The Housing Bubble

USA Today has the latest from the NAR. “Home prices in 72 metropolitan areas showed double-digit increases in the fourth quarter last year, a record that was probably the peak in this real estate cycle, the National Association of Realtors said Wednesday.”

“‘I don’t want to say this is the last hoorah, but it certainly reflects the peak of the boom in terms of price appreciation,’ said David Lereah, the NAR’s chief economist. ‘It wasn’t the highest quarter for price appreciation, at 13% (nationwide), but it covered a big part of the country, 72 metros is enormous.’”

“But he cautioned that the market is cooling fast. Sales of existing home are falling faster than he expected. Home-price appreciation could drop to single digits this quarter, and will only be 5% for the year, down from 13% in 2005, he predicts.”

The PDF file showed the following declines in sales for the quarter. Arizona -7.7%. California -12%. District of Columbia -21.9%. Hawaii -13.6%. Massachusetts -11.5% and Virginia -16.3%.

“Sales of existing Treasure Coast homes plunged during the fourth quarter as prices continued to climb. For the quarter, sales dropped 13 percent, the Florida Association of Realtors said. In the West Palm Beach-Boca Raton market, existing-home sales decreased 23 percent.”

Annapolis, Maryland. “An apparent slowdown in the real estate market could mean less cash to throw around, (a) top budget official warned yesterday. Recordation and transfer tax income fell from $10 million in January 2005 to $8.8 million last month, a decline that mirrors a one-month $20,000 drop in median home prices.”

“‘Maybe the gravy train is coming to an end here,’ Budget Officer John Hammond said.”

“Southern California home prices retrenched in January as the region’s housing market continued to lose steam, according to a real estate report today. The median home price for the six-county region was $469,000, the lowest since July, and a 2.1% decline from November’s and December’s record median of $479,000.”

“Meanwhile, the number of Southern California homes sold in January edged down to the lowest level in five years. A total of 20,085 new and existing homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 30.6% from the 28,952 sold in December, and down 7.4% from the 21,680 for January last year, according to DataQuick.”

“Like it or not, most asset bubbles end the same way. Back in 2000, the first signs of trouble surfaced when various tech-related firms grudgingly began to report overcapacity.”

“Thursday’s report on January housing starts, which is a good indicator for inventories of new homes coming on the market, might shed some light on the state of the housing bubble. Economists on average expect that construction started on an annualized 2.023 million new homes last month, compared with 1.933 million in December, according to a Reuters poll. Warmer-than-usual weather has helped homebuilders in January.”

“Some may celebrate the pick-up in housing starts as a sign that housing is cooling slowly, ensuring that the vast amounts of wealth consumers have been drawing out from ever-rising equities over the past few years won’t disappear overnight. In fact, all it means is that the inventories of new homes is going to get larger.”

“According to Ian Morris, chief U.S. economist at HSBC, about half of the U.S. housing market is frothy, and that the ‘bubble zone’ may be overvalued by 35%-40%. Even a perfect soft-landing scenario, in which national homes prices just flatten, would imply a 35%-40% collapse in existing home sales.”

“If developments, such as an unexpected tightening of lending standards on the many new types of exotic loans and mortgages that have emerged in recent years, then..the rising supply of new homes on the market might have a hard time finding new owners.”

“‘You got to think that this thing is going to end, eventually, one way or another,’ said Christopher Thornberg, an economist with UCLA. ‘Prices have gotten to the point that, even with all the crazy financing out there, people still can’t get into the market. It’s just that over the top. We’ve never seen this size of a housing bubble before, so in a sense we’re in kind of a strange place right now,’ Thornberg said.”

A real estate columnist answers questions about renting and owning a home. “Q: My husband and I have thought about investing in rental real estate for added income, though we realize it would take time before we would have positive cash flow. Across the street from our house, an old townhouse has been rehabbed into several appealing ‘luxury’ condos, and prices in our area seem to be at a peak. Are there any rules of thumb for timing real estate investments of this kind?”

“A: No. In order to ‘time’ a market you would have to know about future pricing, something no one knows.”

