The Housing Bubble

The Orange County Register reports from California. “Former Fountain Valley residents Billy and Betty Lambright moved to this dairy land east of Chino in July, paying $620,000 for a new two-story house. A few months after they moved into their tile-roofed dwelling, the builder dropped the price for the same model by $45,000, plus free upgrades.”

“‘They gave me a good deal, they said. But after that, they dropped the price to $575,000,’ Lambright said. ‘You can’t cry over spilled milk.’”

“The Inland Empire had the biggest percentage increase in mortgage defaults in Southern California and the second highest gain in foreclosures, according to DataQuick. Foreclosures were up 829 percent, compared with 733 percent regionwide. Only Ventura County had a bigger jump in foreclosures.”

“Scott Chappell, a past president of the Multi-Regional MLS, cited statistics showing that the number of defaults ending in actual foreclosures rose from 8 percent in the fourth quarter of 2005 to 32 percent in the fourth quarter of 2006.”

“‘Those are huge numbers,’ Chappell said. ‘We’re thinking we’re going to have the same things we had in the mid-’90s.’”

“People like Lake Elsinore resident Charles Lucas are feeling the effect of that rise. Lucas put his four-bedroom, two-story home near the lake on the market for $499,900. That was in June. Almost a year and 12 price-reductions later, they’re still looking for a buyer, despite a $100,000 price hit.”

“‘(It’s) an expense and quite strenuous,’ he said of the dozen or so open houses and constant impromptu showings.”

“The glut of homes for sale has forced some owners into foreclosure, said real estate agent Pat Crowe of Perris.”

“‘I know of one home in the Perris area, she had over $100,000 in upgrades. Even though she dropped her price $50,000, she couldn’t get anyone to come out and look at it,’ Crowe said. ‘So she had to give it back to the bank. It’s not a good scenario, but she’s not the only one going through it right now.’”

The Contra Costa Times. “Median home prices continued to drop in March in most East Bay cities, with only a few modest gains in unexpected places. Walnut Creek prices dropped 8.6 percent, Concord prices fell 4.8 and Oakland prices decreased 1.2 percent from March of last year.”

“Kathy Thomas, an agent in Pleasanton, said she has seen drops in prices in the Tri-Valley area. San Ramon had a drop of 14.1 percent in median price, from $855,000 to $734,600.”

“‘There’s so much new construction out (in San Ramon); it’s all about the saturation level,’ she said. ‘People are more choosy because they can be and also make lower offers.’”

The San Francisco Chronicle. “As you may know, I’m opposed to any type of taxpayer bailout of subprime mortgage borrowers or lenders. Yet I believe our state regulators and law-enforcement agencies should be doing much more to pressure lenders and brokers to clean up the mortgage mess they helped create.”

“While the problem is usually blamed on an explosion in loans to borrowers with subprime credit, the real problem ‘is the way these loans were structured and sold,’ says Jeffrey Berns, a Tarzana (Los Angeles County) lawyer who is preparing to file suits on behalf of hundreds of borrowers who took out option ARMs.”

“Bob Bishop got an option ARM from IndyMac Bank when he refinanced his condo in San Rafael last year. He says his loan broker, Paul Mikhail, told him that he would get a 2 percent rate and that his payment would be fixed for five years. Mikhail warned him that interest could be added to his principal, but ‘He said the most this is going to increase would be about $10,000 over five years,’ Bishop says.”

“In fact, Bishop says, his principal is increasing at a rate of about $10,000 per year. When he called Mikhail to find out why, ‘He apologized and said this is what we were told by the lenders,’ Bishop says.”

“‘I would argue that if there was no apparent way for repayment down the road after these things started adjusting and it was readily apparent to someone who ought to know, we would investigate, get all the sides. Unless there was some sort of reasonable explanation (as to how the borrower would pay off the loan), I think that’s an actionable offense,’ says Tom Pool, spokesman for the California Department of Real Estate.”

“‘State courts have found that mortgage brokers are fiduciaries in these types of transactions,’ Pool adds.”

The Union Tribune. “The downturn in San Diego County home prices is beginning to show up in a surge of requests to reduce assessed valuations that determine property tax bills. San Diego County Assessor Gregory Smith said about 900 homeowners since January have requested reassessments based on falling prices in their neighborhoods.”

“By the mid-May reassessment application deadline, he expects as many 2,500 requests with 1,800 reductions likely to be granted, more than 26 times as many as last year.”

“County records indicate, for example, that a one-bedroom, one-bath condo on the third floor of Acqua Vista sold for $323,000 in March 2005, while a nearly identical unit three doors away sold in January for $300,000.”

