The Housing Bubble

It’s Friday desk clearing time. “Last year, 37,337 single-family homes were sold in Connecticut, the fewest since 1996, according to The Warren Group. ‘Overall, 2006 was the worst year for Connecticut real estate in a decade,” said CEO Tim Warren Jr.”

“The deepest decline so far came in December. ‘Every market needs a breather,’ said Warren. ‘That’s what I’d say we have here, a breather.’”

From New York. “Numerous for-sale signs have sprouted like dandelions across many a well-kept East End lawn. ‘Add to this a slowed market and signs remaining for 6 to 12 months, it can be demoralizing for the sellers,’ said Ann Rasmussen, a licensed sales associate.”

“‘Customers often remark, ‘Wow, there’s a lot for sale’ or, ‘Is everything for sale in this town?’ Sometimes this makes them feel like they can take their time to buy since there is ’so much on the market.’ In this way signs can be a detriment for sales,’ said Ms. Rasmussen.”

“Recent price increases are not sustainable, according to the co-author of TD Bank’s latest national housing market report. ‘The recent dramatic price gains in Calgary and Vancouver are unsustainable over the long term, and both cities are vulnerable to significant moderation,’ bank deputy chief economist Craig Alexander.”

“Townhouses under construction in Saskatoon are being bought up, sight unseen, by buyers from out of province who have no intention of living in Saskatchewan. ‘A lot of them may never see the property. They may never rent it,’ Agent Bruce Claggett predicted. ‘They will just sell it.’”

“Property listings in Sydney have skyrocketed as investors cash in their housing assets. The number of properties coming onto the market in Sydney and in January rose by 100 per cent and 200 per cent in Sydney and its regions, figures from property group Raine & Horne offices show.”

“‘This selling is going to free the market up … and really bring down the ceiling for first time home buyers,’ said CEO Angus Raine.”

“A report issued Sunday has said that speculations constitute a hazard to the real estate market in Kuwait. The report noted that if the chief aim of investing in the field is re-selling at higher prices, it is then considered speculation and no investment.”

“The report depicted a phenomenon that had appeared recently in the Qatari society, that is the wide emergence of ‘For Rent’ banners on apartments. Many were prompted to find what that meant as they thought it resulted from a surplus in new apartments offered for rent, triggering speculations for a decline in prices.”

From England. “The number of people living in the Whitby area threatened with having their homes repossessed has rocketed by 20% in the last year. Ian Scorah, an advice worker who specialises in debt and housing issues said: ‘Debt seems to be a major problem in our area. Our advice centre is inundated with debt-related issues.”

“‘People are borrowing more than they can afford as property prices are so high, this is leading to some very sad situations for local individuals and families,’ Scorah said.”

“Steve Brashears of Storm Lake, who is representing a leading builder of upscale residential developments in Iowa, will be promoting condos at the large Boat and Recreation Show in Omaha next week.”

“‘We have local people in town who are looking to downsize and leave larger homes for a lifestyle with less maintenance. We have people from places like Arizona and California who see it primarily as an investment opportunity, they may actually spend only a few weeks a year living in the units,’ Brashears said.”

“With an increasing number of newly-built homes available for sale and roughly 9,000 homes listed on the Tucson MLS, buyers have bargaining power, said Paul Olson, MLS President. ‘Sellers are making concessions now days. Buyers are taking their time choosing from all that inventory,’ Olson said. ‘We’ve gotten to the point now where the trend is pretty obvious. It doesn’t bode well for a seller who is in a hurry.’”

“‘Recent figures show there are 9000 resale homes available,’ said analyst John Strobeck in his newsletter. ‘Many of these homes are unoccupied. Estimates are as high as 50 percent. We could, and probably will, see a softening of prices in the resale market.’”

From Utah. “According to statistics obtained from Prudential Real Estate in Tooele, total January home sales in the county leveled off at about $14.4 million compared to totals that hovered around $20 million per month for the last nine quarters of 2006. The January total is well below the $24.5 million in sales set in June of last year.”

