The Housing Bubble

The Sacramento Bee reports from California. “Michael Alexander’s departure from the buyer pool puts him among an estimated 30 percent of potential buyers who have vanished from area model homes and open houses as the real estate season reaches its busiest months. ‘It was starting to look feasible,’ Alexander says. ‘It was really looking feasible. We talked to a Realtor a few weeks ago, and that’s when all the credit issues hit.’”

“John and Celeste Wahlstrom recently toured an Elk Grove condominium complex. Its builder had contracted with an auction company to unload a handful of unsold units. The opening bid for a 1,200-square-foot condo previously valued at $259,900: $149,000.”

“John and Celeste Wahlstrom looked one over for their 22-year-old daughter. The daughter and her fiancé can’t yet qualify for a home loan. ‘We’re thinking of buying and renting it back to them,’ Celeste says. ‘But we’re not in a hurry,’ John says.”

“In 2001, the couple bought a house in Elk Grove and more than doubled their investment before selling it. They’re not having the same luck with the value of their new house, bought in 2005.”

“‘Right now everything is going down,’ says Celeste.”

“In a market with 14,000 homes for sale and prices in Elk Grove not rising, they are feeling no urgency.”

“Downtown (Sacramento) high-rise developer John Saca missed a Friday deadline to buy out his estranged partner, the California Public Employees’ Retirement System, throwing the future of his twin condominium towers into jeopardy.”

“The giant state pension fund now has a week or two to decide whether it wants to take over the stalled, debt-ridden project at the entrance to Capitol Mall and move forward without Saca, CalPERS confirmed Tuesday.”

“Construction on the Towers stopped in January. In February, Saca defaulted on the loan he used to buy the prime site at Third Street and Capitol Mall, once the home of the Sacramento Union newspaper.”

“Contractors who worked on the site have since filed liens totalling about $13 million. ‘It can’t get much worse,’ Saca said Tuesday. ‘There’s a stigma on the property now, and it’s hard to overcome that.’”

The Daily Bulletin. “The median price of a home in California hit $597,640 in April, an all-time high, but the California Association of Realtors’ chief economist says that number is at least a little misleading.”

“Although the median price continues to rise, this reflects the fall-off in sales in the lower priced markets of the state where new home inventories and foreclosures are competing with the existing home market,’ Leslie Appleton-Young said in a release.”

“‘Throughout the state, inventory levels have increased to their highest levels in recent years, giving buyers more time to view a greater variety of homes and sellers who set realistic prices an edge in the market,’ said Colleen Badagliacco, CAR’s president.”

“That has been especially true locally, where the prices would-be sellers are asking have been falling by as much as 10-15 percent.”

“‘There is a lot of strength in the $1 million market in Los Angeles,’ said Jack Kyser, chief economist with the L.A. County Economic Development Corp. ‘That makes the median numbers somewhat misleading.’”

“Kyser said it remains a ‘very tough market’ and probably will for the rest of the year.”

“So for now at least, it’s a market in which homes aren’t being built or sold, but they’re still expensive. Does it make sense? Kyser shrugs. ‘I think it will be 2008 before we see anything that could be called stability in the market.’”

The Orange County Register. “The latest Real Estate Research Council of Southern California data, out today, shows that Orange County home values fell 2.4 percent in the last six months and are down 2.1 percent in total over the past year.”

“Across SoCal, the RERCSC appraisers found home values down 2.3% in a year, the first drop since 1996. By county, Santa Barbara was down 10 percent in a year; Ventura was off 6.7 percent; San Diego was off 5 percent; Riverside was off 3.8″

From Bloomberg. “Taher Afghani was working for discount retailer Target Corp. near San Francisco when friends told him about the riches to be made in California’s Mortgage Alley.”

“Mortgage salesmen like Afghani, many of them based in Orange County, near Los Angeles, lie at the heart of the once-profitable partnership between subprime lenders and Wall Street investment banks that’s now unraveling into billions of dollars in losses.”

“Afghani and other subprime veterans say their job was to reel in borrowers, period. Never mind whether customers needed loans or could manage payments. The sales job was made easier with exotic mortgages such as so- called no-doc loans.”

