The Housing Bubble

The Voice of San Diego reports from California. “The number of San Diego County homes in some level of foreclosure activity reached 1,150 last month, according to RealtyTrac. That’s up 20 percent from January 2006 and up more than 240 percent from the first month of 2005. But even as the market has slowed, the popularity of risky loans has spread. New data for San Diego County reveals that 67 percent of loans made in the first 11 months of 2006 were interest-only or negatively amortized.”

“Of that 67 percent, 30 percent were negative-amortization loans, a threefold increase since January 2004 and 30-fold jump since January 2003, according to FirstAmerican Loan Performance.”

“Last week, a San Diego-based subprime lender, Accredited Home Lenders, joined the ranks of companies vowing to tighten standards after reports of significant losses last quarter. Rick Sharga of RealtyTrac said he’s noticed the link between the lenders’ stricter regulations and the rate of foreclosure activity. ‘I think the two go hand-in-hand,’ Sharga said.”

“Now, home values have stopped appreciating and pricing in some areas has leveled or even declined. Last month, the median sale price for a home in San Diego County was 5.6 percent lower, nearly $30,000, than the $500,000 price logged in January 2006, according to DataQuick.”

“In a report published in December, the Center for Responsible Lending stated that the default rate for subprime loans made between 1998 and 2001 was 3.2 percent in San Diego County. But for the nearly 5,000 such loans originating in 2006, the center predicts that 21.4 percent are headed for default.”

“‘There are some fundamental flaws in the underwriting process that are coming back to haunt lenders,’ the centers’ Paul Leonard said. ‘The lenders seemed to count on appreciation rather than the people’s actual income.’”

“Since 2001, according to the San Diego Association of Governments, local population rose 6.7 percent while the housing stock grew by 6.1 percent. This is hardly crisis material to begin with, but the numbers are even less alarming when you consider that virtually all the disparity between population and housing supply occurred from 2001 to 2002.”

“Between 2002 and 2006, population and housing supply both grew by the same amount, 4.8 percent. During this same period San Diego single family home prices rose 74 percent.”

The Union Tribune. “Mortgage professionals who are struggling with a national spike in residential foreclosure rates were warned yesterday to expect more of the same in 2007. ‘I personally think we are at the beginning of this cycle, mortgage attorney Daniel D. Phelan said. ‘It is going to get worse before it gets better.’”

“Diane Mitchell, an attorney from Salt Lake City who spoke at the conference, said numerous foreclosure filings come from loans that were originated in 2006, when home prices had peaked in many markets. Some borrowers now find that their properties are worth less than they paid for them.”

“‘They got in at the top of the deal and didn’t get out quick enough,’ Mitchell said.”

The San Diego Daily Transcript. “Real-estate analysts, economists and housing industry leaders agree the market is down. The decline in sales of 10 or more units intended for condo conversion was precipitous: 26 sales in 2006, a 75 percent decrease from the 102 sales in 2005 intended for condo conversion.”

“In the second half of 2006, there were only four reported sales of apartment properties (10 or more units) intended for condo conversion, compared with 47 sales in the second half of 2005. The average price paid per condo-conversion unit peaked in the first quarter 2006 at $210,000, and plummeted 37 percent during the rest of the year down to $133,000 in the fourth quarter.”

“There is so much stagnant converted inventory already that the premium for condo-mapped apartments is gone unless they are exceptionally desirable from a retail-marketing standpoint. Developers who entered the fray late in the season prepared to reap their share of profits are now scrambling to stay afloat.”

The Sacramento Bee. “Born during the Great Depression, the 20 percent down payment traditionally used to buy a house has now joined $1.50 gasoline as ancient history. More than 1 in 5 California homebuyers now finance every cent of their home purchase, says the California Association of Realtors. Seven years ago it was 4.5 percent.”

“‘Frankly, I didn’t realize it was that easy to do,’ says Doug Self, who used 100 percent financing last year to buy a house in Citrus Heights.”

“‘Realistically, if a typical house is going for $400,000, just to do a 10 percent payment is $40,000,’ he says. ‘How many people are going to scrape together $40,000 in a reasonable amount of time? That’s three years of socking away a grand a month and not having anything go wrong. That’s just not realistic.’”

From Bloomberg. “Luxury home prices in California fell for the first time in two years as potential buyers waited for prices to fall and fewer sellers received multiple offers, according to a survey by San Francisco-based First Republic Bank.”

“‘The decline in values is due to concerns among buyers about the direction of the market,’ Katherine August-deWilde, chief operating officer of First Republic.”

