The Housing Bubble

The press reacts to the Dataquick numbers. “Home prices in Southern California edged up to a new record in February, although they edged up to that record at the slowest pace in almost four years. The number of homes sold was the lowest in five years.”

“‘It’s numbers like these that both bubble-theorists and market cheerleaders can pounce on to make their points. Reality is more mundane. The frenzy is behind us, we’re in a new phase of the real estate cycle and what remains to be seen is how this cycle’s end game will play out. We’ll know much more when next month’s figures are in,’ said Marshall Prentice.”

“A total of 19,905 new and resale Southland homes were sold last month. That was down 7 percent from 21,394 for February last year. Last month’s sales count was the lowest for any February since 2001 when 18,040 homes were sold. The strongest February in DataQuick’s statistics was in 2004 when 23,004 homes were sold; the weakest was in 1991 when 10,025 homes were sold.”

“The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,251 last month, up from $2,162 for the previous month, and up from $1,905 for February a year ago. Adjusted for inflation, current payments are about 2.7 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle.”

“The annual rate of price increase was the lowest since March 2002, when prices rose 12.7 percent to $257,000. Annual price increases have held in the mid-teens since April. ‘The prices hit a new record, but the rate of increase at which those prices hit that new record was the lowest in four years,’ said John Karevoll.”

“As the buying frenzy that drove the housing boom the last five years subsides, many home sellers are having to settle for less than their asking price. Many would-be buyers, meanwhile, remain reluctant to enter the market, looking for signs prices might come down significantly.”

“But while prices aren’t going up as quickly, real estate agents say they haven’t seen evidence of a widespread drop in prices. ‘We’re seeing prices perhaps level off a bit, but we’re not seeing a decrease in prices,’ said Kathy White, a realtor in Westlake Village, a suburb of Los Angeles. ‘We are seeing more properties on the market (and) they’re staying longer on the market.’”

“San Diego County saw the slowest rise in home appreciation, with median prices increasing 6.4 percent to $502,000.”

“Indicators of market distress are still largely absent, DataQuick reported, and foreclosure activity is edging up from its bottom, but is still low. Financing with adjustable-rate mortgages has dropped significantly during the last three months. Down payment sizes are stable, as are flipping rates and non-owner-occupied buying activity, DataQuick reported.”

Also from Inman News. “In California, which has historically had few foreclosures, there was a 150 percent increase in the number of new foreclosure listings in February compared to January. ‘Foreclosure rates in the western half of the nation are shifting. States such as California and Nevada have experienced a rapid increase in foreclosure inventory over the past six months,’ said Brad Geisen. ‘This is primarily because of a decrease in investment and speculative real estate activity in those markets. That investment activity has been moving away from California and into Texas.’”

Wall Street had some housing bubble news today. “FMF Capital Group Ltd. is a residential mortgage lending company that originates and funds primarily nonconforming or ‘nonprime,’ mortgage loans in the United States and sells those mortgage loans to institutional loan purchasers.”

“Based on financial results for the month of February, the Board of Directors has decided to exercise the company’s contractual right to defer the payment of interest on its subordinated notes..for the month of February. The Board of Directors expects to defer interest for the month of March and..in addition, no dividends will be paid on the common shares for the month February.”

“Legislation being weighed in the U.S. Congress to stiffen supervision of Fannie Mae and Freddie Mac must force cuts in the mortgage giants’ portfolios, a U.S. Treasury Department official said on Tuesday. Secretary John Snow said a fair analysis of the companies’ $1.4 trillion portfolios would show they are now larger than needed.”

“Credit Suisse issued its 2007 earnings estimates for the home-building companies which factor in slowing housing starts, selective price increases and a heavy reliance on incentives. The analysts wrote that the 2007 estimates ‘assume a soft landing scenario, as earnings declines are largely driven by the unfavorable land price to land costs dynamic with volume gains unable to make up for the difference.’”

“If the companies force supply on the market, ‘earnings could come under greater pressure than we presently anticipate with too much product chasing a dwindling pie of buyers,’ Credit Suisse added.”

“The broker said Pulte was one of the first builders to see margin pressure in the fourth quarter of 2005, while the company has a significant presence in decelerating Phoenix..the analysts upgraded M/I Homes on ‘an attractive valuation that more than reflects its greater than average exposure to troubled Midwest markets’…M/I Homes is heavily ramping its communities in Florida and the Mid-Atlantic.”

JP Morgan has this in a report on Barrons. “We observe that at the time of this writing, the weekly Mortgage Banker’s Association Purchasing Index (MBA-PI) is now down 11.7% as of the first week in March from year-ago levels. Second, we find that the average monthly observations of this index have now declined for three consecutive months through February 2006.”

