The Housing Bubble

The Recordnet reports from California. “Sales and sales prices of existing homes in San Joaquin County dropped in January, and statewide, the picture wasn’t much better. Closed sales in January were down from 417 in December throughout the county to 266 in January, a decline of more than 36 percent, while the median sales price slipped from $400,000 to $376,000, according to the latest Coldwell Banker Grupe-TrendGraphix monthly sales report.”

“Statewide, the California Association of Realtors reported Central Valley, sales slipped nearly 23 percent for the month, while the median sales price of $334,810 fell 2.1 percent.”

“In the Bay Area, sales were down 27.5 percent from December to January, while the median sales price slid by 0.9 percent to $719,320.”

“The association’s chief economist, Leslie Appleton-Young, said the unsold inventory of existing homes also took a jump to more than nine months after an average of about seven months in the last half of 2006.”

The Press Enterprise. “Nationwide, new single-family home sales dropped 16.6 percent compared with the prior month. It was the largest drop since a 23.8 percent skid in 1994, the Associated Press reported.”

“‘It’s disappointing,’ Chapman University economist Esmael Adibi said of the report. ‘Everybody knew the numbers were going to be weak but not as weak as this 16 percent.’”

“Builders in Riverside and San Bernardino counties had 45,485 permits to build single-family homes in 2005. By the end of 2006, there were 33,508 according to the U.S. Census Bureau. Comparing January 2006 to last month, U.S. Census data showed a 37 percent drop in permits.”

“Adibi has forecasted that the weak residential market will do away with 13,500 jobs in California. But he’s more concerned about the resale market. Builders can choose to pull back and build fewer homes, but a market flooded with homeowners holding onto properties that are losing value would be worse for the economy, he said.”

“This year, Adibi predicts prices for existing homes should drop about 5 percent to 6 percent. ‘We don’t think there’s a quick rebound. I think that’s a false hope that builders had late last year,’ he said.”

“Palm Springs Modern Homes developer Dennis Cunningham said he’d feel panicked if he were competing with many national builders who could afford to cut prices drastically to get rid of inventory. Instead, he’s taking the current housing situation for what it is and continuing to build.”

“‘We’re not getting 100 sales a month. We’re getting a couple here and a couple there,’ he said. His 132 units near Tramway Road are being graded and he expects it to be finished in two years. He said he could carry his empty homes for 18 months if he needs to.”

“‘The national guys, they don’t suffer well with standing inventory,’ he said.”

The Santa Maria Times. ” A drop-off in homes sales and new construction is generating less property tax than anticipated. During a mid-year budget update presented to Santa Barbara supervisors, administrators warned there may be a widening gap between income and expenditures after 2008.”

“‘The bottom line,’ added County Executive Officer Michael Brown, ‘is that the period when house prices were going up, and (revenues from) property taxes were increasing’ as much as 11 percent annually are over.”

“‘Probably the big message today,’ he told the five-member Board of Supervisors, ‘is that we’re going to struggle to keep the current level of services.’”

“When the county’s $171 million budget was approved by the board in June, it projected more money from construction of new homes in the North County. ‘However, this has not happened due to a downturn in the housing market,’ administrators noted in their written budget update.”

“The cooler housing market has also meant less revenue from ‘property transfer taxes,’ which are now predicted to be down 20 percent from last year’s total.”

From Fortune. “Equity-addicted homeowners have long hung on David Lereah’s every word. He’s also seen as a booster for the housing boom. With his latest book, ‘All Real Estate is Local,’ due out in April, Fortune’s Ellen Florian Kratz talked with Lereah about where the market is headed.”

“Q: Many think we still have a long way to go. A: If you look at local areas, that statement is true. California has a long way to go. I expect them to continue to experience pain all throughout this year. Southern Florida, same thing. Las Vegas is probably going to take a little longer to correct as well.”

“A quarter of the country is still feeling pain, and I can’t guarantee that it’s going to be over by the end of 2007 for some of those areas.”

“Q: So they could decline into 2008 or longer? A: They could. It’s hard to tell right now. The real key for some of these areas that are having problems is prices. Prices need to come down to bring buyers back to the market. And until they do, they’re going to experience drops in sales. California is experiencing some serious drops in sales - 30 percent drops in some places.”

