The Housing Bubble

As more evidence arrives that the global housing bubble is bursting, the worlds’ economists ask, what’s next? “Rising eurozone interest rates could spell the end of the ‘great European housing boom,’ according to a report issued on Tuesday. The study said, ‘If the ECB does follow expectations and raise interest rates further, the implications for European housing markets could be substantial. The end of the boom may be in sight,’ the report concluded.”

“Analysts fear the cycle will turn as rising interest rates in America, Europe and, soon, Japan choke off global liquidity. Andy Xie, an economist at Morgan Stanley, said the ‘bubble’ could burst this year. ‘It may take just one event to trigger reverse momentum,’ he said.”

“The world economy certainly seems to be turning upside down. Ex-Communist Poland is now so credit-worthy it can raise international capital more cheaply than the US. ‘We no longer face a risk of Russia or Mexico blowing up: it’s the US housing market we need to worry about,’ Philip Poole, an economist at HSBC said.”

“Poole said the world had changed so far over the past decade, the next crisis may well be one of ‘reverse contagion’ originating from the mature economies.”

Paul L. Kasriel has this, “If we do have a housing bust, and we likely will if Bernanke does not soon declare a ceasefire, then the cutback in spending by (the) unemployed would have a, excuse the Keynesian expression, multiplier effect on total spending in the economy, adding some homeowners not associated with the residential real estate industry to the length of the unemployment lines.”

“A slowdown in consumer spending emanating from a busted housing market would lead to an increase in unemployment, which would have further knock-on effects to consumer spending and unemployment. Our smug homeowner might find himself in the unemployment line.”

“Housing today is more highly leveraged than it was in 1989, just before the last bicoastal housing bust occurred. Today the housing leverage ratio is about 43%. In 1989, the leverage was about 35%. Between 40% and 50% of new mortgage debt applied for in the past two years has had an adjustable-rate element to it. Back in 1990, only about 10% of new mortgage debt was of an adjustable rate nature. A lot of these adjustable-rate borrowers in the past two years are in the ’sub-prime’ category or are speculators. In either case, they probably have little equity in their homes.”

“It has been estimated approximately $600 billion of sub-prime adjustable rate mortgages will reprice over the next two years. Chances are mortgage defaults will be on the rise with these repricings. This will put ‘repos’ on the market, which will depress home prices. Speculators, with negative cash flows and slower or no appreciation in their investment properties, also will add to the glut of homes for sale.”

“Again, so what if mortgage defaults are on the rise? U.S. commercial banks have a record exposure to the mortgage market. About 62% of bank earning assets are mortgage-related. History tells us that a crippled banking system renders central banks less potent in combating economic downturns and promoting robust recoveries.”

“In other words, if a housing bust led to large credit losses to the banking system, Chairman Bernanke could cut the fed funds rate to 1% and be surprised that a low interest rate did not have the same magic for him as it had for his predecessor.”

“A housing bust..will give renters a lower price point at which to become homeowners. Yes, unless they are in the unemployment line too.”

The housing bubble is losing some air in the northwest. “Home prices on the Eastside climbed to a record high last month, while home prices in southeast King County were 13.1 percent higher in February than they were a year ago. In southeast King County, the median price of homes and condos whose sales closed last month was $294,000, a 13.1 percent increase over the $259,950 median price a year ago, but down slightly from the record $309,000 recorded in January.”

“The countywide median price for closed sales of homes and condos last month was $344,950, down from $352,000 in January but up 11 percent over the $309,950 recorded in February 2005.”

“Rising home prices are to be expected, especially when combined with the limited supply of available properties. But area real estate agents say those conditions have yet to create a frenzy among home buyers in King County, at least not so far this year. ‘I believe a lot of (buyers) are on the sidelines waiting,’ said (Bellevue realtor) Julie Varon. ‘People are taking their time and are not being as fearful (of losing out in bidding to buy homes).’”

“The number of closed sales of homes and condos on the Eastside fell to 683 last month, down 12 percent from the 777 closed transactions recorded a year ago. The number of pending sales on the Eastside, meaning sales of homes or condos that were agreed to but have not yet closed, totaled 948 in February, down 18.6 percent from a year ago.’

“The housing market around Puget Sound has slowed from its blistering pace of a year ago, meaning some sellers don’t get multiple offers and some have to lower their prices.”

“‘Last year, at least half of the homes had multiple offers,’Kim Emmons in Maple Valley said. ‘Now it’s more like 10 percent.’”

From Oregon. “In Lane County, there are some signs of a slight cool-down. The county’s inventory of homes on the market grew modestly in January, reaching its highest point in two years, after months of a squeaky-tight supply featuring bidding wars among buyers. Also, the median sales price has flattened after accelerating rapidly over the past two years.”

Check out the listing increases and pending sales declines on the Northwest MLS release.

