The Housing Bubble

Readers reacted to this thread on a brokers forum for a weekend topic. “Similar to you know your a redneck when? You know your subprime when? The borrower calls in and has a f i c o ( all spelled out) of Four. ‘You know your subprime when? When the Borrower doesnt know there loan amount, interest rate or mortgage payments (no joke i just had one)’”

“‘You spend your closing cost money on a motorcycle 2 days before closing. Happened last fall.’”

“‘You are adding your boarder’s kid’s SSI to the ‘household’ income’”

“‘You are cashing out your equity to go on vacation. Again.’”

One posted, “My favorite so far: your FICO score and total assets are the same number.”

Another liked, “You use ‘there’ for ‘of them,’ and ‘intrest’ for ‘interest.’”

“‘The borrowers’ ‘household income’ incorporates more than 3 individual incomes.’”

“‘The interest rate on the refi is higher than the rate on the existing loan.”

One found this, “Your borrower goes to grab a McD’s meal for the signing, and can’t get it with the first credit card they try.’”

“You knew you were upside down on the first house you bought, so you bought a couple more, just to be sure.”

” From the thread: “You know you have a subprime loan if… Your borrower wants to quit claim his 98 year-old mother-in-law to the property so she can be a co-signer.(happened).’”

“‘Your borrower walks in to your office in his Waffle House uniform and wants a stated income loan.’”

“‘Your borrower asks you if he can (personally) borrow the appraisal money. (HAPPENED!)’”

“‘You pull the borrower’s credit and instead of giving you a report it returns the message ‘Please retain applicant - Law enforcement dispatched’ (No that didn’t really happen but it’s darn funny.)”

“‘When you ask your borrower for his last 2 tax returns he gives you 2001 and 2004 (because he ain’t filed the rest yet).(HAPPENED!)’”

“‘When your borrower calls and asks you to bail him from his foreclosure, but when you pull public records, the house was titled to the bank 6 weeks ago (happened).’”

“‘You know you are a subprime borrower when: You boast of all the miles you’ll get on your creditcard by paying your mortgage with plastic.’”

Another posted, “‘You know you’re a subprime borrower when you think assets are something to be viewed on web porn sites.’”

“‘You know you are a subprime borrower when: The loan officer asks you about your liquid assests on the application and he says, I have 2 6-pack’s of Budweiser in my fridge!’”

The Tribune reports from California. “Saddled with a glut of homes, builders in San Luis Obispo County have spent the last year trying to coax buyers back into the market. Some builders have followed up with more drastic price reductions; as much as $100,000 in certain neighborhoods.”

“New-home sales in San Luis Obispo County are arguably the weakest segment in the current housing market. ‘The new-home market has been long on supply, and homes have been sitting for months,’ said Ed Steinbeck, a broker associate in Paso Robles. ‘There are definitely deals out there to be had.’”

“Sales of new homes in San Luis Obispo County were down nearly 60 percent in May year-over-year compared to 20 percent for re-sale, detached homes, according to DataQuick. The median price for new homes fell in May nearly 14 percent to $525,500 from $609,000 in May 2006.”

“Dallas-based Centex Homes, the nation’s fourth-largest home builder, has been among the most aggressive in the county at reducing prices. In February the publicly traded company embarked on a selling blitz.”

“‘We made cuts in every product line in February because we had to make our numbers,’ explained Chris Bowley, Central Coast division manager for Centex Homes, which has projects in Paso Robles, Templeton, Arroyo Grande, Atascadero, Nipomo and San Luis Obispo. ‘We have an obligation to our shareholders.’”

“Prices in most Centex neighborhoods in the county are more than $100,000 less than they were last summer, said Bowley. ‘We want to keep the engine running, even if we have to take less profit on a house—or sell it at a loss,’ said Bowley. ‘We can afford to take short-term losses. The negative, of course, is that we are forced to do that.’”

“Selling property, even at a loss, is a decision that privately held JM Development has also made. The Santa Barbara-based developer, which has properties throughout the Central Coast, has dropped prices by about $80,000 at Petersen Ranch in Templeton, said company President Mike Rider.”

“‘We’re trying to be more realistic about pricing,’ said Rider. ‘We’ve already closed more homes in six months than we did all last year, but we’ve also lost more money than we did last year.’”

The Sacramento Business Journal. “The outlook for homebuilders and homeowners looking to sell keeps getting worse. New-home sales were dismal in the second quarter. The number of new and existing homes on the Sacramento market has eclipsed last summer’s inventory and stands at close to 22,000.”

“Foreclosures in Sacramento County are 10 times what they were last year.”

“Despite builder promises of reduced inventories, one of the more surprising developments in 2007 has been a new-home inventory increase, which includes ready-to-build lots, over last year. At current sales rates, there’s a 20-month supply.”

