The Housing Bubble

The Sacramento Bee reports from California. “No question about it. These are times that try builders’ souls. Sales of new Sacramento-area houses, condominiums and townhouses fell in April, May and June to their lowest levels in 18 months, according to statistics released today. Average sales prices, too, are back to where they were three years ago.”

“Meanwhile, it’s taking sellers in El Dorado, Placer, Sacramento and Yolo counties longer to unload their existing homes in a market of 14,700 ‘For Sale’ signs. Reports of rising foreclosures and the arrival of home auctions add to the uncertainty.”

“Greg Paquin, Gregory Group president, said builders have cut production. But there are now more builders in more locations. Most bought land during the housing boom, he said, and must build despite the downturn.”

“That has pushed average sales prices 11 percent below the same time last year, he said. Statistics show the average new-home sales price in the six-county area is $444,233, about the same as the second quarter of 2004.”

“Average sales prices peaked at $498,000 in the second quarter of 2006, according to the Gregory Group.”

“Home builders say they are fighting back with price cuts while building smaller, less expensive houses that have fewer standard options. ‘We are more likely to adjust the price downward and use incentives on those things that help customers qualify for a loan,’ said Barry Grant, Sacramento territory president for Los Angeles-based KB Home.”

The Orange County Register. “California homeowners are among the most likely in the nation to lose their home to the bank, according to an industry report released Thursday. In June, the Golden State logged the second highest rate of foreclosure, one filing for every 315 households, in the nation, said RealtyTrac.”

“Notices of default, the first stage of foreclosure, are rising. About 40 percent of such filings result in a bank possessing a home, said Rick Sharga, a spokesman for RealtyTrac.”

“‘If those keep increasing we will eventually get to the point where the real estate market can’t support that,’ Sharga said. ‘Then, it will get nasty.’”

“For the first six months of the year, all foreclosure filings totaled 189,560 in the state, up more than three fold from the first half of 2006. In Orange County foreclosure filings totaled 1,647 in June, or one for every 589 households. That’s…more than doubled the total in June 2006.”

“For the first half of the year, filings totaled 9,012 in the county, more than triple the figure in the same period last year.”

“Walter Hahn, a real estate economist and consultant in Irvine, said foreclosure will keep rising through 2009. He said millions of subprime borrowers and speculators in housing face the end of low introductory ‘teaser’ rates. They won’t be able to afford higher payments, he said.”

“‘It is just unbelievable how many people were conned into taking these mortgages,’ Hahn said.”

The North County Times. “While city officials await developer D.R. Horton’s submission of new plans to rebuild the downtown Paramount townhomes that burned to the ground in January, construction on a nearby Horton residential development has stopped.”

“Work on the Venue, which will be a five-story, 82-unit condominium building next to the Paramount, has ceased since the concrete parking garage on the first floor of the building was completed in the spring.”

The Daily Press. “The housing market in the Victor Valley continued its downward spiral in June as sales of existing single-family homes fell 60.2 percent from the same period a year ago, based on data from Larry Trombley of Century 21 Rose Real Estate.”

“The ongoing decline in sales of existing single-family homes in the Victor Valley dragged down housing prices, which dropped 11.1 percent compared to June 2006, Trombley said.”

“‘From the first half of 2006 to the first half of 2007, prices are down 7.2 percent,’ he said.”

“Inventories swelled from the steep plunge in sales. Of the 4,162 homes on the market in the Victor Valley in June, less than 5 percent closed escrow. Local Realtors attributed the decline in sales and prices of existing homes to the large volume of new homes hitting the market.”

“‘Builders have a lot of new product on the market and they keep lowering their prices to get rid of them,’ Trombley said.”

“For Riverside and San Bernardino counties, the rate of foreclosure filings — including default notices, auction sale notices and bank repossessions, was the fourth highest in the nation in June, according to RealtyTrac.”

