The Housing Bubble

The LA Times reports from California. “There’s a lot of speculation about where the housing market is headed. Dave Hennigan and the company he works for, Home Center Realty, don’t have the luxury of waiting to see how the story will play out. They need to make a living now, and they’re betting that things are going to get worse. Maybe much worse.”

“The roster of agents has sunk to 52, only about half of whom are active. ‘The rest are looking for side jobs at McDonald’s,’ said Home Center President Jason Bosch. ‘It happened overnight.’”

“In this queasy market, sales are slumping. Sellers remember the boom and want more money than they can get, while buyers feel they have unlimited time to make a decision. An agent’s best prospect for a sale is someone who must act now — a homeowner told by a lender to pay up or get out.”

“The new issue of the company’s 22-page listings magazine will tout nothing but distressed and foreclosed properties: 95 of them, many nearly new, each priced at around $250,000. ‘When you throw out the words ‘foreclosure,’ ’short sale,’ ‘repo,’ the buyer thinks it’s a deal,’ said president Bosch. ‘It’s still very early, but I’m convinced that’s where the market is going.’”

“Bosch thinks the residential real estate market will soon revisit the horrible days of the mid-’90s — and then get worse. ‘I have no doubt that we are entering the next phase of an unprecedented market,’ he says. ‘One that Southern California has never seen.’”

“Sure, there’s been employment growth in the area. But much of it, Bosch argues, was related to real estate. This was a boom that fed upon itself.”

“The biggest problem, Bosch believes, was created by the lenders. They used to be cautious. Sub-prime loans changed all this. As houses got more expensive, fewer buyers qualified under the traditional guidelines, so they went sub-prime.”

“Lenders would take their word on income. They no longer needed down payments. They didn’t worry that their loans would soon reset to higher interest payments. Nobody cared too much as long as prices went up, although many people in the business knew the day of reckoning wasn’t canceled but merely postponed.”

“‘To make a living, you had to push a product you didn’t believe in,’ said Aimee Quigley, a Home Center mortgage broker. ‘It was like being a defense attorney where you know your client did it, but you have to say he didn’t.’”

“Quigley says she tried to emphasize how quickly these loans would adjust, but the message rarely got through. ‘Nine out of ten times when these loans closed, we would sit there and say, ‘How long can they hold it together?’”

“If Hennigan barely knew what a default was in September, now the business is coming to him. Lenders are calling. In Fontana, he knows what to expect. No point knocking on the door. This house, like the others, is empty. The electricity is off, the grass brown.”

“It’s a foreclosure. In December 2004, there were about 12 foreclosures a week in Riverside and San Bernardino counties. In December 2006, there were 123.”

“He doesn’t have a key, but the back door is open. The carpets are stained, the living room wall has a hole punched in it, and the bedroom doors are missing. The lender will use Hennigan’s report to set a price and then turn it over to the agent to find a buyer. A little paint, a little plaster and it will go for $500,000.”

“Hennigan doesn’t know who the owners were, why they couldn’t pay or where they went. It’s much better this way. He doesn’t have to feel sorry for anyone. Instead, he can concentrate on work. ‘People are walking away from their houses,’ he says. ‘I’m giddy because I’m going to be so busy.’”

The North County Times. “The number of San Diego County properties in some stage of foreclosure increased by more than 50 percent in January from December, according to RealtyTrac.”

“Notices of default and foreclosures rose from 759 in December to 1,150 in January. That means that every one in 904 properties was facing foreclosure. In San Diego County, 915 property owners got notice last month that they were delinquent in paying loans against their properties, an additional 165 received a notice of foreclosure sale, and 70 had been foreclosed on and repurchased by a bank.”

“While foreclosures in Riverside County actually decreased by 30 percent, from 1,698 in December to 1,196 in January, the overall outlook is weak compared with San Diego. The most recent figures shows that troubled properties accounted for one in every 489 households.”

The Press Enterprise. “A racketeering conspiracy said to have defrauded more than 700 investors in multiple states, including California, was described last week in a federal lawsuit filed by two Rialto residents who claim to have suffered losses of more than $600,000.”

