The Housing Bubble

The San Mateo County Times reports from California. “Home sales plunged in San Mateo County in January, as housing prices fell significantly in poorer neighborhoods but held up in upscale areas, a new report revealed Thursday. It was the worst January in 10 years for sales, which dove nearly 45 percent, according to the San Mateo County Association of Realtors.”

“‘Buyers are afraid,’ said Don McFarland, an independent real estate broker in Burlingame, ‘and they aren’t buying because of the loan catastrophe. I don’t think we’re going to see a recovery anytime in 2008.’”

“Prices declined dramatically in areas more likely to be hit hard by foreclosures, such as East Palo Alto, San Bruno, Daly City and South San Francisco. For example, the median price in South San Francisco fell more than $150,000 to $572,500 in January compared to January 2007. East Palo Alto declined $138,000 to about $468,000.”

“‘There will be a significant drop in the median price (of the county) next month, said Richard Calhoun, a real estate agent in Santa Clara, who follows the local market closely.”

“He said many offers accepted in January were below asking price. However, lots of those transactions have not yet closed, and will show up in the February or March report. He expects the county’s median price to drop in February to 2005 levels — possibly below $800,000.”

Inside Bay Area. “While many real estate professionals hope the $168 billion economic stimulus package passed by Congress on Thursday will give the industry a much-needed boost, others are not as optimistic.”

“Christopher Thornberg, an economist and founder of Beacon Economics, said the stimulus package would not bring the real estate industry around. The proposed new loan limit of $729,750, he said, caters to a small number of households in the Bay Area that make more than $160,000 a year.”

“‘The people who are in trouble are not being helped by this plan,’ he said. ‘How many people earn that kind of money to buy those homes? Prices are falling, and they’re falling for a good reason: because they’re too high.’”

“Jay Damato, the broker and owner of Elite Financial in Walnut Creek, said that while he hoped to do some new mortgage refinancing, he doesn’t think the proposed laws will change the housing market.”

“‘At least 70 percent of my clients are in the $450,000 to $650,000 range,’ he said. ‘It’s not going to turn a down market into an up market.’”

“Because the borrower has to have at least 3 percent equity, Damato said that there will be some homeowners who can’t get the loan, especially in places such as Antioch where the market has suffered a severe downturn.”

“Paul Ward, a broker associate in Danville, agreed. ‘It will help psychologically,’ he said. ‘Overall, it will be positive, and it’s definitely a plus, but it’s not a panacea.’”

“‘I think the impact on the housing market is overestimated,’ said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alt. ‘I expect prices to fall the rest of the spring and into the summer. I think we have a long way to go on the price correction.’”

The Mercury News. “There’s no certainty that rates on the larger loans will drop, said Keith Gumbinger, an analyst with HSH Associates. One reason is that it’s unclear whether Wall Street investors who buy mortgage-backed securities will demand a premium for the larger loans Fannie and Freddie back.”

“As a result, conforming rates could actually rise, he said. ‘When there’s uncertainty, usually investors demand higher returns,’ Gumbinger said. ‘The law of unintended consequences could apply.’”

“In addition, the economy could take another turn for the worse. Lenders could maintain a tight grip on credit. And experts also warn that some Silicon Valley borrowers will fail to meet the tighter lending criteria on conforming loans.”

“‘The three big things every borrower needs in today’s mortgage market is good credit, proof of income, and either money for a down payment or equity in an existing home,’ said Greg McBride, a senior financial analyst with Bankrate.com. ‘If you’re missing any of those three ingredients, you have some big hurdles to getting a deal done.’”

“Renee Morgan, a senior loan officer in Los Gatos, said clients have been ringing her phone ‘big time.’ But she doesn’t plan to submit their loan applications until it’s clear rates on larger loans will fall enough to make refinancing worthwhile.”

“‘Why load up my pipeline with loans I can’t close?’ Morgan said. ‘What we think may be true, or it might not be true. It’s an unknown.’”

The Ventura County Star. “Daniel Margolis, general manager of a new restaurant in Westlake Village, said business has slowed for the area’s restaurants. Vendors who deliver his meat and produce are six hours early because they don’t have as many deliveries, he said.”

