The Housing Bubble

The buzz in California is about the housing bubble. “‘Buyers and sellers are at a standoff,’ said G.U. Krueger, an economist with an Irvine-based real estate investment firm. ‘Buyers want to pay less and sellers don’t want to sell for less.’ The result, he said, is that fewer deals are getting done.”

“New homes remained in high demand in February as sales rose 19% from a year earlier, with every Southland county except San Diego posting an increase. But new-home prices declined in Los Angeles and Orange counties, falling 5.4% and 21.5%, respectively.”

“More homeowners in Orange County are missing payment deadlines on their mortgages, as home-price appreciation slows and interest rates rise. Banks sent homeowners 316 notices of default in February, a 32 percent increase from a year ago. Banks typically send a notice of default if a homeowner has missed four to six monthly payments, said John Karevoll with DataQuick. The number should trend upward..as home prices grow less rapidly, he said.”

“‘We are absolutely positive this number will continue to increase,’ he said. That makes perfect sense, Karevoll said, since defaults move in the opposite direction of home prices, with a bit of a lag.”

“Even in a Silicon Valley market with home sales not quite as robust as they were a year ago, home prices keep breaking records. ‘Yes $765,000 is a record, but it was $750,000 last April and $760,000 last June. I suspect the price (for single family homes) in March will be basically unchanged and would estimate $750,000. If true, that will only be a 2 percent annual increase in prices,’ Richard Calhoun, broker/owner in San Jose said.”

“Martin Monica, a real estate economics instructor ain Saratoga says buyers are biding their time for the best deal. ‘You already have an indication that [Fed Chairman Ben S. Bernanke] is going to up the interest rates to offset inflation and that puts everybody on a kind of guarded position to make sure they don’t get into something that costs more than it should,’ said Monica.”

“Google dollars and stock earnings from other technology companies hasn’t made much of a difference, as some experts had forecast. ‘There’s just not as much funny money out there. The upper end is going to be even softer than the bread and butter stuff,’ Stefan Walker, an associate broker in Los Gatos said.”

“San Mateo County’s median sold price increased to $863,500. This is down from $922,000 in April. Santa Cruz County dipped to $712,000 some $71,000 below their peak price of $783,000 set in August 2005. Because the media focuses on annual price comparison the fact that it was $730,000 last year will like get attention.”

“Ventura County’s median sales price for all home types reached $618,000 in February, a 18.6 percent increase from a year ago, DataQuick reported Tuesday. Ventura County hit its all-time high of $630,000 in December and then slipped to $608,000 in January. Last month’s sales totaled 804 in the county, down 8.8 percent from 882 in February 2005.”

“‘We are sort of in a Never Never Land and no one knows what it is going to happen,’ Hadley Hendrick, an agent in Oxnard said. DataQuick reported that the March numbers are likely to give the first indications of what direction the market is going for the year. Right now, there are a few more signs touting a reduced selling price.”

“Suzanne Tonoli is representing a three-bedroom Todd Ranch condominium in Ventura that recently was reduced from $459,000 to $445,000. Reductions come with the territory when the market cools a little bit, she said. ‘Now stuff is definitely sitting longer, but what I am finding is that my clients still want to try to get in on the tail end,’ she said.”

A report on Chicago’s housing bubble. “With $1-million home listings in many suburbs around Chicago mounting, high-end homebuilders are likely to pursue fewer new-construction starts as they sort through economic data and try to get a fix on homebuyer sentiment. Question No. 1: Is the market oversaturated with monster houses?”

“Recent statistics suggest that it is. As of Feb. 3, there were 2,532 houses in metro Chicago for sale with an asking price of $1 million or more, up 53% from last year, according to the Lisle-based MLS of Northern Illinois. There were 67 houses priced at $5 million or above, an increase of 49% from the year-ago total of 45.”

“This would seem to add up to well more than a year’s supply of million-dollar homes. In 2005, 1,951 houses sold at prices above $1 million. There were just seven $5-million homes sold all of last year, leading some observers to wonder how long the 67 homes in that category currently on offer will take to move.”

“‘There are 10 homes in Hinsdale on the market for $3 million and more right now. That’s an unprecedented number,’ says Timothy Thompson. His firm is going ahead with plans for two spec homes of its own in Hinsdale, priced at $4 million and $5 million, the latter featuring 6,000 square feet of living space and a mahogany front door valued at $35,000.”

“But Mr. Thompson worries that the market is ‘congested with speculators,’ meaning builders and investment groups racing to put up houses with no buyers in sight. ‘Everybody is watching the speculative side of the market,’ says (developer) James Kinney.”

“A year ago, Scott Renken had orders for eight houses. This year he has six. He built two speculative houses in Highland Park and Lake Forest, each priced around $4 million, last year, but he doesn’t expect to start any in 2006. ‘We’re turning more cautious,’ he says. ‘I don’t see any housing bubble occurring. But I do see that houses at the high end are taking longer to sell. That will have builders reconsidering some of their plans.’”

The Naples Sun Times has this report on real estate. “Sellers, are you ready for the news?”"

“In February 2006 there were 5,417 single family homes listed for sale in the Sunshine Multiple Listing Service (MLS) of the Naples Area Board of Realtors, of which 204 sold. There were 5,289 condos/coops for sale, of which 179 sold.”

“Let’s do the math: 5,417 plus 5,289 equals 10,706. Divide that by 383, which is the number of homes that sold (204 plus 179). What do you get? 27.95? That means that in February there was a 28-month supply of homes for sale. In other words, if no other homes came on the market, it would take 28 months for all homes listed for sale to be sold.”

