The Housing Bubble

A report from the Arizona Republic. “At least one-quarter of all Phoenix-area homes to fall into foreclosure this year are owned by investors, according to an Arizona Republic analysis of residential foreclosure records. The number is rising monthly as investors fall behind on climbing payments. Many can’t charge high enough rents to break even or sell their properties at a time when the market is flooded with listings.”

“‘Investors, particularly individuals with multiple properties, are driving up the foreclosure numbers,’ said Tom Ruff, a principal with the Information Market. ‘Foreclosures in metro Phoenix haven’t likely peaked yet, either,’ Ruff added.”

“Through May, 8,597 notices of trustee sales for homes, the precursor to a foreclosure, were filed in Maricopa County, putting metro Phoenix on pace to top 18,000 this year. That would be the highest level since the real estate crash of the late 1980s, though there are far more homes in the Valley today.”

“Already this year, actual foreclosures are more than double what they were for all of last year.”

“‘Investors drove up the Valley’s housing market. Now, they are driving it down with foreclosures,’ said Jay Butler, director of Realty Studies at Arizona State University’s Morrison School. ‘You won’t find a lot of people feeling sorry for them now.’”

“The housing-speculation boom started in California in 2002-03. Investors pushed prices up and cashed out. Their next stop was Las Vegas, where they helped inflate home prices by 50 percent from 2003 to ‘04.”

“As houses got too pricey in Sin City, investors were drawn to Phoenix for its affordable housing and growth. In 2003, the median price for an existing single-family home stood at $155,000. By the end of 2005, the median price for a used Phoenix-area home had soared to $240,000.”

“Las Vegas mortgage broker and investor Zareh Tahmassebian is among the out-of-state buyers who started the speculator-buying boom in metro Phoenix. In 2004, he was just 23 when he and partners bought 15 houses throughout the Valley.”

“Now, like so many others, he is losing properties. Earlier this year, he lost his Chandler house at a foreclosure auction. He owed $490,000 on the property he bought for $464,117 in September 2005, according to public records.”

“When The Republic interviewed Tahmassebian for a story in February 2005, he talked about putting little money down and then tapping equity in one home to buy others. ‘Leverage is the name of the game,’ he said.”

“Tahmassebian moved on to buy homes in Albuquerque. A foreclosure auction for one of his homes outside Albuquerque was scheduled for last week. He didn’t return phone calls about his current investments.”

“Out-of-state buyers may have started a speculator boom, but local buyers quickly jumped in. At least half of the investors with multiple homes now in foreclosure have Phoenix tax-mailing addresses, according to property records.”

“For the neighbors of homes in foreclosure, it doesn’t matter who bought the house or where they are from. Tamara Fisher doesn’t have to sell her home now, but she would like to. She is afraid the investor-owned properties in her neighborhood will pull down her values.”

“Fisher bought a new home in the northwest Valley two years ago. Now, at least two rentals, a house in foreclosure and another home that has never been occupied sit on her block of 15 houses.”

“‘People were just out to make a quick buck, and now they are hurting me and many of my neighbors,’ she said while picking up a dirty plastic bag and a smashed beer can from the yard of the vacant house three doors down from her home.”

“‘I want to sell and move to a neighborhood where people are proud of their homes. But all the investor-owned homes have flooded the market,’ Fisher said.”

“Arizona’s lagging housing market likely won’t recover until next year and will continue to hinder job growth until it rebounds, state economists said this week. Although houses continue to sell, inflated prices and stockpiled inventory will cramp the industry a while longer.”

“Sellers are cutting prices to move homes, but that process needs to continue a while longer before the market can rebuild, (economist) Marshall Vest said. ‘We’ll clearly see a recovery, but it’s not going to go as quickly or surely as high as it did,’ he added.”

“Valley economist Dennis Hoffman said the amount of money changing hands in real estate sales has dropped about 18 percent, to $6.9 billion, from the first quarter of 2006 to the first quarter of 2007.”

“In recent years, the construction industry created about 25 percent of new jobs in the Valley, Vest said. Removing that major source of growth has had a ripple effect on everyone from real estate agents to mortgage bankers to inspection crews, he said.”

“Vest said retail sales also slumped, showing essentially no growth since last year. ‘The slowdown in sales has to do certainly with high debt levels,’ Vest said. ‘We’ve been using our houses as an ATM machine, extracting large amounts of cash to support our spending. That door is closing.’”

The Arizona Daily Star. “State senators are preparing to give final approval this coming week to laws designed to imprison bankers, loan officers and even home buyers who engage in mortgage fraud.”

“The legislation would make it a crime to deliberately make misstatements on a mortgage application that is relied on by any party in agreeing to the loan. And those who knowingly use the lies of others would be equally culpable.”

