The Housing Bubble

The Contra Costa Times reports on a recent poll. “The random telephone poll taken from Jan. 16 to Jan. 23 shows that 40 percent of responders have seriously considered leaving the Bay Area. Of those, 70 percent said the high cost of housing was a major factor leading them to dream of cheaper pastures.”

“Fifty-three percent of those polled in Marin, Sonoma, Napa and Solano counties said clogged freeways and sky-high home prices have them thinking about the color of the grass on the other side of the East Bay hills, according to the survey conducted by the Bay Area Council.”

The realtor association reports on what may be some relief. “The median price of an existing home in California in January increased 13.8 percent and sales decreased 24.1 percent compared with the same period a year ago, C.A.R. reported today. The January 2006 median price increased 0.5 percent compared with December’s $548,640 median price.”

“‘The California real estate market is beginning to experience the soft landing that we expect to be the underlying dynamic driving the housing market this year,’ said C.A.R. Chief Economist Leslie Appleton-Young. ‘The number of homes for sale has risen to a six-month supply, which will translate into a slower rate of price appreciation than we experienced in 2005.’”

“In a separate report covering more localized statistics generated by C.A.R. and DataQuick, 93.2 percent or 355 of 381 cities and communities showed an increase in their respective median home prices from a year ago. Dataquick, which produces a separate, more inclusive, price survey, says the median price in California in January was $452,000. That was down 1.3 percent from $458,000 for December.”

“If Central Valley real estate agents looked a little lean and hungry in January, it might because the sales pace was down 31.9 percent from December and down 23.9 percent from January of 2005. Prices in the Central Valley also fell in January to a median of $347,070. That’s down 2.5 percent from December.”

“‘We have now seen three months in a row where sales have dropped more than expected,’ said Robert Kleinhenz, an economist with CAR. ‘At least some home buyers have adopted a wait-and-see attitude.’”

“‘Mortgage brokers are not as busy, real estate brokers are not as busy,’ said Kevin Clay of a San Carlos-based real estate and financial services firm. ‘There seems to be a decrease in activity overall.’”

“The inventory of homes for sale could swell as new homes nearing completion come on the market, and as home owners who believe mortgage rates will head higher rush to list houses before financing tightens, said Bob Edelstein, co-chair of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.”

The Florida realtors have their January numbers out. “Coming off several years of blistering home sales at a record pace, Florida’s housing sector followed the national trend in January and showed signs of some market adjustments, according to FAR. Realtors from across the state report that more homes are available for sale, improving what had been tight inventories in many markets.”

“Statewide, sales of single-family existing homes totaled 12,815 in January compared to 15,745 homes sold a year ago for a 19 percent decrease.”

“Sales of existing condominiums in Florida also decreased last month, with a total of 4,456 condos sold statewide compared to 5,461 in January 2005 for an 18 percent decline, according to FAR. This release marks the first time that FAR has reported monthly condo sales in the state’s metropolitan statistical areas.”

Not mentioned in the release, but viewable in the tables at the bottom of the link is that of the 20 regions, all but 2 had declining sales, year over year, with several down 20-40% plus.

Comparing previous month numbers, from December 2005 to January 2006, Fort Myers-Cape Coral SFH median price dropped $35,100 to $287,200. Fort Walton Beach SFH median was off $16,600 to $225,500 and Pensacola’s median SFH was down $12,600 to $158,100.

There may be a reason they split the condos from the detached homes; besides similar sales volume decreases, some median prices saw yoy declines. Fort Walton Beach median condo prices were down 57% and Pensacola was off 61%.

Another mortgage REIT has called off a press conference. “Saxon Capital, Inc., a residential mortgage lending and servicing real estate investment trust (REIT), today announced it is delaying its 2005 fourth quarter and year end earnings press release and related conference call. The Company expects to report its complete operating results on or before March 31, 2006.”

“Management is reviewing the..derivative transactions used in its hedging strategy to manage interest rate risks from 2001 to the third quarter of 2005. If the Company determines that it did not meet the requirements of SFAS 133, a restatement of results from 2001 to the third quarter of 2005 may be required. ‘We are disappointed in this delay, but need more time to review these complex accounting issues before reporting our results,’ said Michael Sawyer, CEO of Saxon. Robert Eastep, CFO of Saxon said, ‘In light of recent scrutiny as to the application of hedge accounting, we are reviewing our accounting treatment of our derivative transactions related to our hedging strategy to ensure that our financial statements adhere to SFAS 133.”

