Soft Market Teaches Flippers an Ever-So-Humble Lesson

Insurance brokers, doctors, bicycle mechanics and others who were investing in real estate for fast home sales and easy profits are finding that the financial incentives for speculation are fading fast. Nearly one in five flippers who sold from April to June of this year actually lost money on the deal, the highest level in 2-1/2 years, according to HomeSmartReports.com. Scoring success in flipping a couple of properties, Florida insurance broker Jeffrey Epstein has run into problems unloading a condo and a town house on which he put deposits when they were under construction in Miami in 2004. Epstein hadn’t planned on closing on the properties, but that was what he had to do in June and July in a local real estate market with a 17-month supply of condos and prices 11% below last year’s median. To sell them, he is now offering to pay the buyers’ closing costs and home owner’s association fees for a year, and plans to emerge from the deals with a small profit. According to the National Association of Realtors®, investors bought about one out of every four homes sold last year, focusing on the hottest markets such as California, Florida, Arizona and Nevada. A sharp drop in sales suggests that real estate speculators have fled the market, says Edward Leamer, director of the UCLA Anderson Forecast. Yet prices remain stubbornly high in most markets, showing that many investors are still holding onto their properties with the expectation of making a profit. (www.usatoday.com)
USA Today (9/21/06); Noelle Knox

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Wells Fargo CEO Calls Housing Slowdown a Healthy Correction

Even though Wells Fargo began pulling back about a year ago in the nation’s hot housing markets by requiring lower loan-to-value ratios and higher credit criteria in its home equity lending, the bank’s CEO Dick Kovacevich told the Bank of America’s 36th annual investment conference in San Francisco that he still expects the housing market to be good, “even this year.” Kovacevich said that he views the housing slowdown as a positive development. “We were getting into bubble territory,” he said. “As everyone knows, when a bubble bursts, the smaller the bubble, the better it is.” Kovacevich added that the bank has avoided controversial mortgage products such as option ARMs, which are adjustable rate loans that give borrowers various options on how they want to pay each month. The loans can result in negative amortization, because deferred interest is added to the balance. Kovacevich also criticized the popularity of low-doc loans, which enable borrowers to qualify for mortgages with minimal documentation. (www.sanfrancisco.bizjournals.com)
San Francisco Business Times (9/22/06); Mark Calvey

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It Seemed Like a Good Bet at the Time of the Loan

The Federal Reserve’s policy to increase short-term interest rates has caught many home owners in a “can’t pay, can’t sell, can’t refinance” vise in which increases in their adjustable rate mortgage payments are outpacing their income growth while their homes have not appreciated enough to cover the cost of a refinanced mortgage or to allow them to sell and walk away. While foreclosure could loom for some of these borrowers, most who bought homes with ARMs have seen house values rise sharply in recent years, providing ample room to switch to a loan with higher interest but less risk. Some borrowers whose loans are being reset are simply taking out new ARMs that carry a fixed rate for three years or less. But others are seeking to avoid further increases in the future. According to Craig Focardi, an analyst with TowerGroup of Needham, Mass., a borrower who took out a three-year, 4.6% ARM in 2003 for $300,000 was paying $1,610. When the rate rises to 6.6% this year, the buyer will be left with a monthly increase of $327. According to lenders and mortgage brokers, ARMs borrowers fall into three groups: those who aren’t concerned about higher interest rates; those who know they won’t be staying in their homes for long; and those who simply cannot afford higher monthly payments and are at the mercy of the market. Christopher Cagan, an analyst with First American Real Estate Solutions in Santa Ana, Calif., estimates that there is a risk of default in about 19% of the 7.7 million ARMs that were taken out in 2004 and 2005. (www.nytimes.com)
New York Times (9/24/06); Bob Tedeschi

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Slowdown Soon for PO ARMs?

National Mortgage News reports that there are signs that demand for the controversial payment-option ARM could be slowing, even though $83.3 billion in the loans was originated during the second quarter, accounting for 9.6% of the overall market in the U.S. for residential loans. One of the four different payment options for these loans allows borrowers to keep their monthly payments lower compared to the other options by going deeper into debt with negative amortization. This summer Countrywide Home Loans revealed that 75% of its payment option borrowers chose the lowest payment option. The lender’s CEO Angelo Mozilo was so concerned about this ratio that he had letters sent to eight million customers, advising them what their reset payments would be if they had to reprice the loan. Countrywide originated $5.4 billion in POAs in August, a 48% decline from the same month a year earlier. The performance of POAs and interest-only loans is an “area of substantial uncertainty” for the market, according to NAHB Chief Economist David Seiders. “We know the dollar volume” of the POAs that have been originated, but “we don’t know the features. Is it a payment-option ARM with a piggyback loan too?” (www.nationalmortgagenews.com)
National Mortgage News (9/18/06)

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Slowdown in Home Building Squeezes Vendors

With about 1,600 new homes sitting vacant in the Greensboro-Winston Salem, N.C. area and builders starting to drag their feet a bit on taking out new permits after double-digit increases in 2004 and 2005, John Thornton, of Salem Brick, says he has seen his business decline by about 10% over the past six weeks. While only a few weeks ago, he often had to wait three or four days for an independent hauler to be available to take bricks to a job site, he now has haulers calling him looking for work. Caroline Boyd, a sales manager for Mosaic Tile Co., says that builders are keeping a tighter eye on the budget as they select tiling for their homes, with more builders making selections in the lower price ranges. Richard Brenner, CEO of Amarr Garage Doors, said his customer base of garage door installation companies is reporting that builders are pressuring them to lower the price of installation. Brenner’s customers, in turn, are putting the pressure on him to reduce his prices. Edward Catalano, owner of EC Painting and Drywall Inc., says that because of a tighter market many companies such as his are bidding on projects on a cost-only basis just to keep people working. Bruce Holliday, owner of Cabinet Studio, said that his company set record sales for the last seven years. “If this year isn’t a record, I think we’ll be OK,” he said. “We’re in a position that we could ride it out for a few years.” (www.triad.bizjournals.com)
Business Journal of the Greater Triad Area (9/22/06)

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Midwest Job Losses May Trigger a Sharper Housing Slowdown

While attention has been focused on how the current housing slowdown is enfolding in the hot markets of the boom such as California, Florida and Nevada, recent data from the federal government and private researchers point to areas in the Midwest that are witnessing a more dramatic slowdown in home prices and, in some cases, higher borrower defaults than the rest of the country. Home prices have remained flat in the region for the past few years because of a weaker economy than other parts of the country. Michigan, for example, has lost 300,000 jobs since 2000. An analysis by First American LoanPerformance in San Francisco found that the percentage of loans in foreclosure in the Midwest states of Michigan, Ohio, Illinois and Wisconsin reached 0.93% in June, while foreclosures across the country averaged a historically low 0.5%.  According to a residential real-estate risk-scoring system maintained by analysts at Credit Suisse, which ranks the likelihood of home-price declines within a year, the most troubled metro areas are mainly in Michigan — including Detroit, Saginaw, Holland, Ann Arbor, Monroe and Jackson — and New England areas such as Boston. The least troubled metro areas are in the Northwest. (www.realestatejournal.como)
RealEstateJournal.com (9/22/06); Lingling Wei, The Wall Street Journal Online

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