The Housing Bubble

The North County Times reports from California. “Rising mortgage obligations drove up personal bankruptcy filings dramatically in 2007, according to the San Diego branch of U.S. Bankruptcy Court and North County attorneys. Growing numbers of debtors will probably collapse under mortgage obligations in the next year, the bankruptcy institute said in releasing the report Thursday. North County attorneys said mortgages had been the overwhelming factor in their growing caseloads.”

“Solana Beach bankruptcy attorney Albert Gross said he had fielded a call just Friday morning from a woman whose income as a mortgage broker had fallen over the last couple of years, leaving her unable to make payments on her own condominium.”

“She moved in with her parents and found someone to live in the condo, but the rent was still $700 short of her own mortgage payment, Gross said.”

“One divorced mother owes $441,000 on her home in San Marcos, which is now valued at $430,000, according to her Chapter 7 filing on Aug. 10. She also owes $16,000 on her Scion car and $31,000 to credit-card companies.”

“One Escondido resident owes $580,000 on his house, which his Chapter 7 filing valued at $500,000 last month. He also owes $34,000 on the new Lexus he bought last January, and $30,000 on a 2006 Chevrolet Silverado that’s now worth about $10,000.”

“Many borrowers bought homes between 2004 and 2006 using adjustable-rate loans, and have seen payments increase beyond their ability to pay, San Marcos attorney Mary Cavanagh said.”

“‘There was this unspoken assumption of ‘Well, the bank wouldn’t lend me money if I couldn’t pay it back,’ Cavanagh said. ‘The number of inquiries I’ve had regarding bankruptcies has absolutely skyrocketed.’”

The Orange County Register. “Realtor/economist Gary Watts plays Eyeball ‘08, our two-week long, holiday cornucopia of opinion of how 2008 will play out for local real estate.”

“Eyeball: What’s your outlook for the O.C. housing market? Gary: My forecast for 2007 appears to have been too rosy! Everything was in place…but the buyers remained on the sidelines. I was surprised by the financial crisis…2008 could be a surprising year.”

“Eyeball: Chances we’ll see a bottom in 2008? Gary: The first question I ask my Realtor audience is: ‘how many of you have qualified buyers waiting to buy?’ Almost everyone’s hand shoots up immediately. This is called pent-up demand. As soon as the ‘fence-sitting’ buyers begin to believe the bottom is near, they will once again enter the housing market.”

“Eyeball: What events might change your outlook, pro or con? Gary: I don’t see a recession in 2008 but should the economy begin to slow down more rapidly than expected or mortgage interest rates begin to rise, that could put a damper on our housing market.”

“Troubles in the real estate market are weighing on the economic outlook for Orange County in 2008. Irvine real estate consultant Walter Hahn noted that loans due to reset will rise this year, pushing more homeowners to the brink of foreclosure.”

“‘There’s going to be more of that (this) year,’ Hahn said. ‘Then it takes eight to nine months for home resets to hit the market as foreclosures sale properties. … It’s going to drag on another two to three years.’”

“The mortgage mess in Orange County this year will continue to influence the residential rental market in several ways, says Kevin Andrade, senior managing director of Trammell Crow Residential in Costa Mesa.”

“Would-be home buyers who now can’t get mortgages will put pressure on the rental market as they look to rent instead. Meanwhile, owners of houses and condos who have gotten into financial trouble may choose to rent out their property, adding to the supply.”

“Most folks see the Federal Reserve cutting its benchmark federal funds rates further this year. But a handful of experts have mixed views about whether fixed mortgage rates will drop alongside any future Fed cuts.”

“Lou Pacific, a mortgage broker in Mission Viejo, said other factors will overwhelm any Fed cuts, including weak demand for housing and a continued risk aversion by investors in securities backed by mortgages. Investors are shying away from riskier mortgages amid rising loan delinquencies.”

“Pacific said conforming rates could hit 8 percent by February. And he sees 30-year fixed rates on jumbo loans hitting 8.75 to 9 percent by February. ‘I keep telling people 8 percent is not a bad rate,’ Pacific said. ‘People were spoiled by rates of 3 to 5 percent.’”

