The Housing Bubble

The Wall Street Journal reports on home deals ‘falling through.’ “With the housing market cooling, a number of people are backing out of their agreements to buy new homes, spawning some opportunities for bargain hunters. Typically, new-home buyers must sign a contract and cough up a hefty deposit. But that isn’t stopping them from saying ‘no thanks.’”

“It is particularly noticeable in many California markets and in Washington, D.C.; Phoenix; and Chicago. In Sacramento, Calif., for instance, the number of cancellations quadrupled in last year’s fourth quarter from the year-earlier period. The typical reasons: Buyers can’t sell their current home, or they are having trouble getting a mortgage or fear that they may be buying at the top of the market.”

“Some builders are responding by rolling out incentive programs designed to move these spurned dwellings. In Phoenix, Beazer Homes is advertising reductions of as much as $44,000. In Virginia, Brookfield Homes Corp. is running a special: a reduction of nearly $100,000 on a five-bedroom, 4-bath home in Lansdowne, originally priced at $997,925.”

“In some cases, builders are selling completed homes at prices lower than those charged for units still under construction; in others, they are offering other incentives, such as free upgrades or builder-paid closing costs.”

“Unless you have a compelling need to move, ‘it’s better to be prudent and wait,’ says Ivy Zelman, a housing analyst with Credit Suisse. ‘It seems as if the builders are going to get more aggressive and offer more discounts that will make it more compelling for buyers.’ In some cases, she notes, buyers who thought they had nabbed a good deal have been surprised to find their builder offering a similar home at a lower price a few months later.”

“The higher cancellation rates right now are particularly notable because they come at a time when new-home sales are slowing in many of these areas. That is the case in Sacramento, where cancellations have jumped in part because buyers have pulled back from purchasing higher-end homes amid worries that they may be buying at the ‘top of the market,’ says Jonathan Dienhart. In all, Hanley Wood saw higher cancellations in 10 of the 16 markets it examined.”

“The increase in deals falling through isn’t limited to new construction. In a conference call with analysts last month, Cendant Corp. said its company-owned real-estate brokerage offices in Florida, southern California and New England saw a 30% increase in their cancellation rate in December. Cendant says it reflects the departure of speculators from those markets.”

“Larry Greenberg is among those getting cold feet. Last summer, Mr. Greenberg put down an $80,000 deposit on an $810,000 condo-hotel unit in Miami’s South Beach. When the developer recently approached him for an additional $80,000 down payment, Mr. Greenberg decided to back out. ‘It was too much risk for the potential reward,’ says Mr. Greenberg, who received his deposit back last week.”

“Some buyers could find themselves on the hook for more than their initial down payment. If a house is resold for less than the original purchase price, ‘we are able to go back to the initial purchaser and recoup some of the losses we had there,’ says Mr. Hughes of Brookfield Homes.”

“‘The message has resonated with buyers,’ says Boyd Roberts, vice president of sales and marketing for the Sacramento region. The promotions were triggered in part by a spike in cancellations at the end of the fourth quarter as some investors got cold feet and other buyers ran into trouble selling their current homes, Mr. Roberts says.”

“In San Diego, cancellations reached their highest level in years in 2005, says Philip Romero, who operates real-estate brokerages in southern California.”

The Arizona Republic reports on the housing bubble in the Phoenix area. “Metropolitan Phoenix’s housing market started 2005 with a bang but ended it amid concerns of a price bubble. Home values soared and houses sold within days in most neighborhoods during the first six months of the year. But then investors began to bail, listings climbed and asking prices stared surpassing home appraisals.”

“By September, the market was showing signs of cooling. In October, home prices slipped slightly.”

“Resale listings exceeded 30,000 in January, nearly nine times the level of the same month of last year. Selling time increased from about 5 1/2 days to 49. Sellers are frustrated because they are getting few offers, and many are cutting prices. Buyers seeing the slowing have become much more cautious.”

