The Housing Bubble

The Sacramento Bee reports from California. “Among a crowd of 1,200 people attending a colorful, fast-paced auction of 107 foreclosed homes, Bill Weldon outbid a competitor and won the house in Galt for $300,000. He leapt past his intentions of spending $275,000, but it was the house he really wanted. ‘I figure instead of saving $100,000, I saved $75,000. It’s still a good deal,’ he said.”

“Weldon signed his escrow papers about 1:15 p.m. Saturday, then quickly returned to the boisterous adrenaline-loaded spectacle where an Irvine foreclosure liquidator sold the bank-repossessed homes.”

“Tuxedo-clad runners worked the large crowd and attractive young women staffers heartily applauded opening bids as homes, condominiums and mountain cabins from eight area counties went on the auction block. Many of the houses sold at the rate of one per minute.”

“The firm and its affiliates had 150 staffers on the scene and spent ‘hundreds of thousands of dollars’ promoting a three-day auction of 242 Northern California bank-repossessed houses. Auctions are scheduled today in San Mateo and Monday in Modesto.”

“Saturday’s auction, where winning bids ranged from $105,000 for a dwelling in Sacramento to $810,000 for a house in El Dorado Hills, showed a housing market in distress as foreclosure activity mounts.”

“Banks and mortgage lenders last month repossessed 969 homes in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties, according to Foreclosures.com.”

“Bob Somal and his real estate broker father, Narinder Somal, bought two houses, paying $240,000 for one in Stockton and $400,000 for another in Elk Grove.”

“‘We were going to go to $350,000,’ said Bob Somal. ‘We decided to go to $380,000. And our winning bid was $400,000.’”

“But that was $20,000 less than the 2,460-square-foot house brought the first time it was sold Saturday. Several times during the day, houses returned to the auction block when buyers had financial issues. The Somals plan to resell both houses.”

“Most buyers proclaimed themselves pleased with their savings, which ranged from about 5 percent to perhaps 30 percent below previous asking prices. But some overpaid, said watchful real estate agents. Seeing one Stockton house sell for $460,000, veteran Stockton agent J. Richard Sabbatini shook his head and said the house was not worth that much.”

“Some came to watch for practice, assuming there will be more auctions and better prices later this year or next. Others said they decided not to bid after seeing heavy traffic at open houses and such a large crowd.”

“‘I just figured it was going to be prices higher than I’d like to pay,’ said Mesut Koch of Rocklin. Watching the frenzy, Koch said: ‘I don’t think I would do well here. I’m not coming back.’”

“He said it looked easy for people to lose themselves and go $10,000 too far.”

From News 10. “Many homes valued at nearly $500,000 opened to bidders at just $250,000. But it didn’t take long for the hot homebuyer competition to quickly drive many of those prices up.”

“‘I haven’t heard of that many steals here,’ said Andy Adams, who drove to the auction from South Lake Tahoe.”

“But there were some bargains to be found. Pat and Satya Chaterjee won their bidding war for a Roseville home, paying about $15,000 under market value.”

“The Sacramento region has some of the highest home foreclosure rates in the nation. Nearly 3,400 homes were foreclosed upon in the first quarter of 2007.”

The Orange County Register. “UCLA forecasters call for continued economic sluggishness through next year, due in large part to housing weakness. We wanted to get the scoop on what’s in the details, so we checked in with UCLA economist Ryan Ratcliff.”

“Us: Where are state home prices headed? Ryan:…’Now that the across-the-board interest rate stimulus and the consequent speculative frenzy have gone, each market is left to find its own post-boom equilibrium, and some have further to go than others.’”

“‘We’ve definitely seen the foreclosure spike in the past nine months, but it hasn’t translated into significant resale price weakness, yet. The discounts associated with foreclosure sales are one of the things I’ll be watching closely.’”

