The Housing Bubble

The Union Tribune reports from California. “San Diego County housing prices slipped last month to their lowest levels since mid-2004, DataQuick Information reported Wednesday. The median home price was $472,000, down 5.6 percent from January 2006’s $500,000, and the lowest since the $470,000 median price reported for July 2004.”

“The latest figure also was $23,000 or 4.6 percent lower than December’s median of $495,000, and represented the biggest December-January percentage drop in four years.”

“The new-housing category went from $460,000 to $395,000. This might reflect a burst in higher-priced home sales recorded in December as a result of builders seeking to book sales before Dec. 31.”

“The median home price in Ventura County plunged 6.5 percent to $565,000. Home prices in Ventura County have been down year-over-year since September.”

The Orange County Register. “Orange County’s median home price in January was $600,000, flat vs. revised statistics from a year ago, market tracker DataQuick reports today. Buyers grabbed 16.3 percent fewer O.C. homes last month that a year ago. It’s the 16th consecutive month that sales failed to meet year-ago levels. January’s median prices is down 4.8 percent from December.”

The LA Times. “Southern California home sales posted their weakest January in nine years, data released today showed. Only 18,128 homes were sold in the six-county region in January, said DataQuick. That was down 25.1% from a revised 24,209 in December, and down 17.2% from a revised 21,895 for January last year.”

“January is typically one of the slowest months of the year for buying and selling homes, but last month was the most sluggish since 1998, DataQuick said.”

“Some analysts expect Southern California home prices to continue to edge lower, eventually losing value and showing negative year-over-year growth. San Diego in particular is viewed as a housing trend-setter, because it was the first Southern California county to experience double-digit price appreciation at the start of the housing boom. As prices soften there, many expect the rest of the region to follow.”

“‘We will see a price peak and we will see prices come off that peak,’ said John Karevoll, DataQuick’s chief analyst. ‘It just hasn’t done that yet.’”

“Homes in the Inland Empire logged price gains as well but at a much slower pace. The median price in Riverside County rose 1.2% to $415,000, while sales plunged 34.2%. San Bernardino County’s median rose 4.2% to $370,000, and sales dropped 28.5%.”

The North County Times. “An alleged pyramid scheme focused on Murrieta real estate drew in large numbers of investors from Arizona and northern California and a scattering of others from as far away as Minnesota and Puerto Rico, according to documents filed in conjunction with a growing set of lawsuits.”

“The documents, drawn from a spreadsheet, appear to show a bewildering web of participants, including the four men and 423 ‘core clients’ and ‘golden clients.’ About 20 of those clients have signed on to the original lawsuit.”

“According to the original lawsuit, the plaintiffs borrowed as much as $3 million each in mortgage loans and credit card advances. They spent the majority of that on single-family homes in and around Murrieta. Many of the houses are now going into foreclosure.”

“The document identifies more than 100 of the clients as living in the Tucson, Ariz., area. It identifies other large clusters in the San Francisco Bay Area; Tacoma, Wash.; and northern Texas; and smaller clusters in eight other states and Puerto Rico.”

The Contra Costa Times. “The housing sector’s ailments have begun to sap the vitality of the job market in several East Bay industries. Loan officers, mortgage agents, real estate employees, development executives and construction workers are among the array of people who have lost jobs in the East Bay or are wondering when the ax might fall.”

“A slowdown has arrived and relief has yet to arrive on the horizon. ‘It’s a whole new world,’ said Guy Schwartz, a branch manager with San Ramon-based CMG Financial Services, whose products include home loans. ‘We’re hunkered down for a cold winter. We’re not sure when spring will arrive.’”

“CMG has been forced to respond to the slowdown by cutting its overhead. ‘We have cut staff,’ Schwartz said. ‘Loan agent assistants, loan processors, branch support people. We are down to the core and are trying to keep it lean.’”

