The Housing Bubble

Friday desk clearing time. “Greater Vancouver’s high-flying real estate market saw a 4.1-per-cent decline in sales volume in February compared with the same month a year ago, the first year-over-year decline since last March. Condominium sales showed the biggest drop, falling 8.7 per cent to 1,212 units compared with last February. Sales of single-family homes declined 3.2 per cent to 1,177 compared with February of 2005.”

“‘It may be pointing to the affordability issue,’ David Rishel said.”

“The cheap mortgages that fueled America’s real-estate boom are beginning to hurt the homeowners they once helped. Higher interest rates and the end of honeymoon periods for too-good-to-be-true teaser rates are causing payment shock for those who said “I do” to exotic loans. ‘A lot of people who’ve taken on exotic loans don’t understand them,’ says Scott Hanson. ‘The mortgage industry has sold these loans as a way to buy more house than you’d otherwise afford. Anyone who goes out today and gets an adjustable rate has got to be loony.’”

“You remember that loan, don’t you? Wasn’t it just a couple of years ago when interest rates were nearly sub-zero and you and your very smart loan officer thought it would be a great time to pull out a little equity. But now that fully indexed rates are near 7.50 percent and at least a full percentage point above current fixed rate fare, and going higher, then it makes sense to get into a lower fixed rate doesn’t it?”

“If your loan officer played her cards right, you’re thinking right now about refinancing into a fixed rate loan.”

“D Magazine’s current cover story extols the Dallas real estate market as bulletproof. Unfortunately, that theory ignores an old tenet of economics. Oversupply, the thinking used to go, can prove as harmful to a marketplace as overdemand.”

“That notion has gone the way of the dinosaur, especially as it pertains to condominiums. We’ve got more high-end condos under construction than you can shake a stick at.”

“Moody’s John Lonski commented on the trend: ‘A likely contraction of speculative homebuying will probably soften pricing by enough to encourage a longer period of price search or longer stretches of negotiation over home selling prices. If only to better ascertain the sustainability of home prices in the absence of speculation, home sales will probably be lower than otherwise over the near term.’”

“Mortgage banker PHH said Wednesday that it will not be able to file its annual report in a timely fashion because its auditors are still reviewing the company’s finances. In the regulatory filing, the company also said during the review that it had found a number of ‘control deficiencies” in its internal financial reporting system.”

“Long-term Treasury rates broke out of a month-long range…upward, and today above last November’s two-year high at 4.68 percent. Among the consequences rippling outward: confirmation that a portion of the ‘yield curve inversion’ has been caused by speculative borrowing in low-rate Germany and Japan to buy high-yielding U.S. Treasury bonds. If ECB and BOJ rates are rising, this ‘carry trade’ is no longer a good idea.”

“Consumer confidence fell in February as home-buying attitudes dropped to their lowest level in 15 years, according to the University of Michigan’s Survey.”

“Home sales in Virginia fell for the fifth consecutive month in January. Virginia’s median existing-home price for January was $165,425. January’s median price is down 8.2 percent from December 2005’s median of $180,260.”

“‘Every time I refinance, I use the money to buy another house,’ explained Hector Mata. ‘My goal now is to buy two houses a year.’”

“‘People are looking at their mortgage and equity differently than they used to,’ Lori Garcia in Modesto said. ‘Paying off a mortgage doesn’t make sense anymore. Why have all of your equity sitting in dirt doing nothing for you? You want to put your money to work for you.’”

“Statistics show that Stanislaus County home values fell during nine of the past 24 years, including annually from 1982 through 1984 and from 1991 through 1996. Home sales prices, in fact, dipped in January throughout Stanislaus, San Joaquin and Merced counties.”

“‘I think we’re at the top of the real estate market right now,’ said Mata. He’s said he’s ready to buy more property if prices start falling.”

The Union Tribune reports on San Diego’s housing bubble. “California’s population growth last year continued to slow as more people exited the state than moved here, fueled in part by the steady rise in already high housing prices. San Diego County posted its slowest rate of population growth in a decade.”

