The Housing Bubble

The Ventura County Star reports from California. “Home prices and sales continued to slide last month. The county’s median price for existing single-family homes was $664,400 in January, down 2.6 percent from the same month last year, the California Association of Realtors reported. January sales were down 18.3 percent year-over-year, CAR said, continuing a year of monthly double-digit declines. December’s sales were down 24 percent from the same month in 2006.”

“Oxnard Agent Carolina Alvarez said she has started offering $1,000 ‘referral gift certificates’ to boost sales. ‘The market is kind of stable right now,’ said Alvarez. “Sales have gone up a little bit, especially if a buyer is willing to take $5,000 to $10,000 less than their asking price.’”

“The real estate market traditionally picks up in the spring, but broker Joe Virnig, president of the Ventura County Coastal Association of Realtors. said waiting until then to put up a ‘For Sale’ sign might not be the best strategy.”

“‘I always think if you’re a seller, it doesn’t really matter. You can wait for a busier time,’ he said, ‘but there are going to be more buyers and sellers out there. It’s not like there’s going to be a bunch more buyers out there and the same number of sellers.’”

The San Francisco Chronicle. “California housing prices barely edged up as the number of homes sold fell last month, signs of a sputtering real estate market, according to a report released Tuesday.”

“Economists said reports point to a stagnating housing market. ‘The important thing to recognize is that prices are basically at a zero-percent growth rate,’ said economist Christopher Thornberg. ‘Whether it bumped up or down, it’s all within the range of noise for this kind of data.’”

“‘The resale market is going to take longer as sellers hold on and hold on,’ Leamer said. ‘They don’t have the same kind of pressure that builders have.’”

From KCRA 3. “With interest rates on the rise and the real estate market in a slump, adjustable mortgage rates are skyrocketing, and the high cost of low interest is turning the American dream into a nightmare for some.”

“After five years of an adjustable rate mortgage, one couple sold their home and wound up owing $15,000 after they sold. The couple’s real estate agent said they were paying the lowest option every month.”

“Agent Mike Toste said families are drawn in by the low payment option, not realizing they’re only paying interest on their loan. ‘They get into these loans and they end up falling delinquent because they just can’t afford them anymore. They’re not going up $200 to $300, but $800 to $900, sometimes $1,000 a month,’ Toste said.”

“Real estate records in Sacramento County show more than 7,000 foreclosures in 2006 alone.”

“‘Out of about 310 active homes for sale in Antelope, there are 57 homeowners that have their properties listed as short sales,’ said Toste.”

“‘The unfortunate thing about that is people are borrowing from retirement accounts and exhausting every last penny they have to try and keep this mortgage current. They’re just running right into the wall because eventually…they’re forced to sell their home,’ Toste said.”

“Borrowers are not the only ones facing financial hardships. Several large lenders who specialized in sub-prime loans are also facing tough times.”

The LA Times. “Several other of these sub-prime lenders have seen their shares hammered after disclosing heavy losses this month, including New Century Financial Corp. of Irvine. Others have filed for bankruptcy protection, including Ownit Mortgage Solutions of Agoura Hills and ResMae Mortgage Corp. of Brea. And a host of mortgage companies, including No. 1 lender Countrywide Financial Corp., have announced layoffs.”

“All mortgage lenders will ‘have to reduce their workforces even further to adjust to the slower volume of loans and reducing their losses,’ said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange. ‘This industry was the major engine of growth in Orange County and unfortunately will be a big drag on the overall job growth in 2007 and 2008.’”

“ACC Capital Holdings Inc., the Orange-based holding company for Ameriquest and Argent Mortgage Co., is an example of the heavy damage sustained over the last two years by sub-prime lenders. As the market boomed, the Ameriquest companies had become the biggest sub-prime lenders of all.”

“Last year, after it paid $325 million to settle predatory lending charges in 49 states, it had fallen to seventh place among sub-prime lenders.”

“Its most recent financial statements couldn’t be obtained. But analyst Matthew Howlett of Fox-Pitt Kelton said he had spoken with potential buyers who were put off by what they termed huge recent losses and the potential for more deficits.”