“As an example, imagine that homes in your area sell in the $450,000 range and rent for $2,500 a month. This rental rate is insufficient to cover monthly ownership costs even with 20 percent down. Imagine that you put down $50,000 and borrow $400,000 at 6.5 percent over 30 years. The monthly cost for principal and interest is $2,528. There would also be costs for taxes and insurance, plus you would have repairs and vacancies. Lastly, that $50,000 down payment is not earning interest.”

“Is this property a good investment candidate? If you can afford the negative cash flow in the first years of ownership, perhaps. If you can’t afford the negative cash flow, then no, it’s not plausible.”

“Q: How do you decide when it’s a good time to change from a renter to an owner? A: According to the National Association of Realtors about 40 percent of all homebuyers are first-timers, so more than three million people look at this issue each year and decide to buy. In addition, there are no doubt others who consider the issue and prefer to rent.”

And a website takes a look at the equation for various US cities. “California and NYC region have biggest house price ‘bubbles’: new list ranks US Cities with most inflated house prices. A house price ‘bubble’ is said to exist where the cost of buying a home is unduly high compared to the cost of renting the same property.”

“A new reference book..has published a list of cities with the largest disparities between owning and renting. It is based on a database compiled by the US Department of Housing and Urban Development that includes 71 thousand households. The top nine cities in the list are all in California or the New York City commuter area. The list below shows a dollar amount for each city indicating how much more expensive it is to buy a home rather than rent.”

1 San Diego, CA - $1,442 per month

2 Anaheim Santa Ana (Orange County), CA- $1,376 per month

3 San Jose, CA - $1,340 per month

4 San Francisco, CA - $1,308 per month

5 Los Angeles Long Beach, CA - $1,211 per month

6 New York City, NY - $1,118 per month

7 Northern New Jersey Areas - $1,030 per month

8 Newark, NJ - $1,017 per month

9 Nassau Suffolk, NY - $991 per month

10 Boston, MA - $981 per month

The Massachusetts realtors have the 2005 fourth quarter numbers out. “The good times sellers have long enjoyed in the state’s expensive housing market began to disappear last year. The Massachusetts Association of Realtors reported that price increases moderated, with the median selling price for single-family homes rising 5.9 percent. That compares with double-digit increases in recent years.”

“The association reported that the inventory of unsold homes in Massachusetts grew 20 percent last year.”

“The market’s tilt toward buyers accelerated in the year’s final quarter, when sales of single-family homes fell 8.1 percent. That’s the largest such decline in nearly three years, dating to the first quarter of 2003.”

“Every region of the state saw a drop in fourth quarter single-family home sales.”

From the associations press release. “‘The accelerated sales pace of recent years has all but ended and we’re returning to a more normal market,’ stated MAR President David Wluka. ‘Our strong seller’s market has been replaced by a more balanced one that will help stabilize home prices.”

“Another factor that has helped entice buyers into the market of late is the sharp increase in the number of homes for sale across the state. In the past year, the inventory of single-family properties on the market has risen 20 percent, from a monthly average of 38,823 listings in 2004 to 46,501 in 2005. At the current sales pace this represents 7.7 months of supply, an increase from 6.6 months of supply in 2004, and signals the first time since 1997 that there’s been a healthy balance between supply and demand of 7 ½ to 8 ½ months of inventory for sale statewide.”

“In the most recent quarter, the statewide median selling price for detached single-family homes rose 1.5 percent to $350,000 in the fourth quarter from the comparable period last year, and the statewide median selling price for condos increased 3.8 percent in the past year to $270,000 in the final quarter of 2005. ‘Prices may soften, but look for flat to modest appreciation this year rather than sharp price declines,’ said Wluka.”

Compared to the third quarter, however, it appears prices have already declined. The SF statewide median was $370,000 in the third quarter, now down to $350,000. Looking at some smaller areas, the declines appear even steeper. Greater Boston is down from $515,000 to $467,000, in the same period.

The central region was down from $303,500 to $290,000. Northeast down from $408,000 to $385,000. Southshore was down from $369,900 to $360,000 and The west region was down from $215,000 to $199, 950.

