The Housing Bubble

The LA Times reports from California. “John Rockey has been hanging drywall for 35 years, and he’s seen it all in the boom-again, bust-again Antelope Valley housing market. By the time a new building spree peaked in 2005, Rockey’s payroll had again grown to 200. Now, his Lancaster-based Progression Drywall Corp. is down to 50 employees, and he’s got a serious case of deja vu.”

“‘This is looking like 1990 all over again,’ he said.”

“‘A lot of people are panicking,’ said Jaimes Gumaro, a North Hollywood real estate agent who has a listing in a Palmdale neighborhood dotted with homes for sale. ‘They were expecting to have all this equity, and then it suddenly stopped. Now, they just want to get their money out of it. They’re saying, ‘I’m outta here.’”

“Foreclosure sales in Lancaster and Palmdale rose to nearly 200 between Dec. 1 and Feb. 28, an eightfold increase in a year. Notices of default more than doubled over the same period a year earlier, totaling more than 1,000 from December through February.”

“‘Now, we have all these folks who can’t afford their homes and their loans are adjusting, literally by the thousands,’ said Peter Terracciano, who founded his Palmdale brokerage in 1990, as the housing boom began to go bust.”

“Rockey gets most of his work from large builders. ‘Every customer has a different story every day,’ he said, ‘and they’re not good stories.’”

“He recently learned that the builder of 300 new houses he’d been lined up to drywall in Rancho Cucamonga abruptly halted the project, costing Rockey $4 million in work. ‘We’re getting killed,’ he said.”

The Recordnet. “New-home prices in San Joaquin County continued to slide, from an average $519,350 at the end of last year to $507,115 in the most recent quarter, a decline of 2.4 percent, according to the latest sales numbers from the Gregory Group.”

“That’s down from a high of well above $550,000 in the third quarter of 2006.”

“The number of people out looking at home models significantly increased beginning in mid-January, said Joe Anfuso, president of Stockton-based Florsheim Homes, but that dried up again several weeks ago with the implosion of the subprime market.”

“‘I certainly think all the builders are going to be feeling the effects of the slowdown in the subprime market,’ Anfuso said. ‘It will take some time to flush out of the system.’”

“Gregory Group president Greg Paquin said builders have been lowering the presence of incentives in the sales market because these days, would-be buyers are responding better to lower sales prices, rather than to higher base prices with incentive packages thrown in.”

The Tribune News. “Whether they’re first-time home buyers or investors, more San Luis Obispo County property owners are facing foreclosure, according to local real estate experts.”

“For the first three months of this year, 215 notices of default were sent to homeowners, up from 99 in the same period a year ago, according to All American Foreclosure Service. Forty-nine trustee’s deeds were recorded from January to March of this year. That’s compared to only eight in the same period last year.”

“‘Either the lenders are not working it out with the borrowers or whatever, but more are going back to the lenders as a whole,’ said Don Vaughn, owner of All American Foreclosure.”

“‘The lenders made it easy for people to buy a home, be it the first-time buyer or investor,’ he said. ‘From the lender’s viewpoint, the property would increase in value, but that has stopped. Therefore, the investors are walking away.’”

“The majority of foreclosure activity is concentrated in Nipomo and Paso Robles (and to a lesser degree Atascadero), areas of the county where growth is occurring and people may have bought more house than they could afford.”

The Orange County register. “One measure of how many homes are for sale in Orange County is up 43% in six weeks. By this…logic, it would take 6.57 months for buyers to gobble up all homes listed for sale at the current pace of deals vs. 6.09 months two weeks earlier; vs. 4.59 months six weeks ago (a 43% jump); and vs. 3.62 months a year ago.”

“The Orange County tax man’s official year-end tally that showed 5.32 percent of roughly $2 billion in property tax dollars owed on the first installment due in December weren’t paid at that point. That was the highest level of tardiness since 1996.”

