The Housing Bubble

The Union Tribune reports from California. “The mortgage market meltdown and the resulting surge in foreclosed homes offered for sale has created welcome home-buying opportunities for San Diego County’s low-and moderate-income households. ‘When was the last time we put thousands of affordable housing units on the market?’ asked Gabe del Rio of Community HousingWorks.’We are talking about homes you bought for $450,000 last year that now are being sold for about $300,000. It makes a big difference.’”

“The jump in foreclosures has affected virtually all county ZIP codes, but the biggest numbers have been in Oceanside, Escondido, certain San Diego neighborhoods and areas in the southern portion of the county, including Chula Vista.”

“The county ZIP code with the most foreclosures was 91977, the Spring Valley area, with 98, representing an increase of 654 percent over the same period last year, DataQuick reported.”

The Voice of San Diego. “Resale home prices as measured by the median-based price metrics fell again last month. Since this series’ peak in September 2005, as the accompanying graph shows, the size-adjusted median price has dropped by 12.7 percent for single family homes, 15.8 percent for condos, and 13.8 percent overall.”

“These countywide price statistics fail to express the degree to which the high-end markets have weathered the downturn better than the more affordable markets. Addressing this shortcoming is a work in progress.”

From ABC 30.com. “New homes that weren’t selling in three different housing developments were auctioned off Saturday, and some got better deals than others.”

“Emotion drove some prices high, especially the first up. A 1,800 square foot Madera home went for $336,000. The same size home in the same complex later sold for $184,000.”

“Marty Martinez, Hanford Bidder, says ‘They were good deals; I just wanted a great deal.’”

“One local builder says these homes were too expensive for the areas and feels this auction reveals the state of the market. Sean Castiglione, Sanger Developer/Builder, says ‘Today told me the out of town buyers still don’t know what the true value is here in the central valley.’”

The Fresno Bee. “A frantic two-hour auction Saturday in downtown Fresno was a sign of the times as bidders snapped up 48 new houses — most for thousands of dollars below the builder’s original list price.”

“‘We’re giving away property, ladies and gentlemen,’ auctioneer Mike Carr of Atlanta told the crowd. Carr kept the bidding going nonstop. Most final bids were between $200,000 and $300,000. Previous list prices on some of the homes had been as much as $498,000.”

“Many bidders seemed to be reluctant to go above a halfway mark between the original list prices and starting low bids. ‘Somebody’s going to be livin’ in your house,’ Carr warned one reluctant bidder.”

“Among the successful bidders was Andrea Freeburg of Fresno. She landed a house for $250,000. It’s a good investment, she said.”

The Orange County Register. “A year and a half ago – ‘the good old days’ in real estate life, John Laing Homes from Newport Beach was sold to Emaar, a real estate giant from Dubai for a billion bucks.”

“So I needed to know: What did Larry Webb and the investor group that owned Laing know? ‘I had no idea that the market would do what it did,’ he says.”

“Well, when he thinks about it, there were clues. For example, he speaks about the tensions within his organization about mortgage making. Many builders became lenders to quicken the pace of sales. Webb, on the advice of his chief financial officer – who still rubs it in to this day – chose to outsource the home loans.”

“That didn’t sit well, apparently, with Laing’s Inland Empire division. Webb recalls them complaining about losing sales to competitors that would lend to people who, among other things, couldn’t prove their income. Webb recalls the name of one lender that Laing’s Inland Empire customers with credit challenges were referred to: ‘Miracle Mortgage.’”

“‘Can you believe it?’ Webb says. ‘Something didn’t feel right.’”

“Since Emaar stock trades publicly, we get tiny peeks into Laing’s operations. Last week, Emaar told investors that Laing’s operating profit margin (before land write-offs) was 7 percent in the first nine months of ‘07 vs. 18 percent in ‘06. Plus, Laing wrote off $104 million worth of its land holdings.”

“I first got to know Webb back in 1993. Considering the vintage of our relationship, I had to ask … ‘Is this 1993 all over again?’”

“‘This is harder,’ Webb says.”

“The challenge, to Webb, is that the industry just can’t wait for the economy to pick up. ‘Even with price reductions, average sales prices are very high,’ he says. ‘What the average person pays here, you can get a custom home in Des Moines on an acre of land.’”

