The Housing Bubble

The Union Tribune reports from California. “Sales of San Diego County homes in March dropped to their lowest level since 1995, but prices bounced back, DataQuick reported. There were 3,218 sales, up 12.4 percent from February, but sales were down 26.3 percent from a year ago, the biggest year-over-year decline for any March since 1995.”

“It was also the 34th straight month to show year-over-year sales volume drops.” “DataQuick President Marshall Prentice said in a statement that the medians are rising because of a drop off in starter home sales in Southern California.”

“A total of 21,856 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 32.4 percent from 32,320 for March last year, according to DataQuick.”

“‘The drop-off in entry- level sales is part of a normal real estate cycle. We actually thought this would happen four or five months ago. Lenders and buyers are being more cautious, the dicey mortgage financing has all but disappeared,’ said Prentice.”

“‘It’s becoming apparent that a lot of the 2004/2005 buying activity was drawing from the future, and that future is now. A lot of demand was pre-met, otherwise these low sales counts would have put more downward pressure on prices by now,’ Prentice said.”

The Orange County Register. “Orange County home shoppers bought 3,130 homes last month, 25.5 percent below a year ago, says a report from DataQuick out this morning. It’s the 18th straight month that home sales haven’t met the previous year’s pace.”

The Sacramento Bee. “Home buyers received the keys to 3,223 new and existing houses in March, representing a tepid opening to the spring sales season, DataQuick reported.”

“March escrow closings were down significantly from the 4,571 recorded the same month last year in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties. The biggest year-over-year decline occurred in Sacramento County, which reported 1,749 closings last month compared to 2,587 in March 2006.”

“‘The hope in the (real estate) industry was that the data would begin to show the market was stabilizing without a doubt, and now there’s some lingering doubts, particularly in the Sacramento area and across the Central Valley,’ said DataQuick analyst Andrew LePage.”

The San Francisco Chronicle. “The California Association of Realtors predicted in October that statewide median prices will fall by 2 percent in 2007. Economist Mark Zandi called for an even sharper statewide drop of 6 percent.”

“DataQuick spokesman LePage attributed the soft numbers to the home-buying frenzy of 2004-2005, when California buyers snapped up houses that were rapidly appreciating, just to get into the market. So many people bought, demand is now soft.”

“‘Now you’ve got a change in psychology,’ he said, ‘from better buy quick, to better wait.’”

“‘Mounting foreclosures will also be a weight on housing prices as these properties are dumped into the already fragile market at a significant discount,’ Zandi said. ‘This outlook assumes that interest rates remain stable and that the job market outside of housing remains stable.’”

The County Sun. “Homes in the Inland Empire are more overvalued than almost any place else in the nation, according to a study released this week. Regional economist John Husing expressed reservations about the numbers.”

“‘We are not a market that is isolated out in the middle of Kansas,’ Husing said. ‘We are part of the Southern California market.’ Whatever the ‘overvalue’ figure in the Inland Empire is, Husing said prices will probably drop in the months ahead.”

The Daily Bulletin. “‘I don’t think we’re making any real progress on affordable housing,’ said Bill Ruh, government affairs director for the Citrus Valley Association of Realtors. ‘I don’t think we have a situation now where people making $50,000-$55,000 a year can get into the housing market.’”

“Indeed, he Occidental College study shows that a family able to make a 10 percent down payment on a $500,000 home and getting a 7 percent interest rate would need $4,043 a month to cover insurance, property taxes and mortgage.”

“To avoid paying more than a third of the family income, that family would need to earn more than $147,000.”

The Daily Bruin. “The conversion of apartment complexes into condominiums is a trend that has recently begun sweeping into Westwood, with one building already converted and two more considering the option for the future.”

“The apartment complex at 747 Gayley Ave., on the other hand, has no immediate plans to be converted, manager Ronnie Mehta said. ‘Condo prices are presently experiencing a decline,’ Mehta said. ‘They are currently the worst-performing real estate.’”

“In response to student concern, realtors emphasized the value of investing in a residence, rather than renting. ‘If you figure out what your mortgage would be and the price of renting, it could be more profitable to buy a condo,’ said Shannon Bedore, a Club California sales agent.”

The Desert Sun. “Local figures released Wednesday show higher overall median prices and a somewhat more resilient market that isn’t as hard hit as Riverside County or the rest of the country.”