“He says Mediterraneo is busy on Friday and Saturday nights, but the rest of the week is so quiet ‘you can hear the crickets.’ Tables are about 50 to 60 percent filled on those nights.”

“He attributes the slowdown to the ailments at Amgen and Countrywide, and to the housing slump. Consumers are clamping down on unnecessary expenses.”

“The area, along with the rest of the nation, should receive a boost from the $168 billion stimulus package passed Thursday. John Paglia, a finance professor at Pepperdine University, said he believes increasing the loan limits will be beneficial, but it won’t be enough to spawn a recovery. For one, it doesn’t solve the imbalance between monthly housing payments and monthly incomes, he said.”

“He said he believes sales and home values will continue to drop another 10 percent by the end of 2008 because ‘nobody wants to catch a falling knife and buy until they know we’ve reached the bottom.’”

“Still, the stimulus package should move the market forward because it has a year-end cap, which adds a sense of urgency, said Gary Wartik, economic development manager for Thousand Oaks.”

The LA Times. “Despite a sinking real estate market and job losses at two major employers, Ventura County could still dodge a much feared recession if interest rates continue to fall and Congress passes an emergency stimulus package, a local economist said Thursday.”

“‘Recession is likely to be avoided in Southern California, but we’ll be close,’ said Mark Schniepp, director of the California Economic Forecast, which released its county projections for 2008.”

“‘It’s pretty bleak,’ he said during a conference in Thousand Oaks. ‘We’ve got retail sales going down. We’ve got the apartment market that’s softened. We’ve got the Amgen and Countrywide fallout. We have got a housing market that is absolutely at rock bottom. I think 2008 will be the transition year; 2009 will be a lot better.’”

“Sales of existing homes last year were down nearly 30% to less than 4,100 homes, the lowest level in 25 years, Schniepp said. Further pressuring the market were default notices…more than doubled to 5,022 last year.”

“‘There is a limit to how far a home can go down. It’s time for buyers to realize they are about as low as they’ll go,’ Schniepp said. ‘(If) you don’t have to sell, then hold on until 2010. If you do have to sell, sell right now, immediately. And if you’re a buyer, buy new — these are the best deals you’re going to get.’”

“Darren Hendon worked in the mortgage business for years. He sold many home buyers on adjustable-rate loans with low-interest ‘teaser’ rates that rocket higher, typically after two years.”

“He was laid off last April as the housing slump and credit crisis pinched demand for loans. Now, wearing a crisp-collared shirt emblazoned with the words ‘Financial predators beware!’ Hendon is helping borrowers get out of the kinds of loans he once sold. And, once again, he has plenty of clients.”

“‘I never thought that I was selling anything that was bad,’ he says. ‘I thought I was being part of the solution, and I guess I eventually was part of the problem.’”

“Joel Marroquin, 29 has fallen behind on the mortgage on his Victorville home. Like Hendon, Marroquin is a former loan officer for a mortgage company. But he was laid off last year after home sales plunged and he didn’t close any deals for three months.”

“Now a salesman, Marroquin and his wife, a baby-sitter, have been unable to make their $2,926 monthly payments. They are about $30,000 behind. ‘It’s a little bit of embarrassment,’ he says.”

“The lender, EMC Mortgage Corp., has already offered a workout deal of its own that would require the Marroquins to pay $9,000 of the money they owe upfront. As part of the deal, the lender offered to lower their monthly payments to about $2,300.”

“Marroquin is hoping that Hendon can help him do better. He says he doesn’t have the $9,000 and can’t afford to pay much more than $2,000 a month. Hendon tells Marroquin that he will try but that it is unlikely he can negotiate a workout better than the one EMC already offered.”

“Later Hendon concedes that he can’t help everyone. Neighborhood Assistance submitted 1,057 loans for refinancing or restructuring in November and December, and about half of them have been approved.”

“‘I have a lot of people who bought more house than they could afford,’ he says. ‘Sometimes, I can’t save them from themselves.’”

“Plans for a 45-story, wisp-thin tower of ultra-luxury condominiums between Beverly Hills High School and the Los Angeles Country Club are set to be unveiled today. Developers say it would be one of the most expensive residential buildings in the West.”

