The Housing Bubble

The Orange County Register reports from California. “It used to be easy to refinance, tap into home equity for cash or get 100-percent financing for a home. Mortgage experts say financing is still available to the right people, under the right conditions – at a cost. The danger is that home prices could fall further, a distinct possibility at a time of soaring foreclosures and a glut of homes on the market.”

“‘In parts of Mission Viejo where homes sold for $875,000 a couple of years ago, they’re now listing for $690,000,’ said Lou Pacific, a Mission Viejo mortgage consultant who has worked in the industry 30 years. ‘So what do you do if you want to refinance for $850,000 because you need money again? The house isn’t worth it.’”

“‘If you have to refinance, contact the lender as soon as possible, before you go into default or foreclosure,’ said Dustin Hobbs, spokesman for the California Mortgage Bankers Association. ‘It’s like detecting cancer. The sooner you find out, the more options you have.’”

“Other industry experts say it’s already too late – that even locking in a loan doesn’t guarantee financing. ‘I’ve been hearing the most heart-wrenching stories in my 21 years in this business,’ said Jeff Lazerson, president of Laguna Niguel-based Mortgage Grader.”

The Associated Press. “Mortgage broker Ed Smith Jr. has been arranging home loans for 24 years and it’s never been tougher for him to close a deal than during the past few weeks of turmoil.”

“The upheaval has made it virtually impossible to secure financing for scores of borrowers who would have easily qualified for mortgages just a few months ago, creating a lending drought likely to deepen the housing slump. ‘You have a ripple effect in the marketplace that is devastating,’ said Smith, who is based in San Diego.”

“”I have three borrowers who desperately need to refinance and they aren’t going to be able to do it. They are going to lose their homes,” said Patrick Schwerdtfeger, a Walnut Creek mortgage broker.”

“Orange County mortgage broker Jack Williams has seen nine mortgage deals unravel in the past 11 days. He has since been able to secure financing for two of the borrowers, but ‘it doesn’t look real promising’ for the others as lenders hunker down. ‘You can have one rate sheet in the morning, then it will change at noon and then it will be completely different again at 5 p.m.’”

“The lending slowdown is bound to drive some mortgage brokers out of the industry and prompt layoffs in other related businesses such as title insurers, predicted Wayne Repich, founding partner of Vanguard Mortgage & Title Inc. in Concord.”

“‘This is the worst I have seen in my 19 years in the business,’ Repich said. ‘I’m usually an optimist, but this downturn really has me concerned.’”

The Recordnet. “Home-equity loans…have become more expensive, require more documentation and are harder to come by. ‘I’ve even noticed some entities aren’t even doing home-equity loans,’ said Steven Rosso, CEO of Pacific State Bank in Stockton.”

“The real estate downturn has had and will continue to have a major impact on consumers, said Michael Duffy, CEO of Financial Center Credit Union. ‘We saw in March a surge of individuals coming in for signature consumer loans,’ he recalled.”

“The credit union found many of the applicants held adjustable-rate mortgages whose payments were rising. ‘There were a lot of people who were having their rates adjusting and were not prepared for it and were looking for loans to see them through until they could figure it out or they could refinance,’ Duffy said.”

“The crunch came in when the credit union had to turn many away. ‘In most cases, those folks coming in are already at a high debt-to-income level, and it’s impossible to lend to them,’ Duffy said.”

“Duffy worried that the mortgage credit crisis would prove a major hit on the Central Valley economy, which has been booming until recently, powered largely by an influx of former Bay Area residents.”

“‘I don’t see good times for us,’ Duffy said. ‘We’ll either go sideways from here or we’ll go down.’”

“A lot of commercial loans are funded from the same pool of resources as subprime residential loans, said said Randy Thomas, a Sperry Van Ness commercial real estate broker in Stockton, and that means tighter credit standards.”

“‘No one trusts any of this paper right now,’ he said. ‘Everybody’s re-evaluating because of the subprime lending and giving everybody who could fog a mirror a loan. It’s pressuring all lenders to re-evaluate all types of lending. It means our purchasers may have to come up with more money.’”

