The Housing Bubble

One reader points out the difficulty of tracking housing statistics. “Although the problem of sellers’ denial is likely to prolong the agony, it does provide an opportunity to get around some of the difficulties in interpreting median price data. For example, when we see median prices decline, we don’t know whether it’s because sellers have dropped their prices or buyers are seeking smaller/cheaper units (e.g., condo conversions vs. McMansions).”

“But if sellers are refusing to lower their asking prices, we can instead follow the ‘% of asking price’ metric and more clearly determine whether median price changes reflect the type of residence or adjustments in asking price.” “I think for much of 2005 in San Diego, sellers were getting ~97-98% of their asking price; now it’s closer to 94%.”

The Las Vegas Sun reports on that bursting housing bubble. “The median price of a new home in Las Vegas dropped in January to just over $300,000, a sign the area’s hot housing market may be cooling off, analysts said. At $303,751, the median price is about $6,000 less than it was in December, but is 7.5 percent higher than it was in January 2004, Dennis Smith reported Friday.”

“The median housing price increases if the nearly 800 apartment conversions are excluded. Without the conversions, nearly 28 percent of the new home sales in January, the median price was $343,198, Smith said. Weekly traffic through new subdivisions, a gauge of people looking at new homes, has decreased 21.9 percent from the first few weeks of 2005 and net sales per subdivision are off by about a third, according to the report.”

“Larry Murphy said sales are stronger than expected this year, but prices are stable and the inventory of homes for sale, while growing, is remaining manageable.The median resale price also declined in January. The median price of an existing home was $279,000, down from $284,900.”

The Miami Herald reports on one mans search for the American dream. “In the past five years, the housing crunch in South Florida has moved up the economic ladder from the low-income to the middle-class, pricing a whole new layer of workers, thousands of Quintin Taylors, out of the market. A family in the Miami area earning the midpoint income must now spend 44 percent of its dollars on mortgage payments.”

“The reality, though, is that Taylor might be priced out of the dream. He earned $75,000 last year. In December, he was preapproved for a $185,000 loan. With 10 percent down, he figures that monthly mortgage payments would be close to his $1,650 monthly rent.”

“After weeks of driving around and phoning his real estate agents, Scott Lewis and Rosie Hernandez, Taylor is in love. ‘I picture myself living (there),’ Taylor says. He wanders around the backyard. It needs cosmetic work, but there’s a built-in pool and a concrete patio. Taylor closes his eyes for a moment. He can hear the music and smell the burgers and hot dogs grilling up. ‘I want this house,’ he says.”

“The renovated house in Nichols Heights is listed for $265,000, way out of Taylor’s price range. But Taylor thinks he could negotiate. In 2002, the house sold for $91,500. Seven months later, it sold for $134,000. Current owner Domenick Vitale paid $160,000 for it last September. Two months later, in November, he listed it for $299,000. In December, the price dropped to $282,900. In late January, it was $265,000.”

“Still too high, say Lewis and Hernandez. For one thing, the house is listed as a four-bedroom, but two have no closets. ‘This is really a two-bedroom with a den and a family room,’ Hernandez says. She says comparable recent sales in the neighborhood are in the $220,000 range. One estimate by an appraiser placed the value of the house closer to $220,000.”

“Taylor isn’t deterred. A second estimate comes in at $240,000. Taylor gets preapproval for a new mortgage with only 5 percent down and decides to make a verbal offer of $240,000. His monthly payments, with taxes and insurance included, would be $2,300, $650 more than he wanted to spend. ‘I’ll just have to cut back on things like shopping, eating out and going out to clubs every night,’ he says. ‘The house is the goal.’”

“Several phone conversations later with Lewis, Vitale isn’t budging. ‘What’s going through my head is what might be going through the head of anyone involved in a deal,’ Vitale tells The Miami Herald. ‘Everyone’s trying to make the most money they can make off an investment.’”

“But then Taylor hears from a neighbor that not many people have stopped by to see the house. He decides to pass on making a written offer after all and look at other houses.”

“‘For people who can’t afford to buy, rental properties might be the answer,’ says (economist) Celia Chen. ‘There’s probably going to be a glut of condos to rent soon. A lot of what’s been built has been bought by investors who are going to have to rent them out.’”

The Record.net reports on the housing market in California. “Building permits for single-family homes in San Joaquin County were down even more sharply in January year-to-year than in December, a reflection of a slowdown that has some homebuilders cutting prices and offering incentives in the past couple of months. A total of 322 construction permits were issued last month countywide, down nearly 40 percent.”

