The Housing Bubble

The North County Times reports from California. “On the 3400 block of Hollencrest Road, the real estate bust has turned this neighborhood of 1970s, single-story houses into a checkerboard of browned lawns and plywood-covered windows. Every other house entered foreclosure over the last year. Francisco Lopez will soon join the growing number of former homeowners.”

“Lopez purchased his house for $379,000 with no money down in November 2005, the exact month real estate prices in the county peaked, according to Standard & Poor’s Case-Shiller Home Price Index. He calls it his ‘lucky month,’ with a wry smile. He missed his first payment in March after his loan payment jumped beyond what he could afford.”

“Nearby houses of the same size are listed for as little as $149,900, a drop in value of 60 percent, according to a real estate listing Web site.”

“‘Even if you don’t have a bad loan, you’re upside down on your equity. If you are $50,000 underwater, you could ride that out. But when you’re $180,000 upside down, you’re not going to see that come back in your lifetime,’ said Donna Steward, a real estate agent in San Marcos.”

“But last week, Lopez looked on the brighter side. ‘Before, whenever you looked for a parking spot, you couldn’t find one. Now, there are spaces everywhere,’ he said.”

The Union Tribune. “Those waiting for the lagging housing market to rebound were disappointed yesterday, as MDA DataQuick reported that 2,004 San Diego County homes went into foreclosure in July, a 9 percent increase over the previous month and a spike of nearly 213 percent over last year.”

“The July tally of mortgage failures was a record since DataQuick began tracking foreclosures in 1988. It was the county’s 40th consecutive month of year-over-year increases in both foreclosures and notices of default.”

“‘Prices are going down. A lot of people find it easier to walk away from their mortgages than fighting to stay in the house,’ said Alan Gin, economist for the Burnham-Moores Center for Real Estate at the University of San Diego.”

The Voice of San Diego. “If the rate of new condo sales in downtown San Diego continues the way it did in the first half of 2008, it would take five years and three months to sell all of the new units in the city core, according to recent sales counts from MarketPointe Realty Advisors. That’s about five times as long as the absorption rate for all of the new homes constructed around the county.”

“The years’ supply combined with developers’ inability to find construction financing for projects in downtown San Diego means the boom time gleam of a new condo project has lost its luster. Even the region’s real estate optimists acknowledge the city core is a hard place to do business right now.”

“‘If anything I’m sort of a downtown booster,’ said local real estate analyst Gary London. ‘But let’s face it: the cycle is over.’”

The Glendale News Press. “A round-table gathering of seven business and economic leaders from Los Angeles County and the region gathered Wednesday in Pasadena to address concerns about the economy, energy prices and the recent closure of 33 IndyMac banks throughout California.”

“John Bovenzi, CEO of IndyMac Federal Bank, participated in the forum and answered many of the concerns expressed by constituents. Brenda Cox was one of about a dozen people in the audience who sought advice from Bovenzi after she lost more than $100,000 after her accounts in IndyMac were seized by federal regulators.”

“‘What would you do in my situation?’ she asked Bovenzi.”

The Friday Flyer. “The Canyon Lake Chamber of Commerce held its regular monthly meeting Wednesday. The keynote speaker was Riverside County Tax Assessor Larry Ward, who said his office has reviewed property values in the County and is offering a reprieve for local homeowners whose homes have decreased in value below their original property tax base.”

“Citywide he said it reflects a 2.82 percentage decrease and countywide the property value assessment rolls were reduced by six billion dollars.”

“As many local real estate appraisers have already discovered, the Assessor said Canyon Lake is a challenge when it comes to determining values. Because his office does mass appraisals, they are faced with the challenges of the area having homes in the million-dollar range as well as homes in the $300,000 or even lower price range, with factors such as waterfront property and location within the community contributing to the value.”

“‘The problem right now is no fair market sales,’ he said. The fair market value he explained, is a property offered for sale with a willing seller and buyer who are under no undue stress. Since so many properties are either foreclosures or short sales, he said they don’t fall into the category of fair market sales.”

The Daily Press. “On Thursday, about 800 people were registered to attend an auction at the San Bernardino County Fair grounds to bid on the 163 foreclosed homes that were on the market. Rob Friedman, conducted the auction and said the banks are very motivated to get rid of the properties and are taking some big losses.”

“‘We are liquidating foreclosures for numerous banks. A lot of major national banks have decided they need these properties off their books,’ Friedman said.”

“One example is a large home that was valued at over $300,000 and the winning bid was $70,000.”

