The Housing Bubble

The Wall Street Journal reports on California. “Last November, Allen Harper says he made an offer of $390,000 for a brand new three-bedroom house in a development sprouting here in the desert east of Palm Springs. Home builder Lennar Corp.’s response: No thanks. Six months later, Lennar jumped at the opportunity to sell the home for that very price to Mr. Harper.”

“So he scooped it up Monday in a rare online auction that attests to the lengths a major builder will go to jump-start sales of vacant homes. The event also signaled there will be no quick exit for home builders from their current doldrums.”

“The 14 houses Lennar has been selling online come only from the more expensive 84-unit Marquesa neighborhood. The other Marquesa homes had already been sold conventionally, some for more than $500,000, but new residents say they received sharp markdowns. John Nelson moved from a nearby town two months ago after Lennar accepted an offer, he says, that was $85,000 below list price.”

“Seattle resident Ken Crow decided to bid after monitoring the area’s steadily declining prices. A year ago, he considered making an offer for a Lennar Marquesa home that listed for $530,000. On Monday, his highest bid was $377,000, but he was beaten out by competing offers.”

“He says he’s out of the running for now. ‘I would only buy one of those houses if I could get it at a ridiculously low price where I couldn’t get hurt in this market,’ he says.”

“Mr. Harper, the successful bidder, ended up with the high offer for four of the 16 homes. Even as he agreed to a price for one, he received emails from Lennar offering a discount on an even larger home.”

The Orange County Register. “Think corporate bankruptcies are the worst Orange County has to fear from the collapse of the subprime lending industry? Think again.”

“While just 21 percent of the county’s home purchase loans in 2005 were subprime, well below the statewide average of 26 percent, pockets of the county are much more dependent on high-priced credit. In parts of Santa Ana, 75 percent of the money people borrowed to buy homes was subprime.”

“Subprime was also big in bedroom communities in the Inland Empire, where tens of thousands of Orange County workers live, and elsewhere in Southern California.”

“In a wide band stretching almost to downtown L.A. from the Los Angeles-Long Beach harbors, residents borrowed a staggering $2 billion from subprime lenders. Those loans all were made in 2005, the latest year for which complete data is available, according to an analysis of federal data by The Orange County Register.”

“Before, subprime borrowers ‘had the market as (their) silent partner,’ Aliso Viejo loan broker Paul Scheper said. ‘They could refinance again. They always had the equity.’”

“Not this time. ‘Now they’re kind of trapped’ by stagnant home values, Scheper said. ‘They don’t have their silent partner anymore.’”

The Sacramento Bee. “Budget forecasters watched with concern as state income-tax revenues dipped below expectations during the first months of the current fiscal year.”

“The Legislative Analyst’s Office in January said the administration was too optimistic about property-tax revenues and urged the governor to count on about $200 million less than he had projected.”

“Statewide home sales in March were down 31 percent compared to the same month a year ago, according to DataQuick Information Systems. And in some counties, such as Sacramento, prices have dropped to December 2004 levels.”

The Daily Bulletin. “Maybe they have to go away. But they don’t have to go away mad. I’m talking about all the people in the Inland Empire who have bought houses they can’t afford, and now are facing foreclosure.”

“Sadly, the housing boom of recent years has been followed at the heel by a foreclosure boom. In San Bernardino County alone, 909 foreclosures were recorded during the first three months of this year. That’s double the number for the last quarter of 2006.”

“Inland Empire housing prices are the most affordable in the Southland, which means we have attracted a lot of first-time, inexperienced home buyers. Many of them succumbed to the lure of gimmicky financing plans that inevitably plunged them over their heads and left them unable to make their payments. Now, they are being shown the door.”

“I keep wondering if there’s some way we can spin this, to avoid a public-relations disaster. I mean, as future Emperor of the Inland Empire, I do not wish for our region to become known as America’s Foreclosure and Eviction Capital.”

