The Housing Bubble

As usual, the news on a Friday can get overwhelming. So let’s clean-off the desk. First, you guys are burning up the bandwidth and I had to up the ante again this morning. As some have offered to help with the hosting fees and other additions to this blog, we put up a Paypal icon in the sidebar.

“The real estate investment trust AmeriVest Properties Inc. has approved a plan to liquidate the company. Charles Knight, president and CEO, said the company’s board of directors believes the plan will ‘maximize stockholder value,’ and that the decision came after a ‘long and thoughtful process’ by the board.”

“The $14 billion in new 30-year bonds auctioned on Thursday are now yielding 4.55 percent; about 14 basis points lower than what two-year notes are yielding. A flat or inverted yield curve also squeezes banks’ profits and makes them less willing to lend, dampening growth. ‘There had been concerns about what the inverted curve means. It was getting attention before, now it’s getting even more,’ said Mary Ann Hurley.”

This Washington, DC area site reports a 100% increase in Montgomery County inventory and a 26% decrease in sales.

“The median price of an existing single-family home in Denver last month edged up 4.2 percent over January last year to $245,000 but was flat compared with December, continuing to signal a shift to a buyers’ market. Dave Miley said he has noticed a number of home sales brochures advertising that contracts are subject to the acceptance of a ’short payoff’ from the lender. That’s a sale where a lender allows the property securing a mortgage to be sold for less than the existing loan balance.”

“For example, if the mortgage on a $300,000 home is $290,000, the expense of selling it would surpass the home’s value. ‘The commission itself would be something like $15,000,’ Miley said. “Sometimes, the lenders will cooperate and accept less than their $290,000 balance. If they can do it for $285,000, it’s easier than foreclosing.’”

“The median price of a single-family home dropped by $2,500 in January from the previous month, the Greater Las Vegas Association of Realtors reported. Home sales dropped to 1,778 in January, down 27 percent from December and 10.4 percent from a year ago. The number of homes available for sale on the MLS grew 23.3 percent to 16,493.”

“Linda Rheinberger, president of the GLVAR said David Lereah, chief economist for the NAR, told her to look for an investment property for him in Las Vegas.”

From California. “Palomar Builders pulled 66 single-family home permits in January, a one-month record for Palomar and three-quarters of the total the city’s permit center issued. But while Palomar Builders is busy building homes, it’s also working harder at encouraging consumers to buy into a cooling housing market.”

“Consumers are promised guaranteed interest rates with low loan fees if they buy a home in Autumn Glen, where prices start around $350,000. Jeb Allen, owner of Palomar Builders, said the incentives are a preferred strategy over cutting prices. ‘We’re not going to get stuck in a big price reduction,’ Allen said.”

“‘If you go to Sacramento and some other areas of the state, you have seen a real noticeable drop-off’ in real estate, (inspector Bill) Nagel said. ‘Typically, what happens in the Bay Area is followed in Redding a couple of years later and what happens in Sacramento, happens in Redding a year or so later.’”

“The percentage of Inland Empire households able to afford a home slipped from November to December. In December 2005, that number had dropped to 17 percent. However, much of the housing boom that made affordability so tough for Californians may be ebbing, said Jack Kyser. ‘The frenzy has definitely gone out of the market. The situation is still pretty intense,’ Kyser said. ‘The market has definitely peaked. Homes are remaining on the market longer.’”

“‘We’re hearing more new home buyers saying they’re going to wait,’ (realtor) Jeanette Young in Chino said, adding that a market cool-down might be good for homebuyers to get more value for their home. ‘It’s not as gratifying now when you sell someone a home you think isn’t worth it,’ Young said. “

The Washington Times has an update on the N Virginia housing bubble. “Buyers and sellers in Northern Virginia found themselves in a time warp at the end of 2005. At the beginning of last year, the Northern Virginia communities of Fairfax County, Arlington County and the city of Alexandria were the hottest markets in the region. But by the end of the year, it was suddenly 1998 again.”

“Buyers only had 1,584 homes to choose from in those three markets combined. But by October, more than 7,000 homes were for sale, and they weren’t moving quickly.”

