The Housing Bubble

The Herald Tribune has the latest on the Florida condo bubble. “Two more apartment complexes, with a total of 586 units, are being converted to condos. Six months ago, these conveniently sited complexes would have sold out in a matter of months. Like most other sectors of the real estate market, however, demand for converted condos has cooled. ”It’s definitely going slower,’ said Janice Ingenito, a mortgage originator. ‘We were doing loans right and left. But there aren’t as many buyers now.’”

“The problem, most observers agree, is that investors who poured money into real estate in the past three years are taking a wait-and-see approach. As these buyers represented anywhere from 30 percent to 50 percent of the market, their absence is being strongly felt.”

“‘We are seeing a slowdown in investor buyers,’ said Matthew Kihnke, the Chicago real estate developer. Kihnke has plenty of experience converting condos. He completed the 174-unit Brookwood apartments in Bradenton during the summer and is in the midst of converting 272 units nearby at Saddle Creek.”

“In acknowledgment of the slowdown, however, Kihnke is not using his usual team of brokers to peddle the units. (They) are tied up with the Saddle Creek conversion and admit that sales have been sluggish.”

“Veteran realtor Bill Davidson is confident his team can unload the units by the end of the year. ‘There’s no question the market has entered a period of adjustment,’ Davidson said. ‘We can’t talk about appreciation any more because we have no idea what the future will bring.’”

“Jack McCabe, Deerfield Beach-based real estate analyst, believes it may take longer for the market to turn around than many in the real estate industry may think. ‘Speculators are leaving the market, not just in Florida but all across the country,’ McCabe said. ‘What we’re left with is end users. Complexes that were selling 25 units a month are now selling two or three.’”

“‘This is not just an anomaly. It’s an absolute trend. January and February sales will be up over November and December, but they will be half as much as last year.’ McCabe believes that rather than rebounding by summer, it will take at least two years for real estate market to burn off the inventory that’s building up. ‘We’ll see sales continue to slow and inventories grow. It’s going to get a lot bloodier.’”

“Ingenito, the mortgage originator, thinks investors need to lengthen their time horizons. ‘It will take a year or more for all this inventory to be absorbed. But the market will get strong again. Baby boomers are just starting to retire.’”

The Star Tribune reports on another trend that appears when homes don’t sell. “Super Bowl Sunday, is often considered a kickoff to the spring real estate market. Agents say activity so far suggests the market could be as busy as last year’s near-record pace. But sales of the St Joseph statues suggest that sellers aren’t quite so optimistic.”

“St. Joseph has become an icon to nervous homesellers who believe, or want to believe, that burying his statue on the property will bring the saint’s intercession, and a sale. Purchases of the saint’s statues, including one packaged in a $6.95 homeseller’s kit complete with prayers and instructions, have surged in recent months, according to Tim Doran, president of three Twin Cities-area religious supply stores.”

“Doran said monthly sales of the kits have increased on average 33 percent, adding that sales of a less-expensive statue ($1.95) are up even more. Those increases coincide with a steep rise in the number of unsold houses in the Twin Cities area.”

“For the week ending Jan. 21, new listings in the 13-county metro area were up 26 percent over the same period a year ago, according to the Minneapolis Area Association of Realtors. For buyers, this is one of the best markets in years. Buyers have the luxury of shopping around and doing a little tire-kicking without the multiple-offer worries they faced last year.”

“In December, for example, 7.15 houses were on the market for every buyer, up from 4.32 at the same time last year.”

“Bob Pacieznik, a sales agent in Chanhassen, was something of a skeptic, until he landed a couple of hard-to-sell listings. ‘I walked in and said to the woman: ‘I have to sell a house,’ and she said, ‘You need St. Joseph.’ And they have one with St. Joseph standing next to a For Sale sign.’”

“After their $540,000 house in Prior Lake had been on the market for three slow months, Holly and Sean Ploeger were willing to do anything to sell it. So in December, they pulled up soil at the base of their For Sale sign and buried a little statue of St. Joseph in a plastic bag upside down and looking away from the house (the direction they want to go).”

