The Housing Bubble

The Press Democrat reports from California. “Before retiring to Oregon, Bob and Nona Windus put their Santa Rosa house on the market. Now the couple are about to become landlords. Rather than accept an offer for $114,000 under their original asking price, they decided to rent the three-bedroom home and wait out the housing downturn.”

“‘We’re going to camp on it. I don’t want to let it go while the market’s in the pit,’ Bob Windus said.”

“Many never set out to own a rental home, but have become landlords out of necessity. The housing slump, combined with the traditional slowdown in home sales over winter, has led to a surge in the number of rental homes in Sonoma County, said David Rendino, an agent in Rohnert Park, who specializes in residential investment property.”

“Property managers said they are barraged with calls for help in finding tenants and managing properties. ‘It’s been really heating up as people hit winter and pulled property off the market. That’s when everybody decided to quit,’ said Rendino, who also co-owns Liberty Property Management.”

“Trent and Selena Phillips are seeking a tenant for the Windsor house they weren’t able to sell despite cutting the price $90,000. The couple called it home until they bought a house in Vallejo more than a year ago, when Trent Phillips earned a promotion that requires him to commute to Alameda.”

“‘We need to get a renter in there because right now I’m paying two mortgages. Every dollar I have coming in is going right back out the window,’ said Phillips. ‘We’re just barely holding on.’”

“Monthly rents likely won’t match mortgage payments for homes purchased within the past five or six years. But some have decided that renting is a better alternative than letting their homes sit vacant waiting for a buyer.”

“The Phillipses are in such a predicament and figure they have little choice but to be landlords. ‘I really don’t want to have to do it,’ Trent Phillips said.”

“A home they purchased just four hours after it was listed in spring 2004 couldn’t sell after a pair of six-month stays on the market between summer 2005 and December. They cut the price several times for their 1,900-square-foot, three-bedroom home, from $729,000 originally to $639,500 before pulling it off the market.”

“‘We did almost have it sold at one point, but of course it was one of those contingency deals where the guy who was buying our place couldn’t sell his place,’ he said. ‘I’m not going to give my house away. I’m not going to take it in the shorts.’”

“The $2,000 in monthly rent the Phillipses seek falls short of their $2,300 mortgage on the house. But it would ease the financial squeeze on the couple, who face $5,000 in total monthly payments for the Windsor and Vallejo houses.”

“Bob and Nona Windus don’t have to sell their former Santa Rosa home in order to buy a house in Rogue River, Ore., where they now rent. The couple don’t want to forsake the sizable chunk of equity they would lose if they sold during this current housing decline. ‘I’m still looking to sell it, but I’m waiting for the market to make a nice turnaround,’ he said.”

“Their house hit the market for $714,000 in August. Windus said a similar house sold for $740,000 four months earlier. Still, the only offer they received was for $600,000. ‘That was the straw that broke the camel’s back. We didn’t have to sell, so we decided to rent it out,’ he said.”

“Some hope to hold onto their rental units permanently. ‘So far I’m above water,’” said Carmen Nunez, who became a reluctant landlord last month and wants to keep his former home as a rental.”

“After purchasing a 1,500-square-foot, three-bedroom home on more than two acres north of Santa Rosa for $830,000 last April, Nunez turned to sell his former Healdsburg residence. Finding no offers at $685,000, he lowered the price to $650,000, yet still no serious buyers came forward.”

“Nunez pulled it off the market a month ago and found more interest for the house as a rental. He had a tenant within days. The $2,000 rent falls short of his $2,300 mortgage, but it helps Nunez make payments on his two mortgages, which total $7,300.”

“‘In a way I am working for my house. I just have to work harder,’ said Nunez. ‘But I feel it’s going to work out.’”

The LA Daily News. “Last week The New York Times featured an obituary on the late, great condominium market. That’s bad news, for sure. ‘These markets are getting crushed. Regardless of what the NAR (National Association of Realtors) is spinning, nothing is moving and prices are plummeting. Watch out for bank failures,’ Howard K said in an e-mail.”

“There’s an upside, though. The article did not mention Los Angeles. While the aforementioned markets certainly are in distress, Los Angeles seems to be OK, at least for now.”

“Builders are not yet abandoning the sector. ‘They keep pulling permits for them and they are not going to do that if they are overbuilt. There are some very large projects in the pipeline, and it continues to grow,’ said Ben Bartolotto, research director at the Burbank-based Construction Industry Research Board.”

“For example, last year builders in the county pulled permits for 16,277 multifamily units, both apartments and condominiums. That’s 18.1 percent more than in 2005.”

