The Housing Bubble

The Wall Street Journal reports on California. “Many builders never expected the housing market to fall this far. Now they’re struggling with empty land, too few buyers and an inventory of finished homes that have been sitting empty for months, and some are growing desperate to free the cash locked up in their real estate by enticing the dwindling number of buyers.”

“And those incentives are growing bigger. In California’s San Diego County, real-estate agent Chris Heller says that until about 18 months ago, builders had little reason to offer incentives. Today, he says, ‘buyers are asking for the moon, and they’re often getting it.’”

“Mr. Heller says that on houses in the $700,000 range, his clients are typically scoring multiple concessions totaling as much as $80,000. Generally, that includes a price reduction, an agreement to pay closing costs or upgraded flooring or appliances, or a combination of all three.”

“Incentives alone often aren’t enough to close a sale, however. Rowena Emmett, an independent Realtor in La Canada, Calif., says that during Southern California’s last downturn, a client offered home buyers a new Porsche, ‘but that didn’t work.’”

The Orange County Business Journal. “Newport Beach homebuilder William Lyon Homes Inc. reported a pre-tax loss of $77.8 million in the second quarter on Wednesday.”

“The loss included $84.4 million in write-downs for land the homebuilder owns, to account for softening market conditions and slow sales.”

“The company builds in California, Arizona and Nevada. In the second quarter, William Lyon home deliveries dropped 29% compared to a year ago, while home orders fell 11%.”

The LA Times. “Over the last six years, Los Angeles has approved more than 14,000 condos and apartments for construction in the San Fernando Valley, according to city records, nearly three times the number of single-family residences. It’s a trend that is mirrored throughout the region, and it is expected to intensify.”

“Ellen Vukovich, a board member of the Sherman Oaks Homeowners Assn., said plenty of people still want to live in quiet single-family neighborhoods and worry that their ability to do so will be reduced as more condos are built.”

“‘They’ve all bought into this idea that people are going to want to live in New York in Southern California,’ she said.”

The Voice of San Diego. “2,033 San Diegans went into default on their mortgages in July. This is up 19 percent from June and up 157 percent from July 2006.”

“Even adjusting for regional growth, the rate of default absolutely dwarfs anything we saw during the early-1990s recession and housing bust.”

The Daily Press. “A look at San Bernardino-area homes in the planning stages shows the Victor Valley far outpacing its neighboring communities, according to San Diego-based MarketPointe realty consultants.”

“The glut is not necessarily bad news for the Victor Valley, said Russ Valone, MaketPointe’s CEO, because it means there will be predictable inventory and appreciation as opposed to huge spikes in home values.”

“‘You’re growing your business base, so a significant supply in housing is going to keep that housing stay affordable, and it will be easier for businesses to bring people here,’ Valone said.”

“For existing homeowners, however, the news may not be so good. ‘There’s a lot of ways to interpret the numbers,’ Valone said. ‘A lot of supply means we’re not going to experience rapid price increases. It’s nice to realize appreciation, but stable prices are better for long-term economic stability.’”

The Desert Sun. “Home sales across the Coachella Valley fell 36 percent in June compared with the same month a year ago, a new report shows. The overall median price dipped 5 percent to $380,000, according to DataQuick.”

“New-home sales led the decline as 50 percent fewer homes were sold compared with June 2006. The median price for new homes in the valley fell 11 percent to $373,500, according to DataQuick. Sales of condos fell 16 percent with the median price falling 10 percent to $317,500.”

“The 36 percent decline in home sales is at least partly due to tighter mortgage standards that pose an increasing challenge for first-time home buyers, said Greg Berkemer, executive VP of the California Desert Association of Realtors.”

“And prices that are still out of reach for many valley household budgets, he said.”

“The California Association of Realtors’ numbers vary slightly…(but) both reports put the total home sales decline at 36 to 38 percent, which still was better than for all of Riverside County, which saw a 47 percent drop. In San Bernardino County, home sales fell 50 percent from a year ago.”

