The Housing Bubble

Inside Bay Area reports from California. “A year ago, short sales of homes were in short supply. Not anymore. Today, short sale, or discounted, listings are on the rise in the Bay Area and San Joaquin County due to cooling home sales, soaring foreclosure rates and the resetting of easy-money loans into higher mortgage payments, observers say.”

“In early May 2006, there were hardly any short-sale listings in Fremont, Hayward, Newark and Union City, said Steve Dhillon, a Realtor in Fremont. One year later, almost 8 percent of homes on the market in Fremont were listed as short sales, according to data from the multiple-listing service used by Realtors.”

“In Union City, 15 percent of listings were short sales, followed by 10 percent in Hayward and 7 percent in Newark.”

“Another reason for the increase in short sales over the last year is that many borrowers have taken cash-out equity loans, said Sarah Baggott, manager of the Hercules and El Cerrito offices of Prudential California Realty, who is seeing short sales in El Cerrito, Richmond, San Pablo and Hercules.”

“‘Most of them are because people have pulled out equity over and over again,’ Baggott said. ‘Some people have pulled out so much, their payments are too high. Every time you pull out money, your payment goes up and they don’t think about that.’”

“In early May, almost 7 percent of the homes for sale in Tracy were short-sale listings, said Realtor Dave Konesky. Although there is variation among properties, a typical short-sale discount would be 10 percent off the underlying mortgage, he said.”

“‘I think the biggest thing (leading to the short-sale increases) are the loans,’ he said. ‘And now we are seeing the backlash of that, the looseness (of loan underwriting requirements) is now turning around and biting us,’ he said.”

“Short sales are also on the rise on the Peninsula. Bob Marshall Sr., broker in San Bruno, has been in the real estate business in northern San Mateo County for close to five decades. ‘We have three (short sales) right now being processed,’ he said.”

“In the Bay Area, negative amortization loans soared from 1.7 percent of mortgages taken out in 2002 to 28.3 percent in 2005, according to LoanPerformance. During the same period, interest-only loans increased from 12 percent to 43 percent.”

“San Joaquin County also saw similar growth. Negative amortization loans jumped from just 0.3 percent of loans taken out in 2002 to 21.1 percent in 2005. Interest-only loans went from 2.9 percent of loans taken out in 2002 to 37.5 percent in 2005.”

The Sacramento Bee. “So far, consumers and businesses have borne the brunt of suffering tied to the economy. But now local jurisdictions from El Dorado County to Elk Grove are starting to cope with a revenue squeeze brought on by falling home construction, lower home values and softer retail sales.”

“‘Really the slowdown in property tax has just started to hit the tax rolls and the budgets of our municipalities and statewide,’ county Chief Financial Officer Geoff Davey said. ‘A year from now, that is when you’re really going to see budgetary impacts.’”

“In the first quarter of the year, more than 1,500 homeowners in eight area counties, including Sacramento, lost their homes to foreclosure, 10 times more than in the same quarter in 2006, according to a Dataquick report issued in April.”

“And that was before troubles in the subprime lending market forced another dip in new home sales locally. Fallout from those developments will hit the local governments sometime next year.”

The Union Tribune. “Near the peak of San Diego’s housing boom, home builder D.R. Horton purchased a steep, nine-acre hillside along Friars Road for $22 million. The land was earmarked for Fashion Walk, a trendy, 161-unit condo project. D.R. Horton spent $1.5 million on a retaining wall to hold back the slope.”

“But this March, D.R. Horton walked. It sold the property to apartment developer AvalonBay of Newport Beach. The price: $19.2 million.”

“At San Elijo Hills, a 3,463-home subdivision in San Marcos, four home builders under contract to purchase 257 single-family lots passed on the deals, forfeiting deposits totaling $12.6 million, according to filings with securities regulators.”

“At Del Sur, a master-planned community in Carmel Valley, builders not only have walked away from options on 70 lots but have sought delays in closing sales, said Fred Maas, president of Del Sur’s parent company.”

“‘I’m a very strong believer in the San Diego market, but it has been one of the most difficult markets in the U.S. from a real estate perspective,’ said Richard Douglass, division president of Centex. ‘It certainly went into decline earlier, and I think the decline has been more severe than most people expected.’”

“Most suburban master-planned communities don’t have to cut discount deals, real estate brokers say. ‘Every master-planned community had a crazy run-up in value,’ said Graham Weiss, president of GW Realty Co., which specializes in residential land. ‘So if you don’t have to sell, don’t in a down market.’”

“At 4S Ranch in Rancho Bernardo, developer Newland Communities has held off releasing 288 lots because of soft demand from builders. ‘We’re going to test the market this summer to see if builders are interested in paying a reasonable price for the lots,’ said Mike Rust, a vice president with Newland. ‘Over the past year, they’ve only wanted to buy discounted, fire-sale-type stuff.’”

