Article in August 29, 2007 WSJ

Steep Home-Price Drop Stirs Fears

Market May Get Worse Still
As Effect of Stricter Lending
Has Yet to Show Up in Data

By KELLY EVANS
August 29, 2007

The decline in U.S. home prices accelerated in the second quarter as a glut of unsold homes and tighter lending standards continued to weigh on the market.

Home prices nationwide tumbled an average 3.2% from a year earlier, according to an index compiled by Standard & Poor's Corp. The decline was sharper than the year-to-year decline in the first quarter, when the S&P/Case-Shiller national home-price index dropped 1.6%.

Lehman Brothers Holdings Inc. economist Michelle Meyer attributed falling home prices to a "huge imbalance" in the housing market: "There's a high presence of risky [mortgage] loans and a massive overhang of homes for sale," she said.

Home prices have been falling for more than a year and economists had widely expected the S&P/Case-Shiller index to reflect that trend. But the size of the latest decline was worrisome in part because it was larger than that of competing home-price indexes. A separate report released Monday by the National Association of Realtors found that the median sales price of existing homes slipped to $228,900 in July, down just 0.6% from a year earlier.

Moreover, the latest S&P/Case-Shiller survey covers the April through June period, prior to the sharp deterioration in the health of the nation's mortgage lenders that came to light this month. That trend, which has been unfolding for months, picked up pace in August as Wall Street cut off funding to mortgage lenders and mortgage companies sharply curtailed their lending to consumers, squeezing a number of buyers out of the market. That could lead to further deterioration in home prices in the future.

"These pricing pressures have not been seen in post-World War II history," said economist Brian Bethune at Global Insight. "It's very difficult for the markets to be able to deal with that kind of stress."

Mr. Bethune noted that today's price declines are worse than those during the housing bust of 1990-91 that preceded a national recession. "The housing market is definitely a leading indicator of a potentially more serious downward moment in the economy," he said.

Among the 20 cities in the S&P/Case Shiller survey, Detroit was the biggest decliner, with the average price of a home there falling 11% from the previous June. The Detroit-area economy continues to suffer from a struggling auto industry and a high concentration of risky subprime loans. "Bubble" regions like San Diego, Tampa, and Washington, D.C., where home prices had risen rapidly during the boom, all decreased by more than 7%.

Not all metropolitan areas reported home price declines, however. Seattle home prices were up 7.9% from a year earlier, while prices in Charlotte, N.C., rose 6.8%. Portland, Ore., Atlanta, and Dallas also bucked the downward trend.

The Seattle market may be benefiting from the area's booming aircraft and technology industries, which are adding jobs and fueling demand for homes, according to Mr. Bethune. Charlotte similarly benefits from the recent strong performance of its finance industry, while Portland is increasingly attracting retirees from higher-price cities like Phoenix and Las Vegas.

Notably, the S&P/Case-Shiller survey found that prices in the New York City metropolitan area declined, even though most local real-estate agents say prices for expensive condominiums in Manhattan continue to surge. There are two explanations for the difference. First, the S&P/Case-Shiller survey covers only single-family homes, not condominiums and cooperatives, which dominate the Manhattan market. Also, while prices are still rising in parts of the city, they are starting to decline in the suburbs.

"There's a divergence between what's going on with suburban homes and the apartment/condo market in the city center," said Standard & Poor's Vice President and index committee member Maureen Maitland.

Ms. Maitland also said the index committee was watching prices in the Boston area, which were among the first in the nation to decline -- for any signs of recovery. "There's been some chatter about the Northeast [market] turning around," she said, as price declines in Boston moderate. But she said it would take several months to know for sure whether such a turnaround is taking place.

The Office of Federal Housing Enterprise Oversight index of second-quarter U.S. home prices, which also tracks the same homes over time, will be released tomorrow. The Ofheo data, however, only include those homes with loans backed by Fannie Mae and Freddie Mac -- which excludes many homes in high-price housing markets.

Article in August 28, 2007 Detroit Free Press

Home Prices: Steepest Drop in 20 Years

By VINNEE TONG
AP Business Writer

NEW YORK (AP) -- U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said Tuesday.

The decline in home prices around the nation shows no evidence of a market recovery anytime soon, one of the architects of the index said.

MacroMarkets LLC Chief Economist Robert Shiller said the declining residential real estate market "shows no signs of slowing down."

The report came a day after the National Association of Realtors said sales of existing homes dropped for a fifth straight month in July while the number of unsold homes shot up to a record level.

The S&P/Case-Schiller quarterly index tracks price trends among existing single-family homes across the nation compared with a year earlier .