“Even some 20 percent-down deals won’t be happening in this new credit atmosphere, he said. ‘The bottom line is loans that were getting done 60 days ago aren’t getting done today,’ he said. ‘This is a big deal.’”

“Sean Snaith, a consultant to University of the Pacific’s Business Forecasting Center, said the recent spate of bad credit news doesn’t bode well for residential real estate. ‘It is a kick to housing when it’s already down,’ he said.”

The Daily Press. “Sales of new homes statewide in June continue to lag behind last year’s pace, according to an industry association, while builders in the High Desert report declines in sales.”

“‘Market absorption is off by about 50 percent compared to a year ago,’ said Mike Dwight, VP of Frontier Homes in Hesperia, which sells about one out of every six new homes in the High Desert. ‘We have had to discount prices,’ Dwight added.”

The Merced Sun Star. “In new subdivisions where builders are looking to clear standing inventory, buyers are seeing offers of free pools, cars and even finder’s fees for residents who get their friends to buy a house in the neighborhood.”

“Atwater resident Shane Ingalsbe is among the buyers who’s glad he waited until now to buy in Jacob’s Ranch, a brand-new gated community. The four-bedroom, 2,767-square-foot house he just bought there was listed at $539,900 in May 2006 when he first considered buying it.”

“He’s glad that deal didn’t work out. Ingalsbe bought the house recently for $427,500. The seller, S&N Builders, paid his closing costs, an increasingly common perk for buyers.”

“Realtor Peggy Flanagan, who’s been in the business about 30 years, says she didn’t know whether to laugh or cry two years ago when local buyers would walk into her office pre-approved for a $200,000 home loan. She would think, ‘Honey, that’s not going to get you a lot,’ she recalled.”

“Now, prices have plunged — the median home price in July was $311,500, compared to $369,000 in July 2006.”

“Gone too are the days when soaring appreciation rates meant quick and easy home equity loans, says Flanagan — which is a good thing. ‘Your home is your home, your castle that you come home to,’ she said. ‘It’s not your bank account. It’s not your entertainment center.’”

The Press Tribune. “A downturn in property values is showing up on Placer County’s assessment rolls, with a drop in assessed values taking a bite out of growth. The $4.5 billion increase for the year would have been nearly $1 billion more if real estate values hadn’t decline, forcing a downward adjustment on about 18,000 mostly residential properties.”

“The county contains about 140,000 residential properties and the downward adjustments have been to houses bought in the past three or four years at the peak of price increases. While the demand for housing is still present in Placer County, values have grown far beyond what the market can sustain, said Placer County Assessor Bruce Dear.”

“Like Dear, county CEO Tom Miller mentioned the current problems associated with no-interest home loans made at the peak of the real estate market, particularly on properties that were bought by speculators. The county is expecting more owners to walk away from homes that are worth less but that they now have to pay interest - based upon the higher initial value.”

“Dear said after the meeting that it’s possible that people will walk away from one home and buy a neighboring home for $75,000 less. They can afford to make payments on the second home, now that prices have dropped.”

“Housing prices have outstripped affordability, Dear said. ‘The market activity in the spring was kind of a real estate bust,’ he said. ‘It suggests the numbers will continue to decline significantly in this assessment roll.’”

The News Sentinel. “Inside Lodi’s tony Sunwest subdivision, ‘for sale’ signs dot nearly a dozen of the neighborhood’s well-kept lawns. Some of those signs have become fixtures in front of the two-story mansions, staying as long, or longer, than anywhere else.”

“‘It’s the toughest market to move — anything over $1 million is sitting six months, even at a reduced price,’ said Pam Murray, a real estate agent who specializes in the region’s pricey homes and ranches. ‘There’s a shortage of buyers in that price range,’ she added. ‘We’re having to get more creative.’”

“There are 35 homes for sale at $1 million or more in the Lodi and Galt areas, including Lockeford, Clements, and Acampo. Just four of the million-dollar homes have sold in that area this year, according to listings provided by Lodi real estate agent Kathy Williams.”

