The Housing Bubble

The Sacramento Bee reports from California. “James and Beth Fullenwider are living inside a bad dream growing ever more familiar across the Sacramento region: Their 2,400-square-foot house in Elk Grove is slowly slipping away from them. They can’t afford their $3,300 monthly payment.”

“‘If the credit people had really looked at our situation, they would have laughed and said, ‘You can’t come close to qualifying for this,’ says James Fullenwider. ‘We’re in a house we have no business being in.’”

“He says the couple didn’t read the home loan’s fine print. Only after moving into the $500,000 home last August did they learn the loan agent inflated their income to qualify them for the financing. ‘But we were stupid to do it,’ Fullenwider says.”

“In markets like Sacramento, already heavy with excess resale inventory, some speculate that stressed owners will hand more homes back to banks and aggravate the oversupply. Since the high inventory of houses for sale already is depressing prices, a run of foreclosures would likely further depress them.”

“Last week, DataQuick reported 865 foreclosures in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties during the fourth quarter of 2006, nearly doubling from the previous quarter. DataQuick also reported 3,071 notices of late mortgage payments, known as notices of defaults, during the same period.”

“Economists say areas like the Central Valley that had an explosion of new houses and now wrestle with falling home values are particularly vulnerable to ‘payment shock.’ Many ARM borrowers owe more on their loans than their houses are worth. They can’t sell and they can’t refinance into cheaper loans, which raises their risk of foreclosure.”

“‘For people in adjustables especially, if they owe more than their house is worth, they’re going to have little reason to stay and kill themselves to make that mortgage payment,’ says Vicky Henderson, senior loan consultant at Sacramento’s Vitek Mortgage.”

“In 2004, about 65 percent of homebuyers in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties used adjustables. The next year, the total jumped to 73 percent before falling back to 62.5 percent from January through November 2006, according to DataQuick.”

“That’s about 135,000 ARMS in the last three years, with thousands of them adjusting upward in 2007, according to Loan Performance. Data-Quick analysts said thousands more used ARMS in refinancing loans.”

“Loan Performance estimates that in 2005 as home prices peaked, nearly one in five borrowers used even riskier Option ARMS. In the first nine months of 2006, one in four Sacramento-area borrowers were using them, Loan Performance estimated.”

“The Fullenwiders, who received an interest-only loan, considered walking away from the house and becoming a foreclosure statistic. But real estate agent Mike Toste of Antelope is trying to save them with a short sale.”

The Press Enterprise. “No longer are builders and land developers heatedly competing to pay top dollar for the thousands of acres of prime land straddling western Riverside and San Bernardino counties. Now some developers who negotiated options to buy dairy land at rates of $500,000 to $800,000 an acre are feeling buyer’s remorse.”

“‘The perception is that the housing market is glum,’ said Sybrand Vander Dussen, a land broker and president of a dairy farmers trade organization.”

“Many builders don’t want to buy more, particularly not at yesterday’s prices that now look overly inflated, brokers say. Dairy land prices peaked in 2005, and since then have dropped by half, said David Arnold, president of Hillcrest Homes. Another developer, Tom Dallape, estimates the decline is closer to 20 percent.”

“Arnold and developer Steve Hathaway said they forfeited an option on 90 acres in Chino rather than pay prices of as much as $800,000 an acre they had accepted at the top of the market. They declined to say how much they had paid on the options.”

“In December 2005, Richland Communities, a Newport Beach developer, agreed to buy just under 18 acres in Ontario from Wilbur Bootsma’s family dairy for about $500,000 an acre, Bootsma said. But when the Bootsma family declined to lower their price or extend the option period, Richland Communities walked away from more than $1 million in deposits, said Bootsma.”

The Orange County Register. “Many of Orange County’s boldest lenders are struggling to stay in the black, and in some cases to stay in business, as their customers miss mortgage payments in record numbers. ‘What’s become clear is a whole bunch of people signed up for loans or were sold a loan they really couldn’t afford,’ said Richard Eckert, an analyst in Newport Beach.”

“Perhaps most troubling, loans made by Orange County companies in 2006 were among the quickest to see defaults, data show. And many of those subprime companies, which tend to cluster here in Orange County, are in trouble.”

