The Housing Bubble

It’s Friday desk clearing time for this blogger. “The housing market is so bad that some banks and builders that had been business partners are now adversaries, and experts are using the dreaded ‘D’ word. Eugene James, head of the Atlanta division of the research company Metrostudy, said the 22 metro counties it covers ‘are in a housing depression right now.’”

“Elliot Eisenberg, economist with the National Association of Home Builders, said Atlanta should continue to build even though demand isn’t there. ‘Yeah, we are robbing Peter to pay Paul,’ he said. ‘But that’s OK because Paul is dead.’”

“Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000. The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year. ‘We’re so far underwater it’s not funny,’ says Wallick.”

“Shelley McComb used a no-money-down, interest-only ARM to pay $199,000 in December 2006 for a new three-bedroom home near Birmingham, Ala. The house’s assessed value briefly rose to $225,000.
Now, she needs to move to Atlanta where her husband got a promotion. The McCombs put their home up for sale in March. After getting no offers, they dropped their price to $179,000. They’d settle for $160,000.”

“Shelley McComb, who manages a doggie day care center, says, ‘I wish we’d rented.’”

“Soledad, a rural California town known for its wineries and the nearby prisons where many of the residents work, experienced explosive growth during the boom. Four different builders had projects under way, each with long buyer waiting lists, seven real estate offices were open to accommodate frenzied buyers, mortgage fraud was rampant, and people stretched to purchase properties they couldn’t afford, said Gloria Ledesma, broker in Soledad.”

“It crashed hard. ‘You can now get a house that originally sold for $610,000 for $275,000,’ Ledesma said. ‘Now people can really afford them.’”

“Prices have dropped 27% in Florida’s worst-performing town, Lehigh Acres, a rural area near Fort Myers. Two-year-old houses with three bedrooms, two baths, and granite counter tops now sell for $80,000. The same homes originally sold for well over $200,000, said Joe Kendall, an agent in Fort Myers. For an additional $25,000 you might be able to get a pool and a screened-in porch.”

“‘People are pulling money out of the stock market, and they’re buying foreclosed homes,’ Kendall said. ‘Where can you buy a house so cheap?’”

“The lagging economy and national housing numbers brought a sobering reality to attendees at the recent National Association of Realtors® annual convention, organized with a theme of ‘Destination: Success — Full Speed Ahead.’ Ted Jones, chief economist for Stewart Title, said he also is concerned that ‘pent-up sellers’ will re-enter the market once sales activity improves.”

“‘There are a lot of people who would put their home on the market if they felt they could sell it,’ Jones said. ‘We just don’t know exactly how many of them are out there. When they do plan to sell, it will add to our inventories. So, we may run into a false bottom before we find the real one.’”

“It’s the equivalent of being raised from your death bed only to get run over by a bus. What else to make of this week’s news that close to 60 percent of homeowners offered a bailout from their banks ended up defaulting on a payment within eight months?”

“It’s no wonder why. For about a third of borrowers who benefited from so-called loan modifications, the new house payment consumed more than 60 percent of their monthly income. Sixty percent.”

“John Gray was hoping for lots of action when his upscale home went under the hammer, but although the auctioneer asked for an opening bid that was less than half of its previous valuation, no one was interested. ‘There weren’t many buyers in any case,’ says Mr. Gray referring to auction held in Phoenix in late November.”

“Mr. Gray’s home is just one example of the bargains being offered at auctions in states such as Arizona, California and Florida since the sub-prime crisis caused the U.S. housing market to collapse, says Rhett Winchell president of California-based Kennedy Wilson Auction Group.”

“Canadian snowbirds seeking a home in the sun can get some great bargains at auctions with home prices as low as US$50 per square foot, says Mr. Winchell. ‘We’re talking brand new homes,’ says Mr. Winchell.”

“David Bangert and Linda Harris of Kailua listed their two high-end Hawaii properties on the market about five months ago with real estate agents, but amid a declining market and lackluster response, they recently decided to include a $100,000 reward for each property in hopes of locating a buyer soon. ‘It’s definitely worth it to speed up the process for us because we would like to have it over with,’ said the 62-year-old Harris, who wants to retire.”

“‘We’ve had some bites, (but) at this point in time in the real estate world, it’s not whether people want it,’ Harris said, ‘it’s whether they can finance it.’”

“Foreclosure activity Utah continued to pick up speed in November even as aggressive loan-modification programs and holiday moratoriums by some lenders slowed foreclosures in other parts of the country, according to RealtyTrac. ‘It’s not impossible to get over-extended again because these homeowners could be losing their jobs, taking a pay cut or suffered illness, making it difficult for them to make their payments,’ said Tom Cook, an attorney with Salt Lake-based Lundberg & Associates.”

