The Housing Bubble

From the San Francisco Chronicle. “Bay Area home sales tumbled in February for the 11th month in a row and prices appreciated at their slowest rate in two years. The median price for a single-family home in the nine-county area was $637,000 in February, up 12 percent year over year, but well below November’s peak of $656,000.”

“Sales dropped 35.8 percent (in) Napa County from February 2005 to February 2006, and dropped 30.1 percent in Solano County, 19.2 percent in Alameda County and 18.9 percent in San Francisco County in that time. The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,889 in February. That was up from $2,798 in January, and up from $2,460 for February a year ago.”

“Adjusted for inflation, mortgage payments are 16 percent higher than they were at the peak of the prior cycle 16 years ago.”

And the Sacramento Bee reports that calm has replaced the frenzy. “In the cooling wake of Sacramento’s five-year hot streak, real estate is tilting amid mixed signals back toward the routine, say builders, analysts and agents in Sacramento and across the nation. Gone are waiting lists and buying what’s left when builders of new homes call your name on a Saturday morning. Out is the speculative ‘flipping.’”

“Buyers in February could pick from 9,870 single-family homes for sale in Sacramento, Yolo, Placer and El Dorado counties. That’s up from 3,554 a year ago.”

“Sales of existing homes in Sacramento, Placer, Yolo and El Dorado counties continue to be down about 30 percent so far this year compared to last year. In February 1,333 houses, condos and halfplexes closed, compared to 1,919 in February of last year, a 31.7 percent decline.”

“A total of 6,206 condos and houses changed hands, nearly 17 percent below last February’s tally. Overall for the year, 2,912 homes closed, compared to 4,198 last January and February, a 30.6 percent drop.”

“‘We’re hoping the market will slow down a little more,’ said Nicholas Farrington. ‘We’re kind of holding off a little bit to find the cheapest we can find.’” “Doug Pautsch of Centex Homes, said the departure of speculators who backed out when the boom was ending accounts for the change. ‘It’s about half of what it was in the fourth quarter,’ he said.”

“In Folsom, real estate agent Fred Wilcox used words like ‘dead’ and ‘everybody dropping their jaw and freaking out’ to describe the close of 2005’s house-hunting season. In hindsight, he agreed the market was ‘just too crazy’ and needed a few months to rebalance. That’s what’s happening now, he said.”

The Wall Street Journal reports on a Fed borrowing study. “A new study by Federal Reserve Board economists found that about 35% of people with adjustable-rate mortgages didn’t know how much the rate could increase at one time, and 41% weren’t sure of the maximum rate they could face. About 28% didn’t know which index of interest rates would be used to determine their adjustments; many others gave incorrect answers, such as the consumer price index or ‘the going rate.’”

“What they’re told [by loan officers and brokers] is, ‘Don’t worry about it because you can refinance before the adjustment hits,’ Stella Adams says. ‘Consumers think that if the broker says I can afford this, [then] I can afford this.’ Another problem is that borrowers often choose their loans largely based on the initial monthly payments rather than carefully studying which loan would be in their best long-term interests.”

From the Mercury News. “Lenders are growing wary of the riskier yet more flexible mortgages favored in Silicon Valley, even as rising interest rates are making it tougher for buyers to afford the region’s high-priced homes. Behind the scenes, lenders, regulators and investors are making changes that could make it harder for borrowers to stretch into homes or refinance existing mortgages.”

“Industry experts are beginning to see additional changes that could affect borrowers who want to buy homes or refinance. Some lenders are less willing to let customers take out loans bigger than their incomes typically would justify. Some are shaving their predictions of how quickly rising home prices will provide equity that can cushion homeowners and lenders alike. There’s more wariness of stated-income loans, also known as ‘liars’ loans’.

“Also falling out of favor are so-called piggyback loans that add a second loan for buyers who need to borrow the down payment, said Anthony Hsieh. Some lenders now require borrowers to pay off or refinance the balance of the second loan within two years.”

“Meanwhile, Wall Street agencies that grade the risk of mortgages sold to investors have made it more expensive for lenders to sell bundles of exotic loans to investors. Some smaller sub-prime lenders, who cater to borrowers with sketchier finances, are charging higher interest rates to compensate, said Grant Bailey, a director for Fitch Ratings.”

