The Housing Bubble

It’s Friday desk clearing time for this blogger. “Members of the Assembly challenged the mortgage industry Tuesday on the subprime lending problem. ‘These problems are systemic and fundamental,’ said Assemblyman Rory Lancman (of) Queens, pointing out that half of all subprime loans made around the country in recent years were written by lenders who are now bankrupt, which he said is proof of institutional issues.”

“Lancman also said the industry has perpetuated a myth that subprime mortgages have allowed people with low or moderate incomes to become homeowners. According to the Mortgage Bankers Association, only 45 percent of subprime loans are used to purchase a home and only 11 percent go to first-time buyers. The rest refinance existing mortgages or are made to real estate investors.”

“At least one member of the industry agreed with the critics. ‘The system is complex, and it was originally designed that way to protect consumers,’ said John Robbins, chairman of the MBA. ‘But just the opposite has happened. Now predatory lenders are able to hide under the paperwork.’”

“Much has been made of the very questionable lending that accompanied the rapid growth of subprime mortgages. But less attention has been paid to the gimmickry and manipulation that delivered the loans an industry craved.”

“‘There’s a huge amount of broker fraud out there,’ says Kerstin Arusha of the Fair Housing Law Project in San Jose, Cal. ‘When you look at the applications of many of these borrowers, I see it reported that they make $10,000 or $12,000 a month, sometimes $20,000 a month. They always have $100,000 in personal assets. You can see that these things are created by the broker.’”

“The Oregon Senate has passed Senate Bill 965 ‘prohibits certain lending activities in connection with high-cost home loans, and creates private cause for damages.’”

“We met a couple who bought a new home in March, 2006, with 0 percent financing and a payment of $1,100 per month. (We did not originate the loan). In May, they bought a $50,000 SUV. In August, she got a job, he quit his, they bought a $20,000 vehicle, she lost her job. So they took on $1,100 in vehicle payments, are in foreclosure on their home, but won’t give up their vehicles.”

“All the legislation in America cannot protect these two citizens from their own actions all the time.”

“A foreclosure on almost $7 million loaned for the construction of a Springdale subdivision represents more financial fallout from an overbuilt real estate market in Northwest Arkansas. The Terminella foreclosure is the second large subdivision foreclosure filed in eight months.”

“The outstanding principal now demanded by the bank is $6.89 million plus $92,000 owed in back interest and late charges, according to the filing. ‘Most likely the bank doesn’t feel that there is another option, which is unfortunate,’ said economist Jeff Collins.”

“Home buyers who camped out for more than a week are celebrating after buying ‘first-come, first-served’ flats in a £225m Devon city development.”

“‘If it hadn’t been for something like this I wouldn’t have got on the housing ladder, the odds are just stacked against you,’ Ryan McLean said.”

“The Terraces at River Heights condominium project sold out almost as fast as cold beer on a hot summer day. The price charged for the condos might seem high compared with what Regina residents were used to paying just a few years ago, conceded Muir Barber, president of Pinnacle Developments. But there is strong demand for housing in the city and housing prices have gone up, he noted.”

“‘It’s the new reality,’ he said.”

“Most young adults have heard this advice: ‘You ought to buy a house.’ Stop renting, the message goes.”

“‘There is a myth that people just assume buying a home is better than renting,’ said Kristy Lamb, a regional property manager for NP Dodge Management Co. in Omaha. ‘People don’t always consider that the first five years of (mortgage) payout are going into interest.’”

“Housing ‘screams out as the most important concern of every group,’ the Silicon Valley Leadership Group’s annual CEO Business Climate Survey said. A staggering 99 percent of respondents said housing costs are among the top three cost-of-living challenges, and 84 percent listed it among the top five business challenges.”

“Whenever the housing market takes a turn, how you feel depends on where you stand. There are buyer’s markets and seller’s markets; what’s good news for buyers is bad news for sellers, and vice-versa.”

“So a slow housing market is framed in hand-wringing headlines, like this one from Friday’s Boston Globe: ‘Housing slump may rival late ’80s.’”

“If you are struggling to buy a home, that sounds like good news, not bad. It’s also good news if you consider the long-term needs of the state economy.”

“Lower home prices ‘are healthy for the economy,’ said Alan Clayton-Matthews, the UMass professor who authored the study. ‘With housing prices in line with incomes, Massachusetts will once again be affordable for the state’s future labor force.’”

“On an episode of A&E’s popular reality series ‘Flip This House,’ Atlanta businessman Sam Leccima sits in front of a run-down house and calls buying and selling real estate his passion.”

