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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
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Who holds the Real Estate legal hot potato(es)?
Are lawsuits the next major growth industry?
Most readers of this blog, I think, would
agree that the housing bubble is now
irreversibly poised for a big time bust.
So many fingers in the real estate
industrial complex pie: Builders, sub-contractors,
sellers, sellers agents, appraisers,
loan brokers, banks, insurance
underwriters, government tax agencies,
escrow companies,buyers agents, buyers.
As the bubble breaks, lawsuits from upset
buyers, money lenders and the like would
seem to become inevitable.
Who is most culpable?
Are all players sufficiently shielded from
a legal perspective such that R/E lawsuits
will be fruitless or are they the next
major growth industry?
Will an uptick in legal actions slow
or speed up the bust?
Are any players now building legal firewalls
to insulate themselves from future lawsuits?
For example, I have noticed that even
the most bullish R/E talk show hosts on
the local FM station (Los Angeles KLSX
97.1) on Saturday mornings are
spending more air time disclaiming
thier own commentary than they did
even last year.
For another example, how about
collusion between loan orginators
and appraisers? Provable? Actionable?
Yet another example, buyers overstating
income on stated income loans. Will
lenders go after such individuals?
A 4th example, from yesterday,
posted on this very blog: “A June Swoon for
Phoenix area homesellers” “…resale
experts are saying that builders are
messing up their market by dumping
so many built-but-not-sold homes
on the market with outsize buying incentives.”
Could recent homebuyers recover damages from
a builder who is currently underselling
the very same product?
I think there will be some action against RE brokerages that offer laons and appraisal steering”
would like to get in on this
please advise
I think our legal system needs to be VERY selective about what truly warrants a lawsuit in regards to housing. All out criminal activity - I’ll grant that. But “steering” or “false promises” (i.e. a realtor says, “Oh this home will double in value in 3 years!”), etc. are IMO unethical, but not illegal. If the false promises are not put in writing, it’s “he said, she said” and would NOT warrant a lawsuit.
I’ve said it before and I’ll say it again - people need to be responsible for their own actions rather then be allowed to continually play the victim role.
Unfortunately, in a major housing bust there would be very little “wealth” to be redistributed through legal action. Builders learned long ago to use small sub-corporations for every development they ever create. It is very hard to break through those sub-corporations to get to the hoarded wealth of the parent company. The small sub-corporations go bust, file for bankruptcy or just dissolve, so even if you win a judgment it usually turns up empty.
Appraisers are generally covered by insurance, but if they used legitimate comps, they are fairly well insulated.
Any real litigation will probably take place between the MBS investors and the loan originators on the grounds of breach of contract, fraud, lack of due diligence, etc. There may also be shareholder or investor suits against the MBS entities for their failures to exercise due diligence and there may be a large number of actions seeking recourse (to return the loans) to the original lenders.
There will be an enormous number of prosecutions sought for mortgage fraud. What number of these will be accepted by the states and prosecutors is unknown. Con artists take notice, however. The music is stopped and once everybody finds their seat, people will start pointing fingers and swearing out warrants.
Get ready for BK filings to stave off all the potential lawsuits. This is standard business practice, and if the homebuilders and other deep pocket real estate related firms, hire the lawyers from the tobacco industry, there will be no lawsuits ever won.
Yep. This is what happened here in the South Bay (LA) back in the mid 90s. This area is made up of mostly smaller mom & pop type builders. In 1997, we were looking for a builder to partner up with. We wanted to build on our Hermosa Beach property. We interviewed at least 5 “reputable” builders. But we also did background checks on these guys too. 4 of the 5 had filed BK at some point in the 90’s. But of course it did not stop them from starting up again. Most of these guys have made a ton of $$ in this latest boom but most are highly highly leveraged today. History will repeat itself…again.
The misrepresentation/manipulation is so widespread. For instance, on this morning’s San Diego TV news I just heard, following the blurb about median home prices taking a (tiny) dip YOY, buyers should act now b/c interest rates are up and the dip is the best hope for a deal. Sounded like the CRA wrote the piece themselves.
Now, why does the TV news include the “buy now” suggestion part of their story? They should tell the public about the price dip only, without the speculation plug. That to me is irresponsible since most folks, at best, hear market status from these 1-minute news blurbs. They’re left thinking “better hurry, last chance”, etc. when we know these are not yet the deals.
Could be a long list of defendents on that lawsuit…”DOES 1-45″
Here’s another major misrepresentation on the part of the mortgage industry and borrowers….
