The Housing Bubble

The San Francisco Chronicle reports from California. “ACORN, an advocacy organization representing low-income communities, staged a rally at a Wachovia branch at Mission and First streets in San Francisco on Wednesday, with about 30 people calling on the bank to be more flexible in adjusting loan terms to prevent foreclosures. Wachovia is aggressively trying to get homes in or near foreclosure off its books, by quickly initiating the repossession process and aggressively selling them.”

“Susan Fallis, a communications professor at Saint Mary’s College in Moraga, so far seems to fall into the ‘get the loans off the books’ camp of Wachovia customers. In 2004, she sold the Santa Cruz parking lot her father bought in the 1960s for his mobile home business. She reinvested the approximately $3 million into 20 single-family houses in and around Reno, with a 40 percent down payment on each one.”

“Because Reno rents dropped as her minimum payments climbed, she is now losing about $7,000 per month. She has asked Wachovia to temporarily lower the interest rate on her loans by less than two percentage points, without asking for any adjustment on the loan principal.”

“If Wachovia doesn’t allow any modifications, Fallis expects she will have no choice but to default in the next few months.”

“‘It’s absolutely insane,’ she said. ‘I’m about ready to become the Cindy Sheehan of real estate; this is just making me so angry.’”

The Oakdale Leader. “President Bush has just made it even more difficult for those people to own their first home by shutting down the Nehemiah program. Casey Knowles, a PMZ senior loan officer who’s been in the business for eight years, said even though the program is scheduled to end in October, most banks have already stopped offering the program.”

“‘It’s definitely going away quickly,’ Knowles said. ‘I don’t think it’s going to come back. I’d be happy if it came back but I doubt it. It’s definitely going to affect home prices.’”

“‘The program has done a lot of good for a lot of people. I love it. It helps me get a lot of people into houses but it’s pretty easy to walk away when you have no money put into it. If you put three percent into your house you’re more likely to make the mortgage payment,’ Knowles said.”

The Merced Sun Star. “County Bank laid off about 20 employees Tuesday — the first time in its 31-year history that the bank has been forced to cut back on staffing. Company spokesman Thomas Smith, noting the bank’s parent company’s $12 million loss last quarter, said the decision was due solely to the troubled Valley economy.”

“Though no more layoffs are in the works, Smith didn’t rule them out. ‘Are housing values going to decline further?’ he asked.”

The San Gabriel Valley Tribune. “In an economy dominated by high fuel costs, rising food prices and mounting home foreclosures, many people are having a tough time making ends meet. This year, some are supplementing their income by working at the L.A. County Fair.”

“This year, Lisa Barnhouse is part of that work force. Barnhouse used to work in the customer service department at an Acura dealership, but her job was eliminated when the business was sold.”

“‘This money will be used to pay my bills,’ she said. ‘Jobs used to be a dime a dozen … but now I can’t find anything.’”

The County Sun. “Price wars are being waged in north Fontana’s upper middle-class neighborhoods as home builders drop prices, hoping to stave off multimilion-dollar losses. They’re competing against one another, but collectively, their products are going up against bank-owned properties, foreclosures and short sales on homes that were built just two or three years ago around the corner.”

“Maybe Centex is more stubborn than other Inland Empire home builders, and it might bode it well. That’s because its smallest Coyote Canyon floor plan, a 2,470- square-foot home, is going for about $430,000 - a price that other builders would’ve drastically slashed by now.”

“But homes being built by Riverside-based Van Daele Development Corp. down the street start are comparable in size and are in the high $300,000s.”

“Even short sales, which are sometimes super deals, are having a hard time living up to their potential. Real estate broker Jeff Hill has about 20 short sales that aren’t moving because banks and sellers are desperately trying to salvage any value they can.”

“One of them, a 2,572-square-foot home, lies a half-mile away from the Centex tract and is on the market for about $315,000.”

“‘They’ve postponed the sale four times,’ Hill said about the sellers. ‘We have an offer, and then they go out and do their own appraisal … and by the time they come back, the buyer finds something else. Meanwhile, the values decline even further.’”

“Sellers should be happy with buyers’ offers, Hill feels. ‘Everyone saves a lot more money that way, including the lender that’s foreclosing,’ he said. ‘Buyers walk away when sellers try to counter the offer.’”