A separate index that covers 20 U.S. cities fell 3.5 percent in June from a year earlier. A 10-city index fell 4.1 percent from a year earlier.

Housing is among the economic indicators closely watched by Federal Reserve policymakers.

After five years of rapidly rising home prices, the market stalled last year, with prices holding steady or falling as sales slowed. Since then, lenders have made it more difficult for some people to get mortgages by tightening standards just as foreclosures rise and some who borrowed at adjustable rates facing higher payments they can't meet.

Problems have spread from those with poor credit repayment histories to more creditworthy borrowers.

The Fed has taken a number of steps aimed at stabilizing the situation, and market watchers look further for a possible cut in the federal funds rate, which is the rate commercial banks charge each other for short-term loans. That rate has been kept steady at 5.25 percent for more than a year.

The Fed has its next regularly scheduled meeting on Sept. 18.

Fifteen of the cities surveyed for S&P's 20-city index showed a year-over-year decline in prices in June.

Prices in Boston dropped in June at a slower rate than they did in May, continuing a trend that started at the beginning of the year. In April 2006, Boston was the first metropolitan area to show a year-over-year decline, so any turnaround there could be an early sign of recovery.

S&P said it needed more data to determine whether Boston would be the first area to improve.

Detroit led the cities with the biggest price declines, with an 11 percent drop from June of last year. Other cities with falling prices included Tampa, Fla., San Diego and Washington, D.C., which all recorded drops of at least 7 percent.

Seattle and Charlotte, N.C., were on the small list of cities that saw prices rise in the same period. Seattle prices rose 8 percent in June while Charlotte saw a 6.8 percent increase.

In Monday's report, the National Association of Realtors said sales of existing homes dipped by 0.2 percent in July from June to a seasonally adjusted annual rate of 5.75 million units.

The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. It marked the 12th consecutive month that home prices have declined, a record stretch.

Article in August 27, 2007 WSJ

Existing-Home Sales Declined in July
As Prices Dropped, Inventories Rose

By JEFF BATER
August 27, 2007

WASHINGTON -- Existing-home sales fell a fifth straight time during July, while inventories of unsold property climbed and prices dropped.

Home resales declined to a 5.75 million annual rate, a 0.2% decrease from June's revised 5.76 million annual pace, the National Association of Realtors said Monday. June's rate was originally estimated at 5.75 million.

The median home price was $228,900 in July, down 0.6% from $230,200 in July 2006. The median price in June this year was $229,200.

NAR economist Lawrence Yun said the housing market is holding on despite "temporary mortgage disruptions."

"Home sales probably would be rising in the absence of the mortgage liquidity issues of the past two months," Mr. Yun said. "Some buyers with contracts have been scrambling when loan commitments did not materialize at the last moment, while other potential buyers are simply waiting for the mortgage market to stabilize."

The July resales level was above Wall Street expectations of a 5.72 million sales rate for previously owned homes. The 5.75-million rate was the lowest since 5.73 million during November 2002.

The average 30-year mortgage rate was 6.70% in July, up from 6.66% in June, according to Freddie Mac.

Inventories of homes rose 5.1% at the end of July to 4.59 million available for sale. That represented a 9.6-month supply at the current sales pace. There was a 9.1-month supply at the end of June, revised from a previously estimated 8.8 months.

Regionally, existing-home sales were mixed. Sales fell 2.2% in the Midwest, rose 1.0% in the Northeast, climbed 1.8% in the West, and remained flat in the South.

Article in August 23, 2007 Detroti Free Press

Layoffs grow in mortgage industry

Subprime lending market is no more, says former Countrywide executive

August 23, 2007

BY GRETA GUEST

FREE PRESS BUSINESS WRITER

Brian Jurvis of Hazel Park wasn't surprised when he was laid off late last week from Countrywide Financial Corp.'s subprime lending division.

He was among six employees laid off Aug. 16 at Countrywide's Full Spectrum Lending Division in Troy, he said. About 16 people worked there. He went back Tuesday and the office looked abandoned.

"There is no subprime market anymore," said Jurvis, 36. "I knew something was coming down."

Jurvis joined more than 25,000 workers nationwide who have lost jobs in the financial services industry since the beginning of the month -- more than half of them eliminated since Friday. With few exceptions, the cuts are the direct result of woes in the nation's housing market, especially in subprime mortgages created for borrowers with risky credit.

In Michigan, hundreds of jobs have been lost as subprime and wholesale operations have vanished, said Drew Sygit, a certified mortgage and equity planning specialist with the Lending Edge Team at Meadowbrook Mortgage in Bloomfield Hills.