“Now authorities and legal filings claim that Leccima’s true passion was a series of scams that included faking the home renovations shown on the cable TV show and claiming to have sold houses he never owned.”

“Dan Ward, an Atlanta-area youth minister, said he told state investigators that Leccima took about $100,000 from him to invest in real estate, but, as far as he knows, Leccima never developed anything with it. He hasn’t received his money back.”

“Sonya McGee, who says Leccima took $4,000 from her in an investment scheme, said appearing on the TV show made it easier for Leccima to find such investors: ‘As soon as that first episode aired, he got phone calls from people saying, ‘I love you. Where can I send you some money?’”

The Times Herald reports from California. “The number of home foreclosures in Solano County is rising along with those of other Bay Area counties, even as local median home prices continue to fall, industry experts report. In Solano County, the median price of a home sold was $428,000 last month, a 7 percent drop from $460,000 in April, 2006, according to a recent California Association of Realtors report.”

“Within the county, Dixon saw the sharpest decline, 16.3 percent, while Vallejo’s median sold home price dipped just over 4 percent.”

“Solano Association of Realtors president Jeff Dennis acknowledged that in the past several years, Solano County had more than its share of home buyers who secured subprime mortgages they couldn’t really afford, with no down payment.”

“Often, as prices decline, these folks find they owe more on their home than it’s worth, and as their low teaser interest rates adjust up, many are finding it less painful to just walk away.”

“It’s a problem shared by many Bay Area counties, particularly Contra Costa and Alameda, Dennis said.”

“Benicia mortgage broker Mitchell Chernok, said it’s not unreasonable to expect ‘a wave of foreclosures’ to sweep Solano County for the next several months.”

“Chernok and Dennis agree that after the dust settles, there may be an upside. ‘The light at the end of the tunnel will be a lot more affordable housing in the county,’ Chernok said.”

“‘We can’t continue living like it’s 2004,’ during the red hot Bay Area real estate market, Dennis said.”

The San Francisco Chronicle. “Amid slumping home sales and pessimistic forecasts, a subdued group of builders gathered at Moscone Center this week for the Pacific Coast Builders Conference.”

“‘There are fewer people here and there’s not the upbeat intensity there was a couple of years ago,’ said show-goer Frank Prach, owner of an architecture, building and design firm in Auburn (Placer County). ‘There is a sense of uncertainty.’”

“Robert Becker, president of Wintergreen Enterprises Inc. in Tiburon, said sales have stalled at a high-end development his company has in El Dorado Hills near Sacramento. From 2003 through 2005, it sold 55 lots ranging from $400,000 to $700,000 for custom, $2 million homes. Last year it sold two lots.”

“‘This year, there is nothing,’ he said. ‘Nobody comes through the subdivision. I think we’re in for a down year and we’re in a bad situation for next year.’”

The Mercury News. “Consumers are leery of buying new homes now, agreed Southern California builder Brian Catalde at another session Thursday.”

“Catalde, who is president this year of the National Association of Home Builders, said that in 2006 his customers visited a new-home community’s sales office an average of twice before they bought. But now people make eight to 12 visits without buying.”

“When asked why, nearly three-quarters of them said they feared they’d buy a home and then the builder would lower prices again, effectively wiping out new buyers’ home equity.”

“‘People don’t pull the trigger because they’re afraid they’re going to lose their down payment, and I don’t blame them,’ Catalde said. ‘I’d be concerned too.’”

“In a sign of the leaner times for the home building industry, attendance at this year’s PCBC show fell to about 28,000 from about 31,000 last year. The show’s theme of ‘the new basics’ was highlighted with slogans adorning the entrances to the trade show floor that read ‘rethink,’ ‘reconnect’ and ‘refocus.’”

The Sacramento Bee. “Like all businesses, real estate is one grounded in optimism. It likes to minimize doubt and look for the silver lining. So it’s not surprising that when its industry prophets make forecasts, they lean toward high. Nor does it come as a surprise when they revise downward.”

“On Thursday, the California Building Industry Association did the dance. It now projects 20,000 fewer permits for new houses and condos in 2007 than it predicted in January.”

“Alan Nevin, CBIA chief economist, is downsizing expectations for the Sacramento area, too. In January he predicted 13,500 to 16,500 residential building permits for El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties. His new guess is 10,500 to 12,800.”

“In early 2006 Nevin said Sacramento was likely to repeat the frenetic home-building activity of 2005. That was revised, too.”

The Orange County Register. “Mid-May home-selling stats from DataQuick show buyers seriously balking. Sales activity was down a sharp 35% vs. a year ago for the 22 business days ended May 15. If that holds, last month will have been the slowest selling May in DataQuick’s 20-year history of O.C. real estate.”