“‘You don’t want to extrapolate too early,’ says O.C.’s tax man Chriss Street, of some of the negative trends. But this latest count of paid bills is ’substantially lower than normal. Something is going on here.’”

“In the first two months of 2007, O.C. lenders filed 1,727 default notices, that’s 50 percent above average.”

“New Century last week became the largest subprime lender in the nation to file for bankruptcy. It simultaneously cut 3,200 jobs nationwide, or about half its staff. At Monday’s job fair, about 200 ex-workers networked with potential employers who were were looking for sales representatives.”

“Denise Price, a former senior underwriter at New Century’s Home123 retail division, said the lenders who showed up were looking mostly for people in sales and not with her particular skills. ‘At this point, I think that’s all that’s available, especially in Orange County,’ Price said of sales jobs.”

“Her boss, Richard Measures, lost his job at New Century a year after being laid off at another lending company. ‘The real sad part is we built a team,’ said Measures, a Temecula resident who has worked in the mortgage industry for 30 years.”

“‘I thought of this as a lot more stable company,’ he said of New Century. ‘We were aggressively hiring and expanding. You don’t normally do that unless you’re confident about the future.’”

The Freelance News. “San Benito County’s real estate market picked up in March, but the number of homes on the market and the time they’re sitting unsold continues to rise.”

“One market number has been moving continually upward: the number of days homes sit on the market before selling. In March 2006, homes were on the market for an average of 78 days before selling. By March of this year, homes had been on the market an average 154 days before selling.”

“At the same time, the number of homes on the market has also increased. There were 286 homes on the market in March 2006. That had increased by nearly 50 percent to 427 in March this year.”

“‘Buyers are looking for deals,’ agent Jan Kisla said.”

“Real estate agent Melissa Mitchell said that’s hitting the most expensive homes the hardest. That’s because people buying a home for more than $1 million are usually moving up from one worth about $700,000 or $800,000 she said. But if they can’t sell their home, or they can’t get a good price for it, those buyers aren’t going to be looking at the priciest houses.”

“And it’s not just buyers who are becoming more difficult. With mortgage foreclosures increasing dramatically in the past few months, homebuyers are also being subjected to more scrutiny from lenders, Mitchell said.”

“‘You can wait 17 days and then find out the buyer couldn’t get the financing,’ she said.” “The most expensive home sold in San Benito County last month went for $1.125 million. But even that four-bedroom ‘custom French Tudor’ on ‘beautiful equestrian property’ was advertised as ‘price-reduced and motivated’ at the time of sale.”

“The least expensive home sold last month in San Benito County was an 81-year-old, three-bedroom home in Hollister that went for $420,000, a markdown from the original listing price of $448,000.”

The Dallas News reports from Texas. “Homebuilders hit the brakes in the first quarter, cutting Dallas-Fort Worth starts almost 35 percent. Local housing production totaled less than 8,000 single-family units, the lowest quarterly total since 2001, according to a report released Monday by Metrostudy Inc.”

“And sales of both new and pre-owned homes fell in the quarter. Pre-owned home sales dropped 5 percent, while purchases of new houses were down 7 percent from a year ago.”

“Inventories of homes for sale have been rising, forcing builders to cut prices and curtail starts. Because of the cutback in building, the number of homes in the production pipeline, both under construction and completed, fell to 26,466 units, according to Metrostudy.”

“That’s down from a recent high of 30,117 homes at midyear 2006. Builders sold 9,917 homes in the first three months of 2007.”

“‘We’ve seen demand for new homes slow down a bit,’ Metrostudies David Brown said. ‘We’ve seen less investor activity, and with the subprime loan market tightening up, we’ve had some purchase cancellations.’”

“There were 11 percent more pre-owned homes on the market in March than a year earlier, with more than 47,000 houses listed for sale in North Texas. That works out to about a 7 ½ -month supply.”