“Jack Kyser, chief economist with the Los Angeles County Economic Development Corp, said it’s likely O.C. will see 600 foreclosures a month, as it did in the ’90s, up from 300 to 500 in the second half of 2007.”

“‘We have to see what kind of support package, or packages, comes out of the government,’ Kyser said. ‘Most people are very unimpressed with the packages so far.’”

“To be sure, Orange County’s housing stock has increased by about 90,000 for-sale units since 1992, so the same number of foreclosures should be less of a drag on neighborhoods. However, November’s total of 1,536 homes sold was the lowest in DataQuick’s 20-year database.”

“With such slow sales, foreclosures could have a substantial impact on home prices as they collect on lender’s books as real estate owned, or REO, some experts say.”

LA Downtown News. “This year, Downtown should discover whether the housing market is still booming, or if the bubble has burst.”

“Related Cos. $3 billion Grand Avenue project has been talked about for years, and work actually started late in 2007. A formal groundbreaking is expected by March, though no date has been set.”

“With thousands of residential units under construction, the current buyer’s market will only become more pronounced in 2008. The key is how developers respond. Already, some have offered flashy incentives to potential homeowners (purchase a unit, get a car), or have turned away from sales altogether, going rental while they wait for the market to solidify.”

“In 2007, Historic Core residents and developers cheered the approval of permits for several proposed bars and restaurants. Others warned against opening such establishments near Skid Row, home to thousands of addicts.”

The Press Enterprise. “More Canadians who long have wintered in the golf communities of the Coachella Valley are buying real estate there as second homes and investments.”

“‘Our ship has come in,’ said Linda Dunlop of British Columbia. Dunlop and her husband, David Dombowsky, sold investment property in Canada and in November paid cash for a house on a golf course in Palm Desert’s Sun City. They needed $530,000 in Canadian dollars to meet the $540,000 price in American dollars.”

“It helped that the price on the house they wanted dropped about $40,000. ‘The coincidence of events motivated us to move more quickly,’ Dombowsky said.”

“Meanwhile, the California Desert Association of Realtors reports that the median price of resale homes in the Coachella Valley in November was $317,210, a 14 percent decline from a year ago.”

“Real estate agents say quite a few Canadians are holding off purchases in hope that desert home prices will fall further in the spring, when some economists predict another wave of foreclosures.”

“‘Most of the people I talk to are still looking,’ said Dennis Timmermeister, a real estate agent from Vancouver who has been shopping the desert with the hope of finding good deals for himself and some Canadian clients.”

“Many Canadians mistakenly believe that abundant foreclosed properties are for sale and have been discounted 50 cents on the dollar, Timmermeister said. The bargains are usually far less dramatic and not always where he would want to buy, he said. Timmermeister said he hopes desert real estate prices will dip further next spring.”

“Wealthy Canadians have long bought expensive desert homes, said Billy D. Lewis, an agent in Indian Wells. What is new, he said, is that middle-income Canadians, flush with equity from a skyrocketing Canadian housing market, are buying houses in the desert.”

“Lewis said they are looking for homes priced from $250,000 to $500,000 that they can live in a few months each year and then rent to other visitors.”

“Jim Anderson, a retired oil production engineer from British Columbia, moved quickly to take advantage of what could be a narrow window of opportunity. Anderson and his wife, Doreen, used proceeds from the sale of some Canadian properties to pay $377,000 cash in November for a furnished three-bedroom condo on leased Indian land in Cathedral City.”

“‘You can’t find a house in Canada on a golf course for anywhere close to the same price,’ said Anderson.”

“Anderson, who was preparing to head south from his home in Okanagan, a region halfway between Calgary and Vancouver, said that when he and his wife bought their desert home, they made certain it faced south so it is warmed by the first rays of the morning sun.”

“Anderson said they don’t plan to rent out the condo but expect lots of family members to use it. ‘If we make money on it sometime in the future, so much the better,’ he added.”

Readers suggested a topic on the economic fallout from the housing bubble. “It seems to me housing and the recession are being soft-pedalled by both Rep’s & Dem’s. Reasons? Huckabee’s 23% across the board sales tax promoted on Leno sounds outright devastating to the middle class.”

