The Housing Bubble

The New York Times has this report on Fannie Mae. “A large poster outside the Washington office of Fannie Mae’s new chief executive lists the promises all senior managers were recently instructed to make to reshape the company’s culture. The principles stand in stark contrast to how Fannie Mae long operated.”

“Under Franklin D. Raines and his predecessors, the company was criticized by investors and lawmakers for making arrogance an art form. It relied on an army of professional lobbyists and powerful strategic alliances in the housing and finance industries to silence critics. And when federal investigators found almost $11 billion worth of accounting errors in 2004, Fannie denied it had any problems, choosing to attack its regulator instead.”

“On top of the Rudman report, a flurry of federal regulators are continuing to look under Fannie’s hood. They are examining how executives violated accounting rules to smooth its earnings, leading Fannie Mae’s board to force out Mr. Raines and most of his senior management team beginning in December 2004.”

“On Wall Street, where the company’s share price and dividend have been almost halved, investors are hearing from Fannie more often but can glean few details. More ominously, legislation that threatens the very core of its business looms in Congress. Among the options the Senate is considering are creating a new, stronger regulator and imposing sharp limits on the size of its highly profitable portfolio.”

“For all the discussion of a humbler, gentler Fannie Mae, critics say little has changed. ‘All the talk of the new Fannie Mae means nothing unless you put the proper oversight structure in place,’ said Mike House, executive director of FM Policy Focus, a lobbyist group backed by the company’s mortgage industry rivals. Besides, he added, ‘the only reason that Fannie changed their way of doing business is because they were caught.’”

“Critics say that Fannie Mae’s status as a quasi-public enterprise has simply subsidized rich investors instead of homebuyers and led to a heavy-handed approach in dealing with critics and regulators.”

“This week, Ben S. Bernanke..called for requirements that would cause Fannie to shrink its mortgage portfolio, saying the holdings were ‘much larger than can be justified’ by its affordable housing mission, and represented a financial stability risk.”

“Tactically, Fannie seems to have simply lowered the volume of its approach instead of scaling it back. In public filings yesterday, the company reported its overall lobbying budget actually rose about 15 percent, to $10.1 million, which it attributed to an increase in administrative costs and internal lobbying efforts. And when the House bill was being considered last fall, Fannie still pressed hard.”

“‘They had their own people,’ Mr. House of FM Policy Focus said. ‘Plus, they had the homebuilders and Realtors lobby for them.’ ‘It was very frustrating to deal with Fannie Mae in the past, you weren’t asked for your opinions but were told what to do,’ said Jerry Howard, the head of the homebuilders’ industry group. ‘They are now a partner where you can conduct conversation and dialogue.’”

“Shortly after its chief regulator required Fannie to increase substantially its capital reserves because of the accounting troubles, the company began selling off parts of its portfolio. It shrank by about 20 percent by the end of 2005. Whereas Fannie once packaged about 40 percent of all new mortgage loans, its share fell to less than 20 percent in 2005.”

“‘The markets are getting more competitive and the protection afforded by their implicit subsidy is getting eroded,’ said Dwight M. Jaffee, a professor of real estate finance at the University of California, Berkeley. And hedging against home price inflation and interest rate risk could eat into profits even more.”

The Sacramento Bee has the latest on that housing bubble. “In another sign of a cooling market, existing homes sales in the capital region declined last month to the lowest level in six years. Sales in January fell a combined 29 percent in Sacramento, Placer, El Dorado and Yolo counties compared with the same month a year ago.”

“At the same time, the median sales price, the point where half of the homes sold for more and half for less, dropped for the fifth straight month in Sacramento County to $352,500, a 5.2 percent decline from an August peak of $372,000.”

“The chill also was felt in Placer, El Dorado and Yolo counties, where price appreciation slowed dramatically from the 20-plus percent gains seen over the past few years. ‘Right now, we’re in a downshifting to a normal..time. It’s not unraveling,’ said Sean Snaith, director of the University of the Pacific’s Business Forecasting Center in Stockton. If interest rates jump, inflation flares up or unemployment spikes, ‘then we’re talking a different story,’ he said.”

“‘The buyers definitely have the upper hand right now,’ said (realtor) Pam Petterle. ‘Buyers are coming in now with lower offers.’”

