The Housing Bubble

The Union Tribune reports from California. “San Diego County housing prices turned negative last year for the first time since 1995, DataQuick Information Systems reported yesterday. The market ended the year with a median price of $483,000 for all homes, off 6.4 percent from December 2005. But the downturn was not uniform countywide.”

“For example, Solana Beach was up 6.6 percent, to $1.2 million, on 87 single-family resales, but local broker Brett Gobar said sales at his brokerage were sluggish and prices had fallen 20 percent over the past 24 months. ‘We’re going to have to see a huge amount of activity in the next six months to prevent further declines,’ Gobar said.”

“Imperial Beach turned in one of the biggest single-family-resale price declines, down 6 percent, to $487,000, for areas with at least 75 resales, a situation Cheryl Schaumburg of One Source Realty blamed partly on media coverage of the real estate slowdown.”

“First-time buyer Andy Sobel faces foreclosure on a one-bedroom condo he bought for $240,000 two years ago in Rolando. Sobel took out first and second mortgages with adjustable rates to make the purchase, and once the monthly payments started adjusting upward and the value of his condo fell, he said he had no choice but to stop making his payments.”

“He’s now in the foreclosure process and while his condo is up for sale at a much reduced price, as low as $165,000, he’s had few nibbles. ‘I was a naive buyer, I’ll admit, but no one should have put me in this loan,’ said Sobel.”

“Shaun Anderson said he discovered a buyers’ market when he shopped for a home in Poway. After months of house-hunting, he bought a two-bedroom, $330,000 condo in November, priced $30,000 below recent comparable sales. ‘Things were way too expensive for me before,’ he said. ‘It is fantastic. It’s pride of ownership. It is an appreciating asset.’”

“Sylvia Starbird, broker in Mission Valley, said would-be buyers may want to buy at the bottom of the market but she cautioned against waiting, since no one can tell if that point has already passed. ‘For sellers, if they don’t have to sell,’ Starbird said, ‘they may want to wait a little bit before they do that.’”

The Voice of San Diego. “Of the 1,700 condos on the market in downtown San Diego, 1,485 are brand-new units, about one-fifth of downtown’s entire condo stock. Another 3,414 condos are currently under construction, having at least broken ground, according to the Centre City Development Corp.”

“Just the units currently available would take at least 12 months to sell at the peak activity rate of 2004, estimates Peter Dennehy of Sullivan Group Realty Advisors. He said adding thousands more units may only exacerbate downtown’s housing oversupply.”

“But the nature of high-rise development is that of a nonstop train, once developers start on a building, it’s nearly impossible to stop when conditions get tough. ‘Once they go vertical, they rarely go back,’ Dennehy said.”

“‘The glut potential of downtown San Diego is highly overrated,’ said Russ Valone of MarketPointe Realty Advisors. While he still thinks the market will weather the slowdown, he reluctantly admits there’s at least a little cause for concern. ‘Maybe there’s a window of glut,’ he said. ‘But it’s not a very widely opened window.’”

The Record.net. “The median sales price of existing homes in San Joaquin County was down nearly 6 percent from $425,000 in December 2005 in a yearlong slow market. Sales continued to slow, from 416 in November to 406 last month. That compares with 636 in December 2005.”

“Sales activity has been picking up a little recently, but the market still feels pretty dead, said Bob Riggs, president of Riggs & Associates, GMAC Real Estate, Stockton. ‘We’ve seen the phone ringing a little bit more, had a few more showings in the last few weeks, but it’s still slow,’ he said. ‘I don’t really see much pickup until, one, it quits freezing outside, and two, the flowers start to bloom. That’s pretty typical.’”

The Press Enterprise. “It seemed logical. With thousands of filmgoers and industry types in the Coachella Valley spending 10 days watching movies at the Palm Springs International Film Festival, more than a few had to harbor desires for a second home or a better first home.”

