The Housing Bubble

A report from the Arizona Republic. “Houses have their own Web sites and hold open houses every day. Classified ads start with ‘desperate’ in boldface. In this desperate, desolate, strung-out housing slump, it was only a matter of time before someone thought of T-shirts. When it comes to selling houses, these are the days of no shame. Jeni Barton needs to sell her Gilbert four-bedroom quickly, so she busted out the iron-ons and made T-shirts for her kids that say, ‘Buy my house,’ on the front and trumpet the home’s Web site n the back.”

“All that and still there’s nothing doing at chez Barton. She’s lucky to have one person come to an open house. When people see her daughters and their T-shirts, ‘they just kinda laugh,’ Barton says.”

“There’s a job waiting in Denver, a slew of new homes competing for buyers across the street, and the Christmas crush is freaking her out. Barton’s efforts are a way to calm the panic.”

“‘I’m hoping to speed it up a little. I’m virtually exhausted from keeping (the house) perfect 24/7 and not having anyone come and look at it,’ says Barton. ‘I’ve been trying to figure out what I can do so I didn’t feel so helpless, so I felt like I was doing something.’”

“‘What (buyers) are really looking for is the best deal,’ says agent Neil Brooks. ‘They’re really afraid the market’s gonna keep going down, and they want the lowest price right now.’”

“The only way to really sell a house quickly, Brooks says, is to slash that price until it’s irresistibly low.”

“Still, it’s easy to get lost in this sea of stucco and ‘for sale’ signs. There were 58,178 homes on the market as of October, compared with 47,588 in October 2006 and 23,483 in October 2005.”

“The Valley’s growing foreclosure problem is hitting the upper and middle class the hardest. Metro Phoenix homes in neighborhoods where prices range from $400,000 to $450,000 now have the highest foreclosure rate.”

“The problems are worse for homes in the $400,000-to-$450,000 range because many speculators bought in those neighborhoods, some families moved up beyond their means, and the recent credit crunch has made getting mortgages for more than $400,000 tougher.”

“Valley foreclosures have been steadily climbing this year and are at their highest level since the real-estate crash of the late 1980s. Based on figures from the past few months, as many as 10,000 homeowners across metro Phoenix will lose their homes this year. Last year, there were fewer than 2,000 foreclosures.”

“Homes in areas in the $200,000-to-$250,000 range have the second-highest foreclosure rate, with 63 out of every 10,000 homes in foreclosure.”

From KVOA in Arizona. “Wendy Hatt moved into a house on the far Northwest side with her family just over a year and a half ago. But, her American dream turned into a nightmare earlier this year. Wendy’s home had appreciated in value by about $100,000, only months after she and her husband bought it. So, they took out a second mortgage for almost $80,000 to enhance their new home.”

“When the housing bubble burst, that $100,000 in equity evaporated. But, the interest on that second adjustable rate mortgage by now had climbed from 8% to almost 16%, creating a monster of a monthly payment they couldn’t handle.”

“‘Then, it just gets pulled from right out underneath you.’ Now the couple faces possible foreclosure on the house.”

“Pima County foreclosures are up almost 300% over last year. Real estate professionals and city leaders say the problem here in the 85706 area is that too many people bought homes at the wrong time. They paid too high a price and used adjustable rate mortgages that are now coming back to haunt them.”

“Wendy’s real estate agent is trying to work out a short sale…for less than she owes on it to cut their losses. In her case, that’s just over a $100,000.”

The Wall Street Journal on Arizona. “For people hoping to refinance a home, it should be good news: Yields on U.S. Treasury securities are falling — which translates into lower mortgage interest rates.”

“However…due to continuing turmoil in the housing market, some borrowers could find that they are being shut out of refinancing entirely, as lenders tighten their standards.”

“Steven Walsh, a mortgage broker in Scottsdale, Ariz, says that some of his borrowers have called him looking to refinance and take advantage of lower rates, but are going away empty-handed.”

“Martin Quijada, an architect from Gilbert, Ariz., who has perfect credit, has been looking to refinance his mortgage loan recently. But two banks with good rates wouldn’t sign off on the appraisal, says Mr. Walsh, his broker. Another bank agreed that the appraisal was fine but had ‘terrible rates,’ Mr. Walsh said.”

“‘I was expecting a much simpler process,’ says Mr. Quijada, who plans to hold out for now, in hopes of getting a better rate later. But Mr. Walsh warns that, even if rates drop further, Mr. Quijada will still have to deal with the appraisal issue.”

The Review Journal from Nevada. “Sales of both new and existing homes dropped drastically in October and median prices continue to slide from last year’s peak, a local housing analyst reported Wednesday.”

