The Housing Bubble

The Tribune reports from California. “With home appreciation slowing and payments increasing for some buyers who chose creative financing, foreclosure activity in San Luis Obispo County is starting to creep up. Default notices were sent to 367 owners of homes and condominiums last year. That’s up nearly 61 percent from the previous year’s 228, according to DataQuick.”

“In Santa Barbara County, 298 default notices were sent to homeowners in the fourth quarter of last year, up 360 percent. And in Merced County, 466 default notices were sent, up 400 percent.”

“The increase locally is a sign that homeowners from Nipomo to Paso Robles could be in danger of losing their property. ‘In a market that’s flat or declining, if you have aggressive mortgages, the equation shifts so that people owe more money than their property is worth,’ said Wes Burk, broker in San Luis Obispo. ‘Often, their only option is to let it go to foreclosure.’”

“Burk watches foreclosures in the county closely. In a recent five-day period (Jan. 19-Jan. 24), he said, there were 12 notices of default in the county. The same time last year would have had a ‘fraction of that.’ ‘It’s changing,’ Burk said. ‘January has been much busier than any of the months in the last quarter, and I anticipate that we’ll continue to see an increased level of notices and trustee sales.’”

The Orange County Register. “Orange County property owners are skipping their property tax bills in growing numbers. Fresh stats from the county’s tax collector show that a sharp uptick in tardy payments that we saw for the December 2005 tax installment was no fluke.”

“This past December’s deadline was missed by 53,880 taxpayers owing on $111 million, 25 percent more tardy dollars than the previous year. It means that 5.32 percent of the slightly more than $2 billion tax dollars due went unpaid. Late bills haven’t taken that big of a slice from the tax pie since 1996.”

“For those in financial trouble, and being strategic about their shaky finances, the property tax bill may be one to skip. Even though there’s a one-time, 10 percent penalty for late payments, plus ongoing 18 percent-a-year surcharges, the tax collector isn’t going to take a tax-delinquent property away any time soon.”

“People in such straights are better off making the mortgage payment first. ‘Everybody knows that,’ tax collector Chriss Street says.”

“Standard Pacific Homes CEO Stephen Scarborough said Friday that he doesn’t foresee a huge recovery in the national new-home market at least for a year or more.”

“Scarborough, speaking during the Irvine homebuilder’s fourth-quarter earnings conference call, said earnings won’t improve significantly through 2008. ‘I think clearly that ‘07 will be a challenge for us, and likely, unless there’s a dramatic pickup, ‘08 will be a sub-par year from a return perspective as well,’ he said.”

The North County Times. “In his 37 years in the mortgage business, Bert Morrison has never seen anything like it. The owner of Quality Funding Group in Rancho Bernardo said that scores of customers have come to his office wanting out of their adjustable-rate mortgages.”

“In San Diego County, borrowers took out 173,033 adjustable-rate loans worth more than $75 billion to buy or refinance their homes between 2004 and mid-2006, according to (analyst) Christopher Cagan.”

“Cagan’s research has led him to paint a dire picture. Of the above loans, he said, 66,726 are at a risk of resetting to a monthly mortgage payment that the borrower can’t afford. And almost half, or 30,209 loans, are at risk of default and foreclosure, costing lenders more than $5 billion.”

“Morrison said that the situation will likely get much worse before it gets better. ‘There is going to be a lot of blood in the streets,’ he said. ‘You ain’t seen nothing yet.’”

“As long as interest rates stayed low and prices rose, high-risk loans to higher-risk buyers did not seem to be such a bad bet. While the payments were low, some of these loans increased the loan’s principal, called ‘negative amortization.’”

“Ed Smith, chairman of government affairs for the California Association of Mortgage Brokers, specifically warned against those types of loans. ‘If you are paying the negative amortization amount, you are looking at a small light at the end of a tunnel,’ Smith said. ‘It’s connected to a locomotive that is going to smack you in the face.’”

“That is what happened to a client of Barbara Williams, a certified financial planner in Carlsbad. The client said she wanted to refinance her roughly $400,000 condominium in San Marcos. She said she told her mortgage broker, then a personal friend, that she didn’t want negative amortization, but wanted an interest-only mortgage for one year.”

“Instead, she got an interest-only first mortgage for the first month. Then her rate reset to more than 8 percent and threatens to go even higher. She didn’t notice until interest rates started to rise and her monthly payments rose with them. Also, she discovered that her interest-only loan was actually a negative amortization loan that has added $8,000 to her principal so far.”

“Now she plans on selling the condo. Williams said clients like this don’t see problems until interest rates rise. ‘She knew, but it really hadn’t gotten bad until last year,’ she said.”

