The Housing Bubble

The Arizona Daily Sun reports on Flagstaffs housing bubble, titled, ‘Housing market deluged.’ “Drive through the condominiums in Boulder Pointe and you’ll find about 10 homes with sales signs. North San Francisco Street also has a handful of for-sale properties in a two block section. And new houses are springing up as fast as they can be built, and available land will permit.”

“It’s true more properties are listed in Flagstaff’s real estate market this year, but don’t expect prices to come down anytime soon, say local industry experts.”

“As of the first week of February there were 343 homes actively listed in Flagstaff’s market, a 75 percent increase over the number listed the same week in 2005. But only 40 are currently below $400,000. In addition, the median list this week was at about $415,000, with the median sold price for all of 2006 remaining securely in the $300,000s.”

“‘It’s obvious that there are more houses for buyers to look at,’ said (realtor) Ann Heitland. While it’ll be difficult for prices this year to beat the 37 percent climb seen in 2005, the market will continue to go up, Heitland said.”

“And this land-locked community shouldn’t expect prices to come down soon, if ever, said (developer) Tom Brewster. The shortage of available land coupled with building materials inflating more than 5 percent a year means even new houses can’t be built to meet the demand for properties priced below $300,000.”

“‘It’s hard to put a house out there for less than $325,000, even a townhouse. Most will be $345,000 to $400,000,’ he said. ‘Because we have a real lack of land, we don’t really catch up. There’s no way to increase the supply’ to outpace demand.”

“It’s not likely that sellers trying to gouge the market, or investors flipping their properties, are having much influence on home prices, Brewster added. ‘For people to just throw their house out there to see if they can get it..most of the selling and buying community in Flagstaff is sharp enough to know what a fair price is. I think everybody’s willing to pay fair price for the house if it makes sense and they have the ability to pay for it.’”

“Heitland said sellers do push the market, but they’re capped by what people will pay. ‘Sellers’ motivation has varied greatly from moment to moment and usually they are more concerned with when there house is going to sell and that they get a fair market price then whether they push the market,’ she said. ‘Although, of course, last year there was more pushing the market than we’ve seen in prior years. I don’t know if that’s going to be happening this year or not.’”

“Brewster, who’s now experiencing the market first-hand as a buyer, said it will continue to be difficult. ‘I happen to be right now looking for a home for my brother-in-law. We can’t find anything in town that’s 4-bedroom for less than about $450,000 that’s ready to move into.’”

“The best bet, Brewster added, is to get into the market if you can. Prices might be forever high. ‘The best thing to do is don’t wait to buy. If you can afford to buy, buy.’”

A Baltimore Sun report shows a serious slowdown one market. “Home sales in Carroll County plunged in January, but industry insiders say they expect the market to rebound, possibly as soon as this month. Sales in Carroll County fell last month more than 38 percent below the level of January 2005, and area home prices rose only 5.6 percent, a rise that is significantly less than in any other part of the Baltimore region.”

“‘Last spring is gone,’ said Judy Tyree, (brokerage) office manager in Westminster. ‘We are not seeing escalating clauses and multiple bids. Now houses are staying on the market longer.’”

“‘Toni Braglio, president of the Carroll County Association of Realtors, called the drop ‘a seasonal dip before the spring market breaks loose.’” The housing prices are escalating rapidly and creating a great sellers market, she said.”

“Comparing last month to January last year, when the area was still riding a hot market fueled by high prices, competitive bidding and inventory shortages, creates the wrong impression, said Karen Donaldson, an agent in Westminster. In January 2005, 128 home sales were settled, compared with 79 settled last month.”

“‘We are coming off of three years of the most awesome real estate market,’ said Donaldson, an agent with 18 years’ experience. ‘Those years were not anywhere near normal. The market usually slows down in the last quarter, but sales will even out in February.’”

One reader suggested a thread about incomes and home prices. “Let’s discuss the latest report showing median incomes declined: ‘Income growth was held back in from 2001 to 2004, largely because of a 6.2 percent fall in median wages, the largest source of family income, the report said.’”

“While there is a difference between the median and the average, I think this shreds any arguments that housing prices have gone up due to the fundamentals of rising incomes. Lax credit standards and the willingness to levarage based on creative finanancing, are the clear reasons why housing prices have seen their steep rise. There seem to be few other contributing factors.”

From the link, “Americans may feel much richer because of soaring home prices, but they’re not. U.S. families’ wealth stagnated during the economy’s recession and recovery from 2001 through 2004, as lackluster wage growth, sagging stock prices and rising debt levels offset the gains from higher home values, the Federal Reserve reported yesterday.”

Another saw a related topic, “Others have speculated on this blog about where the next bubble will happen as money flows out of RE. In yesterday’s WSJ, an article pointed out that trades by individual investors at discount brokerages rose 30% to 40% in January over December, and money flowing into stock mutual funds last month was at a near record level. Charles Schwab reported $4.5 Billion in inflows, the highest amount since February 2000.”