“Dallas appraiser Chuck Dannis said that the pullback in builder starts was a couple of quarters late and that home inventories are high. Near-record foreclosures have added to a glut of homes in some areas. ‘The market needs the rest of 2007 to digest the foreclosures caused by loans that probably should not have been made in the first place,’ Mr. Dannis said.”

“The owners of an Oak Lawn high-rise condominium have decided to auction off more than a dozen of the luxury residential units.”

“The rental units were converted into condominiums and have sold for more than $500,000 to almost $3 million. Five of the units will be sold without a minimum bid. The auctioneer is suggesting that opening bids for the high- rise properties start between $250,000 and $500,000 for the condominiums, which range from 1,362 square feet to 5,164 square feet.”

“‘We want to sell the building out,’ said Steve Levin, president of Centennial Real Estate.”

“Dallas housing analyst Mike Puls said the planned auction is a sign that the high-rise condo market has softened. ‘The air is coming out the bubble,’ Mr. Puls said.”

“Foreclosure signs are popping up in front of thousands of Dallas-Fort Worth homes for sale this spring.”

“‘I’m finding more of them when I look at the listings in a neighborhood for comparable prices,’ said Carrollton real estate agent Wendy Hulkowich. ‘The foreclosure market is definitely affecting our listing price comps.’”

“It’s no wonder that home foreclosures in North Texas are starting to weigh on the entire housing market. Dallas-Fort Worth has one of the highest home foreclosure volumes of any area of the country. Last year, lenders foreclosed on more than 18,000 homes in the D-FW area, according to research by Foreclosure Listing Service Inc.”

“During the same period, about 38,000 single-family homes were listed for sale in the MLS. Currently, about 6 percent of the MLS listings in North Texas are identified as former foreclosures. But those numbers don’t include nearly all of the repossessed properties, agents say.”

“‘I think the price impact will start showing up this year,’ said James Gaines, an economist with Texas A&M University. ‘In subdivisions where foreclosures may run as high as 20 percent or more, we can anticipate not just a slowdown in price increases, but price declines and perhaps significant, greater than 5 percent, price declines.’”

“‘They are cutting prices, but so far not a lot,’ said Connie Zetterlund, a Dallas residential agent who specializes in sales of foreclosed homes. ‘But because of what is in the pipeline, I think we will be seeing some price cuts. When a neighborhood has so many foreclosures, they have to do something to sell the properties.’”

“‘They are hanging onto the properties longer,’” said Ms. Hulkowich. ‘They are overpriced.’”

“She estimates that the foreclosed homes she sees on the market have been discounted from 11 percent to 14 percent to start. But many of the houses need expensive repairs, Ms. Hulkowich said.”

The American Stateman from Texas. “The softening housing market around the country may be taking a toll on Central Texas. The number of home starts in the first quarter of 2007 dropped 28 percent compared with the same period a year ago.”

“Builders have become wary of starting homes in part because it’s more difficult for some buyers to qualify for mortgages, said Mark Sprague, (with) Residential Strategies’ Austin office. The tighter credit requirements are related to the shakeout in the so-called subprime market, he said.”

“And that shakeout has trickled into Austin, with more stringent lending rules, he said, especially among subprime lenders.”

“‘These challenges are primarily impacting builders in the first-time market, homes generally priced below $200,000,’ said Eldon Rude, director of the Austin office of real estate research firm Metrostudy.”

“The latest figures illustrate his point. Home starts in the $111,000-to-$150,000 range plummeted 51 percent in the first quarter, compared to a year ago. And starts for homes priced from $151,000 to $200,000 were down 35 percent.”

“With the subprime situation having the greatest impact on first-time buyers, many builders are putting lots back on the market, mainly in lower-priced subdivisions, said Dick Rathgeber, an Austin developer with residential projects in all price ranges.”

“But Rathgeber said national builders are ‘overreacting in Austin.’”

