The Housing Bubble

The Daily Press reports from California. “KB Home is discovering that less could be more when it comes to luring skittish buyers in a housing slump. In recent months, the company has rolled out a new line of smaller, more affordable homes that it hopes will jump-start sagging sales, including at the company’s community in Victorville. ‘Prices for the smaller units have not been set, but they will be priced at a very affordable level,’ said Scott Laurie, KB Home division president for the Inland Valley.”

“Some analysts are now projecting it could take as long as four years for builders to sell off excess inventory. Homebuyers can expect more discounting this year, according to Greg Gieber and other analysts.”

“Like other homebuilders, Los Angeles-based KB Home has struggled to find buyers as would-be purchasers wait for prices to tumble before jumping into the market. Homebuilders incur losses every day a new home stands empty. They have tried everything from slashing prices to tossing in free kitchen upgrades to entice buyers.”

The LA Times. “Nestled on the western shore of the Salton Sea, the town doesn’t have a supermarket or movie theater or drugstore. But it has as many as 250 homes for sale, most of them newly built, a huge supply for a place with just 1,440 people.”

“When real estate values began soaring a few years ago, builders flocked here. Land was cheap. Builders figured that people priced out of Los Angeles and San Diego would discover Salton City and the other towns in Imperial County.”

“Now, with home values sliding, mortgage rates edging up and gasoline prices on an upward trend, that assumption appears premature at best. Imperial County, at least for the moment, seems a subdivision too far.”

“‘Builders are like lemmings. They saw a few of their peers going to Imperial County and they all joined in,’ housing consultant Patrick Duffy said. ‘They didn’t do market studies. They just crossed their fingers.’”

“Not far away is the Ranch, a 273-house project by Stockton-based Matthews Homes that is just getting underway. A steady stream of potential buyers has come to check out the models, which cost up to $355,000 for a four-bedroom, 2,600-square-foot home.”

“Sales agent Teresa Castillo said she had sold three. However, two of the deals are ’shaky. The buyers are having credit issues,’ Castillo said.”

“In a tightened lending environment, it’s common for deals to fall through or for buyers to simply change their minds. New-home sales in Imperial County in the first four months of 2007 totaled 259, according to DataQuick, down sharply from 677 in the same period a year ago.”

“Deals are getting done. Credit the rock-bottom prices. Some brand-new homes sell for less than $200,000 and, thanks to the oversupply, are getting even cheaper.”

“ERA Investment Group, the biggest Salton City developer, touts the community as both ‘California’s last frontier’ and ‘the next hot market.’ ERA’s sales brochure…touts ‘breath-taking views’ and claims the sea ‘teems with fish.’”

“Carol Hines, an office temp worker in Brawley, remembers camping on the shores of the sea about 15 years ago. ‘This developer came bounding up and said, ‘Are you interested in buying some land?’ Hines said. ‘I looked around at the dead birds and the dead fish and said, ‘I’m kind of sorry I’m even visiting.’”

The Bakersfield Californian. “Default notices continue to pile up for properties related to Crisp & Cole. The latest default notice sent to David Crisp last month concerns a $1.75 million loan for a stately Seven Oaks mansion.”

“Three homes are scheduled for auction this week alone. Nearly 40 others, most in southwest Bakersfield, are in some stage of foreclosure.”

“Californian research has uncovered a pattern of property turnover among Crisp & Cole associates, steep price increases and 100 percent financing by subprime lenders in many of the properties now defaulting.”

“For example, a southwest property on Via Bonita Drive initially sold for $342,000 in October 2005. Five months later, after some deed shuffling with a business associate of Crisp & Cole, a Crisp family member bought the home with 100 percent financing for $549,000.”

“The new price showed an increase of $207,000, or more than 60 percent, in less than six months. The property defaulted in May.”

The Orange County Register. “Tough times in the real estate industry mean booming business for Michael S. Buescher, a Trabuco construction contractor who specializes in cleaning and fixing up repossessed homes.”

“In Orange County, the number of foreclosures through May hit 1,031, seven-fold the number a year ago. Default notices soared 121 percent, to 4,520 homes, during the first five months of the year.”

“‘We get more every day,’ Buescher said. ‘We’ve been waiting eight years for this to start happening again.’”

“As more rehab offers trickled in, Buescher felt almost like he was back in the good old days of the ’90s, the last time Southern California’s real estate market tanked. During that era, he employed five crews to spiff up an average 30 repossessed homes a month.”

“So far this year, business has taken Buescher to dozens of trash-outs and fix-ups in Orange, Riverside and San Bernardino counties, to gated communities and rat-infested crack dens, all united under the title ‘real estate owned’ or ‘bank repo.’”

