The Housing Bubble

The Sacramento Bee reports from California. “A North Carolina-based lending policy group contends that 21 percent of so-called ’subprime’ loans taken out in 2006 by Sacramento-area borrowers are likely to end in foreclosure and aggravate an already flat housing market. 2005 brought 26,800 subprime home loans to the region, according to San Francisco-based Community Reinvestment Coalition.”

“The California Association of Mortgage Brokers quickly rebutted the center’s contentions that such loans are a primary cause of foreclosures and that brokers aren’t accountable for loans they sell. ‘If a loan goes potentially upside down, we potentially have to buy it back,’ said Michael Faust, CAMB’s chairman of government affairs.”

“Faust also said subprime borrowers can get into financial trouble for all manner of reasons beyond their mortgages. ‘Life happens. People get divorces. People lose their jobs. People go out and get credit cards and run up debt,’ he said.”

“A fall in California housing prices has also aggravated such loans. ‘If the loans are less than a year to 18 months old, there’s limited equity for them to refinance,’ said Pam Canada, executive director of Sacramento-based Neighborworks Homeownership Center. ‘That’s what they’ve always done to prevent foreclosure.’”

The Union Tribune. “About one in five subprime mortgages made in the past two years is likely to go into foreclosure, with San Diego among the regions expected to be hard hit.”

“The report projected that 21.4 percent of subprime loans issued in San Diego County in 2006 will end in foreclosure. That would be a 567 percent jump from a projected foreclosure rate of 3.2 percent on subprime loans issued in the area from 1998 to 2001.”

“Only Orange County and Santa Barbara are expected to see a bigger increase.”

“Much of the greatest exposure to foreclosure risk was found to be in California and Nevada. Of the 10 cities deemed most at risk, only two were outside the two states. Merced led the list with a projected rate of 25 percent, followed by Bakersfield at 24.2 percent.”

“With a rate of 21.4 percent, San Diego placed 21st among the cities surveyed. Places with rates expected to be greater included; Riverside/San Bernardino, 22.6 percent; and Los Angeles/Long Beach, 22 percent.”

“John Karevoll, a real estate market analyst for DataQuick, said he had not studied the report, but that its projection for the San Diego area ‘doesn’t sound too far out.’”

“He said the report’s findings ‘may not be as dramatic as it looks,’ and instead might illustrate a market that is normalizing after an unprecedented run-up in prices, during which foreclosures were abnormally low due to continuing equity gains by home owners.”

“Ed Smith Jr., a Mission Valley mortgage broker and director of the California Association of Mortgage Brokers, said subprime loans are not necessarily a bad product. ‘They have put more people into homes who wouldn’t qualify for traditional products,’ he said.”

“Smith said that for subprime borrowers, the goal should be to transition into more conventional lending products. ‘Many have not planned ahead,’ he said. ‘Now their (home) values are plateauing and interest rates are rising a bit. That’s a bad cocktail.’”

The Santa Cruz Sentinel. “Fixed-rate mortgages will make a comeback in 2007, according to the California Association of Mortgage Brokers. Peter Ogilvie, vice president of First Residential Mortgage Corp. in Santa Cruz, said the statewide trends reflect what is happening in the local real estate market. For example, he expects prices to drop slightly.”

“Kevin Mee of First Horizon Home Loans in Capitola predicts an attitude change on the part of buyers. ‘I personally believe that more people will begin to shy away from the Option ARMs adjustable rate mortgages with the outrageously low start rates of 1 percent to 2 percent, and become more realistic,’ he said. ‘In other words, buy what they can afford today and tomorrow, and not what they can just afford today with some type of pie-in-the-sky loan.’”

The Contra Costa Times. “It was bound to happen. The job market for home building in the East Bay has begun to stumble, halting a strong run. The pace of employment expansion in the housing sector is a fraction of what it was earlier this year.”

“Only last spring, residential construction was booming in the East Bay. Jobs in home construction were being added at a 10 percent annual rate in April and May. But by October, jobs were being added at a 3.5 percent annual rate.”

