The Housing Bubble

The Napa Valley Register reports from California. “As the number of homes in foreclosure rises in Napa County, American Canyon finds itself at the center of the storm. Of the 64 foreclosures recorded in Napa County during the first four months of 2007, 16 were in American Canyon.”

“In 2005, during the same time period, only two foreclosures took place in all of Napa County, and neither was in American Canyon.”

“ReMax agent David Barker is on the foreclosure frontlines in American Canyon. According to Barker, on average, one in every 60 homes in American Canyon is in foreclosure proceedings or has been foreclosed. Statewide, the statistic is closer to one in every 389, and nationwide, one in every 783 homes.”

“‘I think we’ve got a lot of problems,’ said Barker. ‘Clearly the pace is picking up. I don’t know whether this is just the tip of the iceberg.’”

“Barker attributes the increase from 2005 and 2006 to buyers with adjustable rate mortgages, some subprime. ‘(Owners) can no longer make the payments and they can’t refinance because the value of the property has gone down and they owe more on the property than it’s worth.’”

“Even more serious, ‘They may be subject to negative amortization, where the loan amount actually grows each month if they are only making minimum payment options.’”

“Barker said American Canyon home values are down approximately 12 percent since the market peak of July and August 2005. ‘What’s happened now is there are more homes for sale now. It’s supply and demand,’ said Barker. ‘You have more people that want to sell than people who want to buy.’”

“‘We’re not done with foreclosures,’ said American Canyon broker Anne Schabacker. ‘People bought houses that they shouldn’t have because they had brokers that let them do it.’”

“‘Even last year we were selling 12 to 15 a month,’ said Barker. ‘It’s half the pace from 2005. Anything with more than six-month supply is a buyers market,’ he said. ‘We (have) a 16-month supply, this is a serious buyers market.’”

“Barker’s advice for would-be sellers is direct: ‘If you don’t have to sell your house, don’t.’ However, some people have no choice.”

The LA Times. “For Los Angeles newlyweds Joseph and Jamie Horton, the deal looked too good to pass up: a mortgage with an initial 1.75% interest rate and payments that wouldn’t adjust for five years.”

“The Hortons figured that with all the money they would save on interest payments, they would be able to pay down a significant chunk of the principal on their loan. But after a month, the actual interest rate on their ‘option’ ARM shot above 8%.”

“They blithely made the minimum payment each month, not realizing, they say, that the low rate they had secured was so fleeting. Within months, thousands of dollars in unpaid interest was added to their loan balance. Ready to bail out, they discovered a second catch: a prepayment penalty that would cost them $18,000 if they refinanced.”

“‘They held a carrot in front of us and told us that this was a great deal,’ said Joseph, who has since refinanced into a fixed-rate loan. ‘In one year, it cost us $83,000. It was excruciating.’”

The Union Tribune. “Hindsight, they say, is 20-20. And with the benefit of two years of hindsight, it’s clear that June 2005 was the height of the wacky season for the San Diego County housing market, which has potentially fearsome implications for home prices this summer.”

“Nearly 83 percent of new home buyers in the county used adjustable rate mortgages in June 2005, an all-time high representing about 4,700 homebuyers. Nearly 63 percent of refinancings used adjustable rates.”

“‘An 80 percent rate for adjustable mortgages was so far out of the market that it should have raised red flags for lenders,’ says Raphael Bostic, associate director of the Lusk Center for Real Estate at the University of Southern California. ‘But because of the continuing appreciation of home prices, lenders by and large felt that they were somewhat insulated from any particular hardship.’”

“‘People are not looking at what they are going to have to pay over the long term,’ warned Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies, in an article that ran in this newspaper that June.”

“Retsinas warned that if the economy hit a soft spot, housing could suffer a ‘painful’ downturn. Which is exactly what is happening.”

“‘Particularly for the subprime market, borrowers took out mortgages that were fixed for two years and then adjusted pretty abruptly,’ said Andrew LePage, analyst with DataQuick. ‘People were already stretching to make their monthly payments, but it increasingly looks like some folks can’t handle the reset.’”

