The Housing Bubble

The North County Times reports from California. “In 2004, Temecula resident Vicky Reiss, looked at skyrocketing real estate values and saw a second or third home as an investment that would eventually yield a profit. So when a co-worker told Reiss that she could use equity from rising values to generate cash for still other lucrative investments, it sounded plausible, Reiss recalled in interviews last week.”

“The co-worker’s son and business associates would make it all happen, Reiss said she was promised. She agreed to buy a $506,000 house on Falkirk Drive in Murrieta Hot Springs. ‘I thought real-estate was a good investment,’ she said. ‘It was going up at the time.’”

“But two years later, Reiss faces foreclosure on that house and four others that she bought in the following months. And she has brought a lawsuit against a Murrieta mortgage brokerage and several other companies and individuals. The lawsuit claims that the network included as many as 412 investors. Earl Bonawitz, who manages a real-estate office in Temecula, said such a large number could very well have been involved.”

“Many had expected the strong market to create home equity, allowing them to refinance. Now many are under pressure to sell their way out of the situation, and have flooded the market with homes for sale. ‘When you’re at the tail end of a market that’s been going up, people think it’s going to go up forever,’ Bonawitz said.”

The San Francisco Chronicle. “Q: Like many renters in the Bay Area, I thought the rise in home prices in recent years meant that I would never be able to buy. But now that prices are declining, there seem to be a huge number of houses on the market, and sales even at reduced prices are sluggish or non-existent. Is this the time to buy?”

“A: I wouldn’t dare offer a one-word answer to that question. However, it appears that the real estate bubble could lose more air.”

“In many Bay Area communities, prices have fallen to where they were nearly two years ago. However, to get back down to the long-term trend line, they would need to fall considerably more, perhaps as much as 10 or 15 percent.”

“Many sellers seem to be in denial, pricing their houses as though the market were still at the top. They remind me of the Nasdaq diehards who refused to believe that their market was collapsing, and stuck with Cisco Systems stock all the way from $80 to $9.”

“Fence-sitters are more than a group salivating for a weakening in the market: they’re home buyers who are taking advantage of this balanced market to take their time and really consider whether they’re getting what they want in a home.”

“‘A lot of people are chit-chatting with friends and the general consensus is that they should wait,’ said Mary Ellen Dudum of the Alain Pinel office in Walnut Creek. ‘I’d say maybe as many as 40 percent of buyers are waiting right now. But while people are waiting, real estate is happening.’”

“Dudum is helping her brother buy his first house, and said she has teased her brother when he hedges toward waiting. ‘He told me, ‘My friends say I should wait,’ she recalled. ‘I asked, ‘Who are these people? Other people who are renting? Get on the bandwagon!’”

“Serafina Palandech found the house of her dreams in 2005: A little two-bedroom fixer-upper in Daly Cityr. But she lost the house to someone who paid $75,000 over asking. Heartbroken, Palandech got caught in the market frenzy and started looking at condos, not what she wanted, but she’d take whatever she could get, she said. Then, she went away for a few months for work. And when she came back the market had changed.”

“‘It became clear really rapidly how weird the market had gotten,’ she said. ‘In April, we would see these houses on the same block, one listed for $850,000 and another listed for $620,000. I felt like, ‘What’s going on? Something doesn’t make sense.’”

“Then, interest rates changed. Suddenly, the interest-only adjustable-rate mortgage for which she’d qualified became ‘ridiculous’ and unaffordable. She heaved a sigh of relief that she’d dodged that financial bullet.”

“‘I got caught up in the panic of having to get a house before they were all gone. Now it’s more of a buyer’s market and I feel more in control of the situation,’ she said.”

“While she works on improving her credit and qualifying for a better mortgage, she’s also enjoying her two-bedroom rental in San Francisco’s Excelsior district. There, she has room for her home office. There’s a garage. And there’s a backyard for her two dogs to tromp around.”

“She’ll continue watching the market, but she’s not going to get caught in the frenzy again, she said. ‘Thank god I didn’t buy something I didn’t really want,’ she says with a sigh.”