The North County Times. “The signs are literally everywhere, as apartment complexes display banners and notices advertising discounts on deposits and first month’s rent. And some ‘for sale’ signs in front of single-family homes have recently been altered to read ‘for rent.’”

“Over the last six months, the rental market has shifted, giving renters more choices and greater opportunity to bargain for lower rents. In San Diego County, vacancy rates among large rental complexes jumped from 1.84 percent to 4.54 percent during the six-month period from October through March 31, the highest six-month rate since 1995, according to a survey.”

“In line with the countywide trend, the vacancy rate in North County has more than doubled in the last five years, to 4.52 percent. However, the vacancy rate in some North County communities, including Escondido, San Marcos, Fallbrook and Bonsall, spiked in the last six months, to 7.59 percent.”

“John Baker, property manager in Escondido, said that he has fielded an increasing number of calls from people wanting to rent out homes and condos that they own. ‘A lot of people bought condos with the intent to flip them,’ he said. Now that real estate sales in the region have slowed, they are looking to rent them out. ‘They figure they’ll ride out the market,’ he said.”

“Baker said that when he speaks with owners of homes they plan to lease, he has ‘to talk them down’ from the rents they hope to charge. He said last month that he tried to work with one woman but couldn’t because she wanted to charge a higher rent than was realistic. The amount he suggested ‘wouldn’t cover her costs,’ he said. ‘That sank her ship.’”

“Robert Griswold, who manages property, said he spoke with a woman in Temecula who owns three rental properties, two of them vacant. He advised her to sell one or two immediately ‘before the house of cards collapses.’”

Readers suggested a topic on the conventional wisdom on home prices. “Weekend Topic suggestion: ‘Spinning sound housing bubble remedies to appeal to political activists.’”

“The idea is that with presidential media coverage just warming up and campaign platforms being formulated, now might be a good time to try to push ’sound government policies to combat the housing bubble.’ Policies that will help manage the current crash (not bailouts) and that will prevent future bubbles from occurring.”

“Most importantly, how to spin those policies to appeal to political activists. Although the special interests that fund the campaigns will largely dictate the campaign pledges, if we can influence a groundswell of support from political activists for good policies, there’s some slim chance that politicians will one day pledge and then execute those policies because politicians know how dependent they are on activists to ‘get out the vote.’”

“For example, if you think that the tax advantages of investing in housing compared to other asset classes helped inflate the bubble, you could sell repealing those tax advantages with such spin as: it will put government finances back on a sound footing, redistribute wealth from the rich to the poor because wealthy homeowners will get a bigger tax hike than poor renters.”

“Academic studies have shown that the average worker does not benefit from housing tax breaks, all they do is transfer money that would have gone to the government in taxes to provide public services.”

“One can spin the exact same policies to activists, such as: the lifetime cap on the housing capital gains tax exemption created the housing bubble so that must be rolled back.”

“The current tax policies are a huge distortion of the sacred free markets and have caused over a trillion dollars of misallocation of capital into excess housing inventory instead of real productive capacity, - etc.”

Another reader added, “The time’s becoming ripe for a change in the propaganda re. housing. For the past several years the ‘common wisdom’ has been that inflating housing prices is ‘good’ for the average American. Unbelievably, nearly everyone bought into the concept.”

“Now, with all the foreclosures coming about, it’s starting to dawn on some that high home prices may actually a BAD thing! Today there was a whole hour show on CNN about how rampant foreclosures were trashing whole neighborhoods.”

“Right now, the pols are tending to blame the foreclosures on bad loans. But everyone knows the REAL problem is the high home prices. That’s what the flashlightlight really needs to shine on. The high cost of homes and how it’s destroyed people’s finances.”

“This idea could really pick up some traction in the next few months. Perhaps it’s time for bubble bloggers to pitch in here with ideas to get the ball rolling. Coming up with politicaly acceptable ways for politicians to re-frame this is a really good idea.”

And another said, “Amen! We do need to spread the word that ‘affordable housing’ comes in the form of lower prices, NOT higher debt that is cloaked in artificially low monthly payments!”

The Star Telegram reports from Texas. “Buying a home? Even in some of Tarrant County’s most-popular neighborhoods, the ball is in your court these days. After years of steady increases, sales of existing homes in North Texas decreased in the first quarter this year. The same trend is happening in these neighborhoods.”

“Woodland West, (a) middle-class Arlington neighborhood of more than 600 homes follows the overall North Texas trend of a rise in sales, then a drop in 2007. Sellers had similar asking prices in the first quarters of 2005 and 2007. But the selling price was a different story. The average homeowner dropped the price $4,000 to make the sale this year. Two years ago, the average seller cut $2,315 off the price.”