Sygit notes that Franklin Mortgage Funding, a subprime lender in Southfield, laid off 120 people earlier this year, Aegis in Troy let 25 people go three weeks ago, American Home Mortgage laid off 25 employees at its Farmington Hills underwriting operation and Option One in Novi let 30 people go.

"I'm not aware of a subprime lender with offices in Michigan," Sygit said. "A lot of them will not lend in Michigan."

More layoffs are announced daily. On Wednesday, Lehman Brothers Holdings Inc. closed its subprime mortgage business, laying off 1,200 workers at 23 offices; Scottsdale, Ariz.-based 1st National Bank Holding Co. closed its wholesale mortgage unit and cut 541 jobs, and Accredited Home Lenders Holding Co. added 1,600 positions to the heap.

Tuesday night banking giant HSBC said it would close a main financing office and cut 600 jobs.

Since the start of the year, more than 40,000 workers have lost their jobs at mortgage lending institutions, according to recent company layoff announcements and data complied by the global outplacement firm Challenger, Gray & Christmas Inc.

Meanwhile, construction companies have announced nearly 20,000 job cuts this year, while the National Association of Realtors expects membership rolls to decline this year for the first time in a decade.

It's an employment collapse that threatens to rival the massive layoffs in the airline industry that followed the Sept. 11, 2001, terrorist attacks, when about 100,000 employees lost their jobs.

"It's far from over," said Bart Narter, a senior analyst with Celent, a Boston-based financial research and consulting firm. "The subprime lending collapse will continue to ripple through the financial sector."

For five years, the nation's housing market was booming and mortgage companies grew quickly, at times offering lucrative jobs to people who had little experience.

Jurvis, an account executive at Countrywide, worked in the mortgage business a little more than two years after several years of building and installing elevators around Michigan. He now plans to go back to school to get his teaching certificate.

Article in August 22, 2007 WSJ

Toll Brothers Posts 85% Drop in Net
On Writedowns, Slower Construction

By JONATHAN VUOCOLO and ELANA BEISER

August 22, 2007

Toll Brothers Inc.'s fiscal third-quarter net fell 85% as the luxury-home builder recorded more land writedowns amid continued slowing in new home construction.

Chairman and Chief Executive Robert Toll said in a statement that the builder had experienced "a much higher rate of cancellations than at any time in our 21-year history as a public company" due to the downturn in the housing market.

For the quarter ended July 31, the Huntingdon Valley, Pa., firm posted net income of $26.5 million, or 16 cents a share, compared with $174.6 million, or $1.07 a share, a year earlier. The latest quarter's results included pretax writedowns of $147.3 million. Toll said two weeks ago it would record pretax writedowns of $125 million to $175 million as home builders lower the value of undeveloped land on their books. Excluding writedowns, earnings for the fiscal third-quarter would have been 70 cents a share, the company said. The mean estimate of analysts polled by Thomson Financial was for a loss of 2 cents a share.

Toll released some preliminary results two weeks ago. It said home-building revenue fell 21% to $1.21 billion, topping analysts' forecast of $1.08 billion, as the value of net signed contracts fell 31% to $727.1 million and the number of gross contracts signed dropped 17% to 1,457. Toll's cancellation rate rose to 24% from 19% in the fiscal second quarter. The number of cancellations, 347, was the lowest in a year.

At the time, Mr. Toll said, "The pace of home sales could slow further until the credit market settles down." In the two weeks since he made those comments, the credit markets have become much more roiled. Wednesday, he expressed concern about the "dislocation" in the secondary mortgage market and said tightening credit standards will shrink the pool of potential home buyers, but added that he expects Toll's profile as a luxury builder for buyers with attractive credit profiles to help the company whether the storm.

"Mortgage-market liquidity issues and higher borrowing rates may impede some customers from closing, while others may find it more difficult to sell their existing homes," Mr. Toll said. "However, we believe that our buyers generally should be able to continue to secure mortgages, due to their typically lower loan-to-value ratios and attractive credit profiles."

The company declined to provide any earnings guidance or update any previous forecasts. Chief Financial Officer Joel Rassman cited "numerous uncertainties surrounding sales paces, the mortgage markets, market direction and the potential for and size of future impairments."

Toll also declined to give earnings guidance two weeks ago, citing market conditions. In May, the company declined to update its earnings forecast. The firm's last outlook, given in February, was for fiscal-year earnings of $1.46 to $1.85 a share. Analysts' mean estimate is for earnings of 84 cents a share.