“This summer will see a major wave of adjustable-rate mortgages ratcheting upward. Not just from June 2005, but from following months as well. According to DataQuick, adjustable rates constituted between 76 percent and 80 percent of all new home mortgages between July and September, representing 21,400 purchases.”

“Many of those borrowers will end up in default. Or foreclosure. Between January and April, there were an average of 427 foreclosures per month in San Diego County, and 1,319 notices of defaults, potentially signaling future foreclosures.”

“‘A lot of households will be facing stress in a fairly short time period,’ Knowles said. ‘A lot of tough choices will need to be made. We could see some significant price fluctuations, with a lot of product being put on the market.’”

“Since the beginning of the year, an average of 3,073 homes have sold in San Diego each month. If you add 427 homes into that mix each month, priced for a rapid resale, the supply of cheap homes will inevitably push competing prices lower.”

“Rising foreclosures and declining prices are not unique to San Diego. Even though we led the nation during the housing boom from 2001 through 2005 and the decline of 2006, other spots have superseded us.”

“In California, the worst foreclosure rates are clustered around the Sacramento area, including Stockton, Modesto, Vallejo and Fairfield, according to RealtyTrac.”

“Some areas in Florida, Georgia, Michigan, Tennessee, Indiana, Illinois, Missouri, Texas and Ohio have seen foreclosure rates much worse than San Diego’s.”

“In short, it’s a nationwide phenomenon. The Grubb & Ellis real estate firm warns that there may be more than 1 million foreclosures throughout the country in the next year or two.”

The Daily Breeze. “As chairman of the Assembly Committee on Banking and Finance, Ted Lieu offered a bill to create a pot of funds to bail out borrowers who have defaulted on subprime loans.”

“Lieu’s bill was among the most aggressive in the nation in addressing the subprime loan issue, but it was a tough sell in a tight budget year. Lieu suggested at one point that voter-approved housing bonds could be used to finance the bailout, which many legislators objected to.”

“‘People thought it would be enormously expensive,’ Lieu said.”

The Sun News reports from New Mexico. “Do you want to sell a house in Las Cruces? A couple of years ago, you could have probably had buyers knocking on your door within hours of putting the home on the market. ‘Sometimes, before you could put a sign on, it would sell,’ said Louis Sauceda, owner of the Official Mortgage Team of New Mexico. ‘I was talking to an agent friend of mine and he said they now have to work a little harder to sell them.’”

“Fewer homes have sold than a year ago. In May 2006, 236 homes closed, reports Annette West, a Las Cruces real estate agent. Through May 29 of this year, that number dropped to 111.”

“Real estate agent Barbara Carrison said the fact that homes are taking longer to sell is not caused by a lack of home buyers, but an increase in supply.”

“‘It’s taking a little bit longer because there are so many more homes on the market at this point,’ she said. ‘There are not less buyers, but there are more houses.’”

“Barbara Dean and her husband recently purchased a home in Las Cruces. The couple moved to southern New Mexico from Scottsdale, Ariz. ‘From what I understood, the house was on the market for well over a year,’ she said.”

The Rocky Mountain News from Colorado. “Gov. Bill Ritter signed five bills into law, including one to license mortgage brokers, that supporters hope will stem the tide of record foreclosures sweeping the state.”

“‘We’re on pace to log another 37,000 foreclosures this year, which was up 30 percent from 2006, and that was up 30 percent from 2005. Those are just staggering numbers,’ Ritter said.”

“One of the best features of the new laws, said Erin Toll, director of the Division of Real Estate, is if a broker has a license revoked, he or she can’t get it back until they’ve repaid the consumers they ripped off.”

“Some experts also questioned whether the new laws will do much to slow the number of foreclosures.”

“Peter Lansing, president of Universal Lending, who supports the new laws, said only a housing market recovery can end the foreclosure crisis. ‘What we need are rising housing prices and more jobs,’ Lansing said. ‘Only market forces can stem the tide of foreclosures, not legislation.’”

“Later this summer, rates could rise to around 7 percent, said Lou Barnes, a principal of Boulder West Financial Services. ‘A lot of adjustable-rate mortgages are resetting to 7.5 percent and 7.75 percent,’ Barnes said.”

