The Housing Bubble 2

Technical Delays Today

2006-02-05T10:29:00.000-08:00

There will be periodic technical delays today. Thank you for your patience and please check back.

The Housing Bubble And The Employment Effect

2006-02-05T08:58:00.000-08:00

Readers want to discuss the housing bubble and the jobs impact. "I wanted to suggest a topic: I want to get into the details of the last SoCal collapse that has (to date) been blamed on the Aerospace industry collapse." "Is there a job loss scenario for SoCal that mirrors 1990? There have be oblique references to losses in the mortgage, banking and construction industries that seem to be the most likely candidates, but I also have an example that occured to me through personal experience." "I have a relative in Atlanta that has been working in the mortgage industry for the last five years. He owns a condo, but has been also been buying and flipping properties. He knows appraisers who will appraise for 'whatever he wants,' he can arrange for them to get the loan, and walk them through the application so that they don't 'hit any snags.' I am a lawyer and advised him this is really a bad idea, filled with conflicts of interest and possible fraud, but he advised me that this is standard operating procedure." "This seems to me a very overlooked area of froth (as a shout out to the departing Mr. Greenspan) which might account for some uncertainty in possible housing devaluation." Another reader asks, "How about a job loss update? We all know about Ford and GM. How about other recent announcements? Jobs are the glue that holds it all together." And another, "I, too, am interested in job loss scenarios for SoCal. A few years ago Big Pharmaceutical got hit pretty hard, though I'm not sure what the real cause was. It might have had something to do with the dot com bust and the Nasdaq decline generally. I know of one chemist who was laid off at that time and only recently got a 'real' job again, at Genentech in San Francisco." "I'd be curious to know why the downturn in Big Pharm, and could it happen again. After all, they are not profitless tech startups. A big slump in pharm would have a huge effect on the northern bay area and San Diego, if so." "I'm not sure what the big employment drivers are in the LA area, to be honest. There are a number of smallish tech startups. There is also the movie industry. The major studios are already asking big stars to take pay cuts and they are planning on putting out less product for the next few years." "In my area, much is made of the fact that The O.C. is filmed in Manhattan Beach. Big deal; one friggin TV show. Yet an unbelievable amount of froth has been generated around it. I am only half-joking when I say that the local economy here consists of selling real estate to each other and teaching each other yoga."

A 'Rash Of Cancellations' In Fresno

2006-02-05T07:21:00.000-08:00

The Fresno Bee has the latest on that bursting housing bubble. "Some home builders, trying to keep home prices down and responding to a possibly slower and highly competitive market in 2006, are planning to unveil new, more affordable designs. 'If [builders] see things taper off, they could shift the product a couple price points to midmarket or entry-market homes,' said John Karevoll." "Lower-priced offerings would be welcome in Fresno County, where the percentage of families that could afford a median-priced home sank to record lows in 2005, the pinnacle of a five-year real estate boom in the central San Joaquin Valley." "Rich Wathen expects more competition this year among builders, and without the escalating prices that frustrated many home buyers the last few years. 'Air is coming out of the bubble,' he said. 'There will be a lot of competition, and more as the year goes on. That will definitely have an impact on sales and prices.'" "How much of an impact? Wathen thinks sales in the central San Joaquin Valley could fall 10% to 15%. Developers say the long waiting lists and campouts at model home sites that characterized the past few years have mostly evaporated. 'We were allowing contingency buyers over the last three years, but in October, November and December we got a rash of cancellations as homes were getting completed,' said Steve Lutton, division president of Lennar Homes." "The greatest increase was in Fresno County, where cancellations doubled. Karevoll acknowledged the dangers of trying to assess this real estate market. '2006 will be an interesting year for the number crunchers,' he said. 'The arrows in the grass are pointing in all different directions. I've never seen the measures of uncertainty so high,' he said."

Any 'Freebees' In Your Housing Bubble?

2006-02-04T14:45:00.000-08:00

How about the housing market in your neck of the woods? Post any observations or media sources that you want to share; open houses, anecdotal items, etc. Some readers posted these in the topics thread. "The radio spots that are STILL played by mortgage brokers. Hayes Barnard of Paramont Equity is the worst. His newest is 'the average SD home appreciated nearly 40k last year! You have the power for financial freedom to pay off debt with this new found equity' Like 40k is just like your car keys or that $10 bill in your pants back pocket." "Are sellers including 'freebees' in your area? (Cars, vacations, plasma TV's, ganite counter tops)? Here in Irvine, (Orange County) California, the Irvine Public Schools Foundation is including a BMW 750Li in an 'early bird' drawing as part of its annual house raffle. That's a first." Another said, "I'd like comments from owners/rentors who actually live in these hi-rise condos so we could have first hand knowledge of the pros and cons." This reader noticed a change. "Is the tightening up of credit/liquidity being felt by consumers in areas other than mortgages?" "I pondered this last night when I took my junk mail and fed it to my shredder. Looking at the unsolicited credit card offers, I noticed that the quality of the offers (Balance transfer terms and CCard terms) seems to be way down in the last few months." "I've got the kind of credit profile that gets great offers by the ton (only 3 cards, plenty of activity (use Amex for everything I can), almost no debt, fico mid-800's, flawless histories) so I'm wondering why the change. As a single sample, this could be because something has changed in my credit reports. (Though it shouldn't have - I'm going to get updated reports to make sure nothing funny has happened)." "On the other hand, If I am not alone in seeing this trend, does that mean that lenders are anticipating tougher times and reduced consumer spending ahead? That would likely mean more people using their offers just to transfer balances back-and-forth to keep rates and payments down, and less new purchase spending." To which another responded, "But that's a good thing, right? I get tired of receiving all that mail. I'm just messin' with ya. I understand your observation and it's worthy of note. I agree it would be interesting if the lack of is related."

