The Housing Bubble

The LA Times reports from California. “New Century Financial Corp., once the largest independent maker of mortgages to high-risk borrowers, sank into bankruptcy proceedings today, swamped by demands that it buy back defaulted loans. The Irvine company also said it would eliminate 3,200 jobs, or about half of its workforce. Its fall epitomizes the collapse of the sub-prime lending business.”

“In recent months, forced sales and outright shutdowns of lenders have plagued the industry, woes that threaten to depress the entire housing market. ‘They were big, strong, gigantic, and arrogant too, cocky,’ said analyst Matthew Howlett. ‘It just seems like the whole operation was fast and loose, and it finally caught up with them.’”

From CNN Money. “Geographically, California’s overheated housing market figured centrally to New Century’s business. In 2005, according to its annual report, 37 percent of New Century’s business was in California. New Century made $51.6 billion in subprime loans in 2006.”

“Dr. Greg Hallman, who lectures on real estate finance at the University of Texas, said the New Century bankruptcy put an exclamation point on the era of investing in securitized subprime debt.”

“‘It’s probably over for time being,’ said Hallman. ‘That market worked for as long as investment banks provided funding. [The banks] have cut the money off.”

The Orange County Register. “The troubles in the subprime mortgage industry could bring stagnation to California’s housing market, but Orange County should be spared the worst fallout, according to a UCLA economist.”

“In a report to be released today, Ryan Ratcliff, an economist with the UCLA Anderson Forecast, points out that markets with a higher proportion of first-time buyers and new homes,– such as the Inland Empire and Ventura County, are seeing a bigger surge in defaults, or borrowers who fall 90 or more days behind on their mortgage payments, than areas like Orange County.”

“‘Since the subprime market was almost the only thing keeping sales volume buoyant in the last years of the boom, the drying up of subprime credit suggests that home sales in California will be stagnant for some time to come,’ he writes.”

“The median price of an existing single-family home in Orange County has fallen in six of the past seven months compared to year-earlier levels, according to the California Association of Realtors.”

“Although Orange County is home to a number of subprime lenders, the job losses at those firms aren’t likely to be enough to push the local economy into recession, Ratcliff said. In 2006, non-bank mortgage lenders employed 22,300 people in Orange County, down from a peak of 23,800 in 2005, according to California’s Employment Development Department.”

“‘If the carnage in the sub-prime markets turns out worse than we expect, job losses in Southern California could make things a bit worse,’ Ratcliff said in his forecast.”

“The effect was concentrated largely in Southern California, and Irvine in particular, where many sub-prime lenders are based. ‘Our forecast is definitely that the job loss in that sector is going to deepen,’ Ratcliff said. ‘But is Irvine going to turn into an apocalyptic wasteland? I don’t think so.’”

“‘The surge in notices of default is completely unavoidable,’ Ratcliff said. ‘They were baked in the cake of the loans they were making in the last two years. The question is how many will turn into foreclosures.’”

“In February, the number of trustee sales — the last step in the foreclosure process, was 1,850, about 10 times the number a year earlier, according to DataQuick

The Press Enterprise. “Several areas around the state, including Riverside County, have seen default notices rise more than 150 percent.”

“‘The reason the Inland Empire is seeing an above average (rate) of…defaults is that new building is a big deal,’ Ratcliff said. ‘So you get the combination of builders and their lending partners wanting to keep the party running as long as possible, even when the market is running out of steam.’”

The Daily News. “Tighter credit standards will depress sales totals for some time to come, Ratcliff said. ‘Is there going to be something that comes along and picks up the slack from real estate and provides some kind of a cushion?’ he said. ‘That scenario is still going to look good.’”

The Mercury News. “‘We are still forecasting a significant slowing of the California economy in 2007, as the double whammy from construction and mortgage finance creates drag on the rest of the economy,’ economist Ryan Ratcliff wrote.”

“Already, there is a swell in the number of notices of default, filed when a borrower’s payment is 90 days late. The increase in notices between the fourth quarter of 2005 and the same period last year reached more than 200 percent in some counties, and is higher than 150 percent in the East Bay.”

“Employment decreases at non-bank mortgage lenders and the broader real estate category led to a revision of the financial activities sector from 10,200 new jobs to a loss of 1,600 positions.”

