March 9, 2006

Bursting Condo Bubble Puts San Diego In ‘Greatest Peril’

Rich Toscano writes about housing for the Voice of San Diego. “Not so long ago, downtown was..prime real estate. Condos for sale were hard to find and prices absolutely soared. Units were often bought and sold multiple times before even being built, each iteration allowing sellers to net six-figure profits without ever seeing the objects of their speculation. Those profits were often leveraged up to purchase even more condos, sending demand up even further. Those days are behind us.”

“The inventory of downtown condos for sale has increased more than tenfold since the glory days of early 2004. And it shows no sign of stopping: condo inventory has doubled in the past year. Given that inventory usually increases dramatically in the spring, the number of downtown condos should quickly blow through 600 and beyond.”

“As fellow Voicer Will Carless recently learned, there are 11,000 more units planned or under construction for downtown alone. Some of those projects will doubtless be shelved, but downtown’s ubiquity of cranes and construction sites makes it clear that many are already underway. That inventory number looks set to grow for some time to come.”

“Unfortunately, the buyers are not showing up to the party. According to Sandicor, downtown registered a meager 39 condo sales in February, down 20 percent from February 2005. Sandicor’s data indicates that 92101 condo sales over the past year have averaged 58 per month. Assuming that this sales rate holds up, an optimistic assumption, considering San Diego’s well-documented trend towards weaker sales activity, there is now about 10 months’ worth of inventory waiting to be resold.”

“But this figure does not truly express the imbalance between supply and demand. For one thing, Sandicor’s inventory figure does not include units that are being sold directly by developers. More importantly, it does not include the onslaught of new projects slated to hit the market in the future.”

“We can’t really be blamed for focusing our attention on 92101. Downtown was the belle of the speculative ball during the wildest days of the housing bubble. And now that the bubble is beginning to deflate, it appears to be the market in the greatest peril.”

And a San Diego TV station had this last night. “If you’re looking to sell a house or condominium, don’t hold your breath. It’s taking longer to reel in buyers. Two years ago at this time, about 3,000 homes were listed for sale countywide. Last year at this time, there were about 8,500. As of this week, the unsold inventory has almost reached 16,000.”

“A big drag on sales has been a glut of condos and apartment conversions, a phenomenon partly driven by speculators, experts say. ‘The key is, is there going to be an event that will pop the bubble?’ asked University of San Diego Economist Alan Gin.”




Fed ‘Pulling The Rug Out From Under Speculators’

A check on Wall Street for housing bubble news. “Two senators on Thursday filed a measure to require congressional investigators to study whether lobbying activities by Fannie Mae and Freddie Mac further the companies’ federally mandated mission of supporting homeownership.”

“The U.S. Treasury Department has not seen any acceptable legislative proposal to curb Fannie Mae’s and Freddie Mac’s $1.4 trillion portfolios short of a Senate bill viewed by some as too strict, Treasury Undersecretary Randal Quarles said on Thursday. If a bill is not passed, Quarles said Treasury would consider the tools it has available to deal with what it perceives as a systemic risk posed by the portfolios. Those tools, he said, include limiting Fannie’s and Freddie’s debt issuance.”

“The National Association of Realtors reports that last year an ‘eye-popping 43% of first-time home buyers purchased their homes with no-money-down loans.’ Meanwhile, a foreclosure monitor has announced that nationwide foreclosures jumped 24.5% between the first and fourth quarters last year.”‘

“In somewhat ominous fashion, our Housing Bubble Bellwether Index is now testing its support level. If this bellwether composite of homebuilding, mortgage and real estate stocks breaks sharply to new lows in the next several months, it means the housing bubble unwinding is about to turn ugly.”

“Bubbles usually require an external event to create the first pinhole. For stock market bubbles (1999, 1929 and Japan in 1989), it was central bank tightening. For the housing bubble, it may be a combination of rate hikes (14 so far), plus the U.S. Federal Reserve pulling the rug out from under the speculators.”

“After two weeks of declines, long-term mortgage rates turned sharply north in the week ending Thursday, with 30-year rates hitting the highest level in over two and a half years. The increase put the benchmark 30-year mortgage at a national average of 6.37%. Last year at this time, the loan averaged 5.85%.”

“Frank Nothaft, Freddie Mac vice president and chief economist, said stronger-than-expected gains in manufacturing and service industries, coupled with higher labor costs, ‘ignited inflation concerns,’ which led to higher mortgage rates this week. ‘Financial markets are beginning to think that the Fed will hike rates three more times this year, instead of two, putting upward pressure on mortgage rates,’ he said. ‘Although the signs are mixed, the housing industry is now beginning to shift into slower gear, and higher mortgage rates will only strengthen that change,’ said Nothaft. ‘However, we see no signs of a bursting bubble.’”

“Mortgage loan fundings at Countrywide Financial totaled $31 billion in February, up 15 percent from a year ago but down for the second straight month, the company reported today. In January, mortgage loan fundings came in at $33 billion, which was a large decrease from December’s fundings of $44 billion.”

“Operational highlights included the following: Adjustable-rate loan fundings for February were $16 billion, an increase of 11 percent from February 2005. Home equity loan fundings for February rose by 30 percent from February 2005 to $3.4 billion. Nonprime loan fundings in February were $2.8 billion, up from $2.6 billion for the same period last year.Pay-option loan fundings for the month were $5.6 billion, up from $4.6 billion in February 2005. Interest-only loan volume was $6.3 billion for February, up from $4.6 billion for the same period a year ago.”