Some housing bubble news from Wall Street and Washington. CNN Money, “In the latest sign of trouble for the battered real estate market, one of the nation’s top home builders warned Tuesday that it has yet to see the normal start of the spring home buying season, as it reported sharply lower sales for the first three months of the year. D.R. Horton, the nation’s No. 2 home builder, reported that the number of new homes it sold in its fiscal second quarter fell nearly 37 percent.”

“‘Market conditions for new home sales continue to be challenging in most of our markets as inventory levels of both new and existing homes remain high,’ said a statement from chairman Donald R. Horton.”

“The company said it continues to see an increase in the use of sales incentives in many of its markets. And it said that its cancellation rate, which calculates sales orders cancelled divided by gross sales orders, was 32 percent in the quarter, which it said was essentially unchanged from the first quarter.”

“The worst declines were in California, where volume was down 59 percent, and value of the homes sold fell 56.8 percent.”

From Reuters. “It has become more difficult for many buyers to obtain mortgages as lenders have tightened their underwriting standards. The steeper decline in the dollar value of D.R. Horton’s home orders, relative to the number of orders, suggests that some buyers are ‘downsizing’ to buy homes they can more easily afford.”

“First-time home-buyers account for about 40 percent of D.R. Horton’s sales.”

“The company has contracted some operations to prepare for a slowing housing market, including a reduction in the number of lots it controls.”

From Bloomberg. “The average price for a D.R. Horton house ordered in the quarter fell 6 percent to $260,373 from $276,660 a year earlier. Horton said in the statement ‘we continue to see an increase in the use of sales incentives in many of our markets.’”

The New York Times. “Some of the problems afflicting mortgages sold to borrowers with weak, or subprime, credit increasingly appear to be cropping up in loans made to homeowners who were thought to be less risky.”

“In February, 2.6 percent of Alt-A loans were delinquent by 60 or more days, up from 1.22 percent a year before, according to FirstAmerican LoanPerformance.”

“Until recently, mortgage companies had been able to sell loans to Wall Street banks and other investors. ‘Now you are selling at par or lower in some instances,’ said Thomas M. McCarthy, a managing director at a real estate investment firm that brokers the sale of mortgages. ‘It really throws the business upside down.’”

“‘Alt-A seems to be located regionally in spots where the market is having a great deal of difficulty, particularly in Las Vegas, Arizona and Florida,’ economist Mark Zandi said.”

The Financial News. “Trading volumes of Alt-A mortgages, which are considered less risky than the US sub-prime sector, have hit a wall in the past month as banks reported problems selling the loans in the secondary market.”

“Analysts are warning this is the second problem to emerge after those in the higher risk sub-prime market began in January.”

“Mehernosh Engineer, senior credit strategist at BNP Paribas, said: ‘This is starting to look more like what happened in 1991– a consumer hard landing. Sub-prime and Alt-A is more like a $3.5 trillion problem, which will progress gradually through 2007 and 2008.’”

“M&T Bank last week issued a profit warning after it fetched low bids on mortgages it tried to sell in the secondary market. M&T said it found ‘fewer bids than normal and the pricing of those bids was lower than expected.’”

“Mark Adelson, head of structured finance research at Nomura Securities in New York, said: ‘There’s not less interest, it’s just that the price is worse, which is not what M&T wants to hear. You can sell the loans, it’s just that if you’re greedy, you’re not going to get the price you want.’”

“‘There’s no question the credit problems we’ve seen in sub-prime are blending into Alt-A,’ said analyst Matthew Howlett. ‘It’s reflective of the poor underwriting that has gone on in this sector.’”

“Howlett said part of the problem was that Alt-A lenders had lowered their lending standards. ‘We’re going to see more Alt-A loans perform badly because they’re not traditional Alt-A loans,’ he said. ‘They’re sub-prime.’”

“Subprime lender New Century Financial Corp. has asked a federal bankruptcy judge to speed up the auction and sale of its lending platform so that the business isn’t wiped out, court papers show.”

