By Jeff Bater and Brian Blackstone

From The Wall Street Journal Online

Existing-home sales in the U.S. fell in December, capping a soft year that saw demand make its sharpest drop in 24 years.

Home resales fell to a 6.22 million annual rate, a 0.8% decrease from November’s revised 6.27 million annual pace, the National Association of Realtors said Thursday. November’s rate was originally estimated at 6.28 million.

Sales for all of 2006 dropped by 8.4% to 6.48 million from a record 7.08 million in 2005. The drop was the sharpest since 17.7% in 1982.

The median home price was $222,000 in December, compared with a revised $217,000 in November and an unrevised $222,000 in December 2005.

The decrease in resales interrupted back-to-back increases. Some analysts say declining prices and soft demand has discouraged some homeowners from selling.

The December resales level was below Wall Street expectations of a 6.25 million sales rate for previously owned homes.

The average 30-year mortgage rate was 6.14% last month, down from 6.24% in November, according to Freddie Mac. Inventories of homes fell 7.9% at the end of December to 3.51 million available for sale, which represented a 6.8-month supply at the current sales pace.

Jobless Claims Jump by 36,000

The number of U.S. workers filing new claims for unemployment benefits climbed in the latest week from surprisingly low levels earlier in the month, suggesting some slackening in labor markets, according to a government report. Still, claims levels appear consistent with moderate gains in monthly payrolls.

New claims for unemployment insurance jumped 36,000 to 325,000 in the week ended Jan. 20, the Labor Department said Thursday. Claims had been below the 300,000 level — which economists consider a benchmark for very tight labor markets — the previous two weeks.

The Jan. 13 reading was revised to 289,000 from a previously reported level of 290,000.

There were no special factors in the latest week, though claims data tend to be volatile in January following the holiday season. A Labor Department official said there was nothing in the state-level data to indicate that recent ice storms that struck the West and Midwest were a factor. The four-week average, which smooths out weekly fluctuations, rose by 1,500 to 309,250. Continuing claims for workers drawing unemployment benefits for more than a week decreased by 39,000 to 2,484,000 in the week ended Jan. 13, the latest week for which such data are available.

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By James R. Hagerty and Ruth Simon

From The Wall Street Journal Online

Amid a continuing glut of homes for sale in most of the country, buyers should have plenty of choices and lots of bargaining power in the spring selling season — typically the busiest time of the year.

Many builders and real-estate brokers, for their part, hope the housing market will start recovering this year as buyers respond to price cuts and other sweeteners offered by increasingly nervous sellers. In some markets, agents say, buyer traffic has picked up in the last month or two.

But any recovery is likely to be gradual. Donald Tomnitz, chief executive officer of D.R. Horton Inc., a home builder, told investors this week that the market, which began slumping in 2005, may bottom out by mid-2007, but that “we don’t see any rapid improvement thereafter.”

Given all that, sellers should expect buyers to take their time and be tougher negotiators. David Lee, who recently moved to Wenham, Mass., to take up a post as an associate professor of physics at Gordon College, has rented a home for his family and says they plan to be “quite picky and choosy” as they look for a home to buy. Dr. Lee doesn’t feel any pressure to decide quickly because he figures prices won’t rise in the near term and could fall further.

A quarterly survey of housing conditions in 28 major metropolitan areas by The Wall Street Journal showed that the inventory of unsold homes at the end of 2006 was up substantially in nearly all of the markets from the already plentiful level of a year earlier. The biggest increases were in the metro areas of Miami-Fort Lauderdale, Orlando, Tampa and Jacksonville, Fla.; Phoenix; and Portland, Ore. (Unlike the other cities, Portland had a lean supply of homes a year before.)

The survey also includes recent pricing trends — nearly all negative — based on surveys of real-estate agents by Banc of America Securities in New York, a unit of Bank of America Corp., as well as data on late mortgage payments and job-creation prospects from Moody’s Economy.com, a research firm in West Chester, Pa. Employment figures have a huge effect on housing demand.

Home-price trends vary greatly from one region to another and even within metro areas. For instance, housing demand remains weak in the Detroit area, sapped by auto-related job losses, while the chic urban zones of San Francisco and Manhattan — where space for new construction is extremely limited — generally have stayed firm, though price appreciation is far slower than a year or two ago.

The good news for home sellers is that unemployment remains low in most areas, wages are growing and energy prices have fallen from their recent peaks. What’s more, mortgage interest rates are still low, allowing people with good credit records to obtain 30-year fixed-rate loans at around 6.2%.

But many lenders are growing more cautious about how much debt home buyers should be allowed to take on and more inclined to ask for proof of income. This tougher attitude will exclude some marginal buyers from the market, hurting demand, even as a rising number of foreclosures throws more supply on the market. DataQuick Information Systems, a research firm in La Jolla, Calif., said yesterday that mortgage lenders sent 37,273 default notices to California homeowners in the fourth quarter, up 145% from a year earlier and the highest in more than eight years.

Meanwhile, home builders still have lots of unsold homes that they will unload by further cutting prices and dangling such incentives as help with closing costs or kitchen upgrades. Discounts on new houses, in turn, will make it harder for some sellers of previously occupied homes to attract buyers.

Some of the biggest gluts of new homes are in Florida, Phoenix and the outer suburbs of Washington, D.C., says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse Group. Many of the gluts are due to frantic building of condominiums over the past few years. The supply of condos listed by real-estate agents is up 86% from a year earlier in the Las Vegas metro area, 43% in Washington, D.C., and 21% in the Northern Virginia suburbs of Washington. In Florida’s Miami-Dade and Broward counties, the listed condo supply has more than doubled from a year earlier.

In Miami-Dade, the number of existing condos on the market is enough to last 27 months at the current sales rate, says Jack McCabe, a real-estate consultant in Deerfield Beach, Fla. The oversupply will grow, he says, as about 8,000 condos are expected to be completed this year and 12,000 in 2008.

