The Housing Bubble

It’s Friday desk clearing time for this blogger. The Birmingham News, “Ginnie Mae President Rob Couch said Tuesday metro Birmingham’s housing market is holding up well. He said he doubts reports of a housing bubble. ‘There are declines in markets like California, Florida and the West Coast, but that was largely due to those areas being overpriced due to speculators’ buying homes to flip, Couch said.”

The New Haven Register, “Connecticut’s economy has been performing well, but is likely to tighten up next year in response to a national slowdown, economist Todd P. Martin said Wednesday. The state’s housing market has definitely entered a correctional phase, Martin said. ‘We’ve seen a seller’s market turn into a buyer’s market very quickly,’ he said.”

The Express Times. “The year 2007 should prove to be ‘far from stellar,’ a leading New Jersey economic analyst said Wednesday. James W. Hughes said the state should be able to withstand downturns and escape a recession — ‘unless housing really tanks.’”

The Journal Sentinel. “Fewer people purchased metro Milwaukee homes in November than a year earlier. ‘Sellers get it. They need to adjust their price. And they are,’ said Roger C. Rushman, VP of First Weber Group. Shoppers are helping that process along, broker Kathy Allison-Zimmermann said. ‘When buyers even make an offer, they make a lower offer,’ she said. ‘Sellers may be insulted, but we’re encouraging them to work with any offer.’”

“Canada’s housing sector, for the last few years a key pillar of the economy, is finally starting to show real cracks. ‘I think the numbers we have been seeing suggest that clearly the party is over,’ said Benjamin Tal.”

“The average price for a resale home in Canada’s major markets fell by almost $3,500 last month. In Greater Vancouver, home of the most expensive housing in Canada, the average price dropped by almost $29,000 to $519,294 in November. The number of sales dropped by 21 per cent.’”

The Advertiser from Australia. “While property experts say a glut of apartments is forcing prices down, one financial institution is even warning potential buyers to stay away. A search has revealed hundreds of apartments on the market in the beachside precinct. ‘There are a lot of empty ones, a lot in the market,’ said agent Phil McMahon.”

“‘At the moment, the Bay needs a rest from new apartments,’ agent Anthony Toop said. ‘It’s not ideal to have to sell immediately, because you’d be selling a bargain.’”

The Honolulu Advertiser. “The median single-family home price was $598,795 in November, down 18 percent from $734,500 a year earlier, according to the Realtors Association of Maui. ‘It’s gone up so much in the last few years,’ agent Jeremy Smith said. ‘The panic has stopped. The sellers are getting more realistic.’”

From Inman News. “Sales in Washington, D.C., last month declined 17 percent from a year ago, and the city’s median home price sank 6.8 percent during the period to $410,000. John McClain at George Mason University, notes that Loudoun and Fauquier counties have been particularly hard hit due to the fact that many more new units have been built there. ‘That creates competition, which leads to lower prices,’ he said.”

The Idaho Stateman. “Wayne Forrey has seen the Treasure Valley real estate market from about every conceivable angle. Why has the local residential market cooled so much? A: What has cooled are the overheated land prices. Out-of-state speculators started a land-buying frenzy that drove our land prices sky-high.”

“What was the biggest mistake the real estate industry made during the boom years? A: Undisciplined land speculation drove up housing costs, which hurt Idahoans. Too many local residents were closed out of the housing market. Fortunately, land costs are coming down.”

From CNN Money. “Amy Schuett’s already slashed so many little luxuries, that she’s fresh out of ideas. A big chunk of their income is eaten up by two rental properties. Brian hasyet to find tenants. Even when the properties are finally occupied, the area’s softening rental market probably won’t allow them to make enough to cover carrying costs.”

“But the Schuetts haven’t had a heart-to-heart about selling the properties yet because Brian has been so keen on making them work. ‘Our strategy has been to practice ‘avoidance,’ says Amy. ‘But you don’t have to be a psychiatrist to see that.’”

