Wednesday, May 25, 2005

"Correction Inevitable, Could Be A Doozie"

The Australian has a report out with more details of the speech by Fed honcho Jack Guynn. "He was especially concerned about reports of speculators buying homes and condos 'just to flip them for a quick profit' and that banks and other financers are taking big risks in the area."

"'It seems like every week brings new stories about aggressive financing arrangements that encourage and enable such real estate transactions,' Guynn said."

"New data overnight showed sales of new US homes edged up 0.2 per cent to a seasonally adjusted annual rate of 1.32 million, an all-time record."

"Diane Swonk, chief economist at Mesirow Financial, said, 'The concern is the further we go, the more risk we run of a significant long-term correction."

HBs' Stock Up Double Digits In 10 Days

Many of this blogs' readers are watching for the top in the US housing market. This chart of the homebuilders KB Homes and Toll Brothers exhibits the kind of 'blow-off' action one would expect to cap a multi-year mania. Notice the move from May 13th to date.

All Eyes On Fannie Soon

Fannie Mae has the April monthly summary report scheduled to come out any day. This post took a close look recently and the April period should be interesting.

Buyers, Builders, Lenders May Get "Burned"

Atlanta Federal Reserve Bank President Jack Guynn added to the housing bubble debate with these comments. "'There are some local markets, especially in coastal Florida, where I've heard stories for more than a year about behavior that's got to be characterized as nothing other than speculation,' Guynn said it response to questions after his speech."

"'It makes me very uncomfortable. Some buyers, some builders, some lenders are going to get burned, could very likely get burned, in some of those local markets,' he said."

"The U.S. Federal Reserve is not yet done raising interest rates, but the central bank will watch economic data closely in an uncertain time for monetary policy. 'Given the current outlook for the economy, my personal view is that we've not yet reached a neutral policy stance,' Guynn noted."

Tuesday, May 24, 2005

7% Of LV Listings Reduce Price In The Past Week

The Las Vegas web site that has a search function for homes reduced in price the last seven days has reposted the results. It reports that out of 16,346 total MLS listings, 1,133 have had prices cut in the last week. That's 6.9%.

Maybe the webmaster is playing some blog-chicken with THB, but you might hurry over and look before they realize what's up.

Spanish Mortgage Debt Up 25% In One Year

In Spain, the RE boom has pushed the country to the brink. "Household debt in Spain surpassed disposable income for the first time last year, posing risks for the stability of the financial system, the Bank of Spain said Monday."

"The increase in indebtedness of Spanish households is largely the result of much bigger mortgages to acquire the family home due to an ongoing property boom in which house prices have risen about 150 percent since 1997."

"According to figures from the Spanish Mortgage Association (AHE), total outstanding mortgage loans at the end of March stood at a new record of €615.132 billion, a rise of 24.5 percent from a year earlier."

Fundamentals Belie Housing Boom

A writer at Motley Fool has done the calculations readers of this blog know a lot about. He didn't like what he came up with. "In our neck of the woods, things look pretty unhealthy. I recently came across an OK-looking three-bedroom. Needs a new roof and windows and updating throughout. Price: $500,000. The showing agent expected prospective buyers to waive all reasonable protections like inspection clauses. To me, that screams, 'Bubble!'"

"For a reality check, I popped a few numbers into our handy rent vs. buy calculator. It informed me that we would be $60,000 worse off after seven years if we buy rather than continue to rent. It also assumed we'd be comfortable putting more than 50% of our income on the line for a home payment every month and it assumed 5% annual appreciation in housing prices for the entire seven years. In my opinion, those are pretty bad assumptions."

CA Prices Soar, Sales Weaken

The CAR reports a new milestone in California. "The median price of a home in California topped a half-million dollars for the first time in April, reflecting the continuing demand for housing and the ongoing supply shortage."

About that supply issue. "An examination of 2003 data from the Census Bureau shows there are 43.8 million second homes in the United States, including 6.6 million vacation homes and 37.2 million investment units, compared with 72.1 million owner-occupied homes."

If you look at the reporting today, most stories lead off with some statistic like this, "Home Sales Up 4.5 Percent in April."

But where is this headline? "Statewide, the 10 cities and communities with the greatest median home price increases in April 2005 compared with the same period a year ago were: Reedley, 68.8 percent; Colton, 64.7 percent; Twentynine Palms, 63 percent; Atwater, 58.7 percent; Rohnert Park, 57.5 percent; Laguna Hills, 53.3 percent; Norco, 51.6 percent; La Canada-Flintridge, 50.9 percent; Adelanto, 49.1 percent; Victorville, 45.8 percent."

Don't miss the table at the bottom of the CAR site. Not one region showed a y.o.y. price decrease. But out of 20 regions, 13 had y.o.y. negative sales volume and 8 of those were double digit declines.

"Possible Speculative Excess": FOMC

Disregarding the so-called 'soft patch' in the economy, the Federal Reserve is signaling that the funds rate will be increased. "'Most members regarded the recent slower growth of economic activity as likely to be transitory,' according to the minutes released today in Washington."

"'All members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run.'"

"'Home sales and other indicators of activity in the residential real estate market remained at very high levels,' the minutes said. 'House price appreciation was expected to moderate over coming quarters, but a number of local markets were still regarded as `hot' with signs of possible speculative excess.'"

Fitch Cuts GM, GMAC To "Junk" Status

As the markets wait for the Fed minutes to be released, Fitch Ratings has lowered the bonds of GM and mortgage giant GMAC to junk status. "Fitch Ratings May 24, 2005: Fitch Ratings has downgraded the senior unsecured ratings of General Motors, GMAC and the majority of affiliated entities."

Congress Wants This Bubble, Not Reform

The gut-less US congress will be remembered for it's role in creating the housing bubble. It appears that the lack of courage will continue as the economy sails off the cliff. "Legislation to be debated Wednesday to overhaul regulation of Fannie Mae and Freddie Mac has been changed to allow the mortgage giants to buy higher-cost loans in pricey markets."

"It would also allow Fannie and Freddie to increase the percentage of the secondary mortgage market that they serve, challenging competitors who now operate in the so-called nonconforming market."

This blog has criticized the supposed 'independent' Federal Reserve for it's failure to take away the punch-bowl. But there is no question the elected representatives have failed us miserably as well. How can they ratchet up the borrowing at a time like this?

"Some lawmakers are reluctant to curb the holdings because they create liquidity in the mortgage market. 'The last thing any lawmaker wants to be accused of is killing the goose that laid the golden egg in our housing market,'" said Jaret Seiberg.

Faulty Appraisals Are "Common Knowledge"

As expected, the appraisal industry is warning congress today. "Faulty appraisals are still dictated by interested parties, the schoolyard bullies of real estate. It's common knowledge that if an appraiser doesn't play the game and 'come in' at whatever value is needed to close the deal, the bullies will take his lunch money. And he had better not tattle.' said Alan E. Hummel, SRA.

"The public..needs to be more aware of the menace of mortgage fraud to their home purchases, the largest investments of their lives. Sadly, all Americans pay the price for this miserable performance, bearing the cost of investigations and financial failures."

"The appraisal organizations say the appraisal standards in H.R. 1295 are our lesson plan to do better." Before you buy that, read this report.

"The Biggest RE Bubble In World History"?

Even before the sales numbers were released today, economists were sounding alarm bells. Yale University economist Robert Shiller, "'I think this is actually the biggest [real estate] bubble in U.S. history and possibly even world history,' he said in a telephone interview yesterday (May 23rd)."

"Mark Zandi, chief economist with, said he's worried about the vulnerability of the mortgage-backed securities industry, where hedge funds and other investors have made huge bets. That derivative industry funds many mortgages for home buyers, particularly for low-equity loans. Problems in the mortgage-backed securities market could result in a credit crunch for would-be home buyers."

Even Robert Freed of KB Homes, who has pocketed a few million recently, used the 'B' word. "It's not the bubble in housing. It's the bubble in underwriting."

It's all good for Steve Kalmbach of Pulte Homes. "You'd be surprised how far people are willing to drive to have their American dream."

"'If things continue on as they are for another year or even six months, the potential for price declines is that much greater and the risk to the economy is much more significant,' Zandi said."

Economist To Eat His Own Hat

This has already been posted in the comments, but just to get it on the record. "'Fifteen percent price appreciation is too much, even for me,' David Lereah, chief economist at the National Association of Realtors. 'The real estate market is taking on a life of its own right now and we need to get a handle on it.'"

"I do agree with (Federal Reserve Chairman Alan) Greenspan there's some froth now in the market."

Crowd Gathers To Watch Economic Train-Wreck

The home price increase has caused another economist to change his opinion on the housing bubble. "In a real estate seminar in January, I stated that housing price increases reflected underlying conditions of reduced costs to finance homes. What has changed my thinking about the housing bubble is what is happening in the financing of housing."

"Are home buyers not being smart? No. Lenders are being foolish. Some lenders believe that rising housing prices will soon justify whatever loan they offer the home buyer."

Mr. Donald Ratajczak of Georgia State University is joining the crowd of horrified by-standers. "Pundits, economists, and, yes, Warren Buffett have been rushing to get on the record saying that real estate has maxed out. The top may not be here yet, they argue, but it’s close."

