The Housing Bubble

The Seattle PI reports from Washington. “Seattle’s median home price in January was the lowest it has been in a year, according to statistics released Wednesday. The median price of $379,990 was down from $420,000 in December, according to the Northwest MLS.”

“A dip might help home shoppers such as Bryan Ruppert, who was at an open house in Wallingford. He said he started looking for homes online in June, before moving to Seattle. ‘The prices are just outrageous,’ Rupert said. The selection is good, he said, ‘if you can afford it.’”

“The Northwest MLS reported that Seattle had 20 percent more homes on the market in January than the month before and 30 percent more than January 2006.”

The Seattle Times. “A nasty dose of winter last month meant sales of single-family houses and condominiums were down 4 to 14 percent throughout the four-county central Puget Sound region. Kitsap County had the biggest drop in pending sales, deals signed but not completed, last month. They were 14.2 percent below the same month last year.”

“Besides the weather, two other factors, the number of properties on the market and the rate of home appreciation, point to a continued sluggishness of the market. Compared with a year ago, countywide listings were up 25 percent in King, 31 percent in Snohomish, 42 percent in Pierce and 46 percent in Kitsap.”

The News Tribune from Washington. “Pierce County median home prices in January were the lowest in eight months, pointing to a market still better for buyers than sellers.”

“One indication that Pierce County buyers hold the upper hand: The number of homes sold in January fell compared to the same month last year as listings climbed.”

“Such statistics make for a buyers’ market, giving those on the hunt the luxury of taking more time than they could a year ago, said Mike Larson, a real estate agent in Lakewood. ‘I think sellers are realizing that there is a whole lot more competition out there,’ he said.”

“There were 5,776 homes for sale in Pierce County as of the end of the month, nearly 42 percent more than the same time last year. About 100 fewer homes sold, 888 last month compared to 990 in January 2006. Thurston County saw 49 percent more homes on the market.”

The Curry Pilot from Oregon. “What happening with the local real estate market? Depends on which Realtor one asks.”

“McVay and Caudell have been selling real estate in Brookings-Harbor for more than 20 years. According to McVay and Caudell, things are picking up a bit. ‘More buyers are looking,” McVay said, adding, ‘We had 22,000 more hits on our Web site in January compared to December.’”

“‘We’re getting busier every day,’ Caudell said. ‘My Web site has been having numerous inquiries. It’s a new Web site. I’ve only had it up four or five weeks.’”

“Caudell said that buyers are more cautious and are taking more time to study the market, and prices are going down.”

“McVay said the median price for homes in the area in 2005 was $300,000, dropping to $275,000 in 2006. ‘It’s going to be a great years to invest in in Brookings-Harbor,’ McVay said, ‘There are a lot of well-priced properties on the market.’”

“Eldon Gossett of Coldwell Banker agrees that the local real estate market began its downward slide in October 2005 and that home prices have come down, but he doesn’t see a real increase in real estate sales happening until 2008. He based his prognosis on what he sees happening to real estate in San Diego.”

“He explained that he keeps up with the real estate market down south because sales in California are one of the biggest indicators of what will happen to real estate sales in Brookings-Harbor. ‘The market has to turn around in California,’ he said.”

“Gossett insists that a primary cause of a drop in real estate sales in both states is due to jobs and salaries, which over the past two years have risen only about seven percent, while the cost of homes, in some cases, has doubled.”

“He thumbed through his listing book to show listing prices reduced on properties from $20,000 to $150,000, with some sellers indicating they might even accept a lower offer.”

“Broker Dick Wilson agreed that there was a slowdown in real estate sales in 2006. He said, ‘Last year was not as good as the year before, and people began pricing themselves out of the market. If you want to sell you have to have a realistic price.’”

“Associate Broker Cy Vandermeer, president of the Curry County Board of Realtors, agreed that there was a drop in real estate sales in 2006 as compared with 2005. ‘In 2005 sales were $114 million and in 2006 sales were $99 million, with average days on market 90 in 2005 and days on market in 2006 were 121,’ he said.”