The Rocky Mountain News. “At 17,782 through the first 11 months of 2006, the absolute number of foreclosures has hit a new high compared to the 17,122 in 1988 when Colorado’s oil industry went bust.”

“To defer gratification: to rent for a while longer, live within your means, forgo expensive vacations, squeeze a few more years out of your old car, and save money to put more down on a new home later on. That’s what the proverbial ant does. The grasshopper, conversely, isn’t big on deferred gratification. Modern-day Americans tend to be more like grasshoppers.”

“Had things worked out better, they’d have gotten to enjoy that house for years while the ‘ants’ were scrimping and saving. Ironically, ants may now be buying grasshoppers’ foreclosed homes at distressed prices.”

The Press Democrat reports from California. “Home prices fell more sharply in Sonoma County last month than anywhere else in the Bay Area, except Solano County, according to a report issued Thursday. In Sonoma County, prices have dropped 7.7 percent to a median of $530,000, while sales have declined 22.5 percent, according to DataQuick.”

“Steve Cochrane, an analyst with Moody’s Economy.com who tracks Sonoma County’s economy, said he wasn’t surprised by Sonoma County’s drop. ‘I’ve always felt the Sonoma County housing market was at fairly considerable risk,’ he said. ‘It seems like Sonoma County is one of the weakest economies in the Bay Area. There’s hardly any job growth to speak of. That’s essentially the basic building block of the economy,’ Cochrane said.”

“The county has lost 3,100 jobs over the past year, putting the brakes on what had been a sluggish economic recovery from a recession that was longer and deeper than expected.”

“There is still a glut of homes available. ‘We haven’t seen any falling off of the inventory, hardly any at all,’ said Mike Kelly, an agent in Santa Rosa.”

The Contra Costa Times. “The typical monthly mortgage payment for Bay Area buyers was $2,865 last month. That was down from $2,921 for November a year ago. Adjusted for inflation, mortgage payments are 12.9 percent higher than they were at the peak of the prior cycle in early 1990.”

“Paul Ward, a broker associate in Danville, said he thinks the lower payments have to do with the average buyer believing less is more. ‘While last year was ‘Get as much as you can,’ people are definitely more cautious these days,’ he said. ‘They don’t mind buying a smaller home … and don’t want to spread themselves too thin.’”

The Sacramento Bee. “Analysts called it the slowest November in nine years in Sacramento and Placer counties. Reports show that many sellers have pulled their homes off the market, greatly reducing resale inventory.”

“November’s sales pushed the overall total of new and existing homes and condominiums closing escrow in 2006 to 38,208 in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties, reported DataQuick. That’s 16,129 fewer sales than last year, a factor that has purged area payrolls this year of countless real estate agents, loan specialists and residential construction workers.”

“The median price of a single-family detached resale home declined to $345,000, the lowest since March 2005, according to DataQuick. Placer County’s $442,500 median sales price for an existing detached home remains 12.2 percent lower than its peak of $504,000 in Aug. 2005.”

“While many sellers have given up for the year, others are quietly seeking appraisals to determine an appropriate asking price that will move their home quickly, said Sacramento appraiser Rebecca Ballew. ‘I’ve had three calls in the last week to do appraisals before they put their house on the market,’ Ballew said. ‘They want an idea of where to put it so it doesn’t sit there.’”

The Times Standard. “The housing boom that hit the North Coast and pumped up housing prices locally and around the country has thrown a wrench in the old buying and appreciation formulas. Now, economists and others in the industry are asking themselves whether it really is better to rent a home, duplex or townhouse at the moment rather than buy.”

“Erick Eschker, Humboldt State University economics professor, said that for the first time in a long time, renting may be the wiser option.”

“‘I don’t think we’ve ever seen it this bad here. Not since the Great Depression has there been such a difference between (rents and mortgages),’ Eschker said. ‘I would be a fool to purchase a house right now, unless I could find a house at the pre-boom prices. I think we are in trouble and I’m not going to lie about it.’”