Many people bought investment properties and said they were going to live there. They misrepresented that it was an owner-occupied transaction. Underwriting for investment properties is much stricter.
If borrowers state on their application that their current residence is worth less than the place they are buying, it usually doesn’t get questioned. Nobody checks to see the value of their current residence, which actually may be much more than what they’re saying
I know folks at several large consumer plaintiff law firms. (west coast) I have had conversations with all of them months ago about getting up to speed on the potential real estate problems that may arise.
Topics tossed around were title companies and mortgage brokers that have in any way participated in offering hints as to how to show financial information in a better light. The worst may revolve around filling out blank tax return forms with information that is different from information on the returns filed with the IRS.
Appraisers may have issues to deal with regarding valuing a house to the loan amount requested.
There is also a possibility of a case of colusion amongst banks and agents/brokers with regards to steering buyers to preferred lenders and whether or not there were kickbacks for those referrals.
I worked in the legal field for 10 years. Have no doubt that there will be some very large scale litigation if prices drop much more.
the privatization of profits and the socialization of losses
…from a recent article on fannie and freddie
is this another way of saying…success has many fathers but failure is an orphan?…
definitely smacks of taxpayer bailout…
should be a quote of the day at least…
“…resale
experts are saying that builders are
messing up their market by dumping
so many built-but-not-sold homes
on the market with outsize buying incentives.”
Could recent homebuyers recover damages from
a builder who is currently underselling
the very same product?”
I can not see this happening as the builders could not build it the city did not issue building permits. They can always call it poor city planning and maybe retire the city planner with a nice pension but the truth is the city governments realized that high density property was a boon for their tax base.
should have been an ‘if’ in build it if…..too early in the am….
Too many defendants, not enough lawyers!
San Diego inventory is already at record levels, and I’m trying to get a handle on how many (more) people have to/will have to sell. Corrections to these numbers are welcome.
Home sales in SD ‘04 (Patrick Heald): ~52,000
Home sales in San Diego ‘05 (Bob Casagrand): ~42,000
According to an old SD Union Trib article, 63% of buyers in SD used I/O loans in ‘04 = 32,700 homes. Some of the sales volume in ‘05 was probably resales of ‘04 flips, but that’s still a lot of of hot potatoes floating around.
I think its intereesting discussion about whther the consumer in retrenching. If you look at charts for Cheescake Facotry and other restaurants, they are falling off a cliff.
Simmssays…Let There Be Shake
http://americaninventorspot.com/shake_flashlight
How long until this has a serious effect on the housing market? In other words, how long until the decreased spending translates into a loss of jobs and ultimately foreclosures? Just wonder what the timeline looks like.
Not the cheesecake! Save the cheesecake!!
That’s because Cheesecake Factory is a terrible, terrible place to eat, and they also put advertisements on their menu. I suspect people are getting sick of places like Cheesecake Factory, Chilis, Applebees, and all of those other sh*tbox chains that smother their gargantuan-sized portions in a pound of melted cheese.
Ugh, you’ve got that right. I eat at a small local cafeteria 2-3 times a month for one reason. Their fresh vegatables are wonderful and well cooked. Forget those chain restaurants. Haven’t been in those in years.
Just something I’m curious about. I see the assumption here a lot that it is easier to buy from someone who purchased before 2003 or so, since they will have equity even after the expected price drops.
What will happen to the market if even those who have owned their homes for many years are HELOCed up to the value?
For instance, remember the “Smelly Cat” lady from the Post message boards? She bought in 1986 and can’t reduce her price-no equity left. Its appalling.
Link:
http://forums.washingtonpost.com/wprealestate/messages/?msg=5701.1
Quote: “Loan balance on first: $290,000; equity line $75,000. Lowest asking price $399,000) Right now am negotiating with National City to get better interest rates, as the first is an ARM (rate currently 6%). Equity Line is one I’ve had with them for some time and they don’t seem willing to give me a better rate (it’s 8%).”
Comparable unit just sold for 390,000 plus 10k for closing costs.
What will happen to the market if even those who have owned their homes for many years are HELOCed up to the value?
Those who are HELOC’s up to the value are in the same fix, and you wouldn’t want to bother trying to buy from them, since they would have to bring a large check to the table (money they don’t have). Still, a house bought before 2003 has a far better chance that the owner can make a deal. If you’re keen on a particular house, you can usually go to the county records office to find what mortgages they have on the place. (No idea how many counties put that info on the web, but seems to be remarkably few, even though a mortgage lien is a public record.)
