The Housing Bubble

The Daily Bulletin reports from California. “The number of homes entering the first stage of the foreclosure process in San Bernardino County jumped 140 percent in the October-to-December period last year to 3,538, compared with 1,473 in the fourth quarter of 2005. It was even worse in Riverside County, where the number of default notices nearly tripled from 1,607 in the last quarter of 2005 to 4,528 last quarter, according to DataQuick.”

“Since the intoxication of the real estate boom and easy loans has passed, many homeowners have discovered a hangover of sorts settling in. ‘In the next couple of months, I’m going to be forced out of this home,’ said Eastvale resident Hector Gomez, who had a notice of default filed against him last month. ‘I’m a first-time home buyer, and these people know the system and they’ve taken me for a ride.’”

“As prices soared, lenders were all too willing to offer 100 percent financing or other creative loans. But the urge to get in before it was too late was overwhelming for many.”

“‘Buyers got nervous things would get out of reach,’ said Bobbie Kay Forbes, a Realtor in Grand Terrace. First-timers with no down payments were offered 100 percent financing, reserved in the past for high-income families only, she said.”

“Gomez said his mortgage payments turned out to be much more than his income and certainly higher than he and his loan officer had agreed upon. When Gomez contested the amount, he was directed to the contract, which he had signed.”

“‘It’s in the documents, but it’s hidden. … They used my ignorance against me, and they abused my trust,’ said Gomez, who said he also lost his job due to the stressful ordeal. ‘They take advantage of people hungry for their own home,’ he said.”

“Bill Velto, manager of Tarbell Realtors in Upland, said he attributes the climb in homeowners defaulting on payments to ‘unscrupulous lenders’ over the past several years. ‘You don’t even have to be licensed to do loans in the state of California,’ Velto said. ‘The banking industry got too loose with their guidelines and let people use 50 or 60 percent of their income on house payments,’ Velto said.”

“Gomez said he is busy trying to keep his family’s dream house. The idealism he felt when purchasing his house less than a year ago has since given way to frustration. ‘I’m trying to say I can’t pay this amount and I need you to give me options,’ Gomez said. ‘The only way the bank will help me is if I come up with large amounts of money or I’ll get no equity out of the home.”

“‘If a person is not able to afford a home, they shouldn’t have gotten it in the first place,’ he said.”

“Nearly half of all Americans believe the housing market is poised to go from bad to worse over the next few years, according to a new survey.”

“Leo Nordine, a Redondo Beach, Calif., real estate agent specializing in bank-owned properties, says the sentiment jibes with what he’s seeing in Southern California’s once-scorching real estate market. ‘I’ve been through a couple of these cycles already,’ Nordine says. ‘And I think this next one will actually be worse. The buyers are controlling the market now.’”

“Nordine thinks the Southern California market will decline over the next few years, with prices eroding about 10% each year. As prices have softened, he says, many sellers are already pulling their houses off the market.”

“Meanwhile, another market is heating up: Nordine gets about one new listing a day from banks that are foreclosing on properties. ‘We’ve become a debtor nation,’ he says.”

The Ventura County Star. “Faced with a tough year in the housing market, Countrywide Financial Corp. is striving to find ways to become leaner and more efficient — including continuing to move jobs out of California. The Calabasas-based company is the nation’s largest mortgage company, with about 5,850 employees in Ventura County and Westlake Village.”

“‘We’ve been very diligently working on moving employees out of California,’ CEO Angelo Mozilo said.”

“The company made significant job cuts this year as the housing market slowed. Countrywide spokesman Rick Simon said after the earnings call that he could not comment on job movements. ‘Certainly, the company’s long-known policy of focusing its growth at corporate facilities outside of California is still in force,’ he wrote.”

The Recordnet. “Dolly Cruz, a Bay Area investor who a year ago bought a single-family home in Lathrop’s Mossdale Landing development for $625,000, figures if she had to sell now, she would lose $100,000.”

“The house is rented out at $1,500 per month - not even enough to cover the mortgage payment, she said, but she is still confident in the long-term real estate market and isn’t upset about the slowdown.”

“‘Even though the price is down, you’re not losing anything if you’re not selling it, is the way I look at it,’ Cruz said.”

A housing report from the Arizona Republic. “Valley housing analyst RL Brown said Chandler will see more high-density housing as well as developers building on the smaller lots they ignored before. Construction of high-density housing has begun. Condos are being built downtown and at Fulton Ranch.”