The Desert Sun. “Coachella Valley leaders gathered Thursday to address a looming crisis. Only 10 percent of valley residents are able to afford the $400,000 median-priced home and the nation’s eighth-worst house-price-to-household-income ratio.”

“The valley could end up like Orange County, said economist John Husing, where expensive homes and even rents force much of the workforce to drive long distances in bumper-to-bumper traffic.”

“A simple trip to Redlands will become a mess, Husing told the crowd. ‘You need to have affordable housing here or you’re condemning people to an abominable lifestyle,’ Husing said.”

The Gilroy Dispatch. “The number of default notices in Gilroy nearly tripled in early 2007 compared to early 2006, according to a DataQuick. The trend is driven by sagging home values, which have prevented owners from simply reselling their homes when overdue payments stack up.”

“‘Honestly, I don’t think we’ve even begun to chip away at the iceberg in South County,’ said Nuemi Guzman, a predatory lending intake worker with the Fair Housing Law Project based in San Jose.”

“‘The lender often takes a hit on this,’ added Martin Eichner, director of dispute resolution programs for a tenants’ rights organization with an office in Gilroy. ‘It’s the guys in the middle, the brokers, who make the money.’”

“A bill that would have created a pool of money to help subprime mortgage borrowers facing foreclosures to refinance their loans died in the state Assembly Appropriations committee Thursday.”

“The measure, AB1538, would have allowed some of those homeowners to refinance their loans with affordable interest rates by using a new fund created by tapping into the housing bond that voters approved in November, floating bonds in the future and asking banks that have large numbers of subprime customers who face foreclosure to pitch in.”

Some housing bubble news from Wall Street and Washington. “An index of pending sales of existing homes in the U.S. unexpectedly fell to the lowest level in more than four years in April, a further sign the real-estate slump may linger. The index of signed purchase agreements, or pending home resales, fell 3.2 percent to 101.4, the lowest since February 2003, after a revised 4.5 percent decline in March, the National Association of Realtors said today in Washington.”

“The index was down 10.2 percent from April 2006. The index of pending home resales is considered a leading indicator because it tracks contract signings. The National Association of Realtors’ existing-homes sales report tracks closings, which typically occur a month or two later.”

“‘Psychological factors seem to be holding buyers back as they look for clear signs that the market has bottomed,’ said Lawrence Yun, senior economist for the Realtors.”

“Today’s report showed pending resales declined 10.4 percent in the Northeast and 10.2 percent in the West. They increased 2.3 percent in the Midwest and 0.7 percent in the South.”

From Reuters. “Failures among subprime mortgages offered to borrowers with damaged credit is continuing to dampen the home sales market, the trade group said.”

“‘In April, existing-home sales declined in part because some subprime lenders went out of business and disrupted the market,’ said Yun, the NAR senior economist.”

The Star Ledger. “Hovnanian Enterprises Inc. reported yesterday it swung to a loss in the second quarter, giving the homebuilder a third consecutive quarterly loss.”

“Revenue in the first quarter was 1.1 billion, down 29 percent from $1.6 billion in the same period a year ago. The company builds luxury homes in 17 states including California, Florida, New Jersey and New York.”

“‘We are frustrated to report that the housing market has continued to slip further in many loca tions in terms of both sales pace and sales prices,’ said Ara K. Hovnanian, the company’s CEO. ‘The housing market weakened in the latter part of the second quarter, and the slower conditions have continued into May.’”

“Yesterday, Moody’s Investors Services cut its ratings on Hovnanian, saying the homebuild er’s cash flow from operations will likely remain negative amid the ongoing housing-sector slump.”

From Bloomberg. “‘We are not confident that we’ve seen a bottom,’ in the housing market, CEO Ara Hovnanian said in the statement. He said he was confident that the company’s current strategy of lowering prices would boost sales ‘over time.’”

“‘Lower prices offered to buyers to close homes during the quarter also led to a further reduction in margins and a net loss for the quarter,’ Hovnanian said.”

“Homebuilding gross margin, excluding interest, was 16.3 percent in the second quarter, compared with 23.7 percent a year earlier. Hovnanian announced preliminary results for the quarter on May 4 and said it delivered 30 percent fewer than a year earlier. Cancellations fell to 32 percent from 36 percent in the first quarter.”

“Hovnanian reported…about $34 million in pretax charges for land-related write-downs and impairments.”

“‘We’ll continue to monitor conditions in all of our markets, and if the weakness seen in the first few weeks of the third quarter continues, then we may have additional impairments in future quarters,’ Ara Hovnanian, said in a conference call with analysts.”