"We believe that reducing new home production until the current oversupply is absorbed is a key step in bringing housing markets back into equilibrium," Mr. Toll said, adding that last week's data on housing starts data implied that this is beginning to occur.

Article in August 21, 2007 Detroti News

Michigan foreclosure filings up 39 percent June-July

Alex Veiga / Associated Press

LOS ANGELES -- Foreclosure filings rose 9 percent from June to July and surged 93 percent over the same period last year, with Nevada, Georgia and Michigan accounting for the highest foreclosure rates nationwide, a research firm said Tuesday.

The filings include default notices, auction sale notices and bank repossessions. The figures are the latest measure of the ailing housing market, which has seen defaults and foreclosures soar as financially strapped borrowers have failed to make payments or find buyers.

In all, 179,599 foreclosure filings were reported during July, up from 92,845 in the year-ago month, according to Irvine-based RealtyTrac Inc.

A total of 164,644 foreclosure filings were reported in June.

The national foreclosure rate in July was one filing for every 693 households, the firm said.

"While 43 states experienced year-over-year increases in foreclosure activity, just five states -- California, Florida, Michigan, Ohio and Georgia -- accounted for more than half of the nation's total foreclosure filings," said RealtyTrac Chief Executive James J. Saccacio.

Nevada posted the highest foreclosure rate: one filing for every 199 households, or more than three times the national average. It reported 5,116 filings during the month, an increase of 8 percent from June.

Georgia's foreclosure rate was more than twice the national average, with one filing for every 299 households. The state reported 12,602 foreclosure filings, up 75 percent from June.

Michigan reported 13,979 filings in July, a 39 percent spike from June.

California, Florida, and Ohio were among the states with the highest number of foreclosure filings in July, the firm said.

California cities continued to dominate top metropolitan foreclosure rates.

The state reported 39,013 foreclosure filings last month, the most by any single state, but the number of filings rose less than 1 percent from June's total.

The state's foreclosure rate was one filing for every 333 households, RealtyTrac said.

Florida's foreclosure filings fell 9 percent between June and July to 19,179. The July figure represents a 78 percent jump from a year ago.

RealtyTrac did not say if a single property received more than one notice. The company did not break out the exact property count.

In recent months, the mortgage industry has been battered by rising defaults and foreclosures, primarily driven by borrowers with subprime loans and adjustable rate mortgages.

Lagging home sales and flat or decreasing home prices have made it more difficult for homeowners who fall behind on payments to sell their homes and clear the debt, spurring the rise in foreclosure activity.

Article in August 15, 2007 Detroit News

New Data Reveals Severity of Home Sales Slump

WASHINGTON -- Sales of existing homes fell in 41 states during the April-June quarter while home prices were down in one-third of the metropolitan areas surveyed, a real estate trade group reported today.

The new figures from the National Association of Realtors underscored the severity of the current housing slump, the worst downturn in 16 years.

However, Realtors officials said they saw some glimmers of hope in the data. They noted that existing home prices were up in 97 of the 149 metropolitan areas surveyed compared with the sales prices of a year ago.

That represented price gains for 65 percent of the areas surveyed, an improvement from the first quarter of this year when only about 55 percent of the metropolitan areas reported price gains from the same period a year ago. In the fourth quarter of last year, less than half of the metropolitan areas reported price gains.

"Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming-out in the fourth quarter of 2006," said Lawrence Yun, senior economist for the Realtors.

The states suffering the biggest drop in sales in the second quarter, compared to the same period a year ago, were Florida, down 41.3 percent, and Nevada, down 37.5 percent. Other states with big declines were Arizona, down 23.4 percent; Tennessee, down 21.5 percent; Maryland, down 21.1 percent, and California, down 19.8 percent.

Bucking the downward trend, six states actually showed sales increases during the second quarter while one state had unchanged sales and there was incomplete data for two states, the Realtors reported.

Wyoming had the biggest sales increase, a rise of 10.8 percent in the second quarter of this year compared to the second quarter of 2006. Sales were up 4.1 percent in Iowa from a year ago while sales in North Dakota rose by 2.9 percent, the third strongest gain.

Nationwide, sales of existing homes totaled 5.91 million units at an annual rate in the second quarter, down 10.8 percent from the sales pace of the second quarter of 2006.

The national median sales price in the second quarter was $223,800, down 1.5 percent from a median price in the spring of 2006.

"Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets," Yun said.

Article in August 20, 2007 Detroit News

Lenders to offer loan aid

Some homeowners will qualify to switch ARMs to fixed rates

Nathan Hurst / The Detroit News

Desperate to stop the flood of foreclosures among their Michigan customers, mortgage brokers are loosening some of their lending rules to help homeowners trapped in adjustable-rate mortgages.

