February 24, 2006

‘It’s Now Every Greater-Fool For Himself’

Desk clearing time for this blogger. “With some 30,000 to 40,000 hotel rooms planned for the Strip by 2010, Las Vegas is about to undergo its biggest growth spurt in history. That doesn’t include the more than 50,000 condominium units planned across the Las Vegas Valley, though many doubt whether most of those projects will actually be built.”

“‘Anything less than a high end condo project will not get built in our opinion,’ Dick Rizzo said. ‘There’s no market for it, there’s no capacity to build it and the numbers don’t work.’ As for the demand side of the equation, experts are debating whether there’s enough luxury buyers who can afford these $1,000 per square foot units. Paying $800,000 to $1 million for an 800-square-foot suite is a lot of money outside of New York or San Francisco. Those who may have the money may not want a condo with a kitchenette, anyway.”

“Marc Falcone reported a ‘dramatic slowdown in residential sales,’ from 4,000 to 5,000 units per month during the peak of the condo frenzy to about 400 to 500 units per month.”

One big story of the week was the mortgage layoffs. “A major transition is underway in the U.S. mortgage lending industry, with consolidations and lay-offs at the forefront as companies try to deal with waning demand for home loans. This shift is expected to pick up steam in 2006 if the housing market, as widely expected, cools off from its record-breaking five-year run.”

“‘There are some very important signals emerging in that we have seen some pretty good companies go on the block for sale or have been sold recently, which is a clear sign that consolidation is seriously underway,’ said Douglas Duncan, chief economist at the MBA.”

“Even the larger firms are poised for a downturn. Countrywide Financial Corp., the largest U.S. mortgage lender, recently announced it plans lay-offs for sometime this year, partly in response to lower profits on sales of mortgages.”

“According to Duncan, lenders have been holding ’slowdown’ meetings with their employees, a move he said historically coincides with a turn in employment.”

Inman News, “So, what’s the chance that housing will slow enough to bring true the PIMCO prediction, and knock interest rates back down? A few early signs are right on slowdown track: new-construction condos are the traditional favorite of speculators, and it’s now every greater-fool for himself on both coasts. Inventory-to-sales ratios are deteriorating in most of the used-to-be-hot markets.”

“Psychological shock is unfolding in slow motion: since the rollout of ARMs in 1980 there has never been a sustained rise in ARM rates. PIMCO’s slowdown case is built on the simultaneous impact of flattening home prices, no new equity to extract, rising house payments, and still-high energy costs.”

Here’s a snippet from the report on Fannie Mae. “Mr. Rudman said his team had not uncovered evidence that Mr. Raines deliberately embarked on a course of violating the accounting rules to win larger compensation, although the report found that Mr. Raines had met with Ms. Spencer and Mr. Howard in early 1999 to discuss the plan of deferring $200 million in expenses.”

“‘For 1998, I’m reasonably confident there’s enough in the ‘non-recurring earnings piggy bank’ to get us to $3.21,’ Mr. Small wrote. ‘While that number should satisfy investors, you should be aware that last year the A.I.P. paid out just short of the maximum. This year, the maximum is $3.23, so at $3.21, the bonus pool will be noticeably lower than in 1997, a fact which will, of course, be rapidly observed by officers and directors come January.’”

“The Houston Association of Realtors revealed to HoustonRealNews today that the strength of the Houston market may be directly attributable to the increase in real estate investor activity. The number of available homes (active listings) at the end of January was 40,814 properties, which was a decrease of 1.3 percent versus last January. The figure was an increase of approximately 900 properties from last month though. Total property sales for the month totaled 4,584.”

From the Business Journal. “It seems that the real estate buying frenzy in the Central Valley and in other parts of the state is beginning to slow down. The long lines of buyers at new housing subdivisions aren’t that long. In fact, some developers are offering buyers special incentives.”

