The Housing Bubble

The Orange County Register reports from California. “In the first three months of the year, lenders handled $89 billion in subprime loans, down 41 percent from the end of last year and 47 percent from the same period in 2006, according to National Mortgage News. That follows an 18 percent drop for all of last year.”

“In early 2006, just as the industry began a major downward slide, Orange County boasted four of the Top 10 subprime lenders in the nation. New Century alone did about $60 billion of loans in 2006.”

“New Century today is bankrupt and has sold its major assets. It’s the most dramatic example of a decimated industry. About a dozen subprime lenders in Orange County have shut down, filed for bankruptcy or otherwise scaled back.”

“Tim Rush, a VP with Prudential California Realty…in Cerritos, said account executives working on commission at subprime lenders earned $10,000 to $15,000 a month during subprime’s heyday, and some top producers $20,000 to $30,000.”

“Unfortunately, part of the fat profits came from consumers being steered into higher cost loans, Rush said. ‘You are dealing with people who in most cases don’t have many options,’ Rush said. ‘There have been some heinous abuses.’”

The Sun Post. “Dolores Morales brings up five grandchildren and an adopted daughter on a combination of welfare payments, foster care payments, child support payments and food stamps, worth a total of about $2,500 a month.”

“She lives in a four-bedroom house in Lathrop that she bought in 1975 with her husband. He died in 1992, leaving her the house and a $53,000 mortgage to pay off.”

“Morales had piled up a lot of old bills since the death of her husband, and her credit rating suffered, but in 2005, Town & Country Credit Corp. offered her a high-interest ’sub-prime’ loan Morales thought would help her buy new furniture, a dishwasher and a refrigerator. The total amount of the loan was $195,000.”

“After a year of struggling to cover the $1,390 payments on her loan, Morales sought another loan, hoping it would help lower her monthly payments. The result was a $278,000 loan from California Mortgage Solutions. It required Morales to pay $2,347 a month — a payment that would rise after two years.”

“But Morales didn’t make it through even a single year, and now she is almost certain to lose her home to foreclosure before the end of 2007. She missed her first payment in April and hasn’t made another since.”

“Asked how Morales could get a loan with payments that totaled her monthly income, the office manager at California Mortgage Solutions, Reyna Quilenderino, said that her company had offered a stated-income loan, though she couldn’t remember the details.”

“‘I think we went stated income,’ Quilenderino said. ‘I think she said she made $5,800 (a month), I don’t know. We went off what she stated to us.’”

“She said $37,000 from the loan was set aside for Morales to make her mortgage payments for the following year, but Morales failed to follow the plan and instead spent some of the money to buy a $6,000 van, which Morales said was true.”

“‘It wasn’t a bad loan or a bad loan officer,’ Quilenderino said. ‘She went and spent the money.’”

The Daily News. “The Santa Clarita and Antelope valleys are in strong economic shape, but there are potential bumps in the road from the sluggish house marketing and potential strikes in the entertainment industry, according to economists.”

“The key questions are how many homeowners are in trouble because of difficulties with their subprime loans and how willing will the financial institutions be in working with those distressed homeowners, said Jack Kyser, chief economist for LAEDC.”

“‘Any place where you’ve had a lot of new construction open up is vulnerable,’ Kyser said. ‘The cloud over the Antelope Valley is housing construction.’”

“Mel Layne, who heads up the Greater Antelope Valley Economic Alliance, noted that the forecast shows the housing market starting to recover in 2009. ‘I hope he’s right,’ Layne said. ‘The last time it lasted about 10 years. We’re still in pretty good shape, but we’re heading in the wrong direction,’ Layne said of foreclosures.”

From NBC 11. “A foreclosure crisis in Contra Costa County has caused one congressman to issue a warning to lenders who might take advantage of prospective homeowners, NBC11’s Damian Trujillo reported Friday.”

“Loan defaults went up by more than 200 percent in the first three months of 2007. Almost 1,500 foreclosure notices went out in Contra Costa County in June, according to Neighborhood Housing Services.”

“‘The question of housing foreclosures is plaguing every community,’ said Congressman George Miller. He represents portions of Contra Costa County including Richmond, Concord, Martinez, Pittsburg, Vallejo, Benicia and Vacaville.”