“The Mortgage Loan Operations segment originates, purchases, and securitizes primarily nonconforming residential mortgage loans.”

From Market Watch. “The FDIC reported that industry net income of $32.9 billion fell 5% from the record set in the third quarter. ‘What we see is a banking industry that is fundamentally strong but continues to face some important challenges ahead,’ Martin Gruenberg, the FDIC’s acting chairman said.”

“Among the highlights of the FDIC report, growth in residential mortgage assets increased by $24 billion, the smallest quarterly increase in two years. Also, the net interest margin fell to 3.49% from 3.5% in the fourth quarter, a 15-year low also seen in the second quarter. ‘As short-term interest rates rose more rapidly than longer-term rates, the difference between them has narrowed,’ the FDIC said.”

“‘The narrower spread has made depository institutions’ traditional business of taking deposits and making loans less profitable, as banks and thrifts tend to make longer-term loans and fund them with shorter-term deposits.’”

“In the wake of the prime lending sector’s refinance contraction, the nonprime sector has picked up and become more mainstream, accounting for 28% of total loan originations, according to a panel member at the MBA Expo in Phoenix. Michael Drawdy, senior vice president at Countrywide Financial Corp., said half of subprime ARMs will be due in the summer and over the next 14 months. ‘There will be some people who can’t pay for an ARM change,’ Mr. Drawdy said.”

“‘That is why you must make sure there is a system in place for collections, to make sure borrowers know their options.’ Panelists talked about repayment plans and ARM modifications aimed at helping borrowers stay in their homes. Over the next 12-24 months, there is a potential for severe delinquencies, they said.”

The Massachusetts realtors have some numbers out. “The sales decline of 32.5 percent that took place between December and January is not unusual and generally reflects seasonal changes that occur in the local housing market each winter as cold weather settles in and the holiday season occupies consumers’ time.”

“Active listings for detached single-family homes rose steadily over the last month to 24,331 this January, rising 7.7 percent from December when there were 22,593 listings.”

“The condominiums sales decline of 25.2 percent that occurred from December and January is not unusual and reflects seasonal changes in the local housing market. The condo inventory levels continue to rise. Active listings have increased 25.4 percent in the past year, up from 9,436 units in January 2004 to 11,837 this January. Also, compared to a month earlier, condo listings have increased 16.3 percent from December.”

“Selling prices for detached single-family homes rose steadily last month to a statewide median price of $340,450 in January, but it appears the rate of price appreciation may be starting to moderate. In fact, over the past 12 months, the median selling price increased just 7.4 percent, the smallest gain in year-to-year price appreciation since last January when the price rose 7.5 percent over January 2003. The all-time monthly high median price remains $360,000 set in June 2004.”

The statewide median price for single family homes was $350,000 at the end of 2005. The median at the end of 2004 was $345,000.

The Boston Globe has this update. “The recent slowdown in the state’s housing market deepened in January as sales of single-family homes fell to the lowest level for that month in a decade, MAR said Tuesday. The 2,345 home sales statewide in January represented a 21 percent drop from sales in the same month a year earlier, and marked the lowest January total since 2,332 homes were sold in the first month of 1996.”

The NAR has the existing home sales numbers out. “Total existing-home sales; including single-family, townhomes, condominiums and co-ops, declined 2.8 percent to a seasonally adjusted annual rate1 of 6.56 million units in January from an upwardly revised pace of 6.75 million in December. Sales were 5.2 percent below the 6.92 million-unit level in January 2005.”

“David Lereah said sales are tracking the trend in the association’s Pending Home Sales Index. ‘Our leading indicator, based on pending sales, has been trending down since hitting a record last August,’ he said. ‘In the wake of interest rates peaking in November, I expect we are in a bit of a trough that may be followed by a modest rise and then a general plateau in the level of sales activity.’”

“Total housing inventory levels rose 2.4 percent at the end of January to 2.91 million existing homes available for sale. Single-family home sales dipped 1.5 percent to a seasonally adjusted annual rate of 5.77 million in January from an upwardly revised 5.86 million in December, and were 4.8 percent lower than the 6.06 million-unit pace in January 2005.”

“Total existing-home sales in the West declined 3.5 percent to a pace of 1.37 million in January, and were 14.4 percent below January 2005. In the Midwest, existing-home sales dropped 7.7 percent to an annual pace of 1.44 million in January, and were 3.4 percent below a year earlier. Existing-home sales in the Northeast fell 10.0 percent to annual sales rate of 990,000 units in January, and were 13.2 percent lower than January 2005.”