From NBC 4. “‘We are becoming increasingly nervous about the economic outlook as the period of below trend growth grinds on,’ economist David Shulman wrote in the forecast. ‘Put bluntly, the credit crunch in the subprime mortgage market will likely trigger a second leg down in the housing market in terms of output and prices.’”

“The largest increase in mortgage defaults was seen in the East Bay and Sacramento areas and Bakersfield, Ventura and Riverside counties.”

The Red Bluff Daily News. “Around the West, apparently including Tehama County, the philosophy in recent years has been a bit like what Kevin Costner did in the movie, ,Field of Dreams., ‘If you build it, they will come.’”

“Developers came up with grand plans to swell the county’s population by at least half over the next 10, 12 or 15 years.”

“Sun City Tehama, which was looking at creating what would amount to the county’s second largest community, with some 3,700 homes south of Cottonwood. Now? The project is on hold, and some doubts have been raised whether it will ever be built. Because if the people were out there, the developers would be turning dirt at the edge of Interstate 5 right now.”

“A rough count comes up with somewhere in the neighborhood of 10,370 planning units that were at some point in development in Tehama County at the beginning of 2007. For the sake of more discussion, toss in nearly 2,000 acres of land being offered for sale as residential property on which the listing says 1,000 homes could be built.”

“That figure does not include homes planned or under construction on single lots. For the sake of discussion, figure on perhaps 500 more homes. That’s about 12,000 more homes in the county over the next 10 to 12 years. And no doubt other development plans will surface in the years to come.”

“Homes aren’t selling very well and several hundred of them are on the market right now, and a large number of others are for rent, some of those brand new.”

“Those who sell real estate for a living are reluctant to concede that the bloom is off, not only in California, but in most of the United States. But the headlines and the signs have been and still are there for all to see.”

“All in the third-of-a-million dollar range, ‘For Sale’ signs abound for both new and already occupied dwellings. A drive down one of the streets a recent day showed a dozen houses in a row all on the market. A never occupied three-bedroom, two-bath, 1,731-square-foot model showed on the listing sheet it was being offered for $334,201. On the same street, the same model that has been occupied for a year and has ‘nearly $30,000 in upgrades’ is being marketed for $325,000.”

“Simple math indicates the first buyer may be taking a financial hit just to get out of the home.”

A report from the Arizona Republic. “Three opportunistic home builders are jumping into metro Phoenix’s new-home market, undeterred by the glut of unsold houses and high prices left over from the housing boom. Housing analysts say there is a risk in moving into a home-building market that is trying to get back on its feet after the excesses of a boom. An estimated 10,000 spec homes are on the market here. That is in addition to the more than 45,000 existing homes for sale.”

The East Valley Tribune from Arizona. “With home sales still languishing, Valley developers are holding off on building thousands of houses, focusing instead on purging excess inventory and reevaluating the market.”

“Plans for an estimated 3,000 to 5,000 homes have either been postponed or scrapped, and that’s a conservative estimate, said John Fioramonti with research firm Hanley Wood Market Intelligence. ‘Most of these people have already written off 2007,’ and are waiting to see what will happen in 2008, he said.”

“Scottsdale-based Montalbano Homes decided to delay an 1,800-home development in the Queen Creek area until mid-2008. Montalbano already has a Queen Creek project called Estates at Skyline Ranch. That development still has 14 completed but unsold, or speculative, homes to offload.”

“Starting another project in the same area would have the company competing with itself, risking price erosion, he said.”

“Some builders are sitting on land they’ve already bought…others are walking away from options to buy properties. It’s happening mainly in outlying areas, such as Maricopa, Coolidge and the far West Valley, Fioramonti said.”

“For national, publicly traded companies, holding onto properties that aren’t producing income can negatively impact financial statements for stockholders, he said. That’s been made worse by recent sales figures that have fallen far below projections, he said.”

“‘They’d rather lose the $150,000 or $200,000 they had in options rather than carry a larger inventory,’ Fioramonti said. ‘That’s been happening across the country.’”

“Meanwhile, some builders are moving forward with projects. Canada-based Mattamy Homes is about to break ground on two subdivisions, totalling nearly 250 homes, in the Queen Creek area as part of its expansion into Arizona.”