“UBS analyzed subprime mortgages made in 2006 and found that borrowers were missing payments on loans made that same year at the highest rate since 2000. In fact, UBS found subprime loans made in 2006 are on track to be the worst-performing loans ever issued.”

“So what went wrong, exactly? Lenders made two mistakes, according to UBS and other analysts. They didn’t scrutinize borrowers’ incomes, and they allowed subprime borrowers, who by definition have had past problems with their credit, to take on lots of risk.”

“Borrowers took advantage of ’stated income’ loan programs, where they simply tell lenders what they earn, said David Liu, director of UBS’ mortgage strategy group. Consumers thought home prices would keep climbing, which would enable them to sell or refinance if they got into a jam, analysts said. But stalling or falling home prices last year changed all that, UBS’ Liu said. Borrowers quickly began to miss payments.”

“‘They lost the motivation or incentive to send in the checks,’ Liu said.”

“Bad loans aside, mortgage companies face a tough environment this year. The combination of tighter underwriting standards and investors losing their appetite for risky loans could drag down volume, analyst Bose George said.”

“George said lenders last year went well past their pool of ideal customers. ‘Now on the edges, they need to retrace and cut out borrowers who shouldn’t really be taking mortgages,’ George said.”

“UBS’s David Liu said subprime lending is still a somewhat crowded field. Nationwide there are 40 to 50 big subprime lenders, so a few closing their doors or being sold won’t solve the oversupply problem, he said. ‘You probably need more dramatic changes in the market,’ Liu said.”

“In any case, job growth in Orange County will slow this year as a result of cutbacks by real estate-related companies, including mortgage lenders, said Esmael Adibi, at Chapman University in Orange.”

“Mortgage-related companies could shed 2,000 to 3,000 local jobs this year, he said. That comes on top of cuts last year. State figures show lending support positions, including mortgage brokers, dropped 13 percent for the 12 months ending in December, or a total loss of 1,800 jobs.”

“‘Overall, this sector is going to feel like a recession,’ Adibi said of mortgage firms. ‘You should expect to see a much weaker employment base in all of the sectors related to real estate.’”

Readers suggested a topic on when loan standards changed. “Here’s my question for the gang - when did lending standards start changing so much? I was involved in real estate 20 years ago, mostly as a property manager, but also doing some sales in Capitol Hill/DC, a lot of shells and distressed stuff that was being rehabbed by investors.”

“I remember how difficult it was to get ‘investor’ loans back then, and that rental income was really discounted in terms of qualifying, etc.; as a result, we did a lot of seller-financed deals with a baloon in 3 to 5 years (usually paid off in a year or two when the property was rehabbed and sold).”

“When did it start becoming easy for folks to get these low- and no- doc loans and by 3, 5, 10 — whatever — properties to try and flip? I’d love a history of the change in standards if someone has some good insight — who (agencies/companies) started this shift?”

A reply, “read the Community Banking Bill. Then 911 came and then it was the excuse to open ALL flood gates.”

One had more questions, “I want to know who started the low down stated income loans and when did appraisers start coming in on any sale .I also want to know why the lenders didn’t think it would be risky to sell to short term investors on low down loans etc. From what I have seen so far the lenders just stopped underwriting loans based on ‘real estate always goes up.’”

“Just because the money was there from the secondary market ,it didn’t mean the lenders should of been entitled to stop making prudent loans and resort to fraud and liar loans to meet the quota. The money would of gone to a better place and we would not of had this run-up like we did.”

One took a shot, “Not sure when it started, but I believe that there was a great acceleration in lender stupidity after 2003. Summer 2003 was when fixed rate mortgage rates hit their nadir, and the only way for prices to continue to appreciate was either wage inflation or lowered lending standards. Well, we haven’t had double digit wage increases.”

Another went further back, “I think it started (just a little bit) in 2001 or before. By 2003, ANYONE who wanted a mortgage could get one.”

The Denver Post. “Coloradans are rightly concerned that foreclosures are at an all-time high. But as we confront this problem and consider what we can do about it, it is important to provide some context.”

“Colorado’s lenders offer mortgages to people who would never have qualified two decades ago. Two in five Colorado home loans are considered high cost (also known as sub-prime) and we shouldn’t be entirely surprised by the result.”

