The Housing Bubble

The San Francisco Chronicle reports from California. “Vallejo is the Bay Area’s version of ground zero for the subprime loan crisis. A significant number of residents of the largely blue-collar city of 120,000 have taken out subprime loans. Vallejo home prices fell 8.5 percent from November to March, according to DataQuick. For people who bought in recent months without putting any money down, that means they may owe more on their mortgage than the house is worth.”

“In addition to Vallejo, other Bay Area localities facing the problem are Richmond, Antioch, Pittsburg and parts of Oakland.”

“At nonprofit counseling agency Vallejo Neighborhood Housing Services, the phone has been ringing off the hook for several months, with about 40 people a week calling because they have fallen behind in their mortgage payments, according to Carol Hardy, a housing counselor there.”

“That contrasts with the 12 months that ended in August, during which the agency advised just eight families on foreclosure prevention.”

“The people seeking help have almost identical stories, Hardy said. They bought homes using subprime loans. After a low initial rate, their monthly payments skyrocketed. Meanwhile, home prices in their neighborhoods went down, so they cannot easily sell or refinance. The result is that the homeowners owe more on their homes than the houses are worth.”

“‘They’re between a rock and a hard spot,’ Hardy said. ‘Nobody sat down with them and said if your interest rate goes up just 2 percent, here’s what your house payments will be. These people all of a sudden are getting notices that in 60 days their house payments will go up $600 or $800 a month, and they say ‘I can’t do that.’”

“In Solano County, 116 homeowners received notices of default last March, according to DataQuick. By August, the number of foreclosure notices had almost doubled. By March, it had almost tripled to 338. During the 12 months ended in March, 2,555 Solano households received the notices, according to DataQuick.”

“In Solano County, seven houses were sold at foreclosure auctions in March 2006. The number has built steadily since. In the same month this year, 89 properties changed hands in foreclosure auctions, according to DataQuick.”

“‘Until six months ago, we could almost always save the person’s investment, either by helping them to refinance or explaining that they needed to sell and get their equity out before foreclosure,’ said Martin Eichner, director of a nonprofit HUD counseling agency in Sunnyvale.”

“‘But more and more, the calls we’re getting are from people who bought on a shoestring and have few, if any, options to avoid the foreclosure. They haven’t built up any equity and they put themselves in loans that were essentially doomed to fail with 100 percent financing and/or negative amortization,’ Eichner said.”

“Hardy said she tries to negotiate with lenders to arrange for an extended loan period, but so far none has been amenable. Instead, all of Hardy’s clients have put their homes on the market at the request of their mortgage holders. None of them has received an offer.”

“‘We have very large inventories in Vallejo of houses for sale,’ said Jeff Dennis, president of the Solano Association of Realtors.”

“If the homeowners do sell their homes, it is likely to be what is called a ’short sale,’ where the purchase price is less than the amount owed on the mortgage.”

“Vallejo Neighborhood Housing Services is too overloaded to handle new cases, so it refers calls to a toll-free number run by a nonprofit group that tries to preserve homeownership.”

“‘Calls (from across the nation) have been increasing at an absolutely crazy rate,’ said Tracy Morgan, a VP at the foundation. ‘We’ve been getting 650 calls a day for the last month or two. A year ago we were only getting 75 calls a day.’”

From Bloomberg. “The U.S. housing slump is squeezing Mexican migrant workers from Los Angeles to New York, where permits for new home construction are down 20 percent this year, according to the Census Bureau. That’s reducing the pace of money transfers.”

“In Los Angeles, Miguel Saldivar is struggling to find work. ‘There has been no work for two, three weeks,’ Saldivar said as he waited at the corner of Oxnard Street and Van Nuys Boulevard. He said he sends as much as 75 percent of what he earns back to his mother and brother in Mexico.”

“‘It depends on how many days we work,’ Saldivar said. ‘Now I am making nothing.’”

The Arizona Republic. “Twelve people, suspected of being part of a sophisticated white-collar crime ring led by an ex-convict, have been indicted involving a mortgage-loan scam stretching from Arizona to Nevada to California.”

“‘This was a brazen scheme. To shut it down, a top-notch team was assembled,’ U.S. Attorney Daniel Knauss said. ‘The result is a significant indictment that should put criminals and would-be fraudsters on notice that the investigation and prosecution of loan fraud is a top priority.’”

“The indictment says defendants fraudulently financed 16 properties, as well as 11 luxury cars mostly purchased at Arizona dealerships. One member, Charles Dozzell of California, financed a $124,496 BMW 760 series by falsely saying he was an engineer and made $135,000 a year, according to the indictment.”