“Richard Ackerman, who represents the plaintiffs in both Riverside lawsuits, said the mortgage-fraud allegations focused on one facet of the operation, raising investment cash by borrowing against residential properties that allegedly were appraised at a much higher value than their worth.”

“The plaintiffs in the latest suit, Anna Richter and Deborah Weber, said they were persuaded by the defendants to extract all the equity from their homes, which was subsequently wired to accounts that the defendants controlled. They never received the promised returns, the suit said.”

“Richter said she borrowed $187,000 on their house in Rialto that Pacific Wealth used to help her and her husband buy three more homes. In addition, she said, Pacific Wealth opened credit cards in her name on which she borrowed $76,000 in cash. She said she invested that and another $15,000 from her 401(k) for a six-month investment that Pacific Wealth was touting in foreign currency.”

“The Richters’ finances started to crumble when in December Pacific Wealth stopped making monthly payments totaling $20,000 on the three investment properties, she said.”

“The Richters lost the funds they invested, she said, and also cannot afford the $4,400-a-month mortgage payment on the home where they and their four children live. In addition, she said, they must make $1,200-a-month payments on the credit-card borrowings. She said the family is trying to get their mortgage refinanced at a lower rate and, failing that, they may move to Texas.”

The Orange County Register. “Brea-based ResMae Mortgage Corp., a U.S. lender to Americans with poor credit, has filed for bankruptcy protection and agreed to sell its assets, court papers show.”

“ResMae said it made nearly $8 billion of loans in 2006, up from $540 million in 2003, when it entered subprime lending, papers filed with the U.S. bankruptcy court show. The four-year-old company nevertheless said it has been ‘devastated’ by a surge in defaults, which led to increased demand by investors that it buy back soured loans it had sold.”

“Closely-held ResMae’s ‘future and immediate financial performance has been adversely affected by challenging business conditions and significant repurchase obligations, and it faces a near-term liquidity crisis,’ General Counsel Steven Glouberman said in a court filing. ‘The proposed sale provides the best opportunity to realize value for ResMae’s creditors.’”

“The company said it employs 1,037 people, and hopes the sale will preserve jobs for more than 800. In court papers, ResMae said it does not have enough cash to fund operations past Feb. 16, and is seeking court approval to obtain operating cash from Credit Suisse. The asset sale also requires court approval.”

“Goldman Sachs & Co. analyst Lori Appelbaum wrote Tuesday: ‘The outlook for subprime mortgage credit quality remains extremely challenging.’”

“‘The fundamental issue is weak underwriting on 2006 loans coupled with flat to declining home prices nationally,’ she added. ‘The subprime mortgage market (is) now hitting peak levels of early payment defaults and delinquencies in 2007, with peak losses to follow.’”

The January sales numbers are out for Arizona. “As the new year began, the local resale housing market continued to slip with 4,520 sales recorded in January. This is down from the 4,620 sales of December 2006 and the 5,260 recordings of a year ago. This is the lowest monthly level for January since 4,220 sales were reported in 2003, which was the year that the hyper-market began in the local area.”

“For January 2007, 15 percent of all recorded sales were for homes priced from $125,000 to $199,999, 43 percent for $200,000 to $299,999 and 39 percent for homes priced more than $300,000.”

“Last year, the distribution was 20 percent of all recorded sales were for homes priced from $125,000 to $199,999, 40 percent for $200,000 to $299,999 and 36 percent for homes priced more than $300,000. The increase in the higher price levels demonstrates how the move-up market tends to become more obvious in a slowing market. Several areas are continuing to show declining price activity.”

The Arizona Republic. “Many of the people in Arizona who help home buyers finance what is often the biggest purchase of their lives are not licensed. It’s estimated that there are as many as 18,000 unlicensed people taking mortgage applications, negotiating rates and getting loan commissions statewide.”

“But things could change. If House Bill 2320 is passed, it will require the licensing of most of Arizona’s mortgage loan officers and originators and bring more accountability to the industry.”