"Paul Kasriel, chief economist at Northern Trust Corporation, "constructed a price-to-earnings ratio for housing. In 2004, that P/E ratio 'the highest since 1952, when the time series starts.' And we all know what happens when P/E ratios reach 50-year highs."

"David Rosenberg, Merrill Lynch’s chief North American economist, "We get nervous when we see things move parabolically north, because no asset class at any time ever failed to mean-revert after such an upside move."

Speculators In Charge Of This Bubble

There isn't a lot of celebrating at the NAR this morning, or even much discussion in the media of their existing home sales report. For months their economists have predicted sales and prices to 'level off'. Nothing of the sort in April 2005. "Existing-home sales hit a record high in April, defying expectations of a modest slowing trend in 2005, according to the National Association of Realtors."

"David Lereah, NAR’s chief economist, said sales had been expected to hold at high levels. 'A new record is a bit unexpected.'"

How's this for a parabolic move. "The national median existing-home price for all housing types was $206,000 in April, up 15.1 percent from April 2004 when the median price was $179,000. The last time prices rose at a stronger pace was in November 1980 when the median price rose 15.6 percent."

A double digit gain on top of the biggest gains ever, but no 'B' words in their report. They slipped this in at the bottom of the page. "The median existing-home price in the West was $305,000, up 21.0 percent from the same month a year ago."

Does this look like a plateau or a cooling market? Alan Greenspan said recently that only those who bought at the top would get hurt, financially. It looks like there will be many millions of those. And as for the recent warning about risk in lending, there isn't any shortage of that either.

Monday, May 23, 2005

Over-Capacity Fuels "Renters Bonanza"

It's a "Renters Bonanza" the TriCity Herald reports. "As occupancy rates drop in the Tri-Cities, renters are getting move-in incentives and a choice of amenities. Vacancy rates, which averaged about 3 percent in 2002, increased to 9 percent in Richland, 11 percent in Kennewick and 8 percent in Pasco."

"Pasco's vacancy rates will probably catch up soon. Permits have been issued for three new apartment buildings at Chapel Hill that will add 668 units, bringing the city's total number 1,959. 'There was a lack of complexes in Pasco, but now that's taken care of,' Sylvia Erickson said. The landlord profits are done for too!

"The average price for a two-bedroom in Richland is $667, compared with $708, the average price in spring 2003. The average rent for a one-bedroom Kennewick apartment is about $486. In Richland, it's $563, and in Pasco it's $524."

"Those selling include San Francisco-based developer Robert Young, who has placed his eight properties on the market. 'I'm bullish on the Tri-Cities. I've always been bullish on the Tri-Cities.' So why is he selling his eight apartment buildings? Young said he wants to devote his energy to a commercial development he is building."

"It could be one of the best times to sell an apartment building in the Tri-Cities, said David Eagle. (He) said many investors are turning away from primary markets like Seattle, Portland and Los Angeles, where real estate prices are extremely high and the opportunity for growth limited. He said they're looking more seriously at 'secondary' markets."

In Las Vegas, They Sell Condos Twice

The Las Vegas RE crowd got some bad press when one condo project pulled a fast one. "First it was the housing market, now it's the condo market. It's almost a given in Las Vegas, buy low and sell high. But Jim Snyder has a story that one attorney says could badly hurt the condo market in Las Vegas."

"Imagine my disgust when I get a similar package in the mail that says, it's not a half a million dollars any more, it is eight hundred and seventy-four thousand," said one burned speculator.

"They all attended a Vegas Grand sales event, put down anywhere from five thousand to 25 thousand dollars and signed letters of intent to buy a unit. That all screeched to a halt when they got a notice in the mail telling them they had two options: pay a revised price almost double the amount they agreed to, or get their deposit back with five percent interest."

"Personally, my feeling is, they have dollar signs in their eyes and they know that if they can get rid of me they're going to make a whole lot more money off my unit." If this is how everybody behaves going up, imagine the chaos when it heads down?

Top Execs Bail-Out At Countrywide

The insider selling continues at Countrywide Financial, where the executives have liquidated 72% of their position. A scan of the individual transactions reveals the sell-off has accelerated.

Canada Gets I/O Loans, US Speculating With Debt

The web site reports that interest only loans are headed to Canada. "A unit of U.S.-based General Motors Acceptance Corp. is offering Canadian home buyers the nation's first fixed-rate, interest-only mortgage for up to 80 percent of a house's value."

"The product will get borrowers into bigger homes, as they can take on a mortgage that is 17 percent larger than one that also calls for the payment of principal."

And a story on home equity loans; "The amount of home equity extracted by U.S. property owners surged to $705 billion in 2004, with most of the money put toward buying new residences, repaying credit-card debt, and funding home-improvement projects. More homeowners are using the cash to purchase investment properties--2.2 million in 2004." That last number is more than all the new homes built in the US.

Housing Bubble Seen As Non-Productive

An editorial in the News & Star challenges the public view of housing in the UK. "As the former features editor of the then leading home improvements magazine Practical Householder, I have a sense of guilt at having contributed in the 1970s to an anti-social trend which has led homes to be seen as profit centres."

"I believe that the drive to invest in totally non-productive bricks and mortar will eventually bring to its knees the economy of Cumbria and the UK."

"I strongly resent the use of my TV licence fee to drive the process on through BBC programmes such as Trading Up and A Place in the Country, with prices in the latter usually from a quarter-of-a-million pounds upwards."

"If Tony Blair is serious about reforming our public services, he could begin by reminding the BBC that its purpose is not to promote the interests of estate agents and speculators."

Selling Condos? "The DJ's Got To Be Really Good"

It would seem the Miami condo craze may be reaching it's zenith with stories like this NYTimes piece. "You could salsa with dancers in fringed hot pants at Aqua, hear a drag queen D.J. at Cynergi or watch stunt men ricochet off a trampoline at Soleil. Nightclubs? No. Carnival acts? Not quite. These were launch parties for condominium projects, one of the stranger forms of nightlife in a city obsessed with real estate."

"Deep-pocketed developers, forced to be ever more creative in the pursuit of buyers for condos still years from being built, pay for these lavish affairs. Builders need early deposits to get construction loans, so they work hard to entice the buyers they covet, image-conscious people, many from Latin America and Europe, with money to burn on a second home, a speculative investment or a status symbol."

"The bait includes small initial down payments, slick marketing, and parties. Usually held just before a project begins selling units, the events are meant to create buzz among brokers, who make up the bulk of invitees."

"Jon Graney, who owns two condos in South Beach and is looking to buy more, said launch parties were beginning to rival clubs. He added, however, that he would probably not buy at Vitri because the building was too low. 'If I spend six hundred grand, I want to go high.'"

The MBS House Of Cards

Credit rating agencies grade mortgage pools up-and-down every day. To get a sense of what's going on, here is a May 20th example from Fitch. "The negative rating actions, which affect $526.8 million of outstanding certificates, are taken due to the continued deterioration in the performance of the underlying collateral."

"In the eight transactions that experience downgrade actions, the high level of losses incurred has led to substantial and rapid decline in credit enhancement, particularly in the form of overcollateralization (OC). In the most severe examples, OC has been exhausted and the most subordinate certificates have suffered principal write-downs."

How about the good news, the 'affirmations' of credit? "The affirmations reflect credit enhancement consistent with future loss expectations and affect approximately $1.49 billion of outstanding certificates. In addition, the affirmation..reflects a guaranty provided by Freddie Mac.. reflect a guaranty provided by Fannie Mae..reflect a guaranty provided by XL Capital Assurance Inc.."

Where is this collateral? "All of the mortgage loans in the aforementioned transactions were either originated or acquired by Long Beach Mortgage Company. The mortgage loans consist of fixed and adjustable rate subprime mortgage loans and are secured by first and second lien mortgages or deeds of trust on residential properties."

"Drive-By" Valuations Worry Australian Regulator

The Australian reports that appraisals and lending standards are under review in that country as well. "The nation's banking regulator has warned home lenders that their cutting corners on property valuations could expose them to unacceptable levels of bad debt in a major downturn."

"In some cases, banks are using cheaper, 'drive-by' valuations with no internal inspection, or even a 'desk-top' approach involving statistical analysis and comparative prices in the same suburb. An APRA survey of 96 lenders who control the $500billion mortgage market found that some lenders physically inspected fewer than half of the properties they used as security for loans."

"Ian Herriott, 'There are many lenders relying on computers to do their credit analysis, and in a falling market it's a recipe for disaster.' Property prices have been under pressure since last year when the housing bubble began to deflate. Investment bank JP Morgan said earlier this month that prices could fall by as much as 10 per cent over the next 12 months, even without a further rise in rates."

Feds Scrutinize RE Lending

The higher-ups in the US federal bank system have sent another chilling notice to members, this time in the form of a FDIC letter. "An influential federal agency has raised a red flag over Washington banks for their heavy investment in commercial real estate, fearing that many of them risk a credit crunch if market conditions take a turn for the worse."

