The Housing Bubble

TGIF and it’s time to put this week in the can. “”Paul McCulley, bond-market-giant PIMCO’s Fed-watcher, wrote last week that ‘Weakness in residential property activity self-feeds’ and that we are in for a cyclical ‘wicked turn’ in the economy, and ‘unconventional property-market weakness.’”

“The Treasury Department’s resumption of 30-year bond sales could have an interesting impact on the home mortgage market, with lenders offering more 40-year loans and maybe even 50-year mortgages for the first time. Chris Low..said longer-dated home loans could prevent a dramatic drop in the housing market. ‘It is a kind of a way to play games with monthly payments,’ said Dick Bove. ‘Stretching out the mortgage maturity is simply a way to lower month payments and stimulate sales.’”

“Land speculators are illegally subdividing land in western Box Elder County (Utah) and selling the small parcels on the Internet. ‘I’ve received phone calls from people who want to know what they can do with their land and are surprised when the answer is nothing,’ Garth Day said.”

“The fastest home-building binge in 33 years is bringing new fears of a glut in new homes and not enough buyers. ‘The long housing boom in the tri-state area is dying out,’ said (economist) Mark McMullen. ‘We won’t see a collapse in housing prices, but the real estate industry, the brokers and financial institutions in the New York area, will take a pretty big hit.’”

“McMullen said a glut is already showing up in California and Florida, as well as New York City and New Jersey. ‘In the metropolitan areas on the West and East coasts, there’s over-building,’ he said. ‘The rate is outstripping the number of households being formed and the number of potential buyers.’”

“The Portland area housing boom seems to be withstanding a seasonal winter chill, several real estate industry experts concluded. January’s median figure was down 2.8 percent from the December median price of $252,900. ‘It would be a great sign of strength if we just hold the pricing,’ said Jerry Johnson a professor at Portland State University.”

“‘Pricing power in the Portland area still has not shifted from sellers to buyers, Johnson said. ‘When that change happens, it happens quickly,’ he said. The area’s largest builders increasingly are erecting houses with higher-end finishes, (realtor) Peggy Hoag said. ‘Granted, they’re on minuscule lots, but the houses have character,’ she said. ‘They look Craftsmany.’”

“The Southwest Washington housing inventory is at its highest point in two years, possibly signaling a weakening market. Although new listings increased 9.6 percent, from 1,085 in January 2004 to 1,189 in January 2005, closed sales decreased by nearly 12 percent and pending sales also dropped, by nearly 8 percent. ‘The market has eased off a bit,’ said David Hendrick, association executive with the Clark County Association of Realtors.”

“Fresno has established itself as a defined market for distributors. ‘There is vacant land for miles, but virtually no land is available,’ Stewart Randall said. The market may peak this year, he said. ‘I got to think we’re getting close to the top,’ he said. ‘You ought to consider cashing out or taking advantage of these prices. These things go up and down.’”

“Marin’s housing market continued to cool as home sales sank last month. Sales of single-family homes fell to 136 in January, down from 198 the month before and down from 175 in January 2005. The median price was $867,000 last month, down from $900,000 in December but up from $850,000 in January 2005, according to DataQuick.”

“The trend is similar in the condominium market, with sales dropping about 46 percent. ‘The real estate community is seeing buyer resistance to price,’ said Jack McLaughlin. ‘Prices went up too fast in the last few years so the buyers walked in the middle of last year and they are not back yet,’ McLaughlin said. ‘Sellers are going to continue to have to adjust their expectations and successful sellers are going to be those that price their property realistically and are willing to negotiate.’”

The North Lake Tahoe Bonanza has a rare look at that Nevada housing bubble. “More of Carson City’s high-end homes are hitting the market this year. Now that the housing frenzy has slowed considerably, buyers have time to check out all their options. Last year, four homes priced more than $1 million sold in Carson City; two months into the new year, nine are on the market.”

“‘We’ve already got more (high-end homes) on the market this year than last,’ said (agent) Bob Fredlund. ‘In February last year we probably only had 60 houses on the market. Now I’ve got 335 so far this year.’”

“Only 65-70 homes were on the MLS in September 2004. A year later, 430 Carson City homes were on the market. (Realtor) Kathy Tatro said these numbers show the end of a three-year seller’s market. From 2001-03, buyers flooded the Carson City market. Many came from California pocketing a large cash out from a West Coast home.”

