The Housing Bubble

Dataquick reports on California. “The number of default notices sent to California homeowners last quarter increased to its highest level in almost ten years. Lending institutions filed 46,760 Notices of Default (NoDs) during the January-to-March period. That was up by 23.1 percent from a revised 37,994 for the previous quarter, and up 148.0 percent from 18,856 for first-quarter 2006, according to DataQuick.”

“Last quarter’s default level was the highest since 47,912 NoDs were recorded statewide in second-quarter 1997.”

“‘Defaults tend to happen after a certain length of time and today’s activity reflects a peak in the number of home loans made back in the summer of 2005. Additionally, the loans being made back then were riskier because of the subprime activity, as well as higher appreciation rates. It’s easier to make a loan when the security for that loan is going up in value, than when values are flat,’ said Marshall Prentice, DataQuick’s president.”

“Most of the loans that went into default last quarter were originated between April 2005 and May 2006. The median age was 15 months. Loan originations peaked in August 2005. Adjustable-rate mortgage use for primary purchase home loans peaked at 77.8% in May 2005 and has come down since.”

“About 40 percent of homeowners who found themselves in default last year actually lost their homes to foreclosure in the first quarter. A year ago it was nine percent.”

“The first-quarter numbers were a record in San Diego, Sacramento and Contra Costa counties.”

The Union Tribune. “A record 433 owners lost their homes in San Diego County to foreclosure last month, more than six times the March 2006 figure, DataQuick reported Monday.”

“The previous record was 337 in March 1996 at the tail end of the 1990s real estate recession, after which foreclosures dropped to as low as just four in December 2004.”

“Last month’s defaults locally totaled 1,395, about 400 less than the record 1,794 set in January 1996 and more than twice the 591 reported for March 2006.”

“On a quarterly basis, San Diego’s defaults totaled 3,931, up 156.4 percent from a year ago, when the figure was 1,533. Los Angeles’ total was 8,843, up 110 percent.”

From News 10. “Some 3,400 Sacramento County property owners faced foreclosure in the first quarter of 2007, up nearly 200 percent from the same period last year. In sheer volume of defaults, Sacramento County is in the top ten nationwide.”

“The figures from Foreclosures.com represent filings from lenders against homeowners who’ve defaulted on their loans. The hardest-hit county in California based on percentage was Yolo, with a nearly 400-percent increase from the year before.”

“San Joaquin, Solano and Yuba counties all experienced at least a 200-percent increase in defaults.”

From Reuters. “The likelihood of default was highest in inland Sacramento, Riverside and San Joaquin counties, where prospective first-time home buyers rushed in during the housing boom in search of relatively affordable housing.”

“‘It’s hard for me to say whether or not the damage is done in those areas,’ said economist Alan Gin of the University of San Diego. ‘It probably won’t be until 2008 before we seen some improvement,’ Gin said, referring to California’s default trend.”

The LA Daily News. “From December through February, 401 notices of default were issued to Santa Clarita Valley homeowners, compared with 193 for the same three-month period last year, according to DataQuick.”

“The more than twofold increase in notices of default, the first step in the foreclosure process, comes as home prices are faltering. ‘Yes, it’s up, and it’ll probably even increase some more,’ said Larry Gasinski, president of the Santa Clarita division of the Southland Regional Association of Realtors.”

“The area with the biggest increase in notices of default was the 91355 ZIP code, southern Valencia, which went from nine in December through February last year to 47 in the same period this year.”

“What appears to be driving the increase in foreclosures is that home values are not rising, DataQuick analyst Andrew LePage said. ‘Take away home-price appreciation, or ratchet it down or even make prices negative, and all of those forms of (economic) distress start to result in increased foreclosure activity,’ LePage said.”

The Record Searchlight. “As in the rest of the nation, foreclosures are up in Shasta County. The number of homes in some stage of foreclosure in Shasta County jumped 22 percent in 2006, according to RealtyTrac.”

“Foreclosure Specialists’ Mike Van Bockern estimates their business is up 20 percent from a year ago. When home values were going up 20 percent a year, owners could sell or refinance to bail themselves out of trouble. But home values have stagnated, so the money is no longer there, Van Bockern said.”