“The PAD System Report comes out when editor Daniel A Seiver, a practicing finance professor, feels he has something to say. In his current issue, he recommends a new short sale: FirstFed Financial. It’s a mortgage company heavily exposed to the Southern California market. which Seiver describes as ‘one of the bubbliest and riskiest in the nation.’”

“Plus, he dislikes the company’s significant exposure to option ARM loans, where the borrower can elect not to pay interest but instead increase debt. Seiver predicts there will be defaults in a down housing market. He warns that FirstFed may be difficult to short.”




Does The RE Industry Influence The OC Register?

This blog was contacted by OC Registers’ Jon Lansner regarding that writers’ objectivity on Orange County, CA real estate. Here’s what Mr. Lansner wrote. “I’m trying to figure how to tell people on your blog that I operate under ZERO pressure from my bosses or the real-estate crowd to produce an even-handed discussion of the housing market.”

I proposed that I would put up this post for readers to submit questions directly to him and I will select the best four or five and send them over tonight. He agreed. Tomorrow, when Mr. Lansner replies, I will post his answers. Please keep your questions on topic.

He will also field questions on his outlook for the Orange County property market, so this is your chance; Ask Jon Lansner!




The ‘Crowd Control Problem Is Over’ In Florida

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 during an investors conference. 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 said. ‘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. It noted the rapid increase in home prices the past two years, record inventory levels in recent months, slowly rising interest rates, and pressure on the market as a result of speculators who rushed in but are now adding to the sales supply as they exit.”

“‘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 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.’”

“During the third annual Luxury Living Showcase, developers sat down to discuss the future of real estate in the Manatee-Sarasota area. ‘There’s not a bubble anywhere that I see,’ said Al Piazza.”

“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.”

“‘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.”

“‘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.’”




Buy 2006 Homes At 2004 Prices In Orange Co., NY

The New York press is reacting to the February housing numbers. “For a limited time only, you can buy 2006 homes at 2004 prices. OK, that might be a stretch, but Orange County’s median sale price dipped to $293,500 in February, the lowest it’s been since July 2004 (median $280,500).”

“It’s also the first time the median price for single-family homes has been below $300,000 since March 2005 (median $299,000), according to the Orange County Association of Realtors.”

“The February data is the latest evidence that Orange County’s real-estate market is cooling off after a remarkable five-year run that saw home prices more or less double. ‘There’s no question the deals are harder and more time-consuming,’ said (broker) Chris Scibelli.”

“Through the first two months of the year, there have been 380 sales in Orange County, down from 405 in the same period last year. ‘One of the things we don’t know here is who’s buying,’ said Ann Garti, chief executive officer of OCAR. ‘What is the market for these houses? Do we have investors who are buying to renovate, or are these buyers getting in at price points they can afford?’”

“Another thing yet to be determined: Is this just the usual winter housing lull, or the beginning of something else? After a slow start in 2005, activity picked up during the summer. But this winter has been even slower than last. Sales are down around the region, and prices are flat.”

“‘Last year, we were able to blame the weather. This year, January wasn’t really a weather-blamable phenomenon,’ Garti said.” Sales slump “Home sales last month were down across the region, while median sale prices were down in Orange and Sullivan counties, and up slightly in Ulster.”

“Home sales in Herkimer and Oneida counties mirrored a statewide drop in January. Oneida County’s median price dipped from $90,000 to $79,500. Existing single-family home sales dipped from 189 in December 2005 to 119 in January in Oneida County, while similar sales declined in Herkimer County from 23 to 18. Statewide, sales dropped 33.8 percent, from 8,984 in December 2005 to 5,947 in January. “




Las Vegas Prices Fall As Lenders ‘Clamp Down’

The Review Journal has the latest on the housing bubble in Las Vegas. “Home prices in Las Vegas continued their downward slide in February, dropping to a median of $309,000 based on 1,787 sales, according to figures from the Greater Las Vegas Association of Realtors.”

“Prices peaked at $312,500 in December and retreated to $310,000 in January. ‘We’re definitely softening, definitely slowing down,’ said Linda Rheinberger, president of the Realtors’ association. ‘We’re catching our breath and getting ready for the next boom.’”

“The number of new listings hitting the market in February declined 6.9 percent to 5,214, though the total number of listings rose 7.2 percent to 17,675.”

“Statistics from the Greater Las Vegas Association of Realtors are based on records from the MLS and do not necessarily account for newly constructed homes sold by local builders or transactions not involving a realtor.”

“‘One thing that I have noticed that is slowing the prices down on housing in the valley is appraisals,’ Las Vegas realtor Curt Liquin said. ‘Appraisers were liberal in the past and now they say the lenders are clamping down, which is making it harder for them to come in at the purchase price.’”

“Liquin said he talked to several appraisers in the past few weeks who told him they’re being pushed by underwriters to tighten their criteria. They’re not allowed to take into consideration builder upgrades that can add $10,000 to $50,000 to the original sales price of a home.”

“‘One (appraiser) told me last week that it didn’t matter what he or I thought the value was, it was the underwriters,’ he said. ‘There were a few that told me they are only being allowed to go back 60 days for comps (comparable sales prices) and cannot go farther than a mile away even if there are not good comps in the area or time frame. You can imagine how this may affect things when some areas are so new and there might not be comps in a mile radius of the property.’”