The Housing Bubble

The Contra Costa Times reports from California. “With the housing market in a slump, Martinez’s strategy to revive its downtown may be temporarily stunted, but the city staff said it is not at a standstill. After years of debate and readjustment of the city’s Downtown Specific Plan, the blueprint sanctioning an increase in housing by as many as 700 additional units was approved by the City Council in July 2006.”

“It passed just as the housing market peaked, said Albert Lopez, deputy community development director for Martinez. ‘The city doesn’t have its own ability to do our own projects,’ Lopez said, adding that it relies on outside developers to take interest.”

“Just as the specific plan was ready to be implemented, interest began to fade. ‘The timing is off for (developers) to be trying to pursue something that big,’ Lopez said. ‘The level of interest right now is pretty cold.’”

“Albert Turnbaugh’s four-story commercial and residential building are steadily navigating the city’s permit channels. Turnbaugh said although plans are moving along smoothly, he’s not pushing to get his project off the ground as soon as possible.”

“‘It is causing me to scrutinize things more than I would if the market had been different,’ he said.”

“Although he has focused on making the 14 condominium units appealing to buyers, he’s not worried about the state of the market. ‘The housing market goes up and the housing market goes down sometimes,’ Turnbaugh said. ‘Just because you hear the housing market is down, you can’t say it’s down everywhere.’”

“Economist Christopher Thornberg disagreed. ‘That’s one of the big real estate myths,’ he said. ‘There is no safe haven. These markets move together.’”

The Acorn. “According to the California Building Industry Association and other housing permit data, production for both single and multifamily units remains well behind last year’s levels. Permits in May were pulled for slightly more than 7,000 single-family homes statewide, down 40 percent from May 2006.”

“During the first five months of the year, production began on 54,300 homes and apartments, nearly 29 percent less than last year’s total. ‘Statewide, the number of new projects has dwindled,’ said Alan Nevin, the Building Industry Association’s chief economist.”

“Robert Rivinius, president and CEO of the California Building Industry Association, said more than 200,000 new homes, condos and apartments are needed each year to meet the state’s housing needs.”

“‘What’s pressing is the need for housing in the entrylevel market,’ Rivinius said. ‘Unless major reforms are enacted soon, it’s doubtful we’ll meet that need in the near future.’”

“On a statewide basis, only 11 percent of California homes are considered affordable. ‘In California , there are only two metro areas- Chico and Redding- where affordability even topped 25 percent,’ said Wes Keusder, a Southern California homebuilder.”

“Oversupply is a main reason why local housing sales have fallen, yet prices in east Ventura County and the Conejo/Las Virgenes valleys haven’t dropped in tandem because the region remains a desirable place to live.”

The Press Telegram. “The California Association of Realtors has found itself in a sort of catch-22 situation, but in a sense you could consider it mathematically squared.”

“The group not only stands in opposition to a law that will tighten a legal loophole that allows people to place a limitless tax on a property each time it sells, but in doing so the association faces off with a pair of opponents who make the least likely bedfellows: The building industry and environmentalists.”

“As it stands, the bill would cap the tax at 2 percent, and limit the life of the tax to 99 years. The bill also would require the money for the tax to be used to serve a public benefit.”

“So why would CAR oppose the bill? ‘It’s an affordability problem,’ said Alex Creel, CAR’s senior vice president for government affairs.”

“‘We think that 2 percent is totally unpalatable as well,’ Creel said. ‘If a home sells 20 times, 2 percent of the sales price has to be paid as a private transfer tax each time.’”

The Modesto Bee. “Auctioneers’ calls for bids on used cars and unsold furniture soon will ring out more frequently at The Auction Park in Modesto. In a sign the valley’s economy is cooling, The Auction Park’s owner, Roger Ernst, said his 22-acre site is filled with repossessed vehicles and furniture ordered by retailers but never sold.”

“The Auction Park, which usually holds sales twice a month, will begin weekly auctions Saturday. ‘Physically, we can’t do it in two weekends (a month),’ said Ernst, who founded The Auction Park 20 years ago. ‘This is the first time there’s been this much product.’”

“When the Northern San Joaquin Valley economy hummed along a few years ago, he said, many consumers bought vehicles with little or no money down. As a result, many people got in over their heads, and vehicle repossessions have doubled over the past four months, Ernst said.”

“‘Now people are getting a reality check,’ he said.”

