The Housing Bubble

The Santa Cruz Sentinel reports from California. “For home buyers, there’s good news, and bad news. The good news is the median price for a single-family home in Santa Cruz County dropped 2 percent to $760,000 in May after increasing three months in a row. The bad news is that’s not affordable for most first-time buyers.”

“Only 147 homes sold, a six-year low, harking back to May 2001 when a recession was on the horizon. The number of homes on the market has grown to 1,236, the most in 10 years for this time of year.”

“Nearly 7,000 homes in California were sold at auction last month, ‘a pretty staggering number,’ said investor Sean O’Toole. ‘Eighteen months ago about one out of 10 properties [in pre-foreclosure statewide] went to sale,’ he said. ‘Now we’re closer to 40 percent’”

“Santa Cruz County has seen 70 properties sold due to foreclosure this year, an exponential increase from last year, when 10 such sales occurred.”

“Peter Ogilvie of First Residential Mortgage Corp. in Santa Cruz, provided an example of a family in trouble. ‘They had been persuaded that they could buy the home of their dreams without having to worry about qualifying for a loan,’ he said. ‘They also didn’t read or understand English, so they didn’t know the details of the loan that was arranged for them.’”

“It was a stated-income mortgage with no down payment. Their income was exaggerated to qualify for the half-million-dollar loan; their take-home income was less than their mortgage payment, home insurance and property taxes. Their loan payment was set at 1 percent, but the actual rate was 8 percent, so every month, they owed more.”

“Now that mortgages such as these are not available, Ogilvie said, ‘the bottom-end of our real estate market is feeling the vacuum where those buyers used to be.’”

From CNBC. “At a foreclosure auction in Bakersfield, Calif., it’s standing room only. ‘It’s a tremendous business right now because of the huge amount of foreclosures coming in,’ says auctioneer Sam Marshall. ‘We’re seeing a lot more inventory from banks that are coming to us needing to reduce inventory.’”

“‘What we have right now is an oversupply, and we have a lack of buyers in the market right now,’ says Bakersfield Realtor Darrell Sparks.”

“But it’s not all bad news. Eric and Sheila Tomasi are bidding on homes at the Bakersfield auction, hoping to buy low and sell higher once the market settles down. ‘It’s unfortunate for a lot of people when they got into situations that they might not have known what they were getting into,’ says Eric. ‘Opportunity is there for us.’”

From CBS 13. “In a neighborhood of well kept houses and neatly manicured lawns, a home in foreclosure stands out. Paul Ramos, neighbor of home being foreclosed, says the previous owners just abandoned. The grass hasn’t been cut in weeks, the property is littered with clothing and garbage, and Paul’s drainage system was left in disrepair by a swimming pool construction.”

“‘What they did is the payments got way too high, well over $3000, and they went ahead and bought another house in Lathrop and they let this one go into foreclosure,’ said Ramos.”

“Foreclosure stories like this dominate the Central Valley. In fact, Stockton has the highest foreclosure rate in the nation, up almost 50 percent since May of last year. Merced is second; Followed by Modesto. The Vallejo-Fairfield area ranks sixth and Sacramento is seventh.”

“‘There are people in the mortgage industry who say that there’s still more to come. That we may have another year of this as another round of mortgages to adjust,’ said Dr. Chuck Williams, Dean of the Business School, University of the Pacific.”

The Valley News. “It’s one thing to hear about the record number of foreclosures in Southwest Riverside County, but it is another to go into neighborhoods of all income levels and see the numbers as abandoned homes.”

“Roger Hageman, manager of Prudential California Realty in Murrieta and Temecula, said the main reason for the record number of foreclosures is the sub-prime lenders who made it very easy for people with minimal qualifications to buy a home with adjustable rate mortgages.”

“‘Interest rates have gone up and their payments have gone up drastically and they need to let the property go,’ he said. ‘They were planning to refinance with equity in the property. They were banking on appreciation, but that didn’t happen.’”

“Hageman said as of June 12, there were approximately 2,600 active listings in Temecula and Murrieta alone. There were 250 properties in escrow. About 15 to 20 percent of the 2,600 have been foreclosed upon and are banked-owned or the ’short sales’ category, which means the property was sold for less than was owed to the bank.”

“‘A foreclosure is not always the best deal,’ he said. ‘A buyer has to go in with their eyes open. Banks want to get as much as they can out of the property and some are overpriced and have been on the market a long time. They are sellers like everyone else.’”