"The agency said it would 'typically' apply such additional reviews to banks that have a ratio of commercial real estate loans-to-Tier 1 Capital of 300 percent or higher. Here in Washington, fully two-thirds of the nearly 100 state banks have commercial real estate ratios of over 300 percent, according to FDIC data. Topping the list is Heritage Bank of Olympia with 832.6 percent, followed by Frontier Bank (697.5 percent), Golf Savings Bank (683.2 percent) and North County Bank of Arlington (680.7 percent)."

"'The median level of CRE loan exposure in banks in the San Francisco Region is roughly double that of banks in the rest of the country, with many banks actively involved in commercial real estate lending at levels far in excess of the region's median,' said the letter from Nancy Hall, for the FDIC."

Appraisers Bringing Attention To Fraud

The US congress is going to get an earful Tuesday, when appraisers take center stage. Alan Zielinski said,"All [lenders and brokers] want to do is hit the number because if they don't hit the number the deal doesn't go through and if the deal doesn't go through they don't get the commission. If [appraisers] don't play ball, they don't get paid or don't get work again."

"There are a lot of people who have refinanced for more than their homes are actually worth and they're effectively already upside down even without a real estate bubble bursting," said David Callahan of Demos.

"'The real issue is on the refinance side where people are cashing out of their equity on the basis of higher and higher values,' said Zielinski. 'Conservatively, I'd say that 10 percent of the houses I appraise are worth less than the mortgage on them.'"

"One overvalued appraisal can skew home prices throughout a neighborhood, according to the Appraisal Institute's Don Kelly. 'If a house is appraised for 10 percent or 15 percent more than it's actually worth and the sale closes, it may be used by another appraiser as a comparable sale the very next day. It has a ripple effect.'"

Sunday, May 22, 2005

"Free Money" Is Not A "Bad Day At The Races"

The NCTimes wants to help borrowers with the array of borrowing options. "There are other strategies for lowering monthly payments or increasing total borrowing ability, and those strategies rely on mortgage products that were not even available to most purchasers as recently as a decade ago, according to Doug Perry, of Countrywide Home Loans."

"'Home values and purchase prices have gone up so tremendously, it's led to a number of products to assist consumers to be able to buy and to provide flexible options so they can afford what they buy,' Perry said."

"When Paul Espinoza decided to refinance the home he owns he decided to go with an interest-only package in order to reduce his monthly payment. What he didn't know at the time he signed his refinancing documents was that his principal amount would continue to climb. 'The cost to you is really the amount that the principal goes up over the period of the loan,' said Espinoza who felt that he wasn't made fully aware of that possibility by his lender when he arranged for the new deal. 'I'm curious why this isn't mentioned by loan officers?'"

"Rob McNelis, president of the California Association of Mortgage Brokers' San Diego chapter said, 'We've all known this rapid price appreciation is unsustainable. Historically, the real rate of home price appreciation is around 3 to 3.5 percent; not a bad day at the races when you realize it's free money.'"

Congress Searching For Ways To Lower Standards

Not everyone is worried about risky loans being made to marginal borrowers. Congress is trying to figure out how to get even more people on the gallows, er, ladder. "For some first-time home buyers, it is a tougher hurdle than coming up with the down payment. These buyers are what lenders call 'unscoreables,' or they have such 'thin' credit files, their credit scores are abysmally low."

"Congress took up this issue for the first time May 12, when a House committee conducted a hearing on ways to identify and use alternative data that might help gauge underserved consumers' creditworthiness. Rep. Michael Castle estimated that '35 million to 50 million people' in this country 'may not have a full credit reporting history', or they may have none at all. Yet large numbers of those consumers pay their bills on time and should be treated as solid credit candidates."

After explaining several methods of finding credit history where it doesn't exist, the writer concludes, "Tools are available. Those who truly want to provide home loans to credit-worthy borrowers need only give them a try."

Establishment Press Lectures Masses On Debt

Many observers pay attention when the NY Times and the WS Journal go an a publicity run, as this article continues. "More and more Americans are turning to debt to pay for lifestyles their current incomes can't support."

"'I felt insecure. I was an hourly-paid worker in this fancy neighborhood,' said Benjamin Baggett. Twice he used a home-equity loan to pay off his credit-card debts, and twice he ran up steep credit-card bills again. When his debts reached $30,000 and he ran out of home equity, he filed for bankruptcy in 2003. He has sold his home, and is divorced."

"Last year, 28 of every 1,000 Utah households filed for bankruptcy, twice the national average and nearly triple Utah's rate a decade earlier. In April, Thomas Monson, the (Mormon) church's second-ranking leader, said he was 'appalled' at advertising for home-equity loans that is 'designed to tempt us to borrow more in order to have more.' He repeated the words a Mormon elder spoke during the Depression: 'Interest never sleeps nor sickens nor dies. Once in debt, interest is your companion every minute of the day and night.'"

"Outstanding household debt doubled to more than $10 trillion between 1992 and 2004, after accounting for inflation. Since 1990, income for the median American household has risen only 11 percent after adjusting for inflation, while median household spending has jumped at 30 percent."

"Americans spent half the money from refinancing their homes in 2001 and early 2002 to pay for home improvements, cars, vacations and other consumer expenses, the Federal Reserve reports. U.S. households with at least one credit card owed $9,205 in 2003, a 23 percent increase from five years earlier after adjusting for inflation." Notice that credit card use went up, at a time when we were led to believe the home equity cash-out was being used to pay down consumer debt.

Even Commercial Landlords Are Losing Money

When the 1980's bust came to the oil patch, nothing fell harder than commercial property, as there was no use for it in the economic recession. It isn't surprising to hear the bubble is showing up in Californian office and manufacturing property. But it is odd that market fundamentals are being ignored. "Commercial properties for (the) hard-hit manufacturing sector are nearly 11 percent vacant."

"Matt Quaglino, who has built several office and industrial buildings in the San Luis Obispo area, says the price of land zoned for manufacturing has soared 170 percent in the last five years."

"Commercial properties and building sites around the county are fetching top dollar, and, except for in the downtowns in San Luis Obispo and Paso Robles, it's occurring even though demand is mediocre and rents are stagnant or falling. Industry observers attribute the trend to scant inventory and local investors flush with cash. They're betting that the escalating prices that hit the residential market will hit commercial sites here, too."

"Investors get much less return on their commercial holdings than they would have two or three years ago. Unless a buyer comes in with much more than a standard 20 percent down payment, they could be looking at several years of negative cash flow before rental income rises sufficiently to cover mortgage and operating costs. Some local builders strapped with skyrocketing land and construction costs are locking in quick profits by selling office space in new buildings rather than waiting for lease rates to catch up with development costs."

New UK Plan Will Make Bubble Worse

At least one organization caught on to the new British proposal to subsidize first time home buyers. "Gordon Brown's scheme to help first-time buyers get cheap mortgages funded by taxpayers has come under fire from a leading housing charity."

"Housing charity Shelter today slammed the new plans, claiming they risk inflating the property bubble because more people will be available to buy, and squeezing the next wave of first-time buyers still further out of the market. We need to ask ourselves whether using government resources in wealth creation is the right thing to do because we certainly don't think it is."

The economic foresight stops there, though. Many people have convinced themselves that suddenly, the world has run out of land and houses. "They must adjust supply problems to make housing more affordable to those starting on the ladder. This proposal by Mr Brown to build 200,000 homes with this scheme is simply not enough. We need to look more at public housing."

Renters Enjoying This Boom

There is no stronger economic fact that points to a housing bubble than the rent to ownership ratio. The SFGate has a story up about people who have decided to sit this mania out. "'Every two or three years, I get the urge to buy a place to live in, and then the urge goes away very quickly,' said Guy Smith. 'The amount of risk and up-front capital is not matching the amount of reward I want.'"

"'Personally, I don't like the idea of overbidding 13 times and not getting the house,' said Jim Buckmaster, chief executive of Craigslist in San Francisco. 'I don't have the patience for that type of thing.'"

"Even mortgage professionals see the point in renting. 'It's easier to be a renter with the current level of competition for buying homes,' said Kevin Clay, a former head of the California Association of Mortgage Brokers. 'When you rent, you have more flexibility. You can get another job and move. You don't have the responsibility of a home. You don't have to pay the plumber to fix the toilet.'"

"Ellyn Hament came to a similar conclusion recently, settling in an Outer Sunset flat after enduring a arduous home-buying search. She was advised by her real estate agent forgo a pest inspection that could have protected her from potential structural damage. Hament's TIC offer was accepted, but then she found out about a leaky roof. The seller refused to let her in to inspect the damage, so Hament pulled out of the deal."

"Hament said, 'We didn't want to feel ripped off. Plus, our monthly payments would have been between $2,500 and $3,000. My hand kept shaking when I did the calculations.' Now, she lives 'happily' in a large two-bedroom flat. 'We are savoring the relative stress-free-ness of having a new place to live,' she said."

Cleveland Suburb Foreclosures Double Since 1998

One Cleveland suburb has seen a big jump in foreclosures. "The annual number of foreclosure cases filed in Cuyahoga County has almost doubled since 1998. At the end of April, the court had nearly 12,000 foreclosure cases pending, the highest volume in the state."

The writer attempts to lay off the problem to the county court, but one can't blame the judge for twice the number of filings.

