The Housing Bubble

The Press Democrat reports from California. “Sonoma County’s housing downturn deepened in October, when sales tumbled to a 16-year low and the typical house sold for nearly 9 percent under a year ago, according to The Press Democrat’s latest real estate report. Only 233 homes sold in October, well below the historic average for the month. The median resale price fell for the 16th consecutive month — to $515,000 — returning prices to levels not seen since October 2004.”

“The housing downturn is worse in Sonoma County and other counties on the Bay Area’s edge largely because sales have been slowest and price declines greatest among homes priced around $500,000. More homeowners in that range relied on risky loans to purchase homes around the market’s peak and may be forced to sell.”

“‘We’re still trying to work through the inventory and the bad loans. Under $500,000 is where the inventory is amazing,’ said Rick Laws, Santa Rosa manager for Sonoma County’s largest residential brokerage.”

“At the end of October there were 2,597 houses for sale in the county, October’s highest level since 1992, when the county was last in a housing decline. October’s median resale price is down 8.8 percent from a year ago and off 16.8 percent from the peak in August 2005.”

The San Francisco Chronicle. “The state lost 15,800 jobs outside the farm sector during the month after smoothing out the numbers for seasonal variations, the Employment Development Department reported Friday. Construction and finance, the two sectors most closely tied to housing, led the way down.”

“‘Job losses in construction and financial activities are intensifying,’ said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange. ‘The ripple effect of these two sectors is showing up in every sector.’”

“Sonja Hastings, founder of Oakland firm that recruits mid- and senior-level sales professionals has noticed one effect of the housing slump, a surge of applications from out-of-work mortgage professionals.”

“‘We’re getting flooded with those resumes these days,’ she said. ‘Every day we get 20. We couldn’t find those people in 2001 and 2002, but they’re everywhere now.’”

The Recordnet. “Unemployment in San Joaquin County for October jumped to 8.1 percent, almost twice the national rate of 4.4 percent and well above the state’s 5.4 percent unemployment rate. A good portion of the lost jobs were in construction, financial activities, hospitality and agriculture.”

“In the financial activities sector, which includes jobs in real estate, finance and insurance, 500 jobs were lost in the past year - dropping from 9,900 to 9,400 in the county, according to EDD.”

“‘Financial activities is not seasonal,’ said Liz Baker, EDD’s labor-market analyst for San Joaquin and Stanislaus counties. ‘The economy is changing all around primarily due to the housing market and the mortgage crisis. It’s just transcending across all industries at this point.’”

The Union Tribune. “The slumping housing market led to thousands of job losses throughout California last month, prompting fears that the state and local economies are lurching into a recession.”

“Payrolls at nine of the 11 major industries in the state fell last month, led by construction, which lost 4,200 jobs. In San Diego County, the job losses included a 1,000-worker decline in construction employment.”

“‘The direction that job creation has taken is making everybody nervous,’ Adibi said. ‘The main factor is job losses in construction and the mortgage industry. And the worst is not behind us. The job losses have intensified and will probably continue well into 2008.’”

“‘The whole thing is getting worse,’ said Christopher Thornberg, economist at Beacon Economics in Los Angeles. ‘Housing prices are falling at a pretty solid pace. Foreclosures are mounting. Defaults are skyrocketing, and a large number of them will turn into foreclosures. Can we use the ‘R’ word? Sure.’”

“Kelly Cunningham, economist at the San Diego Institute for Policy Research, said he is more troubled by last month’s 1,200-worker decline in the county’s civilian labor force, which is a relatively volatile measurement of self-employed workers as well as salaried employees.”

“‘The civilian labor force includes people like self-employed real estate agents who haven’t sold anything for many months, but are getting by on credit cards or with the help of their families,’ Cunningham said.”

The Sacramento Bee. “During the real estate boom, consumers used their equity to finance personal spending sprees. Now they’re more apt to close their wallets. That’s already affected car sales in California, they fell 12 percent in June, the latest figures available.”

“Not surprisingly, the commercial real estate market is sagging, too, particularly among retailers. Sacramento brokers say vacancies have crept up and rental prices are coming down. Construction of new projects is waning.”

