The Housing Bubble

The Sacramento Bee reports from California. “Beth Flure thought last week was overwhelming when some East Coast banks sent her 11 new foreclosed houses to sell. Tuesday a Denver mortgage servicer handed her 42 houses to unload. Then came four more. ‘That’s just astronomical,’ said Flure, a Sacramento real estate agent who markets bank repossessions. ‘There’s tons, and we’re going to see far more. It’s not going to stop for a while.’”

“Home loan defaults and foreclosures spiked to unprecedented highs across the Sacramento region, DataQuick reported Friday. Statewide numbers also broke records.”

“At least 6,638 homeowners in El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties received notices of default from their lenders during the three-month period. The default notices are gaining on sales. DataQuick said 7,791 new and existing homes closed escrow during the same period in those counties.”

“With slow sales come more downward pressure on home values. Median prices have fallen by as much 21 percent from their 2005 highs in Placer and Sacramento counties.”

“Statewide, 24,209 homeowners lost their homes during the quarter, the firm said, the highest number since it began keeping statistics in 1988.”

The Press Democrat. “Foreclosures shot to record highs in Sonoma County this summer. Lenders began foreclosure proceedings against 749 homeowners in the third quarter, up from 462 in the second quarter and more than triple the number from a year ago, according to DataQuick.”

“Statewide, 54 percent of those in default lost their homes, up from 19 percent a year ago.”

“Like many homeowners, Anthony Lessnau didn’t figure housing would swing downward by the time the loan he took out two years ago adjusted to a higher payment in June. But the furniture maker couldn’t refinance because he owes more on his loan than his Larkfield town home is valued on the market.”

“‘I would love to keep my house,’ he said. ‘But I saw the writing on the wall when it (my monthly mortgage payment) jumped up. I had a feeling I was in for something bad.’”

“Lessnau has listed the town home for sale at $249,000, less than the $315,000 he owes on the loan. The lender has agreed to the so-called short sale, but Lessnau still could eventually face foreclosure if he can’t find a buyer.”

“Rigzin Vassallo, the Prudential California Realty agent trying to sell Lessnau’s town home, has 22 short sale listings. ‘He’s a typical case. The timing was horrible but he’s not alone,’ Vassallo said.”

The San Francisco Chronicle. “Lenders foreclosed on a record 3,242 Bay Area homes in the third quarter, a 622 percent increase from the same time last year, and there’s no sign of relief ahead, according to a real estate report Friday.”

“A fairly typical case is that of Kathy Quintanilla, who bought a two-bedroom home in Oakland’s Fruitvale district two years ago with 100 percent financing. When her mortgage reset in August, her payments went from $2,800 a month to $3,500. It is slated to reset again in February.”

“‘I’m finding I can’t refinance,’ said Quintanilla, who said the home is now worth about $350,000 - $48,000 less than she paid.”

“She is thinking about a short sale. ‘The IRS would come after me for the difference,’ Quintanilla said. ‘But I’m considering it - is a short sale the best option for me, is it a way out?’”

The Contra Costa Times. “East Bay defaults were high: Alameda County recorded 2,126 notices of default, up by 164.8 percent compared with the third quarter of 2006; Contra Costa County had 3,216 notices, up 217.8 percent in the same period; and Solano County rose 196.7 percent to 1,513.”

“San Joaquin County had some of the highest rates of foreclosure activity in the state. Notices of default more than tripled to 2,961 in the third quarter.”

“Most of the loans that went into default last quarter were originated between July 2005 and September 2006 with a median age of 18 months. Loan originations peaked in August 2005, and the use of adjustable-rate mortgages for first mortgages peaked at 77.8 percent in May 2005.”

“Dave Konesky, a broker associate in Tracy. Although Konesky said his office has seen sales pick up in recent weeks because of prices slashed hundreds of thousands of dollars, he said there are few options for sellers in a ticking clock heading toward foreclosure.”

“‘I’m hoping to see more loan products coming out to help people in foreclosure,’ he said. ‘Otherwise, people are going to wonder, ‘Why should I keep paying on my $600,000 home when it’s worth $400,000? I should just walk away.’”

The Mercury News. “‘Where we’re seeing the biggest increase in defaults is in the Central Valley, the Inland Empire’ and in Contra Costa County, said Delores Conway of the Lusk Center for Real Estate at the University of Southern California. Defaults rose 49 percent in San Joaquin County last quarter, for example, from the previous one.”