“Considered one of the most desirable locations for development in the country, the vacant lot was the object of a high-profile bidding war in 2006 when Irvine home builder SunCal finally topped New York developer Donald Trump with a $110.2-million offer for just 2.4 acres.”

“Two top-drawer projects are also being planned around the intersection of Santa Monica and Wilshire boulevards in Beverly Hills. ‘How much high-end product can the market bear in such a close proximity?’ asked real estate broker Gary Weiss, who called the planned Nouvel building ‘extraordinarily ambitious.’”

“Competition lurks with many other pricey units coming to market. Owners of the Beverly Hilton Hotel also plan to add upmarket condos as part of a major upgrade and expansion on the property. Other high-end condos overlooking the Los Angeles Country Club and at the Montage Hotel in Beverly Hills are being built.”

“The Nouvel design of SunCal’s planned tower is intentionally ambitious, said Frank Faye, chief operating officer of SunCal. ‘This is an exciting opportunity,’ he said. ‘The worst thing we could do is under-deliver.’”

The Los Angeles Business Journal. “The median price of homes that sold in Los Angeles County in January dipped below $500,000 – the first time in more than two and a half years that the price was below that threshold.”

“January’s median price, $496,000, was 9.7 percent less than the same month last year, according to data provided to the Business Journal by HomeData Corp.. It also was 3 percent lower than the previous month’s median.”

“What’s more, the number of homes sold declined. A total of 3,379 homes changed hands in January, 38 percent fewer than January 2007. It was less than half the number that sold two Januarys ago in the county.”

“‘I think slowly but surely it is going to get worse,’ said Mark Wollman, a residential broker for a Beverly Hills brokerage. ‘I think people are really going to start to understand what’s happening this summer.’”

“Jerry Nickelsburg, an economist with the widely referenced UCLA Anderson Forecast, believes the bottom may be hit as early as midyear, when the median could decline 20 percent from its high. Prices are now off 15 percent from their high.”

“The last time the median price was below the half-million-dollar level in L.A. County was in May 2005, when it was $475,000. The following month it was $501,000 – the first of 31 consecutive months in which the price was greater than $500,000.”

“The median price peaked at $585,000 in May and again in July. In October, the price sunk to $525,000 – and it was the first year-to-year sales decline in the current downturn.”

“In the 90241 Downey ZIP code, the median price was down 23 percent to $495,000 and sales volume declined 32 percent to 19 homes sold. In the 90026 Echo Park neighborhood, the median was off 14 percent to $564,000 and volume was down 54 percent to 16 homes sold.”

“In the Burbank 91505 ZIP code, the median price dropped 16 percent to $540,000 and sales volume was down 28 percent to 18 homes sold.”

“Wollman, who has been a broker for nine years and works in Bel Air, Brentwood and Beverly Hills, said that since December he has passed on three listings because sellers had unrealistic expectations. Prior to December, he had only rejected one listing in his career.”

“Wollman was expected last week to meet with a Beverly Hills-area homeowner who wants to sell a house for $2.4 million. Wollman said he would tell the seller, who purchased the home two and a half years ago with an interest-only loan and now wants out, that the asking price would have to be lowered by $400,000 to make a sale possible.”

“‘It is a very different ballgame now. If the buyer can’t get financing, with all the great marketing in the world, the home is just going to sit,’ Wollman said.”

The Press Enterprise. “Chris Erickson said falling home prices and mortgage rates have convinced him it’s the right time to buy. Erickson, 28, figures with his $50,000 income as a maintenance worker for the city of Lake Elsinore, he could buy a house that cost as much as $250,000.”

“He has been attending auctions of houses repossessed by lenders. But so far, he said, the houses he’s liked have been bid up beyond his limit.”

“For several years, skyrocketing home prices far outpaced incomes. From 1996 to 2006, the median price of a house in Riverside and San Bernardino counties tripled, rising from $109,000 to $398,000, according to DataQuick.”

“Meanwhile, median family income in the two-county region increased 137 percent, from $24,250 in 1996 to $57,500 in 2006, according to the U.S. Department of Housing and Urban Development.”

