The Housing Bubble

The Sacramento Bee reports from California. “Few places in America benefited from the housing boom more than the Central Valley. Now, housing starts are down 20 percent to 50 percent. ‘We’re concerned because so much of the employment was due to construction,’ said Rollie Smith, head of a federal task force on economic development in the San Joaquin Valley.”

“It seemed everybody wanted to buy a home in Merced, even people who didn’t want to live here; at the peak, nearly one in five homes sold went to investors, according to LoanPerformance.”

“Hai Nguyen was one of those investors. The former San Jose resident bought a $420,000 home last year in a new development near UC. But the rental market was weaker than he thought. Now living in Arizona, Nguyen has the home up for sale, and is throwing in a $40,000 Cadillac Escalade as a sweetener.”

“‘I’ve learned a lesson,’ said Nguyen, who holds a real estate license. ‘I’m stuck.’”

“Nearly 22 percent of all Merced home mortgages as of December were subprime loans, the highest in California and seventh highest in the nation, according to First American LoanPerformance. Already, for the first three months of the year, nearly 5 percent of Merced and Stockton homeowners, and 5.6 percent in Modesto, are delinquent on their mortgages, according to Equifax and Moodys.com.”

“‘There are a lot of people in a lot of trouble right now,’ said Martha Lucey, head of (a) Fresno office of credit counselor.”

The LA Daily News. “Home sales continued falling across the San Fernando Valley during the first quarter of 2007 as the median price slipped under the year-ago level for the first time in 10 years, a trade association said. That’s the first price decline since the first quarter of 1997.”

“‘It’s a stale market,’ said Daniel Blake, director of the San Fernando Valley Economic Research Center at California State University, Northridge. ‘And weakness is developing in prices.’”

“Blake notes the rate of inflation is 3.8 percent. Housing ‘is losing real value right now even if the price edges up by a few thousand dollars.’”

“At the end of March there were 5,680 properties listed for sale across the Valley, up 20.3 percent from a year ago.”

The Voice of San Diego. “Despite ’storm clouds’ of near-record foreclosure and default rates, weakness in the real estate market won’t be enough to trigger a recession locally, at the state level or nationwide, a team of California economists say.”

“Ryan Ratcliff, the economist responsible for the San Diego County and California sections of the University of California, Los Angeles Anderson Forecast, said the fallout from mortgage defaults will prove a ‘major wild card’ in the next two years.”

“And the crunch and subsequent tightening in the mortgage sector over poor-credit, subprime loans will most likely sap the region’s housing market of any quick rebound.”

“‘The reset crisis is really going to hit its peak early this summer,’ Ratcliff said. ‘Then we’ll see how bad this is going to get.’”

“The impact of the real estate slowdown on jobs is just starting to be seen, the report says. Just 1,800 construction jobs were added in 2006, compared to 3,100 the year before. And financial institutions, such as those providing mortgages or other credit to homebuyers, lost 900 jobs, versus the addition of jobs in 2005.”

“Home prices are now at about the same level they were in 2004, a 5 percent decline from the peak in 2005. Ratcliff conceded that tightening lending standards will ensure continued weakness in the first-time buyer market in San Diego, and the weakness depresses the number of homes selling ‘all the way up the food chain.’”

The Union Tribune. “‘The hiring pace has slowed considerably,’ said University of San Diego economist Alan Gin, who joined Ratcliff in compiling the Anderson Forecast’s report.”

“Making matters worse, 40 percent of the jobs created during the past year have been in leisure and hospitality, the lowest-paying job category in San Diego, paying an average of $376 per week.”

“Stan Sexton, who heads New Horizons Realty in La Mesa, said the sluggishness in hiring is already having an impact on sales.”

“There’s a lot of unemployment and underemployment, especially among real estate agents,’ Sexton said. ‘When the market was hot, a lot of the agents took on a lot of debt and used their newly found wealth to buy million-dollar homes. I would think a lot of them are sucking wind right now. And, in general, demand is so low that we’ve all felt it in the business.’”

“At the same time, foreclosures and defaults have risen dramatically. In the past year, notices of default more than doubled in San Diego County, jumping from 1,533 in the first quarter of 2006 to 3,931 in the first quarter of 2007.”