“Prime, fixed-rate mortgages have a foreclosure rate of about 2.5 percent, fairly consistent with historical trends. But for sub-prime loans, the foreclosure rate is about 8 percent. That’s the cause of our historically high rate of foreclosures.”

“In the aftermath of Sept. 11, interest rates plummeted. Many people got themselves into variable rate mortgages, attracted by the low initial rates, only to see their monthly payments double and sometimes triple in the last few years after rates began to rise again.”

The Napa Valley Register. “Real Estate Broker Chuck Sawday attributed part of the city’s appreciation to interest rate levels. ‘More people were able to buy homes because of low interest rates. That pushed a whole new group of people into buying their own home. Then, the person who just sold moves up,’ adding to more sales, he said.”

“Robin Rose, Coldwell Banker Brokers of the Valley general manager, said new mortgage products and lender competition have also spurred activity. ‘(This) resulted in increased money available for buyers,’ said Rose.”

“Realtor David Barker identified 2001 as a pivotal year for real estate. ‘What really took the market off was after Sept. 11 when the Federal Reserve dropped (interest) rates. That kick-started the housing market. Money was very cheap. It was easier to get a loan.’”

“‘As with any investment there are fluctuations in the market,’ said Rose. ‘So, while sales did decrease, 2006 represented the third-best existing home sale market on record. Remember that 2005 was the record year, so to see a drop off from record levels is not a surprise.’”

What do you see in your local housing market this weekend? Have a home link? “It is roughly the same size as a prison cell. But a Chelsea bolthole, which needs rewiring, refurbishing and totally redecorating, is the latest home conversion to go on the market and is expected to fetch a minimum of £170,000.”

A business development? “Wachovia Corp. has closed its subprime mortgage lending division, EquiBanc Mortgage. Wachovia decided to close the business after ‘an intensive strategic review of its mortgage business, which has altered the company’s approach to the origination of nonconforming loans.’”

“Battered by the slowest housing market in years, Pulte Homes yesterday announced that it would shut down a three-year-old manufacturing plant in Manassas where it once hoped to build many of its Washington area homes.”

“‘Overall costs were higher and that was something that Pulte Homes could not pass on to homebuyers,’ said Melanie Hearsch, a Pulte spokeswoman.”

How about sales? “Home sales slumped in Maine for the second year in a row in 2006, according to statistics released Friday by the Maine Association of Realtors. ‘It’s all good for buyers, as they have a good number of homes from which to choose and sellers are more motivated than they have been in the past,’ said Alan Peoples, president of Home Sellers of Maine.”

“For years, a shortage of houses for sale in Greater Hartford helped create a frenzied housing market. Last year the opposite was true as the inventory of single-family homes for sale inched toward record-high levels. ‘But there is still six months of inventory on the market, which is a buyer’s market. And come spring, those inventory levels could pop up again,’ said Ron Van Winkle, a West Hartford economist.”

Signs of speculation? “Local statistics show Houston is different from other markets, which have been facing slumps in home sales and prices. Those coming from pricier markets like California, with ‘truckloads of money, look at Houston as an absolute bargain,’ said Rob Cook, chairman of the Houston Association of Realtors.”

“Sugar Land resident Henry Rothschild bought one condominium in Galveston last year and has put down deposits on two others. His three-bedroom unit in Ocean Grove is on the market for $380,000. He paid $260,000 for it in 2006. ‘Demand is so great,’ he said of Galveston. ‘Everyone wants to go there.’”

Or falling prices? “‘Let’s say, for example, there were 200 people in the (higher-priced) market two years ago,’ said said Colin Mullane, an agent in Ashland and a member of the Statistics Committee of the Rogue Valley Association of Realtors. ‘If there were 200 in the lower-priced market, about 100 of those went away.’”

“Total home sales in Jackson County dropped by 32.5 percent, from 4,159 in 2005 to 2,805 in 2006. Median prices fell from $295,000 to $275,000. Mullane suggested falling prices on the low end might have hurt some sellers who didn’t have a great deal of equity in the house even after a year or two. If a home was bought for $210,000, Mullane said, the seller wasn’t necessarily in a position to sell it for much less than $190,000.”