“One of the hot economy’s main factors, the explosion in real estate, helped spur a corresponding flood of unsold furniture. Stores bought a lot of furniture from Asia, Ernst said. But because sales slowed as the housing market cooled, he said, there was no market for that new furniture when it arrived.”

“His facility has 100,000 pieces of new furniture, and warehouse manager Joe Gomes said it’s almost impossible to fit everything indoors. ‘We’re receiving more than we’re able to sell,’ Gomes said, adding that he’s noticed fewer buyers at recent auctions.”

“He said that’s depressed sale prices at The Auction Park, which often are below normal retail prices for such merchandise.”

“Gomes said he recently saw a coffee table that normally would retail for $125 go for $25 in an auction. ‘Whoever’s out here, if they put up their hand, we’re going to sell it to them,’ he said.”

“While the flood of inventory is great for buyers, Ernst said, it’s less desirable for sellers. ‘We tell the consigners, if they put out an item for $10,000, we’re just wasting time. It won’t go for that,’ Ernst said.”

“The yard, which opened in 1987, has had up-and-down cycles but never with this much inventory, Ernst said.”

The Herald reports from Indiana. “In 2005, Madison County had 957 houses go through the sheriff’s sales. The number of sales started going up dramatically after 1995, when the county sold 46 houses all year, said Abby Ramsey, court administrator for the sheriff’s department. The rates started doubling in 1998, she said. In 2006, the Madison County Sheriff’s Civil Department sold 1,082 homes through sheriff sales.”

“This is not a problem only in Madison County. It’s happening all over the country. The Web site CNNMoney.com issued a list of the top 500 foreclosure ZIP codes, and on that list Ohio had 49 ZIP codes, Michigan had 34, Illinois had 25 and Indiana had 16. The places in Indiana were all in Indianapolis except for two, one in Fort Wayne and one in South Bend.”

The Daily Press & Argus from Michigan. “The dramatic drop in new housing construction continued during the first half of 2007, according to statistics from the Livingston County Building Department.”

“Just 111 permits were issued in the county through June this year, compared to 290 in the same period last year. ‘That doesn’t surprise me,’ said Kyle Sober, president of the Home Builders Association of Livingston County. ‘(Economists) had said last year that we haven’t hit bottom yet.’”

“Sober said the whole picture may even be worse, since other business sectors are also affected by housing. ‘It affects the banking industry, the insurance industry — I think everything’s affected,’ she said. ‘It’s a real domino effect.’ She said subcontractors have been hit hard, as well.”

“Sober said she thinks the housing sector is due for an upswing, although it may not be as quick in coming as many would like.”

“‘It seems to be picking up a little in real estate (sales of existing homes), and I’m hoping by fall it will pick up even more,’ she said. ‘There are a lot of lookers who want to buy new houses, but they have the problem of selling their existing house.’”

“Does she think Livingston County will ever return to the boom times? ‘Yeah, I do,’ she said. ‘We just have to stay positive and know it’s going to turn around.’”

The Detroit News from Michigan. “Southfield has more than 900 vacant properties, up from 673 in August 2006, according to a report by the Neighborhood Services Committee, which has been studying neighborhoods for 18 months.”

“Like many Metro Detroit communities, Southfield faces an aging housing stock, escalating foreclosures, an increase in rental homes because of the depressed housing market and vacant homes.”

The Wisconsin Radio Network. “In just the first half of this year, over 7,600 Wisconsin homes went into foreclosure. Erick Skrum, with the Wisconsin Bankers Association, says home buyers shouldn’t be scared. They just need to understand what they’re getting into ahead of time.”

“Skrum says many buyers are in trouble now because they over-estimated what they could afford.”

The Plain Dealer from Ohio. “A tide of foreclosures that has brought Cleveland national notoriety continues to surge, with no end in sight. New cases this year in Cuyahoga County could hit a record 17,000, an increase of nearly 25 percent from 2006, according to county Treasurer Jim Rokakis. And 2006 filings had jumped more than 24 percent from 2005.”

“‘Welcome to the epicenter of the mortgage meltdown in America,’ Rokakis said at a recent community development summit hosted by the Federal Reserve Bank of Cleveland. ‘As we say here: first and worst.’”

“Cuyahoga County’s housing market has been poisoned by a mix of national and local trends, experts say. The brew includes lax lending standards and lost jobs. The region’s slow growth in property values also has left homeowners without equity for a safety net.”

