The Housing Bubble

The New York Times found a city in Florida with a condo problem. “As the stepchild to its more beautiful sisters in southwest Florida, Naples and Sarasota, this city has struggled for decades to revitalize its picturesque downtown and attract snowbirds and tourists. Now, the historical buildings are no longer deteriorating; many have been rehabilitated using preservation tax credits and other tax abatement measures.”

“And yet much of downtown is still vacant, leaving some people in Fort Myers to wonder, What if you rebuild it and they still don’t come? ‘The city leaders have put all their eggs in the condo basket,’ said Warren J. Wright, the councilman for downtown Fort Myers. ‘They said, if we build enough condo units, then downtown will come back to life. But the way the economy is going, I’m not sure they’ll ever get built.’”

“The Beau Rivage, the first high-rise tower to be built on the Caloosahatchee River in 15 years, opened in October 2004. It all but sold out before construction began. In short order, the city began approving high-rise condo projects for a total of 3,600 units. Fort Myers also proceeded with a $30 million downtown street improvement project, and spent millions expanding the airport.”

“But the Beau Rivage might become the harbinger of a market slowdown. A year ago people here worried that Fort Myers..would be overdeveloped. Now some are concerned that wealthy condo dwellers might not save the city after all. Open more than a year, the Beau Rivage is only 35 percent occupied at the height of snowbird season, when Northerners come to Florida. Many of the units have already been flipped once, and 26 of the 124 units are back on the market.”

“At least one investor based in Fort Lauderdale, barely made his money back when he sold five units in a hurry; Beau Rivage’s management acknowledged that he escaped a loss only because he bought into the complex at a discount rate.”

“Three of the nine projects that have been approved since the master plan was adopted are under construction, with three more high-rise projects in the process of approval. But one developer recently tried to sell its riverfront property in a deal that fell through.”

“‘The city has approved all these condo units on the river and didn’t pay any attention to the other pieces of the puzzle,’ said Marsa Detscher, an urban planning consultant who lives in Fort Myers. ‘I’m not anti-growth, but you can’t redevelop a city based on high-rise towers alone,’ Ms. Detscher said.”

“‘I don’t know why there aren’t more people in Beau Rivage,’ said Donald Paight, executive director of the Fort Myers Downtown Redevelopment Agency. ‘But I’m very confident that all of the towers that have been approved will get built. Developers have already invested millions of dollars on land acquisition, design and permitting. People will be living in them eventually.’ He added, ‘If an investor doesn’t make as much money as they hoped, I don’t really care.’”

The Arizona Republic reports on the bursting housing bubble in the east valley. “The number of houses for sale in the Southeast Valley keeps rising every month as investors apparently have begun dumping the homes they hoped to make a killing on. Real estate agents say it’s not that a bubble has burst but more a sign that the market has returned to normal. They say many buyers and sellers haven’t realized it’s now a buyers’ market.”

“The number of homes for sale in the Southeast Valley, from Ahwatukee Foothills to Gold Canyon, more than doubled in the past seven months to 9,590 in December. Homes are staying on the market an average of 42 days instead of four as they did a year ago.”

“Agents said they believe a major reason for the increase in residential listings is because investors and homeowners who bought second and third homes over the past few years as investments have realized the time for the biggest gains has passed. ‘The biggest cause of our glut is the investors who are trying to take their profits,’ said Gina McKinley, a Chandler realtor. ‘It’s making it difficult for the poor sellers who have to try to sell. Last year, the investors were making it hard for people trying to buy.’”

“Cindy Flowers, who works in Gilbert, said she was stunned to discover that when she sets a price for a listing and looks at other homes for sale in a neighborhood, from half to three-fourths of them are vacant. That indicates the homes were purchased for investments. She has noticed that in many neighborhoods. ‘That’s just shocking. That means a lot of people were moving up or sideways or going somewhere else. And there was an influx of investors,’ she said.”

“In addition to investors dumping houses, another reason listings are increasing is that it’s normal this time of year. Whatever the reasons more people are selling than buying, the number is increasing quickly. Ahwatukee Foothills, for example, went from 66 listings in the fall of 2004 to 285 last September and 470 on Tuesday.”

“As a result, sellers are having to lower prices. McKinley said, ‘All the people who bought during the crazy time are trying to sell. People who bought in the $500,000 to $600,000 range are selling in the $400,000 range and having to drop their prices.’”

“As for the future, Flowers predicts the listings will keep rising into the summer. ‘I don’t think it’s serious, but I do think we have more pain ahead of us,’ she said.”

The Washington Post reports the ‘urban vision’ is in question. “In Fairfax County’s official vision for Tysons Corner, thousands of people live clustered around the Metro stops planned there. But in the reality of developers’ blueprints, a different Tysons is emerging, one with a population smaller than what county leaders have in mind.”

