The Housing Bubble

The Ventura County Star reports from California. “The house was unfinished, but Ann and Rusty Colemon closed the deal for their new Moorpark Highlands home anyway in December. In exchange for signing before the end of the year, they say builder Pardee Homes offered them nicer fixtures and no mortgage payments until the house is finished.”

“But if they had waited a few days for a special assessment to be waived, they would have saved about $150,000.”

“The Colemons are among dozens of 2006 homebuyers in the Moorpark Highlands neighborhood who are upset about Pardee Homes’ new incentive for buyers there. As of Jan. 1, Moorpark Highlands purchasers won’t have to pay the monthly charge known as a Mello-Roos assessment, which funds community improvements in the tract. Instead, Pardee will cover the cost.”

“Those who bought before Jan. 1, however, still must pay the assessment, which they said can run between $4,900 and $6,000 annually depending on a home’s size, for more than 30 years.”

“On Saturday and Sunday, more than 100 buyers and residents picketed the sales office in the tract’s Shenandoah neighborhood. That’s the way the housing market goes, said Jim Bizzelle, regional VP for Pardee Homes and project manager for Moorpark Highlands.”

“‘The real estate market has changed,’ Bizzelle said. ‘In 2006, each individual buyer came through and negotiated a fair price.’”

“The Colemons said they thought they were helping the developer by closing a little earlier, on Dec. 26. ‘They came to us and said, ‘OK, I will give you upgraded bath fixtures if you close and help us with the 2006 books,’ Ann Colemon said.”

The Record.net. “City leaders are reacting to the slumping housing market by making significant changes to Manteca’s growth policies in hopes of maintaining home building and retaining thousands of construction jobs. Manteca’s move might be a signal that the continuing downturn in the housing market could have a substantial impact on communities that depend on that growth.”

“On the surface, the changes appear mundane: Developers will have an extra year to choose when to build homes after reserving units of city sewer capacity. And the city next year might allocate more sewer units than its current growth ordinance allows, aiming to stimulate building during an expected slow period for construction.”

“‘We wanted to cooperate with (developers) and say, ‘This is something we can do,’ said Karen McLaughlin, assistant city manager.”

“At least one person thinks that Manteca’s strategy is a bad idea and that the city is simply giving influential developers a break. Joe De Angelis, a resident and outspoken critic of city officials, said allowing developers to sit on their sewer reservations a year longer will limit competition from other builders and hurt efforts to develop more affordable housing.”

“That’s because developers will likely wait until housing prices rise again before building, he said. ‘They want to hold the (reservations) so no competition can build. They’re actually trying to actively push (home) prices up.’”

“City Councilman John Harris said the city’s decision is a chance to give both Manteca and its developers more options in an uncertain market. ‘It’s just a one-year Band-Aid, as I see it,’ he said.”

The Voice of San Diego. “The median price per square foot is down 8.4 percent and 9.6 percent for detached homes and condos, respectively, since size-adjusted median prices peaked last September.”

“The more widely reported, if less informative, plain-vanilla median price was actually up for detached homes so that it rests only 2.2 percent below last December’s value. The median condo price, on the other hand, declined to 12.5 percent below last year’s price.”

“While the typical detached home buyer may have spent a little more last month, the lower price per square foot shows that the buyer in question likely got even more bang for his or her buck. In other words, pricing power is still on the decline.”

The Bakersfield Californian. “Bakersfield’s housing market is still healthy and is simply going through a market correction that was inevitable after its meteoric rise, according to several local real estate professionals.”

“‘I don’t think it’s all doom and gloom,’ said real estate agent Jon Busby. ‘We had the investors that came and the builders that came and drove the prices up. It’s just correcting itself now.’”

“In December there were 3,181 homes listed on the market, down 13 percent from the month before, according to a preliminary report on December sales compiled by local appraiser Gary Crabtree.”

“‘Listings are going down,’ Crabtree said. ‘Sellers have come to the realization that the party is over and they can no longer get the prices they were expecting before. We’ve reached a plateau and that plateau is holding. It is not taking this gigantic nose dive everyone was predicting.’”