“‘There’s still demand for new homes at the right price and the right program,’ said Mark McHone, president of the company’s Phoenix division.”

The Verde Independent from Arizona. “The Arizona Governor’s Housing Forum in last September showed that ‘from 2000 to 2006, the median sales price of homes in Arizona increased by 74 percent, but during the same period median family income only increased by 15 percent.’”

“We have seen an even more dramatic trend in the Verde Valley with 128 percent increases in housing costs over five years in Camp Verde where the median price of a home is $289,000.”

“With the failure of the sub-prime lending market after the bizarre lending frenzy of 2005, many homeowners, who received 100 percent loans, have been forced from those homes. Dan Mabery of Coldwell Banker says the foreclosures in the Verde Valley currently number one or two each week.”

“‘That is 10 times the average rate. Lenders got easy with money. Some people should not have had loans. They had adjustable rate mortgages or paid too much,’ he said.”

“He says the Cottonwood area already has one of the largest numbers of single family homes used as rental properties at 40 percent. Those numbers could be subject to change as well for the same reason: high purchase cost and evasive financing. In his newsletter, Mabery points out it is ‘near impossible to cash flow a residential rental that justifies the purchase price.’”

“Right now the real estate market has a glut of properties, ‘it’s very high, with 10 months of inventory,’ says Mabery. For Sedona the number is even higher.”

The Salt Lake Tribune from Utah. “In the midst of tightening lending standards, borrowers with low credit scores probably will struggle to get a good deal. ‘We are seeing a huge shift going on right now,’ said Evan Jones of GMAC Mortgage in Salt Lake City.”

“Just two weeks ago, Jones said, he could have provided a home equity loan to a borrower with a credit score of at least 580. Today the minimum is 620 to 680, depending on a borrower’s circumstances.”

“He said loans in which 100 percent of the purchase price can be financed are available generally only to people with credit scores of 680 and higher. ‘Before, we could offer this to borrowers with a credit score as low as 560 to 580,’ he said.”

“For William and Ronda Starks of Syracuse, the recent turmoil in the nation’s mortgage industry helped turn the process of refinancing their home into a financial nightmare. It’s an ordeal that resulted in a two-day hospital stay for Ronda, whose high blood pressure and heart problems make her especially susceptible to any type of stress.”

“‘You can’t imagine what it was like to go through something like this unless you go through it yourself,’ her husband said.”

“An estimated one in 10 home loans, about 52,000 mortgages in Utah, is considered subprime. About one in five new home loans being granted in Utah fall into the subprime category.”

“William Starks said he and his wife decided to refinance because they needed to cash out on some of their equity. The whole process was supposed to take only a couple of weeks and provide them with a new fixed-rate loan with a higher balance in the low 6 percent range.”

“But two weeks into the process, the Starkses began to watch helplessly as things went horribly wrong. The loan that appeared to be a certainty in January a month later had still not closed and no longer seemed to be a done deal. By March, they were getting desperate.”

“‘The rate kept going higher and higher,’ William Starks said. ‘We kept thinking, ‘What the heck is going on?’ It’s not supposed to work this way.’”

“At one point, their mortgage lender said the best he could do was 9 percent, although by mid-March they were able to close their loan at 7 1/4 percent. And that fixed-rate loan they had hoped to get? All they could qualify for was an adjustable-rate loan that remains fixed for only two years. After that, their mortgage rate, and payment, could balloon.”

“Undoubtedly, some buyers in Utah will watch their ability to buy or refinance shrink or disappear, and some sellers will be affected. Alan Brymer, of Provo, said he experienced this while recently trying to sell an investment property in another state to a borrower who fell into the subprime category.”

“‘The lending standards kept changing, and eventually they didn’t qualify anymore,’ he said. ‘I think lenders are overanalyzing things to the point of being ridiculous.’”

“He eventually found another buyer who did qualify, but only after a frustrating delay of several months.”

“Al Bingham, a senior loan officer for National City Mortgage in Salt Lake City, said if the secondary market will not accept a loan made to a certain borrower, in most cases it can’t be made.”

“‘Credit scores are so critical right now that every point matters,’ he said. ‘Even if you are one point off [from a minimum], there are no exceptions.’”

