The Housing Bubble

Long-time readers may remember this article in Fortune about flippers. “Zareh Tahmassebian is lost. Most people don’t get lost driving to their own residence, but then, Tahmassebian has never actually been to these particular homes. There are a few reasons for that: (1) He has no intention of ever moving into them, (2) he lives in Las Vegas, not Phoenix, and (3) he owns six other houses, and a half share of seven more, in the greater Phoenix area. ‘Sometimes it’s hard to keep track,’ he says.”

“The houses he’s inspecting are somewhere inside the Cholla Ranch development that’s being put up by KB Home. Right now he’s in the general area, but lacking specifics. ‘Is that Tempe?’ he asks. ‘I think I have some houses there.’”

“Tahmassebian bought his eight Phoenix houses with 10% down. The houses aren’t exactly throwing off cash: Tahmassebian estimates that he loses $3,500 a month on them, since he doesn’t bother to rent out all 15. ‘If I’m negative on a few, that’s okay,’ he says. ‘I’m in it for the appreciation.’ In seven months, he estimates, the 15 properties have appreciated from $2 million to $3 million.”

Well, Fortune did a follow up. “When we profiled a group of amateur real estate speculators last year, America was awash in a stark, raving frenzy that looked every bit as crazy as dot-com stocks. Today housing indicators seem to point to a cooling market. Which got us wondering: How have our real estate gold-rushers been faring?”

“They’re still in the game. And they’re still hopeful. (At least the ones who would talk to us. One asked if she could call us right back, then stopped answering her phone.) But they have ratcheted down their sky-high expectations. Cheryl Lawyer, whose rehabbed Phoenix homes now sit on the market for months instead of days, has been cautioning friends since last year to forget about flipping. ‘You’ve got to hold your properties a little longer,’ she says.”

“And Zareh Tahmassebian, who owned 15 properties in Phoenix when we first reported his story, has purchased eight more in the Albuquerque area. One concession to a possible bust: He refinanced all his mortgages to a fixed rate and rented out his properties (the rents do not cover his costs). Why not take his profits? ‘It’s still going to appreciate better than the stock market,’ he says. ‘I’m holding on.’”

“The danger, of course, is that Tahmassebian could be left holding the bag.”

The Pioneer Press reports on the housing bubble in the Twin Cities. “If you think you see a for-sale sign on every block, look again. On some blocks, there are two. There now are more homes on the market in the Twin Cities than ever before, as far as local real estate experts can tell.”

“As of Monday, the total number listed for sale in the 13-county Twin Cities area totaled 24,744, breaking the previous record of 24,692 set late last October, according to the Minneapolis Area Association of Realtors.”

“The record inventories are fueling competition among real estate agents and stirring anxiety in the market. Asking prices are being cut and stories abound about people juggling two mortgages while waiting for the old house to sell. Real estate agents who used to juggle multiple offers are scrambling to attract buyers, who now have the luxury to pick and choose.”

“One real estate agent who works in St. Paul’s Mac-Groveland neighborhood said he’s seen agents teaming up with pizza deliveries to pass out for-sale fliers with the pepperoni. Don’t laugh, he said: ‘It reaches a lot of people.’”

“Meanwhile, Edina Realty has taken an unusual step to address the slower market: It’s marking down interest rates. The company is offering a free one-year warranty on a house, and a 1 percentage point discount for one year on the mortgage interest rate to customers. That means saving a homeowner about $2,300 on a $300,000 loan with 20 percent down payment. The deal started March 12 and runs to March 26. ‘It’s a new reality in real estate sales,’ said (realtor) Barb Jandric.”

“Record inventories have fueled concern that supply could start weighing down home prices to the point where they slide backward in value, instead of creeping up or leveling off. That sets some homeowners on edge. Although real estate agents are not standing still, they caution against alarm. ‘Shift happens,’ Mark Allen said.”

“Jandric said she doesn’t expect home values to slide, but said certain areas and certain types of housing might see prices drop. Entry-level town houses in second-ring suburbs such as Apple Valley are an example of areas with risk, she said. ‘There are going to be pockets where it’s going to be a bit of a dip,’ Jandric said.”

“Some sellers don’t seem worried. Michelle Mitchell said she didn’t hesitate listing her house in the sought-after Mac-Groveland area. After only one week on the market, she and her husband have already turned down an offer, she said. Mitchell acknowledged, however, that she’s feeling some pressure. They’re selling because they found their dream home in the Crocus Hill neighborhood. They’ve signed a purchase agreement. They can handle two mortgages if they have to, she said, but she doesn’t think it will come to that.”

“Not everyone in the neighborhood is as confident. Just a few blocks away, Mary Lemmons is trying to sell her house for the second time. She works in a title office, closing home sales, so she’s trying to sell her house herself, without an agent. But last summer Lemmons’ home sat on the market for five months, even though she’d put on a new roof and siding on it. She didn’t realize last year that the boom in the market might be drawing to a close. She listed now to get a jump on the spring rush. ‘There’re a lot more sellers than there are buyers right now.’”

One reader called for a topic on prices. “Many people are puzzled by the phenomenon of falling sales numbers paired with increasing median prices. Two common explanations are that 1) buyers are purchasing fancier homes that have been discounted (’I bought this mansion at a $150K discount!’) and 2) the prices went so high last summer that even though they’re dropping now, they’re still higher than they were a year ago. Maybe someone else has a more elegant or compelling way of phrasing these explanations (or better yet, some solid data to confirm or refute these hypotheses).”

Another added, “At this point, primarily the stupid money is still buying in, and they’re paying the high prices asked for.”

A third suggested, “Check Irwin Kellner on CBS Marketwatch.com today.