“CMG is far from alone. Ownit Mortgage Solutions filed for bankruptcy. Mortgage Lenders USA Inc. has ceased operations. Countrywide Financial Corp. has retrenched and chopped jobs. EquiBanc Mortgage ceased operations in January. Mandalay Mortgage exited the wholesale mortgage business.”

“A number of Bay Area residents who have worked for a long time in the financial side of the housing market are concerned about the severity of the slowdown.”

“‘This is worse than I’ve seen it before,’ said Judi Ott, a San Ramon resident who has worked for a number of years in the design studio of an East Bay home builder. She was laid off in June. Ott said, ‘I didn’t really get any interviews. Everyone I talked to said they were laying off. Nobody was hiring.’”

“Ott found a job with a mortgage company. ‘It’s not hard to get a job with a mortgage company because they put you on straight commission,’ Ott said. ‘It’s just hard to make any money. It’s a bad time of year to get into it. It’s a bad time with the real estate economy. It’s just a bad time for this business.’”

“That’s an assessment shared by Akiko Davis, a Dublin resident and loan processor who has been laid off and is looking for work. ‘It’s very difficult,’ Davis said. ‘The companies are getting very picky. It is getting harder and harder to find jobs.’”

“‘It has slowed down tremendously,’ said Indira Winesberry, a San Francisco resident and senior loan processor. ‘During the busy times, I could get a job in two days. I haven’t even had a call in three weeks. I’m working as a real estate broker right now, but I haven’t even received any calls for that.’”

The Post Dispatch reports from Missouri. “Residential sales have slowed nationwide, and the downtown market is no exception. At the same time, an unprecedented number of downtown residential units are in the development pipeline. Those factors probably played a role in Cordish Co. asking the city to make residential condos optional in Ballpark Village.”

“‘They may have looked at all the units coming online and are on the market, and they don’t think the absorption is going to be there,’ said Joe Flaherty, senior adviser for Grubb & Ellis/Gundaker Commercial, in Chesterfield.”

“According to a survey, 1,275 new rental units and 6,088 for-sale units were put on the downtown market from 1988-2006. About 88 percent of those units are occupied, according to the study. Even the strongest supporters of downtown growth say that, at least in the short term, demand isn’t likely to keep up with the supply of new units.”

“‘I don’t want to be naïve about it,’ said Jim Cloar, executive director of the Downtown St. Louis Partnership. ‘There’s quite a bit coming online in the spring, and there will be a natural drop-off (in occupancy numbers). But in the next few years, it will get better.’”

“Demographics, however, suggest it could get worse before it gets better. In all, 834 rental and 471 for-sale units are under construction downtown. Another 2,669 rentals and 865 for-sale condos are proposed or planned over the next five years.”

“If all of the proposed units are built and occupied, the downtown population would increase by about 9,800 people in less than five years. That would be a 50 percent increase over the growth rate from 2000 to 2005, based on the downtown partnership’s estimates.”

“‘I hate to say it like that, but the best thing that can happen to downtown right now is for inventory to go down,’ said Dennis Norman, president of St. Louis Association of Realtors. ‘The market is very competitive, and I am hearing from developers that are doing very well, some that are just holding their own and some that are having a hard time.’”

“But many developers keep going because projects are being driven by tax incentives, rather than market demand, said Dan Woehle, VP for CB Richard Ellis. ‘It would be better if the units come online as the demand builds, but developers are scared that the incentives are going to go away,’ Woehle said.”

The Detroit News from Michigan. “Wayne County posted the highest rate of home foreclosures among major metro areas in the nation during January, seven times more than the national average, while Oakland and Macomb counties took huge hits, too.”

“The Wayne County/Detroit area reported 6,653 new foreclosures in January, more than twice the number reported in December. Meanwhile, Oakland saw a 338 percent increase from January 2006, with 1,324 foreclosures filed; Macomb posted a 108 percent increase, with 1,241 foreclosures.”

“‘It’s not easy to say if we have bottomed out. I haven’t seen a forecast that says when the situation will turn around,’ said Bill Martin, chief executive officer of the Michigan Association of Realtors.”