“‘There aren’t too many [houses] that go for full price,’ agent Penny Bradshaw said of the North Texas market.”

“Park Glen, near one of the Metroplex’s most-active home-building areas, has faced stiff competition from builders, homes resold after foreclosure, and homes sold to avoid foreclosure, said agent Jo Ann Anderson.”

“Fort Worth: Fairmount. There has been heavier discounting in the first quarter of 2007, the most significant on Lipscomb Street with a $20,500 discount on a $70,000 listing and a $19,500 discount on a $140,000 Adams Street listing.”

“During the same quarter of 2006, it was more likely the exact opposite happened. A $245,000 listing on Adams Street fetched $18,130 more than the asking price after just more than three months on the market, and a $119,000 listing on Sixth Avenue sold for $135,000 in five days.”

“In the first quarter of 2005, six of 11 homes were discounted off their asking price and none sold for more.”

“It’s rare for a home to be so popular that sellers are bidding the price up, real estate agents said. It is not unusual these days for buyers to ask sellers to pay their closing costs as a condition of the sale, said Steve Young, chairman-elect of the Arlington Board of Realtors.”

“A Star-Telegram examination of sales data from several popular Tarrant County neighborhoods shows that a large percentage of homes sell with some kind of seller concession. In more than half or more of the closed listings in most of the areas, the buyer bought the house for less than the list price, the MLS data show.”

“Area real estate agents say buyers have a lot to choose from as the peak home-selling season approaches. For sellers to catch the eye of summer buyers, local real estate agents offer the following tips: Don’t get too aggressive with your price. Not only are homeowners competing against their neighbors for buyers, home builders are trying to unload their inventory.”

“Many neighborhoods also have foreclosures that are back on the market, which are priced for the lender to unload quickly.”

The El Paso Times. “El Paso’s hot real estate market has cooled a bit in the past couple of months, in part due to tighter mortgage financing requirements caused by the growing number of foreclosures nationwide, some in El Paso’s real estate industry reported.”

“‘The inventory (of homes on the market) is increasing significantly across the city,’ said Charles DeWetter, president of one of El Paso’s largest real estate firms. ‘The pace of the last two or three years, you list a home and sell it in a few days, those days are gone.’”

“The number of out-of-town investors coming into the market to buy homes has also slowed, DeWetter and others said.”

“Realtor Elizabeth Leal, said, ‘Last year, I closed on over $10 million (in home sales). It was just crazy. This year, I’ve got houses, but not enough buyers.’ Leal said she’s seen prices dropping this year on home listings as the number of homes on the market increases.”

“‘All the underwriting rules have changed. It’s harder to get a 100 percent loan now,’ said Elena Mata, president of an El Paso mortgage brokerage firm.”

“Last week, 3,264 homes were listed for sale on the El Paso Multiple Listing Service, which includes most existing homes on the El Paso market, and some new homes. DeWetter said probably half that number of homes were on the market a year ago.”

“Yvonne and Owen Corkran expected to have their home sold by now. Instead, they’ve had to drop the price of their four-bedroom, 2,350-square-foot East Side home from $212,000 when they put it on the market in August to $179,900 today. They plan to move to a newly constructed home in May.”

“‘I think if we had done it (put house on the market) sooner, I think it would have gone,’ Yvonne Corkran said. ‘Now, there’s more to choose from. ‘Two new homes just popped up for sale’ near their house, and many new homes are being built on the far East Side, she said. ‘It’s been kind of a nightmare.’”

“‘We buried (a statue of) St. Joseph in the backyard, and blessed the house with holy water,’ she said. ‘We’ve done everything we could think of.’”

The News Press reports from Florida. “Scott Ayers is about to become a landlord, whether he wants to or not. Wryly referring to an ‘unintended consequence of the current real estate market,’ Ayers has decided to rent his Gateway home after trying to sell it for about six months.”

“‘If you don’t have to sell your house right now, then don’t sell it, and try to rent it while you wait for the market to correct itself,’ says broker Larry Simons. ‘Over time the rental money you get should help you keep it going until you can sell it. If you aren’t in a hurry to sell or aren’t in a hurry to buy is when you get the best bargain.’”

“‘It really is a renter’s market,’ says Betsy Morgan, director of property management for Prudential Tropical Realtors in Trinity. ‘Some owners have determined it’s better to rent and wait out the market. Other people bought property as an investment to begin with, but that was before the market softened and they found it was hard to sell these houses.’”

