The Housing Bubble

A report from the Idaho Statesman. “An Idaho Statesman analysis shows the biggest group, 43 percent, of newcomers to Ada and Canyon counties from 2000 to 2005 hail from other places in Idaho. Just 11 percent came from California, and as many people came to the Treasure Valley from Phoenix, Seattle, Portland and Salt Lake City as came from Los Angeles or San Diego.”

“The data comes from the Charlotte (N.C.) Observer, which collected IRS tax-return address changes from 2000 to 2005. While a healthy chunk of the newcomers do hail from California, many are rural Idahoans drawn to Boise’s metro area by plentiful, better-paying jobs.”

“While many rural Idahoans move to the Treasure Valley for jobs and an urban lifestyle, many out-of-staters are escaping big-city headaches. A major attraction is quality of life at an affordable price.”

“But migration is changing the way long-timers live, too. From 2000 to 2005, the median home price in Maricopa County, Ariz., (the Phoenix metro area) jumped from $129,200 to $212,700. In the same period, Ada County also saw median prices increase, from $124,700 to $167,500.”

“That was still a bargain by San Diego prices, where the 2005 median home price was $552,000.”

“Pamela Hoevel, her husband, Darren, and her parents wanted out of the Bay Area in California. The family had a checklist: high-tech job opportunities, good schools, strong business climate, temperate weather, outdoor activities and affordable living.”

“The Boise area fit like the last piece in a puzzle, Hoevel said. The family moved here in August. ‘The people in California are always stressed because of the high cost of living,’ Hoevel said. ‘We came here, and we could afford a house,.”

“The Hoevels bought a home in Star, where Darren can telecommute to his job at an Internet company. Pamela’s parents, David and Lauren Ianniciello, settled in Eagle.”

“A couple weeks ago, Bob Thompson and his wife migrated to Idaho from Park City, Utah. Thompson, 52, said he was happy to escape growth in Utah caused by ‘California flight.’”

“‘Park City is getting insane. When I moved there, it was a two-lane road,’ Thompson said.”

“He compares Boise’s traffic to backed up rows of cars at Las Vegas intersections but said he likes the friendly neighborhoods and the variety of outdoor activities. The couple is hoping to buy or build a home, and Thompson, a carpenter, plans on getting in on the Treasure Valley’s construction boom.”

The Register Guard from Oregon. “Chalk it up to January’s nasty weather or a general slowing of the real estate market. Whatever the reason, home sales in Lane County started out the year at a relatively leisurely pace, according to figures released Tuesday by the Residential MLS in Portland.”

“Although the number of new listings countywide was up 9 percent over January 2006, the number of sale agreements dipped 3 percent for the same period.”

“One of the greatest indicators of the slowing pace of the housing market is the time it takes to sell a house. A year ago, houses sold in 55 days, on average. At that rate, with 558 new listings to choose from on top of about 850 already on the market last month, the number of houses available for sale would last about 5.6 months, longer than any time during at least the past two years.”

“One difference from a year ago at the high end of the market ‘is a lot less pressure from California,’ said Jackie Hawks, broker/buyer specialist in Eugene. ‘I think their market has softened a bit.’”

“Real estate trends in Douglas County were similar to Lane County in January, with new listings up about 3 percent. However, pending sales took a sharper dive, down 24 percent, and the number of closed sales dropped 15 percent from January the year before.”

“The inventory of housing available in Douglas County would last as long as a year, assuming a perfect match-up of buyers and sellers for properties already on the market. That’s nearly double the 6.5-month inventory of January 2006 in Douglas County.”

The Oregonian. “As the all-important spring selling season approaches, Portland’s housing market continues to show signs of slackening. Home prices have essentially been flat since late spring, and have even come down a hair since their peak in June, when the market was gyrating upward and the area’s median price hit $280,000.”

“New listings were up 19 percent in January compared with the same period last year, and closed sales were down 9 percent. Consequently, the inventory of homes for sale in the region hit a 6.2 month supply in January, its highest level in five years.”

“‘It’s the thing we expected, transitioning from a seller’s to a buyer’s market,’ said Jerry Johnson of a Portland economic consulting firm. ‘If this is as bad as it gets, we can live with that.’”

“Johnson cautions, ‘There’s no way we’re replicating the first six months of 2006 in the first six months of 2007.’”

“Don’t tell that to area home builders and real estate agents, who are still sounding a boosterish note as they head into home sales prime time. Many of them blame the media for spreading doom-and-gloom stories that have scared away buyers.”