“Radio ads increasingly are playing off the fear of rising rates rather than the temptation of low monthly payments with an interest-only loan, said Robert Kleinhenz, deputy chief economist for CAR. Wells Fargo says it’s getting a stream of calls from skittish homeowners holding these unconventional mortgages who want to refinance before their monthly payments vault.”

“And then there are home buyers who feel buffeted by rising interest rates and the risks of exotic loans. Twenty-four-year-old Catherine Gutierrez is two weeks from closing a deal for a new $305,000 condominium. It boasts granite countertops, stainless steel fixtures and cherry-stained cabinets. ‘It looks sleek, it looks clean, and it’s so what I am,’ Gutierrez said.”

“But Gutierrez was uncomfortable when one mortgage broker first steered her toward piggyback loans, then recommended a payment-option plan that would cause her loan to grow whenever she elected to pay only a portion of the monthly interest. ‘He was saying the property will appreciate more than what would be added on top’ of the original principal, Gutierrez said. ‘I just didn’t want to take that risk and put that much faith in the market.’”

“Instead, Gutierrez plans to get financial help from a parent and take out an 80 percent interest-only loan that would guarantee her five years of payments at a fixed rate. Is she confident she can still make the payments or refinance when the payments jump in five years? ‘I think so,’ Gutierrez said. ‘After that I would see what rates are doing. You can’t predict the future. You either jump or you don’t. I’m jumping.’”

A trio of condo craze articles. “‘We certainly believe this idea of urban living will catch on in Brickell. People are tired of using their cars for everything,’ Carl Rosso, vice president of the Related Group said. ‘Brickell will be the motor for Miami.’”

“He said it is difficult to know how many units in the Related projects were sold to speculators. He said earlier projects Loft I and Loft II were priced below market value to enable city employees to live there. Some workers who bought units, he said, then quickly sold them at a profit. ‘Were these users or investors? It’s hard to tell.’ He said. ‘What defines one category becomes blurred.’”

“Alan Ojeda said his company’s project, One Broadway, is the product ‘of a contrarian mind’ because instead of being a condominium, it is a ‘36-story, extremely upscale rental project.’”

“Due to the cost of land and construction, he said, an upscale rental project ‘does not work in the short term’ but his company is in the project ‘for the long term.’ ‘In the short term, we have no competition because everyone has gone condo,’ he said. ‘Any competition we have will be from the people who buy these condos and then rent them.’”

“Recent buyers of new condominiums in Seattle are likely familiar with what can be a stressful, cutthroat process. Wanting to spare buyers from that pressure cooker..the builder of a 20-unit loft development in Madison Valley is holding what is believed to be the area’s first Internet condo auction. Potential buyers must register on the development’s Web site, and attend informational meetings, at which they will be able to see renderings of the building and receive a CD with an electronic ‘fly-through’ tour of the development.”

“‘We’re not changing the whole process,’ (developer Mike Mcclure said. ‘We’re augmenting how you define the price.’”

“But (agent) Corey Patt sees potential drawbacks for buyers who could get caught up in a bidding frenzy and pay more than the unit is worth. ‘I know a lot of my clients just feel like they’re bidding blindly in the dark when they make an offer,’ said Patt, who herself hopes to buy one of the lofts. (Broker) Jim Reppond said potential buyers need to ensure with their lenders that a sale is subject to an appraisal. ‘What if you ended up paying $700,000 on a unit that everybody thought was going to go for $400,000 and it doesn’t appraise for $400,000, or you have a 90 percent loan?’”

“Nobody really knows the depth of the high-rise condominium market in Las Vegas, though nearly 1,000 have been built and sold and another 5,800 are under construction, a local economist said. Nine condo projects and three condo-hotels are ‘real,’ meaning you can see the steel going up. John Restrepo said six projects are ‘dead or wounded,’ canceled or put on hold for whatever reason. Three ‘John Does’ are also on the R.I.P. list, he said.”

“Research shows that 80 percent to 90 percent of condo buyers in the Strip corridor are speculators, investors and second-home buyers, Restrepo said. ‘Very few people want to live on the Strip full time,’ he said. ‘Look at Turnberry Place and Park Towers. They’re always dark.’”

“‘We do know there’s a huge amount of interest in Las Vegas and people want to live here,’ Restrepo said. ‘People want to live near the ocean or water some people say the Strip is our ocean. I don’t know about that.’”