“Another thing changed dramatically between the start of 2005 and the end. In February last year, I wrote this sentence: ‘Condos are the most sought-after type of housing.’ That was true, then. By the end of the year, however, the market was flooded with condominium listings that weren’t selling.”

“Realtors tell me that condos were the hardest type of home to buy early last year, but now they’re the easiest. That, too, reminds me of 1998. Condos were not doing well back then, and it appears an abundance of condo inventory is rewinding the clock.”

“One thing that is different from 1998, of course, is home prices. Even though the Northern Virginia market cooled down more drastically than other parts of the region, home prices didn’t fall through the floor. The median sales price in Northern Virginia fluctuated some last year. In July the median was $500,000. In December it was $479,000.”

Some Arizona sales numbers are out. ” The pace of Valley home resales continued to fall in January, the Arizona Real Estate Center reported Friday. With 5,260 recorded sales in January 2006, the greater Phoenix resale market fell from 6,480 sales in December 2005 and from 9,360 sales in January 2005.”

“‘The primary news of last year’s housing market was the rapid rise in the median home price from $194,000 in January to $260,000 in December,’ said Jay Butler. ‘However, since the record of $263,000 was set in September, the growth rate has disappeared, with the median price being $257,000 in January.’”

“The Phoenix resale home market decreased from 2,685 sales to 1,635 sales. Scottsdale’s resale home market declined from 785 to 400 recorded sales. Resales in Mesa declined from 1,060 to 615 sales. Glendale decreased from 640 to 410 sales. The Sun City resale market fell from 160 to 100 sales. And resale activity in Sun City West also slowed from 95 to 40 sales.”

“The resale market in Gilbert fell from 565 to 310 sales. Chandler’s resale market slowed from 625 to 330 recorded sales. Tempe’s resales decreased from 195 a year ago to 140 sales. Avondale fell from 220 to 150 sales. El Mirage resales decreased from 150 to 70. Goodyear’s resale home market fell from 195 to 100 sales. Surprise decreased from 370 sales to 165.”

And a reader sent in this site. “The Phoenix metropolitan area continues to experience strong growth in the numbers of specs and subdivisions. The following details substantiate this claim. We expect both trends to continue for at least several weeks.”

“We have been predicting that early in 2006 the spec home inventory would surpass the all-time high count of 2,400 from May 2003. With 92 more reported in the past week, the market now boasts 2,431 spec homes! The old record has been surpassed. Looking back, we see there are now almost three times as many spec homes than only 3 months ago. And since the lowest level recorded in 2005, the spec home inventory grew over six times!”

“In the last week alone, we have recorded 12 new subdivisions! Now at 715, the market has 154 more subdivisions than in the fourth week of January 2005. Since the lowest count in 2005, there are now 244 more subdivisions. We have witnessed a growth of 67%. The last time we recorded 715 subdivisions was during the summer of 2004.”

A check-up on the housing bubble and Wall Street. “Bank of America Corp. told employees last week that it will close the mortgage centers of the former MBNA Corp., shifting their work to its own centers, a spokeswoman said Thursday. Bank of America plans to cut 6,000 jobs in total as it swallows MBNA.”

“Bank of America also will shutter Nexstar Financial, a company MBNA acquired last summer that provides mortgage services for other companies, Davis said. Nexstar employs more than 300 in the St. Louis area, and more in Colorado. It will continue to service its existing customers, but will stop accepting new customers, and eventually cease operations.”

What’s the bubble blow-up of the day? “NovaStar Financial Inc., a large U.S. subprime mortgage lender, on Friday said it is postponing its release of fourth-quarter financial results as it seeks legal advice concerning taxes. Shares of the company, which is also a mortgage real estate investment trust, fell as much as 14.6 percent in early trading.”

“In the statement, NovaStar said that in reviewing its year-end financial results and talking with its independent auditors, it decided ‘to obtain legal opinions to further support certain tax positions of the Company.’ Jeffrey Gentle, a NovaStar spokesman, declined to elaborate on that issue. Asked about the timing of the company’s announcement, he said the matters under review involve ‘a recent question that came up.’”

And a homebuilder had disappointing news for shareholders. “WCI Communities Inc. shares were down nearly 5% in early dealings Friday after the company before the opening bell said its fourth-quarter profit fell on a charge for early repayment of debt and delays caused by Hurricane Wilma.”

