The Housing Bubble

It’s Friday desk clearing time for this blogger. “Dawn Erwin has had a tough time since moving to Maryland. Her husband has a new job and the Erwins want to sell their home. They put a Realtor sign up on Jan. 2 and have had 15 people interested in their house, but so far no takers. ‘First I couldn’t get into the house, and now I can’t get rid of it,’ Erwin said.”

“‘A buyer might be able to get a home for $400,000 that was worth [$450,000] a year ago,’ said Bill Hocker, branch manager at Countrywide Home Loans in Waldorf. ‘The buyers have the luxury of asking for more.’”

“(Orange County) home prices are 2.7% below last year’s peak of $642,500. Sales activity is down 21.1% from a year ago, meaning that March will surely be the 18th straight month that less homes were bought than a year ago.”

“Centex Homes has cut half of its work force in Southwest Florida, from Naples to Sarasota. The slowdown in the real estate market is to blame for the cuts, said Tim Ruemler, Southwest Florida division president.”

“Last week, I happened across a pitch letter from Countrywide. ‘Wouldn’t you like to have extra cash at the end of every month?’ cooed the come-on. ‘We know how hard you work for your money, and that’s why we’re inviting you to apply for a 40-year loan that offers one of the lowest monthly payments available.’”

“I thought it was awfully sweet of Countrywide to think of me. I do work hard for my money. And I sure would like to have a little more cash at the end of every month. How did the folks at Countrywide know all that? They must be geniuses or something.”

“Like some fool, I locked in a 4.5 percent, fixed-rate, 15-year mortgage a few years ago when I had the chance. What was I thinking? Instead of being free of mortgage debt at 57, I could keep making payments until I’m 85.”

From Minnesota. “Compared to the first quarter of last year, mortgage foreclosures in Dakota County have grown by 204 percent. According to County Recorder Joel Beckman, 299 mortgage foreclosures have been recorded from Jan. 1 to March 21. ‘We’ve had more filed so far this year than we have in the last two years combined,’ said Beckman.”

From Connecticut. “In recent years, many people have been able to purchase properties with little or no money down. So when property values drop or stagnate, owners with little equity in their properties are more likely to stop paying their mortgages and go into foreclosure.”

“Some lenders also had stopped verifying applicants’ incomes. ‘It was just a time bomb waiting to go off,’ said Greater Bridgeport Board of Realtors president, C. Obiora Nkwo. High-end homes in towns such as Easton and Greenwich appear to be getting hurt more than the affordable housing stock found in Bridgeport, Nkwo said.”

“The wave of mortgage foreclosures feared across the country hasn’t hit West Virginia yet, but it might not be far off. Just over 19 percent of such loans on West Virginia mortgages were late, and nearly 4 percent were in foreclosure in the fourth quarter, the MBA says.”

From Oregon. “The housing boom of recent years, in Portland and nationwide, has been driven in part by a rising trend of home mortgages to buyers with poor credit. Now, as housing prices have stalled or even declined in many cities, the cost is becoming clear.”

“‘The fees are excessive, the interest rates are excessive,’ said Kevin Sheehan, Portland office director for a nonprofit housing counseling service. ‘They get into it because they see home prices are going up and think, ‘If I don’t buy now, I’ll never be able to buy.’ A couple months down the road, they just can’t afford it anymore.’”

“Michigan is being hit hard overall. At last count, at least six Hillsdale County homes a week go to the sheriff’s sale at the courthouse at 10 a.m. each Friday morning. State Rep. Steve Tobocman said state House leadership will be working with mortgage lenders to…have state support for a second mortgage for up to six months.”

“‘Holy Cow! Holy Cow!’ exclaimed Scott Gray, a credit counselor in Tecumseh. ‘(Politicians ) want people in trouble to borrow more money? And have a second loan to pay off when they get a new job?’ Gray said.”

“A few years ago, I was visiting with the top dog at one of the country’s largest mortgage companies. I remember that I questioned him about the surge in home lending to people with bad or no credit and marginal income levels, folks who traditionally wouldn’t qualify for a mortgage.”

“I said that based on what I saw in the late 1980s crash in Texas, many of those buyers with little or no equity would walk away from their houses the first time a cloud passed over their financial horizon.”

