The Housing Bubble

It’s Friday desk clearing time. “Now that overheated markets such as Miami are cooling fast, Related’s talking up another kind of product: affordable homes. The firm has presold 497 of 500 loft condos in a planned downtown Miami high-rise. They’re priced from $159,000, about half the median price of existing condos. That’s a fraction of the price of many new condos, which often now go unsold.”

“Developers are watching how Related fares in its Miami affordable housing mission, says Bryan Finnie, managing director of North Miami developer Redevco. ‘Over the last 24 months you were almost a heretic to talk about affordable housing,’ he said. ‘Now the conversation is, ‘Oh, market opportunity.’”

“Recent condo project cancellations by developers, a rise in prices and a call for more apartments has left some wondering if Downtown Memphis, particularly the 38103 ZIP code, isn’t nearing the saturation point. ‘Yes, we’re overbuilt,’ said Jeff Sanford, president of the Center City Commission. ‘The current inventory that’s unsold, plus what will be delivered this year, 2007, should indicate about a two-year supply.’”

“For (appraiser) Walter Allen, patience and risk tolerance are relative terms and could become factors for developers, builders and investors who might consider converting condos into apartments. ‘You get tired of waiting for the units to sell, you get tired of paying interest, the product itself becomes a little bit shelf-worn, and it’s just not a healthy environment,’ he said.’”

“North Texas home sales dropped again in February, the ninth consecutive month of declines. Sales of pre-owned homes fell 8 percent from a year earlier, double the rate of decline in January.”

“At the same time that sales have slowed, the number of homes on the market has swelled 7 percent. More than 44,000 pre-owned single-family homes were listed for sale in Dallas-Fort Worth and surrounding counties at the end of February. There is just over an eight-month supply of pre-owned homes for sale North Texas.”

From South Dakota. “Faith Wendt, a Realtor and president of the Black Hills Board of Realtors, conceded that the market did level off in 2006. But with prices falling and people unable to sell homes in other markets, level prices are a good thing, she said. ‘We’ve been climbing for a number of years now. At some point, you’ve got to hit a nice level or you’re going to end up like the eastern and western sides of the country,’ she said.”

“In what Finance Minister Michael Cullen called ‘a wake-up call for New Zealanders,’ the central bank yesterday raised the official cash rate, the first rate rise since December 2005. The housing market appeared to have got ‘a third wind,’ which the Reserve Bank could not afford to allow to continue, bank governor Alan Bollard said.”

“‘We’ve now reached a view that the housing sector needs more pressure, and we’ll apply it,’ Bollard said.”

From Australia. “Mortgage delinquencies reached a historic high in December, the Moody’s review of residential mortgage-backed securities shows. ‘With the deflation of the housing bubble and higher interest rates, [an] increasing number of borrowers are running into financial difficulties as reflected by the delinquency numbers,’ the report says. ‘Consequently, some weaker borrowers will lose their homes.’”

“Household debt, as a proportion of household income, has risen above 150 per cent, an all time high, Reserve Bank figures show. Household debt has doubled in the past five years to $960 billion.”

“Montana housing prices have moderated, but continue to increase, according to Paul Polzin, of the University of Montana. During the third quarter of 2006, housing prices climbed 12.7 percent in Cascade County and 13.2 percent statewide, compared to the same quarter last year.”

“‘I’m delighted housing prices are holding up so well in Montana, considering the real estate bubble has burst in many parts of the country,’ Polzin said.”

“Millennium Funding Group in Vancouver, affected by mortgage defaults in the subprime lending market, has laid off 76 employees, its parent company said Wednesday.”

“‘Our personnel moves are a reaction to sudden, dramatic and unforeseeable changes in the mortgage industry,’ said Joe Bell, vice president of human resources of Ace Holding Co.”

“A Santa Rosa man was convicted Thursday of defrauding two mortgage companies and a title company in an effort to eliminate a $240,000 home mortgage. Robison said he learned the mortgage elimination process through books and seminars, and doesn’t believe it’s illegal.”

“Judge Elliot Daum denied Robison’s request for a two-week grace period to see to personal matters before going to jail. He was instead handcuffed and led from the courtroom. Bail was set at $200,000. He faces a maximum sentence of 14 years in prison.”

