The Housing Bubble

David Leonhardt writes at the New York Times. “You remember the great real estate crash of the 1990’s, don’t you? In New York, inflation-adjusted prices dropped almost a third in less than a decade. The fall was even worse in Los Angeles, and it wasn’t pretty in Boston, San Francisco or Washington, either. Thousands of families were forced into much smaller homes.”

“Large numbers of people did not lose their homes. If anything, the drop in prices allowed a lot of families to buy their first house or trade up to one that they never could have afforded in the 1980’s.”

“Now it looks as if we might be about to go through it all again. But instead of panicking, most homeowners should be taking a deep breath. The real estate slump of 2006 offers a fresh chance to puncture the No. 1 myth about the nation’s No. 1 topic of conversation: the idea that we should all be rooting for high house prices. The myth is good for real estate agents, but it creates needless anxiety for everyone else. It’s time that most of us learned to stop worrying and love the bursting bubble.”

“‘Even in the most vulnerable markets, most people just have to look through it and ignore it,’ said (economist) Mark Zandi, ‘because it’s of very little relevance to them.’”

“That’s the good news. The bad news is that a big part of the country’s economic policy has been built on the myth. As long as you are living in the house, you have no way to lock in your gains. Yes, you can borrow against those gains, but new debt is not exactly found money. And when you move, odds are that you will go someplace that has a real estate market very much like yours. Whatever profit you make you will just plow back into a new home.”

“This is why the housing boom of the last decade has not made many people rich. Do you know anyone who retired at age 35 after selling her condo in San Francisco?”

“Obviously, there are exceptions; people who do have a very real stake in the short-term value of their house. Worst off would be the families who have borrowed heavily against their homes. For them, a price drop could erase all of their equity, leaving them with no money for a down payment when they move.”

“But the victims of a moderate price decline don’t come close to making up a majority of Americans. At most, 10 percent of households are so leveraged that their mortgage debt equals at least nine-tenths of their home’s value, Mr. Zandi said. Compare this with the more than 30 percent of families that don’t own a home and clearly have nothing to gain from further price increases.”

“So there is a good argument that society has a compelling interest in keeping house prices from getting too high. Reasonable prices allow young, middle-class families to buy a house without going into too much debt. They also let people live where they want. Right now, there are a growing number of workers making long commutes, solely because they cannot afford a decent-size house in a close-in suburb.”

“They can blame our tax policy for part of their plight. It pushes up home prices by handing out $80 billion a year in subsidies for home ownership, mainly through the mortgage interest deduction. There really is no sound argument in favor of it. It overwhelmingly benefits well-off families who would buy a home even if it didn’t exist. About 70 percent of tax filers get nothing from the deduction, in large part because many don’t make enough money to itemize their tax returns.”

“In fact, a tax panel appointed by President Bush recently called for the mortgage deduction to be replaced by a smaller and fairer tax break. Unfortunately, Mr. Bush seems more inclined to listen to the National Association of Realtors, which has warned that reducing the mortgage deduction would surely cause house prices to fall. To which the rest of us should say: And what’s so bad about that?”

A homebuilder is out with results after-hours. “‘We are pleased to report first quarter results at the top of our guidance range,’ said Ara K. Hovnanian, President and CEO of Hovnanian Enterprises. ‘During recent months, market conditions in many of our more highly- regulated markets, including California, Florida, Washington, D.C., and the Northeast, have cooled from their previous white hot levels, with respect to both sales pace and price increases,’ Mr. Hovnanian continued. ‘While conditions in these markets have improved from the period between Thanksgiving and the end of January, they remain slower than they were during the comparable time frame a year ago.’”

“‘In certain markets where investors in new homes and condos have been more prevalent over the past few years, it now appears that such investors are no longer contributing to demand, but instead are adding to supply as they list their condos and homes for resale. As a result, we have seen an increase in the level of resale listings in several of our markets.’”

“‘However, we expect that sales of new homes will rebound in these markets once the overhang of investor resales is cleared out. Our view is supported by our experience in the Orange County, California market, where this exact pattern occurred about a year ago.’”

