The Housing Bubble

The Miami Herald has this report on a once ‘red-hot’ housing bubble. “This time last year, real estate agents along this island chain couldn’t keep most properties in stock, as eager buyers snapped up trailer lots, pushed prices for ordinary wooden homes beyond $1 million and spawned bidding wars that had many locals believing they were paper millionaires.”

“What a difference 12 months make. After a string of hurricane evacuations culminated in a storm surge that accompanied Hurricane Wilma and left more than three feet of water in many homes from the Middle Keys to Key West, a once red-hot real estate market seems to have screeched to a halt. ‘It’s kind of flattened,’ said Laura Rolston, an agent in Key West.”

“Now, it seems, there are plenty of properties on the market and not as many buyers. The number of sales in and just outside Key West was down 60 percent in January compared to a year ago, with about 78 percent more properties on the market, 1,299, than the same time last year.”

“The real estate chill has been accompanied by major price reductions, as owners try to unload properties whose chief value now lies in their square footage. Diane Nicklaus slashed the price on her five-bedroom home with a pool and massive lot in the city’s New Town neighborhood by $230,000, to $595,000.”

“But it may have to fall farther still: Like scores of homes in this part of town, Wilma’s surge deposited three feet of saltwater inside the concrete home, burned lush landscaping brown and left a legacy of mold. ‘I thought people would come and see the lot and say it’s a huge place, and I thought it would be gone,’ Nicklaus said. ‘That’s not happening.’”

“Now Nicklaus is in the same spot as many locals here whose expectations, and perhaps fortunes, have turned dramatically in a matter of months.”

“One year ago, Key West resident Kim McGee thought she was on the verge of becoming a near-millionaire when she placed her family’s three-bedroom New Town home with an in-law apartment on the market for $995,000. Now she’s asking $837,000, and that’s probably too much in this market. ‘I just wish somebody would make me an offer,’ sighed McGee. Of her hope to sell, she said, ‘It just has not gone like we hoped it would.’”

“One cause of the inventory glut: A number of native ‘Conchs’ are scrambling to forgo paradise as fast as they can, unloading flooded homes onto the market in hopes of selling out while also pocketing insurance or FEMA checks. And another hurricane season is just around the corner. ‘I have a lot of friends who’ve said, ‘By the first of June, I’m going to be outta here,’ Nicklaus said.”

“The slowdown..also seems to have scotched a local stampede to real estate licensing classes. ‘Everybody who was in the fire department or a bartender got a real estate license,’ said real estate agent John Loulan. ‘It was like the dotcom days, and people were just out there paying whatever just to have the property.’”

“The days of the $650,000 one-bedroom cottage seem to be over, while massive price drops reminiscent of a fire sale have become more common. A flooded home that real estate agent Jeff Searcy put on the market last year for $895,000 recently sold for $400,000 less.”

“‘They did not want to deal with the mold issue and ripping everything up,’ he said of the old owners. ‘They wanted out from under it and were willing to take a bath on it.’”

One blogger put together a chronicle of a previous housing bubble from New York Times articles. One item:

“June 23, 1986, Monday By THOMAS J. LUECK, SPECIAL TO THE NEW YORK TIMES (NYT); Financial Desk Late City Final Edition, Section D, Page 1, Column 3.”

“The largest builder of condominiums in the New York suburbs, Kevork Hovnanian, says his biggest sales problem is crowd control. ‘We want to maintain public safety,’ he said the other day. Again and again, the Hovnanian condominiums have sold out within hours of being offered for sale.”

One reader suggested this topic. “Have been watching or know about the bubble in OC, Ca, and how the real estate agents, brokers, etc are trying to hide it.”

“Over the last 18 months, I have had to endure FRONT PAGE news of how the average Home price continues to break new Highs. Over and over, with Large cap numbers like $620,000!!!! average.”

“Well, over the last month, the ‘average’ home price has tumbled, yet no word, no article, nothing. ( except a pg. 3, three sentence statement- home prices take a breather).”

“Just look at the graph; OC register hasn’t updated today. ( New avg= $585k) Do you think they just don’t want to post a single digit gain and Falling?!”

A pair of reports provide an update on Arizona’s housing bubble. “Last month, Arizona was part of a multistate $325 million predatory-lending settlement with Ameriquest, the nation’s largest subprime lender. The agreement, which could result in hundreds of dollars in restitution for more than 14,000 Arizonans, was the second-largest consumer-protection settlement in U.S. history.”

“Arizona does not have an anti-predatory-lending statute. About half of all states do, and Arizona Attorney General Terry Goddard has been pushing for similar protection for Arizonans since taking office in 2002.”