“In Santa Clara County, 1,655 notices were mailed to borrowers last quarter, up 30 percent from the second quarter and 147 percent from the third quarter of 2006.”

” Krysta Dodd and her husband bought a four-bedroom home in Patterson, about 80 miles from Santa Clara, in Stanislaus County. Like many buyers in recent years, they used a first mortgage equal to 80 percent of their home’s $439,000 purchase price and a second mortgage to make up the other 20 percent.”

“In August, the interest rate on their first loan went from 5.85 percent to 7.375 percent, and their combined payments for both loans went from $3,091 a month to $3,843 a month. With rate increases still to come, they want to refinance. But with no equity in their home, which Dodd says is now worth about $350,000, they may not be able to. With more borrowers in default, few lenders will make ‘100 percent financing’ loans now.”

“‘We want to stay put,’ Dodd said. She and her husband are both working overtime at their jobs to stay current on their payments. In the long run, she thinks her house will be a good asset. ‘We’re just hoping and praying that the market turns around.’”

“‘If there are foreclosures in the area, that changes home prices and it changes buyers’ expectations,’ Conway said. ‘They sit on the fence even longer.’”

The Press Enterprise. “There were 9,250 default notices in Riverside County in the quarter, more than three times the 3,040 recorded in the same quarter of 2006. In San Bernardino County, 7,038 notices were filed, up from 2,548 in the third quarter of 2006.”

“‘Defaults were up in every California county, but about half were in the Inland region or the Central Valley, where buyers with weak credit histories, desperate to catch on to the real estate boom of a few years ago, bought homes using mortgages with adjustable rates. Now, many are unable to make the payments because the rate has been adjusted upward.”

“We know now, in emerging detail, that a lot of these shouldn’t have been made,’ said Marshall Prentice, DataQuick’s president.”

“In a separate report, the California Building Industry Association reported Friday a 46 percent drop in building permits issued statewide in September from the same month in 2006, as new-home developers concentrated on trying to sell off existing properties.” There were only 711 residential building permits issued in the past month in the two Inland counties, down sharply from 2,403 in August.”

The LA Times. “In California, foreclosures are concentrated largely in outlying areas such as the Inland Empire, the Antelope Valley and the Central Valley.”

“But data released Friday show that the pain is spreading to higher-priced neighborhoods in Los Angeles and Orange counties and is even trickling into wealthy communities.”

“In four Newport Beach-area ZIP Codes, for example, there were 11 foreclosures in the third quarter, up from just three in the same period last year. There were seven foreclosures in Bel-Air, and none a year ago.”

“‘It’s definitely increasing,’ said Joyce Essex, a real estate agent based in Beverly Hills who specializes in selling foreclosed homes.”

“Essex said most of her properties were in the San Fernando Valley and South Los Angeles, but about 10% of her listings are now in a more affluent part of town. ‘It’s working its way to the Westside. The Westside is always last to get hit,’ Essex said of the foreclosure wave, based on her experience in the 1990s downturn.”

“In the last six months, Essex’s staff has grown from four to 14 to handle the volume of foreclosure work.”

“At the high end, Essex said, foreclosure victims tend to be ‘people who kept pulling money out of their houses, using equity [loans] to pay credit cards, buy cars, go on trips. They used their homes to get cash and kept pulling equity out,’ she said.”

“Laguna Niguel broker Steve DeVre said he had shifted more of his work from sales to foreclosures, including evaluating troubled properties for banks. ‘I’ve been barraged in the last 30 days’ by foreclosure work, he said.”

“Foreclosures are expected to continue escalating as large numbers of variable-rate mortgages reset upward in the next year, leaving homeowners with payments that are higher than they can afford. That could flood the housing market with discounted, bank-owned homes — possibly stalling a recovery for several years, some analysts say.”

“Even if the Federal Reserve continues cutting interest rates, ‘it’s still going to be shocking,’ said Edward E. Leamer, director of UCLA’s Anderson Forecast.”

“The third quarter saw a combined 13,314 foreclosures in the seven Southern California counties of Imperial, Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura. That’s up from 1,960 in the third quarter of last year — an increase of 579%.”

“Los Angeles County led the way with 3,627 foreclosures, many of those in the Antelope Valley. Riverside was a close second, with 3,462 foreclosures.”