“‘At this point, nothing can hurt,’ Holly Ploeger said. ‘It gives us something to hope for because nothing else was working.’”

“‘”It shows the desperateness of some sellers,’ said Bruce Erickson, sales agent. ‘I think sellers can use everything they’ve got right now.’”

Reuters reports on Fed officials speech. “Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Dallas Federal Reserve President Richard Fisher sounded less worried and said the high number of home owners with fixed rate mortgages provide a buffer.”

“In somewhat hawkish remarks, he also said U.S. growth would remain strong, provided the Fed keeps inflation under control and trade was not obstructed. ‘As long as the Federal Reserve does its job of holding inflation at bay, and as long as our political leaders resist protectionism and other forms of interference with creative destruction, we will remain a productive economic machine,’ he said in his prepared remarks.”

“Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Fisher sounded less worried. ‘It is not unreasonable to think the situation is manageable, albeit worth watching closely,’ he said.”

“Robert Schiller, a Yale economist and author of Irrational Exuberance, warns that Ben Bernanke’s focus on the Great Depression has trained him to fight the wrong war. In 1929, house prices and commodities had been falling for several years, even if Wall Street was frothy. This time assets are on fire across the board.”

“‘We are now in the late stages of the biggest real estate boom in US history, driven by frenzied market psychology. In the near future, this could put Bernanke into uncharted territory for economic stress,’ he said.”

And Paul Muolo writes at NMN. “Fourth quarter production volumes were decent, but all lenders (prime and B&C alike) suffered from the profit margin blues. Payment-option ARMs have garnered a ton of negative press because of their risk to consumers but what about lenders? Here’s the concern: when a borrower with a POA chooses the ‘negative am’ option the lender who made the loan gets to book the interest payment as ‘accrued’ even though the institution has not actually received the money from Joe and Mary Six-Pack.”

“The more negative-am POAs a lender has on its books, the greater that receivable. From what I understand, that accrued interest can be booked as income. In other words, the lender gets to count something as income even though it actually hasn’t received the cash yet. Now, maybe there’s nothing wrong with that but it sounds very close to the gain-on-sale debacle that cratered the nonprime industry back in 1998/99.”

“One analyst suggested to me that accrued (but uncollected) interest isn’t so bad as long as the loans are properly underwritten. He also suggested that accrued interest results in a receivable being created that costs next to nothing. But here’s one other issue to consider, if the firm with POAs is a REIT and it’s hooked on paying dividends, what happens when volumes and profit margins hit the wall? We should have our answer by year-end. Then we’ll see who’s left standing.”

The Register-Guard reports that even the Oregon housing market is coming back to Earth. “Happy days aren’t exactly here again, but projected solid job growth and a slowing, but still strong, housing market should keep the local and state economies rolling along this year, according to a five-member board of economists.”

“The biggest change from last year is an expected slowdown in the housing market. Double-digit percent gains in housing permits in Lane County and Oregon last year surprised the board, which had predicted that rising interest rates would dampen activity. ‘I think we’ve been building more houses than we need,’ said Bill Conerly, an economics consultant based in Lake Oswego.”

“With low mortgage rates, buyers ‘jumped the gun a bit,’ he said. They were able to move out of apartments and into homes earlier than they otherwise would have, Conerly said. ‘If you’ve been borrowing from the future, it’s hard to sustain those same levels of sales,’ he said.”

“Conerly predicts a 1-in-10 possibility of a panic in the national housing market by buyers who got in over their heads. Instead of ‘people feeling that their house is a great investment, it becomes an albatross pulling them down,’ he said.”

“But a slight drop from last year’s stellar levels still makes for a decent housing market this year, the board said. ‘Instead of being at the edges of the solar system, we’ve come back to the atmosphere,’ Potiowsky said.”

Several reports on homebuilders show the housing bubble is bursting. “A survey by the National Association of Home Builders found 62 percent of 406 builders are offering buyers incentives such as televisions or free heat for six months. Thirty-three percent are paying closing costs or fees. Twenty-five percent of builders say they are cutting prices, a move area builders try to avoid because it angers previous buyers.”