“‘I think you’re going to see sort of a period of moving sideways,’ said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. ‘The (downtown) market has softened up. I think you’re going to see the number of rental units spike.’”

“John Karevoll, an analyst at La Jolla-based DataQuick Information Systems, doesn’t think the Los Angeles area condo market will follow the others into an abyss. ‘The market here is quite different than those markets. That (decline) would probably have to do with new projects that have not had as much interest as they anticipated,’ he said.”

“Buying patterns play a part, too. Karevoll notes that when markets level off, it first happens with discretionary buying - speculating or second homes. Nor does Karevoll believe the downtown market is in for an especially hard time, although it does need some more amenities, like grocery markets, that are conducive to urban living.”

“‘I’m sure it’s not as strong as some of the developers down there anticipated, but I think it will do fairly well over time,’ Karevoll said. ‘Right now there is just a standoff between buyers and sellers.’”

A report from the Wisconsin State Journal. “A housing bubble didn’t burst and the market didn’t crash, but a housing boom of nearly a decade came to an end last year in south-central Wisconsin. The high inventory meant that even attractive homes in desirable neighborhoods sometimes had trouble finding buyers. ”

“David Schield put his house on the market too late to cash in on the housing boom. Schield bought a house two years ago as an investment to fix up, sell and make some money. After the renovation was finished, he listed the house in Madison’s West Side Crestwood neighborhood with a for-sale-by-owner company in April.”

“When it didn’t sell by August, he hired a real estate agent. He reduced the price to $224,500, but the house still hasn’t sold, and he said the house’s ongoing expenses threaten to push him under the break-even point. ‘It took me a little longer to do the work I wanted to do,’ Schield said. ‘I hit the market when it just dried up last year.’”

“When a woman who lived on the other side of Jane Fitchen’s duplex sold her unit after a week on the market last June for the $250,000 asking price, Fitchen decided it might be time to put her unit up for sale. The other woman’s unit didn’t have a remodeled kitchen and bathroom like Fitchen’s unit, so Fitchen priced her unit higher at $269,000. It didn’t sell during the summer or fall and now it’s priced between $239,000 and $259,000.”

“‘It’s been really dismal,’ Fitchen said. ‘What’s really frustrating is the one next door had not been updated at all.’”

“What’s puzzling is that the local downturn came even as interest rates have been stable and employment remained strong, two conditions that usually signal a strong housing market. ‘I don’t know why things have slowed down here,’ said Chad Wuebben, president of the Madison Area Builders Association. ‘I can’t explain it other than people have gotten a little nervous.’”

“Greed, fear and publicity were three factors that contributed to the end of the housing boom, said John Tuccillo, former chief economist for the National Association of Realtors. ‘A lot of people out there decided that housing was a get-rich-quick scheme,’ he said. ‘Ultimately, greed overwhelmed the market.’”

The Capital Times from Wisconsin. “The boom times may be history for the local real estate market, but a leading industry official is optimistic that the worst has passed.”

“‘I think it will be a good year,’ said Realtors Association of South Central Wisconsin executive director John Deininger. ‘Not necessarily another record, but I don’t doubt that it will be in the top two or three (for sales).’”

“The most problematic issue for the industry remains the glut of homes and condos for sale. The 5,211 homes and condos for sale at the end of the year are 29.8 percent more than at the end of 2005 and 105.1 percent more than at the end of 2004.”

“‘The bubble is a coast story,’ he said. ‘I think the slowdown was a fairly soft landing. The question is what will happen as we move into the spring.’”

The Daily Herald from Illinois. “Despite all the hype, Elgin is not a bustling downtown - yet. ‘We were thinking people were going to come through here,’ says Elgin Books co-owner Gloria Theofanis. ‘It seems like they are building (the townhouses and condos), but I don’t know if they are selling them.’”

“‘Unless they are imaginary people buying them,’ she adds.”

“Suburbs across the region have their own fretting small-business owners waiting for customers - waiting for big condo buildings to sell and rows of townhouses to finally fill with families. The months-long housing slump is now threatening the big bets of mayors and real estate planners who are banking on citylike housing and businesses to rejuvenate their decaying downtowns.”

“Certainly not all are in danger of going belly up if the housing slump trips into a free fall, but experts are questioning just how many condos and townhouses the suburban market - especially a slow one - can handle.”

“Some of the numbers that can offer answers aren’t rosy. For example, some suburbs are grappling with a clear backlog of condos. Elgin has a 15-month supply of condos priced between $200,000 and $300,000.”

