The Housing Bubble

The San Francisco Chronicle reports from California. “Ask any real estate appraiser: Being badgered to overstate home prices is a fact of life, they’ll say. ‘We get pressured every single day to inflate our values,’ said Dan Tosh, principal at an appraisal firm in Brentwood. ‘We get people telling us we’ll never work again, or they won’t pay us because we won’t play ball.’”

“Many real estate experts say appraisal inflation is pervasive in an industry in which pressure to close deals is all-consuming.”

“‘This makes things such as Enron and WorldCom look small by comparison,’ said Ted Faravelli, executive director of the California Association of Real Estate Appraisers and principal at San Jose’s T.E. Faravelli & Associates, an appraisal firm. ‘It was an epidemic.’”

“As home prices spiraled up during the most recent real estate frenzy, con artists found plenty of ways to skim off the top. Inflated appraisals were one of the tools in their arsenal.”

“‘In the mortgage fraud cases we’re uncovering, the linchpin of most of the fraud is a doctored or questionable appraisal,’ said Tom Pool, a spokesman for the California Department of Real Estate. ‘It’s a fairly common scam for properties to be overvalued and then purchased at an inflated price, with the difference coming back to the real estate broker or others involved in the scam.’”

“Faravelli said that appraisers who gave in have told him they figured the rapidly rising market would cover their tracks anyway. ‘The pervasive attitude was, ‘I know it’s not worth this amount today, but six months from now at the current rate of appreciation I’ll be covered so it’s OK,’ he said.”

“When appreciation hit the wall and stalled out early this year, fake appraisals suddenly became more apparent. While market forces obviously depressed prices, if they were artificially high to begin with, that widens the gap.”

“Pumped-up appraisals ‘create what I call phantom equity,’ Faravelli said. ‘Appraisals are arguably the easiest part of the entire process to tweak. After all, it’s just an opinion, and everyone has one.’”

The Sacramento Bee. “Will that lure more local buyers into the market? Many real estate insiders say people are motivated more by lower prices than interest rates. They advise against expectations that falling rates will prod a spike in sales any time soon.”

“‘I think everybody is still going to be on the fence, regardless, until the economy gets into balance and we come out of the stoop we’re in,’ says Joshua Sanchez, a mortgage consultant at Sacramento-based JCL Mortgage.”

“The peak rate for 2007 came in June, at 6.74 percent. For a homeowner with a $300,000 loan, that means the monthly payment would be $1,943.80, before property taxes and homeowners insurance.”

“Buyers taking out the same loan at this week’s 6.26 percent rate would pay $1,849.10 a month, before property taxes and homeowners insurance.”

“The savings: $94.70 a month.”

“There’s no question that today’s buyer’s market is brutal for individual sellers. They have to compete with each other and with deep-pocket home builders that are rolling out the deals. If that isn’t enough, banks are muscling in with their own foreclosure deals.”

“Indeed, here comes another giant auction. Auctioneer Hudson & Marshall makes its second trip this year to Sacramento on Nov. 18. It’s auctioning more than 200 area bank repossessions.”

“Today brings one more answer to the question: ‘What will these builders do next to sell a house?’ Take a cue from car dealers, maybe.”

“This weekend, Irvine-based MBK Homes is putting its Sacramento division president in its models to personally negotiate with would-be buyers. Forget the usual agents and middle managers who take your offer to higher-ups. At MBK’s Camden Place, you can talk to the chief himself, and see who blinks.”

“The builder, a new player that entered the Sacramento market last year, is trying to sell 66 houses in Citrus Heights. Models opened in June, originally priced from $298,990 to $375,990. MBK Homes reports two sales so far.”

The Orange County Business Journal. “Standard Pacific Corp. hung a big Southern California marketing and sales effort in September on the phrase ‘Mission Possible’ and pulled off 227 home sales during the incentive-laden campaign’s two-week period.”

“Declining market values are the least of Standard Pacific’s problems right now. Analysts are questioning how successfully the company can operate with a heavy debt load that totals close to $2 billion.”