"No firm figures exist, but the suburbs say that they have dozens, even hundreds, of empty homes. They worry that the homes will attract arson and other crime, reducing property values. 'The neighbors are just beside themselves,' South Euclid Mayor Georgine Welo said. 'Who wants to live in a neighborhood where you have these popping up all over?'"

"County Commissioner Tim Hagan wonders whether speeding foreclosures and putting a flood of homes up for sale would simply overload a weak housing market. 'We've got a serious crisis in that regard in Cuyahoga County,' Hagan said."

Saturday, May 21, 2005

Las Vegas Web Site Pulls Embarrassing SE

On May 15th, this post ran with the links to a Las Vegas search engine that listed 736 homes that had been reduced in prices in the last seven days. When viewed this evening, that had changed to 10. Obviously, the web site operator found out the public was using the search to guage how bad things are in LV, and pulled down most of the posts.

Well done, everybody. Now we just need an alternative way to track the meltdown in the desert this summer.

Desperate Move In UK To Preserve The Bubble

As the housing bubble bursts, governments can be expected to attempt desperation moves like the one proposed today in England. "Struggling first-time home buyers could gain cheap mortgages funded by public money under plans revealed by Chancellor Gordon Brown."

Of course, this is a thinly veiled effort to stop a property collapse, and it is doomed to fail. "The plans reflect government concerns, not only over the frustrations of first-time buyers but over the effects on existing homeowners."

"If new buyers cannot enter the market, sales of properties will eventually grind to a halt, leading to a meltdown in property prices and the return of the negative equity nightmare last experienced during the early 1990s."

The wisdom of allowing this bubble to form is certainly under scrutiny now, as the governments are caught between millions of people struggling with home price inflation, and millions more trapped in an over-priced mortgage. This turn of events is especially laughable as any country could bring prices in line with incomes just by reinstating traditional lending standards.

"Outdoing The 1920's Boom" In Miami

The Miami Herald reports on what may be the highest level of speculation in the world. "More than 114 major projects, most of them high-rise condos, are under construction or in the planning stages in the urban core along Biscayne Bay. Citywide, developers are proposing more than 61,000 new condominium units, eight times the number built during the past decade."

"'You have a wave of development underway here in Miami that is unprecedented, bigger than anything, bigger than Hong Kong in the boom years of development,' said Charles Hales, a transportation consultant."

"'We are building an instant city; what should take 15 years will take three,' said Michael Cannon, a Miami real-estate analyst. It all amounts to a multibillion-dollar gamble, outdoing in risk and bravado the 1920s boom that made Miami a modern city"

"'As much as 85 percent of all condominium sales in [downtown Miami] are accounted for by investors and speculators,' housing analysts at Raymond James warned in a March report. Philip Spiegelman sold the condo units in the Marina Blue condo going up on Biscayne Boulevard. 'One hundred percent of the buyers were investors and speculators,' he said. 'Anyone who tells you their projects are different are deluding themselves.'"

Housing Bubble Debate On The Air

Finally, a real housing bubble debate. This link to 'To The Point' has an audio interview with Chris Thornberg of UCLA and a NAR economist, among others. Mr. Thornberg demolishes the flimsy associations 'vague comments.' The RE segment starts just under 8 minutes into the file and is 36 minutes long.

The UCLA Anderson School deserves some credit for challenging the status quo and pointing out the terrible risks the various organizations have created in the economy.

A Record 44,000 Homes For Sale In Houston

This blog doesn't get a lot of comments from Houston, probably because they haven't had a big run up in prices. But this month the reports contain the same increases, including record inventory. "All listing categories combined, Houston's overall housing market in April experienced increases across the board including total property sales, average sales prices, median sales prices, available inventory and overall total dollar volume on a year-over-year basis."

"The number of available homes at the end of April was 44,144 properties, which was an 8 percent increase versus last April and a new all-time record."

The Houston area has a high foreclosure rate as well.

Looking For Scapegoats In The Housing Bubble

An odd line of thinking is popping up in the media these days, as reflected in this MSNBC story on young flippers. "Chris Schartiger may sound like a professional real estate investor, but he is in fact a 25-year-old investor and one of a growing group of young real estate speculators buying condos, often before they are built, and using them to turn a fast profit."

"For me, it was a no-brainer to go into real estate with the housing market as hot as it has been recently."

Indeed, the major media has cultivated that very notion for years, even as they now act shocked at all the 'speculation' that they described as 'investing' only weeks ago. This is where the media tries to pass off the bubble to a bunch of twenty-somethings.

"But next time he’s out looking to buy a condo, Schartiger might not find a welcome mat waiting for him. Seasoned realtors are concerned that these speculators are inflating the housing bubble by creating phantom demand. In many cases, these speculators are only putting down a small deposit that they are willing to lose if the market drops sharply. That leaves the developer with a property that he could have sold to a legitimate homebuyer for a lot more money, and now has to sell for a great deal less."

So who is to blame if the developer has to sell for less? "Thousands of new condos are going up, and they are selling for upwards of $1,000 a square foot."

Shanghai Property Market Tumbles

In one major Chinese city, the home price boom has quickly ended. "Shanghai's new middle classes, every bit as obsessed by rocketing property prices as their British counterparts, are suddenly asking if the bubble has finally burst. After years in which prices rocketed out of all proportion to Shanghaiers' still lowly incomes, the last month has seen the first falls being reported by local media."

"Sales in April dropped from 30,000 to 10,000. Prices for some new developments have dropped by a fifth almost overnight, while officials say the fall is already averaging over five per cent."

Doubters of a global bubble should read this. "Speculative investors have plunged into the market from elsewhere in China, Hong Kong, and further afield. There have even been private investors from Britain and Ireland willing to take a gamble. Prices rose by 19 per cent in the first three months of this year alone."

"'I think the overall correction will be in the region of 10 to 20 per cent,' said Sam Crispin, a British property consultant in Shanghai."

"Too Little Too Late" For Greenspans' Bubble Talk

The economic world is commenting on Alan Greenspans' remarks about the housing bubble yesterday. The LA Times has some quotes. "'Affordability is a serious issue,' said Esmael Adibi at Chapman University in Orange. 'The fact is that more people are trying to buy more housing than their incomes can justify.'"

"By letting short-term interest rates hit rock bottom, the central bank helped drive down mortgage rates. That in turn created an exaggerated demand for housing, Adibi said. 'The Fed caused some of the problem, no question,' said Adibi, who believes local housing prices may start to fall by the end of the year."

"Adibi and others suggested that Greenspan might be trying to reduce the impending shock of a slowing housing market. But Greenspan's remarks may be 'too little, too late,' said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast who has been among the few economists to emphatically describe California's housing market as a bubble."

"People have been freely spending 'because they feel wealthy' thanks to soaring home prices, he said. 'When the market cools, it will have implications beyond real estate,' Thornberg added."

"A Game Of Musical Homes"

The thoughts expressed by Jeff Alworth in the Oregonian must be in the minds of millions of homeowners this Saturday morning. "My wife and I have a particular interest. Since last winter, we've had plans to sell our house, and we've been gussying it up for a summer sale."

"We love that our house has appreciated so much in value since we bought it in 1999. We're less excited that everyone else's homes have gone up so quickly with it. The rise is dizzying, as is the calculation of whether we'll be able to sell our home and afford another. Could we be the ones left standing with no home when the market crashes? Or worse, what happens if we take on an inflated mortgage, only to see a market correction in the next year?"

"If this is a mortgage bubble, when will it burst and by how much? What will happen to the value of my house?"

"I would hate to see us make our move just when the bubble bursts and lose all we've worked so hard for. But whether we are the ones to get caught, or someone just like us a year from now, the signs look unmistakable: The housing market will stall out. When it does, and the game of musical homes stops, someone will be left with an overpriced home. I sure hope it's not us."

Friday, May 20, 2005

Mortgage Lender Adopts Anti-Flipping Policy

Inman News reports that the big banks are closing the door on speculators. "US Bank Home Mortgage this week implemented an 'anti-flipping'policy for conventional home purchases, saying it will no longer fund loans for properties in which the seller has held title for the property for less than 90 days's. Property flipping has become 'a threat to the integrity of the residential real estate industry.'"

Mortgage banker Alex Stenback notes, "It won't eliminate flipping or fraud. If all the top institutional lenders implement similar 90-day seasoning policies, he said, 'You have the subprime market out there waiting in the wings who would be more than happy to finance flipped properties.' People will still be flipping properties, and inexperienced buyers could end up holding high-cost loans on overvalued properties."

For some reason the writer ties the new measures to combating mortgage fraud, but that isn't the meat of the problem; it's speculation.

So Long Playboy, Hello Real Estate

The Washington Post has an article on the rush into RE speculation. "It feels as if Playboy's Playmate of the Month for May is speaking for the entire country. Fort Lauderdale native Jamie Westenhiser, 23, told the magazine recently that she is ditching her modeling career to take up real estate investing."

"In the magazine's May issue, Westenhiser poses, leaning on a computer desk next to a stack of books with titles including 'All About Escrow' and 'Real Estate Principles.' In her playmate data sheet, she writes that her ambition in life is to have a 'successful career in real estate.'"