“Or not. One group of three people had taken the shuttle to the Murano development’s single-family, three-bedroom modernist model Saturday, sales counselor Alan Six said. By 12:30 p.m. Sunday, the shuttle’s only occupants that day had been its driver, Bennett Simon, and the company’s real estate agents.”

“‘It didn’t go great,’ Six said. ‘I suspect they’re here to see a movie, not see a model (home),’ said Six.”

“‘We didn’t want to step on anyone’s toes,’ said Candace Casey, senior vice president with Chicago-based developer. ‘It’s a down market and we need to create awareness at a higher level.’”

A report from the Chicago Tribune. “Back in 2003, when Trump was planning his downtown residential tower, he gave about 40 insiders an attractive deal: They could sign contracts to buy condominiums in the Trump International Hotel & Tower at a discount. In some cases they agreed to pay about $500 a square foot. But units in the building, still under construction, are on the market for as much as $1,343 a square foot.”

“Trump has notified them that their agreements are ‘null and void.’ Some real estate experts strained to cite a precedent for a developer offering contracts at a preconstruction discount to get the ball rolling on a project and then canceling the deals later as selling prices rose. ‘I never heard of this before,’ said Richard Peiser, a professor of real estate development at the Harvard Graduate School of Design.”

“If a developer asks firms they work with to buy units ‘to help a project appear successful and achieve certain hurdles,’ Peiser said, ‘it would seem the buyer should enjoy the upside.’”

“One of Trump’s unhappy ‘friends’ is Judi Diamond-Falk, an Evanston architect who designed an early sales office for him here. ‘Anyone who buys preconstruction gets a financial benefit for the risk they take,’ Diamond-Falk said.”

“Trump also benefited from the early sales, she added, because he ‘could say that a certain percentage of units are presold to get his financing and tell the public a certain percentage was presold. People didn’t know they were friends and family sales.’”

“Trump said in an interview Monday that the sales contract included wording that allows him to raise the prices for the friends and family units. In June, Trump attorney Jason Greenblatt wrote to the Diamond-Falks to notify them that the sale was ‘null and void,’ citing ‘Paragraph 12 (b)’ of the contract. That clause refers very generally to ‘matters beyond [the] seller’s reasonable control’ as a reason for the developer to default on the contract.”

“The friends and family sales ‘were a gift’ to a small group, said Greenblatt. ‘From Day One, they understood that if the project was successful, the windfall would go to Mr. Trump,’ he said.”

“In the past two years the slowdown in the residential market has affected the approximately $775 million tower, Trump acknowledged. About 21 percent of the residential units remain unsold, said Tere Proctor, Trump’s sales director here. At the same time, construction costs have skyrocketed.”

“Trump said one reason for canceling the friends and families contracts is to ‘have more income to handle potentially higher construction costs.’”

Some housing bubble news from Wall Street and Washington. “Centex Corporation has cancelled or intends not to exercise land option contracts related to approximately 37,000 controlled lots given the decline of housing activity in many of its markets. Consequently, the company currently expects option deposit and pre-acquisition walk-away costs to be approximately $150 million this quarter. Additionally, the company plans to record land valuation adjustments of approximately $300 million.”

“Tim Eller, Centex CEO, said, ‘We are navigating through one of the most challenging housing environments in the past 25 years. We are responding by reducing our land position and inventory, aligning our workforce to the current sales pace, and improving our overall cost structure.’”

From Reuters. “Deutsche Bank analyst Nishu Sood said, ‘Centex’s preliminary third-quarter results reflect continuing housing market challenges, belying the notion that the housing market has already turned a corner. The company’s announcement is a familiar mix of earnings below expectations, orders that continue to fall and ongoing asset impairments,’ Sood added.”

“In recent months, falling prices and rising cancellations have led home builders to repeatedly slash their forecasts as many buyers either walk away from contracts or press for additional incentives before signing.”