“Van Bockern has posted 152 sales notices in both counties this year, compared with 56 notices in both counties in the first three months of 2006.”

From Contractor Magazine. “Home builder Lennar Corp. has sent letters to its subcontractors in Southern California, Nevada and other states, telling them to cut their prices by as much as 20% and resubmit invoices for work not yet paid for.”

“The letters said the subcontractors have a choice of either cutting their invoice prices or being shut out of bidding on Lennar projects for the next six months. In some cases the work has already been completed.”

“‘Basically, they sent a letter out that said as the customers are paying us a lower price for our homes, we must pay you lower price for services,’ said an Orange County plumber with more than 200 employees.”

“‘So they gave us a choice of either reducing all unpaid invoices under current contracts by a percentage that varies from contractor to contractor, but it’s a range of 3% to 20%,’ the contractor said. ‘This is for work that we had already been lowest bidder on and it was ongoing like the fourth or fifth phases of the project. Lennar already demanded a 5% decrease from the previous phase, so this is the second time they’ve come to the well.’”

The Daily Pilot. “Newport-Mesa’s housing trends are mirroring the rest of the county’s slumping market with home sales dropping compared to last year.”

“‘The amount of sales have absolutely gone down and in my opinion it’s two-fold: There is more inventory and also because the lenders have tightened up a lot of the qualifications for first-time buyer programs as well as tightened up on the zero-down programs,’ Costa Mesa real estate agent Valerie Torelli said.”

“Because of the depressed sub-prime mortgage market, many lenders are being more cautious with the offers they give to entry-level home buyers, Torelli said. She’s had escrows delayed because the borrower had to pay off part of his loans as part of a ‘rapid rescore’ so his FICO score would improve.”

“‘Actually, loans got pulled and everything,’ Torelli said. ‘They tightened up and got real crazy…because they changed the guidelines right in the middle of when loans were being processed.’”

“In some areas of Newport-Mesa the difference in the median price changed drastically. ‘One of the drawbacks in drilling down the median price on the small city level in a high-end area is you can get everything from the older, modest small condo to the…grandest of houses,’ DataQuick spokesman Andrew LePage said Friday. ‘It can do funky things with the median.’”

“In Newport Coast, the median price dropped over 42%, but LePage said such big declines should be looked at cautiously.”

The Journal Sentinel reports from Wisconsin. “Suspense marks home-selling these days. Would-be buyers delight at house layout and location, only to disappear at the first whiff of musty basement. Sellers cling stubbornly to dreams of yesteryear’s heady prices, dooming their properties to long, lonely days unsold.”

“‘Buyers are taking chances, and so are sellers. It’s like they’re playing a poker hand, waiting for the other to blink,’ said Jay Krickeberg, an agent in West Allis.”

“Low-ball offers, way below asking price, are increasingly common, said Ron Nelson in Brookfield. ‘They offer you $20,000 below asking. You’re insulted, (but) deal with the offer you have, because you don’t know when the next one’s coming along,’ said Nelson, a founding member of the Wisconsin-based Discount Real Estate Brokers of America.”

“Metro MLS in Wauwatosa reported last week that in this year’s first quarter: Sales volume dropped 6.1% from a year ago; 3,596 sales, compared with 3,830. New listings rose 5% from a year ago; 10,246, compared with 9,762.”

“Time on the market was three to six weeks longer than a year ago; to 136 days in Delafield, 143 days in Port Washington and Glendale, 157 in Jackson, 174 in Erin and 372 in Lac La Belle. Prices dropped in many places below 2006 levels and, in some places, below 2005 levels.”

“Shoppers like Milwaukeeans Natalie and Melvin Finkley, buying their first house, are wielding new market power. Two years ago, they were overwhelmed by the fast pace of sales and aggressive pricing. Now, shopping is a leisurely pursuit.”

“The couple recently found a place and negotiated the seller’s $189,000 asking price down to $173,000 only to learn from their home inspector that the roof needs to be replaced soon. The parties clashed over who’d pay for it.”