“Some financial institutions don’t make it easier when they dangle mortgages with easy-to-make monthly payments in front of buyers, while failing to discuss in detail things such as prepayment penalties or interest rate changes. Instead of sticking with a more moderate and easier-to-afford home, borrowers extend themselves with risky loans such as option adjustable-rate mortgages (or ARMs) and buy homes costing as much as nine times their household’s income, loan experts said.”

“‘These borrowers are allowed to get into homes they can’t afford,’ Morrison said. ‘It’s a crime, in my opinion.’”

The Daily News. “There’s a movement under way in the nation’s capital to impose a suitability standard on mortgage lenders. Not surprisingly, the Mortgage Bankers Association doesn’t think suitability is suitable for this industry. They’ve countered with a policy paper titled ‘Don’t Turn Back the Clock of Fair Lending and Homeownership Gains.’”

“‘Making the lender responsible for determining which loan is suitable for a borrower will limit consumer choice and could deepen the slowdown in the housing market,’ Kurt Pfotenhauer, MBA’s senior vice president of government affairs, said.”

A housing report from the Arizona Republic. “Pinal County’s resale housing market is steadily declining. The number of sales dropped to 720 in the final quarter of 2006 from a record high of 1,785 in the second quarter of 2005, according to Realty Studies at Arizona State University.”

“In the fourth quarter of 2006, the median sales price for an existing house was $191,500, down from $220,000 in the fourth quarter of 2005.”

“‘In order to reduce inventories, new-home builders have been aggressively pursuing buyers through incentives such as specially priced upgrades, free pools and gift cards,’ said Jay Butler, Realty Studies director.”

“The number of people from California buying Valley homes has shrunk to 5.5 percent of all sales. In mid-2005, almost 14 percent of all houses sold across metro Phoenix went to someone with a California address, reports data firm Information Market.”

“Many of the California buyers in 2005 were speculators enticed by the Valley’s housing prices, relatively low for the West, and the subsequent wild run-ups they sparked with their demand for houses.”

“If you look at the tax mailing addresses of many buyers in some neighborhoods, half of new homes were sold to Californians in 2005. In the middle of 2005, when Phoenix-area home prices had risen nearly 50 percent in a year, almost 25 percent of all houses were selling to out-of-state buyers.”

“But out-of-state investors are still buying, although at a slower pace. In December 2006, 14 percent of all homes were bought by someone with a tax mailing address outside Arizona. Where are the Valley’s out-of-state buyers coming from now? Texas, Nevada and overseas, real estate analysts say.”

“For the many Valley home buyers and sellers who have contacted me to check to see if their cash-back deal was legal: ‘There’s only one absolutely legal way to get cash back on a home deal,’ said mortgage fraud expert and Michigan real estate agent Ralph Roberts.”

“A buyer’s agent can give a portion of a seller-paid commission back to the buyer. All parties must agree on the transaction. And Roberts said that it has to be clearly disclosed in the sales document, and the lender must agree to it.”

The Arizona Daily Star. “Developers are whittling and revising Downtown’s paper population of high-rise condos in response to a slowing real estate market. Over the past five years, developers have proposed about 1,200 condo units…in and around Downtown.”

“But a real estate market that produced the spectacle of people camping out overnight to snap up 120 Foothills condos in three hours in March 2005 has cooled considerably.”

“The reconsideration of condo projects is happening everywhere. ‘I can tell you that in the Phoenix area the brakes are on,’ said Wayne Kaplan, spokesman for the Arizona Multihousing Association.”

“Condo conversion in the Phoenix area ‘really started in mid to early 2004, peaked in 2005 and ended by middle to early 2006,’ said Pete TeKampe, with Marcus & Millichap. ‘Tucson tracked right along with that,’ he said.”

“Ron Schwabe, general partner in 44 Broadway and a partner in the Depot Plaza project, said he’s convinced the market for high-end condos exists, but he wants to lower his prices. ‘We’re going to carve it back to something you can price affordably,’ he said.”

“At the vacant Santa Rita Hotel, where a sign promises a boutique hotel and condo complex, the size and quality of the project are unchanged, said Lou Schulder, sales manager for Pathway Developments Inc., and he might be worried if he were opening tomorrow.”

“‘It’s hard to live in the present,’ he said. ‘Right now the market has slowed dramatically compared to ‘05.’”

“Now, it hopes to begin demolition of auxiliary buildings by this summer, with completion at least two years off. It will be a different market then, said Schulder, and he’ll have a ‘potpourri of product’ to sell, ‘from basic little 600 square-foot studios to super-sexy penthouse lofts.’”

“‘We’re not going into it with our eyes wide closed. We know it’s much harder to sell condos to people right now. Everybody is a little more cautious right now, but this is going to be a landmark project.’”