“Q: So you don’t think California and Florida could bring the whole country down? A: They’ll bring themselves down. But will it bring the whole country down? No.”

“Q: What about the problems in the subprime market? A: I was giving a speech in Atlanta about two years ago. During the question and answer period, someone asked me something about interest-only loans. I said, they’re kind of dangerous and you have to be careful. Someone rose their hand and said, Did you know that in Atlanta, the percentage of interest-only loans in 2005 was 40 percent of the market? Atlanta didn’t even have a boom.”

“That’s when I knew we were in trouble.”

“Q: Will problems with subprime have any effect on your sales numbers? A: I think in some areas yes. Foreclosures are going to happen in California.”

“You may see a rise in Las Vegas or Phoenix or Washington DC and parts of Florida, but it’s not all over the country. The big problem right now is borrowers with a loan balance that may be greater than the value of their home. They have no incentive to make the mortgage payment. They’ll say, I don’t need it, take it. That’s going to occur in some of the real unaffordable areas, like San Diego and San Jose.”

“Q: What surprised you about the boom? A: The share of second home buying. It was 40 percent of the market in 2005. I was in shock. When you have a lot of second home buying, that’s volatile, whereas when people buy a primary residence, they’re buying it to live in.”

“I never anticipated that type of market share in second home buying. That proved to be the end of the boom.”

The Chicago Tribune reports from Illinois. “Though local observers say the slumbering Chicago housing market has started to stir, it snored right through January, when sales slid by nearly 11 percent from a year before, according to data released Tuesday by the Illinois Association of Realtors. It was the 10th consecutive month that sales declined in Chicago.”

“William Dahms, a North Side mortgage banker, has been trying to sell his condo in the Ravenswood Manor neighborhood since July and has dropped the price to $225,000 from $235,000. Dahms says he is firm on the current price, but acknowledges that buyers continue to be picky because they have many properties to choose from.”

“‘They’re a tough crowd,’ agrees Glen Ellyn agent Gaylyn Genovesi, who says buyers are turning up their noses at homes that are not pristine. She recently got a firm contract on a house that had been for sale for about a year, during which time it cascaded through several price cuts to settle at $449,000 from $517,000. After that, the owners got three offers.”

“In the Chicago area the biggest decline was in Grundy County, where home sales fell more than 15 percent. In DeKalb County, however, sales jumped 33 percent, though median prices slipped by 11 percent, according to the Illinois Realtors.”

The Journal Register from Illinois. “No matter how the numbers are added up, the prices people paid for homes in the Springfield market dropped in the final three months of 2006, for only the second time in 11 years.”

“The Danville Area Board of Realtors last year stopped providing sales figures to the national group after the community consistently was ranked at the bottom of the nationwide median-price index.”

“In addition to unfavorable publicity in national publications such as USA Today, association and city officials in Danville told the local newspaper early this year the rankings were not an accurate reflection of the housing market. ‘It’s all how you play with the numbers,’ Mayor Scott Eisenhauer said in the Commercial-News of Danville.”

The Flint Journal from Michigan. “By discounting prices on new houses by as much as $70,000, a group of area home builders hopes its deals are just too good to pass up despite the current sales slump.”

“Thirteen houses from several area builders are featured in the first ‘New Home Inventory Clearance Sale’ taking place this weekend and next. The event is sponsored by the Builders Association of Metro Flint.”

“The sale, featuring discounts as high as 21 percent, is prompted by the area’s slowdown of new house sales and builders’ desire to reduce inventory.”

“‘I’m not going to stand here and lie and say, ‘The housing industry is strong.’ It’s not. It’s weak,’ said Barry Simon, president of the Builders Association of Metro Flint. ‘But that’s to buyers’ advantage right now. There are houses out there some people couldn’t have bought two years ago that they can right now.’”

“Earlier this month, The Flint Journal reported that new housing starts in Genesee County collapsed in 2006, sinking to the lowest level in 14 years. Also, the average selling price dropped 16 percent compared to the previous year.”