“‘I’m not going to pay any more,’ Natalie Finkley said. ‘If the sellers are set in their price, we’ll just keep looking.’”

“Their agent was rueful, as the deal fell apart a day later. ‘What happened here is common,’ Krickeberg said. ‘Buyers are looking for a deal and sellers are holding their ground. It’s frustrating to be the agent in the middle.’”

“‘Buyers have so much to choose from that they’re driving prices down, I’d say, to a little below 2006 levels,’ said Nelson.”

“‘The thought of getting beat out on a property isn’t in a lot of buyers’ minds,’ said Dave Schmidt Jr., chairman of the Greater Milwaukee Association of Realtors.”

The Kane County Chronicle from Illinois. “Housing market predictions are generally best left to the experts, but these days even the experts aren’t weighing in. ‘If I had a crystal ball, it would be cloudy,’ said Donald Parisi, president of the Realtor Association of the Fox Valley.”

“Although the number of homes sold through the end of March is up 17 percent over the same period last year, the average sale price is down 6.1 percent, and the average home spent 125 days on the market, or about a month longer than the comparable period last year, according to MLS data.”

“McHenry County home sales were down 26.8 percent for the first three months of 2007, compared with the same period of 2006, but values have remained fairly stable.”

“The average sale price, January through March, for a McHenry County home was $253,103, compared with $256,834 in the first months of 2006, the MLS reported. ‘I was frankly surprised to see it dip even a little bit,’ said Jim Haisler, association executive for the McHenry County Association of Realtors.”

“‘There’s no panic selling,’ Haisler said, noting that local sellers are willing to wait for a higher bid, even for a year or two.”

“Brian Wesbury, chief economist at First Trust Portfolios in Lisle, said that current weakness in housing likely would not precede overall economic instability. ‘Housing is not weak because interest rates are too high,’ Wesbury said. ‘Housing is weak because the sector is no longer being artificially boosted by excessively low interest rates.’”

“Subprime lenders, who generally make low- or no-down payment loans to individuals with low credit scores, are seeing a dramatic rise in the number of borrowers defaulting on mortgages as low introductory interest rates head upward.”

“Foreclosure rates in both Kane and McHenry Counties were more than double the national average last year and are staying high. The year-to-date McHenry County numbers show there were 193 foreclosures in February, up 28.7 percent from the previous February.”

“Kane County had 707 foreclosures in the first two months of 2007, already more than 75 percent higher than the total for the full first quarter of 2006.”

“Parisi said he believes ‘doom and gloom’ media coverage has hurt the market. ‘We’ve seen some very ridiculous offers,’ Parisi said. ‘People shouldn’t be desperate … The problem is some buyers are out there just to take advantage of the marketplace.’”

Some housing bubble reports from Wall Street and Washington. The Atlanta Journal Constitution, “The environment clearly is getting a lot harsher for home building. Housing sales nationally have been dropping, while inventories of unsold houses have been climbing. As the housing slide accelerated, Beazer Homes laid off about 1,000 employees, roughly one-quarter of employees, and trimmed other expenses, too.”

“Beazer pulled out of two markets in Indiana, Fort Wayne and Lafayette, and abandoned suburban Memphis. Now, the number of borrowers who cannot make their mortgage payments is climbing. For builders, that is bad in two ways: With regulators more engaged and lending standards tightening, the profitability of originating loans is threatened.”

“A federal grand jury in North Carolina is looking into Beazer’s mortgage lending and other financial practices. A group of Charlotte homeowners alleges in a lawsuit that the company’s mortgage division used unfair practices.”

“Few analysts say Beazer is out of the woods, even if the company has engaged in no wrongdoing. No large builder is immune from the overall market malaise, and that syndrome could persist for a year, said analyst Gregory E. Gieber.”

“Builders like Beazer…probably made their situations worse by continuing to build houses even as sales were sagging, he said. ‘Builders are naturally optimistic. That is what makes them businessmen instead of analysts and reporters.’”

“Beazer too was slow to react, he said. ‘I thought that the company did not recognize the seriousness of the correction that was coming,’ he said.”

