The Housing Bubble

A Philadelphia Inquirer columnist has this on second homes. “One of my fantasies is to have a second home near a Vermont ski resort. As impractical as this is, I’ve watched the for-sale listings on Realtor.com and seen some appealing properties languish for months.”

“And a buddy of mine complains that he couldn’t possibly sell his Vermont home for as much as he paid five or six years ago. It seems like the real estate market has cooled, not just in Vermont but also in many parts of the country. Maybe it’s turning into a buyers’ market. So is this a good time to shop for that second home you’ve wanted?”

“Perhaps, but only if you expect to keep the second home for many years and view it as an indulgence rather than an investment. The days of flipping second homes for quick profit appear to be over.”

“The NAR reported Tuesday that sales of existing homes fell 2.8 percent from December to January, the fifth straight month of declining sales. January sales were 5.2 percent below those of January 2005. The Northeast was particularly hard hit, with sales off 10 percent from December to January and down 13.2 percent since January 2005.”

“While sales of single-family homes dropped only 1.5 percent from December to January, condo and co-op sales dropped a whopping 10.6 percent. Previously, this was one of the hottest markets, as buyers gobbled up second homes as investments. The falling sales confirm stories about investment properties sitting empty while speculators who had hoped for quick turnarounds slash prices in the absence of buyers.”

“Second homes and investment properties are hit hardest in a cooling market because people do not need them. As investments, second homes are illiquid: You can’t get your money out with the click of a mouse, as with a stock or mutual fund. Expenses of maintaining and running a second home can be offset by renting it part of the time, but to get the biggest tax benefit on a rental, you have to severely limit your own use. Also, dealing with renters can be a terrible headache, or a big expense if you hire a manager.”

“With real estate, many people focus on purchase price and sale price, figuring that if the second figure is bigger, they’ve made a profit. To be accurate, you should look at all the costs. Say you bought a place for $300,000, borrowing $240,000 at 6 percent. Suppose the property appreciated 6 percent a year, about double the inflation rate.”

“After five years, the property would be worth just over $400,000, for a $100,000 ‘profit’ on the $60,000 initially invested as the down payment. But interest would have cost about $70,000, reducing the profit to $30,000. A $30,000 gain on a $60,000 investment over five years is an annual return of about 8 percent, which is nothing special.”

“But you might also have paid $5,000 a year in real estate taxes, and an additional $1,000 a year in homeowner’s insurance. That’s $30,000 over five years, wiping out your profit. If you pay a standard 6 percent Realtor’s commission to sell the property, you’d be $24,000 in the hole. And we haven’t considered maintenance, utilities and furnishings, and the cost of traveling to the property.”

“Sure, some people make money on second homes, but I bet many are making less than they think. Best see that dream home for what it is: an extravagance, not a moneymaker.”

A Florida writer had a letter printed in the Sun Sentinel. “Re: ‘Sellers be patient; buyer’s market returns’ (Monday): The headline suggests it’s a good time to buy.”

“The housing market has slowed, inventories are way up, sales are way down, prices are flat. That’s called a ’stalled market,’ and will likely be recognized as ‘the peak’ once we gain a little hindsight. The next likely phase (already starting) is price reductions and purchase incentives.”

“Real estate values don’t change on a dime like stocks sometimes do. It’s more like turning a big ship around.”

“Since price increases have stalled, there is absolutely no urgency left to ‘get in before it’s too late.’ Buyers would be wise to wait and see if prices will in fact decline, rather than buying into a falling market.”

“Although the leverage of buyers is increasing at the moment, a ‘buyer’s market’ is not at or near ‘the peak,’ but rather at or near ‘the bottom.’”

“I also question your advice for sellers to ‘be patient.’ There is growing consensus that substantial price declines are in order. Watching inventory rise around you and the value of your asset decline as you remain ‘patient’ may not be a desirable strategy.”

Inman News reports the homebuilders in California didn’t take advantage of the warm January weather. “California housing production dropped about 10 percent from January 2005 to January 2006, the California Building Industry Association announced today. Housing starts (as measured by building permits issued) totaled 12,357 in January, a decrease of 1,430 units compared to January 2005.”

“The total includes 9,036 single-family homes (down 10.4 percent from January 2005) and 3,321 apartments and condominiums (also down 10.4 percent from January 2005). Overall, starts were down 8 percent from the previous month of December. Single-family starts dropped 6.8 percent and multifamily starts dropped 11.1 percent.”

“CBIA Chief Economist Alan Nevin said that construction is expected to pick up in the second quarter of the year. Layne Marceau, 2006 CBIA Chairman and a San Francisco Bay Area home builder, said that production is not keeping up with the demand for new homes and apartments. Marceau (blamed) a shortage of land that is ‘zoned and ready to build new homes, condos and apartments.’”