The Press Enterprise. “Maurice E. McLeod, one of three Riverside County businessmen whom the Securities and Exchange Commission has accused of operating a massive real estate scam, accepted a court settlement that could require him to return ill-gotten gains.”

“McLeod, James B. Duncan and Hendrix Montecastro are accused of defrauding at least 95 investors in multiple states of more than $11 million and forcing many of them into foreclosure.”

“The defendants are accused of directing investors to purchase more than $118 million worth of homes, falsifying loan applications so families with middle-class incomes could qualify to buy multiple homes. According to the SEC lawsuit, the defendants would obtain inflated appraisals on the houses and take the excess mortgage proceeds as a fee.”

“The defendants temporarily made the monthly mortgage payments on the investment homes, allegedly in order to attract more investors. In the process, investors became dependent on the organization.”

“During summer 2006, Pacific Wealth began applying for credit cards in the names of individual investors who were directed to draw the maximum amount of cash on each card for additional investments, the SEC suit stated.”

“‘Investors who questioned the wisdom of this strategy were told by, among others, McLeod, that (Pacific Wealth Management) would stop making mortgage payments if they refused to cooperate,’ the lawsuit said.”

“When the defendants ultimately stopped making the mortgage payments on the investors’ homes amid a cooling real estate market, the properties fell into foreclosure.”

The Union Tribune. “At Magnolia at Bressi Ranch in Carlsbad, about half of the 25 homes have been built and sold for prices approaching $2.3 million. But a few months ago, builder Barratt American abruptly halted construction on six more, and a seventh stands completed and unsold. Work never started on five lots.”

“The reason: The locally based builder, like many home owners, lost its financing. ‘We’ve come to a screeching halt,’ said Barratt’s president, Mick Pattinson. ‘We’re looking for money to pay bills.’”

“Today, virtually no one is showing up at model-home complexes. More than 40 percent of buyers canceled their purchases in July, according to one market research firm. And builders and developers have cut their staffs by as much as 90 percent.”

“‘July was absolutely awful,’ said Steve Doyle, president of the San Diego division of Brookfield Homes. ‘It was the worst month I’ve ever seen.’”

“New-housing market analyst Sharon Hanley reported 193 sales at 1,090 projects in the county in July, off substantially from the July 2007 count of 639. Just three years ago, the all-time July peak sales total was 1,578. Early indications are that sales in August were up a bit but not much better.”

“Hanley’s other findings for July: a cancellation rate of 43.1 percent, up from 27.4 percent in July 2007; weekly traffic to sales offices down to an average 22 visitors per tract, a record low for July; and 84.6 weeks of unsold inventory, more than double the 35.3-week level a year earlier.”

“‘What’s hurting right now is builders can’t sell when there are foreclosures only 10 blocks away that are two or three years old,’ Hanley said.”

“Bill Davidson, an upscale builder and winner of many industry awards, said he understands the future will be different. ‘The world is not ever going to be like it was,’ he said. ‘We’re second-guessing, we’re scared.’”

The Malibu Times. “Only about 60 homes have sold in Malibu through the first two-thirds of the year. Steep price reductions are rampant, but the lower prices are still not sufficient to draw buyers.”

“Even during the worst of years of the last down market-from 1991 to 1996, about 150 homes sold per year. In the glory years, it was more than 300. Last year, when the slow down seemed in full swing, about 175 homes sold in Malibu. If records could be traced back to 1960, possibly this is the slowest year since then for number of units sold.”

“Because so few homes are selling, it is impossible to accurately gauge how far prices have dropped, or at what rate. Everyone has a guess. Fifteen percent? Twenty-five? Thirty percent down so far and heading to 50? Hardly any homes that last sold in 2006 or 2007 have resold this year, so that measure is incomplete.”

“About 220 homes are for sale now and only about 100 will sell during the whole year. Conclusion: Rapid price declines.”

From Bloomberg. “The US housing crisis arrived on July 14 at Stonebrook Court, the 26,000-square-foot Tudor-style home of California venture capitalist Kelly Porter. On that day, four months after putting the house on the market, he cut the price by $US7 million ($8.4 million).”

“It’s still for sale.”