“Instead, the Realtors association is seeing more anecdotal evidence of mortgage fraud that preys on homeowners trying to lower or refinance their mortgage payments, Martin said.”

The Star Tribune from Minnesota. “In the midst of an already busy season in Burnsville’s ongoing effort to build a downtown, the new owner of condos that sat nearly empty for more than a year in the Heart of the City wants to finally fill the building, and quickly. Having recently taken title, the new owner is selling the remaining condos at discounts of up to $100,000.”

“‘It’s time to sell these things,’ said George Zeller, manager of the Minneapolis firm that bought the mortgage from the bank that made the original loan. The firm is orchestrating a publicity blitz that it hopes will culminate in a one-day sale Saturday.”

“Federal investigators are probing a multimillion-dollar mortgage scheme involving inflated real estate prices, according to court documents, and industry leaders believe the case is only part of a larger problem.”

“Between December 2004 and August 2006, Jill Lehn, a former mortgage loan closing agent from Prior Lake, prepared loan documents that overstated the purchase price of the properties and concealed the overpayments from lenders, according to the U.S. attorney’s office in Minnesota.”

“The scam, uncovered by the Internal Revenue Service, allowed buyers to pocket the difference between the actual purchase price of the property and the inflated mortgage amounts. Lehn was the buyer in a half-dozen of the transactions.”

“Chris Galler, VP of the Minnesota Association of Realtors, said in a recent letter to members that he expects ‘a series of arrests’ in the next month or two resulting from investigations into the Lehn case by the FBI and the Department of Justice.”

“‘We don’t know how widespread [mortgage fraud] is, because finding one person leads to another and to another,’ Galler said.”

“Bill Walsh, a spokesman for the Commerce Department, described mortgage fraud investigations as a ‘web that just keeps unraveling.’ He said the agency issued 25 subpoenas in connection with those investigations over the summer. ‘These are new, sophisticated crimes where everyone in the transaction is involved,’ Walsh said.”

“The boom market in real estate in recent years helped create more opportunities for illegal activity, with much of it passing undetected until loans started going bad. In recent months, mortgage delinquencies and foreclosure rates have skyrocketed.”

“In December, Lehn pleaded guilty to one count of wire fraud and one count of money laundering. She is awaiting sentencing. Since being confronted by FBI officers in August, Lehn has been cooperating with investigators. ‘I’m trying to make the best of a bad scenario,’ she said. ‘I made a mistake. I bucked up, I’m paying the price. I can’t be mad or disappointed at anybody but myself.’”

“Although the spring housing market isn’t going to break any records, it is showing some signs of recovering from the deep doldrums of late 2006, according to data released Monday by four Twin Cities-area Realtor associations.”

“The most telling indicator of what to expect in the coming months is pending sales for January, which were down 6 percent from January 2006, compared with double-digit declines during much of 2006. That’s about 600 fewer transactions than were posted when the market peaked in 2003.”

“Buyers have more choices than ever, too. Inventory remains at record highs’ Last month, the number of new listings was up 5 percent. That, too, is relief from the double-digit increases during 2006, but it was still the highest number of new listings added during January since the boom began six years ago.”

“Steve Hyland, president of the St. Paul Area Association of Realtors, said the median price of pending sales is the lowest in two years. ‘Sellers appear to be much more motivated than we’ve seen in previous months,’ said Hyland, broker in Edina.”

Some housing bubble news from Wall Street and Washington. “Accredited Home Lenders Holding Co. reported a quarterly loss three times larger than Wall Street expected as more homeowners defaulted on mortgages. CEO James Konrath called Accredited’s results ‘dissatisfying,’ citing a ‘difficult credit environment.’”

“Subprime lenders are being battered by lower volumes, narrow margins and rising defaults. Accredited said on Wednesday it set aside $42 million more reserves at year-end than in September because delinquencies are rising, and investors are forcing it to buy back more soured loans.”

“Lending volumes declined, as mortgage originations fell 18 percent to $3.87 billion.”

