In '05, 82% In SF Bay Area Bought With ARMs

In a story I already posted on, this bit of info got past me. "With Bay Area home prices rising steeply over the past two years, most buyers have opted for adjustable-rate mortgages, often with the option of "interest-only" payments."

"In the first two months of 2005, 82 percent of people who bought homes in the nine Bay Area counties and Santa Cruz County got adjustable-rate mortgages."

The potential for payments to increase is pointed out. "A buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76."

"And you're not done," McBride said, "because this time next year it's likely to adjust again."

This Housing Bubble Has No Precedent

The people at Elliott Wave International are talking about real estate a lot these days. The chart on todays Features Article is helpful in putting the housing bubble in perspective.

"You can see that 50% swings in stock values are clearly not uncommon, whereas swings that large in home values have no precedent, especially in the post WWII period. No precedent, that is, until the past year or two. If anything the gains in home values are MORE striking." The chart is attributed to Prof. Robert Shiller of Yale.

Toll Bros.: Revenue, Income Down, Inventory Up

The big home builder Toll Brothers, Inc. has the quarterly financials out for the period ending January 31, 2005. Revenue was down 31% from the previous, strong quarter. Net income fell $70 million, or 38% from that same quarter.

With business slowing, the relentless increase in housing-on-hand continued. For the quarter inventory was up $267 million and increased more than $1.5 billion when compared to the period ending October 30, 2002. The stock was way up in trading on lighter than average volume.

Adjustable Rate Loans Hit Record

Borrowers continue to defy logic by seeking adjustable rate mortgages (ARMs) when rates are expected to rise. From the Washington Times, "Mortgage Bankers Association showed 36.6 percent of mortgages, including refinancings and new purchases, had adjustable rates as of last week, which is a record. The figure was more than 3 percentage points higher from the prior week and 9 percentage points above a year ago."

The article speculated that the move into ARMs was a response to higher prices. "With housing prices continuing to rise in many areas, buyers seeking to keep payments low are opting for ARMs."

"Economists fear some of these homeowners, who are already financially stretched, may get into trouble if interest rates rise and their payments go up when their fixed-rate period ends, typically in one to seven years."

Open Corruption Rampant

A new report put out by the Program on Corporate Governance at Harvard Law School attacks the "perverse incentives" at Fannie Mae. The Washington Post reports, "The study, distributed yesterday by the Program on Corporate Governance at Harvard Law School, also took Fannie Mae's past pay practices to task for rewarding "failed" executives."

It says volumes about ethics in corporations and the government that men could commit fraud in the billions and still receive golden parachutes. Where are the prosecutors?

Car Loans Reveal Complacent Borrowers

A reader posted this AP story that has implications for the housing bubble. It demonstrates how easily average borrowers plunge into financial situations that are not in their best interest. "A growing number of new car buyers are finding they owe more on their existing car loans than the vehicles are worth as trade-ins.The phenomenon, known as being "'upside down" on a loan, is the result of a confluence of changes."

And as the size of the problem is great, consider how much more devastating it will be when large numbers of home owners develope negative equity. "'More than a quarter of buyers are upside down when they come in, and the average is nearly $3,800,' said Bob Kurilko."

Freddie Mac: 2004 Profit Down, 2005 Down More

Reuters is covering the news that Freddie Mac, the second largest home mortgage firm in the US, has reported a much lower net income for 2004. "Freddie Mac..(which) is pushing to emerge from a scandal-marked era, on Thursday posted a more than 40 percent drop in 2004 net income as the value of contracts used to hedge against interest rate changes fell."

Yet again, accounting for derivatives is to blame. Sure. But MarketWatch slipped in another bit of bad news. "For 2005, Freddie said it expects to report net interest income "materially lower" than in 2004."

Remarkably Similar Housing Bubbles Worldwide

In an editorial at China Daily, the writer details conditions that could be said of many markets in the US and elsewhere. "The property market has witnessed four consecutive years of sizzling growth since 2001. Investment has risen sharply and, despite soaring prices, housing sales are also brisk."

And as is typical of the reports out of China, swift government action is dryly called for. "It is time for the government to intervene in the redhot housing market, otherwise it runs the risk of spiralling out of control. For many would-be urban home buyers, their dream of owning a home continues to disappear as house prices surge nationwide."

Manhattan Realtor: "Be Scared"

The Feature article at Elliott Wave International yesterday included a colorful email from a Manhattan realtor. Titled "Be Scared--I sell real estate in Manhattan", the guy seems to have had it. "The real estate situation is so bad that I thought to assist fellow Kossacks, I would tell you what's happening at the epicenter of the bubble."

"Most of the speculative hysteria is being driven by college educated people who were wiped out in the Nasdaq bubble and seem not to have learned. Greenspan has done his job so very well, he's snookered them again!"

Property Boom Turns Communities Upside Down

Mr. Mark Young writes to us from Lake Okeechobee of a life style being undone by the housing bubble. "There existed sleepy little patches of paradise where a young family could look forward to owning their home and raising a family with somewhat financial security."

"The fairy tale may well be over, as the realities of the real estate boom invades every corner of every state."

"Working families with the average median income in outlying areas of West Palm Beach are already finding that they cannot afford a $200,000 home. Laura Smith of Dyess Realty 'How long before it gets to us,' she asked? 'It's pretty much happening now. It's just going absolutely crazy.'"

Housing Bubble: Denial Turning To Fear

In another sign that expectations are changing every day, Chuck Jaffe at MarketWatch talks with several experts, who suddenly see a need to prepare.

Mr. Jaffe, "In real estate markets that tend to go through cycles of being super-heated and then cooling off, declines don't necessarily last for just a year or two. In those situations, past history shows that a housing-price decline can last a decade or more."

That could make planning for the future more difficult. "Some people have let the real estate market save for them, figuring their house would make enough money to put them over the top for retirement," says Lisette Smith "If selling at a certain price will make or break someone's retirement, then a decline in home prices means they may fall short of their goals."

Valerie Patterson of RealEstateJournal.com: "You haven't heard of people being underwater on their mortgage for a long time, but you are about to hear about it more and more, because it's going to be a real problem for a lot of homeowners."

With Paper Profits, Owners Consider Selling Out

To sell or not: the decision for some home owners must be a tough one now. As this Kiplinger.com piece examines, people are all over the map when it comes to cashing in on the boom.

"Many homeowners are feeling as if they've won the real estate lottery..There's just one problem: It's all on paper. You can't reap the benefit of all that wild appreciation, or protect it from a blowup in your local housing market, unless you somehow cash out." The report goes on to review the pros and cons, while leaning to the sell side.

Some suggest betting the farm for bigger profits. "There's no reason to have 50% equity in your house," says Scott Leonard, who is advising many of his clients to strip excess equity and invest it in stocks or more real estate. He defines 'excess' as more than 20% of the home's value."

Fence-sitters may want to consider the following. "'Every client who comes into my office asks about buying a condo on spec, every one' says Benjamin Tobias, a Florida financial planner. The indicators of a market top are easy to find, from "get-rich-quick in real estate" seminars filling church basements..to a soon-to-debut reality-TV series."

Lending Standards Blamed For Denver Defaults

Foreclosure filings have exploded in the Denver metro area and county officials are pretty clear as to who is to blame. "'Lenders started giving money to people, and it's gotten out of hand,' said Jeannie Reeser, public trustee of Adams County. 'I am talking to people who have jobs, but their income doesn't come anywhere close to matching their financing.'"

"Soaring foreclosure filings in Arapahoe County for the first three months of this year helped drive metro Denver's foreclosure rate 34 percent higher than the same period of last year and 30 percent higher than the fourth quarter of 2004. The rate represents 1.3 percent of 125,325 single-family, owner-occupied houses in the county."

One mortgage lender says borrowers should be wiser. "Everybody has to have what they want right now, no waiting, no saving up," he said. "Credit is so loose today that I can buy the groceries I need on a credit card, eat the food tonight, discard the food by tomorrow at noon and finance my debt on a 30-year, amortized loan. How stupid is that? But people do it all the time - and then they wonder why they're in foreclosure." Thanks to the reader who posted the link!

Home Price Boom Fuels Deficit

An interesting aspect of the housing bubble was laid out in this New Zealand Herald editorial. The writer makes the point that, because savings are non-existant in the US, the cash used to finance the boom must come from abroad.

"Undeniably, much of the deterioration in the current account position reflects a consumer and, especially, a housing boom. Much of the money that flows in to fund the deficit comes through the banks and is lent to home buyers and to people drawing down the equity in their homes to fund consumer spending."

And when an owner "cashes out" equity, there is really just more debt that must be financed offshore, putting further pressure on the US dollar.

"Ben Bernanke, a Federal Reserve governor sometimes mentioned as a possible successor to Alan Greenspan, (sees) a "global savings glut" in search of places to invest. What worries Bernanke about this..is what the inflow of capital is used for.It is showing up in higher house prices and more construction."