“This is Webb’s third big downturn in his real estate career, so he takes it a bit in stride. ‘They’re always different,’ he says of market reversals, noting one consistency: ‘What’s surprising … is that they’re always a little surprising.’”

“Cures won’t be easy or pretty, as ‘this credit crunch will only get bigger and bigger before it gets better.’”

“He thinks that many major builders will disappear as this downturn progresses either through financial collapse or a sale. The business is now ‘all about cash flow … liquidity is a big deal.’”

“Could it have been just two-plus years since the O.C. median sales price first crossed the $600,000 mark and The Register honored the moment with the new price billboarded across the front page.”

“That day I wrote about Walter Hahn, the long-time market watcher who then was as bullish as possible. His argument: O.C. median would hit $1.4 million by 2014. ‘And that’s conservative,’ Hahn told me at the time.”

“With the median back under $600,000 — and nowhere near $1.4 million — I figured I’d ask Walter to explain to us how he was so wrong. And, much to his credit, he’s taken the high road and explained how he goofed. Us: Where did you go wrong?”

“Walter: Along with almost everyone else, I didn’t recognize that the 2003 thru mid-2006 housing market boom was caused almost exclusively by the introduction (and pushing) of low-teaser-rate loans. Also, the explosion of those loans wouldn’t have happened if the wise guys on Wall Street hadn’t provided the money to fund the loans by packaging the loans to support financial instruments that they sold to bigger suckers.”

“In retrospect this was a house of pure greed built on quicksand bound to collapse when the millions of home loan borrowers couldn’t make their payments when the loans reset and the payments jumped 3 to 5 times.”

“Us: What was it you didn’t foresee? Where did the demand go?”

“Walter: Shame on me! After 40 years of analyzing my way through four economic and housing market booms and busts, I knew that the fuel for every boom also eventually burns it up and causes it to go bust. I had my head in the sand and wasn’t paying attention.If I had been paying attention I would have known that a high percentage of those low-teaser-rate loans would go into foreclosure and bring the whole house of greed tumbling down. But I wasn’t paying attention.”

“Us: How brutal will a recession be on borrowers? Walter: The housing market recession has already been brutal on aggressive borrowers and the unsuspecting borrowers who were conned into low teaser rate loans. That brutality will continue for another 2 to 3 years until all the resets and foreclosures are recycled through the market.”

“Us: What lessons have you learned from this? Walter: I should have had my head out of the sand and been conscious of the fact, which I knew, that every boom has its bust, and I should have analyzed this one to figure out the boom’s cause and when and how it was likely to self-destruct. I just wasn’t paying attention. My bad!”

The Daily Bulletin. “For the past two or three years, people with a lot of initials after their names have been disagreeing on the direction housing prices will be taking. There’s a bubble; prices are bound to fall. There’s no bubble; prices will keep rising.”

“Bruce Norris is a veteran observer of the scene who accurately predicted the boom of the past decade in his book, ‘California Comeback.’ Now, Norris writes, the time is ripe for a ‘California Crash.’ Norris points out that every down cycle in California’s real estate market started when affordability dipped to 17 percent.”

“The CAR changed its method of measuring affordability more than a year ago when the results kept showing that fewer than one in seven families could afford a median-priced house. That’s not the upbeat information people want from their Realtor.”

“It happened in 1980 and it happened again in 1989, but Norris thinks the problem is even greater this time. ‘It’s bad enough that we’ve reached the 17 percent affordability rate,’ he writes. ‘The real problem is how we got there this time.’”

“In 1980, affordability dipped to where it did because mortgage rates climbed to 16 percent. In 1989, mortgages cost 10 percent.”

“This time, interest rates were low enough, about 6 percent, that people were spending nine times their annual income on the price of a house. ‘The payments have reached the breaking point solely on price increases,’ writes Norris. ‘This is going to cause a real problem.’”

“As interest rates climb and as adjustable-rate mortgages reset at higher rates, folks will find they can’t afford their mortgages, he says. ‘Unsold inventory has grown by more than 100 percent in one year,’ Norris writes. ‘Thus far, there has been limited price damage because almost all of the properties for sale have been privately owned.’”

“‘In 2007, that will change. The new inventory for sale will consist of lender-owned properties, builder auctions and short sales. All of these sellers will be selling to a less-motivated, smaller group of less-able-to-qualify buyers,’ he said.”