“The mansion sits on 7.5 acres in Los Altos Hills. It boasts a wine cellar, Venetian- inspired ballroom, Italian statuary and swimming pool. At the reduced price of $US38 million, the property is a bargain, the owner says.”

“‘It’s worth every bit of $US45 million, and I reduced it reluctantly,’ said Porter in an interview. ‘We touched up every square inch.’”

“While Porter declined to say how much he spent on Stonebrook Court, real estate records show he paid $US5 million in 1999. He did say refurbishing the place cost ‘tens of millions’ of dollars.”

“‘The upper end is not immune to this decline,’ said Kenneth Rosen, chairman of the University of California’s Fisher Center for Real Estate and Urban Economics in Berkeley. A worsening economy means ‘these people will have less wealth and they will spend less.’”

“A 10,340-square-foot home in San Francisco’s Pacific Heights neighborhood is for sale at $US14.8 million, 17% below last year’s asking price. A home in Marin County’s Tiburon was acquired in August for $US900,000 less than the $US7 million list price in 2007.”

“‘You have smart buyers seeing a softer market, looking to negotiate a good price,’ said David Lichtman, chief credit officer of First Republic Bank, a San Francisco-based private bank and unit of Merrill Lynch & Co. ‘Nobody wants to overpay.’”

“High-end sellers must lower asking prices by 20% compared with a year ago, when initial listing prices didn’t reflect stricter credit conditions, said James Chalke, a broker in Beverly Hills.”

“‘What’s really happening is that sellers are taking value off their own markup,’ Chalke said. ‘A property is only worth what a buyer is prepared to pay for it.’”

“An 11-bedroom property in the Bel Air section of Los Angeles didn’t attract potential buyers until the asking price dropped by $US10 million, to $US35 million, Chalke said.”

“To be sure, the price cuts may often mean only smaller profits on property acquired years ago. Cinthia Haan bought the Pacific Heights home for about $3 million in 1992 and spent $3 million on renovations, she said. She stands to make an $8.8 million profit at the current asking price.”

“Haan spent three years redoing the six-bedroom house in Pacific Heights. ‘I’m ready to let go now,’ Haan said. ‘I’m ready to sell.’”

The Rocky Mountain News reports from Colorado. “The price of homes in the Denver metro area fell 9.4 percent in June from June 2007, according to a report from a New York firm that tracks the 25 largest housing markets in the U.S. Some local experts are critical of the report. ‘It’s garbage in, garbage out,’ said Lou Barnes, principal of Boulder West Financial. ‘The problem with price analysis is that it is over-weighted with distressed properties. The sales data is as accurate as far as it goes. But the question is: How is the market that is not for sale doing?’”

“Chris Mygatt, president of Coldwell Banker Residential in Colorado, said while the data is interesting, it does not reflect what is going on in popular neighborhoods.”

“‘I would suggest that this information is heavily skewed by all of the properties in places like Aurora and Adams County,’ Mygatt said. ‘If you would take out all of the REOs (real estate owned homes sold by lenders), you would have a much different picture. Homes aren’t losing value in the popular neighborhoods where people want to live. Anyone who thinks they will wait to buy a home in Washington Park, will be paying more a year from now.’”

The Arizona Daily Star. “At the peak of his success, developer Michael F. Teufel had acclaimed projects all over Tucson, earning praise for innovative designs and community accolades for business growth. Then things went bad.”

“Now, Pathway projects across Tucson sit unfinished or with residents complaining of poor workmanship. While Teufel blames the downturn in the housing market, others blame him.”

“In cases where homes are unfinished, buyers say they lost from tens of thousands to hundreds of thousands of dollars in upfront payments. Other buyers whose homes were completed have laundry lists of repairs, including leaking windows, ceiling fans with no switches and hot tubs that don’t heat up.”

“‘I think they bit off more than they could chew,’ said Sky Ranch buyer Lucia Zegarski, who is dealing with stucco cracks.”

“Meanwhile, people who bought homes from Teufel are finding they have limited recourse. Buyers who filed lawsuits are giving up, assuming Pathway has no money to cover any judgment they might win against the company.”

“One buyer, Preston Schrader, paid $38,000 in deposits to Pathway in 2005 for a home and waited for more than a year without seeing construction begin. He ended up losing in arbitration because the contract did not specify when work would start, Schrader said.”