“I think what’s happened with the market is that people don’t have to sell,’ Vandermeer explained. ‘They can hold out longer for their price, and with more properties on the market, buyers can be choosier.’”

The Kalamazoo Gazette reports from Michigan. “Home sales in the Kalamazoo area will remain fairly stable this year compared to other parts of the state and country, a seasoned real estate professional and statistician says. ‘Even by my worst projections we will do better this year than in 2002 (when 4,443 units sold), and that was a really good year,’ said associate broker Woody King.”

“King said he hears multiple complaints from sellers that their homes aren’t selling quickly enough and their listings aren’t generating enough potential buyers. That’s reflected in turnover analyses showing that current listings in the $100,000 to $200,000 range represent close to a year’s inventory.”

“‘The average buyer has twice as many houses to look at as he did two years ago,’ King said. ‘The problem is, they’re not looking at as many houses.’”

The Star Tribune from Minnesota. “The rapid rise in foreclosure rates in Minnesota has lawmakers looking for ways to crack down on abusive lending practices. But some mortgage brokers argue that the proposed new guidelines, expected to be introduced in the Legislature in several weeks, are overly restrictive.”

“Minnesota has the nation’s highest home ownership rate, 78 percent, but its foreclosure rate jumped 46 percent last year, according to RealtyTrac. More than 2,000 homes in Minneapolis and St. Paul went into foreclosure last year, according to sheriff’s records. Cities and counties across the state are seeing record increases. Much of the concern centers on subprime loans.”

“‘State officials ought to step up,’ said state Rep. Karen Clark. ‘You look at abuses and fraud we’ve seen in Minnesota and what it does to individual people involved, what it does to the communities involved, and what it does to people’s confidence in the integrity of the market. A destabilization of the mortgage market can have a huge impact on our economy.’”

“Pat Martyn of the Minnesota Association of Mortgage Brokers, and others say foreclosures are costly to their industry, about $50,000 per home by some estimates, and that market forces eventually will make it too expensive for inappropriate products to be sold to inappropriate borrowers.”

KARE 11 from Minnesota. “Last month alone 436 Hennepin County homes were sold at sheriff’s sales, a modern day record, and more than three times as many foreclosures as in January two years ago. Ramsey County’s 172 foreclosures also set a monthly high.”

“That comes as no surprise to John McEnaney, who nearly added to the statistics himself. John purchased his home in Mound with an adjustable rate mortgage. He thought it made sense at the time.”

“‘By getting the ARM I got the better interest rate,’ he said.”

“But when interest rates rose his mortgage started adjusting. Over three years his initial interest rate of less than 8 percent rose to nearly 12 percent. The increase in John’s monthly house payment: nearly $900.”

“He had planned to refinance; but then lost his job. Without help from a friend and a community agency John would have lost his house too. ‘Once it started adjusting it’s like a snowball going downhill, it just gets worse and worse and worse,’ McEnaney.”

“Credit counselors place much of the blame for rising foreclosure rates with non-traditional mortgage products. ‘Consumers really have to watch out because there’s a financial incentive to sell them loans,’ said (credit counselor) Darryl Dahlheimer.”

MyFox Twin Cities. “Jon Falk’s Falk’s $400,000 condo in downtown Minneapolis has been stripped clean. It had once been the building’s showcase model, upgraded with designer furnishings, art and a home theater worth tens of thousands. Now, all of it’s gone. Video from a security camera shows a man carting it away on the freight elevator.”

“‘I met a realtor out partying,’ Falk said. ‘She goes, ‘There’s a deal I got if you’re interested’.'”

“That realtor is Mickey Wong. It sounded like a very sweet deal. He’d get $4,000 just for signing his name. Falk says Wong arranged for him to buy the Minneapolis condo in his name and then transfer the property to a man who would actually pay the mortgage. That man calls himself Jesse James Holliday. Holliday is a loan officer and licensed real estate agent.’”

“‘All of a sudden I’m a half-million dollars in debt, like that,’ Falk said.”

