The Housing Bubble

The Daily Bulletin reports from California. “Most folks who follow the housing market these days seem to agree on one thing: The news isn’t good. Sales are way down, while prices are either declining or going sideways almost everywhere except at the high end of the price spectrum. Builders like KB Home (have) been making adjustments in size and design to hit prices that are more attractive to buyers in certain areas.”

“Steve Johnson, director of the Southern California office of MetroStudy, said the length of the approval and development cycles is part of the problem, too. That means it’s difficult for a developer to shut down or change a large project when sales are slow.”

“‘That’s why even in a tightening market, we continue to produce a significant number of lots,’ Johnson said.”

“Numerous sources have suggested that many of the homes on the market now aren’t really for sale, that homeowners have seen big sale prices and are hoping to cash in. If they can’t get their price, they won’t sell. That has led Redlands-based regional economist John Husing to call the trend in existing home prices ’sticky downward.’”

“‘Prices will decline, due to forced sales from deaths, retirements and job changes,’ he said. ‘Also, forced sales will occur from those who over-borrowed using sub-prime loans.’”

“Husing said he saw logic to the predictions made by several analysts that existing home prices in the inland counties could fall as much as 20 percent. ‘Income data would seem to support that,’ he said. ‘But this logic misses the fact that a large share of inland buyers come from Southern California’s coastal counties where mean incomes are much higher.’”

“Husing suggested that a reduction in the new-home median to about $380,000 in the Inland Empire, a decline of 13.6 percent from last fall’s peak, would re-establish their market. ‘The existing home market will have a tougher time recovering,’ he said. ‘Conditions appear to indicate that the existing home market is in worse condition than the new home market.’”

“Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., disagreed. He said he doesn’t see that much difference between the two markets.”

“‘The situation right now is that too many people don’t want to buy anything, new or resale,’ he said. ‘They are petrified that prices are going to decline after they buy. I think everyone is in neutral right now until things simmer down.’”

The Merced Sun Star. “The current list of Merced houses headed for foreclosure includes at least one address in the North Merced neighborhood less than a 9 iron’s pitch from the country club.”

“Nobody is immune. Even people who worked, and thrived, in real estate during the boom that preceded the opening of UC Merced find themselves losing their houses.”

“Among them is a 28-year-old former loan processor who bought a house in Merced for $220,000 in January 2006, hoping to flip it after a couple of years. Months later, he lost his job, and his silent partner bailed. He hasn’t made a $2,000 monthly mortgage payment since November.”

“He didn’t want his name used because he hopes to work in real estate again. ‘It’s a lucrative business,’ he explained.”

“He also defended the lending industry against the bad press it’s gotten lately.”

“‘I’m not saying every loan was explained properly, but at end of day, it’s the consumer who signs on the dotted line,’ he said. ‘The picture that’s painted in the media is that everybody that got into a subprime loan is a victim and that loan officers and real estate agents are just a bunch of bad guys out there trying to screw over the hard-working middle-class homebuyers. Even though I’m losing my home, I’m not a victim.’”

“In Merced, those sales happen almost daily on the grassy patch outside the old courthouse buildingt. Last Tuesday the scene played out like a 19th century melodrama: a man from a trustee company stood under a tree and read aloud the addresses of houses on the block and their asking prices. A few feet away, a woman cried behind her sunglasses over the Los Banos house she was losing.”

“No one bid on the properties that day, so all of the houses went ‘back to the benny,’short for beneficiary, the legal term for the lender.”

“That’s what’s about to happen to the North Merced house a local business owner bought in 2000 for $135,000. As his home’s value nearly tripled, he refinanced several times and now owes $365,000. He took out loans to start a business that failed. He said he was too embarrassed to let his name appear in the newspaper. But he offered plenty of theories on why so many Merced homeowners took out loans they couldn’t afford.”

“‘A lot of people here are tired of living check to check and they say, ‘My house has doubled in value and there’s a chunk of change just sitting there. I could take it and for once have a little money in my pocket,’ he said. ‘You see a lot of people driving Hummers around town and they probably make $15 an hour. That money came from their house.’”

“Judy Thompson, a housing counseling specialist with a Los Angeles-based nonprofit, has been in the debt counseling business for 18 years. Right now she’s as busy as she was during California’s real estate bust of the early 1990s. Many of her clients are borrowers who wouldn’t have been eligible for loans before the rise of subprime mortgages.”