As is now common, the focus turns very cautionary. "'Everybody can't sell all together,' economist John Silvia said. 'Somebody has to be buying. There's absolutely a chance that a whole bunch of people will try to sell at the same time. The game can change very, very quickly.'"

Some local investors say they would sell if the market turned. 'I'd want to sell while it's still a seller's market,' said Kitty Bernard, an agent in Reston who has teamed up with several colleagues to invest. 'I wouldn't want to wait until it reverted completely to a buyer's market.'"

Media Awakens To Lending Risk

More warnings on I/O loans, this time from Colorado. "In the Boulder-Longmont area, 54 percent of loans made last year were interest-only, up from 11 percent in 2002. In Denver, 50 percent of loans in 2004 were interest-only, up from 6 percent in 2002."

"Wil Armstrong, of a mortgage firm, said it was too early to know whether the interest-only loans will produce fallout. 'It wouldn't surprise me to see these have a higher delinquency rate, ultimately.'"

This line could have come straight out of the 1980's bust. "'There's not a cushion there if the market were to soften,' said Ira Litke. 'A high percentage of them are highly leveraged."

After Years Of Inaction, He'll Talk The Bubble Down

Alan Greenspan is talking about housing again. "Fed economists have determined that second home purchases are partly responsible for driving up the ratio of sales to the existing housing stock, Greenspan said. The Fed chairman said the more rapid pace of second home purchases may reflect speculation in some markets."

"'When you get speculation, there are only a couple of ways for it to end, and they are not good,' said Jay Mueller, senior portfolio manager at Wells Capital Management. 'We are nowhere close to income growth matching house price appreciation.'"

"There's a risk that consumer consumption may decline if the housing market slows, Greenspan said. 'If it occurs, and eventually it will, it will reduce the fairly large and still accelerating degree of extraction of equity from existing homes. This has been a major force in financing consumption expenditures.'"

Here's AG on the GSE's. "As Fannie and Freddie increase in size relative to the counterparties to their hedging transactions, the ability of these GSEs to quickly correct a misjudgment in their complex hedging strategies becomes more difficult, especially when vast reversal transactions are required to rebalance portfolio risks."

After Bubble Forms, Warnings Abound On IO Loans

This SF Gate report on interest-only loans includes this warning in the title. "POPULAR BUT DANGEROUS: If home prices flatten, borrowers could lose."

"They accounted for nearly 70 percent of home purchases in the first two months of the year in San Francisco, Marin and San Mateo counties, up from 18 percent in 2002 and 59 percent in 2004. In San Jose, 61 percent of purchase loans in the first two months of 2005 were interest-only, up from 9 percent three years ago. And 78 percent of home buyers in the Vallejo metropolitan area chose interest-only loans, up from 6 percent."

"'This is frightening, frankly,' said UC Berkeley economist Ken Rosen. 'I'm worried that more and more people are using (homes) as an investment vehicle and not as a consumption market, and that's true of the peak of housing markets. This is the edgiest we've been in the market for a long time. This reminds me of the late 1980s."

Here's another quote for the history books. "California Association of Realtors economist Leslie Appleton-Young argues that the loans are just the latest advance in the mortgage market. Little outright speculation is occurring, she said. The popularity of the loans reflects the fact that they allow people to get into homes they otherwise wouldn't be able to afford. 'Instruments that help people get into the housing market are a good thing.'"

Price Slump Exposes Australian RE Schemes

In an article titled "Developing Storm", the Sydney Morning Herald puts the spotlight on RE deals that are turning into ponzi schemes. "In recent years, money has been pouring into property-based debenture and finance companies offering a range of high interest rate securities. 'High-yield debentures are a risky investment, and there is no guarantee that investors will get their money back,' the Australian Securities and Investments Commission said."

Apparently, these firms are allowed to 'revalue' their properties upward at will.

"'When the market is trending down, you naturally know that land values and development sites will trend down much quicker than the market,' Bill Moss said."

"In Sydney, Moss estimates site values have come down by between 30 and 40 per cent from their boom highs."

"In these circumstances, there is no flow back of cash from the developer to the debenture issuer until the development is completed. In the meantime, investors in these debentures are paid only from the cash raised from other investors."

"Given that unsecured investors stand last in line, there is no recourse available if assets are sold and used to satisfy first mortgagees."

"Glut" Of Realtors Drawn To California's Bubble

The LA Times has a story about the competitive realty market on the west coast. "'Hi, I'm Joseph Petralia from Coldwell Banker. I'm doing a survey in the neighborhood.' That's his standard opening line. Petralia is working ZIP Code 95118, a middle-class neighborhood in San Jose."

"'Hell, no, I'm not moving,' this fellow says. 'I was born and raised on this street 85 years ago.' 'I'd rather have them hang up than not answer,' Petralia says. 'At least I know I'm getting closer to success.'"

"Last year, as he was breaking into the business, Petralia acted as a buyer's agent for a $1.6-million property. He netted $32,000 more than he had made in the entire previous year stocking auto parts at a Mercedes dealer. But Petralia confesses that the clients were his sister and her fiance. This year hasn't seen a payday like that. He's made only $4,000 in commissions."

"Suddenly, he gets a live one. It's his 21st call of the morning. An unemployed engineer says he's thinking of selling and then renting, hoping prices fall enough so he can get a better house at a cheaper price."

"'You're looking to cash out?' Petralia says. 'Are you aware of the market right now?"

"Is there a homeowner in California who isn't?"

"More than 22,000 applicants took the state's real estate exam in April, nearly three times as many as in April 2003. The last time so many people wanted to sell real estate in California was in 1990. In what might be an ominous sign for the current boom, that year marked a peak in the housing market."

Group Predicts Boston Price Decline

The site is running an article predicting lower home prices. "The gap between income and Massachusetts home prices is the widest since the peak of the 1980s housing bubble, and that gap, intensified by rising interest rates, should cause home prices to dip later this year..declining about 3 percent."

"'It's not going anything like the '80s, but there's going to be a correction,' said Alan Clayton-Matthews, of the University of Massachusetts. 'There has to.'"

Notice the group bases their forecast on the disparity between homes and income, but doesn't see a correction large enough to bring the two measures back into line. One look at the chart that accompanies the piece shows that 3% won't make a dent in affordability.

"Massachusetts' high home prices, nearly double the national median, are a growing concern for economists and policy makers, who worry they are driving young workers and families from the state."

Economist Mark Zandi said, "The housing market is through the roof, way outside anything we've seen historically. The longer it goes on, the more significant a correction we'll see."

Spanish "Burbuja" Worries Economists, ECB

This story about the Spanish housing market sounds familiar to the US. "'If you go back to the mid-1980's, Spain has had the most rapid price increase in housing of any large country in the world,' said Michael Ball."

"As prices continue on their vertiginous path, however, Spaniards are starting to talk about a 'burbuja,' Spanish for bubble."

"'Housing-price inflation is the first indication of a monetary policy that is too expansionary,' said Jörg Krämer, the chief economist of the HVB Group in Munich. 'If we get a bubble, there is a high risk it will burst.'"

"In February, the European Central Banks' president, Jean-Claude Trichet, warned that 'the combination of ample liquidity and strong credit growth could, in some parts of the euro area, become a source of unsustainable price increases in property markets.'"

"Second homes also fuel the Spanish market. 'If there's going to be a crash, it's likely to be in these coastal areas,' Mr. Ball said."

"With this atmosphere of euphoria tinged by foreboding, Spaniards are like partygoers with one eye on the clock. Storefront real estate brokers have sprouted up all over Madrid, peddling everything from dingy apartments for $189,000 to elegant villas for $3 million and higher."

Mortgage Lending To Be Off 30% In The UK

In Britain, Nationwide has announced it expects much lower lending in the coming year. "Britain’s biggest building society has predicted that total mortgage lending would slump 30 per cent this year, from £100 billion to £70 billion, as the housing market slows."

"Philip Williamson said yesterday that the downward trend in house prices would have a knock-on effect in the mortgage market as homeowners became less likely to release equity from their homes. Prices would remain flat for two years."

Thursday, May 19, 2005

The Dallas News Series Continued

The next piece on the Dallas market from Danielle DiMartino is online. "Richard Fisher, president of the Dallas Federal Reserve, noted that many areas of Texas have seen resurging economic growth. Dallas was not one of them. 'The weakest spot is North Texas,' Mr. Fisher said, 'largely because of the hit that telecom, technology and aviation took.'"

"And yet 'builders just keep building,' said David Houston. 'The risk is not so much the prices of the homes themselves, it's the loans being made on the homes. The danger I see here is that people are buying so much more home than they can afford.'"

If that is the case, it is strictly a function of the easy money. "Jim Pearson of Pearson Appraisal Co., 'This is where you're seeing a lot of the problems, where irresponsible or downright fraudulent lenders are trying to find unethical appraisers to work with them.'"

"What will happen when those loans are stress-tested, if the local economy doesn't improve, if the national economy falters, if interest rates rise?"

New Speculative Tool: Letters Of Credit

A new twist has shown up in the lending business. "Investors are getting a chance to purchase luxury condominiums along the Gulf of Mexico with minimal cash out of pocket, as lenders increasingly allow them to use letters of credit in lieu of cash downpayments."

