The Housing Bubble

The San Francisco Chronicle reports from California. “When Dan Wan and his wife, Sara, bought their home two years ago, they managed to snag it in a tight market by contacting the sales office just after another buyer canceled a deal. But now they are looking for a larger home. After four months, they haven’t gotten any offers for their home, despite dropping their price to $350,000 from $370,000.”

“The Wans are in a bind. They are not only competing against at least three other homeowners who want to sell their properties in the same subdivision, they are also facing an aggressive marketing campaign by the builder of hundreds of houses just a few blocks away, where many are selling for less than $350,000.”

“The Sacramento residential market has been hit hard. Nowhere is that more evident than in the new-home market. Builders are desperately unloading their inventory, offering perks. By doing so, they’ve created a situation where it’s cheaper to buy a new house than an old one.”

“‘There’s no doubt that in this market new-home prices are better than resale prices,’ said Jon Nicholson, president of the Sacramento division of Standard Pacific Homes, which has seven developments in the region.”

“Standard Pacific has slashed prices by about 30 percent since the market peaked 18 months ago. For a $500,000 home, that works out to a price cut of $150,000, according to Nicholson.”

“In Sacramento County, the bloated housing market is in midst of a correction after years of overbuilding. At the end of October, there were 13,886 new and existing homes for sale in Sacramento and neighboring Placer, El Dorado and Yolo counties. That compares with just 8,974 in August 2005, when home prices reached a record level, according to the Trendgraphix. At the current pace, it would take nine months to sell all of the homes on the market.”

“Sellers, both individual homeowners in the resale market and builders pushing new homes, are finding the only way to make sales is to cut prices. And that is precisely what is happening.”

“‘When Sacramento got hot, the median price in Sacramento was about a third of what it was in the Bay Area,’ said Stephen Levy, director of the Center for the Continuing Study of the California Economy. ‘Now, it’s closer to 70 percent.’”

“Levy said he believes it may take three to five years for the Sacramento housing market to recover. That’s little comfort to people who can’t wait that long.”

“The Wans paid $298,000 for their house in 2004. Keith Anderson, the real estate agent who is selling their home, held a dozen open houses, one on each Saturday and Sunday afternoon for the first six weeks it was on the market. ‘We had a series of open houses where absolutely no one came through,’ Sara Wan said.”

The Press Enterprise. “Throughout Inland Southern California and the state, home builders this year have more to worry about than selling homes. They are struggling to make the sales stick, with cancellation rates in some areas double what they were 12 months ago.”

“Builders and industry consultants say sales cancellations have been spurred by falling prices in new subdivisions, causing many buyers to get cold feet.”

“Darren Warren, Pulte Homes’ VP of operations for its North Inland Empire Division, said when Pulte opened a new project last February in Victorville, it benefited from the last of the boom-market euphoria, which helped to spark orders at a brisk pace of 40 to 50 homes a month.”

“But by June, those sales were quickly evaporating, with some buyers forfeiting deposits of $5,000 to $10,000 on houses they once yearned for. Warren said that by the end of November, Pulte had recorded about 220 closed sales at the new Victorville community and 90 cancellations.”

“‘We sold those 90 homes twice and some of them three times,’ he said.”

“As the market softened, prices of homes in future phases were lower, not higher. Builders slashed prices and added an array of incentives, from free backyard landscaping to below-market financing, to clear a glut of completed, but unsold, homes.”

“Mike Dwight, of Ontario-based Frontier Homes, said cancellations are running at about 40 percent, up from about 20 percent a year ago. ‘People commit to a purchase and then say, ‘Gee, I don’t know. Everything we read says prices will go down even further,’ he said.”

“Also behind the rise in cancellations has been the reluctance of prospective move-up buyers to lower their sights when they sell their existing homes in a declining market, builders say.”

“Bob Yoder, president of the Inland Empire Division of Shea Homes, said because Shea builds homes primarily for a move-up market, it has seen a 40 percent cancellation rate since March. ‘We have to sell 10 homes to get six that stick,’ he said.”

