The Housing Bubble

A weekend topic on the past year. “We have just experienced a historic year. What was the biggest housing bubble event of 2007?”

One posted, “Containment didn’t happen.”

Another added, “The housing bubble was renamed the ‘Subprime this’ or the ‘Subprime that.’ Mentally containing it, just a little, to loans (and only ‘dodgy loans’ at that). Thus the concern for how loans perform, rather than overpriced houses. And all the interest in propping up housing prices because the problem we have is with bad loans.”

One agreed. “Yet another attempt to pin this fiasco on poor people, aka ’subprime borrowers.’ The problem was not with the borrowers. The problem was with the collateral. Lenders were making loans which far exceeded the fundamental valuation of the property based on income, i.e. rents.”

“That’s the real problem, it extended across all loan classes, and all types of property from Compton to West LA. And all of these properties are going to be experiencing defaults.”

To which was said, “The collapse in collateral prices was just the fan on the house of cards that was the entire lending/borrowing/investing in housing during this period.”

“The (inevitable) collapse in prices just happened to be the first step in knocking the whole thing down.”

Another said, “In a way, the biggest story was the dog that didn’t bark.”

“Consider all that has happened — the media realizing the bubble was a bubble, the media realizing the bubble had popped, financial organizations admitting huge losses, soaring energy prices, a credit crunch, a dollar collapse, etc. These are the worst economic conditions I can recall since the 1970s and early 1980s, worse than the early 1990s.”

“And yet employment and the stock market (in total) are up. Was 2007 the year the sea suddenly pulled away from the shore after an earthquake, drawing onlookers to the beach?”

One was specific. “The article (in April I think) in the New York Times that it is better to rent than buy, and stating exactly why accurately. MSM coverage changed after that.”

“Another watershed event might be the credit freeze that began around November that had central banks of the world scrambling in unison to restore liquidity.” A local opinion.

“Regionally, the big event in the northeast was the dramatic decline in sales in Sept/Oct. The notion that nothing has changed and the status quo still holds among RE believers is still very strong.”

“Few if any of them make the fundamental connection between sales volume and pricing and none are willing to admit that sales volume is the lifeblood of the entire market. Their perspective is something like ‘I don’t have to sell, therefore, I haven’t lost anything.’”

“My point is that the last 5-6 years haven’t put a nickel in their pocket. Not one red cent.”

One pointed to the past summer. “The Funds of August…”

One had a HBB reference, “What was the biggest housing bubble event of 2007? The introduction of the Joshua tree as a WMD.”

The Motley Fool. “In January 2007, the chief economist at the National Association of Realtors said, about the housing market, ‘The steady improvement in [home] sales will support price appreciation … [despite] all the wild projections by academics, Wall Street analysts, and others in the media.’”

“‘We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,’ Federal Reserve Chairman Ben Bernanke said in May.”

“Months later, a global credit crunch of widespread proportions set in and affected the likes of Citigroup, and just about everyone else with exposure to credit products.”

From Bloomberg. “If you didn’t know what subprime meant at the start of the year, it was hard to avoid its meaning by year end.”

“The big question now is what will the subprime crisis and ensuing credit crunch cost. In mid-July, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee that estimates of losses associated with subprime-credit products were $50 billion to $100 billion.”

“Those numbers ‘are far too low,’ Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., said in a mid-November report. Based ‘on historical default and loss patterns in different home-price environments,’ he estimates U.S. losses will be roughly $400 billion.”

The Chicago Tribune. “When Morgan Stanley credit strategist Gregory Peters sat down to write his 2008 outlook, he was delighted to bid 2007 farewell. ‘Good riddance to 2007,’ he wrote. ‘It was one of the most grueling, volatile and taxing years in credit market history.’”

“In an unusual twist, which defied typical bond behavior, a blood bath occurred in some bonds that investors would have assumed were the safest of the safe — mortgage-related bonds rated AAA or AA by firms such as Standard & Poor’s and Moody’s.”

“It turned out that neither Wall Street nor the rating agencies understood the risks, so the safety labels were misapplied and continue to undermine lending confidence.”