A reply, “If the sales tax is a substitute for the income tax and is backed up by some sort of Constitutional Amendment against income taxes, I’m all for it. Most likely though we will get a sales tax on top of the income tax.”

To which was posted, “That’s why I can’t back the so-called Fair Tax (as it’s called by its supporters, or National Sales Tax, by detractors). You have to be realistic. There is no way Congress is going to eliminate all taxes and replace it with one tax on sales.”

“Unfortunately, we ARE going to have both. The new National Sales Tax will start at 2-3% and will be used to pay for National Health Care. It will have a fancy, important-sounding name that includes the words ‘fair,’ ‘just,’ and/or ‘investment,’ but definitely not ‘tax.’ It will eventually morph into a large European-style VAT.”

One added, “Improved High Leverage Enhanced Value Tax.” Another predicted, “A 23% sales tax will spawn a gigantic black market. Crooks will make money at the expense of the law abiding. Think booze in the Twenties, drugs today.”

One said, “If its a VAT, then only the final markup by the ‘retailer’ wouldn’t get taxed. VATs are used a lot in countries where tax evasion is common. In the end we will still buy our stuff at Kroger, Safeway, Albertsons Target and Walmart, etc.”

Another brought up the employment report, “5% unemployment. NAR Spin: ‘Now that people have more time to evaluate their housing options we expect sales to soar in the early part of 2008.’”

To which was added, “Recession fears have a negative effect on housing demand, as would-be buyers become precautious about making big-ticket purchases when their job security become tenuous.”

And another, “Or any non-essential purchases for that matter.”

From Bloomberg. “From Sacramento and Albany to Boston and Tallahassee, politicians in state capitals across the U.S. are wrestling with the biggest increase in borrowing costs in three years as they struggle to shore up budget deficits widening on the national housing slump.”

“The extra yield investors require on 10-year bonds from California, Florida, Massachusetts and New York relative to benchmark tax-exempt rates doubled since July to the widest since at least 2004, according to data compiled by Bloomberg.”

“California’s gap grew to 0.44 percentage point from 0.20 percentage point, adding $24 million in extra interest over 10 years for every $1 billion borrowed.”

“The cost to borrow for roads and schools is rising as property values drop and consumers cut spending, reducing sales- tax revenue that funds about one-third of state budgets.”

“Thirteen states face cash shortfalls totaling $30 billion next fiscal year, the Center on Budget and Policy Priorities, a Washington research group, said in a Dec. 18 report.”

“Officials in 24 states said the housing slump is cutting tax receipts, according to a survey released last month. Respondents in 18 states said they are concerned the trend may continue through the middle of 2008, three times as many as a year earlier.”

“In Florida, which doesn’t have an income tax, the Legislature slashed $1 billion out of the current fiscal year’s budget because the sluggish housing market will cause revenue to decline for a second consecutive year.”

“Maryland raised taxes by about $1.3 billion a year. Indiana Governor Mitch Daniels ordered state agencies to hold back spending by 5 percent.”

“New York Governor Eliot Spitzer must close a $4.3 billion hole in next year’s budget, up from $3.6 billion projected in August, according to the state’s Division of Budget.”

“‘States are going to be challenged by the economic slowdown, the housing downturn and the amount of impact it will have on revenue while spending needs continue to grow,’ said Richard Raphael, who follows state credit ratings for Fitch Ratings.”

The LA Times. “Hopes that the economy could shake off the sub-prime mortgage mess and dodge recession grew fainter Friday as the Labor Department reported that U.S. employers last month added the smallest number of new jobs in more than four years — driving the unemployment rate to a two-year high of 5%.”

“Analysts say that economic activity in some states — notably California, Nevada and Florida — as well as substantial swaths of the Northeast corridor is probably already contracting.”

“But what was particularly disheartening about the report, analysts said, was how widespread the job losses were. For example, the retail sector, which normally adds jobs in December to accommodate holiday shoppers, gave up 24,000 positions last month.”

“Manufacturing, which was thought to be in the midst of a turnaround because of an export boom, dropped 31,000 jobs.”