"Letters of credit demonstrate the investor's commitment to make future payments,with the bank assuming the financial burden for those that do not own up to this promise..but critics believe they fuel speculative buying."

"'If these letters of credits are being given in markets that have a high share of investor purchasing, then it seems speculative, and it's something I'd pay attention to,' says Doug Duncan, chief economist for the Mortgage Bankers Association."

"Don't Screw Up The Comps"

This Money mag story about San Diego showed up on CNNMoney. "It's clear that something big and basic in the way Americans think about housing has changed. For many of us a house has become a way to pay for retirement or the kids' education, or simply a way to get rich."

"With no savings, and a college loan to repay, Kelly Pearson took out a mortgage for 100 percent of the price of the house. Closing costs were paid for by a $10,000 gift from her parents. Her plan: to borrow more soon and invest in a condo."

After several personal accounts of just how unrealistic people are, the writer turns the focus on the coming storm. "It took 60 days for the average detached home to sell during February, up from 39 days in February 2004. The number of homes sold in San Diego in March fell compared with the number sold in March 2004, the eighth monthly year-over-year decline in nine months. The number of San Diego listings swelled 27 percent in March, to 7,062 houses for sale, up from 5,555 for sale in March 2004."

"Jerry and Laura Satran's Sunday open house is empty. (They) are asking $1.3 million. But here they are, the second week the house has been on the market, drumming their fingers. The previous Sunday, Jerry says, 40 visitors stopped by. No offers."

"Two weeks later the Satrans receive an offer: $1.2 million. Not the full asking price. No one seems more disappointed than the neighbors. One woman suggests the Satrans would be hurting the entire block if they settled for less than $1.25 million. 'She says she was only going to be here for two years, so don't screw up the comps,' says Laura. 'She's not being cruel, everybody who lives here is in it for the investment.'"

Flat Home Market Sinks Debt-Based Economy

If you want to know what an on-going property bust looks like, there is the example of England. "Mortgage equity withdrawal slumped to 6.9 billion pounds in the fourth quarter of 2004, the lowest since the final three months of 2001, according to Bank of England statistics."

"'The main trigger has been a slowdown in the housing market sufficient to remove a lot of finance that was boosting the consumer,' John Butler, economist at HSBC said. 'Less mortgage equity withdrawal means less finance available to households, so even a slowing housing market is enough to cause a turnaround in consumer spending.'"

"Consumption has driven 80 percent of the expansion in the U.K. economy since 1997. About 70 percent of the jobs created in the U.K. since 1997 have been directly related to the expansion in consumer spending and the property market, Butler estimates. That means employment will suffer as the property boom fizzles. He predicts as many as 230,000 job losses by the middle of next year."

"It's Insane" In Orlando

The Orlando Sentinel tells us that the RE market may be coming to a head. "'It's insane,' said Gary Balanoff, broker-owner of Re/Max Select. 'Where does it end? I don't know.' The 21-year industry veteran said he has never seen such price escalation."

"There was a sign that change could be coming, with April sales throughout the region falling nearly 5 percent compared with April 2004. That was accompanied by a 5 percent increase in the inventory of available homes."

"Barbara Vance said she is dealing with more investors than ever before, with many buyers quickly becoming sellers."

This is a quote for the ages. "If there is a slowdown, Brenda Rogers of the Lake County Association of Realtors wouldn't mind: 'I kind of wish we would. We've been so busy.'"

Fed Worship Turns To Disillusionment

It is amusing to hear this WS Journal writer's disbelief that the Fed has been wrong about the housing bubble. "For a long time, Alan Greenspan dismissed suggestions that the U.S. was in the early stages of a housing bubble. He talked about the extraordinary demand for houses among hard-working immigrants. He emphasized that it's almost impossible to have a national housing bubble. He explained that it's hard to speculate in a house that you own because to sell it you have to move out."

"But there has been a little more concern creeping into his commentary in the past few months. 'We do have characteristics of bubbles in certain areas,' he said."

"The Fed..contributed to the housing boom by keeping short-term interest rates so low for so long, and encouraging the bond market to do the same with the long-term rates that determine mortgage rates."

"If house prices stop climbing, it won't be pleasant. Americans will feel poorer."

Feds Set To Stop Mortgage Frenzy

CNN Money reports that regulators are preparing new mortgage rules. "Federal banking regulators are weighing new guidelines for mortgage lenders due to growing concern about risks in the mortgage market, according to a published report. The Wall Street Journal reports that the new guidelines could be completed as soon as early next year."

How's that for swift action. This after we learn that maybe two trillion dollars of interest only loans were done last year. We can't be sure, as none of the private organizations will agree on the numbers.

"'There's a consensus among regulators that we need to be working on this,' said Barbara Grunkemeyer, at the Office of the Comptroller of the Currency. 'There are a lot of issues to be addressed there.'"

Too Much Speculation In Dallas?

Ms. DiMartino at Dallas News explains that speculation is booming in Dallas. "To say that local prices won't fall simply because they've risen more elsewhere is equally naïve. In fact, a lack of appreciation in a market like Dallas can be downright toxic, especially if new supply continues to flood the market."

"Too often, local readers e-mail that they can't get their 1- or 2-year-old home appraised for what they paid. All the while, new developments keep popping up as fast and as far as the eye can see. Teardowns are occurring at a pace last seen just before the late 1980s crash."

"'There is an enormous demand for investment real estate,' Joe Milkes said. 'As a result, prices are getting pushed up.' It's becoming more common to see a single buyer gobble up a dozen homes at a time at new developments. Add a bit of speculation to the supply and demand and you get a partial explanation for why local foreclosures remain so much higher than the rest of the country, and why it's dangerous to assume that there's no downside risk in local home prices."

Enough Already, Get Rid Of The Portfolios

The Fed chief is at it again. "Federal Reserve Chairman Alan Greenspan again pushed for limits on the multibillion-dollar mortgage holdings of Fannie Mae and Freddie Mac, saying such restrictions would not hurt the thriving housing market."

"As Fannie and Freddie grow ever larger, their ability 'to quickly correct a misjudgment in their complex hedging strategies becomes more difficult,' Greenspan said. 'We are thus highly dependent on the risk managers at Fannie and Freddie to do everything right.'"

The amazing thing about this is, what is the question about these portfolios? This back and forth about what should be a straight forward issue makes one wonder if something else isn't involved.

"'The assets required for Fannie and Freddie to achieve their mission are but a small fraction of the current level of their assets,' Greenspan said. Thus if Congress were to limit the two companies' holdings so that they can achieve their mission, a substantial liquidation would be required over time, the Fed chief said."

Wednesday, May 18, 2005

Fewer First Time Buyers In London

The web site in2perspective has a news flash on the UK. "The percentage of London's first time buyers has dropped to 18%."

"'First time buyers form the foundation of a healthy housing market. If they are unable to buy because of the high property prices and the fear of rising interest rates, the market will quickly draw to a halt,' warned Russell Jervis, MD of haart estate agents."

Economic Myths Fan Bubble Denial

Reuters is running another bubble denial story. Frank Nothaft, chief economist with Freddie Mac, "If the local economy is doing lousy, I can assure you that the housing market is not going to do well either."

They may have attributed that quote to the wrong economist, but let's explore that last point. In Rockford Illinois. "'A year ago, in April 2004, the average sale price was $US118,000 and now it's almost $US135,000,' the broker said. 'Everybody's asking the same thing: how long can this train keep going?'"

"Employers in the Rockford metropolitan area cut 9400 jobs between March 2001 and March 2005, as the area lost a fifth of its manufacturing jobs. Rockford's unemployment rate was 6.1 per cent in March. 'In our area, we are starting to see some affordability issues,' Mr Nalewanski said. 'We've had a decline in salaries due to the exodus of manufacturing jobs and their replacement with service jobs.'"

The concept of rising wages as a driver of home price appreciation might be valid, except real wages are actually declining. And in that scenario, wouldn't prices move up in some relation to wage increases? Normal supply/demand economics don't explain this housing market because it is a speculative mania, one of the biggest ever seen.

To finish with some quotes by the courageous Dean Baker. "People are betting on the value of their homes rising, and they're not saving. This is a classic bubble. We may be seeing the bubble spreading' from the east and west coasts to inland areas. 'People are buying homes every day and paying much more than they'll be able to sell them for. A lot of people are going to find themselves a lot poorer than they expected,' he said."

US Home Prices 250% Of Real Values: Economist

Princeton University economist and columnist for the NY Times, Paul Krugman, was open in his assessment of the US housing market while making a speech overseas. "Macro indicators suggest that the market is speculative mania. Day trading cannot be sustainable. There is a real bubble mentality in the US housing market,' Prof Krugman said, adding that prices of US housing were 250% of their real values."

"A fall in the housing market and investment would spur a US recession and lead to capital outflows. 'There would be a difficult contraction in the US economy. I think there is 50% chance for a major break in the situation in the US next year.'"

"Prof Krugman said the US economy was currently unsustainable, with the huge current account deficit and overinvestment in the housing market eventually leading to an economic recession and wiping out the US's role as 'the world's importer of last resort.'"

Home Builders Risk Mass Cancellations

The Kansas City Star has an editorial on China policy that quickly turns to housing. "The benefits to U.S. exporters from a modest rise in the Chinese currency would most likely be small, while the effect of higher interest rates could be larger."