The Press Enterprise. “As general manager of Silvercrest Western Homes Corp. in Corona, Al Whitehouse this year saw orders plunge for his factory-built homes, mirroring the retrenchment of more conventional on-site home builders.”

“Drawing on 36 years experience in what is a very cyclical business, Whitehouse slashed production staff.”

“Q: How did you adjust your factory staffing? A: We had 410 production workers in May or June of this year and now we have 290. One of the toughest things I have to do is lay off that kind of talent, but we have to be realistic relative to our level of production. We can’t be overstaffed. Otherwise we end up being unprofitable.”

A housing report from the Idaho Statesman. “Treasure Valley home sales in November have dropped again, compared to either the banner sales year of 2005 or 2004, a more realistic sales year to most in the housing industry. It’s the third straight month that housing sales in the Valley were down from the same period in 2004. It’s the fifth consecutive month for comparable periods in 2005.”

“According to the Intermountain MLS, 970 new and existing homes were sold last month, compared with 1,714 in November 2005 and 1,068 for the same period in 2004. ‘The Realtors are doing damage control (when preferring to compare today’s market to 2004),’ said Boise economist John Church. ‘But I don’t know that you need to panic yet. There’s still an awful lot of construction going on around here.’”

“Some analysts say the local housing slump has become severe enough that comparisons to 2004 are beginning to shoot holes in the industry’s argument that sales activity has returned to the more historic levels of that year. ‘It’s a correction. And it’s hard to paint it in a sunny way,’ said Mark Zandi, chief economist at Moody’s Economy.com.”

“Ken D. Simonson, chief economist with the Associated General Contractors of America, said a slowdown in building permits signal that the housing slump may not be over soon. ‘Builders are pulling fewer and fewer permits. That tells you that they’re not confident that the market has touched bottom yet,’ Simonson said. ‘If they were confident that things are turning around, they would be down at the Building Office pulling permits.’”

“In Meridian, once the hottest real estate market in Idaho, the 43 building permits issued last month were 79 percent fewer than in 2005, 78 percent below 2004 and the fewest since November 2000.”

“Boise authorized only 35 single-family building permits last month, down 61 percent from 2005 and 48 percent fewer than in 2004. Nampa’s 43 building permits were down 58 percent from 2005 and 61 percent from November 2004.”

“Don Hubble, owner of Meridian-based Hubble Homes, said November was the low point of the year for his company, with sales 50 percent below a year ago. For the first 11 months of 2006, the company’s closings are down 10 percent, he added. ‘And most of that happened in the last six months,’ Hubble said. ‘We had a lot of (sales) contracts that were cancelled.’”

“The median price of an Ada County home has now fallen 7 percent since the housing slump began, or from $248,900 last July to $231,000 in November.”

“George Tallabas, a realtor with ReMax Advantage in Nampa, worried that since outside investors have fled the Valley, inflated housing prices will prevent many local residents from buying a home. ‘About 90 percent of the families living in the Treasure Valley earn less than $40,000,’ he said. ‘Where are the buyers going to come from for these expensive homes?’”

The Register Guard from Oregon. “A total of 128 millworkers abruptly lost their jobs Monday at two soon-to-be-dismantled Weyerhaeuser Co. plants in Lane County.” “The causes were twofold, spokesman Mike Moskovitz said: One, the cooling housing market dropped demand for plywood. Second, builders are tending to use oriented strand board from the South instead of western plywood because the price per square foot is about half.”

“‘Most people should be able to find a job before too long,’ Brian Rooney, a labor economist with the state Employment Department. Laid-off millworkers at the OK Lounge on Monday weren’t so sure. Starting pay at the Springfield mill was $16.22 an hour, they said. ‘Where are you going to find that in this area?’”

The Bellingham Herald from Washington. “When it comes to building condo towers in Bellingham, the sky’s the limit, but only if you can get good financing. Last year at about this time, developers said they hoped within a year to see ground broken on four tower projects, with the tallest, Bay View Tower, reaching 23 stories, or 240 feet, into the sky off North State Street.”

“More than a year later, only one project, the 18-story 1010 Morse Square project, has seen dirt pushed, and that’s about all that’s happened so far.”