“Builders say that fast-escalating prices are over as prices rose to levels that began putting off many potential buyers. The San Ramone-based homebuilder, Pacific Mountain Partners, hasn’t marked down sales prices at its 134 lot Mossdale Landing development, which features models running in the $582,000 to $687,000 range.”

“Incentives have ranged between $10,000 and $40,000 per home in the past couple of months to prod sales, though, Heidi Mezenski said. ‘We weren’t doing incentives last summer,’ she said. ‘We were working off waiting lists.’”

“The changed sales market had Oakland residents Stoney and Toni McCree checking out model homes in Mossdale Landing on Friday. The McCrees, who don’t own a home now, are aware of the slower market, and they not only think it’s a good time to buy, but they also intend to take six months to do it.”

“Stoney McCree said he’s not surprised that new homes are better deals these days. ‘I eventually thought the housing market would hit a ceiling and prices would come down,’ he said. ‘I like the prices for what they’re offering.’”

“Toni McCree said they also liked the way homebuilder sales representatives seemed willing to deal, something they wouldn’t have expected in the past.”

One reader wants to know what you’ve done to warn others about the housing bubble. “I’d like to see what others are doing/saying to convince family/friends that the real estate freak show is over! I’ve pissed off any number of people by trying to help, and I’d like to read about other’s efforts and how it worked out.”

Another said, “It was a little tricky in my case because my wife and I moved away from San Diego a little while ago, and we kept our house in SD in case things didn’t work out in our new town. This meant that when we decided to put the house on the market, my in-laws assumed it meant we weren’t coming back to SD. When I tried to explain that this was our best opportunity to buy into a better neighborhood in SD (sell high now, buy low in a better neighborhood later on), it was met with the ‘you’ll never be able to buy back in’ argument.”

“I found it helpful, however, to walk my mother-in-law through the numbers (how much a $400-500K mortgage payment is, how much you’d really have to earn to support that, etc.) and to point out that the high numbers of speculators and tightening credit requirements are really threatening to bring everything to a devastating end. So, now we’re in escrow (please cross your fingers for me and pray that we successfully close), and my mother-in-law still sometimes frets about our decision, but as my wife put it, ‘Mom, this has no effect on your finances. You have no reason to worry.’”

“Granted, this was only to provide the rationale for our decision to sell our own place. I wasn’t about to try to convince my in-laws that they should be selling. That, I must concede, is a much more hazardous undertaking.”

The Chicago Tribune reports on a not-so-hot housing market. ” An early retiree from Ford, Tom Cavanaugh and his wife, Lynne, would like to move to New Mexico to be closer to family. However, since putting their home up for sale last May, they have cut the asking price twice–from $590,000 to $525,000–and have yet to receive an offer.”

“Cavanaugh is stuck in Detroit’s stalled housing market, where inventory is growing, foreclosures are up and buyers are few. ‘I am in real estate hell,’ said Cavanaugh, who divides his time between an apartment in Los Angeles and the Detroit suburb of Northville, where he and his wife built a four-bedroom home for $500,000 nine years ago.”

“The job loss threat is also playing havoc with other Midwest industrial markets. Michigan, Ohio and Indiana ranked 48, 49, and 50 out of all U.S. states and the District of Columbia in price appreciation for the year ended June 30, 2005, said housing consultant Tracy Cross. Only Texas saw lower appreciation.”

“Last September, ‘the market just died,’ said Mary McLeod in Livonia, 25 miles west of Detroit. ‘Very few things are selling. There are a lot of things on the market.’ Farther north, Dennis Wolf in downtown Birmingham, said the inventory of homes in his market area, which includes Oakland County–the most affluent in the state–is 50 percent higher than it was at this time in 2005.”

“In Detroit’s south suburbs, Bob Reume said a lot of homeowners are not even venturing to put homes on the market. They have heard what has happened to others who a year ago optimistically bought a house before selling the old one, said Reume, who has been selling homes for 47 years. ‘There are quite a few people who are paying for two houses,’ said Reume, who is seeing more foreclosures than before.”

“Inventories of existing homes for sale are growing even as the Southeast Michigan Council of Governments estimated there were 20 percent fewer new home permits in 2005 than in 2004. There is no evidence of the panic-selling that occurred in Texas in the late 1980s when oil prices plummeted and house prices fell by nearly half. ‘That came out of nowhere. They went from boom to bust,’ said Bob Walters. ‘Unfortunately for us, it’s a slow leak.’”

“‘The outlook is horrible,’ said Cavanaugh. ‘The only people looking are transferees,’ he said. Cavanaugh said one transferee told him, ‘There are more homes to look at than we even have time to see.’”