“The last time that the MBA-PI monthly data declined for three consecutive months was during September 1999. One year later, (i.e., September 2000), housing starts had dipped by 5.3% on a year-over-year basis..the latest three consecutive monthly declines in the MBA-PI add up on a cumulative basis, to almost twice the overall decline observed in January 2005. Most importantly, one has to go all the way back to September 1999 to find another comparable period in which the average monthly reading of this index actually declined for three consecutive months.”

“With such compelling evidence in hand, we remain convinced that a 5% to 6% easing in housing starts over the next year appears to be a very reasonable expectation.”

“Forbes.com spoke about these nontraditional mortgages with Bill Emerson, CEO of Quicken Loans, the largest online mortgage lender, which closed $16 billion of home loans in 2005, compared with $12 billion the year before.”

“Forbes.com: You have said you don’t think there’s a housing bubble. Emerson: A housing bubble? No, I don’t think there’s a housing bubble. We’ve been talking about it now for three or four years, and I think if we talk about it long enough, sooner or later it may eventually happen.”

Bankrate talked with some real estate analysts about which markets are, or are not overpriced. Highlights, “The D.C. market ranks 10th on John Burns list of markets facing a potential housing bubble, and home sellers in the metro market report that it’s taking longer to sell than it did a year ago. Plus, builders are offering significant incentives to try to move inventory quickly.”

“Ft. Myers/Cape Coral, Fla. Is it overvalued? Yes. The market is still affordable and more reasonably priced than Sarasota (43 percent overvalued) to the north or Naples (a whopping 72 percent overvalued) to the south, but the amount of building in the market is staggering.”

“What goes up must come down. Fortune lists Las Vegas dead last in its list of 100 metro markets for housing appreciation in the next two years, predicting a two-year combined decrease in housing values of nearly 13 percent. ‘Las Vegas is a very interesting market,’ Ingo Winzer says. ‘A lot of people moved in, but construction has kept up with the pace. For a long time until recently, I didn’t consider it an overpriced market. I don’t think the price increases will last. There’s really not an inability to produce new homes out there if there is a demand for it.’”

“We’re not quite sure what Sacramento ever did to anyone, but it showed up on just about everyone’s list of has-been markets. Winzer’s Local Home Value Ratings rates the market as 59 percent overvalued and Burns Housing Cycle Barometer also lists it as overpriced. ‘Sacramento, we think, has topped out,’ says Richard Gollis. ‘There is just so much (housing construction) in the pipeline. It’s a steady-as-she goes market and has always had consistent growth, but we think the land market has gotten ahead of itself.’”

“The bigger they are, the harder they fall, and Phoenix is the largest housing market in the country in terms of new construction. It’s been running at 65,000 new units per year, with housing appreciation increasing at rates of nearly 30 percent per year. ‘You can’t sustain 30 percent increases a year for very long,’ Winzer says. ‘Of all the 100 markets we review, we think if you’re an investor in Phoenix, you should sell, because vacancy rates are already pretty high.’”

“Gollis says his firm has been studying the market carefully and doesn’t like what it sees. ‘It’s had an incredibly unusual amount of growth,’ he says. ‘The land market has accelerated dramatically and the lot price as percentage of the home price has gone up significantly. We have some concerns about going long in Phoenix.’”

“This one is in Winzer’s backyard, his firm is based in Wellesley, Mass., so he sees what is happening there every day. ‘Until about a year ago, homes would go on sale and be gone in a week,’ he says. ‘Now they’re sitting on the market for a year.’ He doesn’t see the prices dropping rapidly here, or in any market, for that matter, because while real estate prices escalate rapidly, they drop slowly.”

“‘In markets that are well-overpriced, prices don’t really fall because people just won’t sell,’ he says. ‘The adjustment mechanism is skewed by people’s emotions getting involved. People will grit their teeth and hang on as long as they can to get the price they want.’ They might not be able to hang on for long. Burns ranks Boston fourth on his list of markets likely looking at a bubble; Winzer’s analysis indicates the market is 33 percent overvalued.”

“The City of Angels has been described as the poster child for how a lack of new housing near employment centers can hurt an economy. It’s ranked as one of the least affordable places in the country to live, with housing prices consuming 91 percent of income, according to statistics from John Burns Real Estate Consulting. Plus, job growth is virtually flat. Together, it’s cause for real estate market consultant Gollis to predict that the prices for California coastal markets are topping out in single-family homes. Fortune predicts a drop-off of nearly 8 percent in housing prices in the next two years.”