“After being one of the nation’s hottest real estate markets in recent years, some have described local market conditions as a bubble and predicted Bakersfield’s real estate market will be one of the nation’s worst in 2007.”

“‘They are crazy. We don’t have one of the worst housing markets in the country,’ said Ray Karpe, the incoming president of the Bakersfield Association of Realtors. ‘The market is not bad at all. The market has just slowed. It has gone from a ridiculously good market to a good market. We couldn’t maintain that forever.’”

“‘The housing market in general has been accused of being a bubble,’ said Leslie Appleton-Young, the chief economist with the California Association of Realtors. ‘In the last year and a half we have seen a significant decline in sales. But the actual decline in prices has been slower.’ But increased foreclosures and a rise in interest rates could spell trouble for the housing market, Appleton-Young said.”

“Crabtree said last year he routinely saw between 20 and 30 notices of default filed a month. The numbers jumped to 41 in November 2005 and 179 in November 2006.”

“Local appraiser Jeremy Jans anticipates the local market will actually pick up a little this spring, despite a possible increase in home listings some are predicting. ‘Although we will not get back to where it was, it will be a strong market this year,’ Jans said. ‘We are a unique market. We always react a lot slower than everyone else.’”

A housing report from the Las Vegas Sun. “Prompted by falling home prices, the Clark County assessor’s office has reduced the assessed value of some homes by more than 10 percent. The reductions give dramatic evidence that a cycle of rapid appreciation has ended in the Las Vegas Valley.”

“Of the 590,000 residential parcels in Clark County, the assessor’s office said the property values of about 85,000 - 14 percent - have decreased. Of those, about 60,000 were reduced by an average of 5 percent and 25,000 were reduced by an average of 10 percent, county officials said. There were a few reductions as high as 30 percent, based on the recorded sale prices of homes.”

“The lowering of the values by Clark County is the most tangible evidence to date that more homeowners are cutting prices to make a sale. Assessed valuations are used by appraisers in determining values of homes on the market, and the reductions may mean banks won’t be willing to finance homes for what some buyers are seeking, said Richard Lee, VP of First American Title.”

“The reduction in assessments has occurred throughout the Las Vegas Valley, including entire neighborhoods - such as one in Anthem in Henderson, where the assessed values of 176 homes were each slashed by $30,000.”

The Review Journal. “Las Vegas median home prices dropped to $306,100 in December, down 2 percent from the same month a year ago, and the inventory of homes for sale shrank for the second straight month to 17,834, the Greater Las Vegas Association of Realtors reported Monday. It’s still up by a third from last year.”

“Realtors sold 1,644 single-family homes during the month, a 32.5 percent decline from a year ago.”

“Devin Reiss, new president of the Realtors association, said this year is going to be about ‘balance in the market.’ ‘Prices have decreased so slightly that it’s hard to believe that we can expect anything other than the status quo for this market through 2007,’ Reiss said.”

“The median price of a condo or townhouse is off 4.4 percent at $195,000 and the number of units for sale is up 86.2 percent to 4,833. There were 372 condo sales in December, down 36.6 percent.”

“The GLVAR statistics are based on data collected through the Multiple Listing Service and do not necessarily account for newly constructed homes sold by local builders, sales by owner and other transactions not involving a Realtor.”

“Community bankers are being more closely scrutinized for their commercial real estate lending activity, which could hurt the nation’s economy if banks unnecessarily pull back from sound lending practices, an executive for the Independent Community Bankers of America believes.”

“‘In this marketplace, the last couple of years, the FDIC got worried. They saw all these cranes in the air,’ said Nevada Bankers Association President Bill Uffelman. ‘To my knowledge, no bank has been dinged for being overinvested in CRE. That doesn’t mean they don’t come in and look at it.’”

“Ann Grochala, lending and accounting policy director for ICBA, said regulators might ask community banks to increase their capitalization, depending on the institution and what they have on their balance sheets. ‘What we’re waiting to see is how these guidelines will be implemented. That’s where the rubber meets the road,’ she said.”

“The Bureau of Land Management is selling 12 parcels of federal land totaling 56 acres at public auction March 7.”