The Orange County Register has this report on home sales. “Orange County home prices took a tumble in January, with the median price falling below $600,000 for the first time in eight months. DataQuick reported today that the median sale price for all residences sold in January was $582,000, down 6 percent from December’s record $621,000 but still up 9 percent from January 2005.”

“Sales volume was weak, too, as 2,594 homes sold; down 11 percent in a year. This was the slowest January since 1997.”

“January is a traditionally weak month, with fewer big families buying bigger, pricier homes. This January’s seasonal slump was amplified by a rush of sales of new, lower-priced homes.”

“Last month, developers sold 426 new homes, slightly more than double the sales of January 2005 and the highest January count since 1989.”

“New homes sold last month include conversions of old apartments to condos and two high-rise condos in Irvine. This relatively cheaper housing helped push the median new-home price for January down 36 percent in a year to $472,000. That’s the lowest new-home median price since June 2002.”

The Star Bulletin reports on Hawaii’s housing bubble. “The start of the New Year saw a continued lag in Kauai’s housing market. The pace of house sales declined 34 percent, with as few as 35 homes changing hands. ‘It’s more of a realistic market, which ties in with the national vibe of people buying hybrids not hummers,’ said Jimmy Johnson, broker in Kauai. ‘The euphoria is gone.’”

“Almost every category of Kauai’s residential real estate has changed into a buyer’s market, Johnson said. ‘If a property is overpriced no one will look at it: There are too many other available properties.’”

“While seller’s cannot command the ‘dream on’ prices of the past, Kauai’s home values are still strong, Johnson said.”

“On the Big Island, the number of single-family home and condominium sales dropped last month. Single-family home sales fell 25.3 percent to 142 in January, while condominium sales fell 31.5 percent to 61.”

“Buyers looking for Big Island properties aren’t showing the frenzy of the previous year’s market, Paula Beamer said. ‘A lot of our buyers come from the mainland and live in markets that are slowing down,’ Beamer said. ‘Buyers aren’t showing nearly the hysteria they did last year. They aren’t in such a great hurry to put an offer on the table.’”

“Home values haven’t dropped as a result of the change in the market, but returns on investment aren’t strong enough to support the speculation that was going on in 2005, she said. ‘We’ve lost the flippers,’ Beamer said. ‘These days, it’s difficult to buy a property and see the value double in a matter of months.’”

There is news on the interest rate front. “Mortgage applications fell for a third consecutive week as demand for loans to purchase homes dropped to its lowest level in more than two years. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended Feb. 10 decreased to 574.1, down 7.3 percent from the previous week’s 619.3.”

“The MBA’s seasonally adjusted purchase mortgage index, which is considered a timely gauge on home sales, fell 7.9 percent to 391.7 from the previous week’s 425.1, its lowest level since the week ended Dec. 26, 2003, when it hit 390.1. Borrowing costs on 30-year fixed-rate mortgages averaged 6.25 percent. The 30-year rate, however, was at its highest level since the week ended Dec. 9, 2005, when it touched 6.28 percent.”

“Federal Reserve Chairman Ben Bernanke said on Wednesday the U.S. economy was running so close to capacity that it faced heightened risks of an outbreak in inflation that could require higher interest rates to tame. In his first extensive remarks since taking office two weeks ago, Bernanke appeared to be making an effort to establish credentials as an inflation ‘hawk’ by stressing the need to keep price pressures contained.”

“‘The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately, in the absence of countervailing monetary policy action, to further upward pressure on inflation,’ Bernanke said.” “He said high energy prices and the possibility of a slowdown in the U.S. housing market after a long boom were potential risks.”

“Ben Bernanke, the new chairman of the Federal Reserve, was once nicknamed ‘Helicopter Ben’ for suggesting during the deflation scare of 2003 that a central bank could always dump money from the sky to jump-start the economy. The suggestion earned Bernanke a reputation in financial markets for being a dove on inflation.”