“‘We’ve received a bit of a breather during the first quarter of this year,’ said Michelle Warner, president of the Tooele County Board of Realtors.”

“More of the same. That’s the story of early February (Orange County) home sales. Median prices are 5.8% below June’s all-time revised high of $642,500. Sales volume runs 19.7% below the year-ago pace.”

“David Lereah, NAR’s chief economist stated that the fourth quarter would be the bottom for the current housing cycle. The report went so far as to fall back on reporting that typical sellers in metropolitan areas ‘experienced healthy gains on the value of their homes over the last five years in almost all 131 available areas, even in areas with recent price declines.’”

“Yeah, we know. It was called ‘the bubble.’”

“NAR stands to lose credibility unless it also loses its Pollyanna approach to reporting the data for which it pretty much holds a monopoly. Realtors and by extension their customers and clients, rely on this information to price homes and set business strategy.”

“It is time that NAR bites the bullet and get real about the full measure of statistics it collects. It is a public service to do so and even the most transparent of cover-ups eventually has drastic consequences.”

The LA Times reports from California. “Monica Wilson loves her vacation home, an ocean-view condo within walking distance of the beach in Carlsbad, Calif. She paid $620,000 for the place 13 months ago. But since then, the California vacation-home market has gone soft. ‘If I sold my second home right now, it wouldn’t do very well,’ the Pasadena-based real estate agent said.”

“Sales of second homes in California’s top vacation markets dropped 37% in 2006 from the year before, another consequence of the state’s overall housing slowdown, according to data released by DataQuick.”

“Second-home sales in California peaked in 2004, when 24,916 transactions were made. That also happened to be the peak year for all home sales in the state. Vacation-market sales started to slow in 2005.”

“Even popular, out-of-state markets are getting less interest from Californians. In 2006, Phoenix home sales to Californians fell 50%, and Las Vegas sales dropped 32%, DataQuick said.”

The Press Enterprise. “The state’s three major second-home markets all saw a similar drop-off: In the Palm Springs area, sales fell 38.4 percent; in the Lake Arrowhead and Big Bear region, they declined 37.3 percent; and in the Sierra mountains and foothill communities, sales plunged 34.7 percent, DataQuick said.”

“The slowdown means there are more homes on the market for buyers, said (realtor) Debby Williams in Palm Springs. ‘They are overwhelmed by the sheer volume of inventory on the market today, and it’s causing them to take longer to make decisions on what to buy,’ said Williams.”

“‘That has changed since 2004 and 2005, when it was almost like a knee-jerk reaction. You saw it, you bought it, because you knew it wouldn’t last long,’ she added.”

From KSBY 6. “The median home price on Santa Barbara County’s South Coast is more than $1.1 million. But the ‘for sale’ signs are staying up a bit longer than they used to. ‘We are seeing fewer sales and higher sales, but just a gradual price adjustment,’ says realtor Bruce Fisher.”

“Some sellers are dropping their asking price, but not dramatically. ‘It’s in recession,’ says economist Mark Schniepp. ‘There is not a lot of sales going on and buyers are on the sidelines waiting for further corrections. And sellers do not want to drop their prices. So, there’s a stalemate occurring.’”

The Sacramento Bee. “The dive in new-home construction around Lincoln has created a monster for a small school district, as developers’ fees slow to a trickle and the interest mounts daily on $189 million that the district borrowed to build new schools.”

“The result of the downturn is a ’staggering’ amount of debt for Western Placer Unified School District, and the day of reckoning has arrived, according to a report presented to the school board Tuesday night.”

“So far this year, only $370,000 in developers’ fees have materialized of the $2 million anticipated. ‘Something that popped out and hit me right between the eyes is the huge debt,’ said private consultant Curt Pollock, the report’s author.”

