The Housing Bubble

The Union Tribune reports from California. “Home builder D.R. Horton has clamped down on public attendance and media coverage of a planned auction today of condominium units at two San Diego developments amid a growing national interest in its marketing strategy. ‘We are going to be closing the auction to the press tomorrow,’ said Michael Schack, senior VP of REDC. ‘We are only allowing registered bidders in. We are not allowing cameras, photography, press, media. It is not our choice.’”

“Earlier, Schack had said anyone could attend but bidding would be limited to registered participants. Schack declined to give a reason for the new restrictions but said they were the decision of D.R. Horton.”

“Builder Michael D. Pattinson, who heads Carlsbad-based Barratt American, contends that such auctions could cause consumers to wait on the sidelines for deeper price cuts.”

From NBC San Diego. “This weekend, there’s another auction, but this one has a twist. Fifty-three condominiums in North Park will be on the block. The units are not foreclosures; they are brand-new units…built by developer D.R. Horton.”

“The homes have previously been valued at $309,990 will have starting bids of $149,000. Bidding for units previously valued at $546,900 will start at $249,000.”

“Bob Green already lives in the La Boheme units in North Park. He said he has mixed feelings about the auction.”

“‘The gut reaction of course is I don’t want my unit to be devalued because of it. That’s my gut reaction. But I also understand that there’s nothing moving in this market place,’ Green said.”

The Sierra Star. “Scott Runtzel is a local broker who is also a licensed appraiser and has worked on the lending side of the industry. Runtzel gave several examples of how the mass of foreclosures are affecting local Real estate prices.”

“‘There is a beautiful three-bedroom, two-bath house listed in the Yosemite Lakes Park area for $325,000,’ he said. ‘But just around the corner is a three-bedroom, two-bath foreclosure house, listed at $233,000. Which would you choose?’”

“Runtzel said he also has a four-bedroom, two-bath home, with a two-car garage, horse arena and five fenced pastures in Raymond. ‘It has been on the market for $760,000,’ Runtzel said. ‘It went into foreclosure, and I now have it listed at $544,900 with no offers yet.’”

“Runtzel said some houses will go for a ‘fire sale’ compared with what they would have cost two years ago.”

“‘It looks bad now, but it is going to get a lot worse,’ he said. ‘I’m not sure what some of these people were thinking, but the two-, three-, five- and seven-year ‘teaser’ mortgages all have escalating payments. We have seen the foreclosures for the two- and three-year escalations but the five- and seven-year ‘teasers’ have yet to hit. This is just the tip of the iceberg.’”

“Nevertheless, Runtzel said all of these foreclosures do not mean the real estate market is unhealthy.”

“‘When you get a flood of foreclosures on the market it does have a slight tendency to bring the overall market down,’ Runtzel said. ‘However, this is still a healthy market. The market in 2001 to 2003 was abnormally high. The market today looks bad, only if you are only comparing it to that abnormal high.’”

“Linda Cavalla, trustee sales officer for Chicago Title, said she has seen a huge upswing in the local foreclosure numbers. ‘We used to open an average 25 foreclosure proceedings a month for our company,’ Cavalla said. ‘Since last October that has been increasing, and we now open at least 35 to 70 each month. We have been quite busy.’”

The Sun Post. “Housing speculators share the blame for a growing portion of the foreclosures in Manteca. In August, 41 percent of the Manteca homes sold at courthouse foreclosure auctions were owned by people who never lived in them, according to an online foreclosure tracking service.”

“According to the service, the foreclosures on investor-owned properties have skyrocketed since four months ago, when just 5 percent of the houses sold at auction were owned by people who did not apply for a tax break available only to those who live in their houses.”

“Deborah Romero, a loan officer in Ripon, said she looked at auctioned homes in Manteca during the first two weeks of September and found only 16 percent where the billing address for the mortgage did not match the address of the home. However, Romero said she wouldn’t be surprised if another 10 percent had lied about their residence.”

“The national Mortgage Bankers Association’s chief economist, Doug Duncan, blamed investors for fueling excessive home building and then walking away from their bet.”

“‘Rapid price appreciation attracted both speculators and home builders, a volatile combination that led to an over-supply of homes,’ Duncan said. ‘When this over-supply became apparent and prices began to fall, many of these investors simply walked away from their mortgages.’”

“Besides the real estate agents and mortgage companies that have been stung by the rising foreclosures and falling home sales, sellers of big-ticket items — such as furniture stores and car dealerships — are also seeing a downturn.”