“The land is being sold under the Southern Nevada Public Land Management Act of 1998, which directs the BLM to provide for the orderly disposal of some 27,000 acres in Clark County based on recommendations made by local governments and the public, BLM sales supervisor Ann Wharton said. The disposal boundary was expanded to about 45,000 acres.”

“Bidding starts at the federal government’s appraised fair market value of each parcel. Most of the parcels are 2.5 acres and appraised at $900,000, BLM spokeswoman Hillerie Patton said. At the most recent auction in August, the BLM sold 27.5 acres for $11 million, or about $400,000 an acre. Since November 1999, the BLM has sold 13,000 acres for nearly $2.8 billion at 13 auctions.”

“‘I think the BLM is looking at the overall market and trying to maximize their profits on the land, and if they don’t see the opportunity, they’re not going to do it. Right now, demand for residential land, especially low density, is not what it was a year ago,’ Nevada Title Co. land specialist Travis Nelson said.”

Some housing bubble reports from Wall Street. “D.R. Horton Inc.’s sales orders for new homes fell 23% during the first quarter from a year earlier, the company said. The drop comes as home builders facing higher buyer cancellations in midst of a U.S. housing slowdown offer more inducements to sell houses.”

“D.R. Horton also said its cancellation rate for the quarter was 33%, down from 40% in the fourth quarter. ‘Although our cancellation rate decreased … we continue to experience higher-than-normal cancellation rates and an increased use of sales incentives in many of our markets,’ Chairman Donald Horton said.”

“‘The lower cancellation rate appears to have benefited from fewer last-minute cancellations,’ wrote analyst Daniel Oppenheim, who had predicted an 18% order decline for the latest quarter. ‘This may have been driven by increased flexibility to negotiate with buyers who had planned to cancel.’”

From MarketWatch. “Meritage Homes Corp. Tuesday said quarterly net sales orders fell 42% to 1,201 homes from a fourth-quarter record of 2,072 in the year-ago period. As a percentage of quarterly gross sales orders, cancellations rose to a record 48%, the residential builder said.”

From Reuters. “Meritage expects to book pre-tax land and inventory charges of $55 million to $65 million in the fourth quarter.”

“‘We continue to actively renegotiate a number of option contracts that would enable us to move forward on projects that are no longer feasible at the land prices in the original contracts,’ said CEO Steven J. Hilton. ‘But when these negotiations are unsuccessful, we must sometimes make the difficult decision to forfeit the option deposit and leave the project. We plan to continue to operate cautiously until we are confident that housing demand is strengthening in our markets.’”

“In 2006, Brookfield Homes Corporation closed 1,159 homes and 834 lots for a total of 1,993 home and lot closings. This compares to a total of 2,824 home and lot closings in 2005. The company’s backlog at December 31, 2006 was 247 homes, a decrease of 208 homes when compared to the same period last year. The targeted home closings for 2007 is between 1,150 and 1,250 homes.”

“The company said net new home orders in its latest quarter rose 52 units from the previous year to 208 homes. Brookfield said the gain was driven by an increase in active selling communities.”

“‘While some might interpret this increase in orders might indicate a market rebound, in our view, it is more reflective of the company’s aggressive discounting to close standing inventory and an easy comparison from a year ago,’ JMP Securities said in a report to clients Tuesday.”

“A worse-than-expected housing slump has left homebuilders with less cash flow to cover debt interest, and some ratings could be cut if that trend continues, Moody’s Investors Service said. Some homebuilders, including some highly rated ones, have forecast interest coverage in 2007 that covers their covenant requirements by only a small cushion, Moody’s said.”

“Typically, homebuilders operate with negative cash flow during good years as they pay for high inventories, then turn cash flow positive in slowdowns as they reduce backlogs, start fewer homes and convert existing inventory to cash, Moody’s said. ‘However, this cyclical model seems to have run into a roadblock,’ Moody’s said, as rising cancellations keep the inventory of unsold homes high.”