“Larry Sorsby, CFO said, ‘Our 2006 projections reflect the slower market conditions that we are experiencing currently, as evidenced by a 140 to 190 basis point projected decline in our consolidated homebuilding gross margin and a lower projected number of deliveries from California than we achieved in fiscal 2005. Our first quarter earnings were only about 15% of our projected earnings for the year,’ stated Mr. Sorsby.”

“‘While we expect margins on new sales to be lower as many markets return to a normal, healthy sales environment, without the positive effects of pent-up price increases that have benefited our margins over the past several years, we see no evidence of a ‘bubble bursting,’ ‘Mr. Hovnanian concluded.”

Inman News has this second piece on Phoenix. “New-home construction in the Phoenix area is analogous to the pink Energizer bunny’s incessant drumming. ‘It never really has slowed down,’ said Michael Chasse, a home builder specialist with a land brokerage company. ‘Since 1992 every year has been an increase from the prior year. We have been on a constant run.’”

“Home prices in the Phoenix metro area have been marching up at the fastest pace in the country, outpacing income growth and forcing affordability issues to the forefront. And there are indications of cooling in the Arizona real estate market and in other major metro areas across the country.”

“Existing-home prices were roughly flat in fourth-quarter 2005 when compared to third-quarter 2005, gaining about $400, or 0.15 percent, in that time. Single-family building permits, at about 54,000 in December 2005, dropped 5 percent in the Phoenix metro area compared to December 2004 permits, though this level of permits still ranks among the highest in the nation.”

“‘I really think things got overpriced for awhile, relative to the rest of the country,” said Shannon Hubbard, a realtor and real estate investor in Phoenix. ‘I think first-time buyers have been priced out of the market. There are not nearly as many investors as you had a year ago. Sales are down and inventories are up.’”

“Hubbard said the rental market is starting to get saturated. Builders seem more willing to offer co-broke commissions to real estate agents and offer incentives to buyers. ‘Days on market is up pretty much across the whole Phoenix metro area,’ she said. ‘A lot of buyers were getting in with interest-only loans and adjustable-rate mortgages. It will be interesting to see how many of those go back on the market as rates go up.’”

“Single-family building permits in Maricopa County, which includes Phoenix, Mesa, Tempe and such fast-growing suburbs as Gilbert and Surprise, reached an unprecedented 13,660 peak in third-quarter 2004 and are projected to maintain a level between 10,000 to 11,400 for the first three quarters of this year. Ten years ago, single-family building permits in the county ranged from about 5,700 to 8,200 per quarter.”

“Investors seemed to enter the Arizona real estate market ‘in droves’ in 2003-04. By mid-2005 property listings dwindled to about 5,000 in the valley area around Phoeix,’ Chasse said.”

“Grady Gammage Jr., a land-use lawyer, said residents are still grappling with rising house prices in the region. Housing has historically been very affordable in Arizona, he said, but the times are changing. ‘We still think of ourselves as affordable. We’re all just in shock at what housing prices are right now. We’ve never seen that before. Our sense is that it’s now stopped, housing prices have flattened and even dropped, the frenzy of speculation has stopped,’ he said.”

“Hubbard said she isn’t rushing to sell the properties she owns now given the latest market conditions. ‘My husband and I, we’re holding what we have and just kind of waiting to see,’ she said.”

The Register Guard reports on the predictable path of Oregons’ housing bubble. “Three words say everything about the shape of Lane County’s real estate market in January: selection, selection, selection. Buyers had more choices in January than at any time in two years, as the county’s inventory of active residential listings reached a 4.1-month supply at the current rate of sales, according to the monthly report from RMLS Inc.”

“Just a month earlier, the county’s inventory had been sufficient to last only 2.5 months, and it reached an all-time low of 1.7 months last May. ‘It’s leveling off, as far as I’m concerned,’ said Cory Neu, president of the Eugene Association of Realtors.”

“Neu said most of the increase in supply seems to be on the bottom end of the market, where investors are either building new entry-level homes or selling homes that previously served as rentals. The number of higher-end homes on the market has remained more stable, he said.”