“‘This is the biggest issue,’ new-home analyst Greg Paquin said. ‘But over the last two years, you’ve got 120 more projects out there. They’re doing smaller phases, but opening up more projects during that time.’”

“Paquin reported the number of new-home projects in the six-county region increased from 253 two years ago to 377 today.”

“‘This is land they bought in 2005 and 2006,’ he said. ‘They can’t sell it, they can’t sit on it, so they’re going to build on it.’”

“Existing homes on the market in Sacramento, Placer, El Dorado and Yolo counties total 17,041 as of the end of June, according to Trendgraphix Inc. That’s above the 15,900 resale homes on the market at the same time last year.”

“‘We knew it would go over last year. That’s too much food on the table, and the buyers are going for the caviar,’ said Lyon CEO Michael Lyon. ‘It goes to show that any sellers who thought there would be a quick recovery need to get that out of their heads. Things are selling when they’re priced below the last comparable sale.’”

“KB Home has had the best performance through May of all Sacramento builders. Territory president Barry Grant said he had no crystal ball to predict future results, but he attributed the company’s success so far to its strategy of concentrating on starter homes and lowering prices rather than offering more incentives.”

“‘Candidly, we’ve been adjusting the price until it’s at a point we think will attract buyers,’ he said.”

The SGV Tribune. “Those proverbial chickens are coming home to roost in the mortgage market, and the picture isn’t a pretty one. The Riverside/San Bernardino metropolitan area ranked fourth in the nation for foreclosures in June 2007, according to a report released Thursday by RealtyTrac.”

“‘It’s getting worse,’ said broker Pat McKenna of Bristol Home Loans in Ontario. ‘A lot of the ARM loans have been resetting, and a lot of people are finding they don’t have enough equity to refinance. They can’t sell, so some of them are just getting desperate and walking away.’”

“‘Some of these people got into loans they couldn’t afford even though they knew it. They wanted the house. That’s the dream. There might not be much that can be done for them,’ she said.”

The Union. “In Alta Sierra this weekend, one developer will auction his home to the highest bidder after failed attempts to sell the house on the traditional real estate market. The 3,400-square-foot custom home on more than 2 acres is appraised for $875,000, said Gary Stokes, who runs an affiliate branch of Fidelity Housing Solutions. But bidding will start Sunday at nearly $560,000.”

“‘In the depreciating market that we’re in, you have to be creative,’ said Stokes.”

“In western Nevada County, 1,070 homes are for sale, compared to 400 in 2004, according to figures analyzed by Skip Lusk, executive president of the Nevada County Board of Realtors. ‘We’ve tripled in inventory, and we have less buyers today,’ said Lynn Griggs, with ERA Cornerstone Realty Group. ‘People are having a hard time even getting homes shown.’”

The Daily Press. “Inland Empire economist John Husing forecasts a a robust housing market in the Inland Empire’s long term but not in the near future. Husing said a market like today’s, when home values are tens of thousands of dollars above what the market will pay, is without historical precedent.”

“The speculative surge that fueled sales has had lingering effects, among them that current homeowners resist selling houses for what they believe they are worth. Additionally, the trend of defaulting on homes continues to increase.”

“In Husing’s view, the Inland Empire market for existing homes would benefit from a 20 percent correction; home values here are nearly twice the national average at a time when there is little difference in incomes locally and nationally.”

“He also recommends a 13.6 percent reduction in new home prices.”

The Union Tribune. “Brookstreet Securities in Irvine imploded late last month because of an overnight drop in the value of its mortgage-heavy investments.”

“‘Disaster,’ ‘horrible’ and ‘horrendous’ were among the words that Brookstreet founder Stanley Brooks used to describe the crash of his firm, which had 730 or so agents nationwide, including about a dozen in San Diego County.”

“At the peak of the market in 2005, only 13 percent of defaulted mortgages in California went into foreclosure. This year, the number is closer to 40 percent and it seems likely to top the highs of 55 percent seen in 1983, at the tail end of a recession.”

“Already, San Diego County has nearly eight months of inventory on the market. The number of homes that have gone into default or foreclosure in the past year has tripled, rising from 842 in June 2006 to 2,564 last month.”

“‘The housing downturn is really knocking the wind out of the San Diego economy, almost totally on its own,’ says Scott Anderson, economist for Wells Fargo Bank.”

“Bruce Norris, who heads the Norris Group, a real estate investment firm in Riverside, says that at the top of the market, there were 18 consecutive months marked by a large percentage of adjustable-rate mortgages and other relatively risky loans. That suggests it will take at least 18 months for the problems associated with those loans to be resolved, through foreclosures and ’short sales.’”