“‘There are a lot of homes to choose from and good deals to be made,’ said Ann McDonald, president of the Victor Valley Association of Realtors in Hesperia. ‘Based on the direction the market is going, my feeling is that it will be this way for another year,’ she said.”

The Fresno Bee. “The number of Fresno-area properties headed into foreclosure climbed 24% in June, as the moribund real estate market showed no signs of perking up. About 1,188 foreclosure filings were reported in June in Fresno County.”

“‘We’re not seeing any recovery,’ said Ken Neufeld, a veteran real estate agent at London Properties.”

“Since January, an average of about 350 houses have been sold each month. That compares with 735 transactions in June 2005, when the market was at its peak, Neufeld said.”

“The median price has fallen from $290,000 in 2005 to $281,000, although appraisers say the actual decline is higher. That’s because sellers often give money to the buyers as a condition of sale. Neufeld said the concessions average $5,000 to $6,000, although some are higher.”

“An auction company has been hired to sell 17 houses in the Fresno area next week, offering a highly visible example of the depth of the real estate slump.”

“The firm will attempt to sell 400 houses in Northern California in a series of auctions beginning Tuesday in Fresno and continuing through July 22 in Sacramento. It’s the first home auction here since 2001.”

“The auction indicates how quickly and how deeply the real estate market dipped after one of the greatest periods of appreciation this region has ever seen.”

“And it is only going to get worse, said Shannon Martin, a Fresno real estate agent who specializes in selling bank-owned properties. ‘There will be another wave coming at the end of the year,’ he said. ‘The teaser-rate adjustable-rate loans are coming due.’”

“‘Over the past year I’ve been doing this, we started in the Detroit area and the Northeast and now we’re seeing the wave of foreclosures moving west,’ said Crystal Wright, a spokeswoman for Hudson & Marshall.”

“‘There is one on Alluvial at San Joaquin Country Club that is a beautiful custom, and the one on Ashcroft is a nice and clean entry-level home. And then there are some junkers in there. They are across the board,’ said Martin, who has some of the listings being sold.”

“Wright said some buyers can purchase properties at significantly reduced prices. ‘It is not unusual to buy at 70% to 80% of the [listed] price in a soft market that continues to get weaker by the day and month. Banks are very motivated to quickly dispose of property and to not hold on to nonperforming loans.’”

“But at least one expert says auctions don’t often produce bargains because they use promotion and hype to jack up the price.”

“‘Those crowds create competitive bidding, which creates a feeling of loss of deals, which creates a bidding frenzy, which creates very high selling prices, often at current market value. Now add to those high selling prices the auction companies’ 5% commission that is tagged on and you have a terrible buy. Not good for any investors looking for deals,’ said Alexis McGee, president of Foreclosures.com.”

“Dave Webb, a Hudson & Marshall principal, said his firm will revisit Fresno in November, and possibly beyond, depending upon the wishes of his lender clients. ‘California is a funny state,’ he said. ‘When it goes up, it goes up fast. And when it goes down, it drops on down.’”

Readers suggest a topic around personal finance strategies. “Yesterday an angry troll chastised the arrogant HBB bloggers for wishing financial harm to the system. The point was that a recession or depression would hurt all of us and it would serve us right. First off, I disagree with this. Some people do very well during downturns. The key to success during hard times is the preparation that one has taken in advance.”

“What is the best way to prepare for a recession or even depression? Personally, I would say step number one is to treat debt like the ultimate evil. It would be nice to see what people think we terribly arrogant bloggers can do to ensure that the bad times are good to us.”

One replied, “I feel like in many ways preparing for a Depression is exactly what I’ve been doing recently. I’m not worried about the return on what capital I have as so much it’s return back to me. Given the 20% increase in my stock value over the last year, I think it’s getting close to time to bail on equities. What are other people doing?”

One has this plan, “I’ve got a shotgun, rifle, and a 4WD and a country boy can survive. Really, if the SHTF and it’s time to evacuate, I’ll play ‘row row row your boat, gently down the keys’ (to Cuba in a canoe - talk about reverse migration).”