“Neil Brooks, an agent in northeast Phoenix, said shoppers are trying lowball offers of $30,000 to $50,000 less than asking prices as a starting spot in negotiations. ‘Last year, it was the sellers who were being very aggressive, and now it’s the buyers,’ he said. ‘There’s so much inventory, they can sit back and spend their time looking at bazillions of homes.’”

“‘The market has done a complete about-face,’ said Barbara Sage, a northwest Valley and Sun City specialist. ‘Last year, 14 offers for a home would come across at once, clogging up the fax machine.’ Now, she said, after showing a property the seller’s agent will call and tell her the ‘owner is anxious to sell.’ She tells them with a ‘yawn’ that her buyer has a few more properties to look at.”

“‘The days of multiple offers made on sight-unseen properties and offers well above list price are gone for now,’ said (realtor) Cecil Duarte. ‘The market has softened. Inventory ballooned, and the days are here again for buyers to negotiate on price, terms and even seller contributions toward closing costs. Homes lasting on the market longer will affect prices,’ he said. ‘If we get that speculated ‘dump and run’ by investors, I expect to see prices to get competitive, and sellers offering incentives like they did in the early 1990s.’”

“The slowdown has hit the new-home market as well. Builders that were overwhelmed with demand a year ago now are offering such freebies as thousands off spec homes, free pools or price cuts on upgrades to bring back the buyers. Doug Fulton said the slowdown was obvious to him on a recent flying tour of Pinal County. He said the number of new-house slabs in Maricopa was down by a third or more compared with six months ago.”

“Fulton said executives of public builders are under pressure from Wall Street to duplicate last year’s results in the Phoenix market this year. He said that would be difficult and said he would be happy with the 10 to 15 percent price increases he expects this year.”

‘”It’s no longer ‘build it and they will come.’ That’s not what will happen in ‘06,’ Fulton said. ‘It will be a battle. Corporate expectations are very high.’”

“Pete Kanton is trying to sell several of his own Valley residential properties as well as some for clients. ‘All are priced competitively, at or below what other homes of similar size and amenities have sold for in the areas,’ he said. ‘All have been marketed on MLS, signs, classified ads and mailing to the neighborhood. But none have sold.’”

“In addition to the normal drop in activity, the first quarter of the year the market appears to be in a ‘holding’ pattern,’ Kanton said. ‘Buyers are anxiously waiting to see if sellers will begin those price reductions many have speculated about, and sellers are looking at comps their agent puts in front of them from middle to late summer and into last fall when the market peaked and not willing to lower their list price because others got that price.’”

“Shannon Osborn put her home in the 85254 ZIP code in north Scottsdale on the market last December. She has lowered her price twice so it’s $25,000 less than where she started. Her real estate agent is running several ads, but so far the only potential buyers who have come to see it want to ‘flip the house’ so they don’t even come close to the asking price.”

“‘With what I owe and what I have put into it, I am not going to give it away,’ she said. ‘My home is beautiful and all the new interior remodel is beautiful. So I am at a loss on ideas.’”

“(Realtor) Margie O’Campo de Castillo said the housing market still is strong. ‘But homes won’t appreciate like last year,’ she said. ‘Sellers can’t over inflate their prices anymore. If you don’t think the market is slowing, just look at all the open houses.’”

“So you bought a couple of houses in the Valley during the height of the real estate frenzy last year, hoping to flip them for quick profits. But with prices stabilizing and sales slowing, what do you do now? Try cozying up with a copy of Arizona’s Residential Landlord Tenant Act.”

“Absentee investors from California and other states, who have helped push up Arizona home prices, might be in for some surprises when it comes to managing properties. ‘At your own home, you can ignore little problems like a leaky faucet or dripping pipes,’ (property manager) Debbie Norton said. ‘But a person paying rent expects that to be taken care of.’”