“The problem, according to local retailers, is that buyers relied on rising home prices and easy access to borrow cash from home equity lines of credit to make big purchases. Forced to operate on a smaller budget, those people are sticking to the necessities.”

“Sam Guedoir, owner of Century Furniture in downtown Manteca, who has run the furniture store since 1995 out of a building he owns, says his sales have been down significantly during 2007. He’s been forced to sell furniture at lower prices to ride out the slump.”

“‘I usually work on clearances — try to make stuff more affordable for people,’ Guedoir said. ‘We’ve started selling more small-sized furniture because people are moving back into apartments.’”

“‘We have left most of our eggs in one basket,’ Guedoir said. ‘Manteca is in many ways a bedroom community. If the bedroom is affected, the whole community is affected.’”

“Car dealers face similar problems, even though their business is not directly related to having a place to live. Mike Naranjo, who runs a used-car dealership, said his business has performed ‘just like the housing market.’”

“His sales are down 30 percent, he said, the worst sales clip he has seen during his seven years operating the dealership. ‘I’m just trying to squeeze,’ Naranjo said. ‘What would you do? Get a car for $2,000 or make your house payment?’”

From KCBS. “Residents in East Contra Costa County, which is considered the center of growth in the East Bay, are worried about what the next two years might bring for homeowners.”

“Foreclosures and delinquency notices have been making life miserable for many homeowners in east Contra Costa who thought they were riding the coat-tails of a booming housing market.”

“‘It’s true that Contra Costa is probably the worst region in the Bay Area,’ said economist Christopher Thornberg. ‘In a large part it’s because of those new housing developments that have been forming here over the last few years.’”

The Daily Bulletin. “A softening housing market cost the county $70 million in anticipated property tax last fiscal year, and county officials are concerned that it could cost millions more this year. Property taxes represent about 60 percent of the county’s discretionary revenues, and brought in $2.39 billion for 2006-07, according to the county CEO’s office.”

“But that was $70 million less than expected, Supervisor Gloria Molina said this week. And the county is bracing for another hit, said Molina spokeswoman Roxane Marquez.”

“‘The big question is, what will be the magnitude of the hit?’ Marquez said. ‘Will it mean that we just don’t enhance services? Or does it mean we have to cut services?’”

“As home values in the county continue to decline, a wave of homeowner-requested property reassessments could result in a similar shortfall for fiscal year 2007-08, which began in July, officials said.”

“A wave of reassessments is already on, as property owners are ‘lining up’ at the Assessor’s Office, county CEO William Fujioka told the supervisors Tuesday. Many are seeking to have their home values reappraised to bring them in line with the declining market, he said.”

“Property-tax bills are also based on the previous January, Assessor Rick Auerbach noted, meaning that people’s property-tax bills will not go down, and their home values will not be reassessed down, unless the homes were cheaper in January 2007 than their October 2007 property-tax bills show.”

“‘The housing values in L.A. County didn’t start changing much until after January,’ Auerbach said.”

Readers suggested a topic on who is buying. “I propose the following weekend topic: With all the bad news from the housing market, you’d have to be an idiot to buy now, right? Yet people are still buying. Are they deluded homeowners, or knife-catching ‘vulture investors’ who are going to be creamed when prices crater? If you know of a friend or rellie who made the mistake of purchasing recently, ask them ‘what were they thinking?’ and post the results back here. I’d be interested in reading about the buyer psychology.”

One replied, “My new (Maine) landlord closed on this house just a month ago. He is a retiring Federal employee, maybe he got a lump-sum distribution. He thinks he got a good deal here, because the price he paid is 30% below the original 2005 asking price of $650K. Shorefront, 2000+ s.f.”

“When he told me he had done very well with the purchase, I ‘yessed’ him - why ask for trouble? I am paying him $1,000 a month to rent his $450,000 alligator, and during the winter, when I am not here, the young couple of housemates with local parents will pay me $420/mo, most of which will go on heat.”

“You might say that it is I who am spending foolishly, and there is some truth in that; my point really is that the landlord is fortunate to collect even $1000/mo from a creditworthy customer. He thinks he will sell his inland NH house within a year. Stay tuned.”

Another said, “I’m considering buying soon. In central Aarkansas, we tend to lag national trends. The bubble lagged and the burst seems to be lagging.”

“I want to get out of the neighborhood scene, get some more room in the house, get a piece of land (5 acres? 25 acres?). So, is now a good time to buy? Probably not the best.”

“I expect to buy some time next year. I figure something in the neighborhood of 170k, I should be able to get a decent house with a couple acres for that. I am also not in a hurry at all, so I expect to make a purchase that is a ‘good deal’ at the time of the purchase. Of course, a ‘good deal’ now is just ‘fair market’ in six months. If I lived in a huge bubble area, I wouldn’t consider it.”