From Bloomberg. “The collapse of the subprime mortgage market may push some big U.S. homebuilders toward Chapter 11 beginning next year, according to bankruptcy advisers and lawyers who specialize in the real estate industry.”

“The weakest publicly held builders are staying out of bankruptcy by relying on the profits they made when sales boomed and on the public debt they sold in those years, said Ronald Greenspan, a lawyer and financial adviser to the creditors of four bankrupt subprime mortgage lenders.”

“Homebuilders issued $3.6 billion in public debt in 2005 and 2006, though only $600 million of that comes due this year, Greenspan said.”

“‘There is no sword over the industry’s head yet,’ said Greenspan. ‘That doesn’t mean the industry is not wounded. Instead, the breaking point could come in 2008 or 2009.’”

“The perceived risk of owning the bonds of some of the biggest U.S. homebuilders has increased since a wave of bankruptcies hit the mortgage industry that caters to homebuyers with poor credit histories.”

“Credit default swaps have more than doubled in price since Feb. 1 for the second-biggest builder by revenue, D.R. Horton, Inc.; the fourth biggest, Pulte Homes Inc.; and the biggest luxury home builder, Toll Brothers Inc.”

“The cost of swaps on $10 million worth of Toll Brothers debt, for example, jumped to $136,750 Friday from $58,500 on Feb. 1, according to according to CMA Datavision.”

“Kara Homes Inc., the New Jersey builder known for so-called McMansions, became one of the first major, closely held home builders to file for Chapter 11 protection in October. Such regional builders are likely to precede any of the big public companies into bankruptcy, Kara’s bankruptcy lawyer, David L. Bruck, said.”

“By next year, or the year after, some of the larger companies will be forced to restructure as the housing crunch continues, he said. ‘It’s only a matter of time,’ Bruck said.”

The Star Ledger. “Just a few months ago, the big homebuilders were expressing cautious optimism. Fast forward to this spring, to what should be the prime selling season, and it’s hard to find an optimist. Inventories of unsold homes are high; profits are down. The ’subprime’ lending crisis is reverberating throughout the industry.”

“‘The housing sector is in the midst of a meaningful, multiyear downturn,’ Fitch Ratings said. Moody’s was even more alarmist in downgrading Hovnanian’s debt, saying the company was bleeding cash.”

“Hovnanian is grappling with a cancellation rate of about 35 percent. Larry Sorsby, Hovnanian’s CFOr, said the company’s staff has been reduced by about 20 percent during the last few quarters.”

“One thing home builders have no control over is how news about the housing market impacts the psychology of prospective buyers. ‘Anywhere in the country you can’t open the paper without some negative comment being made about subprime,’ Sorsby said. ‘I think it’s a fair comment to say we’re less optimistic about the bottom being right upon us, primarily because of the subprime issues,’ Sorsby said.”

The Associated Press. “Wachovia Corp said it remains on track to meet its goals from its $24.2 billion acquisition of Golden West, which it acquired in October, though Chief Executive Ken Thompson said ‘it’s a trying time to be a participant in the mortgage market.’”

“Thompson said: ‘Like everyone else, we’re experiencing slowing mortgage originations, and customers are showing a preference for less profitable products.’”

“With Golden West, Wachovia added more than $122 billion in mortgages during the quarter, almost all with adjustable rates.”

From Reuters. “General Electric Co.’s WMC Mortgage subprime lending unit has sharply cut back on lending activity, an executive said on Friday.”

“‘We curtailed production dramatically during the first quarter,’ said Mark Begor, CEO of GE Money, Americas. ‘We’ve tightened up a lot on our guidelines and really curtailed a lot of the business activities.’”

“He said that the Burbank, California-based WMC unit made just $3.4 billion in new loans during the first quarter, down from $9 billion in the fourth quarter.”

“Fremont General Corp., barred by U.S. regulators from offering mortgages to borrowers with poor credit, said it agreed to sell $2.9 billion of subprime home loans to an unidentified buyer.”

“The company is selling the mortgages, the majority of its remaining subprime loans, at a discount and expects to record a $100 million pretax loss as a result.”