The Orange County Register. “About three years ago, Bob Ralston got the urge to make his own marketing decisions and go after real estate deals wherever he could find them. With a booming housing market and a new broker’s license under his belt, he launched Ralston Realty on the Whittier-La Habra line.”

“Then, things got tougher when the housing market slipped into a deep slump. At the end of last year, Ralston Realty shut down, and Ralston went back to being a salesman in Brea.”

“‘The slowdown made me realize how much I missed being part of a larger group of people,’ said Ralston of La Mirada. ‘To open the door and be the only one in there (made) it hard to be motivated all the time.’”

“The demise of Ralston Realty is just the latest fallout from a downsized housing market that’s seen home sales fall 27 percent and commissions decrease about 20 percent last year. As a result, some real estate offices are closing. Some offices are being combined. And some independents, like Ralston, went back to work for someone else.”

“Office mergers and shutdowns have been occurring across the region and throughout the nation as well. Los Angeles County saw the closure of at least six residential brokerages in the spring and summer, from Agoura Hills to Rodeo Drive, the Los Angeles Business Journal reported.”

“Belt-tightening became necessary only when the market slowdown began cutting into company revenues, said leaders for both the Coldwell Banker and Prudential chains. ‘When the market is really good, you overlook the fact that it’s not efficient,’ said Betty Graham, president (of) Coldwell Banker Residential Brokerage of Greater Los Angeles and Orange County. ‘But when business goes a little flatter, you have a duty (to be more efficient).’”

“After weathering a 50 percent drop in sales in the past 12 to 18 months, broker Jerry Kelly in Westminster says he may have to refinance rental properties he owns to keep his business going. ‘You have to pay your bills whether you have income or not,’ Kelly said.”

The East Valley Tribune reports from Arizona. “New-home sales continued to drag in January. Some 3,746 new homes were sold in January, down 7.1 percent from the same period in 2006, the latest housing market report from real estate analyst RL Brown shows.”

“Permits were also down year over year, with builders pulling 2,876 last month, compared with 4,423 in January 2006. But, Brown said, the number of permits has been increasing slightly the past three months.”

“‘It’s an encouraging sign,’ he said. ‘It appears that the real slide from euphoria has bottomed out.’ Builders have been cutting prices and readjusting their products, offering fewer extras like granite counter tops to make homes more affordable, Brown said.”

“‘I think the next move we’ll see more and more builders cutting the square footage in houses,’ he said. Builders are expected to pull about 40,000 permits for new homes in 2007, compared with 63,000 at the height of the housing boom two years ago.”

“Brown’s report estimates that builders need to unload 12,000 to 14,000 houses built on speculation still on the market throughout the Valley.”

The Las Vegas Business Press. “The writing was on the wall for months. Employees at Silver State’s loan pricing office in Addison, Texas (the division that packaged and sold loans to investors through securities traders), were seeing second-lien loans being sold for losses of millions of dollars. Employees warned company executives that things would have to change, and fast. They were consistently rebuffed, they say.”

“Last month, Silver State CFO Tom Edington abruptly resigned, citing personal reasons. Again, employees were told there was no need to worry.”

“‘We were told everything’s fine. That the owners have deep pockets,’ said one, a five-year veteran of the mortgage business, who now finds herself out of a job. Between 800 and 1,000 employees worked for Silver State nationwide.”

“The day before Silver State closed its doors, pricing-support unit employees finally got the confirmation in a company-wide e-mail that the end was near, despite management’s calm denials throughout the previous weeks.”

“Michael Stoddart, the company’s CEO, wrote on Feb. 13: ‘I know everyone is out there wondering if we are closing our doors today. The honest answer is maybe. We will either get capital infused today from a long term partner, to make sure we (have) cash flow and have breathing room, or we will close our doors if it does not happen.’”

“Silver State closed the following day. Employees have not received any further communication from the company, not even their final paychecks or payment for accrued vacation time.”

“Another Addison-based employee, who also wished to remain anonymous in hopes of getting paid for her last two weeks there, said she understands that employees in the Las Vegas headquarters were so upset that computers and other office equipment were stolen, and Silver State’s owners were threatened.”

“‘I heard the owners were told not to come to the office, that they received death threats,’ the Texas employee said.”

