The Housing Bubble

Jonathan Lansner at the Orange County Register takes a blip versus bust look at recent price trends. Let’s see how his bearish side looks. “You’ve probably heard the news about Orange County’s housing stumble. In January, the median sales price for all types of residences, new and old, fell under $600,000 for the first time in eight months, according to DataQuick.”

“January is an odd month. Home prices have fallen from December to January in 17 of the past 18 years. January’s 6.3 percent decline was practically twice the historical January drop. And if you’re talking 2002, don’t forget that fixed mortgage rates fell from 6.5 percent in January of that year to 4.8 percent by June 2003. Cheap money like that is long gone from the housing scene.”

“The median sales price of all residences last month was 9 percent higher than January 2005. January was the second-slowest month for the appreciation rate in six years. Only May 2005 was less.”

“The median sales price for an existing, detached home peaked back in August at $675,000. Few folks can afford these prices. Sales trends prove it. Total sales of single-family homes in January were the smallest count since February 1997, when the housing’s current winning streak started.”

“Orange County’s smaller, cheaper condos have appreciated 299 percent in the nine years ended in January vs. an overall gain for all residences of 214 percent. Condo popularity shows just how few people can afford a traditional home in this market.”

“In January, 72 percent of Orange County’s homebuyers chose adjustable-rate loans to finance their deals. That’s the lowest use of these loans since May 2004. This drop is likely due to buyers’ reluctance to take on the risk of a double whammy: falling prices plus soaring adjustable mortgage payments.”

“Local lenders filed 384 notices of default in January, the first official step toward foreclosure, the highest since February 2003. In the last 12 months, Orange County defaults grew by 15 percent. That’s the fastest growth rate since November 1996.”

The FOMC minutes came out today. “Federal Reserve policy makers, in Chairman Alan Greenspan’s last interest-rate meeting, said more rate increases may be needed because inflation has been ’somewhat higher’ than acceptable, minutes of the session showed. ‘In the view of some members, the possibility of additional policy moves was reinforced by readings on core inflation and inflation expectations that were somewhat higher than was desirable over the long run,’ the Federal Open Market Committee said in documents released today in Washington.”

“‘The risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path,’ and may put ‘further upward pressure on inflation,’ Ben Bernanke told House and Senate panels last week in his first congressional appearance since becoming chairman. ‘In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur,’ he said.”

“While a sharp slowdown in housing would spell trouble for the economy, the Fed minutes suggested that the most likely outcome was a gradual moderation. That was also consistent with the message Bernanke delivered to lawmakers last week.”

Danielle DiMartino had this at the Dallas News. “Now that the air is coming out of the (housing) market, many are offering soothing reassurances that the landing will be ’soft’ and not spill over into the broad economy. Should we be lulled into a sense of comfort?” “I dare say our new Federal Reserve Chairman Ben Bernanke would answer no, at least for now. In last week’s congressional testimony, Mr. Bernanke hit on many of the red flags the data have raised recently, purchase activity is down, inventories are up, price gains have cooled, and it’s taking longer to sell a home. Encouragingly, he vowed to keep a close eye on the housing market.”

“The following are relevant to the direction of interest rates: Freddie Mac just released figures that showed homeowners withdrew a record $243 billion in cash from their homes in 2005, $100 billion more than the prior year. Mr. Bernanke’s advisers will point out that this money was a result of home price gains alone, not declines in interest rates, which rose throughout 2005.”

“An estimated $2.5 trillion of household debt is set to reset at higher interest rates in 2006. Given the higher level of interest rates, it is safe to say debt-service costs will easily exceed their current record 13 ¾ percent of after-tax income. Homebuilders have warned in recent weeks of declining sales, contract cancellations, falling prices and earnings misses.”

“Foreclosure activity was up nearly 16 percent in the fourth quarter in red-hot California. Dallas-area foreclosure postings were up 17 percent in the first quarter over the same quarter of 2004.”

