The Housing Bubble

The Boston Globe reports on furnishing a McMansion. “A couple buys an estate-size home with multiple rooms and lavish amenities. First they’re thrilled, says Sheri Edsall, a Needham interior designer. Then ‘they’re panic-stricken. They can’t deal with that much house.’”

“But many Boston-area residents are learning to deal with it. Whether they are 5,000-square-foot faux Tudors in suburban developments or 10,000-square-foot showplaces on rural cul-de-sacs, supersize homes come with a host of supersized decorating concerns.”

“Not to mention: How do you pay for all this stuff after you’ve broken the bank on the house? ‘Big spaces cost big money,’ says Sandra Bissell, a North Andover interior decorator who has expertise in ‘designing castles.’ ‘You can’t run out to Penney’s and buy standard-length drapes for those windows.’”

“Some of the new homes in suburban Boston are so expansive they have rooms the owners don’t have names for, and they tend to be a tad underused. Carol Mader has one she’s resorted to calling the ‘bonus room’ in the 13-room, 5,500-square-foot Georgian Colonial where she lives with her husband in a suburb north of Boston. Its main piece of furniture is a mahogany pool table, and other than that the room is basically ‘a big empty space,’ she says.”

“‘What usually happens is they space their furniture out, a piece in this room, a piece in that room, and then they run out of furniture. And they’re cash poor. Almost everyone ends up with one or two rooms that are unfinished. They have tumbleweeds rolling through them. The kids end up riding their bikes in them,’ says Edsall.”

“Jennifer O’Brien is moving from a three-bedroom home in Melrose to a nine-room Colonial in Saugus with nearly 5,000 square feet of living space. ‘This house is way over our heads,’ says O’Brien. ‘We have no money for decorators. The furniture we have now would look ridiculous in this house because it’s worn out from use and this is such a gorgeous house.’”

The Mail Trubune reports a turn in one Oregon housing market. “Rising inventories of homes on the market are beginning to stack up against historic norms in Jackson County. A total of 1,177 single-family residential units were listed for sale countywide as of Friday, 90 percent more than a year go.”

“‘I think we’re getting to a point of equilibrium,’ said Medford appraiser Roy Wright. ‘I think we’re getting back to the norm.’”

“While the inventory is climbing, the number of sales plunged 38.5 percent to 139 sales in January. There were only two months with fewer than 200 sales in 2005 and only one with fewer than 200 in 2004.”

“‘There’s a lot more competition in the market,’ said agent Ron Galbreath. But with sellers holding out for top dollar, it’s going to take something besides the ongoing low interest rates to kick-start the market. That might have to wait until the spring and summer buying season kicks in.”

“Galbreath said lending restrictions have made it tougher for first-time buyers with questionable credit to obtain mortgages. ‘A year ago this time, kids could come in with zero down, and even with B- or C-grade credit, could still close on a conventional loan in 20 to 30 days,’ Galbreath said. ‘What’s missing are easy-to get-into, no-down-payment loans where there are high credit risks.’”

“‘Appraisals are coming in high and that tells us the market is dropping,’ Wright said. ‘Prices may not be below where they were last year, but in some cases they might be below where they were three, four or five months ago.’”

“Bargains were still hard to find in east Medford where activity fell 21.3 percent. West Medford deals dwindled by 50 percent. Eagle Point transactions fell off 31.2 percent. Ashland sales tumbled 37 percent. Phoenix-Talent activity was at a near standstill with only three reported sales at a median price of $300,000.”

“Median sales for both rural ($395,000) and new homes ($319,900) grew 9.7 percent. Activity slowed in the unincorporated local areas by 8.1 percent, while new home transactions declined 22 percent.”

Barron’s Online has a report on subprime loans. Highlights, “The red hot US housing market may be fast approaching its date with destiny. Indeed, inside the mortgage trade, much anxiety is being focused on a looming ‘reset problem.’ Over the next two years, monthly payments on an estimated $600 billion of mortgages to borrowers with checkered or no credit histories, the ’sub-prime’ market, may zoom as much as 50% higher, as the two-year teaser rates on hybrid adjustable-rate loans expire and interest payments hit their fully indexed levels.”

“In the past, such resets caused little disruption. For one thing, the sub-prime market was strikingly smaller. Only $97 billion of such mortgages were originated in 1996, compared with a mammoth $628 billion last year and $540 billion in 2004. Sub-prime loans outstanding now account for more than 10% of the total U.S. mortgage debt of $8.4 trillion.”