The Chicago Tribune reports from Ilinois. “In the Chicago area the housing market continues to suffer from an overhang of unsold homes and from price discounting, said Bill Gronow, a partner with Kennedy Builders in South Barrington. ‘We were overheated and the market isn’t bad, but it has returned to normal,’ said Gronow.”

“Chicago-area home builders ‘were caught off guard by the slowness of the spring selling season, which was a total fizzle, said housing consultant Steve Hovany.”

“Normally, by this time, half the new-home sales for a year have occurred, he said. ‘But this year, if the current total number of sales in the Chicago area were to double, the situation still would be quite gloomy,’ Hovany said.”

From Chicago Business. “Chicago-area foreclosures, which set a record last year, are projected to reach full-blown crisis levels in 2007. Cook County is on pace to record at least 30,000 and as many as 36,000 foreclosure filings this year, according to Cook County Circuit Court Judge Dorothy Kinnaird.”

“That would mean a 35% to 62% increase from 2006, when 22,248 filings were easily the highest in county history after having risen 36% from the previous year.”

“The data show foreclosures up in nearly every part of the city and suburbs, from the middle-class South Shore neighborhood (up 55%, to 331 foreclosures, last year) to the well-heeled suburb of Wilmette (up 192%, to 38).”

“‘It’s not just unsophisticated borrowers who got into trouble,’ says David Rose, the analyst who authored the report. ‘It just shows you how risky these (adjustable-rate mortgages) really are.’”

The Times Reporter from Ohio. “For Realtors, property buyers and sellers in Tuscarawas County it’s a matter of whether the glass is half empty or half full. Although the average number of Days on the Market for real estate is at record highs for most areas of the county, others view it as a great opportunity to purchase a home.”

“Realtor Holly Waldenmyer said there always will be sellers who think their home is worth more than what the market shows it’s worth. ‘Sometimes it takes time to convince them that it’s lower than what they recognize. You see some of them on the market for a long time because it takes them time to be realistic.’”

“Real estate broker Craig Barnett added that the average sale price is being hurt by the record number of foreclosures. ‘The houses that are foreclosed on are stigmatized, they sell for less than they’re worth for the most part,’ he said.”

The Columbus Dispatch from Ohio. “Take your pick, home buyers: You have plenty to choose from. There are 18,571 homes listed for sale in central Ohio, according to the Columbus Board of Realtors. That’s about 300 short of the record, set last July, and it doesn’t include many new builds, homes for sale by owners, repossessions or homes that have fallen off the listings without selling.”

“Ken Danter, (who) analyzes the central Ohio real-estate market, offers (an) explanation: So many people bought homes during the area’s housing boom a few years ago that the pool of available buyers has dwindled.”

“‘It’s not a function of this being a bad market,’ Danter said. ‘It’s a function of having such a good market five years ago.’”

“Central Ohio has become so crowded with homes that one major builder, Centex Homes, announced last week that it is pulling out of Columbus to focus on more-successful markets.”

“‘A lot of people are getting closing costs paid for; a lot of the issues are being taken care of by the sellers,’ said Powell agent Chris Anderson. ‘We need these people to pull the trigger. They see no urgency, because it’s a buyer’s market right now.’”

The Detroit Free Press from Michigan. “Danielle Merriweather hasn’t made a mortgage payment since December. But instead of joining the 16,351 Detroiters whose properties were foreclosed on during the first quarter of the year, Merriweather began to work with her lender and agreed to sell her property in what’s called a short sale.”

“She paid $140,000 for the house and owes roughly $127,000. The house is on the market for $125,000 and probably will sell for even less.”

“The ranks of financially strapped homeowners also likely will increase as those with adjustable-rate mortgages find themselves unable to handle the higher monthly payments. ‘I’m getting calls every day,’ said real estate agent Venesha Harris in Royal Oak. Homeowners ‘ask, ‘What can I do?’ It’s desperate times out there.’”

“Even when lenders agree to a short sale, some may not be willing to take much below what they are owned, said Mandy Melone, a Realtor in Livonia. But in some cases, lenders ‘are taking 50 cents on the dollar of what’s owed them,’ said Melone.”

The Cadillac News from Michigan. “In his 23 years as the owner of Johnson and Associates, Keith Johnson has seen the highs, lows and in-betweens that are associated with the real estate market.”