“Silver State joins a host of high-flying companies, 22 have gone bankrupt since December, that took advantage of expansion in the credit market in 2001 to offer loans to a wide variety of borrowers who would be denied credits in less-robust economic times.”

“Scott Bice, commissioner of Nevada’s Mortgage Division, which is investigating Silver State’s collapse, says he remembers seeing outrageous loans being made by alternative lending companies. One borrower, he says, took out a $1 million loan with no down payment and received the money despite having a very low credit score.”

“‘Because of the (high) default rates, the market has changed,’ Bice reported. ‘Loans you could get six months ago are no longer available. The credit market has tightened up.’”

“Silver State not only made such loans, it also served as a clearing house for other mortgage brokers. The company packaged the loans and sold them to investors as mortgage-backed securities. At one point, the company held $500 million in home loans. But when the housing market began to slow, borrowers started defaulting and investors forced Silver State to buy back the loans, which then could not be resold without significant losses.”

“‘Who wants to buy a loan they know will be defaulted on,’ one of the Addison employees asked, summing up the general feeling among employees handling this part of the business.”

“Three months ago, Silver State’s big institutional investors, among them Bear Stearns, began to jump ship and refused to buy any more loans, an employee in Silver State’s loan pricing division says. Washington Mutual was eventually forced to pull the plug before it too lost significant amounts of money.”

“Stoddart detailed why the company was going under in his e-mail to employees. ‘Our issues have to do with stale loans. These stale loans are in an under-curtailed position, making the warehouse lines freeze our incoming cash flow until the loans are purchased.’”

“Stoddart told employees the company needed an immediate infusion of $5 million. He acquired a $3 million guarantee. It wasn’t enough.”

Some housing bubble news from Wall Street and Washington. “Sales of new homes plunged 16.6% in January to a seasonally adjusted annual rate of 937,000, the Commerce Department reported Wednesday. It was the lowest sales pace in four years, and was the biggest percentage decline in 13 years. Sales were down 20.1% compared with January 2006.”

“The inventory of unsold homes fell to 536,000 from 537,000, representing a 6.8-month supply at the January sales pace, the highest since a 7.2-month supply in October. The number of completed but unsold homes rose to 175,000, up 47% from a year earlier.”

“Regionally, January sales fell a record 37% in the West, 19% in the Northeast, 10% in the South and 8% in the Midwest. Most of the pain has been felt in the largest markets: the West and South. New-home sales are down more than 50% year-on-year in the West, the largest percentage drop in the region since 1981. In the South, sales are down 11% in the past year. Sales are down 2% in the Northeast and are up 1% in the Midwest.”

From CNN Money. “The median price of a new home fell 2.1 percent from a year earlier to $239,800. The latest median price is down 6.7 percent from the record high reached in April 2006.”

“The prices have seen downward pressure from the glut of completed homes on the market available for sale. The report shows a record 175,000 completed homes for sale in January, the eighth straight month that reading has risen to a record level.”

“The median time it takes a completed home to sell now stands at 4.8 months, the longest wait for builders since July 2001, when the nation was in a recession.”

From theStreet.com. “At a pace of 937,000 in the month, home sales fell from the revised December rate of 1.12 million, the Commerce Department said Wednesday. The sales were down 20% from a year ago.”

“Phillip Neuhart, an economic analyst with Wachovia, cited the buildup of completed homes in inventory as a troubling sign for the housing market. ‘There are more homes in the inventory that are actually completed, not under construction anywhere, that are empty,’ Neuhart says.”

“During January, 32% of the new homes for sale at the end of the month had already been constructed, up from a low-20% range during the housing boom, Neuhart says.”

From Reuters. “Fremont General Corp., one of the largest U.S. mortgage lenders for people with poor credit histories, said on Tuesday it will delay releasing fourth-quarter results, and not file its 2006 annual report by the March 1 deadline.”

“‘Most investors understand that the subprime industry is under siege after 17 interest-rate hikes, an inverted yield curve, and flat home prices that have reduced refinancing options,’ said analyst Richard Eckert.”

