The Housing Bubble

The San Francisco Business Times reports from California. “So-called middle class millionaires, those with $1 million to $10 million, say they expect to lose real estate to foreclosure in the year ahead, according to a recent survey conducted by Lewis Schiff, a co-author of The Middle Class Millionaire.”

“Of those surveyed, 36 percent have a second residence for personal use and 5.6 percent of those expect to lose the property over the next year. Of those surveyed almost 45 percent own residential real estate as an investment, and 20 percent of those expect to lose their investment during the next 12 months.”

“‘One of five plan to walk away from residential investment property,’ Schiff told members of the Luxury Marketing Council of San Francisco attending a meeting in Tiburon on July 10. ‘They’re going to walk away like they had made a bad portfolio decision. Some are losing $100,000 to $200,000.’”

“‘We’ve heard of the subprime crash. Next we’ll see the residential real estate investors in trouble,’ he said.”

The Mercury News. “The stock market pitched and rolled Friday, mostly driven by investors’ fears about the financial stability of Fannie Mae and Freddie Mac.”

“Tom Davidoff, an assistant professor who teaches real estate economics and finance at the University of California-Berkeley, said Fannie’s and Freddie’s troubles eventually could lead to higher mortgage rates.”

“‘The federal government is not going to let the conforming mortgage market go away,’ Davidoff said. ‘Obviously, it’s a potentially giant bailout’ - $5 trillion worth of mortgage debt between the two companies - ‘at a time we really don’t have the money.’”

The Simi Valley Acorn. “After nine years of annual assessment rolls in Ventura County increasing by 6 percent to almost 12 percent, the rolls this year went up only 3 percent because the assessor’s office lowered the assessments on more than 34,000 homes by more than $3 billion.”

“In recent years, Ventura County taxpayers have provided local governments with everincreasing property tax revenue, as the countywide total assessed property values had gone up more than 100 percent over the past eight years.”

“Most of the affected properties that were reassessed downward were purchased between January 2004 and December 2007.”

The Sherman Oaks Sun. “According to the San Fernando Valley Economic Research Center, San Fernando Valley foreclosure filings totaled 673 in May - a 242% increase from a year ago.”

“The dramatic rise in defaults and foreclosures in the San Fernando Valley is hitting many families and communities especially hard as the cost of living increases. The Southland Regional Association of Realtors also reported the Valley median single-family home price fell 31% to $450,000 in May.”

“Congress is working to ensure that the problems that have placed so many homeowners at risk of foreclosure will not occur again.”

LA Downtown News. “The 12-story Union Bank building has been returned to its former glory, albeit with a residential twist. Developer Meruelo Maddux Properties is putting the finishing touches on a $40 million renovation that has replaced 10 floors of bank offices with 92 apartments.”

“The apartment-to-condo model has long been Meruelo Maddux’s plan. The idea was pitched to investors when the company went public in January 2007, Maddux said.”

“‘It was a reflection of our anticipation of what the market was going to do,’ he said. ‘At the same time we were planning for an environment with a strong inducement to sell. We expect many people who live here are going to want to own one.’”

“The project arrives as Meruelo Maddux, Downtown’s largest landlord, is facing significant financial challenges: With the stock down about 83% since its initial public offering, the company is reportedly looking to sell some of its properties.”

The San Diego Business Journal. “At the height of the real estate market a few years ago, downtown developers began building up. Young professionals looking to own a piece of property near the waterfront converged with savvy investors hoping to turn a quick profit. Many of the buyers got in over their heads. And lenders offered up more than they could handle.”

“‘There’s a glut of condominiums downtown,’ said Mark Goldman, a mortgage broker with the local office of Windsor Capital Group Inc. and lecturer at San Diego State University. ‘A lot of condos are going into rental supply and that’s creating some softness in the market.’”

“In the past three years or so, Goldman said he’s noticed condominium prices drop an average of $150,000 per unit as inventories inched higher.”

