The Housing Bubble

A final Friday post to clear up the loose ends. “The once red-hot housing market in the Lompoc Valley has started off the year on a sluggish note, with sales down and the median price flat, echoing a trend felt throughout Santa Barbara County. ‘In the intermediate range, most sales are going through only after some reductions in the asking price,’ (realtor) Maria Slizys explained. ‘We’re also seeing a higher number of sellers offering to pay the buyer’s closing costs and other expenses.’”

“‘Some sellers who can’t find a buyer for their house have had to cancel their purchases of bigger homes in the newly built developments,’ Ms. Slizys said. ‘They have had to forfeit the deposits they made.’”

“I saw that our flexibility, creativity and cultural privileges were in part due to the reality of late 20th century coastal California real estate. ‘In the old days, taking out a second mortgage or an equity line had a certain stigma attached. ‘It meant you were the sort of person who couldn’t pay your bills, that you were living above your means,’ Michael Simmons explained. But over the past 20 years, he’s seen things change. ‘Taking out an equity line has become common, prudent, easy.’”

“JPMorgan chief economist Stephen Walters said the home loan data released yesterday by the Australian Bureau of Statistics was ‘unexpectedly soft.’ ‘Investors remain reluctant to enter a market where the rental income yield is unattractive, and the chances of sustained house price appreciation any time soon are low,’ Mr Walters said.”

“A large number of new housing development projects and a declining ratio of pre-sales last year has left northern Taiwan with a huge amount of empty units, and market insiders say that the excess inventory could have a depressing effect on housing prices beginning late this year or early in 2007. Unless either the inventory or the number of housing starts is somehow reduced, market insiders predict, housing prices in the county will drop by an estimated 10 percent this year.”

“Jordan and Linda Celkupa sold their apartment of four years for a 65-percent profit, and since then, they’ve been renting and waiting for the housing market to cool down. ‘If you look at the amount of money we spend every month, it’s just substantially cheaper to rent than own this place,’ Jordan Celkupa said. In almost every part of the country, it’s cheaper to rent than to buy. The cost of your mortgage and real estate taxes is likely to exceed what you’ll pay for a rental, so you’ll not only make a lump sum in cash, your monthly costs will go down.”

“The high for mortgage rates in ‘03, ‘04 and ‘05 was 6.5 percent; we’re almost there, and likely to rise above. The word ’seven’ may be in vogue by summer. The Fed always has trouble with the time lag from rate-hike to economic effect; its last experience with a housing-led recession was 25 years ago; it has never before tried to offset the effects of abnormally low long-term rates; and it has a rookie chairman. That’s a setup for an accident.”

“Home sales in the Twin Cities, Minn., area fell for the fifth consecutive month in February. Realtors reported 2,523 home sales last month, down 6.9 percent from the same month a year ago. Total inventory of single-family homes in the region ended February at 23,417, an increase of 35 percent over the previous February record.”

“The number of very overpriced housing markets grew in the last three months of 2005 from the prior quarter despite slowing demand and rising mortgage rates, a study released on Friday shows. 42 percent of the top 299 U.S. metro housing markets were considered ‘extremely overvalued,’ making them vulnerable to price declines.”

“Major U.S. homebuilders such as Toll Brothers have warned of slowing orders, while other data suggested that the home prices in some of the hottest markets may have peaked. The U.S. median price on existing single-family homes slipped to $213,000 in the fourth quarter from $215,900 in the third quarter, according to the NAR.”

“The most common mistake made when putting a property on the market is overpricing, according to a survey of home sellers. Michael Bearden attributes these mistakes to the desire to capitalize on rapid price gains during the housing boom, noting that ‘it’s not surprising that homeseller expectations sometimes outran market reality.’”

An Arizona blogger has discovered the rumors are true. “Recently, it was reported in the Phoenix market that the number of homes available had jumped from apx3400 homes January 05 to over 30,000 this January. As we watch some of the markets around the country, looking for signs of ‘the bubble,’ this number was astounding.”