“Not only are builders running out of space, but the glut of existing homes for sale has been dampening the market for new homes, said Hank Pluster, interim long-range planning manager.”

“In recent months, prices have been falling or staying flat, depending on the area of the city, according to Realty Studies and Bill Ryan, a broker in Chandler. ‘If you bought in mid- to the end of 2005, you probably have experienced a loss in value,’ he said.”

“As gasoline becomes more expensive, homes closer to the heart of the Valley have become more popular, as opposed to those in Queen Creek and especially Johnson Ranch east of there. ‘The farther out you go, the harder they have been hit,’ said Gina McKinley, a Chandler resident and real estate agent.”

The East Valley Tribune from Arizona. “Developers took out 2,275 building permits for homes in December, a 55 percent drop from the same period the year before, according to analyst RL Brown. New home sales also sagged last month, down 26.6 percent from December 2005.”

“‘2006 activity will cause the industry to pause and rerecognize that housing in this market area has to be affordable,’ Brown said.”

“The dramatic run-up in prices during last year’s housing frenzy was not sustainable, he said. Home sellers will need to price homes according to today’s market or withdraw their listings, Brown said. Builders must also be more realistic if they plan on staying in business, he said.”

“‘I think 2007 is the year that everybody needs to be very careful and watch,’ he said.”

The Reno Gazette Journal from Nevada. “The median price of an existing single-family home in Reno-Sparks fell again in the fourth quarter, continuing a trend of falling prices and sales throughout 2006.”

“During the fourth quarter, the median price fell to $314,250, down 11 percent from the same quarter in 2005 and down from $324,500 in the third quarter, according to the report by the Northern Nevada Regional MLS.”

“And the number of sales continued to show weakness, slumping to 929 during the last three months of 2006. That’s down 22 percent compared with the fourth quarter of 2005, according to the report.”

“Reno, which has the most expensive homes of the three areas, had a median price of $375,000 during the quarter, down 9 percent for the fourth quarter of 2005. Sales in Reno fell 25 percent to 489 during the quarter, according to the report.”

“Sparks’ median price dropped 10 percent to $295,000 on 267 sales, down 17 percent. The North Valleys’ median was $257,000, down 12 percent, while sales dropped 20 percent to 173 for the three months.”

“‘2007, we’ll see some further weakness in prices mainly because people are getting squeezed by the creative financing that they used to buy some of these houses,’ said Tom Cargill, economist at the University of Nevada, Reno. ‘Though we’re not near as bad as Las Vegas, there is still a speculative element here that has driven up prices.’”

The Wall Street Journal on Las Vegas. “As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the mortgage industry is trying new strategies to help bail them out. The rise in bad loans is leading to a pick up in so-called short sales. Sheldon Klain, a manager in Dallas, wound up saddled with loans on two homes last year and now is trying to arrange a short sale of one of them.”

“Mr. Klain got into trouble after he moved to Dallas from Las Vegas to take a new job. He bought a home in Dallas, thinking he had found a buyer willing to pay $475,000 for his Las Vegas home. The sale fell through at the last minute and Mr. Klain found himself stuck with two homes and behind on payments on the Las Vegas house.”

“Mr. Klain says his Las Vegas house is valued at $419,000, according to a recent bank appraisal, well below the $440,000 he owes on the property. ‘The dump in the market put us behind the eight ball,’ he says.”

“There can be downsides for borrowers to short sales. Under certain circumstances, the debt forgiven by the bank may be taxable to the borrower. What is more, convincing a lender to go along with a short sale can be difficult, and borrowers who have a mortgage and a home-equity loan may have to negotiate with two lenders or two departments of the same bank.”

“‘There are all sorts of log jams,’ says John Izzo, the agent handling the sale of Mr. Klain’s Las Vegas house. Mr. Izzo says he is currently working on 19 short sales, but figures just ‘one in five might be successful.’”

Some housing bubble reports from Wall Street and Washington. Origination News, “Countrywide CEO Angelo Mozilo estimates that 40 to 50 subprime firms are going out of business each day, a trend that likely will continue all year. During a conference call discussing Countrywide’s earnings, Mr. Mozilo, in response to a question, said analysts are seeing reports of two to three firms failing each day, but that the number is much larger.”

“Addressing the carnage in the subprime sector, Mr. Mozilo said, ‘I think we have a way to go on that.’”

The LA Times. “Bottom-fishing in especially turbulent waters, several Wall Street firms have purchased specialists in ’sub-prime’ loans to risky borrowers — a business that Mozilo said Countrywide has backed away from as loan delinquencies have shot up.”

