August 11, 2007

The Bottom Line Is The Buyers Determine The Price

The Voice of San Diego reports from California. “While unsold condos pile up on the market, foreclosures mount and developers stall construction or try to sell projects entirely, it’s clear the region’s housing malaise has a home in downtown San Diego. Sales for new units downtown numbered 82 in second quarter 2007. That’s a little more than one-third as many as were sold in the same quarter two years ago.”

“‘Right now, you’re not running into a sales office into that frenzy where you have to bid it up to get it,’ said Russ Valone, a market analyst. ‘But we have to ask the question: Is, fundamentally, downtown a place where people want to live?’”

“As of the end of June, 577 new units were complete but unsold, according to MarketPointe Realty Advisors. Where builders once dreamed of delivering thousands of units this year and next, several projects have stalled construction. Lenders are reluctant to issue massive construction loans. And so some projects are shifting gears, changing planned condo units to hotel rooms.”

“Valone said that 45 condo projects have sold out since 2000, representing 6,000 new units. And another 26 projects, 4,439 units, are under construction. Of those units, about 2,500 have open escrows: buyers who’ve put usually 10 percent down to reserve the unit while it’s built.”

“In the first half of 2007, the 92101 downtown ZIP code had 175 properties in some stage of foreclosure. Many units are listed at prices at or below the prices those owners paid in 2004 or 2005, and the addition of agent commission costs leaves dozens of owners selling at significant losses.”

“But local analyst Gary London said developers aren’t to blame for poor consumer choices. ‘If anyone’s stretched themselves, they should’ve known that,’ he said. ‘That’s not the developer’s fault.’”

The LA Times. “For months, the deteriorating market has been taking money out of millions of workers’ pockets. Real estate agents are selling fewer homes. Appraisers and construction workers are scrambling for assignments. Mortgage loan company employees are being laid off by the thousands.”

“Christopher Thornberg of Beacon Economics in Los Angeles, for example, has estimated that California could lose more than 200,000 real estate-related jobs before the housing market bottoms out.”

“Home appraiser Michael Mathis bought a Redlands fixer-upper in 2003…when the housing market was on fire and he was doing as many as 20 estimates a week. His income soared into the mid-six figures. Now his pay has fallen to less than $75,000 a year, and he is lucky to do even a dozen appraisals a month. What’s more, his work has convinced him that things will get worse before they get better.”

“‘I don’t see anything positive happening in this market until effective demand picks up — and prices come down,’ he said.”

“Mathis, who has borrowed heavily to finance his dream, worries about being overextended on his under-construction home and the one he is living in but trying to sell. That home, also in Redlands, has been on the market since December. He’s cut the price twice in hopes of getting an offer. ‘I’ve already lost $80,000 more than I planned,’ he said.”

From NBC11.com. “There were more signs Friday that people are having a tougher time securing home mortgages in the Bay Area, NBC11’s Marianne Favro reported. Realtor Pegah Lavassani said lenders are making it tough for her to close deals.”

“‘The last three transactions I’ve had have fallen through because of financing,’ Lavassani said.”

“Chief Investment Officer Mark Duvall with Opes Mortgage Banking in Palo Alto said lenders are now much more cautious. ‘Lending standards were greatly softer for awhile, but with delinquencies on mortgages rising, lenders are backing away and that is leaving us in a credit crunch at the moment.’”

“Many Bay Area homeowners can no longer afford their mortgage and have had to abandon it to the bank, Favro said.”

From Palo Alto Online. “Even affluent, good-credit-risk Palo Altans are feeling spinoff effects of the national and international collapse of the subprime mortgage market. Local experts said today that even the financially fortunate are not immune and that the subprime collapse may even affect the venture-capital market and hence start-up businesses.”

“‘Even if you have great credit and make a lot of money, it’s becoming more difficult to qualify for a loan,’ Chris Iverson, an agent in Palo Alto, said.”

“Since documentation of variable income is tricky and time-consuming, consultants and investors in Palo Alto have been drawn to such stated-income loans. But the shattered subprime market has made lenders more cautious, Iverson said.”

“‘People who have really good credit and really high cash flow, your typical Palo Alto buyer, are encountering more stringent requirements. Lenders are saying, ‘I want to see stuff backing up what you’re telling me,’ he said.”