“The slowdown in sales has forced dramatic downsizing among area builders, some of whom are trying to renegotiate land deals that were made in recent years, said Fred Bell, executive director of Southern California Builders Industry Association’s desert chapter.”

“When home purchasing reached a fevered pitch in 2004 and 2005, construction companies converged and multiplied. Now many are struggling. ‘If this doesn’t improve, we won’t be able to keep people working,’ Bell said.”

“The trickle-down effect has hit local escrow and title companies, financial institutions, furniture stores and other companies with close ties to the real estate industry, bankers and real estate professionals said.”

“A surge in defaults and foreclosures has muddied the picture, with 6,648 default notices going out in Riverside County in the second quarter and 5,141 in San Bernardino County, according to DataQuick. That was a 191 percent increase in Riverside County compared to the second quarter 2006, and a 180 percent jump for San Bernardino County.”

“‘The latest forecast from Ben Bartolotto, research director for the Burbank-based California Industry Research Board (July 30) calls for 133,500 housing permits to be pulled statewide this year, down 18.7 percent from 2006,’ said Bell.”

“‘It would be the lowest annual total since 1998’s 125,707. Adjusted for inflation and stated in 2006 dollars, new residential building is forecast at $25.091 billion in 2007, down 20.6 percent from last year,’ he said.”

“‘Everybody knows it’s tough for sellers right now, and whatever they can learn about what buyers are looking for will be an advantage,’ said Bill Clawson, a Realtor (in) Indian Wells.”

“The Riverside/San Bernardino area continues to account for nearly 50 percent of the decline this year in single-family housing production, said Alan Nevin, chief economist for the California Building Industry Association.”

“As production levels continue to taper off, it could be a good time for homebuyers, he said. ‘Developers are anxious to reduce their inventories of unsold homes and have hesitated to start new projects.’”

“‘Why aren’t buyers jumping in with prices, in some instances, the lowest in five years and the largest inventory in a long time?’ asked Emily DiSimone, president of the California Desert Association of Realtors. ‘Buyers are still trying to time the market, and timing the market is more about being lucky as being good.’”

A report from the Idaho Statesman. “The Treasure Valley single-family residential market promises to remain in the doldrums for some time to come, according to a report released this week. Metrostudy reported this week that demand for housing has slowed because of saturated housing market and a lack of consumers who can afford the price of a new home.”

“Don Hubble, owner of Hubble Homes, said Tuesday that his firm is offering agents who bring a qualified buyer a $5,000 bonus, over and above their commission, and $5,000 in upgrades for the buyer.”

“‘That amounts to about 5 percent to 7 percent off our price,’ Hubble conceded. ‘But sales have been so slow that we’re trying anything we can to stimulate the market.’”

“According to the IMLS statistics, the Ada County inventory of homes for sale at the end of June was 5,054 homes, of which only 1,624 were newly constructed. Canyon County’s total inventory of 2,583 included just 767 new homes.”

“Heinrich Wiebe, co-founder of Boise-based Genius Realty, said the consumer should remember that they’re dealing with a builder’s ‘asking price.’”

“He said builders in the Valley have routinely been dropping prices between 3 percent and 7 percent in order to sell homes. In a couple of ‘extreme cases’ the builder has given a 20 percent cut to unload a home, he added.”

“‘Their price on a home is just a starting point. Most builders are willing to negotiate a lower price,’ Wiebe said.”

The Mail Tribune from Oregon. “Armed with a bit of hopeful foresight and the right location, Rob Patridge and his partners Matt and Chris Smith are making a frontal assault on the slumped real estate market. The 1,605- and 1,990-square-foot plans begin at $349,900 in an area where several nearby homes sell for $600,000 or more.”

“‘We saw the market niche that was there and what was missing,’ said Patridge. ‘Our price point of $350,000 to under $400,000 is unique in east Medford. You’re not going to find single-family residential houses like this and there is a lot of inventory over the half-million price range.’”