“Patience is another virtue of landlords, not just in dealing with tenants and repairmen but also in taking a long-term outlook with rental properties. After the sharp run-up in housing prices in recent years, ‘rents don’t come close to covering payments,’ Norton said. That implies landlords need enough financial stability to sit on money-losing properties for years, if necessary. ‘Rents are still low and you can’t buy a single-family home today in the Phoenix area and expect a positive cash flow,’ Ray Wendel warns.”

The New York Times reports on the buyer/seller face-off. “Along much of the East and West Coasts, home buyers and home sellers are engaged in a stare-down. Many buyers, having heard that the real estate market is a bubble in danger of popping, are refusing to offer the asking price on a house, convinced that it will soon drop. But many sellers are not blinking either, thinking that offers will improve when the weather does and biding their time until then.”

“Sometime soon, probably in the spring, the peak sales season, one side or the other will have to capitulate, many economists and industry executives predict. ‘In my opinion, the jury on housing is still out,’ said Antonio B. Mon, chief executive of a home builder. ‘The period from now until May will tell the tale.’”

“In Manhattan, 42 percent more co-ops and condominiums were available for sale at the end of last month than was the case a year ago, according to Miller Samuel, an appraisal company in New York. More Manhattan apartments were on the market in late February than at any point in at least five years.”

“Builders of new homes have also offered bonuses to buyers. So the builders have been able to continue selling homes without cutting the list prices. But many houses in the Northeast, Florida and California are, in fact, selling for less than they would have six months ago. In parts of the Northeast, the drop has been about 5 percent, estimated Robert I. Toll. Other sellers have cut their price and still not found a buyer.”

“In Buxton, Me., a suburb of Portland, Geof and Cheri Toner put their three-bedroom Cape Cod-style house on the market for $379,900 late last year, shortly before moving to Raleigh, N.C., for Mr. Toner’s job. They have received only one offer, for $350,000, which they rejected, and recently reduced the price to $374,900.”

“Mr. Toner expects that the eventual buyer will be a transplant from elsewhere in New England who is willing to pay significantly more than $350,000. ‘We’re not panicking over it,’ said Mr. Toner. ‘It’s just a matter of sitting it out and seeing what happens.’”

“Many real estate agents argue that people like the Toners are doing the right thing and that the market will not slump as it did a decade ago. The current slowdown is simply a transition, the agents say. ‘All we are seeing is a pregnant pause,’ said Richard A. Smith, ‘a disconnect between sellers and buyers.’”

“But many buyers say they have a sense that the long boom has finally come to an end. In the San Jose, Calif., Sathish Pottavathini said he was taking his time with the search for a new home and trying to find a good deal. ‘I don’t want to rush into things especially in this kind of situation,’ Mr. Pottavathini said, ‘where you hear about a slowing down everywhere.’”

“He and his wife, Madhuri, spend $1,200 a month renting an 800-square-foot two-bedroom apartment. They would like to find a three-bedroom town house with a two-car garage for less than $500,000. Although he does not expect prices to fall significantly, he does not think they will rise either. Now, Mr. Pottavathini said, ‘If I wait, I might get a better place.’”

“Buyers who showed similar patience in the early 1990’s were rewarded. From the summer of 1989 to the summer of 1990, the number of homes for sale rose about 10 percent. At first, many sellers refused to accept lower offers, thinking that they would get their asking price or close to it. But they eventually had to unload their houses, and in the Northeast and California that often meant reducing the price. In the Los Angeles area, the median sale price of existing houses fell 22 percent from 1992 to 1996, before taking inflation into account.”

“If a similar slowdown were to happen again, Mr. Toner said he would consider changing his mind and his asking price. ‘At some point, if this were to become protracted, I would consider lowering the price to attract a buyer,’ he said.”

The Herald Tribune reports on Floridas bursting housing bubble. “Is the real estate market really ‘normal,’ as a Realtor was quoted as saying in the newspaper the other day? A look at the sales and listings statistics leads me to believe that a market that was unusually tight a year ago is now unusually loose. There are a high number of houses for sale and so few buyers that there’s a 20-month supply on hand in Sarasota.”