The Herald News. “Hovnanian and other builders have had to cut prices and offer incentives to buyers. Even so, many new-home buyers have walked away from contracts, often because they can’t sell their own houses.”

“Hovnanian was especially hurt by a market slump in the Fort Myers, Fla., area. After speculation drove up prices in that area, investors pulled out. As a result, inventories have soared and prices have dropped. Earlier this year, Hovnanian took a charge of $93 million related to its Florida losses.”

The Financial Times. “Hedge funds are attacking bank decisions that help delinquent US mortgage borrowers remain in their homes.”

“The funds fear that banks are making concessions on the underlying mortgages to avoid making good on derivatives contracts that pay off in cases of default.”

“International Swaps and Derivatives Association, the derivatives industry body, to act on their concerns, according to a letter seen by the Financial Times.”

“‘ISDA should actively promote an industry solution that assures market participants that no one can engage in practices that are manipulative and prohibited by existing securities laws,’ the funds said.”

“Mortgage brokers and lenders concerned about a regulatory backlash by state officials are warning that weightier rules may force them to turn their backs on many consumers.”

“The worst case scenario isn’t inconceivable, lenders could stop providing credit in some locales, said Kenneth Logan, head of NovaStar Mortgage’s warehouse lending before the company cut the program this year.”

“‘Capital (investor money) will leave’ if regulation goes too far, Logan said, echoing others on a panel assembled by the Mortgage Bankers Association.

“‘There are only two ways to clear out the existing housing inventories: If mortgage interest rates go lower or if sellers lower their prices,’ said Mark Keisel, an executive VP with PIMCO. ‘But it doesn’t look like the Federal Reserve Bank is inclined to lower interest rates too much, and sellers are holding firm.’”

“‘(Housing) inventories,’ he observed, ‘are the best predictor of the future direction of a housing market.’”

“‘There are 3.7 million existing homes for sale in the U.S., which is 20 percent above where it was last year. Inventories are not going down, the number of vacant homes for sale has soared, and you have concessions being handed out by home builders,’ he added.”

“Amy Crews Cutts, deputy chief economist of Freddie Mac says…she isn’t sure how bad the subprime market will get. ‘We’ve never been in a subprime credit cycle like this, because overnight all the liquidity evaporated,’ she explained. ‘Who will service and negotiate these loans if the lenders have gone out of business?’”

“With mortgage fraud up an estimated 30 percent in 2006, Crews Cutts says it’s also unknown what will happen to these homes when the buyers walk away. It could be part a big part of the ‘vacant homes for sale’ story.”

“‘The problem with subprime loans and option ARM loans and interest-only loans is that defaults are going up. But early payment defaults are also high,’ she said.”

“Subprime mortgages originated in 2006 are experiencing a greater number of defaults far earlier in the payment cycle than loans originated in previous years, Crews Cutts pointed out.”

“‘One and a half percent of these loans are going bad in month 14,’ she explained. ‘And the (interest rate) reset hasn’t even happened yet.’”

“What will happen when $1 trillion in adjustable rate mortgages resets in the next year? That, say Crews Cutts and Keisel, will determine whether the real estate slowdown bottoms out this year, next year or at some indeterminate time in the future.”

The Hook reports from Virginia. “‘Under Assessment!’ ‘Bargain in the city!’ ‘Best deal out there!’ Welcome to the new reality of moving real estate in Charlottesville. In one recent instance, desperate sellers, trying to unload a Belmont property they purchased two years ago, are asking only slightly more than they paid, and sweetening the pot with the offer of a week-long Hawaiian vacation.”

“Is it panic time for sellers, or are fears of a housing collapse misplaced? ‘There’s an awful lot of inventory,’ says real estate agent Jim Duncan. Indeed, at the end of April, more than 1,100 properties were listed on the market in Charlottesville and Albemarle. By May 29, the number had soared to over 1,400. That’s about 600 more than at the same time in the hot market of 2005.”

“Making the picture even darker for sellers: average days on market in April was 120, up from just 66 days in April 2005, when sales were blazing. More than twice the inventory, and nearly twice as long to sell it.”

“‘Sellers are still stuck back in the market of 2004 and 2005 with expectations,’ says Duncan. And for some homeowners, there’s another problem, they may not even get their money back.”

“‘There are people who paid at the height of the frenzy,’ says Duncan, ‘and are now negotiating from a position of what they need to make rather than what the market dictates.’”

“‘It’s frustrating,’ Duncan says, ‘to advise sellers that sometimes there’s nothing they can do but wait.’”

