The Housing Bubble

The Associated Press reports on California. “California lawmakers on Wednesday began considering restrictions on unorthodox mortgage-lending practices that have allowed hundreds of thousands of Californians to buy homes they otherwise could not afford. About half of all new home loans in California are something other than the traditional 30-year fixed loan.”

“‘The exposure to these sorts of products, the growth, is unprecedented,’ Raphael Bostic, an associate professor at the University of Southern California School of Policy, Planning and Development, told a Senate committee. ‘The regulatory oversight of these types of practices is relatively lax.’”

“In September, five federal regulatory agencies issued guidelines calling on federally regulated lenders to better gauge borrowers’ ability to pay before using the nontraditional loans. California is considering similar rules for state-regulated lenders, as have 24 other states, said Sen. Michael Machado.”

“About 60 percent of sub-prime loans in California those given to the highest-risk borrowers allowed them to pay only the interest or gave them that option on an adjustable rate mortgage, the Federal Deposit Insurance Corporation estimated. Many of those borrowers are at risk of losing their homes as the market continues to stagnate, witnesses said during Wednesday’s hearing.”

“About 12.5 percent of riskier mortgages nationwide were delinquent by last fall. Nearly 1 million homeowners nationwide either lost their homes or missed monthly payments from July to September, according to the Mortgage Bankers Association.”

“‘The market did not save them,’ testified Pam Canada, executive director of Neighborhood Works Home Ownership Center in Sacramento. ‘This was a nightmare with no happy ending.’”

“‘We’ve already seen a dramatic increase in foreclosures here in California,’ said Paul Leonard, California director of the Durham, N.C.-based consumer advocacy center.”

“Lenders and brokers defended the creative loans, noting that they have helped hundreds of thousands of families own their own homes. ‘The problem is that many consumers have not prepared an exit strategy,’ said Ed Smith Jr., CEO of Plaza Financial Group Inc. of San Diego.”

The Norris Group. “Those considering buying into the real estate ’soft landing’ scenario ought to think twice. There will soon be over $1 trillion of adjustable mortgage payments increasing beyond the payment capacity of the borrower. Many borrowers, upon realizing that the monthly payment is about to adjust, will go searching for loan programs similar to their original loan.”

“New ‘guidance,’ handed down by the Office of Federal Housing Enterprise Oversight Committee, requires…the borrower must now qualify as if the adjustable loan had already changed to the highest rate possible under the loan program.”

“It has been estimated that 90% of all people who obtained these ’stated’ income loans lied on their mortgage application about how much they made. On October 1, 2006, the IRS updated their capacity to respond to lenders’ requests verifying borrowers’ ’stated’ income. In short, what used to take months to respond to will now take two days. Inside of 48 hours, the ’stated’ income will be verified as false. How will these people qualify then?”

“According to RealtyTrac, lenders who foreclose on a property in Ohio get 57% of appraised value when they sell the property. That amounts to a 43% hit on principal!”

“Consider the inevitable: You have buyers in the market with a choice of inventory, which do you think they’ll buy? A lender-owned property at a big discount or one owned by a private party for near full price?”

“In California, unsold inventory has grown by over 100% in one year. Thus far, there has been limited price damage because almost all of the properties for sale have been privately owned. In 2007, that will change. The new inventory for sale will consist of lender-owned properties, builder auctions, and short sales. All of these sellers will be selling to a less motivated, smaller group of less-able-to-qualify buyers.”

The Union Tribune. “San Diego County’s economic indicators declined in December for the ninth month in a row because of sharp dips in job openings and homebuilding, the University of San Diego reported in its monthly economic forecast.”

“‘The predominant issue is the housing market,’ said USD economist Alan Gin. ‘The numbers last year were about as bad as people thought they would be. The worry is that housing is going to take the rest of the economy with it.’”

“Three of the six leading indicators were negative in December: building permits, unemployment insurance filings and help-wanted advertising. Home-building permits in December were 37 percent lower than in December 2005. The total number of residential units authorized during 2006 was the lowest annual total in a decade. Permits for single-family homes were down 40 percent for the year.”

“In the meantime, the real-estate decline appeared to have a negative effect on local employment. San Diego help-wanted advertising dropped for the fourth month in a row in December, partly because of a drop in ads from architectural firms.”