“‘If you do away with stated-income loans, you jeopardize an entire industry of people that are maybe getting paid in cash,’ said Julia Wei, a real estate and mortgage lawyer in Palo Alto.”

“Cash earners in Palo Alto include day laborers, migrant workers or any other undocumented, often immigrant, workforce. Wei also speculated that subprime troubles abroad could affect the local start-up venture-capital economy.”

“‘We have a lot of venture funding here on Sand Hill Road,’ she said. ‘If there are international investors feeling the squeeze because generally the economy is affected by the subprime news, they might pull out funds,’ Wei said. ‘We all know someone who works for a start-up.’”

“Palo Alto is experiencing more foreclosures, Iverson said. He cautioned against drawing dire conclusions from the rising numbers, however.”

“‘Percentage-wise, you could say, ‘Oh, foreclosures have gone up 200 percent,’ but that’s an increase from a very small number to a slightly larger one,’ he said.”

“Wei also pointed out that the rising number of local foreclosures and more common short sells, which indicate cash-flow problems, are part of a larger market cycle. ‘We didn’t get those calls for the last seven or eight years. I had the novel experience of dealing with a paralegal who didn’t even know what a short sell was,’ she said.”

“‘But as far as these problems [of short sells and foreclosure] we’ve seen them a decade ago. And also in the savings and loan crisis of the early ’80s and late ’90s,’ Wei said.”

The Press Democrat. “Struggling to sell new Santa Rosa town homes, a Novato builder hopes an auction will clear out the condominiums, Sonoma County’s first such public sale since the housing market began its dive nearly two years ago.”

“Bidding for the 23 town homes left in Chanate Village will begin at 35 to 44 percent below original asking prices. Centennial Homes expects sales to come considerably closer to current market values, though the builder is committed to selling at minimum bids.”

“‘We’re hoping to get as much as we can. I feel pretty comfortable that we will be able to pay the bank,’ said Jim Clifford, the builder’s Northern California division president.”

“‘The builders are sitting there looking for ways to speed up their sales process and this is the best option they have,’ said Rhett Winchell of the Beverly Hills auctioneer for Centennial Homes. ‘My projection is you will see five to 10 more in Northern California.’”

“Homeowners in Chanate Village have mixed feelings about the auction set for Aug. 26. ‘I wish we had waited a couple of months. My concern is if the houses like mine get sold for less,’ said Justo Lao, who purchased a town home for $410,000. Another worry, he said, is that ‘a lot of people will buy units for investments.’”

“Lynn Lott, however, said she welcomes the auction after buying one of the live-work units. ‘I didn’t move here to live in a ghost town,’ she said, referring to the many empty units.”

“A few buyers were enticed by price cuts and free upgrades and offers to pay closing costs and mortgage payments. But the promise of a new $18,000 Honda Civic didn’t produce a sale, Clifford said. ‘It was timing and it was the breaks of the market,’ he said.”

“Condominium sales have slid alongside houses in the county, down 10.7 percent so far this year compared with the same period a year ago. The typical condo sold for $345,500 in June, an 11 percent drop from the peak of $390,000 in October 2005.”

“Homes that don’t sell go back on the market, Clifford said. ‘The bottom line is the buyer’s determine the price,’ he said.”




From Contained To Global Infusions Of Liquidity

Readers suggested a topic on recent developments. “Perhaps we could recap and discuss this historic week. How did we get from ‘it’s largely contained’ to ‘global infusions of liquidity?’”

One said, “If Fannie Mae and Freddie Mac do raise the cap on mortgage portfolios what are some potential resulting scnearios? After all the public could scream loud enough that Congress could force the hand of the ‘piper.’ There is no easy exit from this mess.”

A reply, “And there shouldn’t be… It’s time to pay the piper but our financial engineers are burning the midnight oil trying to come up with a painless exit. However they really have few options, raising the mortgage cap is only putting a band-aid on a bullet wound.”

A skeptic, “I believe that it’s all talk from Congress and the presidential candidates. They know it can’t be done. Imagine the field day that the alternative media will have with Fannie and Freddies reporting record. They are a mess already.”

“Bailing out FBs will effectively shut a much larger number of people out of the market due to propped up prices bolstered by undeserved interest rates for FBs according to some of the proposals I’ve seen proposed on CNBC.” “Can you imagine people who have defaulted on their mortgages being given a 1% interest rate even if it’s just an extended teaser period? They are still stuck with a house no one will buy at these prices.”

