The Housing Bubble

It’s Friday desk clearing time. Connecticut. “Gene Fabbri, owner of Independent Mortgage in Fairfield, sees Fairfield County as immune to any serious downward trends in real estate because of its desirable location, proximity to New York City and Long Island Sound.”

“‘Everything is cyclical,’ Fabbri said. ‘When the market overheats it becomes a seller’s market then has to cool off some way. The mortgage business is slow, but there’s no panic, no bubble bursting. The downward trend in housing was like the flu epidemic that had to run its course. Everyone has to retrench and accept a little less.’”

From New Hampshire. “Russ Thibeault said the first nine months of the year left realtors nervous because prices and the frequency of sales declined while housing inventories continued to rise. ‘Until we know we’ve hit rock bottom, it’s hard to say increases are on the way,’ said Ralph Pope, office manager for Coldwell Banker in Dove.”

“New home sales in the metro Atlanta area dropped almost 13 percent in 2006. With fewer people buying and builders still building, the area became flooded with new homes. ‘My personal feeling is that the market started to slow and builders didn’t stop building,’ said Realtor Lin Stadler-Perry.”

“The old adage that if you give someone enough rope, he’ll hang himself seems to be behind the high rate of foreclosures in the Memphis area. A recent story published in Memphis Business Journal found that there was one foreclosure for every 1.06 homes sold in 2006 in the Memphis MSA. Specifically, there were 19,738 homes sold in 2006, and there were 18,155 residential foreclosures last year.”

From Australia. “House prices fell in the three months to January this year, Land Victoria figures show. The median sale price fell more than $15,000, 5.3 per cent, to $280,000, and follows a $20,000 drop between July and September. The median price peaked in April-June last year at $345,000.”

“Are we beginning to witness a fall in real estate prices in the Cayman Islands? The classic conditions for a fall in price. Witnessing the number of For Sale signs, both their concentration in a given area and the length of time they have been there, is perhaps a rough-and-ready measure of the number of homes that haven’t sold, and looking around, one can see many For Sale signs, and many of them have been up for quite a long time.”

“The property boom which has gripped Latvia since the small Baltic state joined the EU in 2004 is unsustainable and likely to slow in the nearest future, experts warned on Monday. ‘This is the classic form of an economic bubble,’ said Andris Strazds, lecturer in economics at the Stockholm School of Economics in Riga.”

“The Northshore Marina Tower Condominiums, complete with 360-degree views of Slidell and Lake Pontchartrain, were once expected to be complete by mid-2008, said Realtor Henry Aparicio. Yet sales have stalled and some buyers have backed out since 49 of 89 units were sold before Hurricane Katrina slammed Slidell.”

“‘Prices have pretty much outpaced consumers’ ability to afford them,’ said Randy Varuso, president of the St. Tammany Homebuilders Association. ‘And condo sales are in the toilet nationwide.’”

“Missoula County, a Montana hot spot, saw home prices increase by 11.3 percent during the same time, better than the 10.1 increase during the same time from 2004 to 2005, but cooler than the 13.7 percent increase from September 2003 to September 2004.”

“Shelby is seeing an influx of new workers for the private prison and government jobs, said (realtor) Brenda Longcake. ‘We also have people from out-of-state who are investing in real estate here because it’s affordable,’ she said.”

“Hawaii’s housing market was red hot a couple of years ago and many buyers found themselves in bidding wars over high-priced properties. Now times have changed and it is no longer a seller’s market.”

“Real estate agent Maggie Walker is showing a three-bedroom home in Hawaii Kai which is listed for just under $800,000. It is deliberately priced lower than several similar properties. Walker has heard of other homes languishing on the market. ‘They’re all over priced or they don’t show well,’ said the realtor.”

“Subprime loans have attracted wide attention, and Thursday, Warren Buffett, chairman of Berkshire Hathaway, told shareholders that the slowdown in residential real-estate markets partly stems from weakened lending practices in recent years.”

“‘The ‘optional’ contracts and ‘teaser’ rates that have been popular have allowed borrowers to make payments in the early years of their mortgages that fall far short of covering normal interest costs,’ he said. ‘But payments not made add to principal, and borrowers who can’t afford normal monthly payments early on are hit later with above-normal monthly obligations.’”