Some housing bubble news from Wall Street and Washington. “New Century Financial Corp. became the biggest subprime mortgage company to go bankrupt in the past year after the lender, which specialized in loans to people with poor credit records, was overwhelmed by customer defaults. The company filed for Chapter 11 bankruptcy protection from its creditors today in federal court.”

“The largest creditors included Wall Street firms that financed New Century’s lending operations.”

“‘They’re clearly going to be the poster child for bad practices in the mortgage industry,’ said analyst Matthew Howlett. ‘When all is said and done, the management team will be to blame.’”

From Reuters. “New Century, like many lenders focusing on people with poor credit histories, was forced to buy back loans from investors that went bad just months after they were made, straining its finances.”

“‘We are only at the very beginning of the problems facing subprime,’ said analyst Brad Hintz. ‘What you are seeing is that this liquidity crisis is continuing in the marketplace.’”

From Bloomberg. “M&T Bank Corp. said low bids for the Alt-A mortgages it planned to sell will cut first-quarter profit by $7 million. Lenders this month have found demand falling for riskier mortgages even apart from so-called subprime ones.”

“A unit of Cleveland-based National City Corp. that makes home equity loans through brokers today undid much of a loosening of guidelines it introduced only Feb. 28, rolling back standards further in some ways, as a result of demand from loan buyers ‘evaporating quickly,’ according to an announcement obtained by Bloomberg.”

“‘Unfavorable market conditions and lack of market liquidity impacted M&T’s willingness to sell Alt-A loans in the first quarter,’ the company said in the statement.”

The Associated Press. “Many of the media reports on M&T Bank Corp. Monday will no doubt focus on mortgage loans. Actually, though, mortgages represent a relatively small slice of the bank’s problems.”

“Only about a third of the shortfall can be blamed on a shrinking appetite for mortgage debt. The remainder of the shortfall relates to an old story for retail banks in the U.S.: higher costs to raise money.”

“At a recent auction of Alt-A loans, fewer bids than normal were received and pricing was lower than expected, M&T said. Meanwhile, the bank also said it would have to repurchase problem loans sold to investors.”

“Barclays Bank Plc said on Monday it had paid $76 million for subprime lender EquiFirst Corp., about two-thirds less than its original offer, as a rising tide of delinquencies hurts the market for risky mortgages.”

“A Barclays spokesman said the lower price reflected slowing housing prices and higher mortgage delinquencies in the subprime sector.”

“The price declined from $225 million (to) $76 million and may be adjusted during the second quarter, London-based Barclays said. EquiFirst is the 12th-biggest subprime wholesale mortgage originator in the U.S, the bank said Jan. 19 when it announced the deal.”

“‘The original contract had provisions to ensure the credit quality of what we took on was as expected,’ spokesman Peter Truell said in an interview today. ‘The closing price was modified’ due to a reduction in reserves, he added.”

From USA Today. “The crisis in risky mortgage loans is shedding light on aggressive lending practices by some of the largest U.S. home builders, which stand accused of using lax standards and illegal sales tactics to arrange financing for buyers.”

“The Department of Housing and Urban Development is taking more actions against home builders and their affiliated lenders, says Brian Sullivan, a spokesman for HUD. ‘We are seeing increased consumer complaints about builders,’ Sullivan says. ‘Including kickbacks and illegal referral fees, phantom incentives and other violations of our real estate laws.’”

“The subprime mortgage crisis is likely to spread to a higher tier of loans known as Alt-A, according to an economist affiliated with the University of California at Los Angeles.”

“‘The question is to what extent,’ said David Shulman, a senior economist with the UCLA Anderson Forecast in Los Angeles. ‘That could be the next shoe to drop. We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole.’”

From Fitch Ratings. “Today, many properties are purchased and financed with virtually no equity. Loan to value ratios often exceed 100% and, when considering the entire amount of debt on a property, Fitch is seeing more loans where actual debt service shortfalls exist at the outset.”

“Recent struggles, and in some cases defaults, in the condo conversion market are viewed by Fitch as an indication of the danger of relying on valuations predicated on significant future value growth.”

