I've been reading some bizarre stories about the housing market lately. Is the real estate industry gearing up for a crash?
Below are some recent articles I've read. The first story is just weird. I mean, what company in their right mind would allow someone with a $30k income to buy $1.5 million in housing?! I know good credit can get you a lot, but give me a break! It just gets more depressing from there.
Please chime in on how your local real estate markets are doing, and what your thoughts are on this issue.
Below are some recent articles I've read. The first story is just weird. I mean, what company in their right mind would allow someone with a $30k income to buy $1.5 million in housing?! I know good credit can get you a lot, but give me a break! It just gets more depressing from there.
Please chime in on how your local real estate markets are doing, and what your thoughts are on this issue.
http://www.lasvegassun.com/sunbin/stories/text/2004/nov/03/517768223.html
November 03, 2004
Man sues after Pulte price reductions
By Jennifer Shubinski
LAS VEGAS SUN
A California man who bought more than $1.5 million worth of Del Webb homes -- but says he has an income of $30,000 a year -- has sued the company alleging breach of contract after it lowered home prices throughout Las Vegas.
The suit also names Countrywide Home Loans, alleging fraudulent lending practices.
Igor Doncov, a resident of San Mateo County, Calif., alleges in the lawsuit that because Pulte Homes, the parent company of Del Webb, drastically cut home prices at the end of September, it "created an instant loss of over $100,000" on four of the Del Webb properties he owned.
That reduction, according to the lawsuit, caused Doncov to be unable to sell two of the homes he already closed on at the time the lawsuit was filed last month. Two other homes were in escrow.
At the end of September, Pulte reduced prices at its four Las Vegas Del Webb communities between 5 percent and 25 percent, or $50,000 to almost $160,000. Pulte also reduced prices in 18 of its 23 Pulte Home communities, with reductions ranging from $25,000 to $170,000. Pulte Homes blamed the reductions on a slowdown in demand and an over-aggressive pricing strategy.
Sheryl Palmer, Nevada area president of Pulte Homes, said she believes the company is close to a resolution with Doncov. Palmer said she could not disclose any details of the possible resolution.
Doncov, whose attorney Michael Cristalli declined comment, alleged that after realizing he did not have the means to pay the $15,000-per-month mortgages because he only makes "a little" more than $30,000 a year, he tried to cancel two of the contracts that had not closed escrow, according to the lawsuit.
Doncov alleged Del Webb refused to give his deposit money back and refused to cancel the contracts because he allegedly had been qualified and approved to close by Countrywide. The company then lowered its prices, Doncov alleged.
In the lawsuit, Doncov also alleged that Countrywide Home Loans engaged in fraudulent lending practices by overstating his income "in an effort to force him to close on a transaction no lending institution would ever approve based on his income."
According to the lawsuit, Countrywide obtained approval through a "stated income" loan, for which Doncov alleged Countrywide used fraudulently stated income never disclosed or approved by Doncov.
Countrywide Home Loans officials declined comment.
Scott Bice, Nevada's Mortgage Lending Division commissioner, said there have been no formal complaints filed against Countrywide regarding this case.
Bice said standard home loan forms include a section where the borrower signs off on the accuracy of the forms and of the stated income.
"If he signed that application, he's really responsible," Bice said. "If it was wrong, in theory he should have said this is erroneous."
The difference in the cost of the property and Doncov's income raised red flags for Ngai Pindell, an associate law professor who specializes in property and land use regulation at UNLV's William S. Boyd School of Law.
"I'm just struck by how an investor could tie up $1.5 million of property with such little personal income and such little capital behind that," Pindell said. "For me, it just shows one, a problem with speculation, namely how investors could participate in this housing market in this way."
Many investors and homeowners complained after Pulte Homes cut its home prices across the board. Many said it not only created a lack of confidence in the company, it hurt them financially.
Jeremy Aguero, a principal at Applied Analysis, said the bottom line is that any speculation in a market and any type of investment is a risk.
"Prices go up and prices go down," he said.
Aguero said he has sympathy for people who got caught at the peak of the market, but he said all the warning signs were there that the market had experienced hyper-appreciation that couldn't last.
