The Housing Bubble

Reuters reports on California. “Colleen Moorhead knew exactly where to turn when she needed to harvest some cash. Between 2001 and 2006, the Moorheads refinanced their three-bedroom San Diego home at least nine times, county records show. Moorhead and her husband now owe $603,000, up from $196,000 when they started, and more than $10,000 over what their house is worth, according to one online estimate.”

“They’re likely to lose it soon if they can’t somehow make payments greater than their monthly income.”

“Their broker, Joyce DeAngelo, said she tried to save them from financial disaster, but her client kept wanting to refinance. ‘I told her every time that she can’t keep doing this, she’s going to lose her house,’ DeAngelo said. ‘She has no one else to blame.’”

“As the real estate boom of the last half-decade turns to bust, homeowners like Moorhead say they feel betrayed by brokers who profited from bad advice and saddled them with loans they couldn’t afford. ‘It seemed like she was a gift from God or something,’ Moorhead said. ‘But she’s a wolf in sheep’s clothing.’”

“Particularly problematic was the ’stated income’ loan. One lender checking a small sample of applications against federal tax forms found that almost 60 percent of loans had income exaggerated by more than 50 percent, according to an April 2006 Mortgage Asset Research Institute study.”

“One borrower who is confined to a wheelchair, Monica Wray, of Temecula, California, said she was surprised when she checked her loan application later that she owned a cleaning business. ‘I laughed, because I can’t even clean my own house,’ Wray said.”

“Brokerage Fidelity Capital Funding said the broker did not lie on the application. ‘He talked to her and she said she owned a cleaning service and made a certain amount of money, and that’s what he used to qualify her on,’ said sales manager Tom Calise, the supervisor of broker Nick Minielli, who declined to comment.”

The Wall Street Journal. “An auction of nearly 100 foreclosed homes here Saturday showed that mortgage lenders are having to accept huge discounts in some cases to unload such properties.”

“At the San Diego sale, houses and condos typically sold for about 30% below the previous sale or appraisal prices. In a few cases, the discounts were around 50%.”

“A four-bedroom home in Oceanside, Calif., attracted a high bid of $495,000 at the auction, 33% below the sale price recorded in November 2005 for the property. One condo in San Diego sold for $120,000, less than half of its previous value.”

Inside Bay Area. “A short sale may or may not be the right solution for a seller facing foreclosure or a buyer looking for a bargain. ‘Every bank is so different. It’s almost like walking a seller through what is the equivalent of a tax audit. The bank is not going to let you do a short sale because you want to get out. There has to be a hardship showing,’ said Realtor Elisa Uribe.”

“‘It’s tough to paint it with a broad brush,’ cautioned Dustin Hobbs, spokesman for the California Mortgage Bankers Association. ‘It’s a case-by-case issue and lender-to-lender. You can’t say 100 percent they will (approve a short sale), but the odds are a lot better than 15 years ago.’”

“Lenders are anxious to avoid a foreclosure because they typically lose anywhere from 20 percent to 40 percent of the loan’s value, he said.” “A home sold through a short-sale proceeding may not be in the best of shape, said Dave Konesky, a Realtor (in) Tracy. ‘I would be very careful. Even if a buyer gets 10 percent off the mortgage, it doesn’t mean he is getting a good deal in our market,’ he said.”

“Sellers, too, should be aware of the risks of short sales. Say the borrower owed $500,000 on the mortgage and that the home ended up being sold for $450,000 through a short sale. The borrower would actually owe taxes on $50,000.”

“‘The sellers are likely to end up with a tax on a short sale,’ said said Elizabeth Weintraub, a home-buying columnist. ‘Sometimes (real estate agents) don’t tell sellers that is a consequence.’”

The Sacramento Bee. “Thousands of unsold and empty houses in the Sacramento region are fast becoming breeding grounds for mosquitoes.”

“As the region’s housing slump creates more vacant houses and a growing excess of homes in transition between buyers and sellers, Culex mosquitoes that can spread the West Nile virus are thriving in uncared-for swimming pools, garden ponds and yards flooded by broken sprinklers, said David Brown, manager of the Sacramento-Yolo Mosquito and Vector Control District.”