“‘People have backed off,’ said Garrick Brown, regional research director at Colliers International real estate. Part of the problem is that entrepreneurs are no longer using home-equity loans to bankroll a new store or restaurant, he said.”

“‘Throw in oil prices … and we’ve got a royal mess on our hands,’ Thornberg said.”

The Daily Bulletin. “Job creation is slowing to a crawl in the Inland Empire, and employers may be crawling even slower than the numbers indicate.”

“Locally, the job creation numbers are about half of what they’ve been the last few years, even if they do turn out to be correct. ‘Either way it’s looking like a bad year,’ said John Husing, a regional economist based in Redlands. ‘These numbers would make it the worst year for job creation since the early ’90s.’”

The Salinas Californian. “The real estate boom of the past several years ushered a record number of Latinos into the housing market, with the community hitting a milestone this year: Half now own homes.”

“But the credit crunch and escalating foreclosure rates that have hit over the past year or so threaten to erode some of the gains.”

“In 2005, Marcos Rios purchased a two-bedroom house off North Main Street for his family. He said his mortgage consultant took advantage of him and his wife, putting them into loans they couldn’t afford and making several refinancing promises that never came true.”

“While discussions took place in Spanish, Rios said, the documents they signed, which had substantially different information, were in English.”

“To make his monthly mortgage payment of $3,600, he said, he had to take up three jobs. His wife, Janet, had to work two jobs. Their packed schedules affected their health, and the two ended up in the hospital at different times.”

“‘It was a disastrous situation,’ Rios said. ‘I just wanted to provide a proper home for my children.’”

“After losing his home to foreclosure earlier this year, the Rioses, who have three children, rented a three-bedroom home on Constitution Boulevard, where their monthly payment is less than half what their mortgage had been. Rios now only works one job, at The Salinas Californian, and Janet has started up her own housecleaning business.”

“‘One of the things we’re seeing is people who have no equity in their property,’ said Jill Perry, who works for a nonprofit that offers housing counseling in northern Nevada. ‘They’ve used their house as their ATM.’”

“Manny Aguilar, a real estate agent in Salinas, said he’s been inundated with phone calls from people in danger of losing their homes. Most of his clients are Latino.”

“Aguilar said many of his clients bought homes with other agents, only to see their monthly payments suddenly shoot up because interest rates on their loans increased. ‘They were buying $600,000 homes on a $400,000 budget,’ he said.”

“It’s shown in Monterey County, which saw 688 foreclosure filings in the third quarter of this year compared with 142 in last year’s third quarter, according to RealtyTrac.”

“Mel Schell of San Andreas was able to buy that foreclosure home he wanted, but it took a foreclosure auction to make the sale happen.”

“Three weeks ago, he made a $180,000 offer for an 1,100-square-foot house with a list price then of $243,000, but the bank countered at $210,000 and Schell backed off. When the house was listed among 60 area homes being auctioned off Thursday night at the Stockton Grand Hotel, he returned, curious about the auction process, and made another run at it.”

“He was hoping for a bargain but did end up placing the top bid in spirited bidding - at $180,000. ‘That’s amazing to me,’ he said. ‘I was hoping to get it for less, but I’m satisfied.’”

“This was an auction, with no minimum set bids, of 60 foreclosed homes that had sat on the market unsold for at least several months. All homes were ’sold,’ although the banks that repossessed the homes can reject the top bids in coming days if deemed too low. There were no bank representatives present at the auction.”

“Bids ranged from a low of $40,000 for a 1,128-square-foot boarded-up home on south Stockton’s East 12th Street to a high of $350,000 for a 1,668-square-foot home, with assigned boat deck, in the Delta’s upscale Discovery Bay.”

“Cindy Mello, with Coldwell Banker The Vintage Group, had a half-dozen listings up for auction, and she said the top bids came in at about 40 percent under the current list prices.”

“Although Hudson & Marshall says more than 90 percent of top auction bids are accepted by highly motivated banks, Mello said most of the top bids were discounted too steeply for most banks. ‘I just don’t think the banks are going to give those discounts yet,’ she said. ‘That’s just too low. For the banks, their sweet spot is about 15 percent below.’”