“Rising rates, combined with a flat housing market, could increase the number of foreclosures in the metro area, he said. Foreclosures already are at a record level.”

“‘The new lender term is ‘jingle mail,’ Barnes said. ‘They call it jingle mail because the homeowners are mailing their keys back to their lenders.’”

“The biggest weakness in housing prices in the Denver area, and where most of the foreclosures are occurring, is with lower-priced homes, said economist Michael Kone, owner of Housingmetrics Inc. in Boulder. ‘There is a lot of weakness at the bottom end.’”

. “A report shows a 35.4 percent year-over-year decline in Denver metro new home sales in April. Andrew LePage of DataQuick, said last month’s Denver new home sales total is the least it has on record for an April, with only 830 sales, compared with 1,285 in April 2006.”

“‘The Denver region continued its yearslong stretch of flat housing prices in April,’ according to LePage’s report. ‘The median price paid fell just shy of the year-ago mark for the sixth consecutive month as sales eased to the slowest pace in at least nine years.’”

The Denver Post from Colorado. “Two more participants in a mortgage-fraud conspiracy that devastated a neighborhood with foreclosures were sentenced to federal prison terms.”

“Taiwan Lee bought three homes in Villas at Cherry Creek while he was wanted for violating parole. He managed to buy two more after he was jailed, borrowing a total of $3.1 million for five villas acquired with 100 percent loans.”

“U.S. District Judge Edward Nottingham sentenced Lee to 30 months for serving as a straw buyer in a scheme that allegedly purchased 17 homes at inflated prices and took $2.1 million from the excess proceeds.”

“He also sentenced Talita James, a convicted cocaine dealer who bought two villas in one day for $1.1 million, to 27 months for her purchases and for committing a crime while on supervised release from federal prison.”

“To date, eight people have pleaded guilty to felony charges in a continuing federal investigation. Developer Timothy Todd DeNeui and Jerrold Minney, a real estate broker who helped sell the villas, have denied knowing the buyers were engaged in a fraud conspiracy.”

Some housing bubble news from Wall Street and Washington. Forbes, “On Wednesday, 1,300 home builders will call on Capitol Hill as part of a legislative conference organized by their trade group, the National Association of Home Builders. They’ll do so against a grim industry backdrop.”

“‘For the first summer in many summers, we’re not helping to keep unemployment numbers down,’ says Jerry M. Howard, 51, the NAHB’s CEO. ‘For the first time in six years, we are a drag on the economy rather than a plus.’”

“‘Our strategy is to remind policymakers of our importance in economic and societal terms,’ he says, ‘and to convince them to take no action that would exacerbate this downturn in the housing industry.’”

The Associated Press. “Georgia builder Meyer-Sutton Homes Inc. filed for protection from creditors Monday in the U.S. Bankruptcy Court in Newnan, Ga., the result of a ’sudden and dramatic’ decline in business.”

“‘The housing market has suffered a dramatic decline in demand with the result problems of excess inventory and compressed profit margins,’ (owner) James W. Buchanan said in court papers. According to its bankruptcy filing, the company has cut new construction starts to two per month from 25 per month.”

“Home furnishings retailer Bed Bath & Beyond Inc. late Monday warned that its fiscal first-quarter earnings may come in below Wall Street’s expectations.”

“‘Based upon what we have experienced and has been reported by others, the overall retailing environment, especially sales of merchandise related to the home, has been challenging,’ CEO Steven Temares said.”

“American Woodmark Corp. shares fell Tuesday morning after the kitchen cabinet maker reported weaker-than-expected fiscal fourth quarter sales, and forecast a smaller fiscal 2008 profit than analysts expected.”

“‘Given management’s core sales forecast, it appears this rough patch will continue well into fiscal year 2008,’ said analyst Peter Lisnic.”

From Reuters. “Bonds backed by residential mortgages that can be ‘modified’ to stave off foreclosure may get lower ratings since the changes may result in reduced protection for debtholders, Fitch Ratings said on Monday.”