“Developers of three of the downtown projects and one on Northwest Avenue say they’ve delayed construction because of the difficulty of getting good financing deals, high construction costs, confusion over plans or an uncertain economic climate.”

“‘We’re kind of reinventing the wheel,’ said David Hovde, one of the project’s developers. ‘To be honest with you, I don’t really know what’s going to happen at this stage.’”

“Bellingham doesn’t have any other big condominium towers, so lenders at national banks don’t have anything to look at to reassure them such a project could work. ‘When the big banks look at Bellingham, they go ‘Wow, it’s really an unproven market,’ said Terry Daughters, VP for Peoples Bank.”

“Two buildings of 14 and 12 stories with 190 condos above retail space and a twostory office/retail building, was put on hold in late summer after financing problems. ‘I would characterize it as like a lot of the tall buildings and projects right now: Things have slowed down a bit, financing is a little harder to obtain,’ developer Larry Willman said.”

“The Idaho builders behind the project are stretched too thin financially and need to sell off other projects before they can restart the project, Willman said.”

The press looks at the new subprime report. “A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market.”

“‘In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans,’ said Mike Calhoun, CRL president.”

“In recent years, high appreciation in many areas has masked problems in the subprime market. CRL projects that the cooling housing market, will cause failure rates to rise sharply in many major markets. California, Arizona, Nevada, and greater Washington, D.C. will be especially hard hit.”

“‘Foreclosures can be a disaster not only for the family but for the community as well,’ said Pat Vredevoogd Combs, president of National Association of Realtors. ‘When one home forecloses, the surrounding houses lose value, too.’”

The Denver Post. “Subprime loans, which carry a higher interest rate, are designed for borrowers with impaired credit ratings. Once a niche market, they now account for nearly one of every four mortgages made in the U.S.”

“‘We all know that some subprime loans are a recipe for disaster if the family can’t afford them when the payment goes up,’ said Pat Vredevoogd Combs, president of the National Association of Realtors.”

“Realtors are concerned that many families don’t understand the risks behind their mortgages and that a spike in foreclosures could depress housing markets, Combs said.”

“Subprime loans that start out with low teaser payments that adjust rapidly higher after two years, known as 2/28 loans, are especially dangerous. Critics call these loans ‘exploding ARMs’ because payments can rise 30 percent or more from the payment amount that was used to qualify a borrower.”

“Even when home prices nationally were enjoying robust gains, about 13 percent of subprime borrowers lost their homes in foreclosure within five years.”

From Business Week. “The obvious question: If you have a lot of equity in your house and you’re having trouble making payments on the mortgage, why wouldn’t you just sell the house yourself, pay off the loan, and keep the equity?”

“‘Yes, they should sell. But most people put that off until the last minute and hold on as long as they can. There are not that many borrowers who are able to make the rational decision to sell and go rent. Most keep refinancing as long as they can,’ said CRL’s Mike Calhoun.”

“Randy and Jennifer Rimstad of Minnetonka, Minn., refinanced their mortgage in 2004 to replace a 50-year-old furnace and pay for their youngest daughter’s wedding. In May, their interest rate jumped to 8.55% from 5.55%, pushing their monthly payment from $1,654.81 to $2,295.68, and the Rimstads buckled under an adjustable rate mortgage they say they didn’t understand and could ill afford.”

“Then came the collection nightmare that tacked on another $700 or so in monthly payments. On Dec. 5, Option One Mortgage Corp., a Kansas City (Mo.)-based unit of H&R Block Inc. foreclosed because the Rimstads owed more than $18,000 in late charges and attorney’s fees, on top of their past-due payments.”

“Ivy Jackson, a director at the Housing & Urban Development Dept., is bracing for a lot more consumer complaints. ‘The speculation is the servicers don’t have enough people to handle the volumes. We’re hearing that they’re not set up to service [exotic] loans.’”

“Paying on time isn’t enough to protect customers from some wily servicers. A servicer might even pocket an extra payment and never credit it to a borrower. ‘I have audited loans where the consumer has made all payments on a timely basis, and yet the servicing company manufactured a default and, in some cases, completed a foreclosure,’ says Marie McDonnell, an Orleans (Mass.)-based mortgage finance analyst.”