“He philosophizes on the topic, blaming much of the downturn in the residential real estate market on ‘greed at all levels.’”

“‘The thing is, the money screwed the demand,’ he said. ‘It created an artificial increase in demand and now that the aggressive financing is down, we return to affordability again and that’s what is going to drive the market.’”

“Agent Karen Wheeler has been trying to sell a bank-owned, one-bedroom condominium in Cortez Blu, a 67-unit, 20-story high-rise in Cortez Hill that has been listed since January. In February, the price was reduced from $384,900 to $349,000.”

“‘It’s probably dropped by 40 percent value over the last year and a half,’ Wheeler said.”

“About $400 billion in negative amortization loans are scheduled to reset in 2011, which could leave thousands of homeowners owing more than their homes are worth. According to state Attorney General Jerry Brown, Californians hold 60 percent of these loans.”

“‘For a household that could hardly afford the minimum initial payment, they’re fried,’ said mortgage broker Mark Goldman. ‘This will bring more properties to foreclosures.’”

“‘The reality is there are lots of factors we don’t know about that will affect prices upwards or downwards,’ said Paul Habibi, a lecturer at UCLA Anderson School of Management. ‘There are so many moving variables - jobs, interest rates, credit markets, supply and demand. When you take them in totality no one knows what will be.’”

“‘I’ve been starting to think the last couple of weeks about a double bottom,’ Goldman said. ‘We were getting close to a bottom, and I think that there’s some stuff that’s going to occur in the next six months that will cause downward pressure in pricing.’”

“Habibi said the economy will prove to be a big factor. ‘The most obvious is that if incomes rise and the unemployment picture gets a little better, then on the whole people will be better off,’ he said. ‘The other thing is if the credit markets loosen up again.’”

The Valley Voice. “Building activity in Visalia during June was the second weakest so far this year. For the month, total valuation was $19.2 million, down from $26.7 million in May and just $6 million better than the poorest month, February.”

“There were 59 permits issued for new homes and just seven for new commercial construction. The value for the homes was $13.3 million, while new commercial had a value of $3.5 million. For the year, the city has issued 321 permits for new homes, compared to 490 at this point last year.”

“How bad do people need jobs locally? Consider what happened at Visalia Community Bank recently which advertised for one open position as a clerk teller. The bank got 500 applications for the one teller job, says President Tom Beene.”

The Desert Sun. “After three years of planning and ‘dismal’ sales in the Vista San Jacinto housing development, Jim Bartlett is pairing with a competitor to bring new vitality to the project. The new plans include scaling down the homes - they’ll now start in the mid-$300,000 range.”

“‘The homes will be totally redesigned,’ project manager Jim Bartlett said of future plans. ‘We kind of missed the market with (the initial design). People aren’t looking for as large of homes as they were.’”

“Experts say it’s a sign of the times. New construction is one of the heaviest-hit segments of the Coachella Valley’s real estate market: In May, sales were down 45.1 percent from May 2007.”

“‘A lot of people were building bigger and more expensive homes … but that’s not going to happen for a while,’ said Dennis Cunningham of Palm Springs Modern Homes. ‘We’ve got to be more realistic.’”

The Pasadena Star News. “Federal regulators assumed control of IndyMac Bancorp. Inc. on Friday, putting the bank under control of the Federal Deposit Insurance Corp. On Friday, People gathered outside IndyMac’s east Walnut Street headquarters in Pasadena. Some were emotional.”

“One woman, who declined to give her name, banged on the door and yelled desperately at employees inside, asking them to let her make a withdrawal.”

Steve Knieriem of La Canada Flintridge, came by to try to close out his CD account. He had heard the bank was in trouble and had already moved money from one CD account to a checking account, but still needed to close down the second one. He was too late.”

“‘When I came back last week, I was told this place is not closing down,’ he said. ‘But today I decided I better come here and get my money out.’”