“So the question is, are we headed for another stock bubble? Heaven forbid, are in-duh-viduals using HELOC money to buy stocks?”

The Arizona Republic has the ‘bad news’ for homowners. “On Tuesday, Maricopa County residents will start getting the news: Your homes are worth a lot more, and you’re likely to be paying more in property taxes. More than 1.3 million notices of property values will begin hitting Maricopa County mailboxes, bringing news that’s sure to cause delight and consternation.”

“It will be unknown how these latest valuations will translate into taxes until local governments set their budgets and lock in tax rates in August 2007. Property owners will receive tax bills for the new assessments a month or so later. Although higher taxes are likely, a more valuable home doesn’t necessarily mean a costlier tax bill, cautioned Treasurer David Schweikert. ‘As long as the taxing districts don’t spend more money than the revenues from new construction, most people’s tax bills will stay about the same,’ Schweikert said.”

From a columnist. “Bad news for the many homeowners trying to sell: It’s likely only going to get tougher. The number of home listings in metro Phoenix is at an all-time high. In January, there were 30,113 houses for sale across the Valley. A year ago, there were 3,402.”

“Some sellers still don’t realize the housing market has deflated from last year’s peak. Not only are the bidding wars gone but so, too, are many of the buyers. Most of the speculators who sparked multiple offers on homes early last year are long gone, and there aren’t as many regular buyers because fewer can afford today’s higher home prices. The typical house costs 50 percent more, and the typical income climbed less than 5 percent in the past year.”

“Any Valley homeowner with a good crystal ball would have sold last summer and rented until now to be able to take advantage of all the deals out there. I didn’t, but I wish I had. Who would have guessed home prices would climb 50 percent in a year? And who knows where they are headed?”

“Valley home sales are down and so are prices. Foreclosures are bound to climb, but they haven’t so far. Tom Ruff said only 41 homes went on the foreclosure auction block last month. That’s a slow month for the many real estate syndicators hanging out on the county courthouse steps to buy bargain homes. But long before those houses go on the block, investors are trying to buy people out for less than the property is worth.”

“Ruff predicts Valley home foreclosures will shoot up by the end of the year. They already have in other overheated housing markets on the East and West Coasts.”

Some readers got a jump start on the market observations in the topics thread. “I’d like to see pictures of the most outrageous property for sale. I mentioned two the other day that were hilarious. I’ve since gone by to look at these dumps and they were the size of my living room selling for 1.3mm & 1.4mm.”

“I second the outrageous property listings. For example, this is in the Boston-area.” To which another replied, “Wow! That vinyl siding really holds up, doesn’t it? A hundred year old house, looks like new.”

Another reader missed a photo opportunity. “A particular condo for rent in Dublin would have made a great photo but the composition of the picture changed….the balcony that faces a busy street used to have not 1, not 2 but THREE For Rent signs! Honest! Now there is only 1 sign….I think the HOA got to them and had them take the extra signs down. Would have been a GREAT picture for the gallery.”

“Also…noticing a little more desperation on the part of the Bay Area RE agents. Listening to the radio, on the way to work this morning, an agent had a *spot* where she described 2 Open Houses this weekend….one in Livermore for **only** $619,000, and a **steal** in Danville for $1,049,000.”

Another added, “There is nothing in Danville to support $1M homes.”

A reply, “Now compare the Danville house to this. A tad overpriced in my opinion. (the overpriced comment was for the Danville listing, not the McKinney one, though in way, that one is also overpriced).”

A final observation. “How about examples of Realtor desperation? I just got a letter in the mail from a local realtor and I just couldn’t get over it. I’m in Sarasota/Bradenton and basically said a short window has opened for buyers due to the exploding inventory but will end soon with all the spring buyers that will rush in.”

“It was 1 & 1/2 pages long explaining how we’ll ‘miss out’ (said local median price will be $500k+ in 5 years) and a story of how she just helped someone buy a house for $19k off the asking price. She went on to say they now have an instant $19k in equity!! To top it off, the grammar was awful and the thing looks like it was done on a typewriter….. I actually want to email her but it may be a waste of time.”

One reader has news on the appraisal aspect of the housing bubble. “Is everyone aware that they changed the new Fannie Mae forms to place more liability with appraisers shifting away from lenders. It’s an old tatic of blaming rouge individuals instead of the system. As a long time appraiser in the SF/Bay area, I am worried about how this will shake out.I am interested in what other appriasers think out the changes in the forms.”

The Kansas City Star has this related report. “Many Americans no longer can trust appraisals to accurately reflect their home’s value. An independent and unbiased appraisal, once considered the bedrock of any home sale or loan, today is often built on shifting sands, according to concerned appraisers in Kansas and Missouri as well as nationwide.”