“The decline in total sales was driven by a 1.5 percent decline in the pace of single-family sales and a 10.6 percent drop in condo sales in January.”

Some housing bubble news from homebuilders on Wall Street. “Dominion Homes, Inc. today announced financial results for the three and twelve months ended December 31, 2005. The Company’s year-end backlog for 2005 was the lowest in several years and reflects a slowdown in home sales that began during the second quarter of 2004 and continued throughout 2005. The Company’s land position..became disproportionate to the lower demand for its homes experienced during 2004 and 2005. As a result, the Company began to aggressively reduce its land position during 2005.”

“The Company’s CEO, Douglas G. Borror, commented ‘We are offering selective discounts on our homes to improve sales that are expected to reduce our gross margin for the year. Due to our low backlog at the end of 2005 and the anticipated reduction in our gross margin, we do not expect to be profitable for the first quarter of 2006.’”

And from Standard Pacific. “New home orders companywide for the year-to-date period ended February 26, 2006, excluding joint ventures, were down 13% from the level achieved a year ago. This slowing of sales activity is particularly evident in markets which have experienced significant price increases and investor-driven demand in recent years, such as California and Florida.”

“New home orders were down 24% year over year in Southern California on a 29% increase in active selling communities. The lower level of sales activity in Southern California was due to: (1) a softening in buyer demand, most notably in San Diego and, to a lesser degree, in Orange County, (2) reduced product availability, particularly in our Los Angeles division, and (3) an increase in the cancellation rate.”

“In Northern California, new home sales were down 60% on a 12% lower active community count. The Company saw a noticeable slowing of demand in Sacramento in the second half of 2005. New home orders were down 37% in Florida on a 12% decrease in community count. A number of factors contributed to the year-over-year decrease in Florida order activity: (1) reduced product availability in certain divisions, particularly in Orlando and Jacksonville, (2) a softening in buyer demand, most notably in South Florida and Southwest Florida, (3) continued intentional slowing of orders to better align production and sales, particularly in Tampa, and (4) a modest increase in the cancellation rate.”

“The Company’s cancellation rate for the year-to-date period ended February 26, 2006 was 26%, up from the year earlier rate of 18%.

“Nearly half the new homes put up by builders aren’t being sold as expected, the report shows. At the current sales pace, there were enough new homes on the market to satisfy demand for the next 5.2 months, the fattest inventory glut since November 1996.”

A recent report from Santa Barbara. “The housing market in Santa Barbara County has gone from hot to lukewarm, and it’s likely to stay on the cool side over the next few years, according to state and local economists. ‘The boom is over. But the market won’t collapse, and we don’t expect home prices to decline,” said Mark Schniepp.”

“Sales of existing homes countywide fell by about 13 percent last year, the biggest drop since 1995, Mr. Schniepp. On the South Coast, known as one of the most expensive housing markets in the nation, total sales last year also fell in the 13 percent range. And the number of homes available for sale climbed to the highest level since 1998, he added.”

“Chris Thornberg, senior economist at the UCLA Anderson Forecast, also presented his real estate projections, which he titled ‘Chill in the Air.’ ‘When you see sales starting to fall, that’s the signal of the end (of the boom),’ said Mr. Thornberg, who for years has insisted that California was enveloped in a housing bubble.”

“Home sales have fallen not only in Santa Barbara County but throughout California. ‘In California, there is no growing market except in Riverside,’ Mr. Thornberg said.”

“But does a peak in sales signal that home prices will fall, and does that mean the housing bubble will burst in the same way as the stock market? No, Mr. Thornberg said. ‘You can’t day-trade housing like you can stocks,’ he explained. ‘The bubble pops not on the price side but on the activity side.’”

“Instead of homeowners unloading their properties at fire-sale discounts, most will deal with a soft market by ‘going into a bunker mentality.’ They’ll pull back on selling and buying homes, and they’ll stop talking about how much their properties are worth, Mr. Thornberg said.”

“Both Mr. Schniepp and Mr. Thornberg said..the fate of 2007 depends on whether the housing market deflates slowly or takes a sharp dive. Santa Barbara County and the rest of California have grown heavily dependent on the real estate sector over the last five years to keep the economy afloat. ‘A large portion of employment in the county is real estate-related,’ said Mr. Schniepp. ‘About 10 percent of all jobs in our area are somehow related to real estate, not counting retail sales for goods that go into houses.’”