The Housing Bubble

The Union Tribune has this update on San Diegos’ housing bubble. “San Diego County resale housing prices began the new year inching moderately upward, but a record drop in new housing prices pushed the overall median down from December levels, DataQuick reported today.”

“The January median stood at $490,000, down 5 percent from December but still up 2.5 percent from year-ago levels, the lowest year-over-year rise in nearly seven years. Sales dropped from 4,262 transactions in December to only 2,763 last month.”

“But, in the new-housing category, which included newly built homes as well as apartments converted to condos for sale, there was a $104,000 drop from $539,500 in December to $435,000 last month. That dollar decline represented an all-time record change, based on DataQuick reports back to 1988; while the 19.4 percent decline was the second biggest after a 24 percent decline recorded in July 1997.”

“On a neighborhood basis, there were some big declines as well as big increases in January, compared to January 2005, in single-family-resale prices. Big declines among actively selling neighborhoods occurred in Scripps Ranch, which was down 14 percent; La Mesa-Mt. Helix, down 9.4 percent; and western Rancho Bernardo, down 5.8 percent.”

No link is available for the Dow Jones Newswire report. “KB Homes has noticed a surge in cancellations and a drop-off in orders in the first two months of fiscal 2006, and if this trend continues, the company said it likely will have to ratchet down its revenue guidance for the year, according to a 10-K filing.”

“The comments appear to be a sign that the sharp drop-off in orders recently reported by luxury builder Toll Brothers Inc. may not be limited to the luxury segment as many market experts presumed.”

“‘There are signs that consumer demand in the United States for residential housing at current prices is softening,’ KB Home said in its 10K, which was filed with the Securities and Exchange Commission on Friday.”

“The Los Angeles builder noted that the U.S. Census Bureau reported that single-family housing starts in December fell 12% from November, and about 8% from December 2004. Also, the bureau reported that the median sales price for new homes declined approximately 3% in December from a year earlier. ‘Our results to date in fiscal year 2006 reflect these broader market trends,’ the company said. ‘In the first two months of the (fiscal) year, we have experienced an increase in home order cancellations and a decline in net orders for new homes when compared to the same period last year.’”

“In December, KB Home’s board authorized the repurchase of 10 million shares. Since then, the company has repurchased 2 million shares in addition to the 2 million shares it bought back during its fiscal fourth quarter under the previous authorization program.”

“UBS analyst Margaret Whelan expects the company’s orders to be down 10% in its fiscal first quarter, which ends Feb. 28. She said much will depend on how the company’s key spring selling season unfolds. ‘Demand is definitely down, there’s no doubt about it,’ she said. ‘Everything depends on what happens in the spring,’ she said.”

Meanwhile, incentives keep coming. “Kara Homes has announced a quick delivery home ’spec’-tacular. They are offering homes in all designs that are ready to go at discounts ranging from $20,000 to $246,000 throughout its New Jersey portfolio. Currently, Kara has quick delivery homes available to the general market and in our active adult communities from Mount Arlington to Mays Landing.”

“Residential builders, hoping to jump-start sluggish sales in San Joaquin County, are dangling long-unheard-of incentives in front of real estate brokers and new home buyers. ‘We’ve never offered anything like this before,’ said Kimball Hill Homes sales consultant Niki Ryan.”

“Kimball Hill is presenting buyers with Best Buy and Pottery Barn gift certificates totaling $10,000. ‘That’s insane incentives,’ said Henry Doughton. ‘That’s a lot of comforters and sheets,’ he said.”

“Starting in early January, new-home shoppers might have noticed some unusually enticing ads. Although many of those offers expired before today, when the Builders Association of the Twin Cities kicks off its Parade of Homes Spring Preview, some builders are promoting special prices or terms for the event.”

“Wayne Soojian, Twin Cities division president for Ryland Homes, said some builders were seeing an increased number of unsold completed homes, ones built on speculation. ‘You’re seeing some of the bigger-dollar promotions from people trying to move that inventory.”

“Bonita Springs-based luxury builder WCI Communities had a good year in 2005 but customer traffic in its sales centers was down sharply in January, the company reported Friday. In January, traffic was down 49 percent from a year ago and down 44 percent for the first eight days of February, said Jerry Starkey, president and CEO.”

“Mark Carruthers of Garnerville, N.Y., owns a condo near Edison Mall in Fort Myers and is currently negotiating to buy a second condo in the city. But he’s not willing to pay top dollar, said Carruthers. The market, he said, has gone directly ‘from a boom period into a bust period’ in the past few months.”

“Judy Ramage in Cape Coral said she has seen things slow down too. In January, she said, ‘We’ve got about 580 active listings and we had 109 showings’ compared to January 2005 when the agency had 75 listings and 245 showings.”

The Business News has an update on the housing bubble on Long Island. “January housing prices dipped in Nassau and Suffolk counties, but remain ahead of last year’s numbers. The region’s median closing price was $440,000 in January, down from $443,000 in December, the MLS of Long Island reported.”