Everyone is trying to figure out why the homebuilder stocks are falling today. Could it be this? “After debating at length whether a rise in short-term bond yields above longer ones signalled recession in the U.S., global investors are now wondering what the unwinding of this situation might bring.”

“Bond bears have been on a rampage in recent sessions, as markets moved to factor in risk of central banks in the euro zone and U.S. raising interest rates further than previously expected.”

“‘It’s not something I would say is overly severe,’ said Klaus Wiener. ‘However, if this were to continue, if we touch 5 percent or more, the fallout for the overall economy will be more severe, and especially in the housing market.’”

“‘To me this whole discussion about the yield curve being inverted was a little bit missing the point. Typically what you got in earlier cycles was the yield curve inverted, yes, but along with that the entire yield curve moved up,’ said Wiener. ‘That’s something we haven’t seen, until three or four days ago.”

“Don’t look now, but the yield curve appears to be twisting back toward its normal positive slope. Now the question becomes: is this good news or bad news?”

“The answer: it all depends on who you are. If you’re looking to take out a fixed-rate mortgage, the recent jump in long-term interest rates to multi-year highs is clearly bad news. It’s also bad news for homebuilders, or anyone looking to sell a home, for that matter.”

Or maybe it’s related to something like this. “The Central Florida division of Avatar properties Inc. posted 306 new home sales in the fourth quarter to end 2005 with 1,352 home sales. That’s down from 1,921 new home sales in 2004.”

“Avatar’s primary housing in Poinciana, a 47,000-acre master-planned community in northwest Osceola and northeast Polk counties, accounted for 407 sales last year.”

Or maybe this, “Whirlpool Corp.’s chief executive said Tuesday the appliance maker hasn’t seen a slowdown in U.S. new-home construction yet, although it expects a modest decline. ‘We do not see a bubble, and think that net net, we’ll still grow our revenues in that segment this year,’ CEO Jeff Fettig told investors.”

The press is turning its focus to the homebuilders. “Countrywide Mortgage CEO Angelo Mozilo believes that the ‘housing market officially turned south in January,’ according to Banc Investment Daily, and that some overheated markets may see prices plunge by up to 40 percent. Mozilo mentioned Las Vegas as one of those risky markets.”

“But nary a discouraging word was spoken at the Las Vegas Annual Housing Outlook hosted by local title company sales representative Richard Lee and Dennis Smith. But builders I talked to at the Outlook don’t believe Smith’s numbers. They say their traffic numbers are half what they were last year and cancellations are soaring, with the primary reason being potential homebuyers can’t qualify with the higher mortgage rates.”

“Buyers who can qualify are able to play competing homebuilders against each other for free options and upgrades. Builders who have completed houses to unload and the clock ticking on fully disbursed construction loans are evidently bothered. According to one commercial appraiser I spoke with, there is at least one Las Vegas builder with standing inventory that is offering eight per cent commissions to outside realtors who bring buyers to their project.”

“One builder with a project in the busy southwest confided that he dropped his prices $20,000 per unit to compete with the handful of large publicly traded builders that have projects surrounding his. Unfortunately, that move just prompted the big builders to drop prices more. He described competing in that market area as a ‘bloodbath.’”

From Realty Times. “If the full-page ads in my local paper are to be believed, new home demand has begun to flag. The issue is not how many units will be sold, rather it’s the way they’ll be priced. Recent ads have offered new home discounts ranging from $70,000 to as much as $100,000.”

“These new homes are being sold by major builders in one of the best markets in the U.S. The Washington, DC region includes some of the richest areas in the nation by income: Fairfax County, VA (#2), Loudoun County, VA (#3), Falls Church, VA (#8), Howard County, MD (#10) and Montgomery County, MD (#13). If builders are cutting prices in a region known for high household incomes, you have to wonder what’s happening in other population centers.”

“If builders are openly discounting prices, it means they’re competing with recent buyers who now wish to sell. While most owner-occupants tend to hold homes for a number of years, short-term owners include a large percentage of investors hoping to buy-and-sell as soon as possible. The growing number of new-home contract cancellations may well be evidence of entrepreneurial discontent. Speculators may prefer to lose a deposit than to close on a home that costs money to hold each month.”

“Speculators in the past few years have routinely thought of new homes as sure-fire investments. If discounts mean the flames have gone out, then a lot of builders, and a lot of speculators, will have a tough time ahead.”

“Dustin and Rebecca Snook believe they could have listed their North Las Vegas home for more, but considering softening conditions, were prepared to compromise. The decision appears to be paying off. ‘We thought we should probably go for $75,000 more, but we bargained out what could be accomplished with the listing price. We had to go with a price that was reasonable for the time,’ said Dustin Snook.”

“For their own good, Dustin Snook and his wife knew they had to consider the big picture. ‘I guarantee, if we listed for $75,000 more, we probably would have sat quite some time.’”