“Some Fed watchers believe that Bernanke’s main task during his first testimony to Congress Wednesday and Thursday will be to remove any suspicion about his inflation-fighting credentials. ‘He’ll want to do whatever is necessary to counter this exaggerated image of ‘Helicopter Ben’,’ says John Lonski, chief economist at Moody’s Investors Service. ‘That means he doesn’t want to show weakness in regards to enemy No. 1, and that’s price inflation.’”

“Should he choose to accept it, Bernanke’s mission to convey he’s an inflation fighter has been made easier: After a fourth-quarter setback, economic growth and inflation pressures are rebounding in the first quarter. Employment and wage pressures picked up in January, and consumption also seems to be rebounding.”

“The market now prices in a 98% chance that the Fed will lift its key rate to 4.75% at its March 28 meeting and 100% chance that this rate will be reached by May 10. The market also now sees a 70% chance that 5% will be reached by the May meeting and 94% by the June meeting. Odds that the Fed would hike to 5% by the end of June were only at 24% just two weeks ago.”

“In his final year at the Fed, Greenspan began sounding alarm bells about the housing market, which has fueled consumption via ever-rising home equities. Greenspan, who largely created this environment by cutting rates to 1% in 2003 and keeping them there for a year, had began referring to ‘froth’ in the real estate market.”

The housing bubble is changing in Florida. “Like many red-hot real-estate markets in Florida, the Palm Beach market may have started to cool. The number of properties on the market spiked in the fourth quarter from a year earlier, according to Robert N. Goldstein, chairman of the Realtors Association of the Palm Beaches, who said he believes many sellers are second homeowners who have watched the value of their properties creep up and now figure they can sell and and use the profits to rent a hotel room for many years. People ‘think they’re going to cash out and reap huge gains,’ he said.”

“Experts say discounts and deals show housing market is starting to cool. If you’ve tried to buy a home in the past month and noticed more incentives than usual, you’re not alone. Several developers in Central Florida are offering discounts ranging from free homeowner association fees, no closing costs and gift cards for free furniture and appliances.”

“Real estate experts say this is a sign that the hot housing market it’s finally starting to cool off.”

“The Bard family shopped the Orlando home market for months while awaiting the sale of their house in Ohio, but the deal they recently got was too good to pass up. ‘I was bowled over,’ Brigitte Bard said.”

“The condo comes with two years of prepaid fees, cable TV and Internet access, worth $297 a month, plus appliances and $6,500 toward closing costs. Oh, and there is a $5,000 gift certificate for furniture at Rooms To Go. Builders in Central Florida are offering discounts, upgrades and everything except free toasters to would-be home buyers, a sure sign of a cooling market for new and existing houses.”

“One Lennar Corp. ad touted last week in a Valentine’s Day reference to its Orlando-area homes. That promotion offered up to $50,000 ‘to use as you choose’ by applying it to a premium homesite, a buy-down on the interest rate, closing costs or the home price itself.” “Other recent promotions by major home builders in Central Florida offer prepaid homeowner-association fees, stainless-steel appliances, granite countertops and designer lighting. ‘They are trying to goose demand,’ said Bill Mack. ‘It’s not just Orlando. It’s going on in other markets as well.’”

“Budge Huskey said he views the recent increase in home-buying ‘incentives as a ‘return to a sense of normalcy’ in markets such as Orlando. ‘I don’t think there’s an oversupply of new homes,’ he said, ‘except perhaps condominiums in some sections.’”

“Still, home builders are reaching deeper into their bag of tricks to find ‘new pools of buyers,’ he said. That includes paying higher commissions and even bonuses to real-estate agents to bring customers to their subdivisions. ‘That had all but disappeared,’ Huskey said.”

“Higher-priced homes are getting tougher to sell. ‘Builders are calling us,’ said Roger Soderstrom, owner Sotheby’s International Realty in Orlando. There are at least 500 new homes in the Orlando area priced at $500,000 and above, he said, and another 2,000 resales in that price range. ‘We can’t rely on the buyer next door to buy those homes,’ he said.”

“Other signs that builders are facing more challenges are increasing. Los Angeles-based KB Home, for example, one of the top five builders in the Orlando market, said in its annual report, filed last week, that it has seen an increase in home-order cancellations nationally in recent months.”