The Housing Bubble

It’s Friday desk clearing time. “Real estate prices on Cape Cod dropped again in April, said Barnstable County Register of Deeds John Meade yesterday. The median sales price in April was $340,000, 8 percent lower than at this time last year, marking the sixth consecutive month of declining prices.”

“‘The fact that the market’s more active is a good thing and outweighs the slight decrease in value,’ Meade said. ‘Prices are coming down a little bit and as a result we’re seeing more activity. It’s Economics 101.’”

“It’s getting harder to sell a house in the Capital Region. The inventory of available houses is growing. And buyers are getting choosy, demanding that sellers drop their asking prices.”

“‘The price of the house has to come down to sell,’ said Geraldine Abrams of Geraldine and Associates in Saratoga Springs. ‘What people thought they could get is not in line with what’s real.’”

“Rhode Island’s spring housing market opens this year with real-estate agents making a new pitch, lower prices. The statewide median price of a single-family house during the first quarter fell nearly 3 percent, according to two separate real-estate reports.”

“The town-by-town breakdown of sales by real-estate agents showed that on Providence’s East Side, the median house price during the first quarter plunged 26.5 percent, or $152,000, to $422,500 from a year earlier, according to the Association of Realtors.”

“‘Prices kept going up for years,’ said real-estate agent Karen Tomaskzewski, ‘and now we’re making the necessary adjustments.’”

“The soft Sydney residential market is good news for home buyers with Australand forced to cut house and apartment prices in its developments in Sydney by up to $100,000.”

“Werriwa MP Chris Hayes said the rate of mortgagee-in-possession sales in NSW had jumped by 75 per cent since 2004, with a significant number of these in western Sydney. ‘Land values have been decreasing and housing prices are down, so a lot more people owe more money than what their homes are probably worth,’ Hayes said.”

“It’s a real estate reality check. In Sioux Falls, South Dakota, the number of foreclosures is holding steady, but the reason people can no longer afford their homes is changing. Some people who took advantage of sub-prime mortgage offers—are now having trouble making their payments.”

“‘Money was cheap and a lot of banks gave loans to borrowers who probably shouldn’t have been buying a house,’ said Steve Messerschmidt. Messerschmidt has been a realtor in Sioux Falls for more than 20 years.”

“More than 5,000 new foreclosures were filed in Montgomery County in 2006, a 25 percent jump over the previous year, according to data from the Supreme Court of Ohio.”

“‘Our fear is that at this point this is sort of a telling sign of things to come for 2007 and 2008,’ said Bill Faith, executive director of the Coalition on Homlessness and Housing in Ohio. ‘We’re afraid that we could look back to 2006 as the good old days.’”

“The total number of foreclosures in El Paso County, Colorado, during the first quarter of this year was 828, a 42.3 percent increase from the first quarter of 2006 and more than the annual totals from 1993 to 1998.”

“A tightening of the market might be a good thing, because it was probably too aggressive, according to mortgage specialist Dan Bathje.”

“‘Just about every company I know did some kind of ARM loan. Now there are just less sub-prime loans out there,’ Bathje said. ‘So, it might not be as easy for some people to get a loan these days, but that’s OK. There are still things available, but it may mean they have to have a down payment or wait six months to a year.’”

“The news: Foreclosures of homes are up 51 percent this year over 2005. But the Tucson Citizen’s online community places most of the blame on home buyers.”

“‘People are responsible for what they do, including reading and understanding a contract before signing it,’ Rick M. says. Echoes Tmoonz: ‘People, just because someone tells you that you are qualified for a $250,000 home loan does not mean you can afford it!’”

“And O., quoting the 19th-century French political philosopher Alexis de Tocqueville, chalks it all up to good ol’ covetousness: ‘It is odd to watch with what feverish ardor Americans pursue prosperity.’”

“When I bought my first home in 2005, I did everything right. All of those smart moves won’t save me from taking a loss, though. I bought almost at the peak, spending $240,000 on a two-bedroom condo in the trendy Chicago area of Lakeview.”