“The CBIA is a statewide trade association representing about 6,500 businesses, including home builders, remodelers, subcontractors, architects, engineers, designers, and other industry professionals. A recent study determined that home-building generates approximately $60 billion a year to the California economy and creates an estimated 526,000 jobs statewide.”

From the associations website. “”Once again, the construction industry was the shining star in 2005, accounting for 13 percent of all new jobs in the state. In both 2004 and 2005, one out of seven new jobs was in construction.”

“In 2006, we should see a gentle slowdown of single-family construction. Riverside/San Bernardino experienced a major slowdown in new job growth in 2005, with wage and salary jobs increasing by approximately 25,000, only half the gain of 2004. It appears that 2004 was a positive aberration, but not likely to be repeated in the near future. As in each of the past four years, construction accounted for one-fourth of all new wage and salary jobs.”

“2006 will be a slowdown year for San Diego, both in terms of job gains and construction. Although 2005 saw a large gain in employment, few of the gains were in the basic industries that drive the economy. Most job gains in the past year were in support jobs like retailing, local services, and local government. Of all wage and salary jobs (ones which receive W-2’s), fully one-third resulted from gains in construction.”

From Hovnanian financial results yesterday. “Profits for homebuilder Hovnanian Enterprises Inc. were flat in the first quarter amid other signs that the housing market is cooling. Hovnanian saw the number of home contracts decline by almost 11 percent in the Southwest and 37 percent in the West.”

Danielle DiMartino writes at the Dallas News. “The Federal Reserve’s survey of consumer finances for 2001-04 illustrates how vulnerable we are to a cooling housing market. As Merrill Lynch aptly put it, ‘The Fed survey shows that this tide did not lift all boats.’” “As for paychecks, median income across all strata rose by a measly 1.6 percent after inflation, a sharp slowdown from about 10 percent in the prior period surveyed, 1998 to 2001. Not surprisingly, debt played an integral role in the deep slide.”

“After falling for years, mortgage and other debt as a percentage of total family assets rose to 15 percent in 2004 from 12 percent. Moreover, fewer saved in the latest period. The Fed survey found 56 percent squirreling away acorns for a rainy day, down from 59 percent three years ago.”

“Wednesday’s report on the savings rate showed that it remains in negative territory, where it’s been for seven of the last eight months.”

“Moody’s Investors Service reported Tuesday that for the first time in three years, auto loan delinquencies have started to rise. More telling is that serious delinquencies in the home equity sector are up 32 percent over the last year.”

“Maybe squeezing into that home with a piggyback loan and buying a second SUV despite being upside down on the trade-in were not good ideas after all. Such poor judgment calls are common among 35- to 44-year-olds, who experienced the greatest decline in net worth.”

“Those between 55 and 64 saw the most dramatic increase in net worth. We’re talking about the people who were already in a home when the boom began and have counted their winnings in the form of fat capital gains. Which brings us to a recent Census Bureau study. In the last four years, the age group that’s experienced the most pronounced decline in homeownership rates was those between the ages of, you guessed it, 55 and 64.”

“Could it be that the notion that retirees will keep their homes is fundamentally flawed? (If so, it renders fatally flawed the theory that baby boomers will retain two residences in retirement.) In sum, the wealthiest of Americans are net sellers of homes and have the most wiggle room on their balance sheets.”

“The most-stretched households have the least in the way of give. And those who are selling at the peak and pushing prices downward may be forcing the hands of many who are in no position to give up the roof over their heads.”

Even television stations in California are reporting on the housing bubble. Palm Springs, “The Valley’s real estate market is cooling off. Depending on who you listen to, it’s already in the deep freeze. That’s bad news for people trying to sell their homes. It may be good news for people who’ve had trouble buying.”

“While valley home prices have gone up, there are still over 7,000 homes on the market right now. That’s about 4,000 more than last year. And homes that sold in 58 days just a year ago are now taking more than two months to sell.”

“At least one local realtor says many people believe they can’t afford to live here, when they really can. ‘If they would really look into the financing options available, including 100% financing programs, they might find that they do have an opportunity to buy.’”

“So if you’re still looking to buy a home, but can’t afford it Coldwell Banker tells us you might have to move further away from the center of the desert to find something cheaper.”

And from Fresno. “The Valley housing boom is over, with home prices in some neighborhoods dropping $50,000 in just the past two months. When Action News broke down the numbers, we found that in the past couple months, the bubble appears to be bursting. To realtors, it’s a market adjustment. But to some analysts, it’s a full-on correction.”

