The Housing Bubble

The Press Enterprise reports from California. “The shrinking mortgage market is also shattering the dreams of potential homebuyers and sellers and creating what Riverside real-estate consultant Steve Johnson called a housing industry ‘gridlock.’ There are too few mortgage options to fuel the resale market or to clear a glut of newly built housing developments, said Johnson.”

“Mary Baldwin moved from Riverside to take a new job in the Bay Area a year ago. Baldwin said buyers entered escrow in March to pay $410,000 for her Riverside house that had been standing vacant. But she said each time they met the qualifications for a mortgage, the rules had changed.”

“Baldwin, who bought a new house in the Bay Area, said she can’t afford to wait much longer to sell her Riverside property. ‘I have two mortgages, two gas bills, two water bills and two property taxes. On a salary of one person, it doesn’t cut it,’ she said.”

“Scott Chappell, Baldwin’s real-estate agent, said if she puts the house back on the market, she will probably have to cut the price by $50,000 because the market has continued to decline.”

“Dan Herrera, manager of the Riverside office of American Union Financial Corp., said in the past 45 days he has turned away 30 to 45 people about to lose their homes. He could not help them, he said, because the new financing he could offer would cost them more than their existing mortgages, which had spiked beyond their means.”

“‘A lot of people leave the office in tears,’ Herrera said. ‘It is sad. I don’t think people realize how tough it is. My advice is I would rather see them rent than destroy their family because they are trying so hard to make their mortgage payments.’”

The Union Democrat. “Even real estate agents, some of the best sales people around, aren’t trying to put a spin on the state of the home sales market in Tuolumne and Calaveras counties.”

“‘This is definitely the slowest I’ve seen it,’ said Coy Knapp, president of the Tuolumne County Association of Realtors.”

“In territory covered by the Tuolumne County Association of Realtors, 715 houses and mobile homes were on the market as of Thursday. The median listing price for the houses was $391,950.”

“In July, 31 homes sold at a median price of $363,000. In contrast, 43 home sales within the association area were recorded in July 2006 and 81 were recorded in July 2005.”

“Real estate agents say these figures emphasize that it’s currently a buyer’s market, as opposed to the market of five years ago, when there were so few homes on the market that buyer bidding wars and selling prices above the asking prices were common.”

“Fallout now hitting is in the form of foreclosures because of so-called sub-prime loans given to buyers who wouldn’t have qualified otherwise. The result is a spike in the number of homes back on the market and extra-cautious buyers.”

“‘Clearly, we see inventory at a higher level than we’ve ever seen before,’ said Jim Hildreth, a Sonora-based real estate agent who been the business for 31 years.”

“On one day alone last week, the Tuolumne County association recorded 18 price changes. Hildreth noted too that there were 61 price changes for all of last week. Also within that seven days, 43 new listings were put on the association MLS compared to 16 pieces of property sold in the same time frame.”

The Orange County Register. “Lenders foreclosed on just two Lake Forest homes in the spring of 2006. But this spring, the number jumped to 37, making the city’s 92630 ZIP code No. 1 in foreclosures in Orange County.”

“All but four of Orange County’s 84 ZIP codes had at least one foreclosure in the three months ending on June 30, with an average of 10 foreclosures per area, according to First American CoreLogic. A year before, 29 ZIP codes – more than one-third – were foreclosure-free, with an average of just over one foreclosure per area.”

“‘I have a property in every city,’ said Patrick Bartolic, a Real Estate agent in Newport Beach who specializes in selling properties repossessed by lenders. ‘Garden Grove, Anaheim and Santa Ana obviously have been hit hard,’ Bartolic said. ‘But I think every community is having difficulty.’”

“Because lenders are repossessing homes faster than they’re being sold, foreclosures could start dragging down home prices in the Inland Empire and other heavily affected areas later this year or sometime next year, said Christopher Cagan, First American’s director of research and analytics.”

“In 2005, 75 percent of the home loans in the census tract surrounding Camile Street were subprime. At least 40 to 50 percent of the home purchase mortgages were subprime loans in the six Santa Ana and Anaheim ZIP codes with high foreclosure rates.”

“Most of the buyers who ended up in foreclosure only owned their homes for about two years, buying at the peak of the market and hoping to refinance out of risky loans using price gains that never materialized, agents said.”

“Staci Treloggen of Prudential California Realty in Laguna Niguel noted that many who ended up in foreclosure used ‘their houses as credit cards.’ They drew on equity lines of credit, only to see values fall below what they owed as the market cooled.”

“In the 1990s when Treloggen worked in the San Fernando Valley, she saw people lose their homes because of the downturn in the aerospace industry or because they couldn’t afford repairs from the Northridge earthquake.”