“In California as a whole, a total of 38,300 new and resale houses and condos were sold statewide last month according to DataQuick. That’s down 27.5 percent from December and down 9.5 percent from January 2005. The housing trend in the Bay Area where median house prices are some of the highest in the state, could be a sign of what’s to come for the rest of California. Last month DataQuick reported that sales dropped in the Bay Area to their lowest level in five years, where sales were down 20 percent this January compared to January 2005.”

“‘We won’t know for another couple of months if this is a lull in the market or part of a longer-term downturn. The March numbers will tell us much more about what’s going on,’ Marshall Prentice said.”




“A Much Needed Adjustment’ In Tucson

The Arizona Daily Star has this opinion piece on the recent housing market. “‘In all things, there is a law of cycles.’ The wise words of the Roman historian Tacitus from 1,900 years ago apply to this week’s news that more Tucson-area homes were on the market last month than at any point in the past nine years. This is a positive sign that the market is shifting from fast and furious to more realistic. It’s cyclical and a much-needed adjustment to avoid overpricing of property.”

“The Star reported that the Tucson Association of Realtors MLS listed 6,499 homes for sale last month, up 87.3 percent over January 2005. The January report also showed an increase of more than 1,000 houses listed over December.”

“In the last year or so, it was not uncommon to hear stories of houses being on the market for 20 minutes before several contracts, all trying to outbid one another, were on the table. That’s yesterday’s news.”

“More listings equate to more choices for buyers, said (realtor) Sherie Broekema, who’s been selling real estate for 30 years. Sellers who inflate the initial sale price of their home, say 10 percent to 15 percent more than the comparable sales in their area, and expect to be overwhelmed with offers, will be disappointed. The shift is a good thing for home buyers, Paul Olson said.”

“‘Remember, in January 2005, we were in the midst of a buying frenzy.,’ Olson said. The buying frenzy was partly fueled by a shortage of homes, Broekema said. Homes in a number of subdivisions developed in the last eight to nine years are appearing on the resale market. There still may be shortages in some areas and price ranges.”

“In addition, California investors purchased as many homes as they could, especially from new construction, she said. Tucson home prices have increased, the profit margin for rentals has dropped and many Golden State investors are buying in other states with lower housing prices.”

“We’re not saying that sellers shouldn’t make money, but a prosperous local economy depends on a buyers and sellers working together to place real value on property and remove unnecessary risk from the home buying experience.”




New Home Cancellations Sign Of ‘Underlying Weakness’

CNN has this report on new home cancellations. “Home builders are growing concerned about an increasing number of cancelled new home orders, which experts say could be a sign of an underlying weakness in the recent run in home prices.”

“The cancelled orders could be the latest warning sign that buyers who were turning to real estate as an investment, rather than for their own housing needs, are shifting out of real estate. And that could mean that in many hot markets, the air is about to come out of over-inflated real home prices overall.”

“A survey recently conducted by the NAHB of its members found one in 5 reporting more cancellations than six months ago, with 4 percent of the overall group saying the increase in cancellations has been significant. ‘When you start to see cancellations, you really get worried,’ said David Seiders, chief economist for the trade group.”

“Typically, a downturn in a local economy can cause a drop in real estate prices and an increase in home order cancellations. But the trade group’s survey found only 15 percent citing job losses by buyers as a cause for the cancellations. The survey, which allowed the builders to cite more than one cause for cancellations, found 45 percent saying it was due to a buyer’s inability to sell their existing home and a third citing the buyers not being able to qualify for financing.”

“But Seiders and others say a big concern is a factor not cited on the survey, the fear that cancellations are being driven by real estate investors who were ordering new homes with the intention of selling them quickly in a hot real estate market.”

“An investor-buyer..is more likely to cancel an order, even if they lose some deposit money, if they believe that the local market prices have fallen enough that walking away is more cost effective than buying and selling the home. The flight of investor-buyers from the housing market and the increased cancellations could therefore push real estate prices lower in different markets.”