“Indeed there is a lot of inventory all over the map: Southern Oregon MMLS reported Tuesday that 3,041 single-family residences, including condominium units, are now on the market, up 15 percent over last year.”

“The median price for new homes dropped 11.6 percent to $318,000 during the rolling quarter ending July 31, with 93 new homes sold. SOMLS reported 481 existing homes were sold for the period ending July 31, compared to 554 during a similar period in 2006.”

The Wall Street Journal on Washington. “The number of homes on the market in 18 major U.S. metropolitan areas…increased 19% from a year earlier. The biggest increase in supply was in the Seattle metro area, up 6.1% in July. Until recently, the supply of Seattle area homes on the market was lean.”

“But now ‘we’re seeing a significant slowdown in Seattle,’ said Pat Lashinsky, CEO of ZipRealty. Sellers generally have been reluctant to trim their asking prices, he said, and ‘buyers are sitting on the sidelines, trying to figure out what’s going on.’”

The Seattle Times. “Prices of King County houses and condominiums last month increased 9 percent compared to a year earlier, even while the number of available properties grew 51 percent.”

“Likewise, the number of homes for sale was up 57 percent in neighboring Snohomish County and 47 percent in Pierce County, according to July numbers released Monday by the Northwest MLS.”

“July pending sales were down 6.5 percent in King County compared with the previous July. They dipped 14.2 percent in Snohomish County and 15.8 percent in Pierce County.”

“That gave buyers in some areas a distinct advantage. ‘People are able to shop around for quality and value,’ said broker David Milot. ‘Anything substandard is not being snapped up.’”

“‘Two years ago, if a seller wanted to [insist on a maximum] price, it might sit on the market for a couple of months, then appreciation would catch up and it would sell,’ noted Windermere Real Estate general manager Matt Deasy. Now they may wait awhile but will eventually drop their price to land a sale.”

The Olympian from Washington. “Thurston County sales of single-family homes and condominiums are struggling to measure up to last year’s hot real estate market as sales dropped about 15 percent in July, the Northwest MLS reported Monday.”

“July data for single-family house sales show a drop in sales of 14.4 percent to 387 units, down from 452 units, (and) a 22.9 percent increase in inventory to 2,306 units, up from 1,877 units.”

“July condo sales data show a drop in sales of 25 percent to nine units, down from 12 units, (and) a 43.1 percent increase in inventory to 73 units, up from 51 units.”

“While higher inventory levels mean more choices for buyers, it doesn’t mean that homes aren’t selling, Van Dorm Realty Manager Jeff Pust said. But the home has to be priced correctly, he said.”

“‘The price has to be on or (a sale) is not going to happen,’ he said.”

“Besides higher inventory levels, other factors that have slowed down the South Sound housing market include higher mortgage interest rates, more new construction and slower rates of home price appreciation, Abbey Realty real estate agent Ted Leland said.”

“‘A lot of people got spoiled with low mortgage interest rates and the high rates of appreciation,’ Leland said.”

“Now that home prices aren’t appreciating 20 percent a year as they did two summers ago, some buyers aren’t nearly as excited to invest in property, Leland said.”

“Five of Leland’s real estate transactions this year have fallen apart because the buyers couldn’t qualify for home loans, he said. A year ago, it wouldn’t have been a problem qualifying, Leland said.”

“Because of the shakeout in the subprime mortgage market and the American Home Mortgage bankruptcy, there has been a major contraction in home loan products, said Terry Wilson, Heritage Bank’s home loan manager.”

“Increasingly harder to find, for example, are zero-down loans that don’t require income verification, he said. ‘I don’t think it’s a shock that they are going away,’ Wilson said. ‘The shock is that some of them even existed.’”

Some housing bubble news from Wall Street and Washington. Bloomberg, “The Federal Reserve added $24 billion in temporary reserves to the banking system amid an increase in demand for cash from banks roiled by U.S. subprime loan losses. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments.”