“That, Norris says, will make a so-called ’soft landing’ much harder to achieve.”

Readers suggested a topic on personal spending and saving in this holiday season. “I’d like to see a topic about what a bearish investor sitting on the sidelines with Cash that is getting throttled by inflation, stocks that are getting pummeled, and an overall bearish sentiment on the state of the US economy can REALISTICALLY do to maximize their safety while concurrently not overexposing in any one class (such as foreign currencies, gold, other commodities or whatever else)?”

A reply, “If you are *really* bearish on the US stock market (and the S&P 500 in particular), there are always the contrary plays, like UltraShort S&P500 ProShares (SDS).”

“There’s also Short QQQ(Q), Short Dow 30, etc., and the related UltraShorts on all of them. My play money is in the SDS.”

Another asked, “No one can time the market perfectly but does the following sound like a good idea? 2 or 3 year LEAP puts on financials, luxury consumer, and big momentum stocks like AAPL and GOOG. 2 or 3 year LEAP calls on commodities, energy, precious metals.”

“I never hear much talk about LEAP’s but considering that the big players and the Fed are willing and capable of commiting anything to prevent the needed collapse, they can’t succeed for that long. And if they do manage to keep the music going that long. I can not fathom the absolute armageddon that would unleash.”

Another posted this, “Holiday spending? What do you think will save retail and melt the numbers off our credit cards this holiday season?”

One replied, “No because a smaller perfect storm has hit the credit cards too. They’re having to use them for living expenses and even to pay the mortgage now - so no credit limits available for junk.”

“You want to get a good feel for this - read the ‘wanted’ boards on Craigslist. The Christmas begging started a month ago. Very early.”

Another shared this, “I stood behind a fellow in line not long ago and he went through 5 cards until they found one with room on it, and the bill was $37.00 and change!”

One noted this trend, “I think that the places that have been hit really hard already CA, FL, OH, etc. we’ll see some major retail pain, but perhaps other areas won’t feel the crunch as deeply, yet. However, I didn’t see anyone buying big ticket items, mostly just crappy sweaters and towels, so maybe people are cutting back on the cost of items even if the quantity is staying the same.”

And one has a specific measure, “The American consumer will gleefully spend as much as possible so long as they can get more credit. My barometer is my brother in law - a mechanic who has gone BK twice, has some $30K in CC debt and has no problem whatsoever getting new cards, a new truck every couple years, and a new cell phone plan. He’s still spending like nuts. However, he did try to buy a house recently and was turned down.”

One had a prediction, “Christmas ‘07 will be the first visible sign of the consumer pullback. Joe Sixpack and Nancy Pinot Nior are cutting expenses as I type. They borrowed from the future, now comes the belt tightening (either voluntary or forced). I stand by my Christmas ‘07 prediction, that it will be reported as a very disappointing selling season, followed by talk of a contraction/recession.”

From Bloomberg. “Sales at U.S. retailers slowed in October as rising fuel prices and falling property values left Americans with little extra cash to spend, economists said reports this week will show.”

“The housing slump may be partly responsible for decreasing demand for furniture and appliances, economists said. A report from the National Association of Realtors on Nov. 13 may show…the number of Americans signing contracts to buy previously owned homes dropped to the lowest level on record in September, the agents’ group is forecast to report.”

“‘Housing will probably be bad for the next 18 months,’ said Jeffrey Immelt, CEO of General Electric Co. ‘We have to be cautious about the U.S. consumer. The consumer has used their house as a piggy bank.’”

The Detroit Free Press. “Flush real estate values for years meant that consumers could put little money down on a house, watch the home’s value grow and then treat that added equity just like a bonus.”

“But the credit crunch has landed with a thud, falling particularly hard on Michigan. The days are over where practically anyone could turn the house into an ATM.”

“In metro Detroit, we’re watching the collapse of home-equity financing. Homeowners here pulled $200 million out of their homes’ value in the first half of 2007, compared with $2.2 billion in 2006, reports Equifax and Moody’s Economy.com. The number had been as high as $4 billion in 2000.”

“This piece of havoc in the housing market is national and isn’t just hitting people who borrowed way over their heads or are trying to sell the house.”

