The Housing Bubble

A look at condo conversions in Florida. ” It’s happening throughout the country, but South Florida is the top market for condo conversions, followed by Orlando, San Diego and Washington, D.C., said Jack McCabe. In Boynton Beach and west of the city, at least nine apartment complexes have converted to for-sale units since 2004.”

“Countywide, 6,471 units went condo in 2005, compared with just 831 units in 2001, McCabe said. And in the first two months of 2006, a staggering 5,802 new conversion condos hit the Palm Beach County market. What does this mean in a cooling market that real estate experts say now favors buyers instead of sellers? ‘We are going to see things get very competitive this year in condo conversions,’ McCabe said.”

“The market turn already is visible in Boynton Beach. Look, for example, at Orchid Lakes. The 319-unit complex began converting to condos in December and as recently as last month had folks out on street corners waving ‘no closing costs’ signs.”

“But last week, the complex, which touted Orchid Lakes in color newspaper inserts, abruptly abandoned the conversion and began renting its units once again. Orchid Lakes’ owner could not be reached for comment, but a leasing agent who answered the phone confirmed that the development is ‘not converting anymore.’”

And from The Voice of San Diego. “Like downtown, University City has been experiencing a real estate boom that has largely centered on condominiums. But unlike downtown, University City’s boom has been primarily driven by the conversion of existing apartments into for-sale condos.”

“In the last few years, as those condo conversions have flooded onto the market in University City, however, prices have stagnated there, leading some Realtors and home owners to worry about the future of their neighborhood’s real estate prices. (Realtor) Sherry Sangan said the past couple of years have been tough for sellers in all but the best University City condo projects.”

“‘I have buyers who bought two years ago over in Lucera (a condo conversion project) that are getting less right now to sell it than they paid, and that doesn’t include our commissions,’ said Sangan. ‘They’re getting killed,’ she added.”

“Data compiled from Dataquick and ZIP Realty shows that condo prices have completely stagnated since late 2003. Indeed, the median price of condos sold in January 2006 was $45,000 less than it was in January 2004.”

“At the same time, condo sales have also been drying up in University City. In 2005, there were fewer sales in every single month of the year compared to 2004. Sales in 2005 were down 23 percent from 2004.”

“(Realtor) Adam Rappoport, who has a number of clients in University City, said he’s heard a few horror stories from condo owners in the area. Though his clients preferred that their story not be told directly, Rappoport said he knows of a number of people who bought their condo or condo conversion within the last three years and have since run into trouble on their loan repayments.”

“Buyers were simply expecting prices to carry on increasing, Rappoport said; when the market stagnated, they have found themselves unable to re-finance and therefore getting burned. ‘Because of the financing vehicle they took, now not only can they not sell it for what they hoped to get for it, but they’re probably a good $20,000 below the price that they bought it for, and they’re going to have to pay commissions and closing costs on top of that,’ Rappoport said.”

“Asked if sellers have done well in downtown’s younger cousin to the north, (Realtor) Mary Burger was cautiously optimistic ‘It depends upon how long they’ve owned the home. If they’ve owned it for 10 or 15 years, they’re doing quite well,’ she said.”

“And what if they’ve owned it for one or two years? ‘If they’re not absolutely pressed to sell, they still have a lot of opportunity there.’ That’s one way of putting it.”

Some housing bubble news from Wall Street. “Overseas buying of new Freddie Mac notes on Tuesday was sub-par compared with a string of deals drawing near-record purchases. Freddie Mac and Fannie Mae have consistently sold at least half of their new note issues this year outside of North America. The securities draw buyers seeking high-grade U.S. debt with higher yields than Treasuries.”

“The distribution of new Freddie notes placed overseas on Tuesday dipped to 45 percent. ‘There could be a few reasons: the Japanese year end is coming up..maybe the Chinese are looking at other products like mortgage-backed securities, which have cheapened up recently,’ said K.N. Sundararajan.”

“‘In our view, the system ‘works’ as long as overseas sales average 35 percent or greater over time,’ said Jim Vogel. ‘Consistently lower than that would require wider spreads to clear the domestic market for $5 billion issues.’”

“Fannie Mae on Wednesday said it would update investors on its business and an $11 billion restatement process next week, a day before a U.S. House panel holds a hearing on the company’s accounting scandal.”

And on the homebuilders. “Homebuilding stocks came under pressure Wednesday after one analyst cut his earnings forecast for the group for 2006 and 2007, citing order drops and other negative housing fundamentals that he says not even the spring selling season can save. Analyst Stephen East wrote, ‘We distinctly are not in the camp that the sky is falling; but it is pretty overcast right now.’”

“‘The hope of many in the industry that the spring selling season will save the day is just not in the cards,’ he said.”

“‘We have discussed many times that we believe we are in that transition phase from hyper-growth to sustainable growth, and that the phase would be painful. Well, it is painful, and much like the teenage years, it is just a phase that all must endure. Unfortunately for those banking on a spring selling season rescue, the transition is in place and we do not see it reversing just because the weather warmed up and the flowers bloomed,’ East wrote.”