“‘We don’t see how (Standard Pacific) can afford to continue to leak cash or to absorb JV debt,’ said Vicki Bryan, analyst for GimmeCredit.”

“Andrew Parnes, chief financial officer for Standard Pacific, says the company has twice this year gone back to its bank group to renegotiate terms of its loans. If increased pressure arises from banks to pay down more debt, the company says it won’t resort to an out-and-out fire sale or distressed sale to raise cash, said Parnes.”

“Home sales at Lennar Corp.’s Central Park West development in Irvine are being halted until the housing and mortgage markets show signs of recovery. And new construction at the 1,500-home project is being delayed, the Miami-based company said.”

“The shift at Central Park West, one of the few big projects to go forward amid the downturn, is the latest sign of the tough environment facing builders in Orange County. Home sales here in September were down by nearly 40% from a year earlier, and builder concessions are knocking down new home prices by up to 20% in some cases.”

“The company is opting to postpone sales rather than offload the homes at steep discounts, which is the norm at other projects going up in the county.”

“If a builder can hold off sales now, and afford to keep housing inventory on its books, it might prove to be a smart decision. Factoring in discounts, nearly every new-home sale made in the area these days is being made at a loss, said Rich Knowland, formerly the head of OC operations for Lennar.”

“The next generation of Orange County homes is likely to include more density, have a greater emphasis on quality locations and may even be less expensive than the projects you see being built now, county planning directors were told.”

“‘We have to find a price’ that grabs buyers’ attention, said Richard Douglass, Centex division president for Southern California.”

“Factoring in larger concessions of late, homebuilders have seen the median price of a newly built home drop by more than $100,000 in the past two years, to about $630,000, Douglass said.”

The LA Times. “Speaking to a gathering of industry professionals Friday, longtime California real estate titan Fred C. Sands called the housing market ‘pathetic’ and said some agents needed to start looking for other work.”

“‘If you’ve been in it for five or six years and are barely making a living, you might want to think about what you were doing before and get back into it — you can come back in a couple of years,’ Sands told members of the California Assn. of Realtors meeting in Universal City.”

“He added that he could speak with candor because he was no longer in the home-selling business. Such frank remarks are rare at gatherings of famously upbeat real estate agents, but Sands said those in the business needed to remember the last slump and realize ‘the last five or six years were not normal.’”

“The soaring market of a few years ago will be followed by a correspondingly sharp decline, he said: ‘The longer the up cycle, the more excess there is, and the worse it is for what follows.’”

“Wealthy areas won’t escape unscathed, Sand said. ‘We saw 25-year-old guys buying $3-million houses,’ he said of the questionable mortgage practices of recent years. ‘Someone who makes $100,000 a year can’t afford a $2-million house, but that’s what’s been going on,’ Sands said.”

“‘The idea that everyone is supposed to own a home is baloney,’ he added.”

“Speaking with Sands was Alan Long, president of the Southern California region of Sotheby’s International Realty Inc., who also told agents to cut listing prices to speed sales. Rising foreclosures could cause prices to fall 20% below 2005 levels, he said.”

Readers suggested a topic on the adjustable rate loan resets. “An analysis of the ARM reset chart. We are getting close to the top of the first bump, and things are already pretty bad. Yesterday, someone said that Goldman has another chart that shows a different pattern and that we aren’t as close to that first peak as we thought.”

“The chart only deals with first resets. What would it look like if subsequent resets were included? The MSM reports seem to indicate anecdotally that people can sometimes handle the first reset with difficulty, but later ones are just too much.”

“What about the option ARMS? There was a report recently that they are starting to reset earlier than expected because people were making the lowest possible payments and hitting their equity limits. Aren’t the option ARMs a huge part of the second bump of the chart? What happens if they really do kick in ahead of schedule? Is it just more of the same? Something else going to happen?”

Another added, “It would be good to see a current chart. We’ve all been referring to that one chart that came out in January, and talking about the two peaks etc. - but I suspect that the peaks in that chart are somewhat transitory.”