“At the heart of the crisis, Pollock said, is the district’s dependence on certificates of participation. With their adjustable interest rates, these 30-year certificates typically are used for short-term cash flow rather than long-term solutions.”

“They use the schools themselves as collateral. ‘I have to say that we issued more COP debt than we should have. We should have looked for other revenues or slowed down the growth. Of course, that’s easy to say in hindsight,’ said Carrie Carlson, the school district’s assistant superintendent for business services.”

“‘The projections were that we were going to continue with this nice growth, and our projections were wrong,’ said Former Superintendent Roger Yohe. ‘Had the housing market not dropped off so fast and so dramatically, I don’t think we’d be in the situation we’re in,’ Yohe said.”

The Modesto Bee. “Last year was tough for new home builders in the Northern San Joaquin Valley. New single-family home sales in 2006 declined 44.9 percent in Stanislaus County, 50.5 percent in Merced County and 27.4 percent in San Joaquin County compared with 2005.”

“‘For us, 2006 was the slowest year since at least 1995,’ said Mark Wilbur, co-owner of McRoy-Wilbur Communities Inc. in Modesto, which has been building homes since 1983. ‘It wasn’t a fun year.’”

“Sales swings are part of the cyclical nature of the new home market, said Bill Zoslocki, president of the Building Industry Association of Central California. After nearly six years of robust sales, the 2006 downturn was a predictable market correction, Zoslocki said.”

“Buyers are reluctant to purchase homes if they think prices are going to fall, Zoslocki said. ‘For those who are courageous, now is the time to buy because sellers are making deals,’ Zoslocki. said.”

“New home building permits dropped 49.2 percent in 2006 for Stanislaus compared with 2005. Permits dropped 41.2 percent in Merced, 42.5 percent in San Joaquin and 31.1 percent statewide. Because fewer homes are being built and fewer are proposed for development in the near future, construction jobs are declining.”

The Examiner. “Geoffrey Craighead has been a Realtor for 26 years, and was recently elected 2007 president of the San Mateo County Association of Realtors trade group.”

“One of the first challenges Craighead will face is the sheer number of real estate licensees in the Bay Area. In 2006, California Association of Realtors VP and chief economist Leslie Appleton-Young noted that all of the real estate work done in the previous year could have been done by 70,000 Realtors. There are 514,000 people who hold real estate licenses in the Bay Area.”

“Craighead expects to face a drop in membership. ‘We’ve got about 3,300 members now,’ he said, ‘but we’re anticipating about a 12 percent drop this year.’ Fifty percent of Samcar members haven’t sold a house in the past year; and the next 25 percent have sold four or fewer houses. To meet expenses, a Realtor needs to sell about five houses a year.”

“There is also the older generation of Realtors, many of whom Craighead expects to retire. According to Craighead, older Realtors have been through enough near-disasters in the market not to want to push it any further. According to Craighead, a lot of the old-timers aren’t willing to go through a recession again.”

Some housing bubble news from Wall Street and Washington. “H&R Block Inc. said Thursday it swung to a loss in the third quarter as the company’s troubled mortgage lending arm offset a strong beginning of the tax season. H&R Block last year announced it was considering selling Option One, which has been plagued since last summer with falling profits and delinquent loans to ’subprime’ customers.”

“‘It’s headed clearly for a sale,” said Mark Ernst, the company’s CEO, adding that he expected Option One to sell for at least its $1.3 billion book value. The mortgage business lost $69.7 million during the quarter. The company said it was setting aside $111 million to its reserves for expected loan losses.”

From Business Week. “H&R Block Inc. management may be confident it can sell its Option One mortgage unit for $1.3 billion by the end of next month, but while that stance may be ‘encouraging,’ a CIBC World Markets analyst said Friday, ‘it was not entirely convincing.’”

“(The company) didn’t fully address that public perception (regardless of reality) may influence the bids proposed by its sophisticated suitors,’ CIBC analyst Scott Schneeberger said. ‘Moreover, HRB noted that no official bids had yet been made.’”