“Real estate agent Mike Roberts…has revived his Laguna Niguel company Trust Solutions Inc., which offers homeowners who are upside-down on their loans a legal method for selling their property without having to go through lender approval. So far this year, Roberts said Trust Solutions has negotiated one or two deals a month. But he expects business to pick up as more homeowners find themselves underwater.”

“‘I suspect by late summer we’ll be doing one a day,’ he said. ‘That’s what we were doing the last time the market was in trouble in ‘94, ‘95, ‘96 and early ‘97.’”

“Patti Donovan, president of a Santa Ana firm that manages and markets real-estate owned properties, said she got back in the business last year after a four-year hiatus when the market was hot and she ‘pretty much played a lot of golf.’ Donovan, who started in the foreclosure business in 1984, said she expects the down market to last three to five years.”

“‘The difference this cycle is it’s not the economy that’s causing this to go upside down,’ she said. ‘It’s more the types of loans – 100 percent financing, adjustable rate mortgages. Before, it was people losing jobs. Now it’s just people borrowing too much.’”

“Robert Rosenthal is a San Fernando Valley attorney who specializes in evicting tenants from foreclosed homes. He expects a lot of jobs over the next three or four years as more people lose their homes. ‘With this market now, my guess is we’re in the first or second inning of a nine-inning baseball game,’ he said.”

“As the repairs get more complex, Buescher’s fees escalate. Granite counters, a reshingled roof, new wiring, they all make his cash register ring. ‘My job is to convince the client to spend more money to sell the house,’ he said. ‘But at this point, the banks aren’t willing, because the market hasn’t hit bottom.’”

Readers suggested a topic on the new federal lending guidelines. “Will these ‘rules’ have any teeth?”

“Bank regulators agree on subprime rules: Bank regulators have agreed on new standards for subprime mortgage loans and are prepared to release it Friday, several sources familiar with the matter said Thursday. That provision is tougher than many lenders had hoped, as qualifying borrowers at the ‘fully indexed rate’ could put a crimp in standards that evolved during the housing boom.”

“New subprime mortgage rules from regulators. Federal financial regulators issued new rules Friday for subprime mortgage lending to address adjustable-rate mortgage products that can cause payment shock.”

One had these questions. “What exactly does that mean? If they have to qualify at the start of the loan for the monthly payment at the end of the loan, then doesn’t that provide an incentive to make the loan on a ’steady state’ payment schedule? Because the fixed rate fully amortizing loan will provide the lowest ‘highest payment’….won’t it?”

A reply, “When I worked at US Bank in commercial lending, our underwriters would qualify borrowers based on an 8.25% rate. The cash flow of the property would have to exceed 1.2 based on the 8.25% index rate. This was back in 2003/04. We had 5 year fixed programs at 5-5.5% at the time.”

“It would piss all of us sales people off but they did it for a reason…risk mitigation. And none of our commercial loan programs were no or low doc. So every borrower had to qualify for the loan as well. Needless to say US Banks portfolio of commercial loans has a very, very low default rate.”

Another responded to this quote from the article. “(The draft called on mortgage lenders to take more care when dealing with less credit-worthy borrowers by assessing whether they can cover long-term payments and warning them about hidden costs.)”

“Great. As long as the going-in FICO is high enough, you can still nail-em with loans they can afford and exploding terms. Long live Alt-A, until the huge wave of defaults means no one will fund them anymore.”

Another questioned. “What exactly is the ‘fully indexed rate’? Is it the maximum it could adjust to? Is it the current fixed rate? What is it?”

One reader made this distinction. “These rules aren’t rules at all, they’re guidelines. Rules, also known as regulations, are published in the federal register as such and must be promulgated in accordance with the Administrative Procedure Act. These guidelines are simply statements of policy. A bank regulator cannot take direct enforcement action against institutions that don’t conform to the policy (but can for violation of a regulation).”

“The way the guidelines work is if a bank adopts them, then the regulator will take the position that the bank is operating in a safe and sound manner. If the bank does not adopt them and the regulator wants to take action against the bank, the regulator would still have to show, with evidence, that the bank is acting in an unsafe and unsound manner.”

“Also, these guidelines only apply to subprime credits, loans to persons with a poor credit history. Teaser-rate, option-pay, and similar loans to persons with a good credit history (high FICO) do not fall within the guidelines.”

The Sun Sentinel reports from Florida. “Prospective home buyers let the spring selling season pass in May with a yawn and maybe a lowball offer. Broward County had by far its worst May since the Florida Association of Realtors started keeping track in 1994. There were 574 sales of existing homes compared with 862 a year ago, a 33 percent slide.”