One homeowner said, “I bailed out of stocks 2 yrs ago, have no debt, own my home and car outright, and have savings that will last me for 10 yrs. What else do I need to prepare for a severe downturn? (My hope is that a severe downturn won’t last too long so that I have enough cash to catch the stock mkt on an upswing.)”

One got into specifics, “I think that most on this blog realize that we are headed toward some financial ‘black hole’ (unchartered territory). Each has their own idea of how to protect themselves such as buying gold, t-bills, bonds, specific stocks, or bank CD’s.”

“Yes, I can buy gold now only to see it go down by liquidations sales of margin calls. I can put my money in CD’s only to find out that the FDIC protection is there but that it will take me 5 years to get my money back on an installment plan. Even payments on t-bills could be put in abeyance like withdrawals on the hedge funds downunder.”

“I hear some on this blog advocate buying gold funds that retain the hard metal. Do you really know what is in their vault? If you own the metal, if it is not in coinage you have to pay an assay fee; if you own the coinage you need to own coins that aren’t counterfeit, remember the Krugerrand.”

A reply, “Krugerrands trade quite freely on the open market and i’ve never seen a counterfeit. Gold in coin or bar form is an incredibly dense metal, not easy to counterfeit.”

To which was posted, “Then you haven’t done your homework. Sometime in the ’80’s or ’90’s they were counterfeiting Krugerrands.”

Another asked, “I’d like a discussion of where we should put the funds from an IRA or a 401K.”

One sees this, “Regardless of fiat currency or hard money, I think the things that will get one by in a depression scenario that is often painted around here are mobility and common sense. If you have some kind of skill you can trade work with people, and if you are willing to walk away and not look back you have vastly opened doors.”

“I know that I’m preparing myself to walk away from everything with just a laptop in my bag and the clothes on my back, not that I EVER want to have to, but it’s best to be prepared.”

Another sees this trend, “Farmland & a way to protect it. We might see more co-ops or communes of one type or another, where multiple families farm a piece of land & defend it together.”

“Other than that, flexibility & having skills (to trade) would be a good idea, absolutely.”

From Bloomberg. “Contagion from the allegedly self-contained implosion in the U.S. subprime mortgage market is drifting through the securities industry like mustard gas. It helped push the dollar to a record low yesterday, triggered the biggest deterioration in European corporate-bond risk in at least three years, and drove an index that tracks leveraged-buyout loans to a nine-month low.”

“The bigger unknown is whether the ripples will spread from financial markets into the broader economy, as stricter lending standards reduce the flow of cheap money that has been keeping global growth afloat.”

“‘The incremental risk aversion now evident in the financial markets seems to us to be a sign that the financial liquidity spigot is starting to tighten,’ said Richard Bernstein, chief investment strategist at Merrill Lynch & Co. in New York. ‘The childhood alliteration to remember how to turn a spigot is ‘righty-tighty, lefty-loosey.’ It’s now righty-tighty time for the financial markets.’”

The News Journal reports from Florida. “The wave of home foreclosures washing across the nation is making itself painfully apparent in the Volusia-Flagler area, with huge increases in the number of cases filed this year in the circuit courts of both counties. ‘Half the people coming to see me are just walking away from their houses,’ said the lawyer, Walter J. Snell of Daytona Beach.”

“Stretched homeowners did file Chapter 13 bankruptcy to get a breather on their debts, said Snell. Now, their finances are too far gone to try.”

“In the first six months of this year, 1,669 foreclosure suits were filed in Volusia County, more than twice the 774 filed in the first half of 2005, about the time the real-estate boom crested. The total cases filed in the first half of last year was 893.”

“Flagler County appears to be even harder-hit. There were 569 foreclosures filed there as of Friday compared with 450 in all of last year and 216 the year before.”

“‘We see more short sales and rushes to sell in Palm Coast…because it was built up faster,’ said John J. Adams of the area’s biggest real-estate agency.”