“It’s scary to think that your retirement or the kids’ college fund can be hurt by a mortgage company lending money to somebody who, it turns out, can’t afford the payments.”

“‘Things are connected,’ said Jason Henderson, a Federal Reserve economist in Omaha, meaning that problems with sub-prime lending, loans to people with poor credit scores, can have broader consequences on the financial markets and the economy as a whole.”

“‘We see customers come in all the time who can’t refinance because of their credit problems. They’re stuck with a mortgage loan they can’t afford,’ said Dave Ulferts, VP for mortgages at First National Bank of Omaha, which does not make sub-prime loans.”

“Omaha mortgage broker Bruce McClatchey estimated that as many as 25 percent of Omaha’s home mortgages are sub-prime. ‘In some respects, there’s been loans made that shouldn’t have been made,’ he said.”

“‘There will be people taken out of the market,’ McClatchey said. ‘Probably people that shouldn’t have been in the market in the first place. This is almost, maybe, a needed correction.’”

Arizona State University reports the February sales numbers. “For February, 4,280 homes were recorded sold, in contrast to 4,520 for January, 5,460 for a year ago and 7,935 transactions in 2005. This was the lowest February since 4,090 homes were recorded sold in 2003, which was the lowest month for 2003. So far in 2007 a total of 8,800 homes have been recorded sold in contrast to 10,715 in 2006 and 17,290 in 2005 for the same time period.”

“‘The activity levels should be well below those of the last few years, because the current market lacks the market frenzy to own and/or invest at almost any price and reasoning,’ said Jay Butler, director of Realty Studies at Arizona State University.”

“Since home prices have declined slightly from a year ago, the monthly payment of $1,300 is down from last year’s $1,320. Limited home appreciation and household income continues to raise concern about the ability of some homeowners to maintain their homes.”

The East Valley Tribune. “Some people are asking, ‘When will the market recover?’ and are expecting prices to soar again like during the housing boom, Butler said. But the market has recovered, he said. It won’t keep rising at the same frenzied pace, he said.”

The Arizona Republic. “A group of former housing counselors, loan officers and an escrow agent has been indicted on fraud and conspiracy charges in one of the biggest real estate fraud cases in Arizona since the housing crash of the late 1980s.”

“The group is accused of defrauding the Department of Housing and Urban Development of $1.9 million through a pre-foreclosure scam that targeted dozens of first-time homeowners across the Valley from 2001 to 2003, according to a grand-jury indictment.”

“The investigation into the pre-foreclosure scam began before a recent wave of mortgage and real estate fraud in metropolitan Phoenix. Several other fraud investigations are under way.”

The Rocky Mountain News from Colorado. “An analysis of foreclosures in 2006 for the Colorado Bankers Association released Wednesday found that, on average, homes that went into foreclosure had the loans in place for only 987 days, slightly less than three years.”

“Nonbank loans, which accounted for 77.5 percent of the loans in foreclosure, had an average price of $201,536 and a median price of $161,354.”

“Chris Holbert, president of the Colorado Mortgage Lenders Association, said it is not a surprise that most of the loans in foreclosure were made by nonbanks because about 70 percent of mortgage loans nationwide are made by mortgage brokers.”

“But, he said, ‘I would not take from this study that you are at a three times greater risk of foreclosures or default if you get a loan from a nonbank.’”

“Colorado’s status as a mortgage fraud ‘hot spot’ isn’t cooling. The FBI, which named Colorado as one of 10 states with the most mortgage fraud cases in 2004, this week listed the state among seven with the most mortgage fraud cases in its 2006 Financial Crimes Report.”

“The FBI report said research indicates that 80 percent of mortgage fraud nationwide ‘involves collaboration or collusion by industry insiders.’”

“Carolyn Sandberg, a broker with Home Real Estate in Westminster, said she ran into a case of what she considers mortgage fraud when an elderly couple she was representing were buying a house. Their loan was going to rise almost immediately from slightly more than 6 percent to more than 9 percent.”

“‘I stopped the deal three days before the closing’ and put them in touch with a reputable mortgage lender, she said. ‘The (original) lender went nuts,’ she said. ‘He was probably calling me 10 to 14 times a day.’”