“‘Default and foreclosure rates in Southern California are rapidly approaching levels only seen during the worst of the 1990s,’ Ratcliff said. ‘We’ve only seen the very tip of the iceberg’ in foreclosures, warned Ryan.”

“‘The bigger number is the people who are on the edge right now, getting help from their parents to pay off their mortgage, or forgoing vacations and cutting back on expenses to make ends meet,’ said Gary London, who heads San Diego’s London Group Realty Advisors.”

“London said that if home prices decline sharply or the housing slump lasts a long time, those people may not be able to get out from under their mortgages.”

“‘Then, all bets are off,’ he said.”

The Orange County Register. “Both construction and sales of new homes in Southern California declined in the first quarter of 2007 from year-ago levels, Metrostudy reported today.”

“The research firm reported that there were 10,035 new single-family homes started in the Southern California counties of Orange, Los Angeles, Ventura, San Bernardino and Riverside. That’s 30 percent fewer starts than in the first quarter of 2006, Metrostudy reported.”

“Meanwhile, new home sales fell by 30 percent over the first quarter of 2006, to 10,765 homes, the report said. Inventory of unsold single-family homes increased by less than 1 percent to 39,842 unitsd. It would take 9.3 months to sell off those homes at the current sales pace.”

“‘The Southern California regional housing market, both new and resale, has been slammed, first by the bubble talk of 2005, second by the withdrawal of speculators in 2006, and third by the change in lending practices and the abandonment of subprime loans in 2007,’ Metrostudy’s Steve Johnson said.”

The Press Enterprise. “The home-buying season got off to such a weak start in Inland Southern California this year that homes are still being built faster than they are sold, according to Metrostudy.”

“Metrostudy reported 5,414 new home sales in Riverside and San Bernardino Counties in the first quarter of this year, a 50 percent decline from the same period a year ago.”

“‘I had hoped we would have seen more decline occurring in standing inventories. I was surprised that we are not digging our way out of this,’ Steve Johnson said. ‘Spring has been very disappointing throughout the new-home industry.’”

“Construction began on 4,504 homes in the first quarter of this year, down from 7,605 a year earlier, Metrostudy reported. Johnson said that will create a glut of land in various stages of development that builders will not be absorbing as quickly as anticipated.”

“Johnson said at the end of the first quarter there were 15,623 vacant lots ready for development in the two-county area, up from 23,131 a year ago, and another 51,904 lots were still being prepared for builders, up from 31,383 lots in the pipeline a year ago when the market was more robust than today.”

“Once land development gains momentum, ‘it is like a freight train. You can’t stop it,’ Johnson said.”

“It is unprecedented, Johnson said, to have a declining housing market in an economy that is still strong and with mortgage rates historically low. ‘It really amounts to prices,’ he said. ‘The buyers just found a ceiling and decided they weren’t going to go any further.”

The Missoulian reports from Montana. “While still booming, the market for houses priced between $250,000 and $400,000 is seeing slightly longer waits, and motivated sellers are adjusting their asking prices downward in response. At least part of that is due to national news reports that markets in other regions are sliding fast, real estate broker, Matt Rosbarsky said. Potential buyers are waiting a little longer and shopping around a little more.”

“So far this year, 76 notices of foreclosure have been posted with the Missoula County Clerk and Recorder’s Office, 13 more than this time last year. In fact, the number of foreclosures filed in Missoula County soared 22 percent last year, to 215 homes in 2006.”

“‘I am seeing a few price reductions where people who are selling are re-evaluating and making some price adjustments downward,’ said Judy Wahlberg, a 28-year veteran of the Missoula housing market. ‘I think it’s going to be a good year for sellers, but we may see a little bit more negotiation.’”

The Denver Post from Colorado. “Weld County has dropped out of the No. 1 spot in a national ranking of home foreclosure rates, but only because other areas of the country are getting worse, local real estate agents said.”

“‘I don’t think we’ve seen the proof we’d like to see that things are getting better,’ said Greeley-area real estate agent Nate Buie.”

The Greeley Tribune from Colorado. “The homes that seem to be affected most by Weld’s foreclosure trend are those in the lower price bracket, Buie said. For example, in the first quarter of 2007, there were 65 homes in Greeley and Evans that were sold for less than $100,000. Of those, 92 percent of those homes were foreclosures.”