The Palm Beach Post. “Broker Douglas Rill asked me to recap my top stories of the year…so here they are. What many hoped was only a brief breather for Palm Beach County and the Treasure Coast turned into an outright correction. In October 2007, Palm Beach County’s median home price was down 17 percent from the late 2005 peak, while Martin-St. Lucie prices fell 23 percent.”

“Daredevil builders like Standard Pacific and Tarragon got burned. Both recently sold Palm Beach County properties for less than they paid during the boom. Even old stalwart DiVosta laid off hundreds of workers.”

“Record-low mortgage rates helped inflate the housing bubble. But the subprime meltdown and the housing crash were bad news for mortgage companies. HomeBanc went broke, and companies such as First NLC and First Magnus laid off hundreds in Palm Beach County.”

“Housing-related layoffs caused Palm Beach County’s once-microscopic unemployment rate to jump. Publicly traded companies such as Office Depot blamed the slowdown for dwindling profits.”

“Even the state’s supersafe investment fund for municipal governments suffered a run after it gave off the whiff of mortgage taint.”

The Sacramento Bee reports from California. “ResMAE Mortgage Corp.’s job posting, widely advertised just a year and a half ago, promised account executives with experience selling subprime home loans and a high school degree ‘7-FIGURE POTENTIAL.’ Those were the heady days of the real estate boom, and account executives at Orange County-based ResMAE and five other lenders identified by The Bee were getting paid big bucks to do something that seems a little crazy outside that context:”

“Issue subprime loans to almost everyone who wanted one, turning down fewer than 15 percent of Sacramento-region applicants.”

“Property owners who took out their loans were up to seven times as likely to face foreclosure during the past year as the rest of the region’s owners, according to a Bee comparison of property records and data from Foreclosures.com.”

“Most of these six liberal lenders now are history, killed or severely maimed by the housing market plunge.”

“Those miserable with their loans typically had held on a little too long and gotten burned. Many felt they had been suckered into a bad deal. The out-of-the-blue personal letters, the unsolicited phone calls – all were full of breathless promises and muted caveats, they said.”

“‘They betrayed me,’ said Morris Abee, who refinanced with ResMAE in 2005.”

“A 79-year-old veteran, Abee’s most valuable financial holding was the house near Auburn he has owned for almost three decades. Lenders seemed to know that, too. ‘Every day, I got about 20 calls from different mortgage companies,’ he said.”

“One broker made a pitch and Abee bit. It took only about two weeks for the $566,000 refinancing at 6.25 percent with ResMAE to go through, Abee said. Most of the transaction, he recalls, happened through the mail.”

“After a few months, ResMAE sold the loan to another lender. Abee kept up his payments. Then, in October, his rate adjusted, boosting his payments from $3,500 to $4,100 a month. Though Abee knew the adjustment was coming, ‘it surprised me how much of a jump it was.’”

“The statistical fallout from ResMAE’s business practices speaks for itself. At least 14 percent of Sacramento-area properties financed with ResMAE loans during 2005 and 2006 fell into foreclosure during the past year, about seven times the region’s average, according to a Bee analysis.”

“Abee says there is a strong chance he will lose his home, too. ‘If they don’t reduce the payments, I’m going to,’ he said. ‘I’ve got no choices.’”

“In one Flexpoint Funding commercial still viewable on YouTube, cameras pan across snowy hills, sandy beaches and rugged trails while an enthusiastic narrator offers a three-day, two-night vacation simply for calling to discuss refinancing.”

“‘A $100,000 loan, only $253 per month,’ he urges. ‘A $200,000 loan, only $506 per month; a $400,000 loan, only $1,011 per month; a $500,000 loan, only $1,264 a month.’”

“And, Flexpoint’s ad assures, neither bad credit nor no credit rating at all would get in the way of loans issued after as little as ‘a 17-minute application process.’”

“Bill Brashear, 79, needed extra cash after a hospital stay, so he decided to refinance his Del Paso Heights home last year. He lives off $2,259 in monthly pension and Social Security; his house payment is now $2,037.”

The Merced Sun Star. “Not many new homes are being built in the Merced area these days, a trend also seen throughout the state, according to California Building Industry Association figures. The builders’ group said building permits were pulled for only 3,151 single-family homes statewide in November.”

