The Housing Bubble

The Daily News makes a comparison with the last housing bubble. “This year’s San Fernando Valley residential real estate market might have started with a pop, unlike last year’s, which began with sort of a bang. The 851 single-family home sales in January 2005 ranks as the fourth-highest number since 1,057 transactions in 1989. Last month’s sales total, an anemic 582 transactions, ranks 13th.”

“To find any deja vu in this, we’ve got to go way back to 1990, which had the seventh-highest sales total. But that January’s count fell 27.2 percent from the prior year. This year started with a hefty 31.6 percent decline to the lowest level in nine years.”

“There are some striking similarities, and differences, between then and now. Both years started the same way the prior one ended. In May 1989, sales began falling under the prior year levels; that malaise lasted 22 months. Looking back, it’s the point when that real estate bubble began to burst.”

“This January’s sales decline is the fourth in a row and that pattern is expected to continue. At their respective points in time, both markets were past their prime. The last boom market peaked in 1988 with 15,263 sales and the next year they fell by 16.4 percent. This crest came in 2003 with 13,878 sales and the annual declines since then have been much more tepid. Both years started with high energy prices, unrest in the Middle East and a Bush in the White House.”

“A seven-year price decline in the annual median price, halfway between the most and least expensive homes sold, also started in 1990. Now we are at a record $605,000, a whopping 163 percent higher than where 1990 started.”

“Jim Link, executive vice president of the Southland Regional Association of Realtors, does not see a price decline accompanying this fall-off in sales, just a moderation in the rate of appreciation. ‘A year from now, I think it will be a single-digit increase but it will be higher than it is now,’ he said of the median.”

“He was just as optimistic in January 1990, anticipating that full-year sales would match 1987 or 1989. Single-family sales ended up plunging 31.6 percent that year, a suddenly familiar number.”

“Analysts and industry executives don’t expect that kind of a train wreck this time around, though. Of course, no one saw the last one until it flattened the market.”

The Miami Herald reports that some homeowners are oblivious to the housing bubble. “This Miami-Dade neighborhood, like so many across South Florida, is a crucial piece of the giant wealth and job machine that is the real estate economy. Take Devon Rifkin, who moved his family to High Pines three years ago. Convinced of the neighborhood’s value, he bought the house next door.”

“He borrowed against the equity in his first home and renovated both. Then he listed them for $899,000 each, about double what he paid. And now he and his family have moved to a third home nearby, twice as big as the first. Rifkin knows that the real estate economy is slowing down, and he hasn’t yet sold his houses. But he’s happy he got in.”

“‘People have to realize this is life-changing wealth,’ said Rifkin. ‘This is real money.’”

“Just behind Rifkin’s original home, neighbors Alison and Michael Simon are busy adding a master suite and a second story to their three-bedroom 1959 house. The Simons funded those renovations mostly by borrowing against the equity in their home. They estimate that their home’s value has more than doubled since they bought it five years ago for $322,500. ‘It’s a good investment,’ said Alison, who works from home. The new house will include an office for her. ‘Once we’re done, we’ll have even more equity.’”

“Like the Simons, their neighbors down the street are borrowing money to pay for renovations. After a year spent looking for a bigger home, the Nyes gave up and decided to refinance about $500,000 to double the size of their home. ‘Everybody in my neighborhood is doing this,’ said Jamie Nye.”

“In the Miami area, 82 percent of the loans from banks with assets of $1 billion or less were related to real estate. That’s up from 58 percent in 2000. In the Fort Lauderdale area, that figure was even higher, 91 percent in 2005, compared with 81 percent in 2000.”

“Last month, the slowdown led Countrywide Financial to shut down a loan-processing center in Sunrise, costing the area 100 jobs.”

One columnist in Florida is starting to see the light. “Motivated seller. Price reduced. OBO. You see these notations more often in the real estate listings. I hate to scare you, but I actually saw a unit in Baldwin Park listed for under $200 a square foot.”

“The Summer of 2005 is over and isn’t coming back. This is a painful lesson for sellers trying to base their asking price on comparable sales from August. ‘Our members are telling us that owners are beginning to back off prices 10 to 15 percent because they’re not getting people pressing contracts into their hands,’ says Belton Jennings of the Orlando Regional Realtor Association.”