“‘Demand from European banks is driving Fed funds higher,’ said John Murphy, senior VP at Tullett Prebon Plc, the world’s second-largest inter-dealer broker. ‘European banks have lack of liquidity in the euro- dollar market which spilled over to the Fed fund market.’”

“The European Central Bank today loaned 94.8 billion euros ($130.2 billion) to meet banks’ cash needs. The ECB said it will provide unlimited funds today at 4 percent, its current benchmark rate, after demand for cash in the European money markets drove interest rates higher.”

“The Bank of Canada today said it will provide liquidity to ’support stability.’”

The Associated Press. “‘This is a mini-panic,’ said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks’ injection of money into the system an unprecedented move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy.”

“‘All the things that had been denied up until this point are unraveling,’ Battipaglia said. ‘On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.’”

“BNP Paribas Investment Partners, said it was suspending three funds together worth about $3.79 billion and wouldn’t make investor redemptions until it could determine a net asset value for the fund. ‘The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,’ BNP Paribas said in a statement.”

From Reuters. “The BNP problems sent judders through European markets already rife with rumors of worsening troubles in Germany. The Bundesbank hosted a meeting with banks involved in the rescue of Europe’s highest profile subprime victim yet, lender IKB (IKBG.DE), to arrange details of its 3.5 billion euro bailout.”

“‘Nobody wants to lend any money. It’s safety first.’ said Karen Birzler, a money market trader at HVB in Munich.”

“The cash markets were seizing up, several dealers said. ‘There appears to be a dash for cash both in dollars and in euros,’ said Nick Parsons, head of market strategy at nabCapital in London.”

“The cost for banks to borrow money overnight in the world’s second largest economic region shot up to 4.62 percent, the highest level since October 2001 and way above the ECB’s 4 percent target. Only when the ECB offered banks extra cash to assure orderly conditions did rates return to normal levels.”

“A Zurich-based money market trader called market conditions ‘crazy’ since Fed Chairman Ben Bernanke has given no signal of concern that credit markets could unpick the real economy. ‘The market is acting like a yo-yo. It’s all very psychological. The possibility of a credit crunch returning is starting to spook everyone,’ he said.”

“A separate European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses.”

“U.S. Treasury Secretary Henry Paulson has said repeatedly that he consider U.S. economic conditions to be fundamentally strong and that market volatility reflects disruptions in the subprime mortgage lending sector where defaults are rising.”

“‘Risk is being re-priced,’ Paulson said on Wednesday, implying it was a normal reaction to the difficulties that companies involved with subprime mortgages were experiencing.”

“Residential mortgage delinquencies and defaults are becoming more common among borrowers in the category just above subprime, American International Group said Thursday.”

“AIG, the world’s largest insurer and one of the biggest mortgage lenders, said total delinquencies in its $25.9 billion mortgage insurance portfolio were 2.5 percent.”

“It said 10.8 percent of subprime mortgages were 60 days overdue, compared with 4.6 percent in the category with credit scores just above subprime, indicating that the threat to the mortgage market may be spreading.”

“AIG acknowledged that ‘the continuing weakness of the U.S. housing market resulted in a significant increase in losses.’”

“‘Everyone’s looking at their subprime exposure, and they didn’t do very well,’ said Matt Nellans, an analyst with Morningstar. ‘Their domestic second lien business had a loss ratio of 318 percent for the quarter.’”

“AIG said its mortgage guaranty operation reported a pretax operating loss of $78 million in the quarter. Delinquencies and defaults in second lien mortgages were the major contributors to the decline at its mortgage guaranty business, and losses on first liens, or primary mortgages, also increased and were more severe, AIG said.”

“ABX subprime mortgage indexes tied to risky loans made in last year’s second half are trading weaker on Thursday, according to an analyst.”

“The index is ‘weaker on the day, particularly on the single-A’s,’ the analyst said. However, the gap between prices offered by buyers and sellers is fairly large, he said.”