The Valley Chronicle. “San Jacinto has Riverside County’s third-largest percentage increase in assessed property values for 2007-08, according to a news release from county tax assessor Larry Ward.”

“Ward said the appraisal market in Riverside County was strong despite the downturn in the real estate market. However, only sales that recorded before Dec. 31 are reflected in the 2007-08 assessment roll.”

“‘We are in a transitional time between an up-market and a declining market. Our office is proactively reviewing residential home values for any decline in market value,’ Ward said.”

“He said values were reduced on more than 31,000 properties. ‘Of those properties, 6,350 were new for 2007 and a result of a request for review by an owner or our own analysis of the market. The average reduction on these residential properties was $39,953,’ he said.”

The Bakersfield Californian. “The company proposing a controversial housing development in the bluffs of northeast Bakersfield has defaulted on a $3.3 million loan backed by the property, according to county records.”

“Such defaults, if not righted, could send the property to the auction block.”

“Michelle Beck, the co-chair of the Bakersfield Bluffs and Open Space Committee acknowledged the real estate market is slow statewide. ‘I guess when investors make bad decisions, these things can happen,’ she said. ‘Considering all the other defaults we’ve seen around town and some of these other things, it’s not surprising.’”

“They write rent checks each month to Crisp & Cole Real Estate. Some thought the payments were bringing them closer to homeownership through a lease-to-buy program.”

“Instead, the homes are in default, at least a dozen of them, along with more than 50 other Crisp-related properties in Bakersfield.”

“Since the beginning of the year, however, current and former employees, family members, business associates and customers have defaulted on at least 67 homes, mostly in southwest Bakersfield, Californian research of public and industry records has found.”

“Chris Horton and his young family bought their Blue Meadow Court house new two years ago from HomeCrete Homes. Some nearby houses were never occupied. Others had tenants for a couple of months, then became vacant again.”

“‘We started seeing Crisp & Cole signs going up and we thought, ‘Oh, God, here we go,’ Horton said.”

“The Hortons paid $355,500 for their home in the summer of 2005. It recently was appraised for about $325,000, Horton said. ‘The property values are dropping,’ Horton said. ‘My wife and I have our heart and soul in this house.’”

The LA Times. “Eddie Cuevas and Michelle Siqueiros Cuevas have come a long way from their humble upbringings. Now, they want another piece of the American dream: a house. ‘My mother asks me when are we going to buy a house every month,’ says Michelle.”

“The Cuevases so far have managed their finances handily. The downside: They have just $13,000 in other savings. ‘They’re almost ready to buy a house. But they’re not quite there,’ says Jennifer Hartman, a fee-only financial planner in Los Angeles.”

“In a year or two, however, Hartman believes the couple could save enough to put down 5% to 10% on a home. The Cuevases had considered diving in and buying a home with a faddish zero-money-down loan. That made Hartman wince.”

“Patrick Veling, president of a real estate research firm in Brea, says the market is woozy after soaring home values earlier this decade.”

“Although some communities are seeing values continue to rise, the residential real estate market overall is in a slump, and some experts believe it has not yet hit bottom. In June, home prices were lower in two-thirds of Southern California’s ZIP Codes compared with the same month a year earlier, according to DataQuick.”

“For the Cuevases, this means that there is no rush to buy, Hartman says.”

“And if they don’t find a home they adore, they’ll wait. Reflecting on his finances, Eddie remembers the lessons he learned growing up in a family of immigrants. ‘You have to work hard for everything,’ he says. ‘You have to earn even the little things.’”

Readers suggested a topic surrounding hedge funds and the housing bubble. “In light of Bear Stearns’ and other subprime investing hedge fund failures, did we fail to recognize the benevolent Robin Hood like qualties of the subprime lending industry?”

“From one vantage point, it looks like the financial industry levered money from the super wealthy and transferred it to those who would not otherwise be able to acquire the American Dream. On the other hand and in light of rising foreclosures and falling home prices all across the country, it looks like both sides got hosed.”

A reply, “Yes, at the end of the day everybody except for those (realtors, brokers etc.) who made more money from the larger number of transaction loses in this game.”

One asked, “What should be done about hedge funds? Or private equity? These are unregulated entities that have WAY too much influence on markets, even globally, affecting entire populations, even prudent folks.”