From Fitch Ratings. “While rising mortgage defaults are to be expected during a housing market downturn, the sharp rise in U.S. subprime mortgage defaults is notable.”

“Fitch found that the severe response of the 2006 subprime vintage to the cooling housing market is attributable to high borrower leverage and the widespread use of stated income loan programs.”

“After studying the collateral attributes of early payment default (EPD) loans and comparing them to loans that did not default in the first 12 months after issuance, Fitch found that Fair Isaac Corp. (FICO) scores have become less significant as an early default indicator when other high risk loan attributes, such as piggyback second liens or loans with no-income verification, are present.”

“‘While FICO scores continue to be highly predictive measures of relative credit risk for loans with similar characteristics, FICO scores play a lesser role when additional risk layers are added,’ said Glenn Costello, Managing Director, RMBS, Fitch Ratings.”

“‘In the case of the 2006 vintage delinquencies, additional risk layers that are factoring into the sharply higher delinquencies include high combined loan to value ratios (CLTVs) and stated income loan programs as borrowers with higher FICO scores tend to be highly levered,’ Costello said.”

“In addition, loans made for home purchases have become a much larger percentage of subprime originations as opposed to refinances, which historically made up a majority of subprime pools. ‘The added risk from the higher leverage and stated income feature is driving up default rates for purchase loans,’ said Suzanne Mistretta, Senior Director, Credit Policy, Fitch Ratings.”

National Mortgage News. “A large mortgage brokerage operation in the Pacific Northwest has been tardy paying some of its branches we’re told. At press time, one branch manager said he had not been paid in 18 days. Typically, he gets paid in 48 hours, he told us.”

“In case you missed it: First Horizon of Texas has exited the subprime wholesale niche. An executive there told us the company may re-enter the niche at some point but currently profit margins are much too thin.”

“International investors bought a net $58.1 billion in long-term U.S. securities in February, down significantly from January as demand for mortgage-backed securities fell to a three-year low, a U.S. Treasury Department report showed.”

“U.S. agency bonds, principally backed by home mortgages, saw their lowest net purchases by foreigners in nearly three years in February, as news of troubles in the subprime mortgage sector increased.”

“Purchases of U.S. agency bonds, such as those issued by home loan funding company Fannie Mae, fell to $2.02 billion in February, their lowest level since net sales of $624 million in March 2004.”

“‘It probably is related to general concerns about what’s going on in the mortgage-backed arena,’ said Alan Ruskin, chief international strategist at RBS Greenwich Capital.”

The York Dispatch reports from Pennsylvania. “The number of foreclosure notices in York County for the first quarter of 2007 increased 54 percent over the same period last year. If those notices amount to actual foreclosures, it could have an ‘ugly effect on the overall community,’ said Leigh Smith, executive director for the Housing Alliance of York.”

“Foreclosure notices increased from 216 in the first three months of 2006 to 334 in the first quarter of this year.”

“‘The problem might be in the financial institutions being too lax in extending credit to homebuyers,’ said Jacob DeRooy, an economist at Penn State Harrisburg.”

“Homeowners across the nation have been defaulting on loans in the subprime market and loans offered to people with less documentation, such as verification of income. ‘We’re perhaps reaping the effects of a too liberal financial environment,’ DeRooy said.”

The Patriot News from Pennsylvania. “Like elsewhere in the country, Dauphin County is seeing an increase in the number of houses and other properties falling into foreclosure. Cumberland County saw a large jump, from 350 to 543, while Lebanon, Perry and York counties also experienced increases.”

“The cases called at the sale last week varied. Many of the properties were in Harrisburg, where the amount owed ranged between $30,000 and $60,000. Some appeared to have been investments, where a single owner had multiple listings that were in default.”

“But several of the properties were in the suburbs, and it appeared their owners had just gotten in over their heads. For example, two houses in Derry and Susquehanna townships sold at the auction. The amount owed to banks was more than $200,000 each.”