“‘New home sales for February 2007 fell by 28 percent for the Coachella Valley from February 2006, but nearly 50 percent for all of Riverside County. So in that sense, the Coachella Valley is performing better,’ said Patrick Duffy, managing director of consulting for Hanley Wood Market.”

“According to DataQuick, which formulates its information differently, home sales across the Coachella Valley dropped 25 percent last month compared with February 2006, fueled in part by a nearly 43 percent decline in new-home sales, the DataQuick report shows.”

“After several years of double-digit home-price appreciation, could the Coachella Valley finally be in for a decline in 2007?”

“In January, the median price dropped 9.4 percent in the Palm Springs/Lower Desert region from a year earlier, but then rose 6.5 percent to $387,660 in February compared to February 2006, the California Desert Association of Realtors reported.”

“In some areas of the valley such as Indio where there’s been a surge in home building, many home sellers face plenty of competition. It’s not uncommon for them to trim 5 percent to 10 percent off the asking price to seal a deal, said Beth Allen Bentley, an analyst who tracks the valley’s home sales and prices.”

“Another factor affecting prices is steadily rising home inventories. With more than 9,000 homes now on the market, sellers facing more competition often have to hold out longer to get their asking prices, real estate agents said. Or they must adjust.”

The Mail Tribune reports from Oregon. “It sounded like the perfect home loan. When times were tight, Lola could pay as little as 1 percent interest on her Ashland home, postponing a payment or two until the end of the loan. And it was an adjustable-rate mortgage, which typically starts out lower than a fixed-rate mortgage.”

“Now Lola, who did not want to give her last name, must sell her beloved house. Rising interest rates have increased her payments, and she can’t make them anymore on a Social Security income. She owes more on the house now than when she bought it.”

“Lola’s not alone. Defaults on home loans in Jackson County have skyrocketed in the last year, increasing by 82 percent since 2005. According to the Jackson County Clerk’s Office, 400 defaults were filed in 2006, compared with some 220 the year before. In December, 71 were filed last year, compared to 25 in 2005.”

“This year promises no better: 46 defaults were filed in January, 40 in February and 57 in March.”

“Once the real estate market slowed, interest rates climbed, and so did the payments. A year ago, only a couple of defaults were filed every week. Now it’s two, three or four a day, said Jackson County Deputy Clerk Chris Walker.”

“Calls to defaulting buyers were not returned or the buyers declined to comment. A summary of the ‘default with election to sell’ statements in the clerk’s office, however, listed many with high interest, payments and balance.”

“A home on Myers Court in Medford showed a $147,000 balance, 9.6 percent interest and delinquency of five, $1,255 monthly payments. Another, on Midway Road in Medford, had $135,000 owing at 8.25 percent, with four payments of $1,015 delinquent.”

“‘The foreclosure rate here is fairly high. I get a list every week and it’s an inch-and-a-half thick,’ said retail loan officer Chris Jacobsen in Medford. He estimates that 80 to 90 percent of foreclosures here are subprime.”

“Said Judi Robinson of People’s Bank in Medford, ‘I call them ’slime-prime’ loans. I saw 16 foreclosures filed in the last two weeks. Most are nonconforming, subprime loans. People were not qualified and got loans with a ’stated income’ program. The way they were qualified was pretty sad. The subprime market was developed for people who don’t pay their bills.’”

“‘Now they owe more than they have,’ Robinson said. ‘They’re unable to sell because they owe more than it’s worth. (Buyers) waited too long to sell. They panic and they do a short sale.’”

“In short sales, sometimes the lender has to ‘eat’ the loss and sometimes the borrower carries it as a debt, she said.”

“‘It’s pathetic, sad, throwing caution to the wind like that,’ Robinson said. ‘The subprime market had no strict guidelines and allowed buyers to extend their debt-to-income ratio out to 55 percent, when it should be under 44 or 45 percent to be safe. If they haven’t paid their bills now, what makes you think they’re going to pay their mortgage in the future?’”

“Referring to the loose standards for qualifying borrowers, and the steep adjustments and harsh prepayment penalties, Robinson said, ‘It makes me vibrate with anger.’”

“The subprime lending industry in 2003 became ‘extremely aggressive’ in getting money lent out, said Jacobsen. Before that time, borrowers couldn’t get a loan with a credit score under 650, but lenders began giving 100 percent loans with a 550 score, he said. ‘The price of property was going up and the quality of buyers was going down.’”