“‘But I’m definitely feeling, as the statistics say, that there is a larger inventory on the market right now,’ Neu said. ‘And that’s really what’s been driving our appreciation these last couple years, that very low inventory.’”

“Despite the increasing supply, cost is one factor still working against some would-be home buyers. The median price of homes sold in January was $201,400, 20.6 percent higher than the median price in January 2004. However, the median price was at its lowest level since an all-time high of $209,900 was reached last August.”

“Neu said the gradual settling in prices is likely a reaction to expanding inventory. When more homes are on the market, asking prices are driven more by current listings and somewhat less by what previous sellers have gotten for their homes, he said. ‘You’ve also got to take a look at your competition that’s actively on the market,’ Neu said.”

“Home sales and construction have been been in a boom mode nationwide for the past two years due largely to mortgage interest rates that remained at historically low levels. Mortgage rates have risen nearly a full percentage point from their low point about a year ago, but apparently are not yet high enough to burst the housing market’s bubble, as many have predicted.”

“One explanation for the increase in the inventory of homes on the market is that new listings increased at a higher rate than either closed sales or pending sales. There were 510 new residential listings in January, 16.7 percent more than the 437 new listings reported in January 2004.”

CNN Money has this on home loans. “Mortgage applications fell last week as lower interest rates failed to spur demand for loans to purchase homes, an industry trade group said Wednesday. The MBA’s seasonally adjusted purchase mortgage index decreased 1.9 percent to 400.8 from the previous week’s 408.7. The index, considered to be a timely gauge of U.S. home sales, was also below its year-ago level of 440.0.”

A homebuilder had this report out. “William Lyon Homes today reported the Company’s 2005 fourth quarter and fiscal year operating results. The number of homes closed for the year ended December 31, 2005 was a decrease of 8% as compared to the year ended December 31, 2004. Net new home orders for the three months ended December 31, 2005 were 460, a decrease of 7%. During the fourth quarter of 2005, the average sales price of homes down 7% as compared to $570,000 for the comparable period a year ago.”

“During the last half of the fourth quarter of 2005, the Company began to experience some slowing in new orders in many of its markets, increases in cancellation rates and increasing pricing pressures from several of its competitors who initiated aggressive incentive and discounting programs.”

“This softening in the Company’s markets is continuing into 2006 as the Company’s orders have declined for the first eight weeks of 2006 by 31% over the comparable period in 2005. Cancellation rates have increased in this period in 2006 to 26% from 12% in the comparable period in 2005. The Company is also seeing increases in its standing and unsold completed inventory in 2006 as compared to 2005.”

In Phoenix, Arizona. “The Valley’s slowing housing market may mean the buyer is king again, but that didn’t stop new-home builders from raising prices for their houses last month. The average price of a new home in February rose 1.2 percent from the previous month. Builders were using incentives to keep buyers motivated. Those incentives ranged from 3.75 percent interest financing options, to free pools, to furniture allowances and free ‘option’ packages.”

“The average price of new-home sales that closed in January dropped to $306,000, down from $310,000 in December. RL Brown said he’ll be looking closely at sales activity in new developments in the far reaches of the Valley as an indicator of the local market’s strength. ‘They moved out there originally because they saved a lot of money (even if it required a longer commute),’ he said. ‘If the new buyers can’t save a lot of money, they may not make that same trade-off.’”

From The Street.com. “Ken Rosen, a University of California-Berkeley real estate professor and hedge fund manager, believes a 25% to 30% total drop in new-home sales is possible over the next three years, and that builders will be meaningfully hurt this time around. ‘It all depends on how much sales and orders slow and how much earnings are hurt by the margin squeeze we expect in 2007 and 2008,’ Rosen says. ‘I don’t believe that if housing activity is down 25% to 30% in the next two to three years … that (builders’) earnings can hold up at current levels.’”

“What the bulls don’t understand, Rosen says, is that builders ‘have been borrowing demand from the future over the last few years.’ Easy credit amid loose lending standards helped fuel much of the boom, he says.”

The California press reacts. “With unsold inventory continuing to grow, now at over 7,000 properties, according to the California Desert Association of Realtors, the valley market appears a far cry from the fevered seller’s market of early 2004. The ramifications of a healthy residential market are sweeping for buyers, sellers, renters and investors alike.”

