The Housing Bubble

Some housing bubble news from Wall Street and Washington. Bloomberg, “KB Home, the fifth-largest U.S. homebuilder, reported a fiscal first-quarter net loss was $268.2 million. Revenue fell 43 percent and net orders plunged 75 percent to 1,449 homes, the company said in a statement. Los Angeles-based KB Home recorded $223.9 million in pretax expenses to write down the value of land, joint ventures and options on property.”

“‘Many potential buyers either cannot or will not make a purchase commitment today,’ CEO Jeffrey Mezger said on the conference call. ‘Some are worried about losing their jobs, others believe prices have further to fall. Many are simply unable to qualify for financing given the more restrictive lending environment.’”

“The number of homes sold tumbled 43 percent in the quarter, KB Home said. The value of the company’s backlog, or homes under contract and not yet sold and a sign of future revenue, fell 59 percent. The number of homes in backlog tumbled 57 percent.”

“Orders tumbled 83 percent in both KB Home’s Southwest region of Arizona, Nevada and New Mexico and its central region of Colorado, Illinois and Texas. KB Home got contracts for the most houses in the quarter in California. Still, orders in California fell 63 percent.”

“KB Home’s average selling price in the quarter fell 7.2 percent to $248,200. In fiscal 2007, the average price fell 9 percent to $261,600 from the same period a year earlier.”

“KB Home obtained the most revenue in 2007 from California. It sold homes there at an average price of $433,600, down 11 percent from 2006.”

The Chicago Tribune. “Foreclosures are piling up on the books of lenders, and Corus Bankshares Inc. is no exception.”

“The Chicago area’s second-biggest locally headquartered bank has seen its ‘real estate owned’ on its books jump from $8.4 million at year-end 2006, involving a Libertyville office complex, to $37 million at the end of 2007, consisting mostly of a Naples, Fla., condominium conversion.”

“The Naples condominium project, which was being converted from a relatively new apartment complex, is under contract for sale. Asked how Corus was able to sell the properties, CEO Robert Glickman replied, ‘By reducing the price.’”

“‘Naples, Fla., is a nice town, but we didn’t get the price we wanted,’ he said.”

“‘We could hold on in hopes the market will get better in ‘09 or 2010, or otherwise we’ll take what the market brings us,’ Glickman said. ‘It’s an important decision. We wouldn’t sell at too much of a sacrifice because we’re not under pressure to sell, but if the price seems good enough, we’ll let it go.’”

“The Naples condo conversion had sold 90 of 450 units, but then sales slowed.”

“‘The borrowers needed to come up with more money. While they’re renting units, there isn’t enough rental income to make our mortgage payments,’ he said. ‘So they’ve got to dig in their pockets or give us the keys, and they gave us the keys.’”

“While Corus has made progress in disposing of two foreclosures, more could be coming. In late January, Corus said it expected to begin foreclosure proceedings on as many as three loans in early 2008.”

“It has taken title to a condo-apartment project in San Diego. A Phoenix property is winding its way through the courts, and one in Tampa is on a ‘long journey through the court,’ Glickman said. Both of those are apartments being converted to condos.”

The Washington Business Journal. “A New York-based investment company has picked up a Rockville residential building for millions of dollars less than the distressed seller paid for it in 2005. Like dozens of other multifamily developers in the region and across the country, the buyer plans to take the building out of the condo market and put it back where it started — in the rental apartment market.”

“The would-be condo building, called the Monterey, went bust last May, after its then-owner failed to make payments to a mezzanine lender. Triton paid $117 million, or nearly $271,000 a unit, for the 432-unit building in November 2005, and then spent as much as $30 million renovating it to compete in the condo market. The buyer plunked down $97 million for the property.”

“Since mid-2006, 156 condo projects were either canceled or turned into rental apartment buildings, taking more than 31,000 condo units off the market, said William Rich, a VP at Delta Associates. The flips and busts have left a little more than 16,000 condo units on the market in the metro area.”

