The Housing Bubble

The California realtors report on January sales. “Home sales decreased 12.6 percent in January in California compared with the same period a year ago, while the median price of an existing home increased 1.9 percent, CAR reported today. ‘On a regional basis, sales fell an average of 13 percent, while median prices declined in all areas except Los Angeles, the San Francisco Bay Area, and Riverside/San Bernardino,’ said C.A.R. President Colleen Badagliacco.”

“‘The unsold inventory of existing homes jumped to 9.1 months in January, after hovering around the long-run average of 7 months since mid-2006,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘There was a slight increase in statewide listings last month. The increase in the unsold inventory index was driven primarily by the sales decline.’”

The Record Searchlight. “After a spike in December sales that punctuated a late-year run on homes, Shasta County buyers backed off last month. The lull in transactions resulted in the slowest January in the 13 years DataQuick has tracked Shasta County…a 27 percent drop from January 2006.”

“Home values are down about 12 percent from a year ago. The median sales price paid for a Shasta County home in January, according to DataQuick, was $256,750, down from $293,000 in January 2006.”

“‘I think the sheer volume of buyers is not there,’ said (realtor) Ron Largent in Redding.”

“The decrease in sales in Shasta County in January played out across the state. DataQuick reported six counties in Southern California had their slowest January since 1998. In the San Francisco Bay area, home sales fell for the 24th straight month.”

“Those numbers don’t bode well for a market that has largely depended on Bay Area and Southern California equity refugees and investors. They helped revive Shasta County’s real estate market at the turn of the century, which sent home values rocketing through 2005.”

“The median sales price of a home in Shasta County in 2002 was $152,000. It shot up to $285,000 in 2005, Largent said. ‘We don’t have the investors we had in 2005,’ Largent said.”

The Orange County Register. “California Realtors says Orange County’s median sales price for a detached, single-family homes was $688,610 in January, off 0.6% from December and down 1.5% in a year. Realtors say sales volume is down 14% from a year ago.”

The Record.net. “The number of building permits for the construction of single-family homes in San Joaquin County was down from the previous January, according to the latest figures from the Construction Industry Research Board.”

“The number of permits pulled last month in the county totaled 159, the board reported. That’s the lowest number of single-family home permits pulled in any month as far back as 2000.”

“Rick Baldonado, director of Hanley Wood’s Northern California and Northern Nevada region, said the market slowdown is a correction. ‘Everybody knew you just cannot sustain that kind of growth,’ he said. ‘We’re getting back to the real home buyers now versus speculators, investors.’”

“Baldonado said final numbers aren’t in statewide yet for January, but it looks as if building permit numbers for single-family homes will be up slightly statewide.”

“Most of the January permits pulled, more than 90 percent, were for Stockton, Manteca, Lathrop and unincorporated parts of San Joaquin County, according to the report.”

The Merced Sun Star. “Local housing prices dipped in the last quarter of 2006, but Merced remains one of the least affordable markets nationwide, according to new figures. Merced’s median home price fell to $325,000, down from $363,000 during the same period in 2005. The median price peaked at $376,000 in the second quarter of 2006, according to NAHB statistics.”

“Merced County Association of Realtors President Scott Oliver called the price drop a sign that sellers of older houses are becoming more realistic about the competition they face from new housing inventory.”

“‘The sellers have gotten the message now that they have prices a little high,’ Oliver said. ‘(They) fought reducing their prices for about four to six months.’”

“As new subdivisions remain flooded with empty inventory, builders are offering more and more incentives to sell houses, Oliver said. Price cuts, discounts on landscaping, even free swimming pools are among the perks he’s seen lately, Oliver said.”

“In response, sellers of ‘resale units’ are finally lowering their asking prices, he said. Last month the average sales price for a house within the city of Merced was $310,209, Oliver said. In January 2006, the average sales price for the same area was $379,561.”