“At the end of May, Broward had more than 47,500 homes and condominiums on the market, according to the Miami-based Keyes Co. That’s up 27 percent from a year ago. At the current sales pace, it would take about seven years to sell all those properties.”

“Despite the negative forecasts, now is a good time to buy, said Sean Donahue, VP of sales for HomeBanc in Deerfield Beach. With interest rates rising, those who wait will end up paying more for their houses, he said.”

The St Petersburg Times. “Given the worst housing slump in nearly two decades, home builders and condo developers are now jumping to pay your property taxes, homeowners insurance and even college tuition as incentives to buy a new home or condo.”

“The developer of two condo projects in Tampa offers to pay a semester’s worth of tuition at the University of South Florida for home buyers.”

“Condominium sales in Hillsborough County are down 49 percent, reports the Greater Tampa Association of Realtor’s May 2007 year-to-date statistics. Recent new home sales statistics for the Tampa Bay area were not available, but existing home sales were down 42 percent in May compared to a year ago.”

“Venetian Isles has long been known as one of the most attractive waterfront communities in southern Pinellas County. In three cases, though, the homeowners association is having a hard time finding the owners.”

“‘A lot of you have been calling to question what is going on with the home on Overlook Drive with the overgrown lawn, and a few other properties,’ president Jim Pelletier wrote in the current newsletter. ‘Believe me, we are very aware of them and involved with them.’”

“The association is dealing with an increasingly familiar problem in the Tampa Bay area as the housing bubble deflates. Many expensive homes were financed for 100 percent of the purchase price and are now falling into foreclosure and disrepair because the absentee owners can’t - or won’t - make the hefty mortgage payments.”

“In Venetian Isles, concern first arose over a house on Carolina Drive whose ‘owners,’ say their signature was forged without their knowledge on $930,000 in loans. The lawn is nearly dead and the house, now vacant, is in foreclosure proceedings.”

“The association has sued the owner of another house, this one on Overlook Drive, the main entrance to the 533-home subdivision on Tampa Bay. Last week, the grass was knee-high and the house was vacant, as it has been intermittently for months.”

“Public records show that the home was purchased in November for $1,050,000, almost $275, 000 more than for comparable sales during the peak of the real estate boom in 2004-2005. The property was financed for the full amount by Virgil Dennard, who showed a California driver’s license as identification.”

“Dennard does not live in the house, and mail sent there was returned as ‘undeliverable,’ according to the association’s law firm. Nor does Dennard live in another house he bought about the same time on Boca Ciega Bay in the South Pasadena area. He financed that for $1.275-million, $25,000 more than the publicly recorded sales price.”

“The sellers of both houses mortgaged in Dennard’s name say the person they dealt with was not Dennard, but a man named Tommy Watts. ‘He called himself an investor,’ said Robert Learned, one of the sellers. ‘He was kind of vague, he didn’t seem to want to talk about what he did.’”

“It’s such a dilemma when we have these absentee owners who are in violation and we have more than 500 other owners who just don’t understand,’ says Linda Testa, head of the deed restrictions committee. ‘There’s nothing we can do but contact the owner, but when we can’t find the owner, it’s a real problem.’”

The Miami Herald. “The Multiple Listing Service is a real estate agent’s bible. But it has also become a tool for fraud. Real estate agents say they are sometimes asked to raise the list price of a home. In mortgage fraud cases, that allows a broker to pay the seller at the original list price and keep the rest of the money as cash back at closing.”

“The false sales information means other sellers can end up overpricing houses that then get stuck on the market, and other buyers can end up paying more than they should.”

“‘The average person in a neighborhood full of fraud is paying higher taxes because of an artificial base, they’re paying more because somebody cheated,, says Nancy Hogan, a member of the Florida Real Estate Commission. ‘On the other hand, when those houses go into foreclosure, they are also bringing down the neighborhood.’”

“‘It scares me to death,’ says Hogan, also managing broker of Coldwell Banker in Coral Gables. ‘Every time I go and give one of my presentations and there are 100 Realtors there and I say, ‘Has any one seen an offer asking for $100,000 going back to the buyer and 50 percent of them raise their hands…it’s that rampant.’”

“Property appraisers in South Florida say they routinely come under pressure to value houses for more than they are really worth. ‘From talking with appraisers in Southeast Florida, there are entire neighborhoods where all of the data is polluted,’ says Francois Gregoire, chairman of the Florida Real Estate Appraisal Board.”

“‘This is the worst I’ve seen it ever,’ says Doreen Campbell, a Davie appraiser who has been in the industry for more than 25 years.”