“The company will not issue a 2007 earnings forecast, yet said market turbulence will persist through the year’s first half. It expects loan volume to decline and origination costs to rise in the first quarter from the fourth quarter.”

The LA Times. “Fremont General said Tuesday that it would stop making second, or ‘piggyback’ mortgages, that allow borrowers to use a second loan in lieu of a down payment when buying a home. The company said it could no longer sell the second loans at a profit because of the turmoil in the sub-prime business and investors’ fear of defaults.”

From Bloomberg. “Santa Monica California- based Fremont General stopped offering the programs because it can no longer sell the loans at enough of a profit, said Trude Tsujimoto, general counsel for Fremont Investment & Loan, which does the company’s subprime lending.”

“Most of the extra $1.8 billion HSBC will set aside to cover bad loans relates to subprime home equity loans, executives for the bank said. ‘Where we believe that the first lien mortgagee will foreclose, and we’re seeing a lot of that going on, we are then saying it’s unlikely we’ll get anything for the second lien,’ HSBC CEO Michael Geoghegan said.”

“Fremont in mid-2006 tightened lending standards for ‘80- 20′ combo programs, where the second loan represents 20 percent of a home’s value. About a quarter of subprime mortgages in 2006 involved combo programs, up from 16 percent 2004 and 1.3 percent in 2000, according to UBS AG.”

“‘The answer to solve everybody’s problems was the 80-20s,’ as the lending also allowed mortgage companies to help borrowers get into homes made less affordable by record home price appreciation in many states, said Jack McCleary, head of asset- backed trading for UBS.”

“Fremont last month cut programs that allowed borrowers to put no money down without proving their incomes, put down less than 10 percent for properties sold without real estate agents or refinance loans already more than 90 days late.”

The Financial Times. “A savage sell-off has swept through the credit derivatives market for sub-prime mortgages since HSBC and New Century Financial delivered a bitter pill to investors last week.”

“‘Shorting sub-prime credit has finally worked for the housing bears, finding its ultimate expression through the ABX index,’ says Gyan Sinha, mortgage strategist at Bear Stearns.”

“‘Liquidity has (temporarily) evaporated from the ABX market and a ferocious sell-off has caught most of the market off-guard,’ say Gary Jenkins and Jim Reid, analysts at Deutsche Bank. ‘This is perhaps evidence that in the world of structured credit and leveraged positions, things can change very quickly if the facts change.’”

“The Deutsche analysts add the unknown risk is whether any investor in ABX products faces liquidation pressure elsewhere in their portfolios. ‘As a minimum, the conclusion we draw from this recent (and so far isolated) event is that we need the US economy to be strong for the leverage in the system not to cause a panic, and that when the next downturn in the economy does come, credit is unlikely to be immune from this,’ they say.”

From Reuters. “A new version of a derivatives index that lets investors hedge U.S. subprime mortgage exposure on specific layers of risk is slated to hit the U.S. asset-backed securities market on Wednesday.”

“Some investors doubt whether the latest index will become a popular hedge tool for investors, given the sharp slide to new lows in the ABX 06-2 and 07-1 series. ‘I don’t know if this thing will ever get off the ground. You’ve got two of the worst-performing indexes and you’re going to create another product off of that? I just don’t know if that’s going to fly,’ said Mike Kagawa, portfolio manager at Payden & Rygel.”

The Orange County Register. “If guys like Steve Schroeder are correct, shoppers will have another score to worry about when they’re house hunting. But Schroeder thinks you’ll soon need a ‘collateral risk score’ too, a computerized analysis of the home’s pricing to ensure it’s logical.”

“As this housing cycle warmed up, I can’t tell you how many lenders swore to me this time wouldn’t be another boom-to-bust. Why? New loan-checking technology. Yet credit scores may not have been enough. Apparently, credit scores couldn’t entirely tell the lender how risky the loan would be.”