"In the true absence of fraud, that a builder would be held strictly liable for price changes borders on ridiculous," he said.
November 04, 2004
Home Values Built on Rotten Foundations
by Richard Benson
We have been gleaning facts "brick by brick" in order to write this story on the housing market and what it all means for Wall Street and the economy. The story is simple: While the Federal Reserve is slowly raising interest rates, it is our observation that the housing price bubble is already bursting of its own accord.
Let me begin with the sale of a property located a short distance away from our modest casa in Palm Beach, where the big houses have names. Casa Apava, an estate with ocean and lakefront land totaling 18 acres, is under contract for about $70 Million by its current owner, Ronald Perelman. This same property sold for $14.25 Million in 1987. If the sale goes through, it will be the largest residential real estate sale in United States' history. (In 2004, the property was assessed for $33.4 Million and taxes were a modest $664,000 a year, or $55,333 a month). Needless to say, the buyer is reported to be the chairman of NVR, Inc., the nation's eighth largest home builder. Clearly, selling homes at inflated prices to average Americans, who bought them using other people's money, has paid off handsomely for this buyer.
The size of the housing bubble should not be underestimated. In middle America, housing prices are up 44 percent over the past 5 years while in the momentum markets, such as Las Vegas and Southern California, annual "price pops" of 20 to 40 percent have commonly been recorded until just recently. Housing is big business. In 2004, about 8 million new and used homes will sell with a total transaction value of $1.9 to $2 Trillion. Mortgage debt will rise about $800 billion to $7.5 Trillion by the end of this year. The increase in mortgage debt represents the spending that the Bush Administration needed to keep a $12 Trillion economy moving forward.
The good news is that home ownership rose 2 percent to an all time record of 67.2; the bad news is what had to be done to get it there while the labor force participation rate has dropped 2 percent! In other words, easy credit and record low interest rates have boosted home sales. In previous economic cycles, the boost to home sales came from rising incomes and more jobs!
Easy mortgage credit has been fostered by new mortgage products. New types of mortgages have been introduced over the past couple of years that transfer interest rate risk from the financial institution (mortgage owner), to the borrower, while allowing the borrower to take out the largest possible mortgage. Long gone are the days when a borrower borrowed what was considered a safe, prudent amount that they could actually pay back. Today, the borrower takes every penny that lenders will lend. In turn, lenders have "gone crazy" because at the end of the day, the lender is not lending "his" money. The loans go to a GSE security, or into a rated mortgage security, which in turn is bought by a bank or Hedge Fund that is invested just for a short term in the "Cash and Carry Trade".
Today, the new mortgage lenders are offering various types of mortgages to keep mortgage volume and quick origination profits up. These mortgages include Adjustable Rate, Interest Only, 40-Year, and Piggy Back. A Piggy Back mortgage is a senior mortgage combined with a junior mortgage that can leave the borrower owing more than 110% of the cost of the house. Moreover, these lending tactics leave the borrower more than a bit stretched and short liquidity, so it is no surprise that new mortgages that allow the borrower to skip payments and add the interest to principal are becoming popular. What will lenders who don't lend their own money think of next?
If these new types of mortgages aren't good enough to stretch a consumer's buying capacity, a few years ago special charities sprang up to give a home buyer his 5% down payment. (Since a home builder was giving the charity their funds anyway, he could easily "give back" 5% of his 30% profit to charity. Clearly, charity starts at home!
On top of that, President Bush signed the "American Dream Down Payment Act of 2003". This legislation authorized $200 Million per year in down payment assistance to at least 40,000 low-income families. His goal was to increase the number of minority homeowners by at least 5.5 million before the end of the decade.
Under Federal Law, if you are a first time home buyer and your income is 20 percent less than the local medium income, your neighbor - the US taxpayer - will give you the greater of $10,000, or 6% of the cost of the home to buy it! Thus, sub-prime borrowers have influenced home ownership rates considerably.
However, there are some sobering facts about sub-prime borrowers. They are twice as likely to pick an ARM mortgage. (ARM mortgages are already 30% of new home loans and, as the Federal Reserve raises interest rates to normal levels, the monthly payment on an ARM will go up over 25 percent).
