The Housing Bubble

A housing report from the California realtors. “Affordability concerns continued to impact the residential real estate market in California, with the share of first-time buyers declining to their second lowest level from 30.5 percent in 2005 to 27.1 percent in 2006, according to CAR.”

“The CAR survey also found that the share of buyers who used a second mortgage climbed from 38 percent in 2005 to 43 percent in 2006, more than triple the percentage since 2001 and the highest percentage since 1982. The use of alternative loan products also registered a sharp increase.”

“‘Home buyers with zero-down payments increased significantly from 4.5 percent in 2000 to 21.1 percent in 2006,’ said CAR Chief Economist Leslie Appleton-Young. ‘Two out of five first-time buyers made a zero-down payment on their home purchase.’”

The Press Enterprise. “In the fourth quarter of 2006, 1.9 percent of for-sale homes in Riverside and San Bernardino counties were unoccupied, up from 1.3 percent in the same period of 2005.”

“Inland Empire economist John Husing said he believes the figures reflect the burgeoning supply of homes built toward the end of last year but still unsold and the difficulty facing speculators whose hopes to ‘flip’ homes were dashed by a slowing market.”

“‘We are going into this season with more finished vacant inventory than we have had in the last decade in the Inland Empire,’ said Steve Johnson, director of MetroStudy.”

“Johnson said at the start of this year, construction was finished on 7,542 homes that were still unsold, more than double the 3,655 homes that builders held in standing inventory a year earlier.”

“Vacant homes on the resale market also have become more common. The Multi-Regional MLS, which tracks resale homes in western Riverside and San Bernardino counties and eastern Los Angeles County, reports that about 30 percent of the homes listed last year were vacant, up from an average of 25 percent in 2005.”

“Broker Lance Martin in Moreno Valley, said demand for his company’s property-management services has grown significantly. Martin said investors and other home sellers have given up in frustration because competition is making sales take longer and making it impossible for them to get the prices they expected.”

“As of Jan. 31, 30,080 homes were listed, compared with 19,288 a year earlier. ‘You also have a certain number of people trying to rent the houses out, and they can’t get the rent they want,’ Martin said. ‘Most people have very substantial mortgage payments on their homes, and the rents aren’t coming close,’ he said.”

“Borre Winckel, director of the Riverside chapter of the Building Industry Association, said although investors are no longer buying new homes, ‘the consequences of their speculation in a shrinking market is now coming out in that we see an uptick in these see-through homes.’”

“Winckel said investors will be discounting their homes as sharply as possible, especially if they made purchases with very low interest rates that will be adjusting upward.”

The Hollister Free Lance. “Local home prices held steady in January, but prices remain far below where they were a year ago. Twenty-nine San Benito County homes were sold last month, with a median price of $589,000, according to REInfoLink, a real estate database that tracks home sales.”

‘In January 2006, when 31 homes sold, the median price was $669,000. Home prices fell throughout most of 2006, reaching a monthly low of $539,000 in November. Prices have increased since then, but local real estate agents said there hasn’t been a significant upswing in the market.”

“‘I don’t think things have changed at all in the last two or three months,’ said broker Dee Brown.”

“Broker associate Jack Markle estimated that most homes are now selling for between 10 and 20 percent less than their value last year.”

From Reuters. “(In) California, exurban housing markets have softened more than those close to urban centers. Riverside and San Bernardino counties, which are on the eastern edge of Los Angeles’ suburban frontier, saw sales volume plummeted 40.6 percent. High Desert, about 80 miles from downtown Los Angeles, sawa 39 percent drop in the number of sales.”

“Some observers blame the sales stall in the Los Angeles area on home builders who for years gobbled up available land in exurban tracts and overbuilt. Areas closer to the city are already built out and have not faced a big injection of new homes, said Leslie Appleton, an economist with the California Association of Realtors.”

“Now, real estate agents in the exurbs trying to sell a glut of new homes, along with the inventory of previously owned houses. ‘There is intense competition in the inland areas of the state between the existing stock and new homes,’ said Appleton. ‘The absorption of this new product is going to take some time.’”