This is why I really hate to see equity extracted from a home ,unless someone needs to do a home improvement like replace the air-conditioning ,repair the roof or add on a third bedroom etc. It use to be ,in the tax codes , that unless the money that is extracted from a home is used for actual home improvement it can’t be deducted .I guess they must of changed that tax code . I never take equity out of my house so I don’t know .
When you take out a Heloc you are buying your house again at a new, higher price. Therefore these people have effectively bought after 2003.
N.B. This applies to jetski and Hawaiian vacation helocs. Roof replacement and room additions are far less onerous.
Agreed ….. I’m just questioning the tax codes these days on buying cars etc. with home equity dollars . I’m so lazy …I guess I better look it up .
When consumer interest stopped being deductible a lot of this nonsense started up.
Are the homebuilder stocks on the brink of capitulation?
I think the next step for them is consolidation. Then?
San Diego the mother of all housing hangovers:
http://www.signonsandiego.com/news/business/20060713-9999-1n13prices.html
I think its going to an interesting evolution as to whether we are all going to be on the hook for the implosion. I recently heard a legislator in Denver talking about the increase in foreclosures and saying its not acceptable and we all need to step up. I wil try to go find the reverence.
Simmssays..Rediscover Your Favorite Toys
http://americaninventorspot.com/favorite_retro_toys
That quote was yesterday and was noted here on this blog.
Also, someone yesterday posted the link to a very interesting report sponsored by the St. Louis Federal Reserve. In it, the author argued that the United States is on the verge of bankruptcy and the only remedy will be drastically higher taxes. The report didn’t really get into the housing bubble but instead focused on bailing out health care and social security. Still, the skids have been greased and you can be sure that the mortgage industry will have slice of the bailout, too.
The housing bubble is a pretty minor blip compared to the promises we’ve made to retirees in the form of pension payments and medical costs.
Medical costs, yes (barring large scale outsourcing of scheduled procedures, which might just be starting both here in Australia and in the US).
But if you go to http://www.angrybear.blogspot.com, and check out some of the posts from Bruce Webb, it would seem that the Social Security promises are quite close to being fully funded within Social Security itself.
Of course, once the SS Trust Fund stops tipping surpluses into the General Fund and starts drawing on its accumulated balance, the General Fund (= headline) deficit is going to be even more ugly.
I posted and agreed that the Laffer curve is completely fallacious. The problems pointed out by by Laurence J. Kotlikoff
“The paper offers three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy: a retail sales tax, personalized Social Security, and a globally budgeted universal healthcare system.”
and from todays
Asian Times:
…The United States is much more dependent on corporate and personal income taxes to finance government than other countries, and WTO rules prohibit the United States from making similar border tax adjustment for income taxes on exports and imports.
The average standard value-added tax in the European Union is 19%. When rebated on exports and applied to imports, these adjustments provide a 19% subsidy on EU products sold in US markets and a 19% import tariff on US products sold in EU markets. China offers similar benefits to its manufacturers….”
http://tinyurl.com/n6fa3
On the topic of consumer retrenchment, , retail sales fall .1%, where prices are rising. Uhoh.
http://today.reuters.com
Simmssays…10 Types of Women to Avoid
http://www.americaninventorspot.com/dolls_to_avoid
On the San Diego article–what is the trick to pricing a house in a “range”? I don’t get it.
And how the hell does a retired schoolteacher afford a 600,000 condo in the first place???
Possibility that the areas that will suffer the most during the pop are the areas everyone thinks there are no bubbles.
In the U.S., areas like the rust belt and portions of the Midwest where fundamentals (jobs, population & real wages declining) dictate prices should have been declining, have been appreciating at a good clip due to outside speculators seeing their ‘cheap’ real estate as a gold mine and don’t think the locals are smart enough to pick up the gold just lying in the streets. When the speculators have to dump these lower priced properties to service their debt on the more prized/higher priced (read: bubbly) investment properties, it is going to crush those markets (as inventory is already high because few locals are buying, just selling to get out) and throw a relatively much larger portion of the local populations into misery (as these are the people that have really been relying on cashing out the newfound ‘equity’ in their homes to live due to their faltering local economies).
It looks to me there is a decent possibility that while the coasts will be hurt, other markets defined by the media as not being bubbly right now will give a new meaning to the word distressed.
I’ve been making that point ad nauseam for months. I get very amused listening to the BS about Texas being “undervalued.” That’s quite interesting considering the unbelieveably high foreclosure rate. We’ll see how “undervalued” it is when the real dump kicks in and the distress sales start en masse. We’re already seeing some of that.