“Larry Murphy, president of Las Vegas-based SalesTraq, said he talked to a mortgage lender who’s processing six or seven loans in one subdivision of the Anthem community in which new home prices were slashed $250,000, or about 30 percent.”

“‘I don’t know if it’s true or if it’s just a rumor, but he said half of them are Realtors and they plan on walking away from their current home, the same home they bought from the same builder last year,’ Murphy said.”

“Median new home prices fell 9.2 percent in October to $299,575 while sales plummeted 49 percent to 1,302, compared with the same month a year ago, according to SalesTraq. Existing home prices dropped 11.4 percent in October to $257,000 and sales were down 44.3 percent to 1,549.”

The Las Vegas Business Press. “Real estate investors face similar hard-money problem with Las Vegas land values dropping in the third quarter as a result of higher development costs, increased interest rates and a housing-market slowdown.”

“Median vacant land prices were $677,300 per acre at the end of September, or $41,200 less than the previous quarter, reports Applied Analysis. The average price per square foot was $15.55, which is a 5.7 percent drop from the second quarter.”

“Changing market conditions have heavily affected the mid- and high-rise luxury market with nearly 56.4 percent of all projects, 58,461 units worth, stuck in the planning or proposal stage, Applied Analysis reports. Another 3,877 units have been suspended and 5,253 units have been canceled.”

“‘Reservations don’t equal sales,’ said Brian Gordon, an Applied Analysis principal. ‘There are several investors placing refundable deposits on multiple projects around town. But when it comes time to sign the contract, they will often re-evaluate their selection.’”

“Third quarter sales in Southern Nevada’s apartment market slowed amid diminishing inventory and lack of new construction. The slowdown is in response to a softening single-family home market as well as rising land and construction costs.”

“More than 200 apartment buildings, about 11,196 units, sold in the third quarter or 46 percent less than a year ago, reports Michael Belnick, an apartment specialist. ‘We are seeing drastic sales declines even stronger than the residential market,’ Belnick said.”

“The Las Vegas Valley apartment market inventory consisted of roughly 181,085 units in the third quarter, with a 7.7 percent vacancy rate.”

“‘We are experiencing a slower real estate investment market for residential income properties than most markets,’ said Belnick. ‘But we will not be as affected as much as areas like San Diego or Phoenix due to our job and population growth over the next several years.’”

Readers suggested the future of mortgage securitization for a weekend topic. “I suggest a weekend thread on housing bust litigation. Some examples of which I am aware include: 1) NY state Attorney General subpoenas of Fannie and Freddie, plus related investigation of WaMu and outfit that does its appraisals; 2) Class action suit against CFC; 3) Other?”

“I am also curious about what other litigation might ensue going forward; for instance, what about investment banks that paid out record bonuses last year, but are now reporting ‘larger than expected’ subprime writedowns in the $3bn+ range? And what are the broader implications of a possible wave of litigation for the future of Wall Street’s vaunted asset securitisation business model?”

One poster was sarcastic. “CEO Mozilo did deposit his stock sale Dollars $$$$$$$$$$$$$$$$ directly into his ‘personal’ money market account with Countrywide ‘Bank’ right? I mean, that would really be the thing to do to show all the ‘other’ depositors that everything is goin’ be alright…down the road.”

One was philosophical.”Success has a hundred authors; failure, a thousand lawyers.”

One points to the raters. “IMHO, none of this could have happened if the ratings agencies were doing (what investors assumed was) their job — appropriately identifying risk characteristics of various securities.”

The Australian. “Jig could be up for asset-to-security converting. An Australian at the forefront of the Wall Street securitisation industry has warned that the business of converting assets such as home loans into marketable securities will be ’seriously challenged’ as regulators and financial markets seek remedies for the severe downturn in US housing and credit markets.”

“‘There is no doubt that securitisation is going to be seriously challenged,’ said Greg Medcraft, managing director and global head of securitisation at Societe Generale in New York. ‘We could be in for a period of painful adjustment.’”

“A securitisation trust linked to the struggling Countrywide Financial Corp, the US’s biggest home lender, was accused of securities fraud in an action filed by a California law firm. It’s believed to be the first time a securitisation trust has faced a possible class action suit.”

“Mr Medcraft said the system of selling home loans into a secondary securities market needed reform because risk had become too disseminated. Too often, he said, loan originators and lenders were left with ‘no skin in the game.’ This, along with the need to restore confidence in ratings agencies, was among the biggest challenges.”