Speculators In 'Frenzy Of Over-Confidence'

2006-02-04T13:38:00.000-08:00

This financial advice answers some questions for speculators. "Q: I became a real estate investor last year (probably, too late) buying a small townhouse, which, fortunately, I rented out within a month. The idea was to let the property increase in value and sell it in two or three years. Now I know that plan will not work. How do you see the picture for investors who recently purchased properties?" "A: There are three essential issues you need to address: First, are the rent and the value of tax write-offs sufficient to support the property? If not, can you reasonably continue to carry the loss?" "Second, did you finance with a loan where payments may rise significantly in the next few years? If yes, will you be able to reasonably afford the higher payments? Third, what is happening in your local market? Are the population and job bases growing? Speak with local brokers for details." "If you can carry the property in a market with good fundamentals, then you have to question whether it makes sense to sell now and take a loss." "Q: Two years ago I refinanced my home. The lender appraised the house at $165,000. I did the loan, a two-year ARM, now the ARM 'start' rate has expired. My monthly payment has gone from $1,200 per month to almost $1,600. I went to refinance with the original company that gave me the loan and they said my home was now only worth $150,000 tops. I owe $160,000. The people who made the original said that due to foreclosures in my area property values had dropped in the last two years." "I now rent the property for around $1,250 per month. I would like to sell next spring but will be looking at a $5,000 to $10,000 loss. Any ideas?" "A: Interest rates are now rising thus your monthly cash loss a year from now could be substantially larger. You need to get this problem quickly sorted out." "The fact is the real estate is a commodity. Prices go up and down. In your case both property values fell and interest rates rose at the same time, the worst combination for a short-term investor. Huge numbers of people have invested in real estate with little down and financing that they only expected to hold for a few years. They gambled that if prices rose in those few years they would be able to sell the property, avoid higher loan costs and earn a profit from the sale. Some investors, in a frenzy of over-confidence, never considered what would happen if property values simply remained stable or actually fell." "Ask if your tenants if they would like to buy. If they have no interest, speak with local brokers where the property is located. Also, speak with other lenders, they may have a different view of local values." "By the time you're done with closing costs I suspect your losses will be greater than $10,000. Thus you have a situation where you both cannot keep the home and also cannot afford to sell it." "It may be that it will be necessary to downsize your current lifestyle, get a long-term loan to cover your losses, get a second job or sell off a car or other asset. None of this is easy, but the situation would be worse with a foreclosure and bankruptcy."

What's Your Housing Bubble Exposure?

2006-02-04T11:59:00.000-08:00

Several readers want input on where to park their housing cash. "I'm looking for a new bank for my cash. The main thing i'm concerned with is stability in the event of trouble ahead. that and good rates on 6 to 12 month cd's." "And while we're on the subject, how safe is internet banking (Ing Direct etc). Finally, do you guys like the ibonds?" A reader responded, "I've used ING direct for about 5 years now, and haven't had any problems with it, yet. But lately with all the bad financial news banging about, I'm getting antsy about having my cash in a digital account. If you want to get it out in a hurry, you're out of luck. It takes at least 2-3 business days to transfer funds from Ing to your local bank, then you gotta hope your local bank's doors are still open for business." One reader broadened the subject. "I'd like to read about where other readers have their money invested. What the rate and terms are and if it has worked out for them. Did the bank/company give them what was offered, were there any hidden fees, for example to move money in or out, do they know what this bank/company invests in primarily, has anyone discovered something new, has anyone tried something new and did it work out?" "I'm seeing a lot more offers out there (some pretty good) and lots of them are from unknown banks, so I wanted to get an idea of which are the better more reputable ones to stick with. Also, if anyone has suggestions ideas for a good mutual fund with respect to sector or class. Such as ‘good to invest in bio-tech or perhaps energy funds’ or ‘good to invest in growth or emerging markets or maybe small cap.’" Another is curious about housing bubble exposure. "Which institutions are holding GSE-issued or private MBSs and CMOs (asian banks vs. American mutual/retirement funds)? Do asian central banks own more of the stuff, or do Americans (through their mutual/retirement/401K/IRA funds)?" "While GSE-issued debt is fairly easy to spot on a prospectus/annual report (look for Fannie & Freddie), how can you tell if your mutual fund also owns PRIVATELY-issued MBSs or CMOs?" This reader had some answers. "Have you used Weiss Ratings for bank safety ratings? Nobody is as conservative as Weiss when it comes to rating financial institutions. He has a much better track record than AM Best, Moody's, Fitches, etc, when it comes to warning subscribers of impending bank failure BEFORE the failure." "Just last night we got our annual Weiss ratings book in the mail. A number of banks no longer have the A+ rating, probably because they are exposed to local bubbly real estate markets." "Fortunately Farmer's and Merchants bank, right in Southern California, is one of the best banks in the country, at least by Weiss's standards. Even better, they know about their rating and work hard to maintain it." "My survival strategy has largely consisted of having a Treasury Direct account wired to my F&M savings account. I won't mess with any Treasury money funds from a mutual fund company that might have to go through a bank that, you get the idea."

'Where Are The Buyers' In Phoenix?

2006-02-04T10:11:00.000-08:00

The Arizona Republic reports on the lack of affordability in Phoenix. "Skyrocketing prices have made Valley resale homes harder to afford than any time since the beginning of the last decade. A key housing index shows that a used home in metro Phoenix has not been so difficult to afford since 1990, even though interest rates have remained fairly stable and incomes are up. That's because prices for resale homes are at record high, though the market has cooled in recent months." "The new figures have implications for everyone associated with the Valley's real estate market, from agents to owners to businesses worrying if their employees can find a place to live. 'If you are trying to by a home, you have to be careful about what you are doing,' said Jay Butler, head of the ASU real estate center. 'If you are trying to sell this area as a place for a new company, then you may have some serious issues.'" "But incomes are not growing as quickly as house prices, which are at record levels after a yearlong selling frenzy fueled in part by speculators. The index is based on the value of 100 being the level where a typical buyer can afford a median-priced home at current interest rates and household income. Numbers higher than 100 signify increased affordability and those lower suggest the opposite. The Valley's resale index fell from 114 in 2004 to 84 in 2005. The new-home index dropped from 102 to 80 during that same time." "Buyers may finally be fed up with the higher prices. Agents say there are more houses on the market than at the peak of the buying binge and the houses are taking longer to sell." "'I asked another Realtor what he thinks about the real estate market,' said Brett Barry, (an) agent who specializes in the northeast Valley. 'He said, "What real estate market?' I have sellers calling me every day, breathing down my neck, saying, 'Where are the buyers?'"