“There are new ARM loans being done all the time still, which would serve to shift things back continuously - the peaks will always be yet to come - we will never reach them. You can only tell when the real peak happened by looking back at when the resets actually happened.”

One posted this, “(**PDF Alert**)Here’s the link to the Goldman charts. Goldman’s chart show the resets peaking in March 2008.”

“I think the difference in timing between the Goldman and Credit Suisse charts has to do with their respective release dates. The Credit Suisse charts were released in March 2007, while the Goldman charts were just released in October 2007.”

“Back in March 2007, subprimes were still alive and kicking giving some of borrowers facing early resets time to refinance and extend their eventual doom. I could be wrong, but I imagine that’s why there is a discrepancy between the charts.”

From the report: “2. What happened in 2004? The relationship between Californian house prices and disposable income as a multiple of long rates broke down in 2004; we believe that aggressive sales of ‘affordability products’ (e.g., subprime, option ARMs, home equity loans), which spiked in 2004 (see Exhibit 2), drove Californian home prices well-above levels supported by economic conditions.”

“Now that the secondary market for these affordability products has all but evaporated, we expect home prices in California to return to normalized levels (i.e. levels implied by current and forecast disposable income in California as well as U.S. ten-year treasury yields); this implies a 35-40% fall.”

“As of last August the median house price in California was $589K, but economic conditions support prices between $350-380K (see Exhibit 1); material price declines are likely, in our view.”

One poster said, “I noticed this on happenstance of daily data mining. The issue of pushing the time of danger forward creats a false sense of security for the lawdogs to pander to the public, while cutting backroom deals and floating trial balloons in the press.”

The Wall Street Journal. “Struggling homeowners seeking mortgage relief from their lenders say they are hearing a tough message: We can’t help you unless you first fall behind on payments.”

“As past-due home loans keep piling up — and some two million adjustable-rate mortgages prepare to adjust higher in the coming year — mortgage companies are reaching out to borrowers in hopes of fending off foreclosures. On the other hand, they remain wary of cutting the interest rate, extending the term or forgiving debts, as long as borrowers are still current on their payments.”

“‘In general, the mortgage company wants to see a consumer default on three separate payments before considering a loan modification,’ says Elizabeth Schomburg, senior VP of the Family Credit Counseling Service in Chicago.”

“Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, says its member agencies in areas from Southern California to Texas have seen the same trend. ‘One counselor in Amarillo, Texas, just told me ‘It seems to me they almost encourage people to fall behind in order to find help,’ Ms. Cunningham says.”

“Mortgage companies, on the other hand, often point to the way home loans are sold and packaged today as the key factor that complicates their efforts to help borrowers. Most mortgages are no longer owned by the companies that originated them, but are funneled into securities and sold to investors world-wide.”

“As a result, mortgage servicers, who collect payments on the loans for a fee, often define their responsibility as maximizing returns for the investors for whom they service the loans.”

“Mortgage servicers have to make sure they can ‘defend’ the actions they take to help prevent foreclosures, said Steve Bailey, head of Countrywide’s loan-administration division, in a recent interview. Often, he said, those investors ask: ‘Are they truly not able to pay?’”

“Still, Mr. Bailey said, ‘To recommend someone to not pay is a bad recommendation.’”

The Hook reports from Virginia. “Unloading inventory in a strong buyer’s market has many of builders resorting to techniques not seen in the last half dozen years: slashing prices, offering incentives, even converting for-sale to for-lease. ‘Our revenues are down 50 percent from last year,’ says Mike Gaffney, president of Gaffney Homes. ‘Every builder in the market, maybe every builder in the country, has cut staff and lowered prices.’”

“Gaffney says the need to sell the houses quickly has led to deep discounts. In Huntley, Gaffney has lowered prices on houses by $80,000, from $549,000 to $469,000. Still, even such discounts haven’t led to rapid sales, and he believes that’s because people have tuned in to national news predicting ongoing doom and gloom in the housing market.”