“Fewer new homes will be built and sold this year although home prices will continue to climb, according to a Tucson housing analyst. There were 8,579 new-home permits issued in 2006, analyst John Strobeck said. He described 2005, in which more than 11,700 permits were issued, as a ‘dream year.’”

“Speaking before an audience of more than 600, he said 2006 ‘brought us back to reality.’ ‘Instead of hires, there were layoffs. Instead of too much work, there was not enough,’ Strobeck said. ‘So the year brought the entire industry back to the reality of having to run a business.’”

“Permits should decrease this year to 8,200, he said. But that figure ‘could be a little optimistic.’”

The Orlando Sentinel reports from Florida. “Today, the demand for 55-plus housing remains high, and units in the older complexes are relative bargains. It would seem to be a perfect sales environment. Except that the units aren’t selling. The older complexes were hit hard by assessments to cover repairs after Hurricane Wilma. Add that to a glut of units and age restrictions that limit the buying pool, and the units can be a tough sell.”

“The owner of a $300,000 condo would need to make at least $65,000 annually, and the owner of a $700,000 condo would need at least $150,000 in annual income. Realtors consider the older complexes bargains, because many were rebuilt after Hurricane Wilma.”

“‘The exact same condo in Delray, same size and location, in a nonrestricted community that sells for $200,000 would sell for $155,000 or $145,000 in a 55-and-over community,’ says Ron Schulman, managing broker in Boca Raton.”

“Beach-loving baby boomers are starting to take advantage of that. At the 40-year-old Coral Ridge Towers East in Fort Lauderdale, which is near the beach and Intracoastal Waterway, one-bedroom units range from $150,000 to $250,000, and two-bedrooms range from $250,000 to about $350,000, says Realtor Ed Poirier.”

“That’s much less than the average $600,000 cost of a newer two-bedroom beach condo, with some going for more than $1 million, he says.”

“But despite their affordability, older units are not selling, and a big part is ‘the cost of insurance and taxes’ after Wilma, Schulman says.”

“Sandy and Stanley Post aren’t giving up. They have had their three-bedroom Indian Spring condo in Boynton Beach up for sale since April. They’ve lowered the price to $260,000.”

“‘It’s not worth getting depressed about because it’s the real estate market today,’ says Sandy Post, who has lived in the condo six years.”

“It took Joanne and Richard Weed about nine months to find a buyer for their small retirement home in the Mainlands of Tamarac. It sold in November after they lowered the asking price from $199,000 to $185,900.”

“Despite the gloomy market, some condo boards are imposing new rules that make it harder for buyers to be approved. They want buyers to prove they can afford assessments or maintenance increases to cover emergencies.”

“‘We’ve had to because almost anybody can get a mortgage, and when people qualify, they never talk about the maintenance,’ says Joel Leshinsky, president of the Inverrary Association in Lauderhill.”

The St Petersburg Times. “The Florida housing boom was creating instant millionaires when St. Petersburg builder Jesse Battle III hit on a promising formula to feed the public’s hunger for no-pain, all-gain real estate deals.”

“Within 18 months, Battle’s company, Construction Compliance Inc., had lined up customers for more than 500 investment homes he would build, mostly for no money down in southwest Florida.”

“Around the CCI office, Battle buoyantly addressed co-workers as ‘dawg’ before hopping in his new Hummer. In the past three months, that go-go environment collapsed in a tangle of unpaid debts, unfinished homes, burned customers and furloughed employees.”

“His partner in the deal, Coast Bank of Bradenton, financed at least 482 of the CCI loans and is on the hook for upwards of $77-million customers may never repay.”

“‘Coast Bank has become the poster child for many banks having problems in Florida,’ said Miami banking expert Ken Thomas. ‘This is a national story. Everyone around the world is talking about the housing crisis in America. There hasn’t been a bank failure since June of ‘04. The question is: Is this going to be the first casualty?’”

“Michael Wood not only contracted for two houses, but tipped off 25 of his family members and friends. ‘I paid zero out of pocket. There was $30,000 to $50,000 potential to make on it,’ said Wood, who, like many investors, considers the CCI/Coast package legitimate but marred by poor execution.”

“By 2006, they were feeling flush in the Bradenton headquarters of Coast Bank, founded in 2000. In the nine months ending Sept. 30, Coast’s assets, mostly outstanding loans, grew a heady 23 percent from $550-million to $676-million. When Coast CEO Brian Peters left the company in July after two years on the job, the company showed its gratitude with a $743,000 severance payout.”

“By the spring of last year the company was showing signs of sickness from a real estate market in free fall. Battle contends he completed 70 homes last year, but buyers were reluctant to close since many might have lost money as sales slumped in North Port.”