White Collar Recruiting Hurt By Housing Costs

Another report on how the housing bubble is a drag on business. "Dr. Stephen Waters, medical director at Atlantic General Hospital (said) that housing costs were beginning to negatively impact recruiting and retention at the local hospital.'With every recruit, housing is part of the package, and it's always an issue.'"

The concern is understandable as this report shows, "The study found that in the past year the median home price in Worcester County increased 49 percent."

China Worries About Housing, Cracks Down

Officials in China are candid about the property boom and its effects on the nations economy. Bloomberg, "China's rising property prices pose a threat to the stability of Asia's second-largest economy. Excessive growth in housing prices has directly undermined the ability of city residents to improve their living standards, affected financial and social stability."

Actions will be taken to follow up on increases in intererst rates and required downpayments. "Local officials who fail to take measures to rein in growth will be held to account."

"'The State Council's tone is very harsh,' said Fan Weiwei, a Beijing-based economist.,'People's expectations of future property prices will definitely be changed. The likelihood of further price surges is becoming minimal.'"

Miami: Sales Of Existing Homes Down 10%

Miami-Dade and Broward Counties,Florida, bucked the trend in February. While the sales of existing homes rose 8% statewide, the buying there dropped. "In February, just 824 existing homes sold in Broward, a decline of 16 percent from a year ago. And in Miami, 767 homes sold, a drop of 10 percent."

This occurred even as prices continued higher, a trend readers of this blog will recognize. "In Miami-Dade, the median sales price of an existing home topped $300,000 for the first time, climbing 28 percent over last year to $309,800. In Broward, costs are even steeper; the $319,400 median price is up 32 percent from $242,100."

The story is filled out by RE professionals trying to rationalize the fall. I apologize for the secondary, crude link.

US Home Builder Has "Underperforming" Markets

The big home builders are the front cheering squad for the housing bubble. But an accounting move forced one corporation to fess up. Beazer Homes USA Inc. will write off an undisclosed portion of $130 million related to an aquisition.

The announcement put the firm in the unusual position of admitting some market weakness. AP reports, "While the company remains committed to the Indiana, Ohio, Kentucky and Charlotte, N.C., markets, they presently suffer from relatively weak local economics and severe price competition." the press release said.

The companys stock took a dive; down over 4% on the session and giving up another 1%+ after hours. The sector was down as a whole today.

Low Lending Standards Now Haunt GM

The days of lax lending standards are coming back to haunt GMAC, the lending arm of General Motors. "Bad loans at the retail mortgage operations of General Motors more than doubled last year as it increased lending to poorer customers."

FT.com reports, "Non-performing loans in the mortgage business of GMAC, the finance arm that is the most profitable part of the carmaker, increased from $1.3bn to $3.4bn in 2004. The proportion of the loan portfolio that is more than 60 days overdue rose to 8.8 per cent from 5.2 per cent the previous year, according to regulatory filings submitted this month. The company has not previously disclosed non-performing loans."

Why GM is even planning to sell GMAC because its credit is so bad. So while most of the media keeps talking about SUVs, this blog will stick to the real story.

Meet The New "Landlord Class"

One suspects the reporter for this Boston.com piece had to conceal her amusement. The writer examines the move by under-25 "investors" into the landlord biz. "Between 1997 and 2004, homeowners under the age of 25 jumped 11 percent; and now these youths make up one-quarter of all property owners in the Northeast."

"'I am young and property values are soaring,'said 19-year-old Rayford Kelley, who bought a $560,000 fixer-upper in Roxbury with no money down. He had trouble leasing several units after he forced out tenants who refused to pay rent. Kelley agreed to lease one apartment to friends..He's already worried about the number of visitors coming through the house, into which he has put more than $10,000 in repairs, but doesn't want to say anything to his friends."

"25 year old Paul Phadungchai said he probably overspent with $50,000 in renovations that include a whirlpool tub and granite kitchen countertops.'For a kid like me who had college taken care of and was able to save money a lot of the time, not being able to save money ever is really a life change. It's all gone and now all I'm stuck with is a huge mortgage. You have to really think about that.'But it won't stop him from buying another home by year-end."

Mega Corporations Over-Reliant On Hedging

Barry Ritholtz writes for the subscription site RealMoney.com, but todays article is out on Reuters. Mr. Ritholtz is advising his clients to sell on the up bounces and he has a pertinent observation on the hedging.

"I am becoming increasingly concerned about the macro impact of derivatives. From Fannie Mae to AIG to GE to Bershire Hathaway, all too many U.S. companies have turned into heavily camouflaged, leveraged hedge funds. Skipping over the esoteric details, I suspect this too, will end badly."

Media Starts To Get It: Housing Should Be Affordable

The housing bubble is bad for business, for families, for communities, tax districts, urban planners, the environment, etc. And the media is starting to see through the chamber-of-commerce spin. Case in point; this study put out on the Portsmouth Herald site.

"A study confirmed what most business people have felt for some time: The lack of affordable housing is hurting the ability of business to thrive and expand. New Hampshire loses between 1,300 and 2,800 jobs, and between $21 million and $33 million in state and local taxes, annually because of the problem."

"Since 2001, the increase in the cost of housing has outstripped the increase in family incomes by 10 times."

Demos: Mortgage Fraud A Threat

If you haven't seen the Demos web site, this report is a good introduction. Titled "Widespread Mortagage Fraud Threatens America's Homeowners", the non-partisan group does a stellar job in pointing out misdealings in public policy.

"As home prices have continued to increase above inflation, even nearing 20 percent per year in some cities, American homeowners are vulnerable as never before to financial ruin if home prices fall to their natural market value."

One aspect of the report is covered in this blog often. "Appraisal fraud thrives amid a failure of stringent government oversight...Our study shows that, even as evidence of appraisal misconduct has mounted, neither the Federal government nor most states have taken decisive steps to fix an obviously broken system." Now why is that?

The Housing Bubble Got Curbed

We had some new visitors to this blog today, thanks to the good people at Curbed. The link is greatly appreciated. And I love their model of having a blog sponsor, in their case the New York Times. Well done guys!

The THB would love to hear from potential advertisers; are ya' listening Foreclosure.com?

Pull Back Noted In Las Vegas

The major players in the Las Vegas home market are reacting to the recent crisis with caution. "Home builders have cut back on new home permits, which dropped 8.7 percent in February to 2,492 on top of an 81 percent decline in January."

The LV Review-Journal reported February median prices down almost 4% from January, though still far higher than February 2004. "The number of available homes on the Multiple Listing Service has grown to 10,750 in February, about four times the 2,662 listings in the same month a year ago."

It is interesting that sales continue to increase, reinforcing this bloggers opinion that the man on the street will be the last to get the message. "New home closings increased in February to 2,382, a 7.7 percent increase from a year ago. Existing home closings totaled 4,162, up 2.2 percent from a year ago and far ahead of sales in January." Larry Murphy said, "If demand remains the same, prices go down."

General Motors Downgraded

The train wreck that is General Motors got worse as UBS downgraded the company to "reduce" and set a target of $20 per share. Strangely, much of the discussion regarding GMs' future focuses on the auto business, with little reporting on the firms core operations; finance and mortgages.

"We believe things will get worse before they get better," UBS analyst Rob Hinchliffe said. The firms stock was off over 3%.

"GMAC Mortgage Corporation, is among the nation's top ten residential mortgage servicers and originators. The company originates first and second lien residential mortgage loans under the brands, gmacmortgage.com and ditech.com. As of December 2004, GMAC Mortgage originated $89 billion in residential mortgages, representing over 588,000 transactions. The company's servicing portfolio of more than $214 billion represents nearly 2 million customers throughout the nation."

Countrywide Exec Takes The Money And Runs

By now the newswires have changed the headlines from "CFO steps down" to "Countrywide names new CFO". I couldn't resist checking insider transactions for Thomas "Keith" McLaughlin, who has been Countrywides' CFO since 2001.

Lo and behold Mr. McLaughlin did sell over 200,000 shares on March 4th. You can't blame him really, because everybody is doing it. Apparently insiders have sold 2.7 million shares in the last six months, 12% of their stake in the firm. And when you check how many shares were purchased; none.

Some Sydney, Australia Home Prices Down 40%

It is often repeated that home prices can't fall. That assumption will be placed under more doubt by news from down under. SMH.com reports, "A report reveals the price of hundreds of properties across Sydney on sale since before September have dropped by as much as 40 per cent."

"Auction clearance remains low..sellers are being forced to adjust reserve prices. These are the ingredients of a buyer's market." And check out how long some of the homes have been on the market. "A three-bedroom terrace first listed last May for $980,000. Now it's a bargain buy for $580,000. A luxury apartment first listed in March 2003 for $2.79 million is for sale for $1.95 million - a fall of $840,000."

The owners are getting disgruntled. "'We have come down a long way and want to sell. We'd never have put it on the market if we had known it would be like this'. Ms Allen said the family hadn't considered an auction as it would be embarrassing, with the neighbours coming through and no one bidding." Alternate link.

