he added.”

“According to DataQuick, locally the number of default notices, the first step toward foreclosure, was 1,025 in October, nearly three times the number filed in the county a year ago.”

“Lenders enabled more buyers to qualify, but they also raised the risk of default, said Dennis J. McKenzie, a real estate instructor who teaches short-sale courses in Southern California. To keep buyers in the marketplace ‘lenders had to Mickey Mouse the financing, liberalize the financing,’ he said. ‘It’s gotten to the point of no money down, interest-only payments, negative amortization.’”

“Many buyers who entered the market at its peak, in November 2005, have realized little or no appreciation, he said. ‘It is like a chain letter. The last one in loses.’”

“Padilla purchased his Paradise Hills condo in April 2005. Tired of ‘throwing my money away’ on rent, he visited a mortgage broker to see if he could qualify for a home loan. ‘It was just at a very high interest rate. I put zero down. The only thing I had to come up with was the closing costs, which were about $11,000,’ Padilla said.”

“Padilla said he took out an adjustable loan with a starting interest rate of 8 percent. Long before his monthly payments were scheduled to adjust upward, he began to buckle under the weight of his debt. When he put the condo on the market in March ‘I did not get one single offer. I tried refinancing and I couldn’t because the value of my home went down.’”

“In October, Padilla stopped paying his mortgage and homeowner fees. Padilla said he left because he felt overwhelmed. ‘It was just too much.’”

“Padilla said he recently was offered $295,000 for the condo, but that’s $60,000 less than he owes. To make the sale work, the lender has been asked to forgive the difference.”

“For the first time in a decade, the number of residents who left California for another state in 2005 exceeded newcomers who moved here, according to the newest figures from the state Department of Finance.”

“California recorded a domestic net loss of about 29,000 people last year, the first negative flow of residents since the mid-1990s. Anecdotal evidence suggests the high cost of housing was the primary reason people fled the nation’s most populous state.”

“Stephen Gallant moved to Michigan this summer after nearly three years in the posh Silicon Valley suburb of Los Gatos, trading a $2 million house for one in a Detroit suburb that was about half the cost and double the size. ‘If I’m going to spend $1 million on a house as opposed to $2 million, that opens up a lot of purchasing power, the ability to go out and do other things,’ he said.”

“Wayne Brown gave up $40,000 in income to move from the Bay Area to Kansas. And he feels great. It got to be too much last year: the commute to downtown San Francisco that sometimes took two hours, the housing-price spiral, and the high-wire borrowing that paid for it.”

“‘I would find myself sitting in traffic,’ Brown recalled, ’screaming at people.’”

“When the Kansas job came up in early 2005, Brown and his wife, Teresa, sold two Bay Area homes and happily settled in a suburb of Kansas City. They have never looked back.”

“California leads the nation in the number of homes going into the foreclosure process with 136,444 so far this year, up 68.5 percent from 80,989 in all of 2005, according to figures compiled by a Fair Oaks-based real estate investment advisory firm.”

The Northwestern reports from Wisconsin. “Single-family homes remain on the market significantly longer now, have declined in the volume sold in the area and throughout the New North region, they sell at lower prices. According to the Wisconsin Realtors Association, home sales in Winnebago County dropped 6.3 percent in the third quarter, accompanied by a median home price decline of 3.8 percent, to $123,100.”

“(Broker) Dennis Schwab attributed the slowdown in sales to a lack of buyers. ‘We’ve kind of depleted that market,’ Schwab said. ‘For two or three years, the market was unbelievably good. It’s not practical to think it could keep going like it was.’”

“Real estate agent Kris Villars echoed Schwab’s belief that the local housing market leveled off this year after a boom. She attributed that to the glut of no down payment mortgages signed to take advantage of low interest rates. ‘It creates a chain reaction in the market as far as the average sale price,’ Villars said.”

“Buyers meanwhile, Paul Walker said, can be choosy thanks to the larger number of properties available and the shortage of buyers. ‘Don’t settle for less than you want,’ he said. ‘There’s a lot of houses out there. Find the style, size and location you want and be willing to deal.’”

“Villars said this is simply a return to normal for the area. ‘There’s less buyers out there than there have been in the past years, but prior to 2000, this was common for our market,’ she said.”

From Inman News. “The Central Indiana housing market cooled further in October, as home sales and prices fell from their year-ago levels, according to the Metropolitan Indianapolis Board of Realtors.”