The Associated Press. “Home builder KB Home said Tuesday it will book more than $300 million of charges in its fiscal fourth quarter, providing yet another indication the slumping housing market has not yet reached bottom. Los Angeles-based KB Home will record inventory impairments of $255 million for the quarter ended Nov. 30. The impairment lowers the book value of certain holdings, an indication that certain properties cannot be sold for a profit.”

“KB will also book a charge of $88 million related to land option contracts it won’t pick up, indicating the company believes it cannot develop the land at a profit.”

“‘The homebuilding industry in the United States is experiencing an increasingly challenging operating environment, which includes an oversupply of inventory, a decline in new home orders and sales prices and an increase in sales incentives required to generate new home orders,’ KB said in a Dec. 8 SEC filing, announcing the anticipated charges.”

“‘This change in market dynamics has caused a decline in the fair value of certain inventory positions and changes in the company’s strategy concerning certain projects that no longer meet investment return hurdle rates.’”

From MarketWatch. “Mortgage lender IndyMac Bancorp Inc. said the U.S. housing slowdown will cause a big fourth-quarter earnings shortfall. As more of the Pasadena, Calif.-based firm’s borrowers face difficulties affording the higher rates on adjustable-rate mortgages and other esoteric loans, the company is being forced to raise reserves and provisions for losses, which directly impact its bottom line.”

“‘This shortfall reflects the challenging times being faced by the mortgage and housing industries and the difficult nature of forecasting earnings in our business,’ the company said. IndyMac said net interest margin is being squeezed by held-for-sale loans and its thrift investment portfolio in the wake of an inverted yield curve in the bond market.”

“The following is a letter to shareholders of Indymac and other Indymac stakeholders from CEO Michael W. Perry, ‘ Unfortunately, we are starting the year off with some bad news. Last week, as we began to complete our quarterly accounting ‘roll-up,’ it became clear that our Q4 earnings would be substantially below our forecast.”

“I have stated many times before that Indymac is not immune to deteriorating mortgage industry conditions, and it is clear now that during the fourth quarter industry conditions continued to erode.”

“The main differences between our prior forecast…an increase in credit costs related to the loan loss provision, secondary market reserve, and marking-to-market delinquent loans held-for-sale. A reduction in net interest margin related to loans held-for-sale and the thrift investment portfolio due to yield curve inversion.”

The Financial Times. “‘The question is: is this the bottom? Or is there another downward leg to come?’ says David Bernstein, chief economist at Fannie Mae. Mr Bernstein thinks demand could weaken again, as investors pull out of the housing market.”

“According to the latest data, which admittedly, are several months out of date, the investor share of home purchases remains unusually high, at about 10 per cent. Even if demand does remain stable at current levels, both construction and house prices could face continued weakness because of the large overhang of unsold homes - 6.3 months of sales for new homes in November (more if adjusted for cancellations).”

“Jan Hatzius, chief US economist at Goldman Sachs, says home starts need to fall considerably from their present level to clear the inventory backlog, which Goldman estimates could be as high as 900,000 houses, including vacant homes not presently offered for sale.”

“If the bond market decides it has overestimated the likelihood of Fed rate cuts, or reverts to a more normal- term premium (charging more for longer-term debt) bond yields and mortgage rates could jerk upwards, kicking away one of the main props supporting demand for homes. That could set in train a whole new round of housing market declines.”

The Telegraph. “The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned. ‘Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.’”

“‘We believe that housing will soon become the proverbial ’straw that breaks the camel’s back’,’ said David Kostin, the investment bank’s US strategist.”

“Goldman Sachs said homeowners had treated windfall gains from rising house prices as if they were ‘recurring income,’ using home equity withdrawls to subsidize over-stretched lifestyles. This artificial boost to spending has already dropped from 7% to 4% of GDP over the last year, and is likely to halve again in 2007.”

From Bloomberg. “Manufacturing growth in New York state slowed more than forecast this month as new orders and sales deteriorated. The Federal Reserve Bank of New York’s general economic index fell to 9.1 in January, the lowest in 19 months, from a revised 22.2 in December, the bank said today in New York. A number greater than zero signals expansion.”