Readers suggested a topic around New York housing. “My wife and I live in Queens NY. We want to buy here. In 1997-98 the houses we are interested in were around $300,000. Now they are still around $600,000-$650,000, down from $700,000 in ‘05. A return to the mean should put the prices at around $400,000, which I think is fair value for these houses.”

“Am I being realistic that the prices will come down to this? When can I expect that I could buy? I know it’s all conjecture, but I’m hoping the end of ‘07.”

“We are looking mainly in Astoria and Forest Hills (not F H Gardens!) for an attached house. I think there is something like 16 months of inventory in Queens, so I really expect and hope for the sfh next year. Wall Street in swimming in bonuses right now. But if there’s a recession and the market tanks, the firms are very quick to lay-off.”

A reply, “I’m thinking it depends where in Queens. With the big Wall Street bonuses, LIC, Jackson Heights, and esp. Forest Hills might become even more expensive. But other areas might keep on dropping.”

Another said, “Jackson heights is a cesspool imo. If a pre war coop is what you are after kew gardens is similar but a much nicer area with the LIRR close by and some decent restaurants, forest hills is totally overpriced.”

“I would wait it out for a sfh in Queens. Just hang in there the prices will be down alot more. I think i will wait in fact my wife even said yesterday maybe we can rent for a long time! It is finally sinking in. BTW, I live in a coop owned by my wife’s family with dirt cheap housing cost so i am in no rush to buy these days and I just save and invest more and max the old 401k. Good luck.”

One did the math. “Take the median household income, multiply by 2 — that’ll be your price in 2009. Forget Wall Street bonuses… for those still employed there by then they will only be a fond memory.”

From Newsday. “For more than 20 years, Maureen and Vincent Virga both worked full-time in Levittown and never missed a mortgage payment. Then unforeseen and serious medical problems forced Maureen and Vincent to miss work for extended periods during the past three years. The Virgas were unable to make their $2,300 mortgage payments. They ended up in foreclosure and are in danger of losing their Cape-style house.”

“More and more Long Islanders are finding themselves in the same financial squeeze as the Virgas - unable to keep up with their mortgage payments. A Newsday analysis of recent foreclosure data shows that the total number of Long Island homeowners who received new legal notices of foreclosure, called lis pendens, rose 75 percent during the past two years.”

“And experts warn that the worst is yet to come, and as the economy is not expected to gain much ground. ‘I see a lot more Long Islanders in danger of losing their homes,’ said Westbury bankruptcy attorney Craig Robinss. ‘A lot of people are living at the edge.’”

“In those four months, 2,971 Long Island homeowners received lis pendens from their mortgage companies or banks, compared with 1,700 in the same period of 2004, according to the Long Island Profiles data. Most of them were likely in default for at least three months before receiving the lis penden notice.”

“The recent slowdown in the housing market may make the situation worse. Because of the glut of houses on the market and flat or falling prices, it’s harder to cash out their biggest asset. ‘I think what we’re seeing now is really the tip of a spreading iceberg,’ said Pearl Kamer, the chief economist of the Long Island Association. ‘And it’s going to affect more than the lowest-income neighborhoods on Long Island. It’s going to be a middle-class phenomenon too.’”

“Queens’ lis pendens are up 27 percent from a year ago, however, and that could lead to an increase in actual foreclosures in the months and years to come, according to chief executive Ryan Slack, who estimated that defaults and foreclosures could rise for as long as two to five years.”

“Elizabeth Nielsen, who bought her home in 2002, is now in foreclosure and trying to declare bankruptcy to find a way out. The single mother of two said she is constantly weighing which bills to pay and when.”

“Nielsen now thinks she would have been better off if she’d never purchased a home. ‘I came out here [from renting in Queens] and I’ve been struggling ever since,’ she said. That’s the refrain from many troubled homeowners today.”