Moreover, sub-prime borrowers frequently refinance. Borrowers who refinance for cash-out are twice as likely to default as those who don't take cash out. Currently, 70 to 80 percent of sub-prime mortgages are debt consolidation loans which add credit card and other debt onto the house!
These sub-prime mortgages have a terrible record. At least 16 percent are delinquent or in foreclosure, and 4.6 percent are actually in foreclosure. The "funny money" down payment mortgages are worse, with defaults running close to 20 percent. The Federal Housing Administration, FHA, which insures these loans, says national FHA mortgage defaults are 11 percent, while in cities like Baltimore, Maryland and Queens, New York, the default rates for FHA loans are 21 percent and 25 percent. Perhaps more lenders could do what FNMA does with loans heading to default: Re-write half of them and call them "good". Remember, "A rolling loan gathers no loss."
Also, with the Fed making money free, and the government trying to give money to sub-prime borrowers regardless of their willingness or ability to pay, the private sector is trying to get back in the lead of "the easy money free for all". The FBI has reported that in the first 9 months of 2004, 12,100 complaints of suspicious activity in the mortgage market have been reported. Fraud hot spots include the usual suspect states such as Florida, California, and Nevada with honorable mention to Michigan, Illinois and Missouri. (At least this restores my pride in the Midwest). Moreover, the reported fraud would be higher except that i) most of the FBI are out looking for terrorists, and ii) fraud big enough to interest the FBI only includes something like the house or buyer not even existing.
Most mortgages written today have a bit of a fudge factor in the total honesty of income and net worth. Much information is excluded from debt and payment histories, and "appraisals are either wish or myth." Even the Mortgage Bankers Association recognizes that the home appraisal process is totally broken. In reality, with easy money allowing home prices to rise, fraud has become a way of life in the mortgage market because every participant makes a commission or fee if the mortgage closes. The higher the house price, the bigger the mortgage!
Looking back at the facts, it is easy to see that the foundation for housing prices is rotting fast. Buyers have stretched the truth, in every possible way, in order to buy the most expensive house for the lowest possible monthly payment. Given the fraudulent loan underwriting and emphasis on Adjustable Rate mortgages and sub-prime loans, it is clear that any rise in mortgage rates will bury housing.
At the high end of the housing market, there are reports of "Yuppie Fatigue". Super-sizing homes also super-sizes the heating and utility bills, insurance and maintenance costs. Those vaulted ceilings sure look nice, but watch out for the heating bill! Million dollar home foreclosures are picking up.
In the general housing market, 5 to 6 percent of homes already have more debt than home value, and homeowners are loading up with home equity loans and lines of credit. These home equity loans and lines will be up to $400 billion in 2004. Home equity can be spent, but as home prices stop going up, more and more homes will have "no equity left".
Currently, wages and salaries have not kept up with inflation despite "economic recovery"; bankruptcies will hit another all time record of over 1.6 million in 2004. Forty five percent of workers have total net assets of less than $25,000 (including the value of their house) and less than 4 of 10 workers save anything.
All of these facts were in place well before oil and natural gas prices headed north for the economic winter. Reasonable estimates show the average household bill for gas for the car and energy for the home will be $9,000 in 2005, up from $6,000 last year. Other costs of running a household would put people in the poorhouse, but it's too expensive to check in. This Christmas, Santa might skip homes that are draining their home equity.
Does housing always go up forever? In the United Kingdom where housing prices have soared like in America, prices fell last month. Real estate agents can't be found to talk about it, as it is bad for business. In San Diego, housing prices have been flat the last couple of months while the supply of homes for sale has jumped from a 2-month to an 8-month supply.
In Las Vegas there is an unfolding house price debacle. The national public has heard that the large developer, Pulte Homes, has cut new home prices by 8 to 25 percent, and 25 percent of new homes on order have just been cancelled. However, the public hasn't heard that i) 20 to 40 percent of sales in new planned unit developments were to speculators; ii) For-Rent signs in the complexes are everywhere. (To make some easy money on the flip, buyers of second and third homes planned to rent them out first); and, iii) Homes that sold for $750,000 just three months ago are across the street from homes that the same developer is selling today at a nice profit for $550,000. "The Las Vegas housing market has crapped out!"