The Florida realtors have the January numbers out. “The pace for Florida’s existing home sales remained slow in January, according to the Florida Association of Realtors. Statewide, sales of single-family existing homes totaled 9,382 last month compared to 12,906 homes sold in January 2006 for a 27 percent decrease.”

“Sales of existing condominiums in Florida also decreased last month, with a total of 3,007 condos sold statewide compared to 4,279 in January 2006 for a 30 percent decline, according to FAR.”

The Herald Tribune. “Sales of existing homes dropped 8 percent in the Sarasota-Bradenton market during January, which was one of the best performances statewide. But prices dropped 20 percent in the two-county market, the biggest decrease in the state. The median sales price was $284,400 during January compared with $353,500 during the same 2006 month.”

“The Charlotte County-North Port market reported a 20 percent drop in sales. The median sales price in Charlotte County-North Port during January was $199,400, a drop of 12 percent from $227,400 durign the same month in 2006.”

The News Press. “The number and prices of homes sold in Lee County fell in January compared to a year ago, according to statistics released today. According to FAR, the number of single-family homes sold with the assistance of a Realtor fell 34 percent in January to 492 from 751 a year earlier. The median price fell 7 percent, from $287,200 to $266,900.”

“For condominiums, the price fell 9 percent from $313,800 to $285,000 while the number of sales dropped 40 percent from 229 to 138.”

“Charlotte County’s price for single-family homes fell 12 percent from $227,400 to $199,400 while the number of sales fell 20 percent from 194 to 155. For condominiums, Charlotte showed a drop of 5 percent from $185,000 to $175,000 while the number fell 56 percent from 45 to 20.”

From MarketWatch. “Two home builders with operations in Florida said they’re seeing quarterly losses driven in part by the Sunshine State’s ailing housing market.”

“Hovnanian Enterprises Inc., one of the nation’s largest builders of homes, said Tuesday it expects to post a loss after charges for its fiscal first quarter ended Jan. 31. Hovnanian said it expects to book about $90 million in charges related to operations in Fort-Myers-Cape Coral, Fla., ‘due to a continued decline in sales pace and general market conditions, as well as increasing cancellation rates, during the quarter.’”

“Hovnanian said net contracts in its fiscal first quarter fell 23% from a year earlier. The company said the Fort Myers-Cape Coral market ‘continues to face increasing resale listings, including many home listings that were recently constructed and purchased by investors.’”

“Cancellations were 36% of gross contracts in the first quarter, or 29% excluding Fort Myers-Cape Coral.”

“Analyst Daniel Oppenheim said the expected charges are related to Hovnanian’s August 2005 acquisition of First Home Builders, a move to position itself in the Fort Myers-Cape Coral market. First Home builds in western Florida and provides financing.”

“Oppenheim, in a note, estimated the $90 million expected charge represents nearly the entire purchase price of the First Home Builders acquisition, which speaks to the ‘continued deterioration in the market.’”

“A tough Florida housing market also hit WCI Communities Inc. The tower and home builder said Tuesday it swung to a loss in the fourth quarter of $64.6 million, or $1.52 a share, as it booked real estate inventory impairment losses of $91.4 million.”

“The Bonita Springs, Fla.-based company said margins were hit by greater use of incentives and discounts due to rising inventories of unsold new and existing homes in its markets. ‘Our Florida markets, which account for approximately 85% of our business, experienced the greatest slowdown during 2006,’ said CEO Jerry Starkey.”

“In WCI’s tower business, the CEO said defaults and construction delays negatively impacted earnings. The net number of new tower orders for the fourth quarter was negative 22, as defaults of 27 were greater than gross new orders of five, WCI said.”

“Meanwhile, in the traditional home-building operations, revenue fell from a year earlier as 22% of buyers scheduled to close defaulted in the fourth quarter.”

From Reuters. “‘Because of the lack of visibility on demand, cancellations that we’ve experienced … we’re withdrawing the guidance that we provided previously and believe that the most important metrics for WCI to focus on during 2007 is cash flow and debt reduction,’ Starkey said.”