“During the housing boom, many purchasers found homes beyond their means, yet bought them anyway, wanting to get in before prices went higher. ‘The market just ran up beyond what people are making on Long Island,’ said Todd Yovino, a real estate broker in Huntington, which focuses on foreclosure sales.”

“The boom also led to a growing availability of mortgages for anyone. Need a mortgage without a down payment or a low teaser rate? No problem. Don’t have perfect credit? Take out a subprime loan that will cost you more in points and interest, but at least you’ll get the house. Said Yovino: ‘We got away from the basics.’”

“The downturn in the housing market has compounded the problem, especially for homeowners without any equity. ‘If you bought the house with none of your funds and the market turns 2 percent down, you now have negative equity,’ said Beth Marten, who heads a real estate agency representing home buyers. ‘I think a lot of people who have gotten into the market in the last three years or so are facing that.’”

“As a result, Long Island may start to see more short sales, when the bank accepts an offer that’s less than what it is owed, Marten said.”

The New York Times reports on Florida. “In 2002, when the St. Joe Company, one of Florida’s largest real estate developers, began selling parcels in a new neighborhood here, it was inundated by potential buyers. Four years later, you can hear a pin drop at the gated community of WaterSound Beach. Most of the lots sit empty, and even Thanksgiving weekend brought only a handful of visitors.”

“When it sold the lots, St. Joe had a requirement that buyers break ground on their houses within three years. Homeowners who did not meet the ‘build-out deadline’ had two options: to begin paying a penalty, as much as $2,500 a month, or to sell the land back to St. Joe at the original price.”

“As it turns out, many of the landowners were speculators who had no intention of building. ‘People got caught day-trading lots,’ said Marc Levy, who owns a house near WaterColor. Those who did not want to sell their lots at a loss, but had no plans to build, were stuck.The market was so bad that ’some of them would have been happy to sell back to St. Joe at the original price,’ Mr. Belote observed.”

“But St. Joe ‘wasn’t interested in buying back people’s lots,’ said company VP Jerry Ray. So last May, St. Joe issued a statement that caught many of the owners by surprise: They would have an extra two years in which to begin building their houses.”

“Some people who have already built houses in the St. Joe communities are unhappy about the extension, claiming that the company changed the rules in the middle of the game. Pat Spafford bought a lot in WaterSound Beach at the end of 2002, began building within the three-year window and moved in with his family late last month.”

“But the lot alongside his is empty. So instead of living in a finished community, he said, he could end up living next to a construction site. Spafford said he was ‘not too happy’ about the extension. ‘The speculators,’ he said, ‘put pressure on St. Joe.’”

The News Journal. “Will 2007 be the year of a soft landing for the Pensacola Bay Area’s turbulent economy? ‘What we are seeing at this time is a very significant downturn in the real estate market,’ said Al Muller, president and co-owner of Metro Market Trends.”

“‘The downturn is affecting all segments,’ he continued. ‘New homes, resales, commercial and condos are being affected differently. We’re seeing a lot less transaction taking place, and, for the first time, we’re seeing some small declines in median prices.’”

“‘Those sectors will fall but they won’t fall back to where they were before they started the run-up,’ (analyst) Rick Harper said. ‘We’re going to be left with increased amounts of real estate wealth, compared to three years, ago.’”

“‘I’ve never seen as much of a change in the business economy in my time of living as I’ve seen in this year,’ said Sandy Sansing, a new- and used-car dealer in Pensacola. ‘New-car sales are off 16 percent in Escambia-Santa Rosa counties, used-car sales are off 19 percent from 2005. October was far worse, and November was worse than October ‘06.’”

“Local bank have also experienced a sharp drop in the number of home-equity loans, and that is largely a result of falling home values,’ said Christina Doss, VP for SunTrust Bank in Pensacola. Harper notes that home-equity loans, based on rapidly rising real estate values, was one of the key economic factors fueling the growing national economy.”