“He said his law firm is closing on fewer foreclosures in Utah this month because many of his lender clients have moratoriums in place for the holidays. But he said he expects foreclosure activity to pick up again starting the week of Jan. 12-16 when most of the moratoriums are due to expire.”

“‘There’s not much someone who is four or five months behind on their mortgages can do in an extra 45 days. Most properties we foreclose on are owner-occupied. The moratorium allows people who’ll probably never be able to make ends meet stay in their home for another month,’ Cook said.”

“‘The party is still over.’ That’s how Ken Perry, CEO of Broker Knowledge Group, summarized the economy…at the annual housing forecast hosted by the Home Builders Association of Metropolitan Portland last week. ‘I mean, we had a great party, didn’t we?’ asked Perry. ‘America had a great housing value party, and we had some good alcohol.’”

“Oregon and Washington were at the party, said Perry, although they tended to stay at the back of the room, drinking responsibly and watching the rest of the guests. ‘Then California and Nevada show up,’ he said, to rising laughter. ‘And they’ve got these helmets on, with horns on them, and these tubes coming down into their mouths.’”

“‘I don’t really think we’re shocked about this,’ he said. ‘We were giving people 100 percent financing with no money down. Did we really think they were going to pay that back? I call it the race to idiocy,’ he said. ‘It’s a game of who can be dumber.’”

“Unfortunately, said Perry, human nature being what it is, we are certain to repeat our mistakes. ‘I guarantee you,’ he concluded with a wry twist, ‘we will be here again. We will be stupid again.’”

“With the nation’s top investment houses shuttered, sold or changing into staid commercial operations, doubts have emerged about whether the city that for generations has been known as the world’s financial capital can retain that title - or the daredevil swagger that has defined Wall Street for so long. ‘It’s going to be a long, slow process and take many years for us to really restore our leadership in the world,’ said Ron Chernow, who has written extensively on the history of Wall Street. ‘New York has been damaged, and some of it I think is permanent.’”

“Top executives at mortgage finance companies Fannie Mae and Freddie Mac ignored warnings that they were taking on too many risky loans years before the housing market plunged, according to documents released Tuesday by a House committee.”

“Fannie and Freddie own or guarantee around half the $11.5 trillion in U.S. outstanding home loan debt. The two companies are the engines behind a complex process of buying, bundling and selling mortgages as investments. In recent years, they lowered their standards, matching a decline fueled by Wall Street banks that backed the now-defunct subprime lending industry.”

“Lawmakers, in questioning that lasted more than four hours, were clearly frustrated by what they called a lack of willingness among former Freddie Mac CEO Richard Syron and Fanny Mae CEO Daniel Mudd, plus former Fannie Mae CEO Franklin Raines and former Freddie Mac CEO Leland Brendsel, to share any of the blame for the companies’ fortunes.”

“‘All four of you seem to be in complete denial that Freddie and Fannie are in any way responsible for this,’ said Rep. Darrell Issa, R-Calif. ‘Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it.’”

“Michael Cable began paying attention to the housing market here when he and his wife Michelle wanted to trade their south Charlotte condominium for a house in the nearby neighborhood of Park Crossing. ‘People would be like vultures waiting for a house to go on the market,’ said Cable. He quickly realized things had changed when he and his wife started looking earlier this year. Cable remembered, ‘There were more than 20 houses on the market.’”

“With so many choices, the Cables settled on a five bedroom, three story house. At first, though, it was above their budget. So, they waited. ‘Then the price dropped. We kept watching. It’s getting closer. Then the price dropped again. And then we were almost there,’ said Cable. ”

“On the market eight months by that point, the sellers were ripe for an offer. They’d already relocated to California, and the home sat vacant. ‘We bought for $90,000 less than it was put on the market for,’ he said.”

“‘It is definitely a buyers market,’ said Dot Munson, the President of Charlotte Regional Realtor Association. She recently saw another huge price reduction. A home first listed at $670,000, sold for $165,000 less.”

“This may have you asking how low is too low to make an offer. Several realtors we asked said there are no set guidelines. Just consider how much you want the house, what others have sold for and how long the home has been on the market. One agent told me, you don’t want to be insulting, but you never know what a seller will accept until you ask.”

The News Press reports from Florida. “Lee County’s housing market is overflowing with three-bedroom, two-bathroom homes and that’s led to bargains on what was a much pricier commodity during the housing boom. There were 1,603 of them in Cape Coral and 1,814 in Lehigh - everything from upscale, canal-side digs to basic starter homes - found last week on the local MLS. James Sommers, an agent in Fort Myers, said they dominate sales in the Cape, a community he specializes in. ‘I’m selling 2- and 3-year-old homes, neat as a pin, for less than I sold lots two or three years ago,’ he said.”