“East’s concern is that builders’ difficulties over the last three months show a changed level of housing demand that is not yet reflected in Street estimates. He also notes that interest rates could move up more than expected. East believes homebuilder stocks have a Fed funds rate of 5% priced in; however, he said he isn’t sure if a 5.25% or 5.5% level is priced in.”

A Fed official is speaking today. “The U.S. housing sector may already be cooling but it should maintain its lofty level and not undermine the economic expansion, St. Louis Federal Reserve Bank President William Poole said on Wednesday. Poole did say there was some evidence the housing market might be experiencing some sort of slowdown after its strong gains in recent years. But he explained this was already factored into the U.S. central bank’s thinking.”

“‘As noted in the minutes of the FOMC meeting held on January 31, 2006, policy-makers are expecting some weakening in housing construction,’ Poole said.”

“And he played down worries of wider disruption from the bursting of a housing bubble, which he did not believe existed at a national level, though some markets may have overheated: ‘The conventional view, which I subscribe to, is that a housing price bubble does not exist on a national average basis, but there may be pockets … where prices have risen beyond levels that can be justified by economic fundamentals.’”

“Poole repeated the Fed’s long-standing mantra that it was not possible for policy-makers to identify bubbles in advance, an argument they use to justify not intervening to curb price rises in any asset market. ‘Given that bubbles always burst, if there is no burst, then there was no bubble, clear advance evidence of a bubble can never exist.’”

“‘If the evidence were clear, then everyone would know about the bubble and forthcoming burst, but then the buying that created the bubble would not occur in the first place,’ he said.”

“‘So if you have an academic interest in house prices, I recommend that you wait a few years. If you have a direct financial interest, I can’t help much, you’re on your own,’ he said.”

Bloomberg has this out on a new study. “Fewer than 15 percent of Americans surveyed in a Bloomberg/Los Angeles Times poll expect home prices in their neighborhood to fall during the next six months. More than twice that, 36 percent, see prices rising during that time. The majority of those polled, almost seven in 10, expect the value of their homes to appreciate by 5 percent to 30 percent during the next three years.”

“Affluent investors are again more optimistic, with almost eight in 10 predicting such price gains. ‘Real estate is always a good investment because land is finite,’ says Richard Hoffman, a psychologist in Tampa, Florida, who owns two condominiums and an office in addition to his home.”

“More than 40 percent of the affluent investors in the poll own a second home or an investment property, compared with more than a quarter of investors making $100,000 or less annually.”

“More than one quarter of those who have adjustable-rate mortgages say they aren’t sure they’ll be able to make their monthly payments if their interest rate goes up. These loans have been particularly popular in California and other states with high housing costs. The yield on the U.S. Treasury’s 10-year note, which serves as a benchmark for 30-year mortgage rates, rose to the highest in more than a year on March 6 on expectations that the Federal Reserve will keep raising interest rates to rein in the economy.”

“Of those who have adjustable-rate loans, the poll found that 21% said they were ‘not too confident’ about making their payments if they adjusted higher. Five percent said they were ‘not at all confident.’ The rest were ‘very confident’ or ’somewhat confident.’”

“Lillie Oliverof Alvertville, Ala., said she got an adjustable-rate loan a few years ago when she refinanced her house to pay for improvements. But her loan rate recently jumped a full percentage point, and it could adjust again in six months, she said. ‘I’m at the point right now where I can barely make the payments,’ Oliver said. ‘If everything keeps going higher, like groceries and everything, I don’t know how I am going to make it.’”

“Jackie Arnold, 41, and her husband used an adjustable-rate loan to buy a home in suburban Atlanta 18 months ago. Now, as interest rates rise, she’s worried that the loan may have been a mistake. ‘Our dilemma is, do we sit on the [loan] that we have and wait … or do we refinance now and pay considerably more right away?’ Arnold said. ‘We are caught between a rock and a hard place.’”

“Some consumer advocates say home buyers haven’t been fully aware of the risks involved with adjustable-rate mortgages. Homeowners with ’substantial income or assets could well weather the storm of higher payments on these loans,’ said Stephen Brobeck, head of the Consumer Federation of America. ‘But we know that a fairly high percentage of people who have taken out these exotic loans aren’t in that situation.’”

And CNN had this, “Individual investors are moving back into stocks at the fastest pace in years. Uh oh. as history makes clear, by the time individual investors are jumping in, that’s the time the bull market is pretty much over. Individual investors are often the last hurrah, when most of the advance has already happened. For one recent example see the end of the Internet bubble, circa 2000. As Barry Ritholtz wrote, ‘This is how sucker rallies draw people in. Once the most naive and least informed buy in, who else is left to drive prices higher?’”

The Rocky Mountain News has this report on Denver. “Home-sale prices in the Denver area took a larger than expected drop in February, prompting some experts to wonder if the upper-end housing market is starting to cool.”