“A lot of things happened that Falk says he never expected. The property never was transferred out of his name. Someone lied on his mortgage application, claiming his income was three times what it really is. And they didn’t mention that he already has a mortgage on a home.”

“‘There’s no way I should have been approved,’ Falk said. ‘Someone fixed this. Someone had to. This isn’t my signature.’ Falk says that someone had to be Jesse Holliday.”

“After the deal closed, Holliday moved into the condo, but he never made any of the monthly payments. Now, the bank is going after Jon Falk to the tune of $400,000.”

“Holliday was convicted last March for using stolen identities to open up credit card accounts and buy a car. He got his victims’ financial information while working at a mortgage company. Holliday eventually did talk to FOX 9 by phone. We wanted to know how John Falk, with his modest income, ever got approved to buy a luxury condominium.”

“‘We didn’t verify anything,’ Holliday said. ‘He’s on a stated asset, income verification program. He stated to us what he made annually, we write that on the application. We’re not police officers.’”

“Both Holliday and Mickey Wong say the condo deal was legit. So what was in it for them besides a place for Holliday to stay? As real estate agent and loan officer they were in line to collect thousands of dollars for putting the deal together.”

“So who was the man on the security camera moving furniture out of the condo? Holliday says he took the stuff because it was his. He claims Falk sold him tens of thousands of dollars worth of furnishings for just $4,000. He says he won’t give it back unless ordered by a judge.”

“This FOX 9 investigation got the attention of the state commerce department. Jesse Holiday is now barred from ever working as a loan officer again, but he is also a licensed real estate agent.”

Some housing bubble news from Wall Street and Washington. “Toll Brothers Inc. said it may post quarterly writedowns as high as $160 million or more, which would handily top its previous estimate for all of 2007. The home builderposted first-quarter home-building revenue of $1.09 billion, down 19% from the year-earlier period.”

“The company said backlog at Jan. 31 was off 30% from a year earlier. Toll’s net signed contracts were valued at $749 million, down 34%. Net of cancellations, first-quarter contracts fell 33% from the first quarter of fiscal 2006. The cancellation rate was 29.8% in the first quarter.”

“‘Toll’s preliminary [first-quarter] results show a continuation of the weak demand that has plagued the builders in recent quarters,’ wrote Nishu Sood at Deutsche Bank. ‘Management’s recent optimism is notably absent following [first-quarter] results that showed continued order declines, elevated cancellation rates and the likelihood of additional significant write-downs,’ he added.”

“Robert Toll, CEO, stated: ‘Because some deals don’t make sense under current market conditions, we have continued to trim our land position. We ended the quarter with approximately 70,000 lots under control compared to our peak of 91,200 at 2006’s second-quarter-end.’”

“According to preliminary fiscal second-quarter figures, Orleans Homebuilders Inc. lost $7.5 million, compared to net income of $15.4 million in the year-earlier quarter. New orders were down 7 percent. Backlog was down by 52 percent and the cancellation rate was 24 percent, up from 21 percent in the year-earlier period.”

“‘The unfavorable market conditions in the housing industry have negatively impacted the company’s new order activity,’ the company said.”

“The company believes that the unfavorable market conditions may continue to have a negative impact on new orders and new order pricing in the near-term, thereby further reducing future revenues, gross margins and net income.”

From CNN World Business. “Europe’s biggest bank, HSBC Holdings, said its charge for bad debts would be more than $10.5 billion for 2006, some 20 percent above analysts’ average forecasts, due to problems in its U.S. mortgage book.”

“HSBC said in a shock trading update late on Wednesday that slowing house price growth was being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in more recent loans.”

From Bloomberg. “‘The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market,’ HSBC said in the statement. ‘It is clear that the level of loan-impairment provisions to be accounted for as at the end of 2006 in respect of Mortgage Services operations will be higher than is reflected in current market estimates.’”

“‘There will be some doubt about whether this is the big provision or whether it’s a sign of things to come,’ said Tathagata Guha Roy, who helps manage $1 billion for Alliance Trust Plc.”