“Freddie Niem lives in a loft in San Francisco’s trendy SoMa district. After moving in, he realized that the downtown, high-tech neighborhood wasn’t right for him. Still, after looking with an agent for a single-family home last year, Niem is again on the sidelines, figuring he’ll wait another three years to buy again. He’s waiting, he says, because he ‘doesn’t trust the kind of market build-up’ that’s marked the past several years.”

“‘They say San Francisco is an area where prices never go down, but I’ve seen with my own eyes how sales in our own building have gone down,’ he said. ‘Prices went up because people kept bidding, bidding, bidding. It’s not like the value itself went up. It’s just bidding.’”

“Then, after his home being appraised for $700,000 in summer, its value dropped to $649,000 this year. That doesn’t seem right to Niem, and he’s suspicious. He calls the quick and meteoric increase ‘insane.’”

“‘I think San Francisco is drawn too high, way too high,’ he said. ‘They’re out of their minds. If you see a loft increase in value that much in just a few years, it’s not because the property itself has increased that much in value. I’ll wait for it to go down again.’”

“Tom Hehir grew up in San Francisco but never thought he could afford a home there. ‘I’d lost the faith,’ he said, jokingly. ‘But now I feel really driven.’”

“It’s the expected drop in home prices that has Hehir hopeful. If prices fall the way he expects them to, he’s expecting to see record foreclosures. One of those, he’s sure, is the Sunset bungalow that he and his partner see in their dreams.”

“He doesn’t wish foreclosure on anyone, but should it happen, he wants to be prepared. ‘Our plan is to wait a year to get something more affordable…with a high expectation that people will default on loans. Based on that, there’s a possibility for fire sale real estate. That would be the most optimal situation for us,’ he said.”

“‘It’s unfortunate, but something drastically needs to happen to the real estate market in order for many of us to buy. And I think it’s happening because of these funky loans,’ he said.”

A housing report from the Nevada Appeal. “A glut of overpriced properties and falling home values marked Carson City’s housing market through 2006, housing experts say. Methods used to finance the boom in the past three years could prompt higher foreclosure rates in coming years.”

“In an auction that lasted less than 10 minutes on the steps of the Carson City Courthouse, Judy and Ray Barrett’s last tie to Carson City was swept away. The couple’s foreclosed Empire Ranch Estates home sold for less than what the Barretts bought the house for in 2003. ‘I’m numb right now,’ Judy Barrett said. ‘We didn’t want to lose it. It’s been such a nightmare, so it’s a relief that we don’t have to worry about it anymore.’”

“Right after the auction, (winning bidder) Jack Flower said two people told him they were interested in buying the home from him. If buyers want it so badly, why couldn’t the Barretts sell it? ‘It was listed way too high,’ Flower said. ‘But they had to. They had a huge loan on it.’”

“Tom Cargill, economics professor at the University of Nevada, Reno, said what happened in 2006 was the aftermath of a ‘rapid escalation in housing prices’ that could not be supported by supply and demand. Speculators hoped a ‘bigger fool’ would come along to purchase. Soon they ran out of fools.”

“‘The bubble has burst,’ said Cargill, who studies the housing and construction markets. ‘Property values have fallen 10 to 20 percent, therefore, people who bought houses are now unable to sell them without experiencing very large capital loss.’”

“‘It was a good ride, but it’s over,’ said Cathie Jackson, branch manager with Mortgage Options Inc., of Carson City. ‘Every so often the world takes a step back and regroups. And we’re regrouping.’ She said the news isn’t all bad. Jackson is taking loan applications from people who couldn’t get into the market in the last few years.”

“The number of mortgage defaults by Carson City home owners increased 47 percent from 2004 to 2006, according to an investigation by the Nevada Appeal.”

“‘This shows speculation in the real estate market in Carson City,’ said Alan Glover, Carson City clerk/recorder. ‘It was way overpriced and people got in on interest-only loans and 100 percent loans and got in way over their heads.’”

“Glover said he believes it was mostly speculators who lost property in 2006.”