The St Petersburg Times. “In January, Tampa Bay area home sales plummeted 41 percent from a year earlier. Catastrophic? You wouldn’t think so if you counted all the Realtors still on the job. In Pinellas, Pasco and Hillsborough counties, only about 10 percent of Realtors have failed to renew their licenses and memberships.”

“‘The Florida Association of Realtors expected a 20- to 30-percent reduction. We got nowhere near that. We think most Realtors are remaining optimistic,’ said Heidi Beisner, president of the West Pasco Association of Realtors.”

“Not everyone abhors a thinning of the herd. Realtors like Beisner rate quality as important as quantity. And quality tended to slip in the 2005 housing gold rush. ‘Some people who had gotten lucky at first but didn’t have a lot of experience have left,’ she said. ‘It’s always good to know you’re dealing with a real professional.’”

“Southwest Florida’s large unsold-home inventory has crippled the new-home building industry and forced other builders to desperate measures. ‘I’ve got half the work I had a year ago,’ said Cape Coral’s Jack Organo, owner of Bennett Marine Contracting & Construction. ‘The phone just doesn’t ring as much anymore.’”

“When the housing market started to nosedive late in 2005, dock builders started sinking as well. ‘Our business is down exactly 58 percent,’ said Chris Mynhier, of Boat Lift U.S.”

“‘What we are going through is almost identical to what home builders are going through,’ said Organo.”

“A sagging real estate market is driving another market: unfinished single-family homes with weed-infested lots. There are 4,914 single-family homes for sale in Cape Coral, according to the MLS, said broker Scott Marinelli.”

“The falling price of homes in the Cape has contributed to the problem, said Paul Dickson, city building official. Investors who built homes now could be walking away from the homes they hoped would give them $30,000 or more in profit, he said.”

“A city-painted message warns people to stay away from the unfinished home at 1904 S.W. 54th St., which is about a half-mile from Cape Harbour’s two high-rise condominium towers at the southern end of Chiquita Boulevard.”

“‘Notice unsafe building city of Cape Coral’ is scrawled in red spray paint across the front and sides of the hulk.”

“The empty canal-front lots on the street list at more than $500,000. Off-water homes have been assessed at more than $300,000 in the neighborhood, stated (a) property appraiser’s Web site. ‘This house just turns people away,’ neighbor Bill Long said. ‘It brings down all our values.’”

“Robert Schaeffer also says the property values in his Southwest 12th Avenue neighborhood have been affected by the downward trend in home sales. ‘My neighborhood is far less than a few acres in size; however, look at what the neighbors have to face,’ Schaeffer said. ‘There are now a total of 41 homes for sale, rent or vacant in our neighborhood.’”

“Drive through Schaeffer’s neighborhood and it is a patchwork of nicely kept single-story, stucco homes and an overgrown mess surrounding vacant homes.”

“‘My neighbors are sick and tired of the way our neighborhood looks and sadly it is now typical of so many other neighborhoods in Cape Coral,’ Schaeffer said. ‘We want our neighborhoods to look like they did five or six years ago and not like a slum filled with abandoned homes and overgrown properties.’”

Some housing bubble news from Wall Street and Washington. “Total existing-home sales were 4.3 percent below the 6.75 million-unit level in January 2006. Total housing inventory levels rose 2.9 percent at the end of January to 3.55 million existing homes available for sale”

“Median home prices fell for a sixth straight month. The January decline was the third-biggest drop in history.”

“‘For the last several months I have been hemming and hawing on whether we have reached bottom,’ said David Lereah, chief economist for the Realtors. He said that the January report was an encouraging sign that the bottom for sales activity was reached last September.”

“But he cautioned that the warm weather in December boosted home closing in January, the activity that is tracked in the Realtors report. He said there could be a bit of a payback in coming months.”