“In recent years, a buying frenzy sparked by low interest rates and bidding wars drove resale prices to record highs. It wasn’t unusual for some homes to sell for more than the asking price. The roles are now reversed. ‘The sellers are no longer calling the shots,’ said John Karevoll.”

“The biggest impact has come in the high-end market, where homes priced over $500,000 are taking much longer to sell and sellers are forced to lower prices or pull houses off the market. ‘These $900,000 to $1 million McMansions really become less affordable,’ said Snaith. ‘We’re observing more softness in the high end.’”

“Along with January’s sales drop, the number of houses listed for sale in the four-county region rose to 9,267, up 8 percent from December. That was more than 2 1/2 times higher than a year ago. nventory of homes for sale had slipped in November and December last year after hitting a peak of 10,801 in October. The inventory last month was the highest for a January since 1995.”

“It continues to grow this month. Through Thursday, the number of homes listed for sale in the region was 9,543. Last month, the capital area recorded 1,678 sales of existing homes, down 30 percent from December. Statewide, homes sales hit a four-year low in January, marking the fourth consecutive monthly decline. Overall, 38,300 new and resale homes were sold, a 27.5 percent drop from December. The median price of a home in California in January was $452,000, down 1.3 percent from the previous month.”

One reader wants to discuss the blow-back from the housing bubble. “I would like to see a general discussion on how these posters here think the housing bust will affect THEIR jobs. In my opinion, there is too much excitement about this housing downturn on this blog with the intent picking up houses for less money. If your laid off in a recession you probably won’t be buying.”

Another added, “Topic suggestion: Internet morality lectures vs. schadenfreude. My position is there is no shame left in the world and that is a bad thing. A person getting a pounded and trapped by RE and then being publicly humiliated is a lesson that will never be forgotten.”

“I will gladly take a career reorganization to have housing be in line with incomes. It has happened before it will happen again both housing and career corrections. The only people hurt will be those that don’t update their skills and are less employable. Part of the point of this blog is how to position yourself defensively so as to not be in that position.”

“If you know a storm is coming and prepare the odds are in your favor than people basing the decisions on the weather for the last couple of days.”

To which the first reader replied, “And you could do this now by moving to an area where housing is in line with incomes. The point I was trying to make is that the correction in housing prices will not occur in a vacuum and there will be residual fallout. I just think that this is somewhat overlooked on this blog because the general focus is on picking up lower priced RE. As far as being educated and keeping your skills updated to protect yourself, I couldn’t agree with you more. But if things get really bad, as in a depression, you could see 100 people applying for every one job opening even at the higher skill level. At that point your playing a numbers game and the odds aren’t in your favor.”

Reply, “I don’t predict a depression. But even in a depression I would welcome whatever happened. It would be pointless and frustrating to give internet morality lectures. If you look at it from and evolutionary biology point of view the population and relative health of the population is what matters not the individual.”

A third reader said, “Excellent point. I recall hiring for a mid-level planning position here in SCal during the last crash. Ad on Sunday. By Wed, had over 200 resumes, many VERY well qual’d. Guaranteed that we’ll have a lot of collateral damage.”

A fourth points out, “The high cost of housing is speeding up the export of jobs out of America. Why hire someone that has a 500,000 mortgage, when you can hire someone with a 30,000 mortgage in India? The cost of housing is bad for Americas ability to compete.”

The Patriot Ledger has this report on Massachusetts. “House ‘For Sale’ signs sprouted like goldenrod last summer along the highways and byways of the South Shore. But there seemed to be a drought of buyers for all those properties that only a few months earlier were selling overnight at record prices. What was going on? Gradually, concern was turning to panic. Was the dreaded real estate bubble beginning to burst in towns from Milton to Plymouth?”

“This story is still shaking out. But it would seem that the real estate market in our corner of the world is no longer as good as it was, especially those who are stuck with two houses and, therefore, two mortgages.”

“Sellers are clinging to the memory of huge appreciation in house values, while buyers are interpreting reports of a slowing market as an opportunity to get the bargain of a lifetime. The times they are a-changing. Just ask the agents at the real estate office in Duxbury, who, like their colleagues in other South Shore towns, are being forced to talk sellers off the roofs of their expectations and encourage buyers not to count on making a killing.”