“‘Heavy sales pressure has been part of the most-egregious lenders for a while,’ says Kurt Eggert, a professor at Chapman University School of Law in Orange, California, who has studied the role of aggressive sales tactics in subprime lending and sued lenders on behalf of elderly borrowers caught up in home equity scams.”

“In California, which accounts for about 40 percent of subprime borrowing in the U.S., no one even knows how many people are originating loans, according to an October 2006 report by the California Association of Mortgage Brokers. That’s because while the state licenses individual mortgage brokers, anyone can work for a big lender under the umbrella of a single corporate license.”

“‘In other words, the corporation can hire a loan originator right off the street and have them originating loans that day without any education, licensing or individual accountability,’ the report said.”

“Afghani says he and fellow brokers dispensed with details about rates and fees and instead talked up how borrowers could use home equity loans to pay down other debts. ‘It was easier than financing a car,’ Afghani says of getting a mortgage.”

“A month after leaving Secured Funding, Afghani took a new job at Irvine-based Solstice Capital Group Inc., another subprime lender. HSBC, the same bank that had been buying loans from Secured Funding, bought Solstice last year for $50 million. Afghani quit in April, vowing to find a new line of work.”

“Enough is enough,’ he says, adding the good times are long gone. ‘I’m so rock bottom I had to move out of my apartment in Irvine and live rent free with my girlfriend.’”

“‘It was tough love and a great learning experience to live within your means and not end up like the individuals on the other side of the phone,’ he says.”

The Bakersfield Californian. “Local real estate appraiser Gary Crabtree announced in a letter Monday that he will no longer provide news media with monthly reports that examine the local real estate market, saying that his business has been damaged because ‘industry insiders don’t want to hear the truth’ about a troubled market.”

“For two years, Crabtree has been providing reports that compile single-family home market statistics, including unsold inventory, existing home prices and new home prices.”

“As a result, local lenders have ceased to give him appraisal assignments, Crabtree said in his letter, citing a similar ‘persecution’ during the real estate recession of the ’90s.”

“In his letter, Crabtree wrote that lenders have been asking appraisers to ‘hit’ values in violation of the industry’s ethical standards.”

“‘That is absolutely true,’ said Ted Faravelli Jr., a spokesman for the California Association of Real Estate Appraisers. ‘I’m ashamed to say that.’”

Some housing bubble news from Wall Street and Washington. “Builder confidence in the condominium housing market eroded significantly in the first quarter of 2007, according to the latest results of the Multifamily Condo Market Index, released today by National Association of Home Builders. The component of the MCMI that tracks current conditions in the condo market stood at 23.1, down nearly 14 points from this time a year ago.”

“A rating of 50 generally indicates that the number of positive responses is about the same as the number of negative responses.”

“‘There’s heavy excess inventory and now the shakeout in the subprime mortgage market has taken its toll on the for-sale side of the multifamily housing market,’ says NAHB Chief Economist David Seiders. Seiders noted that, in many instances, multifamily developers who had begun for-sale projects are switching gears and delivering new rental apartment communities instead.”

From Reuters. “Citing a difficult market for home builders, Pulte Homes Inc said on Tuesday it would cut 16 percent of its work force, adding to previously announced job cuts. Pulte Homes said it expects a pretax charge in the current, second quarter of $40 million to $50 million related to the job cuts.”

“The company said it aims to reduce costs and improve operating efficiencies amid a ‘challenging operating environment that continues to exist in the U.S. homebuilding industry.’ Responding to the broad housing slowdown, Pulte Homes cut approximately a quarter of its work force in 2006 and earlier this year.”

“‘The homebuilding environment remains difficult and our current overhead levels are structured for a business that is larger than the market presently allows,’ Richard Dugas, Jr., CEO of Pulte Homes, said in the statement.”

“At least three major U.S. home builders suffering from the housing slump may violate contracts that govern bank credit facilities, Standard & Poor’s analysts said on Tuesday.”

“Centex Corp., D.R. Horton Inc. and Pulte Homes Inc. are three of six home builders whose debt rating outlooks were revised on Thursday to negative from stable by S&P. The three are ‘all close’ to breaking covenants, S&P analyst Jim Fielding said on a conference call.”