In the United States, the supply of new homes has risen steadily to a 275 day supply. Six of the 14 largest home builders have debt-to-equity ratios of 95 percent, and home builders know exactly what the car companies know: "If you want to move inventory, cut the price!"
If home lenders would only read history they would know that from 1975 to 1995, on average home prices rose only 0.4% and with prices sagging now, they should ask for a larger down payment, and fast, or they will be facing big losses. In a market where housing prices are flat, it takes a 15 to 20 percent down payment to protect a lender against loss. The sales commission is 6% and REPO, carry, and marketing costs can run another 10% or more.
What would a rational down payment mean for housing prices? Today, a buyer who can scrape up $20,000 for a 5 percent down payment can afford a home priced at $400,000. If you ask him for a 10 percent down payment, he can suddenly only afford a home costing $200,000! Rational down payments will force housing prices down. Whatever you do, please do not share this observation with existing homeowners; they might want to sell before I have had a chance to follow up with Ron Perelman's example.
Richard Benson
Benson's Economic & Market Trends
Specialty Finance Group, LLC
http://www.boston.com/business/articles/2004/10/26/signs_point_to_slowdown_in_housing_market?pg=full
Signs point to slowdown in housing market
By Chris Reidy, Globe Staff | October 26, 2004
The local real estate market is showing signs of slowing down.
There are more homes on the market in Greater Boston than at any time during the last five years, some properties -- especially the more expensive ones -- are taking longer to sell, and price reductions are becoming increasingly common. Meanwhile, sales of single-family homes across the state fell for the second consecutive month, according to yesterday's report from the Massachusetts Association of Realtors.
''Anyone who tells you it hasn't softened is lying," Linda O'Koniewski, the owner of real estate brokerage Re/Max Heritage in Melrose, said. ''A lot of sellers are afraid the market has peaked. They're saying to themselves, 'If I'm thinking of moving in the next few years, why not cash out now?' "
The Massachusetts Association of Realtors yesterday reported that the number of single-family homes sold statewide last month declined 2.7 percent from a year earlier. While the September median sales price of $346,000 was 11.6 percent higher than a year ago, that's the lowest the monthly median has been since May.
As of the end of last month, MLS Property Information Network Inc., which tracks homes for sale, had 7,034 Greater Boston listings for single-family homes and condos -- 862 more properties than a year ago.
Scott Bauman and his wife are feeling the effects. With a baby on the way, they needed to make a move, and in mid-August, they put their antique Ipswich home on the market for $610,000 with Listforless.com, a do-it-yourself website for sellers.
''We thought we'd get lots of offers," said Bauman, 39, who works for a public-relations firm. After five weeks, they received one offer -- for less than asking price. Their home later went under agreement for $590,000 .
''I don't see any other houses selling nearby," he said. ''We definitely feel lucky."
The Baumans' experience is a far cry from those of many sellers in recent years, when bidding wars and offers over asking price were common.
''In prior years, there were three buyers for every house on the market," said Jim Nagle of Coldwell Banker in Lexington. ''Now there are three houses for every buyer.
''When the market was really hot a few years ago, a house might sell in six to eight to 12 days," said David O'Neil, at Century 21 Spindler & O'Neil in North Reading. ''Now they can stay on the market for 90 to 120 days. The market right now is healthy, but it's not robust as it was a few years ago."
Ellen Slaby, 46, and her husband put their Lexington home on the market at $729,999 in February, with plans to move closer to the city. In August, it went under agreement at $615,000. Slaby said a reason it took so long to find a buyer was that there were so many other homes on the market.
But reflecting another side to the market, she added: ''We had friends who sold their house in a week. They were afraid to tell us because they didn't want us to feel bad."
Indeed, segments of the market -- especially homes that are more affordable or are in move-in condition -- remain strong. Statewide condo sales in September rose 16.6 percent to 1,795 units on a year-to-year basis. The median sales price of a condo was $259,900, up 15.5 percent from a year ago.