And another, “I still contend that at least in Cali, Fannie and Freddy can not come in and save the day, even with raised caps…the only thing that can save the day is a 3.5% (or lower) interest rate and no income documentation required or no ‘debt to income’ ratio.”

“Otherwise, by requiring people to actually QUALIFY for loans using ACTUAL INCOME, and ABSURDLY LOW TEASER RATES FOREVER, Fannie and Freddy have very lessened power in Cali.”

Another points to the central banks, “Central Bankss are ‘injecting liquidity’ all over the place. What does that mean exactly? Handing out money? Who’s money are they handing out? Can I have some? I promise I’ll go out and stimulate the economy.”

“Who are the recipients and what do they do with it? How does that work? Does it work? What are it’s limitations? How unusual is this?”

One suggests calm. “Ya know, if we just all think positive thoughts, this could all turn out ok.”

The LA Times. “Americans are learning a painful lesson from the financial market turmoil: One of the qualities that make the modern U.S. system so powerful, its ability to spread the risk of funding loans across millions of investors around the world, turns out to have a damaging weakness built into it.”

“And this uncertainty, brought to the surface by trouble in the sub-prime home mortgage market, is now setting off exactly the sort of panic that the new system of spreading risk was supposed to prevent.”

“‘We supposed that if we atomized the risk of loan, it wouldn’t come back to bite us,’ said Robert Litan, a senior economist with the Brookings Institution in Washington. ‘What we’re learning is that no matter how widely you spread the risk, it doesn’t go away. You can divide and divide and divide and divide it, and the risk is still there.’”

The Wall Street Journal. “Fallout from the intensifying credit crisis stretched from a French bank to the largest home-mortgage lender in the U.S., triggering unusual central-bank interventions.”

“The troubles demonstrated both the global reach of the crisis and its impact on a widening circle of markets and companies. The first jolt came from French bank BNP Paribas, which said early in the day that it was freezing three investment funds once worth a combined $2.17 billion because of losses related to U.S. housing loans. That prompted the U.S. and European central banks to inject cash into money markets to keep interest rates down.”

“The unease accelerated in the U.S. with news that several hedge funds were in the red and selling off assets. Apartment and condominium builder Tarragon Corp. raised doubts about its ability to remain in business amid weak demand and an inability to raise new financing. After markets closed, mortgage-lender Countrywide Financial Corp. said ‘unprecedented disruptions’ in credit markets could affect its financial condition.”

“What started late last year as worry over a sharp rise in defaults on subprime mortgages has mushroomed into a crisis for the entire home-loan industry and investors world-wide.”

“Rattled by a constant stream of bad news, investors in recent days have been shunning nearly all mortgages except for those that can be sold to Fannie Mae and Freddie Mac. That has prompted lenders to boost rates on prime ‘jumbo’ loans — those totaling $417,000 or more, too big to be guaranteed by Fannie or Freddie — to as much as 7.25% or 8%.”

“‘The market for the assets has just disappeared,’ said Alain Papiasse, head of BNP Paribas’s asset-management-services division. ‘Since the start of this week, there are no prices for instruments that carry, directly or indirectly, some types of U.S. assets.’”

The New York Times. “Fannie Mae, the nation’s biggest buyer of home loans, was blocked yesterday from expanding its mortgage holdings by 10 percent in what it called an effort to ease concerns about credit and shore up the struggling housing market.”

“The regulator overseeing Fannie Mae, the Office of Federal Housing Enterprise Oversight, or Ofheo, rejected the request, saying the company’s principal market for mortgages was ‘liquid and working.’”

“Josh Rosner, a managing director at Graham Fisher & Company, said that it was unclear whether Fannie would be using the portfolio to generate profits for shareholders by buying illiquid secondary market securities or help potential homeowners.”

“‘They don’t need the portfolios to do business,’ Mr. Rosner said. Besides, he said, it would be absurd to increase the size of their holdings until the extent of their exposure to subprime loans and other exotic mortgage products, like interest-only and negative-amortization loans, was better known.”

“‘We don’t know the true condition of their books, because they still aren’t current in their filings; they still have internal- control weaknesses,’ Mr. Rosner said. ‘They are sort of saying: raise our cap. Trust us. It wasn’t too long ago, frankly a couple of years ago, that we had them say trust us only to find out they were untrustworthy.’”