“The percentage of households in the region that could afford the median-priced home shrank to 18 percent in 2005 from 53 percent in 2000, according to the California Association of Realtors.”

“Prospective first-time buyers have gotten considerable relief from the abrupt market downturn. In December, the median-priced home in Riverside County was $355,000, an almost 18 percent drop in a year, and the median price in San Bernardino County was $315,000, a year’s drop of nearly 15 percent.”

“Inland economist John Husing called the recent improvement in housing affordability ‘dramatic,’ but he said he does not believe homes ever again will be as affordable as they were in 2000. ‘That’s ancient history,’ he said.”

“Robert Kleinhenz, deputy chief economist for the California Association of Realtors, said it would take ‘worse than a recession’ for Inland housing affordability to snap back to what it was five years ago.”

“Edina Pham, a 33-year-old stay-at-home mother, said she and her husband, a 35-year-old postal worker, had long wanted to buy a house but didn’t figure there was much hope until prices began to fall last year.”

“She said in November, they moved into a four-bedroom house with a loft that they bought from KB Home in Perris for $335,000. They fell in love with the house, which was part of KB’s unsold inventory and had upgrades like Corian countertops and stainless steel appliances, she said.”

“They were able to afford the house because her husband works at least 20 hours of overtime each week and is ‘a saver,’ she said. He had set aside the $50,000 they used as a down payment.”

“Ironically, lowering home prices does not guarantee a flood of first-time buyers, real estate experts say.”

“‘The paradox is, when housing gets more affordable, young people buy it less because it is a bad investment,’ said Dowell Myers, a professor in the USC School of Policy Planning and Development. ‘As long as the price is dropping, young people will hold back.’”

“Bruce Norris, a Riverside real estate investment adviser, recalled that for three years after a resurgence of housing affordability in the mid-1990s, sales didn’t rebound. The push to buy, he said, came when prices again started to rise.”

A report from the Washington Post. “As home prices peaked in the first half of this decade, roughly 40 percent of buyers took out two loans, often from two lenders, to cover the purchase. These loans, known as piggyback mortgages, enabled home buyers to put little or no money down and avoid paying private mortgage insurance, which is why their popularity surged in high-cost areas such as Washington. The fallout could hobble the ability of the area’s housing market to rebound by adding to the glut of homes, further dragging down property values.”

“Theresa Trainer’s Gainesville townhouse may soon add to the troubles. Trainer bought the home in mid-2006 for nearly $357,000. It has since plunged in value, and her second mortgage has made it tough for her to sell it.”

“Like many who used piggybacks, Trainer put no money down. She also did not pay mortgage insurance, which lenders require only if a loan exceeds 80 percent of the price of the house. Her first loan covered exactly 80 percent and the second covered the balance.”

“Trainer discovered that late last year when she got hit with thousands of dollars in back taxes from when she was self-employed. She also realized that the property tax on her home was not included in her monthly mortgage payments. She fell behind on both her loans.”

“A housing counselor suggested that Trainer try to sell the home for less than she owed. In October, a buyer offered $242,000. At the time, Trainer said, she owed $313,000 to the first lender and $76,000 to the second. The first lender accepted the buyer’s offer and agreed to pay $1,000 to the second lender. That lender rejected it.”

“‘I feel stuck,’ said Trainer.”

“Troy Scott, who represented Trainer in the sale, said he was flummoxed by the rejection. ‘They told us they wanted full payment on the second loan,” said Scott, chief negotiator for a Re/Max office in McLean. ‘They stopped negotiating, and the conversation was over.’”

“Trainer’s home is still on the market. Under the circumstances, it’s unlikely that it will fetch a price that satisfies both lenders. Foreclosure proceedings are under way, Scott said.”

The Free Lance Star from Virginia. “Real rays of hope do exist for the local residential construction industry, but one analyst who tracks these trends in Northern Virginia says the market’s recovery is at least a year away.”

“Dan Fulton of Fulton Research and Consulting in Fairfax County told a gathering of local government officials and building leaders Wednesday that the industry found itself in an economic utopia in the years leading to 2006.”

“‘You had a perfect storm of demographics, economics and loose lending standards,’ said Fulton.”