“‘There is a misconception that it’s the poor people who are losing their homes,’ added Neil McTiernan, Real Estate Consultant in Winchester. ‘It’s the matter of buying above your means.’”

“McTiernan said the sub-prime lender played a huge part in the refinance boom of 2003 and 2004, but he doesn’t let off the hook those realtors who were doing anything to make a deal. ‘Everyone saw property values going up and expected to see them continue to go up,’ he said.”

“This is not just a shaky time for homeowners; realtors are taking a hit, too. Many who have been around for a while predicted that the real estate bubble would break. ‘We were saying, ‘This can’t go on forever. There will be a correction,’ and it happened,’ Hageman said.”

The Orange County Business Journal. “The woes of the national housing market continue to impact Irvine-based Standard Pacific Corp. The company’s decline has been dramatic, if not unexpected. Standard Pacific has spent much of the year getting rid of land, cutting building costs, offering incentives to buyers and dealing with slow sales in key markets such as California, Texas and Florida.”

“‘The degree to which the (Inland Empire) market is correcting is greater than we expected,’ CEO Stephen Scarborough said last week. ‘Buyers…like what (they’re) seeing, but haven’t gotten comfortable with the pricing they’re seeing.’”

“Standard Pacific has about 57,000 home lots for current and future projects. That’s down from about 74,000 at the end of 2005. ‘We’ve walked away from several thousand lots over the last year or so,’ said Andrew Parnes, the company’s chief financial officer.”

“The company’s employee count is down 15% from a year earlier. Like other builders, it’s asked subcontractors to lower prices to bring down construction costs.”

The Press Enterprise. “Jobless claims in the Inland region inched higher in May for the third consecutive month and remained well above year-ago levels, according to figures released Friday.”

“‘This I consider all related to housing,’ said Esmael Adibi, an economist at Chapman University. ‘As home sales go down, you’re going to have lots of industries are affected. A lot of self-employed are now basically out of a job.’”

The Orange County Register. “Over the past 12 months, financial activities, which includes the real estate and mortgage sectors, has lost 3,400 jobs in Orange County.”

“‘The question is: Are we bottoming out or have we bottomed out?’ Adibi said. ‘I don’t think the housing market has really hit the bottom. If that’s true, it means financial activities still has to do much more adjustment to the new reality, and that means more layoffs.’”

The Union Tribune. “Alan Gin, economist at the University of San Diego, said that the new job figures were ‘bad news.’ San Diego lost 6,900 jobs in construction; 3,200 in financial services, including real estate and mortgage operations; 1,300 in construction and 1,300 in trade, transportation and utilities.”

The Fresno Bee. “Unemployment rates rose in the central San Joaquin Valley and across California in May, as a weak housing market continued to bring job losses.”

“Mike Miller, Fresno division president for nationwide home builder Lennar Homes, said the company has shrunk its Valley work force by about 25% over the past 12 months. ‘The market has really pulled back, not just in Fresno County, but throughout the Central Valley,’ he said.”

The Contra Costa Times. “The housing market has gone from hero to zero and turned into a drag on the East Bay economy. ‘The housing downturn is starting to show up much more clearly in the employment numbers in California,’ said Howard Roth, chief economist with the state finance department. ‘We are seeing the effects of the slowdown in construction employment and financial jobs.’”

“Those effects have ripped through the East Bay as well. In the past year, 1,800 construction jobs have vanished in the East Bay. The loss of 1,300 jobs in residential construction triggered the rout in building activity.”

“The Alameda-Contra Costa region lost 800 real estate jobs during the year. An industry called credit intermediation, which largely consists of mortgage agents and loan officers, lost 1,200 jobs during the 12 months that ended in May, an analysis of EDD figures shows.”

The Ventura County Star. “Property owners who think their tax assessments should be reduced amid falling real estate prices should wait before hiring a company to help them win a reduction, Ventura County Assessor Dan Goodwin said Friday.”

“That’s because their homes may be among 8,622 whose assessed value has been cut under a program that Goodwin’s staff launched this year in response to the real estate downturn.”

“The reductions will lop off about $400 million in valuation from the county’s assessment roll, which is to be announced in early July, Goodwin said.”

“‘What this is really about is the good government thing of giving people a fair tax bill, not one that is excessive,’ Goodwin said. ‘The other big issue is I didn’t want to wait for thousands of people to have to call me and say, Didn’t you notice? The market went down.’”