“‘There’s no doubt that there will be a tremendous increase in foreclosures,’ says Norris. ‘I’m not being negative, just very realistic. This is a mathematical certainty at this point.’”

The Herald Tribune reports from Florida. “The first thing you notice as you drive the hundreds of miles of crumbling roads in this once rapidly growing city is the enormous number of ‘For Sale’ signs. Every 9th or 10th house is either listed for sale or will be as soon as foreclosure proceedings are concluded.”

“All told, as many as 2,000 of North Port’s 20,600 homes hang over the market, grossly distorting any semblance of balance between supply and demand, data from the Sarasota County MLS, RealtyTrac.com and Port Charlotte property appraiser Dennis Black shows.”

“‘Drive any block in North Port and you will see four or five ‘For Sale’ signs in every direction,’ said Michael Tenn, a Daytona Beach resident still trying to sell the house his grandmother moved out of last year. ‘Everybody is trying to get rid of property.’”

“Now that the boom is over, North Port is suffering more than any other place in Southwest Florida. Its economy is based on home building and real estate sales, and those industries are now at a virtual standstill.”

“The homes that are on the market, or soon will be, represent a 4.7-year supply given the current pace of sales.”

“In all, builders have constructed 9,700 homes in North Port since 2002. Convinced that wave after wave of retiring baby boomers would continue to spur growth for years to come, builders kept building.”

“Today, all that has come to screeching halt. As of mid-June, there were a total of 885 homes for sale in North Port, according to the Sarasota County MLS.”

“There also were nearly 200 FSBOs and 400 houses that builders erected on speculation and are holding in inventory, according to statistics. In addition, another 195 homes have been foreclosed on by banks, while 305 more waiting to go through that same process, statistics show. It is possible that lenders who took possession of those 195 homes also might have put them on the market for sale.”

“Ray Martin, spent nearly $740,000 buying six homes in North Port three years ago, is in a different predicament. He was able to sell one at a $100,000 profit before the boom ended, but is still sitting on the other five and paying interest on nearly $500,000 in loans.”

“‘We’ve come way down on price,’ Martin said. ‘We’re just about where we were three years ago, and I don’t see any upswing.’”

“In the meantime, he is trying to rent the houses to cover his expenses. But rents have also plunged. ‘I have one house on a deep water canal that I’m renting for $895, and I used to get $1,100. The others I used to rent for $1,000 and I’m now getting only $800.’”

“Roger Clyne, an agent with Exit Realty, did not try to sugarcoat the situation. ‘There’s a tremendous supply of homes on the market and demand is way down,’ Clyne said. ‘Property values are melting like ice cream, and no one knows how far they will drop. The only way to attract buyers is to keep moving the asking price below the rest of the pack.’”

“Traditionally, about 85 percent of the 20,000 homes in the city were homesteaded, which means they were bought by people who intended to live in them. By 2005, that figure had dropped to 67 percent.”

“Black checked the addresses of all the non-homesteaded buyers and found that two-thirds of them live in Florida, suggesting that they were speculators and not snowbirds. With all those empty homes hanging over the market, it is no surprise that prices have dropped.”

“A 1,600-square-foot home built in 2004 that might have commanded $203,000 during the boom is now worth $60,000 less, Black said. An acre of land that went for $50,000 two years ago can now be had for $10,000.”

“North Port was the epicenter of the housing boom and is now at the heart of the downturn, a phenomenon that is hurting everyone who catered to those in the construction trade.”

“‘A lot of the local guys are hurting, they’re not working,’ said Ray Behren, (owner of) Chicago Pizza & Pub. ‘A lot of guys are still working, but they’re just not getting paid.’”

“Behrens does not put up dry wall or cement cinderblocks or show homes to prospective buyers, but like nearly every business in formerly fast-growing North Port, Chicago Pizza & Subs has been hit hard by the real estate downturn.”

“‘North Port’s economy was so front-loaded on building,’ said John Pitzer, who works at the Boca Grande Waste Water Treatment Plant, but lives in North Port. ‘Their livelihoods were based on construction. Now they are trying to fall back on something else. There’s a lot of guys out there working for peanuts right now.’”

“Pitzer, too, got caught up in the real estate bubble. Tired of sweltering summer temperatures and the insects that come with it, he and his wife were considering a move to Wyoming. ‘We were talking about it,’ Pitzer said. ‘At first, my wife wasn’t sure she wanted to do it. Then all of a sudden, the bottom falls out. Now we can’t.’”

“Last year…Everett Newton, a molding technician who has been in the industry for 13 years, brought home about $1,200 per week. Now, he clears about $400. ‘They’ve cut back big time,’ Newton said. ‘Last year wasn’t the greatest. But this year, the real estate economy has just crashed.’”