“Locally at least 41 percent of homes - or 1,600 to 1,700 homes - currently listed for sale are foreclosures, said Carol Yule, President of the Victor Valley Board of Realtors. Yule said most of the foreclosures didn’t happen overnight and in many cases it is a combination of factors that lead to a family losing their home with the biggest issue being equity.”

“‘People got this gift of equity. We went up 130 percent in home values between 2000 and 2005, so people got this imaginary gift and people borrowed it all,’ said Yule.”

“An illegal alien with previous criminal convictions, pleaded guilty Thursday to forgery in connection with identity theft and buying a home under someone else’s name, prosecutors said.”

“The investigation began in October 2006 after a woman tried to buy a home in Victorville. She was denied credit because she was told she already owned a Victorville home. After checking the report, she discovered it showed her having two mortgage loans in her name, totaling some $177,000, for which she never applied, officials from the San Bernardino County District Attorney’s office said.”

The Bakersfield Californian. “Two major builders have abandoned housing projects near northeast Bakersfield’s City in the Hills development. A third is halting construction at an Arvin site it recently said was going forward.”

“Such moves appear to be snowballing as deflation of the region’s housing bubble continues. Developers have lost entire tracts to foreclosure, sold holdings at fire-sale prices and, more recently, pulled out of sinking projects and markets altogether.”

“Two incomplete model homes baked in the sun Thursday on the south side of Paladino Drive, west of Vineland Road. No markings indicated this was the Castellina tract of Dallas-based Centex, which announced the new neighborhood’s opening in October.”

“Unfinished tract walls, utility hookups and tiers of graded lots stretched into the distance south and west of the unpainted model units.”

“Lupe Chavez, the on-site sales agent for Azul and Brisa, said a blowout sale held over the weekend was in preparation for shutting down the office by the end of September. About 128 of the tract’s planned 325 homes have been built.”

“‘I’ll be out of a job,’ Chavez said with apparent good humor, adding she was ready for a short break after 12 years of selling houses.”

The Monterey County Herald. “Cedar Funding Inc. bankruptcy trustee Todd Neilson can’t be accused of sugarcoating his assessment of the Monterey real estate lender Thursday.”

“In front of a Monterey Conference Center crowd of about 600 people, many of whom sank money into Ceder Funding’s $183 million loan portfolio expecting double-digit returns, Neilson described the company’s finances as a ‘mess’ and a ‘disaster.’”

“About 1,400 people, many of them Central Coast residents, sank millions of dollars into individual property loans and a mortgage investment pool managed by Cedar Funding. But trouble started this spring, when the state real estate market slumped and Cedar Funding reduced and then eliminated monthly investor payments.”

“During a 90-minute presentation, Neilson detailed three of Cedar Funding’s heaviest real estate investments - a golf course and RV park in Los Angeles County, a 78,000-square-foot residence in Carmel Valley, and a house in Pebble Beach - that face potentially staggering losses.”

“‘It was like a boat sinking,’ he said.”

“Cedar Funding owner David Nilsen sat in the front row of the large meeting room. Nilsen declined the trustee’s invitation to answer questions under oath. Barbara Briley, a Salinas investor, approached Nilsen during a break and told him he should be in jail ‘with the door closed.’ ‘I am very angry and disappointed,’ she said.”

“Paul Capos, a Carmel Valley investor, said the trustee’s report was depressing. He said he expects to get back 20 percent to 30 percent of the money he put in the company.”

“Paul Forgette, an investor from Prunedale, said, ‘It’s just a dose of reality.’ He said he is fortunate that he doesn’t have to rely on Cedar Funding interest payments to get by. ‘What can you do? I could get ulcers, but this isn’t … my whole life,’ he said.”

The Mercury News. “Cupertino accountant Richard Smith wants to buy a few bank-repossessed houses in Antioch and Brentwood priced at about $200,000 and rent them out. He can make down payments of about 30 percent, and can afford the mortgage payments. But he can’t find a bank who will make him the loans.”

“‘I’m a very active investor, I’m self-employed with a solid income, and every one of my properties have positive cash flow,’ said Smith, who has been buying rentals in California and Texas for 30 years. ‘I’ve never had a problem getting a loan. All of a sudden I’ve just run into a solid wall.’”

“‘If we can’t participate, we can’t burn through these inventories and help the market correct,’ said Geraldine Barry, president of the San Jose Real Estate Investment Association. ‘What I’m hearing from our members now is, ‘I have a deal; I can’t get money’.'”