“Maybe we should give them fruit baskets. You know, like welcome baskets, sort of, only these would be more like farewell baskets.”

“Naturally, each basket will include a nice card inscribed with some appropriate words, such as ‘Better luck next time,’ or maybe ‘If at first you don’t succeed, try, try again.’”

“Or how about this: ‘Tis better to have mortgaged and lost, than never to have mortgaged at all.’”

“Let’s add real estate brochures that show current listings in Los Angeles and Orange counties, just to remind our departing friends that the Inland Empire still offers the best deals, when they’re ready to try again.”

“The baskets also should contain a number of practical items, including a passbook for a savings account at an Inland Empire financial institution. Maybe the account could come with a dollar already in it! This would encourage our friends to save, and save locally.”

“There also should be a handy pamphlet with common-sense advice on buying and financing a home. You know, for next time.”

The Mail Tribune reports from Oregon. “Prices are down, and Jackson County home sales grew in year-over-year figures for the first time since 2005. Countywide, April’s median sales prices for existing homes declined 7.1 percent to $257,200, according to Southern Oregon MLS figures. For a three-month rolling quarter ending April 30, median prices declined 4.5 percent to $262,500.”

“‘I’ve been in this business for 20 years and for 19 years real estate only went up or flattened, then it went down,’ said Stephanie Horton, broker in Jacksonville. ‘It remains a buyers’ market, but buyers are trickling out. For little more than a year, there weren’t any buyers, and I had a lot of people tell me ‘I’m waiting to see how low it goes.’”

“With the local market so closely tied to the ups and downs of California housing sales, Horton sees good implications for the Rogue Valley. ‘California is picking up and we’re usually four to six months behind,’ she said.”

“There are about 2,350 homes on the market right now, up 41 percent from a year ago. That reflects a larger housing stock and sellers who took their homes off the market during the winter coming back.”

“‘For the first time in years, sellers are willing to negotiate. I don’t think it’s unusual for buyers to take 10 to 15 percent off the asking price and still get counter-offers. If they don’t get the counter, they’ll just shoot off another offer down the road,’ says Ron Galbreath of John L. Scott Real Estate in Medford.”

The Bend Bulletin from Oregon. “There was employment growth in every sector of Des-chutes County’s economy during the last three months of 2006, according to a federal report. Job growth is key to blunting effects from the softening local housing market for the next year, local bankers said.”

“‘I think we’ve had a run-up in housing prices the last few years, and a lot of that was driven by non-residents like speculators, and a lot of us would agree that the market got ahead of itself. So it’s a real positive to see that job growth, which could take care of some of the inventory in the market right now,’ said Robin Freeman, CEO of Prineville-based Community First Bank.”

“Wells Fargo’s Gary O’Connell agreed, noting that the FDIC report reflected some softness in the real estate market locally.”

“In Deschutes County, single-family housing permit growth dropped 21.1 percent in the fourth quarter of 2006 compared with the same period in 2005, the report said, while multifamily housing permit growth dropped by 62.8 percent during that period.”

The News Tribune from Washington. “Just in time for the spring buying season: several signs that the Pierce County housing market continues to slow.”

“Pending sales in April were down 13.2 percent in Pierce County compared to the previous year, the biggest dip in the Puget Sound. The number of homes on the market shot up in April to 7,305, pushing inventory up 56 percent over the previous year, the region’s biggest increase.”

“‘The news is, pay attention, sellers, you’re not going to have the spring and summer you usually have,’ said said Dick Beeson, a Windermere real estate broker and MLS director.”

“Some of the county’s leap in inventory, Beeson said, can be attributed to the collection of new condos for sale. Pierce County saw a 114 percent increase in April’s condominium listings compared to the previous year.”

“For months, agents around the South Sound have been counseling their sellers to price right before listing a house. Remax agent Larry Tuell said some are still going too high in a market with savvy buyers who now have more time to shop. ‘You can’t get top dollar unless it’s in top-dollar shape,’ he said.”