“I’m suffering a big hit on the condo. My situation is known as an ‘underwater’ sale, meaning my selling price came up short of what I owe on the mortgage. Counting commissions, closings costs, and all the rest, I’ll be out roughly $20,000.”

“Most of that is coming straight out of my pocket. Uncle Sam won’t offer any solace: Because of long-standing tax rules, I won’t be able to write off the loss from the sale of my home.”

“I remember vividly the pride I felt on the first night in my new place. Now the experience conjures up anxiety, restlessness, and regret. It’ll be a long time before I jump back into real estate. But at least, as I’ve reminded myself during the darker days of this ordeal, I love my job.”

The Signal reports from California. “The housing market may be either ‘back to normal’ or ‘depressed,’ but one thing is for certain, it’s not what it used to be. ‘I’ve been in real estate for 20 years, and I’ve seen changes in the market,’ said real estate agent Margo Sherwood, adding that the market has been stagnating locally.”

“Jack Kyser, chief economist for the Los Angeles Economic Development Corp., said that the market is shifting to a very strange dynamic, especially with people who were trying to ‘flip’ properties, and those who were paired with mortgages or homes that were wrong for them.”

“‘A lot of people are quite nervous,’ he said.”

“Realtor Linda Slocum said that the market during the three years previous to the crash was abnormal. ‘It was a frantic three years, and then it went back to normal,’ she said.”

“Kyser disagrees, saying that although there was a dramatic increase in the housing market close to a frenzy, it went too far on the other side of the spectrum. ‘It’s like you were out on a binge, you’re waking up the next morning and you have a very bad hangover,’ he said.”

“The problem with the current market is that the supply is up, without the demand for the homes, and without as many buyers, many of whom are unable to afford housing due to the tightening of conditions by lenders. This is partially due to the foreclosure crisis.”

“Slocum said there have been concerns when people refinance their homes or take out another loan and don’t use it for their homes but rather for ‘play money.’ ‘It’s not all people who got into bad loans,’ she said of foreclosures, although she added that Los Angeles County’s biggest concern regarding foreclosures is in Palmdale.”

“In addition, builder confidence hasn’t been strong. ‘They are selling, but they aren’t selling at the rate they were,’ Slocum said.”

“Although not much activity is expected in 2008 or 2009, 2010 might be the year that things bounce back. Slocum said she receives calls at her office, saying that people don’t want to buy a home because ‘the market’s going to crash.’”

The Contra Costa Times. “The meltdown of the subprime lending arena has imperiled hundreds of East Bay jobs. For the moment, though, subprime lending woes have triggered the loss of at least 250 jobs in the East Bay and dozens in the South Bay, multiple sources said Thursday.”

“Companies in the troubled sector moved to limit further exposure. ‘Once Fremont decided to exit the subprime business, they immediately stopped making new loans,’ said Daniel Hilley, a Fremont General spokesman.”

“‘We have only started to scratch the surface of the subprime problems,’ said Jon Haveman, a principal with a research firm that tracks regional economies in California. ‘That will lead to some job losses. There is a potential that this problem will ripple out into the broader economy.”‘

“Some of those difficulties will jolt the Bay Area economy, he warned. ‘The Bay Area is susceptible to a downturn in employment due to the subprime market going belly up,’ Haveman said. ‘But it will not happen in the Bay Area to the extent we will see in Southern California.’”

“A building industry economist warned that the housing industry’s problems have yet to run their course. ‘I don’t see much of a recovery in store this year,’ said Alan Nevin, chief economist with the California Building Industry Association. ‘Home building will continue to struggle.’”

“Brookfield Homes Corporation today announced net income before taxes for the three months ended March 31, 2007 was $5 million, compared to $31 million in 2005. The decrease is a result of fewer home and lot sales, and a decrease in the gross margin earned on housing to 20% from 31% for the same period in 2006.”

“The decrease in housing revenue is primarily due to fewer home closings during the quarter in the San Diego and Washington D.C. Area markets.”

