The Housing Bubble

Realty Times has this report from Sacramento. “The buyers market of 2006 has begun. Following years of a sellers market in Sacramento, many consumers are facing a more normalized market across the region. Sellers must learn a lesson early in a normalizing market; HOLD ON TO YOUR PROPERTY! Once the market begins to shift back to neutral and the price trend starts back in an upward momentum, sell!!”

“But If you must sell in this market, it’s time to price ahead of the market (that means get ahead of the price reduction curve). Pricing ahead of the market, makes many sellers cringe, but it’s the only way to get your home sold without it sitting on the market for a long period of time.”

And from the Santa Cruz Sentinel. “The home-buying frenzy of 2005 appears to be over, with the number of single-family homes sold in January, 107, setting a 10-year low for Santa Cruz County. The median price dropped for the third straight month to $729,500, That’s a significant fall from where it was last summer but still far out of reach for some buyers.”

“According to (realtor) Gary Gangnes, who compiles the figures, ‘the market has calmed down.’ One indicator, the Unsold Inventory Index, is at a five-year high but in the normal range for a stable market. The index stands at 7.3 months, representing the number of months it would take to sell all houses for sale at current rates. Normally this is six to seven months. By way of contrast, in December 2004, it stood at 1.8 months.”

“The Unsold Inventory Index stands at five months, a three-year high, while the number of listings is up 152 percent from the same time one year ago.”

“‘Sadly, this price is still way too high for faculty and staff at UC Santa Cruz,’ said Ted Holman, associate professor of chemistry. ‘Oh well, I hope this is a trend that continues. Lord knows this whole community needs lower housing costs.’”

Median price drops

June 2005: $785,000

July 2005: $755,000

August 2005: $780,000

September 2005: $749,950

October 2005: $767,000

November 2005: $789,250

December 2005: $739,000

January 2006: $729,500

The Bradenton Herald reports on a housing slowdown where they aren’t making any more land. “In the not-so-long-ago island real estate market, sellers had to do little negotiation and buyers had little power. But a larger inventory and leveling listing prices are more signs the real estate frenzy here is balancing out.”

“The number of active real estate listings jumped to 632 as of Feb. 13, compared to 431 at the beginning of the year, according to the Anna Maria Island Property Sales Report. Current listing prices have stabilized, or in some cases, fallen slightly. For instance, the average listing price of the 250 single family homes on the market is about $1.12 million, compared to $1.13 million a year ago.”

“The average listing price for condominiums has fallen nearly $20,000 from $819,339 in January to $799,575 in mid-February.”

“‘It is clear at this point that while we don’t see a broken bubble, where prices drop precipitously, we do see a flattening,’ said John van Zandt, a sales associate in Holmes Beach.”

“Pending sales during the month of January were significantly lower than the year before. For instance, there were 13 pending sales last month, seven of which had listing prices of $1 million or more. ‘We’re not going to have that frantic pace of sales that were abnormal, almost freakish,’ Barry Gould said.”

“But that doesn’t mean the area has lost any of its desirability, particularly now, which van Zandt characterized as a ‘heavy looking period.’”

“Gould believes the current slowdown will be beneficial in the long run. ‘We’ll look back years from now and realize it was a very good thing of getting more toward a level playing field for sellers and buyers,’ he said.”

News from Wall Street on the housing bubble. “Joseph Tomkinson, CCEO of Impac Mortgage Holdings, Inc. commented, ‘2005 was a challenging year for mortgage REITs across the board. Impac’s earnings came under pressure as the Federal Reserve continued raising short-term interest rates during the year.’”

“Furthermore, earnings decreased as the yield on new mortgage loans added to the investment portfolio did not keep pace with the steady increase in borrowing costs. Even faced with prepayment penalties, borrowers took advantage of the flat yield curve and competitive mortgage environment by tapping into housing price appreciation to refinance their mortgages.”

“William S. Ashmore, President and COO of Impac Mortgage Holdings, Inc., commented, ‘The MBA is predicting a decline of approximately 20% in total mortgage originations for 2006 and competition is expected to remain intense.’”

