The Housing Bubble

The Press Democrat reports from California. “To counteract sluggish sales, home builders in the Bay Area and Sonoma County increasingly have been forced to whack prices and offer incentives to lure buyers. Through November, new homes sales were down 32 percent in the Bay Area, compared to the same period last year, according to the Ryness Report.”

“As a result, buyers are more in control, in some cases paying roughly $100,000 less than what they would have paid for the same new house a little more than a year ago.”

“The median sales price of a new home also is down compared to a year ago. In November, it was $560,000 in Sonoma County, 15 percent less than the $655,000 in November of 2005, according to Dataquick, which lumps both new houses and condominiums.”

“Buyers expect to be wooed. ‘People walk in the door and say ‘What are you giving away?’ They don’t want to see models, or floor plans,’ said Josh Armstrong, a sales associate at Turnberry.”

“One high-end model that initially listed for $840,000 is now offered for $790,000. Homes that sold in the mid-$700,000s are now in the high-$600,000s.”

“Average weekly traffic, or the number of potential buyers in the Bay Area visiting new home projects, has declined 36 percent this year compared to last year.”

“‘Buyers are starting to come out. They’re skittish, like deer coming out of brush. They want rock-bottom prices,’ said Greg Anderson, sales manager for a 149-home project under construction in Santa Rosa.”

“‘Two years ago, there were more buyers than available homes,’ said Maurice Lockwood, a vice president for Cobblestone Homes. ‘Now it’s the inverse. Inventory is there and buyers have a choice.’”

The Record Searchlight. “What’s up with Sun City Tehama? People calling a toll-free number for Del Webb Corp. are being told that it’s ‘not going forward’ or that it’s ‘been delayed for an indefinite amount of time.’”

“But that’s wrong, Del Webb spokeswoman Judy Bennett said Friday. In light of the national housing slowdown, Webb’s parent company, Pulte Homes, is evaluating the timetables of all of its projects, she said. The timeline for Sun City Tehama ‘has been decelerated, but not suspended.’”

“Bennett said she was ‘very disappointed’ by reports that Webb’s customer communication call center in the Phoenix area was telling prospective buyers that Sun City Tehama was in limbo or that it had been scrapped.”

“‘That’s very concerning to me. We don’t know where they’re getting their information from,’ Bennett said. ‘From our perspective, we’re still working.’”

“The California Association of Mortgage Brokers today issued its annual Mortgage Forecast projecting that interest rates will remain favorable in 2007.”

“‘The first six months of 2007 will probably be the ideal time for consumers to purchase a home,’ said Williams. ‘During that period, there will be fewer buyers, more housing inventory, low interest rates, and more motivated sellers. It is important for consumers to be aware of these factors.’”

“Survey highlights include the following: Thirty-eight percent of members believe that home prices will decrease slightly (less than five percent), while 26 percent believe there will be a slight increase (up to five percent). Other projections included a significant decrease (19 percent).”

The North County Times. “More than one-third of California mortgage brokers believe that interest-only loans will be the most viable loans for borrowers because of the continued high cost of housing in the state, according to a survey taken by the California Association of Mortgage Brokers of 400 members.”

“Ed Smith, director of the association and a San Diego mortgage broker, said that interest-only loans were not necessarily desirable, but were a product of the market.”

“‘Most people can’t afford a ‘real’ payment on their house,’ he said. ‘They’re hoping for an increase in income or a windfall. A lot of people got in on the frenzy and made an emotional decision.’”

“Smith said that he has seen a number of homeowners having trouble making their mortgage payments. ‘I’m doing short sales every day now,’ he said.”

The Capitol Times reports from Wisconsin. “Wisconsin ranked 29th nationally in foreclosure rates in November, after ranking 35th in October and 37th in September, RealtyTrac reported.”

“The state had 881 properties in some state of foreclosure in November, one for every 2,614 households. In October, the state had 679 such properties, or one for every 3,391 households. In September, the state had such 498 properties, or one for every 4,624 households.”

The Kansas City Business Journal from Missouri. “A Kansas City man was sentenced Monday to two years in federal prison and ordered to pay more than $6 million in restitution for his role in a mortgage fraud conspiracy.”

“Phillip Thomas was a real estate appraiser doing business in Kansas City and Lee’s Summit, U.S. Attorney Bradley Schlozman said. Thomas performed appraisals for Ameriquest Mortgage in Gladstone and Countrywide Home Loans, which also did business as America’s Wholesale Lender, as well as other mortgage companies, lenders and brokers.”

