The Housing Bubble

Maria Zate at the News Press has a look at Santa Barbara’s home prices. “The median home price on the South Coast reached a record $1.25 million in 2005, with appreciation topping 24 percent. But as many sellers learned, home values didn’t rise equally across all neighborhoods. For those trying to sell in the Goleta area last year, it was a rude awakening that prices were not going up 2 percent a month as the South Coast median suggested.”

“The price difference between homes in Montecito and Hope Ranch and the rest of the South Coast has widened in the past 10 years. While the median price has reached an astronomical level and the number of homes considered affordable for middle-income earners keeps shrinking, multimillion-dollar properties have become more attractive to buyers who want to live on the South Coast.”

“‘Ironically, more of the higher-priced homes are selling because that’s what people can afford. The affluent buyers have been buying more homes in the area in the last two years,’ said Mark Schniepp. Excluding Hope Ranch and Montecito homes, sales and prices didn’t budge much for the rest of the South Coast. Without these neighborhoods, the median would hover in the $1 million to $1.1 million range, Mr. Schniepp said.”

“There are now ’significantly more sales’ in Montecito than in the past, Mr. Schniepp said. In 1981, the Montecito market made up only 6 percent of sales on the South Coast. Last year, Montecito’s share of home sales had ballooned to 20 percent of all transactions. Sales and appreciation of homes at the ‘lower end,’ defined as those priced at or below the South Coast median, reached a plateau during the second half of 2005, Mr. Schniepp said.”

“Despite all the talk of a housing shortage on the South Coast and in California, there’s no lack of homes for sale priced more than $1 million. A recent search on Realtor.com yielded about 500 properties on the South Coast alone.”

“The emphasis on building high-end homes in California and a possible oversupply of homes nationwide troubles Chris Thornberg, senior economist with the UCLA Anderson Forecast. ‘In the U.S. last year, 2.6 new homes were built for every new household created in the economy. This is a big worry,’ he said during a real estate conference held last week in Santa Barbara.”

“‘California is different, yes, only in that it’s not building the type of homes fast enough for what the majority of its residents need. We need homes for low-income earners and low-rent apartments,’ he said. ‘Instead we have plenty of million-dollar homes. All of the building that has been going on recently is of high-end units for high-income people.’”

Back to Arizona, this time in the East Valley. “(Realtor) Trent Powell is stuck among a for sale sign, an unrealistic seller and a leery buyer. In the lucrative game of home sales, he is checkmated in East Valley real estate. What a difference six months makes.”

“While the market clearly cooled with the weather, it has done nothing to change the perception that home prices are still soaring through the the roof and into outer space. Sellers still want top dollar, so houses are staying on the market longer.”

“‘This has got to change. Otherwise the market is never going to change,’ says Powell. ‘You can’t just put a sign in front and sell your home. It’s not like that now. Buyers are gone, investors are gone. It’s just normal people in Arizona buying homes.’”

“The bubble is gnawing at affordability. ‘It would be hard from an economic standpoint to sustain the kinds of growth rates we’ve seen for the last year and a half given our income levels,’ Jay Butler said.”

“The softening in sales is classic economics at work, said R.L. Brown. ‘Nothing changed except prices reached a point beyond where consumers are willing to pay it,’ he said. ‘Those that have to sell will become more and more realistic about their prices. At a point in time when they have reached market reality, their properties will sell. Until they do, they won’t sell.’”

“The growth in the median home prices, especially in previously owned homes, has disappeared, Butler said. ‘We’ve been running pretty close to $260,000 for several months now,’ he said. ‘It peaked at $263,000 in September and was $257,000 in January.’ Sales activity has also slowed for the last several months. The high was 10,700 homes sold in Maricopa County in August, Butler said. The number was down to 5,260 in January. To make matters worse, more houses than normal hit the market in the new year.”

“Brown said it will be anywhere from hours to days, weeks, months before some sellers realize that they’re not in tune with the consumers. ‘Those sellers that have no real reason to move, no real reason to sell, they’re just trying to cash in and make a profit..will probably try to hold their prices,’ he said. ‘That’s a common thing that occurs in a real estate market, especially a market that has seen rising prices over a period of time. The seller will list his house at an unrealistic price and say ‘Well, when the market gets there, then I’ll sell it.’ We’ve got that going on right now.’”

“That’s one of the reasons why Powell is frustrated. Just like last year, sellers wanting to cash out are listing their homes for higher prices than comparable homes on their blocks. He tells them what an appraiser would give them before suggesting a sales price. ‘Most of the people say ‘No, we want to start here,’ he says.’They’re starting $20,000, $30,000 or $40,000 above.’ In a month or two, they want to know why their home hasn’t sold. When Powell reminds them the price is too high, there’s resistance.”