The Herald from Washington. “Sales of single-family homes in Snohomish County continued to sag a little in April. For single-family homes alone, sales dropped nearly 18 percent in comparison to April 2006, according to statistics released by the Northwest MLS. Sales in the pipeline that didn’t close last month dropped by a similar amount, 16.5 percent.”

“For buyers, the good news is that listings increased by more than 51 percent, giving them many more choices than a year ago, when listings were falling. The number of condos on the market soared by 89 percent in comparison to a year ago, with 712 units available.”

The Olympian from Washington. “For the second month in a row, a burst of condominium sales helped to soften a drop in overall Thurston County home sales in April, the Northwest MLS reported.”

“Single-family home sales dropped more than 20 percent last month. The data includes sales of new and existing homes. The combined single-family home and condo sales data resulted in a 15 percent decline in home sales from a year ago.”

“Total active listings were nearly 50 percent higher at 2,029 units, up from 1,358 last year.”

“The pace of new South Sound loan applications has so far been strong this year, said Jeff Devlin, a Wells Fargo Home Mortgage consultant. Devlin said he doesn’t sense the ‘doom and gloom’ today that hung over the real estate market a year ago.”

“Condominium sales, meanwhile, remained strong in April, up significantly from last year. The sales increase had no apparent effect on median prices that dropped more than 16 percent from the same period last year.”

“A higher inventory of lower cost condos has caused median prices to drop, but as construction starts on more expensive condo projects this summer, median prices are expected to rise, said real estate agent Tamera Strawn, a condo sales specialist.”

The Seattle PI. “While home sales have slowed in King County and Western Washington, they’re picking up in Seattle. The patterns of increasing year-over-year sales in the city and declining sales in the county and region also hold true through the first four months of 2007, according to a Monday report by The Northwest MLS.”

“Home sales in April were down 4.2 percent in King County and 7.9 percent in all 19 Washington counties the MLS serves, compared with the same month last year. The declines are even larger excluding condominium sales.”

“The contrast between increased sales in Seattle and decreases in the county and region is not yet a trend, ‘but it’s certainly worth watching,’ said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.”

“The city, county and region in April also continued a trend of increases in the number of homes on the market, with inventory up 52.9 percent in Seattle, 45.1 percent in King County and 39 percent in all 19 counties combined from April 2006.”

“Buyers are thinking about the uncertain state of the market. ‘That’s why we’re being selective in where we’re looking,’ said Eric Norman, who is viewing homes in Mount Baker, Beacon Hill and Columbia City. He said homes in the right neighborhoods should fare better in any downturn.”

“Sahrah Marcantonio was pessimistic about the market, but didn’t care. ‘I think it’s a bubble, we’re at the peak of the bubble, and yet, I want a house now,’ she said. ‘It’s for the long term.’”

Some housing bubble news from Wall Street and Washington. “Luxury home builder Toll Brothers Inc. said on Wednesday it expected to report lower quarterly revenue and warned that its profit would fall short of its own forecasts, as the protracted downturn in the U.S. home market worsened. ‘Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets,’ CEO Robert Toll said in a statement.”

“‘We no longer expect to achieve the most recent quarterly and annual guidance we provided on Feb. 22,’ he said.”

From Reuters. “Toll Brothers’ home-building revenue fell 19 percent for the period ended April 30. Second-quarter net signed contracts were off 25 percent. The second-quarter cancellation rate was 19 percent, higher than a rate of 9 percent in 2006, Horsham, Pa.-based Toll said. The second-quarter-end backlog of homes fell 32 percent.”

“The company expects write downs pre-tax to be between $90 million and $130 million in the quarter.”

From Bloomberg. “Toll said that while fewer than 2 percent of its buyers use subprime loans, stricter lending standards following the collapse of several mortgage companies are making houses at all price levels less affordable.”