“Unemployment claims have been rising since April, reflecting layoffs in construction. About 7,400 construction workers and 900 real estate workers have lost their jobs since June.”

Feom KCAL 29. “Fears of a potential housing price collapse are greatest on the West Coast, where 52 percent of consumers believe a housing bubble burst is likely, a survey shows.”

“Nearly half of all American consumers, 47 percent, say a housing price crash is likely in their local real estate market within the next three years, according to a survey from Costa Mesa-based Experian and Gallup. This is up from the 37 percent of Americans who felt this way in May 2005 and the 42 percent voicing the opinion in April 2006.”

“Renters think that such a drop in housing prices is more likely (57 percent) than do homeowners (43 percent).”

“‘Housing market conditions may not have reached bottom at this point, with 57 percent of renters thinking there is the potential for a price collapse in their local areas over the next few years,’ Ty Taylor, president of Experian Consumer Direct said.”

The Des Moines Register reports from Iowa. “Homebuilding activity in Iowa dropped 15 percent last year, new U.S. Census data show, with most major cities having declines that ranged from 10 percent in Cedar Falls/Waterloo to 26 percent in Iowa City.”

“Last year, builders used incentives, offering perks that ranged from upgraded appliances, closing costs and paid association fees to a leased Mercedes, to reduce the number of new homes in the market.”

“The ‘gloom and doom’ of other larger, more volatile markets has made buyers much more cautious, said Colin King, president of the Des Moines builder association’s board.”

“‘A year or two ago, a couple would start building their house, then put their old house on the market,’ said King. ‘Now, couples are waiting until they sell their existing homes before starting construction. They’re willing to move twice, just to make sure their house sells and they don’t have two house payments.’”

“He expects ‘overwhelming’ inventories in the middle market to shrink with continued job growth and low interest.”

“Tom Stevens, owner of TS Construction in Johnston, said he and others expect inexperienced builders to exit the slower market. Stevens said the rush to capitalize on the boom in 2005 contributed to the number of homes in the market.”

The Detroit News from Michigan. “The best that can be said about the Metro Detroit housing market is that some of the worst may be over. And the worst that can be said is that the rest of the worst is yet to come.”

“The only number that went up wasn’t a good one. That’s the number of homes listed for sale, and it soared across southeast Michigan by a staggering 41.2 percent.”

“‘I never saw values go down like this,’ says Steve Cole, a 32-year real estate veteran in Birmingham. ‘This year will be the bottom. We’ll probably see an increase in sales numbers, but I don’t think we’ll see an increase in home values.’”

“Another issue that could continue to hit the market is the rising number of foreclosures. One of every 21 Wayne households entered foreclosure last year, the equivalent of 40,219 households.”

“At the moment, foreclosures aren’t tapering off, says Doug Schrandt of Life Properties in Chesterfield. His firm works with Macomb County owners who are in danger of losing their homes to foreclosure. ‘We have a steady 60 to 70 homes a week,’ Schrandt says. ‘Some areas are really suffering, like Eastpointe and the areas closer to Detroit.’”

“The foreclosure market could improve as auto-related job losses slow down. Or it could increase as more adjustable-rate mortgages continue to reset, hitting struggling homeowners with rising monthly payments that may push their house payments beyond reach. ‘We’ve got lending institutions to blame as well as the auto companies,’ notes Karen Thomas, an associate broker in Commerce Township.”

“Higher-end homes will continue to stay off the market unless homeowners are desperate. Cole just handled the sale of a Birmingham home for more than $600,000 where the owner still had to bring nearly $80,000 to the closing to cover the shortfall in what he owed to the bank.”

“‘If buyers don’t buy now,’ says Cole, ‘they’ve got to be crazy.’”

The Business Review from Michigan. “Housing starts are down and builders are glum, but 2007 promises better times, one economist says. ‘The demand side is good — it’s the supply side we’re working on,’ National Association of Home Builders forecasting director Bernard Markstein III told builders and associates.”

“But the economy and house inventories weigh heavily on local builders’ minds, he reported, judging from responses to this year’s HBA survey. Members indicated that the area is indeed overbuilt, that sales and profits didn’t live up to expectations for 2006 and that the 2007 outlook is weak across all house price ranges.”