“The measure is largely aimed at the ‘cash-back’ schemes that some sellers have used to move their homes as the residential real-estate market has cooled. That involves selling the home at a specified price and then rebating part of that price to the buyer. There is nothing specifically illegal about cash-back sales.”

“What creates the problem is when banks and mortgage companies are not told, and they lend money based on what they believe is the perceived value of the property, according to Felecia Rotellini, director of the state Department of Financial Institutions.”

“Sen. Jay Tibshraeny, who is sponsoring the legislation, said that could lead to a rash of bad loans and foreclosures. And that, he said, could hurt the entire state.”

“‘It could be like the savings- and-loan scandal of the late ’80s,’ he said. ‘It could really put your economy into a major recession.’”

Readers suggested a topic around interest rates. “The biggest topic of the week has to be the massive jump of the yield on the 10-year. The last hope of the housing market was the dream that the Fed still had control of the situation and could lower interest rates. This would set everything right in the minds of fanatics such as David Lereah, Leslie Appleton-Young and Lawrence Yun.”

“A 30-year fixed may soon be at 7%, still historically low but murder for this housing market. Their illusions seem to have disappeared in the haze of the desert.”

“What other implications does the rising of the 10-year hold for the American economy and Americans in general?”

One reader said, “An economy swimming in debt can’t blossom while interest rates are rising.”

Another pointed out, “I think the Plunge Protection boys are out of dough and answers…. this run up all Spring was classic ‘pump and dump.’”

“(I) would want to have money in treasury bonds of most sorts, cash, some gold and silver and oil. Then pray for some deflation…some of these assets may go a bit down but not as much as stocks, housing, land, and will-of-the-wisp junk bonds/derivatives or any other Rube Goldberg, check-kiting finance paper.”

“Raising interest rates will kill whatever is left of sub-prime and Alt-A craptacular real estate lending. Rates go to 7% and bye-bye any real estate recovery at these bubble prices. Prices must and will fall.”

One had this question, “If Treasury bonds in the US go to 6.5% but the dollar drops 30% against the Yen, buyers of T-Bonds are caught holding the bag.”

“From Bill Gross. (last year he felt that 10 year bonds would stay between 4 -5%, this years analysis).”

“‘As a result, we’ve raised our forecast range for global interest rates, moving the range for 10-year U.S. Treasuries to 4.0-6.5% versus last year’s forecast range of 4.0-5.5%, for instance, which is sort of indicative of how we see the bond markets in general.’”

“‘We expect the U.S. dollar to be weak going forward, for a number of reasons. And we think that commodity prices in general, based upon this strong global growth environment and the demand from the BRICs1 and the emerging market countries, will produce favorable results for commodities.’”

“‘Those are our basic conclusions—not necessarily bond friendly but asset friendly in some ways, with the favored assets being emerging market currencies and commodities in terms of some of the more applicable asset categories. We also think that global stocks, especially those outside the United States, will benefit over this period of time….’”

“I’ll fade Mr. Buffett (short term), but not Mr. Gross.”

The Chicago Tribune. “Reflecting a cascade of selling Treasury securities, the yield on 10-year Treasury notes leaped above the psychologically important 5 percent mark, to 5.1 percent, a dramatic half-point increase in just a month. The 10-year Treasury yield climbed to its highest level since July.”

“Until a few days ago, the consensus on Wall Street was that the next move by the Federal Reserve would be to cut U.S. rates. That view has evaporated amid higher global rates and repeated assertions by Fed officials, led by Chairman Ben Bernanke, that their biggest fear is inflation, which the Fed seeks to pre-empt by boosting short-term rates.”

“‘If the Fed isn’t going to ease, then we better start worrying about them tightening,’ said David Oser, senior VP for investments at ShoreBank. ‘That’s what’s at the bottom of this.’”

The Contra Costa Times. “Investors’ expectations of an interest rate cut, and home buyers’ hopes for cheaper mortgages, seem to be disappearing. Some market watchers say the yield is likely to climb higher as bond prices weaken, making it even harder for consumers to finance home purchases and for companies to borrow money.”

“‘It’s the massive correction that we have been waiting for,’ said loan consultant Ed Jeffry of Peregrine Lending Corp. in Walnut Creek. ‘You could even see rates go up another quarter of a percent by the end of summer.’”

“Jack Ablin, chief investment officer at Harris Private Bank, characterized the relatively high prices and low yields in the U.S. Treasury market in the past nine months as a bubble. ‘Rates are too low,’ he said, and he predicted the 10-year yield will lift to 5.75 percent.”

“Not everyone believes yields will rise that high; RBS Greenwich Capital bond strategist David Ader, for one, predicts that the 10-year yield could possibly float to 5.25 percent, but it then would retreat.”

“Still, any big upswings in the interim could squeeze Americans looking to buy a home or refinance.”