“Rents for duplexes, townhouses and homes with two, three and four bedrooms have been averaging between $1,100 and $1,200, Eschker said. According to the latest affordability release from the Humboldt Association of Realtors, the Humboldt County median house price went up in October to $325,000 from a September median of $306,000. The average mortgage rate on the October median-priced home was $2,009.89.”

“Arcata appraiser Jon Brooks said he has seen a mild correction in the real estate market of around 10 percent in the past year. However, Brooks said that until just recently rent prices were much higher.”

“‘This is the law of supply and demand. When housing prices go up, builders want to build apartments and create subdivisions, and we’ve just experienced a substantial increase in inventory,’ Brooks said, explaining increased competition as being the real reason for drops in rent.”

“Ming Tree GMAC Real Estate owner Larry Doss said he does agree with Eshker on one point. ‘I agree with the rent versus home-cost argument. It doesn’t make sense from an investment standpoint right now,’ Doss said.”

“One concern Doss and others in the business have is the huge run on negative amortization mortgages. These offer ridiculous teaser rates with low or no down payment and small mortgage rates, but requiring a big balloon payment a few years down the road.”

“Humboldt County has seen a large increase in the past few months in home foreclosures, and Eshker said that as interest rates rise, that rate is only going to continue. Doss said he is expecting some changes in the availability of negative amortization loans on the national policy level, and said he hopes to see them come sooner rather than later.”

“‘Many in the mortgage industry categorize these as irresponsible, and Doss said that it goes back to the old saying, ‘If it sounds too good to be true, it probably is.’”

Some housing bubble reports from Wall Street and Washington. “Black & Decker Corp., the biggest U.S. maker of power tools, cut its annual profit forecast for the third time after a U.S. housing slump ’significantly’ reduced sales. There may be ‘additional pressure on our earnings,’ said CEO Nolan Archibald.”

“The slowing housing market also caused Illinois Tool Works Inc., the maker of Duo- fast nail guns, to cut its profit forecast. ‘It’s spreading, and we don’t know how far and how wide it’s going to spread,’ said Marvin Roffman, president of Roffman Miller Associates in Philadelphia, which manages $390 million, including Black & Decker shares. ‘Be prepared for more disappointment from Black & Decker and others’ who rely on the housing market.”

“‘Most disappointing, in our view, is Black & Decker expects their disappointing trends will continue well into 2007,’ wrote Michael Rehaut, analyst with JP Morgan.”

The Wall Street Journal. “New home construction is plummeting. Car sales are weakening. Investors have driven long-term interest rates well below the short-term rates set by the Federal Reserve. All these factors are present today, and all have been precursors of past recessions.”

“But the U.S. central bank and much of Wall Street are now betting that the old rules don’t apply, and that a recession next year, while possible, is unlikely.”

“‘This time will be different,’ Ed Leamer, who heads the forecasting center at the University of California at Los Angeles’s Anderson School of Management, predicts in a report. ‘This time the problems in housing will stay in housing.’ It’s a prediction, he admits, that ‘keeps us up at night.’”

“Dean Baker, a co-director of the Center for Economic and Policy Research, said the rise in housing prices was unprecedented. Optimists are ‘missing the full impact of the housing downturn. They think it’s mostly, if not entirely, completed, and I think we’ve just seen the beginning.’”

The Associated Press. “In accounting circles, it is known as the ‘big bath’ when companies try to wash away as much bad news as possible with the hope that charges taken all at once will make their finances look better in the quarters to come. That’s something the nation’s homebuilders could be up to lately.”

“KB Home announced Dec. 8 that it expects to take non-cash charges of between $235 million and $285 million to write down the value of its land holdings and an additional $90 million related to its abandonment of certain land-option contracts.”

“Dallas-based D.R. Horton Inc. took a pre-tax charge of $199 million to write down the value of land, options to purchase additional land, and pre-acquisition costs. Luxury homebuilder Toll Brothers Inc. took a pre-tax writedown of $115 million, a big jump from the $1.4 million charge the same quarter last year.”

“‘We are getting a bit more concerned with investors’ passiveness toward these equity-destroying exercises,’ Stephen East, an analyst at Susquehanna Financial, said.”