“The home builders are mostly sapped by excess inventories as cooling home-price appreciation and tightening lending standards curbed sales, the analysts said. ‘We’re operating under the assumption that another shoe could drop (in the U.S. housing market) and become more severe,’ Fielding said.”

From Bloomberg. “After years of easy profits, a chain reaction of delinquency, default and foreclosure has ripped through the subprime mortgage industry, which originated $722 billion of loans last year. Since the beginning of 2006, more than 50 U.S. mortgage companies have put themselves up for sale, closed or declared bankruptcy, according to data compiled by Bloomberg.”

“The pain has only just begun. As home prices sink and mortgage defaults climb, bond investors who financed the U.S. housing boom stand to lose as much as $75 billion on securities backed by subprime mortgages, according to Pacific Investment Management Co.”

“The imprint of ‘Secured Funding’ is all that remains of the corporate logo that once graced the outside of the two-story building. What little remains of Secured Funding, which specialized in home equity loans, or second mortgages, to people with lousy credit, is now housed in a building across the near-empty parking lot, where a receptionist tells a caller: ‘Our wholesale division is closed. We’re no longer doing business with brokers.’”

“‘Even with explanations, most borrowers didn’t really understand what types of loans they were getting,’ says Maureen McCormack, (a) former Secured Funding employee. ‘They just cared about the monthly payment.’”

“Dane Marin, who worked at Secured Funding for a year, says managers harangued everyone. ‘If you weren’t on the phone very long, you’d get an e-mail saying, ‘Get your head out of your ass,’ he says.”

“At times, Secured Funding salesmen broke the rules, according to at least three lawsuits filed last year in federal courts in St. Louis and Milwaukee. In one case, Secured Funding sent the plaintiff a ‘personalized Platinum Equity Card’ offering ‘$50,000 or more in cash’ just for calling Secured’s toll-free telephone number.”

“However the leads came in, Secured Funding’s salespeople made sure the fish stayed on the hook. ‘You would say anything to get the loan through,’ says Cristopher Pike, who worked at Secured in 2005 and ‘06.”

“Many subprime sales techniques are now spilling out in the lawsuits, advocacy reports and Congressional hearings that predictably follow such industry meltdowns. Several lawsuits illustrate the lengths to which the big wholesalers, and ultimately Wall Street, were able to outsource the selling of the loans as far down the chain as possible.”

“Mortgage investors dealing with the fallout of the subprime crisis are facing an old nemesis: rising Treasury yields.”

“As a result, the Treasury market faces increased selling pressure as mortgage investors, who typically use U.S. government bonds or interest rate derivatives to hedge against effects of changing mortgage rates, are instead selling Treasuries to counter the impact of higher rates on their mortgage investment.”

“‘There’ll be pressure to sell more as yields head up,’ said Richard Gordon, fixed-income market strategist at Wachovia Securities. ‘This low volatility environment has left some of these players unhedged.’”

“The mortgage sector may be a catalyst for higher Treasury yields, Deutsche analysts said. More homeowners with adjustable-rate mortgages will likely switch to fixed-rate ones in the coming months when ultra-low teaser rates on their adjustable loans expire, they said.”

“The pressure on Treasury yields would be compounded if the 10-year yield hit 5 percent, some analysts said. ‘There could be some pain at 5 percent,’ said Wachovia’s Gordon.”

A report from the Washington Post. “For years, as the bull market in housing gathered steam, people used their homes as glorified ATMs, pulling out money for all sorts of reasons. The trend helped support continued economic growth and recovery from the 2001 recession. But now people are reining in their spending.”

“For a long time, Paul and Amy Woodhull’s house on Capitol Hill was a honey pot. Through multiple refinancings over nearly a decade, they pulled out money to fix it up, buy a car, pay down credit cards, buy three other properties and improve them, too.”

“Now the pot is dry. With interest rates up and home prices down, they’re reluctant to touch their home equity again. They called their six children into a family meeting recently, and Amy laid down new rules: No more impulse purchases or frivolous shopping trips. ‘We’re going to have to save our pennies,’ she declared.”