“Home builder Hovnanian Enterprises Inc. is seeing demand slow in certain markets as many other conventional home builders have been reporting, but is not seeing the sharp dropoff in orders luxury builder Toll Brothers Inc. recently posted. Orders declined 11% in the Southwest and 37% in the West but rose 17% in the Northeast and 61% in the Southeast. Analyst Dan Oppenheim said much of Hovnanian’s order growth was driven by acquisitions. If acquisitions were excluded, he said orders would be down 10%.”

“Oppenheim noted that the 61% order increase in the Southeast was largely due to the company’s recent acquisitions of Cambridge Homes and First Home Builders of Florida.”

The Wall Street Journal has this report on homebuilders. “Hedge-fund manager David Einhorn has a prediction about publicly traded home builders: ‘Slowing orders, reduced prices, reduced margins, slowing backlogs, it’s all going to come.’ And he’s one of the bulls.”

“Could it simultaneously be true that there is a housing bubble and that home builders are undervalued? he washout was bound to come, and now it looks like it may have started. Investors are beginning to panic. Toll Brothers, once the most admired home builder, warned in recent weeks that sales would disappoint. The stock is down almost 50% from its peak. KB Home has warned about cancellations and falling orders. That stock is off 25% from its top.”

“And the next stage could be big price cuts to move product. Credit Suisse analyst Ivy Zelman, a longtime bear who is finally achieving a measure of vindication, says that Centex is already running sales in select markets. ‘Depending on where the builder builds…a great tailwind now becomes a major headwind. It was a great ride up but it could be an ugly ride down,’ says Ms. Zelman.”

“Even while their earnings were skyrocketing and the shares were soaring, publicly traded home builders didn’t win investor respect. Home builders’ shares as a group are now trading at six times projected per-share earnings. That means only one thing, the market doesn’t believe the earnings. And at the heart of it, they fear builder bankruptcies, as happened in the early 1990s.”

“That’s why the bulls need this housing slowdown. They are expecting that the companies will be able to have some earnings growth, grab more market share, and throw off enough cash to buy back stock to shore up their share prices. ‘For five years, we’ve been waiting to see how bad it’s going to get. It’s honest now. We are going to find out whether bears are right and there’s no business at the bottom, or I am right and there’s a good business and good earnings at the bottom,’ says Mr. Einhorn.”

“How bad is it going to get? Ms. Zelman sees a substantial profit squeeze coming. Over the past year, home-builder operating-profit margins were around 17%; she thinks those margins will fall in the next three years and eventually return to a more typical 10%. investors can’t take solace in builders that are more geographically diversified. That’s because many of the home builders have profit concentration.”

“KB Home sells in the Southeast, Midwest and West Coast. But Ms. Zelman estimates that about three-quarters of its profits come from selling houses in booming Las Vegas and California. Even if other markets pick up the slack, the profit margins on homes sold in Texas, for instance, are much lower.”

The Baltimore Sun reports on the realtor bubble in that city. “Lured by the opportunity to get their piece of escalating housing prices and record sales volumes, newcomers have flooded into the real estate business in the past five years. But as the market loses some sizzle, so do classes to license new real estate professionals, as aspiring and neophyte Realtors alike realize that the money may not be as easy as it once was.”

“Evidence has been mounting for several months that the market is slowing. Sales in the Baltimore metropolitan area fell 19 percent last month, with double-digit declines in the city and all five surrounding counties. Prices, too, are slipping, with the average down more than 6 percent from its July peak.”

“‘I’m actually surprised it’s taken as long as it has for some people to realize they’ve gotten into something more agonizing than they thought it was going to be, for the money you can make,’ said Colin McGowan, director and owner of the Frederick Academy of Real Estate.”

“Statistics from the NAR bear that out. The median income for sales agents dropped to $38,300 in 2004 from $44,100 two years earlier, according to the NAR. The decline is largely attributed to the number of newcomers. As of Jan. 31, Maryland had 29,718 Realtors, up 15 percent from a year earlier and about 75 percent from 2000.”

