The Housing Bubble

The North County Times reports from California. “Mortgage fraud is on the rise in California, according to recent reports, and analysts say the cooling housing market is helping to reveal more suspicious mortgage transactions. According to the U.S. Department of Treasury’s Financial Crimes Enforcement Network, in 2006, California had more than one-third of the nation’s suspicious loan activity at federally insured lenders.”

“And the state’s share of the suspected fraudulent activity is growing, according to the agency. Nationwide, in 2006, 37,614 Suspicious Activity Reports were filed by federally insured financial institutions. Of those, 13,768 reports, or 36.6 percent were filed by lenders operating in California.”

“Analysts say incidence of mortgage fraud in California most likely has been higher than reported for several years. It is only becoming apparent now as the housing market cools off and those who commit fraud can’t hide behind housing profits, they add.”

“‘California has nearly twice as many reports of fraud as the national average,’ said Nick Larson, with the Mortgage Asset Research Institute, which developed the report for the Mortgage Bankers Association.”

“A hot California real estate market over the last several years may have been masking the amount of fraud that was occurring in the state, the report says.”

“‘The recent slowdown in its housing market may explain California’s return to high ranking this year,’ it states. ‘Some experts have suggested that (California’s) problems were masked by high real estate appreciation.’”

“One local fraud specialist said recently that he believes fraud is much more widespread than the current report indicates. ‘When values don’t go up, lenders foreclose and they conduct investigations,’ said Bob Simpson, president of Irvine-based Investor Mortgage Asset Recovery Company. ‘I expect the number of frauds to increase at the same pace as the number of foreclosures.’”

“RealtyTrac Inc. reported 6,879 foreclosure-related filings in Riverside County from January through March, an increase of 94 percent from the first three months of 2006, giving the county one of the highest concentrations of foreclosures in the nation.”

“According to the MBA report, over the last several years, California has continued to climb in the rankings. It went from being 30th in the nation in 2002, to 23rd in 2003, to 19th in 2004, to 8th in 2005 and 2nd in 2006.”

The San Gabriel Valley Tribune. “Los Angeles County’s median home price registered an annual gain of more than 5 percent in April, but 14 communities saw their median price drop, according to the California Association of Realtors.”

“Home sales in L.A. County fell 18.8 percent compared with April 2006. Statewide sales plummeted by 27.8 percent compared with a year ago.”

“Marty Rodriguez, owner of Century21 Marty Rodriguez in Glendora, said many potential buyers have dropped out of the market since the subprime crash hit in early March.”

“‘Now there are fewer buyers,’ she said. ‘There’s more inventory and banks are scrutinizing buyers and looking at them much closer.’”

“Locally, San Dimas weathered the biggest year-over-year price decline (10 percent), followed by Altadena (6.3 percent) and Claremont (6.2 percent).”

“CAR Deputy Chief Economist Robert Kleinhenz said the subprime fallout and other mixed signals in the economy have had a heavy impact on some buyers. ‘There has been a broad psychological impact,’ he said.”

The LA Daily News. “April home sales nose-dived in California while prices saw a moderate bump, a trend that continued in Los Angeles County, according to an industry association.”

“Prices trended up because lower- priced homes are not selling as well, leaving their prices out of the mix. ‘At the lower end, we have subprime issues, foreclosures and unoccupied new housing’ competing with sales of existing homes, CAR chief economist Leslie Appleton-Young said.”

“The report found: Fifteen out of the 20 regions studied in the report saw double-digit sales declines. In Ventura County, sales dropped by 20.8 percent.”

“In the High Desert, including Antelope Valley, prices dropped 5.2 percent to $317,420 compared with a year ago. Sales fell by a whopping 51.3 percent.”

“The mixed numbers worry Jack Kyser, chief economist at the Los Angeles County Economic Development Corp. Many foreclosures have not reached the market, there is an exhaustive supply of homes for sale and spring is usually when things pick up, he said.”

“‘Despite these little glimmers of hope here and there,’ Kyser said, ‘I still don’t see the market as having hit bottom.’”