“Us: Hard numbers? Ryan: ‘Across the state, I expect to see a 5-7% total decrease in home prices over the next 2-3 years, which to me falls into the category of ‘flat to slightly falling’…..Since O.C. is mostly a resale market with a slower-growing population, I don’t expect to see much price weakness in OC. IE is a harder call: continuing migration inland and a favorable price differential with the coast provide good fundamentals, which are somewhat offset by increased importance of builders who are willing to cut prices to make sales and the extremely high foreclosure rates.’”

“Us: How long until we hit bottom? Ryan: ‘All I can say at this point is that the data on ARM resets suggest that we’re going to see high foreclosure rates through 2008, and it’s hard to see the market getting back to normal before we work through that mess. So I don’t expect to see substantial improvement until late 2008/early 2009, and that’s optimistic.’”

“Sales of single family homes in California will slow by 14 percent on an annual basis this year, while the state’s median home price will rise just short of 2 percent, a real estate trade group said.”

“Statewide sales for the year will total 410,000, compared to 477,460 last year, according to the California Association of Realtors’ midyear forecast.”

“While sales have slowed statewide, they have been weakest in areas that saw heavy building of new houses and condos. Prices have also slipped the most in those areas, said Leslie Appleton-Young, the association’s chief economist.”

“‘This pattern is likely to continue throughout the rest of the year, particularly in areas that were popular among first-time home buyers, which experienced the greatest run-up in prices,’ Appleton-Young said.”

Readers suggested a widening of the hedge fund problems for a weekend topic. “Is the Bear Stearns hedge fund situation the beginning of the great unravelling?” A reply, “But…..But……it’s all contained!!!!!!”

Another, “I’d like to see a topic on the ‘unwinding.’ I’d like people’s thoughts on what will happen and how it will happen.”

One points to history, “I’d recommend reading Adam Smith’s The Wealth of Nations. He describes what happened to other nations, and I see very little difference today.”

“The whole book is 1200 pages. It is definitely worth every page, but you can cherry pick certain parts that directly deal with our situation today. Coincidentally, he published it in 1776. Our founders used it is a basis, along with other works, for the constitution (1787). It is so enlightening to see how far we strayed, and where we’re headed.”

One focused on a specific fund, “I wonder how the wonder boys who run the hedge fund at Yale U. are gonna weather this storm. Much has been written said about their astute business acumen, now we get to find out. Are there any public disclosures these guys have to do periodically? It would be interesting if somebody could kindas start tracking them.”

Another, “The rich and wealthy would like to keep everyone out of their ’special’ areas - you know, ones where one doesn’t trip over hobos or dead bodies on a daily basis, but in the end all prices will come down for the many reasons we’ve discussed before.”

“I wonder when the real fallout from the crumbling hedge funds will begin… perhaps it has begun? We’ll see…”

One looks at securities, “Wondering about the back and forth we are seeing now between US and China. For years now US MBS have been selling into Chinese hands despite the questionable nature of the underlying loans. For years some, not all, but some of the Chinese exports flowing into the US have been, let’s be diplomatic, less than the highest quality. Now things seem to be worsening. tainted consumables vs deteriorating investments/securitized packages, CDOs, etc.”

“Is this going to get worse or will both sides figure out that doing things the right way really is better for all involved?”

One looked at the most recent casualty, “Brookstreet Securities Corp. I’m curious about the 100 employees laid off. What kind of cars were they driving? What kind of toys did they have? I’m sure some had boats. Where were they living? Obviously they would have higher end salaries and I’m just curious what types of hedging they employed to protect their financial future.”

The LA Times. “Anxiety intensified Friday about the toll the sub-prime mortgage meltdown is taking on the financial industry at large, as Bear Stearns Cos. pledged to lend $3.2 billion to rescue a hedge fund battered by rising defaults on home loans.”

“‘We know that these holdings are not unique to Bear Stearns,’ said Drexel University professor Joseph R. Mason, co-author of a recent study warning of dangers in securities backed by home loans to high-risk borrowers. ‘It would be hard to find a Wall Street firm that hasn’t created similar funds.’”