“‘This is the Scarlett O’Hara scenario: ‘I’ll think about that tomorrow.’ For many home owners, ‘tomorrow’ has now arrived,’ Buffett wrote.”

The Denver Post reports from Colorado. “New-home sales in Colorado fell by 21 percent in 2006 from the previous year, according to a report from the Genesis Group in Englewood. Too many new and existing homes are on the market given the number of available buyers, said Mike Rinner, a senior analyst with Genesis. ‘We have a math problem,’ he said of the Denver market.”

“Denver homebuilders have generally avoided speculative projects, only to be hit by a surge in cancellations, said Jeffrey Willis, executive VP with Berkeley Homes in Aurora. Metro-area buyers canceled 22.5 percent of the new-home contracts they entered last year, mostly because they couldn’t sell their existing homes.”

The Rocky Mountain News from Colorado. “The record number of foreclosures may be playing a role in the higher than expected vacancy rates, said Kathi Williams, director of the Colorado Division of Housing and c-chair of the Colorado Foreclosure Prevention Task Force.”

“‘Although high foreclosure rates may be driving some current homeowners back into the rental market, many first time homebuyers may find themselves looking at a lot of deals offered by homebuilders,’ Williams said. ‘Especially in areas where there is a sizable unsold inventory of single-family homes, builders are competing with landlords for renters who might be considering a purchase.’”

“Jeff Hawks, an owner of Apartment Realty Advisors, said many of the current foreclosed homes on the market are creating a ’shadow’ rental market that is not being tracked.”

“That’s because many of the homes and condos being taken over by lenders or by investors, are being rented, but not are part of the traditional data bases.”

The Review Journal from Nevada. “Las Vegas mirrored the downturn in the national housing market as sales of both new and existing homes fell sharply in January.”

“New home sales fell to 2,052 in January, compared with 2,815 sales in the same month a year ago, Dennis Smith of Home Builders Research reported. It’s the lowest January since 2003. Excluding mid-rise and high-rise units, the number falls to 1,610.”

“In Las Vegas, the resale sector fell 25.6 percent in January to 2,423 recorded transactions, the lowest number for that month since 2001. Median price fell by $5,000, or 1.8 percent, to $280,000.”

“With an inventory of nearly 20,000 homes for sale in Las Vegas and sales declining, home builders are cutting back on new permits for residential construction. Las Vegas-based SalesTraq showed 1,002 new home permits in January, a 54 percent decline from a year ago. From September through January, only 4,422 new homes have been permitted.”

“‘If we continue to see new home permits decline, will that impact the existing home inventory? The answer to that question is how much demand will there be in the second quarter,’ SalesTraq president Larry Murphy said. ‘Watch new-home sales stats very carefully over the next few months to determine how good, or bad, 2007 will be.’”

“SalesTraq reported 2,135 new-home closings in January, down 26.2 percent. Existing-home sales were off 14.3 percent at 2,770.”

“An article on Realtor.org said home sales are sluggish because prices are just too high for many buyers. ‘Buyers are backing off — not because of a poor job market or high interest rates — but because the housing stock is out of their price range,’ the article stated.”

The Deseret News from Utah. “Up, up and away. Utah home prices keep climbing. At 17.55 percent, the state’s house-price appreciation was nearly triple the national rate and was the highest of all states in last year’s fourth quarter compared to the same quarter of 2005, according to a new report by the U.S. Office of Federal Housing Enterprise Oversight.”

“Wyoming ranked No. 2 at 14.29 percent, and Idaho came in third at 13.99 percent.”

“‘I think that the last two years have been very strong in our market after having three relatively flat years,’ said real estate agent Debra Sjoblom. ‘I think we are still in a very stable situation. I think it’s certainly a great appreciation but not so great that we’re running any risk of having it tumble.’”

“Santa Barbara, Calif., was down 4.20 percent in the fourth quarter compared to a year earlier. And the Reno-Sparks, Nev., area showed a nearly 1 percent drop in home prices for the same period. ‘In some sense, what we’ve seen over the last year or two has been unsustainable,’ said Andrew Leventis, an economist with OFHEO. ‘It was just a matter of when the appreciation rates were going to fall.’”