“‘After the servicer modifies the loan, the loan is shown as current. Our concern is it’s still a pretty high-risk loan,’ Fitch analyst Glenn Costello said.”

The San Francisco Chronicle. “When borrowers run into trouble, repayment and forbearance programs are still the most popular loss-mitigation strategies. Loan servicers are offering them in 50 to 75 percent of cases, Fitch says. Nevertheless, servicers report that ‘repayment and forbearance plan effectiveness is decreasing.’”

“Servicers also told Fitch they are having a harder time contacting borrowers who are delinquent or likely to be when their adjustable-rate mortgages reset. One probable reason is that more people today have caller ID and can avoid answering calls from creditors, says Diane Pendley, a Fitch managing director.”

“Also, many people who took out subprime loans in the last few years did not have to document their income. They might be afraid they would have to prove it now. ‘The servicers are trying to convince them’ that won’t happen, says Pendley.”

“A bigger problem: To get a lower interest rate, some borrowers said they were planning to live in a home they were really buying to rent or flip. For obvious reasons, they don’t want a servicer showing up at the door.”

“Despite the Fitch forecast, people who work with troubled borrowers are not seeing a big increase in modifications yet. ‘We have seen 35 cases in the last six months where folks are in a subprime mortgage that is about to adjust and would like a modification,’ says Jane Duong, homeownership program manager with the Mission Economic Development Agency in San Francisco.”

“‘A few of them, less than five, got a forbearance or repayment plan. I have yet to see loan terms modified,’ she says.”

“Duong says the main reason servicers can’t modify a loan is because it is in a security that prevents or severely limits a servicer’s ability to alter terms. Fitch says tax laws and accounting rules also might prevent some modifications.”

The New York Post. “A big hedge fund on one whopper of a winning streak is picking a bitter fight with Bear Stearns over whether renegotiating loans for homeowners struggling with subprime mortgages is fair play.”

“At issue is the motivation behind efforts by Bear’s EMC Mortgage unit to renegotiate subprime home loans, and whether it’s solely to prevent homeowners from losing their houses, or, as Paulson’s general partner John Paulson told The Post, simply ‘to artificially inflate the value of derivative securities.’”

“Federal Reserve Chairman Ben Bernanke predicted Tuesday the economy will rebound from an anemic performance at the start of the year even if the housing slump continues.”

“The Fed chief did make clear once again that the painful residential real-estate bust, which started last year, ‘appears likely to remain a drag on economic growth for somewhat longer than previously expected,’ he said.”

“Residential construction will likely remain ’subdued for a time’ until builders can pare down a backlog of unsold new homes, he noted. But, thus far, the problems in the housing market haven’t spread through the broader economy in a significant way, Bernanke said.”

“‘We have not seen major spillovers from housing onto other sectors of the economy,’ he observed.”

“Bernanke acknowledged that problems in the subprime market can be traced in part to loose standards, which in some cases allowed people to get mortgages with little documentation. Facing criticism from Congress about lax regulation in the subprime arena, Bernanke again said the Fed will consider tougher rules to crack down on abusive practices and improve disclosure.”

From MarketWatch. “Bernanke devoted most of his speech to developments in the housing market. A close reading of data on the housing market indicates that demand for housing weakened over the first four months of the year, he said.”

“Housing prices remain quite soft, but for the most part outright price declines have been concentrated in markets ‘that showed especially large increases in earlier years,’ Bernanke noted.”

From Bloomberg. ” Economists say Fed policies contributed to the housing boom and bust. Former Chairman Alan Greenspan, Bernanke, at the time a Fed governor, and others were concerned in 2003 that deflation could hit the U.S., as it did Japan for a seven-year period. They cut the key rate to 1 percent and held it there for a year.”

“When they did raise rates, from June 2004, the Fed committed to a ‘measured’ pace of a quarter percentage point per meeting. That helped ‘hold down long-term interest rates,’ said Brian Sack, who as a Fed staff economist in 2004 helped Bernanke research the effect of communication on interest rates.”

“As borrowing costs stayed low even as economic growth accelerated, home-buyers took on a record amount of mortgage debt. From 2004 to 2006, lenders wrote a $2.8 trillion in new home loans, unprecedented for any three-year period.”