“One of his Cape Coral listings, a three-two with a den, built in 2006, sold in October for the short-sale price of $85,000. Cape Coral homes spanned a broad range on the MLS. At the low end of the scale was a short sale home on Northeast 13th Place, built in 2004, for $49,900. The priciest was also a short sale, a circa-2002, waterfront home on Southwest 33rd Avenue, with a dock, pool and spa and 2,090 square feet of living area for $699,900.”

“In Lehigh, there were 726 three-twos listed for less than $100,000, the least expensive being a bank-owned home with 1,233 square feet of living area available for $36,000. The high end is represented by an upgrade-laden home with a pool highlighted by a waterfall with an asking price of $487,000.”

“‘Buyers are savvy now and practically ignoring these short sales and focusing on foreclosures because they will get what’s on their wish list at a price that’s awesome,’ said Lynne Brantley, a Realtor-broker associate in Lehigh. She described bank-owned homes as ‘the meat. This is the reality, foreclosures. There are people calling daily from all over the country buying these houses, sight unseen. It’s like the boom, only backwards.’”

The Naples News. “Cape Coral-Fort Myers is back on top. But not in a good way. In November, it took the No. 1 spot for foreclosure activity in the nation. Robert Vreeland, broker and owner of Re/Max Coastal Living in Bonita Springs, fears that next year will only be worse for foreclosures in Southwest Florida. ‘Now all of the sudden a lot of these subprime mortgages are coming due, or the adjustable rates are readjusting and people are losing their jobs and can’t pay these high mortgages,’ he said.”

“‘The foreclosures have to get stopped,’ Vreeland said. ‘They are killing communities. They are killing the values of the homes and they are causing the problem to get worse and worse.’”

The Sun Sentinel. “Federal prosecutors filed a fraud charge Thursday against a Miami man accused of inflated credit scores in the creation of mortgage-backed securities at a South Florida firm. Steven Gordon substituted higher credit ratings on more than 2,800 loans he acquired as a director at Bayview Financial in Coral Gables, prosecutors alleged.’

“Bayview unwittingly packaged the doctored loans with others and sold shares to investors. Between 2004 and 2006, Bayview and its affiliates sold roughly $4.5 billion in commercial and residential mortgages to investors.”

The Tampa Bay Business Journal. “Builders are making heartfelt appeals to Florida financing officials and even key members of the U.S. Senate to curtail the number of construction loans banks are calling in. The results might be casualties before improvement as bankers battle not just for dollars, but also for survival.”

“‘We’re not looking for a handout or a bailout,’ said John Fowke, the incoming president of the Florida Home Builders Association. ‘We need their help in helping us find the bottom to this housing mess. The Fed is forcing lending institutions to do certain things within certain guidelines, which is making it impossible to find that bottom. Instead, they’re creating a downward spiral that we can’t stop.’”

“With regulators looking over their shoulders, banks have to ensure existing and new loans are strong, a necessary evil of the current economy, said Alex Sanchez, president of the Florida Bankers Association in Tallahassee. ‘We’re in an overbuild situation in Florida,’ he said. ‘They know it, and we know it. And we have got to reduce inventory before we start building more homes.’”

“A moratorium could destroy the very banks the FDIC is trying to protect, FBA’s Sanchez said. ‘I just don’t think it’s possible,’ Sanchez said. ‘The first job of bank regulators is to keep the banking industry safe. You can’t just make a blanket statement like, ‘Don’t call loans for the year.’ What if the loan needs to be called? What if that means the bank survives or not?’”

The News Journal. “Not only are existing homes slow to sell in Volusia County, but fewer new ones are being built. Permits were issued for 311 new housing units in July through September for the county and 16 cities, down 60 percent from 775 in the third quarter of 2007, according to the most recent market report by Hanley Wood.”

“Hanley Wood doesn’t track Flagler County. ‘The past six months are the worst I have seen it,’ said Anthony Viscomi, head of sales and marketing for Ormond Beach-based Viscomi Hansard Builders.”

“Multifamily housing permits fell a dramatic 81 percent from 401 last third quarter to 75 this past quarter. Single-family home permits fell 37 percent, from 374 to 236.”

“‘We have all aggressively priced our new homes, and we are whittling away at our inventory, but until all the inventory is reduced, no one is going to build on spec,’ said Charlene Irland, ICI Homes vice president of administration.”

The Capital News Service. “Declining homes sales over the past year and a half have helped spur a two billion dollar hole in the state budget. The good news, sales have picked up over the past two months and the average price of a home in Florida has fallen to 170,000 dollars. Florida Association of Realtors Spokesman John Sebree said the climate is perfect for first time buyers.”