“‘I think the rose is off of California as the land of opportunity,’ said Ed Shaffer, senior demographer with the San Diego Association of Governments. ‘What’s changed is we’re not noticing an increase in people leaving, but instead, there are fewer people coming here from within the U.S.,’ Howard Roth, chief economist for the Department of Finance speculated. ‘The first thing that comes to mind is housing prices.’”

The Sacramento Bee. “Lately, Sacramento County can hardly replace residents as fast as it loses them. Last year, the county’s population grew at a slow pace not seen since the late 1990s. The trend hit most surrounding counties and the rest of the state, too. Ditto for California as a whole, lower domestic migration brought down the growth rate. California lost slightly more people to other states than it drew last year.”

“People considering a move here are now wondering ‘whether this is paradise,’ said Rob Wassmer, professor at California State University, Sacramento. ‘It’s still positive. (The growth rate) is more than other parts of the country. But I don’t think it’s surprising that it’s going down.’”

“Wassmer and several other economic and demographic experts agree about the main cause of the trend: rising home prices.”

No link is available for this New Times story. “Bill Seavey is tired of trying to sell his Grover Beach home. It’s been on the market since last July, and the one offer he got was so much lower than his original asking price that he decided to turn it down. That was in November, and he says now he wishes he’d taken the offer because he hasn’t had another one since.”

“And he’s continued to lower the price, to no avail. He’s decided to try a a ’round robin’ auction on March 18. If things go as planned, Seavey’s home will sell at a competitive price. In the current ’soft market’ this might seem like an unreasonably high goal for a home seller to have, but Seavey says that this is exactly the kind of market his method is mean for, and it’s a win-win situation for both the buyer and the seller.”

And from the Bakersfield Californian. “Bakersfield’s real estate market may be cooling, but it’s still ranked among the nation’s top 20 metropolitan areas for house price appreciation. Local prices began leveling off last summer and have dipped slightly in recent months. In January, Bakersfield’s median house price was $277,591, a 4.8 percent dip from the month before, according to data from local appraiser Gary Crabtree.”

“‘It’s too early for us to tell if this is a permanent trend or if this is just a typical winter market,’ he said. The number of houses on the market has now climbed to nearly 2,800, up from around 800 in June.”

“Some sellers have slashed their asking prices, while others have started offering buyer incentives. Investors hoping to make a quick turnaround for a big gain are also losing interest.”

“Still, Bakersfield is fortunate, said real estate agent Jon Busby. ‘It’s not going to plummet like maybe other areas may,’ said Busby.”

A Fed official was speaking today. “‘The outlook for real activity faces a number of significant risks, including the possibility that house prices and construction could retrench sharply and that energy prices could rise significantly further,’ Federal Reserve Vice Chairman Roger Ferguson said on Friday.”

“‘The incoming data suggest that the housing market has begun to cool somewhat, but they do not point to a sharper falloff,’ Ferguson said. ‘Of course, house prices may become an area of vulnerability,” by reducing the growth of household wealth, leading consumers to cut back on spending.’”

“‘House prices have increased at a remarkable rate during the past several years, and for some fundamentally sound reasons, including low mortgage rates. However, the possibility remains that the recent run-up in prices may be greater than can be justified by the fundamentals and that increases in house prices may moderate or undergo a sharper adjustment. The latest data on house prices, including the figures released this week, provide a hint that a moderation in house prices, and nothing more serious, may now be under way.’”

“‘Another possible avenue for gauging the effects of housing prices on the economy is to look at experiences in other countries..Australia has experienced a decline in real house prices over the past year. One difficulty in interpreting the foreign evidence is that gauging the direction of causality is difficult, that is, are adjustments in house prices causing a slowdown in real economic growth or is a slowdown in activity causing the adjustment in house prices.’”

“On this point, a recent Federal Reserve study of international experience documented the pro-cyclicality of real house prices: House prices have tended to reach a maximum near business cycle peaks, with real GDP growth slowing during the first year or so after house prices peak.’”