“Though the work has slowed dramatically, his mortgage payments have not. His neighborhood was once growing, a home to speculators, newly arriving families and scores of construction crews. Now it is half-built homes, vacancies and ‘For Sale’ signs.”

“‘I would say in a four-block radius of my house, there are 10 homes for sale,’ Newton said. ‘They’ve been up for sale for a year. They aren’t selling. A lot of stuff is going up for sale. I think they are trying to sell and get out before things get worse.’”

The Pensacola News Journal. “Escambia County Property Appraiser Chris Jones says the Florida Department of Revenue is trying to force him to raise property assessments.”

“Jones, who has worked in the property appraiser field for 28 years, said the situation is anything but routine. ‘I’ve been the property appraiser for Escambia County for 12 years, and I’ve never had this happen,’ he said.”

“In reviewing county tax rolls, the Department of Revenue compares property appraiser assessments to the actual prices for which properties sell.”

“But Jones is arguing that such a comparison does not present a true picture of the local real-estate market.”

“He contends that the market, especially the residential market, is so sluggish that sellers are having to make numerous financial concessions, not reflected in the sales price, to unload their properties.”

“‘If I sold you a house for $150,000 but gave you $5,000 in concessions, then that house’s real value is $145,000,’ Jones said.”

“Before Hurricane Ivan made landfall in September 2004, there were between 1,200 and 1,500 homes for sale in Escambia and Santa Rosa counties. This year’s tax rolls are based on home sales in 2006, when there were more than 7,000 homes up for sale.”

“New home sales in Escambia County dropped 41 percent in the fourth quarter of 2006 when compared to the previous year, according to the Haas Center for Business Research and Development at the University of West Florida. During the same time frame, Santa Rosa’s new home sales dropped 35 percent.”

“The housing glut, skyrocketing homeowners’ insurance rates and property taxes generally are agreed to be contributors to the drop.”

“Several real estate salespeople also said they agree with Jones that sellers are making frequent concessions. ‘There is just about a concession on every house sold,’ said broker associate Trish Sarfert.”

What do you see in your housing market this weekend? Statistics? Inventory? “According to statistics compiled by the Northwest MLS, the average sale price of a home in King County in June actually fell from May. And there are more homes on the market in King County compared with last year, giving buyers a little more breathing room. According to the NWMLS, there are 12,282 active listings, which compares with 8,011 in June 2006, which is an increase of more than 53 percent.”

Or foreclosures? “Foreclosures continue to rise on Long Island, as the lure of sub-prime mortgage rates puts more homeowners behind the eight ball. There was an increase of nearly 35 percent in scheduled auction sales over the last two months here, according to Pat Ammirati, general manager of Long Island Profiles.”

“The number of bank notices has more than doubled over last year, Ammirati said.” “In North Hempstead, there were eight sales of foreclosure properties totaling about $1 million in all of 2006; this year, there are already eight foreclosure sales totaling $8.7 million.”

Construction trends? “The slow housing market continues to be a drain on Newport Beach homebuilder William Lyon Homes Inc. William Lyon posted an 11% year-over-year decrease in new home orders in the second quarter. Home orders were down sharply in Arizona and Nevada.”

“Turning home orders into actual sales continues to be a challenge for the company. William Lyon closed on 548 homes companywide in second quarter, down 29% from a year ago. In California, home closings decreased 32%. That’s a 5% drop from the first quarter.”

“The company’s cancellation rate remains troublesome. The cancellation rate for the quarter was 32%, up 7% from the first quarter.”

“The traditionally strong spring housing market turned out to be a dud for local builders. New-home sales in Dallas-Fort Worth were down more than 17 percent in the quarter ended June 30.”

“At the end of June, about 13,000 single-family homes were under construction in North Texas, according to Metrostudy. Just under 11,000 vacant new homes in the D-FW area were recorded in June. While sales dropped, the number of homes on the market rose 8 percent, topping 50,000 houses for sale in North Texas.”

Tighter lending? “Fannie Mae and Freddie Mac have tightened their policies for purchasing high-priced, high-risk home loans from lenders amid stress in the housing market. The policies issued Friday by the two government-sponsored companies were in response to a directive from the federal agency that regulates the mortgage finance giants.”

“U.S. state officials plan to issue guidance next week to tighten subprime mortgage lending by brokers and originators not regulated by the federal government, the Conference of State Bank Supervisors said on Friday.”

“So far about 27 states and the District of Colombia plan to adopt the guidance within 48 hours after it is issued on Tuesday. No state has indicated that it will not eventually adopt it, they said.”

“The states issued the same standards as federal regulators when adopting nontraditional mortgage guidance last November. They are expected to do the same with the subprime guidance.”

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