“As a member of the ‘Arizona Regional Multiple Listing Service’ (ARMLS) I thought I would check for the accuracy of this claim. By the way ARMLS is known to the local realtors as ‘armless.’ In running some stats this morning, there are 33,270 active listings in the MLS. This covers greater Phoenix as well as a bit of outlying area. Another 1,225 are active/contingent. Under contract, but still being marketed for a buyer.”

“There has been a lot of talk of speculation in the Phoenix market, which made me wonder, how many of these homes are vacant. Of the 33,270 active listings, 14,601 are vacant. 14,601, almost half. Wow.”

“Why?? A lot of the ‘flippers’ that bought new homes did not want to put tenants in, so the homes could be marketed as new,never lived in. Move up buyers bought first for convenience/speculation, putting the old home on the market later. People buying 2nd/speculative homes. The high number of vacant homes appears to be the result of this speculative fever that has hit Phoenix, just like many markets.”

“This has led to the unsustainable increase in homevalues, as the investors no longer enter the market. And a 10 fold increase in inventory as the speculators decide its time to get out while the gettins’ still good. I have no year over year comparison for the vacant homes, or info on what is ‘normal,’ just a gut feeling that this doesn’t bode well for the market.”

An update: “Of the 33,000ish active the average price is $484,594. The total number of pending sales is 8,125. The average price of the total pendings is $378,573. Of the 16,000ish vacant homes, average asking price is $456,772. There are 3762 pending sale vacant homes(included in the 8,125), at an average price of $368,218. Looks like what is moving are the low end product.”

Two reports show home prices falling. “Demand for new homes has shrunk in central Ohio in the past two years, causing builders to slow down construction and leaving them with an inventory of unsold houses and condominiums. The overstock and sales slump have prompted something once unheard of: a sale on some homes.”

“Showcase Homes offered up to $60,000 off a new home in January and February. Ambassador, Trinity, Mobley and Homewood joined forces to offer discounts of up to $50,000 in February. Rockford Homes is offering a free fireplace plus ’spring special discounts.’”

“‘There’s no question, it has hit everybody in our market at all price points across the board,’ Rockford President Robert Yoakam Jr. said of the market slowdown. Central Ohio contractors are left with too many houses despite building 26 percent fewer single-family homes last year than two years earlier.”

“‘The market is bearing a lot of discounting,’ Susan Cass said. ‘The buyers expect it when they come in the door. They come in asking about discounts.’”

“‘The promotions we are running today are the largest in our company’s history,’ said Jack Mautino, president of the Dominions Ohio division. During the building boom, which began in 1999, many first-time buyers were renters who were enticed into homeownership by low interest rates. That supply of buyers has been depleted, he said. Columbus has not added new jobs that would create a new supply of buyers.”

“About 12,000 residential building permits were issued for single-family homes and condos in central Ohio in 2005, he said. During the same time, the area added only 5,100 jobs, Jim Hilz, executive director of the Building Industry Association of Central Ohio, said. ‘You can’t be building 2½ units for every new job,’ he said.”

From Alabama. “Home prices fell and the pace of sales declined for the first month of 2006, indicating a slowing trend and perhaps heralding a buyer’s market in Alabama. Existing home sales in January dropped 21.5 percent from December 2005 to 3,702 units sold from 4,725.”

“Average selling price also fell in Alabama by 5.2 percent to $142,522, representing the fifth straight monthly decline. The 27,544 homes on the market in January 2006 represented an approximate 4,000-unit increase compared to January 2005.”

“‘Thought seasonable factors may be part of the explanation for falling prices and declining home sales, it appears that the housing sector is slowing down as we move into 2006,’ Leonard Zumpano said in a press release. ‘A slow but steady increase in the number of unsold homes, coupled with slowing sales, is beginning to exert downward pressure on prices in many locations across the country.’”

“Only five of the regions tracked by the center experienced an increase in existing home sales for January. Sales fell in 16 areas. Fourteen regions reported a decrease in average selling price during January, while prices increased in seven areas.”