“At the Dec. 12 meeting, (Fed) policy makers pointed to manufacturing as an ‘additional source of downside risk to economic growth in the near term,’ according to minutes released on Jan. 3. Still, they ‘continue to expect the economy to expand at a rate close to or a little below the economy’s long-run sustainable pace.’”

“Growth slowed in the third quarter to a 2 percent annual rate, dragged down by the biggest decline in home building in 15 years.”

The Sun News reports from South Carolina. “Condo sales plunged 30 percent last year, sparked by the departure of short-term investors and skyrocketing homeowners insurance rates. Condo sales fell from 9,222 to 6,453, according to the MLS for Horry and Georgetown counties - which captures about 80 percent of the area’s listings.”

“Tremendous price appreciation in 2004 and 2005 cut some buyers out of the market in 2006 and hurt rental investors who found they couldn’t cover their mortgage payments with rental income. As homes flooded the market and prices slowed down in early summer, house flippers started to back out.”

“Skyrocketing insurance premiums added to the slowdown with condominium associations seeing increases as high as seven times the amount they were paying. Many condo owners on fixed incomes were forced to sell. Inventory ballooned, growing 61 percent for homes over 2005 and 26 percent for condos.”

“Today, there are 8,654 condos on the market. (It) will take a year to clear out if the MLS got no more listings, said Tom Maeser, president of the Fortune Academy of Real Estate. ‘The rental investors are not buying anymore. We are waiting for more permanent second home investors,’ Maeser said.”

“One sign that the investor has left the market is in the drop in cash transactions. This year, cash transactions made up only 15 percent of overall transactions in the MLS. The percentage has never been that low, at least not since statistics started being recorded in 1994. Maeser said flippers often pay with cash as they buy and sell properties, and the drop shows they’re gone.”

“‘The rental income investor has been lost and the [flipper] has been lost. It’s the retirees that will keep our market going,’ economist Al Parish at Charleston Southern University said.”

“Real estate broker Dale Johnson Dale Johnson in Myrtle Beach added that the lack of buyers tells him that now is a good time to buy resort property or a second home. He says he’s seen sellers finally giving in to prices much lower than listed price. ‘I think you’ll continue to see prices drop on condos,’ Johnson said.”

The Miami Herald from Florida. “Realtor Richard Barkett’s reaction to 2006? ‘Thank God it’s over!’ said the CEO of the Realtor Association of Greater Fort Lauderdale, adding it was the year that brought the industry ‘back to reality.’”

“Others believe that the rate of owners cashing out of their homes will finally slow this year, dragging down consumer spending. It all means that South Florida’s economic juggernaut is finally slowing down. That’s already been the case for restaurant owner Catherine Malcolm.”

“‘People were more conservative with spending,’ said Malcolm about her business.”

“Construction jobs have taken the most direct hit. Palm Beach County home builder DiVosta Building plans to lay off half of its 552 workers next month.”

“Cement maker Titan America has seen a 20 percent drop in its concrete block business alone, which is almost solely for residential building. At full tilt last year its Pennsuco plant in Medley was running three shifts to keep up with demand. In the fourth quarter, it cut back to just one shift at the block plant.”

“‘Obviously, construction is in a pretty significant slowdown,’ said Florida division president Hardy Johnson.”

“It’s too soon to pronounce a controversial mega-development in Florida City dead, but the landowner is preparing to pull the plug with two key proposals. Atlantic Civil has filed zoning and permit applications in the last few weeks to build fewer than 200 homes on the property adjacent to the Everglades where it had proposed up to 6,000 homes.”

“‘There’s a lot of time and money invested . . . and we are going to continue to move it forward,’ John Shubin, an attorney for Atlantic Civil said.”