The lenders are making it easier for some homeowners to convert their ARMs, many of which are set to adjust upward over the next six months, to fixed-rate mortgages with payments that stay the same over the life of the loans. The bankers figure that if they can keep payments reasonable for their borrowers, they can reduce future foreclosures.

That's not only good for the homeowners who qualify, but also for the bankers. With a market so slow that homes can go unsold for months, even years, foreclosed houses have become a banker's burden. If they can sell the houses at all, it's often for much less than what the homeowners owe on their loans. So it's become a lot cheaper to make refinancing easier for those who are current on their ARM payments, but could find themselves in trouble once the interest rates go higher.

"Here in Michigan, with our economy, banks absolutely do not want houses," said Audrey Acquisti, an owner-broker with MSource Financial Group, based in Clarkston. "They will lose money. Working out a deal with a homeowner is better on their end, too."

The deals lenders are offering counter a larger trend toward stricter requirements to get home loans, in light of a deepening crisis in the mortgage industry. That tightening has accelerated in the past two weeks as many lenders have stopped making all but the safest mortgages.

But loosening the rules for credit-worthy customers with burdensome ARMs makes sense for lenders.

"It's simple," said Brian Seibert, president of Watson Group Financial in Waterford. "Banks are willing to work with good customers who might not have qualified for some fixed-rate loans just a few years ago. Anything but foreclosure."

Foreclosures skyrocket

Michigan's foreclosure rates began rising quickly last year, and this year they have skyrocketed -- fueled by not only the surge nationwide in high-interest subprime mortgages to borrowers with shaky credit, but also the sustained economic slump in Michigan that has left thousands of workers without jobs, especially in the auto industry.

The number of Metro Detroit foreclosures in the first half of this year jumped by more than 50 percent over the same period last year, and the Metro region has consistently ranked among the top in the nation for foreclosure rates this past year.

The help from lenders is coming in many forms and is available primarily to homeowners who have strong payment histories on their existing mortgages and good credit.

Some local brokers are using existing mortgage programs through agencies like the Federal Housing Administration and the U.S. Department of Agriculture to offer fixed-rate refinance options to adjustable rate mortgage holders. Others are crafting their own deals, including loans that let some at-risk owners refinance to prime loans just years after they could qualify only for a subprime mortgage. To get that type of deal, homeowners must have good payment histories on both their mortgages and other bills.

Owners get options

A key provision of many of the refinancing programs, especially those offered by the feds, is that they allow mortgage holders to refinance to a fixed rate for up to 100 percent of a home's value.

Owners who qualify typically have high credit scores and haven't missed payments on their existing loans. The programs are extensions of previous federal offerings meant to stave off foreclosures.

Other options include federal and private loans that will cover up to 97 percent of a home's value, also of particular interest for homeowners who have faced decreasing housing values in recent years.

Options are more limited for those who are current with their mortgage payments, but are upside down on their house -- they owe more on the loan than the house is worth -- because of falling home prices, a trend that has hit Metro Detroit particularly hard the past two years.

In those instances, only certain types of already-issued FHA loans can be easily readjusted to accommodate a drop in a house's value, Seibert said.

Brokers say a homeowner's best bet is to find out when the ARM's interest rate will reset and take action before that happens.

ARMs begin to reset

Homeowners across the country are facing higher mortgage payments in the months ahead, with more than $797 billion worth of ARMs scheduled to reset over the next two years, according to a report released earlier this year by Credit Suisse Group, a global investment services bank.

Just less than $200 billion of those mortgages will reset in the next four months, meaning families with reasonable mortgage payments could face a big jump in their mortgage bill just in time for the holidays. Some $32 billion worth of ARMs will reset in October alone.

The adjustments can bump a mortgage payment up significantly. Acquisti said she had a client visit her office recently who had an ARM on her $112,000 home.

By refinancing to a fixed-rate loan, the homeowner was able to avoid a 2-point increase in the loan's interest rate -- and paying $150 more toward her home loan each month.

The smart ARM holders are those who seek pre-emptive help, said Pava Leyrer, president of the Michigan Mortgage Brokers Association.

"Know your situation," she said.

"Be very proactive, especially if you have a readjustment coming due. Most people would be surprised by the help they can get."

Article in August 17, 2007 Detroit News

Metro Detroit home foreclosures increase

Wayne County listed second in the nation with one out of every 29 homes in foreclosure.

Nathan Hurst / The Detroit News

Nearly 29,000 Metro Detroit houses faced foreclosure in the first half of 2007, according to data released Tuesday.