“‘In reality, the market is still incredible — it’s not like we’re Las Vegas or Arizona, where we can continue to build into the desert,’ said Rob Young, a broker in Clackamas County.”

“Yet RMLS statistics and anecdotal accounts suggest that Clackamas County, specifically Happy Valley, is one of the weakest pockets in the metro area precisely because there is so much new building going on.”

“Johnson, the consultant, says he hopes area home builders will show some restraint in coming months and let the market catch up with supply.”

“There are already signs that they have their ears to the ground. The number of building permits issued for privately-owned housing units in the Portland area was 663 in December, down more than 50 percent from December 2005 and substantially less than any month in the last two years, according to census figures.”

A housing report from the Arizona Republic. “One set of victims bought a house as an investment, only to realize that it belonged to someone else. Another had a lender knock on the door and immediately foreclose on the home, leaving the family on the street. They’re just a few examples of how a Valley mortgage-fraud ring with ties to a former Goodyear real estate agent left seven families in the lurch.”

“This notion of stealing someone’s house and borrowing money against it, something this blatant is new to me,’ said Ted Noyes, who prosecuted the case for the Arizona Attorney General’s Office.”

“‘This mortgage-fraud case had a lot of impact on a lot of families,’ said James Todak, a special agent for HUD. ‘They were defrauded, and we investigated the suspects aggressively.’”

“With the cooling real estate market in the Valley, Todak expects that HUD will get slammed with more bank- and mortgage-fraud cases. Technically, a crime doesn’t occur until a bank suffers a loss. In the hot housing market, people could turn around and sell their properties for a profit to pay off loans. But in the shadow of the prosperous market, that option isn’t as readily available, and banks end up foreclosing.”

“And that’s when cases of fraud start bubbling to the surface. ‘We expect losses to go through the roof,’ Todak said of cases in the dwindling market.”

“‘The best thing a person can do is be proactive and monitor their holdings with the Recorder’s Office,’ he said. ‘Oftentimes, these crimes prey upon people who are already in financial trouble. But when something sounds too good to be true, it usually is.’”

The Denver Post from Colorado. “To understand what’s happening to the mortgage industry, take a look at Douglas County. One of the country’s most prosperous communities now has a foreclosure rate approaching what its former public trustee calls a ‘tipping point.’”

“In 2006, foreclosures as a percentage of population were higher than any other year since 1991, said Jack Arrowsmith, Douglas’ former public trustee and its current clerk and recorder.”

“At a recent foreclosure sale, Douglas officials offered 32 residential properties for auction. According to Arrowsmith, nobody bid on 31 of them. That’s why mortgage companies making risky loans are now closing by the hundreds.”

“So on Tuesday, when a Federal Reserve governor expressed shock at the quick national collapse of the risky lending market, she sounded vaguely like Capt. Reneau in ‘Casablanca.’”

“The explanation for crazy lending has always been crazy. ‘It is no longer community banks making mortgage loans,’ Englewood lawyer Robert Hopp told a recent foreclosure seminar at the Colorado Bar Association. Out-of-town lenders provide mortgage money for a fee. Risky loans are quickly packaged with other mortgages and sold as securities for a fee. Investors buy the mortgage-backed securities expecting a fat return.”

“Everybody gets paid. Risks get diluted in big loan portfolios. Those who can’t afford houses suddenly can. It all sounds too good to be true because it is. Now, the only people capable of stopping the madness, the money grubbers, are getting a clue.”

“Arrowsmith lived through the real estate bust of 1988, when home values actually declined. It was ugly. ‘It’s a positive thing that lenders are starting to review the process,’ Arrowsmith said of the risky-loan meltdown. ‘But it’s going to take time. In the long term, lenders are going to require borrowers to put some money into their property.’”

“Sure, that thins the homebuying herd, but it forces folks back to the reality, and responsibility, of homeownership.”

“The risky-lending boom of the early 21st century was a Ponzi scheme. It depended on constant growth in real estate values. For lenders, growth meant collateral would always be worth more than the money tied up in it.”

“According to Hopp and Arrowsmith, some lenders made loans worth up to 20 percent more than the assessed value of homes. These lenders believed appreciation would make up for negative equity. When the market stagnated and borrowers couldn’t keep up with mortgage payments, negative equity and zero-down lenders ended up with a bunch of houses worth less than the amount of money owed on them.”