“Moreover, the reset triggers on sub-prime mortgages have dramatically shortened, with the loosening in underwriting standards. During the past two years, ‘affordability’ products, as the industry has dubbed them, have migrated from prime to sub-prime borrowers.”

“Significant sticker shock impends for sub-prime borrowers. The shock will be even greater for the sub-prime borrowers who are facing not only a jump from a fixed to a floating rate, but also the burden of amortizing principal after two years of interest-only payments. And for many, the interest- rate reset and IO expiration will occur on the same day, a reflection of the ‘risk layering’ prevalent in the sub-prime market over the past two years.”

“Glenn Costello of Fitch Ratings estimates that at least a quarter of all sub-prime borrowers facing resets may have precious little equity left, even with the huge surge in home prices in the past two years. Many piggy-backed loans to borrow the down payment on their homes, in addition to taking on a conventional mortgage. ‘For some borrowers, there will just be no loan-to-value gap left,’ Costello contends.”

“Even more ominous for the sub-prime borrowers with more than $600 billion or mortgages resetting in the next two years would be new standards for ‘nontraditional’ mortgage products that have been jointly proposed by a number of federal regulators.”

“Obviously, any smash-up in the sub-prime market would hurt lenders. Some such as New Century Financial (NEW) are set up as real-estate investment trusts and, as such, retain some of their securitizations and those of other players. In a bad market, most of the blood would spilled in the lower-ranking tranches of sub-prime mortgage-backed securities, bonds rated triple-B minus and below.”

“(A) New York hedge-fund manager is busily shorting triple-B and triple-B-minus tranches in sub-prime securitizations. The fund is also short various collateralized debt obligations, an estimated $50 billion or so invested mostly in the junior tranches of sub-prime securitizations. ‘These CDOs…could get completely wiped,’ the manager says. The liquidity of the sub-prime market depends on continued purchases by CDOs of the randier tranches of sub-prime securitizations. Should this funding dry up, the sector’s financing structure could seize up. And that would spell big trouble not only for sub-prime borrowers, but for the entire U.S. housing market.”

The Arizona Republic reports on the decline in Phoenix area home prices. “If you’re a Southeast Valley homeowner, don’t gloat too much about how much more your home could sell for compared with a year ago. Prices have begun falling over the past few months. In general, median prices have been coming down since September as buyers have begun balking at paying higher prices, said Jay Butler, at ASU. Home sales figures released Friday reflect that trend.”

“‘What we’re moving into is that home buyers are going to live in the house, so they are more cautious about what they will pay, as opposed to someone who is more investment driven,’ he said. ‘It’s anybody’s guess how far they (prices) might drop down.’”

“Ahwatukee Foothills still had the Southeast Valley’s highest median sales prices in January, at $357,500. But that was a drop from $386,250 in December. Tempe’s $269,900median price in January was down from $275,120 in September. Mesa’s $240,000 fell from $243,500 in September.”

“The number of sales fell dramatically in January, but that’s because last January 2005 had an abnormal amount of sales and was ‘the beginning of the hyper market,’ Butler said.”

“Butler believes people who have been moving to Maricopa and Casa Grande because homes were more affordable will start to wonder if it’s worth it because of higher gasoline prices and more traffic congestion. He said he has talked to Tempe teachers who said their commute from Casa Grande or Maricopa used to be 30 to 35 minutes and has grown to 40 to 60 minutes because of increased traffic. Parents with long commutes can’t spend as much time with their kids.’

“‘Lots of people may be saying ‘is it really worth what we’re doing for this house for two hours a day, five days a week?,’ he said.”

And the Associated Press had this report. “The Bush administration on Friday detailed its proposal to sell more than 300,000 acres of national forests and other public land to help pay for rural schools in 41 states. The land sales, ranging from less than an acre to more than 1,000 acres, could total more than $1 billion and would be the largest sale of forest land in decades.”

“Agriculture Undersecretary Mark Rey said the parcels to be sold are isolated, expensive to manage or no longer meet the needs of the national forest system. The administration expects to have to sell only about 200,000 of the 309,000 acres identified Friday to meet the $800 million goal, he said. ‘These are not the crown jewels we are talking about,’ Rey said in an interview. The public can review the land parcels that are up for sale on the Forest Service’s Web site.”