From Bloomberg. “H&R Block took a $102 million charge for mortgage losses in its first fiscal quarter. At the time, Ernst said it would be a one-time cost that would cover all loans made in the past, and he didn’t expect similar write-offs in the future.”

“‘Until it’s sold, the mortgage unit will weigh down on earnings,’ UBS AG analyst Kelly Flynn said. Rising defaults are plaguing U.S. home lenders, and Flynn said H&R Block may not be able to sell the unit at all.”

From MarketWatch. “Impac Mortgage Holdings Inc. said that it swung to a net loss of $54.2 million, or 71 cents a share. Interest income edged down to $329.1 million, from $340.7 million, while interest expense rose to $334.4 million, from $326.2 million.”

“‘Although we are disappointed by our earnings performance in 2006, our results are to some extent indicative of market conditions, as well as strategies implemented early in the year to reduce originations and our exposure to inferior credit quality mortgages,’ it said.”

“Impac said recent trends in the performance of its long-term investment portfolio have been more favorable, but earnings in 2006 continued to be pressured as the Federal Reserve increased short-term interest rates through the first half of the year.”

“The company also noted that average securitized mortgage collateral declined as Impac tightened underwriting guidelines and adjusted pricing to reduce loan production and limit the company’s exposure to deteriorating credit trends in the mortgage market.”

“The perceived risk of owning low- rated subprime mortgage bonds rose to a record for a fifth day after Moody’s Investors Service said it may cut the loan servicing ratings of five lenders.”

“‘I do not think it is surprising we have trouble in this sector of the market; I think the surprise is the speed at which it has unfolded in the last couple of months,” said Mary Miller, director of fixed-income at T. Rowe Price Group.”

“‘Protection-sellers largely have stepped away until the market settles down,’ Peter DiMartino, asset-backed securities strategist at RBS Greenwich Capital, wrote. ‘Recent mini-rallies were just a few brave souls hoping they could actually catch the falling knife.’”

“New series of ABX indexes are created every six months by securities firms. They indicate prices for default swaps linked to 20 bonds, not prices for swaps on each.”

“The BBB- rated portions of ABX contracts are ‘going to zero,’ said Peter Schiff, president of Euro Pacific Capital. ‘It’s a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults’ by removing demand from the housing market and hurting home prices, he said.”

“ResMae Mortgage Corp. may be on the cutting edge of a trend in the U.S. subprime-loan industry. It’s bankrupt and selling assets for pennies on the dollar.”

“ResMae, which made home loans to people with bad credit, will be auctioned off next week. The opening bid, by Credit Suisse Group, is $19.1 million, less than half the size of an offer received by ResMae before it went bankrupt Feb. 13.”

“More than 100 other lenders will go out of business this year, said Doug Duncan, chief economist of the Mortgage Bankers Association in Washington. Many will be subprime lenders, victims of loans to borderline borrowers last year.”

“‘Loans in 2006 will be the worst we have ever seen in the business,’ said Matthew Howlett, an analyst who covers the subprime market for an investment bank. ‘The underwriting quality was disastrous.’”

“In mid-2005, ResMae received a premium of two to three percentage points on the face value of every loan it sold, according to its bankruptcy filing. By late 2005, the premium narrowed to zero to one percentage point.”

“Because ResMae’s cost to originate a loan was two percent to 2.5 percent of the face value, it began losing money on every transaction, its filing said.”

From CNN Money. “Late payments for residential mortgages shot up by 15.6 percent in the fourth quarter, U.S. regulators said on Thursday. The Federal Deposit Insurance Corporation said the increase in late mortgage payments followed a 5.2 percent increase in the third quarter.”

“Noncurrent mortgage loans, payments that are more than 90 days late, grew by $3.1 billion in the last three months of 2006 after rising by $974 million in the third quarter, the FDIC said.”