The National Post. “Alberta bank ATB Financial has set aside $79.6-million for potential losses and restructuring costs on asset-backed commercial paper. ATB president Dave Mowat said Aug. 28 that ‘there isn’t any impairment of the underlying asset.’”

“On Friday, however, he acknowledged ‘this is a serious financial event for ATB.’”

The Washington Post. “Investors already burned by turmoil from the credit crunch are now worried about unwanted surprises in the industry that insures bonds.”

“In the face of mounting losses in U.S. mortgages, rating agencies are reviewing eight leading bond insurers, which could lead to downgrades. Such a move could ripple across the financial sector, because if a bond insurer is downgraded, most of the securities it has blessed as virtually risk free are likely to follow.”

“‘It would have a domino effect on all of the entities that hold these vehicles,’ said Ed Rombach, a senior analyst at Thomson Financial. ‘They would have to have more write-offs. It’s a vicious cycle.’”

“Moody’s Investors Service and Fitch Ratings are examining the capital levels and structured debt these firms have insured because they are worried that the deterioration in the mortgage market may expose them to greater losses. Moody’s expects to finish its review next week. Fitch said it would complete its review within three weeks.”

“‘The people watching this are not going to say, ‘I’m so happy they’re going to be downgraded only to double-A,’ said Sylvain Raynes, a founding principle of a structured-finance consultancy. ‘They’re going to say, ‘This is the beginning of the end.’ And they’re going to want to go before everyone else goes. This is a stampede.’”

From MSNBC. “Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from investment bank Friedman, Billings Ramsey. That’s making it even harder for would-be buyers to get new mortgages.”

“This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.”

“Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped — it turned out, in vain — to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.”

“‘It’s not just me, it’s a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we’re just looking for a solution,’ he said.”

“Today’s financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.”

“When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction. This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks — losses that could spill into the huge pension and mutual funds that also invest in these securities.”

“‘We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it,’ said economist Thomas Lawler, who was once chief economist for Fannie Mae. ‘We’ve never been in this situation before.’”

The Hook reports from Virginia. “With the real estate slump and glut of new houses on the market, it probably comes as no surprise that one of Charlottesville’s many builders has decided to get out of the biz. But few in the home building community could have predicted the first to go would be one of Charlottesville’s most prominent.”

“Randy Wade, founder and owner of R.D. Wade Builder, announced, ‘We have informed our employees that we will discontinue homebuilding as of January 31, 2008.’”

“He explains that his decision was not made hastily or out of financial duress, but rather resulted from his observations over the last several years as the housing market has cooled from the red-hot sales of 2003-2005.”

“‘We’ve taken a restrained approach to building for the last year and a half,’ he says. ‘We’ve already been through the cut-down stage. We hoped things would get better over that time, but instead they’ve gotten worse.’”

“Indeed, in recent days, several other local builders acknowledged they’ve had to cut their own workforce and that in the upcoming year they expect to build about half the number of houses they’ve completed in other years. Mike Gaffney, of Gaffney Homes, says he’s cut his staff by about half and is discounting some of his existing inventory and converting others to lease-purchase options.”

“Randy Rinehart says his ‘very close’ friendship with Wade stretches back nearly 40 years, when both served as presidents of the Blue Ridge Homebuilders Association. Given Wade’s past influence on Rinehart, Kingma, and other builders, could his current decision spark an exodus from the industry?”

“Rinehart…admits Wade’s decision will have an effect. ‘It has to be in the back of individuals’ minds,’ says Rinehart, ‘that someone as strong as [Wade] has chosen this to be the time to close his business because he doesn’t see opportunity on the horizon.’”

“For Wade, his favorite times were the years before the boom began in the late 1990s. ‘Everything stayed in balance,’ he says. ‘Builders knew how many people would be buying and how many [houses] would be bought; it was market-driven. Now we’re pushing the market, trying to make the market do it rather than meeting the demands of the market.’”

In Richmond from Virginia. “Scott and Dawn Loving were able to stop the foreclosure on their house — at least temporarily. The Lovings got into trouble when the subprime adjustable-rate mortgage on their Chesterfield County home reset after two years.”

“Their monthly payment jumped from $1,250 to $1,400, resetting six months later at $1,600, then again at $1,650. Their new payment consumed more than half their net income.”

“‘We were OK the first two years, but we got stretched when the payment went up $400,’ Scott said. The Lovings agreed to a subprime loan because past credit problems limited their options.”

“The number of foreclosures in Virginia soared from 4,354 in 2006 to an estimated 14,000 this year. In 2008, the number could reach 20,000.”

“The Lovings were locked into their original mortgage because it carried a hefty prepayment penalty. As soon as the penalty phase passed, they looked into refinancing. ‘At least a dozen lenders turned us down,’ Scott said.”