“Anticipating a rise in defaults, Fremont began tightening its lending standards in last year’s second quarter. It had expected to see benefits, as measured by the impact on loan loss reserves, by the current quarter. Earlier this month, Fremont stopped offering second mortgages that can help borrowers afford homes when their primary lenders won’t cover the entire purchase price.”

“‘It can take several quarters for tightened lending standards to work their way through the system,’ Eckert said.”

The LA Times. “Fremont General has beefed up loss reserves and backed away from its riskiest lending practices over the last year. As home prices soften and lenders adopt more stringent standards, consumers who once used ’serial refinancings’ to extract cash and get new low ‘teaser’ rates are finding themselves stuck with loan payments that will soon shoot higher.”

“With foreclosure rates on the rise, some analysts warn that woes in the sub-prime industry could spread to the prime market and affect the entire economy. ‘More people who already own their homes and can’t refinance are likely to lose them,’ said analyst Zach Gast. ‘Think how that’s going to ripple through the economy,’ he said. ‘It could really affect home prices.’”

“The effects of mortgage layoffs already are being seen in employment data for Southern California. In Orange County, ground zero for the sub-prime industry, year-over-year figures for financial services employment showed job losses beginning last summer for the first time since late 1999 through mid-2000, after the last big industry retrenchment.”

“With short-term interest rates back up, big banking firms are charging more for money to loan. Also, they are paying less for loans and forcing the original lenders to buy back huge numbers of new loans that have fallen quickly into default, analyst Matthew Howlett said. Such early-payment defaults occurred at a faster pace in 2006 than ever before.”

“‘You’re relying on people who are willing just to run any time there are fears of credit losses,’ he said. ‘It’s a weakness in the business model.’”

The New York Times. “In a sign of that wariness, Freddie Mac, one of the largest buyers of mortgages, said yesterday that it would tighten lending standards and stop buying certain kinds of risky home loans.”

“Even as the market was growing in recent years, the agencies were pulling back; they bought $119.8 billion of subprime bonds in 2006, down from $169.4 billion in 2005 and $175.6 billion in 2004, according to a trade publication.”

“But Freddie’s announcement is confirmation to other investors in mortgages that a segment of the market that was once Wall Street’s darling finds itself in the doghouse. ‘Freddie is giving its stamp of approval to what the market has already done,’ said Dwight Jaffee, a real estate finance professor at the University of California, Berkeley. ‘Already consumers were going to be finding these loans harder to get.’”

“‘You have to come back to the question: Do you want someone that is in a difficult situation now to get themselves into an even more difficult situation later on because they have postponed a day of reckoning?,’ Richard Syron, Freddie’s CEO said.”

“Concerns about the deterioration of the subprime market have weighed on financial stocks. Those concerns persisted yesterday amid a sharp sell-off in stock markets around the world.”

“The U.S. central bank has some concerns about the domestic subprime mortgage market and is monitoring it closely, Federal Reserve Board Chairman Ben Bernanke told the U.S. House Budget Committee on Wednesday.”

“‘Our assessment is that there’s not much indication that subprime mortgage issues have spread into other mortgage markets,’ Bernanke said.”

“When asked by one lawmaker whether a liquidity crunch was what roiled Tuesday’s global equity market, Bernanke replied: ‘No, I don’t think so.’”

From MarketWatch. “Bernanke said the economy could even strengthen if the housing market hits bottom and the inventory correction eases in the factory sector. He said worries about the subprime mortgage market was one factor in the unease in financial markets, but said he did not think the trouble in the sector was having a significant impact on the U.S. economy.”

“Reacting to increased foreclosures of mortgages in the subprime market, a subcommittee of the House Financial Services Committee will hold a hearing next Tuesday to examine possible predatory lending practices, Rep. Carolyn Maloney announced Wednesday.”

“‘The trend of increased foreclosures is certainly troubling, and it is important to understand the potential root causes,’ said Rep. Maloney in a press release.”

The Massachusetts realtors report the sales for January. “After more than a year of declines, sales volume of detached single-family homes for the month of January was up over 12 percent compared to the same time last year. This is the first time there has been a double digit increase since January 2005. ‘We are encouraged about the way January has started off,’ said MAR President Doug Azarian of Falmouth. ‘As sellers continue to price their homes correctly, we should begin to see demand pick up.’”