“Even Arlington Heights, which already has a rather developed and trendy downtown, has a nine-month supply of condos priced between $200,000 and $300,000. And these figures don’t include many condo buildings on the way, or those for sale strictly through the developer or by-owner listings.”

“‘We are definitely in a slowdown,’ said Bob Headrick, a property appraiser and partner at Naperville-based Appraisal Research, which compiles the condo supply data. ‘And in some cases, we are seeing some declining prices.’”

“Both political leaders and developers have inherent incentives to downplay any effect a housing slump may be having on their plans. Such comments, they fear, can scare away buyers. ‘I had a Realtor say to me, ‘I wish the media would stop all this negativeness because it is really hurting sales,’ Headrick said.”

“Some suburban leaders grudgingly concede they’ve had some worries. ‘I would be lying to say there wasn’t some concern,’ says John Lobaito, Mundelein’s village administrator. Mundelein started its bet in 2000, creating a downtown environment built around a village park, village hall, and more than 700 townhouses and condos on 100 acres of an aging industrial park.”

“Sales started on the bulk of the housing in February, and recent reports show 54 of 484 condos are under contract.”

“Most suburban leaders remain outwardly bullish on their downtown markets. ‘I don’t think anybody thinks this is going to be a real bust,’ said Elgin Mayor Ed Schock. ‘I’m not going to panic.’”

“In the coming years, that retiree boom will hit with a force that could both define and defy the market, said Steve Hovany, who has consulted with numerous suburbs on downtown developments. However, that demographic bonus may also be playing a role in today’s less-than-rosy suburban market picture. Most empty nesters must first sell their ranch houses before buying downtown, and a slow market makes that more difficult.”

“‘A lot of these moves are very discretionary,’ Hovany says. ‘In times like these, people put off decisions. ‘About a year from now everyone would have worked out all their issues,’ he predicts, before adding with a soothing voice, ‘This too shall pass.’”

“For Theofanis, though, the more critical question remains not if it will pass, but when. ‘We are running out of time,’ she says sitting in her empty Elgin Books on a weekday afternoon. ‘We are running out of money.’”

A housing report from the Arizona Republic. “A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals. Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona’s real estate market.”

“‘Mortgage fraud in the Valley has become so prevalent people think it’s a normal business practice,’ said Amy Swaney, a mortgage banker and past president of the Arizona Mortgage Lenders Association.”

“Under federal law it is illegal to misrepresent the value of a home to a lender. Everyone who is a party to the deal is subject to prosecution.”

“At a recent Valley real estate meeting with 1,000 agents, mortgage brokers and escrow people, a speaker asked people in the audience if they knew of any cash-back deals in the Valley. All but a handful raised their hands. Many seemed surprised when told such deals are illegal.”

“Last November, a cash-back buyer approached Brett Barry of Realty Executives at an open house in north Phoenix. The home had been reduced to $500,000. The potential buyer said he would pay full price but wanted to raise the sales price $40,000 or $50,000 and have the seller write him a check for that extra amount.”

“‘He wanted the money under the table after the deal closed,’ Barry said. ‘He said he had a lender with an appraiser who could ‘make the deal happen.’ Barry knew the deal was bad but was obligated to present it to his clients, who also thought it was too fishy and passed.”

“Cash-back deals are so common that a variety of Web sites openly promote them. Postings on the popular craigslist.com include individuals trying to sell homes by offering cash-back deals. ‘Anyone in the real estate business who doesn’t know these deals are illegal should get out of it,’ said Margie O’Campo de Castillo of Arizona Dream Realty. ‘These kind of bad deals will hurt everyone in the industry and the housing market.’”

“The Republic investigation found neighborhoods in Gilbert, Queen Creek, Mesa, Laveen and Surprise where speculators bought groups of homes at prices significantly above asking prices and neighborhood comps: a sign regulators consider a strong indicator of cash-back deals.”

“The Republic found one new neighborhood where a group of buyers has been selling and reselling homes to one another. According to public records, members of this group paid higher than asking prices using high-interest and adjustable-rate mortgages. They own almost 25 percent of the houses in that neighborhood.”

“Tom Ruff is a real estate property record expert. At the Republic’s request, he also analyzed the property records that suggest an ongoing cash-back scheme in the new neighborhood studied by the Republic. He called what he saw ‘a house of cards’ that will soon collapse on the speculators but end up hurting other homeowners more.”

“The extent of the damage from such deals is uncertain because the state task force investigation is just starting, but some believe it is Valley-wide. ‘The scams have created false appreciation for the Valley’s real estate market,’ said Diane Drain, a Phoenix real estate attorney who specializes in foreclosure cases.”