“That led to the region’s rampant growth. Now the region is suffering through the hangover. He estimates that the Fredericksburg area has an 18-month inventory of existing homes for sale, including foreclosures.”

“Faced with competition from national builders, land that’s scarce and expensive, and a devastating economic downturn, Fredericksburg area builders are ready for some good news in 2008.”

“‘We’re all saying the same thing: Please tell me something, anything, positive,’ said Jeff Hall of J. Hall Homes in Spotsylvania County. ‘Builders can’t go much lower [in price] and still stay afloat.’”

“The situation Hall and other builders find themselves in is reflected in plummeting building-permit figures. Spotsylvania issued only 596 residential permits last year, down from 973 in 2006 and a peak of 1,921 in 2001.”

“George Snead of Snead Custom Homes in Fredericksburg, Snead said it’s hard to attract buyers to new homes when sellers of existing homes are cutting their prices, and foreclosures are being sold for a song.”

“‘Then you have the nationals coming in and buying land and lots,’ added Snead, referring to companies such as Beazer, Ryan, Ryland and Richmond American. ‘If they have a lot valued at $200,000, they’ll cut the price in half and write off a $100,000 loss. They can afford to do that,’ said Snead. ‘Then they can sell the house for less. We can’t compete with that.’”

“Pennsylvania-based Toll Brothers, for example, which is building Chancellor Hunt on State Route 3 in Spotsylvania, is expected to take $150 million to $300 million in first-quarter pretax write-downs of land and land options, according to a published report this week. Because it stockpiled land when prices were lower, however, it is better positioned than many of its peers, the report added.”

“Hall added that given the choice, a developer will jump at the opportunity to sell a large block of lots at one time to a national builder rather than sell them piecemeal over time to smaller builders. That was precisely the scenario in 2006 at Stafford Lakes Village off U.S. 17, where local builders had been active until Beazer bought up all the remaining lots.”

“Under the current conditions, Snead said buyers know they are in the driver’s seat. ‘They don’t want a deal, they want a steal,’ he said. ‘We are willing to work with people as much as we can.’”

“Knowing it was a gamble, Snead just completed a speculative house in Spotsylvania to stay busy and keep his subs working. Now he can only hope to find a buyer. ‘My goal is to just hang on,’ he said.”

“Dan Spear of Spotsylvania-based Spear Homes of Virginia faces a similar quandary. Spear, who has been building a broad price range of homes in the area since 1987, peaked at 158 houses sold in 2003. That number has dropped every year since, to a low of 14 closings in 2007.”

“‘Everything’s relative,’ Spear said, ’so even if you go from zero to five it’s a good thing.’”

“In addition to waiting for foreclosures to drop back, the builders agree that existing inventory, both new and pre-existing homes, needs to be sold off before new home sales can pick up. Hall also finds himself carrying empty lots from month to month that he’d expected to build on.”

“The downturn’s ripple effect has taken a toll on the builders’ office employees and subcontractors. Builders need to provide steady work to keep the contractors they like and have worked with for many years.”

“‘But they have to go where the work is,’ said Hall. ‘It’s always, where’s the next house?’”

“Snead noted that many conventional lenders are now requiring 20 percent down payments for new home purchases. ‘People just don’t have that kind of money,’ he said.”

The Times Dispatch from Virginia. “The housing industry has been in a recession for the past year and it’s pulling down the rest of the economy. When will it turn? Not any time soon, said Christine Chmura of Chmura Economics & Analytics of Richmond.”

“‘The bottom line is it will be another slow year like last year,’ Chmura said at the annual meeting yesterday of the Home Building Association of Richmond in Chesterfield County. The topic was ‘Surviving Today’s Market.’ About 500 people attended.”

“In the Richmond area, ‘inventory is up by 30 percent and sales are off by 35 percent from February a year ago.’ It would take 17 months to sell all the houses on the market at the current sales rate, Chmura said. A year ago, there was an 8.8-month supply of houses on the market.”

“If people think this housing market is bad, perhaps they are too young or they have forgotten the early 1980s, said Richmond builder Lloyd Poe, who also spoke at the meeting. Mortgage interest rates were in the double digits and home prices in some areas of the country fell 20 percent, said Poe, owner of LifeStyle Builders & Developers and StyleCraft Homes Inc.”