The News Tribune from Washington. “Olympia foreclosures. So last week the state’s capital landed on a top 10 list for foreclosures, as ranked by RealtyTrac.”

“Why all the foreclosures? Perhaps Olympians are being hit harder than others in the Northwest by the subprime mess.”

The Daily News from Washington. “Cowlitz County’s house price are getting more overvalued, according to a new report. The typical house in the county was 35.1 percent overvalued in the last three months of 2006, according to Global Insight.”

“‘It shows you how inexpensive things had been in recent years in regards to affordability,’ said (broker) Jerry Flaskerud in Longview. ‘Cowlitz County is going down the path of catching up with the rest of the west.’”

“For March, the county housing market continued to cool slightly with fewer homes sold and more up for sale. The median price of houses sold in March was $175,500, down for the second straight month.”

“One important number continues to increase. The 602 homes on the market last month was up nearly 63 percent from a year ago. ‘We’ve got quite a bit of inventory,’ Flaskerud said.”

“In a sign of how rapidly the region is growing, the number of construction permits issued by the Cowlitz County Building and Planning Department has increased by 46 percent between 2003 and 2006.”

“The department granted 362 new construction permits in 2003 and 529 last year.”

Some housing bubble news from Wall Street and Washington. “Mortgage insurer MGIC Investment Corp. said on Wednesday its first quarter profit fell 43.4 percent as losses and expenses cut into its business. ‘Deterioration in home prices…a downturn in the domestic economy or changes in our mix of business may result in more homeowners defaulting and our losses increasing,’ the company said.”

“MGIC is closely watched by analysts and investors because of the ‘meltdown’ in the subprime loan market.”

From MarketWatch. “MGIC said it incurred losses of $181.8 million in the latest period, up from $114.9 million last year. ‘To see a large uptick in the provision for losses well worse than even our below-consensus estimates this early in the year is a bit concerning,’ Goldman Sachs said Thursday.”

“Also in the headlines, Countrywide Financial Corp said loan fundings last month totaled $43 billion, an increase of 5% from March 2006. Subprime loan fundings fell 29% to $2.4 billion in March.”

“Countrywide said…that subprime loans ‘continued to decline, accounting for 5% of total mortgage loan originations for March 2007 and 7% of total mortgage loan originations for the first quarter.’”

From Reuters. “Countrywide Financial, the largest U.S. mortgage lender, said on Thursday the amount of mortgages in its portfolio that are in foreclosure nearly doubled, amid a difficult U.S. housing market.”

The Associated Press. “Moody’s Investors Service said Wednesday it cut its rating on Hovnanian Enterprises Inc.’s debt, saying the homebuilder is bleeding cash amid a downturn in the housing market.”

“‘The housing market has experienced a steep decline,’ Moody’s said. Normally, homebuilders burn cash during an upswing in the market as they build houses they expect to sell. Then, they generate cash during a downturn as they clear homes in their inventories.”

“Now, however, Hovnanian is burning cash during a downturn, Moody’s said.”

“U.S. bonds backed by commercial real estate loans have become riskier over the past few years as lenders have loosened their standards and property appreciation has slowed, according to a Moody’s report.”

“‘Today’s deals have become increasingly fragile,’ Moody’s said in the report. ‘The continued erosion of credit standards in the marketplace has caused us, for the first time, to reverse course and push subordination levels back up.’”

“Moody’s cited a number of factors suggesting growing risk in CMBS deals, including record high leverage, increased use of interest-only loans and fewer investment-grade loans used in deals.”

From Bloomberg. “More homeowners with subprime adjustable-rate mortgages face tests of their ability to handle higher monthly payments starting later this year, RBS Greenwich Capital Markets Inc. said.”

“‘At first glance,’ many subprime borrowers wouldn’t qualify for refinancing if lenders are forced to assess whether they could afford the higher payments from an adjustment that would occur without a change in benchmark rates, Lehman Brothers analysts said.”

“‘A much larger issue’ that will limit refinancing opportunities for the borrowers, potentially making loan performance ‘exponentially’ worse than in the past, are the new standards for how much consumers can borrow compared with the value of their homes, the Lehman Brothers analysts wrote.”

“Relaxed lending standards may have contributed to a surge in U.S. mortgage failures this year, but the chance of recession could hang on the complex derivatives used to hedge loan risk, analysts say.”

“About 40 percent of CDO collateral is residential mortgage backed securities, according to Joseph Mason of Drexel University, and Joshua Rosner of research firm Graham Fisher & Co.”