Another subprime lender disappoints Wall Street. “MortgageIT Holdings, Inc., a residential mortgage company organized as a real estate investment trust, today announced operating and financial results for the fourth quarter and year ended December 31, 2005.’

“Doug Naidus, Chairman and CEO, commented, ‘MortgageIT generated substantial growth in 2005, building its high credit quality portfolio to approximately $4.7 billion and producing well over 100% growth in loan origination volume, to $29.2 billion. During the second half of 2005, an increasingly challenging market environment developed, including a disruption in the value of sub-prime mortgage loans, intensifying competition for prime mortgage loans, and a yield curve that inverted, which had the effect of increasing borrowing costs for both our portfolio and our mortgage bank.’”

“‘During the fourth quarter of 2005, gain on sale margins for loans sold to third parties declined to 71 basis points, a level we have not seen for the past couple of years. We expect this environment to persist over the near term.’”

“Mr. Naidus continued, ‘Our portfolio has continued to perform well and prepayment speeds have slowed dramatically during the first quarter of 2006. We are actively managing our product mix and have substantially exited the wholesale sub-prime business, which drove losses at our mortgage bank in the fourth quarter of 2005 and is expected to contribute to a consolidated net loss in the first quarter of 2006.’”

“The Company now expects to fund approximately $150 million to $200 million of sub-prime loan volume during the first quarter of 2006. Also, the Company expects future sub-prime loan volume not to be a material component of its total originations as the Company will have substantially exited the wholesale sub-prime business by the end of the first quarter of 2006.”

“During the first quarter of 2006, the Company continues to reduce its sub-prime staff and operations. These further reductions, along with the disposition of the remaining sub-prime loans, will negatively impact first quarter 2006 earnings.”

“The company originates and sells self-originated single-family residential mortgage loans that comprise of adjustable rate mortgage (ARM) loans and hybrid ARM loans. It also involves in prime and subprime loan origination, underwriting, funding, brokering, and secondary marketing.”

A reader posted this report. “New York Mortgage Trust, Inc., a self-advised residential mortgage finance company organized as a real estate investment trust, today reported results for the three months and twelve months ended December 31, 2005.”

“Comments from Management: ‘2005, particularly the latter part, presented some significant challenges for us and the mortgage industry as a whole. In our mortgage banking subsidiary we experienced record loan origination volume for the year, an 86% increase over 2004, yet our operating results were less favorable than expected.”

“Steven B. Schnall, Chairman, President and Co-CEO, commented. ‘With the flattening of the yield curve and the corresponding increase in our portfolio financing costs, we have also experienced earnings pressure in our mortgage portfolio management segment. In response, during the first quarter, we are contemplating and are likely to dispose of a portion of our lower yielding acquired mortgage backed securities portfolio, thus realizing losses already recognized on our balance sheet.’”

Newspapers in Florida are asking realtors about the housing market. “Q: We’ve seen the real-estate market in Orlando and Florida cool from last year’s record pace. Is it going to continue to slow?”

“A: Continue to slow? I think what may happen, I don’t think you’ll see a reduction in [intangible] value; let’s put it that way. Value and price are different things. You probably won’t see a reduction in value, but maybe in prices, meaning you can pay less but it’s worth more. Value is how much that particular piece of property is worth to you.”

“Q: We’ve gone from a low existing-home sales inventory last year to a record level right now. Will sellers be forced to slash prices? A: They are [slashing prices]. But let’s look at the builders, and what is going on there. The builders are offering $5,000 to $50,000 in incentives, not off the price but in everything else. And when a buyer sees that, they go to the builder and they get X-amount for this and X-amount for that, the granite countertops and the other upgrades, and they take that in a heartbeat over an existing home.”

“One significant change that could impact the market is the number of homes for sale on the MLS for the Pensacola Bay Area. In February 2005, six months after Hurricane Ivan, there were 1,355 homes for sale in the MLS two-county area. In February of this year, that number had soared to 5,155.”

“Nan Harper, past president of the Association of Realtors, said the local slowdown in sales is more of a ‘blip’ in the market and not a ‘bust,’ she said. Moreover, the high number of homes on the MLS is due, in part, to overpriced waterfront homes not selling and the battles many homeowners are having with their insurance companies.”

“One area of the local market that is experiencing a noticeable slowdown, said Smith, is the condominium market. ‘The higher end condo market may be a little overbuilt,’ he said.”

And a letter to the editor blames the media. “When one wields great power, as you do, it is imperative that they do it responsibly. This is a great public trust that I think that you are not living up to.”

“Reporting on the slump in the Florida home sales and prices and the damage caused by Hurricane Wilma can be informative or destructive. I believe that you are no longer reporting news but creating news by repeatedly hammering away at the negative aspects of living in South Florida. I think that what you are practicing now is irresponsible journalism and being part of the cause of the present real estate slump rather than part of the cure.”

“I’m sure that I speak for many Florida homeowners when I say thank you for doing such a wonderful job in adding to the slump in our housing market.”