“The number of homes listed for sale in Orange and Seminole in January was a hefty 21 percent jump from December. There now are 12,015 listings, the highest number on the association’s database, which dates back to 1995. Inventory has quadrupled in a year. That generally is one reason why values dropped 4 percent in December.”

“Now we will see what our houses really are worth, based not on speculation but what traditional buyers will pay. Given rising interest rates and a skewed affordability index, I’m guessing not as much.”

“Builders are offering financing deals, reduced closing costs and throwing in free upgrades. But if you paid $350,000 for a house three months ago and the builder now is selling the same house for $350,000 but offering $40,000 in incentives, your house is worth less. Try selling a used condo when the developer offers to pay association fees for two years on new units.”

One reader wants to hear your creative side. “Nursery Rhymes and no fair, pop goes the weasel is too easy.”

“Robert was nimble, Robert was slick. He got out of his own TOL but quick.” “Housing assets falling down, falling down…”

“Blogger, Blogger quite contrary how does the bubble blow? ‘With scream and yells, a few oh hells! and FBs fall down in a row.’”

“Hickory, dickory, dock, The FB ran out of luck. The HELOC struck back, The FB fell smack! Hickory, dickory, dock.”

“Alternate: Replace the line ‘The mouse ran down!’ With ‘And down he run’”

The LA Times looks at a housing scam. “At the height of the real estate boom last year, a group of investment promoters crisscrossed California, touting a plan to build rental duplexes in distant states. Mile High Capital Group’s scheme generated so much interest that its executives said they were interested only in buyers who were willing to take a risk.”

“And after investors handed over a $16,500 down payment for each duplex, Mile High founder Rick Dryer warned: ‘It’s no longer your money. It’s our money.’ That turned out to be all too true for hundreds of Mile High buyers, who fear they will never see the money again.”

“The Denver company filed for bankruptcy protection last month and is all but defunct. It collected deposits on nearly 1,200 duplexes but finished building only 55 of them. Regulators say the company’s files are in such disarray that it will be a long time before they know exactly what happened and who was responsible.”

“As a hot housing market becomes tepid, economists and other observers warn that many of those who bought speculative properties could wind up losing a bundle, some because of the market downturn, others because of frauds coming undone. Mile High Capital stands as a vivid example of the latter.”

“The 57-year-old Dryer, celebrated at Mile High’s sales seminars as a millionaire home builder and author of a book on real estate investing, turned out to have a record of securities fraud stretching back a quarter of a century. His book didn’t exist either, despite the fact that it was pictured on promotional materials at the seminars. McFaul joined Mile High in late 2004, a few weeks after he pleaded guilty to felony theft for stealing more than $10,000 of tools from the workers building his house.”

“To thousands of investors who attended the Mile High seminars, the pitch was irresistible. Massoud Balbas, a Laguna Niguel computer consultant, went to three seminars last winter. He bought a duplex each time, one in Colorado, one in Texas, one in ‘North Carolina or South Carolina or one of those places.’ The 60-year-old’s own fall was particularly hard: ‘I was a brand-new investor. I thought I was doing the right thing, but it looks like I lost everything. My wife is mad at me.’”

“Those first few months of 2005 were a heady time, a moment when it seemed more important to buy real estate immediately, before it went up again, than to think too much about where the property was or how much it cost. Homeowners were refinancing and taking cash out at unprecedented levels. Several factors combined to make Balbas and the other investors so eager to surrender their money.”

“First and most elemental was the siren song of real estate. The metaphors at the seminars may have been mixed; ‘Our duplexes are appreciating like an avalanche and cash-flowing like a freight train,’ a promotional film asserted, but the message was clear. ‘If you don’t have several million dollars’ worth of real estate working for you by the time you retire, you’re going to condemn yourself to a life of struggle,’ Dryer said at a San Francisco seminar.”

“Prospective buyers were advised that they should refinance their duplexes every year, taking money out to buy another. ‘You’re in the harvesting business,’ Dryer said. ‘You’re harvesting money.’”

“Colorado Securities Commissioner Fred Joseph wasn’t surprised that the scam revolved around real estate. It depends, he said, ‘what the thing of the day is. It can be wireless cables , it can be oil and gas.’ Investors can get fleeced when they latch onto the latest boom, he warned.”