“‘If you’ve overbuilt the market and sales get cancelled, you have to do something with the homes,’ said Seiders. ‘The incentives we’re seeing builders offering are clearly designed to support prices and stop cancellations.’”




N Virginia Home Prices Fall With Surge Of Inventory

Reader sent in some statistics on Virginia’s housing bubble. “Although the number of single family homes and condos sold in January was down by almost 30% when compared to 2005, the average sales price did top the 2005 January average sales price by 10.3%. Active listings increased dramatically when comparing homes on the market in January 2005 versus January 2006, with a 392.5% increase.”

“Sales prices for the first month of 2006 in Greater Northern Virginia (including Prince William, Loudoun, Fauquier, Culpeper, Madison, Clark, and Rappahannock counties) also followed an upward trend as did closer-in Northern Virginia region. Units sold were 28.1% below January 2005 levels with 2,292 units sold in January 2006. Active listings were up 330% when compared to the number of listings in January 2005.”

“The average sales price was up 13.4% from the January 2005 average of $440,426 to the January 2006 sales price average of $499,456.”

But from the December report. “Sales prices in Greater Northern Virginia followed the same upward trend as the closer-in region. The average sales price was up 18% from December 2004 at $525,274 for December 2005.”




GSE Portfolios: ‘Legacy Of The Decade Of Abuse’

An account of the ‘internal’ investigation of Fannie Mae showed up in the Australian press. ” The $US11 billion accounting fraud at Fannie Mae stemmed from an ‘earnings at any cost culture’ and the US mortgage giant still posed a systemic threat to financial markets, Randy Quarles, undersecretary for domestic finance at the US Treasury, said.”

“A 17-month internal investigation into Fannie Mae’s accounting practices, released on Thursday, exposed no new irregularities and did not implicate any of the government-sponsored enterprise’s current management.”

“Mr Quarles renewed criticisms that Fannie’s $US1.4 trillion portfolio was not justified by its government mandate of promoting the spread of home ownership, and said any reduction in the portfolio could be staggered over time and need not disrupt financial markets. ‘The large portfolio is the legacy of the decade of abuse,’ Mr Quarles said. ‘We might have a better controlled and accounted-for systemic risk now, but it is still a systemic risk.’”

“He acknowledged that the report had found that the accounting violations and corporate governance deficiencies were being repaired, but insisted: ‘The broad systemic risks inherent in the retained portfolio that was at the heart of the process remain unchanged.’”

“Concerns about the errors at Fannie and at Freddie Mac, its smaller rival, have led to congressional attempts to toughen the monitoring of the two, which are the biggest bond market borrowers in the US after the federal government.”

“The 2652-page report did not find evidence that the accounting irregularities were associated with a desire to maximise executive bonuses, except in one instance, but were instead ‘motivated by a desire to show stable earnings growth, achieve forecast earnings and avoid income statement volatility.’”

“Employees in crucial accounting positions ‘were either unqualified for their positions, did not understand their roles or failed to carry out their roles properly,’ it said. Accounting systems were also ‘grossly inadequate.’”

“The report found Fannie’s former chief financial officer Timothy Howard and former controller Leanne Spencer to be ‘primarily responsible’ for the poor accounting. However, it cleared Franklin Raines, who was forced to resign as chief executive when the problems came to light, saying he did not know about the irregularities, although he had contributed to a culture that improperly stressed stable earnings and steady growth.”




FSBO’s Fizzle In Orlando

The Orlando Sentinel reports on ahousing bubble trend. “Last year, 29 percent of the homes sold in Orlando were by owners, according to the Orlando Regional Realtor Association. That’s more than 10,000 properties, and, while there isn’t any historical data, it’s surely a record. My prediction? That percentage will head south, way south.”

“Last year, Orlando was one of the hottest real-estate markets in the country. And the thing with FSBOs is that they blossom in a seller’s market, because there really isn’t much selling you have to do. And, now? This is a buyer’s market, with lots of browsing and shopping around. Realtors are having a tough time, too. Some have wondered if agencies that staffed up during the heyday will eventually shrink.”