“‘In terms of the Wall Street houses, some will succeed and most will not,’ Mozilo said, citing as an example of the latter Merrill Lynch & Co.’s loss of a $100-million investment in Agoura Hills-based sub-prime lender Ownit Mortgage Solutions Inc.”

“When Merrill cut off funding in December, Ownit filed for bankruptcy protection. The filing showed that Merrill also held $93 million in soured loans it had purchased from Ownit.”

“JPMorgan Chase & Co. is cutting its exposure to subprime mortgages amid deteriorating industry conditions that are proving troublesome to a growing group of lenders.”

“JPMorgan CEO James Dimon said in an investor presentation Tuesday that the company has sold off most of the mortgage loans it made last year to people with weak credit histories. He said mortgages are the one area of subprime lending where ‘we really see something taking place that looks like a recession.’”

“JPMorgan said in the presentation that ‘loss severities’ in subprime mortgages have started increasing, and that delinquencies of subprime loans originated last year are higher than the 2005 and 2004 vintages were at a comparable age. In the fourth quarter, JPMorgan saw net charge-off rates on subprime mortgage loans leap to 0.6 percent from 0.1 percent a year earlier.”

“When it released its fourth-quarter earnings earlier this month, JPMorgan boosted its retail bank’s provision for loan losses to $262 million from $158 million a year earlier, due in part to what the bank described as ’some deterioration in subprime mortgage.’”

From Reuters. “Tighter mortgage underwriting to the riskiest homebuyers has helped improve loan quality but has far to go before defaults are reduced to acceptable levels, according to some of the biggest subprime issuers.”

“Lenders including New Century Financial Corp. and Accredited Home Lenders Holding Co are scrambling to reduce the number of early defaults on their loans that surged at rapid rates in 2006. Investors are increasingly forcing lenders to buy back the loans, hurting profits and prompting originators to improve quality at the expense of volume.”

“‘We haven’t seen the turnaround yet,’ Brad Morrice, CEO of Irvine, California-based New Century, told investors. New Century has a rate of ‘first payment defaults’ of about 2-1/4 percent, up about a percentage point from two years ago.”

“At Accredited, bonds supported by loans to borrowers who stated, rather than proved, their incomes dropped to 23 percent from 37 percent over the course of 2006, Stuart Marvin, Accredited’s executive vice president of finance, told investors. Sacrificing volume to tighter underwriting has become a necessary choice, he said.”

“Other Wall Street analysts expect efforts by lenders will have only a small impact since too many loans are still being made to people who can’t afford them. Lenders changing their underwriting criteria is ‘like moving the deck chairs on the Titanic,’ (said) Chris Flanagan, head of asset-backed securities research at JPMorgan.”

“‘It’s incredible to me that there’s a notion of a significant tightening’ in underwriting, he said.”

“Morrice at New Century said the company hasn’t completed changes to underwriting standards to reverse the rapid rise in defaults from low rates in 2003-2005. ‘We suspect things are going to get somewhat worse before they get better, and we are planning accordingly,’ he said.”

The Baltimore Sun. “Black & Decker Corp. reported yesterday that the housing slump continued to cut into sales and earnings and said more restructuring could be on the way.”

“Nolan D. Archibald, Black and Decker’s CEO, told analysts during a conference call that the housing slowdown resulted in fewer orders from key retailers, which forced the company to scale back production to keep inventories in check.”

“‘As we had announced in December, we faced a very difficult market environment in the quarter, resulting in a significant decrease in sales and earnings,’ he said.”

From MarketWatch. “3M Co. said Tuesday that downturns in the housing and automotive markets chilled fourth-quarter earnings growth, and shares of the blue-chip conglomerate lost more than 5% as its outlook disappointed investors.”

“‘The dramatic slowdown in the U.S. housing and automotive markets had a significant negative impact on sales and gross margins in a handful of our divisions,’ CFO Patrick Campbell said.”

“U.S. Treasury Secretary Henry Paulson said on Wednesday that he is working to create a strong regulator for mortgage finance companies Fannie Mae and Freddie Mac.”

“‘I was encouraged by some of the progress late last year we made,’ Paulson said. ‘We’ve got a lot further to go.’”

The TC Palm reports from Florida. “Affordable housing, welcome to Vero Beach. Centex Corp., is offering new single-family homes in the VeroLago subdivision starting at $158,990. The three-bedroom, two-bathroom home was first offered at $218,000 in November.”