“Stock investors weren’t comforted. ‘We are selling on fear and lack of information,’ said David Brady, president of Brady Investment Counsel in Chicago. ‘We’ve got a heavily leveraged hedge fund in trouble, and that’s got the market spooked.’”

“All industry groups were hit, said Gary Schlossberg, economist with Wells Fargo Capital Markets in San Francisco. That’s partly because the market simply doesn’t know what other problems might be out there, he added.”

“The big fear, Schlossberg said, is that hedge funds have borrowed too heavily in an effort to pump up their returns. But borrowing amplifies losses too and can fuel selling as asset values decline. ‘There is a concern about a ripple effect,’ he said.”

“‘It’s similar to what happened in February, when the first round of sub-prime fears started to rock the market,’ Brady said. ‘People sell first and ask questions later. And the selling can really snowball.’”

“Mason, the Drexel University professor, expressed greater concern about the potential damage from sub-prime mortgages. Bear Stearns is relying ‘on the implicit assumption that recovery is right around the corner, when in fact it looks like we’re in for a summer of increased defaults,’ Mason said.”

“What’s worse, he said, is that the biggest investors in mortgage-backed debt are not hedge funds. Instead, they are banks, asset managers, pension funds and insurance companies that serve mainstream Americans and have put their money at risk by buying exotic mortgage securities, he said.”

“Kurt Eggert, a Chapman University professor who testified to Congress in April about the complexities of such securities, said it was unsettling that Bear Stearns, which has a reputation on Wall Street as ‘the smartest guys in the room,’ was unable to manage the bonds’ risks. He, too, said the threat from the sub-prime market was wider than many realized.”

From CNN Money. “Bear Sterns said Friday that it’s bailing out one fund to the tune of $3.2 billion, and is still working on a rescue plan for the other. News of the bailout spooked investors.”

“‘This is not over yet,’ said Jim Awad, Chairman of Awad Asset Management. ‘We don’t know who’s involved, who’s not. The whole recovery has been built of confidence, leverage and cheap money. This has the potential to be widespread in terms of seizing up capital.’”

The New York Times. “It is the biggest rescue of a hedge fund since 1998 when more than a dozen lenders provided $3.6 billion to save Long-Term Capital Management.”

“The crisis this week from the near collapse of two hedge funds managed by Bear Stearns stems directly from the slumping housing market and the fallout from loose lending practices that showered money on people with weak, or subprime, credit, leaving many of them struggling to stay in their homes.”

“Bear Stearns is negotiating with banks to rescue the second, larger fund started last August, which has more than $6 billion in loans and reportedly holds far riskier investments. Those negotiations were continuing yesterday, and it was unclear whether they would be successful.”

“‘We don’t think it is over,’ said Girish V. Reddy, managing director of Prisma Capital Partners, which invests in other hedge funds. ‘More funds will feel the pain, but not many are as leveraged as the Bear fund.’”

“As Bear Stearns worked to manage the crisis, many on Wall Street speculated about how the firm could let the funds get in such a precarious position. In fact, executives at Bear Stearns Asset Management had debated last summer whether to start the second hedge fund.”

“The Bear Stearns funds, like so many others, had invested in collateralized debt obligations, or CDOs, which invest in bonds backed by hundreds of loans and other financial instruments. Wall Street sells CDOs in slices to investors.”

“Last year, $316.4 billion in mortgage-related CDOs were issued, about 77 percent more than the year before, the Securities Industry and Financial Markets Association said.”

“One investor, who asked not to be identified because he was trying to recover his investment, said that when he moved to get his money out, he was told investors had tried to redeem 10 percent of the fund. ‘They didn’t realize this was Katrina,’ the investor said. ‘They thought it was just another storm.’”