“A developer has decided to reduce the number of homes planned for the sliver of open land between the two Tysons malls. The plan approved three years ago called for Lerner Enterprises to build 540 condominiums, but the company now says it will build as few as 300 pricier ones.”

“At stake at Tysons is Fairfax’s fundamental philosophy about growth. The county hopes for mini-cities, complete with high-rises, where people can live, work, shop, eat and find entertainment without getting into a car. But the shift to fewer, costlier units at such a prime location near the Tysons Metro highlights how precarious the county’s plan is.”

“Lerner’s managing director of construction, Peter M. Rosen, said the company is considering going with fewer, larger units because it isn’t sure it can sell a higher number of smaller units. Under the initial scenario, the units would have averaged out to about 1,000 square feet; they are double that now. At current rates, the smaller homes would be priced at about $500,000, and Rosen expressed doubt about whether units of that size could have sold out at those prices.”

“‘We respond to the market,’ he said. The company would be willing to build more and smaller units, he said, but only ‘if you guarantee my market.’”

“To critics of the county’s plans for Tysons, the change to more limited and luxurious housing undermines the county’s claim that new housing at Tysons will benefit many rank-and-file employees there. ‘The canard of ‘Oh, we’ve got all these workers coming, and we need to provide housing’ is disproven when the county allows this to get through,’ said Laurie Genevro Cole, a Vienna Town Council member. ‘Nobody’s saying no to growth. We’re saying growth should serve a purpose. We don’t need hundreds more multimillion-dollar units.’”

The Orlando Sentinel reports on some Florida speculators. “A year ago, if Shani Parkin delivered an eager buyer to a vacation-home builder in the red-hot Four Corners area, the Kissimmee real-estate consultant had little to show for her effort. Builders then had plenty of their own buyers, thank you very much.”

“Today, they call. They send cards. They want her help unloading their new homes. The houses, popular with British vacationers, are getting harder to sell as the properties soar in price, grow in number, and more overseas investors cash in their equity, experts in the business say. Rentals of the homes also are down.”

“‘The bubble hasn’t burst, but let’s say it’s leaking,’ said Parkin, vice president of a business that specializes in helping overseas investors, particularly those from the United Kingdom, relocate to the United States.”

“Sales, though, have plummeted in recent months in Polk County. Polk has 4,127 such homes owned by people from the United Kingdom.”

“Sales of such homes in Polk dropped more than 35 percent from September to October 2005, remained steady for another month before sinking again more than 48 percent from November to December. Sales were 46 percent less in December 2005 than December 2004. Distribution of sales-tax money from the short-term rentals in Polk is down more than 13 percent comparing January with the same month a year ago.”

“One Brit homeowner in Osceola, where about 4,000 people from the U.K. own vacation homes, says it’s about money. Simply put, prices are sky-high. Paul Pilsworth, 50, has watched his Kissimmee vacation house leap in value about $90,000 in one year. ‘They have gone up astronomically,’ said Pilsworth, a British electrical engineer vacationing for seven weeks in the house he co-owns with three partners. ‘That’s probably what’s putting people off.’”

“The same phenomenon happened in England, where the British watched their home values soar and a pound-to-dollar exchange rate tip wildly in their favor.” “Anthony Wressel, who co-owns the house with Pilsworth, said he has considered selling, knowing he could get enough to comfortably retire to Spain, another popular locale for Brits. ‘Every time we come we are amazed how quickly they build,’ he said. ‘You reach a saturation point.’”

“Parkin agrees that a glut of vacation homes going up in the past two years along U.S. Highway 27 has affected the market. Thousands have gone up in the Four Corners area where Polk, Lake, Orange and Osceola meet, with more coming.”

“Ninety percent of the 294-unit first phase and most of the 678-unit second phase of the sprawling Sonesta Orlando Resort at Tierra del Sol along U.S. 27 is sold, for instance, mostly to international buyers.”

“‘I know some people say the market is slow, but at least for the next two or three years we feel the market will keep going,’ said Vega, who is a realtor and recently bought his own vacation home in Four Corners, which he plans to rent out.’”

“Many of his buyers, mostly from Puerto Rico and New York, plan to hold onto the homes for two or three years and then flip them for a profit.”

Thw Wall Street Journal has this report on the nations housing markets. “With the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities. It is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. The slowdown is affecting both existing homes and new homes.”

“Nationwide, there were 2.8 million existing houses and condominiums on the market at year end. That is down slightly from November’s 2.9 million listings, but up 26% from a year earlier. Adjusted for seasonal variations, inventories have climbed 38% since April.”

“In Phoenix, where inventories have climbed steadily since last spring, open houses are attracting a steady stream of lookers, says Charles McLean. ‘But people are taking their time,’ he says. ‘They’re not just jumping and writing a contract.’ Mr. McLean says that if a listing doesn’t attract enough traffic, within 30 days they will consider lowering the price.”

“‘The creativity to sell homes is coming back,’ says Dan Elsea. ‘We haven’t needed it for years.’”