“HSBC Holdings Plc CEO Michael Geoghegan is shaking up management and tightening lending policies after the bank’s losses from bad home loans in the U.S. increased. HSBC made the mistake of ‘going for volume’ and selling second-lien mortgages, Geoghegan said. The company plans caps on riskier lending, he said.”

“‘The impact of slowing house price growth is being reflected in accelerated delinquency trends across the U.S. sub-prime mortgage market, particularly in the more recent loans,’ the bank said in a statement.”

“‘over 90 percent of the portfolio is working,’ Geoghegan said. ‘We are taking provisions for what might happen.’”

“‘The situation has deteriorated faster than we had expected and given the uncertainty regarding future house price trends and the expected further seasoning of the most recent mortgage book, we put our estimates under review,’ said analysts at Goldman Sachs Group Inc.”

“New Century Financial Corp., which lends money to home buyers with blemished or limited credit histories, said late Wednesday it expects to report a loss for the fourth quarter. Because of accounting errors, the company also must restate results for the first three quarters of 2006. It hopes to have that done by March 1. The mortgage lender said it didn’t properly account for some of the home loans it had to buy back.”

“Like many mortgage lenders, New Century doesn’t keep its loans; it sells the loans to banks and investors. The deals normally have clauses allowing investors to force New Century to buy back a loan if the borrower misses an early payment.”

“Loan repurchases are bad for mortgage lenders because few investors would sell back a loan unless it lost value. Piper Jaffray analyst Robert Napoli said a repurchased loan has typically lost 15 percent to 20 percent of its value.”

“New Century made two accounting mistakes: It didn’t assume more investors would sell back loans, even as loan repurchases surged throughout 2006 amid payment defaults. And, New Century didn’t assume the repurchased loans would be less valuable.”

The LA Times. “New Century said it also would write down the value of the residual interests it retains in loans that have been used to create the mortgage-backed securities that have found eager buyers around the world.”

“As the housing market cooled over the last year, some lenders provided loans on overly easy terms to unqualified buyers, analysts have said. Some of these buyers, particularly those who purchased homes for the first time with low or no down payments, are believed to have stopped paying their mortgages when housing prices declined.”

From MarketWatch. “The company’s methodology for estimating the volume of repurchase claims to be included in the repurchase reserve calculation did not properly consider, in each of the first three quarters of 2006, the growing volume of repurchase claims outstanding that resulted from the increasing pace of repurchase requests that occurred in 2006.”

“Furthermore, the loans in question were repurchased because of early-payment defaults ‘by the underlying borrowers or based on alleged violations of misrepresentations and warranties in connection with the sale of these loans,’ otherwise known as ‘defects.’”

From Reuters. “U.S. mortgage lending practices are ‘out of balance,’ Sen. Christopher Dodd, chairman of the Senate Banking Committee, said. Foreclosure filings were up 42 percent in 2006 from a year ago in large part because of weakness in the subprime mortgage market, Dodd said, citing research from Realty Trac.”

“Dodd said ’subprime credit can be a valuable tool in helping people become homeowners’ but ‘the system is out of balance.’ He said he looked forward to working with brokers, bankers, regulators and Wall Street to ‘restore this balance for the sake of the safety and soundness of the banking system.’”

The Tampa Tribune reports from Florida. “Home builders should offer incentives or slash prices to sell off hundreds of thousands of vacant new houses glutting markets nationwide, housing experts warned Wednesday at the International Builders Show in Orlando.”

“‘I’m telling builders that we absolutely have to move these houses’ before the real estate market will rebound, said said David Seiders, chief economist for the National Association of Home Builders.”

“The Tampa Bay area is among the places with an oversupply of new homes on the market. There were 4,606 vacant new homes in the Bay area at the end of the fourth quarter of 2006, an increase of 1,700 from the same period a year ago, according to Metrostudy.”

“More than 34,000 existing homes are on the market in Hillsborough and Pinellas counties, according to local real estate trade groups.”