“Bear Stearns is bailing one of the funds out because it is worried about the damage to its reputation if it stuck investors and lenders with big losses, said Dick Bove, an analyst with Punk Ziegel & Company.”

“‘If they walked away from it, investors would have lost all their money and lenders would have lost all of the money,’ Mr. Bove said. But ‘if they did that to everyone in the financial community, the financial community would have shut them down.’”

The Herald Tribune reports from Florida. “Foreclosures are putting a damper on an already sluggish housing market in Southwest Florida. The number of foreclosures in the region spiked during May, and Manatee County was fifth among all Florida counties in terms of per-capita foreclosures. ‘We all knew it was coming,’ said Steve Jonsson, president of Bradenton’s Flagship National Bank. ‘I’m not sure the housing market can get much worse, quite frankly.’”

“‘They aren’t doing 95 percent loans like a couple years back,’ he said. Several other lenders, including some of the area’s largest like SunTrust and Washington Mutual, declined to be interviewed about foreclosures, saying it has negative connotations.”

“In Southwest Florida, the foreclosure hot spots remain in North Port and north of the Manatee River, two areas with large swaths of homes and condominiums that attracted investors during the recent housing boom. Another substantial concentration was in Port Charlotte.”

“The number of foreclosure actions filed in Manatee County during May rose 164 percent from April. In Sarasota County, foreclosures rose 104 percent, putting it 10th in the the state. Charlotte County foreclosures rose 74 percent, placing it 16th.”

“Three other west coast counties, Lee, Hillsborough and Pinellas, were in the top 20 statewide last month.”

“‘It’s not that people are being kicked to the curb and losing their homes,’ said Mark Vitner, senior economist with Wachovia Corp. ‘It’s more similar to the folks who were day trading in dot-com stocks and were losing their money.’”

“Charlotte, Manatee and Sarasota counties saw a sharp spike in the number of landowners failing to pay their property taxes this year, another sign of a sagging real estate market and struggling economy.”

“The number of parcels with delinquent taxes soared more than 70 percent in Sarasota County, while Charlotte County saw a 50 percent increase and Manatee County nearly 45 percent. Combined, the three counties had more than $55 million worth of unpaid taxes this year, a record total.”

“‘All of this is anecdotal symptoms of the sick real estate market we have,’ said analyst Jack McCabe.”

“The luster is off the large inventory of vacant lots in Charlotte and Sarasota counties, where investors just two or three years ago could not get enough. Those lots appreciated rapidly in value, in some cases jumping 10 or even 20 times in less than five years.”

“For example, one lot on Reading Street in Port Charlotte, valued at $2,550 in 2003, changed hands yearly though 2006, when it hit $33,101 in assessed value. It more than doubled in value from 2005 to 2006 alone.”

“Its market value has since dropped. Whether speculators bought one lot or many, the prospect of paying this year’s taxes, which are based on the higher 2006 values, is not appealing.”

“McCabe noted that people are losing far larger sums by abandoning deposits on condos and homes, knowing that they could incur much greater losses if they close on property that has decreased in value.”

“‘People are walking away from 20 percent deposits on very expensive units, hundreds of thousands of dollars,, McCabe said. ‘Speculators in particular are walking away from property and walking away from taxes as well.’”

“George Huhn, a Venice homeowner and real estate broker, is one of the property owners who opted to pay other expenses over his taxes. ‘I simply didn’t have the cash flow to pay my taxes,’ Huhn said. ‘My business, quite honestly, is the worst it’s ever been in 15 years. It becomes a matter of priorities.’”

“‘I think it’s definitely a trend,’ McCabe said. ‘We’re headed for some hard times over the next three years because of the extremes of the last three years.’”

From TC Palm. “The numbers don’t lie. An independent survey of residential construction issued across the Treasure Coast from January through April showed a staggering drop in building permits, a trend analysts say is reflective of a troubled housing market and slumping buyer demand.”