“In addition, 41,062 Southern California homeowners received notices that they were in default on their loans.”

“In the Inland Empire and Central Valley, foreclosed properties have been selling for about 10% less than other homes in their areas, DataQuick said.”

“Steven Thomas, president of Re/Max Real Estate Services in Aliso Viejo, expects foreclosures to hurt prices in his area next year. Foreclosures and short sales account for 10% of Orange County listings, Thomas said. That has kept inventories up now, even though they traditionally fall this time of year.”

“‘We can’t come off those highs [inventories] when we keep getting more bank-owned listings,’ he said.”

The San Diego Business Journal. “San Diego had 2,221 filings in August before climbing in September, according to Default Research. Default reported 422 local foreclosure filings in September 2006.”

“The top cities within the county with foreclosure listings were San Diego with 740, Chula Vista with 306, Oceanside with 175, Escondido with 139, El Cajon with 116, Spring Valley with 82, and San Marcos and Vista, both with 78.”

“‘Foreclosures have had a negative rippling effect on the California economy,’ said Serdar Bankaci, CEO of Default. ‘With housing inventories high and foreclosures still on the rise in California, home prices are declining in a place where the cost of a home was once an average of $593,000.’”

Readers responed to a question I put out, using one poster’s famous line, “‘Who opened the gates to Dumbass Ranch?’ I am working on the housing bubble problem and the solution (making sure it never happens again). IMO, the source of the problem must be clearly identified, which is why I hope you guys will take up this question and help me out.”

“This was in the W&W post yesterday: ‘In the wake of the financial market turmoil that arose over the summer, there has been a remarkable lack of finger-pointing so far over the cause of the crisis. But one observer, Tom Schlesinger, the founder and executive director of a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of ‘regulatory foot-dragging’ that has harmed the public.’”

“I have come to believe the root cause of this financial mania can be traced to the unaccountability of three groups: the US congress, the Wall Street investment banks and the Federal Reserve. So I ask you, who did open the gates?”

One said, “U.S. Congress gets voted in by popular election. If financial mania can be traced to the U.S. Congress failing to keep accountability, then it can be traced further to the U.S. public for failing to keep accountability on the people it elected.”

“As an ex-political science major, let me tell you incumbancy is a big issue. 97% re-election rate in the House.”

One points at the Street. “I lay it entirely at the feet of IBs, hedge funds and other assorted greedy pigs of that ilk. Of course, the Fed accommodates them but the masterminds of this money grab are on WS.”

Another singles out economics, “The irresponsibility in housing finance is merely a symptom of a greater, more sinister problem. It goes hand in hand with ‘deregulation,’ the ‘laffer curve,’ ’supply side,’ etc.”

One sees a human element, “The root is Greed (…the love of money…), normally held somewhat in check by Capitalism, ie greedy crooks keeping each other in check through competing self-interest. But lack of transparency has subverted checks and balances. The housing bubble has been a classic pump-n-dump. To assign blame, just ascertain who got the vig.”

I replied, “Yeah, but we can really fix the human nature stuff. What I am searching for are the players and institutions that we could take action on to prevent a housing bubble in the future.”

One looks at a bigger picture, “If there has been a remarkable lack of finger pointing it’s because they are all co-conspirators. The very magnitude of corruption from the lowest levels of private sector extending through the government all the way to the highest levels, along with other national events, should awake all freemen to a sense of our awful situation.”

So did this poster, “The housing bubble is just an asset bubble by any other name, so the answer to ensure that a new housing bubble doesn’t blow is to ensure no more asset bubbles. What inspires bubbles? 1) Mania - human nature, unchangeable. 2) Fraud - human nature as well. 3) Unwise investing. People follow the mania and make it more manic. But unless they’re fraudsters, then it’s just stupidity.”

“Let the market hand them their lumps. If we force stupid money to lose value for investing in mania, and control fraud future bubbles will inherently be small.”

One saw a political angle, “I think this scam has been more political than anything. I believe it was all about gun’s & butter.”

And another take, “My answer is more in the category of ‘what’ opened the ranch gate, not ‘who.’ In the past, it was generally accepted that certain people probably should not be lent large sums of money. That principle got replaced with the idea that home-ownership was a universally- desirable, universally- attainable goal. Politicians pandered, lenders grew greedy, and our gatekeepers, the federal regulators and local property appraisers, especially, capitulated.”

