The Housing Bubble

Inman News reports that the growing home investory has a few worried. “U.S. home builders took advantage of record-high temperatures in January and boosted the rate of housing construction significantly higher than expectations at the start of what is seen as a cooling-off year for the housing industry. The unforeseen rise in housing starts raises questions over whether this would lead to an oversupply of homes in cooling home sales market.”

“NAHB Chief Economist David Seiders expects that a decline in February housing starts will counteract the unusually strong month. ‘I’ve had some concern and I’ve been giving some reminders to builders… that the level of inventory is currently running pretty high,’ Seiders said during a conference call this morning. ‘Hopefully this will not exacerbate the inventory situation,’ Seiders said.”

“The level of new homes inventory was at 4.9 months at the end of December, Seiders said, compared to a 4.1-month supply a year earlier. ‘If sales slow down, the months supply can move up fairly quickly and that is the concern moving forward,’ he said.”

“Seiders also mentioned reports of builders offering more incentives to home buyers as well as an increase in home order cancellations. ‘I really do view the (housing) start and permit numbers for January as a temporary burst,’ he said.”

“Ben Bernanke also pointed to a slowing housing market. ‘Prices and construction could decelerate more rapidly than currently seems likely.’”

And the Wall Street Journal reports that Americans may have had enough of housing.

“After climbing steadily for a decade, the nation’s homeownership rate appears to have leveled off. New data released late last month by the U.S. Census Bureau put the homeownership rate at 69 percent in the fourth quarter of 2005, down from 69.2 percent a year earlier. It is the third quarter in a row that the rate hasn’t posted a year-over-year gain, and it’s the first time since 1994 that the rate at year-end hasn’t increased from the previous year.”

“Some economists say that the new data could be a sign that declining affordability is finally taking its toll on first-time homebuyers. ‘You’ve got seven quarters in which the homeownership rate basically has done nothing,’ says Jan Hatzius, chief U.S. economist for Goldman Sachs. ‘It’s fair to say that it’s stagnating.’”

“There may be other explanations for the flattening of the homeownership rate. some people are relocating to the South and West to take advantage of new job opportunities, he says. Some of these people may decide initially to rent rather than buy, even if they can afford a home.”

“The disconnect between record home sales and a stagnant homeownership rate suggests that the recent growth in sales is being fueled in part by investor activity, says David Seiders. While vacancy rates for rental properties declined overall, vacancy rates for one-unit rentals, which are typically owned by investors, climbed to 10.2 percent in the fourth quarter of 2005 from 9.6 percent a year earlier. Housing analysts say the growth of investor-owned units represents a ’shadow supply’ of rental properties that doesn’t show up in traditional rental market measures.”

“Some homeowners may also be taking advantage of recent increases in home values and cashing out as the housing market cools. Christopher Olsen in Lodi, Calif., decided he needed a bigger home with a new baby on the way. But instead of trading up, Mr. Lodi sold his house in May, and moved into a rental property. ‘We are renting for two years, waiting for the market to settle, or crash,’ says Mr. Olsen.”

A look at California housing bubble. “The median price of a San Bernardino County home increased 27.7 percent to $355,000 in January, up from $278,000 in January 2005, DataQuick reported Wednesday. The median price last month was down from a record $361,000 set in December.”

“‘The buying group for each housing category has dropped in a year,” said Bill Velto, broker in Upland. ‘Buyers have a lot more choices. The standing inventory is close to 60 to 70 days,’ Velto said.”

“Gary Teeters, broker in Yucaipa, said his office is seeing fewer multiple offers on properties and more price reductions. Mike Duncan, brokerin Twentynine Palms, said ‘investors are not up here as much.’ Jason Bennecke, in Highland, said that ‘for every month that goes by, it’s less of a sellers’ market.’”

“Sticker shock. That’s what Mentone resident Melinda Wallace felt after visiting several open houses over the weekend. ‘A few years ago, these same houses were selling for a lot less,’ said Wallace. ‘To be honest, I just don’t think they are worth it.’”

“Experts say condo sales, especially ones converted from former rental units, were a major factor in pulling Orange County’s median home price down $39,000 last month. The number of homes sold also fell to the lowest level in nine years, the real estate research firm said. Experts say buyers finally balked at sky-high prices demanded by single-family house sellers.”