“Travis Campbell of Lodi went to the auction looking for a bargain and got one - if the bank takes his top bid. He put in the top bid of $150,000 for a 2,600-square-foot Stockton fourplex - bought two years ago for $450,000.”

“‘I’ll be happy as soon as the bank accepts the offer, and I’ll be over there with crews fixing up the property,’ he said.”

“Frank Orello, (an) agent with six houses up for auction, said that in the previous several months he had fielded offers for all six that were at least $60,000 to $80,000 higher than the top bid marks in the auction.”

“He said he didn’t know what the banks might do with the offers. ‘They’ve played hardball when they should be trying to make a deal,’ he said. ‘I’m already starting to see a change.’”

Readers suggested a topic on circumstance and the housing bubble. “I was wondering, what would we all be saying if the shoe was on the other foot? By that I mean what if those of us who are currently renting due to the insanity of home prices had bought a home pre-bubble? (I am a renter). Would we have the same opinions about the ‘paper gains,’ and be so adamant that sellers lower their prices if it was our home equity on the line?”

“I know that many of us would like prices to fall big time so that we can finally achieve our dream of homeownership (or get back in a home if you sold out to take your gains during the bubble). But I found myself thinking today, would I feel the same way about the housing bubble if I had bought a home for $200K several years ago, that at the height of the bubble was worth $700K and is now worth $500K because of the bursting of the bubble?”

“I told myself that I would have the same opinions because I view a house as just someplace to live, not an investment or piggy bank, and having a paid-for home is a major part of my retirement plan. Therefore, whether my home was worth $200K, $500K, or $0K, it shouldn’t matter if I truly hold that view.”

“But I don’t know. It’s easy for me to sit here and be irritated at a seller who refuses to let go of his/her notions of their home’s ‘value,’ but what if it were me?”

“I guess what I’m trying to determine is, are people like those here (fiscally responsible, prudent, forward-looking, self-controlled, didn’t buy more home than they could afford, didn’t HELOC, bought home just to live in it, etc.) who own a home, just calmly sitting by watching all their equity go up in smoke and shrugging their shoulders? Or are they feeling some dismay even though they won’t be losing their homes, don’t have to sell, etc.? If you were never going to use the equity it shouldn’t matter, no?”

A reply, “Actually, if you owned a house pre-bubble AND did not HELOC it AND do not plan to sell it and move out of San Diego (for example) AND have any need for a move up house - i.e. growing family, nicer neighborhood, closer to the ocean - you are much better off if prices fall.”

“I.e. you bought a $100,000 house that went to $400,000 but wanted to move up to an $800,000 house. If prices stayed the same (all loans at 7% - all equity used for new purchase) You are looking at a $300,000 down and $500,000 loan for $3,307/mo. plus $733 for taxes = 4,040/mo.”

“If both houses ‘values’ were cut in half and your existing home was worth $200,000 and the desired home worth $400.000 - $100,000 down and a $300,000 loan which is $1,984/mo plus $367 in property taxes for a total payment per month of $2,351/mo. Same house. Same standard of living. Heck of a lot less money.”

“Sometimes you have to run the numbers but as long as the person didn’t buy recently and/or didn’t HELOC the property and they want to stay in San Diego, they are better off with lower prices if they ever want to move. Even moving from like to like would mean much higher property taxes.”

“People freak out when their ‘net worth’ drops, but so often this is a false number. Sometimes just running this scenario for them helps out immensely. Unfortunately, if they are retiring and moving out of state then this is a bad scenario for them. (Although it can be argued that prices are dropping everywhere.)”

To which was posted, “Exactly! It was property taxes that kept us from buying up, and convinced us to sell-to-rent. Our payments would have more than doubled, just to get an extra bedroom in a **slightly** better area.”

One wrote this, “From my POV: I built my house in 98-00 and never calculated what it cost, nor what I’ve added since then. As the local ‘comps’ are somewhere between abandoned travel trailer and new-ish doublewide mobilehome, the construction guys kept telling me that I’d ‘never get out what you’re putting into it.’ I’d reply that I had no intention of ever getting ‘anything out of it’ because I had no intention of ever selling it. This was my home.”

“They thought I was nuts, but I paid them in cash every Friday, so they eventually cut me some slack and quit harping on me.”