One saw a chain of events, “I think the roots go back decades. In 1987, the stock market collapse and the Federal Reserve dropped Fed Funds to 0%. This caused the markets to rebound and did not impact the dollar. Federal Reserve intervention in routine markets became the rule.”

“In 1994, the Federal Reserve in its March, 1994 meeting even questioned whether their policies would lead to asset bubble growth. In 1995 all reserve requirements were lifted on bank lending on houses for loan amounts less than $1.4MM. In 1999, the Glass-Steagall act was rescinded, allowing banks and financial institutions to take unprecedented risk. Et voila.”

“This housing bubble is just one aspect of an enormous credit bubble. I blame the Federal Reserve.”

One looked at a societal trend, “I think a demographic factor has been at work. When Boomers were young, the focus was on competition for good jobs. When Boomers reached mid-career, they became more interested in speculative investing and less interested in working. Couple that with the tendency of people over 50 to become ’self-employed’ and you have a huge increase in the number of realtors AND in the number of investor/fixer/flippers.”

“An astute observer (Grantham?) has pointed out that Boomers cannot all cash out simultaneously, they are just trying to sell their assets to one another, or to each other’s children. It can’t work out.”

“How to prevent another housing bubble? Easy. This one will not be repeated until forgotten. I’d say two generations or maybe two and a half. Sixty years or more.”

Another blames securitization, “When banks lent out their own money they had to be careful to be sure that the borrowers could pay it back. When investors started to buy the loans from the banks (and later the non-bank loan originators), the banks didn’t have to be careful.”

“Add together no risk assement by the loan originators and desperately inadequate risk assessment by the securitizers and investors, no regulation to fill in the gap and innumerate borrowers and you have a recipe for total disaster.”

One asked, “Ben: I’m confused by your comments on who is responsible. Ultimately, isn’t it the individual players? No has put a gun to anyone’s head and forced them to invest or buy houses. The minute blame is shifted to banks, government or Fed, doesn’t that allow all the individuals to become victims?”

One posted this from the Times, “Henry Paulson, the US Treasury Secretary, is seeking to persuade the White House to offer financial compensation to American mortgage lenders that try to help troubled homeowners by renegotiating the terms of their loans.”

“It is understood that Mr Paulson’s proposals are meeting significant resistance within Washington, where it is perceived that such a move would be a bank bail-out scheme.”

The Associated Press. “If you want to see a congressman squirm, mention a multibillion-dollar bailout for the housing market crisis. The apparent discomfort contrasts with reality: most risky home loans made near the end of the housing boom can’t be salvaged.”

“The unfolding crisis in the $10.8 trillion U.S. home loan market is so widespread and so complex that many experts question whether the government can do much to fix it — especially if a bailout isn’t on the table.”

“‘Some people are just in houses that are just way out of reach for them,’ said Douglas Elmendorf, a senior economics fellow at the Brookings Institution, noting that politicians do not like ‘explicitly appropriating funds for this.’”

“Congress, the White House and bank regulators have little ability to prevent defaults and foreclosures, said Karen Weaver, global head of securitization research at Deutsche Bank.”

“‘It’s unfortunate, but it has to play out… We need home prices to come back to reality,’ she adds.”

The New York realtors report on September sales. “Sales of existing single-family homes in New York state in September dropped to pre-boom levels for the month, posting a more than 20 percent decrease in sales compared to the same time last year, according to preliminary single-family sales data accumulated by the New York State Association of REALTORS. The statewide median sales price dropped 6.9 percent compared to September 2006.”

“‘The New York state housing market had been experiencing a soft landing from the boom market, and continues to do so despite this September drop in sales,” said Charles M. Staro, NYSAR CEO.”

The Staten Island Advance from New York. “The number of single-family homes sold in the borough dropped 22 percent last month and almost 40 percent from September 2005, according to state figures.”

“A total of 166 single-family homes sold on Staten Island last month, down from 213 in September 2006 and 295 in September 2005.”

The Times Union from New York. “Foreclosure filings in the Capital Region continue to skyrocket. Through the first nine months of 2007, 1,125 filings were made in the region’s four core counties, according to newly reported numbers from RealtyTrac. That’s more than double the 470 filings reported between January and September 2006.”

“Stephanie Galvin, a Cohoes-based counselor at the Albany County Rural Housing Alliance, said the nonprofit’s foreclosure-related workload has tripled in a year. ‘As of late, it’s the main topic I’m handling,’ she said.”

