Housing Bubble Bursting?

[Randolph Kinney]

So, can you still sell a house in San Diego or a condo?

Brad

Sure. All you have to do is set the price below what the short sale listings and bank owned listed properties are on the market.

The bank owned properties are killing the values; these are dumped on the market typically 20 to 30 percent below their original purchase price. Some neighborhood values are below their 2004 values. Refinancing is all but dead.

I am sure there are some neighborhoods that are holding value relative to 2005. However, the sales volume is way down across the county. The spring selling season was a bust.

My projection is for prices of homes will continue to decline.

 

[moh malekpour]

U.S. Housing Starts Fell in May to 1.474 Million Pace

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQfe3diju2fQ&refer=home

Housing starts in the U.S. fell in May, signaling the slump in home construction will continue to depress growth.

Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from 1.502 million the prior month, the Commerce Department said today in Washington. Building permits rose 3 percent to 1.501 million from 1.457 million.

Lower prices and more incentives have failed to spur interest as buyers wait for even bigger bargains, leaving builders with a glut of unsold properties. A jump in mortgage rates and stricter rules to qualify borrowers with poor credit ratings, known as subprime customers, may reduce demand even more in coming months, economists said.

Record levels of unsold homes suggest the slump is far from over. Federal Reserve policy makers now say the housing recession may linger longer than previously forecast.

``The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,'' Fed Chairman Ben S. Bernanke said June 5.

Forecasts

Declines in sales, construction and prices this year are going to be steeper than previously thought, the National Association of Realtors said June 6, in its fourth forecast revision this year. Housing starts are likely to fall 21 percent to 1.43 million from 1.8 million last year, the group said.

Sales of previously owned homes probably will tumble 4.6 percent to 6.18 million and the median price likely will fall 1.3 percent to $219,100, the Chicago-based trade group said. A month earlier, the association projected 2007 home sales to decline 2.9 percent. Sales of new homes will fall to 860,000 from 1.05 million last year, the group said.

A report yesterday showed builders turned more pessimistic this month. The National Association of Home Builders/Wells Fargo sentiment index dropped to 28, a 16-year low, from 30 in May. Readings below 50 mean most respondents view conditions as poor

Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,'' David Seiders, chief economist at the National Association of Homebuilders, said in an interview yesterday

 

[moh malekpour]

Mortgages Give Wall St. New Worries

http://www.nytimes.com/2007/06/19/business/19mortgage.html?_r=2&ref=business&oref=slogin&oref=slogin

After the first cracks in the subprime mortgage business appeared late last year, several large lenders were forced into bankruptcy

Now, the stress is sending tremors down Wall Street, as investment funds that bought a stake in those loans are starting to wobble.

Industry officials say they expect this second act to be longer and slower, unwinding over the next 12 to 18 months. The fallout could further constrict consumers with weak, or subprime, credit while helping to prolong the housing downturn.

On Wall Street, the impact could be far more significant: It could force banks, hedge funds and pension funds to acknowledge substantial losses, which had been tucked away in complex investment vehicles that are hard to evaluate. In turn, that could limit the money available for mortgage lending.

 

[moh malekpour]

Forecast: Weak housing market will take its toll in 2008

http://www.sfgate.com/cgi-bin/artic...hive/2007/06/19/BUGICQHFBR1.DTL&type=business

The sluggish housing market hasn't stalled the overall California economy so far, but researchers at a prominent forecasting group expect lower construction employment to drag growth lower next year.

"We've been expecting to see housing weakness take a toll on California and the fact that it hasn't has been a surprise to us," said Ryan Ratcliff, economist at the UCLA Anderson Forecast, which releases its forecast on the California economy today. "But based on the historical record, it wouldn't be wise to say we'll dodge the bullet."

Ratcliff does not foresee a recession for the state or nation but said the economy will remain lethargic until the real estate market begins to pick up around 2009.

 

[moh malekpour]

Subprime storm winds will keep blowing

http://www.usatoday.com/money/economy/housing/2007-06-18-subprime-usat_N.htm?loc=interstitialskip

The fallout from a years-long surge in subprime lending — higher-cost loans to borrowers with impaired credit — is far from finished. The number of homes entering foreclosure is expected to top 1 million this year, with 60% of those being subprime mortgages, says mortgage giant Freddie Mac.

The Mortgage Bankers Association predicts that adjustable-rate subprime foreclosures, already at a record, will rise into 2008, affecting borrowers, lenders and such Wall Street firms as Goldman Sachs and Bear Stearns, which packaged subprime loans into bonds.

A look at some numbers shows the distress: About 70% of subprime loans made in 2006 impose financial penalties on borrowers who repay or refinance early; 50% were made on stated, not documented income; many included piggyback loans; and few required borrowers to put money in escrow for taxes or insurance, leaving many unprepared for thousands of dollars in bills

The NAACP and other civil rights groups want a moratorium on foreclosures. Powerful House Financial Services Committee Chair Rep. Barney Frank, D-Mass., says that's unworkable. Instead, he and other lawmakers are working to get regulators and lenders to help borrowers restructure or refinance.