“At 72 percent, Naples is No. 2 on Local Market Monitor’s list of overvalued markets in the country (Santa Barbara-Santa Maria, Calif., is No. 1 at 86 percent overvalued). In actual pricing, it outpaces other Florida markets by a good $100,000 margin. Plus, there is an abundance of more affordably priced options for buyers within a short driving distance. It is no understatement that entire cities are being built nearby. ‘The markets that are the most overvalued are the ones at greatest risk of a substantial correction,’ Winzer says. ‘Naples is at the top of that.’”

“Nassau/Suffolk, N.Y., otherwise known as Long Island, this market is No. 2 in the country on real estate consultant John Burns’ list of locations facing a potential housing bubble. (Modesto, Calif., has the top spot.) Similarly, Fortune predicts a loss of about 6 percent in housing values over the next two years.”

Some housing bubble news from California. “Humboldt County home prices have remained essentially flat since August, while average interest rates have climbed to 6.35 percent, increasing the average monthly mortgage payment from $1,851 six months ago to $1,936 in January for an equivalently priced home.”

“According to the Humboldt Association of Realtors, the median home price in the county in January, the most recent month for which figures are available, was just under $320,000, up from $270,00 a year ago and down from $339,000 in December.”

“The affordability index countywide continued to hover near 12 percent, meaning that only 12 out of every 100 households could afford to purchase a median-priced home. The numbers are ‘pitiful,’ according to realtor Jeff Katz. ‘You would expect to find low home-ownership rates like this in Southern California or the Bay Area where home prices are double what they are here,’ he said, but he called the local numbers ‘pretty sorry.’”

“Michael Monaghan, realtor associate in Arcata, said he thinks the local market might be ‘a little ahead of itself.’ Sellers in some areas, he said, are asking too much for their properties. ‘They don’t understand that it’s becoming a little more of a buyers’ market,’ Monaghan said.”

“Building permits for Victor Valley homes were at a two-year low in January. Home builders say they aren’t scaling back building, despite reports of a 32 percent drop in year-over-year home sales and a 110 percent higher inventory of existing homes from last year. But even builders acknowledge they could be signs of a much-needed market adjustment.”

“‘I think what had been described as the feeding frenzy is over,’ said Mike Dwight at Frontier Homes. Dwight says investors are probably exiting the market, allowing buyer-users to find a more affordable home. (Homebuilderz) Joseph Brady said the market is tipping toward the buyer and that builders will begin offering incentives and would also begin contracting with local real estate agents rather . ‘It’s just part of the cycle,’ he said. ‘They’ve been doing it for years. When the automotive industry has a lot of cars on their lot, they’re more willing to give incentives.’”

“San Diego County home prices bounced back above $500,000 in February, but sales continued to slow as rising interest rates put pressure on buyers stretching to get into their first home. DataQuick reported yesterday that the median sales price last month was $502,000, up $12,000 from January and 6.4 percent higher than a year ago.”

“The latest figure represented a partial turnaround from a sharp drop in January, when the median price tumbled by $26,000 or 5 percent. Amid the gain in overall prices, the volume of sales in February declined for the 20th straight month, logging 2,865 transactions, down 16.8 percent from a year earlier.”

“The San Diego Association of Realtors said unsold listings stand at their highest level in eight years of record keeping.”

“DataQuick analyst John Karevoll said San Diego home buyers have already backed off from their use of ARMs. In November 2004 about 83 percent of buyers in San Diego County chose adjustable-rate mortgages. That marked the peak in a database that goes back to 1988, he said. By November 2005 the figure had dropped to about 73 percent. In January, the most recent month tallied, about 54 percent of buyers used adjustables in their purchases.”

“Mortgage broker Ed Smith, Jr. in San Diego said a ‘guidance’ issued to lenders in late 2005 by federal regulators helped reduce the use of some of the riskier adjustable products, such as option or flex-payment ARMs. Those products allow the borrower to decide how much to pay each month. With sales and home-appreciation rates slowing, ‘you have to be more prudent in who you make these loans to, if at all,’ Smith said.”

“Jim Scott in Mission Hills said most of his clients have dug in their heels and are resisting his recommendation to lower their asking prices by 5 percent or 6 percent after a month of no offers.”

“Scott’s base ZIP code, 92103, encompassing Mission Hills, Hillcrest and Bankers Hill, is a case in point. It was one of eight ZIP codes in the county where median home prices dropped by more than 10 percent in February from year-ago levels. The median last year was $975,000 on 10 single-family resale houses and last month, $715,000 on 13 transactions.”

“Charles Jolly, president of the San Diego Association of Realtors, said he detects only one area where a real estate bubble of overheated prices may pop: downtown San Diego. There were 616 resale condominiums on the market as of yesterday, perhaps a record level.”