“And sure enough, when I moved in, the county assessed it at about 10% of what a comparable place in any other part of California would fetch. Boy, was I pissed at myself for wasting all that money on thoughtful design and high quality material and workmanship!”

“So no. The equity fluctuations have had not one iota of effect on my outlook or my finances. I could never replicate this place for anywhere near what I might be able to afford even IF I could find the skilled labor and a comparable piece of property to do so, so I’ll probably die here. A happy camper who still has no clue as to what her home is ‘worth.’”

“(The problem is the FB’s from elsewhere who think they can move up here on a budget cut…and end up trashing their land because they can’t afford to maintain it. On the other hand, as their property values tank, it’s just that much easier for me to buy them up, doze their POS trailers, and let the land revert back to nature.)”

One had this. “Ecclesiastes 1:9 says.. ‘..there is nothing new under the sun.’ But i prefer to quote Don Ameche.. ‘Things Change,’ and a fall in price could become important.”

Another cites market forces, “Here is the beauty of a free market: Sellers are entitled to fantasize forever about the ever-increasing value of their faux chateau. Under a free market system, they cannot be coerced into selling for one penny less than they know their home is worth.”

“Would-be buyers can sit on the sidelines forever if they believe homes are overvalued. They may rent indefinitely if they don’t think homeownership is a smart financial move.”

“The stalemate can continue forever, and nobody is the worse for it!”

The Sun Herald reports from Florida. “Sean Snaith, a University of Central Florida economist, is noted for his work debunking the media-driven image of a ‘housing bubble.’ A speculative ‘bubble’ is a rising market driven only by expectations of still greater price increases. The cost of Florida housing has been driven up by real-world factors like strong demand from a growing population of retirees.”

“The slump in residential construction is putting Charlotte County, at least for now, into the unenviable position of being one of the worst counties in Florida to find a job.”

“‘Looking at the state as a whole, I see nothing that surprising,’ said Snaith. ‘I see job losses in those sectors most closely tied to the housing boom…this is a fairly positive report that shows we’re one step closer to getting through this whole housing correction.’”

“However, ‘There are pockets of pain throughout the state, and unfortunately you’re in one of them. Charlotte County has been hit pretty hard by the housing correction, and has been one of the worst areas in the state in terms of price declines for housing,’ Snaith added.”

“That’s not to say new jobs aren’t being created — they just aren’t being created in certain sectors that have been critical to Florida’s economy. Snaith noted that many of these jobs are good ones. And the hospitality industry is likely to benefit from the cheap dollar, which makes a Florida vacation once again affordable for Europeans.”

The Ledger. “Emily Camp, a staffing consultant in Lakeland, said the firm has seen a rising influx of workers from housing-related professions as the state’s housing market continues to suffer.”

“Some real estate agents and brokers have found clerical positions in medical and legal offices, while skilled workers such as carpenters and roofers are being absorbed by warehouses and other employers, Camp said.”

“‘But they’re taking pretty big pay cuts. They’re going from $15, $16, $17 an hour to $8-an-hour warehouse jobs just to get by,’ she said.”

The Orlando Sentinel. “The state and local unemployment rates have been climbing steadily for the past year. The increases have coincided with steep declines in Florida’s residential-construction industry.”

“Economist Sean Snaith said other areas could begin to pick up once the real-estate market begins to strengthen. ‘We will have some white knuckles here for a few quarters, as we work our way through this phase,’ Snaith said. ‘Every month that the data comes out and looks like it does today means we are one step closer to coming through the other side of this.’”

“‘There are a lot of people in industries affiliated with home building, especially residential mortgage lending, that are looking,’ said Steve Kirby, VP of (an) employment agency in Altamonte Springs.”

“Kirby said that businesses are becoming increasingly reluctant to hire part-time workers as they worry about costs. ‘They are using their own staff to fill in when needed,’ Kirby said. ‘The ‘R’ word, recession, is looming out there.’”

From The Star. “Florida real estate can be had for a song. The Canadian dollar boasts buying power unheard of in decades…and surely there will never be a better time for a Canadian to buy real estate here.”

