The Housing Bubble

The Sacramento Bee reports from California. “The Bee recently invited five real estate analysts to share their opinions. When did you know the boom was over? Greg Paquin: ‘August ‘05. Initially, we saw Lincoln start to struggle. The very first market, and not long after that Centex came out and started paying Mello-Roos fees and incentives and so forth. And they were way ahead of the game.’”

“Scott Syphax: ‘Two falls ago when I was in a sales office and agents were talking about competing with investors who had earlier bought there. It was fall of ‘04.’”

“Leigh Rutledge: It was August ‘05. For us in resale, you do your update, and there’s two new houses on the market in east Sac or wherever. And then the next week there’s 10. So the pending (sales) are slowing and the inventory is growing. This happened in 1991, too. You just go, ‘OK, It’s over.’ And I knew it was over. When you’re doing it every day, you know when it’s over and people didn’t want to talk about it. Didn’t want to talk about it. Just wanted to pretend it wasn’t happening.’”

The Press Democrat. “It was a tumultuous year for many Sonoma County businesses. The real estate industry reeled from a sharp downturn in the housing market. Prices fell for the longest stretch in a dozen years. Having peaked at $619,000 in August 2005, the price for the typical Sonoma County home dropped to $565,000. By one estimate, the housing downturn wiped out 1,300 jobs in Sonoma County.”

The Record.net. “‘The issue is, and the concern we would have, is that if larger builders think they can just build unabated,’ said Tom Doucette, president of Stockton-based Frontiers Community Builders.”

“That could flood the market, said Doucette, who has been in the home-building business for 25 years.”

The Union Tribune. “It will come as little surprise to San Diegans that a big reason for the slowdown is the sluggish housing market. Thousands of construction workers and real estate agents have lost their jobs. Consumers who once relied on home equity loans are keeping a tighter hold on their wallets.”

“‘The biggest question facing the economy is what’s going to happen in housing,’ said James Welsh, head of Welsh Money Management in Carlsbad.”

“‘If you look at the past, housing corrections typically last a lot longer than a year. It seems unfathomable to me that after such a big run-up that home prices have had, we would have just a slight correction and everything would be OK,’ he said.”

The North County Times. “‘We are all sitting on the edge of our seats,’ said Marney Cox, chief economist at the San Diego Association of Governments. Cox puts the possibility of an area recession at 65 percent. ‘North County is at a slightly higher risk for a recession,’ Cox said.”

“Even optimists acknowledge that markets are rebalancing after a full-tilt frenzy. In most Southwest County ZIP codes, prices of higher-end homes are dipping. And signs of pain are frequent. Sales values in parts of Menifee and Sun City have actually fallen below year-ago values.”

“As a result, some families who bought in 2004-05 are finding that it’s not so easy to sell their way out of debt when they’re suddenly hit with medical bills or the end of short-term ultralow mortgage payments.”

“In the July-September quarter, Riverside County had about three defaulted mortgages for every 1,000 residents, according to a firm that provides information to real-estate investors. That was the highest rate in the state in that period, and only modestly below default rates recorded during the recession of the early 1990s.”

The Orange County Register. “No person has personified the O.C. housing outlook game more than Gary Watts. His projection for 15 percent gains in ‘06 was off.”

“Us: How’d you miss on ‘06? Gary: ‘What appears to have affected my numbers for last year were two events: (a) the Fed raising the rates a half percentage point higher than I thought they would…This slowed down sales and then these slower sales ran straight into (b) a huge jump in our spring inventory when those inventory numbers usually decline.”

“‘These two forces caused the sellers, who needed to sell, to liquidate at much lower prices, just to capture the few buyers in the marketplace. Interestingly enough, maybe 30 percent (or more) of the listing market was made up of sellers who were ‘un-motivated’ and just looking to get a specific price. This too added additional pressure on our selling market.’”

“Chapman University’s A. Gary Anderson Center for Economic Research forecasts a drop of 2,000 jobs in Orange County’s construction and financial-activities sectors next year, mainly due to the slowdown in the housing market. Without the commercial construction boom, the job declines would be worse, Chapman economist Esmael Adibi says.”

“Yet the building boom is coming just as mortgage companies are shrinking and moving out of some of their big offices. ACC Capital Holdings, the Orange-based parent of Ameriquest, is leading the trend by putting up 600,000 square feet for sublease after announcing 3,800 layoffs in May.”