“What is the likelihood that no more homes will come on the market? And these figures don’t reflect homes sold or offered for sale not listed on the MLS.”

The homebuilder data should be out by now. “U.S. home builder sentiment declined in March, the National Association of Home Builders reported on Wednesday, in response to rising mortgage rates. The NAHB/Wells Fargo Housing Market index slid to 55 in March, seasonally adjusted, from February’s downwardly revised revised 56.”

“NAHB Chief Economist David Seiders attributed March’s slight downshift to eroding affordability conditions as well as a gradual withdrawal of investor demand in some areas. ‘Rising interest rates and high rates of home-price appreciation have raised the bar for homeownership to beyond what some families can reach,’ he noted. ‘Meanwhile, a retreat of short-term investors from certain markets is helping restore equilibrium between supply and demand.’”

“Builder confidence declined in all regions but the Midwest in March, where it rebounded seven points to 39 from an exceptionally low point of 32 in February.”

“Here’s some builder related news. “In an electronic message to members last week, NAHB economists pointed out that the inventory of units completed or under construction also is at a record level. Furthermore, they noted, sales that are subsequently cancelled never get back into the government’s inventory estimates, ‘and it’s clear that cancellations have been on the rise, too,’”

“In February, NAHB surveyed nearly 500 single-family builders about unsold inventories. Excluding units not-yet-started but including units handed back buy buyers who have changed their minds, more than a third of the respondents said their inventories were higher than six months earlier, while less than one-fifth said their inventories had come down over that period.”

“One of five builders reported that their cancellation rates were higher in January than six months earlier, while only 8 percent said their cancellation rate was down over that period. In addition, a supplementary NAHB canvass of about 30 large single-family home builders showed that, in January, cancellation rates (cancellations as a percent of sales backlog) were up by about one-third, on average, from historically low levels of a year earlier.”

“‘That trend, if it continues, accentuates the need for builders to control speculative building during the period ahead and to employ incentives to support sales and limit cancellations,’ the association’s economic department warned.”

“Avatar Holdings Inc. today reported net income for 2005. The number of units sold declined by 19.9% due to several factors, including establishment of sales policies intended to reduce the backlog, institution of programs to discourage purchase by speculators, and a generally weaker residential real estate market. Avatar Holdings Inc. is primarily engaged in real estate operations in Florida and Arizona.”

“Tarragon Corporation’s homebuilding pipeline at year-end 2005, which includes sites owned or controlled by the Company not yet in active developments, grew to more than 8,800 homes in 30 communities, more than double year-end 2004 levels.”

“CEO William S. Friedman commented, ‘Some of our markets are returning to historically normal levels of housing sales activity. We have, for example, noted a marked slowdown in certain investor-driven West Coast Florida markets. Our guidance for 2006 assumes continued sluggishness in these West Coast Florida communities and moderate sales levels, in line with historical norms for the remainder of the market.’”

The Oregonian reports on the housing bubble in Portland. “The median home sale price in the Portland area was $242,000 in February, 17 percent higher than a year earlier, according to numbers released Tuesday by the Regional MLS. That year-over-year appreciation number was lower than in any of the previous six months. And the median price dipped by 1.5 percent from $245,800 in January, the second consecutive monthly decline.”

“Market activity also dipped year over year, with the number of closed sales down 1.3 percent and pending sales dropping 8 percent.”

“‘I do think buyers took a break from the market,’ said Kathy MacNaughton, a Northwest Portland broker. MacNaughton said some of her buyers were showing a level of ambivalence because they worry that the Portland market won’t be able to sustain current levels of appreciation.”

“The supply of new condominiums is gradually increasing. And the belief abounds that the market can’t levitate forever higher.”

“Central Oregonians have grown accustomed to making Top 10 or Top 20 lists of all sorts, but the latest could give all whose livelihood (or nest egg) depend on the local, long-lasting real estate boom pause: A just released report puts Bend at No. 11 on a list of overpriced real estate markets.”

“According to a study by financial information provider Global Insight and National City Corp., Bend’s fourth-quarter median home price of $256,200 is 68.4 percent overvalued.”

The Hartford Courant provides a rare report on Connecticuts housing bubble. “The number of houses for sale in Greater Hartford rose in February for the sixth month in a row, further evidence that a slowdown in the area’s housing market is taking root. The median sales price gained 4.1 percent, to $239,950, up from $230,500 for the same month a year earlier.”

“That increase compares with 5.8 percent in January of this year and 14.2 percent in February 2005.”

“Closed sales fell 20 percent, to 484, down from 605 a year earlier. Pending sales, an indicator for sales volume in the next two months, were also down by 6.32 percent, to 904, from 965 a year earlier. The inventory of homes for sale jumped 32.1 percent, to 4,228, up from 3,200 a year earlier. It represented the largest rise in the six-month run of increases.”

“Real estate agents said that having more homes on the market will benefit buyers, giving them more choice and breathing room to make decisions. There will be less pressure to jump at the first house they see or bid up the price, worried that they won’t be able to find another house. ‘Now they can go home, sleep on it and go back the next day,’ said John Zubretsky in Wethersfield.”

“Sellers will have to adjust their expectations, price their properties reasonably and make improvements that show their homes favorably to prospective buyers.”

“‘The days of the `as is’ sale are over,’ said Adorna Carroll in Berlin. ‘The seller may have lived with a deficiency. But a buyer won’t look at it that way.’”