“Should you really be buying when a short drive from their bayside suite, there are apocalyptic signs advertising homes discounted by $100,000, desperately seeking any offer? What about those blocks of abandoned homes in counties south of here?”

“But the inventory will never be greater. In Lee County, which includes Fort Myers to the south of here, there were 1,538 foreclosures last month. In December 2005, the median price of a single-family home in Lee County was $322,300. Today, that median price is under $231,000.”

“Lots in Lehigh Acres went from $8,000 in 2000 to selling for $65,000 a couple of years later, says Charles Richardson, Coldwell Banker’s senior VP for residential real estate in southwest Florida. Homes in the county went from $80,000 to $350,000 in less than 24 months.”

“Condominiums were wildly overbuilt, driven again by speculators, with unoccupied units never filled, and a further correction is coming, Richardson says. ‘People got so drunk with the fervour, they anticipated it going on forever, which, of course, it couldn’t.’”

From Local 10. “A newly released report says Florida leads the nation when it comes to mortgage fraud. That does not come as a surprise at all to Glenn Theobald. He heads up Miami-Dade County’s newly formed mortgage fraud task force. ‘This is just scratching the surface,’ said Theobald.”

“In 2005, Miami-Dade police detectives were asked to look into 15 cases of possible mortgage fraud. In 2007, that number spiked to a possible 1,000 cases.”

“A recent report by the Reuters news service said The Club at Brickell Bay is ground zero for foreclosures and mortgage fraud, going on to report that 200 deals within the last year and a half are questionable.”

“Local 10’s Kellie Butler spoke with the head of The Club’s homeowners association. Diana Ospina told Butler foreclosures in the building have led to missed maintenance fees and, in turn, that has affected other owners.”

“Miami Shores real estate broker Alice Kellogg said lenders are now requiring exceptional credit and two or three appraisals on a property before granting a loan. ‘It’s getting more and more difficult,’ said Kellogg.”

From Miami Today. “Although residential inventory remains high, a slowing of new construction has helped to slowly push the home sales market toward a balance in which prices begin to match inventories, local professionals and market reports say.”

“‘There are signs that certain aspects of the market are improving and some are not,’ said Brad Hunter, director of the South Florida division of Metrostudy. ‘The number of finished vacant homes is falling, but the other side of that is that the reason the number is falling is because they are getting rented.’”

“People who bought property in 2005 and are now renting out those properties, Mr. Hunter said, are losing money. ‘There will be an increased number of foreclosures in 2008.’”

“Finished vacant inventory of single-family homes increased from 1,436 units to 2,142, according to the third-quarter statistics. ‘What happened in Miami-Dade is there was a surge in completions of townhomes,’ Mr. Hunter said, explaining the townhomes in the count are unattached single-family residences.”

“‘The townhome inventory doubled in a three-month period. If it weren’t for the townhomes, the level of inventory would have stayed about the same,’ he said.”

“Beth Butler, chief operating officer for Esslinger Wooten Maxwell Realtors, said she has seen a build-up of ‘nice, good-sized, three- and four-bedroom’ townhomes in Homestead. ‘Certainly, we’re coming into the market where we have a lot of things delivering, especially in Homestead and West Dade,’ she said. ‘A lot of single-family houses are reaching completion in our markets where they are still building single-family homes.’”

“Additionally, many more condominiums will be finished within six months, she said. ‘I think overall everybody knows we’re into this surplus inventory and expect that there will be lot more coming, more condos, more townhouses, more single-family houses.’”

“Mike Pappas, CEO of The Keyes Co., has seen builders give huge incentives and upgrades in the new home market. ‘If you are going to buy, you could get $50,000 from a builder on a mid-sized home,’ he said. ‘Behind every gray cloud, there is a silver lining.’”

From CBS 4.com. “A new study shows developers in South Florida’s real estate market are slowing down with projects in what economists are calling a housing depression. New-home construction is at a ten-year low.”

“Just beyond the 55th Street Station in Miami, off Biscayne Boulevard, there is a building site for a project called Kubik, 315 ultra-hip condos overlooking Biscayne Bay. It was a project so attractive, the developer sold half the building.”

“That was three and a half years ago. Now, on the empty lot is a building crane, beginning to show signs of rust.”