“‘2006 was a year to forget, and it was a year we did not expect,’ Erickcek said.”

The Ann Arbor news from Michigan. “Some Pfizer employees are already meeting with Realtors about listing their homes, fearing a glut of houses in an already slow real estate market will drive prices down or make it difficult to sell their properties.”

“‘We do have a number of Pfizer clients who own two properties - they bought a home last year and haven’t sold their (other) home yet,’ said (realtor) Martin Bouma in Ann Arbor.”

“Bouma said the day the news broke, he had several non-Pfizer clients calling in a panic, wanting to lower their homes’ prices to sell it quickly before a perceived glut of Pfizer homes hit the market. ‘I said, ‘Take a deep breath and let’s keep this in perspective.’”

The Daily Herald from Illinois. “Officials of the Federal Reserve Bank of Chicago called on state agencies to clamp down on lenders that make high-risk mortgage loans to people who can’t afford them.”

“In a conference at the bank on Wednesday, Federal Reserve examiner John Taylor said states need to put more resources into examining the lending and marketing practices of mortgage brokers before a rash of delinquencies and foreclosures do severe damage to housing markets. Mortgage brokers are regulated by states, not federal agencies.”

“‘I’m very concerned that there’s a ticking time bomb in (loan) portfolios,’ Taylor said.”

“Christen Wiggins of Neighborhood Housing Services of Chicago Inc. said part of the problem is the fact that the pitch of lenders is pretty simple: lower your monthly payment. The warning material provided by organizations like the Fed is often hard to understand, containing terms like ‘negative amortization,’ Wiggins said.”

“John Bellini at Farmington Hills, Mich.-based Paramount Bancorp Inc., said his bank does not lend to the highest-risk borrowers, but does offer non-traditional mortgages. He said they have to in order to stay competitive.”

“Michael Mangin, executive VP of retail lending at Marquette National Corp., said non-traditional mortgages were originally created for investors who would purchase property using low initial payment rates, renovate, and flip the property before the loan reset to higher payments.”

“But now those loans are marketed to everyone, even people with bad or no credit. He said that tighter regulation would push out the bad seeds.”

“I think it’s fair to say this isn’t an issue that’s going away any time soon,’ said the Federal Reserve’s Taylor.”

The New York realtors have their December numbers out. “The New York housing market continued to slow down as the year drew to a close with sales falling 19.2 percent in December 2006 compared to the same time period in 2005. The statewide median selling price dropped 14.2 percent in December 2006 compared to December 2005.”

“‘Clearly, there was no ‘bursting bubble’ in the New York housing market in 2006,’ said Charles M. Staro, NYSAR chief executive officer. ‘The market stabilized as expected in 2006 with a slowdown in sales price and a return to balance between buyers and sellers.’”

The Star Ledger from New Jersey. “In December, contract-sales activity ran 2 percent higher than December 2005, ‘providing solid evidence that home buyers are begin ning to re-enter the housing market in response to lower home prices and continued low mortgage interest rates,’ the Otteau Valuation Group said.”

“Still, not all is well on the housing front. Indeed, a key indicator of market strength is the Unsold Inventory Index, which currently stands at a 10.6 months, as compared with 7.8 months one year ago, ‘which far exceeds the balance point at which home prices will rise,’ the Otteau Valuation Group said.”

“‘Therefore, while recent market improvements may signal the end of the housing decline, it should not yet be interpreted as a return to higher prices,’ the report said.”

“‘Keep in mind that these improvements have been fueled pri marily by lower home prices suggesting that Right-Pricing! remains the key to successful home marketing,’ he said.”

The Eagle Tribune reports from Massachusetts. “The number of homeowners who lost their homes to foreclosure reached a 10-year high in Rockingham County last year.”

“More than 250 homes were seized in the county’s 38 towns in 2006, almost triple the number of foreclosures in 2005, according to Cathy Stacey, Rockingham County Registrar of Deeds. Officials blame popular ‘exotic mortgage offers’ for the growing number of foreclosures in the most expensive housing market in the state.”

“Stacey said 253 homes were foreclosed in the county last year, but that doesn’t include hundreds of homes that are at risk of foreclosure or petitioned for foreclosure. State officials said they don’t know the number of petitions filed by mortgage companies last year, but they do know the list is growing.”

