The Housing Bubble

The media reacts to todays housing report. “The pace of new home sales slowed in January, according to a government report Monday that included the latest sign of a growing glut of new homes on the market in some areas. The Commerce Department said Monday that sales of single-family homes decreased 5% to a seasonally adjusted annual rate of 1.233 million, from a rate of 1.298 million during December. Sales dropped 7% in November, rose 7.7% in October, and sank 2% in September and 7.1% in August. With sales falling and starts climbing, there were an estimated 528,000 homes for sale at the end of January, a record level.”

“‘The decline in new home sales in January makes it clear that there is some real softening in the housing market,’ said (economist) Joel Naroff. ‘Let’s face it, the weather in January was as good as it gets yet demand fell. The housing market is coming back to earth,’ Naroff said. ‘While there is no free-fall, when the big push comes in the spring and buyers see they have some power for the first time in years, there could be some major impacts on prices.’”

“David Seiders, chief economist at the National Association of Home Builders, said surveys showed that the number of builders who are throwing in various amenities for free in order to move homes has risen to 41 percent. He said a lot of this year’s change will reflect less speculative investor activity and more sales spurred by people desiring to live in the homes. ‘Hopefully, that is all that is developing here,’ Seiders said.”

“Raymond James and Associates analyst Rick Murray said his checks with builders showed that they believe business has slowed on a year-to-year comparison. The more worrisome feature is the inventory level, which is ‘off the charts,’ Murray said.”

“Bank of America analyst Daniel Oppenheim projected new home sales will fall further to a 1.1 million pace in 2006. ‘We expect new home sales to slow based on the weaker trends that we see in the market, and we think the decline in sales will lead to an even more significant slowdown in home price appreciation, the key driver of margin and earnings growth in recent years,’ Oppenheim wrote. Bank of America also has a ‘Cautious’ view on the sector, based on slowing traffic trends, price appreciation and inventory levels.”

“David Seiders said it is too soon to say there is a glut of new homes on the market. ‘There’s been a definite upswing in the inventory level for some time,’ said Seiders.’ Even the report’s figure on median time it took for completed homes to be sold rose to 4.5 months from a median of 4 months throughout 2005, a number that wasn’t affected by the warm January weather.”

“Home builders have reported an increased number of orders for new homes being cancelled in recent months, raising concerns that buyers who were looking to real estate for an investment rather than their own housing needs are pulling out of the market. Such cancellations could put downward pressure on prices in some formerly hot markets.”

“Home builder Toll Brothers warned last week that it is seeing greater supply than demand of new homes in a number of markets, and it pointed to the drop in interest by investor-buyers. ‘Speculative demand has ceased and speculators are now putting their homes back on the market. The result has been more supply than demand in some regions,’ said the company’s earnings statement. ‘Markets such as metro Washington, D.C.,..will need to work through their excess supply before the imbalance once again tips in our favor.’”

Reuters reports on Fannie Mae’s portfolio. “Fannie Mae, the largest U.S. home funding company, on Monday said that its mortgage portfolio fell by an annualized 3.1 percent in January after expanding 21.4 percent in December. The retained mortgage holdings ended last month at $725.3 billion, as the portfolio resumed the shrinking pattern seen in every month last year except December.”

“Congress continues to battle over the size of the combined $1.4 trillion portfolios of these two federally chartered companies, which buy mortgages from lenders and repackage them to sell as securities or keep for themselves. Last week a long-awaited investigatory report spearheaded by former Republican New Hampshire Sen. Warren Rudman found no major new accounting problems at Fannie Mae. Industry experts said the report nonetheless kept the focus on the company’s activities.”

USA Today takes a look at the bigger picture. “The internal report, commissioned by Fannie Mae and conducted by former senator Warren Rudman and the Huron Consulting Group, sketches a positive portrait of Fannie Mae’s board, clearing them of direct responsibility for the company’s accounting troubles.”

“However, independent consultants contacted by USA TODAY say Fannie Mae directors were let off too easily by the report. In the post-Enron era, with stricter anti-fraud, governance and pay practices, the board should have been more aggressive in its watchdog role, they say. ‘In today’s world, it’s very, very hard to comprehend that the board didn’t know anything, that they felt misled,’ said Frank Glassner.”

“Greg Taxin, CEO of (a) corporate-governance research firm, contends the directors are guilty of ‘tolerating a corporate culture and an organizational structure’ that harmed investors. ‘The first responsibility of a board is to protect shareholder capital,’ Taxin wrote. ‘This board, in my view, failed to do that adequately.’”