“As of Nov. 30, just 33,000 houses, condos and townhomes traded hands, according to DataQuick. That’s down 27 percent from the same period in 2005 and the lowest since 1995. But even as homes began to languish on the market for want of buyers, the median price of local homes continued climbing through the first half of the year, hitting a record $646,000 in June.”

“Since then, the standoff between buyers and sellers eroded and the median price dropped $40,000, retreating to November 2005 levels.”

“Builders, who were caught flat-footed in 2006 by cancellation rates of 50 percent or more, should trim inventory to manageable levels by the second half of 2007, said Jay Moss, regional general manager for KB Home.”

“But competition for buyers will remain stiff among builders, he said. He predicted that the resale market will be ‘dormant,’ making it tough for homeowners to unlock their equity and buy a new move-up home.”

“Mac Mackenzie, a real estate agent who was the county’s top salesman in 2005, worries there will be more homes than buyers in the market next year. Mackenzie is worried about bad debt and poor financial management by homeowners.”

“‘I really think that the potential of a downturn is very, very high, and that a lot of people have overborrowed to the point of insanity,’ he said.”

A housing report from the Coloradoan. “Throughout much of the year, Colorado led the country in the number of foreclosures. Mortgage lender Lou Barnes said most of the foreclosure activity stemmed from loans that required little or no down payment or was in areas with soft housing markets. He said soft markets in Larimer, Weld and Adams counties and in eastern Longmont have come to be known as the ‘foreclosure belt,’ where a glut of new housing has depressed prices of existing homes.”

“‘That means the buyer from three years ago who’s in trouble now can’t get out of their house,’ he said. ‘If you’ve got less than 5 percent equity in your house and prices aren’t appreciating, you can’t afford to sell your house.”

“In Larimer County, 1,748 homes were listed in either pre-foreclosure or foreclosure on a Web site. Weld County listed 3,036 homes in foreclosure in 2006. Nearly 800 Boulder County residents defaulted on their mortgages in 2006, making for the highest number of foreclosures in the county in nearly 20 years.”

The Denver Post. “Foreclosures blighted entire neighborhoods from Pueblo to Greeley. They also caused home values to fall for mortgage-paying homeowners across the Front Range.”

“Critics inside and outside the mortgage industry say certain loan terms increase borrowers’ risk of default. In its reporting, The Post found a correlation between 100 percent loans and foreclosures. Of nearly 1,000 foreclosures during one month in Adams, Arapahoe and Jefferson counties, more than half involved no-down-payment loans.”

“Currently, ‘the mortgage broker will find an appraiser he likes to use’ on every sale, said Ivor Hill, an appraiser on the attorney general’s mortgage fraud task force. That makes it too easy ‘to influence the appraiser to the desired value.’”

“‘The perspective on the street is that no one is looking. In the off chance you get caught, nothing will happen to you,’ said Chris Holbert, president of the Colorado Mortgage Lenders Association.”

“Homes nestled in the foothills close to Denver usually have gorgeous custom layouts and are built on large lots with spectacular views.”

“But those unique features haven’t been enough to keep the real estate market from slowing in recent months in the hills above Boulder, around nearby Nederland and in places like Evergreen and Conifer in Jefferson County, according to Metrolist. The housing market in Estes Park is ‘off 10 percent,’ said Tom Adams, a real estate broker in the town.”

“‘We’re picking up the bad PR off the Front Range, in my opinion,’ he said. ‘They don’t understand this is a good market to buy real estate, especially if you are a baby boomer looking to retire.’”

“Homes in all price ranges sat vacant this fall in Evergreen and Conifer as Realtors scratched their heads, trying to figure out how to entice buyers.”

“Two houses priced in the low $300,000s went unsold, as did one at $895,000. In fact, only half as many homes in Evergreen-Conifer sold during October as sold in the same period the year before, according to Realtor Tupper Briggs. ‘Our market had the rug pulled out from underneath it in September. October was very slow,’ Briggs said.”

“In the second quarter, home sales in Conifer ZIP code 80433 dropped 18 percent over the previous year, although sellers got nearly 98 percent of their asking prices. In Evergreen ZIP code 80439, a total of 131 homes sold in the $500,000 range, but prices dropped almost 10 percent from the year before.”

“‘I can’t blame the buyers that are waiting on the sidelines. They didn’t want to buy a property today that would be worth less six months from now,’ Briggs said.”

“Nederland appears to have been hit a lot harder, according to data for ZIP code 80466 from Metrolist. The mountain town west of Boulder, near Eldora ski area, experienced a more than 14 percent price drop on homes averaging $330,000 in the second quarter, and a 30 percent drop in sales, according to Metrolist.”