“Housing inventories have more than doubled in such key markets as Washington, D.C., Miami, Los Angeles, Manhattan and Boston. The next two years will prove a critical test for the subprime market, which is six times bigger than it was 10 years ago, as monthly payments reset at much higher interest rates.”

“The biggest irony for Mr. Bernanke as he mulls which way to steer monetary policy is the pressure exerted on his decisions as a result of the housing boom. Builders broke ground on a record number of homes in January and consumer spending came in at three times economists’ forecasts. The resultant economic strength will all but necessitate the Fed to keep raising rates.”

The Daily Star has some housing bubble news for Tucson. “After a year of Tucsonans rushing to sell their homes to take advantage of soaring profits, it’s now a buyers’ market. More Tucson-area homes were on the market last month than at any time in the past nine years, new numbers show. There were 6,499 homes listed for sale on the Tucson Association of Realtors MLS in January, an 87.3 percent increase over January 2005. And the number is going up fast: January’s figure represents an increase of 1,042 homes over December.”

“Last year’s housing frenzy, characterized by frustrated home buyers and some homes being snapped up within hours of being listed, is over, experts say. Buyers can now take a little time in looking for homes and feel comfortable sumbitting bids at, or even below, asking price.”

“The jump in the number of homes listed even surprised Paul Olson, president of the MLS. ‘We knew it was going to increase, but we had no idea it was going to double,’ Olson said. ‘Sellers are getting a little more anxious.’ He called January’s listings a ‘historic high’ dating back to January 1997.”

“There’s no clear explanation for the jump, Olson said. Last year’s real estate boom lured hundreds of new agents into the market. Individual homeowners may be trying, only too late, to cash in on a heated market. The high inventory may be caused by investors dumping their inventory, said John Strobeck, a Tucson housing analyst. Investors appeared to start pulling out of Tucson’s market in October, when Strobeck said he saw individuals and limited-liability companies were selling multiple homes at the same time.”

“So far, the increased competition isn’t pushing down prices. The median price of a home sold in January was $215,875, up 23 percent from January 2005. January’s figure decreased 1.9 percent from December’s median price of $220,000.”

“Signs of a market slowdown go beyond the number of listings, said (broker) John Rock. New home builders are courting real estate agents and buyers alike with incentives. ‘They’re offering help in closing costs. One is offering $10,000 in upgrades,’ Rock said.”

“Some sellers, hoping to cash in, turn away from agent suggestions that they should lower the selling price. ‘They don’t want to hear what the Realtor is telling them,’ Rock said. ‘Tucson’s always had a great real estate market. It just got thrown out of whack last year by real estate investors.’”

“And timing is everything, said Kristine Lowden, one of Rock’s clients. She is selling her home near West Linda Vista Place and North Thornydale Road and has bought a home near North Shannon and West McGee roads. She listed her home for sale at $282,000 in October. It finally sold last week for $265,000. ‘I got frustrated toward the end. I mean, I knew it would sell. I wasn’t too concerned about that, but I was concerned about, ‘Gee, how much am I going to have to come down on the price?’ Lowden said.”

“She wonders if she could have sold for more if she had listed the home only a few weeks earlier. ‘I think I just missed the window of opportunity,’ she said. The slowing market also worked in her favor when she bought her new home for $224,900, about $5,000 below asking price.”

Bankrate.com fields a question from a disenchanted homeowner. “Q: Four months ago, I signed a six-month listing contract to sell my house with a big local real estate office. I think it was a mistake. They’ve only gone through the motions, and didn’t bring a single offer, showing my home just twice in a fairly hot market. Now, I’m getting calls from them, saying the price is too high and I should cut it. If price was my only weapon, heck, I could have gone FSBO.”

“A: Your best option at this point, unless you desperately need to sell your home immediately, is to wait out the balance of the contract and shop around for a new brokerage. But that won’t necessarily strike at the root of the problem. While there’s certainly a chance your agent is a slacker, there’s a better chance your home is, well, a tad overpriced.”