“‘Our Realtor said the real estate market is so bad and Realtors are quitting, and we picked the wrong time to leave,’ said Judy Barrett. The Barretts’ home sold Thursday on the city court steps for $343,000. They’ll still owe the bank about $150,000.”

In Business Las Vegas. “Anyone who doubts that the prices of resale homes are falling in the Las Vegas Valley can turn to the Clark County assessor’s office for proof. The county, drawing on home sales during the past 12 to 18 months in which more and more sellers lowered their prices, reported it has trimmed residential assessments more than 10 percent on some properties. There were a few reductions as high as 20 percent to 30 percent.”

“‘It means an overheated market is simply adjusting,’ said Richard Lee, vice president of First American Title, who said many investors are now willing to cut prices because appreciation is slowing. ‘It is as simple as that. It is coming back where it should be. The pendulum swings both ways. The consumer who has the power to write the checks is dictating where the market should be.’”

“‘This is definitely a trend for Realtors to say to sellers that ‘you may not get as much money as you thought you would get in today’s market conditions,’ Lee said.”

The Review Journal. “The developer of Sandhurst, one of the early high-rise condo projects announced for downtown Las Vegas, said Friday he’s returning more than $7 million in deposits to 105 buyers as rising construction costs have doomed yet another condo project.”

“Sandhurst had more than 60 percent of its units under contract and was negotiating with Corus Bank for roughly $250 million in construction financing, but coming up with equity financing was the ‘toughest portion,’ Michael Mirolla said.”

“‘We’ve taken it as far as we can. We’re two weeks from pulling permits from the building department. But in all fairness to the buyers, we have to get funding first,’ he said.” “Jeremy Aguero, principal of a Las Vegas research firm, was among the first to predict that only 30 percent of the proposed 100,000 high-rise units would be built. He said sales have fallen significantly in the past three months.”

“‘It’s not the first and I’m here to tell you it’s not going to be the last,’ Aguero said of Sandhurst’s cancellation.”

The Morning Call reports from Pennsylvania. “The sellers of the 1,900-square-foot townhouse in Alburtis had agreed to leave the refrigerator. But their buyer, Lisa Gerancher, wanted the washer and dryer as well.”

“Had the transaction occurred a year ago, Gerancher might not have said anything. ‘They were willing to negotiate because they were moving to West Virginia and had already bought a new house,’ Gerancher says.”

“In recent months, the tide has turned. These days, says (realtor) Catherine Amant of Coldwell Banker Heritage Real Estate in South Whitehall, ‘buyers are bidding under and asking for the world.’”

“Don’t want to overpay? Have an agent do a full comparative market analysis for you, (realtor) Christopher Zajacek in Bethlehem says. ‘You really want to look at the market and what it has done in the last 45 days.’ Because some prices are changing, the shorter the timeframe for that analysis the better, Zajacek says.”

“As buyers read and hear stories about the housing market slowing, ‘they think that everything has switched in their favor,’ says Scott Schultz, an agent in Center Valley. So they try and negotiate $30,000 off a $300,000 house. The market is not so bad that the sellers can’t hold firm and say, ‘Let’s be realistic here.’ ‘The market is slower but it’s not stagnant. Ridiculously low offers still are being refused.’”

“Amant always recommends to her sellers that they at least consider every offer, even if it is low. ‘A lot of buyers in this market think they can offer $180,000 on a $200,000 house,’ she says. ‘But I tell my sellers, rather than reject it out right, let’s counter. Instead of saying, ‘God, they only offered $180,000,’ say, ‘We’ll counter with the full price.’ I always recommend to my people to counter because that leaves the door open and that’s what negotiations are all about.”

“Home prices in the region fell in November for the first time in more than two years, according to statistics from the Lehigh Valley Association of Realtors. The average cost of an existing home in Lehigh and Northampton counties was $208,000, a drop of 2 percent from November 2005.”

“Buyers, on the other hand, have their pick of properties, allowing them to make offers that are below the listing price.”

“The number of homes sold has fallen six consecutive months. In November, the number of homes sold fell 22 percent, compared to the same month last year. And the glut of homes on the market is slowing the pace of sales. The number of pending sales — a measure of future buying activity, fell 25 percent. It was the lowest number of pending sales contracts since December 2003.”