“When that happens, you get foreclosure auctions where only one house in 32 is worth a bid.”

Some housing bubble news from Wall Street and Washington. “Subprime lender NovaStar Financials shares tumbled nearly 40% Wednesday after reporting a fourth-quarter net loss. Problems with mortgages originated in 2006 knocked $17.4 million off fourth-quarter earnings. Provisions for losses on loans NovaStar has been forced to repurchase cut $13.4 million off results. More provisions for losses on a package of early 2006 mortgages the company securitized cost it another $10.3 million, NovaStar said.”

“NovaStar has tightened underwriting guidelines on its mortgages in response to the housing market slowdown, Lance Anderson, chief operating officer, told analysts during a conference call on Tuesday.”

“‘What happened in 2006, in the housing market we had a swift downward shift which caused the guidelines that we had in place to no longer be appropriate,’ Anderson said.”

From theStreet.com. “‘The credit performance of our portfolio, and specifically our 2006 originators, deteriorated during the fourth quarter, resulting in impairments on mortgage securities and additional loss provisions for loans held-in-portfolio in the REIT,’ says Scott Hartman, NovaStar’s CEO.”

“‘Also, our gains upon securitization were reduced during the quarter because of lower whole loan prices. Furthermore, during the fourth quarter, we experienced a greater level of loan repurchase requests due to early payment defaults than we have historically,’ Hartman said.”

“NovaStar is also considering whether it should retain the company’s real estate investment trust status, it says. NovaStar says it expects to ‘recognize little if any taxable income’ through 2011.”

National Mortgage News. “As the subprime carnage continued last week another concern was raised. One non-depository mortgage executive told us that warehouse providers (Merrill, others) have a provision in their contracts, stipulating that a lender must be profitable at least every other quarter.”

“In other words, if a mortgage banker loses money two quarters in a row, they could potentially lose their lines.”

The Charlotte Observer. “Wells Fargo Home Mortgage will close a Fort Mill, S.C., operations center that employs 250 people, the company said Tuesday. The center Wells Fargo is closing is part of the company’s high-rate lending business. The employees approve funding for loans made by mortgage brokers, and also purchase loans made by other lenders. Wells Fargo said it will close a similar operations center in California.”

“The company has responded to the defaults by tightening the requirements for new loans, further shrinking its volume.”

“‘We tightened our credit policy,’ Wells Fargo said in a statement. ‘This decision directly impacts our nonprime loan volume, which in turn impacts staffing levels in the areas devoted to managing these loans.’”

The News & Observer. “Eagerness among mortgage lenders to increase their fee income pushes them to sell as many loans as possible, even ones they know borrowers can’t afford, outgoing Federal Reserve Governor Susan Bies said. That is driving more people to fall behind on payments and default, she said.”

“‘There’s a real transaction-based mentality in the industry today that you didn’t have 20 years ago,’ Bies said. ‘To make a decision faster, and try to get the customer to say yes to you before they go and shop anywhere else, they’ll waive terms.’”

From Inman News. “Chris Flanagan, managing director and head of global research for JP Morgan Securities, said approximately 35 percent of all subprime mortgage borrowers could have a difficult time meeting their loan obligations when their adjustable-rate mortgages hit their first adjustment period.”

“‘These are consumers who were getting into 100 percent loans when home prices were softening,’ Flanagan said. ‘The more troubling characteristic were the lenders willing to reach to make those mortgages available.’”

“Flanagan’s research revealed that 10 percent to 15 percent of all new loans originated in the fourth quarter of 2005 and all of 2006 were subprime loans. The amount of money at stake could be $200 billion, with as many as 500,000 to 1 million consumers in potential jeopardy.”

From Bloomberg. “Denise Hamilton was earning the biggest salary of her life painting and packing refrigerator parts until Collis Inc. decided to shut its Evansville, Indiana, factory and she was fired.”

“Hamilton lost her $11.20-per-hour job last month because Collis’s main customer, Whirlpool Corp., the world’s largest appliance maker, cut production after a drop in home sales reduced demand for new refrigerators, washing machines and dishwashers. Whirlpool fired 500 workers at its Evansville plant and Collis fired 160, including Hamilton.”

“‘Working for Collis was the best job of my life,’ said Hamilton. ‘Money is going to be tight.’”

“New and existing home sales dropped almost 10 percent last year, depressing demand for products from copper pipes to kitchen sinks and resulting in the loss of about 100,000 jobs in the U.S. Housing-related unemployment probably will increase in 2007, according to the Joint Center for Housing Studies at Harvard University.”