“Fitch has begun to see delinquencies and defaults of condo loans in the CMBS market. Sales of condos have slowed or stalled in many markets, including South Florida, Manhattan and Las Vegas. Many projects have been canceled (some mid-construction) and others have been turned into or reverted back to rentals.”

“The rental value of the properties is usually significantly less than the anticipated conversion value, and therefore many developers are not able to meet debt obligations.”

“A massive wave of defaults is set to hit the CDO (collateralised debt obligation) market following the sub-prime mortgage meltdown in the U.S., although this could take a year to play out, a fund manager told Reuters.”

“‘I do think a massive default cycle is about to start in the CDO market. It’s mad. Sub-prime will create massive defaults,’ Francois Barthelemy told Reuters. ‘The event that will destroy the CDO market has already happened. But it will take another year to trickle down. They (the holders of the CDOs) don’t realise what’s going to happen.’”

“Sales of bonds backed by subprime mortgages are tumbling as investors and bankers, concerned about rising delinquency rates, pull back from what had been one of Wall Street’s fastest growing businesses.”

“About $79.3 billion of securities backed mainly by loans to people with poor credit or high amounts of debt were issued this year, down 37 percent from $125 billion in the same period last year, according to a Citigroup Inc. report.”

“‘Right now the CDO machine has essentially been put on hold,’ said Bill Martin, a portfolio manager of $35 billion in mortgage bonds at TIAA-CREF.”

“Moody’s on Monday said it may cut its ratings on Technical Olympic USA, Research) deeper into junk, citing expectations the company may further amend its credit agreements to account for lower interest rate coverage. The homebuilder last month swung to a large quarterly loss compared with a profit in the year-ago quarter.”

“Technical Olympic is also expected to be challenged in 2007 to pare back its land and housing inventory to turn its free cash flow positive on an annual basis, Moody’s said.”

The St Petersburg Times reports from Florida. “Eleanor Andriole likes her new house in Sterling Hill, but she’s not so sure about the neighborhood. Looking down the street from her driveway, she counted half a dozen vacant homes, a couple of rentals and only two other houses occupied by their owners.”

“‘I wish some people would come in and live on this street,’ said Andriole, who bought the house with her son last year. ‘I feel very lonely here.’”

“The situation is similar in most of Hernando County’s newest subdivisions. Builders and developers offered several explanations for the large number of homeowners who have not filed for homestead exemptions in subdivisions like Sterling Hill.”

“But most of the houses, they acknowledged, are homes that builders or investors planned to sell but have not been able to. In some cases, they fell back into the builders’ hands after buyers backed out of their contracts.”

“Jeff Shubrooks, a salesman for Avatar, which currently owns 29 houses in Sterling Hill, limited investors by allowing each buyer to purchase only one home. But some buyers, Shubrooks said, probably purchased houses under the names of relatives or misled sales agents about their intention to live in Sterling Hill.”

“‘The market was crazy then,’ he said, ‘and there were so many speculators.’”

“Builders have slashed prices. Inland Homes, for example, recently advertised a ‘closeout at Sterling Hill,’ cutting prices as much as $55,000 and offering to pay $2,500 in closing costs. Deed restrictions prohibit individual owners from posting ‘for sale’ signs.”

“Kathy Korson lives in South Tampa and bought a house in Sterling Hill a year ago. ‘We’ve had it on the market since March of last year. We’ve had open houses and advertised everywhere. It’s ridiculous,’ said Korson, who said she paid a total of $24,000 in monthly payments for her mortgage, taxes and insurance since last April and is now thinking of selling the house at auction.”

“‘I just don’t know how long I can keep making the payments,’ Korson said.”

“Although most large builders do not list their houses in the MLS used by real estate agents, the MLS is a common measure of demand, and the number of homes listed in Hernando briefly dropped below 800 in mid 2005. The number climbed rapidly through 2006 and in recent months has held steady at about 4,000 homes, with 4,366 last week.”

“Joe Murphy, the conservation chairman for the Hernando Audubon Society, (said) the inevitability of growth is a pervasive myth. ‘We’re always told there’s this wave of growth and there’s nothing we can do about it,’ Murphy said. ‘Once we realize this wave is not coming, we can slow down…we don’t have to rush to build subdivisions as fast as we can.’”