“‘People were dropping their keys on lenders’ desks,’ he said.”

“The housing market ground to a halt. ‘Today it is working, just not nearly as well’ as it did a few years ago.”

“In the Richmond area, housing starts are down 46 percent from their peak 18 months ago. Nationwide, housing starts are down 54 percent. Builders might want to diversify and look into remodeling, Chmura said.”

“Also, they may want to cut back on house sizes, like they did during the last recession, in 2001. ‘People can’t afford larger homes,”‘ she said. ‘The economy has slowed significantly.’”

The Philadelphia Inquirer from Pennsylvania. “Frank Salamone blames himself, mostly, for his small role in the subprime-debt crisis that has helped hobble the global economy.”

“With his household debt soaring from a $123,000 mortgage in 1990 to a $425,000 mortgage on the same house by 2006, Frank and his wife, Joan, are a striking example of how the housing bubble’s easy credit allowed consumers to bury themselves in debt.”

“Now, they are struggling to avoid the worst consequence of what Frank called ‘crappy decisions.’ That would be the loss of their house in Bucks County’s Warwick Township. ‘I’m not an Oprah victim. I don’t blame anybody,’ he said.”

“Frank said a steady stream of credit-card offers and increased borrowing limits were ‘ruining this country. Ignorant people like me are what’s getting sucked into it.’”

“The Salamones have been two months behind on their $3,148 monthly mortgage payments since Frank - who comes across as a man who can eventually laugh at anything that does not kill him - took a 10 percent pay cut last summer. At that point, all the equity had been taken out of the house and the subprime-lending market had largely shut down.”

“To catch up, they took a second job in December delivering newspapers from 2:30 to 5:30 a.m. Income from the paper route has made the monthly payments on their mortgages more manageable. Those payments had represented 55 percent of their gross income; now they consume 38 percent, Frank said. But the Salamones, who have two daughters, still owe more than $50,000 on credit cards, plus medical bills.”

“Their house needed a long list of repairs when they moved there in 1990, Frank said. At first they tried to pay for repairs out of pocket, but then Frank got a real estate license in the mid-1990s. ‘I discovered the wonderful world of refinancing,’ he said.”

“Cash from the first three refinancings - $160,000 in 1997, $230,000 in 2000 and $360,000 in 2003 - went mostly into home improvements. The size of the Salamones’ refinancings outpaced the growth in average house prices in Warwick Township.”

“‘We were doing OK with the refis, but then medical problems hit,’ Frank said.”

“Frank refinanced into a $320,000 mortgage with an $80,000 piggyback loan to consolidate debt in 2005. That was his first experience with a so-called no-doc loan, which means that income was not documented. Otherwise, he said he would not have qualified.”

“Frank took it because he was desperate without his wife’s help. ‘You figure out where my head was at that point,’ he said. ‘It was basically how do I keep things running.’”

“The idea was that he eventually could refinance out of the $80,000 loan, which had a fixed rate of 9 percent. He soon could not afford the $2,800 in payments on those loans. When he called the Arizona-based lender back, the broker who had promised him help was gone.”

“Meanwhile, ‘I was getting literally three dozen calls a week’ from brokers and lenders offering new deals. The latest refinancing, for $425,000, occurred in August 2006 through Mortgage Lenders Network, which went bankrupt six months later.”

“Despite all the refinancings, the Salamones still have $53,000 in credit-card debt. Help with the mortgage might be coming. A Philadelphia lawyer, Robert P. Cocco, said he found a violation of the federal Truth in Lending Act in the Salamones’ loan documentation and sent a letter this month to the current servicer demanding that the loan be rescinded.”

“The originator misstated the annual percentage rate as 10.3 percent rather than the actual 10.6 percent, according to Cocco.”

“Adjustable-rate mortgages, Cocco said, ‘are so complicated and they shoveled them out the door so quickly to investors that it was difficult even for the lenders themselves to accurately calculate and then disclose the costs of the loan.’”

“Meanwhile, the Salamones will keep plugging away - starting each day at 1:30 a.m.”

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