“Eventually, Schroeder thinks these scores will be part of the borrowing process. The computer, unlike other participants in the process, can’t be bullied or swayed by the cash-filled lure of a closed sale. ‘It’s a whole new ballgame,’ Schroeder says.”

“Schroeder knows that lenders made more than their fair share of mistakes in this real estate cycle. ‘This industry operates a lot like a herd of lemmings,’ Schroeder says. If one type of loan becomes popular, lenders frequently have few choices. Do those hot deals or fail to thrive, or even survive.”

“‘The business pressure was tremendous. That began extending the idea of what was a good loan,’ says Mark Fleming, CoreLogic’s economist. ‘Now everybody’s pulling back on their appetite for risk.’”

From MarketWatch. “U.S. retail sales fizzled at the beginning of the year, with big declines in auto and gasoline sales. The report showed ‘a continuing trend of weakening growth in consumer spending,’ wrote Scott Hoyt, an economist for Moody’s Economy.com. Energy prices and, the housing bust will be ‘formidable obstacles to spending growth.’”

“Masco Corp., the maker of Behr paint and Delta faucets, had a fourth-quarter loss after a decline in the U.S. housing market reduced demand. It was Masco’s first quarterly loss in five years. Sales in the quarter fell because of the slowdown in new home construction and a moderation for consumers paying for ‘big ticket’ home-improvement items such as kitchen cabinets.”

“Fed chief Ben Bernanke said Wednesday that the central bank is comfortable with rates at their current levels but stressed that further rate hikes could occur if the inflation outlook worsens.”

“Tentative signs of stabilization have appeared in the housing sector, he said. ‘However, even if housing demand falls no further, weakness in residential investment is likely to continue to weigh on economic growth over the next few quarters as homebuilders seek to reduce their inventories of unsold homes to more-comfortable levels,’ he said.”

“As a result, the housing market continues to be a key downside risk to the growth forecast, he said. The FOMC trimmed its forecast for real GDP growth in 2007 to 2.5%-3% from its earlier estimate of a range of 3%-3.25%. Bernanke said growth would strengthen over the course of the next two years as the drag from housing diminishes.”

The Herald Tribune reports from Florida. “Barbara Simons is furious with Murray Sherry, the outgoing board president of the south Sarasota complex, and with everybody else keeping her from holding an open house to get out from under the condominium she inherited from her mother, to her a half-million dollars on the hoof.”

“Simons figures an open house or two could help the place compete for buyers. She listed her condo a year-and-a-half ago. Two price reductions, or $100,000 later, she still has no takers.”

“The current price range on Pelican Cove listings is $219,000 to $599,000. The top used to be $699,000, says Pelican Cove resident and real estate agent Tony Lingrosso. ‘There’s only been one sold in January. Asking $285,000 and it sold for $210,000. It needed some improvement.’”

“Now, there are at least 65 units up for grabs, not counting For Sale by Owners. That works out to nearly 10 percent of the stock, a worrisome figure to sellers who are reaching out for fresh solutions.”

From TC Palm. “Renters, take your pick: A two- bedroom apartment for $900 a month or a three-bedroom house with a garage and a yard for a little more.”

“With investors struggling to sell off the Treasure Coast homes they had hoped to flip, many are putting them on the rental market. The influx is forcing apartment complexes to offer move-in specials to compete.”

“‘We lost a couple last week that found a three-bedroom house in Tradition for only $100 more,’ said leasing specialist Sarah Strickland. ‘It happens all the time. There is a lot of competition right now.’”

“With 40 vacancies in its luxury lot, the property management company is offering a half-a-month security deposit and last month free, Strickland said. In some cases, though, she said that more motivated owners are ‘getting really creative’ with incentives.”

“The change in the rental market is slight and has happened over the past three to four months, said Casey Cummings, president of Ram Development. ‘It has impacted us a bit,’ Cummings said, adding that vacancy has dropped about 3 to 5 percentage points, but remains above 90 percent. Ram has started offering move-in specials, such as waived fees.”