“H&R Block Inc. said Thursday it will cut more jobs at its struggling subprime mortgage unit and that the planned sale of the business could be delayed until later in the year.”

“H&R Block didn’t give a reason for the possible delay. H&R Block’s earnings have been hurt since last year by the struggles of the mortgage unit.”

“The housing market slump has Toll Brothers’ chief executive perplexed.”

“‘This downturn is very different. It is the first one in my 41 years in the business that’s occurred when you have an up stock market, low unemployment, decent job growth and a very decent economy,’ said Robert Toll.”

The Boston Globe reports from Massachusetts. “A growing credit crisis is prompting lenders across Massachusetts to cut back suddenly on new loans, making it difficult for even creditworthy borrowers to get mortgages and causing some home sales to fall through at a time when the housing market is already slumping.The most prevalent impact in the Bay State so far involves borrowers with good credit now having trouble getting jumbo mortgages, which are popular in Massachusetts because of the high price of housing.”

“Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, said the mortgage market “is moving right beneath our feet. The new story is people with good credit are now having a tough time getting a mortgage.”

“Several mortgage company executives have said they have never witnessed such a sudden cutoff in credit, and analysts predicted the drought and subsequent turmoil may continue for several months.”

“Fed officials ‘could’ve helped the regional mortgage lending environment had they moved’ rates down, said Kevin Cuff, president of the Massachusetts Mortgage Bankers Association. The mortgage market, he added, is ‘in disarray.’”

“In July, mortgage sales plunged to $11.2 billion nationwide, from $41.6 billion in June and $92.2 billion in May, according to FBR Investment Management, which tracks the data.”

“The mortgage problems are also cutting into home sales at a time when real estate prices and home sales are in decline. Allison Horne, owner of Dynamic Capital Mortgage Inc. in Brookline, said one client with $200,000 in savings wanted to buy a $1 million home in Boston’s South End, but had trouble lining up a mortgage.”

“The market turmoil ‘has totally affected people’s decision of, ‘do I want to do this,’ Horn said.”

From NPR.org in Massachusetts. “Eight years ago, Jose Pomales moved into his modest ranch house in Boston’s Hyde Park neighborhood. He says he has always paid his mortgage, but two years ago, Pomales refinanced and got a loan from New Century.”

“The monthly payment on Pomales’ $300,000 loan started at about $2,100. Then, the payment increased by more than $300 a month, and will soon be adjusted to about $2800 per month. In another six months, his mortgage payments will be increased even more.”

“Pomales says he had no idea how much his monthly payments would go up and is now unable to afford his home. His only option, he says, will be to either try to sell the house or just let the bank take it.”

“I foresee several million. I think that we could easily see 2 to 3 million people lose their homes and go back to renting, basically,” says Bill Wheaton, who runs MIT’s Center for Real Estate.”

“He says that some of those affected will be people who paid too much or borrowed too much against their homes. If their payments are rising and the houses are worth less than they owe, they’ll just walk away, Wheaton predicts.”

“Pomales worries that without refinancing, he will soon be forced to leave his longtime home. ‘We’re just regular middle-class, hard-working individuals, and you hate to see things taken away when you’re working hard for it,’ he says.”

The Post Gazette from Pennsylvania. “Chuck Sanders, CEO of Penn Hills-based Urban Mortgage, a mortgage broker specializing in helping home buyers with blemished credit histories, summarized the impact of the turmoil in mortgage markets with one word: ‘Ow!’”

“While severely distressed lenders have stopped making loans altogether, Mr. Sanders said, the truly painful part is that lenders who remain solvent are ‘really tightening the screws’ in qualifying customers. In July, six of 25 loans that he had expected lenders to make to his customers fell through.”

“‘It’s a rough market; there’s no way around it,’ he said.”

“And the worst may be yet to come. Mr. Sanders believes that ‘a couple more national major lenders’ may close their doors, and he hopes, ‘optimistically,’ that the turnaround may come in the second quarter of 2008.”