“By the end of this year, job cuts at companies including Whirlpool, Masco Corp. and Emerson Electric Co. may exceed the fallout from the 1991 housing slump, said Paul Puryear, managing director at Raymond James & Associates.”

“‘The fallout in the early 1990s was much worse than what we’ve seen so far, but this downturn is not over,’ said Puryear. ‘The full impact hasn’t hit yet.’”

“‘We’re going to see other industries have a hangover long after the housing recession is over,’ said economist Richard Yamarone. ‘Housing has a ripple effect through the whole economy, from the carpet makers to the dishwasher salesmen.’”

“‘For the first time in many moons, the fourth quarter was a time for slowing sales in the United States and booming sales everywhere else in the world,’ Caterpillar CEO James Owens said. ‘I think we will see that essentially be the pattern for 2007. My guess is it’s going to get a little bit worse,’ Owens said.”

From MarketWatch. “Home Depot Inc. on Tuesday said its fourth-quarter profit plunged 28%, hurt by a slump in the housing market. Frank Blake, recently installed as chief executive, called results for the most recent fiscal year ‘disappointing’ and said they reflect ‘challenging’ conditions in the housing market.”

“Blake warned that 2007 would be challenging as the housing market continues to shake out. ‘We anticipate continuing headwinds in 2007,’ he said. ‘There is a lot of inventory to work through in housing. If you look at the back half of ‘07, we’re not terribly optimistic, but we could see things start to improve then, but…it won’t be a dramatic turnaround,’ he said.”

The Ann Arbor News reports from Michigan. “A federal agency announced Monday it has assumed control of operations at Ann Arbor-based Huron River Area Credit Union. Regulators from the National Credit Union Administration, the independent federal agency that charters and supervises federal credit unions has taken over the credit union’s management, placing it in conservatorship.”

“‘We found it’s been operating in an unsafe and unsound manner and is in imminent danger of insolvency,’ said Kathy Fagan, spokesperson for the Michigan Office of Financial and Insurance Services. ‘This was something that came up suddenly.’”

“A credit union is typically placed into conservatorship when its loan or investment portfolios are judged by regulators as too risky, putting the institution’s viability in danger, said David Adams, chief executive officer of a trade association that represents credit unions, including Huron River.”

“‘Most often regulators are identifying problems well in advance of it being a crisis and I suspect that’s what’s happened here,’ said Adams.”

“Sreedhar Bharath, a professor of finance at University of Michigan’s Ross School of Business, speculated the move may be due to the actual or anticipated future foreclosures due to the area’s recent job losses. He also suggested the move may be an attempt keep customers, including other financial institutions, from panicking and withdrawing their money.”

“‘Home lending in Michigan in this climate is a risky bet. They may be being cautious and taking action even before bad things are happening,’ he said. ‘My guess is you might see more of this happening in the future. Foreclosure rates are up in Michigan.’”

The Tampa Tribune reports from Florida. “Just as the real estate market was starting its downturn in the fall of 2005, Alan Westfall slipped into the investment game. He paid $365,700 for a six-bedroom home in Heritage Isle in north Tampa. He mortgaged the property at 100 percent, painted, installed wood flooring and quickly relisted the home for $425,500.”

“After more than year of price reductions and unsuccessful attempts to sell or rent the house, Westfall is getting anxious. So he has decided to try his luck with an auction. ‘The weight lifted off my shoulders would be tremendous if this home sells,’ Westfall said. ‘I just didn’t expect the market to take a downward turn so quickly.’”

“Westfall is among 50 Florida property owners choosing to gamble big this Saturday. There are single-family homes, condos and vacant land for sale. A record 34,000 homes are listed for sale in Hillsborough and Pinellas counties. Frustrated sellers are increasingly turning for help to the auction block.”

“Some sellers worry they might not get a good price, so none in Jay Bailey’s auction have opted to sell their property ‘absolutely’ to the highest bidder, Bailey said.”

“In December, the developer who purchased an apartment-to-condo conversion complex in Tampa Palms hired J.P. King Auction Co. to sell 100 units at the Grand Hyatt Tampa Bay. Forty units were designated to be sold to the highest bidder, but the developer halted the auction after some units went for less than half of the listed prices.”