“It’s going to get bloody down here,” Mr. McCabe says. He estimates that condo prices in Miami-Dade fell between 8% and 10% last year and will drop 20% in 2007. Eventually, he predicts, hedge funds and other investors will step in to buy surplus condos in bulk at huge discounts.

10,000 Condos for Sale

In California’s San Diego County, developers have more than 10,000 condos available for sale in new buildings, projects under construction or properties being converted from rentals, says Peter Dennehy, a senior vice president at Sullivan Group Real Estate Advisors, a consulting firm based there. He says that supply is enough to last more than 20 months at the current sales rate. That number excludes several thousand condos being offered for resale by speculators and others.

Mr. Dennehy estimates that condo prices have fallen at least 15% to 20% in the county over the past year, though it’s hard to measure price changes because sellers often give incentives such as free upgrades or help with closing costs that aren’t reflected in the price.

In the Boston area, lower-priced homes in blue-chip neighborhoods are moving pretty quickly. But ones that are overpriced or located on main streets are languishing, says Sam Schneiderman, broker-owner of Greater Boston Home Team. “It’s got to be a really good deal,” he says. “An OK deal doesn’t quite cut it. Buyers are holding out.”

The glut in inventories is likely to increase in some markets as sellers try to take advantage of what they hope will be a stronger selling season. Some sellers pulled their homes off the market late last year, intending to relist them in the spring.

At the Coldwell Banker Residential Brokerage office in Scottsdale, Ariz., near Phoenix, listings are up roughly 30% since the end of December. The office expects listings to increase further in late February and early March as sellers who pulled their homes off the market before the holidays relist them.

Some of last year’s strongest housing markets now are showing signs of cooling a bit. In the San Francisco Bay area, the median price paid for new and resale homes in December was $612,000, up just 0.5% from a year earlier, according to DataQuick. But prices fell in parts of the Bay Area; they were down 6.3% from a year earlier in Sonoma County and down 5.1% in Solano County, DataQuick says.

One of California’s weakest markets last year was the Sacramento area. Anthony Graham, an analyst at Trendgraphix Inc., a provider of housing data, says sellers of previously occupied homes there have had trouble competing with the huge discounts and incentives offered by builders.

Mr. Graham expects average home prices in the Sacramento metro area to fall between 6% and 8% this year, but believes the market will begin to recover modestly by the fourth quarter, assuming that home builders continue to cut their production. Greg Paquin, president of Gregory Group in Folsom, Calif., which gathers data on new home construction throughout the state, also thinks Sacramento is stabilizing after last year’s price cuts. “Buyers who were on the fence are starting to say, ‘Hey, this is a pretty good deal,’ ” Mr. Paquin says.

California’s Central Valley, which includes such cities as Bakersfield, Fresno, Merced and Stockton, may take longer to absorb excess new-home inventory and bring prices down to more affordable levels, Mr. Paquin said. He said that area may not bounce back until next year.

In Manhattan, big bonuses recently doled out by Wall Street firms will help support the market in this year’s first half, says Jonathan Miller, chief executive officer of Miller Samuel Real Estate Appraisers in New York. But a rash of new condo developments will help moderate prices. He expects price increases this year to average 5% to 6% in Manhattan. On Long Island, he believes prices are likely to be flat to slightly higher this year.

In New Jersey, “I’m optimistic that home sales will begin to rebound in the spring,” says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. “However, that would signal the end of the decline — not a return to higher prices.”

Mr. Otteau figures home prices fell an average of about 10% in New Jersey last year. For 2007, he believes homes costing less than about $600,000 are likely to rise modestly, around 3%, while homes above that level are about flat. In the luxury end of the market, prices may edge down again this year, Mr. Otteau says.

In the Chicago area, some homes that have sat on the market are finally moving, says Barbara O’Connor, an agent with Baird & Warner. But some sellers have had to accept far less than they had hoped for. Jody Andre, a restaurateur, put her three-story Victorian-style home in the Edgewater neighborhood on the market in August at $679,000. She later lowered the price to $634,900 but still got no offers. “This is a hot neighborhood and a lot of people couldn’t understand why the house didn’t sell,” says Ms. Andre, who accepted a $605,000 offer last week. “I waited too long to put it on the market,” she says.

Buyer Traffic Picks Up

The end of the year is normally a slow time, but in some parts of the country traffic has increased in the last month or two, helped by unseasonably warm weather. In Philadelphia’s Center City, buyer traffic began to pick up in November and has continued to climb over the last two months, says Mike McCann, an associate broker with Prudential Fox & Roach, Realtors.

A recent open house for a three-bedroom home priced at $469,000 drew 17 parties, Mr. McCann reports. In the summer and early fall, he says, “we didn’t want to do open houses because it was a wasted day.” Sales are also increasing, but negotiations are taking longer and many offers are contingent on the buyers selling their current homes, Mr. McCann adds. Prudential Fox & Roach is also seeing more people asking to get pre-approved for a mortgage, a sign that they may be ready to buy.

In Atlanta, where the housing market began to soften in August, business started picking up again in December, says Lewis Glenn, president and chief executive of Harry Norman, Realtors. “There’s more negotiation,” and builders are cutting prices and offering concessions, such as buying down the borrower’s mortgage rate, he says.

In Scottsdale, some sellers are cutting prices by 10% or more, says Dale Pavlicek, sales manager for the Coldwell Banker Residential office there. “There are a lot of vacant homes on the market,” he says. Sellers who bought in the past year or two are barely breaking even or are coming to the closing table with money to pay off their mortgage and other costs, he adds.

Houston remains one of the nation’s more buoyant housing markets, supported by job growth in the energy industry. Rob Cook, chairman of the Houston Association of Realtors, says the supply of homes on the market is enough to last about six months at the current sales rate — what he calls a “balanced” market. Prices are rising only modestly, though, because Texas has plenty of room for new construction. “We just keep expanding out farther and farther,” Mr. Cook says.