“The market will force a new way of thinking in the industry, Brown said. ‘It’s been a seller’s market for so long, you could say there’s 20,000 new real estate agents who have never been involved in a buyer’s market,’ he said. ‘Those folks could think that real estate in general is always a seller’s market, the seller calls the shots. Well, the reality is most of the time the real estate is indeed a buyer’s market or certainly the optimal market is a balanced market between buyer and seller, but it’s incumbent on the seller to come to the balance point.’”

“Houses under construction will likely become available at a discount because buyers who haven’t closed yet will back out of contracts because they can’t sell their current homes, Brown said. Builders began softening price increases using discounts and incentives in May when buyers began to resist prices, Brown said.”

“‘There are buyers out there,’ Butler said. ‘The concern is you get the hypernegative market where you start suddenly seeing sales going down, more and more signs in the neighborhood, People sort of push the quasipanic button, then you can have some serious issues.’”

A few readers wanted to discuss the real estate profession. “Topic: Nobility of the Realtor Profession.”

Another replied, “Amen brother. Disintermediation. The internet drives disintermediation. Just ask your neighborhood travel agent or read the Economist. Disintermediation will be a b**ch for your friendly realtor lacking basic skills.”

“There was an interview on NPR this morning, and the topic was how the internet will increase the pressure on real estate commissions and further disintermediate the industry. Interestingly, one of the observations was that areas with higher home prices have a higher concentration of real estate agents, which dilutes the amount of money an agent earns since there is more competition for listings and buyers.”

“You are correct. the low barrier to entry causes a flood of newbie real estate agents toward the end of the boom diluting earnings from the people who have chosen RE agent as a true career path. For all of the power of NAR they haven’t erected the barriers to entry to their profession.”

And the New York Times has a report on just this subject. “As it turns out, most agents don’t make very much money during a boom, because of one simple fact: the boom attracts way too many of them. Over the past 10 years, membership in the N.A.R. has risen by more than 75 percent. And why not? Compared with most professions, becoming a real-estate agent is quick, cheap and relatively painless. In economics, this phenomenon is known as free entry.”

“The second reason to feel bad for real-estate agents is even more dire: their very profession is about to join the endangered-species list. Think back for a moment to 1999. Travel agents still roamed the earth in vast numbers. So did stockbrokers. But their business models were being blown apart, largely by the Internet.”

This Bakersfield site has an editorial. “What are we going to talk about? We’re back to the weather, children and Oscar picks. I’m talking about real estate. It’s in the tank. It’s not just quiet, it’s cratered.”

“This has been fun, hasn’t it? Just think, you were rich. For three years the sky was the limit and the ceiling kept getting higher. One minute, your house was worth $250,000 and a month later, you were cresting three bills. We were moguls. We patted ourselves on the backs so much that we were starting to leave handprints.”

“It hasn’t always been like this. If you have lived in Bakersfield longer than five years, you probably developed an inherent modesty about real estate appreciation. This was Bakersfield. We liked living here. Houses were as plentiful as tumbleweeds. Affordable housing. That was our mantra. It was good for the town’s spirit. People could afford to live here.”

“When prices skyrocketed, one of the first things that went bye-bye was cheap housing. People said things like: ‘I’m happy about the appreciation, but the days of affordable housing are over. It’s too bad.’”

“No, it isn’t. Once you’re on the Love Boat, your sympathy for the less fortunate wanes as you drift farther toward the islands. Even if those waving on the shore are some of your own children. The point is houses went from something you lived in to the smartest thing you’d ever done. The best investment you’d ever made. Why not borrow against them because they are going to keep going up forever?”

“That’s all we talked about. Real estate replaced weather as the single most popular subject in Bakersfield. It was fun. Life was beautiful. We had joined the party.”

“Now real estate is flatter than a pancake. A friend told me that heads were rolling in a couple of the title companies. More and more, you see the word ‘reduced’ on real estate signs. The air has gone out of the balloon. More than that, with the sparkle gone from real estate, there is a bigger problem: First, how are are we going to pay off those huge home equity loans that paid for our jacuzzi upgrades?”

“More importantly: What do we talk about? Are we going to be forced to discuss things that really matter again? I’m not sure how long we can keep that up. It’s a matter of appreciation. Or in this case, the lack thereof.”

Real estate analysts who predicted a boom in condos are now hiding behind ‘construction costs.’ “The glossy brochures promised rooftop gardens and posh European spas. The Las Vegas Strip and billions of dollars of hedonism just past your uniformed doorman. Such is the stuff of high-rise living in the imagined vertical Las Vegas.”

“By most accounts, the skyrocketing costs of materials and labor have toppled some high-profile luxury condominium projects, turning the market skittish. At least six projects have publicly folded or stalled in a little more than a year, a fraction of the more than 100 once proposed, but enough to make some real estate watchers declare a bust to the boom.”