One looked back, “They are thinking in exactly the same way investors in the tech bubble thought. That is, ‘It can’t drop much more can it?’”

“Only if you have been through (and experienced the financial pain) of a bubble bursting, do you NOT reach out and catch a falling knife. Almost all who were invested in the tech bubble had very little experience with the stock market (myself being one of them) and thought the prices would bounce back. I myself was invested very heavily in the QQQQ’s (then the QQQ’s).”

“As it happens, I was away in europe and I got out of the market before I left because I couldn’t watch it on a daily basis. As in the property bubble, the buying and selling was fast and furious at the height. Bubbles are ALWAYS the same. I was following an ‘expert’ who advised his news letter subscribers to buy the QQQQ’s (long) at $84.00. They had already dropped from $120.00 at that point and the newsletter said they were a bargain. (Gee, where have I heard that before?).”

“However, and here’s the lesson and the irony, when I got back from europe, the QQQQ’s had dropped to $65.00! I read the newsletter and he had made no mention to his readers that they should sell. ‘Wow!,’ I thought, ‘How can I go wrong!?’ I plowed big bucks into the QQQQ’s at $63.00, thinking, ‘If an expert like him thought the QQQQ’s were a bargain at $85.00, what must they be at $64.00!’”

“Well folks, what is going to happen with property is what happened with the QQQ’s. I and others (the mirror images of todays FB’s and speculators ) hung in. It had to bounce back. Right? Wrong. Thousands of ‘hot companies’ tanked and many went bust. Just like some of the builders, banks and realtors and brokers are going to go bust.”

“Where I was concerned, the QQQQ’s dropped to $55.00. (That’s okay they will bounce back soon). Then $45.00. (That’s okay they will bounce back soon). Then $35.00. (That’s okay they will bounce back soon). Then $25.00. (Jeez, I wish I’d sold at $60.00 but it’s okay they will bounce back soon).”

“Of course there were the odd mini-rallies as the ‘falling knife catchers’ jumped in and bought but the bubble continued to deflate. As it always does until capitulation day arrives. The QQQ’s finally hit a $20.00 low after falling from $120.00.”

“THAT is exactly what is going to happen to property values. Other forces could come into play which might affect, one way or the other, the eventual outcome. However, it will make no difference. This problem is worldwide. I fully expect prices to drop at least 50% from the highs. Possibly much more. A property worth $700,000 at the height will drop to $350,000. THAT is the path ALL bubbles have taken. I’ve now read volumes on the outcome of bubbles and it’s amazing how the pattern repeats time and time again for hundreds of years.”

“THUS: Now is NOT a good time to buy. Now is a good time to sell if you own property.”

A response, “The amazing part (IMO) is how predictable this is, yet how unbelievable it seems while it plays out.”

The Economist. “The S&P/Case-Shiller national index, the best gauge of American house prices, peaked last year after rising by 134% in the previous decade. France, Sweden and Denmark have all had booms of similar size.”

“In Britain, Australia, Spain and Ireland, the ten-year increase in house prices has been even larger. If America is staring at a nasty housing crash, what does this say about the fate of frothy markets elsewhere?”

“What sets America apart is the time-bomb laid by subprime mortgage lending in the late stages of the housing boom…In short, dangerously loose lending standards fuelled America’s housing boom and now the fallout from increasing defaults is exacerbating the bust.”

“The Federal Deposit Insurance Corp reckons over 1.5m households will eventually be unable to meet their mortgage payments. Prices are falling and more forced sales will add to the already swollen stocks of unsold homes.”

“What might this presage for Europe’s overpriced markets? Robert Shiller, a seasoned bubble-hunter at Yale University, has stressed the role of news reporting in influencing price expectations. If America’s slump deepens, it might trigger a reassessment in Europe’s property hotspots, particularly as tighter credit markets start to price out the more speculative investor.”

“No one knows for sure how markets in Europe might respond to events in America. But one thing is certain: when it comes to asset bubbles, bigger is not better.”

The Saugus Advertiser reports from Massachusetts. “Homebuyers are paying less these days to jump in to the Saugus market, following the nationwide trend. Prices have fallen to an average of $380,100 for a single-family home in Saugus, according to MLS statistics. At the same time, it’s taking longer to sell a home. The Saugus market peaked in 2005 with an average sales price of $404,000 for the 285 single-family homes that were sold that year.”