Readers suggested a topic on subprime loans and responsibility. “A member of the Fed’s Board of Governors is coming to Tucson next Thursday. ‘Economic Outlook and Developments in Mortgage Markets’ series presents Susan Bies, member of the Board of Governors of the Federal Reserve System. The lecture and reception following are free and open to the public.’”

“‘I’m tempted to go and raise the following questions during the Q&A period: 1. Isn’t it a little late to be concerned about subprime lending now? 2. Why didn’t the Fed take the punchbowl away three years ago?’”

Another had this link. “Is she going to warn about the perils of subprime borrowing? ‘Federal Reserve Governor Susan Bies said on Thursday looser underwriting standards were partly responsible for recent rises in late mortgage payments and that lenders should tighten risk management practices.’”

“Bies noted that banking regulators had advised lenders last September to beware of the risks associated with nontraditional loans. She said supervisors ‘are concerned that current risk-management practices may not fully address the entire set of risks inherent in nontraditional mortgages — risks that could be heightened by current market conditions.’”

Another noted, “Home prices are dancing on a rotten, collapsing floor of subprime debt.”

A reply, “Well I’ve been saying that if the landing seems soft it’s because the floorboards are rotten.”

The Hartford Courant. “Executives at Mortgage Lenders Network have always been upbeat and optimistic about the company’s future, but on Thursday they sat sober-faced, determined to save their company from the biggest setback in its 10-year history.”

“Mortgage Lenders is the latest company to get caught in a downdraft in the ’sub-prime’ mortgage industry, which has been slammed with rising delinquencies and defaults. Mortgage Lenders is not a bank, so it must secure lines of credit from financial institutions.”

“The companies providing the lines of credit started getting nervous in late December about the problems across the subprime industry. Mortgage Lenders was having a harder time selling loans to wary investors. And two months earlier, in October, Mortgage Lenders was forced to sell hundreds of millions in loans at a loss because they had been closed at rates well below what the market was averaging, President Mitchell Heffernan said.”

“‘They saw that, and it all started to snowball,’ Heffernan said.”

From Bloomberg. “Mortgage Lenders Network said ‘human error’ caused it to lend $600 million at below-market rates, fueling losses that led to the closure of its biggest unit.”

“‘The economics of the market went upside-down,’ Heffernan said. ‘We could continue to go down the path of funding loans at a loss or we could exit the market completely.’ The company furloughed about 900 of its 1,800 employees for two weeks.”

The Tribune Review. “Pennsylvania’s Department of Banking is taking action to head off a trend the state can’t be proud of, one of the nation’s highest mortgage foreclosure rates. The department has told mortgage bankers and brokers they are subject to license suspensions, revocations and nonrenewals if consumers are mistreated, such as enticing them to agree to a mortgage they can’t afford.”

“‘The policy statement is good for the industry,’ said Michael Flynn, president of the state Mortgage Bankers Association’s Southwest Chapter. ‘Laying out guidance is a good thing, but where’s the enforcement?’”

The Rocky Mountain News from Colorado. “Attorney General John Suthers, teaming with a couple of legislators, is promoting a bill aimed at cracking down on the fraud that results in unjustified housing loans and subsequent foreclosures.”

“We hope the bill does some good. After all, Colorado is said to have a disproportionate share of foreclosures. Still, we can’t help but feel that it’s as much political grandstanding as substantive reform. As one critic says, going after appraisers is just ‘nibbling around the edges.’”

“The fact is there are already plenty of laws, federal and state, aimed at fraud in the mortgage business. But prosecutors at both levels of government have been reluctant to take on the cases - despite repeated pleading.”

“Former Sen. Bill Armstrong, who’s been in the mortgage business, believes the new laws will do little good because they don’t go to the root of the problem. ‘It’s nothing but political hot air,’ he says.”

“The larger problem, he argues, is government-guaranteed housing loans.”