Moody's: Fannie More Likely To Need Bail-Out

Translating actions taken by credit rating services can be as tough as those by the Fed. So lets try to make sense of todays downgrade of Fannie Mae by Moody's Investors Service. "Moody's Bank Financial Strength Rating measures the likelihood that a financial institution will require financial assistance from third parties, such as the government or shareholders."

That rating was downgraded after a review started last year. The firm doesn't see FNMs situation clearing up this year. "Moody's believes that Fannie Mae is actively working towards resolving all issues related to the accounting investigation, but in the rating agency's opinion complete remediation will take time, and likely not occur until 2006."

UPDATE: FNMs' regulator OFHEO, "will not be releasing the capital classification at this time as Fannie Mae continues to provide OFHEO with information related to the company's accounting and controls that may affect its capital classification."Moody's Reg. Req.

Adjustable Rate Blues

As interest rates have been ticking up, the analysts have started to calculate what that will mean to those with adjustable rate mortgages. From BankRate.com, "A one-year ARM for $200,000 that adjusts by 2 percentage points sees the monthly payment increase by approximately $230."

"How about those pervasively marketed Option ARMs that permit borrowers to choose which monthly payment they wish to make? A similar increase in rates would drive the interest-only payment on a $200,000 loan up by $333. The danger, of course, is that with such a loan the borrower could instead make the more-affordable minimum payments that actually push the balance higher."

Anyone following the market knows that in the really hot areas, $200,000 doesn't buy very much. We should expect to see headlines like, "Honey, I Shrank Our Standard Of Living."

New Home Inventory: A Chart Worth Looking At

Regular readers of this blog know I point out the huge increases in home builder inventory. This information is available on company balance sheets. So it is a little frustrating to read over and over how there just aren't enough homes on the market.

The folks over at PrudentBear put up a chart, based on Census Bureau data, that should put the issue to rest. I understand that supply is slim in San Francisco and other places, but the housing boom is all over the country, not just in land locked coastal cities.

The PB piece addresses several interesting topics, one is the big run-up in credit issued. "Bank Credit has expanded a stunning $293.7 billion during the first 11 weeks of the year (20.6% annualized), in what is demonstrating all the characteristics of a classic Credit blow-off." So much for Fed tightening.

Every Week Is Crazier Than The Last

Maybe its just me, but I swear the stories about the housing mania are getting nuttier every day. Check out the LA Times story for several examples. One guy buys a mobile home park sight unseen; another sells his stock and buys a piece of desert based on a photo.

But the last example is the most telling. "Kim Kaul, a 36-year-old San Diego homemaker, was an unlikely player..with four young children and a rented apartment. Kaul saw a posting on the Internet..He sold the contract to Kaul for $8,500, money she took out of the family's meager savings.. the Vegas market caught a chill."

"She found a tenant, who pays $1,250 a month. But her mortgage was $3,000. When her husband lost his job, the situation became dire. The couple paid the January mortgage with borrowed money, then gave up."

She still has the fever! "I'm sure the market's going to pick up, but I can't hold out that long. This is kind of a bummer."

Keeping An Eye On Mortgage REITs

Mortgage REITs have had a good run, but the sector will be scrutinized in the changing interest rate environment. One that is reputedly "well-managed" is Annaly Mortgage Mangement, Inc. (NLY). If you check this chart you can see that the companys' stock just broke through its 200 day moving average.

Update: Thanks to Ms. Penelope for pointing out that NLY moved back above the 200 DMA last week. A better chart is available in the comments to this post.

Camping Tips For Home Buyers

Thank goodness for links or you would think I was making this stuff up. As a follow-up on this post, Curbed.com has tips for the camper/home buyer and some photos of the fine neighborhood.

To summarize: "Plan the timing of your attack: want a choice of two-bedrooms? show up early. Want a one-bedroom? Show up a little later. Have drop shipments and scheduled shifts..you can both alternate sleeping. I can't stress enough how important it is to figure out where's the closest Starbucks with a bathroom."

"Consider renting a car..whenever one of us got too cold, we went to sit/nap in the car."

Short Memory In Baltimore

The Baltimore Sun is running a story about the boom in home prices and rehabs. The writer paused to mention the "slump" that followed the last bubble.

"The city has a love-hate relationship with investors, though. Speculation during the real estate boom of the 1980s - particularly from out-of-town buyers who thought anything cheap was a deal - helped push the city into a real estate slump from which it only recently recovered."

"Low-income residents making their first foray out of renting were victimized. So were other investors, people hoping to be landlords. But Baltimore officials say it's different now."

Home Owners Trapped By Prices, Taxes

For many home owners in Florida the high cost of buying and the prospect of much higher taxes is preventing them from cashing in. The Palm Beach Post reports, "Don Todorich is one of many Palm Beach County residents who find themselves suddenly wealthy on paper yet trapped in their homes."I'd have to spend $500,000 to $700,000 (for a new home)," he said, "and my taxes would go to at least $12,000."

"It's not an obstacle for people moving out of the area," said agent Lauren Hollander. "They just can't afford to move down the street."

"This bubble has got to burst sometime," Mark Trudel said. "I just hope it's after I leave."

"It's Going To Be Another Pahrump"

White Hills, Arizona may seem an unlikely candidate for the housing bubble. But the Washington Post found some speculation going on in the desert town outside Las Vegas.

"It's mainly a lot of hills and flats and Joshua trees, punctuated by a couple hundred widely spaced homes, most of them modulars or trailers..a single convenience store, operating off someone's back porch; and no post office..By the time the bypass is completed, Rhodes plans to be..building more than 20,000 dwellings on the 2,000 acres it now owns here, along with an "urban center". If the homes were already in place today, they would probably be priced in the mid $100,000s."

Local innkeeper John McNeely likes the idea, "This area is so depressed, it will help the tax base." But the expected boom does have a downside. "I used to go out in the yard in my underwear," said Tom Lusk, longtime resident,"I can't anymore. I got neighbors."

For her part Pat Kwast, a cook at Rosie's is positively Zen, "Sweetheart, it's progress," she said with a sigh, taking a break at the counter. "Things change -- that's the energy of everything. Everybody knows you can't stop progress."

Florida Sails On

As the Orlando Sentinel reports, people are pretty excited in Florida. "The market is moving so fast, they [appraisers] can't keep up with it," said Greg Pingston.

"The situation has led to behavior not frequently seen in the housing market, "People are buying new homes before they sell their old house,..They're confident their old house will sell."

Rising interest rates aren't as important as cash flow. "Many buyers are more concerned about finding something to buy, not rates," said Dan Dunn. Grant Simon "sees interest rates as becoming less of a problem, 'It's not about rates, it's about monthly payment.'"

"We've started looking at real estate as the gold standard."said Rod Rawlings, real estate broker.

After The Party, Reality Sets In

Housing prices have increased with great celebration in the media. Curiously, when the costs go up due to interest rates, folks see an ugly side to the trend. Sue McAllister writes at MercuryNews.com "Mortgage rates are creeping up slowly but relentlessly, pricing more residents out of the Bay Area's housing market." And then comes to the conclusion, "That means some residents can't buy houses because they won't be able to afford the higher monthly payments."

The hangover has just started for some recent buyers as their adjustable rate mortgage comes due. "Last spring, a buyer with a $450,000 loan at 3.47 percent had a monthly payment of $2,013.17. This year, with the increase capped at a typical two percentage points, the rate would be 5.47 percent, and the monthly payment would be $2,531.76." Ouch!

And one mortgage broker thinks owners may be looking for the exit. "Doug Jones says he thinks a big pool of homes could hit the market this year, especially as many homeowners with lots of equity in their homes think to themselves,'If I don't get this house sold, rates may go up and I may not have the qualified buyers.'" Coffee anyone?

RBA: Risk If House Prices Rise Or Fall

The Herald Sun has a story up about the Australian central banks' concerns. In the March Financial Stability Review the Reserve Bank of Australia (RBA) sees risks if houses go up, or down!

"The bank fears the housing market might be suffering only a temporary slowdown, and could rebound, boosting the chances of a house price crash later. The RBA also said it was possible the slowdown could become so severe that households might stop spending. 'Both these risks seem to be relatively low but they cannot be ruled out,'the RBA's half-yearly statement said."

But some sanity emerged that we could use at our central bank. "The RBA also issued a warning to banks and financial institutions not to loosen their lending practices simply to preserve market share." Hear that Greenspan?

British Lending Standards Weakened

It has been said that the lending organizations in the US will give cash to anyone with a pulse. This report from TimesOnline reveals that a similar lowering of standards is occurring in the UK.

"Five years ago Halifax, the UK’s biggest mortgage lender, would grant an interest-only loan only after inspecting the policy documents of an endowment or other investment vehicle. Borrowers who were relying on rising house prices or an inheritance to pay off the loan would not have passed the application process. But Halifax changed its rules in 2000. Now the bank, in line with many other lenders, does not check any paperwork, but regularly reminds borrowers that it is their responsibility to set aside enough cash to repay their loan."