“Larry Chartienitz of Chevy Chase, the Woodhulls’ realtor, said that during the housing boom he thought of paying $5,000 on a piece of jewelry for his wife’s birthday or of flying off for a weekend getaway.”

“But after seeing his income drop by half last year, he’s cutting back. For his wife’s most recent birthday, he skipped the jewelry. ‘I wanted to reserve it in case I might need it for something else,’ Chartienitz said.”

“Homeowners gained an average of nearly $1 trillion a year in extra spending money from 2001 through 2005, more than triple the rate in the previous decade, according to a study by former Federal Reserve chairman Alan Greenspan and Fed economist James E. Kennedy.”

“About a third of the free cash gained during this period was used to buy other homes, they calculated. About 29 percent was used to acquire stocks and other assets. About 12 percent went to home improvements. And nearly a fourth, 23 percent, went to consumer spending, including paying credit card bills and reducing other non-mortgage debts.”

“The amount of free cash extracted has fallen sharply since the peak in 2005, to $217 billion in the last three months of 2006, down by almost half from a peak of nearly $400 billion in the third quarter of 2005.”

“‘Without the housing boom, we wouldn’t have spent any of this,’ Paul Woodhull, said as he guided a visitor through his home.”

“The couple also pulled money out of their rowhouse to buy another rowhouse as an investment, and to buy a beach house in Delaware. Later, they refinanced the beach house to buy another one next door. They also refinanced at times to take advantage of falling interest rates, lowering their mortgage payments, which freed up more cash. Grand total: nine refinancings in nine years.”

“‘Jeez, we’ve got all these payments every month,’ said Amy. ‘Now, when I look at sending my son to college in a year, I can’t refinance again. Rates aren’t falling. I’m kind of stuck. What are my options? Sell a property into a down market? I’m really feeling quite caught, like panicked caught.’”

“The Woodhulls, they know they could sell their home if they really needed cash. For now, though, they’re planning to hunker down until the housing market picks up. ‘I would love to put a deck on the roof,’ Paul said. ‘If this thing goes up in value more, maybe we’ll do it.’”

The Roanoke Times from Virginia. “Home prices nationally are declining in a scenario that’s also playing out in parts of the Roanoke Valley, according to sales figures and some real estate agents.”

“In March, the average price of a home dropped 7.4 percent, according to the Virginia Association of Realtors. In April, the average home price rose only slightly, at less than 1 percent to $204,218 from $202,635 in 2006.”

“Agent Pam Washington said she has slashed prices on many properties that initially were on the market for more than $170,000. Her target sales community is Northwest Roanoke.”

“Prices for homes in some areas, such as Botetourt County, may be too high, said broker Luther Burkholder. In Botetourt County, there are at least 71 new and existing homes for sale, all priced at more than $500,000, he said. They’re not selling very quickly, he said.”

“‘We just have so much on the market in Botetourt County,’ Burkholder said.”

“One Roanoke Valley home builder, Fralin & Waldron, has felt some pressure from out-of-towners who are relocating to the Roanoke area and want to bargain for lower prices on new houses. Some have moved from larger cities where they have seen builders slash prices to sell homes faster, said Kathy Gentry, sales and marking manager for Fralin & Waldron.”

“‘We have to really do some counseling with these buyers. We tell them we did not inflate our prices to begin with,’ Gentry said.”

From Bloomberg. “The slump in homebuilding, the deepest since 1990, has so far taken only a modest toll on the U.S. job market. Workers like Francisco Leon may be part of the explanation.”

“Two years ago, Leon, an undocumented immigrant from Guatemala, had little trouble finding construction work five days a week in northern Virginia. Nowadays, the 22-year-old mainly does odd jobs, often only two days a week.”

“‘It was much better two years ago,’ he said, glancing around him at several dozen Spanish-speaking men waiting to be offered day-labor jobs outside a 7-11 store on Jefferson Davis Highway, about 25 miles south of Washington, D.C. ‘There was more work. The money flowed then.’”

The Business Gazette from Maryland. “While the residential mortgage market is ‘tightening up’ across most of the nation, mortgage industry players in Maryland are more sanguine.”