“A small inventory and plenty of buyers led to bidding wars. Prices went up drastically. The story is a little different in the dawn of 2006. This week, there are 48 homes on the market priced above $600,000. About 287 are under the $600,000 mark, according to the MLS.”

“‘Some say that the real estate bubble has popped, but what I think is that this is a real positive thing for our economy,’ Tatro said. ‘Prices are leveling right now. There are more sellers and probably less buyers. But these buyers can take their time looking for what they really want.’”

“It’s a great time to be a buyer, she said. Many of the components that had driven up the market before are not in play now. Californians are getting frustrated with Nevada’s rising costs and are heading farther east, such as Boise.”

“Fredlund said these high-end Carson City homes will sell to young professionals working in Carson City or Reno. ‘We’ve got a lot of doctors and lawyers looking for homes,’ he said.”

Barrons has one columnist starting to see the housing bubble. “I have long argued that we’re not in a nationwide housing bubble, although we’ve had some local ones. Therefore, I didn’t think we would see a general housing crash. But I must admit I’m worried that we might see more than just corrections (10% or so) in some areas. And so are several experts and real-estate professionals with whom I’ve spoken this week.”

“‘I don’t think nationwide you’ll see a bust,’ says Mark Zandi, chief economist of Moody’s Economy.com. But we might in certain markets, he adds, the usual suspects like Miami, Las Vegas and Phoenix.”

“And we may get some sense of how deep a correction we’ll have sooner than we think. ‘This is a watershed moment,’ says Jonathan Miller, president and chief executive officer of a large New York real-estate appraisal firm. ‘If we’re going to see trouble, it’s going to be over the next 12 to 18 months.’”

“Bear markets, be they in stocks, housing or commodities, go through certain identifiable phases, like Elizabeth Kubler-Ross’s famed five stages of dealing with dying, denial, anger, bargaining, depression and finally acceptance. ‘It’s a three to five-year cycle on the downside,’ says Kenneth Rosen at UC Berkeley.”

“We’ve already passed stage one, characterized by ‘a falloff in new sales and orders,’ says Rosen, and are just entering stage two, in which unsold inventories build up. That may be where the crunch begins.”

“‘If inventories keep rising, the pressure on sellers to cut prices will be intense,’ says Zandi. Prospective sellers, of course, can just take their homes off the market and live in them until they think they can get a better price. But speculators don’t have that luxury: At some point they can no longer carry a money-losing investment, so they may throw in the towel and unload their once-promising albatross.”

“That’s stage three, says Rosen, and it usually finishes about three years from the beginning of the downturn.”

“The final phase is when we see massive defaults or delinquencies on mortgage loans. That’s several years away, he says, and this time the damage could be worse because of the large number of exotic loans giddy lenders extended to desperate home buyers. So, we could hit bottom by, say, 2010. Rosen predicts actual nationwide home-price declines of 5% by 2007, the first time prices have fallen in any year since World War II.”

“‘The boom is over,’ declares Jonathan Miller. That perception no doubt has begun to trickle down to prospective buyers and sellers. And we might get some sense of whether sentiment has tipped in the other direction when the trees start to bloom again and for-sale signs go out on front lawns across America.”

The Californian press is buzzing about the housing bubble. “Cheri Colon has been selling (Silicon Valley) real estate for more than a decade. Last month she watched home sales drop to their lowest level in five years and watched prices dip as well. Colon said, ‘It’s a tough time to be a seller and to lose the mindset of the Gold Rush days.’”

“‘Sellers are becoming nervous about how long it’s taking to sell,’ said Aaron Zapata in Whittier. ‘There are many sellers who have contingent offers on properties that they’re having to withdraw because they’re not getting their homes sold,’ added Zapata.”

“‘We’re seeing buyers out there, but they’re a little more hesitant, they’re waiting a little longer,’ Patrick Lashinsky said. ‘There’s a mismatch between what buyers are willing to pay and what sellers want to take right now.’”

“Zapata said his firm hasn’t seen many first-time buyers lately, and those who are looking to buy feel little pressure to pay sellers’ asking price these days. ‘Buyers are nervous that they’re buying at the top of the market,’ Zapata said. ‘Most offers now are coming in under full price, somewhere up to 10 percent less than asking price.’”

“Chris Thornberg, a senior analyst at the University of California, recollected an epiphany he had while eating lunch at a West Hollywood restaurant. Sitting in the booth behind Thornberg and his colleagues was a trio of actors, who were discussing home vales. Thornberg recalled the conversation he overheard. ‘One of them said ‘Dude, my condo’s gone up in value by $100,000, what should I do,’ his friend told him ‘Pull it out, buy yourself another condo. It’s free money.’”