The article puts the source of the problem on this familiar trend. "Lenders say the increasingly competitive mortgage market has made it difficult to keep track of borrowers’ repayment vehicles as more homeowners move their loans between rival lenders to take advantage of the best deals." So where are the regulators?

Looking For A Condo? Grab A Sleeping Bag

Curbed.com has posted a readers letter that gives some insight into the mind of todays RE buyer. Typos theirs. "i just spent more than 24 hours camping out on the street to buy a condo...that's what it takes this days to buy a condo pre-construction. i showed up at 9:30am on saturday morning for a sunday 11:00am..offering and was the THIRD person on the line."

First an inspection of the area was in order. "i had gone to walk around the neighborhood to reassure myself it was ok to buy so lost a spot on the line." The nights events would have caused some people to reconsider the location. "crazy stuff happend through thte night too. we got eggs thrown at us from peole at 147 front street (where the sales office is located)."

The writer had to put up with observers who don't understand real estate. "hundreds of people asked 'what are you doing in sleeping bags on the sidelwalk in the middle of the day?' and then laughed at us."

The letter ended without details of a closing, but I suspect all is well. "gotta crash, feeling like sh**."

Washington Mutual Breaks Through Support

The big banking and mortgage conglomerate Washington Mutual (WM) broke down past its 50 and 200 day moving average. Net income is way off, executives are leaving and there are rumors of "hedging activities" that seem so common these days. This blog will keep an eye on WM's situation.

And This Is During The Good Times

A story at Newsday.com set out to establish that home owners in booming markets are paying their mortgages on time. But the national comparisons don't look so good.

"In Texas, 6.8 percent of homeowners were behind on their loan payments. In Mississippi, 8.8 percent of owners were delinquent. In Louisiana, 7.2 percent paid late. Georgia 6.3%, Tennessee 6.4% and West Virginia 6.6%."

And how about the rapidly growing subprime market? 11 percent of subprime borrowers are behind on payments. "Subprime borrowers were 7 1/2 times more likely to be 90 days delinquent, and 8 times more likely to be in foreclosure proceedings. (In) West Virginia..more than 21 percent of (subprime) homeowners were behind." But the worst group is FHA. "Nearly 13.2 percent of all FHA borrowers were delinquent at the end of 2004."

The theme is that if a region is under the national average, 4.6%, things are fine. But this writer senses the public is too comfortable with debt and delinquency. Here are the 'good' numbers. "Delinquency rates in high-cost New York, New Jersey and Florida were..around 4%, California, 2.04%."

This Time Its Different

"'South Florida, he said, is working off of a totally new economic model than any of us have ever experienced in the past'. Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors, predicted."

"'I just don't think we have what it takes to prick the bubble', said Diane C. Swonk, chief economist at Mesirow Financial. 'I don't think prices are going to fall, and I don't think they're even going to be flat'."

"It just seems like everyone is doing it," Laurie Romano, a 26-year-old self-described real estate investor, said with a giggle."

"Perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the New Economy investors' blase attitude toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising."

"Holly Peterson, who is writing a novel about the idiosyncrasies of New York's rich, said that..she frequently hears complaints about high home prices, followed by claims of quick profits. 'They always hit you with their last jab: 'Of course my money's doubled three times over since I got married,' " she said.

"Five years ago, she said, friends at parties were crowing about "making millions of dollars on paper with $25,000 and $50,000 investments." But "most of those people," she added, "got wiped out."New York Times

GM : Dead Man Walking?

One of the largest mortgage corporations in the US may already be bankrupt, only held together with accounting entries. This Forbes.com article brought out some details regarding GM's pension obligations that hint its lending days may be over soon.

"The total future cost to cover its workers and retirees is $77 billion..But it has only $20 billion set aside for this purpose..a funding shortfall of $57 billion. Roughly half of this shortfall finds its way onto the balance sheet as a liability.. GM is allowed to amortize actuarial losses that make up the other half of the unfunded portion. If the whole $57 billion were booked as a liability, GM's shareholder equity would vanish."

"Sean Egan, considers GM junk quality already. "It is highly likely that the company is going to be faced with a major restructuring in the next two years," he says. "Any levers the company has to pull to improve operations are not available, and management is delusional about what the levels of the problems are."

GAO: Appraisal Oversight Lacking

National Mortgage News made a GAO report its "Editors Choice" this week. Titled "HUD's Risk-Based Oversight of Appraisers Could Be Enhanced", the brief addresses some shortcomings of appraiser regulation.

"HUD's process for verifying that appraisers meet all relevant criteria when applying for placement on its roster lacks effective quality control.. it does not require the HOCs (home ownership center) to target for review appraisers who have been recently sanctioned. Because of this, we could not verify that the targeted appraisers were actually those that met HUD's criteria..HUD staff did not routinely visit properties to verify the work of contractors responsible for conducting field reviews."

Not that HUD isn't changing how it scrutinizes the appraisers. "According to HUD, the number of removal actions taken by the department has increased from 25 in 1998 to 132 in 2003, while the number of field reviews decreased from over 83,000 to 1,420." The report has a number of recommendations to "enhance oversight".

NY Commercial Property: Rents Down, Prices Up

The New York Post reports that the state Financial Control Board sees speculation in the property market. "Investors are so eager to get their hands on New York City commercial real estate that they're driving up prices beyond what the rent rolls would justify."

Those rents are down 20% in the last 4 years. "Average asking rents in office buildings were $47 a square foot last year, compared to $59 in 2001..there could well be some element of speculative buying"

Growth Difficult For School Districts, Taxpayers

As reported by the local CBS affiliate, one school district in New York has had a hard time estimating the growth in housing. "In the 90's, homes were built at a rate of 80 to 100 a year. The Gananda school district assumed the growth would continue. It planned for 500 extra students. It built a brand new high school."

"But housing construction slowed dramatically in 2001...only a dozen homes are going up this year. The students the district planned on showing up never did. In fact, some families moved away. The district's enrollment is just uner 1,200, where it was four years ago."

The taxpayers are footing the bill. "Homeowner Beth Platt is frustrated. "They've increased the size of the district in anticipation of students that aren't there...'It seems every year, taxes go up,' said homeowner Ray Salimbene."

The superintendent is open to ideas. "It's a reality check, and it's sort of like saying we just can't continue to do this. We've got to step back for a minute, and collect ourselves... reinvent some things."

Urgency In The Mortgage Business

Fear and greed are the motivators in todays housing market. And from this report at Realty Times it is hard to know which emotion is ruling the day. "Don't wait ten minutes," to lock in a rate, one mortgage broker told a customer waffling on a refinance this week."

In the column titled "Mortgage Market Seeping Blood", the writer took the undecided to task, suggesting that "heel-dragging home buyers, along with procrastinating home owners considering refinancing, could really begin to see red."

This Bubble Proves The Fed Must Be Eliminated

USATODAY.com reports this morning that new home sales were way up in February. As I discussed yesterday it is the nature of financial bubbles to balloon upwards just as the prices could not seem to go higher. Thats what makes them bubbles.

The troubling thing is that the longer this goes on the more painful the retraction will be. Please see the Japanese situation posted about yesterday. This mania could be so big it causes a major financial sea change. Perhaps the US dollar will finally be done in.

And if I am worried about the bust I am angry at the government and the central bank. As Jim Cramer said yesterday, why doesn't Greenspan just require banks to have a full 20% downpayment for home loans? If there is much economic pain in store for the markets, let us not forget who created this bubble. Maybe the sea change will include the elimination of the Federal Reserve. We can hope.

Some California Homes Up 80% In One Year

The California Association of Realtors has a release out today on sales and prices for February. I can save you the trip by telling you both were up. But the real story may be how crazy that market has become.

"Statewide, the 10 cities and communities with the greatest median home price increases in February 2005 compared with the same period a year ago were: Adelanto, 81.8 percent; Rohnert Park, 77 percent; Tehachapi, 70.1 percent; West Sacramento, 69.7 percent; Hesperia, 67.4 percent; Twentynine Palms, 64.2 percent; Union City, 63.8 percent; Menlo Park, 60 percent; Norco, 55.7 percent; San Bernardino, 54.5 percent." Holy housing bubbles Batman!

Not all the numbers are bullish, however. The amount of time a house takes to sell more than doubled from 1.8 months to 3.9 months. And actually such extremes are to be expected in a financial mania with parabolic blow-outs occurring just when you didn't think the market could go any higher.

17 Years Later Prices In Japan Rise 1%

An example of how devastating real estate bubbles can be is found in this Reuters piece. It is reported that certain areas have seen price increases after a long time down. "Residential prices in central Tokyo rose 0.9 per cent in 2004, the first rise in 17 years." I am sure they will get out the party hats, if anyone can remember where they put them two decades ago.

The more interesting aspect of the story is the review of how long and hard the fall really was. "When the bubble burst property prices plummeted more than 80 per cent, undermining company balance sheets, wiping out many families' wealth and helping plunge the economy into 13 years of stagnation."