“‘But I’ve heard doomsday as far as three years out,’ he said.”

The Tribune Review from Pennsylvania. “The credit crunch in the national mortgage market is hitting the Pittsburgh region. ‘The underwriting criteria is changing daily and getting tougher for borderline borrowers,’ said Brad McLean, a Strip District mortgage lender.”

“The housing industry is tightening as more homes remain unsold, said McLean, president of the Mortgage Bankers Association of Southwestern Pennsylvania.”

“Even credit-worthy customers are feeling the effects. ‘You are seeing a movement to full verification on loans,’ said Mark Steele, president of Howard Hanna Financial Services. ‘You verify someone’s employment with the employer, and you would verify what their income is.’”

“‘The industry fell into the trap, quite frankly, where they were doing loans that they were told what the income was, and made some difficult loans that aren’t performing right now,’ he said. ‘Now, you are going to give me income tax returns or W2s to verify what you are making.’”

“‘We are lucky in the Southwestern Pennsylvania region that this region did not experience the tremendous appreciation in housing values that other sections of the country had,’ said Steve Madden, branch manager of Countrywide Home Loans Monroeville office.”

The Union Leader from New Hampshire. “New Hampshire will see foreclosures continue to increase into 2008 as subprime mortgages continue to fail, a study released yesterday said.”

“Foreclosures will hit the real estate market, cutting demand for homes by 10 to 15 percent through 2008, Brian Gottlob’s study said. He warned that if housing prices fall by 10 percent, foreclosures will increase by about 80 percent.”

“The reason behind this rash of foreclosures is different from the 1990s housing market collapse. Rather than a weak economy, the loans are going bad because they were risky to start with, as housing prices rose and mortgage companies rushed to lend money to borrowers whom banks rejected.”

“The number of subprime mortgages in the New Hampshire market increased more than ten-fold since 1999, from 1,700 loans to 22,000 by early 2007. Gottlob said mortgage credit quality has been eroding for the past two years as housing prices stagnated and began to fall.”

“His figures show 19 percent of subprime borrowers are behind on their mortgage payments, compared to 2 percent of more traditional home loans.”

“The subprime industry has collapsed in recent weeks as investors refused to buy packages of risky mortgages out of fear they would turn into bad loans. Gottlob agreed that if troubled borrowers can’t refinance their existing subprime loans, ‘you’d be in essence dooming them to foreclosure.’”

The Concord Monitor from New Hampshire. “When real estate agent Bob Pratte started selling homes in the new Stinson Hills development in Dunbarton, four houses sold immediately. Then, at the beginning of last summer, sales stopped. ‘I’d go there on weekends, and no one would show up,’ Pratte said.”

“For several years, prices were rising fast, and ultimately people could no longer afford it, he said. ‘The market is still adjusting. There was a drastic change,’ he said. ‘The whole country had a dip, and in New Hampshire, it had to happen sooner or later.’”

“The town has at least four residential developments that were approved but have not been built, said Ken Swayze, co-chairman of the Dunbarton Planning Board. ‘I’ve been on the planning board about 10 years, and this is one of the slowest periods I’ve seen for projects to start up,’ he said.”

“Swayze said the conditions remind him of a recession in the 1980s, when several projects were also approved but never went forward, including one that is now being revived. ‘It’s the same thing - market conditions, economics,’ he said.”

“The major difficulty facing sellers in Dunbarton comes from the homes’ prices; new houses tend to cost around $400,000, putting them squarely into the segment of the market that has been hardest hit, according to Tim LeClair, associate broker in Concord. LeClair said luxury homes and starter homes have been moving, but those going for $300,000 to $500,000 have been tough to sell.”

“‘A good number of those people are spending as much as they can spend,’ LeClair said. ‘When you read about housing prices coming down, interest rates going up, foreclosure at record numbers, it makes people wary of making that kind of investment in a house. People remember the late ’80s, early ’90s, when your $300,000 house was almost overnight worth $250,000.’”

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