“‘It’s almost like a paralysis with people that they don’t want to buy,’ he says.”

From NBC 4 in Virginia. “No one showed up to bid or buy in Prince William County Friday, but the auctioneer will stay busy due to the growing number of home foreclosures in the county that are causing a ripple effect in the county’s revenue stream.”

“There have been nearly 1,000 foreclosures since August, and the ‘for sale’ signs are springing up like weeds.”

“Despite the downturn in the housing market, new houses are still being built and sold, but not at the rate they were at the height of the housing boom.”

“‘I imagine that there are some builders and developers who had started their projects and then, of course, the market changed and they had these projects under way and they’re making their own business decision,’ said Chris Martino, the county’s director of finance.”

“The director of finance said there is a silver lining, however. ‘When the market does correct and turn, we’ll have a lot of product,’ he said.”

From WJLA in Virginia. “The increasing number of foreclosures and the jittery housing market have many developers rolling out incentives to attract buyers. At the Metropole condominiums in Logan Circle, developers called in an interior design firm to provide buyers with pointers and even just the right furnishings for lush living.”

“The condo market is experiencing a glut, as units begun during the real estate boom come on-line after the housing market’s dip. That reduced demand and increased supply translates into lower prices for those willing to take a risk.”

“‘Developers are paying condo fees, buying down the mortgage,’ said realtor Jeff Lockard. ‘We’re seeing developers doing things we’ve never seen before-it’s pretty terrific.’”

The Daily Press from Viginia. “It continues to be a difficult time to sell a house and a great time to buy one in Hampton Roads and Williamsburg.”

“An oversupply led to a 22 percent sales decline, according to data from the Virginia Association of Realtors. Williamsburg sellers suffered through a median price drop of 15 percent to $269,450, and the number of homes sold declined by 39 percent.”

“The slowing market comes after years of unprecedented price increases. The median price in September 1999 in Hampton Roads was $107,400. Just eight years later, the median value has more than doubled to $235,000. The state median has increased 83 percent to $229,000 over the same period.”

“The region has also been dealing with growing rates of mortgage delinquencies and foreclosures. Subprime loans made up about 13.6 percent of the region’s outstanding loans as of June, according to First American LoanPerformance.”

Money Magazine on Maryland. “With a six-figure household income and good prospects, Heather and Todd Wade are off to a decent start in realizing their financial goals. But a few years ago, the young couple tried to speed things up by dabbling in real estate.”

“‘I started messing around because everyone seemed to be doing it,’ says Todd.”

“After flipping an investment property near their Baltimore home in early 2006 for a tidy profit of $40,000, Todd and Heather got the bug. In April 2006 the Wades bought a run-down house in a questionable Baltimore neighborhood for $62,000.”

“So far the project has produced a lot of pain but no profits. ‘It just took us a little longer to get this house in order, and we missed the window,’ says Todd.”

“Now the Wades wonder if their error in timing the real estate market may have set their finances back just as they’re hoping to expand their family.”

The News Post from Maryland. “House prices are returning to what one local Realtor calls ‘normal’ pricing. Terry Fox, head of the Frederick County Association of Realtors, said dropping prices were ‘an adjustment toward a normal market after the price surge in the past years.’”

“Fox said the price drop is bringing the market into reality, creating a more healthy atmosphere. With more than 2,400 homes on the market in Frederick County, it is still a buyer’s market. According to the Maryland Association of Realtors, the average home price in Frederick County in August was $359,949, down 5.2 percent from August 2006.”

“In September, the average price in the county was $340,478, down 7.7 percent from September 2006. ‘Prices are not dropping below what the homes are worth,’ Fox said.”

The York Dispatch from Pennsylvania. “Home sales dropped by double-digit numbers in nine out of the 16 school districts in York County for the first nine months of the year, compared to the same period a year ago.”