“The average sales price of a home in October dipped to $150,621, a decline of 2.5 percent from $154,489 posted in October of last year. Some 18,811 houses remained active on the MLS at month end, up 10.2 percent from the 2005 level. This level of inventory suggests a continuation of the current buyer’s market.”

From CNN Money. “Karen and Jerod Williams bought a new home early this year, at a time when the housing market in Huntington, Indiana, was purring along, slow but steady. They then listed their old home for sale, but shortly afterward the market stalled and they haven’t found a buyer. It’s been nine months.”

“‘We didn’t think it would ever take this long,’ says Karen. ‘If we had, we would not have bought the new house.’”

“The market turned south quickly, according to Karen. ‘We had two open houses early on five weeks apart,’ she says. ‘The first attracted two serious buyers, the second, nobody.’”

“So now, the family, burdened with the work and expense of two homes, are at the limits of their budget, even though they both make good salaries. ‘Any emergency may lead to bankruptcy,’ says Karen.”

“When they went to sell the first one, they hoped to get what they paid for it four years earlier. In nine months, they’ve already reduced the price twice; they’re now asking $69,900. Even if they get that, and that’s looking unlikely, they’ll still lose a substantial amount on the transaction, especially factoring in selling costs and the $500 a month they have paid out as the house has stood empty.”

“Their agent advises them to wait out the market. They may do that. As Karen says, ‘We don’t have a lot of options.’”

“One idea they’re toying with is updating the kitchen. The hope is that it could make the difference in selling it at all. For her, the sooner they sell, the better. ‘My husband and I will soon be in the desperation phase,’ she says.”

Some housing bubble reports from Wall Street and Washington. “Existing-home sales are expected to rise gradually in 2007 from current levels, with annual totals comparable to 2006, while new-home sales will continue to slide, according to the latest forecast by the National Association of Realtors.”

“‘Buyers, especially first-time buyers, with the combined benefits of seller flexibility and an unexpected drop in mortgage interest rates, have a window of opportunity. These conditions will persist in many areas until early spring when inventory supplies are likely to become more balanced,’ said David Lereah, NAR’s chief economist.”

“‘Prices in this buyer’s market are temporarily a little below a year ago when we were in a strong seller’s market,’ Lereah said.”

The New York Sun. “The economic ride in 2007 could be a lot bumpier than we’ve been led to believe. More and more potholes are starting to pop up, suggesting that talk of a next year’s widely expected soft landing is becoming increasingly suspect.”

“Merrill Lynch’s North American economist, David Rosenberg, has just dispatched a disturbing commentary to clients in which he notes: ‘It’s getting harder to call it a soft landing.’”

“A Morgan Stanley economist, Richard Berner, also raises the danger that the soft landing scenario may be at risk. Income data, he says, depict a rapid deterioration in fourth-quarter economic growth, one that will likely extend into the first quarter. ‘We need no convincing,’ he adds, ‘that the housing downturn still has a long way to go.’”

The Dallas Morning News. “A sharp downturn for the subprime mortgage business represents the latest sign of trouble in the teetering housing industry. ‘The housing market is going down,’ said David Liu, a mortgage analyst at UBS AG in New York. ‘In a slower market, it’s the weakest borrower and the weakest lender that are the first to go.’”

“The subprime skid claimed a local victim this month, when Carrollton-based Sebring Capital Partners LP said it was shuttering its operations. The failure eliminated 325 jobs, including 140 in North Texas.”

“Some 5.7 million subprime mortgages were outstanding as of June, or 13 percent of the total tracked by the Mortgage Bankers Association. Subprime mortgages accounted for more than 2 percent of the total in 2000.”

“Today, the U.S. homeownership rate stands at 69 percent. That compares with 65.1 percent at the end of 1995, according to the Census Bureau. The growth of subprime lending, fueled by new technologies and new mortgage products ­ could have accounted for as much as half of the increase, according to two economists at the Federal Reserve Bank of Chicago, Jonas Fisher and Saad Quayyum.”

“‘Subprime lending appears to be a very significant factor,’ Mr. Fisher said.”

“Many subprime mortgage lenders borrow money at short-term interest rates, lend it at long-term interest rates. Lately, however, that profit spread has been erased, as interest rates on benchmark 10-year U.S. Treasury notes have dipped below the rates for two-year Treasuries.”

“‘That has just killed subprime companies,’ said Sam Garcia, publisher of MortgageDaily.com.”