“Maxine Golden, a broker in Newport Beach, said a client last year listed her three-bedroom Irvine townhouse for $1.25 million. The woman received several offers below the asking price before taking the home off the market in November. She listed it again last month for $950,000 and the property sold within a week, Golden said.”

“‘Buyers stayed away and sellers pulled their homes and said they’d put them out in the spring,’ Golden said.”

“Bill McKeon, a Marin County real estate agent, noted that potential home buyers are ‘pickier because they have more advantage in this market. It’s been a year of correction anyway, and I believe that November and December were two of the slowest months we had all year,’ he said.”

“‘North of $12 million to $15 million, there are many houses that sit on the market for two years and end up selling for 30 percent less than the asking price,’ said Steven Grothelf, a real estate broker in San Francisco.”

From Inman News. “Leslie Appleton-Young, chief economist for the California Association of Realtors, said many buyers in Los Angeles County ‘were underwater’ with their loan payments in 1992 but managed to find a way to stay in the home. Last year, when home prices softened, many potential buyers lost the ‘psychological impetus’ to get into the market.”

“‘During the boom, houses in some neighborhoods were going up 20 percent,’ Appleton-Young said. ‘Consumers could not afford not to buy. But when that that appreciation factor goes away, psychologically they are not in the same place.’”

The Examiner reports from Maryland. “In 2006, the real estate market in the Baltimore region took a tumble. Local real estate experts believe that the market’s success in 2004 and 2005 spoiled many property sellers, who had a hard time adjusting to more pedestrian sales in 2006. Deborah Ford, a professor of finance at the University of Baltimore, sees a reason for the decline and a need for sellers to adapt.”

“‘The demand is not there, and people aren’t buying anymore because they’re scared they would be buying at top price,’ Ford said. ‘The only way sellers can sell property now is to lower their prices.’”

“Recent data from Metropolitan Regional Information Systems Inc. shows just how much the market has come down. Total sold-dollar volume dropped from around $13.01 billion in 2005 to $11.79 in 2006, a decline of about $1.22 billion for Baltimore City and Anne Arundel, Baltimore, Carroll, Harford and Howard counties.”

“The biggest drop was in Anne Arundel, where there was a 12 percent, or nearly $450 million, dip in sales for 2006.”

“Thomas Hough, president of the Anne Arundel County Association of Realtors, sees things a bit differently. ‘Last year was probably our third best year ever, with 2004 and 2005 being No. 1 and No. 2,’ Hough said.”

The Capital in Maryland. “Although county home sales fell 20 percent last year from 2005 and a glut of unsold inventory has affected housing starts nationwide, home builders like Winchester Homes in Edgewater are still confident about Anne Arundel’s luxury-home market.”

“‘They can afford to buy houses like that because they are shrewd economic people,’ said Charlie Buckley, a Realtor in Anne Arundel County.”

“The opportunity for home builders to buy land for single detached waterfront homes has become increasing rare, said John Kortecamp, executive VP of the Home Builders Association of Maryland. ‘They’re bulletproof,’ Mr. Kortecamp said. ‘You’ve got a commodity that literally the market cannot get enough of.’”

“Mr. Buckley said home prices for waterfront homes in Anne Arundel County dropped 10 percent last year from 2005, giving buyers an extra incentive to look for a bargain this year.”

“Despite headlines about the real estate market that have given even the richest buyers pause, Larry Burrows, president of Winchester Homes, said he’s confident about luxury buyers here. His company is offering closing cost assistance for buyers.”

“‘They have been selling,’ he said of the homes in the Homeport community. ‘There’s no question that the market for the last year has been adjusting.’”

The Gazette. “This spring, eager Maryland homebuyers will ‘jump off the sidelines,’ to make purchases, says one housing expert. But they might not find the surplus of new, single-family houses on the market they expect.”

“As builders continue to throw attractive incentives to prospective buyers this winter via the media, such as free Audis, boats, decks, and irresistible home upgrades, the ‘public is assuming there is a great inventory of unsold new homes out there,’ said housing analyst Kenneth Wenhold.”

“Wrong, Wenhold said. Builders are just trying ‘to cut each others’ throats’ to lure buyers with incentives, said Wenhold, regional director of Metrostudy. The incentive trend began early last year as home sales slumped.”

“The good news for builders, he said, is that ‘we are starting to see traffic pick up. ‘They are not discounting prices, though, because there is still weakness in the market,’ Wenhold said.”