“‘Market conditions remain challenging, and demand has weakened in recent weeks as a result of mortgage illiquidity in the marketplace. Yet our housing margins remain above industry average,’ concluded CEO Ian Cockwell.”

“Our portfolio includes 27,000 lots owned and controlled in the Northern California; Southland/Los Angeles; San Diego/Riverside; Sacramento; and Washington D.C. Area markets.”

The Sacramento Bee. “Next to the US Bank Tower, Denver developer Craig Nassi hopes to build Aura, a 39-story luxury condominium tower that will cost about $177 million.”

“But Nassi has yet to break ground because he hasn’t purchased the land from local developer David Taylor. Last month, Nassi’s deadline passed to line up financing.”

“Three blocks west, all is quiet where John Saca’s $550 million Towers project is planned between Third and Fourth streets. The foundation work on the ambitious 53-story, twin tower, hotel-retail-condo complex abruptly stopped last fall.”

“To close the deal, he must come up with about $25 million by May 25 to reimburse the state pension fund for what has been spent. The Sacramento-based developer also needs more money from other investors and lenders to restart the project. He has taken deposits on about half of the 800 condos up for sale.”

“Saca did not return a telephone call seeking comment. Mark Cordano of Sacramento-based Cordano Co. said his company has put its Towers retail marketing efforts ‘on hold’ for now.”

The Bakersfield Californian. “In another sign of a stalling real estate market, the number of permits issued to build new homes in Bakersfield dipped to its lowest point in seven years during the first quarter of 2007, according to a report prepared by Howdy Miller of Ticor Title.”

“‘We had such a huge run-up for a number of years,’ Miller said. ‘These numbers just reflect the fact that we’re a tad overbuilt and that it’s going to take some time to catch up with the existing inventory.’”

“Locally, an excess of available homes, high land prices and investor speculation during the real estate boom of recent years combined to sideline small builders and cause large developers to scale back building plans, Miller said.”

“KB Home, a national builder with a large Bakersfield presence, canceled a planned subdivision last year because of high land costs.”

“Corky Martinez, owner of C. Martinez Concrete, didn’t need to see a tally of building permits to know construction had slowed. ‘After the first of the year, it didn’t slow down,’ Martinez said. ‘It just shut down.’”

Some housing bubble news from Wall Street and Washington. Bloomberg, “Hovnanian Enterprises Inc., the worst performing U.S. homebuilder stock, reported a wider second- quarter loss than earlier forecast and said the subprime mortgage crisis is exacerbating weakness in the home sales market. ‘The adverse publicity surrounding the subprime market has further damaged home buyers’ psychology, resulting in decreased demand and leading to continued use of sales incentives,’ Hovnanian said.”

“Hovnanian said today it will have a pretax expense of as much as $20 million to cut the value of its property and walk away from deposits on parcels of land it doesn’t plan to buy. The company delivered 30 percent fewer homes last quarter than a year ago and saw ‘exceptionally high cancellations’ in the Fort Myers-Cape Coral area of Florida.”

“Net contracts for the quarter declined 21 percent to 3,116. Excluding Fort Myers-Cape Coral, the company’s cancellation rate was 30 percent and net contracts dropped 17 percent.”

The Associated Press. “‘These contract results reflect a continued challenging operating environment in most of the company’s markets,’ Hovnanian said in a statement.”

From Forbes. “The extent of Hovnanian’s woes is on par with many of its peers. Recently, Pulte Homes said first-quarter sales dropped 38%, to $1.8 billion, in the first quarter, reflecting a 37% decline in home closings. Another major home builder, D.R.Horton also warned investors last month that sales orders tumbled about 40% in the second quarter.”

“‘I think the loss will only get worse as time goes by, at least for another year or two,’ JMP Securities analyst, Alex Barron, said. ‘Most of the builders are operating on very thin margins right now, as soon as they drop the price a little bit, they start losing money.’”

The Orange County Register. “New Century Financial of Irvine, the largest subprime lender to file for bankruptcy protection, said it will lay off 2,000 of its remaining workers, including 500 in Orange County, effective today, after failing to find a buyer for its loan-making units.”