The Tampa Tribune. “Two buyers in the stalled Trump Tower Tampa condominium say it is impossible for developers to finish the 52-story tower by the time their contract mandates. The buyers want their money back and have sued to get out of the deal.”

“The buyers’ attorney, Thomas Long, said his clients don’t believe the riverfront condo will be built and feel misled.”

“‘When you do a high-rise, particularly on land on the riverfront in a marshy area, you better make sure you can build it - before you start collecting the profits,’ said Long.”

“The suit says the buyers were lured into purchasing a $1.4 million condo because they believed Donald Trump owned ‘a substantial stake’ of the project. ‘Donald Trump has boasted that his partnership with SimDag is more than a licensing or marketing arrangement,’ the suit states.”

“Long said his clients have since learned that the developers paid the real estate mogul for the naming rights of the building. ‘If you look at the Web site, it says Trump is a partner,’ Long said. ‘Now, we don’t know where Donald Trump fits into this deal.’”

“Trump has said that the original developer paid him an undisclosed sum in exchange for naming rights. As part of the agreement, the developers must build the tower to certain specifications and standards of the Trump brand, but no one from the Trump organization is involved in the construction process.”

“Darryl C. Wilson, a professor of property law at Stetson University, said the suit sounds weak on the surface. ‘You have to give them a chance to fulfill their contract,’ Wilson said.”

“The plaintiffs made a 20 percent deposit in August 2005. The suit says the deposit consisted of $148,200 cash and a letter of credit in the same amount. Wilson said it may be too early for others to sue, but if these plaintiffs are awarded their money back, ‘it would certainly open the floodgates for other buyers to follow.’”

The Orlando Sentinel. “Spring is still more than a month away, but the for-sale signs are sprouting early this year as home sellers hope to elbow their way into an increasingly crowded field.”

“For Orlando-area homeowners eager to sell now, the numbers have gotten much worse, and the wait for a sale could be much longer.”

“Orlando Regional Realtor Association members recorded only 1,314 homes or condos sold in January, making it the weakest month for local agents since January 2002. The number of properties for sale in the core Orlando market rose by 1,729 to a near-record 21,266, and at January’s slow sales pace, that was the equivalent of a 16.18-month supply.”

“‘That’s a lot,’ said Janice Leckart-Smith, who has sold homes in Orlando for 15 years. ‘If you get an offer that’s halfway decent, take it.’”

“And remember: The Realtors’ listings don’t include thousands of other homes on the market for sale by owner, houses such as Bobbi-Jo Borges’, whose upscale Seminole County pool home has an $859,000 price tag.”

“Borges said she has been running a classified ad and advertising on Web sites for about a month, after listing the Oviedo home through a Realtor last year. So far, she has had no offers she thinks reasonable. ‘Lots of people are looking, but they’re just not serious,’ Borges said. ‘I’m about to reduce it to $839,000. I’m getting a little impatient.’”

“Gary Balanoff, VP of the Orlando Realtors group, said the local resale market for homes is ‘definitely challenging’ for sellers but offers opportunities for buyers. ‘It’s about as good a time as we’ve ever seen in terms of availability — across every price range,’ said Balanoff.”

“Balanoff said many listings hitting the market in recent weeks are condos or town homes, a category with more than an 18-month supply at the recent sales pace. Single-family homes account for about 15 months’ worth of sales.”

“The local Realtors’ January report noted that there were 3,648 condos for sale through their MLS, up 12.7 percent from December. Duplexes, town homes and villas accounted for 1,848 units, up 12.1 percent, while single-family homes totaled 15,770, up 7.6 percent.”

“Condo sales in January were off 47 percent from the same month a year ago, and association members said that’s good for renters because units that remain unsold are likely to be leased to tenants.”

“The competition is intense between existing-home sales and the many new-but-empty homes marketed by builders, Balanoff said, and builders generally have more incentives to entice wavering buyers. For people trying to sell a used home, he said, ‘You have to compete not only with your neighborhood but [with] the new-home neighborhood down the road.’”

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