The Legacy Of Greenspan, And Life After

2006-02-04T08:10:00.000-08:00

During the week, a thread for quotes from Alan Greenspan was suggested, so this is the place for that. And a reader asks, "Topic Suggestion: Life after Greenspan." "Some questions to address: 1) Will Bernanke abolish the PPT? 2) Will he do it gradually (administer methadone rather than induce fatal withdrawal symptoms)? 3) If he tries to reflate through purchase of l-t bonds, will that lead to higher interest rates (read mortgage rates) due to inflation fears? 4) And hence, won't any effort to offset an Asian pullback from $US assets inadvertently crash the housing market? 5) Will Ben B take measures to end the conundrum?" Another ponders, "How will the lower unemployment rate influence the FED on its rate changing policy in relation to Ben Bernanke?" "Will it be business as usual and they will continue to raise rates or will ben get in and just start printing money? We all know what affect higher rates will have on the housing market and we know what lower rates will do to the dollar. What becomes more important to Bernanke?"

Buyers 'Sitting On The Sidelines' In Boston

2006-02-04T07:08:00.000-08:00

The Boston Globe reports on the prospects for realtors. "Tempted by the boom, a record number of college graduates, retirees, housewives, and laid-off executives jumped into the real estate game last year, before sales started to slip. State records show that 9,547 people obtained licenses to sell real estate in Massachusetts in 2005, up 6 percent over the previous year. Today, there are more agents in Massachusetts than at any time in the past seven years." "'I think a lot of people saw real estate as an opportunity to use their business skills and make a lot of money, but things today aren't what they were a year ago,' said veteran broker Ruth Pino. 'Back then, buyers didn't quibble about price or inspection issues because there were 10 other buyers lined up behind them to purchase the property.'" "'Today, there's one buyer for every five or 10 houses, so the job has become a little more stressful,' said Pino, office manager in Gloucester." "A glut of unsold properties in Boston's suburbs is adding to the intense pressures facing new agents. The number of single-family houses for sale in communities around Boston surged 58 percent, to 4,286 yesterday, compared with a year earlier, according to the MLS of Shrewsbury. The figures include the suburbs within the Interstate 495 corridor." "Buyers now have the upper hand, and they know it, said Kelly Martinson, who is a director of the Greater Newburyport Board of Realtors. Many buyers are sitting on the sidelines, waiting to see whether prices will fall as the busy spring selling season draws closer, she said. As a result, homes are lingering on the market longer. For many agents, that means the time between paychecks is also growing."

The Bubble's Popping; Don't Take It Personally

2006-02-03T16:30:00.000-08:00

With many new readers, this blogger should explain that at the end of a busy Friday, it's time to clear the desk. "Lots of news on the home loan front. "Investors in the $5.6 trillion U.S. mortgage-backed securities market are growing wary of the inverted yield curve's impact on their investments since it is a harbinger of price losses. 'Historically, mortgages do not perform well in an inverted yield curve environment,' said Scott Kirby, who oversees roughly $25 billion in an array of different mortgage-type securities." From a mortgage site. "Mortgage companies trimmed 1,400 full-time employees from their payrolls in December, following 2,000 job cuts in November. MortgageWire has reported on layoffs at prime and subprime lenders alike, including Ameriquest Mortgage, Argent Mortgage, Aurora Loan Services, BNC Mortgage, ECC Capital Corp., and Countrywide Home Loans." "Warm weather helped builders in January, and the economy added 46,000 construction jobs after a 5,000 gain in December. Manufacturers added 7,000 jobs last month, after cutting 1,000 positions in December." "The hot job Market in metro Phoenix has a dark cloud on the horizon, however, McPheters warned. 'There's an issue lurking that is new to us, and that is the rapid escalation of home prices,' Lee McPheters said. 'Last year, we moved above the national average (in home prices). It won't stop people moving here, but they're going to live further and further out. We'll suffer growing pains as a result of housing prices.'" "Last month, there were 1,578 single-family homes and 2,125 condominiums being actively marketed for sale, said Mary Flood, president of the Honolulu Board of Realtors. This compares to just 961 and 1,378 dwellings, respectively. While prices are up year-over-year, performance in some markets is off. The median condominium price actually fell 3.3 percent to $295,000 from the prior month's $305,000." "Hurricane season is over, but for John Beach there's one more financial cloud on the horizon. He recently got a notice that insuring the house he owns near the Atlantic Ocean against wind damage will cost $7,606 in premiums this year. 'Bluntly, the coast can't afford itself,' says Jim Oliver." But the biggest surprise of the week for Californians was, foreclosures where? "More Bay Area homeowners had serious trouble paying their mortgages and went into default as 2005 drew to a close, evidence that a cooler housing market can hurt the financially strapped. Lenders sent 2,292 'notices of default' to owners in the nine-county area in the last quarter of 2005. 'From here on out the number will probably increase steadily,' said DataQuick's John Karevoll." "There were 3,163 default notices issued in the 14 counties that DataQuick counts as 'Central Valley.' The largest number, 849, was in Sacramento County, up 31.4 percent from a year earlier. Lending institutions sent 14,999 default notices to California homeowners during the October-to-December period..up 19 percent from the third quarter, and up 15.6 percent from 2004's fourth quarter. All regions of the state saw an increase in foreclosure activity." "Q: Lenders like to tell us to 'cash out the equity in your home.' What they really offer is a loan that must be paid back in full, with interest. The only true way to access the equity in a home is to sell it. People might be more careful with debt if they looked at it this way." "'It's a seller's market transitioning to a buyer's market,' says David Lereah, chief economist for the NAR. Sellers are reluctant to drop their asking prices, but a lot of them might have to." "Prepare yourself mentally. Don't take it personally if you don't get the price you expected. 'The big thing is you've got to accept what the market is, and make the most of it,' says (realtor) Jeff Lyons. 'It doesn't have anything to do with you personally; it has to do with the market.'"