Readers discussed the rising interest rates as a topic. “A possible topic; the effect of suddenly higher interst rate.” “I did the calculations and basically one point (6% to 7%) on a 30 year fixed with 20% down adds $25k to the effective cost of a $250k home. More expensive homes see a greater cost increase, less expensive homes less. For those with a large downpayment (e.g. 50%) and using a 15-year fixed, the increase in buying cost is minimal.”

“Assuming that most folks have little downpayment and max out on the home they can buy, higher interest rates significantly reduce my competition. Time to low ball!”

One replied, “There is another way to look at this illustration. Suppose a budget-constrained household could have ‘afforded’ a $250K home before the rate increase. Now they can only afford a $227K home, roughly a 10% haircut in their maximum purchase budget ($250K X 250/275 = $227K). If everyone in the market simultaneously faced the same tightening of their purchase budgets, then I guess that would translate into a prospective 10% drop in market values?”

Another wrote, “It should translate into less purchasing power, and a drop in prices, right? Unfortunately, people haven’t been purchasing based upon what they can afford, but rather on what they want. This disease hasn’t yet been eradicated.”

One was more specific, “The severity of the rate hikes will dictate the impact…1/2 % will hurt but not cause a meltdown. If we get into the mid 7’s its fasten your seatbelt time particularly if jobless rate climbs into the 6’s.”

“Valuations over the past few years have been established with historically low interest rates and gimmicks…Mid 7’s will wipe out those spiked valuations bringing chaos to the markets, IMO. I hope it does not happen. It will not be fun no matter what position you are in.”

Another expanded the subject, “The higher the interest rate rises with falling house prices, even if rents stay stable, the easier it will be for me to pay my rent and add to my savings. But what’s going to happen to those who need to cover housing costs by selling over priced illiquid assests (art, old cars, jewelry, baseball cards, sports memob’ etc)? Should make for interesting times ahead.”

One reader has a target. “Death by a thousand cuts or 1/4% FED rate increases is soooooooo streching the bungi cord…let this whole load fall on the weight of ‘over-their-head-in-debt’ + ‘my-house-is-not-worth-what-I-paid-for-it-so-I-can’t-get-a-home-ATM-loan-anymore.’”

“I say: Please… some how… someway… make interest rates go to 15%… then we’ll all really know what a…1,000,000 million dollar house is worth. The rest of home prices can fall, where they fall.”

To which was said, “Make interest rates go to 15%? No es necessito. A clear indication that rates are marching up and home prices are falling in conjunction with restoration of underwriting standards (income verification, demonstrated ability to save money, etc.) and downpayment requirements would easily lop off 50% from current bubble market prices before rates reached 10%.”

The Hartford Courant. “A spike in residential mortgage rates is sending shock waves through a housing market that is already struggling both locally and nationwide, causing some buyers to drop out of deals and dashing hopes that the market is on the verge of recovery.”

“Mortgage broker Michael Menatian, of Sanborn Mortgage in West Hartford said he has already had one buyer back out of the market this week and is waiting to hear decisions from two others who are scrambling to see whether they can cover the costs of the higher mortgage rates. Other clients are switching from long-term, fixed-rate products to more risky adjustable-rate loans.”

“‘It’s only been a few days, and already we are seeing the effect of the higher rates,’ Menatian said. ‘Buyers that are in the market, but unsure or on the edge of what they can afford - they’ve walked to the sidelines. This is going to hurt.’”

“Beth Hough and her husband have had their Trumbull house on the market for slightly more than $400,000. They had hoped to purchase a larger home in nearby Monroe, priced between $500,000 and $550,000.”

“But the rapid rise in rates has dashed their hopes. The difference in the mortgage payment between rates of 5.99 percent and 6.75 percent rate on a $400,000 loan is an extra $210 a month.”

“‘It brought us over the edge in what we can afford. Two hundred dollars a month is a big difference,’ Hough said, especially when offers for her house have been lower than anticipated. ‘Two months ago, we were OK. But now things have changed, and we are in a position where we have to pull out.’”

A message from a reporter:

“A national news reporter is looking to interview people who are trying to sell their second homes or have tried to do so in the past year. It’d be great to hear from anyone with a vacation home or investment property for a piece on the highs and lows of second-home sales. If you fit this description, or know someone who does, please email secondhome.story@yahoo.com.”

The Houston Chronicle reports from Texas. “Barbara Thompson put her four-bedroom home near Pearland on the market last November. But even though she upgraded the house about a year ago with hardwood floors, crown molding and a larger patio, it still hasn’t sold. She just dropped her asking price by almost $5,000. ‘I didn’t think it would take six months to sell,’ said Thompson. ‘Nobody has looked at it within the last three weeks.’”