“Thomas pleaded guilty April 27, 2005, to three charges, including conspiring to fraudulently obtain about 177 loans on properties connected to co-conspirators in the amount of more than $12 million in Kansas City and Lee’s Summit.”

“The loans were obtained by preparing fraudulent loan applications and supporting documentation for submission to the mortgage companies in the names of the victims. The fraudulent information included false and inflated appraisals. That false information was submitted to the mortgage companies, which would, as a result, approve the respective loans.”

St Louis Today from Missouri. “Ten months ago Floyd Irons bought three houses over five days in January. Total cost: About $1.5 million. The purchases have puzzled real estate agents and neighbors alike. Why did the homes cost so much? And how could a public school coach making $90,000 a year afford roughly $120,000 in yearly mortgage payments?”

“It turns out he can’t. All three houses have gone into foreclosure. Irons says the bank has taken them back. Two sit vacant. Residents of the third are preparing to be evicted.”

“He said he had bought the homes to pad his retirement but referred more detailed questions to a man he called his business partner. Mike Noll, a local real estate investor, said he had advised Irons on these purchases, and, in the end, they simply had turned out to be bad business decisions.”

“On Jan. 31, Irons bought 11 Arundel Place in St. Louis, on the border with Clayton, for $830,000. Thomas Kowalsky said he hadn’t asked for that sum, the mortgage brokers came to him with the price. He bought it for $240,000 in 1998, according to city records.”

“It was this last house that caught the attention of neighbors and real estate brokers. Many privately pointed out the cracking stairs, the rusting railings and the broken windows. They said Irons had paid double what he should have.”

“Noll agreed that Irons may have paid too much for the house on Arundel. Noll said he simply didn’t know the residential market, despite directing the city of St. Louis’ residential development program in the ’80s, and trusted the brokerage. Now he blames them.”

“Pete Esson and Matt McClure, who run Midwest Mortgage Consultants as well as related real estate and closing companies, said they didn’t remember ever calling Noll. They acknowledged that Irons had used their companies to close the deals, but said they didn’t do the appraisals of the homes, don’t have a personal involvement in the transactions, and don’t know Noll or Irons.”

“But housing deeds show Esson’s and McClure’s companies have worked with Irons and Noll on several other occasions.”

“Irons borrowed almost 100 percent of the money he needed to buy the buildings, and Noll said he ‘legitimately’ qualified for the loans.”

“Irons tried to sell the houses on Arundel and Woodland Meadows. But Noll said buyers weren’t interested. Now the homes sit in disarray. Broken windows and rusting railings greet potential buyers on Arundel. Leaves pile up in doors and walkways at the home in Wildwood.”

“The four-plex on Michigan is still occupied. Linda Greco says the house is falling apart. The bank that bought the house at auction now has filed suit against Irons and his former tenants. It wants them out.”

“Irons said that maybe, he just didn’t scrutinize his investments as well as he should have. ‘I got into a situation, that, you know, hey, bad investment,’ he said. ‘I have to deal with that. I’m a big boy.’”

Some housing bubble reports from Wall Street and Washington. CNN Money, “Home building activity rebounded from a six-year low in November but builders’ applications for future projects fell to the lowest in nine years, the government said Tuesday in a report suggesting the worst is not over for the housing market.”

“Builders started work on new homes at an annual pace of 1.59 million in November, up from the 1.49 million rate in October, which had been the lowest reading since July 2000, the Commerce Department reported.”

“Building permits, which are seen as a measure of builders’ confidence in the market, fell to an annual rate of 1.51 million from a 1.55 million pace in October. That was the lowest building permit level since December 1997.”

“‘The market in general is heading downward,” said (economist) Dean Baker, who’s long maintained that the runup in prices and building in recent years has caused a market bubble. ‘There is a very big supply of new homes. Vacancy rates for owner-occupied units are at a record high. You have tremendous oversupply.’”

“Economist Paul Kasriel said that housing starts were off 27.8 percent in November from a year earlier, the biggest year-to-year decline since a 32 percent drop recorded in March 1991.”

“‘There still is a lot of excess inventory, [in] both new and used homes,’ he said, adding that builders are cutting prices to move homes. ‘They’re working through inventory and they’re not going to be eager to go out and start a lot of homes right now. I don’t think we’re at the bottom of this yet.’”

From Bloomberg. “Construction of single-family homes rose 8.1 percent in November to a 1.281 million rate, today’s report showed. The increase in housing starts was led by a 19 percent gain in the South. Starts rose 8.5 percent in the Northeast and fell 8.1 percent in the West and 6.3 percent in the Midwest.”