'Ethical Bare Minimum' Of The Housing Bubble

2006-02-03T15:04:00.000-08:00

Kenneth Harney writes at the Washington Post. "The recent $325 million multi-state legal settlement involving Ameriquest Mortgage Co. suggests that not all is well on the home loan front, and that even experienced buyers and refinancers need to question more, review more, probe more before committing to what is often the biggest debt burden of their lives." "The alleged abuses by Ameriquest loan officers that triggered the states' legal actions constitute a how-to manual for mistreating customers. Some consumers complained that Ameriquest loan officers convinced them to pay higher-than-market rates with the oral promise that they would be able to refinance to a lower rate at some future date. Ditto on playing games with prepayment penalties. Loan officers are prohibited from influencing appraisers to inflate values under the Ameriquest settlement, but they also won't get to select the appraiser anymore, much less dictate the results." "The same goes for playing fast and loose with popular 'stated income' mortgages that require no hard documentation of borrower assets or income. Ameriquest loan officers cannot 'inflate or fabricate, or encourage [borrowers] to inflate or fabricate' earnings, bank deposits or other assets. Nor can they sign documents on behalf of their applicants." "Regulatory overkill? Hardly. Standards such as these, and dozens of others outlined in the new settlement, should be the ethical bare minimums for the entire mortgage industry." Another site wonders, 'Whose idea was this, and who said it was actually okay?' "As reported by the Washington Post on Dec. 10, 'Federal financial regulators appear to be on the verge of reining in one of the most popular mortgages in hot housing markets nationwide. The government finally seemed to say 'It's not okay,' in public remarks by the Comptroller of the Currency. But yesterday's Wall Street Journal said that fears of a 'regulatory crackdown on option-ARM lending practices turned out to be more bark than bite.' Why, then, did regulators suggest a 'crackdown' and then fail to crack down?" "Lenders who get the minimum payment on Option ARM mortgages are actually able to book the full monthly payment into their earnings. 'The banks' loan-loss reserves are low, by historical measures,' even as Option ARMs comprise dramatically higher percentages of their mortgage portfolios. As much as 80% of recent mortgage loans have been 'low documentation,' which means banks know very little about the creditworthiness of borrowers. As many as 13% of these borrowers are NINAs; 'no income, no assets,' which means 'customers get mortgages without disclosing their income and assets.' Why is this legal?"

'Signs Of Decline' In The Condo Bubble

2006-02-03T13:12:00.000-08:00

Inman News has the latest on the condo bubble. "As the national real estate market descends from record heights, condo developers in some markets are buddying up to home shoppers and real estate agents with promotions and incentives. Inventory is up, and some sellers have dropped prices after realizing they were expecting too much, Thomas C. Demsker, a realtor in New York City said. It's not unheard of to see price reductions of $100,000 for properties that are slow to sell." "'They're (developers) much more flexible and much more accommodating. What they're doing is sweetening the pot by adding a little perk here or there. It's becoming more prevalent. Some are actually negotiating on price,' Demsker said. 'They've become very amenable to my calls all of the sudden.'" "Similar trends are echoed on the West Coast, with real estate professionals in Southern California reporting that developers are reaching out to the brokerage community and are more aggressively marketing their properties. Veronica Hicks, broker-owner based in Orange County, Calif., said the condo market is generally slowing, and buyers 'are starting to be a little bit more apprehensive.'" "Developers of new condo projects aren't negotiating much on price, Hicks said. 'What they are offering consumers is not necessarily price reductions. They are offering them upgrades and closing-cost assistance,' she said. Some developers are offering commissions of up to 4 percent and 5 percent of the sale price as compensation for bringing buyers into a transaction. 'As recent as a few months ago they were offering absolutely zero,' she said." "Troy Soumis, broker-owner company that focuses on downtown Los Angeles, said it's still a seller's market for condo units, though 'it's not as good as it was last year.' Inventory is up, and several conversion and new-construction projects are coming into the market. The growing inventory is also a result, in part, of investors who bought the properties for a quick sell and are now returning them to market." "Meanwhile, the Washington, D.C.-area market 'has softened quite a bit and several projects have folded,' said Daniel Rubén Odio-Páez, based in Arlington, Va. One proposed $100 million-plus project in D.C.'s Logan Circle area has been withdrawn from the market. 'Our market is still strong but there seems to be a glut of condos,' and condo inventory is three times higher than it was 12 months ago, year-to-date, he added." "Market analysts have cautioned about the waves of proposed and under-construction condo projects in some markets, such as Miami and Las Vegas, as a possible indicator of over-supply, with some developers changing their condo plans mid-stream or canceling projects altogether. John Mudd, a Tampa, Fla., realtor, (said) that pre-construction and condo conversion sales are slowing down, 'but that's not my problem, it's the problem of developers. Their brokers often give me and my buyers first pick of the units. Brokers who tell agents it's about getting the listings are wrong. In this market there are too many listings.'" "Mudd said that the market has 'normalized' in the Tampa area. 'If you know how to paint a picture with words to reach the buyer you're targeting, and if you know what buyer demographic to target, you won't have too much trouble selling condos, even if there is a glut of condo inventory on the market, and there is a glut of inventory.'" "Joshua Lioce, broker-owner in Milford, Mass., noted that the higher-end condo market is showing 'signs of decline' in his market area. 'A builder in Uxbridge, Mass., about an hour southwest of Boston, is currently offering to pay the first year of condo fees, roughly $2,500. This is something that we have not seen around this area, but I feel that we will see more and more of this, especially in the higher-end condos.'" "And in San Francisco, the high-end condo market seems to be performing better than the low-end, said (realtor) Ed Campaña. Developers may be more willing to negotiate on the lower-priced units, he said, though they generally aren't offering too many incentives right now. That may change as interest rates bump up, he said. Open houses have slowed down a bit in the condo market, and there aren't as many offers for properties now, he said. 'This year I think will be steady. After that, all bets are off.'"

'Beware Of Overpricing' In Denver

2006-02-03T11:47:00.000-08:00

Several realtors in the Denver area agree about the buyers market. "Yes, we faced a housing price bubble throughout the years 2000 and 2001. However the bubble never burst but rather slowly deflated over the past several years. Pricing a home right is imperative in today's market. Homeowners that over price their homes are hurting themselves in today's market. If your home is over priced a buyer and/or a Buyer's Agent will know it and they may be angry that they wasted their time. BEWARE of over pricing!" "The Denver Metro area is experiencing an abundance of lender owned properties, helping to make this a very strong Buyer's market. As an investor, there are lots of deals to be done. If you are a home Seller, this market can be challenging. Well-priced homes still sell, but the Buyer is looking for a home with improvements at a reasonable price or a home which needs improvements at a rock-bottom price. Over-priced homes are not going anywhere!" "The real estate market in Denver remains a Buyers market. Going into the first week of January, 2006, there are 16,108 single family homes and 6,256 condos/townhomes on the market. If you are thinking of selling your house, don't be alarmed by the high number of lisings. Homes that are kept in good shape and are priced closer to the market than their competition, will be the first ones to sell." "'I think it says the housing market hasn't collapsed, but it's a sluggish market, particularly in terms of prices,' said Tucker Hart Adams, a regional economist in Denver. 'I think the parts of the country that are seeing these double-digit increases are just headed for problems down the road.'" "Another big concern is the 12.8 percent increase in inventory over last year. At the end of December, there were 23,572 active listings, a number that is expected to rise with interest rates." "Denver's real estate 'bubble' occurred in the '90's, with double-digit appreciation 'from 1996 to 2000 before dropping to 2 percent through 2003,' according to Gary Bauer, independent Denver real estate analyst. Values began a correction in 2001 and continued through 2005, with overpriced homes staying on the market longer and selling at a lower price than overzealous sellers expected." "The Sold Homes are on the market an average of 80 days in Jefferson County, in the last quarter of 2005 there were 408 homes sold per month. There are 2,276 homes currently for sale, so that means buyers have a five month supply of homes to choose from which has kept us in a buyers market. As the job market recovers we will see the market balance out."