“Kelly Lewan recently bought a home in north Phoenix’s Tatum Ranch. She secured a loan with a 9 percent interest rate and a promise that she could refinance in a few months and cut her payment. She even paid off a prepayment penalty on the loan when she closed.”

“Now, Lewan is struggling to make her monthly payment, and her mortgage agent isn’t returning her calls.”

“‘There are loan officers in Arizona who aren’t educated on the business. They make mistakes and put consumers in the wrong loans. And some are committing fraud,’ said Stan Lund, president-elect of the Arizona Association of Mortgage Brokers.”

“‘We want to regulate anyone who is soliciting loans and getting commissions,’ said Felecia Rotellini, superintendent of the state Department of Financial Institutions. She recently led efforts to start a statewide mortgage fraud task force to tackle a cash-back scam that involves obtaining a mortgage for more than a home is worth and pocketing the extra money.”

“‘The bad mortgage brokers who can’t pass tests in other states have gone to Arizona, and some of them couldn’t get licenses because they have criminal records,’ said Richard Hagar, a Washington appraiser who helped that state crack down on fraud.”

“‘I know of mortgage people working out of their bedrooms and selling stereos on the side. They got into the business six months ago and don’t know a lot about it,’ said Rick Allen, a branch manager with (a) Valley mortgage firm. ‘But the big lenders who are exempt from the legislation are also hiring people without any experience, and those people can also do bad loans.’”

“Lewan said she thought everything was on the up and up when her Valley mortgage officer said she could get a $310,000 loan for a $299,000 home. She said he told her the extra $11,000 could be applied to her debt and she could quickly refinance to get a better loan with a lower rate because her credit record would improve.”

“But she said most of the $11,000 went to the mortgage broker, and he won’t return her calls about the money or help her refinance to reduce her $2,400 monthly payment. ‘I called his boss and got nowhere, and neither my broker or his boss are licensed,’ said Lewan. ‘I trusted him, and now I can’t make my house payment and had no idea getting money back was part of a scam.’”

The Review Journal from Nevada. “The inventory of luxury condominium units for sale and under construction in Las Vegas far exceeds demand, local research firm Applied Analysis concluded in its fourth-quarter condo market report.”

“There is insufficient market demand to absorb all of the units in the development pipeline, Applied Analysis principal Brian Gordon said. Potential inventory of 98,432 units includes 57,999 planned or proposed units, 3,889 existing units and 11,124 units under construction.”

“‘Obviously the supply side of the equation continues to increase as far as the number of potential units,’ Gordon said.”

“Gordon estimates that 18,500 units will finish construction by the end of 2010. It’s not likely that the feverish sales volume reported by early developers will be sustained in the near term, he said.”

“‘From the demand side, we look at sales activity and pricing,’ Gordon said. ‘The number of units is off the feverish pace of 2004 and the first half of ‘05 as the investment component of buyers has dropped off dramatically.”

“The number of units available in the existing resale inventory was 557 at the end of the year, with an average asking price of $861,000, or $639 a square foot, Applied Analysis reported.”

“Jeremy Aguero, principal of Applied Analysis, cautioned that up to 60 percent of luxury condo units that close escrow could enter the market during the next 36 months in the form of resales.”

Some housing bubble news from Wall Street. “KB Home posted a net loss of $49.6 million for the fiscal fourth quarter on Tuesday, as it took $343.3 million of pretax charges for abandoning land option contracts and writing down the value of inventory, a consequence of the U.S. housing market downturn.”

“Net orders fell 38 percent in the quarter to 6,059, KB Home said. The cancellation rate was 48 percent in the fourth quarter, up from 31 percent a year earlier.”

“‘Last year was clearly a turning point for the U.S. housing market,’ said CEO Jeffrey Mezger. ‘During the second half of the year, an oversupply of unsold new and resale homes, reduced affordability, and greater caution among potential homebuyers heightened competition among homebuilders and sellers of existing homes, prompting the aggressive use of price concessions and sales incentives.’”

“‘Our results were further affected by declining land values and the resulting charges we recorded in the fourth quarter to reflect lower land values,’ said Mezger.”