“Some of the fleeced refuse to be disillusioned. Silicon Valley jeweler Geoffrey Stern figures he’s lost forever his down payment on two duplexes. ‘I was so naive,’ he said. ‘I made an emotional decision, not a logical one.’ His interest in real estate is unabated, however. He recently bought a share of a house in Los Altos Hills, Calif. The partnership is going to renovate the house and sell it. ‘It’s a calculated risk,’ Stern acknowledged. ‘But I feel really good about it.’”

One reader is looking at the macroeconomics surrounding the housing bubble. “The nation’s factories are close to capacity. Productivity, with the exception of last quarter has been excellent. Consumer confidence is high. All these things point to a bright economic future. And yet..”

“The current account deficit hit a record, the budget deficit is near record highs for an expanding economy. The housing bubble shows signs of deflating. Question: If the average, NATIONWIDE price of homes in America drops 10%, is the general economy growing sufficiently to prevent broad economic meltdown.”

Another replied, “About the factory capacity. You’re forgetting that we used to produce more than we consumed, which is not true anymore. Yes, as of now, we might be at near-full-capacity in factories, but capacity of what? Of the equipment we have today, or compared to 30-40 years ago, when there were a LOT more factories open then?”

“Another thing is, check it out: ‘Net inflows into US markets dropped below the level needed to cover the trade deficit for the first time in seven months in December, prompting concern about the dangers of the current account deficit.’”

“‘The Treasury reported net inflows of $56.6 billion in December, down sharply from $91.6 billion in November and failing to match the $65.7 billion December trade deficit. As a crude measure, net inflows that fail to balance trade outflows imply less demand for dollars and therefore suggest the potential for a slide in the US currency.’”

The reply continues, “I don’t think the economy is growing enough to prevent the meltdown. There are other things involved, like inflation, losing faith in the US dollar, geopolitical tensions, lowering real wages and job characteristics, costs of building materials rising, rising interest rates, regulators starting to work on lenders in being more responsible in lending practices, resetting of creative financing, ad nauseum.”

“This year, we have about $80 billion in loans that reset to a higher level, such as the ones with less-than-full-interest payments, interest-only payments, whatnot. Next year, $300 billion of loans are estimated to reset, then in 2008, $1.2 TRILLION (10%!) in these loans will reset. My former rentor (not a landlord, since she couldn’t afford to keep proper maintenance on the house) was forced to sell the house I rented from her. She got one of these loans. She had two houses, and she was a school administrator. I think she ended up having to get both houses off her hands.”

“I see a concern about people being here because they’re looking to buy a house after the real estate collapse. I’ll let you know that for as long as I can’t buy a house with cash, I won’t buy one. It could mean that I will die houseless after all, but who cares? I can’t take it with me anyway, and I have seen too much happen in just a few years time, LOOONGGG before you’re even half-way through paying for the house.”

A third reader added, “Don’t forget the yield curve inversions.”

The Boston Globe reports on the changes in that housing market. “According to data from New England’s largest real estate listing service, the number of single-family homes up for sale in the Plymouth-South Shore region recently was roughly double what was available at this time last year. Yet this week the Massachusetts Association of Realtors announced that sales of detached single-family homes fell 8.1 percent in the fourth quarter. It was the largest annual quarterly decline in home sales in nearly three years.”

“That’s quite a sea change for buyers, who now have a wider selection of houses from which to choose and more bargaining power. For sellers, it’s time for patience and possible loss because houses may sit on the market much longer than they had hoped.”

“A total of 2,131 single-family homes were listed for sale in the Plymouth-South Shore region, which includes 18 towns, on Jan. 31; up 49 percent from 1,429 properties at the same time last year. Real estate specialists say the relative glut of homes for sale this year indicates a balancing of the market.”

“Debra Kirby and her husband, Alan Fujii, have two houses. One is a in Hingham Center; the other is a Victorian with breathtaking ocean views in Hull. But they still carry the mortgage for the house in Hull because, even though the Victorian is the kind of property that can easily seduce, Kirby and Fujii are having a tough time unloading it.”

“Kirby and Fujii bought their new home for $595,000, $105,000 less than the asking price, a discount that would have been unheard of a year ago. At the same time, Kirby said she is surprised it has taken this long to sell the Victorian in Hull, which the couple put on the market in July. ‘I thought it would take two or three months, based on what the market had been like.’”

“Kirby pulled out a booklet with photos of the Victorian. On one page, the asking price of $997,000 had been scratched out and $967,000 written beneath it. The house initially was listed for $1.75 million. Now, the couple will take $949,000, lopping almost 46 percent off the original price. What a difference a few months make.”