“Valley housing-market experts now believe home values are inflated anywhere from 10 to 40 percent. The recent drop in home values, about 5 percent in 2006, is part of a market correction. Ironically, cash-back deals that inflate sales prices may have cushioned the fall so far. But as those bad loans come due, they will contribute to the drop.”

“Calls about cash-back deals began reaching examiners at the Department of Financial Institutions and Swaney at the Arizona Mortgage Lenders Association in late summer and fall of 2006. The calls were from homeowners, real estate agents and lenders asking if the cash-back deals were legal. The number of calls has increased every month.”

“Rotellini of the Arizona Department of Financial Institutions said her agency now receives calls every day on cash-back deals.”

“In 2005, loose lending standards helped the mortgage industry post record profits and struggling buyers purchase a record number of homes, (and) also helped speculators and scam artists snap up Valley homes. The hyperdemand created by speculators played a major role in the rapid rise of Valley home values.”

“According to mortgage giant Freddie Mac, at least 35 percent of all homes sold in metro Phoenix during 2005 went to speculators and investors. Investors accounted for more than 20 percent of Valley home sales last year.”

“As the hot housing market cooled in 2006, business fell for everyone in the real estate industry, including appraisers and real estate agents. Some started looking for new ways to make money. Cash-back deals became a way to keep commissions and fees coming in.”

“Less than a decade ago, home buyers had to put at least 10 percent down on a mortgage, show all types of proof of income and even how they earned the money for the down payment. Now, buyers are getting into houses for nothing down and with little proof of income.”

“But the many easy-to-get, adjustable-rate loans available also have opened the door for the housing market’s downfall. Now, their interest rates and payments are climbing, while their incomes aren’t.”

“‘Adjustable-rate mortgages work for some people who understand them, but there are Valley homeowners who don’t and now are on the verge of losing their home,’ said Jay Luber, vice president of First Horizon Home Loans of Phoenix.”

“Like regular buyers, speculators and housing scam artists are having trouble making their payments as interest rates on their loans rise. And finding a buyer to pay the inflated price they need to cover their loans is getting tougher. The number of homeowners with multiple Valley properties falling into foreclosure also is now rising, according to property records.”

What do you see in your housing market this weekend? Are prices falling? “Tucson home sales and prices fell during December, while days on the market rose, all evidence of a continuing slowdown in the local housing market. That means the market is improving for buyers, they have more negotiating leverage, and sellers may not make as much as expected on the sale of their homes.”

“Median home price fell $3,000 from November to $215,000, an indication that sellers are dropping their prices, according to a report issued today by the Tucson Association of Realtors.”

From North Carolina. “Sales of existing homes fell for a third consecutive month in December as the Triangle’s housing market continued to weaken. Compared with a year ago, buyers closed on 13 percent fewer homes, the inventory of unsold homes rose 6 percent and the number of sellers cutting their listing price to lure buyers jumped 7.5 percent, according to the Triangle MLS.”

“‘Now we can say the Triangle has joined the rest of the country with a declining housing market,’ said Michael Helmar, an economist for Moody’s Economy.com. ‘Sales are actually lower, not just growing slower than they were.’”

The latest legal action? “Despite a flurry of convictions that have included 15 local mortgage brokers, nine loan officers and six appraisers, fraudulent home loan deals continue to fuel Indianapolis’ high foreclosure rate.”

“Michael Smith is the 58th person convicted of fraud since a federal task force convened to look into real estate fraud in central Indiana, U.S. Attorney Susan Brooks’ office reported. Those schemes have depressed property values for nearby homeowners, cost lenders more than $40 million and riddled neighborhoods with abandoned houses, aggravating problems in older, deteriorating neighborhoods.”

“‘There are so many of these foreclosures. But they’re in small quantities. No one is watching,’ said Indianapolis real estate agent Margaret Huddleson.”

“Phillip Hill and 11 co-defendants were crowded with their attorneys in the large ceremonial courtroom at the Richard B. Russell Federal Building, making the start of the trial look more like a business seminar. That courtroom was the only one that could accommodate the overstocked defendant pool in a trial that is expected to take three months.”

“Hill, a real estate developer, is charged with overseeing an enterprise where he used ’straw’ buyers to lend their names to purchase properties that he then resold for much higher, and artificially large, amounts, Assistant U.S. Attorney Barbara Nelan told jurors.”

“Hill would then pocket the money and the properties would usually go into foreclosure, prosecutors alleged. To pull off the scam, Hill, who has pleaded not guilty, needed a team of appraisers, attorneys, brokers, recruiters and straw buyers working in concert, Nelan said.”