“‘Five percent is not in itself a big deal, but a move to 5.25 percent or 5.5 percent could cause some discomfort for people taking out a mortgage,’ Ader said.”

From Reuters. “Consumers are being turned down more often for mortgages as lenders tightened standards due to rising defaults and foreclosures. Now, barring much bigger home price declines, rising mortgage rates could also further crimp affordability.”

“‘It’s clearly not a positive for the housing sector,’ said economist Bill Cheney.”

“Bond guru Bill Gross sees a more dire outcome. The manager of the world’s biggest bond fund told CNBC Television on Friday that an increase in rates will decimate the housing market ‘if they haven’t already.’”

The Baltimore Sun reports from Maryland. “The average home price in the Baltimore region fell for the first time in six years last month, reflecting a sputtering housing market that continues to lose momentum. ‘Clearly things are going to get worse, with prices likely falling somewhat, new housing starts slowing and days on market increasing. We’re in for a bumpy ride, but not a fall off the cliff,’ said Richard Clinch, director of economic research at the University of Baltimore.”

“Anne Arundel County sustained the biggest drop, with the average price skidding 6.75 percent, the most since the market started to turn down in the last half of 2005.”

“In May, the number of listings soared to 18,870, the highest since the slump began. New listings outnumber contracts by more than 2-to-1. The flood of new listings, on top of a bloated inventory of unsold homes, has squeezed prices, economists said yesterday.”

“‘Traditionally, this is a time when houses get put on the market, but the fact that there is a huge active inventory from homes that haven’t sold is putting downward pressure on home prices,’ said Daraius Irani, director of the applied economics group at Towson University’s research and consulting arm. ‘Baltimore is not immune to any kind of real estate home price adjustments that are going on in the rest of the nation.’”

“‘Sellers had been over-ambitious with their expectations after five years of double-digit appreciation,’ said Wanda Lehman, a real estate agent in Timonium. ‘The sellers that really want to sell are becoming realistic.’”

“Cindy Stewart first listed her renovated 1923-era farmhouse on 1.2 acres in Lutherville in January for $720,000 after getting it appraised, but has had no offers. She has since reduced the price twice, first to $699,000, then to $675,000, added another bathroom and switched real estate agents, to Lehman.”

“Stewart, who has relocated to start a new job in Florida, said she…is hopeful the right buyer is out there. ‘I’m trying to stay calm, and I’m trying to be understanding about the market,’ a vastly different market from three years ago, when she sold her last home in three days.”

The Free Lance Star from Virginia. “After experiencing rapid growth in recent years, local home sales have slowed and continue to decline in some areas, according to the latest data from the Virginia Association of Realtors.”

“April home sales in the Fredericksburg region fell by 19 percent compared to the same time last year. The Greater Piedmont area, which includes Culpeper, Fauquier, Orange and Rappahannock counties, saw about a 35 percent drop-off in home sales for April, compared to April of 2006.”

“The Northern Neck, including Northumberland County and portions of Westmoreland, experienced the sharpest sales decline, 74 percent in April.”

“‘When you start to go back toward a normal market place, obviously you’re going to have larger declines because of the extraordinary peaks,’ said Lisa G. Noon, the VAR vice president for marketing and communications.”

“The peaks here, and across the country, were caused by a flood of first-time home buyers entering the housing market. Lower interest rates coupled with relaxed lending rules, lead to a generational shift in potential homeowners.”

“‘When we had 25-year-olds out there who traditionally might have rented they saw rates go as low as they did and the opportunity to buy was offered to them,’ Noon said.”

“The growing immigrant population in areas such as Fredericksburg also had housing needs. ‘These folks demanded homes,’ Noon said.”

“But the home-buying rush is over. Stricter lending guidelines have made it harder for first-time buyers to obtain loans. ‘That puts a crimp in things,’ said Todd Perkins, a loan officer with Fredericksburg Mortgage Co. LLC.”

“The stagnate market is affecting the overall value of homes, preventing real estate owners from upgrading to larger properties or ‘to refinance to fix debts or pay off cars,’ Perkins said. ‘The problem is the values aren’t even there for that. So, we’re not able to get them the money that they need because they don’t have enough equity in their homes.’”

“To combat slow home sales, many builders are offering incentives or discounting optional home features. ‘There are lots that are not being built on now, and there are homes that are unsold that are being offered, in some cases, at incentive prices,’ said Harvey Gold, director of public relations for the Fredericksburg Area Builders Association.”

“‘It’s supply and demand,’ Noon said. ‘Right now, there are more sellers than there are buyers.’”

“Noon advises sellers to price their homes accordingly. During the real estate boom, homeowners ‘use to sell for higher-than-listed prices,’ she said. ‘They expect the same thing is going to happen even though the market conditions have changed.’”

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