The Record Searchlight. “When Helene and Dan Lhamon put their west Redding home on the market late last year, getting people in for a look-see wasn’t the problem.”

“But after two months of gawking and no offers, the Lhamons were anxious. They were about to move to the Seattle area to start new jobs and didn’t want to be stuck with two mortgages. They decided to (hire) Jody Thulin of SharpDressedHomes in Redding.”

“With Shasta County home sales down from a year ago and prices off about 10 percent, Thulin concedes it’s a good time to be in her business. About six of every 10 SharpDressedHomes customers have had their home listed for a while.”

“For about $3,500, Thulin met with the Lhamons before staging the home. The Eagle Ridge Estates home sold in 30 days for $550,000, $30,000 below the list price.”

“‘We didn’t get as much as we wanted, but I think we were asking too much,’ Helene Lhamon said.”

The Daily Mail reports on Florida. “Hundreds of British investors who pumped their money into Florida’s soaring housing market have been caught out in its spectacular collapse. They have been left with property they can’t sell, even for less than the original price, because of rising interest rates and a glut of condominiums for sale.”

“Miami lawyer James Ryan said he had 40 clients, including British investors, trying to get out of contracts even if it meant losing substantial deposits. One client abandoned a £170,000 deposit rather than complete on a £800,000 condominium now worth only £600,000.”

“Estate agents estimate at least 800 Britons have been caught out by the slump but the real figure could be four times that.”

“Florida property consultant Jack McCabe said: ‘Out of staters and foreigners, especially the British, flocked here and pushed the market to the point where about 70 per cent of all sales were to investors who never intended to live in what they were buying.’”

The Miami Herald. “Fearing that a spike in foreclosures will lower property values, Miramar is exploring ways for the city to help homeowners in distress.”

“In the first three months of 2006, the city had nine foreclosure filings. During the same period this year, there were 43.”

“Roughly half of owners of new homes in Miramar hold adjustable-rate mortgages, many of which will reset soon with higher interest rates, increasing monthly payments, said City Manager Bob Payton. ‘It’s alarming,’ Payton said. ‘They just got locked up in a mortgage that’s not best suited for them.’”

“Joann Soufisiavash bought a sprawling Miramar home for $459,900 almost two years ago using 100 percent financing and two mortgages. Now she can’t afford the $2,800 payment (not including taxes and insurance), and her home in a gated community is in the process of foreclosure.”

“She owes $502,000 on it. It has been appraised at $439,000. ‘My American dream turned into a nightmare,’ said Soufisiavash. ‘I don’t know how this is going to end up.’”

The Herald Tribune. “Rob Allegra is division president for Lennar Sarasota/Manatee. Staff writer Stephen Frater corresponded with Allegra recently.”

“Q: Prices have dropped in the existing homes market by as much as a third from the peak in late 2005. I know Lennar has been a leader in discounting new home prices in certain developments but could you describe your pricing strategy and history during the current downturn. Has the average sale price decreased and if so by how much?”

“A: I believe this is one of the most misrepresented measurements on the market. You see all sorts of reports on average home sale prices, but there are so many factors to a home purchase. Sizes of the homes being sold, amenities of the communities, upgrades in the homes.”

“With all that being said, prices have dropped since the peak. As painful as that’s been for everyone, especially for people trying to sell homes, in the long-term, this has been a healthy thing for the market, which has always been cyclical.”

“Q: Since many contractors are much less busy now than they were, has the labor component cost of a new home decreased? The raw materials? How many fewer subcontractor employees does Lennar utilize in this market now as compared to the market peak?”

“A: Lennar in particular has seen a significant decrease in the cost of building a home. It is our strategy to pass along our costs savings to homebuyers.”

“Q: What do you see as the trend for 2007 and 2008 in this new home market? A: We believe this is the bottom of the real estate downturn. This is why we are rolling out a whole new series of floor plans and picking up our permitting and start schedule. We are optimistic about moving back into a growth mode in late 2007 or into 2008.”

The St Petersburg Times. “The housing market has tanked. Banks threaten thousands of homes with repossession. Homes linger so long on the listings that some sellers dump properties for a song.”