“Gary Kent, who operates in La Jolla, said those who bought condos in the last two years will have a hard time selling their homes for as much as they paid. ‘They’re ready to move up and the value of their condo hasn’t moved up,’ he said. Kent said condo buyers might be wise to jump in now while the market is slow. ‘The idea is contrarian investing: The best time to buy is when there are not a lot of people buying, which is now,’ he said.”

The Milwaukee Journal Sentinel reports on a familiar housing bubble scenario. “Metro Milwaukee’s existing-home market posted a robust 1,155 sales last month, amid a landscape littered with ‘for sale’ signs. The highest February volume in three years didn’t totally offset a sluggish January, however. Sales are down 1.6% so far this year.”

“This year’s 5,914 newly listed properties and 2,090 sales compare with 4,543 new listings and 2,124 sales in January-February 2005. ‘We’ve got a shortage of buyers at this point,’ said (broker) Betsy Wittenberger in Hartford. ‘But sellers are not real eager to bring prices down. They’ll accept a longer time on the market, which is what it’s looking like we’ll have this year.’”

“Sensing buyer caution, many sellers are hedging their bets on a home deal, Wittenberger said. ‘People are putting their homes up for sale, but not necessarily moving forward on buying another house. That means they have very little risk.’ It also means ‘a lot of contingent offers,’ in which sellers won’t buy a new place until certain they’ve sold their own place, she said. ‘We’ll have to muster more patience this year,’ she said.”

“Sellers can no longer name their price, Metro MLS President Tammy Maddente said. ‘We’re still seeing about a 5 percent increase, but not 20 percent anymore,’ said Maddente.”

“MLS’ Monday report shows that in the first two months of 2006: New inventory is up anywhere from 11.9% in Washington County to 40.4% in Racine County, compared with 2005. Most counties have 20% to 30% more dwellings on the market this year than in 2005, and 40% to 60% more than in 2004.”

“The region’s sales laggards are: Milwaukee County, 5.2% behind last year with 1,230 sales; Ozaukee County, down 19.1% with 114 sales; Washington County, down 4% with 170 sales, and Walworth County, down 7% with 174 sales.”

The Boston Globe reports on the latest housing sales tactic. “A growing number of homeowners and builders, unable to sell homes or condominiums the traditional way, through an agent, are turning to Sotheby’s-style auctions like this 26-property sale last month in Newton.”

“With the housing market softening in US cities from Boston to Naples, Fla., to Utah ski towns, the National Auctioneers Association reported that residential properties valued at $14.2 billion sold in 2005 in live auctions, a 24 percent increase over 2003 sales.”

“Auction houses said a growing surplus of homes on the market nationwide is expected to drive more owners to auctions in the future. Maine-based J.J. Manning, which typically holds one-house auctions, said this was its first auction of properties owned by multiple owners since the early 1990s downturn. The firm plans more this year.”

“Sheldon Good & Co. also reports doing more auctions, including more on behalf of developers selling the unsold units in large hotel-condo projects, particularly in resort areas. ‘We think there’s a very high likelihood that trend is going to rise based on overbuilding in Boston, New York, Chicago, Houston, Orlando, and Jacksonville,’ said Steve Good, chief executive. ‘The slowdown is just beginning.’”

“Sellers ‘get whatever the fair market’ value is, Manning said. A less-than-stellar outcome at his recent auction may reflect the market’s ‘mood,’ he said afterward. Buyers ‘are waiting to see what happens, and I think the spring market is going to be somewhat of a bust.’”

“Auctioneers certainly hope so, since that would bring them more business. But despite a slowdown in home sales, it’s too early to judge whether the housing market has fully shifted toward favoring buyers after years of rapidly rising sales.”

“Before putting a house on the auction block, the owner selects a minimum, or ‘reserve,’ price, at which he or she is willing to sell. The auctioneer never reveals that price to bidders. In February, the high bids for 15 of 26 properties auctioned met their minimum prices. Numerous auction attendees gasped in unison when the high bid was $800,000 for a Cambridge carriage house with cherry floors and tiled fireplace that had been listed at $1.7 million after a year on and off the market.”

“Patricia Hekmatpour was surprised by the poor outcome for her pink Boxford house. Hekmatpour, who happens to be an agent, turned to an auction after it languished on the market a year. The high bid, $460,000, was half the $900,000 minimum value she and her husband had placed on the house. ‘I thought not only my property, but a lot of other properties would do much better,’ she said.”

“Some properties didn’t sell because owners set minimums unrealistically high in today’s market, Manning said. This echoes a complaint often made by real estate agents, who said some owners grappling with a softening market for single-family homes select asking prices that are too high.”