“In Massachusetts, state mortgage lenders reported there were 18,926 petitions to foreclose on homeowners last year, compared to 11,155 in 2005.”

“Granite State officials said there is not one particular demographic that is highest at risk of foreclosure. Rather, it’s those who take out mortgages they know exceed their ability to pay, but they find lenders willing to grant them anyway.”

“Other homeowners were investors who may take out a balloon loan. The idea is to resell the home before the balance is due. ‘But that doesn’t always happen,’ said Jane Law, spokeswoman for the New Hampshire Housing Financing Authority. ‘If you’ve taken out a balloon (loan) and you’re in the home for five years and haven’t moved out, it’s going to catch up to you.’”

“The majority of homes that are foreclosed on belong to homeowners who take out adjustable rate mortgages, according to James Kenney, president of a foreclosure notification service. When the interest rates go up, they’re required to pay anywhere from $300 to $500 more each month, Kenney said.”

“‘Sometimes, even an increase of a percentage point (in interest rates) can kill people,’ Law said. ‘Especially if you’re in the end of the market price you can afford; it can make all of the difference.’”

“Stacey said it often breaks her heart to see foreclosures, but other times she wishes prospective buyers would just smarten up. ‘Quite honestly, people need to learn to say no, but (lenders) make it so hard,’ she said. ‘It’s just like people getting inundated with credit cards - something needs to change because we’re a growing nation of debt.’”

Some housing bubble news from Wall Street and Washington. MarketWatch, “Pulte Homes Inc. swung to a quarterly loss late Wednesday, as the homebuilder took charges to reduce its land inventory in a slumping housing market. The homebuilding pretax income included about $350 million of land-related charges and impairments, the company said.”

“‘Our earnings visibility going forward remains limited due to rapidly changing market conditions and uncertainty regarding possible future land- related charges,’ said CEO Richard Dugas. ‘For the first quarter of 2007, we are providing earnings guidance in the range from break-even to a loss of $.10 per diluted share, exclusive of any additional land-related charges. Given this fluid environment, we are not in a position at this time to provide full-year guidance for 2007.’”

“Pretax margins as a percentage of home settlement revenues for 2006 decreased 880 basis points to 7.2%, reflecting a 600-basis point decline in gross margins from home sales, and lower profitability on land sales. Net new home orders for the fourth quarter were 6,446 homes, valued at $2.1 billion, which represent declines of 34% and 38%, respectively, from prior year fourth-quarter results.”

“Pulte Homes’ backlog as of December 31, 2006, was valued at $3.6 billion (10,255 homes), compared with a value of $6.3 billion (17,817 homes) last year. The cancellation rate, declined to 34.7% in the fourth quarter from 35.8% in the third quarter.”

The Motley Fool. “Fewer homes are selling at lower prices and that’s a margin-crushing disaster for real estate developers like Pulte. For all of 2006, earnings fell to less than half of what Pulte earned in 2005.”

“As a telling sign that homebuilder vision isn’t exactly 20/20, back in June, Pulte was looking to earn between $4.70 a share to $5.00 a share in 2006.”

“Maybe that’s why I’m skeptical when I hear homebuilders call bottom. Backlogs are still diminishing at homebuilders, and cancellations continue. Over at Pulte, the company is closing out the period with a backlog of fewer homes, and at home sale prices that are $5,000 lower, than at this point last year.”

“When will that recovery happen? The only thing I know is that the least credible sources on pegging a turnaround are the homebuilders themselves.”

“The Federal Open Market Committee latest policy statement shows that members are ‘clearly hawkish’ and are ‘proving themselves to be ever so vigilant about inflation,’ said Gregory Miller, chief economist at SunTrust Banks.”

From Bloomberg. “In the year since Ben Bernanke became chairman of the Federal Reserve, the nation’s central bank has led a push by regulators, including the Comptroller of the Currency and the Office of Thrift Supervision, to raise mortgage lending standards, making it tougher for borrowers to get a loan.”

“Reducing the number of people who can secure a mortgage also may threaten the recovery of the U.S. housing market that the National Association of Realtors is predicting for the end of 2007.”