“Other factors include real estate fraud, unscrupulous lenders and high-interest, or subprime, loans, designed for people with poor credit. Nearly 12 percent of Ohio’s subprime mortgages were in foreclosure in the first quarter of the year, according to the Mortgage Bankers Association.”

“Nationwide, foreclosures should ease by early next year as credit tightens, Steven O’Connor, a VP with the Mortgage Bankers Association, told a group at the Fed forum.”

“Lenders will make deals to cut their losses, said Jim Sassano, a lawyer with a Beachwood firm that specializes in foreclosure. Sassano said clients are approving repayment plans and ’short sales,’ in which property is sold for less than the amount owed.”

“A report from Case Western Reserve University showed that as of Feb. 28, lenders owned 9,175 residential properties in Cuyahoga County, about 2 percent of the total. They owned 8 percent of the residential properties in East Cleveland and more than 6 percent in parts of Cleveland.”

“Cleveland Housing Judge Raymond Pianka is frustrated when out-of-state lenders fail to send representatives to hearings on code violations. He plans to hold trials in absentia.”

“The empty houses in turn have hurt property values. Tens of thousands of homeowners in Cuyahoga County have sought lower appraisals, and many of them won, by citing the presence of vacant houses in their neighborhoods.”

“Things have gotten so bad that the county treasurer has publicly challenged the widely held belief that having more homeowners leads to a healthier community.”

“‘Not everyone can be a homeowner,’ he told the HUD gathering last week. ‘We should stop putting people in loans they can’t afford.’”

Some housing bubble news from Wall Street and Washington. The Charlotte Observer, “More Charlotte-area homebuyers are suing Beazer Homes, alleging a litany of misdeeds and claiming the company ‘fraudulently qualified’ them for loans they couldn’t afford. They misrepresented assets and debts on loan applications, the suit says, and concealed important information from buyers. They also concealed inflated sales prices of homes to cover fees and expenses, according to the suit.”

“Buyers have suffered a decline in property values, as Beazer’s practices led to rampant foreclosures in Oak Hill, the suit says. ‘People are trapped in their homes because their values have dropped below what they owe,’ says…legal partner Daniel Grist. ‘All the foreclosures have flooded the neighborhood with cheap houses.’”

“At least 14 of 98 homes in Oak Hill have fallen into foreclosure, a 14 percent foreclosure rate, an Observer analysis shows. Oak Hill’s foreclosure rate is not among Beazer’s highest in Charlotte. The Observer found 10 Beazer subdivisions with rates of 20 percent or higher.”

From Reuters. “Tax preparer H&R Block Inc. said the subprime mortgage unit it is selling has lost a credit line, lowering its borrowing capacity closer to the minimum needed for the sale to go through.”

“In a late Tuesday filing with the U.S. Securities and Exchange Commission, H&R Block said Lehman Brothers Holdings Inc. did not renew a ‘warehouse’ facility with the subprime unit, Option One Mortgage Corp., after it expired June 28.”

From Fortune. “While Bear Stearns is the most recent financial institution to find itself caught up in the subprime-mortgage quagmire, the three credit-rating agencies; Standard & Poor’s, Moody’s, and Fitch, may be the next ones to see their good names dragged through the mud.”

“The reason? Ohio attorney general Marc Dann is building a case against them based on the role he believes their ratings played in the marketing of risky mortgage-related securities.”

“‘The ratings agencies cashed a check every time one of these subprime pools was created and an offering was made,’ Dann told Fortune, referring to the way the bond issuers paid to get their asset-backed securities (ABSs) and collateralized debt obligations (CDOs) rated by the agencies.”

“These ratings run from AAA for debt with the lowest risk of default all the way down to noninvestment- grade bonds, which many pension funds are prohibited from purchasing in their charters. ‘[The agencies] continued to rate these things AAA . [So they are] among the people who aided and abetted this continuing fraud,’ adds Dann.”

“Dann and a growing legion of critics contend that the agencies dropped the ball by issuing investment-grade ratings on securities backed by subprime mortgages they should have known were shaky. To his mind, the seemingly cozy relationship between ratings agencies and investment banks like Bear Stearns only heightens the appearance of impropriety.”