“Question: What was Ameriquest doing wrong and what did they agree to change in the settlement? Answer: They gave managers extraordinarily rich incentives to meet certain deadlines and benchmarks. Like, you didn’t get a bonus if it was a fixed-rate loan, but you did if it was an adjustable-rate. You did if it was a three-year or more prepayment penalty program. Those incentives..drove individuals to cheat. For example, there were appraisers that pretty much did most of the work for the office even though they are supposed to be independent. If the appraisal didn’t come in where the manager thought it should be for the loan they wanted, they had them change it. And if they didn’t change it, they were told they’d get a new appraiser.”

“Right now, there are bad loans out there, which have not gone to foreclosure because the value of the underlying property has gone up so when people have gotten in trouble they could sell it and pay off their loan. When this problem is going to become most acute is if our market levels out or dips..We are going to have people that are in loans that they really shouldn’t be in, that they don’t have sufficient income to pay, and if property values drop even a little bit, they will find that the loan is bigger than the value of their house.”

“That is extremely dangerous, and it will cause amazing dislocation for people who are not going to just lose their house but end up with significant debts.”"Q: How common are these practices among other lenders? A: We are in investigations so I can’t specifically comment. But I can say this: The fact that these are practices that the two major lenders in the subprime market were engaging in, I think speaks profoundly to how widespread the practices are.”

And the Arizona Daily Sun is still oblivious to overbuilding. “Prospective homebuyers who didn’t want to pay $330,000 for the average Flagstaff house used to be able to wangle something cheaper to the west in Williams. Now some homes there that don’t even include water are coming in at an asking price of more than $350,000.”

“Padre Canyon Trails and its 660 homes will be built along the edge of its namesake canyon, 26 miles east of downtown Flagstaff, if the county approves necessary zoning changes. The development would be about the same distance from Flagstaff as Parks is to the west, and the first major subdivision to leap outside Flagstaff’s forest land along the eastern Interstate 40 corridor.”

One reader wants to talk about what’s for sale. “Let’s talk inventory, inventory, inventory. Just glancing over some numbers looks like they are growing rapidly. Please post examples from your area. It really does appear that superbowl was a kick off for everyone to put their place on the market.”

Another added, “As others have mentioned, the San Diego inventory is right around where it was right before the holidays (after taking a dip due to expired listings, etc.), now just shy of 16,500. In the last several weeks, it was growing by about 50-150/day; now it’s around 0-100/day. The record high was 19,000; the corresponding value for today (adjusted for population growth, as per ocrenter’s numbers) would be around 21,400. It may not be long before we hit that number.”

Another said, “16,515 for Greater SD as of right now on ziprealty.com, but who is counting? Expect another update to a higher number this evening; it seems like they have to revise the number upwards several times a day now to keep up with the swelling torrent of new listings.”

And later added, “As promised earlier, it was updated to 16,601 this evening. What is next, hourly updates?”

The real estate business is shrinking with the housing bubble. “More than half of California’s real estate agents quit within their first five years, according to a recent study. CAR found that many left because of a lack of support from their brokers, but others left because of an inability to make a decent living.’ The association’s membership is at a record level at more than 161,000 members. A quarter of that total, 42,000, came on board in 2004.”

“‘I think you could be seeing something of a shake-out in the next 18 to 24 months,’ said Desiree Otero, president of the California Desert Association of Realtors. Greg Berkemer, the group’s executive vice president, noted that what’s happening in the valley is typical of what has occurred throughout California and elsewhere when real estate became the hot profession because of skyrocketing prices.”

“He pointed to a recent industry report estimating that one in every 300 Americans, and one of every 75 Californians, is now a licensed real estate agent or broker.” “The current number of valley agents and brokers, including full-time and part-time personnel, is five times the 1,000 agents that were here in 1996. ‘Around here, if you think there are two or three agents living on your block, you’re probably right,’ Berkemer said.”

“Unsold inventory levels have jumped sharply. In late January, there were nearly 6,400 unsold valley properties on the MLS, more than double the level of January 2005 and more than quadruple the 1,400 properties available in April 2004. And homes on average are taking around 60 days to sell, more than twice the time seen in early 2004.”

And in Florida. “Amid all the talk of a bubble in home prices, another bubble has been inflating, this one in the number of people flocking to work in the real estate industry. Palm Beach County now has nearly as many real estate agents as annual home sales.”

“Five years ago, the Realtors Association of Palm Beach County had 4,867 members. Today, it has 10,419 members. Consider that Realtors handled only 13,679 sales in the county last year, and that leaves barely one sale per Realtor per year.”

“The increase has been even more striking at the state association, which today boasts 155,000 members, up from 65,000 six years ago. Statewide, Realtors handled 248,565 home sales last year.”

“With the typical real estate commission at about 5 percent, a $400,000 sale generates a $20,000 payoff. But if both buyer and seller have agents, the agents divide the $20,000. And agents’ brokers typically get a cut of their commissions, and agents usually pay for ads, yard signs and car expenses.”