“With the number of listings rising and the pace of sales slowing, there is now a 5.1-month supply of existing homes on the market, according to the NAR. Historically, a 5.5-to-six-month supply has been considered a balanced market, says NAR Chief Economist David Lereah. But with the Internet making shopping for a home easier, he says, it is no longer clear just what a balanced market is.”

“Another uncertainty: how much of the increase in inventories is due to speculators looking to sell, and whether they will be more willing to cut prices as the market cools. Brokers in markets such as Phoenix and South Florida say they’ve seen an increase in investor-owned properties for sale.”

“As orders slow, builders are engaged in heavy discounting and promotional activity, particularly among homes for the second-time, move-up and luxury buyer. A survey conducted last month by the NAHB found that 64% of builders are now using incentives such as offers to pay closing costs and free upgrades; 19% are cutting prices.”

“The supply of unoccupied condominiums is also climbing in many areas. In New York’s Westchester County, the number of condos on the market jumped to 617 at the end of 2005 from 397 a year earlier. In the Boston area, the number of condos listed at the end of January was 5,114, up from 2,876 a year earlier. In the Washington, D.C., metro area, new-home inventory climbed by more than 900% to 2, 413 in the fourth quarter over the same period a year earlier, largely because of the completion of several condo projects.”

The Metro West Daily News has this report on Massachusetts. “Housing prices are projected to drop 5 percent during each of the first two quarters of this year and Bay State residents remain highly concerned over the cost of housing, market analysts said yesterday.”

“A ’sharp’ drop in Massachusetts housing prices has begun, said Alan Clayton-Matthews, a professor at the McCormack Graduate School of Policy Studies at UMass. ‘The same economic forces that led to very high and fast-growing prices here in the past are now working in reverse,’ he said. ‘Housing prices are almost certainly going to decline in the near future.’”

“‘When we do have this housing price correction it is going to help our economy just as it did in the 1990s and is one of the requirements we need for the Massachusetts economy to grow again and expand robustly and for population growth to return,’ said Clayton-Matthews. ‘The longer we avoid a correction in housing prices, the sharper that correction will be and the more steep it will be.’”

“‘The level of concern over housing costs in both Massachusetts and in Essex County housing remains quite high,’ said Michael Goodman, director of economic and public policy at the UMass Donahue Institute, noting the public cares as much about housing as health care and public education. ‘It’s clear that housing costs, housing policy and housing development remain a very relevant issue in Massachusetts public policy circles.’”

The Arizona Republic reports on the Phoenix housing bubble. “Listings are up and houses are taking more time to sell as buyers regain the upper hand in the Valley’s volatile resale market. Andre and Petrusia Bilyk are what’s known in the housing market as motivated sellers.They put up their northeast Valley house for sale in November, hoping it would move quickly.”

“But the couple got caught in the abrupt market swing that has drastically increased the number of houses for sale in metropolitan Phoenix. They’ve reduced the price twice; it now stands at $449,000, yet there were no takers. So they resorted to an old home-selling trick that’s supposed to bring luck, burying a statue of St. Joseph upside down by the For Sale sign in their yard.”

“‘The four of us, we held hands, and my wife said a prayer to St. Joseph to put us in escrow,’ Andre Bilyk said. ‘We were having an open house the next day. You gotta do what you gotta do.’”

“Some homeowners who never considered selling couldn’t pass up the opportunity to try to cash in at prices that are still near the market top. ‘It’s shifting to a buyers’ market,’ said Bob Rucker, head of the MLS. ‘We are returning to a more normal market than we have had over the past year or so.’”

“The pressure is on real estate agents and sellers to get creative or cut prices to make their listings stand out in the growing crowd. ‘The buyers are saying, ‘Show me 10 more houses. They know there is a lot of inventory,’ said Brett Barry, an agent who’s listing the Bilyk house. ‘If it doesn’t pick up, sellers might have to mark down homes more than they expected to get the attention of the few buyers that are out there. The market moved 50 percent in one year. This could be the morning after.’”

“Jay Butler at Arizona State University, noted in a recent study that Valley resale homes have not been so difficult to afford since 1990. Incomes could hardly keep pace with price increases, and Butler said it could get worse. ‘People reach a point where they say, ‘I can’t afford this,’ Butler said. ‘If prices and rates move up, we’re in deep trouble.’”

“How quickly has the market changed? Bill Ryan, an agent in the East Valley, said that it June, he couldn’t keep two or three active listings. Now, he has 35. ‘Investors have basically gone away,’ he said. ‘Prices are so high, they can’t make them economically pencil. They were about 30 percent of market early in ‘05. Take away 30 percent of the market and that’s a big hit.’”

“The Bilyks say they won’t panic and sell out at a bargain-basement price. They expect the market to perk up, and they won’t move to the new house until the old one sells. ‘I’m sitting on a lot of equity in this house,’ Andre Bilyk said.”