“And while new buyers are needed to sop up the housing stock, many investor-owners are losing their properties through bankruptcy, said Jesse Ramirez, a real estate agent in Riverside.”

“‘There were some investors thinking that the market was going to continue going up,’ said Ramirez, who has noticed a spike in the number of bank repossessions. ‘When things go up, they creep. When they go down, they go down fast.’”

The Orange County Register. “Realtor-economist Gary Watts believes prices will rise slightly in 2007. Although his 2006 forecast was overly optimistic, Watts remains confident that local house prices this year will increase 7 percent and that condo prices will go up about 4 percent.”

“‘This will be, I think, a pivotal year,’ Watts said in a telephone interview. ‘If the housing correction is behind us, we’ll be in pretty good shape.’”

“He said he was surprised by a huge increase in the number of homes being offered for sale last year, which held prices in check. Many sellers last year were expecting the same types of double-digit gains seen in recent years.”

“If the inventory of homes listed for sale balloons again this spring and summer, Watts warned, the market won’t appreciate as expected. ‘We’ll just have to see and hold our breath for the inventory numbers next spring and summer and see if that explodes again,’ he said.”

The Garden Island reports from Hawaii. “Kaua‘i home sales had a slower start than last year, with the Kaua‘i Board of Realtors reporting an almost 17 percent drop in the number of January island-wide house sales. January condominium sales fell about 70 percent.”

“However the numbers don’t necessarily represent a trend, said Scott Lindman, president of Kaua‘i Board of Realtors. ‘This is a very small sample,’ he said. ‘I believe that the demand is going to remain constant, and supply will remain constant.’”

“Both houses and condos stayed on the market longer in January 2007 than in January 2006. Houses took an average of 164 days to sell, up from 100 days in January 2006. Condominiums took 300 days to sell, compared to 38 in the year earlier period.”

The Honolulu Advertiser. “The O’ahu single-family median home price slipped to $600,000 in January as the housing market continued to cool from record highs. The Honolulu Board of Realtors said the median was down 2.4 percent from $615,000 in January 2006.”

“The median O’ahu condominium sales price was $320,000. Both condominium and single-family home prices are below record highs of $329,000 and $668,300 set in July 2006 and May 2006, respectively.”

“The market is cooling off as we’ve seen for over a year now, and it will probably continue to cool, but prices are holding,” Shapiro said. “I think it will stay this way at least through 2007.”

“Harvey Shapiro, the board’s research economist, is projecting that the number of homes and condominiums sold on O’ahu this year will fall for a second consecutive year, but remain at healthy levels compared to the low transaction rates of the mid-1990s.”

“‘The market is cooling off as we’ve seen for over a year now, and it will probably continue to cool, but prices are holding,’ Shapiro said. ‘I think it will stay this way at least through 2007.’”

“Richard Rice, an Olomana resident who has his four-bedroom, 2 1/2-bath home on the market for $759,000, said he believes prices won’t dip much farther based on his experience with Hawai’i real estate and what he’s read from experts. He said he believes prospective buyers visiting his open houses in recent weeks have the ‘buy-before-it-takes-off again’ mentality.”

The Star Bulletin. “Inventory of single-family homes also grew, to 1,747 last month compared with 1,578 a year ago, according to the board’s economist, Harvey Shapiro. The condominium inventory grew to 2,288 last month compared with 2,125 a year ago.”

“However, the total inventory remains less than it was three months ago, board figures show.”

“Jim Wright, president of Century 21 All Islands, says the volume of homes sold shrank over the past five quarters but that more contracts are moving around, meaning that more shoppers are out negotiating.”

“‘It’s what I call a neutral market,’ he said. ‘It’s not a seller’s market and it’s not a buyer’s market. It’s just a negotiable market. You’re going to get a fair deal if you work it out.’”

“Wright said he expects to see a 5 percent decline in value this year but also a higher number of units sold.”