A Census Bureau report found that high home prices are driving some people out. “The five counties that comprise New York City grew by about 1.65% between 2000 and 2005, according to the bureau’s estimates. The data further show that New York’s population declined slightly between 2004 and 2005.”

“A steady flow of immigrants has kept New York ahead of other Northeast cities, while steep housing costs may keep the city from further growth.”

“A senior fellow at the Manhattan Institute, E.J. McMahon, said of the city’s population, ‘The thing that’s pulling it down is a slowdown in immigration, as well as real estate and housing costs.’ Joel Kotkin said, ‘What I do sense is that immigrants are getting smart about America and are realizing that there are a lot of other places to go besides Los Angeles and New York,’ he said.”

“Analysts agreed that the city’s high cost of living, heightened by rising real estate prices, was a top challenge for maintaining population growth in the future. ‘Even though New York has done a great job with crime, and it’s more pleasant, it’s just too expensive,’ Mr. Kotkin said.”

“New Jersey’s continuing population slowdown is prompting some economists to warn it could be a symptom of serious economic illness in the nation’s wealthiest state. County-by-county population estimates for 2005 released yesterday by the U.S. Census Bureau showed declining growth rates in nearly every area of the state, with some counties experiencing dramatic drops.”

“‘It may well be an early warning signal,’ said (professor) Jim Hughes. ‘There is evidence that the cost of living has become excessive and income levels don’t fully compensate for that.’ The state has been losing high-paying jobs for several years. At the same time, housing prices and property taxes have skyrocketed..and experts said longtime New Jerseyans are voting with their feet.”

“For the first time in more than three decades, the population of San Diego County declined last year, joining other California coastal counties that are losing their allure as high housing prices drive home-buyers to more affordable regions.”

“While the county’s overall loss of population was 1,728 between July 2004 and July 2005, the more telling number is the net exodus of 43,126 people, many of them who likely headed up Interstate 15 to Riverside County, where housing prices are still considerably lower than in San Diego.”

“‘This is pretty stunning,’ said demographer Ed Schafer of the San Diego County Association of Governments. ‘The net out-migration (domestically) is so powerfully high. That’s the story. Here you have the coastal counties with all these people leaving them but the counties just to the interior have all these people moving in.’”

“People also moved out of Los Angeles and Orange counties, but the two counties were able to muster modest population increases. ‘What’s driving this is the cost of housing,’ Schafer said. ‘It’s just pushing people further east.’”

These Fed comments have been posted in the comments, but just for the record. “The Federal Reserve has no intention of preserving all of the recent gains in home price values, said Federal Reserve board governor Donald Kohn on Thursday. If real estate prices begin to erode, homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,’ Kohn said in a speech.”

“In his remarks, Kohn attacked the popular ‘Greenspan put’ theory that Fed policy would always protect investors from sharp asset market drops while doing nothing to restrain these markets when prices rise. ‘This argument strikes me as a misreading of history,’ Kohn said. ‘Conventional policy as practiced by the Federal Reserve has not insulated investors from downside risk,’ he said.”

“‘Whatever might have once been thought about the existence of a ‘Greenspan put,’ stock market, investors could not have endured the experience of the last five years in the United States and concluded that they were hedged on the downside by asymmetric monetary policy,’ Kohn said.”

“‘The same consideration apply to homeowners: All else being equal, interest rates are higher now than they would be were real estate valuations less lofty; and if real estate prices begin to erode. Homeowners should not expect to see all the gains of recent years preserved by monetary policy actions,’ Kohn said.”

“‘Our actions will continue to be keyed to macroeconomic stability, not the stability of asset prices themselves,’ Kohn said.”

Two reports on housing markets in the eastern US. “Home buyers and sellers have been staring at one another since the fall, waiting to see who will blink first. That stalemate has led residential inventory to climb 67 percent on Long Island and a stunning 82 percent in Queens from February 2005 to February 2006, according to data released yesterday by the Multiple Listing Service of Long Island.”

“Prices, however, are still rising. Suffolk County’s median price stood at $395,000 last month, a 6.8 percent gain over last February. In Nassau County, the median price reached $500,000, its previous high and a 13.7 percent increase from February 2005. Queens saw the biggest gain, a 20.5 percent increase to $470,000.”

The NYSAR reported Suffolk’s median at $400,200 for January 2006, Nassau at $490,000 and Queens at $565,000. The Long Island data is apparently unavailable.