“The slowdown in housing is beginning to cost jobs. Builders shed 29,000 workers in November following 26,000 construction jobs lost the prior month, according to the government.”

From MarketWatch. “Hovnanian Enterprises Inc. reported a fiscal fourth-quarter loss late Monday as the home builder struggled to quell the effects of a U.S. residential real estate slowdown.”

“‘We did not anticipate the suddenness or magnitude of the fall in pricing that occurred this year in many of our communities,’ CEO Ara Hovnanian said. ‘Our profitability and the pace of new home sales in our markets continues to be adversely impacted by high contract cancellation rates, increases in the number of resale listings and increases in the number of new homes available for sale.’”

“Hovnanian’s contract cancellation rate for the fourth quarter was 35%, compared with 25% in the fourth quarter of 2005 and a 33% rate in the third quarter of fiscal 2006, he noted.”

“The company walked away from $141 million in land deposits and predevelopment costs and took impairment charges of $174 million during its fiscal fourth quarter, CFO J. Larry Sorsby said. ‘Although it is painful to incur these write-offs, we believe it is much better than proceeding to build-out these communities at very low returns or losses over the coming years,’ he explained.”

“Total inventories stood at $4.07 billion at the end of October, Hovnanian reported on Monday. That’s down from $4.65 billion at the end of July. Hovnanian noted some ‘hopeful indicators’ from the past two months, such as modest declines in resale inventories, improving consumer confidence and ‘healthy’ levels of buyer traffic at many of the company’s communities.”

“Many analysts and economists who follow builder stocks and the housing market aren’t sold that a recovery is on hand. During Toll Brothers’s latest quarterly earnings call, one analyst skeptical of management’s rosier view even asked which flavor of Kool-Aid executives were drinking.”

“At Hovnanian, management ’seems optimistic that the housing market is on the verge of bottoming, but we continue to believe that it is too soon for such a call, and that pricing pressures are likely to extend the pain in builder earnings through next year,’ wrote Deutsche Bank analyst Nishu Sood.”

“The analyst thinks the housing downturn ’so far has defied conventional indicators, and we think it will persist through the spring selling season in the form of continued home-price declines, especially as pricing in the existing housing market begins to give way more meaningfully.’”

“Morgan Stanley economist Richard Berner wrote in a recent note that ‘these hopeful signs may be false dawn for housing demand.’ Said Berner: ‘So while the intensity of the sales decline is lessening, and the process of adjustment is well under way, builders will have to cut construction significantly further to reduce inventories of unsold homes.’”

The Associated Press. “Alex Barron, who follows homebuilders for JMP Securities, said the industry will get worse before it gets better. He said with so much inventory, builders like Hovnanian must cut their prices to compete.”

“‘Until those inventory levels come more in line with historical levels, it’s going to be very difficult for builders to show an improvement,’ he said. While Hovnanian posted a large write-off, he said the company is being more realistic than other large homebuilders ‘about how deep this current downturn is.’”

“The government on Monday filed civil charges against former Fannie Mae chief Franklin Raines and two other top executives, accusing them of misconduct costing shareholders billions of dollars.”

“The Office of Federal Housing Enterprise Oversight announced that it is seeking fines and the return of millions in bonus money. It filed 101 charges against Raines, former chief financial officer Timothy Howard and former controller Leanne Spencer.”

“Raines and Howard were swept out of office two years ago in the multibillion-dollar accounting debacle at the government-sponsored company, which finances one of every five home loans in the United States.”

“The lawyer for Raines called OFHEO Director James B. Lockhart ‘a fatally biased regulator’ and asked him in a letter to remove himself ‘immediately and completely from any further regulatory action affecting Mr. Raines.’”

“Lockhart’s true motivation in the charges is to get Congress to enact legislation tightening the government reins on Fannie Mae and Freddie Mac, its smaller sibling in the $8 trillion home-mortgage market, said Raines’s attorney, Kevin Downey.”

“Howard’s attorney, Steven Salky, called the allegations against his client ‘a politically motivated attempt to rewrite history.’ Spencer’s lawyer, David Krakoff, said that her annual performance reviews for the six years she was controller ‘found her work was nothing short of outstanding.’”

From Reuters. “The three executives were at the helm when improper bookkeeping was used to ‘grow Fannie Mae in an unsafe and unsound manner’ and sparked an accounting scandal that erased billions of dollars in shareholder value, according to the suit.”

“The regulator said it was seeking penalties and bonuses that could exceed $215 million for six years of wrongdoing.”