“‘Reducing the condo supply helps other developers in the submarket, but it also shakes the confidence of buyers when they see a building that they were looking to live in as a condo [become] an apartment,’ Rich said.”

Investors Business Daily. “Developers are putting some communities on hold for lack of demand, incentives may not provide good value, and prices are still falling. Buyer beware, real estate agents say. Be informed and very, very cautious. What looks like a bargain might be a bad bet.”

“One risk, especially realistic now, is that a builder could mothball the project, leaving would-be residents in a lurch and those who’ve already moved in stuck, surrounded by vacant lots. Pulte Homes, D.R. Horton CTX and other big developers have all been mothballing communities during this dramatic real estate downturn.”

“At the end of February, Centex stopped building at its Cypress at Kavala Ranch development in Rancho Cordova, Calif., near Sacramento. Pulte has mothballed 58 communities, executives told analysts. Forty-six of the communities ‘have never been opened,’ Chief Financial Officer Roger Cregg said on the late-January call. That leaves 12 opened but now sitting unfinished.”

“Near Lake Tahoe, the new luxury communities of Old Greenwood and Gray’s Crossing are both Mello-Roos Districts. These developments among others in the Truckee, Calif., vicinity also are subject to town transfer taxes that can run 0.25% to 1.75% of a home’s sale price, says David Hipkins, a local agent.”

“‘New developments can have a lot of hidden extras, especially in California,’ Hipkins said. ‘This is the way cash-strapped counties and municipalities generate additional revenue.’”

The Dallas Morning News. “Dallas-Fort Worth homebuilders are packing away their hammers, dramatically reducing the number of homes they are building in the area. Fort Worth-based D.R. Horton Inc., which was the lead builder in North Texas in 2006, chopped its starts in 2007 by 57 percent – from more than 4,800 to fewer than 2,100 units last year.”

“Centex Corp., which topped the builder list in 2007, reduced its starts almost 30 percent to 2,170 homes. Florida-based Lennar Corp., which started almost 3,000 homes in Dallas-Fort Worth in 2006, began only about 800 last year. That’s a drop of more than 70 percent.”

“Texas A&M University economist Mark Dotzour would like to see even more restraint. ‘There are some that haven’t cut back very much at all,’ Dr. Dotzour said.”

“He frets that in some neighborhoods, ‘builders are still bringing too much product into a market that may not need it currently.’”

From Reuters. “Fremont General Corp said on Friday that U.S. banking regulators declared its banking unit undercapitalized and has required the company to raise money or find a buyer in two months.”

“Fremont, which earlier this month received default notices related to $3.15 billion of subprime mortgages and said its survival could be threatened if it were sued, said that on Wednesday the company received a directive from the U.S. Federal Deposit Insurance Corp requiring it to take corrective action by May 26.”

“Fremont had been one of the 10 largest U.S. subprime mortgage lenders until regulators, including the FDIC, ordered it to stop risky lending last March.”

“The Oregonian. “A newly surfaced memo from banking giant JPMorgan Chase provides a rare glimpse into the mentality that fueled the mortgage crisis. The memo’s title says it all: ‘Zippy Cheats & Tricks.’”

“It is a primer on how to get risky mortgage loans approved by Zippy, Chase’s in-house automated loan underwriting system. The secret to approval? Inflate the borrowers’ income or otherwise falsify their loan application.”

“Even if the memo was penned by a single employee, it illustrates an attitude prevalent in certain corners of the mortgage industry during the boom years. Some local mortgage brokers view the memo as vindication. Brokers have argued they’ve been unfairly blamed for the lax lending standards that led to a wave of defaults. The large national lenders drove the weakening standards, they argue.”

“The Chase memo is ‘a perfect example of one of the big five banks out and out telling mortgage brokers to commit fraud,’ said Todd Williams, a broker in Portland. ‘And this has been going on for years.’”

From Cox News. “The home foreclosure rate will rise for at least another year and residential real estate prices won’t improve until 2010, said Frank Nothaft, chief economist for Freddie Mac.”