The Orlando Sentinel. “The industry still faces challenges brought on in part by overbuilding in 2004-05, when real estate speculators were among those snapping up houses, a phenomenon that resulted in hundreds of thousands of homes sitting unsold across the U.S., said Seiders.”

“‘There is a seriously large inventory,’ Seiders said, now that demand from investors has cooled and the market is struggling to return to more normal supply-and-demand levels. He said the industry overbuilt by about 400,000 units nationwide over a period of several years, though that number now is being whittled down.”

“Other economists who spoke Wednesday forecast that a rebound wasn’t likely to occur until later this year, and it could be a weak recovery because of high home prices.”

“‘Affordability is at the heart of what drives housing demand,” said Frank Nothaft, chief economist for Freddie Mac, the mortgage giant that helps provide liquidity for the $8 trillion home-loan market. ‘House prices have shot up so much over the past five years, it will take time for affordability measures to gradually improve.’”

“He said the industry still faces ‘a rocky road.’”

The Palm Beach Post. “Home prices will continue to slide for the rest of 2007, Berson said. For 2007, home price appreciation ‘is likely to move modestly negative,’ said Berson of Fannie Mae.”

“‘We’re not at the trough yet for single-family home sales,’ Nothaft said, noting that home prices will have to fall further to burn through the current high levels of housing inventory.”

“That’s not what the more than 100,000 home builders, Realtors and other industry representatives attending the four-day show at the Orange County Convention Center wanted to hear. But most acknowledge that today’s near-record level of homes follows a five-year run-up in home prices, fueled by low mortgage rates and investor dollars.”

“Nowhere was that more true than in Palm Beach County and the Treasure Coast. The median price of an existing single-family home in Palm Beach County soared to a peak of $421,500 in November 2005, plunged to $365,600 in October 2006 and ended the year at $368,200, according to the Florida Association of Realtors.”

“Median single-family home prices for the year in Palm Beach County posted a 10 percent annual decline from 2005.”

“The local condo market, however, ‘is not out of the woods yet,’ Berson cautioned. ‘There’s been a huge swell in price weakness in condos,’ he said. ‘The falloff was bigger in condos because they’re more like a commodity.’”

“Seiders of the builders association placed some of the blame for falling home prices directly on builders’ shoulders. ‘I told Congress we overbuilt the market by 400,000 units,’ he said.”

“Berson agreed. ‘Inventory overhang (unsold homes on the market) is causing price weakness,’ Berson said. ‘If builders had anticipated that, we wouldn’t see these price declines.’”

“The record backlog of unsold inventory nationwide is causing sellers major headaches, he said. ‘It means having two houses for sale on your block at the same time when you put yours on the market, which causes you to lower your price,’ Berson said.”

“Even though new-home builders have slashed prices and offered everything from upgraded appliances to free closing costs, they need to keep aggressively selling, Seiders said. ‘Because of builder giveaways, margins have taken it on the chin,’ he said.”

“Half of the builders surveyed said they cut prices in the fourth quarter of 2006, and 80 percent made non-price incentives, such as buying down interest rates, Seiders said. But builders need to do more, he said. ‘Builders have gotta keep up sales efforts and gotta keep inventory going down. The vacant units for sale are critical.’”

“Other factors besides overbuilding contributed to the housing market slowdown, the economists acknowledged. The lowest mortgage rates in a generation, aggressive lenders and record rates of real house-price appreciation that drew in investors also helped cause ‘a grossly overheated market,’ said Seiders, spreading the blame.”

“One of the worst effects of the housing market decline has been the rise in foreclosures nationwide. About 30 percent of homes that enter some stage of foreclosure get taken back by lenders and become part of the massive unsold inventory of homes, Seiders said.”

The Dallas News. “Berson blames speculators for a lot of housing’s woes. ‘We don’t think we have seen the bottom – the reason is not the core housing demand but investors,’ Mr. Berson said.”

“By some estimates, buyers of investment and second homes accounted for more than 30 percent of recent home sales. Many of those investor-buyers are now bailing from softening housing markets. If investors dump houses on the market, it could further depress prices in some areas.”

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