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By June Fletcher

From The Wall Street Journal Online

As the national housing market continues to weaken, prices of homes in the $1 million range are slumping in many parts of the country. In once-golden Sunbelt cities like Miami and Santa Barbara, Calif., as well as in major Midwestern cities like St. Louis and Chicago, prices fell in the fourth quarter of 2006 from a year earlier, in some places by as much as 7.2%. In other areas, prices rose slightly but appreciation was sluggish, with gains of 4.3% or less. Still, analysts say, the category is holding up better than the overall market, which declined 10% during the same period.

These are some of the results of an exclusive report done for The Wall Street Journal by the National Association of Home Builders. “The million-dollar market is slowing down,” says NAHB’s director of research, Gopal Ahluwalia, who conducted the analysis using information from First American Real Estate Solutions, a Santa Ana, Calif., data provider.

The report looked at sales of new and existing single-family homes costing between $750,000 and $1.25 million in the nation’s top metro areas. In 2005’s fourth quarter, 65 metro markets had 100 or more sales in that price range. A year later, that figure had dropped by more than half, to 32. And appreciation was generally lackluster. Nearly half of those 32 markets saw prices in this “starter luxury” market flatten or decline during the fourth quarter over the same period a year earlier, in some areas by as much as 7.2%. Overall, the median price of these 32 markets rose a modest 1.4%, to $890,000.

Nationally, median home prices during the same period fell 10%, to $225,000 from $250,000 the study showed. The National Association of Realtors, which tracks existing-home prices only and will release its fourth-quarter report Feb. 15, is projecting that overall median prices will drop just 3.9%, to $216,500, in the fourth quarter of 2006. (NAHB says its figures differ from those of NAR because they use different geographical boundaries for their metropolitan areas and include data from both new and existing homes.)

Analysts say that the million-dollar market is doing better than the overall market because it wasn’t quite as overrun with investors during the boom. “There were more buyers trying to move up rather than make a killing,” Mr. Ahluwalia says. Because investors make their money by reselling properties quickly, they’re more likely to cut their losses — and their prices — as soon as they detect a market slowdown.

The Thrill Is Gone

To be sure, a million dollars today doesn’t go as far as it did even a few years ago, before residential real estate in many cities experienced double-digit price increases during the boom. Michael Patterson, a Sotheby’s real-estate broker in Santa Barbara, Calif., says that as recently as 2001, $1 million would get you an oceanfront estate. Now it will get you a remodeled two-bedroom house built more than a half-century ago. In Dallas, meanwhile, it will buy a brand-new, four-bedroom lakefront home.

It used to seem like a lot of money, Mr. Patterson says, the entry point to luxury. “It doesn’t have the mystique that it used to,” he says.

Nor are today’s million-dollar-home customers the same as those of five or six years ago. Then, they tended to be cash-rich buyers who were mostly immune to mortgage-interest-rate fluctuations. But during the run-up, as more ordinary homes were pushed into the million-dollar range, those wealthy buyers moved up too, to the “super-luxury” level of $3 million and above. They were replaced by middle-income buyers, some of whom were hoping to cash in on the boom and who stretched to trade up using creative financing like option adjustable rate mortgages — which allow borrowers to decide how much they’re going to pay each month — and interest-only loans. Now, many are “stuck” with homes whose prices are flat or declining, according to University of Maryland business professor Peter Morici.

The Sunbelt cities that attracted droves of buyers and builders during the boom have fared poorly. Overheated and overbuilt markets finally slowed down by the end of 2006: prices fell 4.2%, to $876,250, in Miami and flattened in Phoenix at $887,660 and in Charleston, S.C., at $937,500. Some Midwestern markets also performed badly. Prices were down 3.3% in Chicago, due in part to the loss of manufacturing jobs there. Things were even worse in St. Louis, which lost 3,300 jobs in the year ending November, second nationally only to Detroit. Prices in St. Louis were down 7.2%, the largest decline in the survey.

Starter luxury homes are doing best in coastal cities where strong local economies support the incomes needed to buy them. The study’s highest price increase, 4.3%, was in the Santa Ana-Anaheim-Irvine area of California, which has seen a steady rise in employment over the past year, particularly in the professional- and financial-services sectors, and the highest wage increases in three years. On the East Coast, fat year-end bonuses at many Wall Street firms fed a buying spree in the suburbs of New York, where prices increased almost as much, to 4.2%.

Overall, the survey showed a return to a buyer’s market in the million-dollar range. But in some places, like San Francisco, where prices have remained high for years — the overall median is $740,000, compared with the median price of $870,000 in the city’s “million-dollar” category — buyers aren’t rushing in. Fatigued by years of fruitless house-hunting, they “can’t quite believe” that the market has finally turned in their favor, according to broker Linda Harrison.

Vienna, Va., housing economist Tom Lawler says buyer hesitation is also being fueled by the change in mentality from a speculative market to one based more on need. During the boom, many buyers bought the biggest house that they could because they saw that as a way to increase their investment in real estate without buying rental property. But now that the market is softening, that strategy no longer makes much sense. Lawyer Beth Joffe and her husband, a physician, recently sold their three-bedroom Chicago home for $760,000 and have moved to a much smaller two-bedroom condo in Madison, Wis., that they bought for $300,000. Though both are far from retirement age, neither wants the hassle or added expense of a bigger place. “We don’t need that any more,” Ms. Joffe says.

Reverse Psychology

Agents say that in many cities, the shifting psychology is causing sellers to reverse their tactics. During the run-up, sellers usually priced their homes slightly above the market knowing that someone would buy them, even if the price tag later had to be lowered somewhat. Now sellers are trying to undercut the market to sell while their listings are still fresh.