“Sure enough, the mortgage company CEO agreed. But he insisted it would be worth the industry suffering those foreclosures if it meant millions of people could own a home who otherwise wouldn’t be able.”

“As it turns out, what we both predicted has come true.”

In Business Las Vegas reports from Nevada. “February’s new-home closings fell to their lowest point this decade as prices tumbled 5 percent from January, but the Las Vegas housing industry had a bit of a silver lining as housing starts reached their highest level since August, according to SalesTraq.”

“There were 1,441 new-home closings in February, a drop of nearly 50 percent from February 2006 and a decline of 30 percent from January’s 2,052. That’s the lowest monthly total this decade. In the resale market, the 2,594 homes sold in February was the lowest total since April 2001.”

“‘I think it’s always disappointing to see dismal results, and let’s face it, those sales figures are disappointing,’ said Las Vegas housing analyst Steve Bottfeld.”

“Bottfeld noted that home closing figures are a look at the past because it can take 60 to 180 days to close. None of the new numbers reflect the recent events in the subprime lending market in which it’s tougher for people with lower credit scores to obtain mortgages.”

“With the decline in home sales, prices came down in February with the median price at $321,555, a drop of 5 percent from January’s price of $339,253. The new-home price is the lowest since March 2006 when it was nearly $320,000.”

“The home prices don’t include the incentives that some builders are offering and have yet to disappear. Meritage Homes recently had a 48-hour weekend sale in which it was offering $60,000 in incentives for homes in Mountain’s Edge.”

“‘The next month or two will tell the tale of 2007, whether or not this is a real or false bottom,’ Bottfeld said.”

“The number of foreclosure filings jumped 24 percent between January and February, giving Nevada the nation’s highest foreclosure rate for the second consecutive month, according to RealtyTrac.”

“The 3,124 foreclosure filings in February were 77 percent higher than February 2006. Nevada has one foreclosure filing for every 278 households, which is three times the national average.”

“(The) National Association Of Home Builders said it expects single-family housing starts in Nevada to drop 28.5 percent in 2007, from 28,500 to 20,400.”

“‘The Las Vegas metro area turned in a similar performance (to Phoenix),’ the association said in its report. ‘Prices rose rapidly, the investor share doubled and housing starts climbed well above pre-boom levels. In 2005, the investor share of mortgage originations was over 20 percent, up from 9 percent in 2000. In 2006, Las Vegas joined Phoenix among the 20 largest housing market declines.’”

“NAHB Chief Economist David Seiders attributed the boom to an excess demand driven by low interest rates coupled with aggressive mortgage lending practices, a combination that…attracted speculators and investors. That in return put pressure on sales, prices and production that has resulted in corrections in 2006 and 2007.”

The Las Vegas Business Press. “All those ‘For Sale’ signs on houses across the valley are indicators of the glut of inventory facing both Clark County and the state. Until the residential market rebounds, local taxable sales could see more of what Applied Analysis Principal Brian Gordon termed ‘a decline.’”

“‘If we look at it on a per capita basis, it is a decline,’ he said of the Clark County number.”

“The state’s February employment numbers reflected an annual growth of about 32,500 jobs, which was around half of the number reported in each of the last three years, according to Gordon.”

“Gordon attributes the annual decline to a lagging housing market and a gap in major resort construction on the Strip. Planned projects, such as MGM Mirage’s Project CityCenter, Echelon Place, Encore and the Trump Tower are still too far off to have a significant impact on employment, Gordon says.”

“The decline in the residential sector has also impacted real estate brokers and agents, he continued. That job and income loss has been showing up in local spending figures. ‘It is significant. We have seen the amount of spending on taxable sales items is down on a per capita basis in Clark County,’ he explained. ‘Now we see it being reflected in the latest employment figures.’”

The Nevada Appeal. “Sales tax collections continued to lag behind projections used to build the budget for January. The slump in the housing and construction industries accounted for much of the problem. Sales of building materials and supplies fell 22.4 percent to $212.8 million. Furniture sales were down 60 percent to $89.3 million and taxable sales from building construction down 38 percent to $11.9 million.”

“Motor vehicle sales were off 10.8 percent to $434.7 million and food services and drinking establishments 16 percent to $592.6 million for the month.”