“‘This, in turn, can impact the entire housing food chain, including some of our potential customers’ ability to sell their existing homes,’ Toll said in the statement. ‘This, coupled with a lack of buyer confidence, may have served to impede the glimmers of a rebound we had started to see in early February.’”

From MarketWatch. “About 70% of cancellations in the latest quarter were from contracts signed more than nine months ago. ‘This means that buyers are typically cancelling closer to closing, likely due to price or inability to sell their existing home, instead of financing issues that typically occur earlier in the process,’ wrote Banc of America Securities analyst Daniel Oppenheim.”

The Star Telegram. “Crescent Real Estate Equities Co. reported a first-quarter loss Tuesday and said it will sell the 21-story Ritz-Carlton Hotel and luxury condominium project under construction next to its flagship Crescent Court development in Dallas.”

“Denny Alberts, president and chief operating officer, said the 217-room Ritz-Carlton and the 70-unit condo project no longer fit Crescent’s portfolio.”

The Wall Street Journal. “In the latest fallout from the housing market’s decline, disputes are breaking out between builders and buyers who signed contracts for new homes and condos when the market was hot, and now want to get out of them.”

“In Alexandria, Va., real-estate attorney Beau Brincefield said he has settled roughly 50 contract disputes and has another ‘50 or more’ in the pipeline.”

“Mr. Brincefield said the terms of that settlement are confidential. In general, he said, builders have agreed to lower purchase prices by as much as 35% or refund 25% to 100% of a would-be buyer’s deposit.”

From Forbes. “The National Association of Realtors said that sales this year will be lower than it earlier forecast. Carl Reichardt, a senior equity research analyst at Wachovia Securities, told Forbes.com that he wasn’t surprised by the lower projections.”

“‘We have seen deterioration in business conditions for the homebuilders that we survey in March and April,’ Reichardt said.”

“Reichardt surveys 150 sales managers for homebuilders in 18 markets every month. ‘Traffic was OK for the first three months, but then deteriorated in April,’ he said. ‘Sales were also OK, but also then deteriorated in March and April as well.’”

“And it could still get worse, Reichardt said. ‘The homebuilding business has lost a portion of its customer base as financing conditions continue to compress,’ he said. ‘The housing industry has relatively modest job growth supporting it. If that leg is lost, housing could get worse.’”

The Philadelphia Inquirer. “This year’s subprime-mortgage turmoil has forced a Philadelphia specialty-finance company to record an unrealized loss of $65.6 million on its $3.6 billion portfolio of mortgage-backed securities.”

“The loss, reported for the quarter ended March 31, reflects a decline in the market value of the mortgage-backed securities, not defaults on specific mortgages.”

“Countrywide Financial Corp., the largest U.S. mortgage lender, said on Wednesday it made 11 percent more home loans in April than a year earlier, but slashed lending to people with weaker credit histories.”

“Nonprime loans, including ’subprime’ loans, sank 49 percent to $1.68 billion, just 4 percent of total volume, and fell 29 percent from March’s $2.36 billion.”

“Like many lenders Countrywide has tightened its loan guidelines, and in March it stopped making some no-down-payment subprime loans. Just 7 percent of loans were nonprime from January to March, and Countrywide expects that rate to fall as low as 4 percent this quarter.”

“Countrywide funded $2.7 billion in pay-option loans during the month as compared to $6.7 billion in the year-ago period.”

“Mortgage investors could turn their backs on the market if they are forced to pay for flawed loans written by other lenders, several financial services industry representatives told U.S. lawmakers Tuesday.”

“A mortgage investor ‘needs to know that he won’t bear responsibility based on conduct by parties outside of his control,’ Howard Mulligan, an attorney who specializes in the mechanics of selling home mortgages to investors, told a Congressional panel.”

“Regarding assignee liability, which would make mortgage investors share the risks of defaults on fraudulent home loans, Wells Fargo home mortgage lending chief Cara Heiden said: ‘I am of the opinion that we shouldn’t go there.’”