“Snell, the bankruptcy lawyer, said: ‘A lot of it, I’m seeing in Palm Coast. People are telling me, ‘I can’t sell it for what I paid.’”

The St Petersburg Times. “As investors struggle in a cooling real estate market, Riverview has become one of the nation’s top areas for foreclosure filings.”

“Lenders are dealing with increasing numbers of people who can’t pay their mortgages. The problem: a combination of 100 percent mortgages and falling home values.”

“‘It’s unfortunate that people bought their houses at inflated prices,’ said Valerie Siger, a mortgage broker in Riverview. ‘Right now, they’re in trouble.’”

“Already this year, lenders have filed 3,573 foreclosure actions in Hillsborough County, according to the clerk of the Circuit Court. That’s more than twice the number of foreclosure suits that had been filed during the same period in 2006.”

“For some, refinancing is an option, she said. Others are being forced to sell. ‘It doesn’t surprise me,’ said Doug Skeggs, a mortgage broker in Riverview. ‘People bought their homes without putting anything down.’”

“Now, some homeowners are stuck with rapidly increasing adjustable-rate mortgages that they can’t afford, he said.”

“‘It’s the same thing that’s happening all over,’ said Horace Morgan, who owns a realty and mortgage business in Brandon and offers credit counseling. ‘In the Riverview area, there are lots of new developments. There were lots of builders there. They were giving new incentives to Realtors and to buyers, including discounts for using their lenders.’”

“The major problems, Morgan said, stem from the ‘creative loans’ buyers secured during the boom, which required less documentation and fewer qualifications. ‘They got their loans in the first place through creativity,’ he said. ‘Now they’re back to reality.’”

The Herald Tribune. “The number of homes being foreclosed on in Southwest Florida keeps growing. The three-county region logged 848 foreclosure actions in June, reports RealtyTrac, more than three times as many as the 202 in June 2006.”

“Charlotte County had 153 foreclosure actions in June, up from 29 a year ago. Manatee had 256 in June, up from 120 a year ago, while Sarasota had 439, up from 53 in June 2006, RealtyTrac said.”

“In Florida, there were 21,035 foreclosure actions in June, up 144 percent from last year.”

The Palm Beach Post. “Because of the severe housing market decline, St. Lucie County is in recession, a leading economist told Florida home building industry leaders Wednesday. ‘Housing-related jobs are a major source of employment in Port St. Lucie,’ said Mark Zandi, senior economist for Moody’s economy.com.”

“Zandi told the group that, as home sales went into a nosedive in Port St. Lucie, one of the nation’s hottest home-building markets during the 2001-05 boom, so did housing-related employment. ‘I’m talking about Realtors, finance people, sales people,’ he said, ‘not just construction workers.’”

“‘This is not a happy talk,’ he said. ‘Housing starts peaked in 2005. In Florida, the downdraft has been more severe. Home sales in Florida will be lucky to get 10,000 this year.’”

“Florida has two big problems, Zandi said: too much inventory and low affordability. ‘It’s impossible to argue that the bottom is at hand,’ he said. ‘It’s at least a year away.’”

From TC Palm. “It’s a buyer’s market these days when it comes to boats. First-quarter numbers indicate boat sales could be down as much as 38 percent when projected out over the year in St. Lucie County alone.”

“‘Business has been terrible,’ said George Field, president of the Marine Industries Association of the Treasure Coast.”

“The result has created a stockpile for area boat dealers, and that has had an effect on manufacturers, too, according to Field. ‘Dealers have backed off on new orders substantially,’ Field said. ‘It’s created a cascading effect on the entire industry.’”

“Field said problems in the real estate market are having a ripple effect on boat sales. Bob Adkins, a Sea Swirl factory representative for Genmar Corp., agrees.”

“‘Those guys who lay block, do drywall, plumbing and electric work are the same guys who buy a lot of boats all across the Treasure Coast and don’t mind spending $300 for gas to go fishing on the weekend,’ said Adkins. ‘Those guys now aren’t working because of the housing slowdown. That is the problem in a nutshell.’”