“Sean Gurske took out a $22,000 equity loan on his Woodhaven home. He invested that money in a tanning salon that didn’t work out. Gurskey now owes about $245,000 on a house that’s worth less than the $265,000 he paid for it in 2003.”

“His monthly mortgage payment is $2,486 and set to climb in July when his adjustable rate goes up again. He’s having trouble refinancing into a fixed rate because the home’s value has dropped, he has that home-equity line and he filed for bankruptcy in 2005.”

“He said he hasn’t missed a mortgage payment yet. He’s working with two lenders…but he isn’t getting any help so far to keep the payments lower. ‘I’m the one that wrote my name down, but I didn’t expect the housing industry to go down like it did,’ he said. ‘I wasn’t expecting to lose all this equity.’”

“Pava Leyrer, president of the Michigan Mortgage Brokers Association, had one customer in the Grand Rapids area who had to borrow about $30,000 through an unsecured loan so he could sell his house. He brought that money, plus some savings, to the table to cover what he still owed on his mortgage and home-equity loan. The house, once appraised at $380,000 a few years ago, sold for $285,000 in July.”

“Going forward, three things will cut into borrowing power: Home values are expected to continue to trend down. ‘The values are coming in lower and lower by the day,’ said Steve Gornick, business development officer for Shore Bank in Detroit.”

“In some cases, he said, he has worked with homeowners who saw a 20% drop in the appraised value of a house in just six months in metro Detroit suburbs.”

“Interest rates are no longer at rock bottom.”

“Lenders are edgy, especially in metro Detroit. ‘In markets where housing prices are weak, we want to keep people from owing more than the house is worth,’ said Tom Kelly, a spokesman for Chase in Chicago. ‘Nobody wins if you make a loan that they can’t pay back.’”

“‘The bubble that fueled a lot of consumer spending just isn’t there anymore,’ said P. Brett Hammond, chief investment strategist for the TIAA-CREF.”

“‘We have things we’d like to do with our home, but we’re not going to do any improvements right now because we don’t want to take out a home equity,’ said Kris Marcath of Leonard. She estimates that her home’s value has fallen by $75,000 or more. She questions whether she could get $400,000 for the 2,700-square-foot home on 18 acres.”

The Philadelphia Inquirer reports from Pennsylvania. “If one word could describe the new-home market in the Philadelphia metropolitan region today, it probably would be sluggish. ‘It’s an enigma,’ said said Diane Williams, in Montgomery County, who has been selling new and existing homes in the eastern part of the county for 24 years. ‘It’s bad even though interest rates are great. Some builders are even going as far as saying that it’s dead.’”

“Granor Price Homes lowered prices at its townhouse development in Royersford, ‘A few earlier buyers called us about it. We asked if they would rather live in a community with 30 homes sold and 300 unsold,’ said principal Marshal Granor.”

“The Center City condo market is suffering from decisions, made three to five years ago, to focus on newly built units more expensive than this market can sustain. ‘How many million-dollar condos can you build?’ asked Joel F. Naroff, chief economist at Commerce Bank. ‘This is not New York. They’re supplying to the wrong level.’”

The Times News from Pennsylvania. “In northwestern Pennsylvania…the number of foreclosed properties listed for sheriff’s sale (is) changing the way people buy homes.”

“That number has been rising steadily since 1999 when 218 properties were listed for sheriff’s sale. After putting a record 636 properties up for sale in 2006, the Erie County Sheriff’s Office saw that total grow by more than 12 percent in 2007, with 716 properties listed for sale before the end of this year.”

“Among the Erie County real estate sales figures for October, Dennis Weed, a Realtor for Century 21 Stover Real Estate, finds another troubling statistic. Weed said nearly 20 percent of the month’s 437 sales involved lenders foreclosing on properties or selling their foreclosures.”

“‘It used to be anybody could get a loan,’ he said. ‘All you had to do was call around.’ Now, Weed said, he’s had clients who have decided to put off buying for a year until they can improve their credit scores.”

From WJZ.com in Maryland. “Last month, the housing market took a big hit in the Baltimore area as home sales saw the largest drop in eight years. There are too many houses and not enough buyers. Experts say that’s just one reason home sales have plummeted. The last time sales dropped this low was back in 1999.”

“‘There were too many people who were able to access credit earlier in this decade. [There were] people who really couldn’t afford the homes that they purchased and as a result, many homes were built,’ said local economist Anirban Basu.”