In the end, the writer had to admit that the hope for a rebound isn't widespread. "Despite strong growth in the cities, the survey said prices nationwide dropped 4.6 per cent, the 14th consecutive year of decline...on average, residential property prices in Tokyo were 41 per cent of their peak in 1991, while commercial property prices were 20 per cent of their peak value." Thanks to the reader who submitted the link!

Fire Sale At General Motors

The situation at General Motors (GM) must be bad. Reports out this morning from MarketWatch have the firm selling a chunk of its lending arm, GMAC. The stunner is the price.

"The money, which the Wall Street Journal says could come to as much as $1 billion, would help the world's biggest automaker grapple with its poor North American car sales." A billion dollars? As this blog has reported previously, GM needs many times that amount in the coming months. And this is the profit center we are talking about, one can imagine how little the manufacturing division is worth.

Refinancing Down 60%, Apps Down 39%

The Mortgage Bankers Association (MBA) put out their weekly numbers today with a bit of a surprise in the refinance column. "The increase in mortgage rates has reduced application activity across the board, particularly for refinances. Refinance applications are down more than 60 percent relative to this time last year," said Michael Fratantoni"


"The Weekly Mortgage Applications Survey for the week ending March 18...decreased 9.2 percent compared with last week but was down 39.3 percent compared with the same week one year earlier."

Insiders Selling At Countrywide Financial

Corporate executives have been busy selling their positions in many housing sectors recently. Today the highlight is on Countrywide Financial which has seen top insiders liquidate almost 16% of their holdings in the firm.

Angelo Mozilo, chairman and CEO has sold 210,000 shares..CFO Thomas McLaughlin sold 108,098 shares..Anne McCallion, senior director of finance sold 96,049 shares.

If you check here you will see the top corporate officers have sold almost 3 million shares in the past 6 months and have bought none. CFC is down 13% in the same period.

Rent: The Price To Earnings Ratio Of Housing

It is fair to say that the rent a home can draw is the equivalent of a price-to-earnings ratio of a stock. If that is the case, why would anyone want to be a landlord?

The Wall Street Journal reports "Since 1999 and 2000, the relationship between rents and home prices has "broken down..In San Francisco, the monthly cost of renting an apartment is just 45% of the monthly cost of buying a home, down from 67% in 2001..Washington, D.C., rental costs are now just 59% of the cost of owning, down from 82% in 2001..in Miami, rental costs are 63% of the cost of homeownership, down from 89% in 2001."

Baby Steps From The Fed

Too little too late. The Federal Reserve increased the Fed funds rate as expected. The financial stocks continued their downdraft. Fannie Mae was off another 1.6%; Countrywide Financial dropped 1.14% and General Motors lost .5%, closing down for the fifth straight session.

Real estate markets hardly blinked with the home builders rising slightly, fat and sassy with the fourth quarter returns from KB Homes and Lennar. To them, happiness is the profit in the rear-view mirror.

The Fed is tinkling in the wind. The genie can't be put back in the bottle. What if anything was accomplished today? Greenspan and company created these bubbles and high profile, meaningless "rate hikes" do nothing to absolve them of the pain to come.

NY Post : "Wrong-Way Greenspan"

The New York Post took a swipe at the lame duck chairman of the Federal Reserve today. "WRONG-WAY GREENSPAN STRIKES AGAIN" was the headline, marking the ignominious final months of the central bank chief.

"These rate hikes are really a joke anyway. Even as he's pretending to tighten credit through these rate increases, the Fed has actually been allowing the nation's money supply to grow rapidly at more than 5 percent over the last year. If all that money is available, it's going to be put to use — creating the next bubble."

The article is fun even if the damage caused by Mr. G and pals is not. The writer has hopes that events will give the chairman the send-off he deserves. "The winner, I think, will be the housing bubble. If all these rate hikes finally take hold over a short period of time they will deflate home prices just in time for Greenspan's Farewell Apology."

Squeeze On General Motors Continues

General Electric used a clause in its contract with General Motors to exit a $2 billion financing agreement. The arrangement paid GMs' suppliers early, in effect providing a line of credit for the automaker. But a downgrade in GM credit gave GE an out.

"Its contract allowed it to pull out if the carmaker's credit rating fell to BBB minus, the lowest notch of investment grade, with a negative outlook - as it was last week by Standard & Poor's'" reported FT.com.

The move will put pressure on the mortgage division of GM as it will have to pick up the slack. "GM Acceptance Corp, the finance arm that will take over the scheme."

The mortgage market is already feeling the effects. "The carmaker’s benchmark bonds were sharply lower in early trading in New York. Yields jumped more than half a percentage point as investors reacted to GE Capital’s decision."

Weightless In Stockton, CA

At the top of a rollercoaster there is a momentary feeling of weightlessness before gravity regains its hold. This report from RisMedia.com about the Californian housing market seems to depict such a sensation.

"Brokers and agents in San Joaquin County, CA., are starting to believe that those heady market days are over...'We're now starting to see decreases in listing prices so to me that's an indication of this thing flattening out', said Michael Collins, of Century 21 in Stockton."

"It feels like it's slowing down..the market has reached a peak.. Appraisals are starting to come up short..Over the past several years..prices were climbing so fast that (appraisers) had trouble setting a home's valuation based on recent comparable sales in the area..some of the appraisals conclude that the sales prices were higher than the market value, in effect knocking out a loan or at least subjecting the sales deal to renegotiation. "We've seen that on several occasions."

One agent thinks things had gotten out of hand. "It was getting ridiculous when you could sell a house for $250,000 or $260,000 that was almost totally a knock-down."

Fannie Mae Quietly Continues Slimming Down

Continuing a multi-month effort, Fannie Mae (FNM) is rapidly unwinding its position in the mortgage market. AP via Reuters; "FNM reported Monday that its gross portfolio..fell to some $875 billion at the end of February from $891 billion in January, for an annualized rate of around 20 percent."

Freddie Mac has been acting on a similar strategy after both firms were chastised by Washington and the Fed for having unstable balance sheets. Taken with the announcement last week by the Home Loan Bank of New York and General Motors' credit woes, the trend of the big players is emerging; lighten up on housing loans.

European Central Bank Eyes Bubble

The Federal Reserve isn't the only major central bank considering higher interest rates. The European Central Bank (ECB) is considering a hike in rates as a measure to bring home prices down.

Forexnews.com reports, "The ECB is also mulling withdrawing its own monetary policy stimulus. Interest rates are at 40-year lows since the last rate cut in June 2003. The ECB has long expressed concerns with mounting liquidity but its intentions to tackle the issue are just recent, especially that the European housing bubble has also began to draw the ECB’s attention."

Home Builder Offers Discount

Fort Worth based DR Horton Inc. has a promotion on to move its inventory. "Purchase a new D.R. Horton home in March and we'll throw in up to $25,000 in cash incentives and extras...Offer good on existing D.R. Horton inventory only. Home sale must close by March 31, 2005, using DHI Mortgage and DHI Title."

The ad even suggested ways to use the $25k, making it sound like found money. "Use it to cut closing costs. Or lower your mortgage rate. Put in a sprinkler system. Add window coverings. You decide." It appears from the web site that this offer applies only to Houston, TX.

Brit Firm: Home Price Fall Slows Consumer

In what could be a worry for countries with rising home prices, Britain may find the bust will curtail consumers and businesses. "Shay Bannon, at BDO Stoy Hayward commented: “The UK consumer boom is over. Falling house prices are lowering consumer confidence. As a result, sectors dependent on domestic consumer markets will find themselves in a difficult position as..consumers’ disposable income (comes) down.”

Even Pakistan Has A Bubble

As you can see from his picture, Farrukh Saleem is a serious guy. And he is worried about the price of real estate in his country along with a stock bubble. "A couple of years ago, a 500-sq-yard residential plot in Islamabad was priced at an average of Rs4 million. It now fetches up to five times that amount. In March 2003, the KSE-100 Index stood at 2,400 points. It now stands at four times that."

Low ownership rates make the situation especially painful for the average Pakistani. "When the price of land goes up only landowners become rich (no more than two percent of our population actually owns shares or land). A nation only becomes rich when the "price of labor" (salaries) goes up, and that unfortunately isn't happening in Pakistan."

China Cuts Off Housing Bubble Commie Style

In addressing a percieved housing bubble on mainland China, the authorities have responded in typical authoritarian means. "China ended the favorable interest rates for private housing loans Thursday..At the same time, the minimum down payment in cities with rapid housing price increases was raised from 20 to 30 percent."

It seems "citizens" were using the banks to speculate in the rising house market, creating too much risk in bank portfolios. "By the end of February 2005, outstanding commercial housing loans exceeded 1.65 trillion yuan ( US$200 billion), accounting for 23 percent of the commercial banks' medium and long-term loans."