“‘(People) got into loans they can’t afford,’ said Thompson. ‘They found a house they liked and their loan officer said, ‘We can get you this loan,’ and they didn’t check to make sure they could afford to make the payments.’”

The LA Business Journal. “Los Angeles County is the center of the Alt-A lending universe. According to Inside Mortgage Finance, Pasadena-based IndyMac ranked No. 1 in the nation last year with $49.6 billion in Alt-A loans and Calabasas-based Countrywide was a close second at $47 billion.”

“Last week the Alt-A market came under siege as funding to buy repackaged loans dried up, a major Alt-A lender teetered on the edge of bankruptcy and mainstream lenders like Wells Fargo & Co. are cutting back on Alt-A loans.”

“As a result, shares of both companies have plummeted about 23 percent in the last two weeks. ‘You will see quite a bit of pain at these larger institutions as this crisis progresses,’ said analyst Zach Gast.”

The Voice of San Diego. “The latest release of the Case-Shiller Home Price Index indicates that San Diego home prices were, in aggregate, still falling as of May. Prices as measured by the HPI were down 7.0 percent from May 2006, and 7.4 percent from the November 2005 peak.”

“It is notable that the decline continued uninterrupted despite a seasonal tendency for prices to rise in spring. Even during the much-maligned housing downturn of the 1990s, prices managed to bounce at least a little bit every spring except in 1993.”

“Of course, seasonal trends aren’t the only factors in play. Since May, it has become significantly more difficult for buyers to get their hands on the New Age mortgage products that were crucial to enabling them to pay San Diego prices. There’s a very good chance that it will become yet more difficult in the months ahead.”

The Union Tribune. “Construction is likely to resume this fall on an 11-story luxury condo project fronting on Balboa Park once additional financing is in place, the building’s developer said yesterday.”

“Mehran Saberi, president of Mayfair Homes, said he had halted activity last week at the company’s 37-unit Biarritz condominium building at Sixth Avenue and Redwood Street because of budget overruns that the project’s primary lender, San Diego National Bank, had not agreed to cover.”

“‘We’re working diligently with our investment group to secure financing,’ Saberi said, adding he is hoping to start construction again in two to four months.”

“Occupancy is now expected in early 2009, but Saberi said the delay might actually help.”

“‘You’re going to see existing inventory gradually dwindle down over the next 12 to 18 months,’ he said. ‘We’ll be dealing with a better market from the seller’s point of view than we’re experiencing today.’”

The Times Delta. “Tulare County businesses tied closely to home construction, from heavy-equipment suppliers to air-conditioner installers, are feeling the ripple effects of the housing slowdown.”

“Jerry Kramlich, general manager of High Sierra Lumber and Truss in Tulare, said the truss-manufacturing business has taken a hit this year. Business has dropped 50 percent despite summer normally being a busy period, he said.”

“‘January and February were terribly slow,’ he said. ‘March and April were not too bad, but May, June and July [were] bad.’”

“As a result, he has had let go of six of the 24 people in his truss operation. He’s not optimistic that he’ll have reason to rehire them any time soon.”

“‘My feeling is it’s going to be pretty slow this year,’ Kramlich said. In fact, he expects the downturn in construction to get even worse.”

“The value of single-family-home permits issued last month fell 35 percent compared to July 2006, Visalia’s Community Development Department reported Thursday. The decline signals an end to a five- or six-year building boom.”

“‘From the numbers we are seeing today, we know that new home projects coming onto the market in Visalia peaked in 2005-06,’ said Pam Sing, a senior administrative analyst for the city.”

“In recent months, builders Centex Homes and Ennis Homes; the area’s biggest engineering/ architectural firm, and big-box building materials suppliers Home Depot and Lowe’s have laid off workers in response to sagging home construction and sales.”

“The pullback in new home building may translate into good news for area homeowners, especially those hoping to sell in a market bloated by a near-record number of properties for sale.”

“The news is far less rosy for businesses tied to new home construction, even those that don’t work on the large, multi home developments. Mike Martino, an estimator for Visalia Tile, said…before this year, he said, about 20 percent of Visalia Tile’s business involved new homes, mostly for contractors building a handful of homes a year.”