“But now that housing prices are falling, and insurance and property taxes rising, Harper and Doss agree that consumers are much more cautious about taking on debt based on the value of their homes.”

The Bradenton Herald. “While at first, skyrocketing price tags on homes priced many might-be home buyers out of the market, condo conversions also took a chunk out of the number of units available for rent.”

“Now, many investors who got caught with homes they can’t sell have turned to renting their properties. ‘We’re flooded with homes that have been taken out of the sales pool,’ said Sharone Martinelli, Wagner Realty’s relocation director.”

“Much like those who listed their homes as the real estate market settled, some people who have turned to leasing their properties instead set unrealistic expectations in 2006. ‘Anything priced over $1,500 a month is very, very hard to rent,’ said Ron Cornette, Wagner Realty’s marketing director.”

“Historically, investors have been able to get about 1 percent of the home’s value as a monthly rent. Now, Cornette said, the homeowners are lucky to get a half percent. For instance, a $300,000 property that might have fetched $3,000 a month in rent is now lucky to get $1,500 a month.”

“‘Owners are better off taking $1,500 a month this year than not seeing any income from their property whatsoever,’ Cornette said.”

“A young couple could buy something for $2,000 a month and although it might not be the same size as what they could rent for the same price, they would be investing in their future, Cornette said. That didn’t stop the number of rentals from soaring at Wagner and throughout the county as many waited for prices to fall to levels within their price range.”

“The early arrival of cold weather in the North has brought some of the seasonal visitors back a little early. While some purchased second homes during the housing boom, many are content to rent. ‘We’re getting our seasonals rented, while our annual rentals are slow unless they are priced below $1,500,’ Martinelli said.”

What do you see in your housing market this weekend? Price reductions? PhillyBurbs, “The average price of homes sold in Lower Bucks County plummeted 14.5 percent in November, compared to prices in November 2005, according to data from Prudential Fox & Roach Realtors in Doylestown.”

“‘We’re seeing similar declines in central and Upper Bucks,’ said Megan Leitch, a spokeswoman for Prudential, adding November-to-November sales prices dropped 7 percent there. Overall, Lower Bucks housing prices declined in September, October and November of this year.”

Unattended open houses? Washington Post, “In a market gone soft, with a glut of property available, agents are dusting off sometimes rusty marketing skills, honing new ones and making sure the word gets out to their peers.”

“For Ty Hreben, brokers’ opens have been less successful. There are so many out there now that ‘I’ll do a catered brunch or desserts from Whole Foods, and I won’t get more than five to 10 people,’ he said. ‘Sometimes I end up eating it all myself. . . . Luncheons can be a total waste unless the agents who know the area know [the house] is well priced.’”

Construction trends? Illinois. “The terms ‘overvalued’ and ‘Rockford housing market’ don’t normally appear in the same sentence. The number of large manufacturing employers has shrunk significantly over the past decade, with many of those workers moving into lower pay scales. The Rock River Valley’s per capita personal income has plunged in the past decade.”

“If income doesn’t grow, how can home prices keep going up? ‘It’s all supply and demand,’ said Vic Nafrano-wicz of Homeowners Concept. ‘You see all these big homes being built, and you have to wonder if there will be people here making the kind of money necessary to buy them in 10 or 15 years.’”

Homebuilding costs? Montana, “Stimson’s VP, Jeff Webber, confirmed Thursday that the company will cut some 43 jobs at the Bonner mill, effective Jan. 2. Stimson has seen its margins squeezed flat by high stumpage prices on one end and low lumber prices on the other, said Michael Woodworth. Average lumber prices have fallen by half, to a 10-year low of $240 per thousand board feet.”

Or foreclosures? “North Texas home foreclosure postings are up more than 20 percent from a year ago. This year, 38,809 D-FW area homes were posted for foreclosure, an increase of 19 percent from 32,513 postings in 2005. It’s the largest number of home loans in default since the 1980s regional recession.”