“Also, 40 percent of the homes sold in the $100,000-$149,000 had been foreclosed on. Those kinds of statistics tend to bring down the price for the homes in those ranges, Buie said.”

“‘Sellers have to keep in mind that they are competing with the foreclosures, which are going to be aggressive with their pricing,’ Buie said. ‘If you want to move your house, you want to be aggressive as well.’”

“Weld had its highest number of foreclosures ever in 2006 with 2,073. But the first three months of 2007 had 155 more foreclosures, an increase of 31 percent, than the same time period in 2006.”

“‘We have not seen a decrease in foreclosures,’ said Donna Schmidt, who has worked for the trustee’s office for 19 years.”

The East Valley Tribune from Arizona. “Some 3,737 permits were issued in March, up from 3,630 in February but down 21 percent from the year ago period, the latest Phoenix Housing Market Letter from analyst RL Brown shows.”

“‘It’s a positive sign that the trend is upward,’ Brown said.”

“The new home market is facing another hurdle, tightening lending standards, he said. Skittish lenders have done away with 100 percent financing, stated-income loans and other types of mortgage products, as well as requiring higher credit scores.”

“It’s becoming tougher for everybody to obtain financing, not just for first-time homebuyers, Brown said. ‘I think that’s the dark cloud that’s on the horizon,’ he said.”

“Also in March, 3,674 new homes were sold, down 20 percent from the same month last year. Some 10,369 new Valley homes were sold in the first three months of 2007, compared with 12,536 in the same period in 2006.”

“The local market may start to rebound as early as the first half of 2008 if the economy continues to grow and the mortgage situation doesn’t get too bad, but those are some big ‘if’s,’ said Ben Sage, director of Metrostudy’s Arizona division.”

The Tucson Citizen. “A cooling housing market here may be good news for buyers, but homeowners facing debt woes may be more likely to find themselves in foreclosure. Pima County had 1,427 foreclosure filings in the first quarter of this year, up 51 percent from the same period in 2005, according to RealtyTrac.”

“Leading the way in those foreclosures are homeowners who bought a home or refinanced using a subprime home loan.”

“Tucson’s increase in foreclosure filings is below those of Maricopa and Pinal counties, according to RealtyTrac. Maricopa filings jumped 108 percent and Pinal’s 233 percent.”

“Jim Whitehill, a Tucson real estate attorney, said he is seeing loans that originated in 2005 and 2006 entering the foreclosure process.”

“‘I think that all of us that are involved in real estate law are expecting an increase in foreclosures,’ he said. ‘We’re expecting that because there were a number of loans that were made in the last three to five years that were based upon and premised upon an increase in the value of real estate.’”

“‘They weren’t loans that were based on the borrower’s ability to repay,’ Whitehill said. ‘They were loans that were not based on the borrower’s character. They were based upon the fact that the property was worth X and that in a rising real estate market, that the property was going to be worth X-plus.’”

“Local Realtor Nancy Colvin said an increasing foreclosure rate will mean that more houses will spend more time on the market.”

“‘I know that there are going to be a lot of foreclosures out there,’ she said. ‘That’s a given. That’s an absolute given. When that number starts increasing, that just increases inventory.’”

“‘The demand of buyers is out there, but because of the changes in subprime lending, a lot of those demands are not being met,’ she said. ‘Therefore you have fewer buyers and lots of inventory so it takes a lot longer to sell. Sellers who really need to sell have to drop their prices, unfortunately.’”

Some housing bubble news from Wall Street and Washington. CNN Money, “Centex Corp., the fourth-largest U.S. home builder, reported a wider-than-expected fourth-quarter loss Monday as it responded to the U.S. real-estate slowdown by writing off and revaluing land and by exiting the sub-prime lending and commercial contracting businesses.”

“CEO Tim Eller said the company was scrambling to deal with what he characterized as ‘one of the most difficult markets in 25 years’ and he acknowledged that he still sees ‘uncertainty in many of our markets.’”

“In all, Centex said it booked $202 million in land option write-offs or land valuation adjustments during the quarter. The company said its results were also pulled down by higher discounts and sales incentives.”