“But with so many new tract homes on the market, Martino said, small builders who used to build 10 or so homes a year now are building four or five. ‘When they slow down,’ he said, ‘we slow down.’”

“‘The market is going to adjust,’ said Bob Keenan, president of the Home Builders Association of Tulare-Kings Counties. ‘The fewer of anything, the more expensive it becomes. Today you are seeing the opposite of that.’”

“As for would-be home buyers, now is their time, Keenan said. ‘Interest rates are low,’ he said, ‘”and everybody is willing to sell.’”

Readers suggested a topic on what the credit meltdown means for the housing bubble. “A topic suggestion: The effects of the coming mortgage drought on the subprime & Alt-A homeowners. Will the ‘new, improved’ lending standards kite the foreclosure rates through the roof? Will LA (where a shack is ONLY 1.2 Mil+ gulp! ) finally tank?”

One said, “If we are going to see credit tightening in the mortgage lending arena, then how can that not affect the rest of our economy as the FED would have us believe. Take crack away from a crack head, cold turkey and you have a problem on your hands.”

A reply, “I don’t think it is a question of ‘if we are going to see credit tightening in the mortgage lending arena,’ we are seeing it. Just how bad did Alt-A get hurt yesterday? Just grazed, or was yesterday really a gut shot like many people think? How long until conforming follows the same path?”

One pointed out. “Wells Fargo just raised the interest rate on their jumbo mortgage to 8% this morning. Last week the rate was 6.78%. The meltdown is in full swing. Hold on the drop is going to be very steep. Ouch!!!!!!!!!!!!”

A followup, “I’ve also heard that Wells Fargo is cutting out the mort. brokers, meaning they will only loan their Alt-A products directly… Anyone else get chills when they read the CEO of IndyMac’s letter?”

One sees a change coming, “I think it is a matter of going back to what always protected the buyer and the lender…dealing direct. When lender dealt directly with the buyer, no mortgage lender, the buyer got what they could afford and there was alot less fraud. We are going to return to those days since it is the only way the lender will have control over the transaction.”

One reflected, “As far, far back as 2002, it used to be said NEVER flip a 750-800K house, because you can’t get $1 million+ for it after you invest 50-100K in the flip — because…..JUMBO mortgages are hard to get, and most people with that kind of cash are very discriminating! Boy how times have changed. So many generations.”

One concurred, “Agreed. $150,000 is about the tops that I would flip a SFR. First off you need to make sure that if you rent it out, that eventually after credit repair, your tenant can qualify to buy and still make you a reasonable profit. I just could never understand the idiot flippers of the past 36 months telling me they were gonna buy at $450,000 or $500,000 and flip for an extra $150,000 profit…I guess for a brief period of time there were some FB’s, but not now.”

The New York Times. “The market dropped particularly sharply yesterday afternoon after investors were rattled by remarks by executives at Bear Stearns, the investment bank that has been heavily involved in mortgage securities. The firm’s assurances about its own financial position were overshadowed by bleak comments by its chief financial officer about the credit markets.”

“‘I have been at this for 22 years, and this is about as bad as I have seen it in the fixed-income market,’ said Samuel L. Molinaro Jr., Bear Stearns’s chief financial officer.”

“Lenders say they are increasingly unable to persuade investors to buy packages of home loans made to borrowers with little or no down payment or those who cannot fully document their incomes. As a result, many companies are no longer offering such loans to potential buyers.”

“‘I have never seen it happen so quickly,’ said Steve Walsh, a mortgage broker in Scottsdale, Ariz. ‘Banks always do these little cutbacks here and there. What they are doing now is a liquidity crunch. It’s a credit freeze.’”

“‘It seems to me things got every bit as silly in the credit markets in the last few years as they did in tech stocks in the late 1990s,’ said Douglas M. Peta, chief market strategist at J. & W. Seligman & Company, an investment firm based in New York. ‘I still think we may have a ways to go in this.’”

From Dow Jones Newswires. “The secondary market that supports a big part of the U.S. mortgage industry has ground to a halt in recent days, a development that dramatically could increase the cost of home loans in expensive regions, experts said.”

“The private, secondary mortgage market ‘is not functioning,’ Mike Perry, CEO of home loan specialist IndyMac Bancorp Inc., wrote in an email to IndyMac staff.”