“Prices of single-family homes across the nation were flat in December, the worst results since slight price declines seen in early 1996, a housing index released Tuesday by Standard & Poor’s showed.”

“S&P index committee chairman, David Blitzer, compared the decline to that of the early 1990s but said this one could be even more pronounced. ‘By most measures, the current slide is steeper,’ he said. ‘It could outdo the 1989, ‘90, ‘91 event. I don’t see any signs that we’ve hit bottom and are about to turn up,’ Blitzer said.”

From MarketWatch. “Government-sponsored mortgage marketer Freddie Mac is the latest company to weigh in on the growing concern over lending to unqualified homebuyers, saying Tuesday it’s tightening its standards for buying mortgages held by such borrowers.”

“Freddie Mac said Tuesday that it would stop buying those mortgages that have ‘a high likelihood of excessive payment shock and possible foreclosure.’ Freddie Mac also said it would limit the use of loans that don’t require income verification or other documentation, and will recommend that lenders collect adequate escrow for taxes and insurance payments.”

“The firm said its new requirements cover mortgages known as 2/28 and 3/27 hybrid ARMs, which currently make up about three-quarters of the subprime market. Specifically, Freddie Mac said it will require that borrowers applying for these products be underwritten at the fully indexed and amortizing rate, as opposed to the initial ‘teaser’ rate.”

“The company also will limit use of low-documentation loans, so-called ‘no income verification’ products in combination with the 2/28 and 3/27 hybrid arms. In addition, the company won’t purchase ‘no income, no asset’ documentation loans and will limit so-called ’stated income, stated assets’ products to borrowers whose incomes derive from hard-to-verify sources, the firm said in a press release.”

“‘There will be a reasonableness standard for stated incomes,’ Freddie Mac concluded.”

The Wall Street Journal. “David Radley wants to borrow $180,000 to buy a house he rents in Appleton, Wis., but he can’t afford a down payment and has a low credit score.”

“Finding such a loan was a snap until recently. Now mortgage broker John Waite says Radley needs to pay off old bills and put down at least 5 percent to qualify. Though Waite’s motto is, ‘We say yes’ when the banks say ‘no,’ ‘he is saying ‘later’ more frequently these days.”

“Investors’ loss of confidence is reordering the mortgage business. ‘A lot of loan programs that have been available for the past several years … are going away,’ says Jack Pevey, president of Integrated Mortgage Services Inc. in Denver. ‘It’s going to keep a lot of people out’ of the market.”

“No-money-down loans to borrowers with low credit scores ‘are going to be a thing of the past real soon,’ says Bob Moulton, president of Americana Mortgage Group.”

“‘We’re probably reverting back to guidelines that were in place’ four years ago, NovaStar President Lance Anderson says. The new guidelines wouldn’t have allowed as many as 25 percent of last year’s loans without more documentation or bigger down payments, he added.”

The Financial Times. “Repayment problems involving ’subprime’ US mortgage borrowers could have knock-on effects in the broader $8,000bn mortgage market and beyond.”

“The latest concerns centre on the Alt-A market, in which consumers with slightly better credit than the weakest subprime borrowers can obtain loans with loose terms - such as no proof of income. Late payments and defaults on such loans are running at four times the historical rate.”

“‘The delinquency numbers for the 2006 Alt-A originations are materially worse than a lot of people would have expected,’ said Charles Sorrentino, mortgage analyst at Merrill Lynch.”

From Inman News. “The Wall Street end of the mortgage business is entering an episode of distress at this moment, and we will see pricing and availability do some strange things in the next week or two.”

“The party most vulnerable to the retreat of housing exuberance is not housing, it’s the mortgage profiteers, at this moment the Wall Street co-dependents even more so than their Main Street lender-accomplices. As of Friday there are not enough buyers of subprime risk to cover loans recently closed or in process.”

“Trash, like other things, rolls downhill: Alt-A loans are closer to junk than trash, but high loan-to-value-ratio Alt-A loans are still trash.”