“‘The one cardinal rule is all real estate is local. When you look at southeast Michigan things are completely different. Prices are falling (in southeast Michigan) but they also had a boom year,’ he said. ‘For better or for worse, we just haven’t had a boom year. We’ve had growth, just not a boom year. Now we are just not seeing the normal price growth we have seen.’”

“‘We would love to have more sales going but the market adjusts,’ said Realtor Rick Lantz. ‘This area felt the boom that there was nationally but not to the extent of the East Coast and West Coast or even the Sun Belt.’”

From Minnesota Public Radio. “Real estate statistics show a continued slump in home sales in the Twin Cities. And industry experts say no one should expect a turnaround anytime soon.”

“After years of a housing boom in Minnesota, Zola Thompson wasn’t expecting a soft real estate market when it came time for her to sell.”

“‘I kept seeing this thing going lower and lower, and I really would like to get as much as we can out of it because we’re going to be living on some of this in our old age, and I just wanted to get as much as we could,’ says Thompson.”

“Glen Dorfman of the Minnesota Association of Realtors recommends that sellers accept the market for what it is, and not hold out for a recovery.”

“‘Right now we’re in a frightening time of flat and declining market values, so why not cut losses?’ says Dorfman.”

“Dorfman says market conditions are more likely to get worse than better if, as expected, the rate of foreclosures continues to climb. That would dump even more homes on an already saturated market, pushing prices down further.”

“‘I’ve been saying to everybody who will listen, if you have your house on the market and your realtor tells you to update the living room carpeting, or stage it…then you should do that,’ says Dorfman. ‘And if you need to reduce the price today $10,000 to $20,000, it’s far better to reduce it 10 or 20 than in six months having to reduce it 70 [thousand] or 80 [thousand].’”

“Tom Musil, head of the real estate program at the University of St. Thomas, predicts the market won’t stabilize until late next year. But even then, he cautions not to expect a return to boom times.”

“‘You have to realize the feeding frenzy that we were in from ‘98 to about 2006 is going to be hard to repeat,’ says Musil. ‘We saw tremendous increases in values and in a short period, maybe eight or seven-year period, and when you see houses increase 250 or 300 percent, that’s pretty tough to match.’”

Some housing bubble news from Wall Street and Washington. “Declines in home prices in 20 U.S. metropolitan areas accelerated in the 12 months ended in March as the supply of homes exceeded demand, a private survey showed. Home values dropped 1.4 percent from March 2006, after declining 0.8 percent in the year ended February, according to a report today by S&P/Case-Shiller.”

“The report is consistent with last week’s data that showed sellers had to reduce prices to lure buyers into the market for both new and previously-owned properties.”

“Thirteen cities showed a year-over-year decrease in prices for the month, led by a 8.4 percent drop in Detroit home values and a 6 percent drop in San Diego.”

The Associated Press. “U.S. home prices fell 1.4 percent in the first quarter compared to a year ago, the first time since 1991 prices have shown a quarterly decline, according to a housing index released Tuesday by Standard & Poor’s.”

“‘We still don’t see anything that looks like a clear bottom,’ S&P index committee chairman David Blitzer said. ‘We’re still headed down.’”

“Boston, Detroit, San Diego and Washington, D.C. showed the greatest year-over-year declines in prices.”

From Bloomberg. “New home construction in the U.S. may take until 2011 to return to last year’s level, said David Seiders, chief economist for the National Association of Home Builders in Washington.”

“‘We’ve fallen way below trend because we soared way above trend during boom times,’ Seiders said in an interview. ‘The upswing will be relatively slow, unlike earlier cycles.’”

“The inventory of unsold homes is the largest since the Washington-based National Association of Realtors started counting them in 1999 and house prices have suffered the steepest drop since the Great Depression, according to the realtors’ group.”

“Atlanta-based Beazer Homes USA Inc. was offering houses in the first quarter at a development about 44 miles outside Phoenix, Arizona, for $136,990, down 36 percent from the year-earlier price of $215,490, said Samantha Morris, senior consultant in Metrostudy’s Mesa, Arizona, office.”

“Larry Zacks, president of closely held Putnam County Builders Inc. in Mahopac, New York, said he put a 3,150-square-foot house on the market in February for $799,000 and had to reduce the price, first to $749,000, then to $699,000 and then to $659,000.”

“‘We finally sold it for $649,000,’ Zacks said. ‘Things are moving, it’s just a question of finding the right price. In a glutted market, buyers have a huge selection, so they don’t have to be forgiving.’”