'Worth Less Tomorrow Than Today' In Mass.

2006-02-03T10:06:00.000-08:00

The Rockland Mariner reports on the housing bubble in Massachusetts. "If you’re looking to buy a new house, Rockland’s the place to go. Just don’t sell your house. That was the assessment of (realtor) Dan Direnzo. Based on a study he has conducted on housing in Rockland, prices have gone from $302,353 to $282,500 in the span of three months. This fluctuation, which is caused in part by the diverse zoning seen in Rockland, Whitman and Abington, could spell trouble for anyone looking to sell their home." "'It’s not a good time to be a seller,' said Direnzo. 'By all indications a house can be worth less tomorrow than it is today.'" "Direnzo said the market has changed over the last few years from a seller’s market to a buyer’s though there have been precious few willing to sign on the dotted line. Since September there has been one sale of a single-family home in the range of $330,000-$400,000, a first for the long-time realtor. 'In 22 years I have never seen less people buying,' said Direnzo. 'The whole housing industry seems off by 35 percent.'" "Because of the fluctuating market, Direnzo said sellers have to face the reality that they are unlikely to get what they paid for when they try to sell their home. He said this spiral could last as long as another three or four years. 'It’s a good time to buy if you have to have a house,' said Direnzo. 'But if you’re out shopping for investment purposes, it’s not a good time.'"

Condo Projects 'Succumb To Realities': SD

2006-02-03T07:49:00.000-08:00

The Voice of San Diego is reports the 'dominos' are tumbling in the condo market. "The fact that Bay Structures LLC., a consortium of developers from Los Angeles, has decided to sell the planned-but-as-yet-un-built project, is the latest in a string of indicators that show the downtown condo market may have hit its high-water mark. Of the 59 residential projects currently underway in downtown, experts are predicting that many will never crawl off the plans and stand in the already saturated condo market. The Elle is the first development to succumb to the realities of that market, they said, and more are sure to follow." "'It's a little scary, no question,' said Joe Werner, COO of Intergulf Development, which has completed a number of condo projects in downtown San Diego. 'The speculators who have driven the market to some extent are bailing out.'" "It was unclear why Bay Structures decided to sell. Calls to the company were not returned. Tim Winslow, a broker who is selling the property, said the entire project, including land, designs and permits, is up for sale. The sale is completely in line with the company's business plan, Winslow said." "But Werner and others told a different story. Werner said he heard the company had run into difficulty with its financing for the project, and downtown realtors and analysts said that is more likely to be the case. Alan Gin, professor of economics at the University of San Diego, said financiers are increasingly wary of lending to condo developers. 'Lenders are starting to see that it's a little bit more risky venture and as a result they may be a little bit more hesitant,' Gin said." "Anthony Napoli, a Realtor in Little Italy, guessed that 35 to 40 percent of the 11,000 condo units in the pipeline for downtown San Diego will never be built in the current real estate climate. He said the superheated condo market of the last few years has attracted many people into the condo business who didn't really know what they were doing. 'In the heyday, a monkey could be a developer in downtown,' Napoli said. 'Now you will only get financing if you can show a real feasibility study.'" "Russ Valone was characteristically upbeat despite the news of the Elle sale. He said the sale could be due to any number of reasons, and that it is not necessarily indicative of a weakening condo market. However, Valone did say that the downtown condo market has become increasingly competitive, and that he can foresee a proportion of the planned condo units never making it off the ground. As developers find it more difficult to acquire the financing for projects, the existing inventory on the market will be bought up, he said, and soon enough, San Diego will face a 'shortage' of condos again." "'It would be better for property owners, people trying to sell their homes or increase their investment portfolio, if there wasn't a constant dumping of new units on the marketplace,' said Jim Abbott a realtor who lives and works downtown." "But Chris Thornberg, a senior analyst with the University of California, Los Angeles Anderson Forecast, said the important thing for owners, realtors and investors to consider is not the fact that the development has been put up for sale, but how quickly it sells. 'How fast will it get snapped up?' he said. 'That's what I would be watching.'"

An 'Abrupt Slowdown' In DC

2006-02-03T06:50:00.000-08:00

The Washington Times is just waking up to the housing bubble. "Last year's real estate market ended very differently than it began, leaving Washington area buyers, sellers and Realtors wondering just what to expect from 2006. The market cooled off abruptly in the second half of the year, though many in the area still haven't come to terms with that." "'It has been interesting, hasn't it?' says Alana Lasover, sales manager (in) Bethesda. 'And I think it will get more interesting this year, but I don't know how yet. In January, a lot of clients were being told, 'Wait another month. Wait until after the Super Bowl to do anything,' she says. 'That's because we've always said Super Bowl Sunday kicks off the year's market. So what's going to happen? You know, I've been in this industry for 30 years, and I still can't tell people what is going to happen,' Ms. Lasover says. 'We just don't know what lies ahead.'" "During the first half of 2005, the housing market was rather predictable. Homes sold very quickly, so buyers were told to expect some disappointments because other buyers would get in their offers faster or outbid everyone else. 'Back then, you only had a day or two to see a home before it was sold, so buyers really had to be prepared to win,' says Jaye Jordan, a realtor in Bowie. 'It's different now. "'Sellers today need to be more open to help from their Realtor,' Mr. Jordan says. 'The services of a Realtor are even more important than before, particularly because pricing has changed.'" "'If you price a home too high, you can wind up getting even less than if you had priced it properly to begin with,' Mr. Jordan says. 'Some sellers still haven't made the transition, haven't realized that the market has equalized. And their homes are staying on the market longer than others. Even some of the Realtors haven't made the adjustment as of yet.'" "In December, the median sales price there was $315,000, compared to $449,000 in Montgomery County and $484,000 in Fairfax County. 'The first time I heard it, it caught me off guard. It was early 2004, and it was the first time I heard someone say they were moving from Montgomery County to Prince George's County,' Mr. Jordan says. 'Before then, it was common for folks to move [in] the other direction, but when prices got too high in Montgomery, folks starting looking around.'" "'This is a trickle-up industry,' Ms. Lasover says. 'If the first-time home buyers can't find something they can afford, if they never come into the market at all, that means the next guy up the chain can't make his move. If he can't sell his home, he can't buy his next home. And if all that movement doesn't take place, the market really slows down.'" "'At the other end of the market, some people aren't buying because homes have become so ridiculously overpriced,' Ms. Lasover says. 'I've heard people say, 'I am not paying $1.3 million for that one-bath, no garage house with tiny closets. No way.'"