“Others maintained a good sense of humor about the situation. ‘I thought I was in a third-world country,’ said Jagdish Belagum, a technology officer at a Glendale firm. ‘I didn’t expect this to happen in the U.S.’”

The Merced Sun Star. “Oh readers, was it just a year ago that Loose Lips was chronicling local developer Ranchwood Homes’ fire sale? Yes, it was. Back then, Ranchwood president Greg Hostetler was selling one of his two Lake McClure houseboats.”

“The fleet reduction was in response to a ‘contracting’ housing market, Hos told us. His plan was to get rid of anything that was nonessential to growing almonds or building houses.”

“That was in June of ‘07. Lips described the local real estate market then as softer than Dom DeLuise’s belly. How innocent and naive we were! The situation has gone from soft to scary.”

“Home prices have plummeted by double-digit percentage points. If we’re sticking with this Dom DeLuise analogy, nowadays it looks like he’s had gastric bypass surgery. And possibly developed anorexia. Someone get the man a sandwich.”

“Even Ranchwood’s streamlining has taken on a more bare-bones tone. Instead of unloading houseboats and helicopters, the company is now selling slightly used office furniture.”

“In April, Ranchwood moved out of its two buildings on M Street in downtown Merced. This Saturday, the homebuilder is opening its doors to the public to sell desks, chairs (including cushy ‘executive’ models), monitors, keyboards, phones and other office fixtures. Everything is priced to sell, according to a classified ad in the Sun-Star.”

“Loose Lips would like to view this news in a positive light. Now that Ranchwood has gone from selling houseboats to desks, it could mean that our tender toes are about to scrape the rocky bottom of this housing bust. We’ve got nowhere to go but up!”

“Also, we’re glad to see a real estate-related company advertising in the Sun-Star again — even if it’s in the Misc. For Sale section.”

Readers suggested a topic on the GSEs. “Is everyone finally realizing this thing is too big to bail?”

Another, “Let’s talk about what would happen if Freddie and Fannie went BK, their stock went to zero, and their bonds traded at about 40% of par value. Would other players be able to step in, raise capital, and start offering traditional 20% down mortgages to 700+ FICO borrowers? How long before that could happen, i.e., how long would it take for a stable mortgage market to rise out of the ashes?”

“What would it do to the house price decline- make it worse? have little impact? extend the length of the decline? Would the ultimate number of foreclosures be affected?”

One posted. “My personal view is that the politicians fall into three categories on the GSEs:”

“1. They don’t understand that there’s a real problem. 2. They understand a problem exists, but don’t understand the magnitude. 3. They understand a problem exists, and are demagoging the public by pretending that the magnitude is manageable. (The kick-the-can-down-the-road strategy.)

One added, “I keep saying that this is too big. Now I’m hearing that Freddie and Fannie are going to bring down Western Civilization if they are allowed to fail, and they might.”

“I’m really worried that the gov’t can only help Fred and Fan so much. I’m pretty sure that it is not enough.”

One asked, “Wait, didn’t this happen because some people finally decided that Fannie and Freddie would need to raise a few tens of billions to become adequately capitalized?”

“FNM and FRE will be around, they may just get a cash infusion from some oil rich country or the US to help recapitalize-existing equity owners will be wiped out, or close to it.”

“The ramifications of this are not insignificant. The cost of borrowing will go up for everyone because FNM and FRE will need to offer higher rates on their bonds to attract capital. Voila, home prices go down some more, further weakening FNM, FRE and all mortgage backed securities. Making borrowing rates go up even more.”

Another suggests, “This is the beginning of the mortgage death spiral, IMO. If the govt attempts to bail the GSEs, it’s possible we see **very high** inflation/hyperinflation as they try to cover all the losses. Maybe we get a new currency out of this?”