“It’s currently difficult to trade even AAA-rated parts of private mortgage- backed securities. Only mortgages that conform to the standards of government- sponsored enterprises, or GSEs, like Fannie currently are trading, Perry said.”

“That account was confirmed by Scott Valentin, a mortgage company analyst at Friedman, Billings, Ramsey. ‘We’re hearing securitizations have frozen up,’ he said in an interview. ‘No one wants to bid on these things and then find out that the loans are worthless tomorrow.’”

“‘If home buyers are in loans that don’t conform with Fannie or Freddie, given present market circumstances, they will have to pay at least 100 basis points more,’ explained Andy Chow, portfolio manager at a $14 billion San Francisco investment firm. (A basis point is one hundredth of a percentage point).”

“That will have a big impact on the housing market in California, Florida and other places where home prices are very high, he said.”

“‘In these areas, if home buyers don’t have much money as a down payment, their loans will be too large to conform with Fannie and Freddie’s standards,’ Chow explained. ‘That means people will pay much higher interest rates.’”

The Street.com. “NovaStar is suspending funding of some mortgage loans, according to a bulletin the lender sent mortgage brokers Friday.”

“A copy of the email message posted on several housing-related Web sites cites a ’severe dislocation in the secondary market’ for the decision. The move applies to ‘all loan transactions that have not been locked via a NovaStar Lock In Confirmation’ through Tuesday.”

The Chicago Tribune. “Once seemingly confined to subprime lending, problems in the mortgage industry showed signs of spreading to more-creditworthy borrowers Friday, triggering concerns about the potential fallout on the real estate market.”

“Wells Fargo & Co., the nation’s No. 2 home lender, stopped making certain loans to consumers with near-prime credit or prime borrowers who don’t document their earnings. Wachovia Corp., the nation’s fourth-biggest bank, also cut back some of its lending activity to consumers previously considered good credit risks.”

“‘As a result of market volatility, UBS Home Finance will be unable to accept any new loan applications today,’ the lender said in a Friday afternoon e-mail to clients. UBS, however, plans to begin taking applications again Monday.”

“‘The real estate market hasn’t had a lot going for it, and now it’s not likely to for some time,’ said Paul Kasriel, chief economist for Chicago-based Northern Trust Corp.”

“‘Since March, we’ve had a significant decline that is very likely due to tighter credit conditions,’ said Richard DeKaser, chief economist for National City Corp.” “If lenders tighten their standards and hike their interest rates on mortgages, a vicious cycle can start.”

“‘If there’s higher pricing of credit, it’s tougher for people to borrow money, which makes home sales weaker, which affects home prices, which affects loan losses because the single most important factor in the viability of loans is the collateral of the loan,’ DeKaser said.”

The Naples News reports from Florida. “Local lenders say the collapse of American Home Mortgage, which has three offices in Lee County, is another sign the mortgage industry is purging itself of high-risk loan practices that are contributing the housing market’s woes and sending shock waves through the U.S. economy.”

“Local lenders said Friday that the troubles of American Home Mortgage and similar companies are unsettling but promise to strengthen an industry that was plagued for too long with easy money for less-than-qualified borrowers.”

“‘I think this is long overdue and I think it’s great. It’s time for the mortgage industry to clean its act up,’ said Benjamin Dona owns Metro Mortgage Company. ‘We’ve seen in the last 48 hours that it’s ripping through the industry as a whole. Alternative programs, like being able to do a no-income, no-asset loan, or not checking loan application information aren’t going to be accepted. All these big mortgage companies we get our money from are discontinuing these programs.’”

“Dona said American Home Mortgage was known for its option adjustable rate mortgages, or ARMs.”

“‘This kind of loan got a lot of people into trouble and it got American Home into a lot of trouble,’ Dona said. ‘I never did option ARMs because it’s only setting people up to get hurt. Getting people into a home if they can’t afford to be there can destroy their lives for years through bankruptcy and foreclosure. There’s not much you can do for them once they’re in that position.’”

“Thomas Budzyn senior loan officer for SunTrust and president-elect of the Mortgage Bankers Association of Southwest Florida, he sees tighter rules in the future for mortgage lending. ‘It’s what needs to be done so the foreclosure rates don’t keep increasing,’ he said.”

“Budzyn also predicts more mortgage companies will close in the short term. ‘They’re not the last one that’s going to go, unfortunately,’ he said of American Home.”

