The Housing Bubble

The New York realtors finally have the January numbers out. “Sales of existing single-family homes in New York slowed in January, according to preliminary single-family sales data accumulated by the NYSAR. The preliminary data showed a median selling price increase of more than 20 percent.”

“The January 2006 sales total decreased 8.6 percent to 5,947 compared to the January 2005 sales total of 6,509. The January 2006 sales total fell 33.8 percent from the strong sales total of 8,984 in December 2005.”

“‘As expected, the New York housing market has slowed from the record-setting pace of the past two years,’ said Charles M. Staro, NYSAR chief executive officer. ‘The January sales total is indicative of a still healthy housing market in New York state, especially when viewed in the context of the past several years. We continue to expect the market to be solid in 2006 even though sales will be below the exceptional pace of the past two years.’”

Checking the associations PDF files, it appears some of the more expensive counties faired worse than the overall numbers. Dutchess, YOY sales down 8.2%, price down 2.9% from December 2005. Greene YOY sales down 50%, YOY price is down 8% and 24.6% from December 2005. Nassau, YOY sales down 7.3%. Orange, YOY sales down 5.1% and prices down 5.3% from December 2005. Putnam, YOY sales down 27.5% and YOY prices are off 2.9%, Prices are down 11.8% from the previous month.

Suffolk, YOY sales are down 6.4%, prices are off 3.6% from the previous month. Westchester, Sales are off 19% from the previous month and YOY prices are unchanged.

Out of New Yorks’ 58 counties, 37 reported YOY sales volume declines and 56 saw fewer sales from December 2005. 14 counties saw YOY median price declines and 40 had lower prices from the previous month. Many of the declines were hefty double digits.

I already posted these in the comments, but here is some detail:

YOY median price declines

Allegany -30.2%

Broome -9.2%

Greene -8%

Lewis -34.9%

Livingston -8%

Madison -11.5%

Niagra -5.4%

Oneida-3%

Ontario -9.5%

Orleans -32.3%

Oswego-9.8%

Putnam -2.9%

Schoharie -45.8%

Warren -9.1%

Wayne -13.4%

YOY sales volume by county:

Albany -25.3%

Chemung -33.3%

Clinton -40%

Delaware -27.3%

Essex -29.4%

Greene -50%

Livingston -38.5%

Monroe -41.9%

Ontario -29.9%

Orleans -43.3%

Putnam -27.5%

Schoharie -35.3%

Seneca -28.6%

Steuben -32.1%

Warren -26.2%

Wayne -52.3%

Wyoming -66.7%

For sales I only did the ones over 25%. There were many at -17%, etc.

The Associated Press is reporting on housing markets. “The five-year housing boom is indeed over, judging from growing statistical evidence and the performance of some of the nation’s leading builders, and the slowdown is already rippling through the economy. Explanations for the recent cooling-off vary.”

“‘We started to see the strain in July and August, and by the fourth quarter the market definitely had slowed,’ said Layne Marceau, president of the Northern California region for Shea Homes, one of the nation’s largest private builders. Rising prices and interest rates pushed more buyers out of the market. When prices finally did cool, sellers couldn’t command a high enough price on their old house to buy the new one, said Marceau, who believes the slowdown is temporary.”

“Builders don’t like to cut prices, it angers customers who paid more, but last week, Centex Corp. advertised $25,000 off on select homes in the Dallas area after making a successful similar offer in California. Around the country, builders are throwing in incentives. Some equal 10 percent of the home’s list price.”

“The median price of an existing single-family home has declined since peaking at $219,700 in July to $210,500 in January, according to the NAR. David Seiders, chief economist for the National Association of Home Builders, said California, Las Vegas, Florida and the Washington, D.C., area ‘have the largest potential for a price slowdown.’”

“The rising prices in those markets were fed by speculators who bought homes intending to ‘flip’ or sell them for a quick profit, Seiders said. ‘The biggest fear I have is investor-owned units coming back on the market in large numbers,’ he said.”

“Mike Mishler said, ‘Maybe it will slow down in a couple years, but right now we have lots of California folks coming in, and empty-nest people looking for new homes.’”

“Mishler, president of the local builders association, says Texas markets are holding up because they are affordable. But even in Dallas, the inventory of unsold homes rose to a record in the fourth quarter.”

“For now, home builders are busy finishing the houses that customers ordered last year. In a sense, their 2006 results are already on the books, and they expect another good year. Investors have been bidding down the stocks of home builders since July. The nine largest publicly traded builders have seen their shares fall 14 to 44 percent since their peaks, with Toll Brothers and Hovnanian the biggest losers.”