“‘What we’re having here isn’t a demand constraint,’ real estate analyst Richard Lee said of the failed projects. ‘The No. 1 problem is construction costs and lack of skilled labor.’”

“On prime pieces of land across central Phoenix, Scottsdale, Tempe and recently even in the bedroom communities of Mesa and Ahwatukee, signs are going up promoting upscale condominium towers and lofts. But at many sites, those signs will be the only things erected for a while. Maybe ever.”

“Almost 8,000 condos and lofts are planned or under construction across metropolitan Phoenix, more than what went up in the Valley in all of the past 10 years. Many investors who bought units in the first wave of high-rises now are trying to sell.Last year, more than 10,000 apartments across metropolitan Phoenix were turned into condos or bought by investors.”

“At the end of February, 18 of the 90 condos in the Orpheum Lofts were on the market. The historic art deco tower in downtown Phoenix sold out, and now many of the original buyers are turning out to be investors trying to sell. ‘Condo developers are now competing against speculators,’ said Jay Butler”

“Robert Sheridan, a veteran national condo converter who is developing a project in Scottsdale and also leading a fund to buy failed condo-conversion projects on the East and West Coasts, said the conversion craze is over. Though his company converted the Las Brisas apartments in north central Phoenix a few years ago, Sheridan said he wouldn’t do another one in central Phoenix because there are too many in the area. ‘Only the condos in the best locations will sell now,’ he said.”

“Las Vegas, southern Florida and San Diego have seen the most new high-rise and condo development during the past two years, and now these markets are facing the biggest overbuilding problems, real estate analysts say. Early projects sold out quickly, and prices jumped with each subsequent phase. Developers then rushed in with new designs, tied up prime pieces of land and began taking ‘presales’ to test how deep the demand was for vertical living.”

“In San Diego, condo prices are falling because of the number of resales put on the market by early speculators. Some developers also are putting new projects on hold. There are about 6,200 condos for sale, double from a year ago. Already in San Diego, some condo-conversion projects are falling through.”

“In Las Vegas, high-profile high-rise projects that are nearly sold out are being taken off the drawing board. The Icon Las Vegas tower is the latest casualty of the condo glut in Sin City. In Miami, more than 15,000 condos are under construction and another 60,000 are planned. To attract buyers, some developers are offering freebies like plasma TVs.”

“The condo-conversion market is untested in the Valley. Market watchers and owners of these former apartments are waiting to see if values climb enough to let them sell for a profit after a few years. For those who don’t yet own, though, the number of condos on the market may be disconcerting.”

“Real estate agents say some investors are now beginning to walk away, or are considering doing so, from small deposits on high-rise and condo-conversion projects in the Valley. Other potential buyers are concerned a glut of new condos will put pressure on prices and don’t want to buy until the market stabilizes.”

“Most projects without ‘real buyers’ and government approvals aren’t getting financing: Lenders are clamping down on condo deals because of the many speculative projects and gluts in some areas. ‘Now most lenders are very cautious and want most of a development to be sold, really sold, before they will finance it,’ said (developer) Eric Brown. ‘There’s demand for urban housing projects in the Valley, but only a few projects really make sense,’ he said.”

Post your market observations here! Any kind of personal insight or media report or website is wanted. Some readers are doing so by zip code. “What is your favorite zip code to follow?”

“92648 downtown huntington beach, lots of speculators and new homes that are dark at night. Inventory is up significantly from last summer.”

“I closely follow zips 92603,92604.92612,92614 which is a subset of Irvine, Ca. (Orange County). Activity is currently mixed, with some sales. However, many properties have been listed for many months. Some sellers are reducing prices 5% 10%. Other sellers have refused to capitulate. I have had recent conversations with R/E agents who are now starting to use phrases such as ‘priced right’ when listing properties on behalf of sellers.”

“Lot different posture than last summer when the mantra from the R/E complex was that ‘Everyone wants to live in the O/C,’ ‘Prices can only go up,’ etc. Spring weather is starting to arrive.. This selling season sure is going to be interesting!”

“I live in 92606 and I’m seeing the same thing. No major price drops but DOM longer. Inventory steady. The new stuff across the street at the old Tustin Air Base seems to be selling rather quickly. I also noticed these ‘newer’ places in a sub called ‘Park Lane’ near the railroad tracks of Harvard and Irvine Center Drive seem to be selling briskly as well.”

“I follow 92627, Costa Mesa, CA I see a lot of activity in terms of new signs, changing signs (FSBO to RE), signs disappearing with no ‘Sold’ announcements, and many many open houses. Sitting very very tight until I see mean reversion or more.”

“34102….Naples, Fla. Big time speculators about to get burned in one of the most overpriced cities in US.”