“It’s a great time to be Shaun Carcary. The South Africa native has built a business on paying 50 cents on the dollar for stressed houses. He gets plenty of takers. ‘Yeah, you can call us bottom feeders,’ he says.”

“Sean and Mary Dean live in Wesley Chapel’s Lexington Oaks golf course community. Their 2,550-square-foot stucco house isn’t ugly. But their financial situation is.”

“Mary Dean complains they’re two months behind on their $1,750 monthly payment. By early June the bank has threatened to get tough. Sean Dean was laid off from his job. They have a For Sale sign out front, but no one’s biting in the tepid market.”

“The HomeVestors team gives the house a once-over. Right-hand-man Ryan Rickard conferences with the Deans at the dining table. He tells the couple he’ll get them the best price he can, reminds them he’s a no-hassle cash buyer.”

“After the 10-minute pitch, the team is back in the Expedition rocking down the highway to Tampa. ‘What’s the deal?’ Carcary asks. ‘If it was up to her, she’d sign the contract right now,’ Rickard says. ‘When I told them about the 80 other houses for sale in the neighborhood, they about spazzed.’”

“A model nearly identical to the Dean’s sold on their street in November for $302, 000. Rickard does a quick calculation and comes up with his best price: $165,000. The couple owes $140,000 on the house, so HomeVestors’ offer would leave them about $15,000 to $20,000 after closing costs.”

“If the bank forecloses, they could lose every scrap of equity and ruin their credit for seven years. ‘It just depends on how logical someone wants to be,’ Carcary says.”

“Competition for buyers is fierce. The Greater Tampa Association of Realtors said its membership doubled during the real estate boom. ‘Houses are on the market for more days, and the inventory is growing,’ said the group’s president, Carlos Fuentes. ‘I imagine many of our members who have other careers will go back to them and sell real estate part time.’”

“Agents popped up almost as quickly as homes were selling. Now, they’re dying under the collapse of the real estate bubble.”

“Jack Soifer, a real estate agent from Seminole, used to own an RV dealership in Pinellas County. He became a real estate agent in 2004. ‘Investors have left the marketplace, and real estate agents aren’t getting any new business’ he said. ‘People think we’re making all this money, and we’re not.’”

“Participation in the local MLS board, an online real estate portal, has taken a dive, Soifer said. ‘It’s much more difficult than one thinks,’ said Soifer, who puts in about 55 hours a week. ‘But I have no regrets.’”

The News Press. “With the ebb in real estate cash flow, players are turning to lawsuits, builders, subcontractors and buyers are suing each other to get out of contracts or simply to get paid. Builders are suing potential homebuyers for backing out of deals. Subcontractors are suing builders for not paying them. Former partners are even suing each other.”

“‘A lot of people are tremendously upside down right now,’ said real estate attorney Kevin Jursinski. ‘Everybody’s saying, ‘Help me, I want to get out of it.’”

“The median price of an existing single-family home in Lee County has fallen from an all-time high of $322,300 in December 2005 to $283,200 in April, according to the Florida Association of Realtors.”

“Meanwhile, the number of homes on the market has quadrupled to about 15,000 as single-family home sales have spiraled down, from 1,084 in December 2005 to only 573 in April.”

“‘When the economy slows down, people’s income slows down,’ said Lee County Clerk Charlie Green. ‘The $1,000 that didn’t seem important then suddenly is important.’”

“The lawsuits are piling up on the second floor of the Lee County Justice Center and many companies are feeling pressure from attorneys. ‘We’re in an environment now that I’ve never seen,’ said Fort Myers attorney Richard Johnston Jr., who represents Cape Coral-based Caribbean Custom Homes.”

“Richard Friday, CFO for Youngquist Brothers, a well-drilling company, has filed 293 liens, according to the Lee County Clerk’s Web site. In 2005, he said, builders were spending tomorrow’s money, so when jobs stopped coming in, there were shortfalls. And when owners decided not to close on homes because values were down, builders were stuck with the shortfall. That’s when the lawsuits began.”