That’s especially true in relatively new “semi-custom” subdivisions, where many homes, though chock-full of amenities like built-in wine racks and tumbled-stoned backsplashes, tend to look alike. In St. Louis, Steve Shadrach has just listed his five-bedroom, brick-and-stone-front home with a swimming pool, which he bought more than two years ago for $770,000, for $949,000. If he finds a buyer at that price, he’ll make a substantial profit. But his asking price is nearly $50,000 less than a nearby neighbor is asking for a nearly identical property, and about $100,000 less than what his builder is charging to build the same house. “I’d like to price it higher, but I have to compete with them,” says Mr. Shadrach, a plastics salesman who wants to move closer to his grandchildren.

Indeed, a surfeit of new homes in central New Jersey is partly responsible for the significant price declines in Edison, where prices of starter luxury houses fell 6.7% in the fourth quarter from the year earlier. Coldwell Banker has a $949,900 listing of a “new” five-bedroom brick house that was actually built in 2005, but interested buyers are few. “People are going for less house,” says Joe Thomas, an agent with Coldwell Banker. “They’re not stretching any more.”

Stretched Out

In many parts of Southern California, prices are still on the upswing, although analysts such as Celia Chen, director of housing economics at Moody’s Economy.com, says the area is at “high risk” for a fall. Although the local economy is strong, incomes haven’t kept pace with the sizzling double-digit price increases these markets experienced from 2001 to 2005. And with federal regulators pressuring lenders to cut back on creative financing, fewer buyers are able to stretch their incomes to buy million-dollar homes.

That’s what banker David Jaffe discovered when he put his five-bedroom stucco home in Ventura, Calif., on the market 2½ months ago for $979,900. Ventura’s prices are still rising — they increased 4% from 2005 to 2006, the study showed — and Mr. Jaffe attracted an offer close to his asking price soon after he listed it. But the deal fell apart in escrow when the buyer couldn’t qualify for the loan.
Mr. Jaffe bought the place in April 2005 for $935,000 in a bidding war, and still hopes to find someone who will meet his asking price. But he doesn’t expect to see lines forming at his door, especially since homes in his price range are affordable to fewer people and no longer have quite the cachet that they once did. “The market is changing,” he says. “It’s definitely a buyer’s market now.”

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By Jeff Bater

From The Wall Street Journal Online

New-home sales finished 2006 on a positive note, rising a second straight month in December, but demand for the whole year took its biggest tumble since 1990.

Separately, durable-goods orders climbed last month, boosted by a sharp jump in orders for commercial aircraft, though demand rose across the board. Business-equipment spending rebounded.

In the home-sales report, sales of single-family homes increased by 4.8% to a seasonally adjusted annual rate of 1.120 million, the Commerce Department said Friday. November sales rose 7.4% to 1.069 million, revised from a previously estimated 3.4% advance to 1.047 million.

Economists had expected a 1.2% increase to an annual rate of 1.060 million last month.

On a not seasonally adjusted basis, new-home sales fell 17.3% in 2006 to an estimated level of 1.061 million, the largest drop since 17.8% in 1990. The housing sector has restrained economic growth, which slowed in the third quarter to a 2.0% pace. The housing component of gross domestic product plummeted by 18.7%, which was the sharpest drop in 15 years and robbed GDP of 1.20 percentage points.

Surging demand in certain markets across the U.S. during the housing boom sent prices skyward and builders breaking ground. Sales peaked in 2005 and began receding, while inventories climbed, which slowed builders down.

New-home inventories fell in December, a sign builders are getting supply under control. There were an estimated 537,000 homes for sale at the end of the month — the lowest level since 522,000 in January 2006, the government data showed. That represented a 5.9 months’ supply at the current sales rate. An estimated 542,000 homes were for sale at the end of November, a 6.1 months’ inventory. In December 2005, the supply was 4.8 months.

Prices were down a bit. The average price of a new home decreased to $290,100 from $290,800 in November and below $290,200 in December 2005. The median price rose to $235,000 last month from $232,200 in November but was lower than the year-earlier level of $238,600.

Financing costs drifted down in December. The average rate on a 30-year mortgage was 6.14%, lower than 6.24% a month earlier and 6.27% in December 2005.

By region, new-home sales last month rose 26.6% in the Midwest, 27.3% in the Northeast, and 0.3% in the South. Demand fell 4.4% in the West. Based on figures unadjusted for seasonal factors, an estimated 76,000 homes were actually sold last month in the U.S., up from 75,000 in November.

Spending on Durable Goods Climbs

Orders for durable goods, big-ticket items such as cars and appliances meant to last three years or more, advanced 3.1% last month to a seasonally adjusted $221.87 billion, the Commerce Department said Friday. Durables rose 2.2% in November, revised from a previously estimated 1.6% increase. For all of 2006, durables rose at a not seasonally adjusted 7.0%, after rising 8.6% during 2005.

Orders for commercial planes increased 26.5% last month, while military aircraft orders rose 20.5%. Overall, transportation orders were up 4.8%, after rising 10.2% in November. However, a key barometer of business-equipment spending — orders for nondefense capital goods excluding aircraft — increased by 2.4%, after falling 1.0% in November.

While demand was up across the board, the overall 3.1% rise in durable-goods orders fell short of the 3.9% economists had expected, according to a survey by Dow Jones Newswires.

Motor vehicles and parts orders increased by 6.8% last month; for the year, on a not seasonally adjusted basis, motor vehicle bookings were 2.2% lower. Orders for all durables except transportation goods increased 2.3%, after falling 1.0% in November. Demand increased 2.5% for fabricated metals, 4.5% for primary metals, 5.0% for machinery, and 1.0% for computers and electronics. Demand decreased 1.4% for electrical equipment.

Capital-goods orders rose by 5.5% last month. Nondefense capital goods — items meant to last 10 years or longer — increased 9.0%. Defense-related capital goods orders fell 17.5%. Inventories rose 0.4%. Unfilled orders, a sign of future demand, rose 2.3%.