“But with significant political and regulatory hurdles and a tanking housing market, any going appears increasingly difficult for a project that has been a lightning rod in Miami-Dade’s debate over whether to open new land to development.”

“Shubin said Atlantic Civil was considering a bigger quarry with a limited number of homes if it obtained permits. The proposals raised one obvious question: Lennar Homes, which has an option to buy the land and was proposing to build the Commons project, has been renegotiating or dropping projects to deal with the weakening nationwide housing market.”

The Sun Herald from Florida. “Imagine hiring a dozen crews to build at least two dozen homes and then running out of money before you can pay them for their services, and you can imagine the mess that Construction Compliance Inc. faces.”

“The company, which has some 90 active building permits in Charlotte County, has apparently been placed in financial limbo after many of its subcontractors, who claim they haven’t been paid for some $1 million in work, filed liens against the homebuyers.”

“At least one bank involved in financing CCI’s home construction projects has ceased releasing cash advances on the work on at least one of the homes. Meanwhile, work appears to be slowing to a standstill on many of CCI’s unfinished homes located in Rotonda Sands.”

“‘I’m literally in the dark,’ said CCI subcontractor Joel Deriso. ‘I know that I’m being cheated out of a lot of money. I know that there are a lot of people like me. We are fighting battles separately, but we are losing the war,’ he said.”

“Homebuyers, however, may wind up being the ones to pay the price. Under Florida law, subcontractors can file liens against the properties where they performed work for a general contractor. The liens give the subcontractors the right to force the property into foreclosure after one year if they don’t receive payment.”

“Jodfer Land Service, which provided land clearing and fill dirt for some 64 houses, has filed liens totaling more than $300,000. Kimal Lumber supplied $182,000 worth of building materials at 29 homes.”

“Beckman Concrete and Masonry filed some two-dozen liens totaling some $220,000. Residential Drywall also filed a dozen liens totaling some $98,000. And Miller Brothers Contractin, filed a dozen liens totaling more than $90,000.”

“‘It’s a sad situation,’ said Gary Reger, manager of Seacoast Supply, which has liens against properties in CCI deals. ‘We’re kind of setting there holding the bag, too.’”

The New York Times reports on Washington. “David Franco’s illuminated model of a proposed 10-story condominium tower dominates a sales center that, in spite of the ‘Now Selling’ banner still fluttering outside, is conspicuously closed for business.”

“After six weeks of failing to lure more than a couple of dozen buyers, Mr. Franco and his partner, joined the builders of nearly 6,000 condominium units in the Washington metropolitan area who have decided in the last three months to recast their projects as rental apartment buildings.”

“Since the middle of 2006, the frenzied condominium market here and in several other big cities like Las Vegas, Miami and Boston has collapsed. In many cities, banks have significantly scaled back loans to condominium builders.”

“Industry analysts also point out that rents may start sagging if too many condos are converted into apartments too quickly. In the Washington area late last year, some buildings in the suburbs have recently started promoting move-in specials and other incentives to lure renters.”

“You can do it, but it isn’t as attractive,’ Tom Meagher, a real estate consultant, said about converting condos into apartments. ‘You are not going to get enough rent to cover the cost. You might have to go back and redesign the floor plans.’”

“Lenders started tightening the purse strings for the condominium market in early 2006 as sales weakened first in cities like Miami and Las Vegas. ‘Did the lenders pull back soon enough?’ asked Robert Brennan, managing director of real estate finance at Credit Suisse. ‘I don’t think we know yet.’”

“Take the owner trying to sell a spacious two-bedroom condo for $879,000 in the former Columbia Hospital for Women, which closed in 2002, in the Foggy Bottom neighborhood of Washington. In 2004, the investor was so confident that he would make a handsome resale profit that he told his agent, Thomas P. Murphy, he wanted to buy five condos. Mr. Murphy said he flatly told his client he would only assist him in purchasing one unit in any one building.”