A reply, “This one can unfortunately be laid of the feet of Bernanke and the Fed. With such loose money policy, there is WAY too much liquidity sloshing around trying to find new ways to get itself in trouble.”

One pointed overseas. “European and especially German financial authorities have been trying to get some regulation of hedge and private equity. The Fed and Treasury have resisted fiercely since those are key parts of the credit machine they used to pump up the economy since 2002. Because of the global nature of the business, nothing effective can be imposed without (at least) the Euro area, US, UK and Japan agreeing.”

From MarketWatch. “Subprime mortgage concerns grew earlier this week after Bear Stearns told clients that two of its hedge funds were worth almost nothing, having lost more than $1 billion partly from leveraged bets in the market for low-end home loans. Other hedge funds, including Basis Capital, United Capital’s Horizon funds and UBS’s Dillon Read Capital, have warned of similar trouble or shut down.”

“Investment banks are exposed to subprime mortgage risks in several ways, according to analyst Bart Narter. After such loans are offered to less creditworthy home buyers, they’re packaged up into mortgage-backed securities and sold into the asset-backed securities market.”

“Investment banks do the bundling and get paid for the service. They also usually keep a small portion of the loans on their own books, Narter explained.”

“The value of some of these subprime mortgage assets has dropped sharply in recent weeks as rating agencies downgraded some securities and some market participants were forced to sell positions to meet margin calls.”

“These assets are tough to value, partly because they don’t trade much. If there’s no clear market price or few trades, banks have to work out the value of the assets based on their own models, Narter said. ‘The concern is that they’ve been very conservative with their estimates and when they actually come to sell these assets, the value will be much lower,’ Narter explained.”

“Even if they don’t have to sell, events such as the collapse of Bear’s hedge funds, will put pressure on other banks to re-value their assets too, Narter and others said this week. ‘The news will likely not improve the perception that brokers are overvaluing mortgage assets,’ said Douglas Sipkin, senior analyst at Wachovia.”

“Third-quarter results, not the second-quarter earnings currently being reported, will be the real test, Sipkin added, noting that Bear’s warning and downgrades of subprime mortgage-backed securities by Standard & Poor’s and Moody’s didn’t happen until July.”

“Banks also lend money to hedge funds that trade mortgage-backed securities. If these hedge funds get in trouble, they can default on those loans.”

“One of Basis Capital’s hedge funds missed margin calls earlier this week. Its lenders declared the fund in default, tried to seize its assets and could end up selling the collateral at ‘distressed’ prices, the firm warned.”

“Barclays Plc, once an investor in a now worthless Bear Stearns hedge fund that bet on subprime securities, is now considering its options for recovering $400 million it invested in the fund, the Wall Street Journal reported on Saturday.”

“Barclays is now considering its options for recovering $400 million that it invested in the fund separately from the loan, the Journal reported, citing people familiar with the matter. The possibilities are a negotiated settlement or litigation.”

“The High-Grade Structured Credit Strategies Enhanced Leveraged Fund, in which Barclays invested, is worth nothing, while there is ‘very little value’ left for investors in the larger, less leveraged High-Grade Structured Credit Strategies Fund, based on estimates at the end of June.”

The Boston Globe. “That so many homeowners are having such trouble meeting their mortgage payments could very well mean your own home’s value has dropped, that you may not be able to get a home-equity loan, or that your retirement savings will grow more slowly than you planned.”

“Conceivably, it could even mean that the global financial system, and by extension the economy and even your job, is threatened.”

“The current mortgage mess has many causes, but none is more important than the abuse of an arcane process called securitization. In recent decades, creative bankers developed financial securities whose value was derived from homeowners’ mortgage payments.”

“This parsing out of risk allowed more investors to provide more credit to more households. And the results, at least at first, couldn’t have been more positive. Many low- and middle-income households gained the ability to purchase homes, and US homeownership soared to record levels. So did house prices in many communities.”

“But the picture changed after the Federal Reserve began raising interest rates in 2004. Higher mortgage rates plus soaring house prices made housing less affordable, potentially shrinking the market for new mortgages. Rather than allow their lucrative business to shrink, lenders and bankers got creative again, devising new loans with looser terms and lower credit standards.”

“By late last year this had produced a kind of credit frenzy.”

