The Housing Bubble

The San Francisco Chronicle reports from California. “For all the talk of a housing slowdown, almost 97 percent of people who sold Bay Area homes in November got more than they paid for their properties, according to a new report. The report, from First American Real Estate Solutions, attempts to quantify the profit realized on home sales, not including any money the owners spent on improvements.”

“What the new report does not show is how much equity homeowners have extracted from their houses prior to sale, either by taking out a second mortgage or doing a cash-out refinancing.”

“Christopher Cagan, director of research with First American, says economists and others are also interested in the percentage of homes sold at a loss. Most homeowners are extremely reluctant to sell at a loss, and an increase in this number would be an ominous sign for the housing market and the economy.”

“In the Bay Area, these numbers are still low, ranging from 1.7 percent in Napa County (unchanged from October) to 5.6 percent in Marin County (up from 1.6 percent in October).”

“In Southern California, homes sold at a loss ranged from 1 percent in Los Angeles County to 6.2 percent in San Diego County. The condo market in San Diego County is even worse, with 10.8 percent of units being sold at a loss in November.”

“‘In downtown San Diego, you have lots and lots of condo construction, more than they could turn over. As a result, you have people slashing prices,’ Cagan says. (First American did not study condo profits in the Bay Area.)”

“Cagan says, homeowners should not expect to see the same outsized gains they’ve gotten in recent years. Long term, in the Bay Area and Southern California, housing appreciates only 3.5 percentage points a year over the rate of inflation, he says.”

“During the housing slowdown of the early 1990s, things were worse. In 1992, almost 24 percent of Southern California homes and condos were sold at a loss, according to figures from Dataquick.”

“Of course that recession was caused by a sharp drop in employment. Today, the job market in California is strong.”

The Orange County Register. “Last year’s slowdown in new home construction in California is expected to continue well into 2007 as builders grapple with excess inventory, a statewide housing forecast issued this morning says.”

“Alan Nevin, chief economist for the California Building Industry Association, projected that housing starts for single-family houses, condominiums and apartments should total from 155,000 to 170,000 this year.”

“That compares to construction levels exceeding 200,000 units a year in the period preceding a housing slump that gripped the state last year.”

“Orange’s Ameriquest, buffetted by litigation woes and talk of a pending sale, didn’t crack a Top 10 list of the busiest lenders nationwide for the third quarter in its key niche: making subprime mortgages.”

“Ameriquest had come in eighth in 2006’s second quarter at $7.2 billion of subprime lending vs. $10 billion in the previous year, according to National Mortgage News. Ameriquest was the nation’s top subprime lender by this count as recently as 2005’s first quarter with $11.6 billion. Back in the third quarter of 2004, it made $19 billion in subprime loans.”

“Irvine’s New Century ranked second in 2006’s third quarter with $13.8 billion in subprime deals, according to NMN. That’s down from $16.7 billion in 2005’s third quarter.”

“Irvine’s Option One ranked sixth in subprime lending, making $7.9 billion in deals in 2006’s third quarter. That’s down from $12.1 billion in the previous year.”

“It wasn’t too long ago, back In 2005’s third quarter, that Orange County dominated this niche with New Century ranked #1 in new loans followed by Ameriquest (#2) and Option One (#4).”

“Your O.C. home just lost some sales oomph. ‘The O.C.’ has been axed. The economic loss ain’t silly talk. The O.C.’s glamorous edge made this town look hip. And that sells everything from T-shirts (which we design here) to our homes. Now it’s back to basic economics for us.”

The Herald News reports from Illinois. “Real estate agents in Danville have decided that, as far as the local housing market goes, no news is good news. The local Realtors group says it no longer will submit sales data to the National Association of Realtors, after the area’s median home prices were ranked lowest in the country in a couple of recent quarterly reports.”