“‘Sellers can’t expect a huge increase over the last sale on the street,’ George Cooper, regional vice president of the Massachusetts Association of Realtors said, ‘and buyers can expect prices are not going to jump dramatically.’”

“That’s stressful news for Kirby and Fujii, who are paying two mortgages and maintaining two houses. Kirby is trying not to let the situation get to her. ‘I can’t conjure up a buyer,’ she said. ‘You have to have confidence in your realtor, and that they know how to deal with the market, whatever it may be.’”

Post your housing market observations here! Some readers sent in this on Las Vegas. “A decline in new home orders by some of the nation’s large builders reflects a softening in the housing market that is being felt in Las Vegas, a local housing research expert said.”

“‘It’s softer than it was, the way it should be,’ said Dennis Smith, president of Home Builders Research, ‘because we all knew it was going to slow down sooner or later. We got away from talking about cycles and started talking about bubbles. The cycle is on the downward slope of the peak.”

The Naples news has this report on Floridas housing bubble. “With season in full swing in south Lee and Collier, the first signs of what a cooling-off of the real estate market here looks like are starting to emerge. The market is flush with sellers, many seeking to cash out on appreciation gains that have been among the highest in the country.”

“It’s a buyers market in the two-county area, ‘but the sellers don’t know it yet,’ said Joe Ballarino, a past president of the Naples Area Board of Realtors.”

“As of last week, there were more than 8,000 homes and condominiums on the market in the Naples area, almost as many as the roughly 8,900 that sold during all of last year, Ballarino said.”

“Carol Dicupero, an agent in Naples, said prices appear to be coming down daily, but buyers aren’t jumping in. ‘Buyers may be taking a wait-and-see attitude,’ she said. Downward price pressure is a function of how desperate sellers are to get out of the market.”

“The hundreds of units that have washed onto the market represent a sharp contrast to the fall when business and government leaders, worried about an affordable housing crunch, noted that there were less than a handful of units on the market for under $200,000.”

The Palm Beach Post. “Major commercial lenders are withdrawing from financing South Florida condo construction and conversion deals, another sign the overheated market may be too hot to handle. ‘We are seeing lenders overall pulling the plug,’ said Dan Kodsi, a developer in Boca Raton.”

“It’s not only lenders on the construction end who are newly nervous about risk. The federal government hopes to damp the sale of exotic home mortgages which enable even credit-poor prospective homeowners to buy. So, even if condo developers get financing, condo buyers may not.”

“The likely upshot: ‘There are many thousands of condo units announced as future projects or in the planning stages that will never get going,’ predicts Bradley Hunter. ‘They won’t even get to the starting line.’”

“You don’t have to be a real estate whiz to spot the early warning signs that condo financing is being hamstrung by everything from the high price of construction to skittishness over rising interest rates. ‘See how many are dark at night,’ said Jack McCabe of condos newly on the market. ‘There might be one light on for every 20 units. People are not living there. It is the height of the season, but they are sitting dark.’”

“Rebel Cook, a local broker, said, ‘People call me every day asking me to sell their properties.’ Real estate agent Darlene Delano said when she recently took a client to view a North Flagler condo, it was empty. ‘This is a four-story building and we did not see one person while we were parking, or on any floor,’ Delano said. ‘In fact, we didn’t see anyone from the time we walked in, to the time we left.’”

“Even ‘pre-sold’ buildings are struggling. That’s because would-be owners who put down deposits thinking they would secure a 2.5 percent interest rate mortgage are now facing rates of 5.5 percent and higher, just as the condo is ready for occupancy, and they have to sign mortgage papers. ‘Within the last three weeks, I have seen several reservation holders who walked away from earnest money deposits,’ McCabe said. ‘There was a fellow who had put over $100,000 down who walked away.’”

“The more optimistic believe that empty condos will ease the shortage of affordable apartments, as investors who can’t sell opt for leasing their empty units. Delano said she represents several people ‘who have bought units and now are unable to sell them, so they are contemplating renting.’”

“But, she said, most condo deeds restrict rentals. Further, ‘People are not going to be able to rent these out at anywhere near the amount needed to cover’ their costs, McCabe said. That’s because many of the new units were designed to appeal to the luxury market, and a lease big enough to cover seven-figure mortgages is out of reach for many renters.” “Balin agreed. ‘The numbers don’t work as a rental,’ he said.”