“Stacey Ingerson left the business in August, just as the local market was passing its peak, after about a nine-month stint as a realtor. She sold two houses. ‘I quickly realized it wasn’t something I was going to do well in,’ she said. ‘I just didn’t think it was a fit for me and my personality. I hate cold calls, and that’s a huge part of it.’”

“Instead, seeing that the market was shifting in favor of buyers, Ingerson started a company that helps sellers fix up their home for sale. ‘I wanted to have my business up when the market did even out a little more,’ Ingerson said. ‘I figured it might not be such a hot market for sellers. They might have to clean the smells out of their refrigerators and uncover the fireplace that they blocked or clean the dining room area that’s full of toys.’”

The Boston Globe has the latest on the bursting condo bubble. “With a wave of new condominium units now available in Greater Boston, real estate developers are offering incentives to boost sales and move hard-to-market units. Developers are often willing to pay closing costs, forgive monthly maintenance fees for a year, or throw in amenities such as free hardwood floors.”

“These incentives are rarely advertised, but buyers, sensing that the leverage in negotiations is shifting in their favor, are bargaining harder for extras.”

“‘All of a sudden, in the last year, there are so many projects that we haven’t really been facing this kind of surge of units and projects in the city before,’ said Lili Banani, a Back Bay agent. ‘There’s a lot of competition, and that’s why you see more of these incentives.’”

“The market for single-family homes in the suburbs slowed considerably in 2005, but Boston’s condo market remains strong. Yet there are currently about 1,350 downtown condos for sale, up from 880 a year ago. And the pipeline is full of new construction and apartment-to-condo conversions. The Boston Redevelopment Authority recently estimated that 14,000 residential units are under way or approved, and, over the next five years, an estimated 1,000 new units will come on the market annually. That’s on top of existing units that would come on the market due to normal turnover in the real estate market.”

“In June, Jerry Greeff helped his 25-year-old son, Adam, purchase his first property, a $322,000 unit in the complex. That deal included the $2,000 sweetener. The developer also pitched owners in the building on buying a second unit. That was ‘the farthest thing from my mind,’ said Jerry Greeff. But Sullivan sold the Greeffs on a second unit on a higher floor by cutting the price $30,000, to $397,000, and giving them $3,000 for closing costs.”

“Some developers are hesitant to disclose specific incentives, for fear of sounding eager to give money away, a fear that conflicts with their desire to send a clear message that they will accommodate prospective buyers. ‘We’re definitely willing to talk,’ said Kevin Lewis.”

And prices are falling in Atlantic City. “With home prices throughout Atlantic County continuing to pull in high double-digit appreciations, a financial data and services group is labeling the area ‘extremely overvalued.’”

“Daniel Maloney, an agent in Atlantic City, defended prices for Boardwalk and beachfront properties in Atlantic City, but did concede that some mainland communities are overpriced. ‘I will admit that places like Mays Landing, Absecon, Egg Harbor Township, where large tracts of land have created a lot of competition for development, are seeing increases that might be an overvaluation,’ he said. ‘There is room for adjustment out there, I would say.’”

“Agents and brokers in the Ocean City area are now saying the market’s valuations retreated by about 10 percent recently.”

“Richard DeKaser, chief economist with National City Bank, won’t call the overpricing a bubble, but said the 58.6 percent overvaluation puts the area at risk of a price correction. The report noted its recent softening. From June to September, the area’s overvaluation dipped from 54.8 percent to 46.7 percent.”

“‘In fact, we saw this for the first time in the third quarter for many markets. The decline in degree of overvaluation, which is not to say it corrected itself, is falling. It suggests that we may no longer be in a rising tide with all areas going up together. Some of the hotter markets might be hitting their ceilings,’ DeKaser said.”

A television station in Florida reports on price reductions. “The days of sitting on property for a few months and selling it for a big profit may be over. Some of Southwest Florida’s biggest names in real estate are about to announce the effect of more than 16,000 homes on the market in our area.”

“Joan Cutler sold more than $6 million in property last year. This year, business is slowing down. ‘I think people got spoiled in Cape Coral that you put something on the market and somebody called and you got a listing and a contract and sold in a couple of weeks and that’s not happening anymore,’ said Cutler.”