“Two-thirds of that is subprime and home equity loans, a market which on a dollar basis has grown from $35 billion in 1994 to $625 billion in 2005. In effect, U.S. residential mortgage finance has been propped up by the CDO market, and vice versa.”

“‘Even a small decline in CDO funding of lower-tier investments can have a large effect on MBS funding overall, and therefore consumer mortgage funding,’ said Albert Edwards, global strategist at Dresdner Kleinwort.”

“By February, 12.4 percent of U.S. subprime loans were delinquent by more than two months, up from 7.8 percent a year before, according to FirstAmerican LoanPerformance. Subprime and Alt-A (sub-prime/prime) account for 21 percent of U.S. loans and 39 percent of mortgages made in 2006.”

“The impact of the delinquencies on the bond market are seen on the ABX index of credit default swaps on subprime mortgage bonds. Spreads on BBB- rated tranches traded at around 1400 basis points on March 23, compared with 200 basis points last July.”

“Moody’s found that subprime mortgage-backed securities were on average 45 percent of structured finance portfolios made from 2003 to 2006.”

“Signs of contagion are already emerging. A Federal Reserve Board of Governors report in February showed the net percentage of lenders tightening mortgage standards was around 18 percent, the highest level since 1991.”

The Financial Times. “US politicians are drawing up a bill that could make it less attractive for Wall Street investment banks and other financiers to repackage risky mortgages into securities and then sell them to investors around the world.”

“Spencer Bachus has backed an ‘assignee liability’ system which would mean investment banks that repackage mortgages into bonds would be liable to pay compensation to borrowers if loans turned out to have been mis-sold. unless they can show they conducted extensive due diligence.”

“Such a move would make it less attractive to repackage these loans and to buy mortgage-backed securities.”

“Mortgage late payments and defaults reached record levels in the first quarter and may threaten the modest U.S. economic expansion seen this year, Moody’s Economy.com said in a survey released on Wednesday.”

“‘Delinquency and default rates jumped to new highs in the quarter, and all indications are that they will continue to rise measurably into 2008,’ the survey said.”

“The first-quarter rate outpaced the previous record delinquency rate in the fourth quarter of 2001.”

“Credit problems exist all over the country, the report said, with the largest increases in California, Florida, Nevada and much of the Northeast. Beyond that, 30-day, 60-day, 90-day and 120-day delinquency rates all rose strongly.”

“At an annualized pace, first-quarter defaults reached 1.16 million, far outpacing the 900,000 defaults last year.”

“More financially stretched borrowers are realizing even declaring bankruptcy can’t save their homes from foreclosure.”

“According to a study released in March by Credit Suisse Group , more subprime borrowers are turning to bankruptcy court to stave off foreclosure, as softening housing prices make it harder for them to sell their homes to repay debts.”

“At least part of the blame, says the report, lies with the bankruptcy law passed in October 2005. The law raised the bar for people to qualify for Chapter 7 ‘fresh start’ bankruptcy proceedings. With access limited, more subprime borrowers are forced into Chapter 13, where some can’t maintain their payment schedules for more than a couple of months.”

“‘It’s become harder to file for Chapter 7 to release debt burdens,’ said Jay Guo, the lead author of the study. ‘Going forward,’ he added, ‘delinquent loans are more likely to go into foreclosure directly rather than into bankruptcy,’ resulting in higher losses for mortgage-bond investors.”

The Orlando Sentinel reports from Florida. “Median home prices in the Orlando area tumbled sharply in March, just at the start of the critical spring buying-and-selling season. The median sales price for existing homes and condos sold by local Realtors fell by $15,000 from February to March, to $240,000, as sellers increasingly cut prices.”

“‘Prices are down because of the shift in supply and demand,’ said broker Lenny Layland. ‘Buyers are being picky.’”

“The inventory of homes for sale by local Realtors continued to swell to record levels in March, while sales fell more than 40 percent from the same time a year ago, the Realtor association said.”

“‘There’s no doubt sales are down any way you want to look at it. And they are down in every price range,’ said Stan Smith, a finance professor at the University of Central Florida.”

“The number of homes for sale by local Realtors rose to a record 23,547 in March from a revised 22,055 in February, a backlog that would take 14 months to clear at the recent sales pace. More drastic price cuts might be in store after the summer, prime selling season ends, Smith said, if the inventory remains stubbornly high.”