“‘At this point our opportunity is the first home buyers. The person who doesn’t have a house to sell before they can buy a house. They now have the lowest price they’ll probably ever have, lower interest rates than they’ll probably every have,’ said Sebree.”

The Herald Tribune. “Only five cities in the nation built housing at a faster rate than North Port since 2005, according to new U.S. Census data showing just how overheated the city’s housing boom was. In fact, North Port added more housing in the past eight years than in the 40 after its inception in 1959.”

“University of Central Florida economic expert Sean Snaith calls places like North Port ‘pockets of pain around the state,’ because of their heavy dependence on the building and real estate industries. According to the area’s Multiple Listing Service, 1,302 single-family homes were on the market in North Port as of Wednesday, 632 of them built since 2005.”

“‘That’s a big inventory, especially in this economy where credit channels have been clogged up,’ said Snaith.”

“According to local real estate agent Kent Lewis, speculators were drawn to North Port’s abundance of cheap, buildable lots, much cheaper than the limited supply of land closer to the coast. ‘You could have a two-room shack, if it was priced below $100,000, they were gone in a day,’ said Lewis, noting that many first-time buyers could not even get in the market as prices rose almost monthly.”

“The number of foreclosures filed in Southwest Florida and across the state fell dramatically in November and is expected to fall further in December because of moratoriums declared by the state’s lenders at the urging of Gov. Charlie Crist.”

“The dramatic declines had at least one Realtor who specializes in foreclosed properties declaring that the foreclosure crisis has peaked. ‘We may have passed the top of the cycle,’ said Matt Augustyniak, broker in Bradenton. ‘Three years ago takes us to the end of 2005 when sales dropped off. There were not as many mortgages in 2006.’”

“Dennis Black, a Port Charlotte real estate consultant, believes the November drop is a temporary blip. ‘Remember, November is a month with a holiday. People tend to work less,’ he said. Black also believes that the only thing the current 45-day moratorium on foreclosures will do is create a landslide of filings on the 46th day. ‘It’s not going to change the fact that people are in houses they can’t afford,’ he said.”

“Margaret Amador, an agent who specializes in short sales, sees other investors holding off because of the financial crisis. ‘I have a little three-bedroom house I am trying to sell on North Lockwood Ridge Road and I had a cash buyer who was willing to pay $77,000,’ Amador said. ‘But when the crisis deepened, this buyer decided he wanted to hold on to his cash.’”

“For Venice resident Steven Baker, the crisis has produced nothing but frustration. He is trying to work with a bank on a commercial property he and his wife bought in 2006. ‘In November 2007, we came to the bank in good faith to advise them we needed some options regarding our loan as we had been unable to sell, rent, or use the property,’ Baker said in an e-mail to the Herald-Tribune. ‘They managed to drag the process on and on, not returning phone calls, e-mails, etc.’”

“‘I think it all comes down to the fact the financial institutions really don’t know how to handle the current situation to protect themselves, so will do whatever they can do at the cost of the borrowers, no matter what that cost is,’ Baker said. ‘They are finding the government will continue to issue handouts to themselves, so why make an effort to help the borrowers? They will get their money no matter what. It’s a combination of greed and stupidity.’”

“Florida’s budget crisis has grown so severe that some state legislators are abandoning their long-held resistance to tax increases or severe program-altering budget cuts. Legislators from both parties are signaling something far bigger is going to have to happen to deal with a $2 billion shortfall in the $66 billion state budget this year that could grow to a $6 billion hole through next year.”

“‘To just make a few cuts is not going to do it,’ said state Rep. Bill Galvano, R-Bradenton. ‘It has to be a real bold restructuring of government programs.’”

“State Sen. Nancy Detert, R-Venice, said legislators are going to have to look more seriously at issues like tax increases, and maybe not just on cigarettes as some have suggested. After the Senate was briefed on the details of the crisis, Detert said it is clear every revenue stream is going down. ‘Even gambling revenues are down,’ Detert said.”

“With Florida’s property values — which form the tax base for local governments and schools — expected to plunge a record $266 billion next year, Crist and the Legislature are confronting two options: Either increase taxes significantly, or make the deepest cuts to programs that the state has seen in decades.”

“Sen. Dan Gelber, D-Miami Beach, who has long advocated a greater diversification of Florida’s economic base, said the crisis was not unexpected in a state that has built its financial health on growth, which has nearly come to a halt because of the recession. ‘This is what happens when you build a state based on growth rather than on producing something,’ Gelber said. ‘Growth is not a product and the fumes of growth cannot forever be the fuel of a state’s economy.’”

Please visit the HBB Forum. Post off-topic ideas, links and Craigslist finds here.