“‘This brings us to today, which is a day that I could never have imagined facing,’ said CEO Brad Morrice. ‘We must terminate most of our remaining workforce, including virtually all origination personnel.’”

“Kathleen Allen, a regional operations manager who is being let go after 11 years with the lender, said she held out hope that part of the company could be salvaged until yesterday’s call. ‘It’s hard to understand how we were number two in the nation and now we are nothing,’ Allen said.”

“Analysts said New Century could not find a buyer for its assets because so many other companies are trying to unload their assets amid the industry meltdown. ‘If you can get it off your hands without losing money, that’s the best you can expect,’ said analyst Bose George.”

“He said subprime loan volume could drop by a third or a half this year. That doesn’t bode well for laid off workers, he said. ‘That has to come out of somewhere,’ George said. ‘Even if platforms are sold the buyers will have to do the trimming. It’s kind of inevitable that this stuff happens for a little while.’”

“Embattled subprime lender New Century Financial Corp. said KPMG LLP resigned as the company’s auditor, effective April 27, noting that KPMG didn’t include any adverse opinion in its audit reports for the years ended Dec. 31, 2005 and 2004.”

“On Feb. 7, New Century said it needed to restate results for the 2006 quarters ended March 31, June 30 and Sept. 30 to correct accounting errors for loan repurchase losses. New Century was advised by KPMG that the 2006 accounting issues could constitute a material weakness in the companys internal control over financial reporting.”

“NewStar Financial, Inc. today reported…a $14.9 million pre-tax charge to recognize impairment in the company’s residential mortgage-backed securities portfolio.”

“The company also announced that it would discontinue its investment activity in this asset class and manage the disposition of its current portfolio over time to optimize its economic value.”

“‘A severe correction in the RMBS market offset an otherwise strong quarter for our core lending franchise,’ said CEO Tim Conway.”

The Chicago Tribune. “The downturn in the housing and mortgage industries is crimping the profits of another Chicago-area financial-services company. Old Republic, which characterized the results as ‘a bit disappointing,’ writes insurance policies that kick in when a borrower defaults on a first mortgage home loan. As more mortgage lenders reported loan defaults, Old Republic had higher claim costs in the quarter.”

“‘I hate to say it, but when we consider the continued negativity of housing statistics so far this year, it does not augur very well for the title business,’ Al Zucaro, Old Republic CEO, said in a conference call last week. ‘Revenue expectations for this year, for the second quarter at the least, are probably not going to be met in light of these trends.’”

“The industry, in fact, could be in for tough sledding well into 2008. ‘It took a while for the housing and mortgage lending industries to reach a fever pitch,’ Zucaro said, ‘and it will take as long to wring the excesses out of this part of the economy and bring down the temperature.’”

“Employers in the US last month added the fewest jobs in more than two years as payroll losses spread beyond homebuilders and manufacturers. The unemployment rate rose.”

“Ian McCarthy, CEO of Atlanta-based builder Beazer Homes USA Inc., said April 26 that the housing market remains ‘extremely challenging,’ and he doesn’t see any signs of recovery.”

From MarketWatch. “Mortgage brokers would be saddled with new rules designed to protect borrowers in the hard-hit subprime market under a bill introduced Thursday in the Senate.”

“The proposal would force brokers and originators to assess a borrower’s ability to repay a loan before taking one out, and prohibits ’steering’ consumers to rates or terms they can’t afford.”

“Also Thursday, the Federal Reserve said it will hold a public hearing June 14 to consider adopting new rules to combat abusive lending, especially in the subprime market.”

“‘The goal is to find ways to promote sustainable homeownership through responsible lending, informed consumer choice, and effective guidance and regulation,’ said Fed Gov. Randall S. Kroszner in a statement. The Fed has authority to issue regulations that cover all lenders, not just banks.”