From Forbes. “The deterioration of homeowners’ ability to keep up with mortgage payments will add oomph to calls on Capitol Hill for new regulation of mortgage lenders and brokers.”

“‘There is considerable discussion to enact a predatory lending law for these mortgage lending problems,’ says Keith Ernst, senior policy counsel for the CRL.”

The New York Sun. “A phenomenon made its debut in 1998, when the housing market was booming and stated-income loans (those based on what you tell the bank you’re earning) became the rage. Given widespread income exaggeration by eager home buyers, such loans soon became known in the real estate industry as the ‘liar’s loan.’”

“Interestingly, a recent sampling of 100 stated-income loans by an auditing firm in Virginia (based on IRS records) found that 90% of the income statements were exaggerated by 5% or more, while almost 60% of the stated amounts were exaggerated by more than 50%.”

“The president of Mortgage Brokers Association for Responsible, Steven Krystofiak, says he believes that of this year’s estimated stated-income loans, ‘most, if not all, are fraudulent.’ He points out that roughly $1 trillion worth of American home mortgages will be reset over the next year (about 11% of the $9 trillion of mortgages outstanding), most at higher rates because of the steep rise in interest rates in recent years. He says, many monthly payments could easily rise 50%.”

“In response to this financial burden, Mr. Krystofiak says, untold numbers of homeowners will simply no longer be able to afford their homes. They’ll face a double whammy: their mortgage payments will increase and they won’t be able to refinance because the value of their homes has declined. What’s more, he points out, they won’t be able to sell them because they’ll owe more money on their homes than they’re worth.”

“This housing horror show, he predicts, will lead to an explosive rise in delinquencies and foreclosures.”

“The latest word from the Mortgage Bankers Association tends to give some credence to Mr. Krystofiak’s concerns. About a week ago, it reported late payments and new foreclosures on American homes in the third quarter rose versus the prior quarter, and it predicted further growth as a massive wave of adjustable-rate mortgages reset at higher interest rates.”

“The bottom line from our mortgage broker is hardly encouraging: The full brunt of the housing weakness has yet to be seen. If he’s right, of course, hopes for a soft landing may be little more than a passing dream.”

The News Observer reports from North Carolina. “The coastal housing boom of the past few years has come to a screeching halt. In Myrtle Beach, new and existing condo sales dropped 37 percent in the third quarter from a year earlier. In Wilmington existing home sales fell 17 percent in the same July-to-September period, according to the N.C. Association of Realtors.”

“Nearby Brunswick County, home to miles of beach towns, saw a 64 percent drop, while there was a 30 percent drop in sales on the Outer Banks. ‘There is going to be a huge number of units on the market next year, and lots of them vacant,’ said Carl Van Horn of Market Opportunity Research.”

“There are about 10,000 condos on the market along South Carolina’s Grand Strand, several thousand more than a year ago, according to Tom Maeser, a real estate marketing analyst in Myrtle Beach.”

“Van Horn said that many of the buyers of coastal property in the past two years have been speculators or investors who purchase a property with the intention of selling it for more in the near term. Continued drop in demand could leave them, as well as developers, with unsold inventory and no cash to pay back their loans.”

“That’s a potentially big hit to coastal community banks, which funded much of the housing boom of the past three years. Community lenders tend to hold on to the loans they originate, rather than sell them to other investors on secondary markets, as bigger banks do.”

“‘Banking institutions with a lot of exposure to [condo] projects are going to have a difficult time,’ said Grant Yarber, CEO of Raleigh-based Capital Bank.”

The Ledger from Florida. “Polk County’s building permit totals dropped again in November, for the ninth consecutive month, and builders don’t see any relief in sight. Last month’s 315 permits was nearly a 60 percent drop from 782 in November 2005. The inventory of new homes is at an all-time high.”

“‘That is kind of expected in the reports we are hearing,’ said Joel Adams, VP of Highland Homes in Lakeland. ‘Sales are off about 35 to 40 percent in most of the major markets around the state.’”