“Median sales prices for detached single-family homes declined only 2.4 percent compared to January 2006. Residential properties did stay on the market an average of 142 days in January 2007 compared to an average of 104 days in January 2006.”

The Boston Globe. “The number of single family homes sold in the Bay State last month was 3,304, up 5.1 percent from 3,144 from January 2006, reported the Warren Group. Meanwhile, median prices for single families dropped from $325,000 in January 2006 to $314,000 in January 2007, continuing a trend of declining prices that has been in effect since May, the Warren Group said.”

The Boston Herald. “‘Things may be stabilizing here, but it’s too early to call a turnaround,’ said John Bitner, chief economist at Eastern Bank in Boston. ‘Buyers have been holding off because they’ve been concerned that real estate prices have been coming down, though that maybe has exacerbated the weakness in prices.’ Prices have been declining since May 2006.”

The Telegram. “The condominium market in Worcester County had a rough month, seeing sales drop 22.16 percent, from 176 in January 2006 to 137 last month, The Warren Group said. The median price of a condominium in Worcester County fell 13.32 percent, from $219,200 in January 2006 to $190,000 last month, the data show.”

“‘I think it’s pricing, that sellers are getting used to the idea that houses are not worth as much as before, and they’re willing to compromise,’ said Timothy M. Warren Jr., CEO of The Warren Group.”

“Meanwhile, foreclosure filings jumped more than 100 percent in January, as Massachusetts homeowners struggled to hold onto their homes, ForeclosuresMass.com reported. Some 2,207 foreclosure filings were made in January, or about 110 foreclosure filings every business day, the report said. That is an increase of 105 percent from the same period a year earlier, when 1,076 filings were made.”

“In 2006, lenders filed 19,487 notices against homeowners, surpassing filings made in 1992, during the depths of a recession. The filings ‘are scary,’ said Alan Pasnik, an analyst for Warren Group. ‘They’re essentially double what they were.’”

“The mortgage banking industry has said the primary reason filings are on the rise is an explosion in mortgage volume driven by the housing boom, which pushed home sales to record levels in Massachusetts and nationwide.”

“‘The flood of foreclosures in Massachusetts is not only continuing; it has reached a new high,’ company president Jeremy Shapiro said. ‘The fact we are starting the year with the highest number of foreclosures we’ve ever recorded for a single month is more than significant - it’s ominous.’”

“ForeclosuresMass.com continues to attribute the increase to a ‘perfect storm’ of factors. The pressures put on property owners include rising interest rates over the past few years, an increase in sub-prime and other ‘exotic’ loans, the affect of adjustable rate mortgages, rising home heating costs, substantially increased gasoline prices, and the slumping Massachusetts housing market, which leaves homeowners trapped in houses they cannot afford.”

The Daily News Tribune. “‘People are starting to price their houses right from the beginning, or if they’ve been on the market a while, they are starting to make the appropriate reductions,’ said Jane Evans, Realtor in Waltham.”

“Finding a perfect match between a buyer and a seller is all about positioning—by way of price, but also by what buyers want today.”

“In the recent past, a kitchen renovation was high on buyers’ wish lists. And although it’s still nice to have a kitchen with stainless steel appliances and granite countertops, the ‘wow’ factor has subsided a bit, said Gary Rogers, Realtor in Waltham.”

“Also, sellers may want to be careful with putting a lot of money into a big renovation because it may not mimic the taste of a potential buyer, said Steve Stratford, Realtor in Lexington. ‘Make what you have as presentable as possible,’ Stratford said.”

“People don’t mind putting in new kitchen cabinets now that the housing prices are more palatable, Evans said.”

“In addition to following the buyer trends in the real estate market, some sellers in the recent past have tried to use gimmicks to sweeten their deals, such as offering a flat-screen TV or plane tickets to a tropical destination with the purchase of the property. ‘You’re better off offering cash or home warranties to get buyers’ attentions,’ Evans said.”

“‘Gimmicks don’t work,’ Rogers said. ‘What does work is properly pricing your house, staging it and making it accessible for showings when the buyers want to see it.’”

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