Weekend Topic Suggestions

2006-02-03T06:30:00.000-08:00

Please post your ideas for weekend topics here! As some have suggested, topics related to the changing of the guard at the Federal Reserve would be timely.

The Good News Is The Bubble's Temporary

2006-02-02T16:08:00.000-08:00

Two analysts see a housing bubble in San Diego, but expect different outcomes. "'Generally good news in terms of San Diego, we will outperform California and the rest of the nation,' (said) Alan Gin, an associate professor of economics. Housing prices should appreciate by about 5 percent or less, and the time it takes to sell a house is expected to increase, Gin said." "'Almost everywhere I go, people ask me if we're in a housing bubble here in San Diego,' Gin said. 'My answer is yes, but the bubble isn't going to burst.'" "Housing demand should continue to outstrip availability, because the relatively strong job market, he said. Downtown, however, may have an oversupply of condominiums." But Rich Toscano sees it this way. "The conventional wisdom among both real estate industry insiders and the populace at large goes something like this: San Diego has not built enough houses to support population growth. San Diego continues to not build enough houses to support population growth. San Diego will never build enough houses to support population growth. And that's why housing is, and will ever be, so expensive." "The San Diego housing supply has more than kept pace with population growth in recent years. Therefore, the sharp increase in home prices is not explained by a housing shortage as is widely believed. As it happens, I entirely agree that there is a severe housing affordability problem in San Diego. Put another way, San Diego housing is overpriced. Really, really overpriced." "Even at the very peak of the late-1980s housing bubble, people were paying about 10 times per capita income to purchase a median-priced home, compared to almost 15 times per capita income now. The good news is that the affordability problem is, by its very nature, temporary." "Consider the fact that San Diego scored an eight on the California Association of Realtors' most recent Affordability Index reading. Only the highest-paid 8 percent of San Diegans can afford the median-priced home. Does this really seem like a sustainable situation?" "Home equity withdrawal and loose lending have served as props under the San Diego housing market, allowing home prices to remain far above what local wages would normally allow. Were home prices to remain flat and lenders to substantially tighten their standards, these artificial props under the housing market would be removed, resulting in a situation where very few people were able, let alone willing, to purchase homes at current prices." "We live in an uncertain world, but I say the following with great confidence: unless wages start rising very fast, San Diego home prices will eventually have to fall. One way or another, the housing affordability problem will fix itself."

Cancellations Up, Cash Down For SPF

2006-02-02T15:40:00.000-08:00

A homebuilder just reported operating results. "Standard Pacific Corp. today reported the Company's 2005 fourth quarter and fiscal year operating results. Stephen J. Scarborough, Chairman and Chief Executive Officer, stated, 'Notwithstanding the demands on capital associated with our growth, we have continued to maintain a strong balance sheet. We increased our lot position 45% year over year." "'Our business plan for 2006 reflects our current view that many of our housing markets are moderating from the unsustainable pace of the past few years and that demand for new homes will adjust to more normalized and sustainable levels resulting in generally lower absorption rates on a project-by-project basis. At the same time, we plan to open approximately 150 new projects during the year, up 63% over 2005.'" "'We remain confident in our long-term prospects for growth. This confidence is no more evident than by our recent stock buyback activity. During the fourth quarter we repurchased over 1.2 million shares, extending our buyback string to 10 consecutive years. And to provide for additional buyback capacity, our Board approved a new $100 million repurchase plan this week.'" "During the 2005 fourth quarter, the Company delivered 989 new homes in California (exclusive of joint ventures), a 12% decrease from the 2004 fourth quarter. Deliveries were up 7% in Southern California..deliveries were down 47% in Northern California." "During the 2005 fourth quarter, the Company's average home price declined 12% year-over-year to $351,000. The lower average selling price was attributable to the shifting geographic mix of our new home deliveries. Our average home price in California was $687,000 for the fourth quarter of 2005, a 1% increase from the year earlier period." "Our expectations for the year are bolstered by our backlog of nearly 6,300 homes, valued at $2.3 billion. The Company's cancellation rate for the 2005 fourth quarter was 25%, up from the year earlier rate of 17%. The Company's cancellation rate was noticeably higher in Northern California." It looks like the company has a negative cash flow again. This firm ended 2004 with $141 million in cash and equivalents and at the time accounts payable was at $96 million. Standard Pacific had only $19 million in cash at the end of 2005, and accounts payable rose to $115 million.

'Not Very Much Land' West Of Phoenix: Economist

2006-02-02T13:36:00.000-08:00

The Glendale Star reports on an economist's view of the housing market. "Although other Arizona economic analysts are forecasting that 45,000 housing units per year would continue in the next decade, Elliott Pollack predicts we will see 55,000 per year being built in that time period. 'People like it here,' Pollack said. 'Housing, even now, is still affordable.'" "Although housing prices in the Phoenix area have been flat over the last six months, the second-home market is still very strong. The listing price average with the MLS was $335,000 in 2005; it is $325,000 today. Pollack foresees housing prices staying relatively flat over the next two years. 'Builders are going to be cutting (prices) to be competitive,' he said." "Vacancy rates in apartments are at 5 percent and the reason for this is because many are being converted to condominiums. Rents are lower now than they were in 2000, but that will change, Pollack said. Rents will be going up." "Peoria's Lake Pleasant area growth will be inhibited by the great areas of state land, Pollack said. Although there appears to be lots of land on the west side, Pollack said if you take out the government land and washes, there is not very much land, 'and that's important.' He was not optimistic in the short term about land prices. 'These things historically have not done well,' he said. 'In the long run, land you own will be more valuable.'" "Workforce housing looks grim, in Pollack's estimation. 'Fifty to 60 percent of median income is in trouble,' he said. 'For people on the lower end of the service industry, they've got problems.' What would benefit West Valley communities is a tax base to take care of community needs."