“‘There’s nothing heartwarming about this report,’ said Neal Soss, chief economist at Credit Suisse Group Inc. in New York. ‘It confirms what economists have been worried about, which is a broad-based economic slowdown.’”

“”The report also left analysts shaking their heads over how problems in a relatively obscure corner of the financial world, the market for mortgages made to people with poor credit, could erupt into such an economy-threatening event and could do so in such short order. Most economists barely made note of sub-prime mortgages six months ago.”

“‘You look at the magnitude of the sub-prime problem, and it’s just not that big relative to the size of the economy or the financial market,’ marveled David Wyss, chief economist at Standard & Poor’s in New York.”

The International Herald Tribune. “The scene: a kickoff party in late November for the new Paris office of the troubled U.S. investment bank Bear Stearns. As applause for a formal presentation faded, and the cocktail party began in a nearby salon, a swing band struck up the 1936 Fred Astaire hit ‘Let’s Face the Music and Dance.’”

“It all served as an ironic reminder of how many banks and investment houses are now facing the music of easy money, risky lending and massive write-downs - and how disconnected the present gloomy picture is from the upbeat gloss being spread by economists, politicians and other pundits.”

“And while 2007 may be remembered as the year of credit crisis and bursting real-estate bubbles, 2008 may go down as the year when all players in the financial markets had to face the music about formerly safe bets like hedge funds, real estate and the U.S. economy.”

“Avinash Persaud, chairman of an investment advisory in London, (and) one of the most prescient voices on international finance in the post-Sept. 11 era, noted that the American consumer boom was financed with real-estate debt: Americans have spent 130 percent of their income over the past five years. ‘They borrowed money against their property,’ he said.”

“‘In our opinion, in a year’s time we will see more of a credit crisis unfurling as opposed to the current liquidity crisis,’ said Persaud, who warned that as gold and oil prices soar, signaling inflationary forces, it will be hard for the Fed to slash interest rates to reinvigorate the economy.”

“Looking ahead, Robert Shiller, a Yale professor and the author of a seminal work on investment bubbles, explained that once real estate prices started dropping, they usually did not turn around until they had hit bottom. ”

“‘Real estate markets rise year after year, and then they slow down and stop, and then they start going down,’ he said.”

“But real estate prices also begin to accelerate on the way down - and that is exactly what is happening currently in the United States. Shiller notes the market is also turning down in Britain. Shiller said that it may also be time to get out in Paris, where real estate prices are no longer accelerating.”

“Despite his pessimistic view of certain sectors, Shiller, who does not make predictions, thinks we are far from a global crisis. The real estate market is worth about $20 trillion, and so far, the fall in real estate prices has wiped out $1 trillion, or 5 percent - much of that bubble-related. ‘It was easy come, easy go,’ Shiller said.”

“But that is a long way from assuming that things will go back to business as usual. Edward Johnson, the founder of the Fidelity mutual fund empire, gave as good advice as any about how to handle times like these: ‘When the music stops,’ he said, ‘forget the old music.’”

TC Palm reports from Florida. “For the second year in a row, Atlas Van Lines is reporting that more residents have moved out of Florida than are deciding to settle in the Sunshine State. ‘The post-Katrina exodus from Louisiana into the surrounding states leveled off and the housing market continued to stagnate. Real estate costs undoubtedly influenced migration patterns this year as well,’ stated Greg Hoover, chief marketing officer of Atlas World Group.”

The Orlando Sentinel from Florida. “More than 2,000 homes in Lake County ended up in foreclosure last year, according to final figures compiled by Clerk of Courts Neil Kelly.”

“Banks, mortgage companies and other lenders filed 269 complaints against delinquent borrowers in December, boosting the foreclosure tally to 2,081, a county record. After a brief lull for the holidays, lenders resumed efforts to seize properties from debtors Tuesday, the first day of business in the new year.”

“They filed foreclosure actions against 26 properties, according to Kelly’s Web site. Another dozen mortgage foreclosures were filed Wednesday.”

The News Press from Florida. “A record wave of foreclosures in 2007 crested in the last three months of the year — but experts warn the worst may still be yet to come. The monthly numbers were leveling off as the year ended, but that may not last.”