“Lagging 147 other metropolitan areas tracked by the national group has generated bad publicity for Danville, some of it from national news organizations and much of it unfair, said Debbie Borgwald, executive officer of the Danville Area Board of Realtors. ‘We looked into it — all avenues of what we should do,’ Borgwald said.”

“Walter Molony, a spokesman for the NAR, said local prices were driven down by ‘bottom fishers,’ investors buying when they sense that a market is at rock bottom.”

The News Gazette. “‘To use a median was not a true reflection of the housing sales market from last year to this,’ said Danville Mayor Scott Eisenhauer. ‘The information as released also made it seem as though housing values were decreasing and that, too, is not the case.’”

The Daily Herald from Illinois. “Despite danger signs of overbuilding, a batch of new, luxury hotel-condos is sprouting across the city. But whether this will work in Chicago isn’t yet clear, partly because the field is getting crowded, even before the doors to the first hotel-condo open, leading some to wonder whether demand can sustain so many new developments.”

“‘It is unclear how much space Chicago, which is already overbuilt in the luxury condo market, can absorb,’ stated Diane Swonk of a Chicago-based financial services firm.”

“This may explain why some smaller hotel-condo developments have already thrown in the towel this year. The Hotel Blake in Printer’s Row recently reversed a decision to convert to hotel-condos, prompting a lawsuit from a Florida company that had put down deposits on several units.”

“Another planned conversion, the Aldens Hotel, went bankrupt after selling 50 percent of its units. The project has been abandoned and the building sold.”

“Chicagoan Ken Jungwirth recently bought one of Elysian’s units and is looking forward to testing the waters when it opens in 2008. ‘It’s a good excuse for us to get out of the house for the night,’ the he said.”

“This is Jungwirth’s first venture into the hotel-condo market and if this investment goes well, he said, he may consider buying a second unit, perhaps in a warmer climate.”

“Trump is already having success with buyers purchasing multiple units, according to sales director Tere Proctor. ‘I even have a doctor — a plastic surgeon — who bought three,’ she said.”

“In Illinois, the housing market continues to transition off the recent boom years for residential real estate. Statewide total home sales (including single-family and condominiums) were down 17.6 percent, compared to November 2005. Year-to-date home sales (were) down 16.3 percent.”

“‘The housing market is stabilizing and is shaping up to be the third best year for Illinois home sales. Conditions are ideal for buyers as we head into the home stretch for 2006 with more choices and room to negotiate with current inventory levels,’ said Robert Zoretich, president of the Illinois Association of REALTORS. ‘Sellers are offering competitive pricing in line with current market conditions.’”

From WBAY 2 in Wisconsin. “A growing number of people in Brown County aren’t paying their bills, putting them in danger of losing their homes. Court records show home foreclosures were up more than 30 percent in 2006, and 2007 is starting off much the same way.”

“With enticing offers like no-money-down loans, combined with falling home prices and affordable interest rates, it is easier than ever to get money for a home. But an increasing number of people, at least in Brown and other Wisconsin counties, aren’t paying for the homes they buy.”

“Financial planner Lloyd Leuthner says adjustable rate mortgages that have moved higher could be partly to blame. ‘If you were barely making it before, you’re not going to make it with a larger rate,’ says Leuthner.”

“Often, though, people are just buying big houses with big payments they just can’t afford, Leuthner says. ‘In some cases it’s just pure irresponsibility, where you bought too much home, you leveraged or borrowed more money than you should have. And in that case, those people should really go out and get an extra job and just find a way to make those payments.’”

“As 2007 rolls in, the foreclosure trend doesn’t show any signs of slowing. Tuesday there are a couple foreclosures in Brown County courts, and the sheriff’s department says it’s already scheduling property sales and auctions deep into March and April.”

Some housing bubble reports from Wall Street and Washington. “Fewer Americans signed contracts to buy previously-owned homes in November, suggesting weakness in the real-estate market may extend into the new year. An index of signed purchase agreements fell 0.5 percent, a third consecutive decline, to 107 from 107.5 in October, the National Association of Realtors said. The index was down 11.4 percent from November 2005.”