“Barbara Ford, who has a new home in the San Marino section of Miromar Lakes, will try to rent it out for a year. ‘The builder put lots of extras in there and it’s really a nice place. We were very surprised when the market slowed. We just didn’t see it coming. That’s when we decided to keep it off the market for a while,’ she says.”

“Many Realtors are still selling homes, albeit at prices lower than a year or two ago. Would-be landlords have to make those same adjustments.”

“‘The first thing we tell somebody is that they have to be realistic about what they can get for the house if they lease it,’ says Simons. ‘You aren’t going to make your mortgage on a half-million-dollar house with what you get for leasing it. Just as you have to price the house reasonably to sell it, you have to do the same then with a lease.’”

The Orlando Sentinel. “Twanda Thompson doesn’t want to lose her home. Like many would-be homeowners with below-average or poor credit, the Orlando woman took out a ’subprime’ mortgage during the housing boom to buy a place she really couldn’t afford.” Now her adjustable-rate mortgage is three months away from a boost in interest that will increase her monthly payment 30 percent. More increases lie ahead, and she already is delinquent on her loan.”

“‘I’ve been on an emotional roller coaster,” said Thompson. ‘I’ve worked so hard to get this far, to have a home and raise my children. To lose ground now is not acceptable to me.’”

“In Florida, nearly 93,000 subprime-loan homeowners were in the lurch as of February, according to First American. And during the previous year, the state’s subprime-foreclosure rate tripled, while its delinquency rate shot up 72 percent.”

“Local experts say turnover in homes financed with subprime loans may already be contributing to the region’s housing slowdown. The inventory of homes for sale through the Orlando Regional Realtor Association, for example, has nearly doubled since January 2006.”

“‘You have to look at the two different sides of the coin,’ said William Weaver, a real-estate professor at the University of Central Florida. ‘The problem is a lot worse now than in the past, and it is likely to get even worse.’”

“Many subprime lenders have collapsed this year, making it harder for financially strapped subprime borrowers to find someone willing to refinance burdensome loans with adjustable rates. ‘That part of the market has come to a screeching halt,’ Weaver said. ‘And when these mortgages adjust, they are going to adjust with a vengeance.’”

The News Journal. “It’s a question Terry Daniell hears a lot these days. As an office manager of a nonprofit credit counseling service in Pensacola, Daniell helps people repair their credit and avoid mortgage foreclosure.”

“‘Primarily, more and more people are coming in, and the first thing out of their mouths is, ‘How do I save my home?’ Daniell said.”

“In Escambia County, during the first three months of 2006, for example, there were eight residential single-family foreclosures with an owed-loan value totaling $437,500. By comparison, there were 23 residential forecloses in Escambia the first quarter of 2007. The owed-loan value was $2.95 million.”

“‘Both the increased number of foreclosures and the increased dollar volume are significant,’ said Al Muller, president of Pensacola-based Metro Market Trends. ‘In my opinion, we are at the very beginning of this surge in foreclosure activity.’”

“Muller said Metro Market Trends, which tracks housing market data throughout the state, is seeing foreclosure numbers in other Florida and Alabama counties that are more alarming than Escambia’s.”

“Flagler County, for example, went from one foreclosure in the first quarter of 2006 to 31 in the first quarter of this year. And neighboring Baldwin County, Ala., has seen an increase from 23 in the first three months of last year to 102 for the same period in 2007.”

“At the heart of the problem is falling home prices, exacerbated by insurance and property tax issues, and a worrisome rise in the number of defaults in the ’sub-prime’ lending market.”

“If their property’s value has declined significantly, as many have in Pensacola recently, their equity is essentially nil. ‘As this housing decline continues, there are just more and more permutations that fall out of it,’ Muller said.”

“‘What’s really different here, what’s being lost in all this, is that people being foreclosed on today are not in the same kind of financial crisis as 10 or 15 years ago,’ he said. The combination of easy mortgage money and falling homes prices makes it much easier and less costly for someone to consider foreclosure.”

“‘Today, if a home is worthless, people will just walk away from it,’ Muller said.”

The Palm Beach Post. “It’s no paradise at the Eden condo in Boca Raton. During the recent condo-conversion craze, the Eden was among the first projects to promise buyers a hip lifestyle in a downtown setting.”

“But four years after sales first started, the project remains a hulking eyesore, partly gutted and nowhere near done. Work on the conversion has started, stopped, started and now stopped again.”