“They found one taker. The payoff on the old loan, a combo ARM and fixed-rate mortgage, was $137,000. They walked away with another ARM. This one was for $161,000, which increased their debt. Fees and closing costs totaled $20,000.”

“It included $4,000 in cash. ‘We didn’t feel we had any choice,’ Scott said.”

“The new payment is $1,623, not much better than the $1,650 payment on the old loan. ‘But we had a fresh start,’ he said. The initial interest rate on the new loan is 9.8 percent, 0.1 percent better than the old loan. It, too, has a prepayment penalty — 5 percent of the loan amount. It resets next June.”

“The Lovings kept up with their new payments for a few months. Then one payment was put into escrow and the Lovings were one month behind. Repeated calls to the lender solved nothing. When the couple received notice of a foreclosure sale, they turned to Housing Opportunities Made Equal.”

“Their HOME counselor (did) what they couldn’t — open a line of communication with the lender. ‘We’re in limbo,’ Scott said, as they wait to find out if their lender will work with them. ‘We should find out right before Christmas if we can keep our house.’”

The Washington Post. “The number of recent home foreclosure filings in Loudoun, Fairfax and Prince William counties is up more than 600 percent from a year ago, a much higher increase than in the United States as a whole, according to a national real estate company.”

“Loudoun had the sharpest increase among the three counties, with 1,073 foreclosure filings in July, August and September, compared with 125 filings during the same period in 2006, a jump of 758 percent, according to RealtyTrac. Those numbers represent filings in all phases of the foreclosure process, from the initial default notice sent to a borrower to the repossession by a bank.”

“‘Quite simply, the foreclosure issue is tied very closely to first-time home buyers who got in over their heads,’ said Jeanette G. Newton, CEO of the Dulles Area Association of Realtors. ‘The [higher] variable rates have now kicked in, and they just can’t afford the mortgage payments.’”

“The jump was 694 percent in Fairfax, from 229 filings in the third quarter of 2006 to 1,818 in the same period this year. Prince William filings rose 624 percent, from 212 to 1,535.”

“Dozens of advertisements for foreclosed Northern Virginia houses have been posted on real estate agents’ Web sites. One ad early this week offered a three-bedroom, two-bathroom single-family house in Sterling for $325,000. Another trumpeted a four-bedroom, three-bathroom house in Centreville for $356,500.”

“‘Most of the people running into trouble either can’t make their payments or are being forced to sell for some reason or another,’ Newton said. ‘Or they are being forced to sell in an economy where they are not going to make any money on their homes, and they have to bring money to the table to sell their houses, and they just don’t have the money.’”

“Newton said there’s an upside to the crisis. ‘There is more inventory of properties and the interest rates are low,’ she said. ‘It really is a good time to buy as long as you are looking for a long-term home investment.’”

“‘If people can hold on to their homes, they are going to be okay,’ Newton said. ‘The market is going to come back. The market always does come back.’”

The Virginia Pilot. “The real estate market in Ocean View is depressed, as evidenced by the hundreds of for sale signs and lack of construction in the community nestled along seven miles of the Chesapeake Bay.”

“But at least one project is moving forward – a plan to build a 54-unit senior condominium on East Ocean View Avenue.”

“Virginia Beach developer Janice Key said she is moving ahead because the project, limited to residents 55 and older, will fill a niche in Ocean View. ‘We believe there’s a demand for this housing,’ she said.”

The Baltimore Sun from Maryland. “Maryland’s housing market spiraled further downward this past summer, registering the fourth-biggest drop among all the states as home sales fell nearly 30 percent from a year earlier.”

“Indications are that the market isn’t getting better. Home sales in Baltimore and the five surrounding counties plunged 31.74 percent in October from a year earlier, the most in the eight years that Metropolitan Regional Information Systems Inc. has tracked sales through the MLS.”

“‘At one point, homes were selling very fast, and now the inventory is catching up and overtaking the demand,’ said Daraius Irani, director of the applied economics group at Towson University’s research and consulting arm. ‘It’s somewhat of a concern that it’s fallen.’”

“Only three states — Nevada, Florida and Arizona — had greater slumps in home sales than Maryland.”

“The sales picture in Maryland deteriorated over the course of the year, the NAR data show. In the second quarter, the year-over-year decline was 21.1 percent, the fifth-worst in the nation.”

“‘There’s a disconnect between sellers and the buyers’ expectations,’ said Marc Witman, a Baltimore County-based realtor. ‘Until the sellers come down with their pricing, the buyers aren’t going to jump off the bench.’”

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