“The past three months were the slowest in nearly five years, with 9,923 homes sold. And January’s 2,594 sales figure was the smallest since February 1997 Michael and Holly Hall felt that slowdown after they put their three-bedroom Mission Viejo home on the market in the fall. After nearly three months, they’ve only gotten one offer, from a bargain hunter. On Wednesday, they cut their price by $10,000. ‘This is driving us crazy,’ Holly Hall said.”

“Santa Monica chiropracter Ralph Alvy says the market is definitely slower than two years ago. When Alvy decided to put his home up for sale in January, he was still expecting to get numerous bids. But this time around, it took two weeks before getting even one offer, and that was after reducing his asking price $20,000. ‘I was surprised when we didn’t get multiple offers,’ Alvy said. ”

“Sales of Bay Area homes dropped last month to the lowest level in five years as price increases continued to ease back. (Sales were) down 35.8 percent from 9,347 for December, and down 20.0 percent from 7,509 for January last year, according to DataQuick.”

“A decline from December to January is normal for the season. Last month was the tenth in a row to see a year-over-year sales decline. The January sales count was the lowest for any month since January 2001. The median price paid for a Bay Area home was $607,000 last month. That was down 0.3 percent from December’s $609,000.”

“‘We won’t know for another couple of months if this is a lull in the market or part of a longer-term downturn. The March numbers will tell us much more about what’s going on,’ said Marshall Prentice.”

The Arizona Republic is cautiously informing readers of the housing bubble. “Metropolitan Phoenix’s housing market is cooling, but it still managed to snag the title of the nation’s hot spot for home price gains in 2005. In the Valley, 2005 housing prices soared 48.9 percent above 2004 levels, according to the Realtors’ report.”

“But that growth was fueled by record increases in the first half of the year. By the end of the fourth quarter, prices had risen less than 1 percent, that’s $400, from where they were at the end of the third quarter. The report is just the latest sign of a slowdown in what had been a sizzling market.”

“‘There are sellers who think the frenzy from last year is still going on, and they can inflate their prices,’ said (realtor) Margie O’Campo de Castillo. ‘But they aren’t getting the offers they want, and their homes are sitting on the market.’”

“The scene is much the same across the country, particularly in areas where large price increases were fueled by heavy investor activity. The investor buying-spree started in Southern California, particularly in San Diego, in 2002. After prices skyrocketed in those areas, many of the same speculative buyers cashed out and flocked to Las Vegas. By early 2005, investors had found metropolitan Phoenix.”

“They also have found Florida. But several of the Sunshine State’s top markets also are seeing a tapering of prices. Orlando, like Phoenix, saw prices rise less than 1 percent in the fourth quarter. David Lereah, chief economist for the NAR, said the dip nationally is an early sign of a market adjustment. Housing analysts say the adjustment will be bigger and more painful on the coasts, where home prices are much higher.”

“In the Valley, the median price of an existing Valley home fell last month to $257,000 from $260,000 in December. And 5,260 existing Valley homes changed hands in January, compared with a record high of 10,700 in August. The pace of sales has slowly been tapering off since fall. There were 6,480 resales in December.”

“As early as September, home prices had begun to surpass appraisals, and investors began to sell in droves.”

“Jay Butler, director of the Real Estate Center, said it’s still unclear how big of an overall impact investors had on the Valley’s housing market and how much their departure will hurt it. He estimates speculators inflated metropolitan Phoenix home prices by as much as 25 percent in 2005.”

The Chicago Sun Times has a ‘warning’ for condo speculators. “Q: My husband and I were on a great path to being financially stable. Before we were married, we purchased a condo in the loop. After we were married for a year, we decided to buy a second condo for investment purposes, and this is where the trouble starts. We used $20,000 that we had saved and took a second mortgage on our unit for $20,000 to make up our down payment for condo number two. The real estate developer was offering one full year of mortgage, assessments and taxes as an incentive to buy, not to mention the unit was rented.”

“We thought this was a win/win situation. We would have two years minimum of no out of pocket costs, and at the end of that period or even before we can put the unit on the market and sell. The lender informed us that our credit score was good enough that they were going to approve us for a no doc loan. I now think this was a red flag for us to realize ‘this means you really can’t afford this loan, but we’re going to give it to you anyway.’”

“Well, here we are two years later, and I fear of what is to come. We put the unit on the market in April 2005 with no luck thus far. We first started the price out high, but by the summer we had came down to our exact purchase price. In November 2005, the tenants’ lease was over, so they left. Now we are in the last stage of the two-year period with no out of pocket costs. We are hopeful that we will get a tenant in the spring, but the rent does not cover all of the costs of owning the unit. We pay our current bills no problem, but once we have to start covering the costs of our second condo on our own, there is going to be no way.”