“Prime Home Builders in Fort Lauderdale, Florida, is advertising a 23 percent discount on a new four-bedroom townhouse in Naples, Florida. The price was slashed to $344,169 from $449,258 in a development where about half the units have been sold, said Keith Thompson, a marketing consultant with Prime Home Builders.”

“‘It was under contract and the buyer forfeited the deposit, which is pretty common in this market,’ Thompson said. ‘We’re putting it out at a much lower price by rolling the deposit over to the next buyer.’”

From Business Week. “Real estate investors got a swift smack back to reality May 25 with news that existing home sales fell to a four-year low and inventories reached a 15-year high.”

“The time-tested retail strategy of ’slash prices, move inventory’ appeared to be the lesson of the Commerce Dept. data released May 24, with an 11.1% drop in the median sales price for new homes driving new-home sales to an annualized rate of 981,000.”

“The pricing inducements, the largest monthly drop in median sales prices on record, suggest the country’s housing-market woes aren’t over yet. ‘What you’re seeing is the blue-light special,’ Pat McPherron, an economist with Moody’s Economy.com, told the Associated Press on May 24. ‘The only way this market is going to move is by price-cutting.’”

“A Banc of America Securities analyst downgraded home builder NVR Inc. Tuesday, saying home sales and prices in the company’s key markets are sinking.”

“NVR makes more than half of its revenue and nearly three-quarters of its profits in Washington and Baltimore, analyst Daniel Oppenheim said. He expects home sale in those markets to worsen and NVR’s margins to fall.”

“‘Our May survey pointed to a 4th straight month of weak traffic in D.C., after improvement from November to January,’ he said.

National Mortgage News. “We got us an industry catfight! This tiff started early last week at the Mortgage Bankers Association’s National Secondary Market Conference in New York where, according to reporting by National Mortgage News’ Ted Cornwell, trade group officials made a number of veiled public comments blaming the foreclosure crisis on, well, loan brokers.”

“Some mortgage bankers believe that brokers work for incentives (commission, yield spread premiums) and could care less about a loan’s long-term performance.”

“National Association of Mortgage Brokers president Harry Dinham fired off a statement saying, ‘It is truly unfortunate that the president of the Mortgage Bankers Association has attempted to shift blame away from Wall Street, federally chartered banks, state-chartered lenders and underwriters for the subprime situation we find ourselves in today.’”

“NAMB is calling for the creation of a national registry ’so that consumers can be protected by the bad actions of all originators whether they work in a bank, state-chartered lender, credit union or mortgage brokerage.’”

“In 2002, Chinese investors owned about $100 million in U.S agency MBS. Now they own well over $110 billion, a nearly 1,000-fold increase in less than five years.”

From Fitch Ratings. “Home prices were virtually unchanged for 2006 subprime mortgages even as subprime defaults rose to double digit levels, according to Fitch Ratings in a new report.”

“The analysis showed that subprime loans originated in the first quarter-2006 (1Q’06) have experienced only 0.5% of home price inflation (HPI) after 12 months, but that defaults have jumped to 8.3% of outstanding mortgage balances.”

“The low HPI is exacerbating the increased risk associated with these loan attributes said Managing Director Glenn Costello. ‘Some of these borrowers are probably experiencing outright home price declines.’”

The Record Searchlight. “Although the online mortgage company, owned by Residential Capital, sells loans mostly to borrowers with good credit, many people mistakenly thought Ditech was a subprime lender. It also didn’t help that Ditech, based in Costa Mesa, was best known for its low-budget commercials featuring a pudgy, scheming banker shouting: ‘Lost another one to Ditech!’”

“Increasing foreclosures and delinquencies have prompted regulators to examine lending practices, and falling home values in many parts of the country have increased the threat of foreclosures on subprime mortgages.”

“In response, Ditech is ditching the ubiquitous commercials in favor of a more sophisticated marketing campaign that portrays Ditech as a respected financial resource for prime borrowers, who make up about 95 percent of its business.”

The News Post reports from Maryland. “The average price of a home sold in Frederick County in the first quarter of 2007 fell by $5,800 and spent more time on the market. In April, 196 homes were sold in Frederick County, dropping nearly 27 percent from 268 in April 2006, according to the Greater Capital Area Association of Realtors.”

“Inventory is too large, said Realtor Stephen Mackintosh. A healthy housing stock is about 1,000 homes. The county has 2,000 on the market, Mackintosh said.”

“Mackintosh said the silver lining in the market could be for buyers wanting to move up to a larger home. ‘There’s a lot going on where they can get a good deal,’ he said.”