While they've made some progress, there are obstacles. Most subprime loans are resold to Wall Street securities firms, rebundled into bonds and sold to investors. Bonds may have a cap on the number of loans that can be restructured, or require the consent of bondholders for changes. Wall Street has shown flexibility, but Frank now wants help lifting prepayment penalties so borrowers can move into refinance programs by Fannie Mae and Freddie Mac.

 

[George Hatch]

Here's what Credit Suisse has to say about ARM resets. We're currently entering Month 6 on this chart. As you can see it starts to peak out from now until the end of the year and then a second wave comes along in 2010. You'll notice that, although smaller in volume, that second wave is comprised of a greater percentage of the more toxic option ARMs.

I think that the fallout from this second wave could well be of greater effect on pricing than that of the first wave. Pricing and demand will already have been weakened by the first wave.

 

[George Hatch]

BTW, The number of sales of SFRs/Condos through the local MLS through May of 2007 (~10,574) is about 14% below the volumes for the same time period of 2006 (12,279). This is significant because 2006 was the worst year for sales volumes (29,086) of any year since 1997 (27,155).

May of 2007 was even worse than that: We had 2,260 sales of SFRs/Condos through the MLS last month, compared to 2,942 sales for May of 2006. At a 23% decline from one May to another that indicates to me that the pace of this decline may actually be increasing as we progress during the year. If this year were to drop by a total of 20% compared to 2006, we could possibly be looking at the worst year for sales volumes since 1996 (22,796).

These are all raw numbers. What happens if we adjust these numbers based on the fact that we've added almost 10% more homes/condos to our housing stock over the last 10 years?

So locally, we have these opposing market forces - foreclosure activity and the subsequent disposition sales that must follow are rapidly increasing over the near term, and the number of buyers who are apparently compelled to buy during a known decline is clearly decreasing. If all the action occurs on the margins of the market and the size of that margin is increasing it follows (and indeed has already been demonstrated) that the pricing of the properties that do sell will reflect those changes.

 

[moh malekpour]

Subprime Mortgage Problems Quarantined? Ask the Home Builders

http://web-xp2a-pws.ntrs.com/popups...data/econ_research/0706/document/dd061807.pdf

The National Association of Home Builders (NAHB) index of current sales of new single-family homes edged down a tick to 29 in the June survey, the lowest reading for this housing cycle and the lowest reading since early 1991 (see Chart 1). Why? I will let David Seiders, the NAHB’s chief economist, tell you in his own words: “It's clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates.” The president of the NAHB, Brian Catalde, a home builder from El Segundo, California, added some flavor: "Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of non-price incentives to work down sizable inventory positions.” The June drop in the homes-sold index marks the fourth consecutive monthly decline. If May housing starts, which will be reported tomorrow, are not down sharply, then there will be about as much disconnect from reality in the housing starts data as there is in the retail sales data.

 

[Pamela Crowley (Florida)]

It's all because the demand that created this was speculator/investor/flipper driven. That put the basics out of balance. Now that those buyers are gone and the hot potatoes they still own cannot find the families that want to live there, we have an over-supply. It will take a long time to bring the basics back into balance and that includes declining prices.

 

[Randolph Kinney]

George has the graphic that shows the ARM reset schedule and the data dealing with demand (sales volume).

Pam has a part of the problem identified as excessive speculation.

Housing affordability with credit availability are the base level for demand for owner occupied homes. Absent the demand from speculators and investors, there is an oversupply of housing that is compounded by foreclosures. Credit availability has tighten considerably for the subprime market. Even if some of these subprime borrowers had a little equity, they could not refinance with today's credit requirements. That leaves them vulnerable when their mortgage payment resets. Home prices are falling the most in the entry level market.

Here in San Diego county, the inventory is rising along with short sales and foreclosures while sales volume is declining.

The last data from CAR on affordability: the HAI-FTB is based upon the following assumptions:

• median price of an entry-level home equal to 85 percent of prevailing median for all homes
• 10 percent down payment, corresponding to a 90 percent loan-to-value
• one-year arm index for previously occupied homes that includes points and fees, reported by the federal housing finance board
• qualifying ratio of 40 percent, meaning that the monthly payment (including taxes and insurance) cannot exceed 40 percent of household income.

Applying these assumptions to the market in the forth quarter of 2006, the minimum household income needed to purchase an entry-level home at $477,400 in California in the fourth quarter of 2006 was $96,760, based on an adjustable interest rate of 6.36 percent and assuming a 10 percent down payment. First-time buyers typically purchase a home equal to 85 percent of the prevailing median price. The monthly payment including taxes and insurance was $3,230 for the fourth quarter of 2006.

Who has $50,000 as a down payment? Who can afford a $3,000+ a month house payment?