“‘The question is how long do you want to have your capital tied up?’ said Douglass, the Centex division president. ‘All your money is tied up in this structure. You close all the units at once, and you depend on all those (presale) buyers being there at the end. The market we’re in today really doesn’t support that.’”

“More than 1,200 people who came to the San Diego Convention Center yesterday morning to bid on nearly 100 houses and condominiums that had been reclaimed by lenders.”

“Reflecting the recent national surge in home loan defaults, the dwellings from San Diego and Imperial counties were put on the block by Real Estate Disposition Corp., a company based in Irvine. It was the first of three such events planned in Southern California this month. REDC’s goal is to sell 300 homes that have gone through foreclosure.”

“A record number of San Diego County homeowners lost their homes in the first three months of the year, as default and foreclosure activity rose throughout the state, DataQuick reported. Locally, 1,182 foreclosures took place from January through March. The previous record was 1,059 in the third quarter of 1996.”

“Robert Friedman, chairman of the auction firm, said yesterday’s sale was REDC’s largest such event since the housing recession of the mid-1990s. ‘These are all foreclosures from major financial institutions,’ said Friedman.”

“Typically, the homes were reclaimed by lenders who were unable to sell them, he said. ‘Maybe the home was too high and there was no equity,’ he said. ‘Now the lender will sell it for less than the outstanding balance, in many situations.’”

“Hamid Gholam, a real estate agent from Irvine, said he saw reasonable deals but few true bargains. For investors like himself, ‘I don’t think there’s much money to be made,’ he said.”

The Denver Post reports from Colorado. “Last week, Denver-based MDC Holdings, builder of Richmond American Homes, reported a $94.4 million loss for the first quarter. Additionally, MDC said prospective homebuyers are having a more difficult time selling their homes so they can buy new homes. MDC is hardly alone. Other large, national developers that build homes in Colorado made similar reports.”

“‘They got ahead of themselves,’ said Wells Fargo economist Michael Swanson. ‘And when you get ahead of yourself, you have to sit back and wait.’”

“Jeff Willis, president of the Home Builders Association of Metro Denver, said local homebuilders are doing a good job of clearing inventories, offering incentives, slowing work on projects, and walking away from land-purchase options. ‘It’s still going to take time to whittle down that inventory,’ he said. ‘There’s still some pain to be had for builders.’”

“Jay Peterson of Hanley Wood Market Intelligence said this winter’s snowstorms kept potential homebuyers off the lots of metro-area developers, compounding the problem of growing inventories.”

“‘There were incentives everywhere from $30,000 to $50,000 off,’ Peterson said. ‘I heard of some builders who were even selling their homes at a loss during that time.’”

“Swanson sees what’s happening as a typical part of the business cycle. ‘Once you have gone to the top of the mountain, you have to go to the valley,’ he said. ‘There will be another summit, but we’re not going to get there soon.’”

The Idaho Statesman. “The number of Treasure Valley homes for sale is at a record high, and that is sure to keep driving down home prices, experts said Friday. The Intermountain MLS said 3,143 homes were put up for sale in Ada and Canyon counties between April 9 and May 9, raising the total available nearly 80 percent to 7,124 in just one month.”

“When condos, townhomes and manufactured homes are added, the total jumps to 7,827, said Heinrich Wiebe, co-founder of Genius Realty. Don Hubble, owner of Meridian-based Hubble Homes, said that on Jan. 6, 2006, only 1,780 homes were listed, about one-fourth as many.”

“‘I don’t see any recovery,’ Wiebe said. ‘All I see are a lot of homes that are not selling.’ Wiebe said MLS data shows that 63 percent of homes for sale are owned by investors.”

The Bend Bulletin from Oregon. “Eleven building projects, at a collective cost of more than $250 million, are either under way or expected to start construction this year or in early 2008. Some of the projects, like Bend developer Steven Trono’s 200,000-square-foot Mercato, promise to transform their neighborhoods with innovative shops, high-end condos and expensive offices.”

“Looking further out to next year and beyond, the 199-unit, five-building 500 Bond project will crown the hill above the Old Mill site with four- to five-star hotel-condo rooms. But, with 90,000 to 100,000 square feet of new retail space coming on line, along with 175 top-end condos and townhomes, at least 50,000 square feet of new leasable office space and 199 new hotel-condo rooms to sell and fill, is it all too much?”

“In a softening residential real estate market, the saleability of the district’s condo and townhome projects remains to be seen. The buyers have split about half and half between local Bend buyers moving down from larger homes to out-of-town buyers.”

“So far, 14 of The Plaza’s 42 units are under contract. Prices average around $650,000 to $700,000 for units in the all-residential building.”