The Washington Post. “The Office of Federal Housing Enterprise Oversight has capped Fannie Mae’s portfolio at $727.2 billion (the level of Dec. 31, 2005), while Freddie Mac’s $712.1 billion portfolio may grow only by 2 percent annually.”

“The regulators imposed these conditions because of accounting scandals at Fannie and Freddie, and it seems unwise to tap them for a bailout now, especially when such an action would leave them holding billions of dollars in new assets of ambiguous value.”

The Dallas Morning News. “A running-scared Wall Street is impacting business in North Texas, as Dallas investment banker David Mahmood saw this week when he tried to complete $90 million in private financing for a California client.”

“‘The lender backed out yesterday, so now we’re scrambling,’ Mr. Mahmood said Friday. ‘If we can’t raise enough money, [the company] will lose tens of millions of orders.’”

“In today’s hyper-connected economy, things can unravel quickly. No-money-down mortgages and low interest rates fueled a borrowing binge over the past six years, as consumers used easy money to buy homes, cars and other goods. Buoyed by rapidly rising housing prices, banks bundled the loans and sold the debt to hedge funds across the globe.”

“But Bill Carter, a certified financial planner in Dallas who specializes in helping small business, saw some upside in the shifting lending landscape.”

“‘It’s going to be more difficult – and frankly, it should be more difficult – to get a loan,’ he said. ‘It just got out of hand.’”




There Will Always Be A Better Deal Down The Road

The Herald Tribune reports from Florida. “‘Like the proverbial butterfly that flaps its wings and sets off a tidal wave on the other side of the world, Sarasota, Florida is the centre of the U.S. housing bust that sent shockwaves through global markets,’ said the London-based Financial Times. The Times was wrong to single out Sarasota as the epicenter of the global financial crisis, but focusing on the Sunshine States makes a lot of sense, said real estate analyst Jack McCabe.”

“‘Naples, Fort Myers, the Cape Coral market has experienced the largest price drop in the U.S.,’ McCabe said. ‘So they botched that one.’”

“‘Florida is where the boom started and ended, and where the bust started,’ McCabe said. ‘Previous boom-and-bust cycles have started in California. This time, Florida is the state that experienced the height of speculative activity that drove the boom.”

“Locals who read the story, titled ‘Canary in the cage’ tells of housing woes,’ agreed that it was not too far off the mark.”

“‘We were in the lead when everything was going up and everything was wonderful,’ said Joe Hembree, president of the Sarasota Realtors Association. ‘Now prices have to go back down. But it’s a relative thing. Prices have not been going down as fast as they went up.’”

The St Petersburg Times from Florida. “It’s been the glut that wouldn’t give, gumming up any chance of a housing recovery in the Tampa Bay area. We’re talking listings of houses and condominiums for sale, a figure that in April topped 50,000 in Pinellas, Pasco and Hillsborough counties.”

“Only now the glut appears to be in retreat. Home listings are at their lowest in more than year. In July the market counted just under 42,000 homes for sale.”

“Though encouraging news on its face, real estate boosters shouldn’t cheer just yet. Sales have continued their postboom sluggishness, running about 40 percent under last year’s numbers. And a significant part of the story is sellers who have grown sick of trying to move their properties and turned to renting.”

“At this rate it’s still about a year before the region could eat through the inventory. Prices have suffered as supply outpaces demand.”

“Ann Guiberson, head of the Pinellas Realtors Organization, notes another trend: Agents refusing to take on listings when they think owners are overpricing properties.”

“Clearwater Realtor Tony Marottoli spurns even million-dollar listings if he believes owners are unrealistic. Here’s an example from Belleair Beach: The owner bought a house for $400,000 three years ago and wanted Marottoli to list it for $1.4-million. He wasn’t interested.”

“‘Not gonna happen,’ Marottoli said. ‘It’s old. It’s dated. It’s a ’60s house. If the market weren’t dead, it could be a different story.’”

The Sun Sentinel from Florida. “Stung by the downturn in the U.S. housing market, Fort Lauderdale-based builder Levitt Corp. on Friday announced a $58.1 million loss for the quarter ended June 30.”