The Denver Post. “A survey of 374 randomly chosen foreclosure filings released by the Colorado Banker’s Association found that the average age of a loan going into foreclosure was only 2.8 years, and that borrowers had paid down 3 percent of the mortgage amount. Nearly 8 out of 10 of the foreclosures involved adjustable-rate mortgages.”

“Many ARM loans adjust to current interest rates three or five years after the original loan. But some are going bad well before that. ‘You may be looking at people who couldn’t handle the original payment,’ said Don Childears, president of the Colorado Bankers Association.”

The Gazette. “The Colorado Springs economy slowed dramatically during the second half of last year, a malaise that has continued into early 2007, according to revised state job-growth data released Thursday. In January, local job growth slowed to the lowest level in nearly three years.”

“The number of firsttime claims for unemployment benefits surged 74 percent in January from a year earlier, to 451, the most since March 2005. ‘You obviously have a slowdown, but I am not convinced the Springs economy is headed into a recession,’ said Joseph Winter, an economist for the Colorado Labor and Employment Department.”

“From job growth to home sales, economic indicators point to a sluggish economy in the Pikes Peak region: Home sales fell 11 percent in February compared with the same period a year ago.”

“The pace of new-home construction in 2007 is off to its poorest start in years — single-family home-building permits fell by 50 percent in February compared with the same month in 2006.”

“If you could spend a few hours with me driving around the Denver area, you would be amazed. Many neighborhoods have a dozen foreclosed properties, and there are more waiting in the wings. I spent five days showing the nicest young couple around, and we looked at vacant foreclosure after vacant foreclosure.”

“If these foreclosed properties keep coming on the market, as all indications seem to show, we will have way too many foreclosed homes. It will overwhelm this market and have unavoidable long term effects. Prices will have to come down.”

“It is a very serious situation: We are going to see second mortgages on zero down purchases be eliminated. They are simply too risky.”

“When buyers buy, they need to be aggressive and patient and wait for that great deal. It is their only protection against this coming real estate market. I look forward to the day when I can see a turnaround and a positive growing market. As it stands now, when you buy here you had better be getting a great deal.”

The Capital Times reports from Wisconsin. “Drive past the luxurious Weston Place condos at 625 Segoe Road after sunset and the 12-story tower is three-quarters dark. That’s because just 35 of the 121 units have been sold since the project opened 15 months ago.”

“‘It’s pretty quiet over there but I had concerns from the beginning whether it was going to be economically feasible,’ said west side Ald. Noel Radomski.”

“Certainly, Weston Place isn’t the only local condominium project facing a soft market. The number of condos for sale in Dane County is at an all-time high. ‘It’s certainly a beautiful building, so I’m not sure why they’re not doing better,’ said John Deininger, executive vice president of the Realtors Association of South Central Wisconsin.”

“So why have sales gone so slowly? (Realtor) Kathy Walch says it’s unfortunate timing. Weston Place opened in October 2005, just as the real estate market here was beginning to slide. She said that robbed Weston Place of the initial momentum needed to create a buzz and a flurry of offers.”

“‘You have to remember we’re coming off a year unlike any other,’ Walch explained.”

“The problem now, experts say, is an oversupply of condominium units. There are some 2,300 condos for sale in Dane County, nearly double the number from a year ago. With the market slow and buyers sitting back, the question all comes down to price, said Barry broker Mirken. ‘The high end stuff is still really struggling,’ Mirken said.”

“Developer Peter Frautschi remains optimistic things will pick up this spring. The project has been refinanced to help provide additional money. ‘Signing a big loan didn’t seem like such a big deal back then, but I guess it does now,’ he said.”

The Record Eagle from Michigan. “The housing market is flat or in decline throughout Michigan, so Dorothy Roush wants to know how Garfield Township’s assessor determined that her home’s value jumped almost $12,000.”

“Then there’s Ray Reamer of East Bay Township, who saw his assessment jump by $41,300. ‘I don’t know where they come up with these figures,’ he said.”

“‘Southeast Michigan is struggling much worse with its values,’ said Robert Reamer, president of IRR-Residential Veri-Tech Appraisal. ‘I haven’t seen the numbers but some appraisers said they have segments that have lost 25 to 30 percent of their value.’”