“Total housing starts in California, as measured by building permits issued, dropped 45 percent in November compared to the same month a year ago to 5,498, according to the Construction Industry Research Board.”

“Last month in Merced County 35 building permits were issued for new homes, four more than October but 48 fewer than in November 2006.”

“Don Gray, president of the Merced chapter of the Building Industry Association, said homebuilders have recognized the lack of demand for new housing and won’t build new dwellings unless there is a demand for them.”

“‘Builders are pulling in their horns. There is a glut of excess inventory, mostly used homes. It will be some time until the market comes back,’ Gray said.”

“The standing inventory of new homes in the Merced area is around 70 units, some of which may be display models. Most of the glut in existing inventory includes used homes. Merced City Manager Jim Marshall said new building starts have been affected by vacancies in existing housing and available stock that hasn’t been sold. He estimated there are about 800 vacancies in existing houses.”

“The city of Merced issued 10 building permits for single-family homes last month; from January through November of this year 168 permits were issued for single-family homes. In the same period last year, 937 single-family home permits issued, Marshall said.”

“Gray, a land-acquisition specialist with Summerton Homes, said in a boom market, homes were sold as fast as they were built. Even with homes built on speculation, most were bought before they were even finished.”

The Recordnet. “Joseph Anfuso, president of Stockton-based Florsheim Homes, said he’s been seeing slow sales and increasingly scarce buyers all year. ‘With new home building, it’s tough in this market,’ he said.”

“Developers also don’t want to build homes to risk having the completed projects sit empty in a slow market. ‘You really have to watch your construction very closely to make sure you’re not over extending,’ he said.”

“New home sales were flat in San Joaquin County, too, with 82 transactions in October sales a tick up from September sales of 81. It was off nearly 55 percent from October 2006, when the county registered 182 sales.”

“Long gone are the days of the first half of this decade when builders quickly sold every home they built as well as many they hadn’t built yet. ‘To get somebody to sign a contract to wait out construction is very difficult in this market,’ Anfuso said.”

The North County Times. “New home sales nationally in November dropped to their lowest level in 12 years, a trend mirrored locally. Local new home sales numbers were not available, but the number of building permits for new homes issued through November in San Diego County has fallen by 25.9 percent from last year to 3,290, according to the Construction Industry Research Board.”

“Building permits for new condominiums have tumbled even more, dropping 40.1 percent this year to 3,474, according to the group.”

“Builders said they have already lowered prices on new homes to the point where they lose money on the price of construction. Some said they would rather hold onto the properties than slash prices further.”

“‘If you’re in a position where you have to lose even more money just to get cash, you’re not going to do that,’ said Paul Tryon, president of San Diego’s chapter of the Building Industry Association.”

The Chicago Tribune reports from Illinois. “The number of homes sold in Illinois dropped dramatically in November while prices slid outside of the nine-county Chicago market, according to the monthly report by the Illinois Association of Realtors. Statewide, the median sale price was $193,000 for the month, down 3 percent from $199,000 a year ago, with a 20 percent drop in sales from last November.”

“Geoffrey J.D. Hewings of the University of Illinois, said slow job growth rate in Illinois is dragging on the economy and housing market. ‘It is hoped that the recent declines in interest rates may help stimulate the housing market. In the interim, consumer sentiment is moving to a cautious mode,’ he said.”

“With prices predicted to keep falling through the coming year or even longer, one might question the wisdom — even the sanity — of buying a home now when even better bargains probably await.”

“But people are buying. Armed with attractive mortgage interest rates and a bountiful supply of houses to choose from, some bargain-hunters say it is the time to act.”

“‘If you think there is blood in the streets, you want to be buying,’ said Vince Allegra, who in late November swooped in on a west suburban house that had languished on the market since spring.”

“Dickering with the relocation company that owned the house, he snagged it for $860,000 — less than the original list price of $1.1 million and even below the $950,000 it sold for in 2005, he said.”

“‘I still think the market will get worse before it will get better,’ said Allegra, a money manager for high-net-worth clients. Still, he said he believed the market was near enough to a bottom to make a deal worthwhile.”