“Some 2.5 million homeowners, 5 percent of all mortgage holders, are expected to default on their mortgage loans this year and next. This is a record percentage that will mean a whopping $400 billion worth of defaults and $100 billion in losses to investors in mortgage securities.”

“Home values will sink. Loans will be tougher to get, meaning fewer families will qualify for mortgages. Foreclosure sales will put more properties on the market at steep discounts. Less housing demand and more supply add up to lower prices.”

“What is to be done? Policy makers should not bail anyone out, not borrowers, lenders, nor investment bankers. Easing the financial pain could encourage even more aggressive risk-taking in the future.”

The News Press reports from Florida. “Real estate inventory in Southwest Florida remains high. So does the grass at some residential listings. Upkeep of unoccupied new and old construction is fading. Once pristine properties are now unkempt, deprived of necessary attention because of absentee or inattentive owners. ‘It’s becoming an eyesore to the already complicated market,’ said John McWilliams, broker in Fort Myers.”

“‘It’s the kiss of death because there are so many homes for sale,’ said Judy Ramage, broker associate in Cape Coral. Slow sales and home foreclosures have resulted in residences that sit vacant for months, maybe a year.”

“Though Realtors said unsightly properties are common in outlying parts, such as Lehigh Acres, many areas have been affected. On a recent weekday morning, three of five homes for sale along Kismet Parkway in Cape Coral…had overgrown lawns. All of the properties had signs on the front lawn to display brokerage or builder names, and four homes were new construction.”

“According to the National Association of Homebuilders, as many as 1.4 million new housing units are sitting vacant, an all-time high.”

“Some builders and brokers, whose contact information is given on signage, are not tending the crop. Weeds taller than the roadside mailbox sprouted on the overgrown lawn at a new home on Northeast 24th Avenue in Cape Coral. Telephone calls to the real estate company’s number on the sign out front resulted in a message stating the number was no longer in service.”

“Homeowners in dire financial straits skimp on upkeep of the dwelling’s interior and amenities, notably the swimming pool. ‘If they’re getting foreclosed on, they tend to let the property go down the tube,’ McWilliams said. ‘If they’re in the final stages, they cut off the AC. There’s a risk issue.’”

“Real estate experts said these listings, especially older homes, show poorly and will not move as quickly as those that are maintained. ‘It hurts the homeowner,’ McWilliams said. ‘It gives the buyer the impression that they’re in trouble. The buyer wants to buy at or below the market value.’”

The St Petersburg Times. “Almost everyone’s heard about the pain the crumbling housing market has inflicted on building trades, real estate agents and mortgage lenders. But the tremors have cascaded from the inner circle to more distant, but related, industries.”

“Think furniture stores, appliance dealers, pickup sellers, even the CSX trains that lug lumber to Tampa to build homes.”

“‘It’s weighing down the economy and it’s shaved growth off. There’s no doubt about that,’ said Sean Snaith, a University of Central Florida economist.”

“Jeff Bloom’s family has run Ethan Allen furniture stores in and around Tampa since 1967. Since late last year, customers just aren’t coming through the doors at his design centers in Tampa, Citrus Park and Brandon. ‘We have to wait and see when housing’s coming back before we can justify building,’ said. ‘This is as rough as we’ve seen it in many, many years.’”

“Home Depot named Florida as a sore spot. Sears cited a dip in demand for appliances. Wal-Mart delayed construction of a supercenter in Dade City, citing lack of ‘maturation’ in a housing market turned south.”

“When St. Petersburg builder Construction Compliance Inc. filed for bankruptcy this year, one of the first things seized was its pickups. Tom Castriota, owner of Castriota Chevrolet in Hudson, has noted the same phenomenon in Pasco County: a glut of pickups for sale on U.S. 19 from idled plumbers and other tradesmen.”

“Even the car company with the hottest hand, Toyota, isn’t moving as many Tundra pickups as it would like. ‘What I’ve heard industry-wise is that Florida and California are taking the hit,’ Castriota said.”

The Herald Tribune. “The downturn in residential real estate and home building has caused a sharp rise in Southwest Florida unemployment.”

“‘Clearly there has been a deterioration in the labor market since last year,’ said David Denslow, research economist for the University of Florida’s Bureau of Economic and Business Research. ‘It is due to the housing downturn.’”