The Gazette reports from Colorado. “Nancy and Dana Barber realized they had to do more if they hoped to sell their four-bedroom, four-bathroom home. Last year, they installed oak floors, kitchen appliances, bathroom floor tile, a furnace, central air conditioning and window coverings and painted the inside. The tab: $26,300.”

“‘We’re moving,’ Nancy Barber said. ‘We have to sell it. In my opinion, it had to be as perfect as it could be for someone when they walk in the door.’”

“But up to now, few people have. The Barbers have had only three showings and no offers since the home went on the market nearly seven weeks ago. At the start of 2007, nearly 1,000 more homes were listed for sale by area real estate agents than a year earlier in Colorado Springs and the Pikes Peak region — a 25 percent jump in supply that’s given buyers a chance to be picky.”

“Home sales in December were down 24.5 percent from the same month a year earlier, according to the Realtors Association.”

“‘There’s too much inventory,’ said (broker) Joe Clement. ‘It’s common sense that it’s more toward the buyers’ side. It’s not like prices are collapsing and there’s a desperate feeling. But it’s just that there’s so much competition out there, and so the buyer can get a very, very good deal.’”

The Denver Post. “Colorado suffers from a high foreclosure rate today partly because the national lending industry misread the Denver market, an expert told a Denver task force on foreclosures.”

“Lenders engaged in ‘parachute financing’ throughout the West, swooping in, believing there was money to be made in fast-growing states with rising house prices, Tom Clark, a VP of Metro Denver Economic Development Corp., said.”

“Kathi Williams, director of the state Division of Housing, warned that Colorado’s foreclosure epidemic is far from over. ‘We have over 37,000 loans delinquent in Colorado as of today,’ she said, including more than 10 percent of all subprime loans to higher-risk borrowers.”

The Review Journal from Nevada. “For all of 2006, Las Vegas had 36,051 new home sales, down 7 percent from the previous year. The resale market hit the skids in Las Vegas as inventory grew to more than 21,000 and homes sat on the market for six months without getting a bite.”

“The resale median of $285,000 is unchanged from a year ago. ‘It’s so useless to generalize, since the market here is so diverse. We keep hearing about median prices going up, but all it means is that the few houses that sold have more above that median than below. That figure says nothing to the average home seller who keeps dropping his price and has had no offers for six months,’ Kurt Lehman of Realty One Group said.”

“Lehman found 1,454 single-family homes that closed escrow in December. The MLS showed 656 contingent sales, which means they’re in escrow but open for backup offers, usually indicating the buyer must still qualify for the loan or has another house that must be sold first.”

“Jeremy Aguero of a Las Vegas research firm, said he expects existing home prices to go negative in the first and second quarters this year. ‘Realistically, housing prices have already dropped 7.5 percent,’ he said.”

The Reno Gazette Journal from Nevada. “Builders’ tighter budgets caused by the housing slowdown continued to weigh down the Reno-Sparks office market in the fourth quarter, according to two separate reports.”

“In the fourth quarter, Grubb & Ellis reported that 18.8 percent of office space was vacant, while Colliers reported an increase in the vacancy of garden office buildings, common in south Reno, to 16.5 percent.”

“‘I think we are going to see this for awhile,’ said Brian Armon, at Grubb & Ellis. ‘There was a big push when the residential market was growing so rapidly and we had new companies coming in, which were primarily the national home builders. All of those now have significant amounts of sublease space on the market that they acquired when they thought they were going to continue to grow at that pace.’”

“‘The major corporations that are here are real quiet. They are just waiting to see what the (national) economy does in 2007, and it’s 50-50 whether we have a small recession or moderated growth,’ said Tim Ruffin, senior VP of Colliers’ Reno office properties group.”

The Arizona Republic. “Metropolitan Phoenix’s ailing home-building business got a prescription for a return to health Thursday, but some of the medicine may be hard to swallow.”

“Analysts RL Brown and Greg Burger told a crowd of about 1,300 housing and development professionals that Phoenix’s new-home market will get better after this year. But that is expected to happen only if builders get serious about such things as reducing speculative-home inventory and prices.”