Even if the translation is elementary, the Chinese seem to be more straight forward than US central bankers. "If the housing bubble burst and the borrower could not make the repayment, the commercial banks will be faced with a large amount of bad debts." English.Eastday.com

GM : Layoffs May Indicate Turmoil Ahead

The past week saw big moves in mortgage and home builder stocks. This blog blamed the nervousness on the General Motors situation. A report from CBS MarketWatch tells us there may be more to come regarding the mortgage giant.

The headline; "GM to cut white-collar jobs, up to 28% of nonunion positions could be eliminated." Add in a Federal Reserve meeting that is expected to announce a rate hike and it could be an interesting week for housing stocks.

Biltmore Hotel And A Tale Of Two Bubbles

There was a period in the 1980's when it was reported that the land under the Japanese emperors palace was worth more than all of California. The spectacular rise and fall of that islands real estate market was revisited in a Mercury News report.

The Millennium Biltmore is up for sale and its financial history can be useful in todays realty boom."It was sold for $219 million to a Japanese buyer during the 1980s real estate boom and for a reported $60 million during the 1990s real estate recession."

"Buyers today are paying record prices, so it is a great time to be selling," said Alan Reay. He predicted the Biltmore could bring as much as $171 million." Thats a little more than the Japanese buyer lost on the property.

There is the vacancy issue to deal with. "It comes with..235,000 square feet of nearly empty office space that could be converted to condominiums."

Fraud Indistinguishable From The Bubble

Mortgage fraud is increasing in a market where true values are becoming harder to discern. Could we be getting to a point where the con resembles the bubble itself? That would appear to be the case when the acts are no longer hidden.

"W-FIVE found plenty of people involved in questionable real estate deals. One man who has raised some eyebrows is Gohar Pervez, a convicted cocaine and methamphetamine dealer, now into real estate. On a number of his deals, ownership of the houses passes through the same associates and the same numbered companies time and time again. At any time, if Pervez chose to mortgage the houses, he'd be making serious money."

"The Bank of Montreal..claims it was defrauded of more than $1 million. Pervez maintains he's done nothing wrong. Det. Mike Shorter..has been working exclusively on mortgage fraud. When asked how many charges he has laid, Shorter says 'none.'"

The US has a problem as well. Chris Swecker, of the FBI said "We went from 4,000 complaints a year to 17,000. And we think that's just the tip of the iceberg."

7 Year Low For Mortgages In UK : Update

England and Australia are ahead of most markets in the housing cycle. This report from Financial Times confirms that the trend is in place. "Mortgage completions dropped from 63,000 in January to 59,000 last month, the lowest since monthly records began in 1998..This is at comparable quarterly levels last seen during the early 1990s when house prices were falling."

And Yahoo has an article up with tons of UK data. Prices are largely dithering near all time highs, while the market is steadily deteriorating. "All of this has come about despite 110,000 new sellers adding to the growing over-supply..levels per estate agent rising 6% this month to stand a third higher than a year ago...The number of properties coming on the market is almost twice that coming off, the biggest imbalance in 3 years...Over-optimistic sellers face months on the market, while agents report realistic sellers agreeing deals at 10% below last year's boom prices."

Notice that the mortgage numbers fell before prices followed. Total mortgage originations in the US dropped over $1 trillion in 2004 compared to 2003. Thanks to Patrick at San Francisco Bay Area Housing Crash Continues for the link.

Mortgage Broker Doesn't Like Credit Trend

There is a least one mortgage broker who doesn't like some aspects of the easy money trend. David Reed writes in Realty Times that he doesn't "like these..Payment Option ARMs."

"The name has been changed from the more sinister "Negative Amortization" moniker to the Barbie-like "Payment Option Arm."...I'll tell you why they're being resurrected. Lenders can freak out pretty easily when they see their pipelines shrink..So what do lenders do? They find a new product and market the dickens out of it. And when one lender finds a new product, then the other lenders must follow or else they can be perceived as not having as many loan choices as the next guy."

Mr. Reed does a good job detailing how the loans work. "Under Payment Option programs.. loans can "negatively" amortize..actually increasing the principal balance rather than decreasing it."

Decades of prudent lending practices have been cast aside because an industry is addicted to the housing bubble. Whoever is supposed to be regulating these guys should share the blame when this falls apart. Mr. Reed gets the last word, "Neg-Am loans have little use in this business."

Sociological Effects Of Housing Bubble

In the never ending debate about the existence of a housing bubble, what is often ignored are the consequences to our lives. So perhaps because Peter Saunders believes that in Australia "the house price bubble has finally burst", he is looking at what the boom has wrought.

"When passive ownership of a house delivers riches far beyond what most people could accumulate from many years of working and saving, traditional virtues emphasising hard work, saving, enterprise and deferred gratification are likely to get eroded. Yet these are values on which capitalist liberal democracy ultimately depends."

"One of the key sociological developments of our time has been the emergence of a division between a majority of families who are accumulating wealth through home ownership and a marginalised minority who have few assets, little material stake in their society, and no realistic prospect of accumulating wealth or passing it on to their children..Rapidly rising house prices make it more difficult for non-owners to get a foothold ..and new buyers..may have over-stretched themselves."

I do disagree with Mr. Saunders on this one, "it is sometimes argued that capital gains from the housing market do not represent real increases in personal wealth because owners cannot get their hands on the money." See this post to clear that up.

High Vacancy Rates In Silicon Valley?

Not for houses to be sure, but one of the highest vacancy rates for industrial space in the nation is in "the heart of the Silicon Valley". "For example, San Jose, Calif...has a 16.8% vacancy rate in the Integra survey and a 16.4% vacancy rate in the Colliers survey."

I present this statistic to suggest that booming housing markets may not be justified by the economic fundamentals. The vacancy rate is much higher than the national average of 9.5% to 10%. Milwaukee Journal Sentinel.

Fitch; Manufactured Housing Causing Losses

I don't ordinarily post about individual credit rating actions by Fitch or Moodys because there are so many of them. But this one caught my eye as it may be relevant to readers interested in the manufactured home sector.

"March 18, 2005: Fitch Ratings has taken rating actions on the following IndyMac Manufactured Housing (MH) contract pass-through certificates:Series 1997, 1998, 1998-2 downgraded..approximately $147.8 million of outstanding certificates, are taken due to continued poor performance of the underlying collateral, as well as diminishing credit enhancement..the cumulative loss percentages are 22.63%, 22.10%, and 20.01%, respectively."

All three certificates suffered this fate ; "overcollateralization has been fully depleted, and the high level of losses incurred has resulted in the..balance ..being written down to zero." These loans were backed by liens on the property the homes were on and presumably many will head into foreclosure.

Federal Bank Caps Mortgage Program, Cites Risk

The Federal Home Loan Bank of New York will limited future commitments for mortgage deliveries (MPF) to $100 million per year, per lender." Alfred A. DelliBovi, President of the FHLB of New York made the announcement effective as of March 15, 2005.

"(T)he risks of the program must be managed prudently and in an extremely conservative manner", Mr. DelliBovi said . The Seattle FHLBank said it plans an "exit strategy" for the program. The Seattle and Chicago FHLBank "were ordered over the past year by the system's regulator, the Federal Housing Finance Board, to improve their controls on the interest-rate risks created by mortgage loan investments," according to Dow Jones NewsWire.

Equity Into Debt: Over $600 Billion In 2004

There is an calculation done by Goldman Sachs economist Jan Hatzius called mortgage equity withdrawal, or MEW. You can find the description at the Dallas Morning News link or a copy here.

MEW represents "the flow of new borrowing secured on existing homes..Ten years ago, MEW was $74 billion. Last year, it bulged to $640 billion." The piece titled "Formula puts price on greed", challenges Alan Greenspans assertion that a bubble in homes is unlikely due to a lack of liquidity. "Kathleen Bostjancic, economist at Merrill Lynch,..begs to differ on the liquidity issue."

Mortgage Holding Co. Stock Down 50% For Week

The shares of Doral Financial have lost almost half their value the past 3 days, including an 18.5% drop today. Standard & Poor's downgraded the firm after affirming its rating only last week. The market cap now stands at $2.32 billion.

Recent financial reports seem to show the Puerto Rico based corporation operating normally. But rumors of a $200 million "trading activity" loss is the likely source of the selling. Such losses could spring from derivative strategies these holding companies use.

Subprime Defaults Rise, Cracks Appear

We hear a lot about the efforts to make home loans available to low income borrowers. I have said before that in the current market the result is likely to be an over-valued home being sold to someone who can't afford it.

We can expect this story to be repeated often in the coming years. "American dream, Pennsylvania nightmare" in the Philadelphia Inquirer shows that even in a state with above average finances, the subprime programs are harming many communities.

"For high-rate subprime loans..11.94 percent foreclosed each year..Two of every five mortgages made in Philadelphia by high-interest "subprime" lenders in 1998 and 1999 had resulted in defaults and foreclosures by 2003."

The article points out the financial trickery being employed. "Traditionally, the fear of losses kept banks from lending to people with bad credit. Since big banks have cut back on mortgage loans..Wall Street investors have stepped in, there is less risk for loan originators and brokers, because loans are quickly sold to other investors." Separating lenders from default risk worked in the boom but will haunt us in the slowdown.