“‘Our government encourages people to get into deals they can’t afford,’ he says. In order to expand home ownership, the VA and the FHA put people into houses with little or no down payment. It may be a legitimate public policy, he says, but if you accept it, you’ll have to accept the high foreclosure rates as well.”

“‘If it weren’t for the government guarantees very few of these loans would get made,’ Armstrong argues. The policy encourages plenty of scam artists who are eager to help foolish borrowers leap into the quicksand.”

“John Head, an attorney familiar with the industry, says enorcement is lax because the lending agencies quickly sell the loans and they end up on Wall Street as part of an investor’s portfolio, an investor who has no idea default is likely. Once the loan is upstream the original lender doesn’t care what happens. Head suggests the federal government should change its policies so that if there’s a default on a loan, it gets charged back to the original lender.”

What do you see in your housing market this weekend? Any graphs? How about marketing? “Elisabeth Mills, VP in The Corcoran Group’s East Hampton office, is not sitting back and waiting for buyers in this slow market. Last summer, as the market continued to chill, she took advantage of the potential buyers that flood the Hamptons during July and August by featuring four of her East End listings in television ads that ran on local cable TV, a bold (and expensive) move most agents don’t make.”

“You really have to put more time and effort into marketing homes, as well as promoting yourself these days, Mills says.”

A financing trend? “Home-buyers in a stagnating real-estate market are starting to hear a term not bandied about since the days of high interest rates: seller financing. Walter Molony, a spokesman for the National Association of Realtors, said that seller financing was popular in the late 1970s and early 1980s, when mortgage rates were in the high teens.”

“‘Conventional financing was basically unaffordable, so seller financing was the only thing keeping the industry alive,’ Molony said. Although interest rates remain low, home prices are high enough that some buyers still struggle to save enough money for a down payment. ‘And you’ve got sellers that are more motivated to negotiate terms that might help the buyer,’ Molony said.”

Any statistics? “Eighteen months ago, the market - which includes Charlottesville and the counties of Albemarle, Fluvanna, Greene, Louisa and Nelson, had only 1,100 homes for sale, or roughly four units per buyer. Today, there are 2,504 homes listed for sale in the Charlottesville market, or an estimated 10 homes per buyer.”

“‘The sellers thought they could get the same price as their neighbors who sold in 2005, so they weren’t willing to come down very much,’ broker Michael Guthrie said. ‘But now they’re starting to come to the decision to drop their prices to a certain extent.’”

“Real estate agent Denise Ramey said she too has noticed an ‘attitude adjustment’ on the part of sellers, leading to recent corrective reductions in price. ‘The negative news we’ve all been hearing has helped sellers understand that they need to start being realistic,’ Ramey said.”

Any bidding strategies? “Sarah wants to buy a house. She has submitted a purchase offer on five different houses. Her actions are cutting a wide swath, leaving behind a trail of disappointed and irritated sellers. Sellers are anxious, and houses always are priced much higher than sellers expect to get for them. So she is submitting purchase offers of $250,000, insultingly below asking prices, convinced sellers will welcome them gladly.”

The Ledger reports from Florida. “Carissa and Jerry Saus are suffering a seller’s fate in a buyer’s market. Despite a price drop of $15,000, the couple’s home is still on the market after four months. But the home isn’t much different than its neighbors, said Carissa Saus. ‘Maybe that’s part of the problem.’”

“Brian Dockery, their Realtor in Lakeland, said lowering the price is becoming a necessity and the wait to sell a home is getting longer. Dockery has nearly given up on open houses and associate lunches, which once served as good marketing tools. ‘People just don’t come,’ he said. ‘There are too many out there to compete with.’”

“Only a handful of people came to the last several open houses he hosted, mainly for the free food, he said. And Realtors these days are on a tight budget.”

“Polk County’s active real estate listings in December outnumbered existing home sales 11 to 1. There were 4,215 listings for homes, condominiums and townhomes throughout the county last month. But in that time, only 362 sold, a 26 percent drop from 488 in December 2005.”