“Auburndale’s permits fell from 22 a year ago to 18 last month, and Lakeland’s permits dropped a staggering 71 percent in November, from 98 in November 2005 to 28 last month.”

“An increased inventory of new homes has forced some builders, like Highland Homes and Southern Homes, to offer more incentives for new home buyers. ‘It’s going to take most of 2007 to move that inventory,’ Adams said.”

From TC Palm in Florida. “Layoffs at another leading Treasure Coast homebuilder again raises questions as to when the new-home market will rebound. DiVosta Building Corp. executives said Tuesday they will lay off 218 employees in the Treasure Coast and Palm Beach County.”

“‘I think this is a continuing indication of larger national builders downsizing to accommodate the changes in the residential housing market,’ said Don Santos, past president of the Treasure Coast Builders Association. ‘I think there’s a lot more of this going on in the field, but we don’t hear about it.’”

The Herald Tribune from Florida. “Tuesday was the day that Sheila Schaller decided her problems as an Avalon Homes customer had gone beyond a civil matter.”

“As the informal leader of a group of disgruntled Avalon customers, she took the matter to the North Port Police Department, requesting a criminal probe against Avalon Homes and its owner Joseph Pufta.”

“Sheila and Fred Schaller’s struggles with Avalon started when the Ortonville, Mich., couple bought two $228,000 North Port houses and lots from Avalon in May 2005. One was meant for the couple and the other for Sheila Schaller’s retired mother. Pufta promised the homes would be ready in August.”

“The family moved into a $1,500 monthly rental to await their homes’ completion. Then, the couple got hit with liens totaling about $10,000 from various subcontractors.”

“Another lien came in from a window supplier. That is when Sheila Schaller ‘knew we had a problem’ because there were no windows installed in the houses yet. Then the couple noticed that all work had stopped on their homes.”

“The Schallers hired a lawyer and sent Pufta a letter. On Oct. 10, the Schallers got a letter from Pufta’s Tampa attorney. ‘It is not the intention of Avalon Homes to close its doors,’ Bernard J. Morse said.”

“That was the last time that the Schallers heard anything from Morse, Avalon or Pufta before Avalon closed its doors in late October or early November.”

“Morse said Pufta remained in Sarasota but had changed his home and cell phone numbers because Pufta ‘had received several death threats and threats of violence against his family.’”

The Palm Beach Post. “A housing developer has defaulted on a $9.5 million contract to buy and demolish the Kokomo Mobile Home Park. As a result, Kokomo’s longtime owner says he will continue to operate the Old Florida-style trailer park.”

“The developer’s agent, Robert M. Hall, didn’t return phone messages requesting comment. In June, Hall had vowed that condos would be built to replace the trailer park. ‘The people who live there now need to get out,’ he said at the time.”

“‘It will stay the way it is,’ said John C. Mitchell, whose family opened Kokomo in 1960. Mitchell blamed the collapse of Palm Beach County’s housing market for the developer’s failure to raise $9.5 million for a purchase.”

“‘The whole year has been a disaster,’ Mitchell said. ‘The economy went to hell and everything fell apart.’”

“Mitchell gave the developer a 10-day extension to restructure his project. But bankers apparently remained leery. ‘In the end, the buyer just didn’t have the money,’ he said.”

“Mitchell hopes to keep the developer’s $375,000 deposit. But Palm Beach Kokomo has asked a judge to return its deposit, which is now in a court escrow account.”

“Park resident Joanne Stifter said she and other neighbors believe their ordeal has reached a happy ending. ‘We are all so relieved that we will have our homes. It’s been a very tough year,’ she said. ‘It will be nice to have a quiet Christmas,’ her husband Bob agreed.”

The News Times reports from Connecticut. “The median prices of both single-family homes and condominiums in Connecticut declined in October, the first time in nearly a decade that both have declined in the same month. ‘We looked at the state prices for the third quarter of the year, and prices declined by 2.29 percent,’ said Norman Krayem, president of the Connecticut Association of Realtors. ‘That’s very, very good.’”