“(Analyst) Alex Barron said builder stocks have been trading at relatively low multiples of their earnings since the late 1990s because investors always believed the strong housing market was too good to last. ‘Investors kept saying, ‘Next year housing will go down,’ Barron said. ‘I guess they’re finally right.’”

Reuters reports on the shuffling of mortgage backed securities. “Newcastle Investment Corp. today announced the acquisition of a portfolio of approximately 11,300 subprime residential mortgage loans for approximately $1.5 billion, or a purchase price of 99.60% of unpaid principal balance. The loans are secured by residential homes located throughout the U.S.”

“Kenneth M. Riis, Newcastle’s President, commented, ‘The subprime market has come under pressure as rising interest rates and a re-pricing of credit risk have lowered loan prices. Operating margins for companies that originate these loans are declining and as a result, investment capital for their business is constrained.’”

“‘These market dynamics create opportunities for buyers with long-term capital to selectively take credit risk, and price that risk conservatively. While we expect continued disruption in the sector, this portfolio represented a good opportunity to deploy capital at a high-teens risk adjusted return utilizing conservative underwriting assumptions.’”

From Originator Times. “Mortgage fraud is likely to increase as the mortgage market continues to shrink, according to The Prieston Group, which provides lender quality certification to hundreds of lenders for fraud insurance coverage approval.”

“Based on the group’s most current statistics, housing values are dropping by about 9 percent in some areas while defaults are rising by as much as 22 percent. TPG has also observed that lenders are increasingly dealing with harder loans and less qualified borrowers.”

“Requests for exceptions to loan guidelines have increased, as have the cases of suspected misrepresentation and the resulting referrals to lenders’ pre-funding quality control departments.”

“Additionally, some lenders have reported a 10 percent drop in volume during January over the previous six months. FICO scores have also dropped, averaging 610 in January compared with 649 for the six months ending January 31. Lenders seeking to qualify for coverage have reported significant increases in early payment defaults containing fraud.”

“All these factors are signs of a contracting market. As the market contracts and margins thin, lenders are under more pressure to accept loans of dubious quality. In response to the desire to keep loan volumes up, lenders may be more tempted to not look too closely at loans. Fraudsters understand this, and may try to take advantage of the situation by pushing through loans containing material misrepresentation.”

“‘The mortgage industry must remain vigilant in the fight against fraud, even as loan volumes decrease,’ said Arthur Prieston. ‘It is absolutely essential that lenders..continue to maintain loan quality through all cycles of the mortgage market.’”

Some housing bubble reports from Florida. “Florida’s biggest private landowner, the St. Joe Co., has at least ‘a couple of generations of supply’ in raw land to sell and develop, much of it near the coast, company executives said Wednesday in Orlando. While hurricanes the past two years have slowed resort and home sales a bit, much of the company’s 838,000 acres are within 10 miles of the Gulf of Mexico and will become more valuable in time, and the company can be patient, St. Joe President Kevin Twomey said.”

“‘We are in this for the long term,’ Twomey told analysts during the conference. ‘If we don’t sell today, we will sell tomorrow.’”

“But St. Joe’s relatively optimistic outlook and prediction that baby boomers will keep boosting housing and second-home sales was not uniformly shared by analysts at Raymond James. ‘The economy and the housing market are now entangled in a very delicate and circular relationship, whereby they are both dependent upon each other for stability,’ Raymond James analysts Rick T. Murray and Paul D. Puryear and research associate Andrew Fenton said in the report.”

“‘A disorderly slowdown in the housing market could lead to some destabilization of the economy, given the consumer’s reliance on home equity over the past several years to drive strong spending. At the same time, the housing market needs the economy to remain fairly stable in order to turn the current slowdown into a soft landing and avoid an all-out crash,’ the report said.”

During the third annual Luxury Living Showcase, developers sat down to discuss the future of real estate in the Manatee-Sarasota area. ‘When the market was so hot, people would buy anything just to have their dream, their place in the sun,’ said (broker) Michael Saunders. ‘We think we have an adjusting market and things are just fine,’ Saunders said.”

“There’s not a bubble anywhere that I see,’ said Al Piazza. He said the fact many investors have left the market is good as far as developers are concerned.”

“Piazza, who has helped develop properties in Miami and is developing a project in downtown Sarasota, said he doesn’t see any bursting bubble. ‘We saw investors disappear and the crowd control problem is over, but now we are selling to real buyers,’ Piazza said.”

“Saunders said the market would continue to support all of the new homes in each price range. ‘It is a more measured inventory and a normalization compared to where we were just six months ago,’ she said. ‘When we hear about people reducing prices because they won’t sell, it is probably because they were too high in the first place. It’s time to get real.’”

A pair of reports provide an update on two rarely heard from housing markets. “The Illinois housing market has set records in each of the past three years. With January homes sales down statewide from a year ago, real estate experts are wondering if this will be the year the housing market finally slows down. Inventories are up, but average sales prices are going up and down across the metro-east.”