From theStreet.com. “Alt-A loans include option adjustable-rate mortgages, negative amortization loans and other nontraditional loans. These loans are made to homebuyers whose credit is generally better than that of subprime borrowers but worse than that of prime borrowers, on the basis of FICO credit-quality scores.”

“‘Everyone says these problems are contained in subprime,’ said Carl Tash, a portfolio manager of a long/short real estate securities hedge fund. ‘If you think about it logically, what is the difference [between subprime and Alt-A] ? Some arbitrary difference in FICO scores.’”

From USA Today. “Former Federal Reserve Chairman Alan Greenspan said Monday it is ‘possible’ the U.S. economy might fall into recession by the end of the year.”

“Greenspan also said he has seen no economic spillover effects from the slowdown in the U.S. housing market. ‘We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing,’ he said.”

From Bloomberg. “Federal Reserve Chairman Ben S. Bernanke during his semi- annual monetary policy report to Congress said there are ‘tentative’ signs of stabilization in housing, and the slowdown hasn’t hurt other sectors of the economy to ‘any significant extent.’”

“Still, it is ‘too early to say this problem is over,’ Bernanke said. ‘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.’”

“New orders for U.S.-made durable goods plunged 7.8% in January as nearly every category of manufactured goods declined, the Commerce Department reported Tuesday. This is the third drop in the past four months and the sharpest decline since July 2005.”

“‘With capital spending having been down in the fourth quarter, this trend is not something that makes one comfortable about the strength of the economy,’ said economist Joel Naroff. Economist Ian Shepherdson went so far as to say the factory rector was in a ‘recession.’”

The Globe & Mail. “For decades, the U.S. Congress and a string of presidents have struggled to make the dream of home ownership a reality for more Americans. Prodded by Congress, regulators operated on the principle that more mortgage cash couldn’t possibly be a bad thing. Bad credit history? No down payment? No problem.”

“Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School of Business, estimates nearly two-thirds of all home loans since 2003 have been ‘aggressive.’ But all this easy money hasn’t been without consequence.”

“Fannie Mae and Freddie Mac have seen a host of new players come into the market, offering big returns and steep risks. These subprime securities have become popular with the hedge funds, which are unregulated. No one knows with any certainty where all these subprime securities are stashed away.”

“Whatever happens, Washington’s fingerprints are all over this. It is, after all, exactly what they wanted.”

The Journal Sentinel reports from Wisconsin. “Fields of dreams are scattered across metro Milwaukee, platted subdivisions awaiting the end of the home-building slump. Only one in four vacant land parcels for sale in the four-county region sold last year, a ratio that went to one in eight in January, MLS figures show.”

“Real estate appraisers say some speculators got caught by the abrupt end of the 2001-’05 building boom. ‘It’s like musical chairs. These people kept developing, leveraged to the hilt, as the market changed. Now the boom is over, and they’re stuck without a chair,’ said Steven G. Stiloski, president of the Appraisal Institute’s Wisconsin chapter.”

“Real estate industry veterans say it’s not them stuck without a chair. ‘We’re not that stupid. We knew this was coming,’ said Mark Lake, director of development at Redmond Residential of Wisconsin.”

“His Waukesha firm is marketing two subdivisions, Emerald Ridge and Hines Meadows, both in Saukville, on MLS ’simply so Realtors and buyers know the subdivision is there. Those lots haven’t been developed yet,’ he said. ‘When the time is right, we’ll build.’”

“‘This is nothing compared to 1980-’84, when the market was so slow you couldn’t give lots away,’ said Bill Carity, owner of Carity Land Development in Brookfield. ‘But there’s no question that certain markets have been overbuilt. I’ve never seen so much land for sale.’”

“Stiloski said he’s never seen so much buildable land before on the MLS system. ‘Me neither,’ said Michael Brachmann, president of Independent Fee Appraisers in Menomonee Falls. ‘I haven’t heard of any subdivisions going belly up yet. But if somebody bought at the top (of the boom), it wouldn’t surprise me. The carrying costs are going to eat them alive.’”