“According to experts in structured finance valuations, the ratings agencies are the central drivers, particularly in the riskier areas of asset-backed securities markets. The pool of buyers would be much smaller without a rating because pension and mutual funds hold only investment-grade bonds, says Christopher Whalen, who sold asset-backed securities at Bear Stearns.”

“‘The rating drives everything,’ adds Sylvain Raynes, a former Moody’s analyst and currently a principal at a firm that examines these securities.”

“Regardless of whether a lawsuit materializes, the ratings agencies already seem to be policing themselves. Of the pool of securities created from 2006 subprime mortgages, Moody’s has downgraded 19 percent of the issues they’ve rated and put 30 percent on a watch list.”

“As Whalen puts it, ‘The Street dragged everyone into increasingly bizarre and illiquid instruments, and there was huge profitability there, but what it did was buy itself a lot of trouble.”

From Bloomberg. “Delinquencies and defaults on U.S. subprime mortgages will keep rising as problems in the housing market persist, said Robert Parker, vice chairman of Credit Suisse Asset Management.”

“‘It’s naïve to assume the worst is past us in the U.S. subprime market,’ Parker said at a bond market conference today. ‘At least over the balance of this year, the subprime default rate will rise.’”

“In the U.K., lenders are providing mortgages to customers who don’t need them and might not be able to afford them, practices that may lead to ’serious wider consequences,’ the country’s Financial Services Authority said in a report released on July 4.”

“All the subprime-mortgage lenders examined failed to apply responsible lending standards, and five of 34 intermediaries are being investigated and may be punished, the regulator said.”

“The number of Britons entering bankruptcy rose to a record in the first quarter as consumers buckled under higher borrowing costs. Individual insolvencies in England and Wales increased 24 percent from a year earlier to 30,075, the Department for Trade and Industry said. The number of insolvencies was the highest since records began in 1960.”

“Private equity firms led by New York-based KKR and Blackstone Group LP need to borrow $300 billion this year to pay for acquisitions, according to Bear Stearns Cos. More than a dozen companies abandoned borrowing plans in the past two weeks as investors demanded higher yields.”

“Investors are demanding a 288 basis-point premium to buy junk bonds rather than Treasuries, the most since December, according to Merrill Lynch & Co. global index data. Spreads widened 53 basis points in the past month, the fastest increase since General Motors Corp. lost its investment grade ratings in 2005. A basis point is 0.01 percentage point.”

“‘Private-equity firms will carry on refinancing until the economy slows and operating profits thin out,’ said Edward Eyerman, head of leveraged finance at Fitch Ratings in London. ‘By then it will be too late as current debt loads will look unsustainable. The bill comes one day, that’s the problem.’”

The Financial Times. “Investors in the worse-hit of two stricken Bear Stearns hedge funds are offering to sell their holdings for as little as 11 cents on the dollar but still finding no buyers, according to unfilled trades on a secondary market for funds.”

“The best bid for Bear Stearns High-Grade Structured Credit Strategies Enhanced Leveraged Fund, the more geared of the two, is just 5 cents on the dollar. ‘There are buyers but they can’t agree on price,’ said Jared Herman, co-founder of Bahamas-based Hedgebay.”

“The Enhanced Leverage Fund’s net assets of $638m were more than 10 times geared in March, meaning a drop of just 10 per cent in the value of its holdings would wipe out investors. Market participants estimate the CDOs the Bear funds held would sell for at least 10 per cent less than the values calculated by lenders.”

“‘Where things transact is still many points below where dealers have been marking them,’ said one manager of CDOs and hedge funds. ‘That is the big ugly secret of this market.’”

From MarketWatch. “Of the top five industries, only the financial sector cut more jobs in the first half compared with the same period last year.”

“‘The financial sector is clearly affected by the significant housing slowdown and subsequent collapse in the subprime lending market,’ said John Challenger, CEO of the employment firm, in statement.”

“Cuts in the financial sector doubled in June to 9,800 compared with May and were up 131% in the first six months of the year to 64,825.”

“The Mortgage Bankers Association said its mortgage applications index rose 0.1 percent to a seasonally adjusted 619.4 in the week ended June 29, nearing its lowest level since mid-February.”

“The refinancing applications gauge dropped 2.6 percent to this year’s low of 1,687.2 on a seasonally adjusted basis.”