“Still, the home mortgage market is nowhere near where it was two years ago, many say. ‘There’s been a tightening in the subprime market, and Wall Street is not buying loans as much as it did,’ said Charles DiPino, president of the Maryland Association of Mortgage Brokers. ‘That’s hurt some customers.’”

“According to Michael Galeone, executive VP of The Columbia Bank, the subprime market was ‘abused’ during the mortgage boom of two years ago. ‘The subprime market got into trouble as lenders began lending to people with less-than-sterling credit qualifications,’ he said. ‘Sub-prime lending lets you borrow based on the value of your home, maybe up to 125 percent of the value. The trouble happens when the market goes against those people.’”

“‘People bought more than they could afford,’ he said. ‘In the past, they could buy an $800,000 house at 3.5 or 4 percent interest. Then the market shifted and their monthly payments doubled. Many people didn’t have the cash to cover it, and they’re struggling.’”

“Foreclosures in the first quarter of 2007 totaled 2,031 in Maryland, up 88 percent from last year’s first quarter, according to RealtyTrac.”

“‘In the last few years, you had a lot of people who were not really qualified to buy a house buy a house anyway,’ said Cary Reines, executive VP of Mason Dixon Funding in Rockville. ‘Now they’re finding out that they can’t afford to keep them. We’ve seen a lot of that in the last six to nine months.’”

The Miami Herald reports from Florida. “A glutted real estate market is spilling into the lodging sector, as recent condo buyers who had counted on flipping for a profit instead face mortgage payments and maintenance fees. ‘They can’t sell them and they need an income coming,’ said Linda Luft, a mortgage broker, whose short-term rental business grew between 20 percent and 30 percent this year.”

“‘Basically, what they’re doing is telling me: ‘Please rent it. Get me anything,’ she said.”

“Housing sales are already down 29 percent from a year ago. And some real estate experts predict harsher times ahead for sellers, with more than 22,000 condominium units under construction in Miami alone.”

The St Petersburg Times. “Two months ago, Nikki DuFore and her husband paid the owner $3,000 and settled into a spacious Tampa home with a big back yard. But their stay may be short-lived. On May 19, they were served with notice that the bank seeks to foreclose because the owner is months behind in his mortgage payments.”

“‘It was a shock,’ DuFore said. ‘We had just moved in, and now we’re already having to look for another place.’”

“It used to be that tenants got all the scrutiny. But in Florida’s topsy-turvy, fraud-plagued real estate market, it’s the property owner who may warrant a closer look.”

“‘We’ve been getting a lot of calls of late, and the amount of these calls is increasing because more people are in foreclosure,’ said Tom DiFiore, head of the housing and consumer unit of Bay Area Legal Services.”

The Star Banner. “Sales of existing homes statewide in April continued to tumble from last year’s levels, and the Ocala area was no different.”

“The 267 homes sold locally last month were down 38 percent from the same period last year and down 33 percent from last month’s total, the Florida Association of Realtors reported.”

“Ocala broker Steven Light said holding back the market are sellers who are looking to unload their homes for prices that were commonplace when the local housing boom was at its zenith, but are no longer realistic in today’s buyers’ market.”

“‘I see people still holding on to 2005 prices,’ Light said. ‘It’s a mindset.’”

“Light said Realtors shouldn’t let sellers dictate what prices the market should bear.

From the Ledger. “April marked another tough month for the local economy with ongoing housing declines and a slight uptick in unemployment, according to The Ledger’s monthly Polk County Business Barometer.”

“The county’s builders had a slow April, amassing 333 permits for new home construction. That made for a decrease of 41 percent from 568 in April 2006. Winter Haven saw its permits sink to 47 from 115 last year, a 59 percent drop.”

“Meanwhile, Polk had 348 existing homes sold last month, down nearly 35 percent from 535 in April 2006. Lakeland’s total fell to 207 homes from the previous year’s 314, a decrease of 34 percent, while East Polk’s 137 homes fell 35 percent from 211 a year ago. Bartow had four homes sold in April, compared to 10 last year.”

“Realtor Shawn McDonough said…that too many homes have lingered on the market for six months or more. ‘That’s the change we could see that would be helpful,’ McDonough told The Ledger.”