“Gopal Ahluwalia, staff VP for research at the National Association of Home Builders’ Economics Group, foresees stability.’I think that in the spring, things will have leveled out when the inventory has gone down’ nationally, Ahluwalia said.”

“But maybe not in Maryland, said Kathleen Maloney, executive VP for the Maryland State Builders Association. ‘We are hoping by the spring some of our builders will have been making corrections, and amending start dates to get rid of inventory,’ Maloney said.”

“Judging by how counties are ‘pulling’ residential building permits, she said, there should be an upswing in March.”

“‘What we have been seeing in the market is that speculative homes are sitting,’ Maloney said. ‘You are seeing builders offering closing cost incentives, waiving origination fees and administrative costs, plus free upgrades on carpets and kitchens, landscaping and fencing, which makes it a great for buyers. One condo builder in Ocean City is giving buyers a boat.’”

Some housing bubble news from Wall Street and Washington. “Toll Brothers Inc. on Thursday said the weak U.S. housing market drove down its quarterly profit 67 percent after write-downs for lower land values, and the luxury home builder lowered its forecast. The results included write-downs of $96.9 million for the lower value of the land Toll owns or from forfeiting payments for land options Toll decided not to exercise.”

“Investors, home builders and other industry watchers have been looking for signs of an upturn, but Toll’s chief executive expressed caution. ‘There are too many soft markets at this stage of the selling season to call a general upturn in the new home market,’ CEO Robert Toll said in a statement. ‘Demand varies greatly from week to week in individual markets.’”

From theStreet.com. “New home orders fell 33% to 1,544 units. The steepest drop came in the Western region of the U.S., where orders fell 65% from a year earlier amid particular weakness in Arizona, California, Colorado and Nevada.”

“Bank of America analyst Daniel Oppenheim said he views Toll’s comments as less positive than two weeks ago, when the builder reported its orders for the quarter and signaled an uptick in demand in January and early February.”

“‘We think this [less positive commentary] is a reflection of choppy market conditions and the soft traffic at the start of the spring season, consistent with what we have seen in early results of our February Survey of Real Estate Agents,’ Oppenheim wrote.”

“Oppenheim said his research shows that an expected increase in buyer traffic in February has not happened so far. He said his traffic index, which polls real estate agents on customer volume, is likely to fall in the month after three consecutive gains.”

“‘Agents attributed the easing of traffic to the perception that prices will be lower in coming months,’ Oppenheim wrote in a note to investors. ‘The weather does not appear to be the driver.’”

“‘We believe further price cuts are needed to bridge the gap between the pricing expectations of buyers and sellers,’ Oppenheim said.”

“‘We see risk from continued pricing declines (necessary to remedy the excess inventory), which will negatively impact earnings expectations along with the potential for inventory levels to worsen further at the start of 2007,’ Oppenheim said.”

The Vancouver Sun. “Top American homebuilders are walking away from deposits on land options, a clear signal that the slumping U.S. housing market has yet to bottom out, according to a research report by the International Wood Markets Group.”

“‘When I look at the data, I don’t believe the builders think the worst is over,’ report author Peter Butzelaar said, referring to $1.4 billion the top 10 builders collectively wrote off their balance sheets for the last three months of 2006. ‘To me, you don’t write off future opportunity unless you don’t believe there is an economic opportunity there.’”

From Reuters. “Moody’s Investors Service on Wednesday said it may cut its servicer quality ratings on NovaStar Mortgage, Inc. due to the mortgage servicer’s exposure to weakness in the subprime mortgage market.”

“‘NovaStar, like a number of other independent subprime mortgage finance companies, is facing lower profitability as well as potentially an increased level of liquidity risk given current market conditions,’ Moody’s said in a statement.”

“NovaStar late on Tuesday surprised investors by saying it may generate no taxable income from 2007 to 2011, and may drop its tax-friendly real estate investment trust status in 2008..”

From MarketWatch. “The company said that certain reports ‘erroneously stated’ that it doesn’t expect to be profitable from 2007 through 2011 and that it believes it will ‘generally be profitable’ as calculated in terms of generally accepted accounting principles over the next several years.”

“‘Our comments about 2007 to 2011 related to taxable income, as part of our discussion of a potential change in NovaStar’s real-estate investment trust status,’ the company said.”

From Business Week. “‘While NovaStar’s results were disappointing, the guidance of little to no taxable income from 2007 until 2011 was unexpected,’ Deutsche Bank analyst Stephen Laws said.”