“New Century said it wants to sell the platform by early May, and sees an ‘exigent and immediate need’ to set up bidding procedures, according to a late Monday filing.”

“‘There is a narrow window of opportunity,’ wrote Marcos Ramos, a lawyer representing New Century. ‘Indeed, it might be difficult to pursue and complete a sale of the loan origination platform after early May because the debtors have ceased originating loans.’”

“Prospects for a US growth rebound in the second half of 2007 have dimmed as the housing recession deepens and businesses cut spending, according to economists surveyed this month by Bloomberg News.”

“The subprime problem ‘is a brand-new kind of shock,’ said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ‘The data we’ve seen lately is consistent with an economy that’s just not picking up.’”

“‘No one’s sure of the scope of the problems,’ said Harris. ‘We don’t have a lot of history to draw from in estimating the impact. It’s difficult to quantify.’”

“‘Since the risks to both economic growth and inflation are up, it makes the Fed even more uncertain,’ Lehman’s Harris said. ‘The Fed is a deer in the headlights right now. They don’t know which problem to address.’”

From MarketWatch. “The subprime mortgage crisis has re-ignited scrutiny of the industry and people who broker home loans. The main problem is that, counter to common perception, mortgage brokers do not represent the borrowers who pay them for advice. Instead, they are more like independent salespeople who are often paid as much by the lenders offering loans as the borrowers.”

“As the housing market boomed, mortgage brokers’ influence grew as they became involved in arranging the majority of home loans. ‘We all have some culpability,’ said Steve Heideman, a mortgage broker who heads an organization dedicated to improving disclosure in the business. ‘The problems and abuses are happening because brokers see it as their right to make as much money as they can on a loan.’”

“There’s a basic problem with mortgage brokers being paid by lenders as well as borrowers and ‘very few’ people know this happens, he added.”

“‘It’s a dirty little secret of this business,’ he said. ‘It shows a lack of confidence on the part of a mortgage broker to not tell the client what they’re making on the back side.’”

The News Press reports from Florida. “A Michigan credit union has collapsed following hundreds of questionable loans to people buying First Home Builder houses in Lee County. Meanwhile, some buyers have filed suit against First Home, the credit union and others, alleging fraud and conspiracy in the marketing, sale and financing of the homes.”

“The credit union also made loans for building houses that may not be worth the full amount of the loan after the housing market collapsed last year, say those involved. Fort Myers-based attorney Richard Ingalls said he has five clients with contracts to buy First Home houses that are worth far less than the amounts of the construction loans.”

“Often they have no way to close on their houses because they can’t get permanent financing for the full loan and can’t make up the difference, he said. ‘These are people who initially got into these investments with good credit scores but not many assets,’ Ingalls said.”

“Larry Sorsby, CFO of Hovnanian Enterprises, parent company of First Home, said ‘up until two or three weeks ago we had no idea Huron even existed. We had no direct dealings with Huron; we were dealing with a local mortgage company that I guess made the loans and may have assigned them’ to Huron.”

“Sorsby said he doesn’t think any fraud occurred. ‘What we’re faced with is a classic situation where a market in Southwest Florida experienced an intense boom’ and then collapsed, leaving prices lower than what some had agreed to pay, he said.”

“Lawyer Steve Carta said there was no fraud and the lawsuits concerned a program in which First Home provided tenants for the homes that it sold. ‘That program did exist and was very successful until the market tumbled,’ he said.”

“Michael Timmerman, the Naples-based managing director for Florida at Hanley Wood, said that if a substantial number of the mainly moderately priced homes involved go into foreclosure, prices likely would come down for that sector of the housing market.”

“Timmerman said there will be a lot of shaky home loans at all levels of the market. ‘I think we’re going to see more distressed sales in 2007,’ he said.”