“The slowdown is being felt primarily in the lower-priced market, which is being affected by stricter lending standards. ‘Unfortunately, it is owners in that range that have been most impacted by the mortgage industry’s woes of late,’ said Rob Cook, Houston Association of Realtors chairman.”

“Sales of homes in the $80,000 to $140,000 price range, which made up 32 percent of the May transactions, were down 8.3 percent compared to the same period last year, according to the association. The number of homes on the market rose in May by 16.2 percent over last year”

“‘If you have bad credit and no money, you’re probably up a creek,’ said Shad Bogany of ERA Bogany Properties.”

“Thompson said three different buyers tried to purchase her house, which is now listed at $132,000, but none could get approved for a loan. She also has competition from other homes in her neighborhood that are for sale. And builders are putting up new subdivisions nearby.”

“New agent Vira Garza, has lost out on several potential sales because the buyers couldn’t qualify for loans. Garza recently quit her job to go into real estate. She’s now reconsidering her decision.”

“‘I had plenty of clients and little by little they’re dwindling out cause they don’t have good credit,’ she said. ‘I’m really thinking of going back to work and doing this part time.’”

The Dallas Morning News. “Burned-out homes and a number of foreclosures along Rolling Oaks Ridge, where Audrey and Stephen Riser built their 3,940-square-foot home in 1998, have soured the couple on their neighborhood.”

“‘Lake Ridge has just ruined my dream,’ said Ms. Riser, who lives across the street from a home that burned in January. Another home around the corner on Golden Pond also sustained fire damage several months ago, and both houses are exposed to the weather.”

“‘It’s an eyesore, and I can’t stand to look at it,’ Ms. Riser said. ‘Then we’ve got all these foreclosures. I know we’ve got at least four of those on this street, and who’s going to buy a house with burned houses on the street?’”

“Officials in both cities admit to problems in the 3,000-plus-acre community, where homes range from $350,000 to $2 million.”

“Some homes have been abandoned midconstruction, and unscrupulous dealings have forced some homes into foreclosure, Cedar Hill Mayor Rob Franke said.”

“According to Addison-based Foreclosure Listing Service Inc., 88 foreclosures have been posted for Lake Ridge since January, compared with 48 in the first six months of 2006. That is six times the foreclosure gain for the overall Dallas-Fort Worth area, said George Roddy Sr., the company’s president.”

“‘Midyear’s residential foreclosure posting activity for D-FW metro increased 14 percent compared to the same time frame last year,’ Mr. Roddy said.”

” Bob Way of Barclay Custom Homes said he is tired of seeing so many foreclosures and unfinished projects in Lake Ridge, where his company has been building homes for 19 years. ‘It seems like any street we run up and down out there, every third home is in foreclosure,’ Mr. Way said.”

“Kenneth Hollingsworth, president of the Lake Ridge Property Owners Association, said many of the area’s problems can be attributed to growing pains associated with ongoing construction. With more than 1,200 lots still without homes on them, it will be awhile before construction ends.”

“‘The only problem I see if you’re in it for the long term is the crime rate might increase because I think vacant houses probably attract criminals,’ said Keith Thieroff, who lives next door to the fire-damaged home on Overlook Circle. ‘But I think the [adjustable-rate mortgage] lenders have learned their lessons and will have stricter regulations, so people will get conventional loans and finish off those houses.’”

The Dallas Business Journal. “Land prices are reaching historic highs in northern Denton County, despite a slowdown in housing development.”

“Parcels in far northern areas, largely agricultural tracts, are selling for $75,000, $85,000 and even $99,000 an acre, double and triple what buyers were paying 10 years ago.”

“A little more than 2,800 homes were posted for July’s foreclosure auctions in North Texas. That’s up only 3 percent from a year ago, according to statistics released Thursday by Foreclosure Listing Service. Before July, total postings were up 14 percent for the year.”

“‘I don’t think this is a trend,’ said George Roddy, president of the real estate statistics firm. ‘I think it’s an anomaly.’”

“Since next month’s foreclosure auction is the day before the Fourth of July, some trustees and lenders who coordinate the postings may be taking off, he said. ‘It always drops in July,’ Mr. Roddy said.”

“But Collin and Rockwall counties continued to see double-digit gains. Collin was up 11 percent, and Rockwall 22 percent.”

Please post off-topic ideas, links and Craigslist finds here.