“Nassau slipped $2,000 to a median $480,000, while Suffolk dropped $10,000 to $390,000. ‘It’s another indication that the housing market is cooling,’ said Pearl Kamer, chief economist at the Long Island Association.”

“Sellers apparently raced to the market: Housing inventory placed on the MLS in January soared 55 percent to 10,627, up from last January’s 6,823. Currently, 23,470 residential properties are available, up 66 percent from 14,139 a year ago.”

“Suffolk’s 9,825 units represent a 64 percent increase, while Nassau’s inventory spiked 67 percent to 6,689 in twelve months. Christopher Armstrong, MLSLI president, said the region is ‘beginning to see the signs of a balanced market.’”

Fortune magazine reports on a ‘tale of two cities.’ “If you want to know where real estate prices are headed in California’s Orange County, the man to talk to is Gary Watts. The Mission Viejo broker has 35 years of experience and doubles as a spokesman for the O.C.’s Association of Realtors. ‘Fifteen percent is pretty much in the bag for Orange County in 2006,’ he says. ‘It’s impossible for prices to go down this year.’”

“Head 3,000 miles east and talk to almost any broker in Boston, by contrast, and he’ll tell you that business has slowed in the past several months. Consider John Ford.. who employs 30 agents in three Boston area offices. Today he’s averaging 14 property tours before a skittish client is ready to buy.”

“The almost daily drumbeat of national statistics doesn’t help sort things out. Is it more significant that we just had a fifth straight year of record home sales, or a third straight month of decreasing prices? ‘No one really understands how these things behave,’ says Robert Shiller, the Yale economist who presaged the dot-com crash and has lately been spending much of his time studying real estate. ‘Looking for indicators is a little bit futile because we’ve never seen this kind of growth in housing before.’”

“In fact, the best way to get a handle on where the broader housing market is headed is probably to ignore the national numbers and heed the example of Scary Gary: Stay local, and always follow the inventory. Yale’s Shiller surveyed Orange County residents last year on what they expected home prices to do over the next ten years. The average expectation was a 23 percent return, per year!”

“That kind of unbridled optimism has caused buyers to stretch beyond their limits. Southern California has become a hotbed for “exotic” mortgages, such as interest-only loans. ‘One of the reasons we think this market will start to run out of gas at some point is that you’ve essentially created as much gold from straw as you can from this financial alchemy,’ says Scott Simon, mortgage chief at California bond house Pimco.”

“Recently there have been some signs of weakness. The rate of home price growth has decelerated dramatically, from 25 percent in 2004 to 14 percent in 2005, according to DataQuick.”

“Boston isn’t quite so fortunate. In the city’s suburbs, single-family homes have gushed onto the market. Inventory increased to 4,281 by January, 79 percent higher than a year earlier. A company that tracks the downtown market shows an inventory increase of 61 percent in the last year. And 2005 foreclosure filings were up 45 percent in Suffolk County, which includes Boston. Prices are still holding up, but there are no Gary Wattses in Boston guaranteeing another year of gains.”

Paul Muolo had this insiders report from NMN. “Investment banking firms increasingly are buying notable stakes in publicly traded subprime firms. For instance, Deutsche Bank, until recently owned 7.2% in Accredited Home Lenders. It no longer owns all that stock in Accredited, though. What happened? Good question.”

“Meanwhile, it appears subprime funders originated north of $720 billion in 2005, a record. If that number holds subprime now accounts for about 26% of all loans funded.”

“Another earnings report and yet another disclosure about competition and pricing pressures. This time around it’s NetBank. In its 2Q press release the mortgage lender disclosed that its conforming and nonconforming mortgage units reported pretax losses of $7 million and $10.8 million, respectively, noting, ‘The decline in profitability within both channels was due mainly to competitive margin pressure, not production volumes.’”

“The Senate Finance Committee issued a statement saying its chairman, Sen. Chuck Grassley, R-Iowa, is reviewing whether government-chartered companies Fannie Mae and Freddie Mac may have abused the special tax status of their charitable foundations by using them ‘and other charitable contributions to skirt’ campaign-finance and lobbying laws.”

And the sell-off continues for Novastar Financial Inc.

The Wall Street Journal has this report on the condo bubble. “Perks being offered by sellers? Until recently, buyers in many markets were competing for the chance to snap up new condos downtown. There are spreading signs that the market may be cooling, just as in the overall market. The worry for investors is that this real-estate slowdown will mirror that of the early 1990s, when condo values in some markets dropped more sharply than those of single-family homes, in part because many had been bought by speculators, the same kind of speculative buying that has fueled this era’s boom.”

“In San Diego, where condo prices more than doubled from 2001 to 2005, inventory (units being sold by owners, not developers) rose more than 80% in 2005, according to local agent Lew Breeze. In the same period, inventory in Minneapolis tripled. In Las Vegas, the epicenter of the condo boom, at least four condo projects have been scrapped, including Icon Las Vegas, which had already sold contracts for units.”