“So is the hot housing market finally cooling off? ‘It definitely could happen,’ said Belleville real estate broker and Illinois Association of Realtors President Stan Sieron. ‘I think what we’re seeing is that the industry has started to cool off a little bit.’”

“‘We’ve been waiting for this particular time for a number of years,’ said Al Suguitan. ‘And much has been made about a soft landing in an overheated market, and 2006 may be that year.’”

“The results vary from county to county throughout the metro-east in that span. There were 1.9 percent fewer homes sold in St. Clair County last January than in January 2005, but an 8 percent drop was reported in Madison County. A more dramatic shift was reported in Monroe County where 31 percent fewer homes were sold.”

“Realtor Association of Southwestern Illinois President Chad Doyle said the area is reporting 82 percent increase in housing construction. Although inventories also are larger in St. Clair County, Doyle said real estate agents in the county have more homes to show and have been showing more than usual.”

“Suguitan said his association’s biggest concern is sustaining the market. Once investors..notice a cool-down, it could lead to a slowdown in investors buying properties to fix up. After the first two months of the year, he said it is too early to tell. ‘A bubble? No,’ he said. ‘A cool-down? Probably, a little bit.’”

The Delaware News Journal informs home buyers, ‘you’re in charge (again).’ “Sales of new houses fell about 15 percent in January across the Northeast. ‘It has definitely slowed down,’ said Cindy Ramsay, a real estate agent and loan officer in New Castle. ‘We see price reductions instead of bidding wars.’”

“In this housing climate, home buyers will find houses on the market for longer periods of time than in the past. For example, in New Castle County, 2,749 single-family homes were on the market in January, about 35 percent more than there were the same month a year ago.”

“With spring just a couple of weeks away, more houses are expected to enter the market. So if you can afford to wait you and see what’s out there, you should. ‘I am telling people to take their time with properties,’ said Ramsay. ‘Just take your time and see what happens; the price could come down.’”

Bloomberg has the NAR data. “Contracts to purchase previously owned U.S. homes fell for a fifth straight month as higher prices and mortgage rates discouraged buyers. The National Association of Realtors said today its index of pending home resales fell 1.1 percent to 116.3 in January. The index fell 2.6 percent to 117.6 in December. Pending sales were forecast to rise 0.3 percent.”

“‘Clearly, the market has slowed from the white-hot conditions that have existed over the prior years,’ Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc., said. Hovnanian, the ninth-biggest homebuilder by stock market value, is seeing some of its competitors using more incentives to sell homes they’ve already built. Order cancellations at the company rose ‘modestly’ in its fiscal first quarter, to 30 percent from 27 percent the same period a year earlier, Hovnanian said.”

From Inman News. “Robert P. Curran, an analyst for the Fitch Ratings agency, said builders’ net new orders for the latest quarter have generally been weaker than a year ago. ‘What they see or fear with sluggish-to-weak orders will translate to sluggish-to-weak revenues and some pressure in earnings,’ he said. Cancellations on new-home orders have spiked in some areas, he said, such as the Greater Washington, D.C., area. ‘What I see there is more a reflection on short-term investors who committed to buy a home (and then) bailing out and giving up the deposit.’”

“Phillip Neuhart, a Wachovia economic analyst, said analysts expected to see a stronger showing for January new-home sales. ‘I’d like to see the inventory numbers notch down a little bit,’ he said. The current level ‘is not comfortable for me,’ he said.”

“Existing-home sales have dropped each month from September 2005 through January 2006, according to NAR. ‘The question is now (whether) builders will adjust to the slower sales. My concern is that builders, just like retailers, should adjust their pipelines to what’s going on,’ Neuhart said. Hopefully, he added, builders will construct fewer homes for which they have not previously secured buyers.”

Reuters has this report on the mortgage market. “The expansion of new types of home loans in the United States means mortgage bond holders may be exposed to bigger than expected losses if the housing market cools, Bank of International Settlements staff research said.”

“An article published in the latest BIS quarterly review said the boom in private mortgage lending and the extension of loans to households with less than perfect credit histories had exposed investors to higher risks. ‘The significance of this additional risk has been disguised in recent years by housing price appreciation,’ researcher Allen Frankel said. But now there were signs of the market cooling.”

“‘To the extent that some investors may have failed to recognise the degree of sensitivity of their MBS investments to housing market developments, they may be exposed to losses in excess of what they had anticipated.’”

“Non-traditional mortgages helped extend a five-year rally in the U.S. housing market by reducing monthly payments and allowing homebuyers to afford ever-pricier houses. But some economists now worry that as interest rates rise, so will defaults as borrowers may find themselves unable to make payments, also pressuring the banks that offered the mortgages and the investors who hold much of the risk due to their purchases of mortgage-backed securities.”