“Should I start talking to attorneys or debt consolidators? I just want to be pro-active in taking care of this costly mistake.”

“A: “About two years ago the speculative condo boom was at its peak. And now many speculators are about to find out that it doesn’t take a ‘crash’ or ‘breaking the bubble’ to create your own personal speculative crisis. All it takes is being unable to cover the carrying costs.”

“Now, I’m going to tell you exactly what I told a woman I know who mentioned she was in the same situation way back last summer. I told her then and there to reduce the offering price at least 10 percent below what other condos were going for in the same building, and to tell the realtors that she would offer them an extra incentive if they’d sell it by Labor Day. I told her that at least she’d be the first one out the door, before the rest of the crowd figured out the situation, and cut their prices too. And when she said she didn’t want to cut the price, I reminded her that the carrying costs for an extra six months would be equal to the price cut.”

“I told her then that I knew I would be writing about this phenomenon in six months, and now it’s starting to happen. If you can’t carry this property, then you have to bite the bullet and list it at such an attractive price that it is the first one that gets sold.”

“Now, by printing this response I know I’m going to get letters from other people accusing me of starting a ‘run’ on the condo market. So let me forestall that. I don’t think I have that power, to suddenly frighten people into selling. I think that the selling wave will happen inevitably because so many people are over-extended in the speculative condo market.”

Inman News has a similar tale. “DEAR BOB: A year ago, we bought a house in a new neighborhood one hour away from our current home. We were offered no mortgage payments for six months, but then we had to sell or refinance. When we tried to sell or rent the house, we learned the builder sold all 20 houses to other investors who were doing the same thing.”

“We sold the house for $90,000 less than our purchase price, and will have to come up with $33,000 cash to close the sale. Our monthly payments of $3,000 are way above the rental market of about $1,750 per month, plus a $100 monthly homeowner’s fee. Is there any way out of this nightmare?”

“A: After reading, and re-reading, your e-mail, I can’t figure out why you would buy such a rental house an hour away from your residence under those very unfavorable purchase terms requiring you to sell or refinance within just six months.”

“I don’t understand how the house could lose $90,000 in market value in just six months and why you have to come up with $33,000 cash to close the sale to your buyer. Obviously, you grossly overpaid for the house. The only good news is, because you purchased the house as an investment, you can claim a capital loss tax deduction. Please consult your tax adviser.”

The Boston Globe follows up on yesterdays’ MAR report. “Cape Cod’s housing market was hit harder by declining home sales last year than any other Massachusetts region, as buyers held back in hopes that prices for vacation homes would drop. Sales of single-family homes on the Cape fell 14.5 percent, to 3,986 in 2005 from 4,633 in 2004.”

“The Cape was more sensitive to rising interest rates and economic disruptions, such as higher oil prices, because purchases of retirement and vacation homes, the biggest segment of that market, are entirely discretionary. While a growing family may have no choice but to move into a larger home or baby boomer couples may be anxious to downsize, buyers of second homes have nothing but time.”

“‘They were saying, ‘We’re going to wait for prices to come down, and we’re not going to buy until they do,’ said Laura Usher, a real estate agentin Brewster. Buyers ‘got very savvy,’ she said.”

“James Crocker, the president of The Cape & Islands Association of Realtors, said the reason houses aren’t moving as fast is that sellers refuse to drop their asking prices to reflect a weaker market. Some sellers, defying their agents’ advice and analyses of their local markets or recent sales in their neighborhoods, insist on putting higher asking prices on their homes, he said.”

“‘The buyers are willing, ready, and able,’ said Crocker, an agent in Osterville. ‘We just need more fairly-priced properties to ignite the market.’”

“Last year’s housing market got off to a terrible start due to 100 inches of snowfall on the Cape, causing sales to plunge nearly 24 percent in the first quarter, compared with the same quarter in 2004. After a 17 percent drop in the second quarter, summertime sales rebounded. But sales fell again, by 18 percent, in the fourth quarter.”

CNN Money has this breaking story. “The pace of home building soared to the highest level in nearly 33 years in January, according to a government report Thursday that showed a real estate market that continues to top expectations.”