“It’s not just the Cape, it’s happening all over Southwest Florida. Realtors explain more properties are listed for sale than are selling. The reason this is called a buyers market is because there are lots of homes being built and that means you’ll have plenty of selection.”

“Cutler says sellers are dropping their prices. ‘There are between 400-700 price reductions going through a day,’ said Cutler.”

“‘684 price reductions in Cape Coral alone in the last 24 hours,’ said Mishelle Montgomery. Montgomery is selling her salt water canal home. Last year, it may have sold in days, now she’s waiting. ‘October, the very beginning of October and we had no idea we’d still be sitting here today having not sold our home,’ said Montgomery.”

“‘We’ve lowered our price $70,000 and we will probably have to lower it even more,’ said Montgomery.

“Realtors like Cutler say it’s a leveling off. ‘If people will come to that realization that they’re going to be getting a little less, their homes will still sell,’ said Cutler.”

“Vacant land is still selling, but the prices are also coming down. One realtor said sellers who have reduced their prices slightly have sold in a few days. If you want to get that higher asking price, you may have to hold onto it until the extra number of homes are bought up and people are looking to build again.”

The Columbus Dispatch reports on lawsuits in Ohio. “Add two class-action lawsuits to the challenges facing Dominion Homes. In a coincidental one-two punch, homeowners in three subdivisions filed lawsuits yesterday against the Dublin-based builder. The lawsuits, filed in different courts, could affect thousands of Dominion customers in central Ohio.”

“‘Buyers always are going to be suspicious from this day forward,’ said Delaware resident Jim Newton, the chief economic adviser for Commerce National Bank. ‘To dig out of this kind of mess is pretty tough.’”

“Clifford and Shannon Rece and Christopher and Amanda Endl, who live in separate Far West Side subdivisions, say their houses are overpriced because purchase and financing incentives were wrapped into the cost. ‘The effect of the scheme employed by Dominion Homes is to sell homes ..worth far less than the amount financed and less than the amount of the appraisal,’ says the lawsuit.”

“Residents at the subdivision in southern Delaware County filed the other lawsuit because their FHA loans were converted secretly to mortgages for borrowers with poor credit. Stephanie Stuart, Amy and Scott Rudawsky, and Michelle and Jeffrey Beard were ‘tricked into purchasing a home which lacked the resale benefits of an assumable FHA mortgage,’ Zanesville attorney Gary M. Smith wrote in the federal suit.”

“The Reces and Endls blame Dominion for the drop in home values in Galloway Ridge and the Village at Galloway Ridge. The lawsuit contends that Dominion artificially pumped up the prices of its new homes to cover enticements such as down-payment assistance and interest-rate subsidies.”

“Out of 17 sales last year in the Village at Galloway Ridge, only one homeowner made a profit. The median loss was $23,099. In Galloway Ridge, of the 38 houses that sold last year, 25 were sold because their owners fell into foreclosure or bankruptcy. Only 11 home sales showed a profit.”

“Dominion has acknowledged that property values have declined in those two subdivisions but has blamed the problem on economic forces. ‘It’s not necessarily driven by mortgage lenders or practices,’ Dominion Vice President Thomas Hart told Galloway Ridge residents on Jan. 31.”

“However, The Dispatch has received e-mails and calls from residents in 20 other Dominion subdivisions in central Ohio who said their neighborhoods also were losing value and plagued with foreclosures. Also named in the suit are appraisers and charitable organizations that give down-payment grants that are later reimbursed by Dominion. Appraiser Michael M. Baciu, whose company, is named in the suit, declined to comment.”

“The suit also accuses National City Mortgage of fraud. The Miamisburg-based lender agreed to buy FHA loans from Polaris Park borrowers but has said it returned them to Dominion when the insurance backing was denied.Dominion recently offered the residents a $2,500 settlement if they promised not to sue the company. It’s unclear whether anyone accepted.”

“Their attorney wrote that the homeowners ‘have suffered actual damages, including but not limited to the value of an assumable mortgage, a lowering of the home’s resale value due to their inability to sell a starter home to an FHA buyer, (and) lost FHA insurance premiums.’ Both cases will take months if not years to resolve.”