“Only six of the 19 builders that file public financial documents have turned cash flow positive, Moody’s said. The cash flow squeeze has been exacerbated by builders’ growing appetite for share repurchases, Moody’s said. ‘It may take some sizeable positive swings in cash flow accompanied by some significant debt repayments to avert some rating reductions,’ the agency said.”

“Shares of Novastar Financial Inc. fell after a JMP Securities analyst said mortgage loan delinquencies and foreclosures are rising as housing suffers. Analyst Jim J. Fowler painted a bleak portrait of what the weak housing market means for Kansas City, Mo.-based Novastar Financial, which lends money to home buyers with bad credit.”

“During the run-up, lenders like Novastar Financial loosened their credit standards and devised creative ways to entice consumers with bad credit to borrow money to buy a house, Fowler said. Now, home prices have stopped rising as much and in some cases are falling as unsold homes remain on the market.”

“This hurts Novastar Financial because low-income consumers will find it more difficult to pay off loans by borrowing against the value of their homes. That leaves Novastar Financial vulnerable to loan defaults. ‘A cursory review of industry data would show that most especially the nonprime market is under siege from faltering credit,’ Fowler said.”

“Secured Funding of California has shuttered its wholesale division, which accounts for about one-third of its total production.”

The Providence Journal. “About 75 Rhode Islanders have been left in financial limbo after Mortgage Lenders Network USA Inc, which is based in Middletown, Conn., backed out of nearly $38 million it had promised to borrowers or was considering, because of a downturn in Wall Street’s taste for sub-prime mortgages.”

“‘What you are finding is that as business got tougher last year, some lenders began to stretch their guidelines,’ said Sam Garcia, publisher of an online newsletter. ‘Some of those loans that they have made have started to default, and those that are buying these mortgages have started to pay attention.’”

“According to Rhode Island Department of Business Regulations Director Michael Marques…the fallout of Mortgage Lenders Network’s decision to halt its operations is the kind of episode one expects to see during a housing-market contraction.”

“‘They are doing $12 billion in mortgage volume and all of a sudden the music just stops,’ Marques said. ‘When it’s hot, nobody thinks it’s going to happen — and then delinquency rates increase and foreclosures go up, and the secondary market stops buying…. But there is no crystal ball, so there is no way you can predict when it’s going to happen.’”

The Union Tribune. “Late payments on credit card bills climbed in the summer to their highest point in a year, suggesting that some consumers are feeling financially squeezed. A factor influencing the rise in the third-quarter delinquency rate can be traced to the housing slump, said James Chessen, the association’s chief economist.. With home prices either falling or not going up nearly as much as they had, some owners aren’t feeling as wealthy.”

“‘With savings rates negative and home values stagnant, the spring has gone out of shock absorbers that handle life’s financial bumps in the road,’ Chessen observed.”

The Wall Street Journal reports from Florida. “Plenty of investors, who purchased homes to rent or flip, continued to buy and sell through the height of the boom. One of them was Marjorie Dresner. The Canadian native believed that Naples would long be an attractive market. A prolific investor, she purchased dozens of houses in recent years, many of them with a partner. One of them cost her $1.7 million.”

“But it’s increasingly evident that investors and speculators here and elsewhere played a greater role than previously thought in pumping up the real-estate bubble, especially near the end of the run.”

“In late October, Ms. Dresner tried auctioning off 28 of her properties, but some bids were as much as 40 percent lower than what she paid. One three-bedroom ranch house she purchased in July 2005 in the middle-class Lake Park neighborhood fetched a high bid of $400,000; Ms. Dresner and a partner paid $690,000 for the house, according to county records.”

“Ms. Dresner won’t talk much about her investment experience, but prefers to focus on the positive. ‘I did very well in the beginning,’ she says. ‘I look at the overall picture. You don’t just look at one year.’”

“Economists cite individual investors for pushing prices up excessively and lenders for lowering their credit standards. ‘The thing that sent us into a contraction was that house prices were getting high and affordability was aggravated by investor speculation,’ says David Lereah, chief economist at the National Association of Realtors.”

“Some of the buyers who placed bids on Ms. Dresner’s houses at the auction in October were other investors. One of them was Jerry Krecicki Jr. ‘It’s all about timing,’ says Mr. Krecicki, a local real-estate investor and real-estate agent who believes the market will rebound.”