“Veteran Realtor Margaret Murchie said buyers today are cautious. ‘I think we were flying so high, we were due for a transition,’ she said.”

“Murchie, who specializes in selling, said she has canceled a few listings from clients whose asking prices were unrealistically higher than the current market.”

“Sales seem to have slowed on the North Shore and Ewa side, according to Realtor associate Tony Kawaguchi. ‘If you have a nice house, and it’s updated with granite counters and wood floors and it’s in decent condition, you can sell it in a few weeks,’ he said. ‘A lot of homes are not in great condition … and people are just not buying those anymore because there’s more selection.’”

“A notable boost to Kaka’ako’s population began yesterday as the first residents of the twin-tower Moana Pacific condominium picked up keys. An estimated 2,000 or so people who over the next few months will settle into their units.”

“The project’s 720 units make it the third-largest residential high-rise condo project on O’ahu. The first two, Hokua and Ko’olani, opened early last year. Five others are planned or under construction in Kaka’ako, while several more are planned or under construction in Waikiki and downtown.”

“Research analyst John Jacobson, said the impact on O’ahu’s real estate market of such a large condo will be that many people will be moving out of homes, apartments and other condos, though the greater effect on the market won’t be huge.”

“‘With our continued growth of the condo inventory, the (new) building is a relative drop in the bucket,’ he said, adding that there were more dramatic condo development booms in the late 1970s and late 1980s.”

Some housing bubble news from Wall Street and the Washington Post. “With college costs looming for their four children, Bryan and Susan Andrews were looking for a way to cut their monthly expenses. The sales pitch that came in the mail seemed perfect: A mortgage at 1.95 percent, fixed for five years.”

“But after the deal closed, in 2004, the couple realized to their horror that the $191,000 loan they got from Bethesda-based Chevy Chase Bank was an adjustable-rate mortgage. They went to court, saying they were deceived. A federal judge has sided with the couple and is allowing a class-action suit involving up to 7,000 borrowers against Chevy Chase.”

“Last month, U.S. District Court Judge Lynn Adelman…ruled that while the borrowers were not eligible for damages, they could be permitted to turn back or ‘rescind’ their mortgages. Recision would permit borrowers to be released from the loans, receive reimbursement of any interest they paid to Chevy Chase and get back their closing costs, too.”

“In other words, the ruling may give some borrowers a refund of everything they have paid to live in their houses for years.”

“The case worries the lending industry because of the potential for hefty losses if other borrowers are allowed to rescind mortgages they claim were misleading.”

From Reuters. “Mortgage Lenders Network USA Inc. on Monday filed for Chapter 11 bankruptcy protection, becoming one of the largest casualties among lenders to people with poor credit histories as the U.S. housing market slows.”

“‘Lenders may be having trouble finding white knights, whether to fund their operations or provide warehouse lines of credit,’ said Keith Gumbinger, a VP at a mortgage information publisher. ‘More trouble is likely in 2007.’”

“‘Recently originated loans are falling into default much more quickly than lenders expected,’ Gumbinger said. ‘It’s tough to tell which lenders are most vulnerable, because underwriting standards are not transparent enough.’”

“Economic development assistance that had been sought by Mortgage Lenders to build a Wallingford campus was halted last month. James Watson, a spokesman for the state Department of Economic and Community Development, said Monday that any aid package is now dead because it was based on a pledge by Mortgage Lenders to create 1,000 jobs.”

“Instead of creating jobs, Mortgage Lenders has left hundreds unemployed.”

From Origination News. “Mortgage lenders dropped 6,500 full-time employees from their payrolls in December. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banking/broker sector declined from 501,200 in November to 494,700 in December.”

“The BLS also revised downward the November and October job numbers, and the statistics now indicate that the industry cut 10,000 employees during the last two months of 2006.”

From Business Week. “FirstFed Financial Corp. may be the riskiest mortgage lender around. In the fourth quarter, mortgage originations plummeted by 66.8%, to $365 million—one of the steepest declines among all lenders.”