And not everyone agrees that the boom -- fueled by historically low interest rates amid the region's limited housing supply -- has ended. Some realtors insist that it's normal to see slow sales and price reductions in the fall because New Englanders hate moving in the winter, and that this season has the presidential election and the Red Sox as added distractions.
''Based on the time of year, I've seen no real change in open-house attendance, general inquiries, nor in the number of houses going under agreement," said executive vice president Michael Jewell, who oversees 85 New England offices of Coldwell Banker Residential Brokerage.
Judy Moore, president of the Massachusetts Association of Realtors, said the launch of military action against Iraq hurt the spring 2003 market. Nervous buyers waited until the fall to make a purchase. As a result, comparing last fall's robust sales activity to this fall's doesn't give an accurate picture, she said. While more homes are for sale this year and homes are staying on the market longer, there isn't enough data yet to say that market has entered a new cycle, she said.
But it does feel weaker to some.
Bill Wendel, president of the Real Estate Cafe, a fee-for-service brokerage firm, said his analysis of Arlington and Belmont shows that ''demand and prices are falling."
Paul Frank, owner of Homefinders Buyer Agency in Foxborough, also sees a market losing momentum.
''Last spring was pretty hot; summer was OK; now it's definitely slower," he said.
Walid Saba, president of MAPASS Inc., which arranges appointments for agents showing homes to potential buyers, said the average number of showings per listing was 6.5 last month, versus 4 a year ago.
''More showings mean it takes longer to sell a house," Saba said. ''Last year, if you saw a house you liked, you needed to bid on it immediately. This year, people are looking, but they don't feel they need to make a decision right away."
According to a recent report by economic analysts at Goldman Sachs, the risk of a downturn in the national housing market is rising. The report points to the fact that the inventory of houses on the market has grown and that building of new units continues at a relatively strong pace. At the same time, many buyers have adopted a speculative mindset, believing that prices will keep going up at a fast rate. In a worst-case scenario, the rising supply of houses on the market coupled with overinflated values could lead to a sharp drop in prices.
Saba doesn't believe prices will plummet any time soon, but said, ''We could see prices flattening."
Indeed, demand already appears to be softening.
Marcus Groff, a computer systems administrator, recently cut the price on his Lowell home. Last month, he put the house on the market for $324,900 . After getting no offers, he came down two weeks later to $309,900 .
Chris Reidy can be reached at [email protected].
Business Week October 2004
Homebuilders Are Stretched Thin
Even as demand falls and inventories rise, they're taking on debt to boost construction and keep up their heady growth
To the casual observer, the homebuilding industry appears to be in remarkably good shape this deep into the housing cycle: Most of the large publicly traded builders such as Lennar Corp. (LEN ) and KB Home (KBH ) are still reporting double-digit gains in both sales and profits. And most also still boast high returns on their investments. Los Angeles-based KB Home, for instance, is on a pace to earn 16% return on capital over the past year. "Other companies only dream about that," says KB Chief Financial Officer Dom Cecere.
Yet despite those solid numbers, cracks are starting to form in the foundations of the nation's largest homebuilders. To maintain their heady growth rates, the big builders are placing ever-bigger bets as they continue adding to their land holdings and the number of houses they have under construction.
BORROWING FRENZY. Even as the Federal Reserve has started raising interest rates -- while signaling that further hikes lie ahead -- builders have continued to throw up new homes at a furious pace. The amount of capital that the 14 largest publicly traded builders have tied up in inventories of unsold homes and land, adjusted for sales, has risen an average 12% over the past year, according to Palladian Research, a New York institutional research firm.
As a result, those inventories now stand at the highest level relative to sales in seven years. And some builders are faring much worse than average. Inventories at Dominion Home (DHOM ) in Dublin, Ohio, for instance, have soared 38.8%, while Ryland Group (RYL ) in Calabasas, Calif., has seen them jump 30.6%. "They are increasingly running their businesses with an 'If we build it, they will come' mindset," says James D. Poyner, a market strategist at Palladian.