“Steve Snell, the Realtors association’s executive officer, said the cooling in the housing market is ‘perhaps a little bit more extensive than we really had anticipated. My concern is the public will misinterpret the numbers,’ he said. ‘It may not be the greatest time to be a seller, but it’s a perfect scenario for the home buyer.’”

“Blue Bell, Pa.-based Judd Builders is currently offering up to $30,000 in savings on closing costs, condo fees and upgrades to a townhouse through the end of November.”

“Michael Wheeler, a developer and) Realtor, said he thinks York’s market is more normal than the national trend. Wheeler said people with a moderately good credit rating to a very good credit rating should be able to secure mortgages with low interest.”

“‘For people with horrendous credit though, there will be problems,’ Wheeler said. ‘And maybe there should be.’”

Capital News 9 from New York. “‘How could I allow myself to get into a situation like this,’ Louise Owens asked herself. After the Rochester woman lost her husband in an accident last year she took the advice of a mortgage broker and refinanced her home.”

“At closing she discovered she had agreed to two loans, not one. ‘What’s worse, the principal balance on loan number one had increased by more than eleven thousand over the first year,’ Owens said.”

From Newsday in New York. “The rate of foreclosure filings in Nassau and Suffolk counties rose by double digits in the third quarter, according to a report issued yesterday.”

“Nassau saw 1,241 foreclosure filings from July to September, an increase of 27.4 percent from the previous three months, according to RealtyTrac. Suffolk, meanwhile, had 1,080 foreclosure notices, up 14.4 percent from the prior quarter.”

“Todd Yovino’s company sells bank-owned properties and his inventory is growing, especially in Suffolk. While there were always people in financial trouble, in the past they could sell their homes or refinance their mortgages to alleviate their burden, he said. That’s no longer as easy to do.”

“‘Today, there are fewer alternatives and fewer alternatives translate into increased foreclosures,’ Yovino said.”

The New York Daily News. “The threat of foreclosure is worsening in the city — especially in Queens. In fact, in all the boroughs except Staten Island, more homeowners are struggling.”

“There were 2,790 foreclosure filings against homeowners in Queens in the third quarter, up 69% from summer 2006, according to RealtyTrac. Across the city, there were 7,314 foreclosure filings during the third quarter, up 37%.”

“The number of third-quarter foreclosure filings in the Bronx, 1,011, was 43% higher than a year earlier. Foreclosure filings in Brooklyn totaled 2,498, up 31%. Manhattan cases rose by 14% to 402.”

The New York Times. “Kenny Timmons has spent three long weekends in New York City since 2003, catching up with friends he knew in Ireland, visiting ground zero, restocking his wardrobe at Armani and Niketown and chatting about real estate with a bartender in an Irish pub in Midtown Manhattan.”

“That was enough of a glimpse of New York for Mr. Timmons, a 32-year-old carpenter from County Meath, Ireland. Last summer, he put down 10 percent on a $760,000 studio under construction at 75 Wall Street.”

“Mr. Timmons has never seen the apartment and does not plan to live there. Instead, he hopes to rent it out for $3,000 a month when it’s finished next year and eventually to sell it at a profit.”

“He predicts that a Wall Street address will always be in demand. ‘If you can’t rent on Wall Street, then where can you rent?’ Mr. Timmons said.”

“The increase in demand comes as a new tide of high-rise condominiums is hitting Manhattan. Buyers from other countries who don’t have credit histories in the United States or who do not intend to use their apartments as primary residences have historically had trouble passing muster with co-op boards.”

“But condos pose no problem for foreign buyers, and they often find that buying in Manhattan is less expensive than buying a comparable house or apartment in cities like London.”

“And while in the past an influx of foreign buyers could often be traced to boom times in a particular country, brokers say that the interest in Manhattan real estate is now worldwide, with buyers from Australia, Korea, Russia, Israel, Italy and Colombia.”

“‘In the late ’80s, we totally depended on the Japanese market,’ said Louise Sunshine, development director for the Alexico Group. ‘It’s a diversity of a different kind. There’s a huge amount of new wealth everywhere.’”

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