“‘If delinquencies in NovaStar’s mortgages continue to rise, pullback from investors in its securities could create a liquidity crunch, limiting NovaStar’s ability to originate new loans in the future,’ analyst Ryan Lentell wrote Feb. 9. After NovaStar’s news on Feb. 21, Lentell added that ‘liquidity remains our number-one concern associated with the firm.’”

“One passionate supporter of NovaStar went so far as to start a Web site to rebut negative reports on the company. Yesterday, in what he described as ‘probably my last writing here,’ the investor had this to say on the site: ‘I am shell shocked after the conference that took place yesterday, and quite annoyed that I participated in the collective hallucination that led so many into such a disaster.”

“Michael Simonsen, CEO of Altos Research, which studies California and 15 other major U.S. real estate markets, says subprime lenders’ recent performance is ‘one of the scariest signs’ for the larger housing market.”

“‘The majority of the subprime business is with first-time buyers. So it may take several years to shake out,’ Simonsen says. ‘But when it comes time to sell and trade up we may find that the low end has been squeezed out.’ In other words, a meltdown in the subprime market could affect the supply of future buyers for years to come.”

The Financial Times. “A key derivative index that tracks the credit risk of high-risk mortgage-backed bonds hovered near record levels. ‘The market is still searching for a level where people feel they are being fairly compensated for the risks they’re taking,’ said Alex Pritchartt, a trader at UBS.”

From Bloomberg. “Prices for credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and created in the second half of 2006 fell 3.9 percent to 78.59 today, and are down 19 percent since being introduced Jan. 18, according to Markit Group Ltd.”

“The drop in the ABX-HE-BBB- 07-1 index means an investor would pay more than $1.1 million a year to protect $10 million of bonds against default, up from $389,000 last month.”

“‘It’s been a one way train,’ Dan Ivascyn, a managing director at Pacific Investment Management Co., manager of the world’s largest bond fund, said in an interview. ‘There’s been selling from a lot of different areas, and there’s not a natural buyer.’”

“‘Somewhere in the mid-3s to around 4 percent’ of the mortgages that NovaStar sold last year experienced ‘early payment defaults,’ or missed payments within the first few months that allow loan buyers to force repurchases, NovaStar Chief Investment Officer Mike Bamburg, said on a conference call yesterday. That was up from about 1.25 percent in 2005, he said.”

“Janet Yellen, president of the Federal Reserve Bank of San Francisco, is sleeping better than she was a year ago, thanks to signs of stabilization in the housing market. Last year, when it looked like the housing downturn could turn into a bust, Yellen said she found it more difficult to sleep.”

“‘I’m waking up less at night than I was,’ she said.”

The St Petersburg Times reports from Florida. “Nearly 50 buyers paid thousands of dollars apiece last year to reserve a condo at the Seaside Villas at Gulfport, a 121-unit complex along Boca Ciega Bay that was scheduled to be completed by August. So far, though, the only people living there have been squatters, who moved into the property after the last unpaid subcontractor pulled out several months ago.”

“Last month, lenders sued to foreclose on three waterfront projects that developer John Loder, architect Stephen Spencer and various partners allegedly defaulted on in Pinellas County.”

“The list of casualties is long. Among those allegedly owed money are dozens of subcontractors, condo buyers, secondary lenders and the county’s property tax collector. Hundreds of former tenants were removed to make way for the renovations.”

“‘I would have loved to buy my unit, but the price was twice what I felt it was really worth,’ said former Snell Isle Club resident Cheryl Harrison. The club’s new owners wanted more than $400,000 for her three-bedroom, $970-a-month apartment.”

“Fremont Investment & Loan - a Brea, Calif., bank, alleged that its loans went into default when Loder and his partners failed to pay subcontractors, property taxes, utility bills and certain insurance premiums. The partnership also missed promised completion dates and minimum sales targets. On-site sales offices and model condos were shuttered.”

“Earlier this month, Fremont alleged, the South Pasadena property was beset by trespassers, exposed wiring, broken windows, asbestos warnings, open or missing doors, dangerous balconies, and dozens of washer-dryers left sitting in a parking lot. ‘The project is in an abandoned state,’ Fremont wrote.”

The Herald Tribune. “In 2004 Kevin Ward bought a deteriorating hive of apartments near the Venice airport and converted them into 20 affordable condominiums, his first play in Florida real estate. Five sold in one day. In less than a year he flipped the entire building.”