“‘They are that urban buyer who wants to bike or walk, who doesn’t want to worry about exterior maintenance,’s said broker Debbie Tebbs. ‘We’ve had interest from people from L.A., people from Chicago, from all over, for that type of housing. So it is a different buyer than I think we have seen in Bend.’”

“Bend developer Steven Trono is shooting even higher on the income scale, planning condos that will range to more than 3,000 square feet in size with price tags, in some cases, surpassing $3 million.”

“‘We’re looking for maybe 26 buyers who already love Bend but don’t have an urban product like this to buy into,’ Trono said, ‘and maybe 26 buyers who are maybe already in Bend, who want to come down from huge houses to something that’s maybe still big enough they can visit with their grandkids in it. People who are living in 6,000- to 8,000-square-foot houses now.’”

“In other words, he’s shooting for buyers in an income bracket that most local developments have never really tried to target.”

“‘Vail, Aspen, Jackson Hole. That’s our competition. It’s nobody in town,’ said Trono, who says his experience consulting with a regionwide radio and TV network in the early 1990s convinced him that the right development in Bend could compete on that kind of dollar level.”

“‘I don’t know if we are overbuilding,’ Compass Commercial’s Jeff Mollencop said. ‘I think we are trying to keep up with the demand. It runs in cycles, of course. There is going to be a lot coming onto the market, and it may take some time to fill, but overall I think it’s very strong and healthy.’”

The St Petersburg Times reports from Florida. “After handling close to 30,000 cases in his career, Pinellas County bankruptcy lawyer Jay Weller insists home debt has never loomed so large. ‘I’ve never had that many people walk away from their houses before,’ Weller said. ‘Real estate is playing a larger role in bankruptcy than in the 15 years I’ve been doing this.’”

“Angel and Myranda Acosta moved to Pasco County from Oklahoma in 2004 near the height of the housing boom and paid $139,000 for a three-bedroom, two-bath house in the Moon Lake Estates neighborhood.”

“They felt lucky to get a loan from Fremont Investment & Loan: 100 percent financing with an adjustable rate mortgage starting at 10 percent. The $1,810-per-month payment is already a struggle and it’s set to ‘bloom out’ next year by an undetermined amount. Their income and credit preclude them from refinancing.”

“‘No theme parks for us. We pretty much stay around the house. At least the weather’s nice,’ Myranda Acosta said.”

“Two homeowning friends recently walked away from their mortgage and moved into apartments. They’re far from alone. The national firm RealtyTrac lists 17,147 troubled properties in Pinellas, Hillsborough, Pasco and Hernando counties. They’re properties in preforeclosure, scheduled for auction or seized by the bank.”

“Horace Morgan, in addition to his realty and mortgage business in Brandon, also dispenses credit counseling for free. Four potential clients who called last week all had the same problem: They used their home equity as an ATM and now are almost broke.”

“‘All four owed more money than their homes were worth and all four were behind on their mortgages,’ Morgan said.”

The News Press. “Christopher and Cathy Comerota bought their Cape Coral home in December 2003 just as the boom in housing prices was taking off. But now they’re looking foreclosure in the face.”

“They’re not alone. Last month, 783 notices of foreclosures were filed in Lee County court, six times the number from the same period a year ago. The increase in foreclosures has been steady in a real estate market that has seen a yearlong fall in Lee County home prices and a glut of houses purchased by speculators who no longer want them.”

“The median sale price of an existing single-family home in the county was $268,000 in April, down 16.8 percent from the all-time high of $322,000 in December 2005.”

“They find themselves owing $350,000 on a house that’s worth about $300,000. Their income is down because Cathy Comerota’s job as a mortgage processor no longer pays much in today’s slack market, so they can’t afford the $3,000-a-month mortgage.”

“Robbie Roepstorff, president of Edison National Bank in Fort Myers, said a wave of speculation in the residential market is to blame for today’s foreclosures.”

“‘As we all know, things got a little out of hand, the real estate market got a little aggressive,’ she said. ‘Investors did a lot of investing in speculative homes. Unfortunately, that doesn’t last forever.’”

The Sun Sentinel. “The Housing Leadership of Palm Beach County has released a study concluding that 90 percent of households in the county can’t afford a single-family home; the median price of an existing single-family home countywide was $375,100 in March, the latest figure available. The situation is no better in Broward County, where the median price is $372,400.”

“Developers are beginning to respond to the growing need for work-force housing. While many of the projects are meant to be affordable to middle-income workers, the prices of others have some housing industry experts asking questions.”

“‘Developers are looking to sell their projects, and they need to do whatever they can to appeal to prospective buyers,’ said David Levin, a housing industry analyst in Delray Beach. ‘Some developers who anticipated selling…at prices that are no longer realistic are repackaging their projects and trying interesting marketing tactics to sell units.’”