“‘He needs $890,000 to break even, but the offers are at $800,000 to $840,000,’ Mr. Murphy said. Could he rent the condo? Yes, but that option is not appealing, either. Mr. Murphy estimates that the unit could rent for $4,000 a month, far short of the $6,800 a month the condo costs in mortgage interest, maintenance fees, insurance and taxes.’”

“‘They have a choice of how they want to lose it,’ Mr. Murphy said of investors and condo developers. ‘Drip by drip or in one slap.’”

“At the end of 2006, 24,200 units were on the market in the Washington area, up from 13,000 at the start of 2005. Sales have slowed to 663 in the fourth quarter of 2006 from 3,520 in the first quarter of 2005, according to Delta Associates.”

“Recorded prices have been flat, which probably masks an effective decline since only the most attractive properties are selling and many owners throw in extra inducements that do not show up in official figures.”

The Washington Post. “Looking toward his retirement next year, Willie Lee Howard agreed to refinance his duplex in Northeast Washington, thinking that a fixed-rate loan would help stabilize his finances.”

“What Howard got instead was a mortgage he did not understand. Baffled by the loan documents he was mailed after the closing, he consulted a lawyer and learned that he now had an interest-only loan, a new and controversial kind of mortgage. Howard was told that under its terms, his mortgage balance will rise instead of fall and that he will need to refinance in 10 years, when he may be too old to work.”

“‘This is a bunch of junk they done to me,’ said Howard, a construction worker.”

“Howard said he was persuaded to refinance his house by a ‘very friendly’ loan officer who called once a week for a year, telling him the time was right to stabilize his finances. After deciding to take out the loan, he said he told the lender he would need help reading the paperwork at the closing.”

“It is an interest-only loan, which is designed to help wealthy people manage their cash flow, and for people whose incomes are likely to rise, not for those whose incomes, such as Howard’s, are likely to fall as they retire on Social Security. The rate is fixed, but only for 10 years.”

“Jim Sugarman, supervisory attorney at AARP’s financial-abuse unit said Howard appears to have qualified for it with a ‘no-income, no assets’ loan that required minimal income documentation. ‘It’s a very exotic mortgage, and he had no idea he was getting that,’ Sugarman said. ‘He thought he was doing something smart.’”

“Sugarman said that in the past, lenders didn’t make these kinds of loans because they put financial institutions at risk. What has changed is the booming market for real estate securities. Major financial institutions now put thousands of loans together and sell them in slices to investors.”

“The new mortgage products have fueled record profits for the lending industry in recent years. Brokers can generate tens of thousands of dollars in additional fees.”

From the Capital in Maryland. “Michael Bergeson plans to frame his tax assessment notice. The assistant state’s attorney’s modest waterview home on a half-acre lot in Arnold was valued at $281,000 three years ago. His latest assessment weighed in at a whopping $1.8 million, a six-fold increase in value, well above the average 55.5 percent increase seen across the county.”

“Mr. Bergeson will be one of thousands of property owners appealing their home values. ‘If I could sell my house for $1 million less than its assessed value, I’d be happy,’ he said laughing.”

“Nearly 60,000 commercial and residential properties were reassessed last year. The average property assessment statewide will go up 18.7 percent a year over the next three years, a 55.5 percent increase by 2009. The increase is less than last year’s record of 20.1 percent.”

“Norman Hannah plans to appeal his latest assessment as well. ‘It seemed kind of ludicrous,’ he said after his rancher on an acre of land near Route 50 was assessed at $574,000, a 51 percent jump over its previous assessed value.”

“‘Nationwide the housing market’s gone flat,’ the airline pilot said. ‘It’s in a recession.’”

“During the last round of assessments the Hannahs’ home value jumped 49 percent, but the couple didn’t bother to challenge the valuation. ‘My wife was on my case for not appealing that one,’ Mr. Hannah said ruefully as he prepares to challenge his latest assessment. ‘I like Maryland, but if it gets too expensive to live here, I’ll move.’”

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