“Many economists doubt U.S. housing will emerge from its slump before next year, predicting further price cuts to lure buyers to the huge supply of unsold homes. ‘We’ve got a huge amount of inventory to work through, particularly of existing homes,’ said David Kelly, economic advisor at Putnam Investments in Boston.” ”

“Pending sales of existing homes sank to their lowest level in more than 5-1/2 years in May, the National Association of Realtors said last week. There are almost 5 million new and existing homes on the market, and ‘that’s got to be very depressing for a Realtor,’ said Kelly.”

A report from the Washington Post. “Residential property values are dropping lower than county and city officials had projected, foreshadowing an even tougher budget season next year. There are 20 percent more houses for sale now than at this time last year, said said John P. Grzejka, Manassas’s commissioner of revenue, and the number of foreclosures continues to rise. The foreclosure rate and the flooded market are blamed for the falling property tax base.”

“‘The big question is whether we’ve seen the bottom or if we see a continuing drop in values because of more houses on the market. The pressure is to continue to lower their prices,’ he said.”

“The Prince William Board of County Supervisors budgeted for a 2 percent overall drop in assessed real estate values, but the county is seeing a nearly 4.5 percent drop when comparing prices from May 2006 to those in May 2007, said Allen Scarbrough, the county’s investment portfolio manager.”

“Nearly 700 homes in Prince William County entered the foreclosure process in the first quarter of 2007, according to RealtyTrac. RealtyTrac data show that during the first three months of this year, 68 Manassas properties either were the subject of a default notice, were posted for sale or were repossessed by a bank.”

“That compares with the first quarter of 2006, when there were 12 in Manassas; itself a significant increase from the first quarter of 2005, when there (was) just one in Manassas.”

“‘It just seems like the foreclosures are really hitting the construction workers’ areas and some of the lower-end demographic,’ said Supervisor W.S. Covington III, who said local real estate agents had told him that some county neighborhoods are seeing closer to a 9 percent drop in values.”

“Prince William and Manassas had some of the highest rates of subprime lending in the Washington region, according to a March study by NeighborhoodInfo DC, a project of the Urban Institute and the District’s Local Initiatives Support Corp. Nearly 18.5 percent of the county’s new-home purchases or refinanced mortgages in 2005 were through subprime lenders, according to the study.”

“In Manassas, 23 percent of 2005 mortgages were made by subprime lenders.”

“These types of mortgages are very favorable to people who have ‘informal income,’ such as illegal immigrants and people who are self-employed, said Peter Tatian, a housing expert at NeighborhoodInfo DC. Buyers who thought they were going to ‘flip’ a house for a higher price also were candidates for these mortgages, he said.”

“‘Even if those homes don’t go to foreclosure, people end up having to sell at unfavorable terms for them. Whatever they put into that home, they are likely to lose,’ he said.”

From WSLS in Virginia. “In May of 2006, 575 homes were sold totaling more than $199 million in sales. In may of this year, only 443 homes sold totaling a little more $97 million. That’s a 23% drop in sales.”

“Kit Hale, a local realtor and the 2006 president of the Virginia Association of Realtors, says we are in a slow down with more homes on the market.”

“‘Homes were not staying on the market long the last several years, so now, yes, the inventory is up,’ Hale said. But, he adds that the housing market is essentially correcting itself.”

The Times Community. “The real estate business…seems to be facing the most difficulties right now, after several boom years. National surveys show that residential real estate has been hardest hit, even in this area, which some have called ‘recession-proof.’”

“For Valerie Frank, president of Preservation Mortgage in Warrenton, 2005 was great, and 2006 was steady, but 2007 is very slow.”

“‘I think it’s going to get worse before it gets better,’ she said. ‘This is a first-time homeowners market, an investor’s market, and definitely not a refinance market. Property values just are not there anymore.’”

“‘I’m seeing a lot of foreclosures in Haymarket, and they are beginning to happen here in Fauquier County left and right. People who are in this business are suffering,’ Frank said.”

“Steve Vento, executive VP for Angler Development, has seen the residential side of the business dry up.”

“‘Last year was a challenge, and 2007 is proving to be challenging for us, as well,’ he said. ‘Last year was substantially worse than 2005 for us. Residential lots that we prepare are not moving at all. We’re hoping that this is the bottom.’”

“‘The economy is an anomaly to me,’ he continued. ‘We still have good job growth, mortgage interest rates are still low, but residential is not moving. I think what has happened is the investors who used to buy houses to flip them later for more money have all left the market, and that’s caused the market to slow down.’”

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