“And they decried the threat from ‘financing from Disneyland’ that offers exotic mortgages to underqualified buyers. They also emphasized that the depth of the damage caused by mortgage fraud hasn’t been calculated. ‘The challenge isn’t over yet,’ Brown said.”

“He estimated that as many as 25,000 unsold spec homes are sitting on the market, the result of buyers backing out of deals when they couldn’t sell their existing homes.”

“Here are some items on Brown’s list of the market’s cracks. New home developments too quickly became resale communities as early investors competed with builders. The Valley’s loss of its affordable edge compared with other big cities.”

“More risky mortgages. They have opened the door to allow investors to buy multiple houses and other home buyers to potentially commit fraud and put struggling buyers into more house than they can afford. The collapse of the resale market due to too many overpriced listings.”

“And here’s what Brown believes needs to happen for the market to come back. Home builders have to get rid of their excess inventory, all the spec homes sitting empty and unsold. Reposition edge subdivisions to give buyers more value or, in my words, cut home prices on houses far from jobs.”

“Builders pulled more than 60,000 permits for new homes in both 2004 and 2005, but this year’s slowdown cut the number drastically.”

“The analysts expect permits to total 41,000 this year and 44,000 in 2008. They expect the market to hit 47,000 permits in 2009 and 50,000 in both 2010 and 2011 as the market recovers.”

The News Press reports from Florida. “The price of a home in Lee County has almost doubled during the past five years, despite a softening of the market throughout 2006. Liz Paul, a real estate agent in Fort Myers, said it’s important to put the turbulence of the past five years in context.”

“‘Prices didn’t go anywhere for the longest time,’ she said. ‘Some people bought in 1988 or ‘89, and they were sometimes taking a loss if they sold in 1996 or 1997.’”

“For some local homeowners, it’s already too late. Teresa Tarr lost her job with a title company last year when the housing market slowed and hasn’t been able to get work since. She and her husband would like to move out of Florida but know it won’t be easy to sell their northwest Cape Coral house, which they bought in 2003 for $129,000.”

“In late 2005, it was worth about $300,000 based on sales of comparable houses nearby, Tarr said, but now ‘it’s a buyer’s market’ and she’s not sure what it will bring. ‘People are being disillusioned about so-called paradise,’ she said.”

“Ed Bonkowski, a Fort Myers-based real estate broker, said it’s not clear how many speculators will default on their loans for houses and condominiums. He noted that many banks failed in the early 1990s when they lent money to developers who went under after prices fell in the late 1980s. Condominiums were the hardest hit.”

“‘I guess the question is whether that’s going to happen again. We’ll see where the banks will be if there’s a rapid foreclosure run. How many foreclosures are we going to have? That’s still unknown,’ Bonkowski said.’

“Chuck Novy retired and bought a condominium off Beach Parkway in Cape Coral 19 years ago for $60,000. Novy, who spends four months a year in the Cape, doesn’t intend to sell but said he sees signs of stress on some of his neighbors. He worries that rising property taxes spurred by higher values will drive some off.”

“‘I think Florida’s going to find the goose that lays the golden egg is gone,’ he said.”

“‘It’s been my experience watching people buy and sell that you can always tell the ones who are looking to flip a house — they’re bitching about what prices were six months ago. I’m not going to complain about something I never had in my hand,’ (said) Frank Alexander.”

“Nowhere were prices more volatile than in Lehigh Acres. John McWilliams, broker in south Fort Myers, said a typical quarter-acre lot went for $2,000 five years ago, spiked up to $50,000 in mid-2005 and now would go for $11,000 to $13,000.”

“The main difference between Lee and Collier is that Collier buyers are more likely to pay cash, said (realtor) Keith Hopkins in Naples. As a result, he said, owners in Collier are less likely to sell at bargain basement prices now that the market has gone south.”

“‘The people who have cash to put down have more wiggle room. They usually have more income — they can get some breathing room,’ Hopkins said.”

“Hopkins said one house in Stoneybrook in Estero sold for $250,000 early in 2005 and was appraised at $380,000 at the end of that year. The same house now would sell for about $310,000.”

The Herald Tribune. “The allure of a handy profit with no money down was too much for some of those now caught between Bradenton’s Coast Bank and St. Petersburg’s Construction Compliance Inc.”