“Don Santos, past president of the Treasure Coast Builders Association, said the new price points will certainly attract more traffic into the model homes, which could translate into buyers. ‘I think in today’s market, price is the determining factor on whether or not someone buys a home or not,’ Santos said. ‘I think they’ve realized that they if they want to continue selling homes, they have to come down in prices.’”

“(Broker) Sally Daley in Vero Beach agreed, but questioned if flippers and speculators who bought during the boom years will also be willing to lower their prices. ‘Only time will tell as both investors and developers have shown a willingness to offer both incentives and aggressive pricing to sell their properties,’ Daley said. ‘There are a ton of investor-owned properties currently on the market that are direct competition for new developments like this.’”

“Helene Caseltine, development director at the Indian River County Chamber of Commerce who has pushed for more work force housing in Vero Beach sees the pricing as a positive. ‘I think it’s a step in the right direction,’ Caseltine said. ‘I think it’s great, but I hope it’s just the beginning.’”

The Herald Tribune. “The idea of buying houses in Southwest Florida with no money down and making tens of thousands of dollars by selling them before construction was even done obviously appealed to a lot of investors nationwide.”

“Hundreds of investors from California to New Jersey jumped at the opportunity to sign contracts with St. Petersburg-based Construction Compliance Inc. and Enchanted Homes and Advantage Builders of America in Fort Myers. But with the real estate market in general retreat, CCI is now in deep trouble.”

“Advantage’s customers are not satisfied. They say Advantage did not begin building their homes as planned, and officials at the Fort Myers company have been unreachable.”

“Bruce Steifman of Old Bethpage, N.Y., found out about Enchanted Homes from a representative of Seashore, a company that made a presentation to his Long Island real estate investment club. For a reservation fee of $12,000, Seashore representatives promised to handle everything about Steifman’s investment.”

“The problem, Steifman said, is that when he contracted with Seashore and Enchanted in early 2006, it looked like the real estate market in Southwest Florida was still strong. ‘Most investors took $12,000 out of their pockets and expected to make $50,000,’ Steifman said. ‘They figured they would never have to close. But now, because the market has turned, there’s an abundance of inventory and houses are not worth what they were.’”

“‘I’m caught in it, too, but I don’t think anyone misrepresented anything,’ he added.”

“Both Seashore and Enchanted met their obligations, Steifman said. The only company that the New York investor is worried about is Coast Financial Holdings, the Bradenton-based holding company of Coast Bank. ‘I’m just going to pay off my loan to Coast and get some sort of creative financing,’ Steifman said.”

“‘My house got finished,’ said Craig Rymal, a Bluffton, S.C.-based home builder, who contracted with Enchanted to build two houses in Cape Coral. Like other Enchanted investors, Rymal was hoping to sell his houses at a profit, but he is prepared to rent them for a while. ‘The market is just as slow up here in South Carolina.’”

The Sun Times. “It was late November in 2005, and Dan and his wife saw what they thought would make a good holiday gift to themselves within a year or so. They picked out a condo they liked, that seemed like it would return a handsome profit in short order.” “After running the numbers over and over for the next few weeks, they convinced themselves that they had made the right decision. So they bought three more virtually identical condos in the same location.”

“I was telling Dan’s tale to Connie, my friend and a real estate investor. ‘Once you convince yourself that you have made the right decision,’ said Connie, ‘it is natural to try to multiply that.’”

“In one condo association I studied, at least four couples made the same move that Dan and his wife did. They each bought four condos. Others bought three of the same; still others bought two of the same. Now there are 48 of those you-can’t-miss-with-these condos on the market at the same time.”

“I have a good friend and client who is an astute investor. His name is Red. ‘Most people run into a problem because they buy one piece in one market. If the market goes sour, or it happens to be a questionable buy, they get hurt,’ said Red. Maintenance costs, interest on the mortgage, taxes, lawyer’s fees and real estate commissions start eating quickly into the hoped-for profit, Red said: ‘Soon these investors have a loss on the books and are bemoaning their fate.’”

“‘With two partners, I bought two pre-construction homes in Lee County. We were supposed to close this month and decided that the market had declined so badly we would be better to walk away from our down payment than to hang tough and maybe have a bigger loss down the road,’ Red said.”

“What’s Red’s opinion of the Naples market now? ‘This is a fabulous time to buy in Naples, because the forecasts for continued growth are positive and the prices are low,’ Red said.”