The St Petersburg Times. “Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records.”

“‘In the past half-dozen years, if you could fog a mirror, you could get a loan,’ said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach. ‘Now we’re starting to see that a lot of those loans that were made probably shouldn’t have been made. Investors and lenders are taking a more conservative stance.’”

“The impact can be felt in the Tampa Bay area, where home sales are off nearly 50 percent year over year and housing values have slipped 10 percent or more in many areas.”

“Lenders say what’s making them run the fine-tooth comb on loan applications is the disappearing appetite of mortgage-bond investors for risky mortgages. That includes those dubbed ‘Alt-A.’”

“Alt-A loans accounted for about 13 percent of U.S. home loans granted last year, according to Inside Mortgage Finance, and subprime loans about 20 percent. Industry executives have said subprime lending is likely to shrink by more than 50 percent this year. And much of the Alt-A market is vanishing, too.”

“‘This will help bring reality to the industry,’ said Carlos Fuentes, president of Greater Tampa Association of Realtors.”

The Sun Sentinel. “Foreclosure filings across South Florida continue to rise, as hopes for a housing recovery have fizzled. The number of people behind on their mortgage payments in July almost tripled in Broward County from a year ago, from 517 to 1,430, according to Realestat.com. In Palm Beach County, the number more than tripled from 298 to 1,063.”

“Experts say lenders, court clerks and lawyers are having a hard time keeping up with all the filings. They expect a significant surge by the end of the year as more adjustable-rate mortgages come due.”

“‘Everybody’s inundated and overwhelmed,’ said David Dweck, founder of the Boca Real Estate Investment Club. ‘Sales are taking longer to get to the courthouse steps.’”

“Circuit Court Judge Jeffrey Colbath handles all foreclosures in Palm Beach County. He devotes a day and a half a week to the 7,000 cases in his division but says he might have to set aside even more time in the months ahead.”

“‘There are a lot of different stories that lead people into my world,’ Colbath said Friday. ‘The worst of it has not come yet.’”

“Last month, Broward’s foreclosure sales increased 70 percent from a year ago, from 224 to 381. Deerfield Beach foreclosure lawyer Brian Rosaler said he’s working seven days a week, often into the night, to keep up with all the filings.”

“‘In Broward, they can’t get the cases clocked in fast enough,’ he said. ‘All of us involved in this, we’re working our tails off.’”

“Experts mostly blame the trouble on adjustable-rate mortgages made to borrowers who bought houses and condominiums that shot up in value during the housing boom from 2000 to 2005. ‘A lot of people got into more house than they could afford,’ said Lewis Goodkin, a Miami-based housing analyst.”

“Many foreclosed homes will go back on the market, adding to the glut of properties. Palm Beach and Broward counties have roughly triple the number of homes for sale now compared with two years ago, according to the Miami-based Keyes Co.”

“As a result, some experts who had predicted a housing rebound this year now insist it won’t happen until later in 2008 or even 2009. ‘In October, more adjustable-rate mortgages are coming due,’ said Marc Thomashaw, a VP of Realestat.com. ‘I expect much higher foreclosure numbers early next year because of that.’”

The News Press. “The first buyers in The Residences at Coconut Point will begin closing on their condos by mid-August at the regional mall off U.S. 41 in Estero.”

“Joy Selby, spokeswoman for The Residences developer, said more than 225 of 290 total condos were under contract long before buyers could tour the model home, which will also open mid-month.”

“Residents will begin moving into the 35 front units overlooking the shops along Fashion Drive between late 2007 and early 2008. Condos start at $350,000 for 1,100 square feet under air and go up to more than $800,000 for about 2,200 square feet.”

“Selby said many buyers are drawn to the simplified life the community will provide. ‘When you’re at home, you can take the elevator downstairs and walk to dinner. You don’t have to get into your car.’”

“Reggie Morgan, executive project manager, said about 400 subcontractors and employees are on site every day. ‘The job is three to four months ahead of schedule,’ Morgan said, noting the lack of rain and increase in available workers has helped. ‘It allows us to take advantage of the current market.’”

“Real estate broker Diann Masi of Estero was one of the first to buy a condo in The Residences in December 2005. ‘I’m a visionary,’ she said. ‘It’s more of an investment right now. I’m not sure what I’m going to be doing with it. I’ll wait and see what happens.’”

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