“‘We don’t have a lot of activity,’ she said, noting that even high-end buyers are being more cautious about how much they pay for a home. ‘They just want to make sure that they’re not overpaying…and that’s true in any price range (of the housing market).’”

“In the city of Lodi (plus Woodbridge) eight homes sold for $800,000 or more during the first eight months of 2005 — considered the peak of the housing market. So far this year, just three homes have sold at that price or above, said Paul Mertz, past president of the Lodi Association of Realtors..”

“‘I think this year is obviously different from the norm,’ he added.”

“Potential high-end buyers, often retirees or families from Southern California or the Bay Area, haven’t swarmed the area this year, looking to buy country properties, Murray noted. They’ve struggled to sell their own homes in their areas.”

“‘Our clients that would have been coming up here in droves and raising our prices — they’re not able to close on their properties, and that’s really slowing us down,’ she said.”

“One Bay Area real estate expert said he sees the region’s housing market, high end as well, struggling through 2008. The large supply of new and expensive homes, especially in areas like Stockton, will weigh the market down.”

“‘The Central Valley is not going to look good for the next couple of years,’ said Thomas Davidoff, an assistant professor who specializes in real estate at the Haas School of Business at the University of California, Berkeley. ‘Five years out, I think things will be fine and dandy,’ he added.”

Readers suggested a topic on the recent banking problems and home prices. “My topic for discussion would be how fellow HBBers see the decline in housing prices over the next year in light of recent credit market developments?”

“As this saga unfolds maybe we should update our projections including the magnitude of the decline, velocity of price decline and the idea of large downward price steps vs. the historical grinding declines we have seen in the past. As we know this time is different.”

One replied, “In the highest-priced markets, how can there NOT be an immediate sharp price drop, if buying anything bigger than a 1br condo requires a jumbo mortgage or a Godzilla-sized downpayment?”

“Northern Virginia (my area) seems on the edge of this. Even with recent price drops, very few SFHs here are selling for less than $500k unless you go out to the far-flung exurbs. Condos and attached housing can be gotten for somewhat less than $400k, outside of the swankiest neighborhoods. But California has to be toast after this…”

To which was posted, “From your lips to gods ears. A 20 to 25% drop in some markets might mean that buyers looking for a plain old home could buy and only get mildly ripped off over 20 years. Some markets need 40% down, but with some inflation and some additional modest drops all those not directly involved with the 2004 to 2006 craze can get on with our lives.”

One suggested activism. “All real estate is local (!). So it’s time for local papers, broadcasters, and economists to figure out just how inflated their markets are and let everyone know that. This is especially important for ‘non-bubble’ areas, where overcorrection is more likely, and for areas not in the NAR/Moody’s 146 metro area data.”

One from the Washington area. “The recent rate increase for jumbo loans (among other things) will hit the NoVa area really hard. This fall and winter will be another big price leg down. A recession and/or a pullout of Iraq will be another long-term downward pull on the market, since most of NoVa employment is defense or tech.”

One also points to the jumbo loan issue. “I am starting to see cracks in the dike, price drops are getting larger & more frequent. People are switching agents, upping the incentives and still not getting bites. Its the PRICE combined with the inability of buyers to get financing anything above the conforming cap, and then only if they are a PRIME credit risk.”

From Reuters. “Withdrawal slips in hand, customers lined up at Countrywide Bank branches on Friday to take back their money, as parent Countrywide Financial Corp. tried to assure investors and depositors that it and its bank were stable.”

“‘The bottom line is it’s your money,’ said Yumi Oshima, who had come to move her more than $100,000 out of Countrywide certificates of deposit if the penalty was not too stiff.”

“Oshima wondered how much worse the situation would become. She knew that her two CDs were insured by the Federal Deposit Insurance Corporation (FDIC) for $100,000, but said she was still concerned. ‘Do I trust them?’ she asked, referring to federal banking regulators. ‘They’re not doing so well for the entire economy.’”