“Cash from operating activities dropped into the red in the third quarter (the most recent data available), falling from $49 million in 2005 to negative $77.1 million a year later. Meanwhile, the number of problem loans more than quadrupled last year.”

“The biggest problem: Its mortgage portfolio is packed with risky loans known as option ARMS. All of FirstFed’s mortgages are for homes in California, where prices have cratered and foreclosures have skyrocketed. Also, 80% of its loans have little or no documentation to prove the borrower’s income or assets, according to a recent company presentation.”

“The bulk of FirstFed’s income is derived from noncash earnings, largely from the deferred principal on its option ARMs. That so-called negative amortization constituted $223.9 million, or 68.4%, of the bank’s income before taxes in 2006, compared with 1.3% in 2004. In essence, FirstFed is booking profits on money it hasn’t collected.”

The Associated Press. “Due mostly to the slowdown in new home construction, lumber prices have sunk from a peak of about $1,000 per thousand foot board 18 months ago to around $200 per thousand foot board. In addition, prices for oriented strand boards, or OSB, are at a four-year low.”

“Lumber and building materials supplier Louisiana-Pacific Corp. on Tuesday posted a fourth-quarter loss due to feeble demand from home builders in the sluggish U.S. housing market.”

“‘Fourth-quarter sales declined 40 percent compared to the same quarter a year ago, as levels of building activity dropped to the lowest levels we have seen this decade,’ said CEO Rick Frost. ‘Weakened demand negatively affected volume and pricing in all of our product lines.’”

“Frost cautioned that the first quarter this year ‘looks and feels a lot like last quarter, with lower building activity and depressed prices for our commodity products continuing.’”

“Building Materials Holding Corporation, a leading provider of construction services and building materials to professional residential builders and contractors, today reported sales for the fourth quarter of 2006 decreased 26% from the same quarter a year ago.”

“Robert E. Mellor, CEO, stated, ‘Our fourth quarter results reflect the on-going correction of inventory levels which currently overhang the housing market. The rapid deterioration of our markets during the second half of the year has made for a very challenging quarter as homebuilders curtail production while excess inventory is absorbed.’”

“Mueller Industries Inc., a maker of copper tubes and fitting used in plumbing and refrigeration, said Tuesday the slumping housing market and lower copper prices led to an inventory write down, sending fourth-quarter profits tumbling.”

“The latest quarter included a charge of 26 cents per share to write down inventory that lost value as copper prices fell during the period. Mueller said the slumping housing sector also hurt sales volume.”

“D.R. Horton Inc., the largest U.S. home builder, on Monday said net sales orders in January continued to fall compared with a year ago, but its cancellation rate for the month was about the same as that seen in the most recent quarter.”

“The industry-wide softening of demand for new homes which began in fiscal 2006 has continued into fiscal 2007. In many markets, home price appreciation over the past several years had hurt the ability of some potential homebuyers to afford a home, but the price appreciation had also attracted real estate investors and speculators to the new and existing home markets.”

“As price appreciation slowed, the demand from investors and speculators for new homes also slowed, resulting in an increase in new homes available for sale. At the same time, existing homes offered for sale by investors and speculators increased.”

“In response to higher inventories of both new and existing homes, homebuilders increased the use of sales incentives to continue to sell new homes. During the three months ended December 31, 2006, we have continued to experience a decrease in our net sales orders due to a decline in homebuyer consumer confidence and continued elevated levels of sales contract cancellations.”

“Our use of incentives also contributed to significantly lower gross margins on the homes we closed during the quarter. We cannot predict the duration or severity of the current market conditions.”

“The value of net sales orders decreased 28% for the three months ended December 31, 2006, from the same period of 2005. The number of net sales orders decreased 23% for the three months ended December 31, 2006 compared to the same period of 2005.”

“Our cancellation rate during the quarter ended December 31, 2006 was 33%, which exceeded our typical historical range of 16% to 20%, but improved from our cancellation rate of 40% in the fourth quarter of fiscal 2006. A significant portion of the increase in cancellations above historical levels was due to our prospective homebuyers being unable to sell their existing homes.”