The Hartford Courant reports from Connecticut. “On one thing almost everyone agrees: The real estate market in Greater Hartford has slowed compared to a year ago, with more houses listed for sale and fewer houses selling. Homeowners in Portland listed their property for sale last June, asking $524,900 for the 3,600-square-foot house.”

“June turned to summer and summer to fall. Now, with winter here, the price of the well-kept home has dropped to $449,000 and the owners, who purchased the house in 2004 for $435,000, will probably lose money on their purchase. The owners did not want to be identified.”

“‘I’m as frustrated as they are,” said Tom Abbate, a real estate agent in Middletown, who has the listing for the house. ‘The owner said to me, ‘Should I come down more?’ Coming down $10,000 isn’t going to make a bit of difference. There hasn’t been a house sold in Portland in this price range in the past few months.’”

“‘In the $400,000 to $500,000 price range in my market, it’s a very limited market. There simple aren’t any buyers out there in that price range,’ he said.”

“Middletown and surrounding towns, such as Portland, Cromwell and East Haddam, have all felt a slowdown in the mid- and upper-level price ranges, basically anything $400,000 and above. And there are more houses for sale in that price range than a year ago.”

“‘I’m hitting my head against the wall,’ Abbate said of the lack of interested buyers. ‘It’s not that this house is not worth that money. It is. And I’ve got several others just like it. It’s just that there’s no buyers out there.’”

“When the owners of a contemporary house in Simsbury decided to downsize, they put their house on the market with a listing price of $378,000. The house sat on the market all summer and through the fall. The price dropped, three times, until it is now listed at $354,900.”

“‘I don’t understand the market at all,’ said the home’s owner, who asked not to be named. ‘It changed so fast. It was slow in the summer, it perked up in the fall, and now it is really slow. There’s no reason for this to be happening.’”

The Boston Globe. “Sovereign Bancorp. said yesterday it will cut 800 jobs, 77 of them locally, and close most of its wholesale mortgage operation in an effort to slash costs by $100 million annually.”

“In a statement, CEO Joseph Campanelli said it was a ‘difficult decision’ to cut so many jobs during the holiday season.”

The Record from New Jersey. “David Moro and his wife stretched their budget to the limit when they bought their center-hall colonial in 2003. They took out an interest-only loan. Moro dreads that day.”

“‘What’s getting me a little squirrelly is seeing interest rates go up,’ said Moro. ‘The reality is when I went into this mortgage, I didn’t fully understand it. I’m not going to be able to make the payments.’ Moro would like to refinance to a fixed-rate loan, but can’t find one with monthly payments he can afford.”

“For many home buyers, including the Moros, these mortgages were the only way to afford a house in recent years, as prices skyrocketed from 2000 to 2005. In addition, option adjustable-rate mortgages let buyers vary their monthly payments, in some cases, paying so little that the mortgage actually grows, rather than being nibbled away over time by monthly payments. These are called negative amortization loans.”

“‘That’s a scary product,’ said Mary Johnson, at the Consumer Credit Counseling Service of New Jersey. ‘You can be losing equity on the home while you’re making your monthly mortgage payment.’”

“‘They come to us when they’re two, three, four, six months behind in mortgage payments,’ Johnson said. Many of these homeowners borrowed more than they can really afford; others have seen their monthly payments readjust to unaffordable levels. Some are paying half of their income for shelter.”

“‘We don’t have an easy solution for people in this situation,’ Johnson said. Some people are so determined to keep their homes they take on second jobs, she added.”

“Much of the fallout from the boom in exotic mortgages hasn’t hit yet. Many people took out these loans in 2004 and 2005, locking in the low rates for three to five years, or longer. But looking ahead, mortgage professionals, borrowers and regulators are worried.”

“Mortgage consultant Alex Giassa said he has a client who chose an option ARM, but can’t pay all the interest every month. So it is being added to the body of the loan. ‘Her mortgage balance has increased by almost $20,000,’ Giassa said.”

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