“‘This time around, it’s like people couldn’t keep up with the Joneses,’ she said. ‘They fixed up their houses. Now they look very nice. They just couldn’t afford to keep them.’”

“We asked Richard Gollis, co-founder of real estate consultants Concord Group from Newport Beach, what he was hearing from his developer and financial clients.”

“Us: What’s your view on the current state of the O.C. new-home market? Richard: ‘Clearly the short-term market is weak, at best…The O.C. market for new homes is deflated to the core demand for sales. Today, as sales are at volumes under 50 percent of peak, we are seeing predominantly shelter transactions. We are starting to see recalibration in home prices, size and mix.’”

“Us: Any idea when this market malaise may end? Richard: ‘It’s more than malaise. It’s a serious correction compounded in last 10 days by credit contraction of global scale. If we were an isolated market area, the price/affordability/demand /product adjustment would require 18 months at the outside.’”

“‘As over 30 percent of our housing market (or more?) has been built by public homebuilders in the peak of the cycle, we are caught up in the national problems. There’s a pervasive though that ’smart money is on the sidelines.’ Who wants to be the greater fool? We could be in this scenario for 24 to 36 months.’”

The Wall Street Journal. “For the nation’s real-estate lenders, the other shoe may be about to drop: condominiums. Already plagued by rising home-loan defaults and foreclosures among overstretched consumers, major markets across the country, including parts of Florida, California and Washington, D.C., are seeing rising foreclosures and bankruptcies of entire condo projects.”

“The percentage of bank construction loans overall that are in default has risen to 2.3% in the second quarter of 2007 from 1.0% at the end of 2005.”

“‘Condos are a significant share of defaults and delinquencies going on,’ says Matthew Anderson of Foresight Analytics, an Oakland, Calif., research firm. His analysis shows condo lending ballooned to $31.3 billion in 2006 from $8.4 billion in 2003. These figures don’t include the large amounts flowing into condos from hedge funds and investment banks.”

“Downtown San Diego can expect 2,900 new units to arrive on the market in the next year, according to real-estate investment brokerage Marcus & Millichap. Hessam Nadji, a managing director at the Encino, Calif., firm, estimates it will take as long as 18 to 24 months for the most-saturated markets to buy up the glut of condo inventory, if the economy overall stays strong.”

“‘More of the iceberg is being revealed, but we haven’t seen it all yet,’ says Norman Radow, a real-estate investor who works with lenders to rescue distressed condo complexes.”

Readers suggested a topic on the PIMCO chiefs proposal. “Mr. Gross’s diatribe should be THE weekend topic. Right problem, wrong solution. He can’t reconcile his points, so it becomes incoherent.”

One pointed out, “Let’s not forget, this isn’t some ‘Robin Hood’ do-gooder, ‘help the little man’ type of guy, this is Bill Gross, a very wealthy FUND MANAGER. When you fall for the illusion that such people are trying to help the little guy out, that’s when the crocodile strikes, pulls you underwater, and spins you around to prepare you for his next meal.”

“A bailout of home-debtors? Sure. Just pay for it by removing the deduction on mortgage interest.”

One questioned the logistics. “So pretend with me for a second that there will be a bailout. And pretend with me further that the size of the bailout is equal to the Iraq war funding. This is probably the right order of magnitude in order to bail out a significant fraction of FBs.”

“Does anyone believe that our gov’t would be capable of doling out the funds to those who are actually in need of it? (Hmmm. Katrina part 2 anyone?).”

Another added, “I was pondering whether or not idiot-Gross’ suggestion on a Federal bailout would even be effective. I eventually came back to the same ole’ things we talk about. 1) Won’t bring median family incomes up to be able to buy homes at current prices. 2) It wont help the job losses, loss of consumption, etc. 3) It wont get yields down on jumbo mortgages, and on and on and on.”

Another skeptic. “I cannot see how this would happen. A bailout of this magnitude? Remember that the LTCM and S&L bailouts were of companies and not a million or more homeowners, flippers, speculators, Wall Street slimeballs, foreign investors, hedge fund sharks, Cocaine Larry, and Bill Poole’s good friend Jim Cramer.”

“I just don’t see this happening. More to the point, how do you prop up housing prices? Cheap jumbos? A very good argument can be made that the ‘Law of Supply and Demand’ does not really apply to this specific instance of slumping housing demand.”

“The whole bailout would essentially be the gov’t buying part of the house, paying off part of the loan, reducing the interest rate on the house, and trying to prop the price. All of this would be needed.”

“It’s really better to get it over with. The Japanese wanted to ‘mitigate’ their problem bubble in the late 80’s early 90’s and are still suffering. We are in the same boat.”