Amen, Neddie. Those who think that there’s been no bubble in areas where prices haven’t risen much seem never to have considered the possibility that sans bubble they’d have fallen. (But of course, we all know real estate never goes down, right?)
I have a little theory that I have absolutely no evidence for, but am hoping some readers have seen this.
Concerning the large homebuilders, are their tracts of land located in undesireable locations?
Speaking from a Boston point of view, we have very few tracts of land available. A lot of new home developments seem to be built on steep hills, right on top of highways, in swamps, or in locations that would put a homebuyer in commuter hell. I don’t think their are any new developments that put a person within walking/biking distance of a town center or even parks. All the good land is gone.
Does anyone know if Toll Bros’ (et al.) tracts of land are any good? Is this just bad land stuck out in the middle of nowhere? WIll that get them in the end?
King of Swamp Castle: We live in a bloody swamp. We need all the land we can get.
Prince Herbert: But I don’t like her.
King of Swamp Castle: Don’t like her? What’s wrong with her? She’s beautiful, she’s rich, she’s got huge… tracts of land
Are we @ the tipping point ??…..My belly indicator says yes….
Maybe you just need some breakfast.
Maybe your right….I am off to Taco Bell….
You trust an indicator powered by Taco Bell?
Im back…..Double Grande been Barrito……
been Barrito…… Sorry…Bean Burrito…Thank God I don’t get paid for my Vocab….
Double Grande Bean Burrito
Just don’t deflate that bubble anywhere near me :).
Is this headline indicative of a housing crash?
News & Analysis: Homebuilders/Construction
Roof Collapses at Horton
By Nicholas Yulico
TheStreet.com Staff Reporter
7/14/2006 9:57 AM EDT
“In other builder news Friday, Raymond James released a report that said contracts for housing sales fell 42% year-over-year in June in the greater Washington area, according to an area realtors groups. Closings declined 38% and the inventory on the market now represents 7.1 months of supply, compared with 1.6 months in June 2005, and 5.9 months in May.
“We continue to believe the Washington, D.C., market is headed lower as excessive speculation and overbuilding will weigh on the market for the foreseeable future,” Raymond James analyst Rick Murray wrote.”
Good day for my housing bubble portfolio. Puts on HB’s and lenders are up about $30 k so far this morning and about 60K (24%) for the week, and most of my positions are 3-6 month options, not more agressive short term. I think that DHI is the first builder to start writing down much in the say of land and land contracts. I did not think that WCI could go down 6 or 7 trading days in a row, but today is the biggest down day. However, I would be careful about buying new positions here on the stocks that are down so much. BZH dropped straight through $40 down to $39 the last I looked–usually even numbers offer some resistance.
What is your thinking on William Lyon?
http://thestreet.com/newsanalysis/homebuildersconstruction/10296849.html
Is this headline indicative of a housing crash?
Uh oh. The contrarians of the world will look at this and say it’s time to buy…
Yeah, but there are not enough of them to affect the market.
NEW YORK (July 14) - Consumer sentiment slipped unexpectedly in July, a report showed on Friday, as consumers’ view of their current conditions and expectations declined modestly.
Unexpectedly???? Do any of these so-called experts ever talk to the average person?
You know, the ones paying through the wazoo for gas, housing, food and whose son/daughter/nephew can’t find a decent job.
The results are from questions asked in MAY! By the time August rolls around with July’s figures the drop will be even greater. Remember in the 1st week in May the Stock Markets world wide had not crashed (May 12th start date) the US economy appeared to be booming, jobs were up Wal MArt was hiring, etc… Yes it is a surprise.
Curt - those experts are not smart enough to find an average person. They rely on idiots like “in the bag” Watts to ‘enlighten’ them.
About a month or more ago, I reported on this blog that that the Intel buildings in Folsom California where put on the market for sale…..This is what came out today in the Sacramento Bee newspaper;….
——————————————————————————–
Folsom braces for Intel cuts
Up to 70 managers could be laid off at campus.
By Clint Swett — Bee Staff Writer
You nailed that one!
Who is your source? I would a weekend topic of who posts here and what their REAL jobs and positions are. I think we might have some important people here (excluding me).
I enjoy reading your comments. You give important insight. Thanks
THANKS!!!
The new weight loss company started by the trio, Liar-rah, Watts, and Suzanne. Their first client was the ’smell cat lady’. She was dropping weight like mad, due to the high stress of her debts. This whole housing mess was put together to lower the obesity epedemic. Now, few will be able to afford to eat, and will be too stressed to eat. Look out WW, and Jenny Craig. The idiot trio have cornered your market.