“At a high-rise in Atlanta that was completed in mid-2004, the developer recently began offering to pay HOA dues ($270 to $450 a month) for new buyers for a year. Why? Half of the building’s 206 units are unsold. Sellers of existing condos are also coming up with inducements. Lenaya Miller, a real-estate agent who sold her six-year-old condo near Midtown in October for $164,000, says she paid the buyer’s first year of HOA fees ($5,000) and the closing costs ($4,900). ‘To be competitive, I gave them everything but the shirt off my back,’ she says.”

“Downtown-Boston condos peaked in 2004. But it wasn’t until the last quarter of last year that developers and sellers of existing condos really started to feel the impact, as condo resales fell 30% from a year earlier. Porter 156, a 217-unit condo conversion in East Boston, has about 25 unsold new loft-style units and 25 just-purchased units on the market. During the December holidays, the developers left cards in owners’ apartments offering a $1,000 gift certificate to Ikea for owners who found buyers for any remaining units.”

“According to the Minneapolis Area Association of Realtors there were four sales of existing condos in January, compared with 27 a year earlier. One example is the 39-story Carlyle, which is scheduled for completion in December. Developers have presold 240 of the building’s 255 units, taking down-payments of 5% to 10% on units costing $250,000 to $1.5 million. In hopes of keeping those buyers from backing out of their contracts, the developers have treated them to bicycle tours of downtown, a group trip to a Gophers football game and a private holiday party.”

“Of the condo markets we surveyed, San Diego showed the strongest signs of a slowdown. San Diego had an 82% rise in inventory of existing condos last year as speculators stopped buying. Many also backed out of contracts and forfeited their downpayments: In San Diego County, the number of canceled purchase agreements for new condos and townhouses jumped by 75%, to 264, from the second quarter to the fourth quarter of 2005.”

“For Rachelle Amini, such developments strengthened her bargaining position when she found a two-bedroom condo in a downtown high-rise last fall. The 28-year-old psychotherapist says she talked the investor-seller down to $1.15 million, $50,000 less than he had paid for it in 2004. He also threw in two plasma TVs and a new white sofa.”

“In Sarasota, Fla., an overbuilt downtown condo market is leading to incentives such as deals on beach-club memberships. More than a dozen condo projects have been built since then in this city of 55,000, and there are as many units under construction now as have been completed over the past six years. Plus, about 273 condos are on the market.”

“That’s almost triple the amount of condos on the market here a year ago. And more continue to be announced, including a 16-story tower, and the Grande Sarasotan, with 144 condominium units priced from $1 million to $3 million. ‘Where are the people going to come from?’” says broker Barbara Ackerman, who predicts the median condo price in downtown will drop a ‘minimum of 10%’ this year.”

“January is typically a slow month here, but this year there were six condos that resold, down from 14 in January 2005. It’s no longer uncommon for sellers to offer hard-to-get golf and beach-club memberships, which can cost as much as $75,000 apiece. Bert and Jane Kummel, retirees who put their three-bedroom condo on the market for $2.4 million at Thanksgiving, have thrown in $1,000 worth of opera tickets as a lure. But to no avail, says Mrs. Kummel: ‘It’s a great marketing idea, but people just aren’t buying like they were.’”

The Danbury News Times has a rare look at a Connecticut housing market. “The sales pace for homes has slowed in past few months from the fevered pace of 2003 and 2004. Realtors say price jumps have halted, causing homes to stay on the market longer. A year ago, 35 Danbury houses sold for less than $500,000 in the first 40 days of the year. The typical house was on the market for 55 days. The average sales price was $330,000.”‘

“So far this year, the price increased by 2 percent, and only 27 houses closed. They were on the market an average of 86 days.”

“‘We hosted a sales training meeting and compared November 2004 with November 2005. The market time increased and we had to adjust the way we were talking to the clients,’ said Scott Cooney. Cooney said he counseled Realtors to ask their clients to be realistic. Just because their neighbor’s house sold for a certain price a year ago doesn’t mean theirs will today.”

“Things aren’t flying off the shelf,’ Cooney said.”

“The city reported a 4,800-unit backlog of approved housing units, both condominiums and houses, in 2004. Today, the backlog for units approved or in the permit process is only 2,700, said City Permit Coordinator Sean Hearty. That means 2,100 houses and condominiums hit the market in the last year. ‘It appears that the neighborhood housing boom has slowed down,’ Hearty said.”

“Fairfield University Economist Ed Deak said residential real estate inventories are 40 to 60 percent higher now than they were a year or two ago. The higher inventory could level out home prices and slow price rises, Deak said.”

“In New Fairfield, Realtor and Broker Christopher Gould said the town has a higher number of houses for sale today than it did over the last few years. ‘A couple of years ago there was a shortage of inventory,’ Gould said. Today there isn’t.”

“Gould said 2005 was as good a year for sales as 2004, but the test for 2006 will come over the next few months if the Federal Reserve continues to raise short-term interest rates. ‘Houses are on the market a little longer, and we may see some price breaks,’ Gould said.”