From MarketWatch. “‘We know we won’t experience any significant margin improvement through house-price appreciation for the foreseeable future,’ the CEO Eller said. ‘So we must think even more as a manufacturer.’”

“Sales trends softened in March ‘as buyers became cautious due to the reports of subprime concerns and tighter lending standards,’ said Cathy Smith, Centex’s CFO.”

“She said the cancellation rate in the latest quarter was 34%. The historical average for cancellations runs between about 20% to 25%, the CFO said. ‘The main reason buyers are canceling remains the inability to secure financing or sell their existing homes,’ Smith said.”

“‘Considering the lack of clear directional trends in the market, tighter mortgage lending standards, and soft results in March, we don’t believe it’s prudent to provide earnings guidance for fiscal 2008 at this time,’ she said.”

The Oregonian. “Millennium Funding Group, a major regional subprime lender, has halted its lending and cut all its jobs amid nationwide mortgage turmoil.”

“The company had laid off 76 in March. After 71 layoffs late last week, only 10 workers remain in Millennium’s downtown Vancouver headquarters. Their jobs will end after Millennium’s remaining loans are closed.”

“As he did in March, Joe Bell, VP of human resources of Ace Holding Co., the Indianapolis-based owner of Millennium, pointed to the subprime lending market as the chief contributor to Millennium’s layoffs.”

“‘That was a large portion of our business,’ Bell said. ‘It was roughly 60 percent of business when we acquired Millennium in November, and that market just isn’t there right now.’”

The Record. “The Paramus-based lending and loan payment collecting arm of a real estate investment trust is trying to shake off a serious bout of the subprime contagion.”

“Within the past two weeks, Opteum Financial Services LLC, a subsidiary of Vero Beach, Fla.-based Opteum Inc., has closed its wholesale and conduit-lending businesses, eliminating 257 jobs.”

“Reasons for the loan-office shutdowns included ‘weakness in consumer demand’ and ‘deterioration in the secondary market for closed mortgage loans,’ the company said in an April 20 filing with the SEC.”

“About two-thirds of the loans the company makes are ‘Alt-A,’ which the company defines in its annual report as loans for those who would meet standard Fannie Mae or Freddie Mac underwriting guidelines, but are putting less money down and have less verified income than Fannie or Freddie would allow.”

The New York Times. “In the spring of 1998, the chief financial officer of New Century Financial wrote an unusual paper describing a then little-known accounting technique.”

“The executive, Edward F. Gotschall, marketed his white paper at industry seminars and conferences, and promoted it to Wall Street analysts as an insider’s look at New Century, according to people who read the paper.”

“The technique promoted by Mr. Gotschall allowed the company to report profits before they actually existed. The paper profits were pegged to future earnings from loan sales to institutional investors. Some financial analysts say that New Century appears to have also used gain on sale to hide losses as the subprime market began to falter late last year.”

“‘The thing about gain on sale accounting is that you can create a machine that just manufactures earnings out of thin air,’ said Richard Benson, an expert on securitization. Mr. Benson said that the stock prices of subprime home lenders like New Century Financial had ‘collapsed so fast because the income and balance sheet had been built on gain on sale, which turns out to be imaginary.’”

“‘The market woke up to the fact that there’s no there there,’ Mr. Benson said.”

From Reuters. “Subprime mortgage lenders created a surge in delinquencies in the past year by repeatedly breaking their own underwriting guidelines to capture business, analysts said on Monday.”

“So-called ‘exceptions’ to loans were made as written standards did not change much, Michael Youngblood, a managing director and portfolio manager at FBR Investment Management Inc., said.”

“‘The amount of loan exceptions made in 2006 must be historically the highest,’ he said.”

“Subprime lenders also paid scant attention to ’soft’ guidelines, such as how they analyze ‘FICO’ credit scores for each applicant, said Mark Milner, chief risk officer for PMI Mortgage Insurance Co.”

“For instance, relying on a credit score that was generated by an applicant paying back bills to a doctor and securing a $200 credit line ‘is just not enough,’ he said.”

“Pricing of collateralized debt obligation bonds laden with subprime mortgage securities is getting more perilous amid deep uncertainties over when ratings on the assets will be downgraded, money managers and Wall Street analysts said.”