From Reuters. “For U.S. consumers and companies, the era of easy access to cash may be ending. ‘A weak housing market can tighten credit constraints and raise the overall costs of consumer finance,’ said Suzanne Mistretta, an analyst with Derivative Fitch. ‘The housing market and financial health of the consumer will be the focus’ in 2007.”

“Subprime mortgage loan borrowers stand to be the most significantly strained by a housing slowdown, which may mean higher delinquencies and more rating downgrades next year. For consumers and companies, that means borrowing costs may rise and access to capital may dry up.”

“Lenders such as New Century Financial Corp and Accredited Home Lenders Holding Co already are tightening lending practices. New Century, for example, is making fewer loans to first-time home buyers with risky attributes such as high loan-to-value ratios and undocumented income.”

“Downgrades on subprime mortgage securities are expected to climb to a record 300 by the end of the year, twice as much as last year, and rise even more in 2007, Fitch Ratings said on Thursday.”

“‘You are starting to see signs of deterioration and evidence that you will see tougher lending standards in the future,’ said Mark Kiesel, a portfolio manager.”

“Delinquencies rose for all home loans, but most notably for adjustable loans to subprime borrowers who were already stretched before mortgage rates climbed, the Mortgage Bankers Association said.”

“‘After years of enjoying an ideal environment, the environment for RMBS has turned increasingly challenging,’ Fitch analyst Grant Bailey said on Thursday. ‘On the subprime side, we expect asset performance to continue to deteriorate.’”

“Some 29,000 construction jobs were lost in November, adding to a 24,000 reduction in October, also suggesting signs of a housing slowdown.”

“‘The time has come‘ for an end to easy credit, said Bob Moulton, president of Americana Mortgage Group Inc., a mortgage broker in Manhasset, New York. Moulton, who deals with prime and subprime loans, said lenders who were once aggressive in vying for high interest rate loans have suddenly made themselves scarce.”

“The pullback may affect the fifth of the 300 million U.S. population that would qualify as subprime borrowers, according to estimates of Fair Isaac Corp.”

“‘There’s still too much capacity in the market today,’ said Jim Konrath, CEO of Accredited Home Lenders in San Diego, California. The drop in home price appreciation has become a poison pill to the industry, Konrath said.”

“Until recently, loans ‘continued to perform because the buyer always had an out if (he) got in trouble,’ said Konrath, who guided Accredited though the industry’s last shake-out in the late 1990s. ‘As the market started to change, credit was still expanding. The industry didn’t react’ fast enough, he said.”

“Revelations about Fannie Mae’s accounting flaws and lobbying push offer proof that the U.S. leading mortgage finance company needs a tough regulator, a leading member of the Senate Banking Committee said on Thursday. ‘We need a world-class GSE regulator to assure America’s taxpayers that we are not headed for a financial fiasco,’ Sen. Chuck Hagel said.”

“The companies enjoy a favored place in the capital markets because investors believe the government backing would trigger a bailout if Fannie or Freddie were to fail.”

“In his statement Thursday, Hagel pointed to two media stories that Fannie Mae dipped below its required capital level years ago and continues to spend millions of dollars on lobbying work.”

The News Press reports from Florida. “Expect Lee County’s residential real estate market to stay in the doldrums for another three years, Orlando-based economist Hank Fishkind told (a) Conference in Fort Myers. As Florida’s housing bubble deflates, he said, ‘the shape of the bottom will be different’ for each metropolitan area.”

“Lee County likely will not see any significant further decreases in prices but will ‘bump along the bottom’ following this year’s decline in home values, Fishkind said. ‘I think it’s going to be more L-shaped than U-shaped here.’”

“The problem, he said, is the county’s huge inventory of unsold homes: about 14,000 houses, roughly five times what it was two years ago.”

The Naples News. “‘We’ll only have inventory because we don’t have the right price,’ Fishkind said. said. ‘Everything will sell at a price.’”