“Sacramento Association of Realtors spokesman Greg Vlasek said there are 9,672 houses for sale in the mosquito district’s Sacramento and Yolo counties coverage area alone. Nearly 1,400 have swimming pools.”

“The district is calling in a new cavalry in its war on mosquitoes: real estate agents.”

“‘As you show homes for sale or visit unoccupied properties, please assist us by reporting unmaintained swimming pools, ponds, fountains etc. to the district,’ states a letter being e-mailed to 6,500 agents today by the district and the Sacramento Association of Realtors.”

“‘There’s a lot of houses for sale where the pool isn’t being maintained,’ said Sacramento-Yolo technician Lisa Fitzgerald. More and more houses she sees now (are) home to a murky backyard pool that eventually prompted complaints from neighbors.”

“‘I was at a pool at just a beautiful house. The backyard was just beautiful. Then there was the pool. It was in foreclosure,’ she said.”

“As real estate agents add mosquito patrol to their duties, there are more than 14,000 homes for sale in El Dorado, Placer, Sacramento and Yolo counties.”

“The rising number of foreclosures is also emptying out more houses in the capital region. More than 1,500 homeowners lost homes to banks the first three months of 2007 in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties, according to DataQuick.”

“Add to that a large but unknown number of empty houses owned by investors. At the height of the region’s housing boom in 2004, more than one in four Sacramento County home sales were to investors, according to DataQuick.”

The Tribune Star reports from Indiana. “They are sitting empty all over town. Foreclosed homes, known as REO (Real Estate Owned) properties, have become a huge part of the housing market in Terre Haute, Indiana and the country as a whole. ‘This is a national thing,’ said Cy Marlow, broker in Terre Haute. Marlow, who deals only in REO properties, already has listed 63 foreclosed properties in 2007 and sold 248 REO listings last year. The REO market ‘is huge,’ he said.”

“Sen. Evan Bayh and other senators say the Federal Reserve is ‘looking the other way as irresponsible lenders use aggressive and often abusive tactics to sell borrowers on loans they will never be able to repay.’”

“Others are pointing a finger of blame at real estate appraisers, saying they are overvaluing properties under pressure from mortgage brokers, homeowners and real estate agents.”

“Still others look elsewhere for the cause of the problem. ‘It’s not due to predatory lending. It’s not due to over appraisals,’ Marlow said. ‘I think people aren’t living within their means.’ The media bombards Americans with the message ‘buy, buy, buy,’ Marlow said.”

“And others say the problem of foreclosures is a result of the bursting of the ‘housing bubble.’ The end of the ‘bubble’ means more and more people are finding themselves owing more on their homes than the property is worth.”

“One local securities trader who deals frequently in mortgage-backed securities said he witnessed first-hand an incident where a home sold for several thousand dollars more than its asking price so that the borrowers could use the extra money to make the required down payment.”

“‘This stinks to high heaven,’ the securities broker, who asked not to be named, said. But, he added, ‘I’ll bet you it happens a lot.’”

“Practically everyone interviewed for this article agreed that historically low interest rates, which reached 1 percent by 2003, generated by the Federal Reserve helped fuel the housing bubble.”

“‘All of a sudden we had a lot of people in the [loan] market who couldn’t get there before,’ said the Terre Haute banker who asked not to be named.”

“‘Foreclosures are bad for honest Hoosiers,’ said Indiana Secretary of State Todd Rokita. ‘We’re almost in a crisis mode in our subprime market,’ Rokita said.”

The Journal Sentinel from Wisconsin. “The calendar says 2007. Home prices say it’s still 2006.”

“‘If your house was worth $300,000 last year, that’s probably what it’s worth today. But buyers may come in with a $280,000 to $285,000 offer. I tell sellers, ‘If that happens, you need to find a way to make the deal work because there’s an awful lot of inventory out there. The buyer will just go find another house,’ Dave Schmidt Jr., chairman of Greater Milwaukee Association of Realtors, said.”