“That leads to too much supply. Basu says the only way to clear the inventory is for prices to fall.”

“‘Sellers–if they’re looking to move their homes very quickly–then they have to price to this market. They have to be aggressive in prices and they have to be realistic about pricing. Many are not, which is one of the reasons home sales aren’t being made,’ said Basu.”

The Baltimore Sun from Maryland. “The number of homes sold in Baltimore and the five surrounding counties in October totaled 1,918, down 31.74 percent from a year earlier, according to Metropolitan Regional Information Systems Inc. It was the biggest year-to-year drop recorded since MRIS began tracking homes sold through the MLS in 1999.”

“‘Buyers are hesitating to make any kind of decision,’ said Sonya Francis, an agent in Catonsville. ‘Buyers don’t feel they should be paying the price the seller has listed. They’re looking at a $400,000 house and saying it’s only worth $350,000.’”

“‘Sellers are beginning to realize it’s not 2005 anymore,’ said Melvina Brown, an agent in Ellicott City. ‘I tell people they’re not going to make the money you made in 2005, that’s long gone.’”

“John and Amy Cooney, architects who gutted and redesigned their Fells Point rowhouse with a custom oak staircase, a heated kitchen floor, glass block walls and a sky bridge to a carriage house, put the home on the market for $889,000 and got a contract last month, after just 13 days. But a month later, the buyers backed out of the contract.”

“‘It’s frustrating,’ said John Cooney, who will be relocating to Portland, Ore. ‘In a hot market three years ago, you’d have three or four offers lined up. Luckily, we don’t have a time frame and are not in a position that I have to sell it.’”

“Metrostudy said this week that the region, which it defines as Washington, Northern Virginia and Maryland minus the Eastern Shore and far western edge, is in better shape than most of the markets it follows. But the continually increasing stock of unsold existing homes is a problem for builders, who aren’t immune to that competition. And on top of that, local builders are feeling the mortgage crunch.”

“Sales in the region dropped about 50 percent last month, compared with September, Metrostudy said. The cancellation rate was 60 percent. ‘The banks are going into a bunker mentality,’ said Kenneth Wenhold, Metrostudy’s director for Maryland and Virginia. ‘It’s a major problem.’”

The Daily Press from Virginia. “When Pennsylvania-based Fulton Financial announced in 2004 that it would buy Virginia Beach-based Resource Bank, it looked like a simple, logical combination of small community banks.”

“But the deal has become a gigantic headache for Fulton. It soon became apparent that Resource, which was one of the leading mortgage lenders in Hampton Roads, had embraced some of the industry’s lax lending practices and run up huge liabilities.”

“‘The management of Resource Mortgage has been replaced,’ said Fulton CEO R. Scott Smith on a recent conference call. ‘and the offices giving rise to virtually all of these potential losses have been either closed or are in the process of being shutdown.’”

“The large Wall Street banks have spent recent weeks reporting big losses on packages of high-risk, high-return mortgages they bought. But many of those mortgages started at Main Street operations like Resource, which dropped lending standards because Wall Street was willing to buy the risky loans.”

“‘This real estate market got out of control for everybody, and we’re all guilty,’ said Smith in an interview.”

“Most of Resource’s problems are not even tied to mortgages it sold to its own banking customers. The mortgage wholesale division of Resource that lent the bank’s money to borrowers nationwide is the source of most of the defaults. These independent brokers — mostly in Virginia, Maryland and North Carolina — embraced weak lending standards to sell mortgages that used Resource’s money.”

“Fulton revealed in a securities filing that…investors asked the bank to buy back loans that financed the entire cost of a home with no documentation of the borrower’s income. The investors were able to force the bank’s hand because so many borrowers had failed to make one of their first three payments.”

“As a result, Fulton took a $6.4 million loss when it bought back a package in July of $34.7 million in mortgage and home equity loans with high default rates. These loans were made in late 2006.”

“Fulton said that of the $34.7 million loan package it bought back, $21 million was placed in non-accrual status. That means the borrowers are at least 90 days behind in their payments, but haven’t been foreclosed on yet, and the bank doesn’t expect the loan to ever be fully repaid.”

“Another $9 million went onto its books as real estate it owns.”