“There should be a long discussion of national/gov’t/business hubris at this point, but I’ll pass.”

The New York Times reports on Florida. “In a sign that the real estate slowdown has hit even the most desirable locations, the developer converting the Savoy Hotel in the South Beach section of Miami into multimillion dollar Fendi-designed condominiums and condo hotels may be facing foreclosure. ‘You have a situation where you have one of the most beautiful locations in Miami right on the beach. You have an amazing architect. You have an amazing designer,’ said Seth Semilof, a former broker. ‘This is the first of many that’s going to go down.’”

“The vice chairman at Prudential Douglas Elliman, Dolly Lenz, was hired to market the apartments. Ms. Lenz said that the project fell apart because the developers could not get enough money from banks to finance the construction. ‘The banks just felt that the whole Miami market was an issue to start,’ she said. ‘I introduced them to every bank on the planet. They couldn’t get financing.’”

The Wall Street Journal. “Problems are emerging as some buyers who signed contracts to buy new condos two to three years ago, when construction was just starting, seek ways to back out as they encounter trouble getting financing in the suddenly dicey mortgage market.”

“Falling prices are forcing appraisals down, so banks aren’t willing to lend the full amounts that people committed to in the sales contract.”

“‘Closings that are scheduled to take place are not taking place,’ says Marvin Moss, a North Miami Beach real-estate attorney. He is suing several developers to help clients get out of contracts.”

“Miami added 4,549 condo units in 2006 and 3,276 so far this year. Another 7,985 will be delivered by the end of the year, with another 8,260 slated for 2008 to 2011, for a grand total of 24,070 news units between 2006 and 2011.”

“Buyer’s remorse is causing problems for some developers. Cindy Cicala plunked down a 10% deposit on a $370,000 two-bedroom condo in a new project in Tampa, Fla., in August 2004, a time when investors were elbowing each other aside to sign contracts. Her unit was to be finished by August 2006, making it one of the first high-rise residences to be built in the city’s reviving downtown.”

“But in April, 2005, the developer asked for an extension. ‘It was just one delay after another,’ says Ms. Cicala, a residential-mortgage broker. She decided she didn’t want to close on the condo, claiming the developer hadn’t held up its end of the contract.”

“Ms. Cicala says she asked for her deposit back but hasn’t received it, so she sued under a federal law that guarantees condos must be delivered within two years unless the developer can prove certain extenuating circumstances.”

“Her attorney, Harry Lee Coe IV, says Ms. Cicala and other clients ‘are seeing their investing potential has dwindled, and they are now no longer at the front of the pack — and you don’t want to be in the middle of the pack in a bad or down market.’”

“In a sign of how widespread the condo frenzy was among lenders, developer Farbod Zohouri’s financing sources ranged from tiny local banks to Lehman Brothers, which lent him $180 million for two Orlando condo-conversion projects that flopped.”

“Several commercial banks lent him money for five projects, despite his relatively small operation and spotty track record, which included a settlement with the federal government on mortgage-kickback allegations.”

“Zohouri says he is ‘an honest person’ who is working hard to get his investors’ money back. He says because of possible legal actions, he can’t explain exactly what went wrong.”

The Street.com. “The developers of Jade Ocean, a luxury high-rise condo near Miami Beach set to be completed in 2009, claim they’ve already sold 98% of the building’s units.”

“Of course, the reality is that this ‘pre-construction sales’ number at Jade Ocean carries little meaning. It’s a phrase that previously impressed people but carries little meaning in present-day Miami, which is increasingly looking like the Netherlands in the aftermath of the Tulip Craze more than 300 years ago.”

“Buyers will walk away from their 20%-down deposits because of rapidly falling prices and a huge inventory overhang that will only get worse in the market, several industry experts say.”

“South Florida real estate agent Mike Morgan estimates that condo flippers have made up 90% of the buyers at the projects Corus has lent to in Miami. ‘These flippers are now under water in most Corus buildings based on what they paid and where the market is today,’ he says. ‘But the market is getting worse.’”

“‘I don’t know anyone that is loaning on these condos to investors,’ Morgan says. ‘If it is not your primary [residence] , you have a problem. I am predicting condos in less-desirable areas will sell for 25 cents on the dollar.’”

The Herald Tribune. “Some Southwest Florida builders are seeing a better year than 2006. ‘We’re actually seeing good increase over last year,’ said Lee Wetherington. ‘The only caveat is that last year was probably the slowest year we’ve ever had.’”

“‘Prices are 20 to 25 percent less than they were a year ago,’ Wetherington said. ‘We’re also getting a lot of help from our suppliers and subcontractors. Their prices are also coming down.’”

“The price of new homes is now substantially less than the price of existing homes — at least 20 percent lower, Wetherington said.”