“The sales gains are barely starting to make a dent in inventories. The number of previously-owned homes for sale decreased 1 percent to 3.82 million last month, last week’s sales report from the Realtors showed. The supply was just less than the record 3.861 million reached in July.”

“Figures from the Commerce Department showed the number of new homes completed and waiting to be sold were at a record 169,000 in November.”

From MarketWatch. “Regionally, pending home sales fell 2.8% in the Northeast, 1.1% in the South and 2.6% in the West. Pending home sales rose 4.8% in the Midwest. Pending sales are down about 16% year-over-year in the West.”

From Bloomberg. “Anyone who thinks ‘housing has bottomed should talk to Lennar,’ says Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. ‘Inventories of completed homes continue to increase, both in absolute terms and relative to their total inventories,’ he said. ‘Historically, until the relative inventories of completed homes begin to decline, the starts of new homes continue to decline.’”

“Because the Census Bureau, keeper of the new home sales data, doesn’t capture cancellations in the monthly statistics, sales are probably being overstated and inventories understated.”

“The lag between turning points in residential and non- residential construction is variable, economist Ian Shepherdson said, but one follows the other as night follows day. ‘The plunge in housing construction promises tough times ahead, sooner or later, for the non-residential construction business,’ he said.”

From the Street.com. “Homebuilders rivalry is intense. The result is shrinking home prices and eroding profitability. Lennar remains the biggest bully in many markets, cutting prices and aggravating fellow builders.”

“Lennar announced this week that orders were down 6% in its latest quarter, but its backlog of homes fell 42% year over year in dollar terms. JMP Securities analyst Alex Barron says those numbers imply the prices of Lennar’s new orders fell at least 30%.”

“‘If that is remotely true, I don’t see how or why any builder, public or private, will just sit there and not eventually have to begin cutting prices down to match or beat that,’ Barron says.”

“The only real way to hold steady on prices in such a market is to offer a differentiated product. If you travel around the country, you’ll find Lennar’s homes similar to other builders, Barron says. ‘There is not a huge noticeable difference from one to the next,’ he says.”

“The threat of substitutes remains high for builders. There is a glut of existing-home inventories, and rental apartments and houses are often more affordable across the country. In some communities, builders selling new homes are facing competition from buyers looking to sell a version of an identical home purchased a year ago.”

From Forbes. “Automatic Data Processing on Wednesday forecast a 40,000 decline in American jobs. If the payroll processing firm is correct, it would be the first time in nearly four years that U.S. employment rolls have declined.”

“‘Given the economic slowdown, particularly in housing, firms could be getting more cautious about hiring,’ Goldman Sachs economist Andrew Tilton said.”

“Tilton said the most vulnerable employees are those working in the residential real estate market. ‘You have seen huge declines in home sales,’ he said. ‘Yet housing employment is just slightly off. So this sector needs to shed some employment.’”

“Members of the Federal Open Market Committee agreed unanimously in December that inflation remained the primary risk to the economy, although they acknowledged that the economy may have been a ‘touch softer’ than they had previously believed, according to minutes.”

“All the policymakers agreed that housing remained a drag on the economy, but they noted ’some indications’ that sales might be starting to stabilize. Residential investment would continue to decline for several more quarters, however. The risks of a broader drop in spending would rise ‘if housing prices were to decline significantly.’”

From CNN Money. “Economist John Norris said the Fed may not look to lower rates until its May meeting at the earliest. ‘Most folks will agree that we will get a rate cut at some point this year. But the minutes suggest the Fed could be on pause for a while.”

From Reuters. “The U.S. House of Representatives will pass legislation this year that will create a new regulatory regime for mortgage finance companies Fannie Mae and Freddie Mac, the incoming leader of the House Financial Services Committee said on Wednesday.”