“At the peak of the real estate boom in Lee County, 20,000 residential units were under construction but there was demand for only 10,000, Fishkind said. Sales of existing homes in Lee County peaked around 4,500 homes per month in August 2005. During August 2006, 1,500 existing homes were sold in Lee, he said.”

“‘There was a huge speculative mountain of inventory generated,’ Fishkind said. ‘It will take until 2009 to work that inventory off.’”

“Condominium prices, however, are in for a decline, he said. ‘Resale on condos is going down, down, down,’ Fishkind said.”

The Herald Tribune. “In the year before Neil Mohamed Husani engineered an eyebrow-raising deal to build a $125 million condominium tower opposite the Sarasota Quay, he became a master of flipping properties to partners at greatly inflated values.”

“Just five years ago, Husani was so strapped for cash that he wrote bad checks, a crime he pleaded guilty to in circuit court in Manatee in 2002. The next year, he was placed on two years’ probation after pleading guilty to stealing $14,000 in furniture from a vendor.”

“For months, Southwest Florida’s real estate community has been asking how Neil Mohamad Husani and his former partner, Michael Tringali, were able to buy properties for one price, get them appraised for more than twice as much a day or so later, and then use the high values to get whopping loans from area banks.”

“Now that some of those loans are going bad, the new question on their minds is how one of the lenders, Fort Lauderdale-based BankAtlantic Bancorp, was able to get a property it bought from him appraised at a similarly high value and avoid taking losses that could besmirch its balance sheet.”

“Rather than foreclosing, one of BankAltantic’s subsidiaries bought Tringali’s 1,143-acre property near Myakka City for $27.2 million, Manatee County court records show. Alan Levan, BankAtlantic’s CEO, has said that the property was recently appraised again at about $28 million.”

“Local real estate experts say that the recent $28 million appraisal is not realistic. ‘How can that be a legitimate number?’ asked Barbara Anson, an agent who has been selling land in the Myakka City area for 30 years. ‘The legal and market value must be around $17 or $18 million. That’s what it’s worth.’”

“‘At some point bank regulators will not allow the bank to keep property on its books at $27.9 million if it does not appraise out,’ said analyst Richard X. Bove. ‘When it is forced to mark the property to market, it will take a hit.’”

“Analysts and market watchers suggested that BankAtlantic might have bought Tringali’s property through a subsidiary to avoid damage to its balance sheet. ‘They don’t want to look like idiots,’ said George Huhn, who runs a Venice-based company that buys troubled loans from area banks. ‘They’re searching for a way out of this mess that doesn’t involve taking a loss against earnings.’”

“But the biggest problem with the deal is the appraisal that BankAtlantic received on Tringali’s former property, said veteran Sarasota appraiser Richard Bass. ‘When something is sold three times in a year and the value more than doubles, you have to go ‘whoa’. What was done to enhance the value of the property to make the value go up?’”

The Newtown Bee reports from Connecticut. “2006 is shaping up to be the year the region turned into a buyer’s market, with a housing slump hitting New England harder than most of the rest of the country, and predicted to stay that way through the decade’s end.”

“‘Statistically, I just don’t see prices coming down fast or far enough,’ said independent Newtown broker Susan Washburn. ‘When I attend open houses, frankly I’m shocked at some of the asking prices still out there.’”

“Ms Washburn is telling her clients that today, they cannot expect to get the same type of price as the highest selling similar home in their neighborhood, even if that sale was relatively recent. ‘And I’m strongly advising clients not to go forward with new home purchases unless they have airtight contracts in place on their existing properties. Today, there aren’t many people in a position to carry the burden of two homes,’ she said.”

“Every state in the region except New Hampshire ranked among the nation’s bottom ten states in housing starts from 2000 through 2004, according to the Federal Reserve Bank of Boston.”

The Cape Cod Times from Massachusetts. “Record numbers of mortgage holders on Cape Cod and the rest of the state are in jeopardy of losing their homes. An analysis released yesterday reported 838 foreclosure filings in Barnstable County from Nov. 1, 2005, to Oct. 31, nearly double the previous 12 months.”