“The Bonita Springs, Fla., builder of luxury homes and towers said fourth-quarter net income fell 7.3%. The company said net new orders in the fourth quarter plunged to 334 units from 1,081 last year, due primarily to the effects of Hurricane Wilma and fewer properties available for sale.”

“The company is the second builder that caters to the high-end market to report disappointing results. Earlier this week, Toll Brothers Inc., which is considered a bellwether for the U.S. housing market, led the sector lower after it reduced its forecast for 2006 for the second time in three months.”

“But WCI Chief Executive Jerry Starkey said Friday the company is optimistic. ‘While there is a general sentiment that pricing power has begun to soften in many markets, we believe this is temporary,’ Starkey said.”

The Washington Times has the last of their series on home loans. “Federal banking agencies, concerned about the potential for abuses in mortgage lending, are going after the worst practices in the industry. A directive last month from the Federal Reserve and four other federal agencies targets the proliferation of loans offering interest-only payments for extended periods and adjustable-rate mortgages that offer the option of paying interest only, making a minimum payment each month or adding in principal. That includes about half of all mortgages made last year.”

“The regulators also expressed concern about the growing practice of “layering” risky mortgages on top of already dicey lending practices, such as requiring no down payment or proof of income from borrowers.”

“But many inside and outside the mortgage industry question how much impact the banking directive will have, because so many mortgage brokers operate outside the banking system. Only those that are subsidiaries of banks would seem to be affected. ‘Banking regulators actually have fairly minimal control or even influence over a huge portion of our economy,’ said Christopher Cruise, a Washington mortgage broker. ‘I’m not saying we’re thumbing our nose at the regulators,’ he said. But ‘if I’m a street-level originator licensed by the state of Maryland generating 20,000 loans in a year, and I find rich investors to buy them, nothing the [Office of the Comptroller of the Currency] says has any impact on me.’”

“Mortgage companies such as Countrywide, the biggest nonbank lender in the country, appear to be unaffected, he said. ‘I think they own a bank, I don’t think the bank owns them. They sell their mortgages to Wall Street,’ he said.”

“Mr. Cruise noted that debt appears to be addictive for some consumers who simply cannot save or go without lavish things. Some will refinance their mortgage at Christmastime, for example, so they can splurge on expensive presents.”

“‘I feel like a drug dealer,’ he said. ‘I’m horrified at the empire of debt we’re creating.’ Mr. Cruise said some of his customers are so intent on getting loans, they won’t take ‘no’ for an answer. ‘We’re enablers. We’re just middlemen. In a sense, we profit from their foolishness.’”

“Most mortgage brokers today are in their 20s or early 30s and have not lived through a deep recession or other ‘worst-case scenario’ in their adult lives, Mr. Cruise said. ‘I’m not sure the loan officers themselves know what could happen’ if rates rise precipitously or the economy plunges, he said.”

“Jack M. Guttentag, a retired professor from University of Pennsylvania’s Wharton School of Business, said it’s not clear whether the guidelines will change anything. ‘What a broker or loan officer tells a borrower is pretty much up to them, so long as they comply with the disclosure laws,’ which don’t prohibit most current practices, he said. ‘That is part of the market culture, and the regulators would have their hands full trying to change it.’”

“Mortgage brokers also are right to question whether the directive applies to them, because the Federal Reserve has, at best, distant control over what the nonbank subsidiaries of bank-holding companies do, he said. ‘Many potential borrowers are shocked to discover that there is no registry of bad apples, and no system to certify good ones,’ he said.”

“Some financial analysts say the banking directive will have a definite impact on banks as well as on investors who have been using interest-only loans to purchase property. David Lereah, chief economist with the NAR, says he expects the directive particularly to discourage speculators who ‘flip’ properties in transactions that require minimal down payments and liberal loan terms. ‘There will be fewer investors in the market this year,’ he said.”

“Deborah Lagomarsino, a Fed spokeswoman, declined to say whether or how the Fed would ensure that its directive is followed by the many mortgage companies not directly regulated by the Fed.”