“But the decline in house sales isn’t just in Genesee County and southeast Michigan. The sale comes just as a new U.S. Commerce Department report showed new house sales nationally fell last month by the biggest percentage in 13 years.”

“Lexington Properties has a home in Davison Township for sale for $239,900, down from $270,500. The company also has four others available at discounted prices, said Ted Macksey, managing partner for Lexington and president of the builders association.”

“‘This isn’t like a furniture store that has a sale every week or every month,’ Macksey said. ‘This is a true blue, incredible deal.’”

“And even the prices listed aren’t necessarily the lowest prices, Macksey said. ‘Builders are willing to make concessions, but we’re not foolish, and there is a point where we can’t go any further,’ Macksey said. ‘But we are encouraging buyers to make offers.’”

The Winona Daily News from Minnesota. “Last year, Winona County had 42 home foreclosures. The county is on track to have that many by spring this year. There have been 10 already this year with another 20 pending, putting the county on pace for a record increase, said County Recorder Bob Bambenek.”

“The county is poised to see ‘drastic changes,’ Bambenek told the county Board of Commissioners in a real estate market update Tuesday night.”

“The trend, largely a result of too much credit, isn’t unique to the area, or even the state, which saw a 46 percent increase in foreclosures between 2005 and 2006 and recorded 738 new ones in January, according to RealtyTrac.”

“In Fillmore County, foreclosures jumped 33 percent over that same period. In Houston County, they doubled. ‘It’s really scary,’ said Houston County Recorder Beverly Bauer. ‘A lot of people in the last few years have extended themselves very deeply.’”

“Bambenek said that of the foreclosures his office has handled this year, both completed and pending, several are associated with Internet lending companies. Some of those companies, which often deal in giving subprime loans to people with poor credit, have high interest rates and use overly complicated formulas to mask fees and other charges.”

“Bauer also said she’s seen an increase in recent years of mortgages from outside lenders, which she said she’s ‘leery about.’ ‘People have done online mortgages and all of a sudden had problems,’ she said. ‘They try to contact those people, huge corporations, and don’t get to talk to a real person. They come here and say, ‘What can we do?’ There isn’t much we can do besides giving them a copy of their foreclosure.’”

“Minnesota Attorney General Lori Swanson has suggested a series of bills to reform lending practices, some of which will be introduced in the Legislature in the coming weeks. Her agenda includes criminal penalties for those who consciously provide ‘grossly unsuitable’ loans, banning prepayment penalties, and requiring lenders to verify that borrowers can repay a loan.”

Some housing bubble news from Wall Street and Washington. “Countrywide Financial Corp., the biggest U.S. mortgage lender, said payments were late at the end of last year on almost 20 percent of the subprime loans it tracks for other companies and investors who own them. CEO Angelo Mozilo has said the company holds only higher-quality prime loans at its bank and pulled back from subprime lending last year.”

“‘If you look at our market share, we lost some for the first time in years, but it’s all in the subprime area,’ he said in a Feb. 8 interview. ‘We were a dominant player, and now subprime is a pretty small portion of our business.’ One reason was that rivals were paying salespeople in the business too much, and ‘the other reason was we wouldn’t take the toxic waste,’ he said.”

From Business Week. “Big banks’ loans are souring. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December, 2006, vs. December, 2005, at banks with more than $10 billion in assets, says SNL Financial. Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio.”

From Reuters. “Rising delinquencies may cause losses within some subprime mortgage bonds rated as high as the ‘A’ rated classes, despite conventional wisdom that only the lowest-rated mortgage securities would be hit, according to UBS Securities data.”

“Among the 20 subprime asset-backed securities in a benchmark index, the ABX 06-2 index, run by Markit Group Ltd., six will likely sustain losses to ‘BBB-’ classes based on UBS calculations, analysts said.”

“Projected losses are so deep on two issues that they may exceed levels of protection included with the higher-rated classes, they said.”

“‘People think the higher rated stuff will be protected because it’s well subordinated’ with lower-rated pieces, said Kevin Jackson, a mortgage strategist at RBC Capital Markets. ‘That’s the assumption people are making, but I agree there could be some problems higher up, at the margin.’”