Home Prices Can Fall

Japan is often cited as proof that real estate doesn't always go up. Since the late 80's bubble, the island has struggled with property deflation and a report out today shows that is still the case.

The report at Research Worldwide.com focuses on the continued global boom in housing prices. But one notices Japan at the bottom of the table provided, with another 6% annual decline.

Fear Sweeps Through Housing Sectors

Fannie Mae (FNM) finished the day down 4.3% and was down over 5% intraday. GM continued its fall, down another 2%. The home builder sector was hit as well with Toll Brothers leading the retreat off 4.5% and Countrywide Financial dropped 3% in the last two sessions.

Keep in mind that Fannie is largely held by institutions. And despite being down over 20% since the beginning of the year, FNM volume today was 3 times the average. Fear is sweeping through the credit markets when institutions sell into such a fall.

Time will tell if this is the beginning of the end of the housing bubble, but it very well could be. If so, it is following a path I have expected; a cascading collapse through finance stocks, home builders and finally down to the retail level.

Regardless of where we are in the cycle, billions of dollars evaporated from mortgage lenders and home builders in the last two days. And if the financial media continue to whistle past the graveyard, rest assured The Housing Bubble will keep you up to date.

Smart Money Last To Get The Word

Smartmoney.com reports "Fannie Mae (FNM) shares sank to a new low, losing 4%, after The Wall Street Journal reported that regulators are probing instances of employees falsifying signatures and accounting records." Reuters is late to the story as well.

Readers of this blog will remember I reported on these irregularities on March 9th. See:Agreement Gives Insight Into Fannie Mae Scandal. "The implementation of controls surrounding accounting ledger journal entries,including policies that prohibit the falsification of signatures..adoption of internal controls that limit the ability of personnel to overwrite database records."

And on the 15th: "As it became known last week, Fannie employees have been "falsifying signatures and altering information in databases" and were "not isolated incidents." Score one for the bloggers!

Housing Bubble Has A Downside?

With a tag line like "Another month, another real estate record", you know what's coming. One more can-you-believe-it story from California about their wacky housing market.

However the San Francisco Chronicle stumbled upon the fact that the boom has a downside. "'We got presentations from buyers who were prospective first-time homeowners, schoolteachers, newlywed couples, single moms -- the letters broke our hearts,' she said..It went for 33 percent above the $419,000 list price."

At 33% their hearts weren't too soft! The monthly payment is "another record" as well. "Bay Area home buyers in February committed to a typical monthly mortgage payment of $2,549, a record. That payment is up 21.9 percent from $2,091 a year ago."

NAR Backs Away From Its Survey

The National Association of Realtors put out a statement on their web site this morning which seems to reduce the significance of its own survey. Earlier this month the NAR report shocked the real estate scene with this revelation. "The new study, based on two surveys, shows that 23 percent of all homes purchased in 2004 were for investment, while another 13 percent were vacation homes."

But today NAR President Al Mansell said people buy homes for the long-term even if they are investors. "Real estate simply isn't the kind of quick-in, quick-out investment that Wall Street is fond of. It's a tangible asset."

This blog and others have demonstrated that rents don't come close to covering an owners cost, so why would an investor want to hold long term? Anyway, Mr. Mansell should walk down the hall and speak with the NAR chief economist, David Lereah. Mr. Lereah said at the time that in-and-out investing was a sign that real estate had become liquid.

"As an economist, I think that's good...You could never have done that 20 years ago. Real estate was a large, tangible, awkward asset."

General Motors And The Housing Bubble

To expand on my earlier post, I believe the meltdown in GMs stock today has a lot more to do with the debt and housing bubbles than auto manufacturing. After a little research, some facts stand out.

GM has been described as a "financial firm now producing cars as a hobby." The financing branch, called GMAC, has $260 billion of debt, second only to the GSEs. It seems that a good chunk, some $40 billion, will need to be refinanced in the next 18 months. But with debt downgrades coming left and right, the costs of refinancing are soaring. The action today will result in an additional $78,000 of cost for every $10 million held by creditors.

The Financial Times wonders if "the slump in General Motors' bonds could signal a possible turning point in the credit cycle..does it mean the credit market rally is unwinding?"

Although the firm is no longer a manufacturing giant, its past is playing a role in the crunch. It has reportedly under funded its pension obligation by $17 billion, in fact having more retired employees than those working. So todays announcement that GM is still posting losses on its car sales really just brought this situation to a head. And should the bond market take a big hit, interest rates would spike up and clobber the housing market.

Census Report: Builders Charge Ahead

The Census Bureau/HUD (PDF) report got overshadowed by other news today, but a close look shows the home builders are charging full steam ahead. I will only refer to single family homes and year-on-year comparisons.

The number of homes completed in February: 1.57 million, a 7.6% increase.

The number of homes started in February: 1.77 million, a 16.7% increase.

The number of new permits given in February: 1.62 million, a 4.5% increase.

Keep in mind these increases were compared to a big year in 2004. Clearly the builders are gambling on higher sales in spite of all the warnings to the contrary.

For Sale: A Hole In The Water

Just when you think you've heard it all, check out the new waterfront "property" they are selling in Florida. Inman News has a link to the Dockominium Group where you can park your yacht for as little as $229,000.

"It's not an investment as much as it is a purchase of real estate," McDowell said. "I don't think people buy them expecting to make money on them. I think they buy them as a location for their second home."

But buyer beware, "developers in some cases do not own the submerged land beneath the dockominium boat slips..It's more of a long-term license agreement..There are no guarantees that the state will continue to renew the licenses."

Attack Of The Bubble Heads

Looking back at a past report of the Contrarian Chronicles by Bill Fleckstein, I was reminded of the two starkly differing mind sets that people have regarding bubbles. "The problem with being a 'level head' as opposed to being a 'bubble head', is that when the aftermath of the stock mania played out, even level heads would have to suffer."

"The longer the insanity persists, the greater the frustration on the part of people who've acted prudently and tried to prepare themselves." As the article says, we can't all "live in a $1 million house..the income necessary to support the debt service just isn't there."

So hang in there level heads; prepare yourself for sure, but take comfort in the fact that you are right to be cautious. "We have seen drunken lending orgies in the past, and they always end in disaster."

Analogies Fly In Southern California

Industry professionals don't seem to know what to make of the "seemingly relentless" price appreciation in some California communities. Many are finding interesting ways to describe the housing mania.

"'February marked the 13th consecutive month that the region's median price rose at least 20% year-over-year..There's still plenty of gas left in the tank,' said DataQuicks John Karevoll."

Economist Christopher Cagan says the price increases are moving inland and "suddenly starting to pop, and when it comes, it comes like a really hard whip crack."

Sales are down however. "In Los Angeles County, sales dipped 8.6%, in Orange County sales fell 11%, in Ventura, sales slid 3.9%, and in Riverside County, sales edged down 2.7%. Michael Davin of CataList Homes in Hermosa Beach believes the region's high prices are "sucking the oxygen out of the market."

"San Diego should have hit the wall about a year ago," Karevoll said, "but since then prices have..gone up another 16%. There is some uncharted territory we're in right now," he said. "And we would love to have had a chart."

What Does GM Have To Do With My House?

You may have heard that General Motors shook up wall street with a warning this morning. What does this mean to housing? As one analyst put it, "GM has become more of a bank than a car company," and its residential financing arm is being reviewed for a downgrade by Moodys. Standard & Poor is going to cut the company's credit ratings as well and both actions will push up borrowing costs.

Its not just GM. Bond investors have "grown increasingly uncomfortable..people weren't being compensated for the risk." Yesterday Fitch Ratings said it may pull AIGs triple A rating, leaving just 7 US firms holding the top rank. "To put the erosion of AAA-rated companies in perspective, consider that 32 non-financial companies carried the distinction from 1980 to 1983."

Thin spreads have enabled massive industry borrowing: GSEs, home builders and originators all issue junk bonds. As financial corporations like GM falter, mortgage rates will head up. GM was down 13% at this writing.

Pulte Homes Inventory Bulges, Housing Starts Up

In today's release of financial data Pulte Homes reveals they expect demand to remain high. Inventory surged almost $2 billion, up 33% from one year earlier.

When a firm as big as Pulte homes decides to increase or decrease inventory, it probably takes years to steer the numbers in the direction they want. I have no doubt that the home builders thought they were making the right move two or three years ago when they acquired lots of land and started dozens of subdivisions.

The slow motion effect will haunt the sector as it will take years to slow down the trend. The housing starts came in 5% higher than expected suggesting the industry is ignoring the signs of a slowdown.

WSJ: Fannies Problem Persist

"Fannie's Regulator Says Problems Not Yet Resolved, the worst may be yet to come." The Wall Street Journal gave us an update on the Fannie Mae fiasco today. Some tidbits: "'Fannie's problems are worse than those of sibling Freddie Mac and that a hefty fine could be in the works'. said Armando Falcon, director of OFHEO."