“The Company’s housing gross margin decreased to 11.7% in the fourth quarter of 2006 from 27.1% in the prior year’s quarter, in large part due to pretax non-cash charges of $152.7 million for inventory impairments and $88.3 million for land option contract abandonments, as well as an increased use of price concessions and sales incentives. Excluding the non-cash charges, the fourth quarter 2006 housing gross margin was 18.8%.”

“‘As the year progressed, market conditions worsened, cancellations increased, net orders declined and margins came under pressure,’ said Mezger. ‘The result was a 2006 year-end backlog substantially below the year-earlier level. At a minimum, this will likely result in a year-over-year decrease in our unit deliveries through the first half of 2007 and potentially longer.’”

The Dallas Morning News. “In the midst of the biggest housing slump in over a decade, industry watchers are already trying to figure out where the business will head when the downturn is over.”

“Fort Worth-based builder D.R. Horton Inc. has been one of the biggest buyers of building companies, acquiring more than a dozen firms since the early 1990s. During last month’s earnings conference call, analysts asked Horton’s officers if they were shopping again.”

“‘The only reason we would want to do that is if we felt like we would need to add to our current land and lot inventory, which at this stage in the game we absolutely do not,’ CEO Don Tomnitz said.”

“National Association of Home Builders’s Gopal Ahluwalia said that top homebuilders are holding about six years of land inventory. ‘Now, with the decline in the housing market, that is causing more trouble,’ he said. ‘A lot of builders have disposed of land.’”

“Some homebuilding execs may be short on the experience to find their way through the current downturn, said industry consultant Michael Kahn. ‘If they came into the business after 1993, most of them have no idea what a down cycle really means,’ Mr. Kahn said.”

“Some equity investors are also considering purchases of public homebuilders whose stock is depressed. ‘We’ve been dealing with a number of private-equity groups that are looking to get into the business,’ Mr. Kahn said. ‘They are headed for a disaster,’ he said.”

From Bloomberg. “ResMae Mortgage Corp., a U.S. home lender to people with bad credit, filed for bankruptcy protection and said Switzerland’s Credit Suisse Group agreed to buy its assets to for $19.1 million.”

“‘Despite the earlier successes and persistent efforts of ResMae’s management team, the subprime mortgage market has recently been crippled and a number of companies stopped originating loans as U.S. housing sales have slowed and defaults by borrowers have risen,’ ResMae said in its Chapter 11 filing yesterday with the U.S. Bankruptcy Court.”

“Closely held ResMae is at least the 20th mortgage company to be sold or closed as delinquencies surge and the market for home loans to risky borrowers contracts at the fastest pace ever.”

From Reuters. “On Monday, Moody’s Investors Service said delinquencies of 60 days or more on securitized prime jumbo mortgage loans rose to 0.323 percent in November, the highest in 2006. That was also 8.7 percent higher than the 0.297 percent in November 2005, when the rate reached a ‘temporary apex’ following Hurricane Katrina three months earlier, Moody’s said.”

“On Friday, Countrywide said foreclosures rose to their highest level since at least 2002, while delinquencies held near a five-year high.”

“Early this month, Friedman Billings Ramsey & Co. said the default rate on subprime loans that were packaged into bonds reached their highest level this decade.”

“Then on Wednesday, in a report titled ‘Inferno,’ Credit Suisse analysts said the 60-day delinquency rate for second-quarter loans that were six months old had doubled from a year earlier to 5.7 percent.”

From CNN Money. “Some experts estimate that rates for subprime mortgage loans could rise a half to three-quarters of a percentage point because of the higher default rates, and that could top a full percentage point if the default problem gets worse.”

“‘Market forces in general will exert discipline on the process,’ said Sandler O’Neill analyst Mike McMahon. ‘Investors in lower-rated (mortgage securities) will demand higher yields, or alternately they’ll pay less for the securities, which will force the underwriters of this product to demand higher quality mortgage loans.’”

“McMahon and other experts say either move is likely to stop some potential home buyers from getting the financing they need to buy a home, money they might have been able to get in recent years.”