“‘The sub-prime wholesalers who used to be banging on the door have been conspicuously absent in the last few months,’ said Keith Shaughnessy, president Foundation Mortgage Corp.”

“Underwriting standards for sub-prime loans have been too low for at least a year, resulting in loans being issued to borrowers who have little chance of paying them back, Shaughnessy said. That will hurt the insurance companies, pension funds and asset- management firms that are holding some of the U.S.’s $6 trillion of mortgage-backed securities in their portfolios, he said.”

“‘There’s a monster beneath the surface of the financial markets,’ Shaughnessy said. ‘No one knows when or where the credit crisis is going to rear its ugly head.’”

“Investors are demanding an average 1.6 percentage points more than benchmark rates to buy BBB-rated bonds backed by sub- prime mortgages, up from about 1 percentage point in August, data compiled by Barclays Capital show. Investors seek ’significantly’ higher yields to own the securities whose underlying borrowers struggled to meet their obligations within a year of taking the loan, according to Barclays Plc.”

“Since July, when ABX indexes based on 20 sub-prime mortgage securitizations created in the first half of 2006 debuted, the annual cost of credit-default-swap protection on BBB bonds bought with contracts tied to one of the indexes has about doubled to more than 3 percentage points, according to Barclays.”

“The percentage of borrowers as of September who had fallen at least two months behind on sub-prime mortgages taken out last year was the highest ever, twice the average, according to data compiled by UBS AG.”

“FMF Capital Group is a residential mortgage lending company that originates and funds primarily nonconforming or ‘nonprime’ mortgage loans in the United States and sells those mortgage loans to institutional loan purchasers.”

“Today the Board of Directors has accepted the resignation of Edan King as Co-CEO of FMF Capital Group effective January 31, 2007. Robert Pilcowitz will continue to serve FMF Capital Group as CEO and will waive his compensation until further notice.”

“FMF Capital LLC, the operating company, has continued to tighten its mortgage lending guidelines and reduced its corporate staffing levels in response to mortgage industry developments and institutional investor requirements.”

The Daily Advertiser. “Martco is closing its oriented strand board plant here, company officials said. The closure will eliminate about 190 jobs, according to Martco Limited Partnership.”

“In announcing the shutdown, officials noted that in the past six months ‘the nationwide housing market has plummeted and is not expected to rebound in the near future. … Due to continuing low OSB prices and the negative financial impact of OSB operations, Martco OSB plant is ceasing operations, closing its facilities, and reducing its work force.’”

The Oregonian. “Weyerhaeuser announced Wednesday that it would close its Bauman sawmill near Lebanon on March 30, laying off 70 employees. The announcement follows Weyerhaeuser’s decision in December to close two other Oregon mills: a plywood mill in Springfield, which employed 86, and a veneer plant in Coburg, which employed 42.”

“The Bauman mill, built in the late 1940s, produces timber and lumber for residential and commercial construction. It is being permanently closed, Weyerhaeuser spokesman Mike Moskovitz said. ‘I think everybody’s surprised,’ Lebanon City Manager John Hitt said. ‘We hate to see those jobs go.’”

The LA Times. “Members of the Senate Banking Committee said Wednesday that they would quiz the regulator of mortgage finance company Fannie Mae about approving more than $14 million in pay for the current chief executive.”

“The pay for CEO Daniel Mudd was ‘astounding’ since the company has not yet emerged from an accounting scandal that has so far forced the company to restate $6.3 billion in earnings from 2001 to mid-2004, Sens. Chuck Hagel of Nebraska, John E. Sununu of New Hampshire and Mel Martinez of Florida said in a statement.”

“Office of Federal Housing Enterprise Oversight Director James Lockhart defended his agency’s decision to endorse the pay, saying it was ‘comparable’ to pay for heads of similar-size banks and insurance companies.”

“Still, Lockhart said, excessive pay is a concern ‘because excessive compensation can lead to excessive risk-taking, and excessive risk-taking can lead to the kinds of problems they’ve had in the past.’”

The Herald Tribune reports from Florida. “Over the past few years, Chris Fountain and her husband bought 10 small parcels in the largely undeveloped eastern section of North Port, part of the couple’s plan to dabble in Florida real estate. Like other speculators in North Port real estate, they now find themselves in a double bind.”