“The house-price index is based on transactions involving conforming, conventional mortgages purchased or securitized by Fannie Mae or Freddie Mac. Only mortgage transactions on single-family properties are included. The index measures price changes in repeat sales or refinancings on the same properties.”

“Leventis cautioned that Utah’s double-digit price gains, like those in other states, will only last so long. ‘Unless income growth really picks up in your area, 18 percent is definitely unsustainable over the long term,’ Leventis said. ‘But at the end of the day, Utah house prices relative to income are relatively affordable.’”

“Dan Bodily of Lehi, owner of Blue Ridge Cabinets and a homebuilder, said he is unsure whether Utah’s appreciation rates are sustainable. Bodily said he has more work than he can handle, but most of it is for investors hoping to make money on speculative homes yet to be sold.”

“‘I think the market is being flooded with spec properties at the moment,’ Bodily said. ‘The builders are making good money right now because they get their money up-front. But I wonder what is going to happen with all these investors.’”

“For now, Utah homeowners and builders are riding the housing wave, hoping it will last amid a national slowdown.”

Some housing bubble news from Wall Street and Washington. “Standard Pacific Corp. said Thursday net new home orders for the first two months of the year fell 19 percent, hurt by weakness in Florida and Arizona, two of the markets hardest hit by the national housing slump. Standard Pacific used what it called aggressive pricing to wring a 40 percent increase in orders in California, another market where home prices have tanked and sales have slowed.”

From MarketWatch. “Countrywide Financial Corp. was the subject of a report in Friday’s Wall Street Journal that said the largest U.S. home mortgage lender saw a sharp increase in late payments in 2006.”

“The WSJ said the company disclosed in a filing with the Securities and Exchange Commission that payments were at least 30 days late at the end of 2006 on 2.9% of prime home-equity loans Countrywide serviced, up from 1.6% a year earlier. In addition, payments were late on 19% of subprime mortgage loans at 2006’s finish for Countrywide, up from 15.2% at the end of 2005, the paper said.”

The Orange County Register. “Troubles keep piling up for mortgage lender New Century of Irvine. Today it announced that its 2006 annual report will be late because it hasn’t yet been able to sort through the accounting errors it made in connection with bad loans. The company will ask the Securities and Exchange Commission for an extension.”

“New Century Financial said it cut 300 jobs on Thursday, or about 4 percent of its work force, including 124 positions in Irvine, as the shakeup continues in the subprime industry.”

“The company said it has not ruled out more job cuts. At least two analysts have said New Century could face a cash crunch if more than one investment bank stops funding and buying its loans.”

The Associated Press. “The cratering of the subprime mortgage industry could present more than just a pothole for General Motors Corp.”

“The world’s largest auto maker disclosed Thursday that it will need more time to file its 2006 annual report with the Securities and Exchange Commission, marking the second year in a row the company has postponed the key filing.”

“‘We continue to believe GM equity is complacent about the potential impact of such subprime exposure,’ Bear Stearns auto analyst Peter Nesvold wrote. He said the weakness at GMAC due to subprime problems is one of the key risks facing GM.”

“At the end of the third quarter, ResCap, long viewed as the crown jewel in GMAC’s businesses, held $57 billion of subprime mortgages for investment, or 77 percent of its total loans held for investment. Its exposure to ‘residual interest’ in mortgage securities, the high-yielding slices that suffer some of the first losses if loan defaults are higher than expected, was $1.4 billion as of Sept. 30.”

From Bloomberg. “Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.”

“‘These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time,’ said analyst Richard Hofmann. ‘The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they’re not able to keep that securitization machine humming along.’”

The Wall Street Journal. “The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.”

“A record $400 billion of these midlevel loans, which are known in the industry as ‘Alt-A’ mortgages, were originated last year, up from $85 billion in 2003, according to a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.”

“Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. ‘The credit deterioration has been almost parallel to what’s been happening in the subprime market,’ says UBS mortgage analyst David Liu.”