“Economist John Tuccillo says a balanced market has a six-month supply. The situation is similar in Manatee County. In January 2005, 776 houses were listed and 223 sold (28.74 percent). In January 2006, 2,627 houses were listed and 166 sold (6.32 percent).”

“‘That’s a 15.8-month supply,’ said realtor Ruth Lawler, who has sold Manatee County real estate for decades. ‘What we are seeing on a daily basis is more and more supply. Normal is what you are used to,’ she said, adding, ‘I’ve never seen the market change so rapidly in such a short period of time.’”

“This is what we call a buyer’s market, kids. You older homeowners know this already, because you remember the real estate recession of the early 1990s, or previous versions. ‘We used to pray a house would sell in six months,’ Lawler recalled. Now, at the current rate of sales, it would take almost two years to clear the boards, if no other listings came on the market in the meantime.”

“‘We are having price reductions every single day, and we’re talking tremendous amounts, as many price reductions as we have homes on the market,’ said Lawler. ‘It’s got to affect the price.’”

“But, you say, the headline in the paper said, ‘Prices up.’ Just because the median sales price goes up, that doesn’t mean home values are appreciating across the board. It just means that the houses that actually sold were more expensive than the houses that sold last year at this time. The number is skewed by expensive new homes that are selling.”

“But that will change, said (realtor) Steve DuToit, when sellers realize they have to cut prices if they want to sell houses. ‘Because we have more than double the normal inventory that we’ve had over the past years (and) sales are less than half what they normally are, it has the market very out of balance,’ said DuToit.”

“‘Sellers are “the last to know what is going on,’ said DuToit. ‘The numbers are clear: It has become a buyer’s market.’”

“But Tuccillo, a Sarasotan who is former chief economist of the National Association of Realtors, says the housing market remains on strong footing. ‘There’s no way you can’t interpret this as a slowing down of the market,’ he said. ‘But no market goes to pot unless the underlying economy goes to pot, and that’s not happening here. We’re going through a cycle. This is a marginal change downward and the market will stabilize.’”

And from the Daily News. “In January the number of homes sold by Realtors in the Fort Walton Beach-Crestview-Destin area dropped by 32 percent from January 2005. The median sales price of those houses was $225,500, down from $226,500 in 2005. The number of condo sales in January was down 43 percent from 2005. Median condo prices sank to $200,000 from $465,000 in 2005.”

“‘I think we’re on a plateau,’ said realtor Claudette Heinrich, who has sold properties in the area since 1970. ‘You’ve got fewer buyers and you’ve got more houses. It’s sticker shock for a lot of people.’”

“‘We’ve just done a 360 and we’re in a buyer’s market,’ said (realtor) Debbie Gericke. Dave Dorman, knows that better than most. He and his wife have had their five-bedroom house up for sale since September 2005. ‘It’s frustrating because we put the house up for sale and purchased a house in Chicago,’ Dorman said. ‘We have two mortgages we’re paying right now.’”

“He’s come down in price, to $798,000, but refuses to go too low. ‘We can’t fire sale the house where we’ll lose money on it,’ he said. ‘We can’t do that.’ Teresa and David Diluzio are in similar situation. They put their house on the market and bought a smaller one in the same neighborhood.”

“Ask Teresa Diluzio how long she and her husband, David, have been trying to sell their home and she laughs. She asks her husband. He laughs, too. They compare notes and decide their four-bedroom, 2.5-bath home in Raintree Estates near Bluewater Bay has been on the market for at least six months. The price has come down. Traffic has picked up a little. They try to stay optimistic.”

“‘We just missed the craziness,’ Teresa says, referring to last summer’s lucrative seller’s market. It’s been months and their larger house hasn’t sold, so now both of the Diluzios’ homes are up for sale. ‘Now what we’re having to do is we’ve had to put both of them on the market to see which one sells first,’ Teresa says.”