The Miami Herald. “The owners of Holiday Isle announced Monday they were scrapping plans to finance a new luxury resort there with condominium sales and will seek a traditional commercial loan to build the project instead.”

“The decision reflects South Florida’s growing disillusionment with condo-hotels, where individuals own the rooms and share in the rental revenues.”

“Robert Falor, once South Florida’s most prolific condo-hotel converter, said he has dropped plans to convert South Beach’s Royal Palm, Breakwater and Edison hotels in the face of a slow real estate market that helped push the Breakwater and Edison projects into bankruptcy.”

“‘The market for the condo-hotel has just gone sideways,’ said Gregory Rumpel, executive VP of the Jones Lang LaSalle hotel brokerage in Coral Gables.”

“With the housing market slow, sales of Miami-Dade condominiums dropped 44 percent in February from a year ago…Rumpel said hotels are looking more lucrative than condominiums for some real estate developers.”

“Adam Schlesinger, whose company paid $98 million for the 151-room Holiday Isle in February, said weak sales forced him to switch gears after only two months, despite a lavish launch that included glossy full-page newspaper supplements for the planned Ocanos resort.”

“‘It is simply a victim of a skeptical housing market,’ Schlesinger said.”

From USA Today. “The housing market in Sarasota, Fla. hit the brakes in spring of last year. The median price for a single-family home was down 18% in the fourth quarter compared with the same quarter of 2005.”

“At the height of the boom, ‘People were buying sight unseen,’ says Russ Marquardt, an agent in Sarasota. ‘It’s not similar to that now by any means.’”

The Naples Insider. “At the end of March, Naples had a slightly less than 12,000 homes listed for sale. Which is three times higher than a balanced market. But, during March the number of homes listed for sale peaked at over 12,300 homes. The reduction down to 12,000 homes is the first noticeable decrease in the number of homes listed for sale, since late 2005.”

“The reduction is not due to increased buying activity, but rather by sellers taking homes off the market at a greater rate than those being added.”

“Of the 12,000 homes listed for sale, approximately 35% were purchased in 2005 or later, pretty much making the original purchase price for that group of homes higher than current market values.”

“Those high price sellers waiting for the return of peak prices might have a very long wait. Using the Cedar Hammock example, where a 1,232 sq. ft floor plan sold at peak prices at $425,000 and then later sold for $280,000 in 2007. If a $280,000 purchase increased in value 8% a year going forward, it would take over 5 years to return to peak price levels.”

The Tampa Tribune. “A sluggish real estate market and a glut of vacant land in some areas have KB Home, one of the nation’s largest home builders, trying to unload land in three Bay area counties.”

“Los Angeles-based KB isn’t the only builder finding that it overestimated demand for new homes in some markets. Blake Whitney Thompson said he is in talks with several other major builders that want to shed land. This could mean less expensive homes and property for consumers and developers who have been used to dealing with high prices in recent years.”

“‘It’s a very poor market in Florida right now,’ said analyst Greg Gieber. He covers KB and other home-building companies. ‘Builders have too much land and aren’t in the position to hold on to it for very long.’”

“Now that market conditions have changed, some of the planned subdivisions no longer are profitable, said Joseph Narkiewicz, president of the Tampa Bay Builder’s Association.”

“‘Builders are evaluating their holdings; some are trading sites, selling some and buying others,’ Narkiewicz said. ‘Some may want to shake loose lots, because you can only hold on to so many lots and build so many houses.’”

“The Cypress deal is expected to close June 1. The purchase price for the land was not disclosed, but Thompson said his company generally is offering about $14,000 to $17,000 per home lot. By comparison, the same types of lots typically went for $50,000 to $60,000 last year, Thompson said.”

“The KB contract doesn’t surprise some analysts, such as Paul Puryear of Raymond James & Associates in St. Petersburg. ‘All the home builders are trying to sell off excess land, without exception,’ Puryear said. ‘This is good for consumers who are trying to buy.’”

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