“The current unsold inventory, already up 10 percent from just a month ago, is more than double the level of February 2004 and more than five times the level seen in April 2004, during the height of the fevered seller’s market. ‘We are having to lower prices and be willing to wait longer for buyers,’ said Jill Chavez of La Quinta, who has invested in several east valley properties in recent years.”

“In February 2005, there were 3,079 unsold homes on the market. This February there were 7,046. The median price for a new construction home dropped from $420,500 in December to $398,500 in January.”

The LA Times. “Home builders figured they’d face cooling demand this year. But they’re also facing another challenge: competing against some of their most recent customers. Speculators, whose robust purchases made 2005 one of the best years for new-home sales, have reined in their buying and started selling amid signs of a housing slowdown. The influx of their almost-new homes is making it harder for builders to sell brand-new ones.”

“Even though builders have tried to limit investor purchases by prohibiting buyers from selling homes within a certain time, ‘clearly they slipped through,’ said John Burns, an Irvine-based building industry consultant. Orange County resident John Cullum is one such investor. He’s trying to sell a new home he bought last year.”

“Cullum recently listed a four-room house in the Riverside County community of Menifee that was completed in October by privately held builder Van Daele Homes. It has never been lived in and is listed at $460,000, a price that he believes is competitive with yet-to-be-built models nearby that are being peddled by other building companies. ‘There’s so much new construction in this area,’ said Cullum, who said he received more than 100 inquiries in recent weeks. But his house is still not in escrow, and Cullum acknowledged that demand seemed slow.”

The Orange County Register. “A slowdown in homebuying continued through January in Orange County, causing inventories of unsold homes to rise. Unsold inventories hit their highest level in seven years. It would take 8.9 months to sell all the homes on the market in January, CAR reported. The last time it took longer was November 1998.”

“Meanwhile, Irvine-based Standard Pacific Corp.reported Tuesday that its new-home orders dropped by 13 percent in the year ended Sunday. Buyer demand didn’t match ‘the unsustainable pace of the past few years,’ the company said.”

“The firm reported that new-home orders were down 24 percent in Southern California ‘due to a softening in buyer demand, most notably in San Diego and, to a lesser degree, in Orange County,’ a company statement said.”

The Santa Barbara News Press. “Home sales and price gains across Santa Barbara County flattened in January, perhaps setting the tone for what many say will be a relatively soft year for the local real estate market. Sales of South Coast homes fell by 16 percent last month. Although the downpours and floods of January 2005 were cited as slowing sales last year, the mild weather of the recent January did little to boost buyer interest.”

“‘In January a year ago, we had the El Nino rains that got into the way of showing homes. So compared to that, you would think that January this year would have been better for sales,’ said Mark Schniepp. ‘But sales were down, and it looks like February will be down, as well.’”

“In January, Santa Maria posted a median of $419,500, a rise of just under 5 percent from a year ago. Sales were basically flat. The Santa Ynez Valley reported a decline in its median price to $810,000 in January, compared with $865,000 a year ago.”

The Boston Herald has the latest from Massachusetts. “Massachusetts house sales plummeted 21 percent last month, stoking fears that the housing bubble may have burst and could send shock waves across the economy. It was the biggest year-over-year sales drop in almost 11 years, as Realtors recorded the slowest January since 1996.”

“What’s more, one of the worst fears of homeowners appears to be coming true: House values have dropped nearly 8 percent since August.”

“The MAR reported yesterday that only 2,345 houses changed hands last month. That’s down more than 20 percent from January 2005’s volume and an even steeper 34.4 percent from December levels. ‘Higher mortgage rates, increased inventory levels and bold predictions of major price corrections’ kept buyers on the sidelines, said MAR President David Wluka.”

“The MAR also said median house-sale prices fell to $345,500 in January, off 0.1 percent from January 2005 and 2.4 percent from December. All told, median prices have dropped 7.9 percent from August’s $375,000 peak. Wellesley College economist Karl Case said the latest figures show ‘evidence of a bubble, but housing-market bubbles don’t unwind the way stock-market bubbles do.’”