From Fortune. “When a certain $126,000 subprime loan on a $696,000 house on the West Coast failed to produce a single mortgage payment, alarm bells went off at Clayton Holdings, a company that monitors credit risk.”

“Closer scrutiny revealed other red flags. The borrower’s previous rent payment had been $1,000, compared to the $4,482 she was supposed to be shelling out for both the primary loan and the $126,000 piggyback. And her stated income was $84,000 even though she was an hourly worker at Target.”

“‘We do an autopsy to find out what caused the loss of blood,’ says Keith Johnson, Clayton’s COO. ‘It’s a CSI subprime.’”

“Particularly troubling for investors is the rapidly deteriorating quality of subprime vintages originated in 2005 and 2006, years when lenders were downright promiscuous about who they loaned money to. Serious delinquencies, defined as loans at least 60 days late or in foreclosure or bankruptcy, for a 5-month old loan originated in 2006 is running at almost 4 percent, according to Moody’s, compared to 2.2 percent for a similar loan originated in 2004.”

“‘The scariest part of that statistic is the fact that 2006 borrowers are still in their fixed-rate period. ‘What will they do when their payment starts to rise?’ says Glenn Costello of Fitch Ratings.”

“‘If there is a fault line in the global financial system, it runs through the U.S. mortgage market,’ says economist Mark Zandi. ‘If some hedge fund blows up on a residential mortgage-backed securities investment, that has very different kinds of implications because it is the biggest chunk of the global fixed income market. So the ripples will be more like waves, and it could turn into a tsunami.’”

The New York Times. “Insurance premiums on the potential default of Wall Street bonds have risen sharply, indicating possible concern among bond traders about potential exposure. The cost of insurance against potential bond default on Bear Stearns’s debt, for example, increased 40 percent recently, from about 22 basis points in mid-January to more than 31 on Tuesday, according to Lehman Brothers data.”

“‘It is impossible to get a number’ on big investment bank’s exposure to subprime loans, analyst Richard X. Bove told The Times. ‘And I don’t think they even know.’”

From Origination News. “Ivanhoe Mortgage, a $2 billion-a-year conventional/government lender based in Orlando, Fla., has closed its doors, according to industry officials familiar with the company.”

“IndyMac Bancorp, Inc., the holding company for IndyMac Bank, today released its annual letter to shareholders from Chairman and CEO Michael W. Perry.”

“‘Dear Shareholders: 2006 was a challenging year in the mortgage banking industry. Industry loan volumes of $2.5 trillion were 34 percent below 2003’s historic high level and 17 percent lower than in 2005. Mortgage banking revenue margins declined further after sharp declines in 2005, and net interest margins continued to compress, as the yield curve inverted with the average spread between the 10-year Treasury yield and the 1-month LIBOR declining from 89 basis points in 2005 to negative 31 basis points in 2006.”

“To cap it off, the housing industry slowed down significantly, increasing loan delinquencies and non-performing assets and driving up credit costs for all mortgage lenders.”

“We have seen the return on equitys we are earning on our whole loan and MBS portfolios decline, and even fall below our cost of capital at times for some assets, such that it does not make economic sense for us to grow these portfolios to the extent that we had previously planned.”

From Bloomberg. “Construction spending in the U.S. fell by the most in three months in January, pulled lower by the biggest decline in homebuilding since July. Residential construction fell at an annual rate of 19.1 percent in the fourth quarter and subtracted 1.2 percentage points from economic growth, the government said yesterday.”

“‘There is so much overbuilding in the last few years that we have to work down that inventory,’ Federal Reserve Governor Susan Bies told reporters in Durham, North Carolina on Feb. 20. ‘This could take us a year to two years depending on where the location is.’”

“U.S. banking regulators plan to issue eagerly awaited guidance on the subprime mortgage market as early as Thursday afternoon, two sources familiar with the matter told Reuters on Wednesday.”

“The proposed regulation affecting borrowers with poor credit histories will be issued by agencies, including the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.”

