The Housing Bubble

The News Press reports on the bursting Florida housing bubble. “Lee County’s housing market is slowing after years of robust growth, and the worst may be yet to come as homes already being built flood the market. Every day, more than 400 houses go on the market, but only about a hundred are sold, according to real estate broker Denny Grimes. About 300 owners per day are reducing their sales prices.”

“While prices haven’t fallen much, unsold houses are piling up and ‘the inventory will get worse before it gets better,’ said Grimes.”

“In December, 617 homes sold of 6,662 for sale. That’s compared to January 2005, when about half the 2,906 homes on the market actually sold. Sales prices in the past three months of the year headed down from $358,560 to $307,184; list prices, what owners are asking for their houses, fell only slightly.”

“Unincorporated Lee County saw 17,833 single-family homes permitted last year, an increase of 46 percent. As those houses hit the market, they will depress the market even more, he said.”

“Things are no better around the country. The inventory of homes for sale was 2.8 million at the end of December, compared to 2.2 million a year earlier.”

“Where prices have risen dramatically, he said, ‘”there’s sort of an overshoot taking place’ as sellers price homes far over what the market would bear even a few months ago. ‘In some cases, if they want to sell soon, they might have to reduce their price significantly,’ McIlwain said.”

“Some are already doing that in Lee County. Aaron and Leatrice Lebowitz put their home up for sale more than two months ago for $399,000 and have since come down to $375,000. They’ve had two real estate brokers, but nobody has even looked at the house. ‘We’re debating what we’ll do next; we haven’t reached any definite conclusions,’ Lebowitz said. ‘Apparently the whole atmosphere has changed.’ Lebowitz, 76, said they’re trying to sell so they can move into something easier to maintain. ‘We can’t keep up the property the way it should be done,’” he said.’

“Their agent, Jeanette McMullen, said there’s nothing wrong with the three-bedroom, two-bath house. “It’s got a great floor plan, recently painted, carpet and tile floor throughout,’ she said. ‘It’s on a good size lot on the corner. It’s still an attractive place to live.’ The problem, McMullen said, is that ‘there’s a lot of sellers and few buyers. Buyers have more choices than ever before.’”

“In Estero, Kathy O’Regan’s two-story house with golf course and lake views in a gated community has been for sale for nearly three quiet months. ‘We expected it to pick up in January,’ said O’Regan, 34. ‘We haven’t seen that. We thought we’d sell within 60 days.’ She blames the slow response on the increased number of homes on the market, specifically within her Stoneybrook community.”

“When no offers came, they dropped the price to $515,000 on Dec. 1, $499,000 on Jan. 9 and finally to $484,900 on Jan. 27. O’Regan said her family wants to relocate closer to work but is willing to wait for a buyer at the current price. It’s all about your expectations, she said. ‘In reality, it might be less, but it’s still good. You’re still making a profit.”

“One expert recently told a Fort Myers real estate symposium things could be worse. Orlando-based economist Hank Fishkind (said) that Miami is likely to get a harsher version of whatever happens because of overbuilding in the condominium market. ‘I’m going over to Miami, and I have to talk about the condo market,’ he told the conference. ‘I’m going to put my wetsuit on’ in anticipation of a flood of dismay over the bad news. He warned, a correction is coming. ‘I don’t think you need a Ph.D. to figure this out,’ he said. ‘Of course there’s a housing bubble in Florida.’”

With the new blog up and running, how about some suggestions on new features? Forums, podcasts, photo areas; any neat tools you’ve seen on other blogs or websites. Here are some suggestions from the topics thread.

“I suggest people go out and get photos of things that suggest the end of the bubble and upload them to Flick with the tag housingbubble. There are only four photos with that tag right now and Ben can add one of those Flickr web page inserts that show the latest images for a tag. We’d have a constantly updating look at the bubble and it’d be simple to do.”

“Tools, Tips, and Tricks. There are a lot of tools like domania.com I use today that I had no clue about until I stumbled onto this blog. Let’s share more of what works for us. I would wager that there are many bloggers here who have Tips and Tricks used to make sense out of the housing market. Some for watching RE pricing, some for gauging HBS.”

“If we can put all of these things in one place we may be able to create a toolbox and a tips and tricks FAQ (on this blog).”

Another reader suggests dedicated threads. “I want some one subject only threads. That and a little more restraint. When the subject is unoccupied Phoenix housing Boston condo cancellations don’t belong in the comments section. Single Subject suggestions can mean limited to just one geographic area and let fly, say San Diego or Maryland. It can mean outrageous incentives, free SUV, etc. It can mean a contest for who can show ziprealty or realtor.com the highest price per square foot.”

“To piggyback onto (the previous) comment/suggestion, how about just having some sort of FYI topic? It’s obvious that posters are itching to share information to help enlighten and inform the readers, but usually the place to put that information is in whatever the current topic is. Or, they post where the biggest audience may be. I don’t know what you would call it other than FYI Financials, or FYI Anecdotal Info…something like that.”

And this was added, “FYI Breaking News/This Just Out, FYI New Resource, FYI Anecdotes, FYI Misc/OT.”