The Detroit Free Press. “In one of the few good signs in the housing market in some time, sales of single-family houses and condominiums in southeast Michigan increased from January to February by 6.7%, a local MLS reported Thursday.”

“But the troubles afflicting the state’s residential markets are hardly over yet. Median sale prices continue to decline. Median prices stood at $130,047 in February. That was down from $141,000 in February of 2006 and $150,000 in February of 2005.”

“Hudson & Marshall plans to auction 260 foreclosed homes in Detroit worth between $10,000 and $300,000 on March 17-18 in Dearborn.”

“Bank-owned homes more than doubled from December to 6,653 new filings in January. More than 11,500 homes were in foreclosure across Michigan in January.”

From KFVS 12 in Missouri. “It’s the biggest single purchase most of us will ever make. But, the housing market has hit a major skid. Lenders say home loans that don’t require you to put down any money may be partly to blame.”

“‘It’s very common for people not only to want a hundred percent loan but want the seller to pay their closing costs and their prepaid so virtually go from their apartment into their house without spending a dime of their own money,’ Sandy Schooler, a loan officer in Cape Girardeau says.”

“Schooler says some buyers will choose to spend more than they can afford - just because it’s available. ‘I’ve heard people say buy more house than you need you’ll grow into it. You might, and you might not - but make the payment fit,’ she cautions.”

“Schooler says otherwise - you could end up with a foreclosure before you even know it.”

“One homeowner Heartland News spoke with, knows all too well how painful a foreclosure can be. Her home goes for sale on the steps of the Cape Girardeau County Courthouse in late March.”

“But Schooler says there are ways to avoid losing your home. ‘Don’t let yourself get two or three months behind. Call a realtor and put the house on the market and sell it. It will save your credit. If you have to - go back to an apartment.’”

Chicago Business from Illinois. “The glut of downtown condominiums is spilling over into the apartment market, where landlords face increased competition from condo owners who rent out their units.”

“Over the next two years, downtown developers (will) finish building more than 8,000 condos, a record number. Adding to the pressure, the weak condo market has led some investors who planned to flip their units for a quick profit to rent them out instead.”

“‘The financial institutions and equity players are very concerned about it because it does add competition to the rental market,’ says Ron DeVries, vice-president at Appraisal Research Counselors. ‘This is a hot button. Everyone wants to know what’s going on with it.’”

“Though the shadow market is fragmented and hard to quantify, it’s growing according to one key measure: the number of downtown condos rented through the MLS. That figure rose to 2,247 units last year, up 20% from 1,867 in 2005, according to Appraisal Research.”

“Newly built units are driving the growth: The number of condos less than five years old rented through MLS more than doubled to 1,867 last year, from 809 in 2005.”

“And apartment developers are building again: They’ll add 1,976 apartments to the downtown market next year and another 2,568 in the next few years after that, according to Appraisal Research.”

“With condo prices sluggish, many speculators who bought new condos hoping to resell them quickly for a profit are renting out the units while they wait for the market to pick up.”

“‘As these buildings come on line, you’re going to see more (condos) fall into that shadow market,’ Mr. DeVries says.”

The Chicago Tribune. “From slick, cinematic productions touting waterfront castles to underlit, homemade tours of modest condos, real-estate marketers are eyeing online video as the next way to capture that increasingly elusive creature, the home buyer.”

“Dina Davis, an agent in Evanston. made a video of a Rogers Park townhouse listing and stuck it on YouTube. After two months and a paltry 45 viewings, the townhouse is still available.”

“‘I didn’t think we’d get tons of business from it,’ Davis said. ‘I just hoped to pique someone’s interest.’”

“Professional videographer Malachi Leopold found himself being hoisted by a hydraulic lift last year to capture the second-story view that a buyer of an oceanfront lot in Massachusetts would get after building on it.”

“After the video went up on several Web sites, it was spotted by someone in California who bought the property, Leopold said.”

“‘In a time of market flattening and rising inventories [of homes for sale], people need to do whatever they can,’ said Christian Sterner, co-founder of WellcomeMat.”

Some housing bubble news from Wall Street and Washington. Bloomberg, “Hovnanian Enterprises Inc., the sixth- largest U.S. homebuilder by revenue, reported a loss for the fiscal first quarter as sales slumped and Florida homebuyers canceled orders. It was the second consecutive quarterly loss for the company after nine years of gains.”