“At issue is whether regulators will force lenders to qualify subprime borrowers based on their ability to make the highest possible monthly payments during the life of the loan, instead of the initial lower rate, according to banking experts.”

“‘The idea would be to have in place some criteria by which institutions would be able to evaluate the effectiveness of their programs and whether or not there are potential safety and soundness and consumer protection issues there,’ one source said. ‘They (the lenders) should already be focusing on that.’”

The News Press reports from Florida. “Compared to the market a year ago, both prices and numbers of sales in Lee County were down sharply: prices were off 7 percent from January 2006’s $287,200 and sales were down 34 percent. Locally, some would-be sellers are feeling a mounting frustration as they find themselves unable to dispose of their homes for what they consider a fair price.”

“‘It’s incongruous,’ said Jerry Adler, who’s been trying to sell his four-bedroom, three-bath house in south Fort Myers for a year and a half so he can move to Tucson, Ariz. ‘The mortgage rates are good, the median price is down, building permits are down, employment is up, so what the hell does sales price have to do with it?’”

“Adler started off asking $535,000 and now has it listed at $464,900 but still hasn’t had a nibble, he said. ‘It’s not logical.’”

“Meanwhile, the supply of unsold resales continues to mount: about 15,000 single-family homes for sale in Lee County, about four times what it was a year ago.”

“(Realtor) Phil Wood said part of the problem is unrealistically high expectations from sellers. ‘There’s the real inventory and the fake inventory,’ with about 40 percent of the houses listed for sale being beyond the range of what someone might realistically pay, he said, sellers need to adjust their asking prices to the real world.”

“One expert said the big price increases for homes in 2004 and 2005 are to blame for sluggish sales. ‘The Fort Myers area was heavily speculator-driven during the run-up,’ said Brad Hunter, an analyst at Metrostudy. Speculators listing properties ‘are not yet lowering their prices enough to let those properties sell.’”

“One hopeful seller, Cindy Infiesto, is trying to sell her 6,300-square-foot, all-concrete Alva house on 7.5 acres with a seven-stall horse barn and a putting green.”

“Infiesto, a real estate broker with the Florida Real Estate Store, is motivated to sell, with a property tax bill of more than $13,000 this year and skyrocketing insurance rates. But at $1.4 million, no dice.”

“‘I’m desperate to sell my house,’ she said. ‘I’ll even throw in the horses,’ she said with a chuckle.”

“The washed out hotels, crumbled asphalt and shuttered businesses that marred Pensacola Beach after Hurricanes Ivan and Dennis in 2004 and 2005 are mostly gone. But real estate agent John Pinzino still cannot find buyers for the homes and condos he has listed.”

“Only five of 354 residential properties on the market in Pensacola Beach sold in January. Pinzino lost one deal after the prospective buyers paid a deposit, but later discovered the $3,500 they had estimated for insurance would actually be $8,500.”

“‘(Insurance) is a huge deterrent to anyone looking at buying property anywhere in our state. We have property for sale that normally would have been gobbled up but, because of the insurance situation, is just sitting,’ Pinzino said.”

The Herald Tribune. “Many of the homes in the south Manatee County gated community were built around the same time and are of similar appearance. That makes for easy comparisons.”

“In early 2004, the houses were changing hands for list prices in the mid $400,000s. Toward the end of that year, some sellers were asking for and getting prices in the low to mid $500,000s.”

“Then, during 2005, pricing got wackier, edging into the upper $500,000s and the low $600,000s. Even in 2006, with the market starting to crumble, one asked and received $624,000 for a 2,400-square foot home on the same street as real estate agent Steve Dutoit’s listing.”

“Dutoit just listed the three-two with a den, a three-car garage, twin pantries, a deluxe kitchen and a screened pool for $519,500. ‘That home probably would have sold in the sixes, say, in the summer of 2005,’ said Dutoit. ‘We’ve just seen probably a 30 percent drop in value in most of our inventory.’”

The News Journal. “In Volusia-Flagler, Realtors sold 520 houses, down 19 percent from the 643 sales in January 2006. The median sales price, the point at which half sell for more and half for less, was $207,100, down 8 percent from $225,600 in January last year.”