“Lyon County suffered a major drop in building materials sales from $5.6 million to $2.8 million and furniture sales went down 40 percent to $849,793. But Lyon’s amusement, gaming and recreation category also took a big hit in January as taxable sales fell from $1.3 million to $345,084. Overall the county was down more than 23 percent compared to the previous January.”

From KUTV 2 in Utah. “According to one research group, the state of Utah is the worst in the country when it comes to home mortgage fraud. In Utah for some reason people have fallen hard for mortgage fraud and the con men and women have gotten away with it.”

“Sean Anderson was sold on a deal to build a house and earn fast equity. ‘It sounded like a great deal,’ says Sean. ‘They hooked us up with the mortgage company, hooked us up with the appraisal, which came in at $464,000. And I built the house for $425,000.’”

“Sean was told he could use the equity to make the payments. What he didn’t know was the agent and lender used an inflated appraisal. ‘I can’t make the payments,’ says Sean. ‘There was no equity. Right now I’m into this over $100,000.’”

Some housing bubble news from Wall Street and Washington. “Beazer Homes USA Inc. said late Thursday that it got a grand jury subpoena demanding documents relating to its mortgage origination business. Several major home builders also operate finance companies to help customers buy their houses. Those businesses and the broader home-lending industry have been under scrutiny lately as defaults among the riskiest of those loans, called subprime, have spiked.”

“Lerach Coughlin Stoia Geller Rudman & Robbins LLP today announced that a class action has been commenced on behalf of purchasers of Beazer Homes common stock during the period between July 27, 2006 and March 27, 2007.”

From Bloomberg. “U.S. homebuilders may trigger a ‘correlation crisis’ similar to the credit sell off in 2005 when Ford Motor Co. and General Motors Corp. lost their investment-grade credit ratings, according to Bank of America Corp.”

“‘We see increasing risk signals that remind us of the run- up to the 2005 correlation meltdown,’ the analysts wrote. Investors may demand a higher premium for holding the equity tranche related to the benchmark investment-grade credit- default swap index, should the cost of contracts on homebuilders in the index rise, the analysts said.”

“‘We would not be surprised to see a potential dramatic increase in the premiums required by equity tranche holders to hold first-loss risk,’ the analysts wrote. ‘A reversal in the current demand for equity tranche protection could send investment-grade index spreads significantly wider.’”

From CNN Money. “On Tuesday, Lennar CEO Stuart Miller told investors on the company’s conference call that some markets were still seeing declines, according to Reuters. That comment and other recent signs probably mean the industry is still a long way from the bottom, said Morningstar analyst Parrish Glover.”

“‘There’s a reason why D.R. Horton’s CEO said, ‘07 is going to suck’, Glover told CNNMoney. ‘We’re not even expecting a recovery in the next 18 months. Even for the next three to five years, we’re not looking at an especially robust market.’”

“‘This kind of bull market that’s deflating is something that comes around once every 20 years,’ he said.”

From Reuters. “‘2006 may prove to be the worst subprime vintage ever,’ said Roelof Slump, a U.S.-based managing director for (Fitch Ratings), adding that he expects losses of between 6% and 8% in the value of these bonds.”

“Slump told Reuters that problems in the subprime housing market could have an impact on the overall housing sector in the United States. ‘We do believe that the very same things that are happening in the subprime market are likely to be happening in the Alt-A market, again driven by home prices.’ he said.”

The Financial Times. “Credit Suisse has filed lawsuits against at least three US subprime mortgage lenders, marking an escalation of efforts by Wall Street banks to use legal action to purge themselves of bad housing loans.”

“DLJ Mortgage Capital, a unit of Credit Suisse, is separately suing the three mortgage companies. EMC Mortgage Corp, a unit of Bear Stearns, has filed at least one $70m lawsuit against a lender. Other suits are expected. The legal action comes as Wall Street seeks to limit damage from the subprime collapse.”

“In one instance, cited in the case against Infinity Home Mortgages, DLJ claims it bought four mortgage loans totalling $838,000 made to an individual borrower for three properties on the same street in Irvington, New Jersey. DLJ bought the loans from Infinity between March and April 2006, and claims that the individual failed to make payments on three of the mortgages in May.”

“‘I can’t believe there is a soul that has been dealing in mortgage sales to Wall Street that hasn’t run into early payment default problems,’ Sunset Direct Lending CEO Bob Howard said. He added that Sunset was no longer making new loans.”