“‘The Fed was too easy for too long,’ said Ethan Harris, chief U.S. economist at Lehman Brothers and former New York Fed staff economist. The Fed’s gradual pace of lifting rates ‘contributed to the lack of bite from monetary policy.’”

The Star Tribune. “A trick that some borrowers have used to boost their credit scores is about to lose its punch. Fair Isaac Corp. won’t include the practice of including ‘authorized account users’ when it calculates its FICO credit scores.”

“Lenders are increasingly worried that the practice artificially boosts FICO scores, making it harder for lenders to determine whether borrowers are good credit risks. Experts suspect inflated credit scores are at least partly to blame for the recent rash of delinquencies in the subprime mortgage market.”

From Broker Universe. “Two more managers for All Fund Mortgage have stepped forward and told National Mortgage News that they have not been paid in several weeks. (Typically, All Fund used to pay within 48 hours.)”

“One manager, requesting anonymity, said she has not been paid since April and is owed close to $8,000. ‘They are not returning my phone calls or e-mails,’ said the manager who is based in the South.”

The Orlando Sentinel reports from Florida. “(For) the company known for its ‘We Buy Ugly Houses’ signs, Florida has been one of Home-Vestors’ best markets. And there’s no shortage of houses for sale, a virtual smorgasbord. But these days, many of the homes for sale in markets such as Central Florida can’t be bought, rehabilitated and sold for a profit.”

“‘I don’t know how some [owners] are able to pay the taxes and insurance,’ said CEO John Hayes.”

“Ron Smith, an independent housing-rehab specialist in Apopka, said he gave up his sideline business a few months ago after 20 years of working the Orlando area. ‘It just got a lot tougher. I went to work full time with a roofing company,’ said Smith, who used to buy and fix up homes to sell, or to rent until he could find a buyer, as many as four or five times a year.”

“Smith said his best years were the late 1990s through 2004, when ‘it just went crazy.’ So many buyers were bidding up prices, it got harder to compete, he said. Then, earlier this year, sales went flat as thousands of homes flooded the market at inflated prices.”

“‘I didn’t believe the market here would go 180 degrees, but it did,’ Smith said.”

The Herald Tribune. “Do not blame developers for bringing hundreds of thousands of square feet of office space to market at the worst possible moment. Three years ago, every indicator was persuading them that Sarasota County’s southernmost city was in desperate need.”

“But it was the collapse of North Port’s home building industry that brought the office market to a standstill. Suddenly, developers found it impossible to fill their new buildings, and lease rates plummeted.”

“Figures presented by the the Economic Development Corp. of Sarasota County point to an office vacancy rate in North Port of about 50 percent, amounting to about 180,000 square feet of space. Based on the city’s historic annual absorption rate of roughly 22,400 square feet, that space will take eight years to fill.”

“‘It’s not a pretty picture, especially given current market conditions,’ said George Hugh, a Venice real estate agent and foreclosure specialist. ‘Eight years is a long time for developers to keep feeding money to their banks.’”

“Huhn added that the situation in North Port proves that home builders were not the only speculators during the boom.”

“‘You’ve got to wonder whether developers and bankers, in their rush to develop in 2004 and 2005, were doing proper due diligence,’ Huhn said.”

“Benderson Development Group’s office park on Toledo Blade is a case in point: The company’s six office buildings, totaling 40,000 square feet of space, stand empty. ‘I’m sure they saw rooftops being built and they didn’t count on them being sold to speculators,’ Huhn said. ‘You’ve basically got a situation down there in which half the homes are empty.’”

The Miami Herald. “Tom Murphy Jr. is CEO of Coastal Construction, a general contracting firm in Miami building many of the high-rises going up across South Florida.”

“Q: So you have reduced the number of condos you are doing as it relates to your overall business. Why?”

“A: For condos, five years ago the market was on fire, and we made the decision to try and reduce the amount of condo work we’re doing as a percentage of our business. I think a lot of people built their business on condos because it was easy to get the business.”