In Wayne County alone there were 20,231 homes that were in some stage of foreclosure from January through July of this year, according to RealtyTrac, an Irvine, Calif.-based listing service for foreclosed homes.

Those 20,231 homes represented 28,705 filings in Wayne County in the first half of the year, because each home facing foreclosure usually is involved in two or three filings.

Nationally, Wayne County's foreclosure rate of one of every 29 households for the first half of 2007 was second only to Stockton, Calif., which had one of every 27 homes in foreclosure. Other areas hit hard by foreclosures included Las Vegas, Denver, Miami, Cleveland and Memphis, Tenn.

Homeowners throughout the region and the country are struggling to hang on to their homes amid a major glut in the residential real estate market and continued fallout from troubles in the subprime mortgage market.

Foreclosure filings were up significantly in all four Metro Detroit counties for the January-June period:

In Wayne County, there were 28,705 filings, up 99 percent from the first half of 2006.
In Macomb County, 6,152 filings, up 74 percent.
In Oakland County, 6,083 filings, up 120 percent.
In Livingston County, 217 filings, up 40 percent.

Many housing markets nationwide have been hit especially hard by a spike in subprime mortgage foreclosures, most resulting from interest rates adjusting on adjustable rate mortgages. Many homeowners who took out ARMs in 2004 are seeing their interest rates -- and monthly payments -- adjusted upward now, sometimes to levels they can't afford.

In Michigan, however, local foreclosures have less to do with the subprime mortgage fallout than overall economic problems plaguing the state, said Pava Leyrer, president of the Michigan Mortgage Brokers Association,

"Here, we are actually below the national average for subprime-affected households," Leyrer said. "It's more traditional. People here are losing their jobs. If you don't have the job, you don't have the money and you can't make the payment."

Article in August 16, 2007 Detroit News

New home building slump worst since 1991

WASHINGTON -- Construction of new homes fell to the lowest level in more than a decade in July as builders continued to struggle with the steepest housing slump since 1991.

The Commerce Department reported Thursday that construction of new homes and apartments dropped 6.1 percent last month to a seasonally adjusted annual rate of 1.38 million units. That was down 20.9 percent from the pace of activity a year ago and represented the slowest pace since January 1997.

The housing industry, which had enjoyed a prolonged boom until 2006, has been struggling this year with a deepening slump as builders are slashing prices and throwing in various incentives in an effort to unload record levels of unsold homes. The problems have been worsened by rising home foreclosures, especially in the subprime market, a development which is dumping even more homes onto the glutted market.

Article in August 9, 2007 Wall Street Journal

Anxious Builders Pile On Incentives

Perks, Price Cuts Become More Lavish
As Developers Grow Increasingly Desperate;
Would You Like a Pool With That?

By JEFF D. OPDYKE

August 9, 2007

With the housing market looking increasingly frail, home builders and real-estate agents are going to new extremes to attract buyers, dangling lavish incentives and slashing prices.

In Boca Raton, Fla., Gordon Homes is offering to pay two years of property taxes and insurance --worth as much as $150,000 on houses priced as high as $2.5 million -- for buyers of completed homes at its upscale Azura development. In Richmond, Va., Orleans Homebuilders Inc. is offering "Sizzling Summer Sale Savings" that include as much as $100,000 off the cost of upgrades ranging from granite countertops to a conservatory. And in Medford, Ore., Diane Adams, a real-estate agent, is offering to pay four months of mortgage payments on the $975,000 house she and her home-builder husband constructed on 20 acres near Crater Lake.

"I'd also negotiate a lower price, too," says Ms. Adams, an agent with Re/Max International Inc. "I just want this house off our books."

Across the country, the theme is the same: Home builders and home sellers are juicing their efforts to unload single-family homes. Among other things, they are offering buyers cash discounts of as much as 20%, throwing in a pool and agreeing to finish basements, garages and other spaces at a cost of several thousand dollars -- incentives much richer than builders were offering as recently as six months ago, when the downturn didn't look as bleak.

Since then, home builders have been hit hard as rising mortgage delinquency rates have made lenders much more reluctant to issue new loans, causing home prices to fall and inventories of unsold homes to rise. In June, new-home sales had fallen more than 40% from their peak two years ago, and more than half a million new houses -- nearly eight months of supply -- sit in inventory, according to the most recent report from the National Association of Home Builders. Contract cancellations, meanwhile, have hit nearly 30% for some builders.

Things may not get better for a while. The National Association of Realtors said yesterday that new home sales this year were likely to fall 19% from last year, worse than its previous forecast of a 17.7% drop.