“In January alone, more than 6,000 homes were listed, about double the number of year ago. A chunk of those, I bet, were once for sale by owners. Overall, there are more than 12,000 homes in the metro inventory now. At the height last year, there were only a few thousand.”

“Prices are flattening. Builders are loading new homes with all sorts of freebies. Hindsight tells us the market changed at the end of the summer. If I were one of those housing investors who was doing funky flips and interest-only loans, I’d be shaking in my Guccis right now.”

“Beth Mallery bought one of those red-and-white ‘for sale by owner’ signs. She stuck it in the front yard. She waited. Then she went to a flat-fee listing, paying to get her College Park house in the computer database that Realtors use. She waited some more.”

“But after nearly five months with no sale, Mallery broke down and hired a real-estate agent. ‘It wasn’t as easy as I thought it would be,’ said Mallery, whose home has been listed for a few weeks.”

“I can’t blame Mallery for assuming she’d have a fast sale. She did her homework. She checked out what homes were selling for in her neighborhood. And she was a witness to the selling frenzy: Signs put in the yard one week were gone the next when a deal was done.”

“‘I was on the market for 45 days and had two people,’ said Kathy Parker, recounting her FSBO experience in Casselberry.”

“As for Mallery, she wishes she had put her home on the market several months earlier. And now she’s working with Sutton & Sutton to help her sell. ‘They tell me they see an increase in sales at the end of February,’ she said. ‘I’m hoping that the trend follows this year.’ But for now? She’s still waiting.”




Speculators ‘Trying To Unload Homes’: Toll

The Philadelphia Inquirer has this report on Toll Brothers. “The chief executive officer of Toll Bros. Inc. acknowledged yesterday what many in the housing industry have long feared. Speculators helped fuel the housing boom, and now they’re trying to unload homes in a weakening market.”

“‘In 2005, demand for new homes in many markets was propelled to unsustainable levels by speculative buying,’ Bob Toll said in a quarterly earnings conference call. ‘We are now on the other side of that slope.’ Some regions have experienced more speculation than others, Toll said, mentioning Washington, Las Vegas and Orlando, Fla. He characterized the Philadelphia region as holding steady.”

“It is troubling news for a housing market that has been hurt by rising interest rates and a growing inventory of unsold homes and condominiums. Data from the NAR show that the number of unsold existing homes last year rose 524,200, to 2.5 million, as more people tried to sell homes than there were buyers for.”

“The number of existing unsold condos rose last year by 135,000 units, to 483,500. The numbers do not include new homes or condos.” “(Economist) Mark Zandi said that the housing market peaked last summer and that a correction could last three years. ‘It does not feel that this market is crashing; it will correct,’ Zandi said, noting that he expected home prices to decline in many places. In the most overpriced markets, declines will range from 10 percent to 15 percent, he predicted.”

“Toll Bros. had reported earlier this month that contracts for homes it would build later this year fell sharply in the first quarter, reflecting the weaker market. Toll Bros., of Horsham, said yesterday that it believed its rate of cancellation, people backing out of signed contracts, had peaked in the first quarter.”

“Toll Bros. said it had repurchased one million shares this month. As of Jan. 31, it had 167 million shares outstanding.”

“William Mack, an equity analyst with Standard & Poor’s, said maintaining past growth will be tough for home builders as the housing market continues to cool. Robert Toll told analysts ithat he expects business to stay in good shape even if home prices fall.”

“‘We have enough cushion between the price of the land and price of the home..to build lower-priced homes. But that’s not our interest,’ he said. ‘Our interest is to adjust to higher-priced homes if we can.’”

“California showed the only decrease in performance, down 16 percent. But the picture is different with signed contracts, down 21 percent overall to $1.14 billion. All regions showed declines in signed contracts.”




Weekend Topics, Photos And Appraisers

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