“That ‘free money’ line sent shivers down Thornberg’s spine. He said it signaled to him just how dangerous the real estate ‘feeding frenzy’ could become. ‘A bubble is when the market price of an asset has no basis in what the rate of return on that asset is going to be; when the fundamentals say one thing and the market says another,’ he said. That’s the market we are in right now, Thornberg argued.”

“‘At some point we have to come to grips with the basic affordability question. This is not an affordable market,’ said Stephen Levy in Palo Alto. ‘I think prices could drop, and once these things start, they have a snowball effect.’”

“Levy, who estimates prices could drop by as much as 20 percent in the next couple of years, said rising interest rates are quashing the segment of buyers who can only get into the market using riskier, adjustable loans. ‘People chose to bet on future appreciation by choosing loans where they knew payments would go up by a lot, but they got in cheap,’ Levy said. ‘There are no cheap loans now.’”

“In January, the average rate for a one-year adjustable rate mortgage was 5.17 percent, compared with 4.12 percent in January 2005 and 3.93 percent in January 2004.”

“Meanwhile, notices of mortgage defaults and foreclosures are rising as some builders report more buyers backing out of deals, canceling purchases at new-home tracts. Sharon Hanley said 89 single-family homes were sold and 30 sales were canceled for the week ended Feb. 5, representing a 33.7 percent cancellation rate. For the same week two years ago, near the peak of the boom, the cancellation rate was 10.9 percent.”

“Suzie Ek, vice president for sales and marketing at Standard Pacific’s San Diego division, said higher cancellations come from buyers unable to sell their present homes at the price they needed to afford to move up.”

“Sandy Perlatti, spokeswoman for McMillin Communities, her buyers are not expressing concern with macroeconomic forces around them, she said. Greg Geisen said he closed escrow on a Quintessa house, priced at just over $1 million, even though he has yet to sell his current home. ‘It’s not real money,’ he said of the anticipated profits. ‘It’s transferring equity from one home to another.’”

A pair of reports provide an update on the soft landing in Australia. “High-risk lending in the recent housing boom has left some Australians struggling to meet mortgage repayments, forcing them to hand over properties to lenders. The housing bubble has burst and investors who jumped into the housing market 12 to 18 months ago are now seeking advice regarding problems with mortgages, says Sydney accounting firm partner Geoff McDonald.”

“‘You have had a culture of people who wanted to buy off the plan and borrow to buy, just to get in so they would not miss out and now (the market has) turned,’ he said.”

“All the signs are pointing to a very difficult road ahead for both homeowners and lending institutions, Mr McDonald said. ‘There are going to be some sad stories involving highly geared properties and mortgages that cannot be met,’ he said. Gearing is the ratio of debt to equity capital.”

“Mr McDonald said many investors borrowed 80-90 per cent of the value of the home and property values have dropped in some areas, leading to negative equity for some borrowers. ‘Not only are individual borrowers going to be hurt, but there may well be damage to lenders such as the banks and home loan originators,’ he said.”

“‘The last time we saw this happen was in the 1980’s and early 1990’s,’ Mr McDonald said. ‘The banks got caught badly and Westpac lost in the order of $1 billion.’ Mr McDonald questioned when the law suits would start rolling in against valuers for over pricing properties in deals done in 2003-2004.”

“He was not convinced that lenders have made adequate provisions for the possibilities of such a downturn. ‘I am seeing people who are admitting that there is a 10 to 20 per cent shortfall to the banks, and their bank hasn’t started to take action yet,’ he said.”

“Mr McDonald’s warnings were supported by the Australian Prudential Regulation Authority (APRA), which has voiced concern about high risk lending in the housing market. The concerns were raised after NSW Supreme Court showed a 60 per cent increase in repossession orders made against NSW homeowners last year, with more than 4,000 such orders in 2005 compared to about 3,000 in 2004.”

“For those investors who have overextended themselves in the housing market, ‘going bankrupt sooner, rather than later is something to seriously consider,’ said Mr McDonald.”

“Falling house prices in some places are ‘not a cause for alarm,’ the nation’s top central banker says. Reserve Bank governor Ian Macfarlane said the central bank had no troubles with the slowdown in the housing market, including where prices for homes had actually fallen.”