“‘With so many homes currently listed in Lakeland and in Polk County, sellers need to make their home stand out, and the most effective way of doing so is to reduce the price,’ said Realtor Justin Kranitz. ‘We’re at a stage in the market where buyers can choose to be very picky and choose not to purchase a home because of one minor thing they don’t like about the home.’”

“‘We had one couple who seemed pretty interested,’ Dockery said. ‘But one day I called them and they said they changed their mind and not to call anymore. I don’t know what changed.’”

“The inventories of builders are undercutting existing home sales and making it difficult for local Realtors and their clients. ‘It is really affecting resales in a negative way,’ said Judy Cleaves, a Realtor in Winter Haven. ‘It is causing the sellers to realize we are competing with new homes.’”

“New homes are being priced in the $150,000 range, a significant drop from asking prices a year ago. And incentives like $3,000 to $5,000 in closing costs plus free upgrades make selling even more difficult.”

“‘The prices got so far out of hand a year and a half ago,’ Cleaves said. ‘We’re just now getting a correction in resales. They still don’t quite believe it,’ Cleaves said of the need to lower prices. ‘It’s a good time to buy,’ she said. ‘We are ready to negotiate.’”

The News Journal. “Pensacola Realtor Sheree Domine’s specialty is working with first-time homebuyers. Since Hurricane Ivan, she has seen the average worker priced out of the Pensacola market.”

“Even the recent drop in home-sale prices has not scaled prices back to pre-Ivan days when Domine was the Realtor for a family who purchased a new 1,500-square-foot home in a subdivision off W Street for $125,000.”

“‘Those same houses are on the market for $170,000 now,’ Domine said. ‘They could not afford to buy that home now. And to top it off, we’ve got these insurance problems.’”

“The market woes have hurt Domine’s income. She has cut back on spending at restaurants and local stores. ‘It’s a snowball effect, and I don’t see it recovering anytime soon.’”

The Herald Tribune. “In April 2005, Erik and Kathryn Matthews contracted with Construction Compliance Inc. to build a $159,000 single-family home on a lot they own in Port Charlotte. ‘It’s been a nightmare since day one,’ Erik Matthews said.”

“Just this week, the Matthewses received four new ‘Notice to Homeowner’ letters for additional undetermined financial claims. The couple contacted their lender and were told that roughly $87,000 had been drawn down on their credit line by Construction Compliance Inc.”

“The trouble for the Matthewses and other customers of Construction Compliance comes against the backdrop of a struggling housing industry. The sizzling pace of sales in 2004-05 has slowed to a trickle, leaving even the biggest players in Southwest Florida offering huge incentives to move their product in the sluggish environment.”

“Carol Simmons, a broker who sold many of the North Port homes to be built by Construction Compliance, said…she was not in a ‘position to provide any specifics.’ Meanwhile, the company’s subcontractors are wondering when they are going to get paid.”

The Palm Beach Post. “Still debating which New Year’s resolution to keep through next week? Developers of two unbuilt West Palm Beach condo projects have their resolutions already lined up: We promise to give buyers back their deposits … soon.”

“During the past month, buyers in the Opera Place and Palladio Terrace high-rises slated for downtown West Palm Beach have been peppered with Dear Buyer letters from their Miami-based developers. The letters promise the return of buyers’ deposits now that these luxury condo towers aren’t going forward. Blame a lousy condo market and vaporized bank financing.”

“Buyers can’t wait to get those big checks back. Sadly, details on deposit returns at Palladio Terrace are a little vague. ‘The only thing missing is the how and the when, which is everything,’ one buyer groused.”

“Also missing: The amount of money being returned. Buyers in both projects had to put down 20 percent of the purchase price of their condos to hold their units. For some buyers, this amounted to around $100,000 or more.”

“But in both cases, not all 20 percent still remains in escrow. The escrow agents for both projects released 10 percent of the deposits to Opera Place’s BAP Development and Palladio Terrace’s Merco Group. Understandably, buyers of both projects are antsy about whether they’ll get all their money back.”

“It looks like Merco still is toying with the idea of building Palladio Terrace. So, anyone interested in taking Merco up on its offer? ‘They might find someone else crazy enough to, but it won’t be me!’ one buyer said.”

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