“Homebuilders such as Hovnanian are struggling as inventories of unsold properties swell while speculators, who propelled the five-year home boom in places like Florida, cancel contracts and drop out of the market.”

“‘Once the housing market bottoms out, we are not expecting a rapid recovery,’ Chief Executive Officer Ara Hovnanian said.”

“‘Builders like Hovnanian got blindsided,’ said analyst Alex Barron. ‘There was a frenzy of buying and selling that caused prices to rise dramatically, as much as 30 percent a year in Florida at the peak. Now it seems the homebuilders got caught selling to speculators.’”

“The company wrote down $93 million in the quarter on plummeting home prices and a growing inventory of unsold houses in the Fort Myers-Cape Coral area of Florida, Hovnanian said. When Hovnanian bought First Home Builders of Florida in August 2005, every house that came on the market in Fort Myers and Cape Coral sold immediately, Hovnanian said.”

“‘We made that acquisition an hour and a half from the market peak,’ Hovnanian told the conference on March 6. Within 18 months, the number of homes for sale in the area went from 2,000 to 22,000, he said. As a result, home prices in Cape Coral and Fort Myers, Florida, slid 12 percent to $258,900 from $293,100 a year ago, according to the National Association of Realtors.”

“‘Buyers are afraid to buy and a ton of people in Florida canceled,’ Barron said. ‘So you’re at a standstill. A number of builders experienced negative sales — cancellations exceeded the number of homes bought.’”

From MarketWatch. “New Century Financial Corp. said late Thursday that it has stopped accepting loan applications because some of the subprime-mortgage specialist’s financial backers are refusing to provide access to financing.”

“New Century also said that it has received $150 million worth of margin calls from its so-called warehouse lenders. It has satisfied about $80 million of those calls, but $70 million remains, according to the company.”

“‘As a result of the current constrained funding capacity, the company has elected to cease accepting loan applications from prospective borrowers effective immediately,’ New Century said in a statement. ‘The company expects to resume accepting applications as soon as practicable; however, there can be no assurance that the company will be able to resume accepting applications,’ it added.”

“‘Once you get hit with one of these crunches, warehouse lenders don’t want to lend to you, so you’re really done,’ said Joseph Mason, associate professor of finance at Drexel University and a visiting scholar at the Federal Deposit Insurance Corp.”

“‘These firms that rely on funding mechanisms like securitizations are like sharks — if they stop moving they die,’ Mason added.”

The New York Times. “New Century estimates that it lost money for the six months that ended in December but it has yet to release detailed financial statements.”

“‘New Century is at the center of the subprime storm,’ said analyst Matthew Howlett. ‘Bankruptcy is not an extreme outcome here. They are in a tremendous liquidity crunch.’”

“The company said yesterday that it had significantly tightened its lending standards in the last few months and was no longer allowing borrowers to take out loans without putting any money down.”

“Recent dealings in shares of Fieldstone Investment Corp. suggests that the subprime lender’s agreement to be acquired by Credit-Based Asset Servicing and Securitization LLC could be renegotiated lower or even called off, analysts said this week.”

“‘Given the deteriorating condition of the subprime sector recently, investors fear that C-Bass may try to negotiate a lower price or back out of the deal,’ Scott Valentin, an analyst at Friedman Billings Ramsey, said on Tuesday.”

“The main concern is that Fieldstone may be forced to repurchase some loans that it previously sold on to other investors, according to Valentin. ‘The wild card is the early-payment default issue,’ Valentin said. ‘If Fieldstone saw a material increase in loan repurchases, that would cut the value of their loan portfolio and could give C-Bass an excuse to withdraw.’”

The Pioneer Press. “At its peak Maribella Mortgage had 125 employees, operations in Chicago and Milwaukee and investors eager for the subprime mortgages it bundled together at $20 million to $50 million a pop.”

“Maribella’s Edina headquarters are empty now but for three remaining employees. The company officially shuts down March 15, the latest casualty of escalating turmoil in the $1.36 trillion subprime mortgage market as rising defaults, weakening home prices and a get-tough approach by investors hammer the industry.”

“‘I never thought it would get to this,’ said Mark Kiewiet, Maribella’s executive vice president of operations. ‘If we got through the fog, I figured we’d be fine.’”