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By Ruth Simon

From The Wall Street Journal Online

As the number of borrowers falling behind on their mortgage payments climbs to the highest level in five years, the mortgage industry is trying new strategies to help bail them out.

Much of the attention is on homeowners who in recent years took out adjustable-rate mortgages, a popular way to finance a home when interest rates were low. Now, with rates having moved up, many of these borrowers have recently seen, or soon will see, their mortgage rates adjust higher for the first time.

To head off problems, mortgage companies are reaching out to borrowers earlier. Bank of America Corp. is allowing some borrowers with ARMs to refinance into a different loan at no cost. Citigroup Inc.’s CitiMortgage unit is focusing extra attention on parts of California, Florida and New York where home prices have moved up sharply. It is also contacting delinquent borrowers within days after a missed payment, if it doesn’t fit their normal bill-paying habits.

The rise in bad loans also is leading to a pick up in so-called short sales, in which a lender allows the property to be sold for less than the total amount due and often forgives the remaining debt. For the lender, the process can be shorter and less costly than foreclosing, especially in a declining market. For borrowers, it is a way to avoid having a foreclosure on their credit report.

Sheldon Klain, a manager in Dallas, wound up saddled with loans on two homes last year and now is trying to arrange a short sale of one of them. Mr. Klain got into trouble after he moved to Dallas from Las Vegas to take a new job. He bought a home in Dallas, thinking he had found a buyer willing to pay $475,000 for his Las Vegas home. The sale fell through at the last minute and Mr. Klain found himself stuck with two homes and behind on payments on the Las Vegas house.

Mr. Klain says his Las Vegas house, which is in a gated community and has a swimming pool, is valued at $419,000, according to a recent bank appraisal, well below the $440,000 he owes on the property. “The dump in the market put us behind the eight ball,” he says.

For some borrowers, efforts to work out bad loans can be complicated by the fact that many mortgages no longer are held by the banks that made the loans. Instead, roughly two-thirds of mortgages are packaged into mortgage-backed securities and sold to investors. How much leeway a borrower is given can vary, depending in part on the rules spelled out at the time the securities are created. Some agreements, for instance, don’t permit loan modifications or limit the circumstances under which a loan can be modified. Others put a cap on how many loans can be restructured.

Some 2.51% of mortgages were delinquent in the fourth quarter, according to new data from Equifax Inc. and Moody’s Economy.com Inc. That is up from 2.33% in the third quarter and the highest level since a recent peak of 2.53% in the first quarter of 2002.

The increase in bad loans is broad based, with delinquencies rising in the past year in roughly 80% of the 250 local areas analyzed by Moody’s Economy.com. Some of the biggest increases have come in California, where high prices have made it hard to afford a home, and in other once-hot markets such as Las Vegas and Port St. Lucie, Fla. Among the handful of major metropolitan areas where delinquencies have fallen: Salt Lake City, San Antonio and Albuquerque, N.M.

The rise in delinquencies is unusual because it comes at a time when the economy is relatively strong. Even though job growth remains healthy, “the total mortgage delinquency rate is the highest that it’s been since the depths of the [2001] recession,” says Mark Zandi, chief economist at Moody’s Economy.com. He attributes the increase in part to the weaker housing market and the widespread use of adjustable-rate mortgages, many of which now are resetting at higher rates.

What is more, as demand for loans softened, mortgage lenders loosened their standards and made riskier loans, Mr. Zandi says. He expects that nationwide delinquency rates could rise by as much as a full percentage point from current levels in the next year, but he doesn’t expect the trend will have a significant impact on the overall economy.

Until recently, mortgage delinquencies were low by historical standards, which Mr. Zandi pegs at about 2%, based on the dollar value of loans that are at least 30 days past due. One reason: Rising home prices made it easy for borrowers who missed payments to refinance or sell their home. That changed as home prices flattened or fell in many areas.

Adding to the pain are higher short-term interest rates, which mean bigger monthly payments for borrowers with adjustable-rate mortgages or home-equity lines of credit. In addition, many mortgages were taken out in the past few years and now are approaching the point in their life when delinquencies typically pick up. An increase in mortgage fraud in parts of the country also has contributed to bad loans, lenders say.

“Keep in mind that 2004 and 2005 were aberrations,” with low delinquencies and rapid home-price growth, says Michael Fratantoni, an economist with the Mortgage Bankers Association. He says the biggest increase in delinquencies has been among borrowers with scuffed credit records who took out adjustable-rate mortgages.

To head off potential problems, CitiMortgage contacts borrowers with adjustable-rate mortgages by phone and by mail monthly, beginning months before the rate on their loan resets, to alert them to the upcoming payment increase and explain their options, says CitiMortgage President Bill Beckmann.

Bank of America is using computer models to predict which borrowers may run into trouble — even before they miss a payment. “We’re calling earlier and more often” because it increases the chances that a borrower’s problems can be worked out, says Bob Caruso, Bank of America’s national servicing executive.

Among the bank’s options: Borrowers who miss a payment because of illness or job loss may be allowed to add the unpaid debt to their loan balance, Mr. Caruso says. Other kinds of loan modifications also are becoming more common. These include arrangements that allow a troubled borrower to refinance into a less costly loan or that lower the interest rate on the mortgage for several years to make the payments more affordable.

Mortgage companies also are looking for additional ways to reach financially stretched borrowers. In some of the Midwestern markets where it has bank branch offices, National City Corp. is working with local clergy, United Way organizations, social workers and housing counseling agencies to help borrowers reluctant to talk with their lender. The bank’s Web site explains workout options and allows borrowers to apply online for assistance. National City is one of a dozen major lenders behind a national advertising campaign that will, beginning this spring, promote a toll-free number (888-995-HOPE) borrowers can call for homeownership counseling and referrals.