“According to agents Diane Cole, Faith DiBone and Evan Sabran, South Shore houses are an incredible value right now. Six years ago, at the height of the tech boom, many people were taking their profits and investing them in real estate. ‘You didn’t even have to market your house,’ says Sabran. ‘That market lasted for so many years some sellers think it still exists,’ Sabran said.”

“Cole agreed. ‘Sellers tend to listen to rumors about what’s going on in the market.’ According to Sabran, ‘Sellers usually are three to six months behind the curve.”Sellers got caught short,’ DiBone confirmed. ‘The result is they get angry with their agents. I lost three listings because of that, and those houses are still on the market.’”

“So are some of the houses that buyer Liane Bromberg looked at early in her seven-month odyssey to find a home in Hingham or Weymouth. Bromberg says today’s market is strikingly different than the one three years ago when she bought her Hanover home. Today she wonders if she might have overpaid for the Hanover house.”

“There’s no danger of that happening now. Bromberg says she is looking seriously, but not feverishly. She gets daily e-mails from her broker, and most weekends she goes to open houses. But rather than feeling pressured, she’s ‘having a good time.’”

“A recent tour of the housing market in Hingham revealed that there were several $1 million-plus houses that had been on the market for at least a year. Still, owners not only were showing little sign of lowering their prices, they already had purchased new homes.” “Creative financing has made it possible for some owners to carry two mortgages and not be forced to sell at a sacrifice, says Diane Cole. That’s one of the reasons for a current spike in ‘inventory,’ Realtor-speak for the number of houses on the market.”

“Sellers also have to start thinking differently about pricing. No longer is it productive for the seller to price a home considerably over what he or she expects to get in order to allow for wiggle room, Sabran says. He recommends to his clients that they state ‘a first and final offer. Don’t worry about leaving room for negotiation,’ he said. ‘Buyers know if a price is fair.’”

“Fair is the operative word. All the Realtors interviewed for this article agreed that if a house is priced fairly, for both parties, it will sell.”

The Arizona Republic reports on the bursting housing bubble. “The frenzy is gone, and home builders are trying to entice buyers with freebies and price cuts in ‘let’s make a deal’ sales pitches. It is another clear sign that the Valley’s home-building market is slowing from the pace that made it No. 1 in the country just last year.”

“It is not just home building cooling off in the Valley. The number of existing homes for sale has shot up from a year ago. Home prices are flat or down slightly in most areas. And in January, used-home sales were half of what they were in August, a record month.”

“‘Most of the investors are gone, and traffic is down in home builders’ sales trailers,’ said Jay Butler at Arizona State University. ‘Just look at all the ads. Builders are trying to move homes fast.’”

“Builders nationwide regularly construct a few spec homes for buyers who need a house quickly. But several Valley builders have more spec homes now because even as the market slowed late last year, they continued to speculate that demand would be high, so they kept putting up houses.”

“There are about 2,800 more empty new homes Valley-wide than a year ago. ‘It’s been years since we have seen any unsold inventory like this in Phoenix’s new-home market,’ said John Burns, a national real estate consultant. ‘Too many builders went too far out and built houses that were too expensive.’”

“Too many empty spec homes could hurt builders’ profits and pull down all home prices throughout the Valley as other sellers adjust their prices to remain competitive. Phoenix’s new-home market runs on a formula where builders move farther out, stretching the city’s fringes, where cheap land and low city fees keep prices in check. But builders now are pushing the threshold of how much buyers will pay and how far they will commute.”

“The result? Empty houses and killer deals. ‘There’s no question the overall marketplace has changed,’ said analyst RL Brown. ‘The consumer is saying, ‘Excuse me. The prices are too high.’”

“Some houses are empty because most of the investors, who snatched up three or four new homes at time a year ago, have moved on or see the market slowing and are willing to walk away from deposits. Others are empty because buyers who signed deals that were contingent on them selling other houses are unable to sell now that the market has slowed.”

“But for many builders, there is pressure to improve, especially for the public companies. For them, just keeping pace with what they did last year is not enough. ‘It’s all about numbers,’ said Doug Fulton. ‘They have to keep the building profit machine moving. But division presidents have a hard act to follow after. ‘We were all fishing with dynamite last year.’ Fulton sees a market for spec homes because other builders are dumping their spec inventory and will be reluctant to build as they wait to see how much the market slows. His company recently started about 300 spec homes. ‘I couldn’t be in a better position to take this risk,’ he said.”