“‘Now, there’s a tremendous amount of litigation,’ Jursinski said. ‘I don’t think we’ve seen the worst of it yet.’”

“Friday said builders getting into trouble today are those that didn’t plan well two years ago. ‘One of the things about success is you don’t pay attention to details,’ Friday said.”

“Steve Magner, president of Advantage Builders of America, said in many of the 14 lawsuits in which Advantage is a defendant, owners are suing for breach of contract because the house’s value might have fallen with the market.”

“‘A lot of people don’t realize it’s a risk; it’s not a guarantee,’ Magner said of investing in real estate. ‘They want to blame everybody but themselves.’”

Readers suggested a holiday topic on predictions. “I’d like to see a weekend topic generally doing a critical analysis of predictions of when [insert any generic real estate market prediction here] is going to happen. The real estate people love to predict there will be a big turn around in the 4th quarter of this year, provide no justification and people here rightly call them on it.”

“But people here make predictions too. I can see that 5 months from now as a prediction of a turn around is ridiculous on its face, but why is 2011 better? or 2016?”

“People sometimes analogize to the Japanese real estate bubble. Why is that a good comparison? People say the bubble will take as long to deflate as it did to inflate. Why?”

“I’m not looking for any guarantees. Just an explanation of your reasoning. Or an explanation/critique of the real estate cheerleaders’ reasoning (assuming they have any or have ever stated what it is). That is what is on my mind this holiday weekend.”

One replied, “I have no idea what is going to happen. I only know what happened last time, sellers held out for years, 2/3 of the loss in value was inflation. The question is whether the exploding mortgages will speed things along.”

Another posted, “Predicting the pace and severity of the decline is almost impossible. There are so many other economic factors (recession, employment, value of the dollar…) that predictions are guesswork at best.”

“But there are macro economic principles that are in play. When you look at what occurred with pretty much every bubble for the last 500 years, you can predict where this bubble is headed, if not the exact timing. When you look at Prof. Shiller’s chart of home values over the last 150 years, and see that prices at 4x median income is the overwhelming average and mean, then you can predict that todays 9x - 10x median income prices are way out of whack.”

“A return to the mean is inevitable. Will this be in quick declining prices or stagnant prices for years with values eaten by inflation is hard to judge.”

“My guess is that with the bloated inventory, mortgage crises, and a slowdown of the economy, plus the vast amount of speculative buyers who can’t just sit tight. We will see price declines over a few years (2-4) as a return to the mean. The mean is probably 1997 prices plus inflation, around 30% -50% below current prices.”

“My guess is based on recent downturns in the early 80s and 90s here and in Japan. In the case of Japan the bottom lasted 15 years, but most of the price decline happened early on. I believe the same thing will happen here. I think some buyers in the last few years will never see their house worth what they paid again in their lifetime.”

One agreed, “The key point (imo), is the speed of decline driven because of tenuous mortgages. The subprime and Alt-A resets as well as the level of speculation (buyers not living in the purchase) will drive the speed of decline. These were not ingredients of prior RE bubbles to the level that they currently exist.”

One reader looked at loans, “The resets are made up of two waves. The first started this May as monthly resets jumped from 25-45 billion dollars. They will hold at the 35-50 billion dollar level for around 15 months. They then fall back to 10-15 billion until late 2008.”

“The second wave jumps back up to 35-40 billion in resets from late 2009-2010. Foreclosures run 3-6 months behind the resets.”

“A look at a long term US chart since the origination of the FED (1913) shows market lows during the Congressional Election year. Expect a cycle low in 2010. I would not look to buy until late 2010-2111. Four years.”

The Union Tribune. “Economists from Wall Street to the Federal Reserve are scratching their heads trying to parse the future of housing in light of worsening default and foreclosure rates.”

“But they might have saved themselves some trouble if they had consulted Robert Gertz, a senior at the University of California San Diego.”

“He examined the trends in San Diego County, considered by many to be the bellwether of the nation’s housing markets, and predicted doom. ‘San Diego will likely face the worst foreclosure rates in its history in the coming three years,’ said Gertz.”