'Unmanageable Payment Shock' Seen: Bies

2006-02-02T11:30:00.000-08:00

A Fed official had this to say about home loans this morning. "Regulators are concerned about heavy commercial real estate exposures and risky mortgage lending practices at U.S. banks, Federal Reserve Board Governor Susan Bies said on Thursday. 'There are certain rapidly growing business lines in banking operations that are placing pressures on risk-management systems,' Bies (said) as she outlined guidance regulators have issued on commercial real estate and so-called nontraditional mortgage lending." "In discussing the guidance on exotic mortgage products, such as interest-only loans, Bies repeated that government regulators were concerned risk-management practices had not kept pace with the risks that these widely available loan products could present. She also cautioned those risks could be 'heightened by a downturn in the housing market.'" "Bies said that in the past such products were normally offered to higher-income borrowers only, but they now were being extended to low-income borrowers in the subprime market. 'These borrowers are more likely to experience an unmanageable payment shock at some point during the life of the loan, which means they may be more likely to default on the loan,' she warned." "Bies also expressed worry that banks could face difficulties if abnormally low risk-spreads in capital markets increased. 'When risk spreads return to more 'normal' levels, banks need to be prepared for the resulting impact on liquidity and pricing,' she said." "Bies added that regulators had observed that lenders were increasingly combining nontraditional mortgage loans with weaker controls on credit exposure. 'The absence of traditional underwriting controls may have unforeseen effects on losses realized in these products,' she said." And Inman News has this related report. "Foreclosure activity in California edged up in fourth-quarter 2005, according to DataQuick. Lending institutions sent 14,999 default notices to California homeowners from October to December, up 19 percent from 12,606 for the third quarter, and up 15.6 percent from 12,978 for fourth-quarter 2004." "'Because of the rise in home values, much of that financial distress has been covered by the increasing amount of equity that people have had in their homes. That equity is now being created at a slower pace, and default activity is inevitably on the rise,' said Marshall Prentice." "The median amount owed when the default notice was recorded was $6,862 in fourth-quarter 2005, up from $6,130 for the same period a year ago. All regions of the state saw an increase in foreclosure activity, ranging from 10.5 percent in the Bay Area to 19.6 percent in Southern California. In Southern California, the number of notices jumped from 1,123 to 1,607 (43.1 percent) in Riverside County; from 872 to 1,173 (34.5 percent) in San Diego; from 684 to 918 (34.2 percent) in Orange County." "In Northern California, the number of notices increases from 636 to 849 (31.4 percent) in Sacramento County and from 73 to 106 (45.2 percent) in San Francisco. On a loan-by-loan basis, mortgages are least likely to go into default in Marin County. The likelihood is highest in the Central Valley and Inland Empire." "'While foreclosure properties tugged property values down by almost 10 percent in some areas nine years ago, the effect on today's market is negligible,' DataQuick reported."

New York Housing Markets 'Achieved Touchdown'

2006-02-02T09:28:00.000-08:00

If information from realtors is any indication, there are some changes in the New York housing market. "There are signs that the roaring real estate market is slowing. That doesn’t necessarily mean prices are dropping. It just means that selling your home is a little more tricky and could take longer. Linda Bonarelli, president-elect of the Long Island Board of Realtors (said), 'Your best opportunity is within your first 30 days of the listing to get your price. And if you're overpriced, you’re missing the buyer for your house. You’re missing the entire market,' Bonarelli said." "'On Long Island in this current market, it takes four to five months’ marketing time to sell a house,' Bonarelli said." "The froth is dissipating in the Lower Hudson Valley's housing market. 'In terms of the high-flying housing market of the past five years, we have probably already achieved touchdown on the runway to a soft and uneventful landing,' the MLS stated in its report." "The Westchester median price of $652,250 was up 6.1 percent compared to the fourth quarter of 2004." If you read through the entire 4th quarter, 2005 report, no comparison is made to the 3rd quarter. So I looked it up. "Notwithstanding the third quarter’s slower pace of sales and the slight bulking of inventory, prices increased in all categories. The median sale price of a single family house in Westchester reached $711,700." From the 4th quarter report: "The cooling in the pace of sales reflected itself in the accumulation of inventory that has become more pronounced since 2003. The year-end inventories of 4,776 units in Westchester County and 821 units in Putnam County both were about 21% higher than at the end of 2004. The condominium sector posted a very large 55% increase in inventory from 397 units in 2004 to 617 units at the end of 2005. Some of the bulking up may be attributable to an influx of newly constructed luxury condominiums, particularly in White Plains and the surrounding region." "Robert and Mary Conway left Manhattan 2 1/2 years ago to start a family. They bought a new house on 5 acres near the New Croton Reservoir in Yorktown, and later had their first baby. But the rural lifestyle left Mary Conway feeling more isolated than she had expected, she said. They put their house on the market in the fall for $1.6 million and began looking for communities with more bustle." "Buyers were slow in coming, she said. 'We could barely get people to look at the house,' Conway said. They decided to take it off the market just before the holidays 'and kind of pretend that fall never happened.' Then last month, one of the few people who stopped by to see the place put in an offer. It was less than the asking price, 'but we were definitely willing to talk about it,' said Conway." And a reader found another source on the Hamptons. "So while the bubble is popping, it seems lots of property is still selling. There is no longer a frenzy to buy, but demand does exist; It's just more discriminating. Those properties that languish on the market for six months or so without an offer, are taking upwards of a year to make it to the closing table. Despite what many brokers may claim, if there are no offers on a property within six months, it is axiomatic that it is priced above the market; after all, the market is always simply what people are willing to pay, not what it is 'worth.'" "In the Hamptons, the up to $750,000 market is the new entry level for home buying. Even local landscapers who are not yet legal can find that kind of money."