“More than 14,000 properties hit the market in this year’s four months, nearly three times the 4,989 recorded sales. April, typically a banner sales month, produced just one sale more than March, 1,493, as 4,014 newly listed properties joined unsold inventory in Milwaukee, Waukesha, Washington and Ozaukee Counties.”

“Home shoppers keep pushing their market advantage on one main front: price, said Tammy Maddente, executive vice president of Wisconsin-based First Weber Group.”

“‘We’ve had a year of the media saying that the real estate market is tanking. Prices have corrected. The markdowns have been taken (and) it’s probably a fair assessment that we’re at 2005 levels. But buyers’ offers are still coming in way under asking,’ Maddente said.”

“Lowball offers, typically defined as 10% or more below asking price, have lost their historic status as a deal-stopping insult.”

“‘You have to start somewhere,’ reasoned Joseph A. Horning, president of Brookfield-based Shorewest Realtors. ‘Buyers are always looking to keep prices down. Because of such large inventory, they’re having success these days.’”

The Grand Rapids Press from Michigan. “The home on Cascade Road SE is listed for sale at $234,900, but you can name your price. Whether it is accepted or not remains to be seen.”

“The four-bedroom home on more than an acre is one of 18 foreclosure properties in West Michigan to be auctioned later this month. Troubled properties are hitting an already flooded market.”

“More than 3,000 properties joined the market last month in the Grand Rapids area, 5 percent more than April 2006, according to the Grand Rapids Association of Realtors.”

“Agent John Hilton, who specializes in selling foreclosure properties for lenders, said they are affecting the rest of the market. ‘It’s kind of forcing the retail market down,’ he said. ‘There are so many (foreclosure) properties on the market, it’s going to have an effect on price.’”

The Star Tribune from Minnesota. “Two years ago, buyers were snapping up downtown condos and townhouses as fast as they could be built.”

“Today, Todd Stutz is pondering the future of a high-profile condo project he had planned to build on a prime site near the Guthrie Theater in downtown Minneapolis. He attributes the demise of the project, which he hopes to revive in some fashion, partly to a scarcity of investors and speculators.”

“‘That has an impact on everyone’s projects,’ said Stutz. “We’re returning to more of a normal business. That speculative buyer has really [gone] away, which I think is good for the market.’”

“Tom Melchior, a multi-family real estate analyst in Minneapolis, said a flurry of purchase agreement cancellations at several projects suggests that a greater-than-expected number of the reservations were held by speculators.”

“‘We’ve all underestimated the impact of this investor market,’ he said.”

Minnesota Public Radio. “Minnesota lawmakers and the governor have approved bills addressing the mortgage foreclosure crisis.”

“‘You can bring a direct suit against the mortgage placement person. Not only can they sue them, the consumer will now have the right to get their attorney’s fees paid if they win against the mortgage broker. They will also get the right to bring an injunction against that broker so that they don’t do it to other people and they can also get their costs of investigation,’ says Rep. Joe Mullery.”

“Sherrie Pugh Sullivan, who directs the Northside Residents Redevelopment Council in north Minneapolis where foreclosures are spreading like wildfire, says 600 families came to her neighborhood non-profit seeking help because of foreclosure in 2006.”

“She says the new state laws will reduce the number of new mortgage scams. But Pugh says there are hundreds of families in her area already locked into bad mortgage deals.”

“‘We really haven’t hit the peak and so we actually think there’s potentially another three years that we’re going to see people coming through,’ Pugh says.”

Some housing bubble news from Wall Street and Washington. The Orange County Register, “Michael Perry, CEO of IndyMac Bancorp, is stubborn when it comes to delinquent loans. He refuses to ditch them, even as they expand rapidly on the books of Pasadena-based IndyMac, which…is the largest U.S. lender in a credit category dubbed ‘Alt-A,’ which is one level above the risky subprime niche.”

“During an April 26 conference call with analysts, Perry said the company didn’t sell a single dud loan in the first three months of the year because no one wanted to pay what he thinks they’re worth. No way is IndyMac selling to a hedge fund for ‘pennies on the dollar,’ Perry said.”

“In that time, IndyMac’s sour loans and foreclosed real estate ballooned 75 percent to $324 million. ‘We are not going to fire-sell when we have the intent and ability and expertise to work through those loans and sell them ourselves,’ he said.”