“‘At the margins what this is doing is making mortgage credit less accessible to some people,’ said Bose George, an analyst who follows New Century and other subprime lenders. ‘Maybe it’s a cohort that shouldn’t be borrowing in the first place.’”

From MarketWatch. “The number of U.S. homes entering the foreclosure process because of nonpayment on mortgages rose to 130,511 in January, 25% more than in January 2006, according to Realtytrac.”

“There were 14,728 foreclosure filings in Texas. Detroit had the highest foreclosure rate among cities: one for every 124 households. Greeley, Colo., had a foreclosure rate of one in 173, while Atlanta had one for every 214. Foreclosures doubled in Detroit and rose by 25% in Atlanta compared with December.”

“‘January’s foreclosure number represented the highest monthly number we’ve seen since we began issuing this report two years ago,’ said RealtyTrac CEO James Saccacio.”

The Herald Tribune reports from Florida. “It is no surprise that Michael Tringali is being forced to sell homes, home sites and land at public auction. When the market turned, he was unable to generate enough income from his home building and real estate investment activities to cover his nearly $87 million in bank debt.”

“Now a group of Tringali’s banks are forcing Tringali to hold a public sale. The auction should provide a fascinating glimpse into how far the once high-flying Southwest Florida real estate market has fallen. For sale are four luxury homes and 12 home sites in Sarasota County; 14 newly constructed, middle-class homes in Golden Verna Estates near Myakka City; and 253 acres in the same area of Eastern Manatee County.”

“With the downturn in residential real estate sales and the logarithmic increase in unsold homes across the region, Tringali’s properties will sell for much less than at the height of the boom,’ said Martin Higgenbotham, the owner and founder of the Lakeland auction house that is handling the sale.”

“‘Every builder built too many houses and there is way too much product on the market,’ said Higgenbotham, who formed his company in 1959 and has witnessed at least five real estate market cycles. ‘Whenever you have this much supply and only so much demand, prices will fall.’”

“This is not an absolute auction, said Donald Kirkland of Higgenbotham Auctioneers. ‘It becomes a question of what level of losses they are willing to take,’ said George Huhn, a Venice real estate agent and foreclosure specialist. ‘This auction is probably a trial balloon for them.’”

“Barbara Anson, a veteran real estate agent in Myakka City, said said Tringali has been trying to sell houses at Golden Verna Estates for $400,000 to $500,000, which she believes is much too high. Anson predicts that Tringali’s 253-acre spread in East Manatee will fetch no more than $6,000 per acre.”

“That is in spite of the fact that Neil Mohamad Husani paid $12,000 per acre, for the property in August 2005, and quickly sold it to Tringali in a cashless transaction valued $7.6 million, or $30,000 per acre.”

“It is Coast Bank that is now on the hook for the property. For the bank to recoup its losses, Anson believes the property will have to be sold for $19,525 per acre. But that is impossible, she said. ‘It is agricultural land. Nothing has been done down at the county to subdivide it.’”

“That means the bank will have to take a $12,500 per acre loss on the property — a total hit of $3.1 million — if it wants to sell on auction day. ‘That’s why I don’t think it’s going to sell,’ Anson said.”

“One thing is for sure, though, Higgenbotham added: This is not going to be his company’s last auction of the year. ‘Auctioneers always get busier in a down market,’ he said. Because of the chronic oversupply of homes in Florida, local auction activity should be especially brisk in 2007.”

“The average monthly apartment rent in Sarasota, Bradenton and Venice fell by $8 in the fourth quarter of 2006, the first time the market’s rent came down in at least two years, according to a national research firm.”

“Several landlords blamed the drop on the high number of investment properties on the rental market. Lack of tenants has also played a role, as occupancy fell from 97.8 percent at the end of 2005 to 92.3 percent at the end of 2006.”

“Landlords such as Al Holmes say the market is so saturated with $1,000-and-up rentals that landlords can’t charge higher rent, he said. ‘So many investors have bought them and they can’t sell them and they put them on the rental market. In North Port they’ve got a super glut,’ Holmes said. ‘This is very typical of investors. They’re not landlords. They’ve been forced to be landlords.’”