“Now comes word that two of the complex’s four buildings won’t be finished anytime soon. Meanwhile, residents who have moved into the first building won’t be enjoying their clubhouse in coming days. Work on the 8,000-square-foot facility has ceased, and several subcontractors have filed liens in Palm Beach County over unpaid bills.”

“‘It’s ludicrous,’ said Rick Salzman, an Eden condo-unit owner. ‘What are these guys doing?’”

“Antsy buyers don’t know what to do. Reports are some buyers are getting their deposits back, while others are being sued for trying to get out of closing on their units.”

“Faced with a meltdown in the housing market, Lake builders have launched an aggressive campaign aimed at persuading county commissioners to say ‘no’ to dramatic increases in impact fees.”

“Builders say they’ve never been so alarmed. ‘Lake County used to be an affordable-housing location for families,’ said Jim Bible, president of the Lake County Home Builders Association. ‘Now people are being priced out of the market.’”

“The fear is that raising impact fees could further dampen a housing industry that is already in a ‘depression,’ according to Don Magruder, general manager of Leesburg-based Ro-Mac Lumber & Supply Inc.”

“Magruder said the county has seen a downturn in the housing market since last year. But the bottom has fallen out of the housing market. There has been a nearly 50 percent drop in residential building permits in unincorporated Lake since 2004. The decline prompted the county this month to lay off 12 employees and two paid interns in its building department.”

“Ro-Mac also has been hard hit. Magruder said the company was forced during the past year to lay off more than 200 of 505 employees.”

“County Commissioner Jennifer Hill said affordable housing has long been an issue for Lake County. She questioned why home builders are so concerned about it now.”

“‘Where were they when property values were skyrocketing?’ Hill asked. ‘Property was being flipped all over the place. Homes were being sold and resold as much as three times a year.’”

What do you see in your housing market this weekend? Falling prices? “Ann Smith in Danbury (Connecticut), said sales have been falling since last fall. Home prices have dropped about 10 percent in the region since last fall, she said. Robert Budnik, with Century 21 in Bethel, said houses in the Danbury area typically stay on the market two to three times longer than in the boom time of two or three years ago.”

“‘If sellers think they have the upper hand, they don’t,’ he said.”

“The median sale price in Fairfield County dropped from $494,700 during the last three months of 2005 to $461,700 for the last three months of 2006.”

“JoAnne DiCarlo, like many real estate agents, said some sellers haven’t come to grips with the fact that it is now a buyer’s market. ‘They are still under the impression they can put it at a higher price of a year ago,’ she said.”

Or polling results? “This week, we asked in our weekly poll: Should the government intervene to prevent a predicted wave of mortgage defaults? A majority of respondents, 60 percent, said no, because the deals are private contracts and borrowers need to be accountable.”

“Several respondents left comments on the matter. Here are some of those comments: ‘If they bail out the mortgage holders, how about bailing us all out on our bad investment decisions?’ ‘The lenders KNEW they were lending to Sub-Prime customers. They made their own bed. Let them lie in it.’”

Failed developments? “The West Side Flats condo project was supposed to showcase a new era of riverfront development. For now, though, developers have halted the project and are returning down payments, all seven of them.”

“It’s no secret that the condo market is soft, and real estate experts say it is especially difficult to sell buyers on a speculative idea such as the West Side Flats when so many completed condos are flooding the market.”

“‘I think the biggest problem is the condo market is oversold,’ said Ralph Peterson of Coldwell Banker Burnet. ‘They way overbuilt, way too fast.’”

“Peterson added that another barrier to sales is price.”

An insiders opinion? “The sharp decline of the subprime housing market offering high-cost mortgages hasn’t yet hit bottom, the head of home mortgage buyer Freddie Mac said yesterday.”

“‘I don’t think it’s troughed yet, because of the class of 2006,’ CEO Richard F. Syron said. ‘The mortgages written in 2006 in the subprime market are probably the most troublesome. They haven’t hit the reset point yet on interest rates.’”

“‘To some extent, people in the past thought, ‘Well, I’ll be bailed out by the rise in housing prices, no matter what happens,’ Syron said.”

International headlines? “In the heyday of Spain’s real estate boom a few years ago, homes were going up so fast brick-makers literally could not bake the things fast enough, and had to import.”

“But this week stocks in Spanish construction companies, banks and other firms heavily exposed to the property market plunged, the most vivid evidence yet of a widely expected slowdown. The big question now is whether the meltdown signaled a bubble bursting or a jet coming in for a soft landing.”

“‘Spanish housing is about to implode,’ economist Charles Dumas wrote this week.”

“‘Spain saw Goldilocks at her most beneficent,’ Dumas wrote. ‘Sadly it will now see the bears.’”

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