“Even at just 5 percent down, a buyer has to cough up $20,000 on a $400,000 unit, a big investment for some. Eric Feldman, a real estate agent in Hollywood, said that the monthly carrying charges on a $400,000 townhouse could be a burden, too.”

The Herald Tribune. “Three years ago, North Port’s booming population set local leaders on a hunt to bring businesses to the fastest-growing city on Florida’s west coast. But now, the city faces many hurdles to stimulate a local economy that has suffered with the downturn in building and real estate.”

“In February 2006, the city looked like it would have a steady stream of growth revenue coming in from home building. Today, North Port is faced with diversifying a largely one-dimensional economy.”

“According to Jeff Finkle, CEO of the International Economic Development Council in Washington, many high-growth communities are facing similar problems. ‘You’re now 50,000 people,’ he said. ‘The economics are not working, and now everybody is going ‘Egads, what do we want to do?’”

“According to the 2005 city survey, the last conducted, only 8 percent of respondents worked in North Port. Many of the companies already in North Port rely in some way on the building industry and are suffering in the downturn.”

“Busy Bee Cabinets Inc. has had to lay off dozens of people as work has dried up. Matt Uebelacker, the company’s president, is trying to increase the company’s sales to homeowners and rely less on home builders, who are not nearly as active as they were even six months ago. North Port issued 41 new home permits in April, down from 88 a year ago.”

“‘It’s ugly right now,’ Uebelacker said.”

The Miami Herald. “At 3-year-old Great Florida Bank, the woes of two commercial real estate borrowers have caused the bank’s problem loans to jump.” “And BankUnited, one of South Florida biggest thrifts, saw the handwriting on the wall two years ago when it stopped making construction loans for high-end condominiums.”

“Several local banks have boosted their first-quarter reserves for loan losses, an indication they may be expecting more delinquent loans this year. At Great Florida Bank, two commercial real estate borrowers that ran into problems sent total nonperforming loans to $9.4 million, and loan payments overdue 30 to 89 days surged to $23 million, almost 2 percent of all loans. Anything over 0.80 percent is considered high.”

“At Ocean Bank, a big mortgage lender, loans that are 30 to 89 days overdue surged from about 2 percent of all loans at the end of 2006 to 4.6 percent at the end of the first quarter.”

“‘The change in the amount of the past-due category is a reflection of the slowdown in the real estate market in Florida,’ said Terry J. Curry, chief credit officer of Ocean Bank. Our loan portfolio is well-secured, and we look forward to the inevitable rebound in the real estate market,’ Curry said.”

“In a recent report, New York investment bank Goldman Sachs estimated the housing downturn would be a mild drag on the U.S. economy, but it singled out Florida as the one state where the slump ‘is likely to cause an outright recession.’”

“As the business environment gets trickier, South Florida banks have come up with strategies to ride out the bumps. BankUnited, for example, decided to eschew lending in the condominium construction market.”

“‘We see a glut coming,’ said Chief Financial Officer Bert Lopez. ‘We have not made a construction loan on a high-end condominium in two years.’”

What do you see in your housing market this weekend? More inventory? “Jill Stone and her husband have been trying to sell their Burlington, Vermont home for a month now. ‘We’ve had a few showings, and we’ve had a few offers. But the offers are coming in lower than our listing price,’ said Stone.”

“The number of houses for sale in Vermont has about doubled in the last two years. ‘You don’t have to make an offer right away, there’s plenty on the market for people to take a look at. When we were buying 2 and half, 3 years ago, you had to make an offer that day or the house was gone,’ said Stone.”

“North Texas existing home sales are down for the third month in a row, according to figures released Friday. Sellers are also seeing increased competition from their neighbors. The number of homes on the market has increased 10 percent to 48,948 active listings in the past year.”

Housing affordability measures? “San Diego County’s high housing prices are no surprise to residents, but now Forbes.com has named the region as the nation’s most overpriced real estate market in a ranking of the country’s 40 largest metro areas.”

“Report author Matt Woolsey said that rankings were based on a complicated mix of a theoretical ‘price-to-earnings’ ratio, attempting to measure the price a homeowner paid for every $1 in return, and housing affordability.”

Insurance changes? “Allstate, California’s third-largest home insurer, is backing away from writing homeowners policies. Allstate claims the combination of high housing costs and all-too-frequent natural disasters is just too much for it to handle anymore.”

News from Wall Street? “Never underestimate the ability of a Wall Street investment firm to find a new way to pawn off risky assets onto retail investors. The latest example? The initial public offering for Everquest Financial.”

“Everquest…has been buying up equity interests in risky bonds backed by subprime mortgages from hedge funds managed by Bear Stearns, one of Wall Street’s biggest underwriters of mortgage-backed securities and other exotic mortgage-related bonds. The deal appears to be an unprecedented attempt by a Wall Street house to dump its mortgage bets.”

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