“‘Whether January’s steep decline in home sales foretells a slow housing market for the entire year remains to be seen,’ Zumpano said. ‘For prospective buyers and the health of the market, that is probably a good thing.’”

Some housing bubble news from Wall Street. “MFA Mortgage Investments today reported a net loss available to common stockholders of $32.6 million. Stewart Zimmerman, MFA’s Chairman said, ‘As previously indicated, increases in the target federal funds rate continue to increase the cost of MFA’s liabilities at a more rapid pace than the yield on its assets, negatively impacting spreads.”

“As a result of the Federal Reserve’s efforts to tighten monetary policy and the fact that, in general, the yields on MFA’s assets reset annually, but only after an initial fixed rate period, we anticipate that MFA will experience a period of reduced earnings over the next several quarters.’”

“Freddie Mac, still recovering from an accounting scandal, on Friday said it would delay by two months the release of its quarterly and full-year 2005 financial results to implement an accounting change. The company recently decided to make greater use of third-party market information in its method for valuing those assets.”

Speaking of third parties. “The current environment of deeply teased short-term U.S. subprime hybrid adjustable-rate mortgages (ARMs), combined with an interest-only (IO) affordability feature, can lead to substantial payment shock at the ARM reset, according to a newly released criteria report by Fitch Ratings. As a result, Fitch is adjusting its treatment of IOs on two- and three-year subprime hybrid ARMs to reflect the higher odds of default.”

“Fitch analyzed the payment shock potential for 2005 subprime IO and non-IO ARM products and found that the payment increase for an IO at the rate reset is significantly larger than the increase from principal amortization and is high even if rates do not rise due to the high margins and low initial rates.”

“Subprime IO credit performance has been strong due to the favorable economic climate of the past few years. ‘However, newer vintages may not exhibit the same strong performance because more borrowers could face a payment increase as home price appreciation slows,’ said Grant Bailey, Director, Fitch Ratings.”

“Fitch believes that the 2004 borrowers who are rate resetting for the first time in 2006 are less likely to face this obstacle since home values rose between 2004 and 2006. Fitch believes that loans resetting in 2007 and later may be more susceptible to the payment shock risk.”

From the LA Times. “Japan’s audacious five-year experiment of force-feeding cash into an ailing economy began to wind down Thursday, chased into history by central bankers convinced that Japanese industry and consumers have risen from their sickbed and no longer need easy credit.”

“Some economists also worry that higher rates could have global repercussions by encouraging Japanese investors to repatriate some of their vast U.S. investment holdings. That could force the Federal Reserve to push up rates more steeply than they are already climbing, leading to higher U.S. mortgage costs and depressed housing prices.”

The Dallas News reports on builder incentives in that city. “Sale. Price reduction. Limited-time savings. If it works for Wal-Mart, why not Centex Homes or Grand Homes? That’s what builders are hoping. Coming out of the winter slow season for home sales and with inventories edging up, some builders are spreading the word that they want to wheel and deal.”

“The supply of unsold new homes in the Dallas-Fort Worth area was up more than 10 percent at the start of 2006. There were about 8,751 completed, unsold new homes on the market at the end of December. While that’s a small number historically, it’s still more than double the unsold home inventory at the end of 2000.”

“The deals sound too good to pass up, and that’s what builders are hoping. Grand Homes is advertising new homes in Lancaster ‘reduced $30,000.’ In Allen and McKinney, they are cutting prices by $15,000 and $25,000 on some models. Mercedes Homes says it will give up to $14,000 in free options for buyers of its houses. American Legend Homes is offering ‘$10,000 savings’ at one of its McKinney subdivisions. And Centex is cutting prices up to $15,000 on some of its models.”

“‘I know Centex is hitting it pretty hard, their [fiscal] year end is March 31, so that might be part of what you are seeing,’ said housing analyst Ted Wilson. ‘There is a fair amount of speculative construction in the market right now, so I imagine the incentives will stay with us at the higher level through the summer.’”