The LA Times. “The notion of a taxpayer bailout would be highly controversial, and many politicians are wary of having government come to the rescue of borrowers who took out voluntary loans. Community activists, however, maintain that many borrowers were deceived about the costs they were incurring.”

“‘To be clear, no one is getting bailed out,’ said a statement by John Taylor, president of the National Community Reinvestment Coalition. ‘Borrowers will repay their loans, but at interest rates and with fees that are fair and reasonable.’”

“As state lawmakers rush to reform lending practices that have contributed to a recent surge of mortgage defaults and foreclosures, consumer advocates say these efforts fall short of what is truly needed: a federal law protecting home buyers.”

“Any new laws from Congress are far from certain, however. Senate Banking Committee Chairman Christopher Dodd says increased regulatory oversight and voluntary actions by lenders are preferable to a government bailout.”

“Kurt Pfotenhauer, senior vice president for government affairs at the Mortgage Bankers Association, called Dodd’s approach ‘responsible, thoughtful and forceful.’ A taxpayer-financed bailout plan doesn’t make sense, he said, because ‘the mortgage finance industry is already stepping up to help those borrowers.’”

“Steven Wieting, senior economist with Citigroup, said tighter lending standards should result in lower levels of home sales in the coming years. He does not believe the mortgage market’s troubles will hamper the economy in the short term.”

“As defaults rise, credit agencies Standard & Poor’s and Moody’s have in recent weeks downgraded or placed under review bonds backed by risky mortgages, particularly second mortgages that borrowers have used to finance 100 percent of a home’s value.”

“Economist Christopher Thornberg said the credit rating agencies should have been far more skeptical. ‘These things should have been rated as risky a long time ago,’ he said.”

The St Petersburg Times reports from Florida. “As of last month, a record 30,000-plus single-family homes were listed for sale in the Tampa Bay area, and for the first time in three years, the median sale price in Pinellas County dipped below $200,000.”

“Realtor Nancy Baird doesn’t mince words when asked about having to hang on another six weeks or longer. ‘It’s a huge problem because so many people are waiting to see what happens,’” Baird, a sales agent in St. Pete Beach, said. ‘They’re scared they won’t be able to take their Save Our Homes cap with them. I have a customer who’s selling her condo and renting instead of buying because it’s cheaper.’”

“Baird recently sold a home in St. Petersburg that had an assessed value of $230,000. Because the home had been on the market 18 months, it sold for the discounted price of $180,000.”

“In its latest study, Metrostudy found that Pasco County’s annual housing starts fell 46 percent in 2006 from the year before, the biggest drop in the Tampa Bay area.”

“But, in some cases, the chilly market does not explain everything. For example, the award-winning, 4, 800-acre ‘new town’ of Connerton in Land O’Lakes launched its sales in late 2005.”

“It’s approved for 8, 700 homes. So far, it’s sold about 200, said Stewart Gibbons, Connerton’s president.”

The Orlando Sentinel. “The number of finished-but-vacant homes ‘remains troublesome,’ according to a report released Thursday by Metrostudy. The number of vacant new homes in the region rose 26.3 percent from the first quarter of 2006.”

“‘No one is putting anything new on the ground,’ said Keith Bass, Orlando division president for Ryland Homes. The Metrostudy report showed that housing starts in Orange, Lake, Seminole, Osceola, Volusia and Polk counties fell 46.7 percent during the first quarter compared with a year earlier.”

The Citrus County Chronicle. “Statistics show new residential starts in Citrus County declined 29 percent from 2005 to 2006 and the total dollar value of new residential construction declined 26 percent in the same period.”

“Jim Crosley, director of sales and marketing for Rusaw Homes, said the company has felt the slowdown. Rusaw Homes marketed 130 sales contracts in 2005, but only 50 in 2006 and just 3 so far this year.”

“‘The market has gone completely south,’ he said.”

“Colony Stone, a subcontractor that handles stuccowork for Rusaw Homes and Citrus Hills, has laid-off 60 employees, Crosley said. ‘That’s going to be a big impact on the county,’ he added.”