Bank of America says it has seen short sales of homes increase 25% from last year, albeit coming off of relatively low levels. And in San Diego, the number of entries in the local multiple-listing service that include the words “short sale” has climbed to 98 from about 50 a year ago, according to Sandicor Inc., the local multiple-listing service. A short sale can be less of a black mark than a foreclosure on a borrower’s credit record, because it indicates the borrower was working with the lender.

There can be downsides for borrowers to short sales. Under certain circumstances, the debt forgiven by the bank may be taxable to the borrower. What is more, convincing a lender to go along with a short sale can be difficult, and borrowers who have a mortgage and a home-equity loan may have to negotiate with two lenders or two departments of the same bank.
“There are all sorts of log jams,” says John Izzo, the agent handling the sale of Mr. Klain’s Las Vegas house. Mr. Izzo says he is currently working on 19 short sales, but figures just “one in five might be successful.”

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By Lingling Wei

From The Wall Street Journal Online

As the number of foreclosures rises, homeowners unable to make their mortgage payments are facing another growing threat: “foreclosure rescue” scams.

State and federal authorities say they are investigating an increasing number of homeowner complaints about fraud and deception by companies that engage in lending to financially distressed borrowers seeking to avoid foreclosure. Several states have recently passed or are contemplating new laws to provide more protection against dishonest businesses trying to take advantage of already vulnerable homeowners.

The problem centers on foreclosure-rescue companies, which target homeowners behind on their mortgage payments through newspaper ads or fliers claiming services such as “fast cash,” “equity funding” and “no credit check.” According to some recent cases filed by consumers and regulators, the companies mislead borrowers into believing they can save their homes from foreclosure in exchange for a transfer of the title for a year or two. The companies promise borrowers they can stay in their homes by paying rent for that period, giving them time to catch up financially until they can buy back their property. Often unknown to the borrowers, however, the companies may have sold their homes to a third party, stripping out the home equity and leaving the borrowers on the verge of eviction.

“More and more, we’re seeing some real sharks, pretending to be the homeowner’s best friend, but what they are after is the equity in the house,” says Arizona Attorney General Terry Goddard.

Foreclosure fraud has existed for a long time. But in recent years, experts and law-enforcement officials say, the schemes have grown increasingly complex, with scam artists often eyeing the chunks of equity that homeowners across the country amassed during the rapid housing-price appreciation from 2000 to 2005.

The scams are getting a boost as the housing boom fades and the numbers of past-due mortgage loans and foreclosures climb. Foreclosures historically have hit mainly homeowners with weak credit ratings. But now, a wider range of borrowers are struggling to pay off high-priced loans that lenders churned out during the boom. Online foreclosure-data service RealtyTrac says more than one million borrowers have seen their properties put in foreclosure so far this year, up 27% from the same period last year.

Statistics on the exact number of foreclosure-fraud cases filed are hard to come by as they are usually lumped together with mortgage fraud, which includes fraud against both lenders and borrowers. The Federal Bureau of Investigation estimates that mortgage fraud led to over $1 billion in losses in 2005, up from $429 million a year earlier. “We’re increasing our focus on mortgage fraud,” says Bill Stern, a supervisory special agent and mortgage-fraud coordinator at the FBI.

Alejandro and Martha Balderas tried for months to refinance their Chicago home and take it out of foreclosure after medical bills kept the couple from keeping up with their mortgage payments. They thought they had found their white knight when Platinum Investment Group LLC, a mortgage and real-estate investment company, promised the couple a loan against their house so they could pay off their mortgage and stay in their home, according to a complaint filed against Platinum in Circuit Court of Cook County, Illinois, by the state attorney general’s office.

The Balderases, in their early 40s, signed on in April 2005 — only to find out soon afterward that they had signed over their home to Platinum, which then sold it. Unable to keep paying “rent” to the company, they are now threatened with eviction, Ms. Balderas says. “It’s a nightmare and we’re reliving it every day,” she says.

The Illinois attorney general charged that Platinum duped homeowners into transactions that caused them to lose substantial equity in their homes and face eviction. Platinum has denied the allegations. A lawyer representing Platinum didn’t respond to requests for comment.

A total of 10 states have legislation in place to deter foreclosure-rescue fraud, including California, Georgia, Missouri, Minnesota, Maryland, Colorado, Rhode Island, New York, Ohio and Illinois, according to Creola Johnson, an associate law professor at Ohio State University.

A common feature among those laws is that they give homeowners the right to cancel the “rescue” transaction days before the closing. In addition, for instance, under the legislation passed in Illinois this year, if a company acquires any financial interest in a property in foreclosure and simultaneously leases the property back to the homeowner and gives the owner the option to buy it back at a later date, the acquirer, in certain cases, must pay the homeowner at least 82% of the property’s fair-market value at the closing of the purchase.

The goal of the payout requirements under the Illinois law, which goes into effect Jan. 1, is to ensure that distressed homeowners receive a substantial and fair amount of home equity when entering into leaseback transactions, while giving legitimate foreclosure purchasers a reasonable chance to profit.

Another common type of consumer complaint involves so-called foreclosure consultants, who, for an upfront fee, promise borrowers to negotiate with their lenders to postpone or avoid foreclosures. Illinois and several other states forbid foreclosure consultants from charging an upfront fee before performing the agreed-upon services.

Still, homeowners who find themselves duped into foreclosure scams often have a hard time recovering their losses, consumer lawyers say. For example, state law may not protect consumers if their houses are sold to third parties who claim they were unaware of any alleged fraud, according to a National Consumer Law Center report on foreclosure fraud.

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By Ryan Chittum

From The Wall Street Journal Online

Colony Capital Acquisitions LLC closed a long-awaited deal to take over a massive mall project in New Jersey from struggling real-estate investment trust Mills Corp.