Many builders never expected the housing market to fall this far. Now they're struggling with empty land, too few buyers and an inventory of finished homes that have been sitting empty for months -- and some are growing desperate to free the cash locked up in their real estate by enticing the dwindling number of buyers. The latest survey taken by the National Association of Home Builders indicates that 56% of builders are now offering incentives, up from about 45% a year ago.

And those incentives are growing bigger. In California's San Diego County, Chris Heller, a real-estate agent with Keller Williams Realty, says that until about 18 months ago, builders had little reason to offer incentives. Today, he says, "buyers are asking for the moon, and they're often getting it."

Mr. Heller says that on houses in the $700,000 range, his clients are typically scoring multiple concessions totaling as much as $80,000. Generally, that includes a price reduction, an agreement to pay closing costs or upgraded flooring or appliances -- or a combination of all three.

Builders in the greater Dallas-Fort Worth area have also been struggling to move homes and are using incentives more freely. "They are giving stuff away here," says Kenneth Cox, a real-estate agent with DFW Urban Realty in Dallas.

In suburban Dallas, incentives on single-family homes abound, including price reductions of as much as 20% and free swimming pools. Steve Wall, president of builder Wall Homes Inc., says his company is knocking as much as 18% off the list price for inventory homes in the city's northeast suburbs. For other homes yet to be built, the builder is offering free blinds, a free covered patio and 50% off upgrades, up to $20,000. "It's more competitive than this time last year," Mr. Wall says.

This trend toward more-generous incentives is "likely to intensify," says Mark Zandi, chief economist at Moody's Economy.com, citing a growing inventory of new homes, an oversupply of pre-owned homes on the market and "a glut of homes that are a year or two old that investors bought as rental property that have never been lived in, and those investors are now trying to sell, too."

Incentives alone often aren't enough to close a sale, however. National builder KB Home says that in May, it was offering to pay $5,000 toward closing costs on already completed, or "inventory," homes, up from $1,000 about a year ago, "but we find that these kinds of incentives don't generally work that well," says a spokeswoman. Rowena Emmett, an independent Realtor in La Canada, Calif., says that during Southern California's last downturn, a client offered home buyers a new Porsche, "but that didn't work."

Builders generally try to avoid outright price markdowns, in part because it angers prior home buyers who don't want prices in their subdivisions forced down. These days, though, builders increasingly resort to price cuts "because it's all about avoiding bankruptcy for some," says Gene Rivers, a Keller Williams agent in Tallahassee, Fla., where builders are offering incentives and price markdowns of as much as 15% of the purchase price on $300,000 and $400,000 houses, double the level of a year ago.

Certainly, not every market is struggling. Dianna Kokoszka, a vice president at Austin, Texas-based Keller Williams Realty, says homes in hot markets such as Austin still receive multiple offers, making incentives unnecessary. In other markets, pockets of strength may still exist, particularly in popular neighborhoods. Jim Napier, president of Napier Realtors ERA, in Richmond, Va., says an agent last week listed a house for $600,000 in a desirable subdivision, "and it sold in two days at the list price, all cash."

Still, in much of the country, it's a buyer's market. And the savviest buyers are using that to their advantage.

Lummie Jones, a vice president at Napier Realtors, says the best deals go to those who buy inventory homes, can close within 30 days and who have no contingencies in their contracts, such as the need to sell another house or find financing. Those buyers, Ms. Jones says, "are getting concessions of between 5% and 10%" of the house price.

Also, have a preapproval letter in hand, which indicates that a lender is ready to fund your mortgage immediately up to a certain amount, "and tell them to show you the two or three best deals they have," says Mr. Rivers, the Tallahassee agent. Certain houses -- even identical ones -- can have different carrying costs because one needed a special foundation or took longer to build. "That's the house the builder wants off his books first," Mr. Rivers says.

Orleans Homebuilders, based in Bensalem, Pa., for instance, has knocked nearly $200,000 off the price of some already built million-dollar homes in Richmond, Va., and is offering an additional $20,000 reduction for buyers who buy inventory homes before Labor Day.

For buyers short on cash, builders are offering as much as $10,000 to help cover costs, which can help buyers qualify financially for the home.

In markets such as Denver and Seattle, builders are increasingly willing to pay agents substantially larger commissions -- as much as 4% of the home's sales price, up from 1.5% or less -- to help unload inventory homes. In turn, some agents are returning some of that money to builders to lower the home price to help buyers qualify for the house.

"Don't be afraid to negotiate for as much as you can these days," says Judy King, a Seattle-area Re/Max agent. "There's a lot of flexibility in a market like this."