“Meanwhile, there have been 47 foreclosures in the town of Saugus in the past 180 days, according to foreclosuremass.com. ‘The aggressive predatory mortgage industry put a lot of people in a bad situation,’ said Arthur Coombe of Century-21 Coombe Real State.”

“He further explained that homebuyers with variable mortgage rates and no money down are in the biggest trouble. The market had been rising steadily for nine straight years, added Combe, who said that it was inevitable that an adjustment period would eventually take place.”

“‘I see a change with sellers and buyers coming to grips with the market,’ added Rick Parziale of Red Coach Realty, who gave the example of a seller from Indian Rock Hills whose home might have sold for $725,000 during the recent market peak, but would now probably get closer to $625,000 for the home.”

The Boston Globe from Massachusetts. “More than 9 percent of all homeowners in Massachusetts with adjustable-rate home loans, about 10,000 borrowers, are facing larger housing payments when their mortgages reset to higher interest rates over the next three months. The total value of all those loans, according to First American LoanPerformance, is $2.45 billion.”

“‘This is an unprecedented wave of resets,’ said Wellesley College economics professor Karl Case. ‘It’s going to lead to a credit crunch for people who will find it hard to find loans,’ he said.”

“‘I don’t know how I’m going to survive,’ said Sana Masoud, a single mother facing a $600 a month increase in one of two mortgages she obtained to buy a two-family house in Brighton for $712,000 in 2004.”

“That mortgage will reset on Dec. 1 to 7 percent, from 6.125 percent, pushing up Masoud’s total monthly housing costs to $4,350. She rents the second unit for $2,400 and earns $63,000 a year. But her income will not be enough to cover the mortgage and other expenses, such as property taxes, college tuition for her eldest daughter, and ongoing medical bills for her youngest daughter.”

“‘I don’t want a foreclosure,’ said Masoud, who is asking her lender to renegotiate her mortgage.”

The Staten Island Advance from New York. “Ada Diaz’s belongings are packed in boxes, ready to be moved sometime in the next 10 days. The bank recently sent her a notice to get out of the Mariners Harbor home she owned for 17 years before losing it in July to foreclosure, the result of a series of increasingly calamitous subprime mortgages.”

“Ms. Diaz refinanced four times over the last four years, public records show. WMC Mortgage Corp., where Ms. Diaz got her last and what she says was her worst mortgage in 2005, was recently shut. A Long Island-based mortgage broker solicited Ms. Diaz and originated the last loan, allegedly falsifying her income in the process.”

“‘We wish Ms. Diaz’s case was unique but it’s not. It’s happening all over America,’ U.S. Sen. Chuck Schumer said during a visit yesterday with Ms. Diaz at her Grandview Avenue townhouse. ‘It’s just criminal,’ he added.”

“She said she was seeking some extra cash to finish work on her house. Loan documents show her income was listed by the broker as $8,000 a month. The broker also said she worked at a cleaning service, even though she was retired and not working at the time.”

“What was supposed to be one mortgage payment turned into two payments of $1,769 and $550, respectively, for a combined total of $2,319. The first mortgage was slated to reset next year to $2,314, and the total monthly payment represented more than 90 percent of Ms. Diaz’s income.”

“The broker, meanwhile, made $10,000 to originate the loan, noted Margaret Becker, director of the Foreclosure Prevention Project for Legal Services NYC/Staten Island.”

The New York Times. “With home foreclosures on the rise, buying a property in default may seem a sure route to profit or, at least, a cheap way to get a home. It can be. But it is not an endeavor for the shallow of checkbook or faint of heart.”

“‘Before, even if you didn’t know what you were doing, you were safe because the general market was on the upside,’ said Joseph Tammaro of Brooklyn, a real estate agent and investor. ‘Now, when you buy foreclosures in today’s market with property values in decline in certain areas, you have to be careful because you might be catching a falling knife.’”

“Brad Rozansky, a real estate agent in Bethesda, Md., cautioned against thinking that buying and selling foreclosures is an easy way to make a living. ‘I have plenty of customers who have lost $20,000, $30,000 or $40,000 on a house,’ he said.”

The New Haven Register from Connecticut. “Connecticut’s home building market continued to pull back in August, with the number of permits issued falling 13 percent from July levels. For the year to date, the number of permits issued statewide was down 12 percent at the end of August.”

“Mark J. Nuzzolo, owner of Brookside Development LLC in Woodbridge, said…a logjam has been created as many potential buyers put off making a move in anticipation of further price drops. ‘Clearly sales are down, and as builders we’re a lot more cautious today than we were in the last recession. We’re not anxious to run out and start building new houses,’ he said.”