Also, Mills former Chief Executive Larry Siegel resigned his position as Mills chairman to help run the Meadowlands Xanadu project, which would be the most expensive mall built in the U.S.

Colony Capital President Richard Saltzman said yesterday the mall could cost up to $2.3 billion to complete. The project, under construction since March 2005, is now scheduled to open in the fall of 2008.

Under the agreement, announced late Wednesday, Mills is paying Colony Capital $175 million to take over the project. Mills wasn’t able to finance the mall’s cost, which has increased from an original projection of $1.2 billion.

About $800 million has been spent, and Colony Capital has financing for another $1.5 billion, of which $500 million is new equity, Mr. Saltzman said. Colony Capital will provide the majority of that new equity, while Dune Real Estate Funds will have a minority interest, he said. KanAm USA Management XXII LP, Mills’s original partner on the project, will retain an interest, which Mr. Saltzman declined to define. KanAm has spent about $340 million on the project, and Mr. Saltzman said it may put in more equity.

The deal clears the way for the possible sale of Mills after it releases its financial statements, which have been delayed more than a year. Mills, based in Chevy Chase, Md., has been hit by accounting woes and cash-flow problems, forcing it to slash its development pipeline, sell off assets and borrow money at a premium. Its shares have tumbled 51% in the last year.

Mr. Siegel stepped down as CEO last month after more than a decade. He presided over the project and was CEO when the outline of the deal with Colony was reached in August. Mills likely will have to write off about nearly $600 million it spent on Xanadu, according to earlier securities filings.

“We have a whole group of people joining us who had previously been at Mills,” Mr. Saltzman said. “Larry is going to have a very important leadership purpose with us.”

Mr. Siegel and Mills officials couldn’t be reached for comment yesterday.

Colony Capital said it has signed anchor tenants to an additional 200,000 square feet at the 2.2-million-square-foot mall, bringing the total leased to more than 500,000 square feet. Because of the troubled outlook for the project and its own woes, Mills had had trouble leasing retail and entertainment tenants.

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As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate.

So far, the U.S. housing slump hasn’t produced a bonanza for such investors, but lenders stuck with foreclosed property are becoming more inclined to slash prices or sell properties through auctions, industry experts say.

“We’re all going to have to be more creative in the next 12 to 24 months” in selling foreclosed homes, says Chad Neel, president and chief operating officer of Fidelity National Asset Management Solutions, a unit of Fidelity National Information Services Inc., Jacksonville, Fla. Mr. Neel’s company helps lenders manage and sell foreclosed homes.

Williams & Williams Inc., a Tulsa-based auctioneer, says its sales of foreclosed homes will nearly double this year to about 5,060. Dean Williams, chief executive of the auction firm, expects another near doubling of sales in 2007.

Dallas-based Hudson & Marshall Inc. expects its auction sales of foreclosed properties to total about 4,800 this year, up 23% from 2005. David Webb, co-owner of the auction company, believes sales will rise at least 20% in 2007.

The auction firms say their busiest auction markets recently have included Michigan, Ohio, Indiana, Pennsylvania, Texas and Colorado. “Word on the street is that California, Florida and Arizona will also be very active in the next 12 months,” Mr. Webb says.

Lenders refer to foreclosed homes as REO, short for “real-estate owned.” They generally try to sell REO homes as quickly as possible to minimize holding costs, such as those for insurance, taxes and lawn care.

In the first half of 2006, REO properties accounted for 3.1% of all U.S. home sales, up from 2.4% two years earlier, according to a study by First American Real Estate Solutions, a unit of First American Corp., Santa Ana, Calif. The study found that those homes sold at a median discount of 14% to their estimated value in the first half, compared with 12.5% two years before. The discounts reflect the gap between the actual sale price for the homes and the value estimated by a computer model, which takes into account sales of comparable homes nearby and price trends.

It has taken a while for foreclosures to mount. The housing boom of recent years reduced foreclosure rates because most people who fell behind on their loans could refinance or quickly sell their homes for at least enough to pay off the loans. At the end of this year’s second quarter, only about 1% of all home mortgage loans outstanding were in the foreclosure process, down from an average of 1.2% over the past decade, according to the Mortgage Bankers Association. Doug Duncan, chief economist for the mortgage bankers, expects a modest rise in foreclosures over the next year or two.

People with weak credit records who have taken out loans over the past year are falling behind on payments at a rapid clip, according to a recent report by mortgage analysts at UBS AG in New York.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, notes that REO sales are a lagging indicator of the housing market because at least a few months elapse between a borrower’s default and the foreclosure. Dr. Cagan expects a modestly higher foreclosure rate and deeper discounts next year.

Discounts are likely to be larger in areas where inventories of unsold homes have soared, such as in parts of Arizona and Florida, Dr. Cagan says. Another big factor in determining demand for REO homes is local job and population growth.

In Los Angeles County, which has strong housing demand and an extreme shortage of space, the median discount on REO homes was just 1.7% in this year’s first half. In Ohio’s Cuyahoga County, where job losses have left a glut of empty homes, the discount was about 30%.

Most REO homes are listed by real-estate brokers and sold like ordinary houses. But lenders often turn to auctions when they see their REO inventories piling up. Lenders that choose the auction route want to get “current market value, whatever it is, rather than sit on vacant property and speculate as to if or when it might sell,” says Mr. Williams of the Tulsa-based auctioneer.

One recent buyer at a Hudson & Marshall auction was Warren Russell, who bought a 1,300-square-foot home in Detroit for just $1,500. Mr. Russell says the home is structurally sound but needs new windows, paint and some other items. He expects to spend about $10,000 renovating the home and then rent it out.

In considering purchases of foreclosed homes, Mr. Russell says, “you can’t think, ‘Would I live here?’ There are people at every level of income that need a roof.”