As it became known last week, Fannie employees have been "falsifying signatures and altering information in databases" and Mr. Falcon says such problems were "not isolated incidents."

"Moreover, he adds, 'there are additional issues that we still haven't looked at yet,' and these issues could haunt Fannie for some time."

Exit Strategy: "We Can Always Sell"

This Palm Beach Post story is a good example of an ordinary couple taking incredible risks with real estate. "(R)eal-estate investment is what has allowed the Ackermans to move from a modest $165,000 home, purchased in 1999, to the six-bedroom stunner they live in today..The Ackermans bought three of their houses the same way: They financed 80 percent of the purchase price with an interest-only loan. To avoid paying private mortgage insurance, they put 20 percent down on each home, but only 5 percent of that was out of pocket. The remaining 15 percent came from simultaneous second mortgages, called 'piggyback' loans."

"The double loans have left them carrying eight mortgages..If interest rates go up, "we could be in trouble," admitted Gregg. "If that happens, our exit strategy is to start liquidating homes. Right now, I'm just playing the game," said Janey. "But we have an out. We can always sell." How many speculators have the same exit strategy?

UCLA Anderson Forecast: Recession

The Anderson School of Management at UCLA has earned a reputation for making major calls on the economies of California and the nation. "(It) was unique in predicting both the seriousness of the early-1990s downturn in California, and the strength of the state’s rebound since 1993. Most recently, the Forecast is credited as the first major U.S. economic forecasting group to declare the recession of 2001."

The report has a housing related prediction for the Golden State; "a weak housing market" that will drag the economy down. Noting that the current expansion is getting aged in historic terms the forecast "concludes with the assertion that a recession is in the future; he just doesn't know when yet. He doesn't see it in 2005, but believes it could happen in 2006."

Mortgage Business A Joke

They are laughing it up in the mortgage origination industry, or so reports Inman News. "'We're coming out with a 'stated Social Security program',deadpanned Dan Rawitch,..igniting a delayed wave of laughter in his audience of listeners."

"Though joshing, Rawitch was making a serious observation about the headlong rush by lenders to market a slew of new, and more liberal, loan products intended to open up new flows of business, at a time when "traditional" originations are shrinking by as much as 40 percent."

What kind of "products"? "One revived category is the "stated income" loan, where customers "state" their income amounts, without delivering the normal documented proof.'(T)he 40-year mortgage is really just a response to the fact that the market is shrinking.' Lenders are trying to figure out "how to get that next customer into the game." One firm "will pretty much originate [any]loan if an investor will buy it."

But not everyone is pleased with the environment, "Appraisers themselves are writing anonymous letters to regulators telling them that they are being pressured by lenders to come in with agreed upon values..and if they don't come up with the value they're off the job." Temporary Link.

Countrywide Heads To UK, Looking For Risk

Countrywide Financial is crossing the Atlantic in search of borrowers. "(T)he largest U.S. mortgage bank, will expand its presence in the United Kingdom next year where it plans to focus on mortgage lending to riskier consumers."

In light of this earlier report, one can only interpret this move as another sign of desperation in the lending business. "Alt-A (loans) fall into another category," Angelo Mozilo, CEO, told analysts. "We think we can play a major role there in that business."

RE Mogul On Why There Is No Bubble

Sometimes you have to let the story tell itself. Listen to Barbara Corcorans' reasoning as to why real estate can only go up.

"I think it's a much scarier world that we live in. When kids are scared, where do they run? They run home. People are staying home more..it's really reassuring for people to know they own the walls around them. People have also become more distrustful. People don't trust the government, they don't trust Corporate America, they don't trust the stock market. They trust their house."

"The movie 8 Mile, I believe, did for downtown Detroit what Ghost did for downtown Manhattan. I remember a stuffy couple I took down to Tribeca before Ghost came out. Then after the movie (premiered), they thought it was cool."

"I think the bubble theory is nothing more than an intellectual expression of people's typical worry that good times can't last forever. When your marriage is going well, you worry there's a problem on the horizon." Has she struggled with success? "Other than my boyfriend and business partner marrying my secretary, it has been my hardest transition."

Buyers Market In The UK

The power of the market is evident in England where a multi-year boom in house prices is unraveling. "The ratio of completed sales to the numbers of property on estate agents books fell to 27%, its lowest level since 1996...Buyers are holding back expecting prices to go lower, and properties are sticking."

The strong psychology of a mania is playing out in reverse, along with headlines like this, Panic selling as house prices slide. And the fear of paying too much is taking over,"it is now a buyers' market as people can pick and choose from a rising number of properties."

Las Vegas Home Glut: "Nearly 14,000 Homes"

When you read this Reuters story keep in mind that Las Vegas set the all-time record appreciation for a metro area in 2004.

"Resale homes are glutting the Las Vegas market with the inventory at nearly 14,000 homes in January," said Foreclosures.com president Alexis McGee. Such swift property market changes may be a result of heavy speculation.

Ms. McGee sees more trouble coming for Sin City. "The Las Vegas market is very fragile right now..An increase in borrowing costs, which we now see as inevitable, could knock many prospective buyers out of the market, drive the speculators out of town and create a new wave of foreclosures." Ouch! Tell us what you really think Alexis.

NASDAQ IPO Doubles In 3 Months, Then Tumbles

The title of this post may sound like it belongs in the tech era but it applies to today's home building sector. Comstock Homebuilding Companies Inc (CHCI) builds single family homes in North Carolina and Washington DC, and admittedly it is a small cap outfit. Still, it is indicative of market psychology that a small firm goes public and the price rapidly goes through the roof.

One would also expect these recent IPOs to collapse before the established home builders. So a check of Comstocks' brief trading history reveals that after doubling in about 100 days, the stock has dropped 28% from its high. That decline includes over 10% today, and there is no apparent news to drive the fall.

Greenspan, Fed: "Menace To Society"

When discussing the housing bubble many have compared this market with the stock mania of the late 1990s. So it is instructive to review how the powers that be were dealing with that bubble while it was building.

Mr. Bill Fleckenstein has done just that at the MSN web site. He went through the Federal Reserve meeting in December 1999, which was just released. Its a great read and he wrapped it up well.

"What I'd like to know is, given not just Alan Greenspan's record but also what he says in public (and what we can now see he says behind the public's back), how can this menace to society have any credibility whatsoever? (R)ead through these minutes just to get a flavor for how completely untrustworthy and shallow these people are."

And think about this statement from Greenspan the next time he says there is no collapse looming. From the 1999 transcript,"Owners’ equivalent rent is going to start to accelerate unless I misread how asset prices interact with consumer prices. The reason is that the ratio of owners’ equivalent rent to the value of housing has been going down continuously, and the implicit rate of return that that is suggesting cannot credibly be expected to continue." Well it has continued, so he knows this is a bubble.

Mortgage Insurers Back Away From Speculators

In what could be bad news for housing speculators, two private mortgage insurers have announced they will quit insuring buyers with "risk exposure". PMI Mortgage Insurance Co. and MGIC Mortgage Insurance Corp. are limiting the number of policies per person and are putting caps on the amounts insured.

Kevin Harney writes, "The problem, say insurers and others in the mortgage industry, is that when property appreciation rates decline in the hottest markets, speculators are likely to be stuck with properties they can't sell at the prices they need. Negative cash flows are then likely to push them into default."

Of course actions like this could tip the housing markets lower as many speculators need the insurance to qualify for the loan.

Miami Condo Market Speculative: CSFB

A mid-sized condo developer in Florida was downgraded by Credit Suisse First Boston, characterizing its future as "neutral at best." The market is threatened by "investor speculation", and the shares of WCI Communities lost 4% on the news.

The Miami Herald report found at Planet Realtor includes the typical arguments surrounding the question of overheated markets. But one bit of data may be telling. "South Florida is in the midst of an unprecedented condo development boom. More than 55,000 residential condo units are in some phase of development in Miami, and..increasing monthly. In contrast, Miami has built about 7,000 condo units in the last 10 years."

Nor was the story lacking in humor. "Downtown developers have brushed off worries about rampant speculation..'I don't see it backed up by empirical statistical data' said Pedro Martin, CEO of Terra Group (which) recently signed a contract to buy 10 acres..for $190 million(!)'You don't put 20 percent down on a $500,000 condo when you are a speculator' said Martin, who has two other high-rise projects in downtown Miami."

They Are Getting Worried In Orange County, CA

The OC Register found at least one RE professional who was losing his cool. ""We're dead in the water as far as home-price appreciation" if interest rates rise another half-point, said one in Laguna Niguel. "Wages are just not in line with home prices."

Even the bulls don't sound real sure of their conviction. "Paul Scheper of L.L. Financial in Aliso Viejo noted..'inflation fears, prompting an increase in rates. It's a knee-jerk reaction'...there's 'no need for concern or panic - unless the ... (jobs figure) does the same thing again.'" Link Reg. Req.