“Industry analysts said loan buybacks could have presented the Sebring with liabilities that outstripped its assets. Sebring Capital issued mortgages totaling $930 million last year, according to National Mortgage News. Sebring Capital issued mortgages worth $921 million in 2004, and $966 million in 2003.”

From Paul Muolo at National Mortgage News. “The biggest story this past week, hands down, had to be the failure of OwnIt Mortgage, a subprime lender 20% owned by Merrill Lynch. Sources tell us that 60 days ago OwnIt auctioned off $20 million in defaulted paper (buybacks) at a price of 70. (Par is 100.) Recently, it tried to sell $70 million in bad paper.”

“The bids, we’re told, were under whelming. Merrill owns somewhere between 20% and 25% of OwnIt. One mortgage executive told us that some Merrill officials are calling its $100 million investment in OwnIt one of the worst investments the mortgage group has ever made.”

From Reuters. “During the recent U.S. housing boom, mortgage lenders touted so-called exotic mortgages that allowed people to buy houses they could not otherwise afford. Now those lenders are bracing for the not-so-happy story of borrowers like Jesline Jean-Simon.”

“The Miami woman bought her two-bedroom condo a year ago on a 3 percent adjustable rate mortgage with flexible payments. When home prices in the city were blasting off two years ago, Jean-Simon was sitting pretty.”

“But now prices have eased and she works three jobs just to manage a mortgage that has ballooned into interest rates of around 10 percent. ‘I don’t sleep much,’ the 35-year-old says about her round-the-clock work schedule. ‘But the first thing that I pay is my mortgage because I don’t want my credit to go bad.’”

“‘One way or another, the industry is going to get a black eye,’ said John Taylor, president of the National Community Reinvestment Coalition. ‘There will be questions about tricks, fraud and whether these loans should have been made in the first place.’”

“But there is still a chance for lenders to take control of the issue, said Kurt Photenhauer, a top lobbyist for the Mortgage Bankers Association. ‘I think that we can make a pretty convincing argument that we want people to stay in homes,’ he said. ‘We get no benefit from people defaulting.’”

“A mortgage survey (is) due on Wednesday. In a hint at Wednesday’s data, October saw more foreclosure actions than any other month this year according to RealtyTrac.”

“Still, he said, lawmakers might get pushed along by the coming headlines about defaults and people losing their homes. If Wednesday’s data shows a serious uptick in delinquencies, he said, ‘our arguments get harder.’”

The LA Times reports from California. “Every day, Will Hertzberg owns a little less of his three-bedroom house in Corona. Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month. Like many of them, he always chooses to pay as little as possible.”

“His debt is swelling, and his mortgage company controls his fate. ‘I am rather screwed,’ he said.”

“Hertzberg could sell now, but his lender would charge him an $11,034 prepayment penalty, money he doesn’t have. Yet if he stays, the housing market may tank, vaporizing what little equity he has left. ‘I made choices, and they happened to be the wrong choices,’ said Hertzberg.”

“One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan. A second possibility is to pay $2,279, which would cover only the interest. But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.”

“In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to First American LoanPerformance. Last year, 1 in 5 loan applicants got one.”

“In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.”

“Hertzberg bought his house 11 years ago for $129,995. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid. He would see little of that, however, because he’s already seen so much. Over the years he has taken out $190,000 in cash through refinancings.”

“Hertzberg’s home equity paid off his credit cards, financed trips around the world, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities, and lost money faster.”

“‘Free money always has the unfortunate effect of making people go overboard,’ said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump’s ‘How to Get Rich.’ ‘You’d be surprised how fast $190,000 can go.’”

“Last fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.”

“But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115% of its original size he’ll run out of credit with the company.”

“That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150%, to $2,848 a month. ‘If I could afford that,’ he said, ‘I wouldn’t have needed this loan in the first place.’”

“It’s a sorry situation, and Hertzberg is generous in assigning responsibility for it. To start with, he blames his mortgage broker, who didn’t advise him how risky these loans were.”

“Few brokers do, U.S. Comptroller of the Currency John Dugan says. In an October speech, Dugan said the marketing materials for payment option loans often ‘emphasized the low initial payments but glossed over the likelihood of much higher payments later.’”

“Although Dugan and other regulators are taking steps to address both problems, Hertzberg said they never should have allowed these loans to become so prevalent in the first place. ‘The government wanted to keep the housing party going,’ he said.”