“There are other signs that things aren’t as rosy as they used to be. As the Daily Progress noted in a Saturday, May 26 article, foreclosures advertised in that paper have increased by 27 percent in the past year.”

“‘We have noticed that the sales are coming in below the 2007 assessments,’ says Roosevelt Barber, the city’s assessor. ‘If this continues, then we will make adjustments downward.’”

The Morning Call from Pennsylvania. “According to statistics from the Lehigh Valley Association of Realtors, the number of homes sold has fallen for the past 11 months, while the number of homes for sale has skyrocketed, the group said. The slowdown comes on the heels of a trio of blockbuster years for home appreciation and sales.”

“The slowing pace of sales in the past year has irked some homeowners who hoped to sell their houses quickly. Many suburban homes and properties that cost $250,000 or more are sitting on the market longer.”

“At a conference last month at Lehigh University, area real estate agents said inventory continues to rise because some homeowners are trying to sell their houses while prices are still on the rise. At the same time, buyers are taking longer to purchase homes. With a large number of homes for sale, buyers don’t need to rush.”

“‘The buyers don’t want to purchase in a declining market so there are a lot of buyers on the fence waiting,’ said Loren Keim, who owns Century 21 Keim Realty in Allentown.”

The North East Reporter from Maryland. “Sharon Blough, manager of the Perry Hall office of Long and Foster Real Estate, (said) that there are more foreclosures this year than in the recent past, particularly the span from 2002 to mid -2006, a period of real estate boom with house values going up dramatically, and often doubling.”

“Veteran agent Joseph Banick said he has noted more clients telling him they could no longer afford their homes and needed to sell. Banick said they were often young couples under 35 living beyond their means and discovering that the ‘well has run dry.’”

“During the 2002-2006 boom years, as house values kept escalating, home owners could easily refinance, since rising appraisals gave their properties more equity than they had paid in. But in mid-2006, the merry-go-round stopped whirling.”

“‘Many clients assumed the boom would keep going. But we (professionals) know from history that they never do. They always end,’ said Sherrie Brandquist, a housing counselor.”

“Some home appraisals are going down, and those homeowners find themselves with a house worth less than the amount they owe on the mortgage. This situation is called ‘negative equity.’ It means there is no escape for the cash-strapped homeowner.”

“Brandquist said the boom times also encouraged a few lenders to make loans that would not pass muster today.”

The News Journal from Delaware. “Foreclosure filings in Delaware are soaring toward record highs and are likely to keep increasing into 2008, state banking officials say.”

“Foreclosure filings in all three counties stand at 2,395 so far for fiscal year 2007, already topping last year’s total of 2,228, according to Superior Court records in each county.”

“‘At this juncture, each county is projected to break a record this year, and Sussex has already broken’ its record, said Gerry Kelly, Delaware’s deputy bank commissioner for consumer affairs. ‘And we still have a year to go in what we see as potential growth in this problem.’”

“Gladys B. Spikes, a housing counselor in Wilmington, said her agency is working with hundreds of families who are in the foreclosure process or have already lost their homes. Calls from clients seeking to avoid foreclosure ‘have quadrupled’ in the last couple of months, she said.”

“‘Mostly what’s happening is that these exotic mortgages are coming due,’ said Spikes.”

“With 6.46 percent of subprime loans in Delaware showing up as 90 days late or more during the last quarter of 2006, the news on foreclosures is not likely to improve anytime soon.”

“‘That’s your ghost of Christmas future,’ said Ira Goldstein, policy director for the Reinvestment Fund. ‘The 90 days or more delinquent are certainly likely to go into foreclosure. So to me, it means that there are a bunch of these things that are going to hit Delawareans. From a state perspective, you have to be concerned.’”

From CBS 3 on New Jersey. “A cooling real estate market has lead to a tremendous amount of home foreclosures at the Jersey shore. Home foreclosures at the Jersey shore are up 110-percent over last year.”

“‘I think it’s very similar to the dot.com boom,’ Steve Brasslett, CEO of Ivy League mortgage said.”

“‘Every deal was a record breaker and then the market became saturated. Eventually it dropped and the door closed. Investors couldn’t sell homes for what they bought them for, so they were unable and had no intention of making mortgage payments,’ said Brasslett.”

“Mortgage brokers say homes of all shapes, sizes and prices are going into foreclosure. A brand new two-story home in Ocean City is up for foreclosure because more than half a million dollars was owed to the bank.”

“A unit at Flagship Condos in Ocean City went back to the bank Wednesday at a Cape May County sheriff’s sale. ‘The bank didn’t want to buy it back, but they have taken it back through foreclosure action,’ foreclosure specialist, Adam Palmisciano said.”

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