From today’s LATimes:
“Los Angeles Condo Conversions May Be Slowing”
“With interest rates up and home prices stagnating, the days of easy money are over, an observer says.”
“One possible indication of a coming slump was the number of people willing to pay $1,800 for investment advice on the topic. Only about 50 signed up for a two-day West Coast Condo Conversion Conference, sponsored by the New York-based Information Management Network and held at the Hyatt Regency Century Plaza.”
“In L.A., we wouldn’t touch a condo conversion because of the political climate,” said Lawrence Thompson, assistant general counsel of Lennar Homes and a panelist.”
For the weekend I think it would be fun to hear people’s “Gee, you were right afterall” stories.
Now that the masses are starting to get wind of the bad news,
are some bears now hearing such things from friends and family?
Me, not so much…yet. But I suspect my turn will come to say “I tried to warn you way back then”. For now, most still in denial. Sigh…
Excellent topic. I got one last night. A friend at the bar said: You were right about the housing market. I assured him that he was OK since he owes 60 something on a 400K home and has a recession proof job. It was nice to hear, though. Everyone loves to be right now and then.
How about something of a constructive nature (pun intended
Some thoughts on how to solve some of the problems that a market slowdown will create.
For instance, McMansions. The trend in the last 10 years has resulted in a dramatic increase in square footage per person. For families that may be having financial difficulties and for other reasons there will probably be a desire to lower the square footage per person numbers. Since it is not possible to do a “honey I shrunk the house” kind of thing. What options do people have?
For instance, have aging parents move in. Bring back the kids that just left the nest.
What about physical space alteration? I have friends who have very large houses but with very few actual rooms.
What can be done with mega master bedrooms. etc.
LOL, IMHO the bottom in the housing market (>12 yrs) will be when the Plywood Mansions are turned into 4 flats.
Is the stock market beginning the slide which has been predicted here by many or is this just a minor correction?
* Inflation is up, including higher than expected wage inflation.
* Unepmployment is up
* Retail sales are down, and continue to decline.
* Housing ATM is drying up fast.
* Housing inventory is at all-time record levels across much of the country.
* Oil sets new price records month after month with no sign of leveling off.
* Default rates are foreclosures are up.
* Interest rates are up and climbing.
* US populace is pessimistic about the country’s economic future.
* Israel and its neighbors seem intent on having a major conflict (this will only continue to escalate). Iran (the worlds fourth largest oil exporter) appears to have stake in the conflict.
All of the predictions made over the past year by bloggers on this site have come to pass, and many of the indicators have just begun to turn negative.
Is this too much for Wall Street to take?
IMHO - YES!
how about:
a thread listing cancelled condo projects.
how will retirees really effect the housing market?
top 10 Re myths that have been busted- land shortage, new economics models, boomers and etc.
I think it’s finally time to consider our Blog party. I like Melody’s idea in Orange County, CA, or Las Vegas.
Should we have a party? Where? When?
They did that on patrick/wp. Apparently a good time was had by all. Of course, I’m personally not going to fly out there, but I hope y’all have a good time!
Perhaps a glossary review?
Condotels: Hotel rooms sold to investors and managed by hotel management.
Repartments: apartment buildings that were slated to be sold as condo units but have instead continued to be rented by the building owners.
Rentominiums: Condo units rented out by owners, usually for negative cashflow.
GF - Greater Fool
REO - Real Estate Owned - a property after the bank has repossed it and before they sell it.
others?
Do you want your money in a housing bubble exposed bank?
Interesting comment John;…..All of my cash is at the same institution that my loans are….If they default on my cash, I get credit agaisnt my loans….
Even if that is true, it isn’t necessarily going to work out neutral or in your favor.
I already changed that from WAMU to Farmers and Merchants bank.
FMB only lends at 60% LTV on RE and not toxic mortgages.
Oil prices are over 78 today… When do they really impact home prices?
Topic: Can we all admit now that the bubble is national? And are the ominpresence of high-risk loans the reason why?
Now that people are starting to see YOY declines (GO SAN DIEGO!), how about people post any MEMORABLE QUOTES they may have saved from “experts” over the past 3-4 years? I would think that reading some BS from 2004 or 2005 on how prices will keep heading up might be cathartic for some. Some, like, me.
Whaddya think?
Why have the homebuilders tanked(like DHI) but the mortgage giants(like CFC) haven’t? how can the two be so out of whack?
How about a thread on cool places to live — where (and why) people are monitoring the crash with a view to buying a little piece of paradise in the next 2-3 years. In the US and abroad.