“Barry and her husband recently bought a foreclosed house in Sacramento for $114,000; the previous owner owed about $250,000 on the property when the bank repossessed it. Even with a 25 percent down payment, they were unable to find a loan because they have more than four outstanding mortgages, so they paid in cash.”

“Barry said she wants to buy more bank-owned California properties in coming months, but has yet to figure out exactly how she will finance deals, if lender restrictions remain in place.”

“‘There are only so many houses I can buy in cash,’ she said.”

The Fresno Bee. “A slowing economy and falling gas prices could stem the skyrocketing cost of construction materials, which are helping squeeze the profit out of home building.”

“William Lyles, president of a diversified construction company in Fresno, said price declines will become more obvious. ‘This break in commodity prices is only a few weeks old,’ he said. ‘I think you will see a lot of commodity prices drop in the near future.’”

“Home builders also are getting relief in the form of lower labor costs. The slump in construction has flooded the marketplace with workers. But housing prices have fallen 16% in just the past year in Fresno County, which puts builders in a tough spot.”

“Going forward, developers will see lower land prices. But many builders, especially those who entered the Fresno area at the peak of the real estate boom, are sitting on land they paid top dollar for and can’t sell.”

“‘They have existing houses they are trying to sell and are faced with a choice going forward: They can exit the business or try to charge prices people are willing to pay,’ said Bernard Markstein, senior economist at the National Association of Home Builders.”

“That means lowering prices. To do that, builders are constructing smaller homes, including fewer frills and accepting little or no profit.”

The Ventura County Star. “A bigger home is not always better, according to a survey by Coldwell Banker, which asked consumers what influences their buying decisions.”

“When economic times get tough, homebuyers crave security. They are more apt to choose comfortable, cozy and warm homes over airy spaces and lofty views, said Ruth Peters, a clinical psychologist in Clearwater, Fla. ‘Lofty views don’t keep people together,’ Peters said.”

“Today’s buyers don’t necessarily need granite tops and new stainless steel appliances that people were demanding three years ago, said Temple Schneider, a Realtor in Camarillo. It’s partly because the market is dominated by short sales and foreclosures, and most of the homes on the market are not as nice as they were a few years ago, she said.”

“‘It seems like buyers’ attitudes are falling into alignment with what’s available,’ Schneider said.”

“While just a few years ago, some buyers were eager to get as much house as they could afford, now they have grown more cautious. Many buyers are more willing to trade square footage and fancy upgrades for a lower, more comfortable mortgage.”

“‘People are beginning to realize what’s important,’ Peters said. ‘In this topsy-turvy, everything-going-so-quickly, divorce-laden world, we want our home to not necessarily be a castle, but we want it to be a safe, secure and comfortable refuge.’”

I suggest the topic of coming changes in the down payment assistance program. ABC 15, “A ban on seller-funded down payment assistance programs will kick in October 1 when the new Housing Bill takes effect. Critics say the programs, which basically allow sellers to pay for a buyer’s down payment, artificially inflate home prices. Supporters say they are the best way to get a buyer into a home.”

“‘We have to get the loan figured out before the 1st of October because that’s when the AmeriDream program ends,’ said David Mills.”

“David and his wife Julie have four kids and are expecting a fifth. They are looking for a home after learning the home they have been renting is about to go to the auction block in October.”

“It took two months to look for a home, but according to their RE/MAX realtor Danielle Martinez, it only took about a week to sign a contract and make a deal.”

“Martinez said, ‘We are advising our sellers to be as aggressive now with pricing to make sure we get the buyers in, because we basically need to have them in Escrow with in the next week to close by September 30. FHA loans take a little bit longer so we need the full month of September to close them.’”

“David added, ‘I hope it all works out because when you buy a house you’re pretty well stuck with it.’”

From KTAR.com. “A hot program responsible for a big chunk of home sales is about to disappear. The Down Payment Assistance Program was the last zero-down program available for people looking to buy a home, but a new housing bill eliminated the program, which had sellers donate the downpayment to a charity which then passed it on to the buyer.”

“The program was supposed to end Oct. 1, but Valley mortgage broker Dean Wegner said it’s happening sooner.”

“‘Banks are pulling out right now,’ Wegner said. ‘If you’re approved and you’re looking for a house, using down payment assistance, you should have a house in escrow in at least the next 10 days and close on or before Sept. 15 — Sept. 20 at the very latest.’”

“Wegner said 30 to 40 percent of all home sales have used down payment assistance. Uncertainty about the future of mortgage giants Fannie Mae and Freddie Mac is responsible for banks getting out of the program fast, Wegner said.”