“The spike in foreclosures on the Cape may be particularly high because of the region’s disparity between home prices and incomes, said Nancy Davison, (who) counsels people facing foreclosure. The Hyannis nonprofit estimates the Cape’s median home price at about $362,000 and the median income for a family of four at $65,800.”

“Davison said the people who seek help do not always have exotic mortgages. Rather, they often simply cannot afford their payments after a sudden decrease in their family’s income. ‘I can’t say the exotic is completely out of the picture, but it’s not the driving force,’ she said. ‘There is just no wiggle room.’”

“Davison said that many of the borrowers facing foreclosure received mortgages from large, national mortgage companies, not local banks. That suggests the large mortgage companies may have been less careful about whom they chose to approve for a loan, and may have helped many people on the Cape get into houses they could not afford, she said.”

“‘It would make sense that the buyers would go to those lenders,’ Davison said. ‘They seem too good to be true. And they are.’”

“Charles Dowick, an East Falmouth real estate investor, said he receives about five calls a week from people facing foreclosure. ‘It’s just really expensive to get into a mortgage in the first place because the property values are so high on the Cape,’ he said.”

“Dowick said he anticipates temporary layoffs in the construction and other seasonal industries on the Cape may lead to even greater increases in foreclosures in January and February. Higher interest rates may also have an impact as loans with adjustable rates reset, he said.”

The Patriot Ledger in Massachusetts. “Mortgage foreclosures are skyrocketing across the region, especially in such urban areas as Brockton and Taunton among immigrants and moderate-income people who used nontraditional financing to buy homes.”

“Leo O’Neil, VP at Brockton-based HarborOne Credit Union, attributed the surge in foreclosures to ‘exotic’ or nontraditional mortgages that attracted marginal buyers during the past few years. ‘The problem is escalating,’ said O’Neil.”

“Mortgage broker Don Lambert said the state has cracked down on mortgage brokers with questionable practices, shutting more than 30 in recent months. But, he said, much of the blame for the marginal mortgages rests with the ’stated-income products’ that allow applicants to use income levels other than IRS W-2 forms, and to consumers themselves.”

“Lambert said one consumer went to a nearby mortgage company and got a loan after he denied her. The nontraditional mortgages also allowed people to buy more home than they should, he said. ‘Now, it’s all coming home to roost,’ Lambert said. ‘The payments increase and they can’t afford them.’”

The Boston Herald. “The real meltdown is happening at in neighborhoods like Dorchester, Roxbury and Mattapan. A silent plague of foreclosures is doing its own devastating work.”

“As banks lower the boom, more condos and homes pour onto a market already glutted with units for sale. So far, Dorchester has seen nearly as many foreclosure filings this year, 412, as Boston as a whole saw last year, said John Anderson, who runs a data collection business.”

“Just ask Chris Phelan, with a two-bedroom condo he bought near Savin Hill in 2004 for $245,000. Phelan, who wants a home now, not a condo, says he’s ready to sell his unit for what he paid for it, or less, in order to move on. So far, he’s received only ‘ridiculous’ offers, including one for $200,000.”

“‘It’s tough,’ Phelan said, adding ‘there are 400 condos for sale in the Dorchester area alone.’”

“Condo prices in Dorchester peaked in April 2005 at $286,262 before sliding to $231,738 today, Anderson reports. Dorchester accounts for a large percentage of the 984 foreclosure filings in Boston so far this year, he adds.”

“Another hard-hit area is Ward 18, which covers sections of Mattapan and Hyde Park and has seen 190 foreclosure notices to date, up from 78 last year. ‘Dorchester, Mattapan, Roxbury, they are feeling the hit. The sellers are feeling the pressure of foreclosures,’ said John Ford, head of a top downtown brokerage.”

“The foreclosures are a sign of the larger real estate crisis gripping the ZIP codes where most Bostonians live. Builders found condo gold in humble Dorchester triple-deckers, and a host of rapacious, subprime lenders were only too eager to help make the unaffordable seem suddenly attainable, experts say.”

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