To fund all this new construction, homebuilders are burning through cash at a furious pace. For the 12 months ended in June, the large publicly traded builders laid out $373 million more cash than they took in, Poyner notes. Compare that with the much more modest $73 million "burn rate" builders went through for the year that ended in June, 2003. That has left builders increasingly resorting to debt and stock issuance to fund their operations: Of the 14 largest publicly traded builders, six now have debt-to-equity ratios of 95% or higher, including Dominion and KB Home.
OVERBLOWN FEARS. What concerns critics is that this frenzy of borrowing comes as housing demand is starting to cool: Single-family starts dipped 8.2% in September, to a seasonally adjusted annual rate of 1.54 million units. Some Wall Street experts, such as Jan Hatzius, senior economist at Goldman Sachs (GS ), predict that single-family starts could slide an additional 10% to 20% in the coming year as higher rates take their bite. "The risks of a serious problem will rise the longer construction activity remains at its current elevated level," Hatzius wrote in an Oct. 15 report.
Builders counter that fears of a housing crash are overblown. They argue that their land purchases are largely in the form of options that often require them to put down less than 10% of the value of the tracts; even then, they say they often build only when firm orders from buyers exist. What's more, builders contend that if demand cools, they'll have the wherewithal to scale back construction quickly -- and turn negative cash flows back into positive territory by simply selling down their existing inventory of finished homes.
"When the market does slow down -- and our data doesn't show that it is slowing down -- our earnings might slow, but free cash flow will come in bucketloads at that point," says J. Larry Sorsby, chief financial officer for Hovnanian Enterprises Inc., a Red Bank (N.J.) builder. STRAINING TO BUY. Still, there's growing evidence that cooling demand already has some builders coming up with novel ways to produce higher profits. To generate a 12% rise in earnings during its third quarter -- less than half the growth rate of recent quarters -- Miami-based Lennar resorted to heavy land sales to other builders. Kathy Shanley, a senior analyst for Gimme Credit, a bond-research firm, estimates that in the quarter that ended on Aug. 31, Lennar generated roughly a quarter of its $225 million in earnings from land sales to other builders. Moreover, with gross margins of 37% -- well above the 22.9% gross margin Lennar generates from its home sales -- such sales also help keep overall margins up.
By contrast, land sales contributed less than $2 million to Lennar's bottom line as recently as 2001 and 2002. The company's chief financial officer, Bruce E. Gross, says the land sales occurred only because it saw opportunities to exploit heavy demand for new tracts by other builders. "We're not liquidating our assets to meet a number," he insists.
Maybe not. But Lennar clearly needs land sales to counter weak orders in some markets and to boost profits. In its West Coast markets, new orders fell 6% in its fiscal third quarter.
Another potential sign of weakening market conditions: Fully 35% of Lennar buyers took out adjustable-rate mortgages, vs. just 20% a year ago. That suggests that some customers "are straining to afford current price levels, even with low interest rates," says Shanley. Gross says the rising use of adjustable-rate mortgages simply reflects buyers' growing preference for lower-cost, floating rates. "We haven't seen any degradation in credit quality," he says.
CANCELLED ORDERS. In markets that have gotten overheated, some builders are starting to get burned. In Las Vegas, home prices rose an average 41% over the last year, fueled in part by speculators flipping new homes almost as soon as they're finished. With the rise in interest rates, however, the Vegas bubble has burst. Inventories of unsold existing single-family homes in Las Vegas shot up from 1,400 in February to more than 15,000 in September.
That's one reason Pulte Homes (PHM) in Bloomfield Hills, Mich., announced in early October that its 2004 profits will come in as much as $50 million below expectations. After raising prices in some developments by over 50% over the past year, Pulte is rolling them back 8% to 28%.
Still, buyers continue to cancel orders in droves. Some analysts say cancellation rates are running at about 25% throughout Las Vegas. "We overpriced our product relative to the competition," says Pulte Chief Executive Officer Richard J. Dugas Jr. But even with lower prices, Dugas maintains that Vegas remains "among the company's leading markets for margins."
Given the heavy bets builders have placed, a slowdown doesn't auger well. All of a sudden, the housing industry's future is looking more and more like a roll of the dice.