“From January through April, Indian River County residential permits issued dropped 71 percent from the prior year while in Port St. Lucie the number of permits issued dropped 72 percent.”

“Residential permits dropped 70 percent in Martin County and 86 percent drop in Fort Pierce.”

“This year, payrolls have been trimmed at employers such as Indian River Medical Center, the Indian River County Property Appraiser, Harbor Federal Savings Bank (now National City Bank) and the St. Lucie Building and Zoning Department. DiVosta Building Corp. and KB Homes shut their Treasure Coast divisions.”

“Consultant Jack McCabe said condominium builders in Miami have resorted to giving away a two-year luxury vehicle lease to rid themselves of excess inventory. ‘Frankly, we are going to see a recession in 2008,’ McCabe said. ‘The housing boom drove us all into this paper wealth, artificial wealth that drove consumer spending.’”

“McCabe said many homeowners refinanced their homes based on inflated values and the effects of that are about to hit Florida and the rest of the nation.”

“‘Things are really bad in the Midwest and Northeast,’ he said. ‘All those Baby Boomers we thought would move to Florida, well it maybe very troublesome for them to leave.’”

“Fran Love, owner of the Clubhouse Bar & Grill in Vero Beach said because business has dropped 25 percent since last year, she’s had to make some drastic decisions. ‘We don’t open for lunch anymore, we open a 3 p.m.’ Love said. ‘It’s like a snowball effect, everyone feels like there’s a noose tied around your neck.’”

“John and Regina Barczykowski, owners of Allen’s Diner in Fort Pierce, says business has been unpredictable since the housing market started to slide. ‘We’re all feeling the affects of the housing market,’ John Barczykowski said. ‘Everyone is tightening their belts.’”

“Rich Barker, a broker of SUVs, motor homes, trucks and imports in Fort Pierce is one who describes current sales as terrible, in part because of the softening housing market and because of higher gas prices.”

“‘It’s not just me feeling this, everyone down the street is feeling it,’ Barker said. ‘It’s a new reality that no one wants to talk about because everyone wants the public to feel secure and happy so they’ll spend more.’”

“Bill Wallace, owner of Wallace Automotive Group, said the company is down 20 percent for the first four months versus 2006.”

“‘I would attribute about 90 percent of that to the housing crisis,’ Wallace said. ‘Anybody that depends on the residential real estate market for a living isn’t doing as well as they were a few years ago.’”

The Bradenton Herald. “Although he moved to Parrish almost two years ago, real estate investor Mark Snider won’t be buying properties in Manatee County any time soon. Like many other investors, Snider hoped that the property-tax reform would help in the recovery of the local real estate market.”

“‘It’s a miserable failure. They haven’t done it,’ Snider said about the reforms.”

“Snider was one of about 40 people who turned out Friday to hear Sen. Mike Bennett speak to the Bradenton Real Estate Club, making it the best-attended meeting in the club’s history. ‘Local government has shut down the No. 1 industry in the state of Florida, and the No. 1 industry isn’t tourism, it’s growth,’ Bennett said.”

“‘It’s been a big disappointment to me,’ said attorney John Wickman. ‘It’s put a chilling effect on people. Couple that with a 22-month straight-down real estate market.’”

“Potential buyers had been in a holding pattern, waiting to hear what legislators would propose in their regular and special sessions, which just ended. But now real estate professionals like broker Marie Avery feel like the plan may have done more harm than good. ‘People are just going to leave the state,’ Avery said.”

“Bennett says they already are. ‘For the first time since 1953, people left the state of Florida with more frequency than they came last year,’ Bennett said.”

The Atlanta Journal Constitution. “When Warren Lambert’s insurance company canceled his homeowner’s policy, it was the last straw.”

“Even though he had never filed a claim despite a punishing year of hurricanes in 2004 and had absorbed a 40 percent rise in his insurance premium, Lambert was among thousands of Florida homeowners left in the lurch by retreating insurers.”