“‘The fact that on average over the country house prices are flat is something that gives us some encouragement,’ he said in evidence to a parliamentary committee today. ‘The fact that they are falling in some places is not a cause for alarm in our view, particularly if they’re falling in the place where they previously had the biggest boom, that seems to me perfectly normal.’”

The News Press reports on a Florida homebuilder in trouble. “The city of Cape Coral is cracking down on a major homebuilder for delays in starting dozens of homes, but the builder says its problems are largely the fault of a bank that stopped financing 380 of them. Last week, city officials stopped issuing permits for Cape-based Hansen Homes because of a backlog of permit applications that had piled up but hadn’t been picked up or paid for.”

“‘We realized they’re having financial difficulties’ and it wouldn’t be right to let them keep piling up more permits without some assurance the work will actually be done, city spokeswoman Connie Barron said, noting that Hansen had accumulated 48 permits plus an additional 169 permits that were voided for sitting unused too long.”

“Some customers say they’re upset Hansen isn’t proceeding fast enough on their houses, but Hansen consultant Duane Davis said that’s mainly because First Community Bank of Southwest Florida pulled its financing for 380 homes. Of those, 160 were already under construction and the rest were in the permitting process. Davis said the bank recently reinstated 78 of those loans for houses that are well along in the construction process.”

“Chip Black, president of First Community, said he couldn’t comment on the situation with Hansen because of bank privacy regulations. But the bank was ordered in June by the Federal Deposit Insurance Corp. to stop making construction loans to commercial builders.”

“Homebuyers who can’t recover money from a contractor any other way can apply to the state Construction Industries Recovery Fund. You must exhaust all possible remedies, i.e. court judgments. The most an individual can collect from the fund is $25,000. All payments for a specific contractor can total only $250,000. It’s first-come, first-served, based on date the fund awards a payment.”

“To collect, you must do a search to make sure you’ve uncovered all the assets of the contractor. If the contractor is in bankruptcy, you must obtain certain bankruptcy documents instead.”

The New York Times has this report on condo mania. “When developers in Arlington, Va., threw a party 18 months ago to showcase plans for Clarendon 1021, a condominium development that had not yet been built, 3,600 prospective buyers stood in line just for the chance to book reservations to bid on the apartments. Now, less than a year after the building opened, speculators in this and other buildings are putting dozens of units on the market at the same time, causing asking prices and profits to slip.”

“Of 23 investors who sold since Clarendon 1021 opened last summer, the three most recent sellers actually lost money. ‘I hate it when people say prices can never go down,’ said Frank LLosa, a resident of the building. ‘The speculators make the profits more volatile.’”

“The Great Condo Gold Rush is fading from memory and the Great Sell-Off has begun. ‘Money Down! Motivated Seller, Want More? Just Ask!’ screamed an investor’s online advertisement last week for a one-bedroom apartment in Clarendon 1021 that had never been lived in.”

“As more speculators look to cash out in recently hot condo markets around the country, some economists say they could put even more downward pressure on prices in those buildings where for-sale listings are swelling. In Miami, at the Jade Residences, more than 20 percent of the building’s 352 units are on the market. In San Diego, about a third of the 96 units in the Alicante, a condominium that opened last fall, are listed for sale and sellers are already starting to cut asking prices.”

“In Donald Trump’s luxury condos at 120 Riverside Boulevard in Manhattan, owners of more than one-fifth of the building’s 250 units are currently marketing their apartments. With so much inventory, said Ilan Bracha, ‘the buyers are coming in, checking the best views and then they negotiate. This is the reality.’”

“This is not the first time that condo markets have been influenced by investors. In the late 1980’s, developers converted thousands of condo units in the Northeast and many of them were bought by speculators, said Karl E. Case, an economist at Wellesley College. Many of those investors, he said, ended up losing money when they sold in the early 1990’s. ‘It was ugly,’ he said.”

“A little over a year ago, Shabana Qureshi, a 26-year-old engineer, put deposits down on two condos in Arlington. ‘My friends were making hundreds of thousands of dollars off of properties,’ Ms. Qureshi said.But having taken a pay cut with a new job, she can no longer afford the mortgage and maintenance fees, which are almost $3,000 a month.”

“Having scrimped to buy at what she said she believed was the peak of the market, Ms. Qureshi said she regretted her investments. If she had to do it all over again, she said she would have spent more money on travel and a new car. ‘I would have been more carefree and invested once I had a family,’ she said.”

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