“Prosecutors told the jurors that Hill’s enterprise ‘flipped’ more than 50 houses and 250 condominiums in the metro Atlanta area.”

A housing report from the Baltimore Sun. “Steve and Debbie Lombel put their four-bedroom Colonial in Odenton on the market in May, figuring it could take maybe four months to sell a house in the mid-$800,000 range. But eight months later, the now-empty house is still sitting on the market.”

“The couple and their children have since relocated to temporary quarters in South Carolina for Steve Lombel’s job. They have borrowed from their anticipated equity and sale to build a new house. Their agent has held 21 open houses. They’ve cut their asking price three times and now are offering to pay mortgage loan points.”

“Such is life after the housing boom. Sales of homes across the Baltimore region plunged 19.34 percent last year from 2005. As listings mount, an unprecedented number of unoccupied homes for sale are piling up, creating unexpected headaches for homeowners.”

“The number of vacant homes for sale nationally jumped more than 30 percent in the third quarter from a year earlier, to 1.9 million homes. That’s about half of all single-family homes on the market, said Michael Carliner, vice president of economics for the National Association of Home Builders.”

“More than a third of those, 825,000, are in the southern region of the United States, which includes Maryland.”

“‘The share of vacant for-sale is unusually high, compared to anytime in history, really,’ Carliner said. ‘Over the past few years, total housing production has been beyond what the underlying fundamentals would indicate.’”

“Local real estate agents say the surge in unoccupied homes is apparent across all price brackets in the market. ‘A lot of people are calling me concerned; they’re carrying two mortgages and that’s not fun,’ said Frank Lanham, a real estate agent based in Fells Point. Nearly half his listings are unoccupied houses.”

“‘The longer homes for sale remain vacant, the more desperate on average become the sellers,’ said economist Anirban Basu in Baltimore. ‘The growing number of vacant homes means more sellers out there are ready to be realistic about the market to drop prices.’”

“And buyers, sensing weakness, tend to pull back and wait for prices to fall more, he said: ‘If buyers are waiting longer, then an increasing number of homes become vacant, which means sellers become desperate and prices fall further. That’s where we are in the cycle.’”

“Agents say that vacant homes for sale are often a result of job relocations that force the seller to move before the house can be sold. And in other cases, buyers decide to buy before they’ve sold their house to take advantage of a deal but then have trouble selling a then-unoccupied house, agents said.”

“‘I do have one listing now where the buyers have already purchased a home and moved into it, which is happening more often now,’ said agent Lisa Edleman. ‘And I’m showing buying clients more unoccupied homes as well.’”

“Buyers often sense a level of desperation in the sale of a vacant house, even when a seller is determined to hang on as long as it takes to get the asking price.”

“‘Sellers like the Lombels are between a rock and a hard place,’ said the couple’s agent, Lore Peterson,. ‘They’re caught in a situation like many sellers where the prospective buyer that’s buying and has a piece of property to sell wants to make sure they have an offer on their property first. If the property the prospective buyer is selling isn’t moving, the [sellers] are stuck.’”

“Waiting it out led to many sleepless nights for seller Dan O’Connell. O’Connell and his wife, who had decided to downsize, put their house in Bel Air on the market last May. In June they found a house they wanted to buy in Sparks. They settled on their new house in July, still without a single offer on their Bel Air house.”

“‘We didn’t want to lose the house in Sparks,’ said O’Connell. ‘I just never thought it would take this long to sell our house. There was a lot of borrowing from Peter to pay Paul.’”

“The couple moved to their new house in August, hoping that the Bel Air house would have a better chance selling as a vacant home. At the beginning of September, they found a new agent and drastically reduced their price, by $73,000, to $302,000.”

“‘At some point you’ve got to cut your losses,’ O’Connell said. ‘It was costing so much a month to be carrying three mortgages,’ totaling more than $3,000 monthly, including the old mortgage, the new mortgage and payments on a bridge loan.’”

“The price reduction worked. O’Connell sold his house last month and now feels relieved to have that experience behind him. ‘It was extreme anxiety, and I was short-tempered,’ he said. ‘It just was hanging over my head constantly. I kept hearing, ‘It will sell, it will sell,’ but when? The hardest thing was, how low do you go with your price, and at what point do you decide it’s costing me money to get a certain price? I had to accept the fact that it’s gone to being a buyer’s market.’”

“The Lombels feel confident that their latest incentive, offering a buydown on a buyer’s interest rate, will bring an offer. Otherwise, they too will have to lower their expectations. ‘In February, we would have to re-evaluate and see where things are, and if we would reduce it more or try another incentive,’ Debbie Lombel said.”

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