“Many lawmakers have cited as a model a New Jersey law that allows mortgage fraud victims to sue for damages but protects investors who take steps to make sure the loan is proper.”

“Donald Lampe, another attorney who works on mortgage investments, told Tuesday’s panel that an assignee liability statute that was too strong could spook investors with the fear of homeowner lawsuits and ‘impair the secondary mortgage market.’”

“Standard & Poor’s joined Moody’s Investors Service in requiring more protection for investors in bonds backed by second mortgages, as late payments and defaults exceed expectations on such debt to borrowers with poor credit.”

“Subprime versions of ‘piggyback’ loans have performed worse than subprime housing- debt overall, putting some AAA rated securities sold by Goldman Sachs Group Inc. at risk of downgrades from Moody’s and leading HSBC Holdings Plc to set aside more reserves for losses.”

“‘People are taking out these loans and then realize they can’t make payments on them,’ said Terry G. Osterweil, an analyst at S&P. ‘The first one they’re going to default on is the second lien, not the first lien, because many times a servicer will write off the second lien and not foreclose.’”

“In November, ratings services broke from their past practices on mortgage bonds to reassess their initial ratings before a passes. Since then, securities of second mortgages have had the most ratings downgrades or warnings about downgrades among bonds from 2006, including on the only AAA bonds.”

“‘The bonds have come out of the gates performing extremely poorly,’ said Jeremy A. Shor, a portfolio manager at Brown Brothers Harriman & Co., who oversees about $3 billion in asset-backed bonds. ‘The market is trying to determine if this is due to idiosyncratic or systemic reasons.’”

“The poor performance of subprime piggybacks stems from ‘a combination of the home-price-appreciation effect hitting at the same time as the origination standards led risk-layering to be at its highest,’ which created more stretched borrowers and less ability for them to tap equity in a refinancing or sell, said Nicolas S. Weill, a senior vice president at Moody’s.”

“Defaults by real-estate speculators, or ‘flippers,’ probably also is rising, Weill said.”

“Bank of America Corp. CEO Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.”

“‘We are close to a time when we’ll look back and say we did some stupid things,’ Lewis said. ‘We need a little more sanity in a period in which everyone feels invincible and thinks this is different.’”

“Lewis isn’t the only U.S. bank executive who expects that credit conditions will change. Wells Fargo & Co. CEO Richard Kovacevich said in December that ‘I am not a forecaster of the future; I’m a historian. And history says this will blow up. It always has. And there will be some blood on the street.’”

The News Press reports from Florida. “Florida’s stagnant real estate market sunk Bonita Springs-based WCI Communities Inc. to a first-quarter loss of nearly $16 million, the company said Tuesday. ‘The first quarter was a tough quarter with no broad signs of improvement, particularly in Florida,’ CEO Jerry Starkey said.”

“Revenues for the first quarter were $340.6 million, compared with $570.7 million for the first quarter of 2006, a 40.3 percent decrease. Starkey blamed stalled sales, declining profit margins and contract cancellations for the shortfall.”

“WCI’s new orders for the quarter fell 41 percent and the total value of new homes and condominium units dropped 53.4 percent over the same period a year ago. In all, gross margins on new homes were 16.6 percent, down from 22.8 percent a year ago. For condominium tower units, contract cancellations put an even greater squeeze on margins to reduce them to about 1 percent, down from 24.8 percent a year ago.”

“‘Obviously, it was not a very good quarter for the tower business,’ Starkey said.”

“More than 250 Lee County home builders each could save about $6,000 as they cope with contractors who have abandoned them. County commissioners voted Tuesday for an ordinance that will allow home builders with expired permits to renew them for $100 instead of paying thousands more.”

“‘It’s a real problem out there,’ said Commissioner Frank Mann. ‘We have these homes being vandalized, creating eyesores, and they would remain that way for the foreseeable future unless we did something.’”