“‘It has been the higher-end market that has been driving up the average and median prices of all homes for the past 18 to 24 months, so if that starts to cool, we might start seeing an adjustment across the board,’ said Steve McGuire. McGuire said the segment of the market that appears to be softest is in homes priced below $300,000.”

“Brian Bartlett said there are pockets of hot areas, such as Washington Park, Bonnie Brae, Hilltop, Crestmoor and Mayfair in Denver. ‘But Arapahoe County is scary,’ Bartlett said. He said that he was listing a home near Smoky Hill Road that the sellers bought for $208,000 in 2004. After 35 showings, they hadn’t received an offer, so they dropped the price to $189,000. ‘Prices are dropping, and buyers have no sense of urgency.’”

“Bauer said McGuire may be correct in saying that sellers of mansions are dropping prices, sending ripples throughout the rest of the market. ‘It is actually a better time to be buying high-end homes than it has been in the past couple of years,’ because sellers are being forced to negotiate more, Bauer said.”

“Condos prices took a big hit. The average price of a condo fell by $16,849 in February from $192,271 in January, almost a 9 percent drop in one month. ‘I was surprised,’ Bauer said. ‘I knew they would be down, but I didn’t think by this much.”

“The average price of a single-family home sold and closed in February fell by $3,808, to $276,746, from $280,554 in January.”

The Denver Post. “The median price for a condominium in Denver has dipped below $150,000 for the first time in two years. The median price for a condo in February was $149,440, compared with $155,000 in January. The median price for a single-family home also dropped to $238,500, compared with $245,000 in January.”

“There are 25,484 homes on the market, up 15.4 percent from the same time last year. The increase suggests people are feeling stress from higher interest rates, causing them to put their houses up for sale, said Tucker Hart Adams, an economist with U.S. Bank in Denver.”

“‘This sounds like it’s a little bit more of a buyer’s market, or maybe the beginning of a buyer’s market,’ she said. ‘I don’t see any sign of a bubble popping, but I think I hear air seeping.’”

The North County has this report on San Diego’s housing bubble. “In one of the strongest signs yet that the housing market is cooling, San Diego County’s inventory of unsold existing homes is fast approaching 16,000, twice the total one year ago and five times the number in March 2004, a local real estate agent said Tuesday.”

“Dennis Smith in Carlsbad, said the number of unsold single-family houses and condominiums on the market reached 15,842 late Tuesday afternoon. Smith said that figure compared with an inventory of 8,449 on March 8, 2005, and 3,020 on March 15, 2004.”

“‘We’ve gone up by 400 properties in the last five days,’ he said. ‘That’s 80 properties a day.’ At the same time, sales are declining sharply.”

“The inventory buildup comes on the heels of reports that countywide sales for January fell below 2,000 for the first time in years. The total of 1,876 sales for that month was down sharply from 2,297 in January 2005 and 2,599 in January 2004, according to the real estate listing service Sandicor.com. In January of each of the three previous years, sales totals exceeded 2,300.”

“In North County, sales of existing homes also fell sharply early this year, as the January total of 533 sales was 27 percent off the 2005 pace of 732, Cal State San Marcos economics professor Robert Brown reported last month.”

“‘We are just experiencing a soft correction,’ said Nicole McAllister, for the University of Southern California’s Lusk Center for Real Estate, noting she does not consider the buildup to be alarming. ‘I don’t think (the market) is headed for any catastrophic burst,’ McAllister said. ‘We’re going to gradually see sellers adjust and soften their prices a bit. I don’t think it’s going to turn around and tomorrow everybody is going to get all these great deals.’”

“‘This is still just the beginning of a cooling trend in real estate,’ Christopher Thornberg, senior economist with UCLA said. On the other hand, he said, it remains to be seen if prices will fall at some point or flatten out for several years. Thornberg is one who subscribes to the theory that Southern California is in a ‘housing bubble,’ a term used to describe a market where home prices inflate beyond what incomes can sustain.”

“Given today’s low interest rates, Thornberg suggests a healthy ratio of housing prices to income levels is 8- or 9-to-1. ‘”Right now we are at 12-to-1, and counting,’ he said. Thornberg suggests homes are overvalued by 25 percent to 30 percent.”

“For his part, Smith said the buildup is ‘absolutely going to keep a cap on prices. I don’t expect the bubble to burst, but the air has been let out of the bubble.’ For now, prices are holding steady, Smith said, noting that preliminary reports suggest prices were about the same in February as they were in January.”

“He said Oceanside’s Quail Ridge is illustrative of an emerging trend. There, one of his clients who is trying to sell a two-bedroom, two-bath, 1,152-square-foot condo is offering it for a range, between $294,000 and $324,000, rather than a fixed price. And Smith said the owner is offering to pay the first six months of principal and interest, roughly $11,000, to any buyer willing to pay in the high end of that range.”