The Times Dispatch from Virginia. “What a difference from a few years ago when builders in the Richmond area couldn’t build fast enough and received multiple offers on houses in the planning stages. ‘Everyone got used to the craziness,’ said Rich Napier, president of the Home Builders Association of Virginia. ‘We’re back to a more normal pace,’ he said.”

“Local builders are sweetening the deals to unload existing inventory in a soft market for new homes. They aren’t cutting costs, as they would if the market tanked, but they are offering incentives to entice more buyers. Centex Homes, with houses for sale in 16 subdivisions here, is offering $30,000 in upgrades. Main Street Homes, one of the largest Richmond builders, will build a basement at half price.”

“It’s a buyer’s market, particularly in the $400,000 to $650,000 range in the Richmond area, Napier said. ‘There’s a lot to choose from for that, not only in new homes but existing homes.’”

“Napier built the Richmond Symphony Designer House last year. The 7,600- square-foot French country home in Founders Bridge, Chesterfield County, is still on the market for $1.95 million. The house has $125,000 worth of electronics, and $200,000 worth of discounts is built into the price, Napier said.”

“‘I’m not happy that it’s sitting there, but there are not that many $2 million buyers walking around out there,’ he said. Still, ‘for those who think the sky is falling, it’s just not happening,’ Napier said.”

“Economist Christine Chmura said the housing industry may have hit bottom. The number of building-permit applications statewide flattened over the last three months, and that could signal a turn, she said.”

“‘It’s unusual for the general economy to be strong overall but the housing market to be in a recession,’ Chmura said. ‘The main problem is affordability. Prices are rising faster than income, and that makes it difficult to purchase a home.’”

“Richmond saw double-digit appreciation during 2005, but it never rose more than 20 percent as it did in the Northern Virginia area, which was hit harder by the softer market. ‘We expect the Richmond area to turn up sooner, because the housing industry here is in better shape than the nation,’ Chmura said.”

The Daily Progress from Virginia. “In an increasingly common scenario in Central Virginia, on Tuesday attorney John G. LaFratta stood on the steps of the Albemarle County Courthouse to auction off a foreclosed property.”

“The number of foreclosures in the Charlottesville region has jumped dramatically, reflecting a trend seen both across Virginia and nationally. ‘The problem is absolutely as bad as people are saying it is and it’s going to get worse,’ said Michael Martin, loan officer and CEO of Crown Mortgage Services in Charlottesville. ‘There’s some chickens coming home to roost.’”

“During the first three months of 2007, there were 128 notices of foreclosure filed with The Daily Progress, a 27 percent increase over the same period in 2006. The number of area families who have fallen behind on mortgage payments appears to be even higher.”

“The Piedmont Housing Alliance, which seeks to help homeowners keep their homes after they have defaulted on mortgage loans, has seen its number of clients skyrocket from one or two people per week in early 2006 to two or three per day so far in 2007.”

“‘It’s really scary,’ said Shelley Murphy, director of program services for the Regional Homeownership Center at PHA. ‘We’re having so many more clients come in that we’re almost not able to handle them all.’”

“Supervisors like Murphy are taking on cases at the homeownership center. ‘We’ve never seen so many cases,’ Murphy said. ‘And they’re from all levels of income. It’s not just low-income folks - it’s everybody.’”

“The number of foreclosures statewide jumped by 137 percent during the first three months of 2007, compared with the first quarter of 2006, according to RealtyTrac. A Richmond nonprofit agency estimates that 10,000 families in Virginia will have lost their homes by the end of the year.”

“As the subprime lending industry exploded, lending companies began to relax their standards for who could borrow. ‘There’s a lot of people out there who are in homes that really should never have been given a loan,’ Martin said. ‘There’s a whole vulture system out there that preys on these people.’”

“Some homebuyers saw adjustable rate mortgages as the only path to homeownership in the Charlottesville-area housing market, where the median housing cost was $289,900 in 2006.”

“Troy Johnson, of Absolute Appraisals in Charlottesville, assesses the value of properties on behalf of lenders and mortgage brokers after a homeowner goes into default on a loan. In recent months, Johnson said, his firm’s business has increased substantially.”

“‘Last year we were getting hired on these jobs once every two months or so. Now it’s about one every week,’ he said.”

“Johnson said he has also observed that more homeowners who took out home equity lines of credit to pay for renovations, college tuition, new appliances or other big-ticket items in 2004 or 2005 are now finding themselves stuck with homes that are actually worth less than their total loan amount.”

“‘People are upside down in their own houses, so to speak,’ he said.”

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