“You try to read the future, but you know one thing for sure when a market is so heated up, it won’t last forever.”

“Now, the number of condo developers looking for general contractors has shrunk. It has significantly shrunk. Fallen off a cliff when compared to the last five years.”

“Q: For general contractors that are largely focused on condos is that downturn creating changes in the market?”

“A: We are seeing a lot of movement because guys that only build condos are starting to feel the slowdown that is coming. A lot of these people see what is happening, and they know the company has never built a school or an office building. It’s kind of like rats jumping off a sinking ship for some of them.”

The News Press. “As difficult as it may be to see, there is a silver lining (something positive) to Lee County’s current real estate market.”

“First, the facts: Residential inventory is still near its all time high. Residential sales are roughly equal to the sales rate of 1999. Prices are down, down and down from the high of 2005.”

“Foreclosure filings are up, up and up – by some counts, at six times that of 2006. The property insurance and property tax crises remain unresolved at the time of this writing. The residential downturn is having the expected effect on commercial real estate. The number of people moving into Lee County is down by as much as 30 percent.”

“So where’s the silver lining? With residential inventory still too high relative to the number of buyers, prices will continue to decline.”

“Our residential market set a record last month. According to the MLS, there were fewer homes sold last month then there were in any May so far this decade. In fact, comparatively speaking, more homes were sold in May of 1999 than in May 2007!”

“Another interesting fact is that most of the homes that sold last month had one thing in common. They were priced right! The good news is that it’s going to get better. The bad news is, many market segments will get worse before they get better.”

“The builder’s unsold inventory that is hitting the market at heavy discounts will continue for another year. Foreclosures and short sales will continue beyond that.”

“A Realtor told me his clients were waiting it out. Their investment properties that were purchased pre-construction in 2005 were listed, but at prices that would allow them to break even. However, their prices are above what the developer is offering, and what the market is willing to pay.”

“What his clients fail to realize is that they have already made a bad investment and waiting to sell just makes it that much worse.”

The St Petersburg Times. “If you need a construction-related permit for work in unincorporated Hillsborough County, you may not want to wait until a Friday to request it.”

“The county will be closing its Building Services Division offices every other Friday starting June 15. The closings are a cost-saving measure in response to the sharp downturn in housing construction.”

The Naples News. “In Collier County, commissioners have given the green light to nearly 5,500 affordable housing units since the end of 1999. Fewer than 1,500 of those units have been built, according to county records.”

“‘The houses are just not being built that we approved,’ Collier County Commissioner Fred Coyle said.”

“Coyle wonders whether the delays are market-driven. ‘People are just reluctant to begin building at a time when prices are down and demand is down,’ he said.”

“Several affordable projects that have yet to be built also include market-rate housing, a much tougher sell these days. That may give developers a reason to drag their feet. ‘It is more complicated when the affordable housing is merely a component of a larger housing development because the demand for other types of housing is not as great,’ Coyle said.”

“Phil McCabe, a longtime Naples businessman and developer, believes some of the approved projects won’t get built for ‘many, many years to come’ because of a slower real estate market. ‘I think they’re just frozen in their tracks,’ he said.”

“Even with falling home prices and a higher inventory of homes on the market, the average sales price is still in the high $300,000s in Collier County, putting home ownership out of reach for many workers, from police officers and firefighters to teachers and nurses, said Marcy Krumbine, the county’s director of Housing and Human Services Administration.”

“‘This is actually the first time since I’ve been working in housing that it’s a buyers’ market,’ she said. ‘It’s a better time to buy right now. There is more flexibility in pricing and more things on the market.’”

“There’s more than enough demand to support the more than 4,000 affordable housing units that have yet to be built and sold, Krumbine said.”

“McCabe isn’t so sure. He said there are many other affordable housing options available today, with rents and home prices coming down. ‘My view of this whole thing is that this affordable housing issue is gone,’ he said. ‘It’s gone.’”

“McCabe built an affordable housing project called Botanical Place in East Naples. He had trouble finding people to purchase the 64 units in his project, even after knocking on the doors of local employers to try to reach out to workers.”

“‘I still have one left, by the way,’ he said.”

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