“Stephanie Decker is confident her house will sell. She just doesn’t know when. ‘I’ve had a lot of people looking at it,’ she said Tuesday. ‘I’m not really worried. It’ll sell eventually.’”

“In Flagler County, a large inventory of home builders’ spec homes is adding to the pressures sellers are facing, said Honora Giumenta, president of the Flagler County Association of Realtors. Giumenta said homes have to be priced right to make them attractive to buyers, and some sellers are ‘rethinking’ and lowering their asking prices.”

The Palm Beach Post. “Struggling local housing markets started 2007 not with a bang but a whimper. Palm Beach County and the Treasure Coast both reported plunging home sales and declining prices for existing single-family homes, the Florida Association of Realtors said.”

“Some Realtors said buyers are still sitting on the fence, despite recent price drops. ‘People keep talking about the lack of supply of affordable housing, but they are not rushing toward the opportunity,’ said (broker) Randy Bianchi in West Palm Beach.”

“Hesitant buyers, and sellers who won’t lower prices, pushed the inventory of unsold homes between Boca Raton and Hobe Sound to 22,888 homes in January, according to Illustrated Properties Real Estate. That’s a 37 percent increase over January 2006.”

“A housing economist believes the inventory of unsold condos for sale in Palm Beach County could shoot up in a couple of years ‘when all the units currently under construction are reaching completion,’ said Bradley Hunter, of MetroStudy.”

“The likely result will be more condos in the MLS, Hunter said, since many of the thousands of new condos still being built were bought by investors who don’t intend to live in them. ‘I would expect to see a lot of price declines going forward,’ Hunter said.”

The St Petersburg Times. “In the Tampa Bay area last month, condo sales were half what they were in January 2006. Sales of single-family homes locally were down 41 percent from a year ago.”

“Yet median sales prices of local residences barely budged from the 2006 level, indicating plenty of stubborn sellers with unrealistic expectations.”

“‘Prices aren’t reflective of the actual market yet,’ said Carolyn Kling, a real estate agent in Pinellas County. ‘A lot of buyers are out there waiting till those prices get where they need to be.’”

The Tampa Tribune. “The Tampa Bay area experienced its steepest home price slump in recent memory in January, while the number of home sales continued to drop. The median sales price of existing single-family homes in the Tampa-St. Petersburg-Clearwater area was down 7 percent from December and significantly below the real estate market’s $239,900 peak in June.”

“‘The housing market in Tampa doesn’t look good at all,’ said Per Gunnar Berglund, senior economist for Moody’s Economy.com. ‘This is the sharpest drop in pricing since the early 1990s.’”

From Florida Today. “Chris McCarty, director at the University of Florida’s Bureau of Economic and Business Research, said Tuesday that some Realtors and people shopping for a home are hoping for the Federal Reserve to lower interest rates. However, McCarty said, given recent data on inflation, and statements from Fed board members, ‘it is very unlikely that interest rates will be lowered in the near term.’”

“‘We still are predicting the effects on housing to spill into other sectors of the economy by May or June,’ McCarty said. ‘This should be more pronounced here in Florida, given the enormous gains in the value of Florida real estate. It has much further to fall than other states.’”

The Sun Sentinel. “Sellers of existing homes in Palm Beach County found relief in the new year when plummeting prices leveled in January after 2006 ended with three consecutive months of double-digit declines.”

“‘I’m still concerned about the overall affordability issue. Prices are still not low enough for the average person.’ said David Levin, a Delray Beach housing consultant.”

“Mike Halleran, who is buying a home in Boca Raton, said many of the properties on the market are overpriced by at least 10 percent. Another buyer, Melissa Rutherford, of Boynton Beach, agrees. She and her fiancé plan to wait awhile longer because they think prices will keep falling.”

“‘We don’t want to buy a house that’s valued less than what we paid for it in six months,’ Rutherford said.”

“Meanwhile, the inventory of unsold homes remains a concern. Palm Beach County has more than 33,400 homes and condominiums for sale, up nearly 19 percent from last year, according to the Keyes Co. of Miami. At the current sales pace, it would take several years to sell that inventory.”

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