“The same problems shaking up the subprime market are now emerging in the Alt-A industry.”

“‘The most creative mortgage products came out of the Alt-A business,’ said Manuel Ramirez, an analyst with Keefe Bruyette & Woods in San Francisco. Last year, 20 percent of home purchase loans were Alt-A, up from 5 percent in 2002, according to a March 12 report by Credit Suisse.”

“Ramirez said it’s ‘eerie’ how the subprime correction appears to be repeating in Alt-A. ‘Compared to subprime it’s at a snail’s pace but I think it’s real,’ Ramirez said.”

From Inman News. “LendingTree laid off about 440 workers Friday as a cost-cutting response to falling revenue and loan production.”

“‘There has been significant lender pullback or outright exit from certain segments of the mortgage lending market, particularly from the highest-margin products,’ the company reported. ‘As a result, LendingTree’s business, at both the exchange and at LendingTree Loans, is currently focused on conforming loan products, which are the most competitive from a lender’s perspective and hence the lowest margin for LendingTree.’”

“A spokeswoman for the company, Rebecca Anderson, told Inman News that loan-request volume was up 17 percent in the first quarter compared to last year, but ‘problems in the subprime market are causing spillover effects,’ including reduced margins on loans and fewer orders transmitted to exchange lenders.”

The Wall Street Journal. “Anderson said the company needs to get costs in line ‘with the current realities in the market.’”

“Mortgage lending has declined in recent months as lenders tighten standards amid a surge in defaults. Ms. Anderson said lenders are turning down more loans, and that has squeezed profit margins at LendingTree.”

National Mortgage News. “Fannie Mae plans to tighten its underwriting guidelines on certain loans especially where risk layering is involved. A spokesman confirmed to National Mortgage News that changes are coming in regard to high loan-to-value ratio mortgages and ‘very low’ downpayment loans.”

“Meanwhile, the Department of Housing and Urban Development wants to ban all downpayment ‘gift’ assistance provided to homebuyers by sellers and in some instances nonprofits working with sellers. The ban would apply only to mortgages insured by the government.”

“HUD’s proposed rule threatens dozens of nonprofit groups, including Nehemiah Corp. of Sacramento, Calif., that have doled out hundreds of millions of dollars of payment assistance to mostly low-income home buyers across the country.”

“Such groups have been controversial because many provide down-payment gifts to buyers and are then reimbursed by individual home sellers and home builders. Critics say some builders have included the cost of the gift into the price of the house, which inflates values. Critics also say these gifts lead to higher than normal foreclosure rates.”

“Supporters say down-payment gifts have served low-income home buyers better than subprime mortgages, which have even higher default rates. Scott Syphax, Nehemiah’s CEO, says the HUD rule could further crimp the ability of low-income buyers to afford a home using FHA loans.”

“‘At the very time that the collapse of subprime is killing access to the American dream, the one program that is a lifeline for working families is marching to the front of line to shut the last open door,’ Mr. Syphax said.”

The Financial Times. “Eurozone demand for house loans has dropped sharply, supporting the European Central Bank’s view that property markets are cooling, so far in an orderly manner.”

“Demand for housing loans to households ‘fell significantly’ in the first three months of this year, the ECB reported. It said that the decline was driven mainly ‘by a sharp deterioration in the assessment of housing market prospects.’”

“The survey showed a much larger number of banks reporting declining demand for house loans than reported increases, and that the difference was the largest since the survey began in 2003.”

The New York Post. “The housing market has not hit bottom yet and probably won’t until sometime in 2008. According to data gathered by the FDIC from the end of 2001 to the end of 2006: Loans secured by real estate are up 76 percent to $4.51 trillion. Residential mortgages for one- to four-family homes jumped 57.7 percent to $2.18 trillion. Home-equity loans are up 203.4 percent to $559 billion.”

“And, no surprise, foreclosures are up too. National foreclosure filings were up 47 percent last month from a year ago to 149,150, according to RealtyTrac.”