“‘A lot of downgrading has to happen’ on CDOs that include subprime asset-backed securities, said Lang Gibson, Merrill Lynch & Co.’s director of CDO research.”

“The economist who prodded investors into the U.S. housing boom and has been skewered by bloggers during the bust is leaving a top real estate trade association, the group said Monday.”

“David Lereah, the author of ‘Are You Missing the Real Estate Boom?’, will leave the the National Association of Realtors’ by the middle of next month after serving as the head economist for seven years, a spokesman said.”

“‘David has been an expert in the field, is widely respected and has been an excellent spokesman for NAR,’ said said Lucien Salvant of the real estate agent trade group.”

“In October, Lereah said that he expected ’sales activity to pick up early next year.’ In recent months, Lereah has pushed his expectations for recovery deeper into 2007 and has trimmed his forecast for home sales for the year.”

“Problems in subprime mortgages caused a sharp drop in home sellers being able to find buyers for their homes in March, according to a trade group report Tuesday that showed the battered real estate market was much weaker than expected.”

“The National Association of Realtors’ Pending Home Sales Index fell 4.9 percent in March, following a 1.1 percent increase in February. The index was down 10.5 percent from the March 2006 reading.”

“‘Although the weather improved in March, we’re starting to see the effects of a decline in subprime lending and tighter lending standards,’ said a statement from David Lereah, the chief economist for the trade group. ‘Home sales will be relatively sluggish in the second quarter, but a modest uptrend should resume during the second half of this year.’”

The Tampa Tribune reports from Florida. “Condos For Sale. Developers advertise slashed prices and promise flat-screen TVs and computers. All the hype hasn’t worked. The white-hot trend to change apartments into condominiums has long passed, and developers that overestimated the demand have found themselves with half-empty complexes.”

“Some that tried converting them back into apartments aregrappling with foreclosure. Others are turning in their keys, leaving the lenders with unwanted residential properties they’re trying to sell themselves.”

“‘It’s the oldest thing in the American economy,’ said Eddie Flom, of Flom Equities LLC. ‘Greed, greed, greed overcomes wisdom.’”

“Developers aren’t the only ones feeling the pain. In some cases, lenders are on the hook for loans on complexes where sales have been slim. At CrossWynde Condominiums, an apartment conversion near Brandon, 60 percent of the 453 units are owned by the lender, according to county property records.”

“Arthur Nevid, managing director for Mountain Funding, said the lender plans to hold the complex until the real estate market turns around. ‘The market was real hot, and then it hit a wall very quickly,’ Nevid said. ‘Two years ago you’d sell 10 units in a day. Now if you sell 10 in a month you’ve had a good month.’”

“Although the trend squeezed some renters out of apartments a few years ago, it’s helping them now. Converted condos for rent are plentiful, leaving renters in a good position to negotiate a deal.”

“Amanda Gates, for example, knew her landlord bought three condos at CrossWynde and needed tenants fast. He wanted $850 a month for the one-bedroom condo. Gates and her husband talked him down to $700. ‘We knew he didn’t have anyone else,’ Gates said.”

The Palm Beach Post. “St. Lucie County home builders face ‘one of the most troublesome inventory problems in the nation,’ research firm Metrostudy said. The county has a 16.6-month supply of homes for sale, even after builders slashed construction from 777 starts in the third quarter of 2006 to 387 starts in the first quarter of 2007.”

“‘The county attracted an enormous amount of speculators,’ director Brad Hunter said. ‘The speculators put down deposits on houses and the builders started construction. But by late 2005, a lot of those speculators said, ‘Ahh, I don’t want the house anymore.’”

“‘Everyone is being super cautious,’ said Bruce Malasky, past president of the Gold Coast Builders Association. ‘There’s no urgency for buyers to make offers.’”

“Builders have had little choice but to pull back on construction and dangle incentives such as low closing costs and temporary waivers of homeowner association fees.”

“‘Builders are slowing down on their production,’ said Gail Kavanagh, executive VP of the Treasure Coast Builders Association. ‘It’s going to affect the economy of the area tremendously.’”