“Julio Suñe, an appraiser in Monroe County for more than 25 years, said he started shunning assignments from new mortgage companies after several of his appraisals were rejected and orders went unpaid. Other appraisers said the same.”

“Ron Schwartz, an appraiser in North Miami Beach notes that appraisers don’t care if a loan goes through because they get a flat fee. But they come under pressure from others who simply want a deal to go through or are involved in mortgage fraud.”

“‘We were getting calls from mortgage brokers, buyers, sellers and real estate agents,’ says Schwartz, who no longer does work for mortgage brokers. ‘They are screaming and yelling, ‘You appraised my property for $300,000, and we have a contract for $400,000 and you’re ruining our deal.’”

“Campbell reviewed another appraiser’s work for an appraisal management company. When she pointed out significant flaws, she claims her client stopped sending her work.”

“‘They don’t want the truth,’ Campbell says. ‘They kicked me off their list when I said, ‘It’s a bad appraisal and it should be turned in.’”

“Would-be mortgage brokers in Florida need little more than a weekend course to qualify for a license. And loan officers, who originate loans for mortgage lenders and banks, need no license at all.”

“‘Really, it’s too cheap and too easy to become a mortgage broker,’ says Steven Schneider, board member (of the) Florida Association of Mortgage Brokers. ‘I have recommended to the state to raise the cost from a few hundred bucks to $1,000 or more. If it’s not so easy to become one, chances are they won’t.’”

“A new law that takes effect in October will require brokers to have at least a high school education, and to give more detailed disclosures about adjustable-rate mortgages.”

“Jim Greer, president of Gold Coast real estate schools, is not sure stricter licensing requirements would work. He says current requirements are sufficient, and students who learn the laws still may not follow them.”

“‘What you see is greed getting in the way, and doing what they do to make the money,’ Greer says. ‘I don’t know if it’s a 24-hour course or a 60-hours course is going to make an impact.’”

“Underwriting practices for home loans have come under scrutiny in recent months, in light of widespread foreclosures and reports of mortgage fraud.”

“The job of an underwriter is to vet loan applications. But some consumers and investors are now complaining about home loans that got what amounted to rubber-stamp approvals during the real estate boom.”

“One reason for lax underwriting is that companies sell home loans down a chain of investors, and so have little incentive to make sure they are sound, says Dale Ledbetter of Fort Lauderdale-based Ledbetter & Associates.”

“Ledbetter’s firm has recently filed several lawsuits against Wall Street investment companies, alleging they failed to protect investors by properly scrutinizing loans.”

“Problems with underwriting grew largely out of the real estate boom, when lenders assumed, rightly, that rising property values would cover the cost of bad loans, says Juan Carlos Perdomo, VP of sales for Miami-based Verification Bureau. His company provides fraud prevention and data verification systems to mortgage lenders.”

“‘They didn’t want to look into very deep detail because they were concentrating more on getting the commission and getting the deal done,’ he says. ‘They weren’t looking at the long run.’”

“Lenders also faced manpower and time constraints, Perdomo says. The sheer volume of applications prompted some lenders to turn to automated underwriting systems rather than a set of eyes to comb through documents.”

“An audit by one lender showed that borrowers’ income was exaggerated by more than half in nearly 60 percent of its loans requiring no documentation.”

“‘If Wall Street had said, ‘We are going to be more careful about what we are going to take. We’re going to do more due diligence,’ then mortgage fraud would not have proliferated to the extent that it did,’ says attorney Ledbetter.”

Readers want to hear your housing bubble predictions for the coming months and years. “It’d be neat to have an ‘end of the quarter wrap’ highlighting all of the major occurrences and stats for Q2.”

“Or a predictions thread? Check this one out from the same time last year: ‘What are your housing market predictions at the mid-year point of 2006? Call any market; local, regional or global. This thread will be forwarded through the holiday weekend.’”

Or this one from the first of this year. “How about predictions of what next year brings? 2007.”

One noted, “The predictions from the (first) link were quite interesting: On balance, the housing-price related predictions were in the ballpark and the stock market/mortgage-rate/oil predictions were wide of the mark.”

One said this, “Housing market predictions? Local market opinions have the most value IMO…”

Another looked at the timing of events. “I predict that the return to normalcy will take much longer than I would have predicted. Just like the bubble went on much longer than I would have predicted.”

“It may take another year before we get the big leg down in nominal median prices, as sellers continue to hold out and investors are no longer willing to lend people money they cannot afford. Sales volume REALLY drops (still high despite the year-on-year decline given prices), new construction starts fall below 1 million next year (an actual low number, not like what we have now), but median sales price fails to crash until a year or more from now.”