“‘Given the limits of what we know about the future path of housing prices and about the implications of any particular house-price scenario for real activity, the Federal Reserve will have to continue monitoring this area closely.’”

A pair of reports looks at the rent or buy question. “John, a chiropractor in Los Altos, California, has just committed the financial equivalent of heresy. To the surprise of many of his friends, he has defied the cult of home ownership, selling his historic five-bedroom house in favour of renting.”

“‘I don’t feel that house prices can support more appreciation and will probably drop back for the next few years, so it seemed the right time to cash out,’ he says. ‘We pay about 40 per cent less in rent than our mortgage and don’t have to spend a cent on repairs.’”

“An exhaustive survey of the US housing market by HSBC has highlighted the appeal of renting in many parts of the US. ‘It’s fairly common to say that renting is like throwing money down the drain, but people forget that there is a lot of that in owning too,’ says Ian Morris, an economist at HSBC. ‘There is not a lot of difference between paying rent to a landlord or interest to a bank.’”

“Even taking account of the generous tax subsidy, new homeowners are paying an increasingly hefty premium over renters. The annual cost of home ownership in Los Angeles, for example, is now more than double the cost of renting. LA homeowners have long been paying more than renters, says Mr Morris, but the premium for owning is now 40 per cent more than its average over the past three decades. The figures for many of the other leading US property markets are no less alarming.”

From Newsday. “Ray Smith knew the heyday of real estate had to end sometime. So last fall he and his wife, Michele, sold the five-bedroom Port Jefferson home they bought in 1988, getting $856,000, or more than 2 1/2 times what they paid for it. Instead of using their profits to buy another home, they chose to rent a house in Stony Brook. A bit like a short-seller in the stock market, Smith is betting the housing market will falter.”

“‘”I think I sold at the peak,’ said Smith. ‘The more I looked at the numbers, I said, ‘This can’t go on forever.’ It was not an easy decision to make, especially because Long Island lacks a significant supply of rental property. Nearly six months later, however, they’re pleased with the decision. ‘Now all of a sudden, we have money for things like furniture instead of constantly living with credit cards and debt,’ said Smith, who has paid off what the family owed and invested some of the money in a mix of stocks and bonds.”

“Some homeowners, however, aren’t worried about buying again in the future. They’re getting out of ownership altogether. Take Beverly Slott, who now lives in a rented apartment in Rockville Centre, sold her home in Oceanside last July, a home she bought 47 years ago for $16,000. Although Slott wasn’t thinking about the housing market realities, her son, Rockville Centre certified public accountant Ed Slott, was. And he backed his mother’s decision the whole way.”

“‘What are you going to do, buy another place that’s highly overpriced?,’ Ed Slott said. ‘It seemed better to invest the money and rent.’”

The Star Bulletin has this report on Oahu’s housing bubble. “Oahu’s residential real estate market is still posting strong year-over-year gains, but from month to month the market is falling, leaving buyers and sellers to interpret the mixed signals.”

“While the median price paid for a single-family home on Oahu was $613,500 in February, 16.7 percent above the year-earlier $525,500, that was down 0.2 percent from January’s $615,000 median, according to statistics released yesterday by the Honolulu Board of Realtors. The record for Oahu’s single-family median price, $640,500, was reached in November.”

“The number of houses sold on Oahu fell 6.8 percent in February from a year earlier as more buyers balked at prices and turned to condominiums.”

“‘Frankly, the market is just not that good,’ said (realtor) John Riggins. ‘The consumer needs time to rethink and adjust to the higher prices and higher interest rates.’”

“Residential real estate professionals on Oahu have said that the market’s once frenetic pace, with buyers making multiple offers on tear-downs and paying premiums on properties site unseen, has slowed. ‘We’re in the zone,’ Paul Brewbaker, Bank of Hawaii’s chief economist said, forecasting that median home prices on Oahu, Maui and Kauai will soon start to echo those in California’s now cooling markets.”