“Richard Brown, FDIC’s chief economist, said regulators are seeing emerging signs of distress among subprime loans, especially with hybrid mortgages that subject borrowers to higher monthly payments after introductory interest rates.”

“‘While the degree of credit distress in these portfolios is still well below the peaks that we saw during and after the 2001 recession, it seems likely that their performance will get worse before it gets better,’ Brown said.”

“‘The banking industry continues to perform well, even as … a weakening mortgage market (has) made the operating environment more challenging,’ FDIC Chairman Sheila Bair said. While banks and savings institutions generally are in sound financial condition with adequate capital, she said, ‘bankers and regulators should ensure that risk-management practices are also equal to the challenges.’”

“Writeoffs of home mortgage loans by banks and thrifts totaled $888 million in the October-December period, a three-year high, according to figures in the FDIC’s quarterly banking profile.”

The Chicago Tribune reports from Illinois. “Housing analyst David Seiders told Chicago-area builders Thursday that the federal estimate of 3.5 million homes for sale at the end of 2006 is ‘grossly understated.’ ‘There is a big inventory overhang out there, and it’s bigger than anybody understands,’ he said.”

“In an annual forecast on the local industry in Addison, Seiders, chief economist of the National Association of Home Builders, cited the high level of sales contract cancellations in 2006. Many homes marked as sales in government data ended up back on the market too late to be counted as inventory, he said.”

“‘Cancellation rates more than doubled between the end of 2005 and the end of 2006, meaning that net sales for the year nationally may be down 65 percent,’ he said.”

“Alan Lev, a Chicago builder and developer, agreed this is a critical juncture. ‘January and February and into June, this is supposed to be the time of the year that you’re supposed to make your hay,’ he said. ‘In a normal year, we do 70 percent of our sales between mid-January and mid-June.’”

“Maureen Parotto, director of sales and marketing for Itasca-based William Ryan Homes, also noted a pickup in business. ‘Last week we had 39 sales–that’s a record for any week we’ve ever had,’ she said. However, the builder was offering buyers up to $60,000 in free features and upgrades.”

“Analysts note that such widespread discounting and incentives have kept a bad spell from turning disastrous. ‘The common phrase that you hear on buyers’ lips is, ‘What are you giving away?’ said Buz Hoffman, president of Lakewood Homes in Hoffman Estates.”

“Patrick Curran, president of West Point Builders & Developers in Hinsdale, said his company is offering flexible closing dates to address buyer concerns that they won’t be able to sell their existing homes in a slow re-sale market.”

“That fear, that consumers will be stuck with two mortgages, ot only kept browsers out of model homes but also helped to propel those cancellation rates.”

“‘This year is going to be quite an adventure, trying to piece this thing back together,’ Seiders said. However, he said several factors could slow housing’s recovery: uncertainty over the size of the inventory of unsold homes, potential tightening of mortgage lending standards and affordability.”

“The mortgage industry, responding to criticism of lax lending standards feeding a growing foreclosure rate, has begun tightening its criteria. Congress and federal regulators also are considering reforms, he pointed out.”

“On the affordability issue, Seiders said: ‘For [the Chicago market] we’re talking about flat pricing year over year. But we’ve got to get affordability restored’ for the market to recover.”

The Pioneer Press from Minnesota. “A condo clearance sale got results in Burnsville’s Heart of the City. Buyers signed purchase agreements for almost half of the 34 condominiums, discounted by up to $100,000 off their original price.”

“A mortgage lender slashed prices on the units after the original developer defaulted on the mortgage, resulting in the lender foreclosing on the property in May 2006.”

“The Uptown Landing project, which was to have three phases and 111 units, was the first condo project in the Heart of the City. The condos, originally priced from $175,000 for a one-bedroom with 862 square feet to $325,780 for a two-bedroom with 2,021 square feet, now range from $134,900 to $229,900.”

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