“Carl Carter, spokesman for the auction company, said it had hoped for better prices, but the developer was happy to shed some of its condo inventory. ‘They certainly sold at a discounted price, but when nobody’s been selling anything at any price point, it’s good to just make a sale,’ Carter said.”

“One agent eager to sell her client’s home, said she received three phone calls from potential buyers who wanted to preview the home. Lynn Hanratty, a real estate agent in Palm Harbor hopes to sell her client’s home in Clearwater. It has been listed with her for six months.”

“‘I think this is a unique opportunity in this overpopulated market,’ Hanratty said. If the sale is a success, she said, she will pitch auctions to more clients.”

“Marty Higgenbotham of Higgenbotham Auctioneers International in Lakeland said sellers are still having a tough time in today’s market. Three weeks ago, Higgenbotham auctioned 115 Cape Coral and Fort Myers properties. Nearly every property had a contract by the end of the auction. There was $24 million in contracts, Higgenbotham said, but sellers accepted just 15 bids.”

“‘Sellers aren’t willing to accept today’s property value,’ he said, noting that he has seen six real estate booms and busts in his 48-year career. ‘They’ll get over it.’”

The Daytona Beach News Journal. “City officials and residents alike are irate about a developer’s decision to halt construction on a $250 million resort project because of slow condominium sales.”

“A downturn in the real estate market has affected condo sales and forced Centex to stop construction, Centex division president John Lenihan told City Council members at a meeting Tuesday. Lenihan said the local real estate market was ‘hot’ when the project began almost two years ago.”

“‘Now, we don’t have the sales,’ Lenihan said. ‘We are barely staying above water.’”

“Lenihan’s explanation left members of the council and residents fuming Tuesday. Vice Mayor Jon Netts said the golf course now resembles ‘Chernobyl’ because of the company’s sudden decision to delay construction. ‘There’s a wasteland in the middle of our city,’ Netts said.”

“The market for such ‘condotels’ has also cooled in Volusia County, said Ramon Rivera, president and owner of Coldwell Banker Cornerstone Realty in Edgewater. ‘It has softened and primarily because there is just so much of that inventory in the market,’ Rivera said.”

“Centex broke ground on its condominium hotel project in October 2005 and was expected to open it this year. Officials estimated it would bring nearly 300 jobs and generate $70 million in city and county taxes over 20 years.”

“Sixteen months later, a nearly completed eight-story condo unit and parking garage sit on the site surrounded by heavy construction equipment. The golf course is brown and unkempt.”

“Larry Stencel, who lives across the road from the golf course in Carlson Park Estates, said residents want city officials to resolve the matter quickly. ‘This is an embarrassment to the city because they were sold a bill of goods,’ he said.”

The News Press. “A massive inventory of unsold homes in Lee County could bring bad times to both the residential and commercial real estate markets. But real estate agents could help soften the blow by telling sellers to ask more realistic prices for their houses. That’s what two experts told a sold-out audience Tuesday night in downtown Fort Myers.”

“In 32 years in the real estate business, ‘I’ve never seen the impact of residential on commercial like this. There’s a lot of fear,’ said commercial broker Frank D’Alessandro.”

“With 23,000 houses and condos on the market in the county and the number rising, he said, the residential construction market is likely to slow dramatically this year as builders work through a backlog of homes ordered in better times.”

“With 65 percent of industrial space occupied by people such as developers, subcontractors and suppliers for the residential market, D’Alessandro said, the commercial market could be hurt. ‘The bottom line is fewer tenants,’ he said.”

“Talking about the results of falling land prices, residential broker Denny Grimes noted dryly that ‘the work force housing crisis is over’ with houses in Lehigh Acres selling for less than $200,000. But generally, he said, the near future isn’t going to bring boom times for real estate in the county. ‘Don’t expect the tide to start rising this year,’ he said.”

“He did hold out hope that if real estate agents muster the collective will to talk tough to their sellers about prices, the supply of existing homes could be reduced more rapidly. ‘We all know what the solution is, don’t we? It’s called a price reduction,’ he said.”

“Meanwhile, he said, things are bad and getting worse. ‘In spite of what you want to believe,’ Grimes said, ‘we’ve not hit bottom yet’ and won’t until the inventory of existing homes starts to shrink.”

“Grimes got the biggest laugh of the night when he used black humor to make the point that many in the industry find themselves with time on their hands. ‘The good news is I won’t be long-winded, because some of us have to get to our night jobs,’ he said. ‘Note I didn’t say second job.’”

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