“Brandon Brescia, a Boynton Beach firefighter, said the buzz about the River Place development spread around the firehouse in 2005. More than half a dozen other firefighters invested in up-and-coming St. Lucie County. Brescia joined them, putting nearly $50,000 down for two townhomes in the River Place subdivision called Hawk’s Ridge.”

“During those real estate boom times, more than 200 other deposits poured into Sullivan Homes from both in and out of state, either 5 percent or 10 percent down on homes that sold for an average of $216,000 each.”

“Today, in a bearish housing market with experts declaring St. Lucie County in a real estate recession, Kevin Sullivan has not constructed a single townhouse in three of the five River Place subdivisions where he planned to build.”

“As litigation continues, Sullivan said he cannot, at this time, refund the deposit money, which has been ‘exhausted’ in building capital and efforts to save a deal from turning sour.”

“‘It’s extremely regrettable that all these things happened simultaneously with the real estate industry taking the biggest downturn it’s taken in 15 to 20 years,’ Sullivan said.”

“He said ‘50 or 60 percent’ of his buyers still want to go forward. ‘It’s a great value. It’s a great neighborhood,’ he said. ‘It’s still a really good investment.’”

From ABC News. “Not long ago the only thing going up faster than buildings in Miami was the prices, and Lucy Blanco wanted in.”

“‘It was going up so rapidly that I was fearful that if it went any higher I could not afford it anymore,’ she said. ‘So I needed to get it while it was still at a price I could afford…before it went out of my range.’”

“‘If we don’t hurry up and buy something now,’ she said, ‘we’re never going to be able to buy anything.’”

“In February 2006, Blanco bought a preconstruction one-bedroom unit in a condo community called Quantum on the Bay. She paid $465,000. Today, however, Blanco estimates the property is worth $100,000 less than what she agreed to pay.”

“The condo has lost more than the value of Blanco’s $93,000 deposit. And so, just as fast as Blanco wanted in, she now wants out.”

“Michael Schlesinger is at the forefront of a new subspecialty in Miami real estate law, that might be called condo extractors. He said he gets 20 or more calls a week from people like Blanco. ‘They’re all asking the same questions,’ he said. ‘Can I get out? Do I have a chance to get my deposit back? If not, what are my options?’”

“Schlesinger said he looks for a flaw in the condo contract, a blocked view, a change of design, delayed construction, anything about the new building that allows him to argue the developer isn’t delivering on what was promised.”

“He only takes on a few new cases a week, the ones he thinks he can win. ‘Most of the time, unfortunately, I have [to] say that the contracts are too tight,’ he said. ‘There’s not much I can do, and the options are either you close or you leave your deposit on the table.’”

“Schlesinger said greed played a huge role in Miami’s current situation.’I think two years ago people were making hundreds of thousands of dollars doing exactly what they’re asking me to get them out of today,’ he said.”

“Blanco is convinced she’s not getting the square footage she paid for. She’s enlisted an architect to measure her floor plans. ‘It’s wrong,’ she said. ‘It’s not what I purchased. I paid a lot of money for that. I want every square foot of it, because I paid for it. I’m entitled to it.’”

“‘I can’t think of any other area of investing,’ said Steven Landy, a lawyer who represents other developers, ‘where if it doesn’t go your way… you say, oops, it didn’t work out, now I want my money back.’”

“Blanco said she has learned ‘lots of lessons. Never put so much money in a preconstruction. I would never do that again,’ she said.”

“Retired businessman Tom Leon bought two condo units two years ago for $500,000 each, hoping to flip them for quick profit. Today, as the buildings near completion, Leon is certain he couldn’t he even get $400,000 for each of the units, so he’s decided to cut his losses and walk away from $200,000 in deposits rather than pay the $800,000 balance he now thinks is a bad investment.”

“‘Nobody wants to lose a hundred grand,’ he said. ‘Once in a while you’ve got to be smart enough…to leave when the time is right and I think now is the time.’”

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