From Business Week. “Michael Youngblood, head of asset-backed securities research at Friedman, Billings, Ramsey Group, Va. points out that there was a sudden but little-noticed shift in lenders’ strategy that occurred at the end of 2005: Lenders went from competing for customers on price (by lowering rates) to competing for customers on easy terms (by lowering lending standards).”

“Says Youngblood: ‘The lack of overt changes in underwriting guidelines allowed the industry covertly to adjust its underwriting standards.’”

“‘You had two choices: relax your standards or lose business,’ says Robert Lacoursiere, a Banc of America Securities analyst. ‘It was a giant game of chicken.’”

“Youngblood is disgusted by the whole thing: ‘Basically the Keystone Kops were making loans,’ he says. ‘Or, to change the metaphor: Every time they see a sword they want to throw themselves on it.’”

The Christian Science Monitor. “‘Wall Street wanted the mortgage brokers to keep making loans even though they were riskier and riskier,’ says Ira Rheingold, executive director of the National Association of Consumer Advocates. ‘They didn’t care that … people were getting loans they couldn’t afford because there was so much money to be made.’”

“Housing advocates believe the regulators are reacting too late. ‘They’re good positive steps but it’s not close to being enough, the genie’s already out of the bottle,’ says Mr. Rheingold.”

From News 10. “Former employees of Folsom-based Central Pacific Mortgage are angry over the lack of warning before this week’s sudden layoffs. As News10 first reported Tuesday, Central Pacific Mortgage and its Florida-based division Ivanhoe Mortgage abruptly closed their doors Monday saying they had no money to meet Wednesday’s payroll.”

“Insiders say the collapse can be blamed on a combination of earlier loans that had gone sour and an inability to sell high-risk new loans on the secondary mortgage market.”

“A veteran Sacramento loan broker and past president of the California Association of Mortgage Brokers says the failure of Central Pacific Mortgage is just the ‘tip of the iceberg’ in the mortgage industry.”

“‘It’s like a freight train coming at us full bore,’ said Michael McGee of Winchester-McGee Financial. ‘The type of risk that’s been involved in the industry is far beyond anything I’ve ever seen.’”

“Federally-sponsored Freddie Mac, the second largest source of mortgage money in the United States, announced this week it would no longer purchase high-risk loans like those that helped push Central Pacific Mortgage into insolvency.”

“Central Pacific Mortgage CEO John Courson serves on the board of directors for the Mortgage Bankers Association. One of Courson’s former employees in the Northeast was sarcastic in an email message to News10.”

“‘I have two small children and now I have no money, no job and no health or dental benefits,’ wrote the former employee. ‘Let’s give a nice BIG HAND to the MAN for all of his major accomplishments.’”

The Idaho Statesman. “Boise Cascade’s 2006 earnings fell by more than 40 percent because of the downturn in the nation’s housing market.”

“Tom Stephens, Boise Cascade CEO, told investors there was an ‘unprecedented’ decline in the demand for building materials. ‘During the third quarter it really kicked in, and when it did, it kicked in big time,’ he said.”

A housing report from the Virginia Pilot. “Home building will be under continued pressure rhis year, speakers at Old Dominion University’s annual real estate forecast predicted Wednesday. Hampton Roads builders have to contend with a large inventory of existing homes still on the market, J. Van Rose Jr., president of the realty firm Rose and Womble Enterprises, said.”

“ODU’s E.V. Williams Center for Real Estate and Economic Development conducted Wednesday’s program. In its annual review-and-forecast publication, the center called attention to a sizable inventory of unsold homes in Hampton Roads. The number of active sales listings surged last year from 3,000 in January to more than 10,000 by November, said the real estate center.”

“For the 12 months through November, the number of closings on single-family detached homes in Hampton Roads fell almost 10 percent, while closings on existing condominium units fell 7 percent, the report said.”

“Home sellers will likely become more realistic about their asking prices, and builders, the research center said, ‘will probably be quicker to offer incentives that translate into increased affordability.’”

“The most significant change to the housing market in coming years, Rose said, will be the abundance of homes in the mixed-use projects planned for Hampton Roads. More than two dozen projects, with 13,075 housing units, have been approved or will be approved shortly, he said, and another five projects are in the works. ‘That’s going to change the landscape’ for housing, Rose said.”