“I’m all over 34787. Winter garden, Florida. Right outside Orlando. Started tracking inventory on Dec. 27, 05 … it was 282. Now, 2 months later, it is at 408. I’d like to find out what people will happen at the midway point this year (June 06), and the end of the year (Dec. 31). Because all the renters are going to be in a rush to buy, and I have a gut feeling, that rush is going to begin sooner, rather than later.”

Another added, “I was hoping you would look into the Reno market. Reno has 5100 houses for sale, including 1800 new listings in Jan 06. Only 500 homes sold in Jan 06 and the Reno Gazette/Ostrich has decided to report little on the home bust here. Considering that Reno has only 450,000 people this bubble could be of epic proportions. Reno is far more expensive than Las Vegas.”

From a reader in Arizona, “Todays Kingman Daily Minor, Rhodes Homes wants to build 650 unit apartment complex in golden valley. the reason is to house the workers that are going to build the 33,000 homes in golden valley. Like Kingman needs more housing, 100s of new homes empty now and the min wage jobs in Kingman the workers here cannot affort to rent, never mind buy.”

To which another replied, “33,000 more new homes in Kingman? My gosh, what are those people going to do to work? There is not anything there to support that number of people. And it already looks like a whole slew of McMansions have been built right next to the freeway. While I drove through last week, all of the trees around Flagstaff were looking pretty dry. If they catch fire, then Kingman can rescue all of the displaced folks. Or is it for still displaced Katrina victims? There is plenty of land to park a trailer. Violla, no houisng payment.”

A flurry of reports on Florida’s housing bubble. ” The number of home and condo sales declined steeply across South Florida in January compared with January 2005. The number of existing homes sold in January was the fewest in one month since February 1997 in Palm Beach County. In Broward, the January sales were the fewest in a month since the Realtors group started compiling housing data in 1994.”

“Median prices also are flat or falling. In January, they dropped below $400,000 in Palm Beach County for the first time since July, indicating sellers no longer are getting huge windfalls.”

“Yanet and Yasit Sanchez want to move into a bigger condo or a single-family home. Yanet wants to let the market cool even more. ‘I want to wait a few more months for homeowners to really get desperate,’ said Yanet. ‘I feel like I’m going to get a better deal in the second half of the year. I feel that once a house sits on the market awhile, the owner will say, `OK. Let’s work out a price.’”

“At a Thursday meeting of the Sarasota Association of Realtors, veteran broker Candy Swick held her own informal poll, asking the roughly 300 in attendance to raise their hands if they thought prices were still going up. No hands.” “Then, raise your hands if you think prices are remaining the same. No hands. ‘Then I asked them if they believed prices were adjusting downward. It would be accurate to say 99 percent of the hands went up,’ Swick said. Welcome to the new reality of residential real estate in Southwest Florida, where a dearth of homes for sale has turned to glut.”

“On the surface, the latest report from the Florida Association of Realtors would have you believe that prices in the Sarasota-Bradenton market appear to be hanging in there at a median of $353,500, a stellar 23 percent above a year ago. But there is a lag time built into that system, as Swick points out. ‘I would say the price lag is at least a quarter to six months behind,’ she said.”

“In the Sarasota-Bradenton market, agents closed just 511 transactions in January, down 48 percent from 976 a year earlier, the FAR reported this week. ‘Forty-eight percent, that is shocking,’ said Jack McCabe. Almost half the market is gone. And the reason is the speculative investors have quit acquiring properties and have moved to disposition mode.’”

“Asked if a downturn would force banks to re-evaluate lending practices, spokespeople for companies like AmSouth, SunTrust and Wachovia issued statements along the lines of ‘we’ve always been conservative and remain so.’”

“But below the surface bubbles a fear banks could lose their collective shirts on bum condo deals. Bank executives talk about driving past dark windows in newly opened towers that were supposedly sold out.”

“Mainline banks shunning many condo projects usually spot red flags: Projects in which investors grab too many units. Projects that allow buyers to assign apartments to new owners before closing. Projects by inexperienced developers who have never tasted the downside of a market.”

“Susan Brown, vice president of real estate finance, said a typical warning sign is ‘when you start seeing end users buying three, four or five units’ in one development.” “Trump Tower Tampa began selling its proposed 192 condos about 13 months ago, but hasn’t announced who will provide the estimated $200-million loan. Not one of five Tampa area banks surveyed for the story said it’s financing Trump’s project. Some worried the condos are too expensive. Others questioned the smallish 11/2-acre Hillsborough River lot expected to carry the 600-foot skyscraper.”

“Despite the celebrity gleam of Trump’s name, not all bankers drool at the thought of handing money to a brash-talking tycoon whohas had his fill of bankruptcies. ‘There’s some allure to having your name attached to that project. But for our own reasons, that’s one that we passed on,’ Owen LaFave said of Trump Tower, echoing other lenders. ‘I don’t know of any new projects we’re looking at,’ LaFave said.”