“‘The banks are pulling out six to seven weeks ahead of HUD’s announcements because they are furious that if they go to sell it (a mortgage) to the FHA, the FHA’s not going to buy it and they’re going to get stuck with a loan that is totally unsellable to anybody,’ he said.”

The Reno Gazette Journal. “The median sales price for an existing single-family in Washoe County in July was $251,000, a 5 percent decrease from June and down 22 percent from July 2007.’

“Washoe County reported 386 existing single-family home sales in July, an increase of 6 percent from the previous month and up 31 percent from the same period last year. Besides increased affordability due to lower median prices, the uptick in sales is also likely the result of buyers trying to get in before key changes from the Housing and Economic Recovery Act of 2008 take effect this October, said Ken Wiseman, broker-owner of Reno Rancho Realty.”

“One change will close the loophole that allowed down payment assistance programs such as Nehemiah and Ameridream to be used with Federal Housing Administration or FHA loans, Wiseman said. The programs basically make it possible for home sellers to indirectly contribute the 3 percent down payment required by the FHA to home buyers.”

“The changes, combined with the fact that they will take effect in a month when housing sales traditionally start to slow, could have a negative impact on home sales in October, Wiseman said. But they are also spurring more sales now.”

“‘Word is out on the street now that if you’re looking to do an FHA loan with down payment assistance, you better hurry up,’ Wiseman said. ‘About 40 percent of all the offers I get now are for FHA loans with down payment assistance. What’s going to happen to those buyers come Oct. 1? I guess we’re going to find out.’”

The Pioneer Press. “The clock is ticking on the popular no-money-down “gift” programs for people lacking cash for a down payment on a home. The country’s new housing law bans seller-funded down payment assistance starting Oct. 1, adding another dash of turmoil to the nation’s reeling housing market and sparking alarm - or cheers - depending on whom you talk to.”

“Nonprofit gift assistance is a critical safety net for working Americans, they say, including more than 15,000 Minnesota homebuyers estimated to have gotten their down payments through just one such group, Nehemiah Corp. of America.”

“‘It’s a program that’s really for the little people,’ said Scott Syphax, president of Sacramento, Calif.-based Nehemiah, one of the largest down-payment assistance charities.”

“The FHA criticizes the deals as circular financing schemes that can take advantage of vulnerable homeowners and claims the loans default much more frequently.”

“Seller-funded down payment programs are almost exclusively used with FHA-insured home loans. The ‘gift’ is money provided by so-called charities working with home sellers, not gifts from relatives or public agencies. The nonprofit essentially forwards money for the down payment from the seller to the buyer via a donation the seller makes to the nonprofit.”

“The nonprofit pockets a fee, typically about $400. The seller unloads a property. The buyer gets into a home with no money out of pocket.”

“Such deals took off in the Twin Cities in the past few years as other subprime loan products fell by the wayside, said Chris Galler, chief operating officer of Edina-based Minnesota Association of Realtors. Agents are reluctant to let go of any option for borrowers given the shrinking bag of mortgage tools available, Galler said, but they realize it’s best for homeowners to have skin in the game and generally support the ban.”

“‘Long term, we would say it’s the right thing for the marketplace,’ Galler said. ‘Short-term, I think it’s going to be a headache.’”

“To Patti Mazzara, that’s an understatement. Mazzara, a mortgage broker in Edina, said she anticipates fallout from the ban as would-be buyers get cut off from a market sinking in excess inventory. There is a real need for 100 percent financing, Mazzara said, because it is so difficult for many working-class people to save for down payments at today’s higher home prices.”

“‘These are still proven, qualified homebuyers. We’re not pushing people who have bad credit,’ Mazzara said.”

“Her clients Aaron and Amanda Swanson are buying a $132,000 split-level in Big Lake with an FHA-insured mortgage and $7,920 from Nehemiah for the 6 percent down payment. Amanda, 27, is a stay-at-home mom while her husband works in a machine shop making steel tubing. They rent a townhome in Coon Rapids and simply couldn’t save enough for a down payment, she said.”

“Amanda said she’s never owned a home and has always wanted the security. ‘We never lived in a house that was ours,’ she said. ‘For my daughter’s sake, I wanted something she could live in and stay in and have as her own.”

“‘I’ve told everybody I can to try to get a house, if they want a house, before October 1,’ she added.”