“Higher-end properties have ‘been very slow,’ said (broker) Bill Goodacre. ‘There was a foreclosure in Boulder County (of a house) that was over $1 million. It was overpriced,’ Goodacre said.”

Readers suggested a topic surrounding the changes in the lending industry. “Which of the big lenders are at the most risk of collapse in 2007? HSBC? Countrywide? etc. I suppose I’ll start looking through their 10KSB & 10Q’s for clues.”

One said, “1. Countrywide, Option One and Ameriquest go bankrupt. What happens to a mortgage when no one wants it at any price? Fannie Mae attempts to turn in a Long John Silver’s placemat as a financial statement, they get another extension and a stern warning that they will be delisted.”

Another said, “Credit will tighten and this means that there will be fewer sources of funding since the MBs holders will begin to demand the appropriate risk premium. Debt is debt and has to be paid back at some point in time. This is why M3 cannot expand indefinitely. Deflation will happen because of credit destruction.”

One hears aircraft. “Bernanke says he will drop money from helicopters. Your argument says people won’t pick it up, or banks won’t lend it. I just can’t believe that. A bank that doesn’t lend is out of business.”

One is doubtful, “He will continue trying to walk the volatile tightrope between death by fire (inflation / possible run on the dollar) and ice (recession / deflation). Discrete helicopter drops will only be used to the extent judged as necessary to stay on the tightrope. Good luck!”

The Wall Street Journal. “As more homeowners skip out or fall behind on their mortgage payments, some lenders have started tightening their underwriting standards.”

“That might not be enough to save them from losses. Mortgage lenders, such as Countrywide Financial Corp., Downey Financial Corp. and FirstFed Financial Corp., try to avoid risky ’subprime’ borrowers and have become more cautious about whom they lend to in general. Also, they’re setting aside more reserves for potential defaults. But the increasing popularity of second mortgages could end up undermining their efforts.”

“New data in a research report from securities firm UBS show a high percentage of borrowers with delinquent, defaulted and foreclosed loans have second mortgages, which they’ve usually taken out at the same time as their first loans to buy a house. The UBS data suggest these borrowers are so stretched financially by the added debt that they can’t make payments on their first loans on time.”

“Second mortgages underwritten by the same bank that originated the first loan are termed ’silent seconds’ because the loan-to-value ratio lenders report includes only the first mortgage. They can enable a home buyer to borrow more, often to buy a property he or she couldn’t otherwise afford.”

“These second mortgages, sometimes called piggyback loans, started to take off along with other ‘nontraditional’ mortgages, such as interest-only mortgages and payment-option ARMs, as housing prices appreciated in recent years and meeting traditional mortgage requirements became more difficult.”

“Today, adjustable-rate, interest-only loans constitute the highest percentage of silent seconds. In the ‘Alt-A’ mortgage market, where borrowers have good credit but don’t necessarily fit traditional lending standards, 58 percent of the $24.6 billion in adjustable-rate, interest-only mortgages originated in 2006 have second mortgages.”

“The amount borrowed in silent seconds probably is greatly underestimated, says David Liu, a director in the U.S. Securitized Products Strategy Group at UBS. The lack of knowledge among lenders about silent seconds held elsewhere presents a problem as the lenders try to determine how much to set aside for potential losses.”

The LA Times. “Ownit Mortgage Solutions Inc. of Agoura Hills, which shut down abruptly early this month, has filed for bankruptcy protection, saying it owes more than $165 million to Merrill Lynch & Co. and other financial firms that bought Ownit loans now in default.”

“The filing is a sign of the stresses felt by so-called sub-prime lenders such as Ownit, which make higher-cost loans to borrowers with poor credit or limited incomes. In its filing, Ownit listed its assets as between $1 million and $10 million and said it owed $170 million to its 20 biggest creditors. By far the biggest portion of the debt resulted from soured mortgages.”

“Ownit sold its loans on the condition that it would have repurchased them if the borrowers missed payments in the early months.”

“Merrill Lynch demanded that Ownit repurchase mortgages totaling $93 million. Several other Wall Street firms are seeking smaller amounts, and Calabasas-based Countrywide Financial Corp. has $11 million in loans it wants Ownit to buy back.”

“Merrill Lynch was Ownit’s chief backer on Wall Street, having bought a 20% stake in the company for $100 million in September 2005. Merrill also had provided a large credit line to Ownit and purchased two-thirds of its loans to convert into mortgage-backed securities.”