“Judy Westin filed a complaint about her unfinished Aldea del Rey town home after trying numerous times to contact Pathway. The property is partially built and ‘growing tumbleweeds all around it,’ said Westin, who lives in Tennessee.”

“‘Of course, we would just like to have the money back that we put down,’ Westin said. ‘It’s very sad.’”

“A real estate agent who represented Pathway, Scott Niles, said the developer fell behind in the boom, then hit the brunt of the slowdown. ‘The market was so quick,’ he said. Then ‘everything kind of fell off a cliff.’”

The Arizona Republic. “Metropolitan Phoenix was the home-builder capital of the country a few years ago. But the industry has shrunk with the housing market’s downturn. A few home builders, some Valley-based, have filed for bankruptcy. Some smaller home builders have closed their doors. And other builders, including a few large ones, have walked away from empty lots, model homes and entire subdivisions.”

“Several Valley subdivisions have been foreclosed upon. ‘Rumors abound about this builder and that builder,’ said real-estate analyst RL Brown. ‘Subs aren’t paid by a handful of builders. Contracts are renegotiated, layoffs occur. Divisions are consolidated. Management changed. Mortgage brokers close and a bank or two fail. Investigations into unlawful practices grow by the day.’”

“Mortgages Ltd. has gone in less than two years from being Arizona’s largest private commercial real-estate lender to a company plunged into bankruptcy following the suicide of its CEO, Scott Coles.”

“Along with questions raised by the suicide, Mortgages Ltd.’s dramatic fall raises the business question of why a firm holding $900 million in high-interest commercial loans suddenly had to borrow money to stay afloat.”

“‘I can’t figure out how Mortgages Ltd. decided to fund the condo projects it did when it did,’ said Eric Brown, founder of the Artisan Lofts in Phoenix and an analyst with national real-estate consultants Robert Charles Lesser & Co. ‘The timing was bad for most new housing developments.’”

“‘In the end, Coles was probably trying to stem the bleeding,’ said analyst Eric Brown. ‘It’s a very sad and tough situation for many people. Projects were going to him because it was too tough to get money from banks. Coles was aggressive, and it appears he felt he couldn’t lose.’”

“Developers of Downtown condominium project 44 East Broadway are putting the partially finished building on the market, hoping to find a buyer or investor with deep enough pockets to finish the job.”

“‘It’s not a panicky situation,’ said James LeBeau, managing partner in the project. But ‘we can’t let it limp along anymore.’”

“He said, the business partners simply want to find someone with ‘a lot of cash’ to expedite the process. ‘All the hard work is done,’ said LeBeau. ‘All they have to do is put in a lot of money.’”

“‘There is still money for investment nationally,’ said Tucson Mayor Bob Walkup. ‘Your credit has got to be good and your risk has got to be low. Downtown Tucson is a low-risk investment.’”

“In addition to the penthouses, the building would have 30 condominiums priced from about $350,000 to $650,000, LeBeau said. If no big investor or buyer materializes, LeBeau said he plans to finish the building but will probably rent the units out as apartments. ‘That would be plan B,’ he said.”

The Review Journal from Nevada. “New York-based Related Cos. has been hired by Wall Street investment house Deutsche Bank to finish development of the $3.9 billion Cosmopolitan project on the Strip, an affiliate of the bank announced Wednesday.”

“‘The good news from a market perspective is that the project goes forward as opposed to sitting there idle and leaving a big question mark on the Strip,’ said John Knott, executive VP of the Global Gaming Group for CB Richard Ellis.”

“Knott said he assumes Deutsche Bank will continue to evaluate possible partners and investors. The investment bank did not say if the project’s opening will be pushed back from its current late 2009 date.”

“Deutsche Bank has taken over full ownership of the project under an affiliate. A call to the bank’s New York offices asking if the company still plans to sell the project after the credit markets loosen were not returned by press time.”

“This is Related’s third attempt to move into the Las Vegas resort market. Related was a joint-venture partner with Centra Properties on the canceled Las Ramblas project. Slated for 4,000 hotel-condominium units, the project involved actor George Clooney.”

“Related’s Icon luxury condominium project was canceled in November because of rising construction costs. Related also once held a development agreement for the 61-acre Union Park, but it expired when talks with the city collapsed.”