“Three out of five of California’s top markets, including Silicon Valley, San Francisco and Orange County, have gone flat, he said. ‘I always say that Hawaii is the western edge of Orange County,’ Brewbaker said.”

“Even wealthy baby boomers, who have boosted Oahu’s home prices for much of this housing cycle, are expected to start showing some pause as the gap between Hawaii and California prices continues to close. ‘They aren’t all looking for a piece of the rock. It’s also about investment,’ Brewbaker said. ‘When their 30 percent rate of return goes to zero, from a portfolio prospective, real estate starts to fade a little bit.’”

“As prices have risen and sales have decreased, inventory has begun to build on Oahu, and the market advantage has begun to swing toward buyers who are beginning to negotiate concessions for the first time in a long while, Riggins said. The last time Oahu had this much inventory was in March 2003, Riggins said. There is a 5.3-month supply of single-family homes and a 4.4-month supply of condominiums remaining for sale.”

“The buildup in inventory and slowdown in the market is ‘absolutely incredible news’ for a buyer, Riggins said. ‘But sellers are going to have to adjust their mental outlook, and real estate agents will have to adjust their thinking,’ he said.”

The Virginia Pilot has this report on that housing bubble. “Years of hefty returns and attractive offers made real estate in South Hampton Roads a seller’s market, but the latest market data show the pendulum swinging back toward buyers. Properties are staying on the market longer, and more buyers want home inspections and help with closing costs.”

“‘The market has cooled off quite a bit,’ said agent Jim Willis in Virginia Beach.”

“Across the region, the median sale price was $229,900. That’s $32,150 more than a year ago. Median prices also rose compared with January’s levels in some locales. But those gains were far less dramatic, 2.7 percent in Norfolk, 4.6 percent in Virginia Beach and 3.7 percent in Suffolk, while prices were flat in Portsmouth and fell by $9,900, or 3.7 percent, in Chesapeake.”

“In Virginia Beach, which provided 38 percent of the area’s sales in February, the average market time more than doubled, to 46 days from 22 a year ago. In Portsmouth and Suffolk, properties lingered on the market for two months or more on average.”

“Buyers’ agents are taking notice, and enjoying it. ‘We had the best February for buyers than we’ve had in four years, said Maggi Davis, broker-owner in Virginia Beach.”

“Willis said buyers are less willing now to waive home inspections in order to seal a deal. Plus, sellers are beginning to offer more closing-cost assistance in order to attract buyers.”

“January and February are typically slow months in real estate, with sales and prices heating up in the spring months. February’s lengthened market times and less enthusiastic buyers, however, could mean something more than a seasonal hiccup, Willis said.”

“‘I think it’s going to pick back up, but the indicators I’ve had is that it won’t be the appreciation and the feeding frenzy that it has been for the last three years,’ he said. ‘It’s legitimately more of a buyer’s market than it has been.’”

The News Limited reports on the so-called soft landing in Sydney, Australia. “Sydneysiders are voting with their wallets, bowing out of the NSW property market at an unprecedented rate as new home approvals fall to their lowest level in almost 20 years. With fears of a softening state economy and rising unemployment, demand for new homes is hitting all-time lows.”

“For the 12th month in a row, building approvals have declined across the state, with fewer homes being built per year than in the mid-’80s. The State Government claimed it was indicative of a slowdown in the housing sector across the country, although construction makes up almost a quarter of the state’s economy.”

“The Australian Bureau of Statistics figures revealed approvals were the lowest for 19 years. Only 2039 homes were approved in January. Dwelling unit approvals fell by 10.9per cent. In 1995, 4167 homes were being approved a month, around 50,000 homes a year. It has now crashed to around 33,000.”

“A NSW Property Council spokesman said: ‘I think the figures reinforce what we all know..the economy is soft and the housing market is also soft..and until the situation turns around we are less likely to see a pick-up in demand for housing.’”

“Treasurer Michael Costa yesterday said the property market slowdown was more significant in NSW because the housing boom had been much stronger in the state.”

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