“‘I had one client who saw a house for $1.75 million. But when he came to us, he realized we could build the same model for $1.25 million,’ Wetherington said. ‘Guess what? He signed a contract.’”

“‘Some national builders will leave the area; other builders will shut down,’ Wetherington said. ‘I don’t expect any real upturn until 2009, and we won’t return to normalcy until 2010. I haven’t seen anything like this since the oil embargo in the 1970s.’”

“Sun-soaked Southwest Florida is largely considered an enclave of wealth. But the last year of suffering in the real estate market has slowly percolated to nearly every industry in the region.”

“Tina Stebner is a college-educated former British Petroleum account executive who came to Sarasota from Chicago three years ago. She bought a home two years ago, at the height of the real estate boom.”

“When she lost her job at BP, she began temping. But even those sporadic jobs ‘ran out’ in the past year. In July, after looking for work unsuccessfully for months, she landed a sales job in Venice. But two weeks ago, she was let go because of ‘economic uncertainty.’”

“‘I was brought up to believe that you go to school, get a college degree and that you buy a house, it’s the smartest investment you will ever make,’ Stebner said.”

“Meanwhile, the back rooms of area pawnshops are filling up with saws, drills and other tools and equipment pawned by displaced workers in the construction trades. ‘We’re being swamped, to the point that we’ve pretty much stopped taking it,’ said James Sewell, co-owner of Goldcoast Pawn & Jewelry in Sarasota. ‘It’s gotten really bad in the last four to five months.’”

“Sewell said many of the former construction workers tell him they are leaving the Sunshine State. The unemployment situation combined with rising taxes and property insurance premiums has made Southwest Florida unlivable for many, Sewell said. ‘It’s gotten to be like California, but without the wages.’”

From Florida Today. “A national economist told representatives of the housing industry Thursday not to count on a sales turnaround in the Sunshine State for at least 18 months.”

“‘Are things going to turn around next year? No,’ said Ted Jones, chief economist with one of the nation’s largest title companies. ‘We’re going to have another 18 months of ugly coming out of this subprime mess’”

The St Petersburg Times. “Jones, a prognosticator often cited by Realtors’ groups, told agents that rashly approved mortgages, the worst of which he dubbed ‘time-bomb loans,’ would help keep the Florida housing market hobbled until 2009.”

“‘If you think it’s bad now, you haven’t heard the end of this,’ Jones said to audible groans from Realtors who’d enjoyed earlier pep talks from the likes of Gov. Charlie Crist.”

“Jones blamed a get-rich-quick ethos that drew gamblers into the housing market and encouraged bankers to make risky loans on the assumption the good times would roll forever. ‘What is the difference between flipping real estate in Florida and playing craps in Vegas?’ Jones said. ‘You get free drinks in Vegas.’”

“Jones described prospective home buyers as buzzards circling fresh highway roadkill, waiting for prices to fall further. He urged Realtors to speed up the process by confronting sellers with the reality of a glut that’s left 41,000 homes on the market in the Tampa Bay area alone.”

“‘We’ve got to sober up sellers,’ Jones said. ‘I don’t care what you paid for it.’”

The Sun Sentinel. “For those with a mortgage who want to refinance…it can be done, but not if your property’s value has fallen off a cliff.”

“‘Banks haven’t stopped lending money to people, they’ve just made it more practical on both sides,’ said Casey Casperson, a senior loan officer in Palm Beach Gardens. ‘Now they’re making borrowers prove they can pay it back.’”

“During the housing boom, lenders didn’t require that of borrowers. As unbelievable as that sounds, let’s give money to people without checking to see if they have a job or looking at their pay stub, it was the way the subprime market worked.”

“What happened a few weeks ago was investors who bought those mortgages from lenders simply stopped buying. Now that no one is willing to take on the riskiest mortgages, lenders say they’ve raised their standards.”

“At Wachovia, those 5 percent down payment mortgages with no verification are gone. If you want a loan that does not require proof of income, you must put 20 percent down. And you’ll need a higher credit score than in the past for any high loan-to-value mortgage, a spokesman for SunTrust said.”

“It’s similar for borrowers with credit that’s not good — 20 percent down payments are being required.”

“Jonathan Klein, general manager of Associates Home Mortgage in Boca Raton, was recently working on a $480,000 mortgage for a home near Loxahatchee, in western Palm Beach County, a few weeks ago. The buyer was making a 25 percent down payment and the interest rate was to be 7 percent.”

“The day the loan was scheduled to close ‘was the day when the market completely collapsed,’ he said.”

“In a matter of two hours, the interest rate rose to 8 percent and the borrower had to pay 5 points, for an extra cost of $17,000 on the loan, to prevent the deal from falling through.”

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