The Las Vegas Business Press from Nevada. “The Meridian, a luxury condo property just east of the Strip, is in turmoil as multiple investors try to evict the company that was renting out their units — in many cases, for illegal overnight stays.”

“Unit owners, many of them absentee landlords, are trying to regain control of their units in order to generate their own tenants. Their rental incomes stopped in July when the county shut down an informal hotel operation at the Meridian. Many owners counted on an onsite rental company to generate funds to cover the cost of their condo mortgages.”

“‘They don’t have use of their property. And they’re not getting rent,’ said lawyer Edward Kania, who is representing 12 Meridian owners.”

“About 400 of the Meridian’s estimated 450 owners are in some degree of financial distress ‘now or soon,’ according to Scott Oelke, a real-estate agent who owns two units at the Meridian.”

In Business Las Vegas. “Some elected officials and business leaders met over two days last week to give their insights on how local governments and community leaders can create a sustainable environment in Southern Nevada.”

“Mike Dwyer, a UNLV professor of environmental studies who participated in one of the sessions as a moderator, says sustainability is a complex concept to implement. ‘It is not rocket science, but it is hard,’ Dwyer says. ‘We have rocket science figured out.’”

“In other news: The number of listings by Realtors continues to be primarily composed of nonowner-occupied units. Vacant units represent 54 percent of the 22,095 homes for sale, according to Applied Analysis. There are 7,279 homes under contract, with 4,259 contingent and 3,020 pending. Forty-eight percent of the contingent units are short sales.”

The Las Vegas Sun. “A Green Valley home with a front courtyard and a bubbling fountain is advertised in the newspaper with 100 percent financing. The ‘Nehemiah’ program is popular because ‘there’s little to no money out of pocket and it’s easier to qualify (than under other programs) in terms of credit,’ said local loan processor Shani Fazzi of First United Mortgage.”

“Despite its attraction to buyers, this seller-funded down payment assistance program will expire Oct. 1. ‘We noticed as time went on that these loans were failing at two or three times the (overall) frequency,’ HUD spokesman Brian Sullivan said. ‘It’s not enough to put people into homes. You’ve got to keep them there.’”

“Local real estate agents say the program has enabled families to buy homes they may not have been able to afford otherwise.”

“‘When we get rid of this program, a lot of people will have to rent,’ said agent Teresa McCormick, who with husband Paul posted the advertisement for that home in Green Valley.”

“That screeching sound heard throughout Las Vegas Valley is the brakes being applied not only to large-scale Strip projects, but to many of the residential and mixed-use projects planned for the outskirts of town and outlying rural areas.”

“Expansive master-planned communities such as Coyote Springs 50 miles northeast of Las Vegas and White Hills in northern Arizona advertised the lifestyle and amenities associated with Summerlin and Anthem — poster neighborhoods in Las Vegas — at a significant discount in home prices.”

“Focus Property Group, which snapped up thousands of acres at public land auctions, sunk more than $1 billion into the development of the Mountain’s Edge, Providence and Inspirada communities. The company also made a play in Pahrump with about 1,000 acres.”

“Whether Las Vegas is on the verge of a boom or bust is a matter of opinion.”

“‘The projects that were marketed to come on line and haven’t … am I going to suggest that those projects won’t get built? No way,’ housing analyst Dennis Smith said. ‘Do you think Las Vegas will stop growing? Does anybody really think Las Vegas will stop growing?’”

“Builders at Inspirada are in trouble. Utah-based Woodside Homes may be near involuntary Chapter 11 bankruptcy, and Kimball Hill Homes filed for bankruptcy earlier this year. Toll Brothers, Meritage Homes and Beazer Homes are also partners in Inspirada.”

“Home building at Coyote Springs has been delayed 18 months and prices have yet to be determined, said Klif Andrews, Nevada division president of Pardee Homes.”

“The golf course is finished and open for play and some of the basic infrastructure is in place, including 21,000 feet of sewer lines and 11,000 feet of water lines, A water treatment plant is finished and a separate wastewater and sewer plant is near completion.”

“‘You’ve got to spend $30 million on wastewater treatment before you can hook up one toilet,’ Andrews said. ‘That’s why houses will always appreciate because it’s difficult and expensive to build in outlying areas.’”

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