“The average price of a net sales order in the three months ended December 31, 2006 was $261,400, a decrease of 5% from the $276,300 average in the comparable period of 2005. During the three-month period, the largest percentage decrease occurred in our Southwest region, due primarily to price reductions and increased incentives in the Arizona markets.”

“Our net sales orders for the month ended January 31, 2007 decreased as compared to the same period in 2006 at a greater rate than the 23% decrease we experienced in our most recent quarter. Our cancellation rate for the month ended January 31, 2007 was similar to our cancellation rate during our most recent quarter.”

The Herald Tribune reports from Florida. “More and more sellers in Southwest Florida are coming to the conclusion that the only way to attract buyers in a sagging real estate market is by slashing prices. Serial condo converter Matt Kihnke is now offering one-bedroom Bradenton apartments for $99,900.”

“And price is everything right now, said Ross Bryans, who is helping Kihnke sell the converted units. What a change from the frothy exuberance of early 2005.”

“Kihnke started selling the units in the late summer of 2005. Eighteen months later, about 30 percent of the units remain unsold. ‘Some of them are the best units, the ones with water views,’ Kihnke said. ‘We kept them because they were set at the highest prices, but we have had to come down in price.’”

“Units that were listed at $169,900 are now on the market for $129,900.”

“Bryans said the reason Garden Walk apartments sold so much faster than units at The Sanctuary is that most of Garden Walk’s buyers were investors looking to cash in on the rapid appreciation of Southwest Florida real estate.”

“By late summer 2005, those investors had vanished, and Bryans and Petitti had to begin the slow, arduous process of marketing dwellings to first-time home buyers. ‘We’re now selling four a month, compared to 40 a month at the peak,’ Bryans said.”

“Even with these incentives, however, Bryans and and his partner, John Petitti say it is difficult to get people to check out their product. That’s why they have been raffling off flat-screen televisions and laptop computers to get people to tour the property, and why Kihnke has upped broker commissions from 2 percent to 5 percent.”

“‘Everyone in the market is offering incentives. We have to do it too,’ Kihnke said.”

The St Petersburg Times. “Prospective new home buyers are learning they don’t have to settle for low-dough incentives like granite countertops. Now available in the Tampa Bay area: college tuition with a new home purchase and a condo/yacht deal.”

“‘I’ve never seen incentives like this,’ said Carlos A. Fuentes, president of the Greater Tampa Association of Realtors.”

“Elsewhere, home builder Taylor Woodrow will contribute $11,000 to the Florida Prepaid College Plan on that buyer’s behalf for each new home buyer in the company’s six Tampa Bay area developments.”

“Lonnie Herman, VP for the company’s Central Florida division, said it used to be that having Taylor Woodrow as your builder was enough incentive to buy. But with inventories bulging, there were more than 17,000 condos, townhomes and single-family homes on the market in Hillsborough County in December, compared with 7,800 a year earlier, things have changed.”

The Palm Beach Post. “Remember when snagging a pre-construction deal was prize enough for hungry home buyers? Now developers are offering free plasma televisions and hosting elaborate soirées - just to get prospective buyers and agents in the door.”

“Verano, a 6,300-home development planned for western Port St. Lucie, is marketing its Sunday grand opening as a ‘Venetian-style street festival,’ with hopes of drawing traffic to its model homes.”

“‘This is the best way to do it: Have a little party,’ said Craig Perna, president of the West Palm Beach developer behind Verano. Is he worried about the more than 1,200 completed new homes already sitting vacant in the county?”

“Just after reporting a record loss on Monday, Coast Bank of Florida announced that it had hired a longtime Sarasota banker as a ’special adviser.’ Tramm Hudson will work with Coast’s board and senior management in dealing with the loan fiasco that has shaken Coast’s financial condition and threatened its future.”

“Coast funded $110 million in loans to nearly 500 borrowers, many of them speculators, who were building homes with CCI, a St. Petersburg company that has suspended operations.”