“The Warren Group reported that the median price of a single-family home in Connecticut fell from $271,500 to $265,000. At the same time, the median price of a condominium in the state dropped from $192,000 to $190,000.”

“In Fairfield County, the median price of a single-family home declined only about 1 percent, however, the number of homes sold in the county declined 18.7 percent.”

“In Litchfield County, the median price of a single-family home declined 8.41 percent, from $267,500 to $245,000. The number of homes sold in the county declined by 17.28 percent.”

“Krayem of the Connecticut Board of Realtors said the market grew too pricey. People were shying away from buying, while a big inventory of homes available for sale built up. ‘The prices were outstripping the ability of people to buy homes,’ he said. ‘Especially the first-time buyer. They’re crucial to the market.’”

“Sellers have had to realize that they can’t expect to get the prices they might have received a year ago. ‘Sellers have gotten the message,’ said Timothy Warren Jr., CEO of the Warren Group.. ‘They’ve had to adjust.’”

“‘The buyers are now seeing a better selection of homes at better prices,’ said Matt Rose, a Realtor in Danbury. ‘It’s a good situation in two ways for them.’”

From The Day. “Housing sales in New London County fell nearly 19 percent during October and skidded more than 33 percent in nearby Windham County, according to the Warren Group.”

“In Windham County, sales fell 33.1 percent and the median price of housing dropped from $212,950 in October 2005 to $203,000. New London County’s condominium market also lost steam during October, with sales falling 55.4 percent.”

The Times Union from New York. “Hugh Johnson is upbeat about the economy, to a point. The local investment adviser says housing woes could send the economy into a funk if oil prices soar again. ‘That’s the big risk this economy faces,’ he said.”

“Johnson said the housing market is in a ‘revulsion’ stage, in which prices decline and speculators sell. This followed a period of speculation in which as many as one-fourth of the homes purchased in the United States were bought for investment purposes. ‘That’s speculation,’ he said. ‘The hope, the dream, the fantasy.’”

“New York was hurt less by the housing bubble than places like Boston and California, he said. Parts of upstate New York such as Rochester and Buffalo are still struggling to create jobs. ‘It’s a disaster,’ he said.”

“‘It costs too much to do business in New York state, and somebody has to do something about it,’ he said.”

The Concord Monitor reports from New Hampshire. “The number of people in Merrimack County losing their homes to foreclosure has gone up nearly 60 percent in the past year. According to credit and mortgage counselors, homeowners who signed up in recent years for adjustable-rate and interest-only mortgages, hoping to refinance when their rates increased, are having a hard time making their payments.”

“The sluggish real estate market had made it harder for homeowners to draw equity from their property or sell to recover debt. ‘Some people are apparently experiencing, for lack of a better word, payment shock,’ said Dean Christon, executive director of the New Hampshire Housing Finance Authority.”

“Last year, there were 56 foreclosures in Merrimack County. So far this year, there have been 89, an increase of 58.9 percent. In Concord, that number went from six foreclosures in 2005 to 16 this year.”

“Forty of this year’s foreclosures were on homes financed with adjustable rate mortgages that started in 2002 or later, Register of Deeds Kathi Guay said. ‘Those people that got a great interest rate to begin with, now that the interest rates have changed, have run into a problem,’ she said.”

“Kerry York, of Consumer Credit Counseling Service of New Hampshire and Vermont, said the increase in foreclosures can be attributed to many factors. Many of the people serviced by his agency have reached their limit on several credit cards and are facing high interest rates on those, York said. The cost of gas and home heating fuel is going up. And then their mortgage rate adjusts and their payments get bigger.”

“‘What was a problem six or eight months ago is now a huge problem,’ he said. ‘Income doesn’t go up - not at that rate.’”

“James Kenney runs a website aimed at people who want to invest in foreclosed properties. He said the market for them is good. ‘Since there have been so many foreclosures lately, the banks aren’t really in the business of real estate, so they want to get rid of the properties quickly,’ he said.”

“According to his records, 418 foreclosures were posted in October, an increase of 214 percent over October 2005.”

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