“Nuzzolo said people are attending open houses and expressing an interest in buying new homes, but many cannot find buyers for their current homes.”

“‘There are so many homes on the market now that buyers are becoming paralyzed by the choices they have,’ he said. ‘Everything is bogged down, and people are very nervous.’”

The Washington Post. “If there’s anything real estate experts agree on these days, it’s that you should not buy property unless you are willing to keep it for years.”

“‘I think a person who’s buying, they’re not going to do quick flips,’ said Sara Rubida, an agent in Arlington. She said she advises her clients to be prepared to own their home for at least three years to break even or make a profit on their investment. ‘But I’d feel more comfortable if they lived there at least five years.’”

“‘The investors who got into the market recently are really paying the price’ for not treating real estate as a long-term investment, said Gregory H. Leisch, CEO of a research firm in Alexandria.”

“‘Try to save some money so you can come up with a 20 percent down payment,’ advised Tom Bryan, a senior VP of Coldwell Banker Residential Brokerage.”

“With Washington area prices as high as they are, that’s no easy feat. As of May, the median condominium resale price for the metro area was $303,968, and the median single-family house resale price was $465,726, said Leisch.”

“So you’d better have about $61,000 or $93,000 sitting around if you want to get a decent mortgage.”

“Condo resale prices in the past 12 months fell in the District and Northern Virginia. New condo prices, meanwhile, declined 0.5 percent across the metro region, according to the Delta report.”

“‘We’re not going to see too much of a rise in the market until all these foreclosures are cleared up, and that’s going to take two to three years,’ said Randy Morrow, an agent in Arlington.”

“In 2005, the pipeline of apartment units planned for construction over 36 months was 18,000. As of June, it had ballooned to 31,030 units, according to Delta.”

“For the first time in a long while, the tide may be turning in favor of renters. ‘It looks as though, through anecdotal evidence so far, rents are pretty flat from last year this time,’ Leisch said. ‘We were predicting that rents would turn flat for the next year or so because of all the condos turned into rentals. The more supply, the less pressure there is on rent.’”

The Virginia Pilot. “South Hampton Roads is not experiencing the condo collapse that has plagued some big cities, but in the past year, prices have fallen more than 20 percent, units are staying on the market about a month longer, and condo building permits have fallen off.”

“‘This is a very tough time to be building these high-rise condominium projects,’ Norfolk Mayor Paul Fraim said, adding that the shortage of credit is killing projects nationwide, especially condominium developments.”

“James V. Koch, an economist and former president of Old Dominion University who oversees the school’s State of the Region report, said the climate in Hampton Roads does not appear to differ greatly from the national situation.”

“‘Verbal reports I have received indicate that some condo buyers are walking away from their condo prior to purchase,’ he said. ‘They forfeit their deposits rather than purchase units that in some cases have fallen in value since the deposit was made.’”

“The median sales price of a condo in South Hampton Roads, for example, has dropped about $60,000 in the past 12 months, from $289,272 to $229,900, according to the most recent data.”

“Not many people are willing to put money down on a condo they can’t see, said developer Bart Frye, of East Beach. ‘When the market was white-hot, people were buying without doing as much due diligence as they do now,’ he said.”

From WVEC in Virginia. “The housing market in Hampton Roads is making some condo developers reevaluate their projects. Crews are hard at work on the East Beach Villas in Norfolk. When they’re done, there will be 20 new high-end condos and it’s owner Bart Frye’s job to sell them in a tough housing market.”

“‘Unless you were living on an island someplace by yourself, you’d be concerned about the market,’ said Frye.”

“Several local condo developments are now on-hold, like the Point Chesapeake project. Economist Dr. Vinod Agarwal says he’s not surprised by builders’ reactions. There are more condos on the market this year than last year, and they take longer to sell, so developers are cancelling projects and lowering prices for new condos.”

The Daily Press from Virginia. “The first home price drop in more than five years means that everyone involved in real estate in Hampton Roads is about to stare down the biggest boogeyman of the business: buyers’ expectations.”

“Hampton Roads home sellers came to grips with their own expectations and finally recognized in August that they no longer had the upper hand on price in an oversupplied market. August marked the first month since February 2002 when the median price of a home in the region was lower than that from a year earlier.”

“‘The message is finally getting across to sellers,’ said said Perry Pilgrim, broker in Hampton.”

“Now that seller psychology is changing, will the consumer get stubborn and wait? Pilgrim said anyone who needed to move would find no problems finding a good deal and mortgage. The buyers who hold out are the marginal ones just looking for a deal that blows them away, he said: ‘Some percentage of buyers are always going to wait for the best deal.’”

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