“‘The regulators are concerned about the situation, but they have, in my estimation, been very supportive of the bank’s effort to address the loan issue,’ he said. ‘They’ve recognized that this is symptomatic of the overall depression in the real estate market.’”

“A key question is, why did the bank’s management and directors allow 20 percent of Coast’s loans to go to borrowers doing business with CCI?”

“‘Sometimes bankers can get lulled to sleep with their residential portfolios,’ Hudson said. ‘Everyone feels a residential loan is the safest loan they can make because it is secured by someone’s home.’”

The Bradenton Herald. “Coast Bank officials must prepare a year-end financial statement by mid-March. The bank must meet a Securities and Exchange Commission filing deadline giving its earnings results for the 2006 fiscal year. Chances are, the report won’t be pretty.”

“Coast Bank will likely have to add to its reserves to cover potential loan defaults as a result of the CCI deals. Increasing the reserves could seriously erode the bank’s bottom line even further, said banking analyst James Schutz. ‘It will be a bigger loss than they would have normally had,’ Schutz said.”

“On Sept. 30, Coast Bank’s provision for loan losses was $3.7 million, according to SEC filings. Schutz said there is no rule of thumb governing how much of an increase in the reserve account would be needed to cover any potential losses from the $110 million worth of loans. Roughly $66 million has been disbursed so far.”

“‘In my career, I’ve seen a number of banks get into trouble and work their way out,’ Hudson said. ‘I’ve also seen banks that have been very orderly transferred with the FDIC’s assistance to other banks. I think it’s a reflection of the tough economic time we have right now in the residential real estate market.’”

The Orlando Sentinel. “The pace of new-home construction continued to slow in Central Florida during the fourth quarter, with housing starts falling 37 percent from the same period a year ago, a new survey found.”

“Metrostudy said work started on 5,281 single-family homes in the final three months of last year, down from 8,443 in the same period a year earlier and 6,853 in the third quarter of last year.”

“The region’s inventory of new homes declined nearly 10 percent at the end of last year, to 19,808 units, or a 7.7-month supply. The ‘finished, vacant’ category doubled, to 8,867 units, while the number of homes under construction dropped 40 percent to 10,129.”

“The industry has plenty of challenges, said Anthony Crocco, director of Metrostudy’s Central Florida and Northeast divisions. ‘Contract cancellations are still high,’ he said, and competition from the huge inventory of used homes for sale remains a barrier to any rebound for builders.”

The Sun Sentinel. “Las Olas Riverfront may be dying, but it ain’t dead yet. ‘People think the place is being torn down or is torn down,’ said Laura Richards, owner of shoe boutique Beach Soles.”

“Riverfront’s owner wants to add towers of hotel, condo and office space, even though the current condo market is down. According to the Florida Association of Realtors, local condo sales declined by 36 percent in 2006. The 28 retailers left in the half-occupied real estate wait. Meanwhile, they deal with shrinking clientele and short-term leases as they consider their options.”

“Planners blame markets and structural design. Visitors blame too little parking and too many shuttered stores. Business owners blame lack of advertising and negative publicity. They all agree there aren’t enough upscale clients. Bring back the high-end stores and the shoppers who ‘come here in boats with money,’ Merv Brody said.”

“But store owners won’t come if scared away by short-term leases, he said. Landlords offer only six-month leases because they want to have the freedom to quickly begin converting the property if the city approves the new plans, Brody said.”

“Jason Kamerer, the owner of Atmosphere Coffee Bar, said his last lease for an outlet in Philadelphia was signed for three years. ‘I was surprised by the six-months thing. I mean, it’s a lot of money to put into a place to get furniture and the equipment, you know?’ he said.”

“Kamerer’s coffee shop is probably the third or fourth incarnation in the same location, said customer Linda Pearson from Lauderhill. ‘The whole area has fizzled out,’ she said. Pearson said she wishes more people would show up so the owners wouldn’t have to close the hangout she and her husband visit monthly.”

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