Article in August 6, 2007 Wall Street Journal

Housing Market to Weaken Even Further
As Mortgage Industry Takes Cure

By JAMES R. HAGERTY

August 6, 2007

After a binge of lax lending in recent years, the U.S. home-mortgage industry is finally taking the cure, swearing off high-risk loans to people with lousy credit records. The bad news is that this medicine is creating a vicious circle that will make the housing market even weaker, at least in the near term.

As regulators and jittery investors force them to adopt more and more conservative lending standards, lenders are cutting more people out of the housing market. In what would strike most people outside the industry as a return to common sense, lenders now are shunning would-be borrowers who can't make a down payment, prove that they have a reliable income and show a record of reasonably regular bill-paying. They also are turning down refinancing requests from many people trapped by adjustable-rate loans that are proving too expensive after the initial feel-good period of low payments.

"This week is going to be a nightmare," says Melissa Cohn, chief executive of Manhattan Mortgage in New York. Lenders are scaling back so fast that it isn't clear which loans are available or on what terms, and rates are jumping even on large loans, known as jumbos, for prime borrowers.

These stricter lending standards reduce demand for homes and nudge some people who can't refinance toward foreclosure. Higher foreclosures add to a glut of homes on the market in most of the country. And, completing the vicious circle, a weaker housing market comes back to bite the lenders by wiping out owners' equity in their homes and increasing the risk of even more foreclosures down the road.

"The market is in a panic," says Larry Goldstone, president of Thornburg Mortgage Inc., a lender in Santa Fe, N.M. He says he thinks the mortgage-bond market, which supplies most of the money for home mortgages, will calm down within a few months, but the housing market may need at least another year or two to heal.

Earlier this year, lenders had to cut back on subprime mortgages, those for people with the weakest credit records, because a surge in defaults made investors unwilling to buy so many of those loans. In the past few weeks, stung by losses on mortgage securities at some big funds and clampdowns by rating agencies, investors have grown much more nervous. For good reason: A recent Merrill Lynch report estimates that they face $120 billion to $170 billion of default-related losses on U.S. home mortgages currently outstanding. So investors now are shying away from many more types of mortgages, including those known as Alt-A, a category between prime and subprime.

By late last week, panic among mortgage lenders and investors was starting to feed on itself. One midsize lender, American Home Mortgage Investment Corp., shut down its lending operations after creditors cut off funding; the chief executive of another big lender declared that the mortgage-securities market was "not functioning;" and Countrywide Financial Corp., the nation's biggest home lender by loan volume, felt compelled to issue a statement Thursday saying it had plenty of cash on hand. Despite that reassurance, Countrywide's share price dropped 6.6% Friday. Some lenders temporarily stopped taking loan applications Friday because they were unsure about their ability to sell mortgages to investors.

This retreat by investors, who until six months ago seemed to have a boundless appetite for risky mortgages, is forcing lenders to concentrate on more traditional types of loans that they can keep as investments or sell to Fannie Mae and Freddie Mac, the government-sponsored providers of mortgage funding. Fannie and Freddie's share of mortgages packaged into securities rebounded to 49% in the second quarter from a low of 37% a year earlier, according to Inside the GSEs, a trade publication.

Because loan standards are now much tougher, at least 10% to 15% of the people who could have qualified for a home-purchase loan last year can't do so now, says Jan Hatzius, chief U.S. economist at Goldman Sachs. Meanwhile, many of the people who would still qualify for a loan don't want to buy a house now because they think prices will fall further. So the housing market is likely to remain weak for at least another couple of years, Mr. Hatzius figures.

One reason is that it takes time to absorb all the houses and condos waiting for buyers. The National Association of Realtors counts about 4.2 million resale homes for sale, along with more than 500,000 new homes on the market. That is enough to last about 8½ months at the recent sales rate; a supply of five to six months generally is considered balanced.

Foreclosures will add to the supply. Moody's Economy.com has estimated that 2.5 million homeowners will default on their mortgage loans this year and next. Some will be able to keep their homes, through "loan modification" agreements that reduce payments or through various refinance packages offered by lenders and state rescue programs. But about 1.7 million of them will lose their homes to foreclosure, the research firm projects.

The U.S. housing boom over the past decade turned about five million renters into homeowners, says William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology. But many of the loans that made that possible have proved unsustainable. Dr. Wheaton expects about two-thirds of those people to go back to renting. Eventually, he says, rents will rise, and more people will see owning as a better alternative, helping to revive the housing market, perhaps in 2009 or 2010.