“The FBI estimates that last year loan fraud bilked lenders and consumers of more than $1 billion, twice the loss reported in 2004. Concerned appraisers who talked with The Kansas City Star, however, say that the problem goes far deeper than that. They contend that thousands of homeowners across the country, from the urban core to the suburbs, are unwittingly victimized by an epidemic of inflated appraisals.”

“‘I’ve seen appraisals where descriptions and prices were totally fabricated, it can have a disastrous effect on consumers,’ said appraiser Jack Shelton.”

“A go-go real estate market is partly responsible for the inflated appraisal epidemic that gives consumers a false sense of their home’s worth. One disastrous result: mortgages and refinanced loans that exceed the value of a home and create crushing debts that can take years to pay off or lead to foreclosures.”

“Annie Lewis knows what that feels like. ‘It’s a very sick feeling,’ said the Lee’s Summit woman, who fears losing the recently built condo she bought in 2003 for $94,000. In 2004, she responded to an Ameriquest TV ad to consolidate her debts by refinancing her home. She was delighted when an appraiser sent by the company valued her condo for $129,000, a 37 percent leap in value in little more than a year. She paid off bills and settled for a 7.7 percent adjustable rate mortgage.”

“But it was too good to be true. This past year, six lenders rejected her efforts to get a new, fixed-rate loan to keep her interest rate from rising. All said her condo was overvalued and is only worth $108,000. Now, because of all the debts she consolidated, Lewis owes more than her home is worth, what’s called being ‘upside down.’ What’s more, her adjusted interest rate is set to jump to about 10 percent.”

“Besides victimizing homeowners, overstated appraisals can lead to higher property taxes in a neighborhood, or losses to banks that relied on bogus appraisals to lend money. If home prices suddenly plunge, the much feared bursting of the ‘housing bubble,’ many loans could default.”

“Wildly inflated values were partly to blame for the savings and loan debacle of the 1980s, which cost financial institutions and taxpayers billions and created a drag on the economy for years.”

“Appraisers said the problem began to grow with the housing boom and low-interest rates that spurred aggressive loan brokers to encourage consumers to refinance their loans. The carrot dangled in front of consumers, in thousands of direct-mail campaigns, TV commercials and Internet ads, is freed-up cash to consolidate debts. But to make such high-dollar loans pass muster with underwriters, unscrupulous loan brokers chasing big commissions pressure appraisers to meet predetermined values. In other words, artificially inflate the value of the homes to justify the costlier loans.”

“Appraisers say many have succumbed to pressure from brokers and some real estate agents to stay in business, if not to grease their own greed. ‘If you don’t hit the right number, it can kill a deal,’ said Steven Smith. ‘I’ve had mortgage brokers flat out say, ‘Can you bring in this house at this or another number?’ If you say no, they’ll call someone else. They’ll just keep calling until they get someone who will give them that number,’ added Smith, who said his business is down two-thirds because he has refused to exaggerate appraisals.”

Bloomberg reports on the new Fed chiefs approach to the housing bubble. “Federal Reserve Chairman Ben S. Bernanke, like his predecessor Alan Greenspan, doesn’t plan to get in the way of surging home or stock prices. Bernanke, staking out a key policy in his first month on the job, said yesterday at Princeton University that the central bank ‘doesn’t really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another.’”

“Bernanke’s views on dealing with rising asset prices match those of Greenspan, who was faulted by some economists for allowing a stock-price bubble to inflate in the late 1990s and for letting U.S. home prices soar in recent years.”

“‘To use interest rates to try to puncture the housing bubble would be a disastrously bad idea, and Bernanke obviously agrees, because he’s not going to come close to doing that,’ said Alan Blinder, a former Fed vice chairman. He wrote a paper last year saying Greenspan may have been the ‘greatest central banker” ever.’”

“Blinder said the Greenspan-Bernanke approach to bubbles is ‘basically, you do nothing, and then the corollary to that is that you mop up after they burst to keep the financial system from taking a big fall.’ Bernanke’s hands-off approach has ‘been his position for years, since he was an academic,’ Blinder said.”

“U.S. home prices have risen 55 percent in the past five years. Sales of previously owned U.S. homes fell in December to the lowest level since March 2004, evidence the five-year housing boom may be coming to an end.”

“Bernanke in the past has said using interest rates to attack asset prices may damage the broader economy. ‘A much better approach for the Fed in dealing with problems of financial markets is from the microeconomic point of view,’ Bernanke said yesterday. ‘For example, we pay a lot of attention to the supervising of banks to make sure that they are taking sound policy, making sound loans.’”

“‘Bernanke is not inheriting the best of situations,’ Paul Volcker said in an interview after Bernanke’s speech. ‘How would you like to be responsible for an economy that’s dependent upon $700 billion of foreign money every year? I don’t know what I would do about it, but he’s going to have to do something about it sooner or later.’”