“If the housing market is weakening, why are home prices still rising? To answer this question, let us return to those thrilling days of yesteryear, when we first learned math. It was then we discovered that figures may not lie, but liars do figure. You see, there are averages and there are averages. And when it comes to home prices, you need to know how they are calculated before you can conclude what’s happening to the price of the average home.”

“If more higher-priced homes are selling than lower-priced units, the median or geographic midpoint will move up accordingly. Like new cars and trucks, many new homes have list prices. These are the prices that get recorded when the house is sold, even if the seller has to sweeten the deal by offering such amenities as upgraded appliances, furniture, carpeting and the like. And there’s a lot of this discounting going on.”

“Another reason to question what is reported as average home prices is that new homes are getting bigger, so part of these higher prices simply reflect more materials and a bigger piece of land. The Census Bureau reports that the size of the average new home is now about 2400 square feet, a 15% increase since 1990.”

“Finally, logic would tell you that when interest rates rise, the more expensive homes, whose buyers are not as likely to be as affected by stiffer borrowing requirements as buyers of less expensive homes, will sell faster than lower-priced models.’

The Herald Tribune has this report on the Florida housing bubble. “John Lafabregue Jr. dropped off monthly spreadsheets dating back to July 2003 the other day, and the statistics contained in them painted a vivid picture of just where the Sarasota realty market has been. But in March 2004, absorption rates jumped to 30.4 percent for houses and 30.9 percent for condominiums.”

“Three months later, the market peaked with 718 house sales out of 1,167 listings, for an incredible absorption rate of 61.5 percent. That same month, 47.9 percent of listed condos sold. Put on a chart, the market looked something like the Grand Tetons, with peaks in June 2004 and March through June 2005, before dropping precipitously each month to the current absorption rates of about 5 percent for houses and 3.6 percent for condos.”

“At the ‘power marketing’ meetings, where agents from a number of brokerages get together to promote their listings, the mood has changed recently. ‘At a meeting a couple of weeks ago,’ Lafabregue Sr. recalls, ‘Somebody got up and said, ‘I got a buyer,’ and he got a round of applause.’”

“His outlook for 2006: ‘I think a lot of agents are going to do a lot more business at lower prices. I’m not sure in Sarasota that the agents will do as well as they did last year. Looks to me like prices are down about 15 percent.’”

“‘The numbers sort of tell you that’s where we’re at. I just sold a house that we listed in November at $510,000. Then we went to $490,000, then $460,000. (After a similar nearby property closed for $430,000) I said, that’s where this market is going to be. So I said, ‘Go down to about $440,000, and you’ll probably end up at $430,000.’ (The seller) said, ‘How about four and a quarter?’ So we reduced it to four and a quarter and we sold it for $412,000. In November, that house priced out at $510,000 (a 19.2 percent reduction.’”

“He says a big factor is how soon the market will find a balance between listings and sales, sellers and buyers. A thousand houses for sale is too few, and 5,500 is too many. ‘We have to work off some of this excess inventory. I’m not sure it’s ever going to be back at 3,000 (houses for sale). It might be 3,500 (that represents a balanced market).”

“‘But to get rid of the 2,000 houses from 3,500 to 5,500 is going to be very painful, and it’s going to take I don’t know how long,’ he said.”

Annette Haddad at the LA Times has this report on speculators. “Too much speculative activity from investors hoping to turn a quick profit is perhaps the biggest sign that a market, whether real estate or stocks or any other asset, is in an overpriced ‘bubble’ condition, economists say. Too many speculators drive prices too high, and when they sense that the market is topping, they tend to sell all at once, sending prices into a free fall.”

“Justin Lane is seeing the consequences of other speculators’ efforts in Arizona. After watching prices double in the 16 months since he moved into the newly built Queen Creek neighborhood east of Phoenix, Lane says he can’t afford to sit on the sidelines. So he listed his five-bedroom house for sale in November.”

“Six other neighbors had the same idea, including one absentee owner who priced his house about 10% below the rest. That forced Lane to reduce his asking price from $362,000 to $343,000, still well above the $165,000 he paid. ‘The investors are pushing down prices,’ he complained.”

“As Lane has learned, Arizona is one of the biggest magnets for speculators. Close to 40% of the homes in Maricopa, Pinal and Pima counties, which include Phoenix and Tucson, were bought by absentee owners as investments or second homes last year. For the nine months ended in September, investors snapped up 11,000 homes in the Phoenix area.”

“‘There is no doubt that the investor has been the driving force’ behind Phoenix’s white-hot housing market, said Jay Butler, at Arizona State University. Speculative buyers helped pump up Phoenix’s median home price by a whopping 40% in 2005, the highest growth rate in the nation.”

“Of absentee owners who bought in Phoenix last year, nearly one in four was from California.”

“Phyllis Rockower is one investor who’s done with Southern California for now. Although she had been buying local real estate since 1996, the South Bay resident sensed that prices were peaking last year. So she started to unload her remaining seven properties in April, closing the final sale last month. ‘People aren’t willing to overpay anymore,’ she said.”

“Now there are signs in Phoenix that speculators with less staying power are beginning to sell in larger numbers. Rising inventories and weakening demand typically lead to softening or even declining prices. Since August, the supply of homes for sale in Maricopa and Pinal counties has more than doubled to 38,000 as of Sunday. By contrast, in Los Angeles County, with three times the population, inventories have risen from 20,000 to 30,000 homes in the period.”

“Arizona State’s Butler figures that many Phoenix investors are looking to sell now because they are having trouble finding renters willing to pay enough to cover their mortgages. He expects home appreciation in Phoenix to start declining this year, which could intensify if more owners decide to bail out. ‘It will be a question of whether there’s more panicking,’ he said.”