The Journal News reports from New York. “The median price of a single-family house declined last quarter in Westchester County for the first time in nearly 12 years, and further price declines can be expected early this year, the Westchester-Putnam MLS said yesterday. Buyer resistance to relentlessly escalating prices finally broke through the market in 2006, the MLS concluded in its quarterly report.”

“Inventories rose and sales dropped for every type of housing in Westchester and Putnam in the fourth quarter of 2006, year over year. Westchester’s median house price of $630,000 was down 3.4 percent from a year earlier. Condominium median prices dropped by 2.3 percent to $375,000. Year-end inventories of all housing types grew by 20.9 percent in Westchester and 14.9 percent in Putnam.”

“Many sellers today are demanding prices that their neighbors had obtained during home sales of a year earlier, said P. Gilbert Mercurio, CEO of the Westchester-Putnam Board of Realtors. In the meantime, some buyers ‘think there are fire sales going on,’ he said. ‘They’re waiting each other out,’ he added.”

“Clare Santora said she put her three-bedroom raised ranch in Cortlandt on sale in late September for $469,900. She has since dropped the price to $440,000. One buyer backed out of a deal in the fall, she said.”

“‘Most of the problem I’m having is people think the taxes are too high,’ said Santora. With the state STAR tax-relief program, the taxes are $8,900, she said.”

“Agent Cathy Duff-Poritzky said sales strategies have changed. ‘It’s not 2005 or 2004, when things were flying off the shelves. I think it’s a very normal market,’ she said.”

“Nicholas Misch, an associate broker in Yorktown Heights, said buyers are waiting on the sidelines for now. ‘Obviously the market’s lost a lot of steam. It’s a good thing,’ he said.”

“The good news is that the Lower Hudson Valley hasn’t experienced the overconstruction of new housing that has led to boom-and-bust cycles in areas such as Florida, California and Nevada, the report said. The region’s ‘true vulnerability’ lies in the high prices that housing commands.”

The Republican from Massachusetts. “Real estate is considered a somewhat reliable investment: homeowners expect to buy low and sell higher, but the equation isn’t foolproof.”

“Consider, for example, the fate of homeowners who are forced to sell a house purchased in the midst of a real estate boom that later went bust. They’re faced with the predicament of having bought high, and being forced to sell for lower than the balance on their loan.”

“With the median price of a single-family home increasing annually for 12 years, many people who were priced out of the market were enticed in with attractive loan offers including adjustable-rate and interest-only mortgages. Unfortunately, for many it was a ticket to a foreclosure auction.”

“Foreclosure petitions soared nearly 70 percent in the Bay State in 2006, capping the end of the worst year for the state’s housing market in over a decade, according to figures compiled by The Warren Group. And foreclosures are expected to climb again in 2007.”

“It’s a phenomenon that seems to occur every decade or so, and, for many Massachusetts homeowners, the time is now.”

The Daily Democrat from New Hampshire. “Dickinson Development Corp.’s waterfront plans are built on a foundation of high-end residential housing units expected to sell for a much greater amount than the current Dover market sees.”

“The current draft of the proposed development still includes the roughly 180 residential units, but their makeup has changed and the price has gone up. The plan now includes townhomes, condos and flats, which will range in price from $379,000 to $700,000.”

“During an interview at Foster’s Daily Democrat last week, Mark Dickinson, company president, said the condos would start in the $400,000 range but during a phone interview today Dickinson said the price was $379,000. Dickinson said the earlier reporting of figures was incorrect.”

“‘The residential pricing of $265 per square foot is a reasonable estimate, but one subject to considerable deviation,’ the August report said. ‘This is because, despite a thorough investigation of the local and comparable markets, only relatively indirect market comparables with prices ranging well above and below the estimated level were uncovered.’”

“The city’s consultant’s report noted that should pre-selling the units not achieve the targeted prices, ‘the development could be delayed or abandoned with the loss only of up-front risk capital.’”

“According to the city’s assessing office, the average assessed value of condominiums in the city is increasing, but has yet to top $200,000. The most current data comes from 2007, where the average condominium rings in at $175,326. Consultant Barry Abramson’s report notes Dickinson’s condo prices are ‘well above the prior top of the market in Dover.’”

“President Mark Dickinson agrees there is currently nothing comparable in the city of Dover. ‘We are definitely creating a market,’ Dickinson said.”

“Dickinson’s report calls into question the quality of the construction. ‘We consider the pro forma’s construction cost estimates, especially for the residential component, at $100 to $118 per square foot of gross habitable building area, to be lower than we would expect,’ the report said. ‘This raises a question about the quality of construction.’”

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