“Fulton appraised the properties on the loans it has bought back, which were mostly in Maryland and Virginia, at the end of September. They were worth 14 percent less than the original appraisals.”

The News Leader from Virginia. “Here are some quick tips from GAAR President Pat Rexrode, who also serves as an associate broker in Waynesboro. For Buyers: Don’t get in a hurry, or ‘It’s better to be safe than sorry.’”

“‘When we were in a really hot market and we had bidding wars going, people were putting in contracts on homes and waiving inspections just to beat the competition and have their offer accepted,’ she said. Rexrode explained that as some of those properties are starting to come back on the market, their current owners are faced with making — and paying for — repairs that should have been caught when they purchased the residence.”

“‘In some cases, we’ve got people who didn’t make anything on the house over the last couple of years because the appreciation didn’t cover the cost of the repairs that were needed to sell the house this time around,’ said Rexrode.”

The Charlotte Observer fronm North Carolina. “At the end of a Plaza-Midwood street, real estate broker Ryan Dawson blew up balloons and brewed coffee as he prepared to sell a property in a home auction.”

“His company needed to unload the four-bedroom house that recent Sunday afternoon for any reasonable price. It had languished under a traditional real estate listing for months. The company was planning to take a hit on the price, he said. ‘This was our first one. I hope I won’t have to do it again.’”

“In this sluggish real estate market, a growing number of sellers are turning to the auction block to get out from under properties that aren’t moving the traditional way. Long the purview of high-end art dealers and foreclosures, the auction option is entering the real estate mainstream.”

“The required opening bid at the auction for the Heritage home was under $300,000, and there were only three bids. Less than a year ago, the 2,400-square-foot house, with heated bathroom floor in the master bedroom, granite countertops, soft wood and wide plentiful windows, might have fetched $500,000 or more, when compared to the recent selling prices of other nearby homes.”

“The company finalized a deal with one of the bidders the next morning, but it won’t reveal the selling price until the sale closes next month.”

“N.C. auctioneers, such as Mark Rogers, say they’ve seen an increase in the Carolinas. Rogers said that home auctions are only likely to keep increasing. ‘Sellers bought in this run-up of crazy appreciation, and the reality has now set in. Some of that was unrealistic,’ he said. ‘I see those people as having to take deep discounts.’”

“Be prepared to take a lower price than your neighbor who sold through an agent only a few months ago, says Rogers. ‘There’s the perception of market value and then there’s the seller’s perception,’ he said. ‘Even sometimes in a slow market, comparable sales (of other homes in the neighborhood) may still be too high. You have to be realistic.’”

What do you see in your local housing market this weekend? Economic indicators? “The housing market took a big hit in September: Oregon residential permits plummeted to their lowest level since September 2000, said Tim Duy, economist and the author’s index.”

Subprime related problems? “Indianapolis-based Indiana Children’s Wish Fund has been caught in the national subprime mortgage lending crisis.”

“The small not-for-profit, which grants wishes to terminally ill children, filed an arbitration claim after an investment it had in an intermediate-bond fund lost about $50,000 between late June and late September on an initial investment of $222,812. The bond fund had more than half its assets in mortgage-related investments as of mid-year, according to the filing.”

Online posters? “A slumping stock market, sky-rocketing gas prices, an expected increase in energy costs, and home foreclosures, make up a full economic plate for many Valley residents.”

“In online discussions people post comments such as, ‘Smaller stores are down 20, 30, 40%. This is going to get very ugly. Less Tax $$$$ for Arizona which is already in big trouble.’”

Indication of defaults? “The phone is buzzing for brokers who specialize in selling foreclosed properties, and that’s attracting dozens of new agents into that small but growing segment of the market.”

“Craig Murphy, co-owner of one of the biggest foreclosure specialists in the metro area, estimates that there are 30 to 35 agents in the Twin Cities that have more than 20 active listings of foreclosed properties.”

“A year ago there were only four or five firms with that many, he said. Epic has about 180 listings today, six times the number it had a year ago.”

“Based on the amount of adjustable-rate mortgages issued a few years ago, Murphy thinks the foreclosure activity is at the start of a busy three- to five-year run. ‘Short of government intervention and the lenders stepping up to the plate, or a miracle from God, we’re going to be inundated [with more foreclosures],’ he said.”

Please post off-topic ideas, links and Craigslist finds here.