The Voice of San Diego reports on a new trend in the housing bubble. “For the last few years, there were maybe a couple of homes for sale at any one time in the Morningside development in Sabre Springs, a local realtor said. Right now, there are 10. The huddle of houses for sale in the San Diego neighborhood is part of a growing phenomenon in San Diego County real estate. ‘Cluster selling,’ which Realtors said they haven’t seen since the mid-1990s, is now becoming evident in several San Diego neighborhoods.”

“‘People are getting nervous. They’re seeing their neighbors selling their home and they’re thinking maybe now I should go ahead and put mine on the market before they take something really low and the prices go down,’ said Karen Whitfield, a realtor in Santee.”

“The prevalence of such cluster selling is undoubtedly adding to the high levels of real estate inventory in the San Diego County market. There were 16,464 homes on the market Wednesday. That’s up from March 2004’s all-time record low inventory of 2,301 homes.’

“Alan Gin, professor of economics at the University of San Diego said homes sales generally lead to more home sales, whether the sales prices are high or low. When a home sells for more than expected, Gin said, the neighbors may try to cash in their equity. When a home sells for a disappointing price, however, the neighbors may think it’s time to bail.’ Gin said it’s too early to tell whether the selling trends being seen in the county could lead to a larger ‘chain reaction’ in selling, as homeowners scramble to cash in on the equity gains they have seen in the past few years. ‘I’d like to see more data,’ he said.”

“Realtors said they are certainly starting to see homeowners who want to cash in on their homes in the face of an uncertain future for home values. Indeed, some Realtors said they are advising their clients that selling now, rather than in a few months, is a good idea, if only because it could take a few months to sell their home. ‘You might as well get into the market right now. I don’t care if you’ve got to move out and move into an apartment for a couple of months. You’d be a lot cheaper doing that now, and probably get a better price now,’ said Gordon Kane, a realtor in Poway.”

“Many investors and first time buyers have ridden the wave of price increases this far, realtors said, and are now ready to paddle to shore before they get wiped out. ‘We see a lot of move-out buyers,’ said Judy Kesselring in Escondido. ‘You have a young couple in a condo who decide to have a family and buy a home. They don’t want to pay $600,000 for a small home, so they say ‘I’m going to take my equity and go to Arizona or Nevada.’”

“Rich Toscano said he’s fascinated by the rise in cluster selling. ‘While the countywide median home price is up over last year, more than 20 percent of San Diego ZIP codes have seen year-over-year median price declines of 5 percent or more. ‘Cluster selling’ could potentially explain the regional disparity in home price performance,’ Toscano said.”

“With home prices so reliant on the optimistic or pessimistic sentiment flowing through the proverbial grapevine, Toscano said the latest trends could be indicative of a changing attitude about San Diego’s housing market. ‘It makes sense that the euphoria would start fading in a piecemeal manner, and through neighbors starting to discuss the idea that maybe home prices can go down.’”

The Rocky Mountain News reports on Denvers ‘glut’ of homes. “Sellers were trying to unload 24,387 previously owned homes on the Denver-area market last month, a 16.6 percent increase from the number of unsold homes on the market in January 2005. Although still below the record 28,043 homes clogging the market in June 2004, it is the largest number of houses ever on the market in January, Steve McGuire said.”

“‘The inventory concerns me,’ McGuire said. ‘That’s about 3,400 homes above where we were last January. That is a pretty high number to be starting with.’ McGuire said his fear is that if the supply of unsold homes continues to climb and interest rates rise, knocking potential buyers out of the market, it could cause home prices to dip.”

“Mark Eibner expects the Denver area market to get a boost from people selling their homes in previously hot markets that are starting to cool, such as California, Phoenix, Las Vegas and Washington, D.C. He recently sold a home in Parker to a couple from Orange County, Calif., for $265,000. They had paid $450,000 for their home in California and sold it for $650,000.’”

“‘They made $200,000 in three years,’ Eibner said. ‘I really think we’re poised to see people dump their homes in other markets to come here.’”

“Ed Jalowsky said that homes priced below $300,000 are facing a lot of pressure from homes in some stage of foreclosure. He recently sold a foreclosed home on behalf of a lender in the Curtis Park area for $160,000 that sold two years ago for $210,000. Another broker unsuccessfully tried to sell it for $180,000.”

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