“‘Anybody could get a mortgage a year ago,’ Galvin said Wednesday. ‘If you were breathing, you could get a mortgage.’”

“‘We’ve been seeing it growing and growing over the last eight months,’ said Ellie Peppers, the Better Neighborhoods Inc.’s assistant director in Schenectady. ‘And we’ve been anticipating a rush of people in November, because that’s when a lot of the rates adjust.’”

“In each of the Capital Region’s four core counties, the number of foreclosure filings through Sept. 30 this year far surpasses the number reported during the same period in the prior two years.”

“The counselors concede homeowners are often partly to blame for their troubles. Some ignored advice or warning signs as they rushed to sign complicated paperwork.”

“‘People are very embarrassed,’ said Galvin. ‘They feel foolish, like they made bad decisions. And that may very well be the case, but they’re not alone.’”

The New Haven Register from Connecticut. “The median price for a home sold in Milford this year has dropped by about $5,000 to $335,000 from $340,000 last year, said Peter Spalthoff and owner of Shoreline Mortgage in Milford.”

“Statewide, prices for single family homes were down about 2.5 to 3 percent during the first quarter of this year. In most towns in the New Haven, Bridgeport, Norwich and Stamford metropolitan areas, prices declined 5 percent to 15 percent, according to a report by University of Connecticut professor John Clapp. During the second quarter, prices fell by another 1 percent before stagnating in the third quarter.”

“‘There has been a reduction in prices,’ said Ken D’Ademo, a realtor in Milford. ‘It has certainly turned toward a buyers market and we’re seeing the houses stay on the market for longer.’”

“‘It is probably wise to prepare for the possibility of two to three years where general inflation outpaces house prices, with declines more likely in the Fairfield County area,’ Clapp said.”

The Christian Science Monitor on Connecticut. “Even in some well-to-do communities, immune to the price drop until recently, prices are under pressure. That’s the case in Madison, Conn., where the average sale price is down 11.2 percent from last year.”

“‘There is downward pressure on prices, inventories have risen,’ says Brendan Grady, a regional VP for Caldwell Banker.”

The Wall Street Journal on Pennsylvania. “In Philadelphia, some condo developers are trying to attract buyers by offering to cover their monthly fees for the first year, says Virginia Jarden, a VP at Prudential Fox & Roach Realtors. She says developers also sometimes throw in a parking space or cover all or part of the real-estate transfer tax usually paid by the buyer.”

“‘By trumpeting discounts and other incentives, home builders are ‘educating the buying public to ask for concessions,’ Ms. Jarden says.”

The Times from New Jersey. “With bad news continuing to rattle the housing scene nationally, Mercer County’s real estate market appears hobbled but not crippled by the crisis.”

“The number of houses sold dropped by 12.2 percent in the same time period, the report said. New Jersey has had a decline of 13.4 percent in the number of home sales compared with last year.”

“The municipality with the largest drop in sales was Trenton, which fell from 874 properties sold in the first nine months of last year to 574 this year, a 34.3 percent decline.”

“Prudential Fox & Roach Senior VP Steve Storti said Trenton is joined by other urban areas that have seen record sales increases in recent years and are seeing drops this year.”

“Real estate appraiser Jeffrey Otteau, whose firm is based in East Brunswick, said the current downturn in real estate is affecting communities differently. ‘Over the past 25 years, all ships in the harbor rose equally with the tide change,’ Otteau said. ‘The current credit crunch in the mortgage market is mostly affecting those who are on the fringe of affordability.’”

“Mercer County Association of Realtors President John Terebey Jr. described the market as ‘fragile.’ He said that with continuing low interest rates, there are prime opportunities for those looking to buy ‘entry-level’ houses.”

“Most towns in the northern portion of the county saw price declines, led by Bordentown Township, which dropped from a price of $339,000 in the first nine months of 2006 to $278,450 in same period this year, a 17.9-percent fall.”

“Burlington County had a 16.5 percent drop in the number of homes through September of this year compared with 2006.”

“When the market began to slow in late 2005 and dropped in 2006, many real estate agents thought the market had reached a bottom, Storti said. However, problems with subprime mortgages this year continued to batter the market, he said.”

“‘I’m hopeful that you’ll see some stabilization going into next spring,’ Storti said.”

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