The St Petersburg Times reports from Florida. “Bruce Sparks painted a bright red ‘4 SALE’ sign on his home’s roof in September, hoping to attract a buyer for his waterfront home. It was a desperate attempt by a man who had hoped to flip the house for a quick profit. Now, several months later, the house remains unsold, and Sparks is facing foreclosure, said Richard Doyle, Spark’s real estate agent.”

“‘The market shift is creating hardships for many property owners,’ Doyle said.”

“Four Percent of listed homes that sold in November, less than one-third the sales rate of a year ago. The nmber of homes for sale in Pinellas County in last month was 16,000, compared to 6,000 in October 2005. $192,000 Median price for a single family home in November, down from the January 2006 price of $210,000.”

“Sparks, who could not be reached for comment, bought his 1960s ranch-style home in March. He paid $1.32-million for the property, which last sold for $275,000 more than a decade ago.”

“Sparks then put the two-bedroom home back on the market for $1.6-million, hoping to realize a quick profit. Instead, he found himself with a home that did not sell. Faced with foreclosure, Sparks dropped the price to just over $1-million and, according to Doyle, is taking any reasonable offer to the bank in an effort to forestall foreclosure.”

“‘We hope this will be a short sale,’ Doyle said. ‘We have several offers the bank is considering.’”

The Naples News. “Despite the fact that real estate prices dropped in 2006, mortgage foreclosures were up nearly 300 percent in November in Collier compared with the same month last year, court records show.”

“People like Scott Hopkins are struggling, even though he earns more than the area median income of $66,100 a year. The three-bedroom townhouse Hopkins bought for $367,000 in November costs $9,000 a year in taxes, insurance, and mortgage insurance. By the time Hopkins pays the principal, interest and condo fees, he’s spending nearly half his annual income on housing.”

“‘How is that affordable?’ he asks, anger rising in his voice.”

“The drop in real estate prices has helped some. In 2005, fewer than a handful of single-family homes were selling for less than $300,000. Last week, the real estate MLS showed 305 single-family homes for less than $300,000. And nearly 1,000 condos were for sale for less than $250,000.”

The Herald Tribune. “In a post-boom residential market where sellers are having a tough time making buyers get out their checkbooks, both builders and individual home sellers are throwing in a lot more than the kitchen sink.”

“Southwest Florida is by no means alone in facing a downturn in housing sales. In this region, the news was even worse. Sales fell by the same third, but the median price was 11 percent lower than a year ago.”

“With the home builders wheeling and dealing, it is not surprising to see individual sellers adding special incentives to their listings. Katrina Taylor has been trying to sell her one-bedroom downtown condominium for a year. She has already reduced the asking price from $465,000 to $325,900.”

“Now she is throwing in a $5,000 bonus for the agent who shows up with a contract. ‘There are price reductions everywhere,’ said her agent, Steve Ivan. ‘I’ve got price reductions on every listing I have. They are finally facing the reality that they really have to reduce, and that is with a capital R. But this one in particular has a great bonus.’”

“‘And I am willing to throw in some of my commission money, not all of it, but I am willing to help out, and she is willing to negotiate, even at that price,’ Ivan said.”

“Steve Rinehart is getting ready to build a 114-unit subdivision in Manatee County, and he needs to clear the decks of some leftover inventory from his last project, a group of homes in eastern Sarasota County.”

“The original prices on the remaining Secluded Oaks homes were $825,000, $740,000 and $700,000. Now they are $750,000, $690,000 and $650,000. Adding fuel to the fire, Rinehart is working with a bank that will offer 100 percent financing on those homes.”

“At this particular moment, appraisals are coming in higher than transaction prices, which makes the 100 percent loan more feasible, he said. During the boom years of 2003-05, appraisals often did not meet market value. Now, the reverse is often true.”

“‘Prices are coming down, people are trying to get out and appraisals are still working with some of the market value that was during our hot time,’ Rinehart said.”

“The time to get that kind of loan? ‘While appraisals are still coming in real good,’ he said.”

“Southwest Florida’s slow-mo real estate market has Bradenton real estate agent Frank Maruca settling into the leather seats of a 2007 Lexus ES 350. Maruca has the distinction of being the only agent who took advantage of Neal Communities’ summer 2006 sales incentive program aimed at moving inventory homes the company built in East Manatee County.”

“In perhaps another sign of the times, Maruca won the prize by selling houses to his own family, one to his brother, one to his daughter and one to himself.”

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