“The long list of participants in the subprime mortgage crisis will not go unscathed in sharing the pain but should work together to find solutions to the problem, a U.S. banking regulatory official said on Wednesday.”

“‘I believe there is more than enough blame to go around,’ Sara Kelsey, general counsel of the Federal Deposit Insurance Corporation, said.”

“The pain starts with borrowers and then mortgage brokers and bankers to brokerage firms, parties involved in securitizing mortgages, domestic and foreign investors, and insurance companies, she said.”

“The list also includes pension funds, mutual funds and hedge funds, as well as banks that provided money to each of the market participants, she added.”

“She said data suggest 52 percent of subprime mortgages are originated by independent mortgage banking companies, 23 percent by banks and thrifts, 13 percent by mortgage banking subsidiaries of bank and thrifts and 12 percent by mortgage banking units of bank and thrift holding companies.”

“The Federal Reserve encouraged this but also has hiked interest rates. ‘I believe that the hard lesson we are all learning from the current situation will involve shared pain, all along the line,’ Kelsey said.”

“NAR Chief Economist David Lereah predicted that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than 3 percent a year over the next two years.”

“Lereah warned against overreaction to the situation. ‘Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of overcorrection. Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch,’ Lereah said.”

The Boston Herald. “Amid outrage on Beacon Hill over a tidal wave of home foreclosures, leaders of the Bay State’s embattled mortgage industry are quietly doing a little housecleaning. The Massachusetts Mortgage Bankers Association has ejected a trio of now controversy-tarred, and financially troubled, subprime lenders from its membership rolls.”

“‘It’s more the case we want to protect ourselves,’ Charlie Nilsen, head of the Massachusetts Mortgage Bankers Association’s communications committee. ‘When we talk to regulators, our integrity, our credibility is really important.’”

“Community activist Jenelle Dame has a secret weapon to hit back at the predatory lenders blamed for putting millions of Americans at risk of losing their homes: she calls in the sharks.”

“‘We go to their office and bring people and signs and little plastic sharks, like loan sharks. We put sharks all around their offices,’ said Dame, an organizer in Cleveland, Ohio, which had the nation’s highest foreclosure rate last year.”

“Florida’s tax receipts are falling for the first time since 1975 as a slump in construction and home sales dims the economy of the Sunshine State.”

“States from New Jersey to California are getting pinched, just a year after many enacted the biggest spending increases in almost two decades. ‘A lot of states are starting to worry,’ said Iris Lav, who follows state budgets for a nonprofit. ‘We have yet to see the effects of the bursting of the property bubble.’”

“Philadelphia Federal Reserve Bank President Charles Plosser on Friday cautioned against seeking quick policy solutions to pressing problems like rising defaults in subprime mortgage markets.”

“Speaking at a Fed conference on community development, Plosser never referred directly to the issue of subprime lending defaults but left little doubt he was talking about calls for action to deal with the problems the sector faces.”

“‘While the symptoms of economic and financial hardship can be stark and dramatic at times, the causes are often subtle and complex,’ Plosser said.”

“‘Bold headlines, graphic news stories are tempting to generalize and may evoke calls for immediate policy response,’ he added. ‘But public policy driven by headlines rarely turns out to be good public policy.’”

“‘We must remember that markets are a powerful source of innovation. Our development efforts should not necessarily focus on thwarting or overriding market mechanisms, but rather they should focus on taking greater advantage of it,’ Plosser said.”

The Bradenton Herald reports from Florida. “Condo buyers are getting a warm welcome these days with 2,246 condos actively listed for sale in Manatee County. A caveat might be: If you’re selling condos, you’d better have them competitively priced or they won’t sell, according to developers and real estate sales agents.”

“A broker who sells waterfront condos and single- family homes on Anna Maria Island and Longboat Key was unenthused Monday about the market. ‘All of the listings are coming down in price. They’re not even moving even though they’re coming down,’ said Phillip Saadi, a broker in New Tampa. ‘Why? I don’t know.’”

The Herald Tribune. “Warren Hickernell looked like the boldest contrarian in the Southwest Florida real estate market last year. He spent millions changing motels and apartment buildings into condominiums long after the conversion trend seemed spent.”