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The Associated Press

By MARTIN CRUTSINGER

Sales of existing homes posted a tiny increase in October but the median home price fell by a record amount. Analysts forecast more price declines in coming months as the once-booming housing market undergoes a painful correction.

The National Association of Realtors said Tuesday that existing home sales edged up 0.5 percent to a seasonally adjusted annual rate of 6.24 million last month. It was the first increase after seven consecutive monthly declines.

However, the median price for a home sold dropped to $221,000 in October, a decline of 3.5 percent from a year ago. That was the biggest year-over-year price decline on record.

It marked the third straight month that median prices have fallen compared with the same period a year ago, the longest stretch of such declines on record. The median is the point where half the homes sold for more and half for less.

David Lereah, chief economist for the Realtors, said he expected home prices to continue falling for the rest of the year as sellers, accustomed to the booming market conditions of previous years, reluctantly cut their prices.

‘Many buyers remain on the sidelines,’ Lereah said. ‘After a period of price adjustment, we’ll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007.’

The once-booming housing market, which had been one of the economy’s standout performers for the past five years, has experienced a significant slowdown this year, which has dragged down overall economic growth.

Some analysts have worried that the correction in housing could be severe enough to drag the entire country into a recession. However, those fears have eased in recent months as a big fall in gasoline and other energy prices has provided support for consumer spending.

For October, sales were down 2.9 percent in the Northeast and 1.2 percent in the South. However, they rose by 6.4 percent in the West and were unchanged in the Midwest.

The inventory of unsold homes rose by 1.9 percent in October to 3.85 million units, the second highest total on record. It would take 7.4 months to exhaust the backlog of unsold homes at the October sales pace.

Analysts predicted further price declines with inventories of both existing and new homes hovering near record levels.

By region of the country, median prices were down the most in the South, a drop of 7 percent followed by declines of 5.2 percent in the Northeast, 1.2 percent in the Midwest and 0.6 percent in the South.

Lereah said the big price decline in the South could represent not only sellers adjusting their asking prices but also a changing mix of sales with lower-priced areas of the South such as Texas seeing an increase in sales while high-priced areas such as the Washington, D.C., area and Florida still suffering sales declines.

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By James R. Hagerty

From The Wall Street Journal Online

Just when the gloomier pundits were starting to enjoy the housing slump, optimists are piping up to declare it could be almost over.

Former Federal Reserve Chairman Alan Greenspan, whose interest-rate cuts helped create what he once called “froth” in house prices, said in a speech last week that he detected “early signs of stabilization” in the housing market. Some Wall Street economists also are saying the worst may be behind us.

Not so fast, replies Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., a Valhalla, N.Y., research firm: “It’s going to get worse before it gets better.”

Both camps are making valid points. The maximum impact of falling home construction may have hit the U.S. economy in the third quarter, some economists say. But that doesn’t mean the housing market is on the verge of a miracle recovery. Construction is expected to fall further as builders struggle to shed a glut of unsold homes. And many economists expect house and condominium prices to continue falling for at least an additional six months to a year in parts of the nation where speculators went wild.

For now, the consensus among economists is that the housing downturn will remain a drag on the economy but probably won’t sink the U.S. into a recession next year. Even Mr. Shepherdson, among the most bearish, believes the U.S. has a 60% chance of averting a recession in 2007. In any case, the weak housing market will remain painful for speculators who loaded up on credit to buy near the top — and for millions of people working in housing-related industries. Just last week, Countrywide Financial, the U.S.’s largest mortgage lender, announced plans to shed about 2,500 jobs, or 4.5% of the company’s total.

Largely because residential investment dropped at an annual rate of 17%, inflation-adjusted economic growth in the U.S. slowed to a feeble rate of 1.6% in the third quarter, according to an estimate released by the Commerce Department. Without that drop in residential building, economists said, the growth rate would have been about 2.7%.

After the third-quarter carnage, expect “some gradual improvement from here,” says Peter Kretzmer, a senior economist at Bank of America in New York. He expects residential construction to decline at an annual rate of 13% in the current quarter, 5% in next year’s first quarter and 2.2% in the second quarter before starting to grow again. Mr. Shepherdson disagrees, arguing that the drop in construction will accelerate before the market regains balance.

Offsetting the housing damage are several positives. Gasoline prices and mortgage interest rates have fallen in recent months. The stock-market rally has made some people feel richer, even as those who trust only in real estate feel poorer. And job growth, though unspectacular, continues at a “solid” pace, says Scott Anderson, an economist at Wells Fargo in Minneapolis.

With home prices flat to lower in much of the country, Americans already have less ability to tap their home equity to finance spending. But it is unclear how much effect that will have on consumer spending. Some economists believe that rising wages, the stock-market rally and lower energy costs will be enough to keep Americans loading their shopping carts with iPods and flat-screen TVs.

Mr. Greenspan sees hope in the rate of applications for home-purchase mortgages. After falling in the second half of 2005 and earlier this year, they have leveled off in recent weeks.

Some of the optimists’ arguments are dubious. To bolster its position that the housing market is stabilizing, the National Association of Realtors last week trumpeted a 2.4% decline during September in the number of previously occupied homes offered for sale through multiple-listing services. But the Realtors’ news release didn’t mention that listings almost always decline in September, when the back-to-school season means fewer people are moving. Over the past 20 years, listings have declined an average of 3.4% in September, says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse.

Ms. Zelman, who last year correctly predicted a plunge in home-builder share prices, thinks investors who now are bidding those prices back up are way too early. Sales of new homes are unlikely to start rising again before early 2008, she says. Meanwhile, “land is going down in value daily,” she says.

Joshua Shapiro, chief U.S. economist at research firm MFR in New York, is more upbeat but still thinks home prices will “stagnate” on a nationwide basis for several years, as rises in parts of the country are offset by continued declines elsewhere. After the unusually steep surge in home prices during the first half of this decade, he says, it will take time for incomes to catch up again with housing costs.

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