“If the govt does not bail the GSEs, we could see debt deflation that takes us back a couple of decades, financial markets could seize up, and we literally run out of money to conduct business in the U.S. GSE debt is held everywhere by almost everyone. Though most of us despise the idea of a bailout, the potential for GSE insolvency is probably the greatest financial event in modern times. We are definitely in a quandry.”

“Anyone have a ‘Plan C’ that could save the financial system, yet avoid a hyperinflationary scenario at the same time?”

One said, “When the word ‘conservatorship’ starting bouncing around in some MSM articles, the marbles is my head went to warbling. Dang, I want my mommy!”

The Asbury Park Press. “Their struggles are reverberating at the Shore, where mortgage brokers say lenders have already tightened their standards so much that only well-paid residents with a clean credit record can obtain loans.”

“‘We could be the greatest thing since sliced bread, but if (Freddie Mac and Fannie Mae) disappear, we’re dead in the water,’ said Drew Anlas, senior VP of Select Mortgage Corp. in Brick.”

“The problem? ‘All loans in the marketplace are pressured by falling home prices,’ said Keith Gumbinger, VP of a Pompton Plains company that tracks mortgage rates.”

“A year ago, lenders might have required a borrower to show proof of income simply by supplying a pay stub and a bank statement. Today, they require at least a month’s worth of pay stubs and tax returns from the past two years, mortgage brokers said.”

“A buyer in Monmouth and Ocean counties wanting a $300,000 home probably needs an income of $72,000 a year, money for a down payment and little debt on his or her credit record, said Jim Brown, VP of Kastle Mortgage in Freehold.”

“‘It got very lenient,’ Brown said. ‘In the last 2 1/2 months, it’s made up for all of that.’”

“Mortgage brokers shuddered at the mere idea of life without Freddie Mac and Fannie Mae. But keeping the companies viable won’t come without a cost, said Gary Stroik, VP of a Little Silver investment firm.”

“The companies’ business model depends on their ability to raise capital cheaply from investors and lend it back out at a higher rate. If investors view the companies as riskier, they will ask for higher interest rates in return, Stroik said.”

“Investors might shy away from anything related to mortgage companies, particularly with home prices falling and potential buyers struggling with rising energy prices and layoffs, he said.”‘

“‘If you’re a lender, how anxious are you to (provide) them a loan?’ Stroik said.”

“But mortgage brokers said the two companies can’t be allowed to fail. ‘If the government doesn’t come in and bail them out, there will be such a limited supply of funding sources it will be impossible to get a loan,’ Anlas said.”

Time Magazine. “All debt issued by mortgage giants Fannie Mae and Freddie Mac comes with a prominent disclaimer: ‘Not guaranteed by the United States.’ But the business model of both companies, not to mention the continued functioning of the U.S. mortgage market, depends on nobody quite believing that disclaimer.”

“Wrap your head around that contradiction, and you’re well on your way to understanding the Fannie-Freddie drama currently gripping U.S. markets.”

“The reason that the stock prices in both companies has plummeted, is that if the government had to step in to keep Fannie and Freddie functioning, shares in the companies would probably become worthless. On Friday morning, Treasury Secretary Hank Paulson issued a cryptic statement that seemed to say there wasn’t any such bailout in the offing, and the stocks recovered slightly.”

“Then word got out that Federal Reserve chairman Ben Bernanke had said the Fed would extend credit to Fannie and Freddie, and the stocks recovered more. But what happens next is anybody�s guess.”

“Here’s why it matters: Fannie and Freddie buy the bulk of the home loans made in this country.If the two companies were unable to keep buying home loans, the current housing crisis would get much, much worse. But if the federal government had to backstop them, the cost could run as high as $1.1 trillion.”

“Bert Ely, a financial consultant and a long-time critic of Fannie and Freddie…thinks that Fannie’s and Freddie’s charmed existence as private enterprises with tacit government backing can’t continue. ‘What all this bailout talk does is blow away the notion that there’s an ‘implicit’ guarantee. There is a guarantee, or there isn’t.’”

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