“Paul Kasriel, chief economist for Northern Trust in Chicago, believes Florida’s all-important tourism and boatmaking industries will also be hit because people across the country can no longer tap into rising equity in their homes.”

“Now that the housing sector is in recession, there is no question it will spill over to other sectors. Construction workers won’t make as many trips to Wal-Mart, and Wal-Mart won’t order as many goods. Eventually it works its way through the entire economy,’ he said.”

“‘We’re seeing a general slowing in financial services and retailing,’ said Mark Vitner, an economist with Wachovia Bank. ‘Fewer people are moving to Florida.’”

The Palm Beach Post. “Jobless rates spiked in June in Palm Beach County and the Treasure Coast, hitting their highest point in two years.”

“One culprit: Layoffs in the housing sector. In one example of that trend, DiVosta Building Corp. has laid off 430 workers in Palm Beach Gardens since December.”

“The state’s construction industry shed 18,000 jobs over the past year, state officials said, marking the first time since 1992 that the state has experienced four consecutive months of year-over-year declines in construction jobs.”

The Naples News. “Jim Lowndes likens it to driving off a cliff. After establishing Liberty Aluminum in 1993 and growing it to 105 employees by the end of 2006, he had to lay off 60 workers in early 2007. He’s been able to hire back 10 of them, but business is still down 60 percent from where it was a year ago.”

“‘We don’t see any improvement in the residential screen enclosure market for at least another year,’ Lowndes said. ‘Business is down 90 percent for some people.’”

“It’s something Sand Springs Development President Dennis Cantwell sees every day.”

“‘Everybody I talk to is laying off somebody in (residential) construction and I think it’s resulting in a trickle-down effect,’ said Cantwell. ‘It’s not only construction; people no longer have the grass cut or pool cleaned, and they don’t need day care because they’re staying home with the kids now. It’s going to blow through the whole system. Some people aren’t even going out for dinner anymore.’”

“Lee County’s unemployment rate grew to 4.2 percent in June as the construction jobs dropped and school district contract workers officially went off the rolls for summer. That rate is sharply up from the 3.1 percent jobless rate in June 2006.”

“Construction companies, particularly those who specialize in homes, continue to trim jobs, said Barbara Hartman, spokeswoman for the Career and Service Center in Fort Myers. The sector that includes construction lost about 800 jobs from a year ago, when home construction was more active.”

“David Atyeo of Fort Myers, lost his job at a local construction supply company this month because business has been slow. ‘I’ve tried to get work in construction, but those jobs just aren’t there right now,’ Atyeo said. ‘It’s been a couple of years since it has been this hard to get work in construction.’”

“‘We’ve begun to see construction employment begin to finally drop … at fairly substantial rates,’ said Frank Williams, a legislative economic analyst.”

“Brace yourselves. Sometime in the next two months, more road projects may be axed from the county’s road building budget.”

“Earlier this year, Pasco cut projects in 22 locations countywide, worth $950-million, from its five-year roadbuilding budget for 2008 through 2012.”

“The first round of cuts was based on planners’ calculations that assumed 5,000 building permits for 2007. Even when they made that forecast back in April, county officials knew they were being a tad optimistic.”

“‘If they don’t go right, they’re going to have to come back and readjust the budget,’ county Commissioner Ted Schrader said at the time.”

“County planners now believe they’re on track for just over half of that projection: 2,600.”

“‘We have enough money to get us through ‘08 and probably ‘09,’ said Michele Baker, Pasco’s chief assistant county administrator.. But the budget is for five years, so common sense tells planners to prepare themselves.”

“Only 1,118 single-family permits were issued between January and June this year, compared to 3,488 in the same period last year, according to Pasco’s central permitting division and the U.S. Census Bureau. June saw 189 permits issued, compared to 473 last year.”

“While supply appears to be stabilizing, real estate broker Natalie Feldman said price stabilization hasn’t yet but should catch up.”

“That’s not quite the same note of enthusiasm that was in a July 17 memo Baker wrote when she prepared for negotiations on the Wiregrass Ranch development. ‘The revenue estimates for (the next four years) will likely have to be revised downward and additional projects will have to be delayed,’ she said.”

“In Round One, the axed projects included some that were near and dear to planners’ hearts. As far as Round Two goes, there’s no hint yet of what might get cut. ‘I don’t know,’ Baker said. ‘That’s the hard part.’”