“The potential for prices to stabilize or slow down is not entirely a bad thing, experts said. ‘If sales prices come down a little bit, it will open the doors for more buyers to come into the housing market,’ said Bob Moulton, a mortgage broker in Manhasset. So far, times are tougher for Moulton, who said volume is down 35 percent compared with last year. ‘In the last 15 years, I think this has been the weakest start to spring that I’ve seen.’”

And from Massachusetts. “West Roxbury and recently Roslindale have shared in the statewide appreciation; however, experts are forecasting a 5 percent drop in housing prices in both the first and second quarters this year. However, while acknowledging the temperature of the real estate market has cooled from all-time highs in the past years, several local Realtors don’t share CHAPA’s analysis, saying they feel that the dip in the market has already occurred.”

“‘I don’t see that 5 percent drop over the spring and then again in the summer,’ said (realtor) Justin Christensen in West Roxbury. ‘I think it’s already happened over the past six months to a year, and I think we’re at where it’s going to be for the foreseeable future. I don’t see them dropping any further than where they’re at right now.’”

“Deirdre White in West Roxbury also feels that the housing market has already undergone a substantial correction, and said she is eagerly waiting to see how the spring market will play out. ‘It’s really too difficult to predict. I think we already have seen a 5-plus percent drop since last fall, and I think the next couple of months are going to be real bellwether months,’ White said. ‘The spring market is upon us, and I think it’s going to speak volumes about who the rest of the year will go.’”

“Factoring into which way housing prices could swing is how the market deals with the annual flood of houses up for sale in the spring at a time when it has yet to shed its ‘winter weight.’ ‘There is a little bit of a glut,’ said Jesse Goldman in West Roxbury. ‘We’re just entering the spring market, so there’s more houses coming on the market that’s already loaded with a lot of properties that have been sitting around for a while.’”

“For housing prices to stay at their current levels, demand is going to have match that large supply, something many experts aren’t so sure will be happening hence the predictions for a downward turn in the market. It has all the makings of a buyers’ market, but, says Goldman, all the news about dropping prices is also serving to keep buyers away.”

“‘It is more of a buyers’ market,’ she said. ‘But the buyers are also hearing all this negative information and that’s working to drive prices down, so it also keep buyers away. Nobody wants to take that initial hit.’”

“Added into the equation, Realtors said many sellers won’t accept that there already has been a drop in the market. ‘That’s a little bit of an issue,’ Christensen said. ‘I think the problem is that a lot of sellers are chasing last year’s market. They’re trying to get last year’s prices in today’s market, and I can’t blame them, but that’s not going to happen.’”

“‘They just don’t want to believe it,’ Goldman said. ‘You’re talking about people whose real estate is their investment, and they don’t want to give up on it.’”

The Commerce department has the housing starts data. “The pace of U.S. housing starts fell less than expected last month. Builders broke ground on new homes at an annual rate of 2.12 million in February, down 7.9 percent from January’s revised 2.303 million, the Commerce Department said. Building permits, a sign of future construction, fell 3.2 percent to an annual rate of 2.145 million.”

“Builders kept up the momentum in February after unusually mild January temperatures let them get an early start on the construction season. Housing starts probably will slow later this year as mortgage rates and selling prices put new homes out of the reach of more would-be buyers.”

“‘Housing starts are still on a rising trend despite all this talk about housing cooling off,’ (economist) Kevin Logan. ‘With a lag we should see housing starts fade. The second quarter will really tell the tale.’”

“Economists expected starts to fall to a 2.03 million rate in February from the prior month’s originally reported 2.276 million, according to a survey. Permits were forecast to fall to a 2.11 million pace, from 2.217 million. Starts fell in three of four regions. Starts fell 23.5% in the U.S. Northeast, biggest drop since May 2001. Construction declined 11.2% in the South and 10.4% in the Midwest, but rose 7.9% in the West.”

“The number of homes under construction rose 0.6 percent last month to 1.428 million, the most since February 1974.” “As home sales decline, price increases will slow, said Ara Hovnanian, CEO of Hovnanian Enterprises Inc., the ninth biggest U.S. homebuilder by stock market value. ‘I think it’s very likely we’re going to see a leveling off or at least a slowing in the appreciation rate,’ Hovnanian said. ‘Our view is it’s going to be a very soft landing,’ for housing. The housing market accounted for 55 percent of economic growth last year, according to a Merrill Lynch & Co. report released last month.”