“A cooling market only boosts marketing expenses for agents who had been cashing in on quick sales. ‘You’d stick a sign in the yard and two or three days later you’d have competing offers,’ Brad Westover said of the boom during the past few years. But, he said, those days are over. ‘These weekend warrior real estate agents are going to go away,’ said Westover in Jupiter.”

A reader asks, “First post-Superbowl open house report: Has open house activity picked up noticeably in your neighborhood?”

“Whats current sentiment amongst sellers and agents?”

A reader posted this web link. “Centex homes on California’s Central Coast are now offering $100,000 incentives - very interesting.”

From the ad, “Get down off the ladder. Put away the calculator, don’t miss your chance to buy a Centex home in one of our Central Coast neighborhoods and save $20,000 to $100,000 on the base price depending on the location. So why not leave the gutters alone, you are going to be moving anyway?”

Some reports from Florida. “Over the past five years, South Florida has gone through the most explosive housing boom in its history. Now the big question is: Is the wild ride over? Yes, experts say. The signs are already there. Prices have wobbled in recent months, with sellers..lowering their expectations. The number of homes for sale in Miami-Dade County has nearly doubled since April.”

“There are, for instance, 15,080 units under construction in the city of Miami alone, compared with 11,241 built in the entire past 10 years. And that doesn’t even count the more than 28,000 units approved to go up in Miami. To summarize the market, developer Henry Harper scooped up the milky froth on his cappuccino at a Miami restaurant with his spoon. ‘This is now gone,’ he said.”

“‘There is severe overbuilding of condos,’ economist Hank Fishkind said. ‘People will get hurt, banks will go bankrupt.’”

“Real estate agents and home sellers throughout the Palm Beach County describe a dramatic shift from what only six months ago was a strong seller’s market. The chill came quickly. Just last year, the typical home’s value rose at a rate of nearly $1,900 a week.”

“Four months after putting their Wellington home on the market and cutting the price $40,000, John and Mary Porter are still waiting for an offer. The Porters initially asked $409,000 for their house, but they’ve cut the price to $369,000, said their real estate agent, Randy Bianchi. The Porters paid $279,000 for the house in 2004. ‘They have a beautiful home,’ Bianchi said. ‘It’s just a tragedy of timing.’”

“Indeed, the slowdown is spurring a backlash from once-beleaguered buyers, who suddenly feel free to drive hard bargains, said Mike Dooley, a broker in Hobe Sound and president of the Florida Association of Realtors. ‘We’re seeing buyers coming in and making very low offers,’ Dooley said. ‘That’s just evidence of the pendulum swing.’”

“Sellers simply roll their eyes at low-ball offers, Dooley said. But buyers suddenly have more choices, and now they enjoy the luxury of making a discounted bid without the fear of losing out to another buyer.”

“The spread of buyers’ revenge is bad news for sellers such as Brian Williams. The marriage counselor and his wife put their Lake Worth home on the market in September. Williams has not lowered his $496,000 asking price, even though offers have been scarce.”

“‘I’m disappointed that there isn’t more traffic,’ he said. “I’d consider reducing the price if houses started selling in the area at lower prices, and if people were making offers that were lower. But I haven’t seen any evidence that it’s about prices yet.’”

“Meantime, Williams cannot miss the telltale signs of a cooling market: ‘For sale’ signs are multiplying in his neighborhood. ‘There seems to be 5,000 homes for sale on Lakeside,’ Williams said, ‘and nothing’s selling, so that’s a little frustrating.’”

“A couple of blocks away, Sharon Gorman is asking $369,000 for her home. That once was a price guaranteed to attract offers, but the house has languished on the market for three months. ‘The market is full of houses right now,’ Gorman said. ‘It looks like half the county is for sale.’”

“Their agent, Bo Allen, said sellers need to get used to a new reality. The days of aggressive pricing, eager buyers and house-hungry speculators are over. ‘You’ve got a lot of investors starting to bail out,’ Allen said. ‘And you’ve got all these talking heads on TV telling people the market’s going to crash.’”

“Which begs the question: Will prices plunge, or is this slowdown just a return to normalcy? Realtors in other once-hot markets such as California and Washington, D.C. report a growing inventory of homes and more restrained buyers. ‘It is a little disconcerting to drive down some of these streets and see every other house for sale,’ said (realtor) Brad Westover in Jupiter.”

“Even if there’s no crash, area sellers will have to get used to the idea that their homes are not the gold mines they once were. Westover said one of his clients recently accepted $650,000 for a home listed for $750,000. ‘If she had not run with that offer, in all likelihood she’d still be sitting there with that property,’ Westover said. ‘For the first time in five years, people are actually taking a breath, instead of just buying.’”