The Herald Tribune. “Martie Lieberman parlayed a few highly successful years as a real estate agent into a handsome real estate portfolio. A licensed Realtor for only four years, Lieberman recalls the advice of her real estate class instructor: ‘If you’re not doing realty investment for yourself, you may be missing opportunities, since who knows your market better than you?’”

“During the ‘crazy years in real estate when everything was so good from 2003 to 2005,’ Lieberman plowed all her commissions into property. Investing about $4 million, she thinks now that she probably bought ‘more than I should have.’”

“Like everyone else now, Lieberman is feeling the pressure from the market slowdown, both in her recently weak realty commissions as well as in her carrying costs as a multiple property owner and landlord.”

“That is what is prompting her to place the Cohen House on the market, but she said she plans to ensure that it winds up in the ‘right hands.’”

The Miami Herald. “Many South Floridians are eating out less and springing for fewer big purchases like a new car or expensive vacation. Economists talk about a new cost-consciousness among consumers who had relied heavily upon their houses for their net worth and are now watching the housing market slow way down.”

“And as the housing market slides, that new consumer psychology is rippling through South Florida’s economy, and is already hurting South Florida’s biggest companies.”

“South Florida companies you wouldn’t automatically associate with housing are also pointing to the real estate slowdown as a big culprit for less robust earnings, in industries as varied as car dealerships, cruise lines and shipping companies.”

“‘We’ve been expecting effects like this for some time,’ said Per Berglund, an economist who tracks Floridam. ‘In a sense, that is Florida’s Achilles Heel, a lot of industries are very closely tied to the state of the U.S. economy.’”

“Consumer confidence among Floridians dropped last month, according to data released by the University of Florida last week. ‘Housing is an increasing problem,’ said survey director Chris McCarty. ‘It’s very clear that people were using their home equity to fuel spending, so I don’t think this should be that much of a surprise,’ said McCarty, who also cited the rampant speculative buying and use of exotic loans.”

“Last year, 16 percent of the new car purchases in Florida were made with home equity loans, said Art Spinella, president of market research firm CNW Research. That compares to 9 percent in 2000.”

“Florida and California have been hurt the most in terms of auto sales, said Spinella, stating that the No. 1 reason for the decline in auto sales in California is its housing market, and that in Florida, it’s ‘in large part’ due to housing.”

“‘There is no way of really knowing, but…I do believe that some of those people who have stretched to buy homes and got very aggressive mortgage financing are people in the income levels we are dealing with,’ Gerry Cahill, Carnival Cruise Lines’s CFO, told analysts.”

“‘It’s not just the subprime issue. There’s a lot of other issues going on in the housing market,’ he added.”

The Christian Science Monitor. “When Patrick Greenish accepted a job offer in Charlotte, N.C., last July, he assumed that his house in Orlando would sell quickly. His new employer offered to let him telecommute for a month until the sale was complete.”

“But when the month ended, the ‘For Sale’ sign remained firmly planted in his front yard. Even so, the company expected him to be working in Charlotte.”

“‘I had to leave everybody at home while the house was still on the market,’ Mr. Greenish says, referring to his wife and two young daughters. ‘It was a bit hard on everybody.’”

“Some potential employees are turning down new jobs or transfers they cannot sell their house or would have to take a heavy loss. And companies that offer relocation benefits are spending more for employees’ moving expenses.”

“‘It’s costing companies an exorbitant amount of money to cover the loss on sale to get an employee moved,’ says Andrew Drescher, a relocation consultant.”

“For months Greenish lived in a rented room in Charlotte, returning home every other weekend. The price on his house continued to drop.”

“‘The profit was just going away,’ Greenish says. ‘We started questioning our decision to move. It was getting harder and harder, the financial issues of living in two places, traveling back and forth, and the general strain on a marriage.’ Greenish and his family took their house off the market, and he was able to return to his former position.”

“For families, the current housing market raises complex questions. ‘It’s not as simple as, ‘Hey, honey, I have a new job, we need to move,’ says Jim Lanzalotto, VP of an outsourcing firm. ‘Now you have to evaluate whether it’s worthwhile to make the change.’”

“He calls the current slump ‘unprecedented’ and ‘nondiscriminatory,’ because it stretches across the country. Previous slumps were more regional, he says.”

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