“By the fall, CCI was buckling under the financial strain: Sales were slowing, interest payments on construction loans multiplied and subcontractors were getting stiffed.”

“St. Petersburg investor Marilyn Schwegman, who ordered a $237,000 house from CCI, got the letter around Christmas. The concrete company that laid her slab and the concrete block dealer who has built her walls wanted her to pay nearly $30,000. ‘CCI is supposed to be covering construction costs and I’m getting this certified notice from the concrete company,’ Schwegman said.”

“CCI has ceased paying subcontractors and abandoned work in North Port. The freeze affected 482 homes in Coast’s loan portfolio. Frustrated contractors retaliated by filing liens against the property owners, bypassing Battle. Scores of customers were saddled with debts to Coast of $80,000 and up. They had nothing to show for it but empty lots.”

“Most customers want their debt cleared or restructured downward. ‘Will I repay Coast Bank? If they’re telling me I owe $90,000 on a vacant piece of land with all these dirty hands involved, then no way, I’m going to walk,’ said Wood, the Zephyrhills investor.”

“For banking types, Coast is a perfect illustration of the danger of lending too heavily to one customer. Smitten with easy money from residential real estate, it piled a fifth of its loan portfolio into the CCI deal.”

“At least four law firms are gathering clients from the discontented. Their opinions converge: Coast failed in its fiduciary responsibility to ensure CCI properly spent the bank’s money.”

“‘There’s definitely a bunker mentality at the bank,’ said Sarasota attorney Alan Tannenbaum. ‘The bank is taking a no-compromise position: ‘It’s not their problem. It’s CCI that defaulted.’”

“Battle is struggling to avoid becoming a footnote. He’s broken his lease on his new office and returned to his old downtown storefront, more or less a one-man shop after laying off most employees.”

“Port Charlotte attorney Glenn Siegel represents mostly unpaid subcontractors. He’s unimpressed by Battle’s attempts to make amends. ‘If my clients have to sue,’ he said, ‘I believe there are grounds to pierce the corporate veil and hold Jesse Battle personally responsible.’”

What do you see in your housing market this weekend? Changes in local government? “Even at the height of excess revenues from the county’s deeds tax, county officials knew the cash cow wouldn’t graze in Barnstable’s fields forever. Revenue solely from the Registry of Deeds Tax is anticipated by the county to fall $1.17 million lower than in fiscal year ’07.”

“‘For the first time in a long time, there’s actually a housing market $350,000 and under,’ said Mark Zelinski, county administrator and director of finances.”

“In addition to the lower prices, he said, the Cape’s higher-level housing market, above $1 million, has stagnated, resulting in dramatically reduced deeds tax revenue. ‘Revenue-wise … we’ll be under,’ he said.”

Home sales statistics? “New housing starts, a bright spot in the county’s economy for several years, collapsed in 2006, sinking to the lowest level in 14 years, according to statistics collected by The Flint Journal from area cities and townships.”

“The average selling price dropped 16 percent compared to the previous year, said Doris Nurenberg, executive director of the Flint Area Association of Realtors.”

“There are too many never-lived-in houses on the market right now to expect a rebound in 2007, said Ted Macksey, whose family has been building homes in the area since the 1950s. ‘I think it’s a function of the economy. Once we hit June 2005, things just stopped,’ he said.”

Or overbuilding. “At the end of 2006, almost 875 new houses were finished and vacant or under construction in several Dallas and Park Cities neighborhoods, according to a survey. Demand for these high-end homes, often referred to as McMansions, has caused a flurry of teardowns in several close-in residential districts.”

“But while there are lots of unsold homes on the market, some builders may decide to go ahead with more starts, said said Jeff Dworkin, who builds homes ranging from $375,000 to over $450,000 in East Dallas neighborhoods.”

“‘The market has gotten the message in some places,’ he said ‘But there are some smaller builders out there who have no choice, because they already own the lots and have the loans in place.’”

An increase in foreclosures? “The number of properties repossessed by banks was higher last year than after the recession of the early 1990s, as a growing number of overstretched investors were burned by Sydney’s house-price slump.”

“Young investors defaulting on home loans was one factor behind a surge in legal action against borrowers last year, a court spokesman said.”

Changes at local banks? “Metropolitan Savings was closed today by the Pennsylvania Department of Banking, and the FDIC was named receiver. Metropolitan Savings is the first FDIC-insured institution failure in the country since June 25, 2004.”

“The failed bank’s sole office will reopen Monday as a branch of Allegheny Valley. Deposit customers of Metropolitan Savings will automatically become depositors of the assuming bank. All depositors will continue to have immediate access to their insured funds. Customers with more than the insurance limit on deposit at the failed bank should contact the FDIC.”

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