“Lambert is among a wave of transplants migrating to metro Atlanta from coastal communities, driven by soaring insurance premiums, devastating weather and a volatile real estate market that has priced much coastal housing beyond the reach of average workers.”

“Leslie Johnson, vice president for business development at Coldwell Banker The Condo Store, said recent research about the Midtown market shows that 33 percent of all the buyers there over age 55 are moving from Florida.”

“‘I think there will be more when those people in Florida can sell their houses,’ Johnson said.”

“For a growing enclave of Florida transplants in Henry County, those costs combined with a growing market of attractive salaries made moving to metro Atlanta a no-brainer. Miami teacher Nannette Bradley said the annual $3,000 insurance cost for her three-bedroom, two-bath townhouse was straining her public-servant salary to the breaking point. ‘The bills were piling on,’ Bradley said. ‘You couldn’t see the end to anything.’”

“In January, she visited friends already living in the Hampton area and found a lot to love about the area, including higher teacher salaries. With a job secured, she will close on a new home this month. The new five-bedroom, four-bath house in a Hampton subdivision was the same price as her Miami townhome.”

“‘In Miami, that house would have been at least $600,000,’ Bradley said.”

What do you see in your housing market this weekend? Price reductions? “Vermonters selling their homes are having to wait a little longer and price their homes more competitively as the residential real estate market settles into a steadier pace. This return to reality was bound to happen, real estate observers said, after a period of several years in which sales and prices took gazelle-like strides.”

“‘The prices reached a point where they didn’t make sense,’ said Steve Allen of Allen & Brooks, which analyzes Vermont’s real estate market.”

“That scenario is playing out on the streets, according to some real estate agents. ‘If you have sellers hanging on to ‘05 prices and refusing to give up, they’re not selling,’ said Hank Gintof, owner of Signature Properties of Vermont in Essex.”

Or foreclosures? “Northwest Arkansas counties are still at the top of the list when it comes to percentage change in foreclosures from May last year compared to May this year, as well as year-to-date.”

“Benton County had 127 foreclosures last month, up 119 percent compared to 58 in May 2006.”

“Logan County, along with Sequoyah and LeFlore counties in Oklahoma, have been impacted less than surrounded areas.”

Mortgage fraud? “Is Enid, Oklahoma a hotbed of mortgage fraud? A new report ranked Enid No. 2 in the nation among ‘potential breeding grounds’ of mortgage fraud involving subprime loans. Enid was second only to Jackson, Mich., according to the study, which tracked loans originated in 2006.”

“The ranking was based on an index of early payment defaults, loans 90 days late within 90 days of origination, the borrowers never made a payment.” “Enid also ranked high in potential fraud involving prime loans, according to the Mortgage Bankers Association, which commissioned the report.”

“If many loans are going bad in Enid, said Enid banker Bob Emery, who also is a property appraiser, ‘local banks aren’t making the loans. It’s probably from the Internet — quote, unquote — banks.’”

New legal action? “Sparked by the suspension of a Pueblo real estate appraiser, the state agency that oversees the practice plans to examine all recent real estate appraisals in the southern part of the state in the next few weeks, its director said.”

“Erin Toll, director of the Colorado Division of Real Estate, told The Pueblo Chieftain that her office will launch a full-blown probe of real estate appraisals in the Pueblo area because of the high incidence of foreclosures in recent years.”

“‘We’re just going to be taking a much closer look at real estate activities in the southern part of the state because the mortgage fraud and the mortgage foreclosure rate is so high in Pueblo,’ she said.”

“It all began when a Pueblo real estate appraiser, James Esters, voluntarily surrendered his license to the board after allegations surfaced that he overvalued eight Pueblo properties.”

“Toll said the board took the actions it did because it takes overvaluations seriously because they contribute to the state’s rising foreclosure rate. She said there appears to be additional incidents of overvaluations in Pueblo, but Toll couldn’t say how pervasive the practice is.”

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