“Anyone who’s been in the real estate business for a while will tell you that the most common reason a property isn’t selling or being shown is a too-high asking price. Think about it: If your agency thought there was a good chance of selling your home at or near your asking price, it wouldn’t be trying to talk you down, they’d much rather hold out for that higher commission check.”

“I presume your home is priced above the area ‘comps’ that your agency should have compiled for you in a comparative market analysis. Sometimes, if such higher-than-market homes do attract suitors, the deals can disintegrate when buyers have trouble securing financing. For example, if present market conditions and comps for the past six months don’t support your asking price at the bank, the home will not appraise favorably for a home loan.”

“Be careful trying to hold out. If your house remains on the market too long, it might actually get harder and harder to attract good offers. After a while, buyers may assume you’re getting desperate and will try to lowball you. Also, it doesn’t sound as if there have been many, if any, buyer’s agent tours of your house. In the first couple of weeks after it went on the market, there should have at been at least a few such agents dropping by to preview your place for their clients.”

“The price may have kept them away. If buyer’s agents are not bringing potential buyers around it could be a good indication they, too, think your house is priced too high.”

“If you do plan to change agencies, interview three different ones and get estimates on your home’s price range. But don’t just pick the one that best agrees with you. Sometimes, agents will use that tactic, all the time intending to talk you into lowering your price later.”

Realty Times reports on the Silicon Valley housing bubble. “Silicon Valley’s housing market is rearing its volatile head again. Consumers are bailing out in numbers reminiscent of the area’s last major housing market downturn, but is it a buyer’s market?”

“Buyers are negotiating down list prices, but rising interest rates and median home prices stuck at record levels are preventing more buyers from cashing in. Rather than a buyers’ market, it’s more like a ‘buyers aren’t buying’ market.”

“‘Basically, the buyers have gone away, causing the number of transactions to be at or near record low levels. This is across all four counties that I track. This indicates that it is a fairly broad change and not localized,’ said Richard Calhoun, broker owner in San Jose.”

“Calhoun’s statistical report compiled with data from the area’s official MLS, reveals in Santa Clara County (Silicon Valley) there were only 661 closed sales on single-family homes in January 2006, down from 970 in December and down further from 839 in January 2005. Since 1998, only January 2001 had fewer closed sales, 599. The next lowest was January 2000 with only 719 transactions, he said. There were only 283 closed condo sales in January 2006, down from 352 a year earlier, Calhoun reported.”

“‘Offers accepted, or initiated sales (for single-family homes) were way down also, at only 811 (for January 2006). Only January 2001 had fewer, at 761. So 811 is significant and it means February closings will be way down,’ said Calhoun. As sales fell, inventories swelled to 2,229 for single-family homes, up from 1,547 a year ago. The number of condos for sale has nearly doubled in the last year moving from 440 in January 2005 to 825 in January this year.”

“‘Buyers are a lot smarter then they have been in past years. They are doing their research and waiting for the ideal time to get into this market. This is really going to turn into a buyers’ market. We will see homes on the market for much longer than we have seen in the past and we will also see buyers really taking their time to shop for that perfect home,’ said Shawneequa Badger, a real estate agent in San Jose.”

“But a bona fide buyers’ market needs, well, buyers. The big sticking point in putting the ‘buy’ in a buyers’ market is the cost of housing. That’s because falling prices, often a key component in a strong buyers’ market, haven’t appeared. The median price in January was $740,000, up from $664,000 a year ago, and not much off the peak median price for single family homes reached twice last year, $760,000. Buyers don’t appear to be buying it.”

The Arizona Republic reports on the flippers in Phoenix. “The housing market may have cooled but not the enthusiasm for investing in Phoenix area real estate. About 1,000 investors and would-be investors spent the weekend at Phoenix Civic Plaza learning how to find cheap properties and then ‘fix and flip’ them.”