“The bigger problem is that the price of a home must ultimately correlate to what individuals can afford, notes Mark Grinis, a partner in Ernst & Young’s real estate, hospitality and construction group. ‘If prices advance significantly ahead of wages, over time there will be a price correction.’”

“And clearly, our wages have not kept up with the inflated housing prices, so we’re due for a fall. ‘The typical cycle is about four years, and we’re only a year and a half in,’ notes Grinis. ‘It will be late ‘08 before the dust settles and you can call a bottom.’”

From MarketWatch. “A spring home-selling season that’s looking like a bust and pressure from growing inventories of houses in the resale market should intensify home-price declines in the second half of 2007, Wall Street analysts say.”

“‘We think the housing downturn has decisively moved to its second act of falling prices,’ wrote Deutsche Bank in a report to clients Monday.”

“‘With the first act consisting of significant retrenchments in volumes, the second act is one with home prices falling back to more equilibrium levels after a period of breathtaking increases during the housing boom,’ Deutsche Bank said.”

“The analysts…think prices in the resale market ‘may begin to retreat in the second half of the year, as existing-home owners face a second [disappointing] spring season and as competition from a surge of resale listings increases.’”

“As existing home sellers throw in the towel, that could put more pressure on the builders of new homes to match the lower prices and remain competitive. Additionally, resale listings have risen ‘dramatically during the spring selling season’ which could further pressure prices, Deutsche Bank said.”

From Bankrate.com. “Fact or fiction: The media decide whether you buy or sell a home.”

“Sounds ridiculous, even insulting. But many real estate professionals insist there is a psychological component to buying a house, and that a lot of negative publicity about the housing market can have an effect on whether consumers will buy, sell or sit.”

“Many blame the media for the slowdown that hit the housing market in 2006. ‘What happened to us is the media,’ says Ellen Renish, regional vice president for the National Association of Realtors.”

“Stories about a real-estate ‘bubble’ and its potential to burst caused consumers to ‘not do anything,’ she says. ‘And nothing happened. The bubble stories really stopped things for three months,’ Renish says. ‘It was pretty scary.’”

“When it comes to sales, the biggest factor is ‘the local economy,’ says Dick Gaylord, president-elect of the NAR. ‘But I can tell you that almost every buyer I talk to today thinks they’re going to get a phenomenal deal.”

The Palm Beach Post reports from Florida. “The region’s once-sizzling housing market has simmered to a showdown. Some market watchers believe home prices are the object of a high-stakes tug of war. The result has been a painful slowdown with a ripple effect that has even local retailers crying foul as they see their sales dip.”

“As the song says, ‘Something’s gotta give,’ and experts are betting that sellers will blink first. And when they do, they’ll see a buyer’s market.” ‘Palm Beach County teacher Stephen Luzinski wonders why prices have not already come down more. ‘I am still waiting for prices to fall,’ said Luzinski, who’s looking to buy his first home.”

“‘It seems that most sellers are still looking to double, triple or quadruple what they paid for their house,’ he said.”

“Such seller attitudes are unlikely to last, according to real estate forecasters. Primarily because there are just too many homes on the market. Nationwide, the number of vacant unsold units in the first quarter of this year set a record, the U.S. Commerce Department said recently, continuing a sharp upward trend that started last year.”

“David Seiders, chief economist for the National Association of Home Builders, puts the number at an ‘excess of about 1.4 million.’”

“The median price of an existing single-family home in Palm Beach County fell from $388,000 in January to $375,100 in March. The number of unsold homes on the market from Boca Raton to Vero Beach has been steadily rising, surging to a record 24,028 homes for sale in March, according to Illustrated Properties Real Estate.”

“That’s a 27-month supply at the March sales pace. The same month a year ago, there were 18,178 unsold homes.”

“‘The biggest problem for single-family medium-priced homes is the beginning of this flood of foreclosures,’ Delray Beach developer Frank McKinney said.”

“‘The change from a sellers’ market to a buyer’s market is going to make for some strange bedfellows,’ said William Cozart, chief executive of the Realtors Association of the Palm Beaches. ‘A reduction in prices of somewhere between 5 percent and 10 percent will start the pendulum swinging in the right direction.’”