“The interest rates on such mortgages taken out at the height of the housing boom are adjusting upward, said economist Ryan Sweet. ‘More often than not, it’s going to be the straw that broke the camel’s back, and you’re going to see delinquencies,’ Sweet said.”

“This month’s sheriff’s sale was packed with lawyers representing the banks. About 65 of the 170 properties posted for sale that day sold. The lawyers did most of the successful bidding.”

The Virginia Pilot. “When Joseph Rinaldi lost his job last May, he and his wife began tapping their personal savings for the monthly mortgage payments of $1,800. After finding full-time work late last year, he tried repeatedly to devise a repayment plan and filled out the required forms.”

“The lender, however, delayed acting and made additional demands, he said. In late February, a friend told Rinaldi that his house ‘was in the newspaper.’”

“A growing number of Hampton Roads homeowners are finding themselves in Rinaldi’s situation. During January and February, 181 of the region’s homeowners were in some stage of foreclosure, almost double the 100 for the comparable two months in 2006, according to RealtyTrac.”

“That jump came on top of increases of 45 percent or more for foreclosures in Virginia Beach, Norfolk and Chesapeake last year.”

“The surge in seriously delinquent home loans shows no sign of subsiding. Norfolk housing counselor John Allen said that during the first quarter of this year he began working with 15 clients who sought to avoid foreclosure. That was more than all of his clients seeking similar help last year.”

“In recent months, dozens of subprime lenders, including a handful that did business in Hampton Roads, have shut down or scaled back their operations because of mounting losses. One that did significant business in Hampton Roads, New Century Financial of Irvine, Calif., sought protection from its creditors in bankruptcy court earlier this month.”

“‘I’ve seen a lot of peaks and valleys in the mortgage business, and I was very surprised to see so many people close their doors so quickly,’ said Keith Robinson, VP at TowneBank Mortgage in Virginia Beach.”

“‘People became a little bit complacent with the seemingly low risk,’ said said Russell E. Lundeberg Jr., chief investment officer at an asset-management firm in Midlothian. ‘The wake-up call came from the subprime lenders that decided to close up shop.’”

The Washington Post. “Even though builders have cut back on the number of new homes they’re starting, they are finding themselves saddled with an unusually large inventory of finished or nearly finished homes. Those empty houses are expensive for builders to carry, thanks to construction loans that won’t be paid off until the home is sold. So builders are getting serious about unloading them.”

“There are 40,409 new, single-family houses on the market in the Maryland and Virginia suburbs, according to Hanley Wood Market Intelligence. That doesn’t include condominiums, which are certainly in flush supply, or even townhouses. And nearly one-third of that unsold inventory sits in just two jurisdictions, Prince George’s and Loudoun counties.”

“‘Builders and developers have more inventory than they’ve had in recent memory, at least in a decade,’ said Charles Browning, publisher of New Homes Guide.”

“Even if the place you would like to sell is a three-bedroom Cape Cod near the Metro in Bethesda or a 1960s ranch house in North Springfield, potential buyers could be lured away by an irresistible deal on a spanking new house in Prince George’s or Loudoun counties.”

“And if you’re trying to sell a two-year-old house in one of the same developments where these builders are trying to unload their inventory, good luck. The only way to compete with that new-home freshness is to lower your price.”

“So what are builders doing to sell their expensive inventory? Some are cutting base prices, some are throwing in free upgrades, and most are advertising their ‘quick delivery’ homes aggressively. And that is where the deals are.”

“Many of these ready-to-own houses represent casualties of the subprime mortgage mess. Local real estate agents say they have been seeing loans, many of them arranged by brokers, fall through after lenders backed out, or went out of business entirely.”

“‘Houses that were under contract and for whatever reason have washed out, typically builders are a little more aggressive with them,’ says Boyd J. Campbell, a broker in Lanham.”

“Some builders, instead of throwing in freebies are lowering their base prices, according to Pamela Jones, an associate broker in Loudoun County. ‘Some are really lowering the base price and getting people emotionally involved. Then they upsell all the bells and whistles,’ said Jones.”

“Some have lowered their base prices for single-family houses to less than $600,000, she said. ‘They’re competing, and they’re winning over some of the resales.’”

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