“‘This is a reasonable proposal to take a small fraction of a percentage of national land which is the least necessary and use it for those in need and achieve an important overarching public purpose,’ Rey said. The proposed sell-off would total less than half of 1 percent of the 193 million-acre national forest system.”

“A spokeswoman for the Bureau of Land Management, which previously said it will sell another 125,000 acres, said BLM land to be sold would be identified at the local level. The lands are typically part of a checkerboard pattern of small parcels surrounded by suburban or urban areas, Interior officials say.”

“BLM spokeswoman Celia Boddington said much of the land would be near urban areas with high market value. In recent years, the government has sold parcels for tens of millions of dollars in Nevada, for example, she said. ‘Lands formerly remote are now abutting metro areas. That is certainly the case in New Mexico, Arizona and Utah,’ she said. Nearly 500 parcels totaling more than 85,000 acres in California are identified for possible sale.”

A pair of reports provide an update on the housing bubble. “More than 3,200 metro Milwaukee homes sprouted “for sale” signs last month, over three times the number reported sold, a Friday industry report shows. That new inventory was 43% higher than January 2005 and 66% higher than January 2004, Metro MLS figures show. The Wauwatosa market-tracking firm reported 936 January sales, a 10.2% slide from 1,042 a year earlier.”

“This massive influx of sellers ‘could be people testing the market’ for changed conditions, Metro MLS President Tammy Maddente said.”

“‘The next 30 days are going to tell us a lot. If the sales pace picks up, we’ll be fine,’ she said. If sales don’t pick up, Maddente said, buyers will dictate terms this year, a financially painful switch for sellers.”

“New listings mushroomed throughout its southeast Wisconsin reporting region. In the four-county metro area, 3,201 dwellings hit the market, compared to 2,241 a year earlier and 1,934 two years earlier. Waukesha and Ozaukee counties had the biggest surges - 47% and 58%, respectively. Milwaukee County wasn’t far behind, with 44.5%, while Washington County had a 15.7% gain.”

“South of metro Milwaukee, new listings were up 41% in Racine County, and 30.1% in Kenosha County. To the southwest, Walworth County’s new listings rose 34.3%. Sheboygan County, north of Ozaukee, had a 38% gain.”

“Sales were down everywhere except Sheboygan County. County year-over-year dips: Milwaukee, 9.8%; Waukesha, 5.1%; Ozaukee, 32.9%; Washington, 9.5%; Racine, 10.2%; Kenosha, 4.1%; and Walworth, 8.6%.”

From the Baltimore Sun. “With each passing month, there is mounting evidence of a mild if uneven slowdown in the regional real estate market, with the number of homes on the market rising steadily as prices and sales slip further from their summer peaks. Prices in the region peaked in July, and January’s average sales price of $291,337 was 6.4 percent below that level.”

“About 2 1/2 times as many homes were listed for sale in the region last month as a year earlier, and sales ran 15 percent or more behind year-earlier levels in most areas. The number of homes listed in the Baltimore area more than doubled from January last year, jumping from 4,114 houses to more than 10,600.”

“‘When inventory goes up and the sales turnover goes down, that’s an early indication of an adjustment in the market of some magnitude,’ (economist) Brian A. Bethune said. ‘The question after that is how much of a price adjustment is there going to be after the froth comes off.’”

“Sales in Carroll County fell more than 38 percent in January from the same month in 2005, and prices year over year were up 5.6 percent, significantly less than any other part of the region. Melvina Brown, an agent in Ellicott City and past president of the Howard County Association of Realtors, agrees that adjustments in pricing are inevitable. ‘Because we have more inventory, prices are going to be more realistic than they were last year,’ she said.”

Several readers have a question about home values. “There are many would-be homeowners on this blog, like me, licking their chops as housing prices dip. They are eager to buy when the market bottoms out. ‘But here’s my 64 million dollar question; how does one make a good buying decision in a down market? What characteristics of stable neighborhoods should we be looking for as we seek our dream home (or dream investment) in this rather unstable time?”

One responded, “Maybe I’m overly optimistic, but I think it may be a less frightening undertaking than it first seems. Let’s suppose that things totally crash and burn; you’ll be able to see that things are still going down when it’s happening, and afterward people will be really reluctant to buy back in. So, there would be a prolonged period when everything had bottomed out and you could then take your time sorting through your options to find the right situation.”