“Local housing prices have come tumbling down over the last two months, erasing months of drastic increases. Just two months ago, the median sale price for homes in Clovis’ 93611 zip code was $439,000. But in just 60 days, those homes plummeted $51,000, to $388,000.”

“Over the same time frame, Fresno homes were unchanged, while homes in Merced lost a little more than $4,000 in value. The correction hurts worst for people who flip homes, buying them and selling them again within a matter of months. ‘You can drive through any brand new subdivision. You will see just as many for sale signs and for rent signs as you see people living in the homes,’ said Joan Jolly, from the Fresno Association of Realtors.”

“Realtors say the adjustment is great news for buyers, who are all of the sudden paying a lot less for the same homes. Sanger homes are in the top 10 in the entire state for appreciation over the last year. They’re up 54%. But for the last two months, they’ve been on the way down too, by almost $17,000.”

The Herald Tribune reports on the housing bubble in that part of Florida. “The Sarasota-Bradenton market had the dubious distinction of being the Florida market with the biggest decline in sales during January: a precipitous 48 percent drop when compared with the same month a year ago, more than double the state’s 19 percent decline.”

“It might be Southwest Florida’s affluence that is causing the slowdown. ‘I can tell you the buyers are here,’ said Scott Sosso. ‘The problem is with the sellers who don’t have their homes priced correctly.’ Sosso’s theory is that because so many sellers, especially in the upper end of the market, are reasonably well off, they can, and do, wait for their version of the ‘right offer.’”

“That would also explain the almost magical ability of prices to remain at record levels despite soaring inventory levels. Sarasota, for example, had roughly 1,626 listings in early July, a number that has climbed to more than 6,000 now. Deals at the newer ‘reasonable’ prices are simply not being done, Sosso said.”

“Sarasota-Bradenton saw sales of existing condominiums drop 41 percent. In Charlotte County-North Port, the condo action was far more anemic, dropping a whopping 92 percent as prices swooned 18 percent to $165,000.”

“Even Realtors who have been expecting things to improve in the region’s high season have to be thinking that it’s going to be tougher until the market sorts out its pricing and supply issues. The absorption rate of homes, or ‘weeks on hand,’ in the Sarasota County market has increased from 10.4 weeks in July to 73.3 weeks this month.”

“Like homes, condominium listings have increased considerably in the last eight months or so, rising from 1,154 in July to 3,232 now. The absorption rate for that segment of the market has gone from 14.3 weeks for condos to 62.8 weeks.”

“‘Based on the retreat of investors and or speculators and some temporary hesitancy on the part of second and third homebuyers in many of Florida’s coastal markets, you would expect to see a measurable drop in sales year over year,’ Budge Huskey, Coldwell Banker’s Sarasota-based Florida president wrote. ‘You can’t keep Florida down for long.’”

“But don’t tell that to Mark and Stacey Eve. In January, the couple felt they were ready to sell their home on Novus Street near downtown Sarasota. Unfortunately, four other homeowners on their block decided to do that, too.”

“Priced at $249,000, the Eves’ home is move-in ready and one of the lowest-priced on the street. They are perfectly willing to cooperate with real estate brokers who bring them customers. But after four weeks of fliers and advertisements, only two potential buyers have come inside to take a look.”

“The couple are having a larger home built for them in North Port that is scheduled to be ready by April. ‘My husband keeps telling me we should have moved last summer,’ said Stacey Eve, who convinced her hubby not to list it then so that they would only have to move once. ‘We are concerned about the market. We don’t want to float two mortgage payments.’”

“As in Sarasota-Bradenton, listings of single-family homes in Port Charlotte and Punta Gorda are stacking up, more than doubling from a year ago to 2,658. The trend prompted Karen Norberg, a longtime real estate broker, to predict a sharp adjustment in prices. ‘I would say the market is going to adjust itself somewhere between 10 percent to 15 percent below last year’s market. On a $500,000 house, you are talking somewhere between $50,000 and $60,000 reduced. It has to come down that amount to even be in the running to be sold.’”

This Australian report show what government officials think of a housing bubble after the fact. “The government would be happy to never see another housing boom, Treasurer Peter Costello says. Apart from WA and the Northern Territory, housing prices have flattened in recent times, after booming through the early part of this decade.”

“Mr Costello said it was a welcome thing that housing had been slowing for some time. ‘I think house prices got too high and as a consequence of that, you would expect a correction and we’re getting a correction,’ he told Southern Cross Broadcasting.”

“‘I want a see a correction, once you have had that correction, what you would like to see is stable prices, maybe small increments, but I don’t want to go back to the situation where house prices were booming in the way they were a couple of years ago.’”

“‘That’s not good for an economy. Remember this point, the bigger the boom, the bigger the bust. The reason we’re against booms, is we’re against busts.’”