“Yet who didn’t want that? Hertzberg admits he was a willing co-conspirator. ‘I got spoiled and complacent and was not prepared when the bottom fell out,’ he said.”

“Several times a week, he gets a refinancing offer in the mail. Hertzberg always looks at these fliers, hopeful in spite of himself. ‘I’m waiting for a 100-year loan,’ he said. ‘My heirs can worry about paying it off.’”

The Worcester Telegram reports from Massachusetts. “In times of tough housing markets, the remodeling industry has historically seen a boost as homeowners tap into their equity to fix up their properties to sell or meet their changing needs. But after years of double-digit home price appreciation, the market is in the midst of a correction.”

“Area home prices have dropped more than 4 percent since the first of the year, and Central Massachusetts remodelers say their jobs have slowed down or been scaled back from what they were even a year ago.”

“‘I’ve seen everything since the early 1980s,’ said William J. Morin, owner of Bill Morin Construction in Northbridge. ‘I’ve been through three recessions. I haven’t seen it this bad. I would average almost a call a day, but now I’m not getting a call a week.’”

“Guy A. Webb, executive director of the Central Massachusetts Builders Association, said some homeowners who would pay for remodeling projects with their home equity have probably already used it for other things.”

“In his own contracting work, Mr. Webb said, more than half of his customers used the equity in their homes to pay for their projects. ‘Tapping into equity is very common,’ he said.”

“‘I think my membership is pretty well-prepared for this,’ Mr. Webb said. ‘They scaled down their operations already. I assume some let go of some employees. A lot of builders and remodelers…just use subcontractors now. They’re just calling them less.’”

“Kenneth R. Gaumond, owner of New Surroundings in Auburn, said the housing market correction has not resulted in more home improvement spending, as it had in the past. ‘Spending is down everywhere,’ he said. ‘People are still more likely to adapt their home to their needs. It’s not scaring people away from projects, but they’re scaling down their wish list.’”

“During the housing boom, homeowners took advantage of their growing equity, using home equity lines of credit for college expenses and purchases that could be paid off more cheaply than with a credit card’s higher interest rate.”

“‘They’re continuing to borrow, but at a slower pace,’ said Gus Faucher, director of macroeconomics at Moody’s Economy.com. ‘Price growth (in homes) has come to a halt. People have been borrowing against their equity. And there is less equity. People are strapped. There’s less ability to borrow.’”

“George Yacik, a VP a New Jersey firm that studies the home mortgage market and home equity lending, said the dollar volume of home equity borrowing in the Worcester area is about half of what it was last year. Dropping house prices have an effect, too, he said. ‘That certainly plays a role. Their equity is not growing like three to five years ago. People have been tapping their equity all along.’”

“Walter Plew, owner of Gemini Home Improvement in Worcester, said that with the slow market and oversupply of houses, there is evidence they may be doing less. ‘Last year and before, with the market up, there was more money available to spend,’ he said. ‘They’ve dropped doing the big kitchen and bathroom. For now, they’re doing painting.’”

“‘The lumberyards, Home Depot, the subcontractors, they all say it’s dead. Builders are going into the remodeling business. That was always the golden egg when home sales dropped off. There’s a lot more people in the business now,’ Mr. Morin said. ‘Mr. Morin, who has been in business 21 years, said the volume and scale of his jobs now are less than in previous recessions.”

“‘In the past, when new construction slowed, home improvement increased,’ Mr. Morin said. ‘Now, new construction and sales of existing homes are in the gutter. Values are dropping as well. Home improvement is off. People have less disposable income than they had five years ago. I make less money now than I did five years ago.’”

The Salem News. “People continue to flee Massachusetts and men are increasingly leaving the work force, trends that threaten the long-term health of the state’s economy, a new report says.”

“Massachusetts lost 233,000 people between 2000 and 2005 to other states, according to the report by MassINC. Massachusetts’ high costs, particularly its high housing costs, are driving many people out of the local work force and into other states, Bowles said.”

“‘Affordable housing is a critical piece of the puzzle,’ said Ian Bowles, CEO of MassINC. ‘Housing is a big issue.’”

“Laurence Gross, an economic geographer at Salem State College, said Essex County, because of its proximity to Greater Boston, has seen home prices rise. And rising home prices discourage businesses from locating in Essex County and creating new jobs.”

Please post off-topic ideas, links and Craigslist finds here.