“‘I think that’s just the lack of productivity because of the holidays,’ said mortgage broker Jeff Tumbarello in Fort Myers. ‘I think there’s a glut of foreclosures; the system just can’t file them.’”

“For the year, there were a record 10,700 in Lee County, according to the Southwest Florida Real Estate Investors Association. That’s compared to 3,923 in 2006, according to records.”

“December saw 1,441 foreclosures, including 433 on homes that were the primary residence for a family. For the year, there were 7,324 single-family foreclosures. That’s 4 percent of the county’s 180,305 single-family homes.”

“Most of the year’s foreclosures were filed since August, Tumbarello said. Prior to that, the monthly numbers were in the hundreds.”

“Ground zero for the foreclosure explosion was Cape Coral, where 4,858 were filed, almost half the total. Home construction has come almost to a standstill in the Cape with a record-breaking low of only nine single-family permits issued in December. A year earlier, 90 permits were issued and the record was 858 in March 2005.”

“In a way, Cape Coral was a victim of its own success as prices surged in the boom that ended in late 2005, said Bob Knight, president of the Lee Building Industry Association.”

“Ray Kest, a business professor at Hodges University in Fort Myers who follows the local economy, said banks and other lenders are unable to process the increasing numbers of people who aren’t making their payments. ‘I understand they’re backed up so far, it’s a tidal wave coming.’”

“Retail sales statistics from 2007 already show the area slipping into the equivalent of a recession, he said, and the owners of the county’s 248,128 occupied housing units are leaving as they find themselves unable to make enough money to live here.”

“Factors such as higher oil prices and a soft national economy could affect the local tourism industry, which so far has been holding up, Kest said. If that happens, ‘We’re in for a rough ride.’”

The Sun Herald from Florida. “Although economic forecasters are predicting a lackluster 2008 for automobile sales, area dealers are looking for a gradual recovery, especially toward the latter part of the year.”

“Mark Schlundt, general manager of DeSoto Auto Mall in Arcadia, said he agreed that credit had become tight during 2007. What started in real estate eventually spilled over into automobile financing.”

“‘Everyone had heard so much about the subprime (mortgage) lending market. In general, things had tightened up so much that you had to have pretty solid credit … to even think about buying a vehicle. I think that’s going to loosen up this year,’ he said.”

“Gene Gorman, president of Gene Gorman’s Auto Sales, said he agrees that truck sales are off and that the image of the truck market following home sales isn’t far off the mark.”

“But high gas prices and sluggish home sales have yet to kill the market for used sport utility vehicles, Gorman said. What may be changing is that their owners are using them more for the original reasons SUVs were designed.”

“‘People may be staying in their homes, but they still want to make sure their lifestyle goes on, so they still want an SUV to haul their boat and carry the kids around,’ Gorman said. ‘People who can afford a boat are not going to be that concerned about additional gas mileage — and they’re not going to be taking their SUVs on a long trip anyway.’”

The St Petersburg Times from Florida. “The Great American Job Machine got stuck on ‘idle’ in December, sending unemployment up to the highest level in two years and renewing investor worries that the economy will slip into a recession.”

“Job losses were largely concentrated in manufacturing, construction and financial services, a fallout from the continued housing slump. In addition, retailers hired fewer additional people than usual this past holiday season.”

“Unemployment also is rising in Florida, although December’s numbers aren’t available yet. The November rate was 4.3 percent, up from 3.3 percent in 2006.”

“‘Florida will get closer to the national average in the next couple of months,’ predicted University of Central Florida economist Sean Snaith. ‘But once we get past the first part of 2008, things will start to pick up a little bit. We should remain below the national level longer range.’”

“Snaith said the increase in unemployment might even have a bright side, giving the Federal Reserve Board a reason to cut interest rates again at the end of this month, perhaps as much as half a percentage point.”

The Sun Sentinel from Florida. “Alarmed by the declining housing market, owners of the Fashion Mall this week postponed for at least two years plans to build 600 condos on the property. In the meantime, construction will begin on an entertainment hub with shops, restaurants and offices.”