“The FHA has made it clear the charity programs are a problem. Federal Housing Commissioner Brian Montgomery has said data show FHA-insured loans made to borrowers relying on seller-funded down-payment assistance ‘go to foreclosure at three times the rate of loans made to borrowers who make their own down payments.’”

“Studies have shown that some sellers stick the extra ‘gift’ down payment onto the end of the loan, increasing the price and loan amount, meaning buyers pay for it over the life of the loan.”

“The IRS ruled in 2006 that the specialized groups don’t qualify as tax-exempt charities when they are paid by sellers to simply funnel money from seller to buyer in a self-serving circular loop. Since then, the IRS has revoked the tax-exempt status of more than two dozen nonprofit down payment assistance groups.”

“The average down payment gift is about $4,500, Syphax said, which works out to about $20 a month. ‘Down payment assistance is the safety net provider for housing opportunity in this country,’ Syphax said. ‘Cutting that net out from underneath working families is going to kill housing opportunity. The ripple impact across the economy is going to be enormous.’”

The Star Telegram. “Qualified buyers who act quickly can move into a new Legacy home with no out-of-pocket expenses at Lakes at Lost Creek.”

“‘Qualified buyers who purchase a completed home by Sept. 15 and finance with MTH Funding are eligible for both a zero down payment and $5,000 in closing costs, so the majority of our buyers pay no out-of-pocket costs,’ said Curt Fletcher, community sales manager. ‘But the government is ending the federal Down Payment Assistance Program next month, so visit us today before it’s too late.’”

“Lakes at Lost Creek features Legacy homes priced from the $130s to the $170s and Meritage homes priced from the $170s to the $200s. Home sizes range from approximately 1,550 to 3,000 square feet.”

“The zero down payment promotion is available only on completed homes. Buyers who prefer to build from the ground up can receive a dream package valued up to $20,000. Buyers who contract by Sept. 15 to build a new Legacy or Meritage home at Lakes at Lost Creek will receive popular designer features.”

From Reuters. “Known as ’seller-funded down payment assistance,’ builders could pay up to 6 percent of a home’s sale price. The ban is a near-term negative for the industry, since it will shrink the pool of potential buyers, raise cancellation rates and weigh on already-depressed builders’ shares.”

“The chief executive of the largest U.S. home builder, D.R. Horton Inc, said he ‘got suicidal’ over the ban.”

“‘I’m absolutely shocked by it. And I’m upset by it,’ Horton CEO Don Tomnitz told analysts on a recent call. ‘To take 10 percent, 20 percent, 30 percent of the buyers out of the home buying decision, at a point in the economy that they did, it’s absolutely ludicrous.’”

“While the new law contains a $7,500 tax credit for first-time buyers, that will not offset the ban on down payment assistance, which had no such restrictions, National Association of Home Builders CEO Jerry Howard said.”

“What’s more, builders had come to rely increasingly on down payment assistance as the credit crunch forced more buyers into the very government mortgages affected by the ban, Morningstar analyst Eric Landry said.”

“Assisted down payments secure about a third of the Federal Housing Authority’s portfolio today, up from 18 percent five years ago, said Housing and Urban Development spokesman Lemar Wooley.”

“In reducing the number of potential buyers, whether or not they could afford down payments, the ban ‘could cause another leg down’ for builders by depressing home prices further and forcing them to write off the value of more land, JP Morgan analyst Michael Rehaut said on a conference call for clients.”

“Also, cancellation rates could rise because agreements to buy homes struck before October 1 could see any assistance invalidated by a routine credit recheck after that date, said Bill Renner, NAHB’s director of single-family finance.”

“Builders such as Horton and Centex Corp, which both target first-time buyers, will especially feel the loss because more of their customers need either financial help or a government-backed loan, or both.”

“Horton assisted 21 percent of buyers in its latest quarter, up from 7 percent in all of fiscal 2007, while Centex assisted buyers in a quarter of closings. Lennar Corp tops the big builders with about a third of its closings using down payment assistance in the second quarter, spokesman Scott Shipley said.”

“Even luxury builder Toll Brothers Inc, which does not offer down payment assistance (DPA), will be hurt as owners struggle to trade up, CEO Bob Toll said on a conference call. ‘We would expect that the whole daisy chain of the market will be impacted to some extent,’ he said.”

“Still, some builders see the logic in the ban.”

“‘The end of DPA will probably pressure industry sales in the near term, but over time, our buyers and the market will adjust,’ Centex Chief Financial Officer Cathy Smith said on a conference call. ‘We continue to believe that a return to more normal qualification standards is a very good thing long term, even if it carries with it a little short-term pain.’”

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