“But with banks foreclosing on six of his 18 conversion projects, demanding repayment of more than $17 million, Hickernell now looks like a gambler whose luck ran out after he kept letting it ride on red.”

“In December 2005, Hickernell bought the 46-unit Bermuda Apartments in Sarasota from Daniel Prewett for $10.23 million, court records show. Prewett had paid just $5 million nine months earlier.”

“‘Hickernell had to have a lot of courage to pay that much at that time,’ said Kent Davis, a former Anna Maria Island motel owner. ‘Everyone knew the market was dead in late 2005. No one expected a happy ending at that point. It was game over.’”

“Backed by the RBS Companies of Brighton, Mich., and other investors, Hickernell spent nearly $20 million to buy five apartment complexes during the first six months of 2006.”

“Court records show that Hickernell and his partners defaulted on their first loan on June 30, 2006, just three days after a different Hickernell-led investment team had spent $6 million to buy the 41-unit Three Fountain Apartments in Sarasota.”

“The default was on a $1.884 million loan from the Bank of Commerce that was used to buy the Pearl Beach Inn in July 2004. The bank foreclosed on Pearl Beach six months later.”

“Meanwhile, three investors contacted by the Herald-Tribune say Hickernell has not informed them about his financial struggles. ‘We heard he had a problem with one property,’ said Boca Grande resident William Decklever. ‘We didn’t realize he was having trouble with five.’”

“In the latter half of 2006…two California investors, John Couch and Christopher Woods, appeared on the scene and bought five Bermuda condo units at an average price of $659,200, nearly twice the average per unit price paid by the first three buyers.”

“Richard Dear and other experts contacted by the Herald-Tribune are convinced that the two Californians paid way too much. ‘I would not want to be the lenders holding the mortgages on those properties,’ said Dear, a Siesta Key vacation resort owner and friend of Hickernell’s.”

The Orlando Sentinel. “In the midst of showing a house for sale, real-estate agent Debbie Frucci got an unexpected visit, from a police officer.”

“The problem: her open-house signs. Placed in the public right of way, the signs violated Winter Springs city rules. So the signs came down, and the open house got shut down. ‘There was no sense in doing it if people didn’t know where to go,’ Frucci said.”

“Open houses have become increasingly important in the softening real-estate market. But most of the signs, whether those placed by real-estate agents, new-home builders or homeowners, are there illegally, and local governments are cracking down. A coordinated, statewide sweep six months ago collected more than 7,000 signs in just Orange and Seminole counties.”

“‘A lot of our members weren’t having to do open houses, the market was so hot,’ said Frankie Elliott, VP of government affairs for the Realtor association. But things have changed. There’s more than a year of inventory on the market, according to association data.”

“‘Now, you’re having to go back to the way the old market was,’ Elliott said. ‘You don’t want to spend four hours sitting in a house and have no one come by because your signs have been taken.’”

“Even real-estate veteran E. Everette Huskey found himself with virtually no customers at an open house when his sign advertising the event got removed from along Wekiva Springs Road. ‘They’re hurting the Realtors,’ he said. ‘They’re hurting the homeowner.’”

“‘The Realtors are being thrown in a big pot, if you will, with all the other people that put out a gazillion little signs [such as] ‘Lose 30 pounds in 30 days,’ said Jeff Bales, a Lake Mary real-estate agent.”

“Gloria Beharry owns the house Frucci was trying to sell. Now paying taxes and mortgages on two houses since she moved to a bigger home, Beharry wants to sell fast. ‘If the house had more exposure,’ she said, ‘it would help a lot.’”

The Sun Herald. “This deal is dead. Developer Mark Flannagan allowed the March 28 closing date to pass, effectively ending his intention to purchase the 12-acre tract of land comprising Shady Haven Mobile Home Park for $7.8 million in order to build a condo complex there off Old Englewood Road.”

“‘Our contract is now dissolved,’ said park co-owner Mary Allseits. ‘That’s about all I know. We are no longer under contract with Mark Flannagan. He did not go through with the deal.’”

“‘We’re going to return to business as usual until we decide something further. For right now, though, we’re just going to be running Shady Haven as we always have,’ Allseits said.”

“This came as a reprieve to Shady Haven resident Dolly Fetcko. ‘It means we can breathe a little bit easier, at least for another year or so,’ Fetcko said.”

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