“Martin County builders likewise pulled back on housing starts. There were only 95 starts in the county in the first quarter, well off the all-time high of 345 starts in the third quarter of 2005.”

The Orlando Sentinel. “This comes from an insider in the downtown condo market: ‘The downtown market is ‘immature’ and is only receptive to products in the mid to high $200K. Past that threshold, there are very few buyers. This is not Manhattan after all.’”

“I couldn’t get a breakdown of just downtown condos, but I did go to the Orlando Regional Realtors Association site and added up all the listed condos in the Orange-Seminole area on the market for more than $300,000. I counted 758 of them.”

“Then I added up March sales of condos costing more than $300,000. I counted 20 of them. Ouch.”

“In the Orlando area, vacation homes are typically investment homes as well, and sales in Central Florida have been held down by a number of factors, according to local agents who specialize in vacation properties.”

“‘The rocket ran out of gas,’ said Steve Schaffer, a partner in an Orlando real estate company that specializes in vacation-home and second-home sales. ‘After Hurricane Katrina [in 2005], sales started to drop,’ and they continued falling throughout 2006, Schaffer said.”

From TC Palm. “Although there are nearly 1,000 unoccupied new homes in Indian River County, move-ins are happening at a record-breaking pace, according to data on new home construction released Monday.”

“While the overall number of move-ins is up, Metrostudys Brad Hunter said that much of that could be fueled by renters. With investors unable to dump their properties, many are ’surviving by renting it out.’ Those homes may end up as ‘deferred supply’ and will return to the market in a few years.”

“Hunter added that the county is similar to St. Lucie County, in that both are overbuilt, leaving builders to create incentives to attract buyers. In Martin County, there is a six-month supply of vacant finished homes.”

The Herald Tribune. “Real estate appraisers were under tremendous pressure during the boom to provide appraisals that would allow bankers to make mortgage loans. Now that the boom is over, appraisers find themselves being blamed for loans that went bad. Bill Temple, an appraiser with 25 years of experience, recently discussed this issue with staff writer Michael Braga.”

“Q: How did the boom from 2002 to 2006 alter conditions under which appraisers operated? A: ‘Any appraiser will tell you that there was incredible pressure on values on either vacant land or homes. Pressure on completing appraisals within a ‘quick’ turnaround time resulted in hastily completed reports. Major lenders and banks are just as responsible as mortgage brokers for pressuring appraisers.’”

“Q: Do you think appraisers pushed back enough against bankers and borrowers during the boom? A: ‘It is no secret that there are some appraisers who will appraise anything for any number. But the majority of appraisers only want to do a good job. When ‘pushing back’ to a lender or originator, they did not care. They could just pick up the phone and find somebody to fulfill their demands.’”

The News Press. “A Lehigh Acres couple alleges in a fraud lawsuit that the value of eight properties they bought was falsely inflated by three real estate appraisers in Lee County to support a construction loan.”

“The suit, filed March 9 in circuit court by Robert and Judy Schmidt, says they bought four Cape lots and four in Lehigh Acres from First Home Builders in 2005. The couple obtained financing to build houses on the property through a program offered by D’Alessandro & Woodyard Commercial Realtors.”

“The Schmidts want out of their contracts to buy the houses, claiming that they stand to lose at least $250,000 because the value of the properties was exaggerated by the appraisers; Gary Neese, William Meador and Gulf Coast Appraisal and Associates.”

“But Miami-based attorney William Strop, who represents Neese, said there was nothing improper about his appraisals. ‘Certainly Mr. Neese did nothing wrong,’ Strop said.”

“Besides, he said, the complaint filed by the Schmidts didn’t name specific flaws in the appraisals. ‘The allegations are so vague and confusing we really can’t tell what they’re saying.’”

“William Thompson, the Schmidts’ attorney, said he’ll be revising the complaint to be more specific, but it’s clear the couple was defrauded with the help of bad appraisals. ‘We’re alleging fraud and conspiracy by all of the players to bilk these people.’ he said.”

“Strop questioned whether the Schmidts, Judy Schmidt is a real estate agent, were simply bad businesspeople. ‘It seems to me they made an educated guess, and then it didn’t pan out,’ he said. ‘Why is that anybody’s fault? If they’d gambled and won, nobody would ever have heard from them.’”

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