“‘We will pass a bill,’ Rep. Barney Frank told reporters. ‘(It) will substantially increase the ability of the regulators to oversee Fannie Mae and Freddie Mac. That has never been in question.’”

The Boston Globe reports from Massachusetts. “Potentially hundreds of Massachusetts home buyers and other mortgage borrowers are being left in the lurch after Mortgage Lenders Network USA Inc. of Connecticut reneged on funding loans it promised to make, banking and government officials said yesterday.”

“‘I am thinking hundreds’ were affected, said Kevin Cuff, executive director of the Massachusetts Mortgage Bankers Association, estimating the toll on Massachusetts customers.”

“In Massachusetts, the company made 1,140 mortgages worth nearly $240 million in 2005, state regulators said. Mortgage Lending Network’s executive VP, James Pedrick, yesterday attributed the cessation of the wholesale business to ‘turmoil’ in the subprime market.”

“The firm has been unable to resell some packaged, subprime loans on Wall Street, he said. This apparently interrupted the stream of financing necessary to make the next batch of loans, brokers said, though Pedrick would not elaborate. ‘We didn’t have the choice to fund those deals,’ said Pedrick.”

“Massachusetts brokers said some of their prime customers’ loans were also affected. Donald Lambert, a Dartmouth broker, said eight of his customers’ loans worth more than $2 million fell through, including some that apparently closed last week but were never funded.”

”And a home purchase scheduled to close Friday fell apart, driving the buyer and seller into a legal dispute over the deposit. Customers ‘are pretty upset,’ he said. The affected loans were for his top-rated, not subprime, customers.”

The Boston Herald. “Massachusetts banks have seen a 41 percent drop in home loan activity due to the recent slump in the local housing market, according to industry estimates. Kevin Cuff, executive director of the Massachusetts MBA, said the number of home-financing applications, both for mortgages and home refinancings, hit about 850,000 in 2004, the height of the recent housing boom.”

“But that number could fall to about 500,000 in 2006, based on preliminary estimates, Cuff said. ‘It’s cool out there - very cool,’ said Cuff of the housing market.”

“Local bankers say they’ve seen the big dropoff. ‘It’s pretty quiet,’ said David Falwell, chief lending officer at Middlesex Savings Bank in Natick.”

“Richard Holbrook, the new chief executive at Boston’s Eastern Bank, said fixed-rate mortgages originated at his bank hit about $800 million in 2005 and fell to about $500 million in 2006.”

“It’s the same outfit that criticized talk of a ‘housing bubble’ back when people were talking seriously about million-dollar “fixer-uppers” in toney towns like Newton.”

“Now the Massachusetts Association of Realtors has another news bulletin for you: The housing ‘correction’ may soon be over. That was fast.”

“With serious buyers scarce, that observation may be at odds with what many would-be home sellers are experiencing in the current market. And it is also at odds with an even more telling measure: the Realtors’ own statistics.”

“‘November figures, and the word on the street from our Realtor members, indicate that the correction may be nearing an end,’ David Wluka, the group’s outgoing president, stated in a press release last week.”

“Nor is it the first time that MAR predicted the struggling home sales market had turned a corner. In fact, it was a prediction made just a month before, in late November. A 2 percent drop in the median home price, and a 16 percent slide in sales, prompted this declaration. ‘It appears that the market correction may be about over,’ Wluka declared then.”

“To support its latest turnaround prediction, MAR used a month-to-month sales comparison, noting sales dropped by a mere .3 percent from this October to November. Yet for years, especially when the market began to lose steam, the spokesman for the Realtors group argued against such month-to-month comparisons.”

“Wluka, whose term as MAR president just expired, defended the recent use of month-to-month comparisons for what he called ‘trending.’ ‘I am very careful about not spinning because you lose all credibility,’ he said. OK, maybe spinning is the wrong word. Cheerleading is probably more accurate.”

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