“The loss included a pretax charge of about $63 million to revalue its home-building inventory. The company said the ‘large’ impairment charge reflects the ‘continued deterioration’ of its home-building markets, especially Florida, the need for ‘aggressive pricing and discounting strategies’ to increase sales, and ‘the prolonged duration of the weakness in the market.’”

“The outlook appeared dim for future sales. Roughly 39 percent of total orders for new homes were canceled during the quarter, up from 21 percent canceled in the same period a year earlier, the company said.”

“Demand was especially weak for Levitt’s active adult and family communities in Florida, which made up 58 percent of unsold lot inventory. Average selling prices for orders in the quarter fell to $256,000 from $283,000 in the same period a year earlier.”

“‘We intend to continue to employ aggressive discounting strategies in an attempt to reduce this inventory going forward,’ the company said.”

“If you’re hunting for a home loan and have lousy credit, plan to keep looking. Even if your credit is stellar, prepare to pony up a sizable down payment and prove every penny of income to the lender.”

“‘Banks, especially those in South Florida, are becoming increasingly tight-fisted,’ said Ken Thomas, a Miami-based industry analyst.”

“‘Lenders created riskier and riskier instruments to get more and more homeowners,’ said Jeff Kaufman, a senior VP for SunTrust Bank in South Florida. ‘Now we’re paying the price for all those aggressive loans.’”

“Indeed, foreclosure filings are skyrocketing across Palm Beach and Broward counties because homeowners no longer can make their monthly payments as adjustable-rate mortgages rise.”

“Robert Toll, chairman of luxury builder Toll Brothers, this week described the southeast Florida housing market as a ‘flunk minus.’”

“‘This is definitely going to put a speed bump in the home-purchase business in South Florida,’ said Louis Spagnuolo, VP of mortgage banking for WCS Lending in Boca Raton.”

The Charlotte Observer from North Carolina. “Troubled homebuilder Beazer Homes USA may have understated expenses in past filings with securities regulators, the company said Friday. The Atlanta homebuilder blamed its former chief accounting officer, saying he may have ’caused’ the wrong numbers to be reported.”

“The disclosure may deepen concern about Beazer’s financial health. The company already faces a federal criminal investigation of its mortgage practices.”

“The Observer has reported, in articles since March, that Beazer’s operations in the Charlotte area sometimes violated federal laws and regulations. The Observer found the company’s aggressive sales practices contributed to a high rate of foreclosures in many of its local developments.”

“In a four-part series, the Observer found Beazer Homes USA sometimes crossed the line between selling to people who could barely afford homes and selling to people who couldn’t. Ten Beazer developments in Mecklenburg have foreclosure rates of 20 percent or higher.”

The Post & Courier from South Carolina. “Home sales in the Charleston area fell last month, dragging down the median sale price as the Charleston real estate market continued to cool. The number of homes sold in the Charleston area in July was down 12.6 percent from a year earlier, according to the Charleston Trident Association of Realtors’ MLS.”

“For the year to date, sales totaled 7,912 houses, down 1,850, or nearly 19 percent, from the 9,762 sold in the same period last year.”

“Broker Rob Woodul said the falling prices could be a reflection of sellers who are listing their homes at more reasonable rates. ‘I think that sellers are being more realistic about what they can get for their homes,’ Woodul said.”

“Experts blame the housing slowdown on tighter lending standards, the loss of investor dollars and a glut of homes on the market.”

“As of Friday, there were 10,779 homes for sale in the tri-county area, up 3 percent from last month. With all those listings, sellers have to be ‘extremely careful’ in pricing their homes, said agent Liz Dettrey.”

“The drop in median home prices last month could mean that sellers are doing just that, and the figure leaves buyers who are waiting for ‘the bottom’ wondering: Is this it?”

“Earlier this summer, the National Association of Realtors said it would likely take until the second quarter of 2008 for the market to turn, several months later than they first thought.”

“‘I think it might last even longer,’ said agent Lou Russo, who’s bracing for an overall market rebound in 2009.”

“Builders are discounting their new homes and throwing in upgrades. Homeowners are competing by covering closing costs and offering to take on small home improvement projects.”

“Russo compared the situation to a consumer who wants to buy a computer but keeps waiting for the most advanced model to come out, they’ll never commit to a sale, he said.”

“‘There will always be a better deal down the road,’ he said.”




Bits Bucket And Craigslist Finds For August 11, 2007

Please post off-topic ideas, links and Craigslist finds here.