One pulled one up from last summer. “Pretty good prediction from GH last year: Comment by GH 2006-07-01 06:06:55.”

“‘Inventory will continue to rise and the buyer seller stand-off will continue while both sides dig in fro the rest of 2006. Areas which have already experienced extreme appreciation will continue to slowly deteriorate, while outlying areas will continue slow appreciation as the outer reaches of the shock waves propagate outward.’”

“‘I would not expect meaningful downward price action until the coming wave of foreclosures and much anticipated workforce reductions associated with building and real estate begin to have an impact. This will be the BIG news for 2007 thru 2011 and when the storm abates I predict the middle class will be a whole lot smaller, the poor poorer and the rich richer. Property prices may well decline below the 40 year trend line as lenders swell their inventory of foreclosed properties and are forced to begin dumping en masse.’”

One reflected, “I was wrong about the stock market I thought it would be down and we would be in a recession by now. It appears the stock market has made a soft landing? The housing market is holding up better than I thought as well. The future? Home prices down again, stock market flat and interest rates down, dollar down.”

One focused on the economic picture. “I think we’re already in a recession. There tends to be a lag time between the beginning of a recession, and the widespread acknowledgment of its existence. Don’t focus so much on the stock market, but on the retail numbers. Things aren’t looking too good out there, despite the decent job outlook.”

Another stands by this call, “”I’ll stick with my prediction from last year…YOY housing prices, nationally, will be down 10-15% by Dec 2007. There will likely be some type of (failed) bailout attempt, which will stem the foreclosures temporarily. Recession by Dec 2007. Foreclosures rise into 2008 & national prices drop an additional 10-15% by late 2008.”

“The credit markets will likely be volatile & I believe there will be periods when it looks like everything will collapse, then suddenly all will seem well as more money is injected into the system (from???). Each time the credit spigot gets turned back on, though, the loose periods will be shorter and shallower than before, IMHO. Very slowly, liquidity will dry up, but it will probably take years to totally unwind.”

“The bottom arrives no sooner than 2010-2012, with an emphasis on 2012 (or later).”

What do you see in your housing market this weekend? A slowdown in construction? “Builders continued their cautious approach toward new homes in the second quarter, with starts down nearly 22 percent from a year ago. The decreasing numbers signal a slowdown in the Austin area’s housing market.”

“Area builders started 3,367 homes in the second quarter, down from 4,295 a year ago, according to Dallas-based Residential Strategies Inc. Builders also sold fewer of those homes, down nearly 18 percent from last year’s second quarter to 3,281.”

“‘The market has plateaued, and investors don’t want to hear that,’ said Mark Sprague, Austin area partner for Residential Strategies.”

“‘Builders are aware of the potential downturn and are taking drastic steps to make sure they’re not stuck with inventory,’ said Harry Savio, executive VP of the Home Builders Association of Greater Austin. ‘While it looks ominous that it is down 22 percent from the second quarter last year, it’s important to note that it was a record year last year.’”

Housing related budget woes? “Facing a souring economic outlook, Florida Gov. Charlie Crist on Friday ordered state government to trim up to $1 billion in spending for the budget year that begins next week. Deeper cuts could be in store.”

“Florida witnessed a drop in state sales and corporate income taxes during the past three months worse than economists had expected, courtesy of the collapse of the state’s five-year housing boom and the subsequent jitters of consumers.”

Innovative ways to move a property? “Both the Putvins and Cliftons still have their homes for sale on the conventional market, but both also put their houses up for swap on a Web site where they’ve posted messages on the ‘Housing Swap’ forum describing the house they’ve got and the one they hope to get.”

“The couples are part of a small but growing group of homeowners in Metro Detroit and other areas looking to swap homes rather than taking a more traditional path.”

“‘It’s not like we haven’t tried our best to sell this house,’ said Kelli Clifton. ‘We’ve offered everything, dropped the price. If this does the trick, that’s fine by us.’”

Or housing bubble financial news? “Benchmark subprime mortgage ABX indexes closed at record new lows on Friday as concerns over subprime mortgages intensified, traders said. The index has tumbled by 42 percent since January.”

“‘Until two weeks ago, the market was mostly focused on trying to discern the impact of the declining housing market and deteriorating collateral performance on the ‘fair value’ of subpime-related assets,’ said Richard Parkus, Deutsche Bank analyst.”

“‘However, with the events surrounding the problems at the two BSAM (Bear Stearns Asset Management) structured credit hedge funds last week, the market is now focused on the risk of a wider-scale contagion issue that could potentially impact other sectors as well,’ he said.”

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