“The crowds heard tantalizing tales from investors who picked up distressed properties cheap, fixed them and resold them for solid profits. The fact that housing prices have stabilized or even fallen in some areas and the number of homes for sale has risen significantly in the past few months didn’t seem to cool interest.”

“‘It does affect the short term. I think the heat is going to come out of the market a little bit for not long and not much,’ said Phoenix investor Dolf de Roos as he signed copies of his new book 52 Homes in 52 Weeks about his success investing in the Las Vegas housing market. He was the featured speaker Saturday night at the event, sponsored by the Arizona Real Estate Investors Association.”

“He said that even if housing prices come down by 5 or 10 percent, investors still came out ahead because the prices had grown by about 40 percent last year in the Phoenix area. ‘If it was the stock market, that would be a minor correction,’ he said. ‘So what’s the big brouhaha? In five years, it’ll be way ahead of where it is now. I am not worried about it, not with 100 houses being built and filled every day.’”

“Investors have been blamed for, or credited with, causing the huge run-up in housing prices over the past year. But Alan Langston, executive director of the Arizona Real Estate Investors Association, said it wasn’t investors who did that but short-term speculators. True investors make their money over the long term, while speculators like to hold property for several months or a year, he said. Many have moved on to other states, such as Florida and Texas, he said.”

“David Lindahl, a Boston-based investor, said he has earned a lot of money owning apartment complexes. Dealing with tenants was a hassle at first, but then he learned to hire good management companies. He said tenants expect you to raise rents every year. Don’t disappoint them; raise that rent, he advised.”

“The conference lured amateurs eager to make money, including some who have not owned a home, such as Steve Reppe, 23, a University of Arizona student. ‘I used to work really hard when I was in the Army for not much money,’ he said. ‘Why not work less hard for more money?’”

“Ekaterina Glover, 23, a Phoenix resident, said she has been reading books about real estate investing and realized that many mentioned Phoenix. She dreams of getting rich in real estate. ‘I do not have a stable job history or a credit history,’ she said. ‘But if you’re enthusiastic and happy to learn, you can make it.’”

“Valerie Walters wants to invest and has been studying up on it for years. ‘I am tired of reading and ready to get my feet wet,’ she said. LeBertha Umbreit, a former Realtor who has been a Phoenix lawyer for two years, has learned from representing people in real estate transactions that there is a lot of money to make in real estate. ‘Real estate is still the best investment around,’ she said ‘You can get into real estate investing with virtually no money.’”

The Orlando Sentinel follows up on the latest inventory numbers. “The Orlando Regional Realtor Association reported Monday that the record 12,015 existing homes for sale in January in the core Orlando market was nearly four times the number available a year earlier. And most of those homes hit the market in January, when members entered 6,172 homes, compared with 2,970 in January 2005.”

“When Taffie Prince placed her Apopka home on the market last fall, she figured it would be snapped up within weeks. Four months later, she’s still waiting. And the asking price has been lowered by $5,000 in the past 90 days to $154,900. ‘I was told the quarter-acre of land would sell the house. But it’s still for sale. I don’t know what else to do,’ Prince said.”

“‘It’s getting a little scary,’ said Franco Ferrari, co-owner of the agency listing Prince’s three-bedroom home. He said his sales staff of fewer than 10 agents is ‘lean,” yet the slowdown has agents working harder and seeing fewer purchase offers per home.” “If the growth rate in home sales continues to slow for much longer, he said, large agencies that added significantly to their staffs in recent years will begin to shrink.”

“Jerry Smith, 58, a retiree in Lake County, has had his former home in north Apopka on the market for about five months and has cut the asking price from $400,000 to $320,000. The competition for sales is heating up, he said, with two other homes on his road sporting for-sale signs. ‘The signs are popping up everywhere,’ Smith said.”