“‘The idea is to rejuvenate the project by adding more office and retail,”‘ said Erick Collazo, director of Boca Raton-based MBA Development Partners, which was hired two months ago to recast the project given falling housing prices.”

“The residential portion will be on hold until the housing market rebounds, Collazo said. ‘Market conditions show that the residential market is not going to turn around until 2009, so it won’t be until a few years after that that the residential portion will be built,’ he said.”

“‘It doesn’t seem like a developer right now would be looking to add more housing stock when the housing market is down,’ Dan Keefe, assistant to the mayor.”

From WFTV 9 in Florida. “Central Florida homeowners living in areas with high numbers of foreclosures may soon pay a hefty price for the slumping housing market. Some communities in Central Florida have increased fees 25-percent this year since owners of foreclosed properties aren’t paying up.”

“But some homeowners said it’s unfair to force them to foot the bill. ‘They are always going to go up, go up, but I think it’s unfair to have to pay for somebody else’s mistakes,’ said Mike Wuinones, a homeowner.”

The Hartselle Enquirer from Alabama. “November represents the second consecutive month the state housing inventory has decreased from the previous month, according to the Alabama Center for Real Estate at The University of Alabama.”

“‘We will continue to closely monitor this very important market indicator as the reduction in excess supply will be critical for the market to regain traction as we enter 2008,’ said Grayson Glaze, executive director of the UA center.”

“Slower home sales during the latter part of the year contributed to the increase in the number of homes on the market, as the current supply of Alabama homes, when compared with November 2006, reflects a significant increase in year-over-year supply by 6,238 units, or 17.16 percent, Glaze said.”

“According to Glaze, the inventory of homes for sale at the current sales pace is 11.3…months at the current sales pace. The 2007 year-to-date average inventory/sales ratio is 8.5, while the average Alabama inventory/sales ratio in 2006 was 6.6, closer to traditional and desired industry levels, Glaze said.”

“Total statewide home sales of 3,768 units in Alabama during November posted a decline of 11.78 percent.”

The Birmingham News from Alabama. “Regions Financial Corp., the largest bank based in Alabama, said Thursday a troubled real-estate market has led the company to quadruple provisions for bad loans in the fourth quarter, and take millions in other charges.”

“Birmingham-based Regions Financial said the provision for fourth-quarter 2007 bad loans will be increased to $360 million, from $90 million at Sept. 30. Regions said the prospect of not being repaid for loans made to residential developers prompted the increase.”

“‘The velocity and the volume that has gone from ‘performing’ to ‘in trouble’ has done so at a very quick pace,’ Regions CEO Dowd Ritter said in a conference call with investors. ‘Projects that were viable, with good sales four and five months ago, are at zero activity today.’”

“Ritter said prospective home buyers are having trouble finding loans, which has led to an oversupply of housing and an ensuing reduction in the value of residential property. Regions lent money to some of the developers of that property, and now has to face the prospect that it won’t be repaid for all of it, Ritter said.”

“In the third quarter, Birmingham’s Superior Bancorp and Montgomery’s Colonial BancGroup acknowledged problems with residential loans in Florida. The cold air wafting through the financial services industry is keenly felt in Birmingham, where 40,000 people work in some aspect of the business.”

“Also Thursday, Regions said it plans to record about $131 million of other pre-tax charges in the fourth quarter. They include…$42 million in other valuation-related expenses, most of which relate to its mortgage servicing business.”

From Reuters. “Regions said it is experiencing a sharp slowdown in real estate demand, especially in parts of Florida and Georgia, and in particular around Miami and Atlanta. It said this is hurting its $7.5 billion portfolio of loans to residential builders.”

“Regions also announced a $38 million charge related to its Morgan Keegan asset management unit, where two bond mutual funds fell more than 50 percent in 2007 because of exposure to risky debt, according to Morningstar.”

“‘Industrywide credit issues have reduced consumer demand, which in turn has led to an oversupply and decline (in) residential real estate values, all of which are increasingly stressing developers of residential properties,’ Ritter said.”

“‘This is, without a doubt, the most challenging environment that the financial services industry has encountered in many years, particularly relating to residential real estate,’ Ritter said on a conference call.”

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