“Demand for apartments in Hampton Roads will remain strong in part because of a wide gap between the cost of renting and the cost of buying a home, said Aubrey Lane, president of Great Atlantic Management Co. Renters.”

The Washington Times. “Last year was a gloomy one for real estate in the Washington area, and home builders didn’t fare any better than the rest. New-home sales were down 20 percent last year. In fact, it was the slowest year for builders since at least the 1980s.”

“‘If we haven’t hit bottom, we’re pretty close,’ says Victor Furnells, regional sales director for Hanley Wood Market Intelligence. ‘And I think we’re going to stay at that level for a while.’”

“In the existing home market, which saw sales drop 23 percent last year, that change in market forces caused time-on-the-market figures to go up and prices to go down. As sellers understood what was happening, they began lowering their expectations, spiffing up their homes and offering buyer incentives. New-home builders used many of the same strategies.”

“‘This is a business for home builders, so they don’t have the same emotional attachment that a homeowner has. The large, publicly traded builders have been hit. Many of them have taken huge write-downs in their land values. But after that, they are ready to move those properties at reduced prices. So they are more highly motivated than a homeowner to take that financial hit and get on with business,’ according to Clark Massie, president of TETRA Corp.”

“This connection between the sales climate and new home prices is most clearly visible in the condominium market. The region’s condo market was flying high in 2005 and slowed dramatically in 2006. After appreciating faster than other housing types, condos were suddenly out of favor.”

“Dozens of new condo projects were under way when the slowdown occurred, so builders had to act quickly. Some converted the buildings to apartments for rent. Others adjusted their pricing to suit the market forces.”

“In Montgomery County, condo sales fell 16 percent last year, and the median price per square foot went from $465 to $432, a drop of 7 percent. In Fairfax County, sales dropped 55 percent, and prices went down 6 percent.”

“Another difference between the resale market and the new-homes market is how the new sales climate affects large companies and the thousands of people who work for them.” .

“‘Many of them are training them to be more flexible with consumers, to listen more than they talk. You realize how important this is when you learn that 70 percent of the sales staff has been in this industry for less than 3 years,’ Mr. Furnells says.”

“Apparently, some home buyers are taking advantage of such inexperience. ‘We’ve heard about consumers who actually sign a contract and pay a deposit of as much as $50,000, and then use that contract to haggle with other builders,’ says Mr. Furnells. ‘They tell a builder at another development: ‘I’m willing to walk away from my deposit if you will give me a great deal.’”

“That is certainly a creative, but perhaps unethical, approach to home shopping when market dynamics are shifting around the way they are these days.”

“The end of the condo craze is leaving real estate developers looking for other options. Developers in the Washington area are dumping their proposals to build condominiums and switching to apartments as a glut of new and old condos slows sales.”

“In the latest move, a project in Takoma Park originally designed as condominiums, then canceled, is being reborn as an apartment complex.”

“Last month, Centex Homes suddenly canceled the condo project, citing unfavorable market conditions. ‘I guess the condo market got a little bit saturated,’ said Ronny Salameh, Centex Homes’ division manager for Maryland and the District. ‘Until all that inventory goes away, it really slows down the condo market. It opens up for the rental market.’”

“Condominiums still are selling in the Washington area, but they are being bought by people who plan to use them as their primary residences instead of investment properties that offer a quick buck when they are re-sold a few years later.”

“‘People are buying them for the correct reason today,’ said Grant Montgomery, VP of real estate research firm Delta Associates. ‘They’re a home first and an investment second. During the craze, I think that was inverted.’”

“In 2004, 13,557 apartments were converted to condos in the Washington area, Delta Associates reported. Last year, no apartments were switched to condos.”

“In 2005, Monument Realty planned to convert the 574-unit Park Center apartments in Alexandria into condominiums but switched back to apartments in May. Developers of the View 14 housing project being built at 14th Street and Florida Avenue Northwest originally designed as condos until the condominium market slumped. In December, Level 2 Development said the 183-unit building would be used for apartments.”

“Last year, condo resale prices fell 6.1 percent in the District, according to Delta Associates.”

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