“‘The whole industry has imploded,’ said Maribella co-founder Keith White.”

“White said Maribella was crushed by rising buyback requests that began in late 2005 and just got worse. People defaulting on loans early was the prime culprit, White said. White blames poor loan servicing by other companies for the early defaults on about half of the loans he was asked to buy back.”

“White said Maribella employees who bought home loans from mortgage brokers diligently checked documents for fraud. Nonetheless, people lied about incomes and inflated home values. He estimates that about 5 percent of his buybacks involved some kind of fraud.”

“‘If there was fraud, we were a victim,’ he said.”

“Other small traditional prime lenders may go by the wayside as the restrictions shrink the pool of potential buyers, he said. ‘A day doesn’t go by that I don’t get guideline restrictions from investors,’ White said. ‘Products are going away every single day.’”

“Federal Reserve Chairman Ben Bernanke and other policy makers were warned that rising mortgage foreclosures are likely to get worse, as the central bank reported the slowest pace of loan growth in four years.”

“‘We have found neighborhoods with abandoned homes, 200 at a shot,’ said Louise Gissendaner, director of community development in Cleveland at Fifth Third Bancorp, the 10th-biggest U.S. bank by assets. She said abandoned housing has ‘devastated our city to a great degree.’”

“Consumer advocates at today’s meeting said poor underwriting standards in the subprime market were behind the rising foreclosure rates. ‘We are facing a foreclosure crisis in this country,’ said Stella Adams. ‘There is a distinct problem in the subprime market that is contributing to the foreclosures.’”

“While several council members painted an ominous picture of the future, they offered praise for recent guidance from federal banking regulators that could result in fewer borrowers qualifying for subprime loans.”

“The proposed guidance, issued last Thursday, would instruct lenders to be more conservative when underwriting certain adjustable-rate mortgages. At the time, regulators predicted their proposed guidelines would likely ‘result in fewer borrowers qualifying for the type of subprime loans’ that they are targeting.”

“Mark Metz, a member of the council and senior VP at Wachovia Corp., said ‘it’s very hard to argue with a lot of the guidance.’”

From Business Week. “The 2/28s now coming up for their first reset were made in early 2005. It seems crazy now, but when the loans were made, nobody worried much about the reset. But home values today are flat or falling. What’s worse for many subprime borrowers, the escape route of refinancing at long-term rates is pretty much sealed off.”

“Regulators allowed this problem to develop and only now are cracking down.”

“Chances are the Fed will stay hawkish on inflation in spite of the harm to weak borrowers. Says Mark Gertler, a New York University economist: ‘I don’t think the Fed is going to base monetary policy on distributional considerations. Once the Fed loses its focus on maintaining price stability, all hell could break loose.’”

“Americans continued to load up on mortgage debt last year, even though the housing market was stalling, according to data released on Thursday by the Federal Reserve.”

“Owners’ equity as a share of the total value of their property edged down to 53.1 percent at the end of 2006, from 54.4 percent in the fourth quarter of 2005. Homeowner equity was almost 58 percent of housing value in 2000, and nearly 70 percent in the 1980s.”

“Rising mortgage defaults by subprime borrowers may add more than 500,000 homes to a residential real estate market already beset by slumping prices.”

“‘We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default — an unwelcome phenomenon given the existing supply surplus,’ Sarah Rowin and Frank Lee of bond research firm CreditSights wrote.”

“‘Not only do we have a lot of supply in the new home market, the existing homes are sitting much longer on the market,’ said Edie Ousley, a spokeswoman for the Florida Home Builders Association. ‘That increases competition for a new home to sell.’”

“‘Probably the gain in home ownership over the last four, five years, is almost entirely due to looser lending standards,’ said James Fielding, a homebuilding credit analyst at Standard & Poor’s in New York.”

“Fielding said the number of new homes on the market also is understated because when a customer cancels a home contract that house does not go back into the inventory of unsold houses. ‘There’s a lot more shadow inventory out there,’ Fielding said. ‘It’s just a quirk of the statistics. They never get recaptured.’

“Cancellation rates for new homes have surged to nearly 40 percent and that has boosted the inventory of unsold houses, said Margaret Whelan, an analyst at UBS AG.”

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