The Arizona Republic reports on the demands of the housing bubble. “Earl Kemp watches daily as earth-moving equipment rumbles past his home in rural Golden Valley, near Kingman, pushing aside dirt and desert scrub as a Las Vegas developer prepares to build the first of more than 130,000 homes.”

“The developer, Jim Rhodes, couldn’t promise..that he could provide enough water for all the people, a failing Kemp thought would doom the project. ”There’s no water out here to begin with,’ said Kemp, who pays to have water hauled in. But water worries haven’t derailed the project. The Mohave County Board of Supervisors approved all but one of Rhodes’ subdivisions in early December, and the fifth was hung up on land issues, not water.”

“The Arizona Department of Water Resources has yet to finish its assessment of whether the area has adequate water to sustain nearly 400,000 people. Even if the state finds the water supply inadequate, that’s what appears likely unless the builder’s engineers can shore up their studies, Rhodes can keep building.”

“While developers must prove they have a 100-year assured water supply in Phoenix, Tucson and Prescott, they face no such regulation in rural Arizona and, under the law, can build even if the state rules their supply is inadequate. Many officials worry about losing revenue if growth slows.”

“Building a crisis slowly is not a word Denise Bensusan would use to describe the arrival of big-city developers in Kingman. In the space of a year, maybe two, builders have proposed more than 160,000 single-family homes, apartments and condominiums, more housing units than currently exist in all of Mohave County. ‘We are in a crisis,’ said Bensusan. ‘Our entities are not listening to us. The way these plans were rushed through, it was a joke.’”

“Mohave County officials don’t deny that they are missing some information about water supplies, but they insist they are only following the law. They angered opponents of the subdivisions when they said state law prevented them from rejecting proposals solely because the builders couldn’t guarantee water supplies. ‘I’m all for private property rights, definitely,’ Bensusan said. ‘But when our small group was invited to participate in the Long Mountain area plan, we were called anti-growth and all we were doing is talking about how much water do we have, how much density can we handle here, what about the infrastructure, the roads.’”

“The Water Resources Department will issue a determination of ‘adequate’ or ‘inadequate’ to meet residents’ needs for 100 years. The actual result isn’t binding, but the builders have to disclose the finding to the first buyers of the subdivision parcels. So far, no lawmaker has proposed changing that law. ‘This is a very serious issue,” said Lela Prashad, an advocate for Arizona Public Interest Research Group. ‘In 80 percent of the state, there are no protections so that when people buy a home with an inadequate water supply, they know it.’”

“Rhodes and other developers say that’s not their aim. They promise high-quality communities that will improve their surroundings without taxing resources. State officials say they rely on the developer to submit the best information possible. That’s especially critical in Mohave County, where little is known about the aquifers beneath the undeveloped areas. Some studies suggest ample water, but there’s been no real confirmation. If the state had to issue a report now, Tom Whitmer said, it would conclude that there is inadequate water to sustain the homes.”

” Bill Abbott hasn’t conducted any engineering studies, but he can offer firsthand evidence that it isn’t easy to maintain water in the arid valleys outside Kingman. He and his wife kept a few horses on their small spread and lived for years off two wells. Then the wells started to slow and before long, they’d nearly gone dry. He worries now about selling so many new homes without assurances that the water will hold out. ‘When I see my wells going dry, when I see my horse trough going dry, I don’t go out and buy more horses,’ he said.”

“It’s no secret that Rhodes intends to market at least some of the houses to Las Vegas-area workers, creating a far-flung bedroom community for people who want affordable homes and don’t mind a drive of an hour or more. The completion in 2008 of a bridge designed to bypass Hoover Dam will make such commutes possible and could leave Mohave County with tens of thousands of residents who work in Nevada but live in Arizona.”

The Calaveras Enterprise found some property with reduced prices in California. “The property for sale along Highway 26 is unusual in a lot of ways. But it has one feature you can find on some other residential properties in Calaveras County: a ‘price reduced’ sign.”

“That’s because the county is experiencing the same price flattening seen in home markets nationwide, Realtors are saying. ‘I believe it’s a buyer’s market now, and people are not necessarily getting their asking prices,’ Betty Gibbs, who’s selling the Highway 26 property, said.”

“The property has been on the market for more than a year. Originally listed at $1.3 million, its price has been reduced by $550,000.”

“Gibbs said what it’s listed as now, $750,000, is in line with an appraiser’s assessment. And that asking price is firm, as far as the property’s sellers are concerned. ‘But it just depends on how long that ‘for sale’ sign stays up,’ Gibbs said.”

“Economists, realty associations and mortgage lenders acknowledge that while home sales are still high, the market is changing. Although demand for housing isn’t something that’s short-lived, like the ‘irrational exuberance,’ as outgoing Fed Chairman Alan Greenspan called it, surrounding the tech market before its crash in 2001, homes are said to be settling into their actual value.”

“For a property on Highway 4 in Murphys, a cabin and a cottage on 4.8 acres, that means coming down $40,000 on the asking price. It’s already been on the market 203 days. Ariana Walker, owner of the company selling that property, said its long stay on the listings log is due to its price. ‘People expect to sell their homes for more than the market can bear,’ she said.”

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.”

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.”

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.”

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.”

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.”