'McCondos' A 'Warning Shot' To The Bubble

2006-02-02T08:24:00.000-08:00

The New York Times looks at a trend that may indicate the beginning of the end to the housing bubble. "For more than a decade, McMansions have been a fixture on the American landscape. Now apartments are being supersized, too. Make way for the McCondo." "On Fisher Island, near Miami, a condo developer is offering penthouses of 20,000 square feet, more than eight times the size of the average single-family house. In a Las Vegas suburb, a custom-home builder is developing high-rise condos topped by 16,000-square-foot apartments. And in New York, some luxury pads now on the market measure over 10,000 square feet, gargantuan by Manhattan standards." "This week Deborah Grubman and Sharon Baum gave a guided tour of a floor plan for one of the jumbo apartments. In addition to a master suite that could comfortably house a family of four, the apartment will feature seven other bedrooms with en suite bathrooms, a drawing room, a dining room, a family room, a media room, a library and two wet bars, one attached to the master suite. 'So if, God forbid, you should get thirsty at night, you don't have to go all the way back to the kitchen,' Ms. Grubman said. At nearly $4,200 a square foot, that yields an asking price of $35 million, not to mention the $26,000-a-month maintenance fees." "With every real estate agent, developer, homeowner and mortgage banker in the country trying to figure out what direction the market will move next, supersize condos may represent a warning shot. 'One word that came to mind is elephantiasis,' said Robert Fishman, a professor at the University of Michigan. 'It's the disease or syndrome of an individual or species that just before the crash there's this huge expansion in size.'" "'It's like raising your voice at a crowded cocktail party,' said Robert H. Frank, who is a professor of economics at Cornell University. 'If everyone is speaking loudly, you have to raise your voice a little louder to be heard. They just want something that feels spacious to them, but when the houses and apartments all around have gotten bigger, for a place to confer a feeling of spaciousness, it's got to be bigger than before.'" "In Manhattan, the emergence of these jumbo apartments uncannily evokes the grand co-op buildings of the late 1920's and early 1930's, built just in time for the start of the Great Depression." "'Home is an expression of self,' said Setha M. Low, a professor of environmental psychology at the City University of New York Graduate Center. 'And the more of it, the bigger you are.'"

Housing Bubble A 'Crapshoot' In Sacramento

2006-02-02T06:51:00.000-08:00

The Sacramento Bee reports on the change surrounding the housing bubble. "Until recently, home sales were on a blistering pace. But for the first time in years, a rapidly slowing market has left would-be buyers and sellers facing conflicting signals about what to do next. Buy now, or hope for a drop in prices? Try to sell now, or hope that demand bounces back in the spring?" "'What's the right answer?' asked Pam Petterle. 'It's a crapshoot out there. Nobody knows for sure.'" "Sales of new homes in Sacramento, Placer, El Dorado and Yolo counties plunged 57 percent in the last three months of 2005, compared with both the previous quarter and fourth-quarter 2004, according to the Gregory Group, a Folsom-based industry research firm. Sales of existing homes in December fell 30 percent from a year ago." "That leaves agents, mortgage brokers and others struggling to craft plans for the spring. Many agents are encouraging would-be sellers to put their homes up for sale soon, arguing they need to beat the anticipated crush of competition. Erin and Ron Steward will do just that. They tried to sell their Foothill Farms house in the fall, then took it off the market. They plan to re-list it later this month for $449,000, $40,000 less than their initial price." "'I think a lot more houses are going to come on the market in March,' Erin Steward said. Others are holding off. They want to see a rebound before they throw up a 'For Sale' sign." "Petterle doesn't think that's wise. She says new listings in the spring will compete with homes that have been for sale for up to six months, ones whose prices have been reduced multiple times. 'Sellers waiting for spring may have to start a lot lower (in price) than they thought they would have to,' she said." "Regina Luster has been trying to sell her 2,100-square-foot rental home in the Pocket since October for $559,000. She recently tried to sweeten the deal by offering to cover closing costs and lend a buyer enough to cover a 10 percent down payment. 'It's an effort to let buyers know you're flexible, that you're trying to work with them and not just trying to take advantage of a market that no longer exists,, Luster said." "A month ago Jerry Wright figured a simple newspaper ad was all it would take to sell a 1,400-square-foot rental home he owns in Roseville for $359,000. Not many homes sell for less there. But he found barely a trickle of demand. 'It's been very quiet,' Wright said. 'I've been getting very few phone calls.'" "Last week Wright, a real estate agent, decided it was time to 'stop the bleeding.' He put a renter back in the home to cover his mortgage. When the market picks up, he'll consider selling again. When will that be? That's what everyone is trying to figure out."

Exotic Loan Problems 'Inevitable': WSJ

2006-02-01T16:32:00.000-08:00

The Wall Street Journal reports on the 'exotic' loan business. "Oil prices are rising, economic growth slowing, housing sales faltering, consumers weakening and earnings outlooks dimming. So stock investors have, naturally, become more optimistic. Faith burns strongly that the Federal Reserve will manage the economy perfectly. Investors seem to believe that the power of the Fed resides in the title of 'chairman,' and that infallibility is passed to the holder, papal-like." "It's possible to see this whole phenomenon in the sunny climes of southern California, home to a modest bank called FirstFed Financial Corp., a Santa Monica bank with a $1 billion stock-market value. Its main business is option adjustable-rate mortgages. Option ARMs let customers choose how much to pay each month, including a small minimum. It's just like a credit card, with the same catch: The unpaid interest is tacked onto the mortgage and the balance grows larger." "The earnings that result from such loans are squishy. Even when a customer makes only the minimum payment, a bank books the full monthly payment into earnings. But these are noncash earnings. At FirstFed, such earnings are surging. Last week, it reported that the amount of interest that customers are rolling into their mortgage balances, known as 'negative amortization', rose $25 million in the fourth quarter to $63 million for the year, up from $6 million a year earlier." "Fully 51% of FirstFed's pretax income and 41% of its net interest income was from negative amortization in the fourth quarter. Investors are blithely ignoring the inevitable problems these banks will endure with their option-ARM customers. Just yesterday, mortgage giant Countrywide Financial Corp., another seller of option ARMs, reported rising delinquencies." "The banks all say that their losses on option-ARM mortgages long have been minimal. That's true. But the California housing market hasn't gone through a boom like it just went through." "Unlike Golden West, which is famously disciplined about its lending, FirstFed doesn't use its own housing appraisers. That should be a red flag to investors. Over 80% of FirstFed's recent loans have been 'low documentation' loans, meaning they required less confirmation about whether the customer was a good risk. Through the first nine months of last year, over 13% of its mortgages were NINAs, 'no income, no assets.'" "Analyst Fred Cannon notes that the number of customers who are prepaying their loans is rising. That is good for earnings in the short-term because the penalty fees from prepayments are high. But he figures that means savvy customers who are good credit risks are prepaying now rather than face higher rates in the future. He worries those who remain are doing so because they can't afford to do otherwise, making only the low-minimum payments." "That means that, just as earnings are starting to rise, these banks are likely to need to set aside more and more for mortgages that go bad."