“That would make the median price of an existing home somewhere between $340,000 and $350,000, he said. That’s still too high for many local buyers. Hamstrung by a subprime mortgage meltdown that has forced lenders to become more stingy with credit, prospective buyers no longer can qualify for loans.”

“‘Lenders have tightened standards. I am probably losing two buyers because of it,’ West Palm Beach Realtor Randy Bianchi said. ‘We had them all set with a credit score of 702. Then it dropped to 698, and those four little points made a big difference.’”

“The financing disappeared, he said. ‘The program was no longer available to them.’ ‘Just four points,’ Bianchi said, his voice trailing off in disbelief. ‘Unbelievable.’”

“The new Marina Grande condominium seems like the dream residence for the Florida lifestyle. So why have so many Marina Grande buyers changed their minds about living there?”

“During the past year, two dozen lawsuits have been filed by buyers wanting out of contracts for about 30 units in the $200 million waterfront project.”

“Marina Grande is by no means the only Palm Beach County project losing favor with buyers. Growing numbers of home buyers have begun running to the courts exploiting any remedy to get out of pre-construction contracts on houses, townhouses and condos throughout South Florida.”

“Buyers who signed sales contracts months or even years ago expecting to flip properties for fat profits now realize they might not be able to sell into this market slump.”

“‘If the market had continued soaring, these people would have closed on their contracts, and this lawsuit never would have been filed,’ said Michael MuÒiz, a Boca Raton lawyer. MuÒiz represents Hovstone Properties Florida, which 16 buyers are suing, trying to get out of their contracts to buy at Monteverde, a Boynton Beach condominium.”

“‘What’s really changed is the market,’ said said Fort Lauderdale attorney Maurice Garcia, who represents Marina Grande. ‘Not anything else.’”

“Garcia alleges that buyers are making excuses to get out of their deals by complaining about minor changes, such as the number of parking spaces. Or the exterior color of the building.”

“Delray Beach lawyer Brian Lipshy represents 16 buyers suing Hovstone Properties. The buyers want out of the Monteverde condo because they say Hovstone has changed the deal.”

“The buyers contend that Hovstone’s decision to build only two of four planned buildings makes the project a ‘phased’ condo, in violation of contract terms. Lipshy said his clients might not have bought into the project if they knew up front that Monteverde wasn’t going to be built all at once.”

“Although court documents show that Hovstone Properties admits Monteverde is being built in stages because of sluggish sales and hurricane fears, lawyer MuÒiz said the lawsuit is nothing more than speculators trying to avoid closing on their contracts.”

“The sides have been duking it out in court for months, and the matter shows no signs of being settled. Lipshy said it’s a sign of the times: ‘I’ve filed more lawsuits in the past six months than in all my years as an attorney,’ he said.”

The Sun Sentinel. “When Denise McGill moved to Palm Beach County from rural North Carolina two years ago, she was stunned at the high cost of housing. So she found a roommate and resigned herself to renting.”

“‘In retrospect, I definitely did the right thing,’ said McGill. ‘I’m so glad I didn’t buy because I would have bought at the peak of the market.’”

“Changes at the Spring Harbor apartment complex in Delray Beach are typical of those across the region. It briefly converted to condos, only to revert back to rentals when sales didn’t meet expectations.”

“Meanwhile, developers are building more apartments. The batch of new units and a rising inventory of investor-owned rentals are providing more of a selection and easing rent increases that were so common in the past four years.”

“‘Vacancy is lost money,’ said said Susan Harding, publisher of the Boca Raton-based Southeast Florida Apartment Guide. ‘So we’re seeing a lot more concessions out there designed to get people moved in.’”

“Lenders are tightening credit standards, keeping potential homeowners in the rental pool. Others realize home prices won’t increase as fast as they have in recent years, economist Sam Chandan said.”

“‘That pressure to buy isn’t there,’ he said. ‘I think that may tip things in favor of renting.’”

“Ron Witten, owner of a Dallas-based apartment advisory firm, agrees. ‘There remains a degree of uncertainty about housing prices,’ he said. ‘And if [price] is important to you as a buyer, then waiting’s the safe way to go.’”

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