“Or let’s suppose that..we see a relatively soft landing. In that case, the period when things have bottomed out will be shorter, and it also won’t sink to the same depths, so your chances of a nice neighborhood totally going to pot are slimmer too. I’d say that if you’re a generally prudent individual then you’ll probably be in a generally good position to find yourself a nice, stable (and affordable) home with not too much to worry about.”

Another reader added, “How will the less established areas fair. Especially those with high vacancy. We all know the consequence of sprawl. We must now ask, what is the consequence of super sprawl?”

One had an answer, “Here’s a simplistic answer (in that it probably will not find you the absolute bottom, but you can know that you are getting a good deal): buy when you could rent the home and withdraw 10% (or 10 year treas +3%) of the home’s value per year after all your costs are covered as if you had financed the home using 100% fixed rate mortgage (to account for your opportunity cost of downpayment money).”

This reader sees a time horizon, “Every housing run up and run down (SOcal in 1990s…Japan, etc) has happened VERY gradually. The San Diego market was at a bottom for about 3 years. Interest rates and the stock market also play into the equation. The best advice is to buy a house as a home with a loan you can stomach for 10 years…Maybe 5 years if you think we are near a bottom!!”

Another had this advice, “Pay attention to all the details the bubble pushers ignored. As soon as the cost of ownership obtains parity with renting you will be pretty safe. You may not catch the bottom, but you will be no worse off and the much touted bennefits of ownership are real. If you are disciplined enough to save enough to pay cash, go to the courthouse auctions observe and learn.” “In the mid 90’s auctioned property went for between 1/2 and 2/3 of retail value (ie. 60k homes sold for 30-40k). You must be very careful and assure that the auctioning party has the sole interest in said RE. Contact the auctioning party to determine the terms.”

“Don’t bid on anything till you have done your homework and talked with anyone at several auctions that will give you some time. Look at as many housed as you can and make YOURSELF the best judge of VALUE. A good agent is vital at the bottom of the market. If you become the best judge of value out of all your peers you will not hesitate on the real great buys, and believe me there will be no hurry, there will be more really great buys than you could possible purchase. You must keep your powder dry for the optimal purchases.”

“Nothing sucks more than to be making a GOOD purchase (that precludes you from anothet) when a FANTASTIC purchase surfaces. Like I said above, there will be more FANTASTIC buys than you could possible entertain.”

The Sun Sentinel has the latest on Floridas’ housing bubble. ” Even the rosiest real estate analysts concede that South Florida’s housing frenzy is fading after five years. Lewis Goodkin, an industry consultant in Miami estimates South Florida’s home sales pace will fall by 20 percent, compared to recent years, while the overbuilt condominium markets in West Palm Beach and Miami will face ‘dramatic’ slowdowns by the summer.”

“He said the housing forecast for South Florida is typical of what’s happening in many growing cities, such as Las Vegas and San Diego.”

” Here are five key indicators: Sales are down. The number of home sales across South Florida has dropped by roughly 40 percent, according to the Florida Association of Realtors. The Orlando-based trade group tracks single-family home sales but not condominiums, townhouses or co-ops. ‘Prices just got to be too high,’ said Marilynn Obrig, a broker-associate in Fort Lauderdale. ‘There comes a point where buyers say, `I can’t do it.’”

“Listings are up. It’s not just your imagination: You are seeing more for-sale signs in front yards. The number of homes and condos on the market more than doubled in Broward County from July through December. Listings rose more than 81 percent in Palm Beach County and more than 64 percent in Miami-Dade.”

“Prices have flattened. As demand wanes, sellers are losing leverage, and some are cutting their asking prices. From July through December, the median increased less than 5 percent to $408,200 in Palm Beach and to $377,700 in Miami-Dade while decreasing 4.3 percent to $369,000 in Broward.”

“Incentives for buyers and real estate agents are increasing. Some builders are offering free upgrades on appliances, countertops and cabinets, as well as offering to pay points and closing costs worth thousands of dollars that the new-home buyer normally would pay. ‘There hasn’t been the necessity to do that before,’ said Jack McCabe, a Deerfield Beach analyst who is betting on a market slowdown and organizing investors to buy properties at reduced rates. ‘The environment is going to get highly competitive this year.’”

“Interest rates are rising and credit requirements tightening. Thirty-year fixed mortgage rates are near 6 percent, and analysts predict they could inch closer to 7 percent in 2006.”

“‘The direction of the market is clear,’ said Manuel Iraola, chief executive of a Miami-based online real estate service. ‘What’s open for debate is the magnitude of the adjustment the market will go through.’”