“The BIS said while the U.S. mortgage market was still dominated by the government-sponsored Fannie Mae and Freddie Mac, non-agency MBS issuance had almost doubled in recent years. At the same time, more than 75 percent of new loans issued by private lenders now went to borrowers who missed out on the top ‘prime’ credit rating and who often paid higher interest rates as a reflection of the added risk of default.”

“The BIS said the common practice of using average credit scores to price mortgage pools could lead to a systemic underprediction of default risks and leave investors exposed if housing prices turned down. Market pressure, driving down mortgage costs, also made it more difficult to assess the risk of borrowers refinancing and paying off loans ahead of time, depriving investors of a revenue stream, BIS said.”

And a Fed official had this, “While the housing sector may not contribute as much to growth this year and next as it has the past couple of years, Stern said concerns about the collapse of a housing bubble are overblown. ‘The probability of a large and widespread decline is not great,’ Gary Stern, president of the Minneapolis Federal Reserve Bank said. ‘And if it occurred, I don’t think the impact would be that great’ on the economy.”

The Boca Raton News has this update on Florida. “Sales of existing single-family homes noticeably declined in January in Boca Raton and other parts of Palm Beach County—the sharpest drop since February 1997. According to the Florida Association of Realtors, only 586 homes were sold in the Boca-West Palm Beach area during the month. The number represented a 39 percent drop from January 2005, when 957 homes were sold.”

“The slowdown has also affected the local condominium market, with FAR officials reporting that condo sales dropped 32 percent in January.”

“Boca realtor Richard Bass remarked that the lack of home sales does not come as a surprise to him. ‘This trend has been taking place for awhile,’ Bass said. ‘It’s a new part of the real estate cycle that we’re going through for the past three years. Many investors are leaving the market these days because of the slow appreciation, resulting in a lot more houses to choose from,’ Bass said”

“Palm Beach homes additionally experienced a median home price of $393,700 for January, representing a nine percent jump from $361,800 this time last year. Statistics point out, though, that Palm Beach home prices went down slightly from $408,200 in December, marking the first time that the median cost slipped below $400,000 since July.”

“Palm Beach is not the only county to feel the wrath of the real estate cycle, according to FAR reports. In Broward, home sales dropped 36 percent for January while Miami-Dade experienced a sale decline of 28 percent. Total statewide home sales were only 12,815 in January—a 19 percent decrease when compared to 15,745 homes sold a year ago during the same month.”

The Sydney Morning Herald has an editorial on Australias housing bubble. “Evidence is mounting that the slump in the housing market has ended, with house prices rising, auction clearance rates increasing and rental vacancy rates falling. Is that what you’re starting to think? It’s certainly what your friendly real estate agent and the property developers would like you to think.”

“But I doubt it. So does Kieran Davies, chief economist for ABN Amro. Mr Davies is sceptical that the rise signals a renewed boom because simple valuation measures indicate the housing market’s still extremely expensive, despite prices having gone sideways to down for most of the past two years.”‘

“For example, if you compare median house prices with average weekly earnings, you find that the average price for the capital cities remains close to the all-time high reached in 2003. It’s 9.5 times annual income, down from a peak of 10 times and still well above the historical average of 6.5 times.”

“Or take the gross rental yield - the rental income (before allowing for expenses) expressed as a percentage of the market value of the home. It’s off its multi-decade low of 2.7 per cent, but it’s only back up to 2.9 per cent, compared with its long-term average of just over 4 per cent.”

“Given that there has been so little change in valuations in the past two years, we are interpreting the recent rise in house prices as volatility in the data rather than a sign that the housing market is reinflating,’ Mr Davies says.”

“What’s more, since prices remain so far out of line with wages and rents, he continues to expect a long period in which prices are on a flat-to-down trend until they achieve the usual decline in real prices seen in the aftermath of a house price bubble.”

“It’s still taking a long time to sell a home. In Sydney and two other major capitals, it now takes about 100 days to sell, up from about 40 days at the height of the boom. And home owners still have to discount the advertised price to achieve a sale, with the discount averaging 7.5 per cent.”

“The increase in real rents nationally seems mostly due to the booming housing market in Perth, where both rents and house prices are rising at an extraordinary rate. And Mr Davies suspects the Perth boom will peter out later this year. At present, Perth is building as many houses as Sydney, even though there are three times more households in Sydney. So it’s hard to see that national demand for rental housing is so great as to almost completely soak up this supply.”

“No, the signs of the property market starting to recover don’t really stack up. The recovery will happen one day, of course, but I wouldn’t be holding my breath.”