“There might have been conflicts and close ties among directors and corporate officers ‘that blinded the board from what was going on,’ said Charles Elson, head of the University of Delaware’s Weinberg Center for Corporate Governance. ‘The big question is: Was this a failure of internal controls, or a failure of the board itself?’ Elson said. ‘How did something this large escape their notice?’”

“Among other governance issues, the report questioned Fannie Mae’s pay practices in recent years. The investigators found Fannie Mae set corporate earnings targets ‘at achievable levels’ it knew executives could reach. Once they hit those targets, they received higher salaries and bonuses from a bonus pool of millions of dollars.”

Business Week did an interview with some housing industry professionals. “I caught up with three housing heavyweights, CEO Angelo Mozilo of mortgage lender Countrywide Financial, CEO Bruce Karatz of KB Home, and real estate bear Professor Bob Shiller of Yale University, and asked how worried we should be.”

“How would you characterize the housing market right now? MOZILO: The market has turned. The psychology of the buyers for single-family homes has clearly changed. We are seeing it from the flow of loan applications. If I had to pick a time, I would have to say it turned in January.”

“SHILLER: The real question is: Will it be a soft landing, or will prices come down substantially? It’s hard to say because this is the biggest housing boom that this nation has ever seen, so we are in uncharted territory. I worry about a big fall because prices today are being supported by a speculative fever.”

“How severe are the price declines you are expecting? MOZILO: I would expect a general decline of 5% to 10% throughout the country, some areas 20%. And in areas where you have had heavy speculation, you could have 30%. We will see…sellers back off from the prices they have been demanding. A year or a year and half from now, you will have seen a slow deterioration of home values and a substantial deterioration in those areas where there has been speculative excess.”

“SHILLER: In Los Angeles in the last cycle, prices peaked in 1989 and bottomed out in 1997. In that interval, L.A. lost 40% of its real value. I can see that happening there again or in any of the cities that have had tremendous price increases, and there are quite a number of them in this country. I think a pullback of as much as 40% is plausible in many places.”

“KARATZ: I don’t see a fundamental slowdown other than in the hottest markets. Things don’t continue through the roof forever. In some markets, 10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%, and it takes three to four months for whatever overhang there was to be sold.”

“Where are the most vulnerable areas? MOZILO: Miami and Fort Lauderdale. Las Vegas is another area where there is heavy speculation. That means people were buying three, four, five condos at a time and thinking they can flip them. Those are the spots we have identified where… we will only make loans when we know the person will live [in the housing].”

“SHILLER: The most spectacular cases are Phoenix and Las Vegas. They soared so suddenly. But others [are vulnerable, too,] such as San Francisco, San Diego, L.A., really much of California.”

The Honolulu Advertiser reports on Hawaii’s housing bubble. “In January, the median list price of a single-family home was $699,000, according to the Honolulu Board of Realtors. Last year, the high point for single-family list prices came in October, when the median list price was $698,000.”

“While sellers continue to list at high prices, the homes aren’t moving as fast as they used to and the inventory is growing. January saw 738 new single-family listings,. The number of new single-family listings in one month topped 700 in August for the first time since the Board of Realtors began keeping records in 1986.”

“‘The inventory has risen considerably,’ said Bryn Kaufman, a real estate agent in Kailua. ‘The fact that some sellers are starting to reduce prices and accept lower offers is helpful. It started to happen right near the end of last year and it’s working its way into this year. A lot of people priced into the upswing in the market and now they’re overpriced.’”

“Out of 1,627 single-family homes for sale, 533 have seen price drops, Kaufman said. For homes that have been on the market six months or more, the average price was $2.5 million, Kaufman found.”

“Alicia and Jon Sturnick of ‘Ewa Beach dropped the asking price on their Ocean Pointe house by $15,000 and are starting to get the uneasy feeling that they missed the peak of O’ahu’s latest housing boom. ‘If we had put it on the market earlier, we would have definitely sold it already,’ Alicia Sturnick said. ‘I knew the market would slow down but I didn’t know it would happen so soon.’”

“The Sturnicks, like many others interviewed, have dropped their price and continue to hope for any kind of offer. But in their Ocean Pointe neighborhood, they have found that 52 other homes are also for sale. Several other single-family homes are brand new and priced in the same range. ‘I think I missed a very profound peak,’ Jon Sturnick said. ‘I’m a little bit disappointed. But I know our house will sell and the price will go up.’”

“Raul and Nancy Dollente originally listed their Kapolei house at $581,000, ‘then we dropped it to $579,000, then $565,000,’ he said. ‘Now we’re going $555,000.’ I’m not really sure how long we’ve had it for sale,’ Raul Dollente said. ‘Since October? It’s been so long already.’ The assessed value is $581,000. ‘Somehow it will be sold,’ Raul Dollente said. ‘I just don’t know when.’”