The Gazette Extra from Wisconsin. “Darrell Pelikan knew his home value would go up in the town of Janesville’s reassessment this year. After all, the town hadn’t assessed the home in nine years. But he wasn’t expecting a 77 percent increase.”

“Pelikan was shocked to see the assessor, Associated Appraisal Consultants of Appleton, valued his 1,300-square-foot home at $193,000, up $84,000 from its assessed value in 1998 and up $82,000 from the price he paid for it in 2001.”

“‘It was outrageous, even at the prices real estate was going two or three years ago,’ Pelikan said.”

“Pelikan wasn’t the only one angry. Town clerk Andrea Peabody estimated a couple hundred residents showed up for the town’s open book session in November, and about 60 appeared before the town’s board of review a few weeks later.”

“Bruce Gurney was one of them. He went to the open book session to complain about his assessment rising 90 percent since it was built in 2000. His 1,092-square-foot home was assessed at $223,000. ‘That place was packed,’ he said of his trip to town hall. ‘I had to wait two hours.’”

“After the open book session, Associated Appraisal lowered the assessment to $188,000, Gurney said. The board of review declined to lower the assessment further.”

“Pelikan hired a private appraiser, Robert Kagel, who valued his home at $164,000. ‘There’s no way that I’m going to be able to sell this property at $193,000 or—anytime in the next few years—$177,000,’ Pelikan said.”

“Pelikan believes the assessor made his decision based on the inflated sale prices of homes in the last few years and didn’t take into account the current nationwide housing crisis. ‘Now with this subprime (mortgage collapse) and all this, things have to come down,’ he said.”

“But assessors can look only at sale prices from before Jan. 1 of the year of the assessment, said Joe Griesbach, president of Associated Appraisal. That means the company couldn’t look at any home sales after Jan. 1, 2007.”

The St Cloud Times from Minnesota. “It may not be as bad as it is on the coasts, but St. Cloud’s economy and housing market have taken a hit this year.”

“About 70 mortgage brokers are no longer operating. Foreclosures in area counties have dramatically increased in the last year. Builders’ and real estate agents’ business has slowed. Local financial counselors are twice as busy this year compared with last year.”

“At least one bankruptcy attorney has seen a 50 percent spike in business in the last year. And getting a loan is much harder than it used to be.”

“Rich MacDonald, an economics professor at St. Cloud State University, said markets need time to untie the knots. Another local economist, King Banaian, chairman of the economics department at St. Cloud State University, agreed.”

“‘The credit crisis has continued and will continue to rise over the next several months,’ he said.”

“Despite the gloomy prediction, local business leaders are keeping a positive outlook. Bankers and real estate agents say this is the best time to buy a home: prices and interest rates are low, and buyers have plenty of homes to choose from.”

“‘It’s like Christmastime out there for buyers,’ said John Pearson, an agent in St. Cloud.”

“Foreclosures are up 36 percent in Stearns and Benton counties — from 39 in November 2006 to 53 in November 2007. From November 2005 to November 2006, foreclosures more than doubled, from 14 to 39.”

“Housing starts in the six-city area are down 39 percent from November 2006 to November 2007. That slump followed a major hit from November 2005 to November 2006, when housing starts dropped 42 percent, from 893 to 522.”

“But that could reflect a correction in the market. Bonnie Moeller said it’s like the housing market was going 100 miles an hour, but now it’s going the speed limit. Moeller is the executive director of the Central Minnesota Builders Association.”

“Because of the downturn in the housing market, and because of the new requirements, many brokers or mortgage companies stopped operating. In St. Cloud, 70 mortgage brokers who had licenses before August no longer do. Now just 33 have active licenses, according to the Minnesota Department of Commerce. Before August, Minnesota had 4,000 licensed mortgage brokers, and now there are just over 1,200.”

“At Munson Mortgage, subprime mortgages — once 20 percent of its business — are no longer part of its portfolio. Stricter federal lending standards have affected his ability to make such loans.”

“‘I can’t make up my own rules,’ John Munson said.”

“At some local banks — such as Bremer, Liberty Savings Bank and ING Direct — leaders said they haven’t been hit hard by the crisis because they did not make subprime loans. ‘We make loans to people that can pay them back,’ said Brian Myres, head of Midwest operations for ING.”

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