The LA Times. “One concerned depositor at the Beverly Hills office, Woody McBreairty, said he heard about Countrywide’s troubles for the first time Friday morning. ‘I got out of bed and came right over here,’ said McBreairty. ‘It was a wave of shock. I thought, ‘My God, I’ve got to go and get my money.’”

“The retiree from West Hollywood said he intended to close his CD account, which holds more than $100,000. ‘Who wants to leave their money in a bank where they might lose it?’ he said.”

The Baltimore Sun from Maryland. “Market observers say the depth of the mortgage problem is impossible to ascertain at this point. Not only is it unclear how many more borrowers will get into trouble, but the problems can be masked by the fact that mortgages are repackaged by Wall Street and sold to investors around the world.”

“‘The underlying problem, of course, is that people are reneging on their mortgages, but that has set off a house of cards,’ said Michael Greenberger, a professor at the University of Maryland and a former securities regulator. ‘The big question is whether confidence will return.’”

The Rocky Moutain News from Colorado. “The unprecedented mortgage meltdown is hammering hundreds of thousands of homeowners nationwide who are trying to buy homes or refinance loans, at both the low end and the high end of the housing market.”

“‘It’s a terrible, terrible situation,’ said Steven Chotin, president of his namesake asset management group in the Tech Center, which structures mortgage- backed security deals. ‘The market right now is in turmoil.’”

“Many market observers, especially in Denver, where foreclosures have been raging for the past six years, had been warning that it was inevitable the lax underwriting standards, easy credit and creative financing deals, such as 100 percent loans, interest-only loans, and option ARMs, would lead to a correction, if not a collapse.”

“Even some well-heeled borrowers with good incomes and credit scores are being denied loans, face paying interest rates not seen for decades, or are being told to cough up at least 30 percent at closing.”

“Veteran mortgage bankers and brokers, some of whom have been in the business for the past three decades, said they have never seen anything like it. Liana Pomeroy of Cherry Creek Mortgage said she has been scrambling to keep loans afloat, so far with 100 percent success. ‘Every single one has been a challenge,’ she said.”

“Broker Susan Mathews said that many people are sitting on the sidelines, waiting for the markets to calm down. ‘There’s no sense of urgency,’ Mathews said. ‘People think that the house they are looking for will probably be here, and if not, there will be a lot of other ones to choose from.’”

The New York Times. “The turmoil in the international mortgage market is starting to make it harder for New Yorkers to get the large loans that are typical in a city where the average apartment in Manhattan costs $1.3 million.”

“‘It’s the end of an era of highly leveraged lending on residential apartments in Manhattan,’ said Keith Kantrowitz, the president of Power Express Mortgage Bankers in Lake Success, N.Y.”

“Less than two months ago, Mr. Kantrowitz said that the average mortgage request by Manhattan borrowers had nearly tripled, to $4 million from $1.45 million, in the previous two years. Now, he said, his company will not lend more than 90 percent of the value of apartments worth more than $2 million.”

“‘Buyers are going to have to liquidate their assets and put more money in,’ he said.”

“Mr. Kantrowitz said he had a client who was trying to buy a $3.6 million Upper East Side condominium with a $3.3 million mortgage. That would mean the buyer borrowed about 92 percent of the value of the home. The buyer had a strong credit score and had been pre-approved for the loan by a major bank. But last week that bank said it would lend only $3 million, or about 83 percent.”

“Jeffrey Appel, director of new development financing for the Preferred Empire Mortgage Company, said most banks still made loans for jumbo mortgages, but under stricter guidelines.”

“‘I have had people call that, two weeks ago, I could have gotten 95 percent financing,’ Mr. Appel said. Now, he added: ‘It’s just not available. Things have changed overnight.’”

“Yossi Notik, a broker for the Manhattan Mortgage Company, had a client who was trying to buy a $1 million Upper East Side co-op. His client, who makes nearly $500,000 a year with a credit score in the 600s, wanted to take out a mortgage for about $850,000.”