“The Census Bureau reported that housing starts reached an annual pace of 2.28 million homes in January, compared to just under a rate of 2 million homes in December. Economists forecast that housing starts would come in at an annual rate of 2.02 million in the month.”

“Building permits came in at an annual pace of 2.22 million in January, compared with the 2.08 million pace in December. Permits were expected to edge down to a 2.07 million.”

“The Commerce Department reported Thursday that building activity was up 14.5 percent last month when compared to December. The 14.5 percent rise in construction activity in January followed a 6.9 percent drop in December. Analysts had been expecting a rebound but the actual rise was far above their forecasts.”

“For January, construction of single-family homes rose by 12.8 percent to an annual rate of 1.819 million units, an all-time high.”

“Some economists have expressed concerns that once home sales start to slide, the big price gains could turn into sharp declines in prices in some areas, bursting the speculative bubble in much the same way that the stock market bubble burst in early 2000.”

“Builders may also have stepped up construction to try to close agreements before buyers can back out, economist Chris Low said. ‘There’s a sense of urgency in construction,’ Low said. ‘If builders have approval for a project, they’re going to try to move ahead as quickly as possible.’”

“Home order cancellations increased the first two months of KB Home’s fiscal year and net orders for new homes are lower than a year earlier, the sixth-largest homebuilder by stock market value said in its annual report on Feb. 10. ‘If the current trends do not improve, we may be required to moderate our revenue guidance,’ KB Home said in the report.”

A pair of reports provide an update on the Florida housing bubble. “A planned high-rise condominium tower called 1390 Brickell Bay in Miami won’t be built and deposits will be returned to buyers, the developer announced. ‘Market conditions impaired us from doing this project,’ said Kenneth Baboun. ‘The market changed so fast, the rules have changed drastically.’”

“Baboun was in some ways the classic example of the young, wealthy developer with big ambition but little experience. Just 25 years old, the Mexico native moved to Miami in 2003 and had never built a high-rise tower in his life. Last fall, Baboun staged a lavish condo party, a trademark of the South Florida condo boom, but something seen less today.”

From the Sun Sentinel. “Linda Rudner of Boca Raton bought a two-bedroom condominium near the beach as an investment last year. She fixed it up, then listed it at $450,000 but later dropped her asking price to $399,000. Rudner might have to come down even more. She wants to sell soon and said she’s done dabbling in real estate.” “‘I won’t do it anymore,’ Rudner, 51, said Wednesday. ‘I’m too afraid. There’s too much on the market.’”

“The rising inventory of existing single-family homes is slowing sales across South Florida. Sales fell by 35 percent in Broward County and 23 percent in Palm Beach County. As inventory builds, homes sit on the market longer, causing antsy sellers to reduce their asking prices.”

“Steve Petranick, a Broward real estate agent, said he used to have only three or four properties to show clients looking for homes in the $200,000 to $300,000 range. Now he has 20 or more. ‘There are a ton of listings,’ he said. ‘It’s definitely become more of a buyer’s market.’”

“The housing market has slowed, and sellers need to be more realistic, Anne DeFries said. ‘They can’t compare their home to a home that sold a year ago or even six or eight months ago,’ she said. ‘And homes have to be properly marketed. The days of just putting it in the MLS or putting a sign in the front yard are over.’”

“Brevard County’s home resale prices fell in the fourth quarter. Realtors and home sellers say the market is slowing. Jeanne Dobus of Indian Harbour Beach, who put her home on the market in October, said she has been disappointed so far in the response, which has been slow. ‘I’ve never seen such a glut of homes for sale in this area,’ Dobus said, noting the asking price of her four-bedroom home is $349,000.”

“‘People are offering $250,000 to $260,000,’ Dobus said. ‘That’s just not the right price.’”

“Kathy Smith had a much-easier time selling her Port St. John home, asking price $89,900. Smith, who moved to Fort Pierce, put up a sign in her yard Friday, and had it sold that afternoon. ‘It’s because of the price,’ Smith said. ‘We probably could have asked for more, but we needed to move quickly.’”

“Sales of existing homes fell 34 percent in the Bradenton-Sarasota market in the fourth quarter compared with the previous year, and inventories are on the rise. Agents collectively sold 1,062 fewer homes in the fourth quarter. ‘Artificial prices seemed to outdistance buyers’ desires,’ Richard Taylor, president of the Manatee Association of Realtors. said. ‘We’re not in the frenzied market we were in a few months back.’”