The News Journal. “Integra Land Co. has set out to saturate the Volusia-Flagler market with as many Class A rental units as possible. Lake Mary-based Integra wants to put 288 units in Daytona Beach, 277 units in Orange City and 482 units in Palm Coast, at prices ranging from $800 to $1,300 a month.”

“But the big questions are whether or not the market can withstand all the new apartments, and just who are these guys?”

“David McDaniel said, ‘By the time we start leasing in 2008, I believe the moderation in leasing currently in the market place will be abated.’”

The Star Banner. “Jumping into the housing construction business these days is like diving into a swimming pool, with no water. The market just isn’t there. But North Carolina-based Beckwith Homes is donning swimming trunks and heading toward the diving board, anyway.”

“Beckwith is betting that small, nimble builders can still do well in the Marion County housing market, despite the wailing and gnashing of teeth by large developers that are sitting atop big inventories they can’t unload.”

“Big builders that traded on Wall Street had the added pressure of making investors happy, said Beckwith’s division president, Cheri Bass, who has worked in the housing business for more than 10 years.”

“‘I’m not trying to get the whole piece of the pie,’ Bass said. ‘Just a little sliver.’”

“The companies built as much as they could when the market demanded more homes, regardless whether they could sell them fast enough, said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida. ‘They had quarterly numbers they had to hit,’ he said.”

“‘It’s in the doldrums now,’ Snaith said of the housing market. ‘But the reality is the housing market wasn’t a bubble. There was a real demand and a demand is still there.’”

What do you see in your housing market this weekend? Regulation changes? “On Tuesday, a group of banking regulators agreed to extend new guidelines for federal mortgage brokers to ones charted on the state level, where many experts say the riskiest loans come from. In Passaic County, foreclosures are projected to rise by 22 percent this year, an analysis of county Sheriff’s Department statistics shows.”

“Melissa Totaro, a West Orange lawyer who previously worked for the Passaic County Legal Aid Society said that any measure helps. ‘It’s too late for people who are in foreclosure,’ she said. ‘It’s not too late to stop this craziness and help people in the future.’”

Neighborhood foreclosures? “Neighbors have been eyeing the shoulder-high weeds at a vacant Kennewick house for months. Laura Roberson lives right next door. She remembers how nice the house was when people used to live there. ‘This wasn’t our neighborhood less than two years ago. It’s just gone down hill and gone down hill,’ said Roberson.”

“Kennewick code enforcement officer Patsy Osborn wishes there was an easy fix. She says forclosures are her biggest hassle.”

Market statistics? “The number of homes sold in the Lehigh Valley continued to fall last month, as average home prices dipped slightly and the time homes sat on the market lengthened.”

“Home sales fell last year for the first time in at least 10 years. Simultaneously, the number of new listings set a record.”

“So far this year, those trends have held: as home sales have fallen, new listings have soared. The healthy stock of homes for sale has been a boon for prospective buyers who have more choices. But for sellers, the competition has proven a nuisance.”

Industry issues? “Walk into the mustard-and-Similac-stained office of any Realtor in Southern California and ask the following question: ‘The newspapers keep telling me the real estate market is dropping like a rotten pear. Foreclosures are up, lending is tight, and I’ve got a cousin who serves complimentary Rob Roys at his Sunday open houses and still can’t draw a crowd. So why should I even be wasting my time considering these astronomical asking prices?’”

“No matter how you phrase the question, you’ll get the same answer: ‘Prices are stable, but houses are just staying on the market a little longer, so now’s a good time to get in.’”

“So it’s spectacularly good or bad timing that Southern California Multiple Listing Service has decided to limit disclosure of days-on-the-market and cumulative-days-on-the-market data.”

“First, this is clearly a change that serves nervous home sellers and their agents, the only parties who would be concerned that apparently lengthy days-on-market periods might prompt buyers to make low-ball offers.”

“Second, despite this hiccup, the real estate market is experiencing a rapid trend toward transparency.”

“Third, it’s a sign of how much the market has changed from a few years ago, when the buying frenzy made days-on-the-market a nonissue. So here’s some advice: When an agent tells you that overpriced starter home you’re looking at just listed two days ago, smile, nod and check to see how thick the dust is on the windowsills.”

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