The Herald Tribune. “Incorporated in 2003, Golden Rule Construction Group. was soon besieged with orders to build and repair houses, apartments and offices across Southwest Florida. But like so many ventures during the recent real estate boom, Golden Rule’s success proved fleeting.”

“In a way, (co-owner) Keith Chandler Powell’s story is a familiar one in Southwest Florida: His construction business took off in 2004. Thinking the boom would last forever, he spent too freely and ended up in bankruptcy.”

“Larry Ekstrom contracted with Powell to build an $850,000 house in Port Charlotte. ‘We gave him $40,000 upfront and he moved dirt around a little. Then we gave him $80,000 more and he couldn’t get anything else done.’”

“Ekstrom ended up having to settle with Powell’s unpaid subcontractors before hiring another builder to finish his house.”

The Miami Herald. “It’s about to get a little easier for South Florida renters. The sharp jumps in rental rates of recent years are finally starting to flatten out. There are now more vacancies. And thanks to a weak housing market, some condo and house owners who can’t sell have decided to become temporary landlords instead, giving renters more choices.”

“Heidi Williams just started renting her 1,030-square-foot Brickell Key condo from an individual owner for $2,100 a month. That’s after her agent negotiated $200 off her rent each month.”

“‘I was actually surprised because I’ve never gotten that break,’ said Williams. ‘In my mind, they were just saying, ‘Let’s get it rented.’”

“Another sign of better times for renters is the return of incentives from landlords desperate for leases. Of 408 large market-rate apartment complexes in Miami-Dade, Broward and Palm Beach countries surveyed by Jack McCabe’s firm, about 10 percent offered concessions such as one month’s rent and other incentives. That’s up from virtually none in 2005 and 2006.”

“‘They don’t normally do this unless they see their occupancies drop,’ McCabe said.”

“These landlords are now facing competition from a new source of rentals, condo owners. Some of these owners never planned on renting their condos out, but figure they might as well pay their mortgages through renting while waiting for the housing market to brighten.”

The Times Union. “In the boom years, some home buyers bought their American dream, and with clever loans that kept early payments low, it was a bigger dream than ever. Now, those adjustable-rate mortgages (ARMs) that took off at the turn of the century are set to adjust, and if owners aren’t careful, their dream will end with the housing boom’s demise.”

“Hank Oltmanns, president of the Northeast Florida Association of Realtors, says so far, most of his past customers have been able to find ways out of ARMs that stretched budgets thin, but he expects that won’t be the case for long.”

“‘It’s going to happen. This market is going to get some people who are going to be at that point [of adjustment] and not be able to refinance because the equity isn’t there or another reason,’ he says.”

“Patrice Yamato, president of the Florida Association of Mortgage Brokers, says that the next few months will most likely bring a dose of reality to many owners. The subprime market in particular, in which buyers with poor credit took loans with high rates, will be rocked by adjustments, she says.”

The Orlando Sentinel. “It’s take a real estate agent out to lunch week. This is from a post that I decided to share with the entire class. ‘This market has just about put me out of business. Listing that don’t sell, sellers won’t lower their prices, huge marketing overhead, gas, dinners, it’s just too much I’m going into bankruptcy soon! Buyers have all but dried up! I’m going to have to sell something else just to feed myself.’”

“Gosh, how far we’ve come from sticking a sign in the yard then waiting for a dozen speculators to bid up the price another 20 percent.”

“This brings up an interesting issue. A good chunk of Central Florida’s job growth since 2004 has been in, you guessed it, real estate!”

“When the business of houses takes a hit, a lot more than the cost per square foot takes a hit. A sizable chunk of the economy takes a hit, which, impacts the cost of housing. It is quite the nasty circle.”

“Not only do house prices have to get back to a sustainable level, but the percent of the workforce in real estate has to return to its proper share of the economic mix.”

Please post off-topic ideas, links and Craigslist finds here.