“Ward doubled-down, pitching two more projects far more ambitious than the first, with some 3,000-square-foot units carrying $1.5 million price tags. Today, both are at a standstill.”

“‘We’ll probably be back this time next year with a new project,’ said Ward. ‘We think the world will be a little bit better then.’”

“It’s a familiar story these days. Building and planning officials across the region confirm they’re seeing growing numbers of plans like Ward’s being shelved or delayed.”

“For Ward, the market shift has pinned him between property owners who refuse to sell and a bank that’s reluctant to loan him money. Since the market downturn, appraisals of the six properties that make up the 1.5-acre Kelley’s Way site have come in about 25 percent below what the sellers are asking, Ward said. The bank refuses to lend any more than the appraisal.”

“‘I’m trying to say this nicely: We’re not proceeding forward based on what some of the sellers think they should be getting,’ Ward said. ‘Was that nice enough?’”

“Of his own hassles, Ward speaks gratefully, saying they forced him to do what so many of his competitors have done and slow down. ‘If I decided to build a year ago, I’d be in trouble,’ Ward said. ‘I’m grateful for my dumb luck.’”

The New York Times. “It was a simple pitch: Investors would put little to no money down and take out construction loans that a developer would use to build modest homes in a fast-growing stretch of Southwest Florida. When finished, the homes would be flipped for tidy profits of $30,000 to $40,000 apiece.”

“Work on the homes has come to a halt, leaving 482 investors with half-built houses and thousands of dollars in construction liens. Coast Financial Holdings, which owns the bank that made the loans, has disclosed that $110 million, or a fifth of its total loan portfolio, could be troubled.”

“‘It was strictly a passive investment,’ said Paul Matera, a retired contractor from West Islip, N.Y., who signed up for two houses and introduced dozens of others to the plan. ‘You didn’t pick out the model of the house. You didn’t pick out the exact location. Everybody signed papers without reading what they were signing.’”

“The case of a relatively small development in Southwest Florida illustrates the important role that real estate investors played. Like the day traders who drove up Internet stocks in the late 1990s, these investors, aided by cheap mortgages, helped drive a housing boom over the edge.”

“‘It was a groundswell,’ said Jerry Manning, who runs J. J. Manning Auctioneers, which sells homes in the Northeast and in South Florida. ‘Everybody thought that they were going to be a real estate mogul.’”

“‘You will have a correction, and the correction will make regional homeowners unhappy’ as property prices fall, said John Lonski, chief economist at Moody’s Investors Service. ‘Regional mortgage bankers will find their livelihoods threatened.’”

“Transeastern Homes, which builds homes in Florida, is in settlement talks with lenders who contend it is in default on debt totaling hundreds of millions of dollars. ‘We’re going to see much bigger builders and much bigger lenders facing bankruptcy because so much of the building has been on a speculative basis,’ said real estate consultant Jack McCabe.”

“Mr. Matera is paying $4,800 a month on four properties near Sarasota that he cannot sell and that do not collect enough in rent to cover their costs. Two properties, which are complete, are under his name and have tenants. His mother-in-law and his sister each own one of the two incomplete homes that cannot be finished because they have liens.”

“All together, about 100 of the nearly 500 investors are from the New York area, according to lawyers who are representing many buyers.”

“Seashore Resorts in South Carolina steered borrowers toward loans that start out as construction debt and convert into traditional mortgages when the house is built. ‘I’ve got my father stuck, my brother stuck, an ex-wife stuck,’ said Carl Cirinelli, a partner at Seashore. He says that he recruited 25 relatives and friends and has a $200,000 loan under his name.”

“Investors who signed on to buy the homes say the experience has been a painful reminder that real estate can be risky, but they insisted that the rewards can be great, too.”

“Alan and Linda Ellman, who live in Plainview, N.Y., put a $12,000 deposit on a $300,000 home in the spring of 2005 after hearing about the offer from Mr. Matera. Given their previous successful experience with investment properties, Mr. Ellman estimated that he would be able to sell the home for a $40,000 profit. ‘Nobody twisted our arms,’ he said.”

“Instead, the home now has liens totaling $17,000 from landscapers, painters, insulation companies and cabinet makers. They still have not seen the house, but a real estate broker there reports that the driveway is unpaved and the swimming pool is an empty shell.”

“In spite of the problems, Mr. Matera, for one, believes that real estate is a safer investment than stocks. ‘I would rather have a house that I can’t sell at the moment than a stock certificate,’ he said. ‘I still have a house. It’s not what an owner of Enron stock can say.’”

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