“Developers and appraisers said they know of land holders in financial distress but wouldn’t name them. Wally Neumann said the Summit property on which he advertised a ‘drastically reduced’ price proved to have only five salable lots instead of the envisioned nine. The price reduction ‘has nothing to do with a soft market,’ he said.”

“Regardless of where the building downturn is hitting, the underlying economics are undeniable, said Glendale appraiser Robert S. Schley Jr. ‘Not only has supply increased, but demand has slackened. Economics 101 tells you that if we don’t soon return to equilibrium, prices will fall,’ Schley said.”

“‘I’d say most areas here have been flat since the fall of ‘05,’ he said. The market’s direction should be known by spring, he said.”

The Detroit News from Michigan. “Alan and Alyson Wirgau live in a cute ranch on a quiet suburban street. There’s a new roof above their heads, a new deck in back and a For Sale By Owner sign in front. Instead of weighing offers, the family is weighing an option that seemed unthinkable a year ago: If they don’t sell their home soon, they may turn down the heat, load their possessions in a U-Haul and drive away.”

“With a job in Indianapolis and dim prospects for selling their home, the Wirgaus are considering handing the keys back to the bank and walking away from their home.”

“That process, called a deed in lieu of foreclosure, is an agreement to give up all ownership rights in a home or piece of property to the lender.”

“It’s not a good option for anyone, but it’s often better than the alternative. Homeowners’ credit ratings are hurt, but not as much as in a foreclosure; the lenders lose money on homes now worth less than the outstanding loan, but lose less than the cost of a foreclosure proceeding.”

“‘Nobody knows you can even do it,’ said Ann Howard, a bankruptcy attorney in Southfield. ‘I’m seeing people coming in and saying, ‘What do we do about our house?’ Their (mortgage) rate changed, they’re not getting the overtime they used to, they’ve taken a job out of state.’”

“In normal times, they’re the homeowners who would write ‘motivated seller’ in their house ads and sell for a few thousand less. But with no buyers and property values declining, homeowners who have to sell fast find themselves in unchartered financial territory.”

“Two years ago the Wirgau family’s 1,500-square-foot home was valued at $210,000. Today, it’s for sale at $180,000, just enough to pay the mortgage and the closing costs. No one has made an offer in the three months it’s been on the market. At the full asking price, ‘we’d just break even, and I’d bend down and kiss their (the buyers’) feet,’ Alyson Wirgau said.”

“Lenders who frowned on such deals as well as short sales now are routinely agreeing to both. For lenders, the choice often is between losing a little money now or a lot of money later. ‘The banks don’t know what they’re going to get back,’ Howard said. ‘If people are willing to hand the house over, then it’s less likely the bank will get possession of a house that is completely trashed.’”

“With home prices continuing to fall, the sooner a lender can sell the distressed house, the less money the lender loses, said Michael Kus, spokesman for the Michigan Association of Community Banks. ‘It’s the busiest department in the banks now, short sales and deeds in lieu,’ Howard said. ‘They have people devoted to it.’”

“‘People choose between trying to salvage some of their credit rating versus living in the house for free,’ said Southfield bankruptcy lawyer Stuart Gold. ‘Some banks are even paying people to give their houses back, even on a short sale. They’ll pay them $500 to help on moving expenses to get them out of the house.’”

“The Wirgaus don’t know what they’re going to do. They’re considering lowering the price of their home and dipping into their savings to pay the bank the difference. Even then, there’s no guarantee that their house will sell. In July, the family’s adjustable rate mortgage will jump from 5.25 percent to 8.25 percent, costing another $250 a month. A property tax bill of $2,800 will be due.”

“‘If we’re not out of here by then, something’s gotta give,’ Wirgau said. ‘I’ve covered all the angles. I hope it doesn’t come to that but it may be worth starting over.’”

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