“Kari Waldhaus and her husband, Jack, bought their three-bedroom, two-bathroom house on Kakoo Place in upper Makakilo in 2004 as a rental home. After renting the house for a year and cleaning out the smell of the renters’ Great Dane and bulldog, the Waldhauses put their house on the market in October for $549,000.”

“They had one offer below their asking price that fell through. After that ‘nothing happened,’ Kari Waldhaus said. ‘Then in November we dropped the price to $515,000 and offered a credit back for closing costs. Thirty days later we dropped it to $499,000. We were thinking that getting it under $500,000 would make it sell. We were wrong. Now the house has sat vacant for five months. That house has a negative cash flow. Not fun.’”

“The house and property are assessed at $506,400. Kari asked whether she and her husband should invest more money in improvements, but her agent said that would only drive up the sale price or their costs, which they might not recoup. So the Waldhauses are left with an empty home and the nagging suspicion they missed O’ahu’s real estate peak.”

“‘We should have gotten in in July or August when things were flying off the market,’ Kari Waldhaus said. ‘I read and pay attention to the market and everybody thought it would be a gradual thing. But it’s like somebody flipped a light switch and people stopped buying.’”

The new home sales numbers are out. “Sales of new homes in the United States fell 5% to a seasonally adjusted annual rate of 1.233 million in January, the lowest in a year, the Commerce Department said Monday. The number of new homes on the market increased 2.5% to a record 528,000, representing a 5.2-months supply at the January sales pace. The months’ supply is the largest in nine years.”

“The growth in inventories and the slower pace of price appreciation are factors suggesting the booming housing market of the past four years is losing steam as mortgage rates rise and affordability falls. Homebuilders remain relatively upbeat about market conditions, however. Nearly 20% of the homes on the market at the end of January had not been started in construction. Another 58% are under construction.”

“Sales fell in three of the four regions, with the West, climbing 11.3% to buck the trend. Sales fell 10.3% in the South, 10.8% in the Midwest and 14.9% in the Northeast.”

” “The biggest decline was a 14.9 percent decrease in sales in the Northeast, which followed an even bigger 23 percent plunge in sales in December. Some economists have expressed concerns that once home sales start to slow, the big price increases of recent years could turn into sharp declines in a similar pattern to how the speculative bubble in stocks burst in 2000.”

A mortgage REIT has some news for Wall Street. “ECC Capital Corp., a mortgage finance real estate investment trust, said on Monday it would not pay a first-quarter dividend on its common stock, citing losses in its mortgage banking segment.”

“‘Given current conditions in the whole loan market and the operating losses in our mortgage banking segment, we plan to retain capital and liquidity in order to provide greater flexibility in the disposition of our held-for-sale loan portfolio and for the prudent operation of our business,’ Shabi Asghar, ECC Capital’s president and co-chief executive, said.”

“The company, which is required to distribute at least 90 percent of its REIT taxable income each year, said future dividends will be at the discretion of its board of directors and will depend on the performance of its mortgage banking segment, desire to maximize corporate liquidity, maintenance of REIT status, and other relevant factors.”

“Earlier in 2006, the company announced plans to lay off 440 employees, or 27 percent of its work force, and consolidate seven wholesale loan processing centers into three.”

The Sun Sentinel has an advice piece for home sellers. ” If you think you’re seeing a lot more ‘Open House’ signs springing up on street corners these days, you’re not mistaken. The open house, which seemed so unnecessary in South Florida just a few months ago, is making a comeback.”

“There’s good reason why. Gone are the days when houses sold within minutes of hitting the MLS. Inventories of available houses and condominiums are swelling, prices are stabilizing and the time houses remain on the market is lengthening. All signs point to the return of a buyer’s market, good news for buyers after a long period of tight supply in many markets.”

“Sales in Palm Beach and Miami-Dade County plummeted, by 23 percent and 38 percent, respectively. As a result, sellers must adopt new strategies, or actually return to old ones, to sell their homes quickly and at optimum prices. Be realistic. Set a fair price, and realize that the more houses on the market, the more competition you face. ‘With the market settling down a bit, sellers have to be reasonable,’ Barry Rothman said. ‘They can’t get egregious prices anymore.’ Rothman said that if a house is overpriced now, buyers won’t even take the time to look at it.”

“Most importantly, sellers should try to think like buyers. ‘Honestly evaluate what you would buy if you were them,’ Rob Rose said. ‘If it’s not your property because there are other, lower-priced options, don’t expect an offer any time soon.’”