“Rodney Arnold, a builder of several subdivisions in Cape Girardeau, said in the past he has offered buyers an incentive by paying part of the closing costs. ‘A builder never wants to cut the price of a home,’ Arnold said. ‘So by giving incentives, it keeps the price of the home up.’”

“Central Ohio’s housing market is going through the equivalent of a closeout sale as builders slice prices in hopes of luring back buyers. But whether a builder is cutting prices immediately or holding out until later, many observers agree the cost of a house will be dropping, discount or no discount.”

“New-home sales in the region dropped 17.8 percent last year, with a 56.7 percent drop from late 2004 to fourth-quarter 2005, the biggest drop for a quarter since the homebuilding boom began in 2002. That has led to a slowdown in jobs related to the new-home market. It’s more like a pinch than a heavy blow for the industry so far. ‘I don’t think anyone’s in a panic mode,’ said David Lucchetti.”

“The cuts went deep at air-conditioning contractor Beutler Corp., which as a result of the housing downturn has laid off or lost to attrition 250 of its 1,500 workers, said president Rick Wylie. That figure includes 175 workers in Sacramento.”

“‘January’s been pretty tough. We’re struggling to stay even with last year,’ said Harris Blickstein, COO of a furniture-store chain based in Sacramento. For years the retailer enjoyed the effects of a booming housing market, the large number of houses sold, their rising values and numerous home-equity loans being made. Now people don’t feel as rich, Blickstein said.”

“Construction is a big factor in the local economy and has been one of the strongest job sectors in the wake of the economic downturn at the start of this decade. In Yolo, Sacramento, El Dorado and Placer counties, construction accounts for 70,400 jobs, largely in homebuilding.”

“‘Sooner or later, when you keep increasing prices and land prices go up to reach the ceiling, there won’t be enough people to buy your house,’ said subcontractor Jay Fischer (who) has laid off 50 of his 150 workers.”

The Sacramento Bee reports on distressed borrowers. “It took less than eight months for Dustin Suposs’ ‘”American Dream’ to become a nightmare. He and his girlfriend, both in their early 20s, got caught up in the better-buy-now mentality that fueled the Sacramento area’s housing market last spring. They bought a $365,000, 1,550-square-foot home in Elk Grove with no money down.”

“The result: A $2,300-a-month payment that was more than 2 1/2 times the rent they were paying. By December the couple were drowning in bills and debt. Now they’re two months behind on the mortgage. Experts say the pair are part of a new trend, a growing wave of distressed borrowers just beginning to hit Sacramento and across California.”

“In December, lenders filed 321 notices of default in Sacramento County, the highest number in nearly three years Already, many working with distressed borrowers see ominous signs that suggest foreclosure activity is picking up fast. ‘We’re seeing the early indicators that it’s only getting worse,’ said Pam Canada, of the nonprofit Neighborworks Homeownership Center. ‘We’re creeping into the dozens of calls per month (from owners behind on their payments), and that’s higher than a year ago, when it would have been half a dozen a month.’”

“‘Everyone was anticipating getting in (a house) at any cost and then letting appreciation in the market handle it in the next year or two,’ said John Arvanitis, in Citrus Heights. ‘In theory, that’s great if appreciation stays at certain levels, but it’s not happening anymore.’”

“Some of today’s distressed borrowers have exacerbated their predicament by blowing their credit score or by tapping what little equity they had with a cash-out refinance or a home equity loan. Experts stress that there’s always a certain amount of financial distress among homeowners. They expect defaults to rise from today’s level even if most people with riskier loans stay out of trouble.”

“Regardless of what kind of mortgage they have, Karevoll said, people always lose jobs, get divorced, get ill or injured or simply make bad borrowing decisions. “As grim as it sounds,” Karevoll said, ‘foreclosure activity has a function: It’s kind of the sanitation department of the real estate market.’”

“For now, Suposs and his girlfriend look to have escaped their immediate financial trouble. A relative has agreed to buy their home before they lose it to the lender. ‘There were a lot of nights of restless sleeping because they can come get the house,’ Suposs said.”