"If that were to happen, the effect could be acute in the housing market. Investors in housing stocks have been nervous for some time, happy to see ever-higher profits but worried that the good times must end someday and fearful that they could be left holding the bag when that happens."

Then a bond analyst reveals just how sensitive speculators are. "When things were at their worst in Las Vegas, Pulte was seeing cancellations of home purchases that amounted to 75 percent of new sales. 'The risk of similar, and perhaps more prolonged, regional downturns should not be ignored,' Kathleen Shanley wrote in a note to clients."

"Shanley points out that Pulte's inventory of land is concentrated in areas where home prices have been rising rapidly and that the company's cash flow is negative, even as profits soar, because of all the land it is buying. Pulte has been borrowing money even as it buys back stock at high prices."

"Narrow Group Should Be Worried": CA, NY, FL

More odd articles are coming out of the WS Journal. This piece, after the obligatory calming setup, goes on to counsel homeowners on strategy in a price correction. "A slump in property prices might hurt speculators. But if you are an ordinary homeowner, I wouldn't be overly concerned, provided you have enough money for your next down payment."

"Chris Mayer, of Columbia University. 'I think it's a very narrow group of people who should be worried. It's high-end properties in New York, Florida and a couple of California cities. Outside of that, I don't think there's a bubble.'"

"Suppose you live in one of these markets, you are convinced property prices will crash, and you want to protect yourself. What are you going to do?"

The writer recommends a handful of options, none of which are that original. He especially doesn't seem to like the idea of selling and renting. "Even if property prices tumble, you might be out of pocket, once you figure in rental and moving costs and the expense of buying and selling real estate."

The gist of it seems to be; hold on, it's going to get rough and owners don't have a lot of options. Come on WS Journal, can't you do any better than that?

"Buyers Have No Idea" : Pulte

This Business Week story reports that the number of interest only loans is far higher than the MBA allows. "Here are some scary statistics: In 2004, fully 50.4% of the mortgage loans issued for purchases of single-family homes in Georgia were to pay interest only. That made the Peach State No. 1 in the nation in its share of interest-only mortgages."

"But a whole bunch of other states were not far behind: California was second, at 47.1%, Colorado third, at 45.5%, Nevada fourth, at 44.7%, and the District of Columbia, fifth at 43.8%."

"The numbers come from LoanPerformance..They're for loans that were packaged for resale, so they don't cover quite the entire market, but they give a pretty good picture of the trend."

"The availability of such loans has probably contributed to the upward spiral in home prices, as shoppers armed with cheap financing try to outbid each other."

"Interest-only mortgages were designed for wealthy families..Trouble is, the sheer numbers indicate that the loans are also being taken out by a much bigger sector of the public."

"But even some parties that benefit from the rage for interest-only mortgages, like homebuilders, are wondering if the trend may have gone too far. 'In most of those cases, buyers have no idea how they're going to pay' the higher payments that will be owed once principal payments begin, says William J. Pulte, founder and chairman of Pulte Homes."

Property Flipping Scams In Baltimore City

This blog has pointed out that in todays' RE market, fraud is almost indistinguishable from everyday conditions. Inman News, "The perpetrators of a real estate flipping ring in Maryland will be held liable for penalties and restitution, Attorney General J. Joseph Curran Jr. said Monday."

Which raises the question, if RE is such a great investment, why do crooks have to resort to scams? "The court upheld a finding that Lee Shpritz, Lee P. Woody III, and John M. Morgan Jr., had engaged in a flipping scheme to sell and finance properties at inflated values. Additionally, the court upheld a finding that Michael Almony misled home buyers by submitting misleading inflated appraisals."

"Property flipping hurts home buyers and creates significant problems for the neighborhoods in which the homes are located."

Crossing Their Fingers In Palm Springs

The various media of California are picking through the Data Quick numbers for clues about their local markets. The Desert Sun thinks a slowdown might prevent a 'collapse'. "There are several signs of what observers contend is a healthy cooling down."

"The (Coachella Valley) inventory of unsold resale homes is now around 3,330 - more than twice the level seen a year ago. The total 1,432 properties sold in April marked an uptick from March's 1,385 and was the highest sales count so far in 2005. But it was a drop of 16.7 percent from April 2004, when a record 1,720 properties were sold."

Here is an interesting stat, "(prices for) new-construction homes dropped 8.9 percent to $345,000."

Speculation is evident. "A real estate agent in Indio said a large proportion of buyers are still coming from coastal areas, where they are using sales proceeds from much more expensive properties to purchase homes in the valley. That is creating an affordability crunch for the lower-income east valley buyers."

Affordability vs. Recession: Who's Fault Is That?

A member of the Royal institution of Chartered Surveyors put his finger on one of the main dilemmas in the housing bubble. "RICS national spokesman Harvey Williams said the only way to bring house prices within reach of most young people was a reversal in market conditions."

"Mr Williams said: 'It would take a recession to get properties into the price range that first-time buyers can manage and nobody wants a recession because that isn't good for prosperity.'"

Williams has it backwards, in a way. It is clear that housing has propped up the major western economies and a recession will bring down home prices. Wouldn't a recession happen regardless of what anyone "wants"?

On the other hand, the situation that the easy money has created is that of overpriced housing. And when it reverts to fair value, that will probably spark a recession. People who want affordable housing aren't going to take any blame for that.

In a time of low interest rates, housing is still out of reach for many. Yet experts like Williams don't see any problem with facts like this? "Landlords are buying up more than 90 per cent of newly built flats in towns such as Leamington and Warwick. He said: 'Even with the increase in the amount of property available, first-time buyers are still struggling to make it onto the property ladder.'"

Tuesday, May 17, 2005

"Florida Will Be The Next California"

The St. Petersburg Times reports that around Tampa, everybody wants to be a landlord. "Of the people who bought existing homes, townhomes or condos in Hillsborough County last year, an unprecedented 40 percent didn't move into them. It was 30 percent the year before."

"'The returns have been unbelievable,' said Alan Schreier, who buys rundown houses. 'A lot of people are jumping into the business.'"

"Sammy Tuffaha has lived in Tampa Palms but coveted historic Hyde Park. But when Tuffaha shopped for a condo there, he couldn't stomach the prices. For two years, he watched the market and stewed. This year, Tuffaha concluded that prices will keep climbing. 'It's at least double what I would have been willing to pay two years ago,' Tuffaha said. His faith in the market extends to New Tampa. Tuffaha is keeping his house there, seeking a tenant."

"Wanda Vann of Cheval also is becoming a first-time landlord. She paid $132,000 four years ago for a home in Cheval West. She couldn't bear to part with it. As for being a landlord, she said, 'I'm getting a little brave."

"Linda Nowicke a real estate agent, entered the business after moving here in 1998 from Michigan, where she owned a day spa. 'I help people all the time with investment properties. They've been burned by the stock market, and they're looking for places to protect assets.' In the process, Nowicke began buying investment houses for herself. Nowicke prefers houses she can see. 'My firm opinion of this market is, it's crazy.'"

"Wayne Spencer noticed movers loading a van in the driveway of a doctor's home. Spencer bought the house with his fiancee. He said, "I believe Florida will be the next California."

Flashback: Prices The Only Thing Still Headed Up

Mortgage data isn't free, so from time to time it helps when a company like Countrywide Financial has to restate an older quarter, like this one ended June 30,2004.

"Industry-wide, residential mortgage originations were approximately $800 billion during the second quarter of 2004, down from approximately $1,075 billion in the second quarter of 2003."

In the US, total mortgage production for 2003 was a trillion dollars higher than 2004. But if you asked most people they would say the market has never been hotter than now. That's how mind-numbing the hype can be.

Let's look at the plunging prime originations at CFC in the quarter ended June 30, and the fall-back on new 'products'.

2003 in $millions
Home Equity...4,373
2004 in $millions
Home Equity...7,301

No Money Down, Cash Back, Maximum 9 Homes

A reader sent in this link to a real estate 'investors' site that has this pitch. "Because of the popularity we need to limit investors to a maximum of 9 of these properties for now for those that qualify financially. 680+ credit score will be needed to qualify for this program with No Money Down and Cash Back."

"If you have lower than a 680 credit score please check out how you can benefit with our pre-construction."

Here is some detail from the soliciting email. "I have a good local investor friend that has been working with unsecured business lines of credit for years, he has a patented system no one else is doing. He claims $20,000 for unsecured business line of credit. Now he is saying some are doing $150,000 in unsecured lines of credit that don't go on your personal credit."

WSJ: Oh Wow, This Could Be A Disaster!

This WS Journal report must mean that the halls of power are getting worried about what they have created. "In California, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from 47.1 percent in 2004 and less than 2 percent in 2002."

"Mortgage strategists at UBS AG called the shift to ARMs and nontraditional mortgage products such as interest-only loans 'symptomatic of..the end of the housing cycle."

"Partly because of these products, mortgage originations are expected to total nearly $2.5 trillion this year, according to the MBA, down slightly from $2.6 trillion in 2004."

There you have it, the MBA admitting that mortgages are down. And what would the numbers be if these 'products' weren't around? The bubble would have already burst. Consider this; if the interest only loans were 17% of 2004 totals, that's $442 billion! The percentage is certainly higher for 2005.