“Gertz, who based his predictions on mathematical models that he verified using historic data, said the peak number of 7,605 foreclosures he projects for 2009 represents a ‘best case scenario’ because of the possibility that such failures could tip the local economy into recession and result in more distressed sales.”

“‘Home price deterioration reinforces foreclosures, which reinforces home price deterioration,’ he said. ‘This basic phenomenon is what causes the cyclical nature of the housing market as a whole.’”

“Alan Nevin, chief economist with the California Building Industry Association…said things may not turn out as badly as he thinks. ‘It’s my belief that there will be a spike in foreclosures, but it will be short and then recede,’ Nevin said, with most activity happening by the end of this year. ‘As long as interest rates stay in their current range (of about 6.2 percent for 30-year, fixed-rate loans) that should not be a problem.’”

What do you see in your housing market this holiday weekend? A confession? “Realtors had to temper their sunny market optimism this year. Former NAR head economist David Lereah was often heavily criticized for claiming that the housing bubble did not exist and there was no danger in extending loans into the subprime market. But in an interview he conducted before stepping down, Lereah gave a much gloomier assessment of the market.”

“‘We’re in a real estate recession,’ Lereah said. ‘We’re all partly guilty. But the lenders and the speculators, they had the most in it. Making zero down payments with no documentation, that’s just irresponsible. But the Realtor, the lender, the title attorney, they all got wrapped up in the frenetic pace of the boom.’”

Construction statistics? “In the first four months of the year, housing starts in the East Bay declined sharply, the California Building Industry Association said Friday. Multifamily housing starts stood at 817, a 40.5 percent decline from the same time a year ago. San Joaquin County had 29 multifamily housing starts, a 78.7 percent decrease from the same time ago, while single-family home starts stood at 935, a 29.5 percent decrease.”

Or foreclosures? “Hays County properties scheduled for foreclosure auction are expected to be 35 percent higher this June than a year ago. The increase over June 2006 was the greatest in the nine Central Texas counties the FLS tracks, agency spokeswoman Bonnie Brown said.”

“The number of home foreclosures in metro Atlanta has risen 200 percent since 2000, in part because of an increase in the use of high-interest, sub-prime mortgage loans, the Atlanta Regional Commission said this week.”

“Despite the number of homes in foreclosure, housing development continues to rise in both Henry and Clayton counties. In 2000 Clayton County had roughly 86,000 housing units, according to Equity Depot, and in 2006 there were nearly 105,000 units.”

“Henry County had about 43,000 homes in 2000 and in 2006 there were nearly 68,000.”

“When the subject of foreclosure arises, Lincoln Park isn’t usually the first neighborhood conjured up. But even that vibrant Chicago community is not safe from the dark cloud in the housing industry.”

“In the 2007 results, 11 neighborhoods, including Lincoln Park, where foreclosures have doubled, showed triple-digit percentage increases in the number of foreclosure actions taken against homeowners. They include a 167 percent rise in Mt. Greenwood and a 120 percent boost in Irving Park, says Record Information Services Inc.”

“The highest number of foreclosures for the first four months came in West Englewood, up 77 percent to 259.”

“‘Our phone is ringing off the hook,’ said Michael van Zalingen, director of a non-profit that arranges financing and offers counseling.”

Building trends? “Are McMansions McOver? If recent trends are any indication, the bigger-is-better approach to residential real estate may already be giving way to a more reasoned level-headedness.”

“A historic confluence of factors drove America on a cattle stampede to invest in real estate. Today more and larger forces have now slowed the market to a surly teenager’s stroll.”

“‘I firmly believe that when the housing market slows, you’ll see a short-term drop in the demand for large homes. But in the longer run, it’s going to be even more challenging to sell these because the average household size of the boomers is going to go down as the last kids leave,’ says housing consultant Thomas Lawler.”

“Meaning the inventory of McMansions is likely to grow. And grow. And grow. Could we one day see a landscape with large white elephants lingering on the market?”

“‘I find it difficult to see how we won’t,’ Lawler says.”

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