“Mike Wood, a Zephyrhills resident, is one of those investors who might just walk from his unfinished homes. Wood contracted with CCI to build two houses in North Port neighborhoods in 2005. He was told about the investment possibility from a friend who worked for American Mortgage Link in Tampa. Wood then told 20 friends and relatives, who also leapt at the chance of making $30,000 to $40,000 with no money down.”

“‘All I had to do to complete the deals was to show that I had 10 percent of the value of the home liquid,’ said Wood. ‘I was never asked for the money. I never paid one red penny out of my pocket.’”

“American Mortgage Link processed all the paperwork and handled the closing, and the loan was financed by Coast. Wood said the deal was a no-brainer because he would be getting a house for 10 percent less than its appraised value and would have no out-of-pocket expenses.”

“‘With the market going up, there was a built-in profit of 10 percent and the potential to make 15 to 25 percent more based on appreciation rates at that time. I could make as much $40,000 on the flip, and in the worst case I would have to hold the property for a while,’ he said.”

“Equally important, nothing would show up on Wood’s credit until the house was completed and transferred to his name. ‘At this point, people have no idea that I have $400,000 in liabilities from a non-income-producing property in North Port,’ Wood said.”

“The company sent out e-mail progress reports. But when Wood visited the properties, he found the company’s statements were inaccurate. ‘They have never touched a blade of grass in the second home,’ Wood said. ‘Two years out and $80,000 drawn against my credit, and all I’ve got is a lot that is worth $20,000 to $25,000.’”

“He said he might be better off walking away from his obligation. ‘I’m not going to convert $80,000 in credit into a lot worth $20,000,’ Wood said. ‘If I walk away, it won’t help my credit. If I was foreclosed on, it would be a bump, but it wouldn’t slow me down. I know a lot of other people in the same position. They are also willing to walk.’”

“Closing costs and interest were paid from the loan itself, Wood said. The initial draw of around $50,000 from Coast was used to pay all the commissions to mortgage brokers, title agents and others associated with the closing.”

“Additional money from subsequent draws went to pay subcontractors. But in the case of Wood’s second home in North Port, CCI withdrew $80,000 from Coast and has not spent a penny on construction. ‘The lot hasn’t even been cleared yet,’ he said.”

“Michael Pacheco got involved in a large, Long Island, N.Y., real estate investment club in 2005. Members of his investment group began talking about the incredible deals being offered by Seashore Real Estate, a Bluffton, S.C.-based real estate investment firm.”

“For an initial investment of $10,000, Pacheco could get a team of real estate, mortgage and home building experts to build a house and sell it at a $40,000 profit before construction was finished. Pacheco put in orders for two houses in early 2006.”

“‘I never saw the properties,’ Pacheco said. Pacheco said he never expected the real estate market to tank or to be sitting on overpriced property.”

“Pacheco said he is not waiting to see whether things pick up again. ‘I’ve hired counsel to see what the repercussion of walking away from that one,’ Pacheco said of the Advantage property. ‘A lot of other people in the investment club are also seeking counsel to get out of their houses.’”

The Naples News. “When Collier County commissioners decided a few days ago to kill a proposal to charge linkage fees on new development, Commissioners Donna Fiala and Fred Coyle both made statements that suggest they don’t believe there is an affordable housing crisis in Collier County.”

“Coyle said there are homes on the market that aren’t being sold that qualify as affordable housing.”

“Fiala said her problem with the affordable housing situation is that she doesn’t know how big a problem it really is. Everywhere she goes she sees homes for sale, and ‘for rent’ signs, Fiala said. ‘There’s a glut of homes on the market,’ Fiala said. ‘Golden Gate, Immokalee and East Naples have hundreds, maybe thousands of people living in affordable housing that we don’t count.’”

“The views of Fiala and Coyle appear to have ticked off fellow Commissioner Jim Coletta, who does believe there is an affordable housing crisis in Collier. ‘There wasn’t any staff to correct what was being said,’ Coletta said.”

“While home prices have dropped, it’s unrealistic to think prices will continue to drop long-term, Coletta said. ‘I know it was a crisis up to six months ago,’ Coletta said. ‘I can’t say what it is now. But it’s still a problem that a lot of smart people are working on.’”

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