“The MAR said median condo-sale prices hit $270,000 last month, down 1.8 percent from December but up 1.9 percent from January 2005.”

The Boston Globe. “The number of ‘active listings’; homes being offered for sale, for both single-family homes and condos in January rose 41 percent from January, 2005, the realtors association said. ‘It’s a balloon, not a bubble,’ Wluka said of the local housing market. ‘Balloons inflate and deflate; bubbles burst.’”

“‘For the last few years, buyers often outnumbered the supply of homes for sale, allowing prices to escalate rapidly, but that’s no longer the case,’ said Wluka. More recently, activity has picked up because of mild weather and ‘more realistic pricing on the part of home sellers,’ Wluka said.”

Some reports on Floridas housing bubble. “The median price of an existing home sold in Palm Beach County in January fell to $393,700, well below the November peak of $421,500 and the first time the typical home has sold for less than $400,000 since July. Meantime, sales volumes plunged as buyers, wary that prices will keep falling and a better deal could be around the corner, waited out the slowdown.”

“The number of sales in Palm Beach County plummeted 39 percent compared with a year ago. ‘Palm Beach County has a mini-blood bath going,’ said David Dweck, a Boca Raton real estate agent and investor. Sales volumes also fell in the Treasure Coast, dropping 44 percent compared with a year ago.”

“Shrinking prices have proven painful for some sellers. Bob Graeve, an agent in Palm Beach Gardens, remembers a seller signing a contract to pay $615,000 for a Gardens home last year. The lender agreed to finance that amount, but the deal fell through, and the house now is on the market for $525,000.”

“The mushrooming number of homes for sale reflects buyers’ newfound caution, said Heidi Cole, managing director of Corcoran Real Estate in Palm Beach. ‘There was so much bubble talk that people got scared,’ Cole said. ‘A lot of buyers are sitting on the sideline waiting to see if prices are going to fall.’”

“South Florida’s five-year housing boom is over. The number of home sales fell 36 percent in Broward to 552, the fewest used homes sold in the county in one month since the Orlando-based state Realtors group started tracking home sales and prices in 1994. In Miami-Dade, home sales in January dropped 28 percent from a year ago.”

“The real estate slowdown also has spread to the once-frenetic condominium market. The state Realtors association Tuesday reported monthly condo sales for the first time. Existing condo sales for January dropped 21 percent in Broward and 13 percent in Miami-Dade, compared with the same period last year.”

“Sales and price appreciation also is declining in Palm Beach County. The number of existing homes changing hands in January fell 39 percent to 586, the fewest houses sold in the county for one month since February 1997. Palm Beach County’s median price for January was $393,700, up just 9 percent over January 2005 and down from December.”

“Prices and the number of sales for existing single-family homes in Lee County fell sharply in January as the inventory of unsold houses soared. The median sales price was $287,200, down 10.9 percent from December’s $322,300. Sales declined 30.7 percent from 1,084 to 751.”

“Fort Myers-based real estate broker Denny Grimes said, ‘The inventory’s still climbing. There are more than 11,000 houses on the market, triple what it was at the low point in the second quarter of last year.’”

“Naples home sales plunged 31 percent in January 2006 compared with January 2005, while condominium sales dropped 41 percent in those same months. Inventory is up more than 400 percent, Brad Inman said. ‘Tell them the sky is NOT falling,’ said Jo Carter, president of the Naples Area Board of Realtors. Also, Carter said statistics can be easily manipulated. ‘I hate statistics. They can be so deceiving,’ Carter said. ‘We live in paradise,’ she said.”

“Buyers like Sharon Raymond who just sold her condo in Davie don’t have to rush to buy the first home they can afford. The 47-year-old school secretary plans to take her time, something she wouldn’t have been able to do last year. ‘You had to make an offer at that moment and give them exactly what they were asking for,’ she said. ‘But now homes aren’t selling nearly as quickly as before. A couple of places have lowered their prices since I’ve been looking. I’m taking that as a good sign.”

Have a housing bubble photo? A shot of overflowing for-sale signs or what half a million dollars buys in your neck of the woods? Please send it by email to:

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