"If home prices fall as rates rise, some borrowers with interest-only loans could wind up owing more than the value of their home. Even if the growth in home prices simply flattens or slows, some borrowers could be squeezed by rising mortgage payments." A little late, WSJ, but welcome none-the-less.

FDIC Report Revisited

The FDIC flip-flop was revisited by this mortgage blog, with a few new facts. "The Corporation which insures and to an extent regulates the nations' banks has good reason to hope that it won't soon encounter the kind of real estate downturn that most recently occurred in 1990-1993."

"At that time the Corporation was forced to close some 300 banks, largely in the Northeast and California. This was merely the frosting on the massive savings and loan mess which forced closure of over 750 S&Ls throughout the Midwest and Southwest."

"The FDIC still had its hands full. The failure of the banks was largely due to their unbridled enthusiasm for real estate and FDIC inherited billions in real estate secured loans and bank owned (foreclosed) properties from the banks it closed. Clearing it all up took almost a decade and nearly bankrupted the bank insurance fund."

Check out the first comment, "I dont know much about this. I live in California. What is a housing bubble? What is a real estate bubble? Is this housing bubble going to hurt my home price in California? What can I do to protect myself? Thanks for any advice."

The Human Aspect Of The Housing Bubble

This Seattle PI story will likely be played out in households all over the US. "Like thousands before them, Tom, 44, and his wife, Clare Cronkleton, 43, had grasped at home ownership as their ticket to the solid middle ranks of the middle class. The couple made the leap even on their relatively modest incomes, each in the $40,000 range, and with no money down."

"It took a second piggyback mortgage at a steep 15 percent interest rate to pull off the sale. (Then) their 8-year-old son, came down with a mysterious, flulike illness. In the summer of 2004, Tom lost his job."

"They had already refinanced their mortgage at a lower interest rate to cut their payments and drawn out what little equity they had accrued. Tom says, 'As long as things were going good, it was OK.'"

"They listed their house last winter (and) sold in a hurry for $300,000. By the time all the closing costs and commissions were figured, however, they still owed the bank money. The bank finally relented and agreed to a 'short sale'."

"People have been buying on the very edge of their ability to afford a home," says Glenn Crellin, at Washington State University. 'People are (getting in at) a below-average rate, and they run the risk. We may see some households no longer able to afford the houses they're in.'"

"Close Your Eyes" And "Buy Some Land"

This story from the Hamptons deserves to be posted if just to document the quotes. George Simpson of Suffolk Research Service said, "Just close your eyes, buy some vacant land anywhere out here, and you can make an almost unbelievable profit.You can't make one-tenth of this kind of return on investment with any other speculation.'"

"Chris Chapin of Prudential in East Hampton, agreed that buyers’ thirst for land appears to be unslakeable. 'When you have people who don’t care what they have to pay for a parcel of land, they just want it, that affects prices."

Realtor Joe Kazickas had this to say. "What percentage of property owners do you know who can afford to buy the houses they live in now? I would guess the answer is about 30%. What’s going to happen in 20 years when the baby boom generation starts dying off? What happens when we are on the backside of that bubble? No one knows. But there won’t be the buyer base then that there is now."

Home Building Surges

The home builders started a bunch more homes in April. "Construction of new U.S. houses rose 11% in April to a seasonally adjusted 2.04 million annualized units. This follows a 17.6% drop in starts in March to 1.84 million units, which economists attributed to cold and wet weather."

The Census Bureau report reveals much more in the pipeline. In Table 2, under 'New Privately-Owned Housing Units Authorized, but Not Started, at End of Period', there are 40,000 more units under this catagory in April 2005, compared to the 183,000 in April 2004. That is up 22%.

"Don't Sweat The Bubbles" California

In the Santa Clarita Valley, the local realtors association seems confused. "'We expected things to level off a little bit this year, but it appears that’s not the case,' said Jim Link, association vice president. 'People are concerned that if they didn’t buy now, they won’t be able to afford to buy later.'"

Where did they get that idea? " Mike Davis, president of the association’s Santa Clarita Valley division, said 'It’s (a) good to buy and (a) better time to sell,' Davis said. 'If someone is going to relocate they should do it sooner (rather) than later.'"

An opinion piece in another Santa is more sanguine. "If the housing market softens and you lose a little short-term equity, it's a safe bet you'll get that value back just by waiting out market swings, and have a comfortable place to live while you're waiting."

"The collapse of tech stocks in the late 1990s is a classic demonstration of bubble activity. That market went crazy for several years, turning teen-agers into Ferrari-driving multi-millionaires. The kids who used to be known as computer geeks quickly became sirs. Then that bubble burst, and the sirs went back to geekism and Ford Fiestas."

Too Little Too Late Regulators, The Bubble Is In

After hundreds of billions of dollars have been loaned, now the US regulators are warning about home equity loans? "At issue is the fast-growing market for home equity lending, which rose to $881 billion at the end of 2004 from $492 billion at the end of 2000, up 79 percent. Overall mortgage indebtedness nationwide climbed 57 percent, to $7.54 trillion at the end of 2004 from $4.8 trillion at the end of 2000."

Such a delay in action makes this blogger think the 'officials' wanted to pump cash into the system by any means possible, even if it meant poor loans.

"Veteran banking consultant Bert Ely said the warning comes at a time when a growing number of industry observers think the real estate price appreciation bubble 'can't expand further.' He added that whenever home prices rise for a long time, 'some lenders go overboard.'"

"Some lenders do not see a looming problem.'As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe,' said Scott Stern, chief executive of Lenders One." Chief executive?

Everybody's playing CYA. "The government warning was issued on the same day that the National Association of Realtors called for increased consumer education on the dangers of what the trade group called 'toxic' loans with predatory terms that hurt homeowners'. The group said that banking regulators were doing little to protect homeowners."

"'Consumers are also at risk, and the possibility exists that they could lose their homes' to foreclosure, said JoAnne Poole, president of the Maryland Association of Realtors."

Home Equity Loans Touted At Yahoo

From obscurity to neccessity, home equity loans become a prime source of funds, says Yahoo.

Loans Originated Without Sufficient Funds: Wamu

Mortgage firm Washington Mutual Inc. lost a round in court. "The Department of Labor has told Washington Mutual Inc. to rehire a loan executive, ruling that the company fired her in retaliation for blowing the whistle on certain mortgage practices."

"Theresa Hagman was vice president in the custom construction disbursement loan fulfillment center in California. Hagman noticed a sharp increase in loans on which borrowers defaulted, mainly because of insufficient due diligence during origination to determine whether there were sufficient funds to complete home construction."

"Hagman 'raised concerns that the bank was not following its written policies as required by law and therefore loans were being funded and underwritten without proper documentation or other safeguards,' the Labor Department ruling says. 'As a result, the bank, and consequently its shareholders, were put at financial risk' because Wamu was violating a number of federal laws and regulations on banking."

Monday, May 16, 2005

Rates Will Rise To Curtail "Spending Imbalances"

Donald Kohn, who sits on the board of governors at the Federal Reserve had this to say tonight. "We have not yet finished this task," he said in a video conference broadcast to an Australian Business Economists function in Sydney."

"The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run."

"And if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace," he said.

"Further Fed changes to interest rates should induce an increase in the personal savings rate, by increasing a return to saving and dampening the upward momentum in housing prices, Dr Kohn said."

Speculators Risk 'Bubble Bursting' : Lereah

The CBS News site has a story on more speculators being herded into the market. "Darryl Wortham says he's not speculating. 'I’m not looking to get a 50 percent return out in Vegas. I'm looking at 5 percent, 10 percent.'"

"Wortham, a tech project manager in California, has bought three houses this year in Georgia. 'So I bought all the properties really sight unseen.' That's right, he bought them online, through an Internet investment group."

"'You see they have all the pictures up here, so it makes it real easy to make the buy,' he says. 'You come down and see the 'purchase' button. That's all you have to do.' Asked if he's concerned about a housing bubble, Wnuk says: 'At least there won't be a depression in real estate.'"

This guy is changing his message every day. "'The second home market is surging,' says David LeReah, chief economist with the NAR. In some red-hot markets, he says, speculators are now driving up housing prices."

"'So there certainly is some risk,' says LeReah. 'There are certainly some pockets where they may be more vulnerable to a price bubble bursting than other areas of the country because of the speculative element.'"

Foreign Sources Of Mortgage Capital Dry Up

There was a stunning report from the US treasury on MarketWatch. "Foreign central banks became net sellers of U.S. assets for the first time in 19 months in March, helping to slow foreign capital inflows into the United States by 46%, the Treasury Department said Monday."

"Net capital inflows fell to $45.7 billion in March from $84.1 billion in February."

But the real shocker was the decline in net purchases of US Government Agency bonds, like those that Fannie Mae issues.

From private and official sources, in $billions:
Dec '04 25.6, 1.0
Jan '05 19.9, 6.1
Feb '05 10.9, 5.2
Mar '05 6.5, 1.0

To put that in context, from all sources in 2004, foreign buyers of agency bonds purchased $226 billion. The real lenders may be calling an end to the housing bubble.