“‘We’re likely to have worse news’ on foreclosures throughout 2008, Nothaft said Thursday in a speech. As a result, homeowners will see ‘huge increases in the average amount of time it takes to sell a house.’”

“With so many properties sitting on the market, families that want to move before 2010 will find that ‘it’s a lot harder to sell a home,’ he said. ‘It’ll take some time to wear down this inventory.’”

From MarketWatch. “Returning to lecterns around the country after the self-imposed silence before and after rate policy meetings, one Fed official said hopes of a short and shallow downturn were probably misguided. Another said that the Fed’s hands-off approach to asset bubbles not might be such a good idea.”

“Atlanta Fed president Dennis Lockhart said that his previous forecast of a turnaround by mid-year was probably too optimistic. ‘The recovery in growth I had expected in the second half of this year may be delayed,’ he said.”

“Home prices most likely wouldn’t bottom out until then and ‘preconditions’ of stability in financial markets were likely to be absent until the fourth quarter as well.”

“Minneapolis Fed president Gary Stern called Thursday for a reexamination of the view that it was impossible for a central bank to uncover an asset bubble before it burst.”

“That viewpoint has been dominant at the Fed over the last two decades. In basic terms, the theory was that any central bank attempt to pop a bubble before it got too big might do more harm than good.”

“Stern said he was reviewing this long-standing belief in wake of the fallout from the plunge in housing prices and the earlier collapse in technology stocks. ‘I suspect there may be practical, albeit far from infallible, ways to identify excesses in asset prices,’ Stern said.”

“‘It is not-clear, however, that such policies would necessarily pass a cost-benefit test, for actions to limit or reduce asset prices quite likely would have implications for economywide growth and employment,’ he said. ‘But then, so, of course, do asset-price collapse,’ he noted.”

“Stern, the longest-serving (Fed) policy maker, said in a speech yesterday that it’s possible ‘to build support’ for practices ‘designed to prevent excesses.’”

“For Fed policy makers, ‘the consequences of their permissiveness have become so disastrous that they simply can’t keep singing the same old tune in public,’ said Tom Schlesinger, executive director at the Financial Markets Center.”

“Stern’s comments show how the credit freeze has forced officials to scrutinize long-held philosophies about the Fed’s role in markets, and even ask how their current policies may undercut those views.”

“‘As a risk manager, the Fed needs to take account of both directions, not just dealing with the aftermath,’ said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. ‘We have had two asset-prices bubbles in the last 10 years that have had big implications for the Fed’s desire for a more stable macroeconomy.’”

“For two decades, the ruling philosophy has been former Chairman Alan Greenspan’s. ‘I have always said if we could defuse a nascent asset bubble, I would be all for it,’ Greenspan, 82, said in an e- mailed response to a question yesterday. ‘The reason I am against is that in my experience it cannot be done. I know of no occasion when such actions have been successful.’”

“The Federal Reserve must exercise its supervisory authority over banks in order to gain access to confidential financial information that will enable it to make sound decisions, a top central bank official said.”

“Boston Fed President Eric Rosengren said in prepared remarks on Friday that public earnings statements often do not offer enough of a basis for prudent policy.”

“‘While U.S. banks report detailed information on their balance sheets and their income statements, these reports do not provide sufficient information to allow central banks to really discern how banks are responding to problems,’ Rosengren said in remarks for delivery to the Bank of Korea and Bank of International Settlements Seminar.”

“Rosengren said the turbulence was difficult to foresee because bank models focused solely on their exposure to riskier assets like subprime mortgages, ignoring the possible knock-on effects on other sectors.”

“‘What these stress tests crucially failed to capture was the effect of house price declines on the large holdings of highly rated securities that global banks held — the products of mortgage securitization activities, with their payment streams ultimately tied to the performance of subprime loans,’ he said.”

“The belief that housing prices would never fall on a national basis, which permeated even the Fed itself, was partly to blame for this underestimation of risk, Rosengren said.”