“OFHEO decided to move against the three former executives now because a statute of limitations law might have stymied them after the end of the year, said Alfred Pollard, the chief counsel to OFHEO. Besides Monday’s suits, OFHEO is reviewing the conduct of other current and former employees for wrongdoing.”

The Herald Tribune reports from Florida. “Another Southwest Florida home builder has exited, leaving dozens of customers with unfinished homes and regulators dealing with a third-party contractor who qualified the company’s permits. Sarasota-based Avalon Homes left its offices unfurnished, unlocked and deserted several weeks ago, its former landlord says.”

“Meanwhile, the small builder has 56 open permits with the city of North Port and officials there have been in touch with Venice-based contractor James Leake, who qualified the Avalon homes for permits, to try to get the houses finished.”

“The city has been going to Leake on the issues associated with Avalon’s permits, said Bud Korte, plans division manager for the city of North Port. ‘We have to hold the license holder responsible,’ he said. But Leake said he has been as unsuccessful as Avalon’s customers at reaching Pufta: ‘All the phone numbers I had for him were disconnected.’”

“‘I’m truly stupid,’ Leake said. ‘I am being held responsible for decisions I did not make.’”

“Joe Powell was one of Avalon’s customers. He bought a North Port lot in September 2004, put $16,700 down on the $167,000 house and has since watched his home languish. Powell considers himself ‘one of the lucky.’ There are 50 to 60 other buyers who might not be so far along in extricating themselves from Avalon, he said.”

“The company’s travails could become something more commonplace as 2007 dawns and small players throughout Southwest Florida struggle with a customer base that has evaporated along with the booming real estate market of 2004-05.”

“Several homeowners have filed lawsuits against Avalon Homes. Avalon was one of five proposed home builders in Michael Tringali’s troubled Steeplechase Estates subdivision near Myakka City, recently bought in lieu of foreclosure for $27.2 million by Fort Lauderdale’s BankAtlantic Bancorp.’

The Palm Beach Post. “The housing downturn hit home in starkly human terms Monday when DiVosta Building Corp. said it will lay off nearly half its local workers. ‘We’re trying to match our workforce to the construction pace,’ said Beth Cocchiarella, spokeswoman for DiVosta parent Pulte Homes.”

“In addition to the cuts here, DiVosta laid off 135 workers in Sarasota last month. Industry experts say DiVosta and Pulte are far from the only home builders to cut workers as construction slows. Lennar, Toll Brothers and Centex also have laid off employees, they say, as have smaller companies such as Sunland Homes of Jupiter, which this year cut 20 of its 45 workers.”

“‘All of the major builders are in the process of very large layoffs,’ Jeff Spear, president of the Gold Coast Builders Association said.”

“‘They want to bring the production of homes back in line with true demand,’ said Bradley Hunter, a housing analyst at Metrostudy in Boca Raton. ‘Builders were building at a pace that was matching an artificial demand.’”

“Home prices have fallen from their peak in late 2005, and sales volumes have plunged. Builders started construction of 1,017 homes in Palm Beach County in the third quarter of this year, only half the pace of the July-September period in 2005, Metrostudy said.”

“The DiVosta layoffs contradict a commonly held piece of workplace wisdom: that construction workers are in such short supply in Florida that job security is not a concern.”

From NBC 2. “Thousands of homeowners are losing their property because they can’t afford the mortgage payment. The number of foreclosures is up by almost 1000 in Lee County and the year isn’t over yet. Realtors point out they saw it coming, the market has done a 180 over the past year.”

“Patricia Francioni has three homes for sale. That’s not easy in a buyer’s market. They aren’t investment homes, she and her son have lived in them. Now she wants to sell them all. ‘It’s killing us, can’t sell anything,’ said Francioni.”

“With taxes and insurance on three homes, she’s over-extending her budget. ‘Three times what my husband makes, I paid out this year in taxes, real estate taxes,’ said Francioni.”

“This year alone, almost 2200 homes were forced into foreclosure in Lee County. In 2005, just under 1,300 homes went into foreclosure.”

“Realtors say the housing market has changed. ‘Now it’s leveling off, and all of these people are stuck with these properties. They can’t afford the taxes, they can’t afford the insurance, they’re upside down,’ said (realtor) Dawn Gallet.”

“‘This is something that would have sold right away a year ago, now you’re just holding on, hoping somebody will give you an offer,’ said Francioni.”

“Real estate agents say more foreclosures mean a chance at a great deal. Until the market changes, they say only people buying homes for long-term should invest. The days of flipping are over.”

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