“But four days before the scheduled closing last week, the bank changed its mind and said it would not do the loan at all. Mr. Notik found his client an $800,000 mortgage with another bank. But the change forced her to delay the closing, put down more money and pay the seller’s expenses incurred by the delay.”

“‘She deliberated walking away from her $100,000 down payment due to the tremendous amount of stress,’ Mr. Notik said.”

“Robyn Sorid and her husband spent six months searching for a two-bedroom apartment in TriBeCa to buy for about $2 million. But as Ms. Sorid watched her friends have problems with changing mortgage rates, she decided to rent. Last week, she signed a lease for a place in TriBeCa.”

“‘Tons of friends are seeing their mortgage quotes being re-priced,’ she said. ‘We will probably sit it out for the next six to eight months, watch what happens and see.’”

The Miami Herald reports from Florida. “In a blow to an already weak housing market, Option One Mortgage will no longer provide mortgages to buy Florida condos, a decision industry watchers warn other lenders could copy. Option One’s move comes as the once-hot market for condominiums in Florida has become glutted with thousands of unsold units.”

“Warned Alex Barron, an analyst with Agency Trading Group: ‘It’s got a pretty broad implication.’ If other lenders follow, ‘you’re going to find a lot of very desperate buyers’ who won’t be able to close even if they wanted to.’”

“The news comes at a dark time for the Sunshine State, which has found itself in a condo glut. In Miami-Dade County, there’s a 31-month supply of existing condos, and the pace of sales has dropped nearly 40 percent year over year, according to McCabe Research & Consulting in Deerfield Beach.”

“‘I think the worst thing you want to do in this market is be a condo seller,’ said Jim Gillis, broker in Miami. ‘It’s almost like a disease that is going to be very difficult to get rid of.’”

“Something is missing from two new companion condo towers in the inner core of Miami’s downtown: cars. The white towers of the Loft 1 and Loft 2 buildings have no garages.”

“Forgoing on-site parking means huge savings in land and construction costs for developers, and affordable, well-finished if compact urban dwellings for buyers.”

“If all five buildings are completed, downtown would have about 1,600 new workforce condos, according to the parking authority. Prices at Loft 1’s 196 units, now open and occupied, ranged from $99,000 to $250,000. At Loft 4, a planned 404-unit tower, sales opened this week, with prices at $139,000 to $399,000.”

“‘Urban housing should not have parking on site, especially workforce housing,’ said Miami real estate analyst Michael Cannon. ‘People in Miami have to be educated that that’s the way it should be.’”

From CNBC. “Mike Huckman reports that the tip of the Florida peninsula is being called the ‘ground zero’ of the market downturn.”

“He says that in Florida’s three toniest counties, prices have plunged 7%-9% over the past year, thanks to ballooning inventory. Some 45,000 new condos are currently being built, on top of 63,000 condo conversions over the past few years.”

“One site Huckman visited, a $91 million, 522-unit condo conversion project, is now in receivership.”

The Orlando Sentinel. “I’m living next to the Amazon jungle, you see. My neighbor’s once-pristine property has gone to seed, another casualty in America’s stagnant housing market. For months, the ‘For Sale’ sign in the weedy front yard was the punch line of a cruel shopworn joke.”

“Gone from our communities are scores of families that overreached pursuing the American dream. Left behind are thousands of homeowners who inherited the nightmare of declining property values and shabby vacant homes that are selling as fast as Slurpees in the Arctic in a market with a 20-month glut of homes.”

“Code-enforcement units report spikes in complaints about overgrown yards, pools with foul green water and junky driveways. ‘You’d be surprised at the number of overgrown lots at [upscale Orlando communities] Vista East and MetroWest,’ says Mike Rhodes, code-enforcement manager for Orlando.”

“Don’t bother calling the real-estate agent on the ‘For Sale’ sign. All he or she can do is plead with the property owner to act responsibly. William Weaver, a real-estate professor at the University of Central Florida, says lenders have a legal duty, a fiduciary responsibility to the foreclosed, and an ethical responsibility to keep the property from becoming an ‘eyesore.’ In reality, though, you often have to ‘rattle the chain to get them to cut the grass.’”