“Builders had better be careful with the giveaways. Apartment landlords have offered so many freebies to attract renters in the last few years that they can’t get their prices up even though the market has tightened. And although it’s possible for builders to finagle their pricing to give homebuyers the lure of markdowns, it will be more painful for sellers in the pre-owned home market to play the price reduction game.”

Forbes reports on flippers in Florida. “Condo flippers in south Florida will tell you that they are sure, real sure, that they will sell out at a profit.”

“Robert Jenkins began speculating on real estate in hot-hot south Florida. He borrowed heavily and flipped 19 houses in Fort Lauderdale, reaping profits of $750 to $71,000 on each property and plowing two-thirds of his $300,000 in profits into still more homes. He now owns seven, worth $2.5 million and doubts a crash will happen. He vows to keep flipping, even if it does.”

“Donna Franklin owns five homes. Last year she and a partner borrowed against a Miami apartment they own and rent out to make down payments on three $400,000-plus ‘preconstruction’ condos in Fort Lauderdale. They are confident they can flip the three condos at a nice markup soon, well before construction ends, at which point they must take mortgages for the $1 million they owe developers.”

“That could be wishful thinking. The number of unsold condos for sale in and near Miami has more than doubled from a year ago to 2,232, says Miami realtor David Dweck. Some 25,000 condos are under construction in the Miami-Dade area, more than the total number of purchases in the last nine years combined.”

“Three-fourths of those are in the hands of speculators, says Jack F. McCabe. ‘The demand is artificial. Most south Florida speculators have been selling to other speculators,’ he says. ‘It works fine, until you’re the greater fool and nobody else comes along to pay that higher price.’”

“Brisk sales of new homes have helped prices stay aloft, for now; sales are running at 1.2 million houses a year, 40% more than normal. In some parts of the country the last speculators, people like Jenkins and Franklin, would be in deep quicksand.”

“A correction may already be under way. The number of half-million-dollar-plus condos up for sale in Miami is twice the number in Los Angeles, whose population is four times as large. In New York prices reportedly slipped 13% last summer. In Las Vegas several developers have canceled projects amid soaring construction costs, spurring suits.”

“Terrance and Jennifer Trott, both 26, describe themselves as ‘regular folks’ who happen to own two homes. Last July they borrowed on their four-bedroom house near Tampa to pay $200,000 for a two-story condo in a development near downtown Tampa. They listed it at $235,000 in December. Two months later they dropped the price to $217,000 and are getting some bites.”

“The Trotts together earn about $85,000 a year, and the extra $22,000 a year it costs to carry their condo is a severe drain. ‘We only go out to eat on the weekends, and it’s not every weekend,’ Terrance Trott says. If the condo doesn’t sell, they may try to rent it out, just like everyone else; but even at $1,000 a month they would be pouring cash into the property.”

“Jack McCabe, is raising a $250 million vulture fund to buy condos. Lenders are already offering him blocks of condos repossessed from distressed homeowners. ‘We’ll focus on buying million-dollar properties at 2003 prices, at 70 cents on the dollar,’ he says.”

From a Tampa Bay news channel. “Unhappy Polk County homeowners looking to unload their properties can blame England for a real estate slump. Six months ago, Four Corners residents could put up a real estate sign and could sell their home for more than they bought it for, but not now.”

“The super hot housing market has lost its steam and homeowner Carlos Gonzolez has had to lower the price on his home by $20,000. ‘It went from March to November,’ Gonzolez said. ‘You are talking about a house you got for $130,000 going for $190,000 in a five or six month period, then stops.’”

“That’s because people from Britain have been buying many vacation homes there with profits from skyrocketing real estate prices in Britain. But, the market there has gone flat. ‘The property market in the UK is very flat at the moment,’ real estate agent David Edwards said.”

“Edwards said home sales in the area are off by 50 percent partly because many British buyers are scared off by recent hurricanes. Gonzolez is hoping he hasn’t missed out on the real estate boom. ‘If you time it right, you make a lot of money,’ Gonzolez said. ‘If you wait too long then you’re stuck.’”

Please post your weekend topic suggestions here. Any ideas are welcome, so be creative!