“RealFacts’ data doesn’t account for hundreds of single-family homes that have hit the rental market in the past year. Chris Bates, a spokesman for RealFacts, said it is clear Southwest Florida’s rental market is ‘in flux.’”

“Bates said Southwest Florida’s landlords could read that statistic as a new trend: renters are sitting in apartments, watching property values and for-sale prices fall, and contemplating buying.”

“‘Looking at these numbers, I would say owners were just a little slow in figuring out that their occupancies were going down as much as they were,’ Bates said. ‘Buyers aren’t necessarily buying. They are staying in apartments and waiting.’”

“Gerri Holmes, secretary of a local landlord association, hopes that scenario doesn’t unfold in Sarasota, but anecdotal evidences suggests it is possible. ‘When we have our meetings we ask our landlords if anybody’s got vacancies. And it seems to be that everybody’s got at least two vacancies,’ she said.”

“Renting is a necessity for some investors who need money to help pay the mortgages on investment properties that won’t sell. John Stone, broker in Palmetto, told the Herald-Tribune that some newer communities in Manatee County displayed ‘a classic case that someone’s trying to help with the cash flow.’”

“‘You’ll see a ‘For Rent’ sign and a ‘For Sale’ sign on the same yard,’ Stone said.”

The St Petersburg Times. “Re/Max Advantage Realty, once a dominant real estate agency in Pasco County, abruptly shut down Tuesday. Nearly 25 affected agents did not learn of the decision until Tuesday morning.”

“There was no explanation for the closing. Rick Miller, who said he represented the owner, would only say Tuesday that the closing ‘was just a business decision.’”

“Broker Barry Grover, who is one of the Re/Max contractors now looking for a new firm, said the real estate boom brought in inexperienced agents. As the market has slowed, he said, some had problems paying their company fees, which can run about $1,500 a month.”

A letter to the editor from South Carolina. “Re Bob Coombs letter, “Insurance burden will drag down S.C.,” Jan. 13: When real estate journalists report the local real estate agents’ scary scenarios about insurance killing sales, they should do the numbers themselves, not just listen to fantasies.”

“Just 18 months ago I heard story after story from agents about pricing property. Fairly recent market evaluation told them to price a unit at say $150,000. Then someone said, ‘Let’s put $175,000 on it and see what happens, and we did and had a contract in five days.’”

“I’ve spoken to people all over the East Coast who were buying condos off the Internet at any price because someone in their office bought a condo in Myrtle Beach and quintupled their money in 12 months. Just like the stock market of a few years ago, we have enjoyed a huge speculative bubble that may not have burst, but a lot of the air went out.”

“Unfortunately the speculators have an immediate and direct impact on our finances. Speculators have run the market up to a point that the rate of return on equity is poor and more money can be made in other investments. The rate of return on equity is always the basis for evaluating an investment (not a speculation).”

“Five years ago I bought a duplex for $95,000 that generated $1,100 in rents per month. In 2006 an identical duplex sold for $177,000, and it now generates $1,300.”

“So what effect does the insurance really have on an investment property compared to the price of the investment? If we need 1 percent of the sale price per month in rents to make a property a good investment, then a $100,000 property needs $1,000 a month in rents.”

“If I double the price of that property, as has happened, I need $2,000 a month in rents. If my insurance went from $800 a year to $2,000, a $100-a-month reduction in income, it has the effect of cutting the investment value of the property from $200,000 to $190,000. But the rents only went up $200 a month, which only raised the investment value of the property to $120,000.”

“Now, what is the real problem? In the article, real estate agent Steve Tansy says they can’t make the numbers work. Steve, if they gave the insurance away, the investment value would only drop by about $20,000.”

“The numbers still would not work. Somewhere, we have to come up with $700 a month more in income, or heaven forbid, drop the price back to where it is a good investment. Insurance regulation may need some work, but don’t blame the real estate market on the greedy insurance companies.”

“After all, who made all the money in real estate in the past couple years?”

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