“Sales of homes and condos in March (were) down 42 percent from March 2006, when home sales were still on a hot streak. Existing-home sales for the broader, Metro Orlando area tracked closely with the core-market sales, down 42 percent year-over-year in March. Osceola’s sales were down 44.1 percent, Orange’s sales were off 43.7 percent, Seminole’s fell 43 percent and Lake’s slipped 31.2 percent.”

“The Realtors’ listings don’t include homes such as the one in Conway that Belle Isle homeowner Tom Wren is trying to sell on his own. He recently stuck a for-sale sign in the window offering the two-bedroom, two-bath home, with 1,076 square feet of space, for $210,000.”

“‘I figure I’ll give it three months,’ Wren said, before considering other options such as renting out the house once again. ‘It’s a entry-level house’ that should sell, given that homes throughout Central Florida ‘are all overpriced,’ he said.”

“Also, new homes are competing with many existing homes, pressuring prices even more. Shelly and Justin Braniff recently relocated to the Apopka area from Jacksonville, and (an) agent found them a new home from a builder’s inventory.”

“‘They discounted it over $100,000, and it has lots of upgrades,’ Shelly Braniff said. The four-bedroom, two-bath home listed for $429,000 but sold for just less than $300,000.”

The Herald Tribune. “The National Association of Realtors thinks the national median price for existing homes will drop this year for the first time since the organization began keeping records in the late 1960s.”

“‘My first thought was, ‘Wow, not even the spinmeisters at the NAR can sugarcoat the current market any longer,’ said Sarasota Broker Thomas Heimann. ‘My second thought was: I wish we’d only have a 0.7 percent drop in prices in our market.’”

“Sarasota-Bradenton’s median sales price dropped 9 percent in February when compared with the same month in 2006, from $324,200 to $294,500. Charlotte County-North Port saw flat sales in February and registered an 11 percent drop in prices, taking the market to near a $200,000 median sale price.”

“Heimann thinks that a recovery in the Southwest Florida market ‘may take a lot longer than even I anticipated.”

“While sales volume did pick up a bit during the last few months, most were for homes below $250,000, and most buyers used subprime loans. ‘As a matter of fact, 9 of our 10 last sales had 100 percent financing, and if the subprime market dries up, then that will have a certain impact on sales activity,’ he said.”

“Heimann is expecting that some areas of the region will see another 5 to 10 percent price decline. ‘It may well be into 2008 until we see a recovery and significant reduction in available inventory,’ he said.”

“‘It’s all about inventory levels,’ said Manuel Iraola, president of an online realty brokerage that sold $70 million worth of property in Florida last year. ‘Inventories have only one way to go, up, and prices have only one way to go, down,’ until the situation stabilizes.”

“The trouble in the housing market is coming from many directions, and involves buyers, lenders and mortgage originators, said Andrea Rankin, president of Sarasota’s Rankin Mortgage.”

“Roffers thinks buyers have enormous leverage right now. ‘There are 10,000 homes to pick from instead of 3,500′ and ‘plenty of sellers will work very hard to get a deal done.’”

From Reuters. “U.S. homeowners who bought a home with a subprime mortgage, and now face foreclosure because they cannot make their payments, may have an unlikely remedy: get another subprime loan.”

“‘If regulators come in and disallow subprime lending, we are going to end up seeing more foreclosures because these people just can’t get another loan,’ said Patrice Yamato, president of the Florida Association of Mortgage Brokers.”

“But debating the virtues of refinancing into another subprime loan may be academic, said Patrice Yamato, since funding for high-risk mortgages has evaporated.”

“‘Subprime lenders have tightened up so much that a lot of those subprime loans are not getting made,’ she said, so many homeowners are just going to have to brace for a payment shock or contemplate giving up their homes.”

The Ledger. “Central Florida has to emerge from the current real estate slump, which most likely won’t end until 2008, said David Lereah, chief economist for the National Association of Realtors.”

“‘It’s not good right now,’ he said. And it hasn’t been good for the past 18 months.”

“‘In August 2005 we peaked,’ Lereah said. ‘That was the end of the boom. We just went down from there. And speculators got caught with their financial pants down.’”

“Last year, Florida’s residential real estate went into a recession. ‘Prices got too high,’ Lereah said of the 2005 market. ‘They shouldn’t have gotten that high in the first place.’”

“And it has taken sellers nearly a year to realize the market isn’t in their favor, he said. ‘But we are headed in the right direction.’”

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