“Mr. Krecicki says he met Ms. Dresner a few months after he sold her his home in Lake Park in September 2004 for $435,000, more than double what he paid for it. After that deal, Mr. Krecicki served as her real-estate agent on multiple sales in Lake Park.”

“Mr. Krecicki says he went to the auction out of curiosity and jumped into the bidding when he saw the low prices. ‘After about two hours, a house came up for bid that I knew very well,’ Mr. Krecicki recounted. They put up the highest bid, which was $275,000. It was the same house Mr. Krecicki and a partner sold to Ms. Dresner for $435,000. Given the huge price drop, ‘it would have been stupidity’ not to bid, Mr. Krecicki says.”

“Many of the sales from the auction haven’t closed yet. In many cases the top bids on Ms. Dresner’s homes weren’t high enough to pay off her lenders in full, says auctioneer Paul Drake. Ms. Dresner says she never bought a home for more than its appraised value. ‘The sellers can ask whatever, but it’s up to the banks in how they appraise it,’ she says. ‘I never overpaid for anything.’”

“In the past month, both Countrywide Home Loans Inc. and the Bank of New York filed court papers in Collier County Circuit Court in Florida saying they are seeking to force a foreclosure sale on two properties owned by Ms. Dresner.”

“Mr. Krecicki and a partner still own about a dozen homes that they are renting out. He says they have cash reserves to cover homes where expenses exceed the rental income. He says he feels badly that Ms. Dresner has had trouble selling her properties. ‘This market downturn came out of nowhere, like a snowstorm,’ he says. ‘It surprised everybody, especially the people making mortgage payments.’”

The Naples News. “Naples real estate is in the national news — again. The Wall Street Journal published a story about a ’slump in chic Naples,’ noting that home prices have dropped and the number of unsold homes have swelled as frenzied investors have scrambled to get rid of their properties.”

“Word about the story spread quickly among real estate agents, brokers, builders, and developers on Monday. Some say it will only hurt the market, while others say it may actually help the market by bringing attention to Naples.”

“‘You know the old adage, ‘I don’t care what you say about me, just spell my name right,’ said Ross McIntosh, a Naples-based real estate broker. He said the story could actually rekindle interest in the market if buyers get the impression that prices have plunged or there are bargains to be had in Naples.”

“‘We don’t want the speculators back,’ McIntosh said. ‘But this kind of news may attract real buyers. So how is that bad for business?’”

“Realtor Bob Brewer received several calls from clients in New York, New Jersey and other Northern states about the story. ‘They wanted to know what was going on,’ he said. ‘Their comments were, ‘Are they still printing that garbage?’ He said he is working with 15 to 20 buyers who can’t find what they’re looking for, though there’s a 16-month supply of homes on the market.”

“Michele Harrison, president of the Collier Building Industry Association, said the worst has passed, as other local, state and national headlines have acknowledged the market has started to turn. ‘If I were in the market to purchase this is the time I would be looking,’ she said. ‘Right now.’”

From TC Palm. “In the cooled-down housing market, some Port St. Lucie builders are complaining about the city’s longstanding policy to require all property owners to pay an ‘availability charge’ for trash pick-up on vacant houses.”

“Having to pay $70.50 every three months for trash service at every house he doesn’t sell won’t help, said Pyramid Development VP Aleksin Szwed. ‘It’s not a pro-business environment for builders,’ Szwed said. ‘(But) that might be something they want to do. They’ve had too much building, maybe.’”

“Metrostudy, a company that tracks housing, reported 1,059 completed but unoccupied homes in St. Lucie County at the end of September. In 2005, there were 492 homes completed, but empty.”

“The housing market is causing a ‘predicament’ for builders, Mayor Patricia Christensen said, but the city is unlikely to change the trash bill policy because it would make garbage collection too difficult. ‘They have to pick everything up,’ Christensen said. ‘If they had to go down a list and say, ‘Wait! That house hasn’t paid. Leave the pile,’ (then) we’d have piles everywhere.’”

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