“A neighborhood lawsuit brought the project to a halt. ‘Oddly enough we were thinking of not moving forward with Kubik anyway because of the market,’ said developer Paul Murphy. ‘You know, sales came to a dead halt.’”

The St Petersburg Times. “When freebies like granite countertops and no-cost closings didn’t woo back buyers, homebuilders began trying to outdo one another with bigger and better price cuts. But now, the tactic may have backfired.”

“The reductions, builders complain, have sliced into already thin margins. And buyers, fearful their houses will depreciate faster than a new car, won’t make purchases until prices stabilize.”

“‘If people stop cutting prices, that’s actually good,’ said David Goldberg, an analyst with UBS Investment Bank. ‘If everybody does it, it works. If one builder does it, it doesn’t.’”

“Last month, nearly 60 percent of builders cut prices. But some may be losing faith. About half labeled the cuts at least ’somewhat effective’ in bolstering sales or limiting cancellations, down from a high of 72 percent in May, according to the National Association of Home Builders.”

“‘The reason some companies say ‘enough is enough’ on the price cuts is because price cuts often generate expectations of further reductions,’ said Dave Seiders, the Washington group’s chief economist.”

“But empty homes carry costs, including insurance and maintenance. And after a year or so, there can be significant additional costs, such as repainting and redoing landscaping.”

“‘It doesn’t get better with age,’said Jim Dietz, chief financial officer of WCI Communities Inc., a condominium and traditional homebuilder in Florida that has sold some completed units for minimal profit.” “Reduction-aversion, he said, is a risky play.”

“‘Their risk is that, okay, sales drop 80 percent and now you don’t have enough cash come in to pay the bills and your debt sours. How long can you do that?’ he said. ‘I agree that discounting is bad, but I also believe that the market needs to reset. The inventory needs to be cleared through before we can get to a more normal selling environment.’”

“If you want to move waterfront mansions in a hurry, it’s best to settle for 40 cents to 70 cents on the dollar. ‘The current market has been dysfunctional,’ said SKY president Chad Roffers, whose company offered up 79 homes worth about $200-million in a giant lawn tent at the private Long Boat Key Club. ‘Homeowners learned what fair market value is.’”

“About 30 of the 79 properties sold on Friday. Some were auctioned, but required a minimum bid, while others were sold ;absolute; - best offer takes the property.”

“While Roffers proclaimed the day a triumph, none of the three Pinellas and Hillsborough County properties on the block ever passed Go. One 5,200-square-foot waterfront house in Bayway Isles in St. Petersburg, originally listed for sale at $2.4-million, couldn’t rustle up a minimum $800,000 bid.”

“Another of the higher-end waterfront properties, listed at $11.9-million on Longboat Key’s Gulf of Mexico Drive, also failed to sell.”

“Considering their ability to toss around tens of millions of dollars, many of the buyers were a secretive lot. Participants paid a $10,000 deposit just to win use of a blue bidder’s paddle. If they won, they had to write a check for 10 percent of the purchase price on the spot.”

“‘It’s the aftermath of irrational exuberance,’ said one anonymous millionaire with a British accent from Southeast Asia who - no doubt enjoying the weak U.S. dollar bargain effect for foreign buyers - scooped up four properties for about half their recent value.”

“His son chimed in: ‘This is a market wake-up call. Forty to 50 cents on the dollar: I think this is the new reality.’”

“Auctioneer Daniel DeCaro, who’s done 40 luxury real estate auctions so far this year, mostly in Florida’s hard-pressed market, spent most of the four-hour auction trying to flog interest in the properties that didn’t sell.”

“A house in Apollo Beach’s MiraBay was such one no-sell. It was originally listed for $1.25-million but couldn’t attract an acceptable opening bid. ‘Five hundred!’ DeCaro bellowed from the stage in the auction tent, seeking half-a-million dollars for the MiraBay. ‘Four hundred to get it started? Four hundred, anybody?’”

“By the end of the auction, interest had waned to a trickle. No-sale followed no-sale. Blue bottles of Saratoga spring water littered the floor along with glossy auction booklets. ‘Looks like there’s a lot of money in this auditorium,’ DeCaro told a dwindling crowd. ‘But you guys aren’t spending it.’”

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