The Sun Sentinel. “On Tuesday, when the nationwide index of consumer confidence compiled by The Conference Board rose more than expected, a Florida index of consumer confidence from the University of Florida went in the opposite direction and fell to its lowest level in more than 18 months.”

“Floridians, reeling from record-high gas prices and falling home values, are veering away from the rest of the nation in their outlook for their finances and the economy.”

“‘In Florida, employment is solid, but people’s finances are not,’ said Chris McCarty, director of survey research at UF.”

“‘No doubt retail sales [in Florida] have been declining for some months already,’ said economist Per Gunnar Bergland. ‘Particularly related to construction.’”

“Palm Beach and Broward counties lost almost 12,000 jobs in April from the year before. McCarty expects Florida consumer confidence to track the housing market’s fortunes and gas prices. ‘Until housing has complexly corrected, there’s going to be downward pressure on consumer confidence,’ he said.”

The Herald Tribune. “Smacked hard by regulators, Coast Bank of Florida is under the gun to strengthen its financial condition and its management. The struggling bank faces numerous deadlines, some as soon as next week, to shape up or face further sanctions by federal and state banking authorities.”

“Coast made $110 million in loans to nearly 500 customers of Construction Compliance Inc., a defunct home builder in St. Petersburg. CCI drew millions of dollars from the bank, even though it did little or no work on some of those homes. Many of those customers are now refusing to repay their loans.”

“The bank has other deadlines to charge off or collect on millions of dollars in loans. It also must immediately stop collecting brokered deposits, which typically pay high interest rates, and within 10 days file a plan with regulators to eliminate its reliance on those CDs.”

“The bank has $40.7 million in those deposits it gathered from customers after its loan problems were revealed.”

“Trump Tower Tampa has lost its biggest asset: the Trump name itself. New York tycoon Donald Trump has terminated his contract with SimDag, the Tampa development team behind the proposed $300-million condo tower long touted as west Florida’s tallest and most luxurious.”

“In a lawsuit filed Friday in federal court, Trump sounded like a man whose patience was spent. Investors scooped up many units, but SimDag failed to hook financing. Banks shied from pouring hundreds of millions of dollars into a Tampa Bay area housing market stagnant with thousands of unsold condos.”

“Tampa officials looked to the tower, one of several new condo high-rises, to help revitalize its central business district. But the proposal never shook criticism that its fancy penthouses and gold-trimmed living may have suited Miami and New York but clashed with Tampa’s middlebrow image.”

The Tampa Tribune. “SimDag has not made payments since October and owes Trump at least $1 million, the lawsuit claims. The developers have yet to break ground on the building.”

“The company’s office phone is disconnected. Trump declined to answer questions but said through his assistant, Rhona Graff, that ‘the lawsuit speaks for itself.’”

“Trump Tower was announced with much fanfare in early 2005. But the luxury high-rise project has struggled to go vertical. Construction activity stalled in November. On Tuesday, there was no equipment on the vacant site.”

“SimDag boasted it had sold out of condo units shortly after announcing the tower project, but the company has acknowledged that some buyers have dropped out. SimDag has passed along at least $40 million in construction increases to buyers who had signed up to purchase units.”

“In recent months, two buyers have sued the developer for their deposits. In the lawsuit, filed in January, buyers Louis Ricci and Joe Shultz, both of Walton County, near Pensacola, argue it is impossible for SimDag to build the tower by the December 2008 deadline stated in their contracts.”

“They also complained that they bought, in part, because they thought Trump was involved in the building of the tower and felt misled when they learned SimDag had only licensed the use of Trump’s name.”

“George Galiouridis was among the first buyers to put up a 20 percent deposit. In January, 2005, he reserved a 2,900 square-foot, three-bedroom condo on the 31st floor for $1.1 million. A few months later, he says, SimDag said he would have to pay $200,000 more to convert the sales agreement to a hard-purchase contract, locking in the sale price.”

“When he learned about Trump’s lawsuit, Galiouridis said he wants Trump to take over the project and build the tower himself or push SimDag to return deposits to buyers. ‘This is good news,’ he said. ‘I believe Trump finally realizes that his name and credibility is at stake. He’s said he can build it out of his pocket. I hope he does.’”

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