“Overgrown properties, he says, ‘obviously are going to be a concern now and will continue to be a concern. It’s not going away, and it’s going to get worse.’”

“‘Too many people have been funded who really shouldn’t have gotten loans, and as a result it’s affected all of us,’ says Gary Balanoff, VP of the Orlando Regional Realtor Association.”

‘”We’re now trying to bail out of a leaky-boat situation.’”

The Herald Tribune. “Think the global credit crunch is something distant? Not if your loan was in the pipeline from First Magnus, which made $30 billion in mortgages last year and employs 5,000 people, all of whom were sent home from work, apparently for good, on Thursday.”

“The First Magnus episode is becoming all too common, and that phenomenon is making itself felt in Southwest Florida, where real estate is the king of the hill.”

“‘A lot of lenders I used to work with are going out of business,’ said Marta Grande, a Sarasota mortgage broker who had counted on First Magnus for quite a few loans up until this week. ‘I would have to say about 40 percent.’”

“‘All of us in the food chain, bankers, builders developers, mortgage lenders, I would say we all got a little bit intoxicated with the market,’ said Jody Hudgins, Florida executive for the First National Bank of Pennsylvania, which operates in Sarasota and five other Florida communities.”

“‘As far as getting a loan, it is a real, real struggle to get somebody with good credit a loan,’ Grande said.”

“Even very prosperous investors like Sarasota’s Harvey Vengroff, founder of the world’s largest debt collection agency, are running into extreme makeovers on their real estate loan paperwork.”

“‘One is for $5.7 million on a property that was a no-brainer a couple of months ago,’ groused Vengroff. ‘Now they’re asking for more information and checking their verbiage and doing other stupid stuff.’”

“The media has put nearly all its attention on defaults for so-called subprime mortgages. However, less exotic creations like ‘no-documentation loans’ for those with high credit ratings and big bank accounts, and even normal real estate loans for investors, are becoming rarer.”

“‘It all kind of went down with the subprime, but that’s all everybody hears about,’ said Max Shaw, a residential lending officer at People’s Community Bank in Sarasota.”

“Like Grande, he said that so-called ‘Alt-A’ loans have nearly vanished. ‘It is just getting back to the way it should be,’ Shaw maintains. ‘It is just that you are going to have to have decent credit and you are going to have to prove you have what you say you have.’”

“The nation is still about 18 months away from feeling the full impact of those loans, because they reached their peak popularity about two years ago, said Sarasota’s Bob DeCecco, the former head of Opteum Financial Services’ Florida operations.”

“‘So these individuals got 100 percent loan-to-value loans, on properties that are now depreciating, with interest rates increasing, and a tighter credit market, in which they would not even re-qualify for that program,’ DeCecco said. ‘They have to refinance, and they can’t.’”

“Shaw said he has plenty of money to lend, for those planning to move into the home. OK, but what about an investor seeking to buy and then rent out a bargain home being made available by a desperate seller?”

“‘I couldn’t even quote you investor money,’ Shaw said.”

“The collateral damage from cheap money turning expensive is definitely not limited to consumers. The run-up in volume and prices on expensive homes during the first half of the decade caused developers and builders to bolt herd-like to grab property for future construction.”

“In nearly every case, there was a banker at the front end making a construction loan with an interest payment reserve to tide the developer over while he or she prepared the property for eventual sale.”

“With those projects now getting postponed in Southwest Florida’s slow housing market, those interest payment ’set-asides,’ in some cases, are now running out, said Hudgins.”

“A lot of those real estate speculators and developers will not have the money to carry the debt. Banks will then be faced with ‘limited options,’ one of which is foreclosure, he said.”

“‘Nearly every banker in Florida got seduced,’ Hudgins said. ‘What we never put into the equation was how much of the purchasing was fueled by easy money, cheap money, foolish money, from lending sources that were desperate to meet their production needs.’”

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