“As the value of their property rose so did their tax bills. Now, people like Fountain and her husband are facing their highest tax bills ever in a market where selling would likely mean taking a loss.”

“In 2005, 2,100 lots sold in North Port. Last year, 380 sold.”

“Fountain’s lots are uncleared, lie along badly worn roads, and nine of the 10 don’t have city water or sewer service. Yet the properties will cost Fountain and her husband, Guy Padhaisky, almost $8,000 this year in taxes. Combined with what they will pay for their residence, the couple will give almost one third of their income to various government bodies this year.”

“‘The middle class is just being wiped out,’ Fountain said of small-time land speculators in a city with more than 60,000 empty home lots. ‘We could sell all our lots and still not make any money,’ said Padhaisky, noting that years of taxes already paid and a buyers’ market that is driving prices down would likely lead to a loss if he decided to sell.”

“Jeff Berman and his father, Herb, own more than 200 lots in North Port. In business for more than a decade, the Bermans sold an all-time low four properties last year. Meanwhile they have tax bills totaling $140,000.”

“‘It’s the first year we’ve ever been negative,’ Jeff Berman said. So the Bermans have decided they won’t pay the taxes on about one third of their lots. And they are not alone.”

“‘I’m not going to pay all my taxes,’ said Lanie Campion, a retired man who lives in Sarasota and owns more than 100 lots in North Port. His tax bill for those lots is about $100,000.”

“The only hope for people like Fountain and Padhaisky could be some form of property tax relief. Even if that happens this year, it’s not going to affect Padhaisky’s 2006 tax bills. ‘What is the county of Sarasota doing for me?’ he said, standing on one of the couple’s wooded lots in an area so deserted people dump debris on his land.”

“The loan crisis between Construction Compliance Inc. and Coast Bank of Florida is wider than one bank or one geographic area. A CCI customer who immigrated recently from China and some of his friends have a total of seven CCI homes with construction at a standstill.”

“Another CCI customer from Pennsylvania, Steve Hatch, has seen $110,000 drawn from his Coast Bank loan with only a slab to show for it. That, too, is a story fairly common to CCI customers. But Hatch’s property is in Sebring, not Charlotte County or North Port.”

“Some of the properties of Caijun Sun and his colleagues were not financed by Coast, but by Ohio-based National City Mortgage. On Wednesday he retained Sarasota attorney Alan E. Tannenbaum, a construction law and real estate specialist who represents other CCI home buyers.”

“In September 2005, he contracted with CCI to build a home in the Charlotte County community of Rotonda. Sun made a $17,500 deposit and got a construction loan from Coast Bank.”

“Including his deposits, Sun is now on the hook for $95,000 and says his credit has been trashed. ‘How can something like this happen?’ he asked.”

“Hatch, a Millersville, Pa., resident, is asking himself the same thing. Hatch agreed to invest in another speculative property, one that CCI was supposed to build in Sebring’s Sun ‘n Lakes Estates. That golf resort is owned and operated by National Recreation Properties, the Irvine, Calif.-based company whose TV spokesman is former ‘CHiPS’ star Erik Estrada.”

“Hatch signed the $265,000 contract for the Sebring home on Dec. 20, 2005, and made a $5,000 downpayment. He was stunned to find in December that his account at Coast was drawn down by $110,000. ‘I was freaking out,’ said Hatch, describing himself as ‘having a mental block accepting’ what had happened.”

“‘I will be damned if I take a $110,000 loan for a $30,000 lot,’ Hatch said Wednesday. ‘I’ll walk away, let the bank foreclose and take the hit to my credit.’”

“A visit to the site today revealed that property consists of only a concrete slab. A spokeswoman for the Highlands County Building Department said the slab has yet to be inspected, and because the permit for the work is more than six months old and the site is apparently inactive, more impact fees would be levied against the homeowner.”

“Susan Matyi, a Jacksonville, Fla., retiree, has spent six months trying to sell her four-bedroom, two-bath ranch-style home. She has reduced the price to below appraisal in an attempt to sell it more quickly.”

“‘In this market, you do have to market your house well and have a reasonable price,’ Matyi says. ‘We had a good offer on our house three days after we put it on the market. We didn’t take it, but we should have.’”

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