“He said some people are paying twice as much in taxes as they were three years ago. Property values were falsely inflated when investors ‘flipped’ property for quick profits in 2005, he said.”

“Development Services Director Gary Maidhof said more single-family housing permits were issued during the first three months of 2007 than in the first or second quarters of 2006, respectively.”

“Maidhof said the trend in 2005 was for investors to sink money into real estate, which was rising in value, but the reverse is true today. ‘Keep in mind, in 2005, that was an anomaly,’ he said.”

The Sun Sentinel. “When a mortgage broker convinced Erik Zapata he could own a home, he quickly signed on the dotted line. He and his girlfriend moved their two children out of a low-income housing project in Pompano Beach and settled into their new Coconut Creek condo.”

“But as the numbers on his monthly statements soared, Zapata found himself in a sinkhole of debt. He says he did not clearly understand what he signed: a deferred-interest loan that adds thousands of dollars in unpaid interest to his mortgage.”

“‘The dream home becomes the nightmare,’ said mortgage lender Tino Diaz,. ‘If we’re putting people into homes they can’t afford, we’re wrecking them. You have lenders out there saying, ‘If you’re breathing and you’ve got a paycheck, let me give you a home.’”

“The brother-in-law of a good friend, a Boca Raton lender, talked him into an easy deal, Zapata says. His income, at the time $22,000, didn’t need verification, the lender said.”

“Zapata agreed to pay $700 monthly before taxes on a $244,000 condo in Riviera Palms. He’d pay over a 40-year period at an interest rate of 1.7 percent. But he didn’t know he was paying only a fraction of the total interest, 8.6 percent. He soon noticed his statements showed a debt growing by $1,000 a month.”

“‘I felt cheated,’ said Zapata. He considered walking away and losing the condo, but is trying instead to get a refinancing loan with a different lender. He could pay more than $7,000 in refinancing penalties and has little money left over for other expenses.”

“Zapata admits he had been in a hurry to sign and glossed over key details in his contract. ‘We were so happy when we moved into this place,’ Zapata said. ‘Now I sit up at night staring at the numbers.’”

The Herald Tribune. “Coast Financial Holdings Inc. continues to hemorrhage, posting a loss of $2.4 million in the first quarter. Coast also increased its provision for loan losses by $1.4 million in the first quarter, primarily to cover a commercial real estate loan to developer Michael Tringali.”

“The bank made 482 loans totaling $110 million to CCI customers, many of whom were speculators. The company drew millions of dollars from the bank, even though it did little to no work on some of those homes.”

“Many of those borrowers, $31.6 million worth, have stopped making payments on their loans, and Coast will file foreclosure actions against them. ‘We have begun enforcing our rights under the construction loan agreements,’ said Tramm Hudson, Coast’s special advisor.”

“Four additional customers of a home building company that abandoned 50 home sites here went to police this week to pursue further criminal charges against the company’s top executive.”

“Joseph Pufta, the former head of now-defunct Avalon Homes, was charged last month with 21 felonies after seven families contacted police saying he took their money and failed to complete the work they paid for.”

“‘It’s all the same,’ said North Port Police Detective Lenny Hills, of the families’ stories. Avalon got money from construction loans and failed to pay subcontractors for work, Hills said. Those subcontractors, in turn, abandoned the jobs and placed liens on the houses, he said.”

“While several other local home builders faltered when Southwest Florida’s real estate bubble burst last year, Pufta is the only area builder to face criminal charges. One of Pufta’s charges stems from an episode where police say his company cashed a New Jersey woman’s $42,180 check, yet 18 months later her lot had not even been cleared.”

“‘I didn’t know it was a crime that you filed with police because it’s a builder that just didn’t finish your house,’ said Alisha Buckingham, who finally contacted authorities after work on her two-story home stopped last June.”

“She said that on Aug. 11 the company drew $42,000 from her account. ‘I don’t care if I’m in labor, I’ll be sitting in that court until it’s done,’ Buckingham, now seven months pregnant, said about seeing Pufta held accountable.”

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