The Housing Bubble

The North County Times reports that fewer people are denying the housing bubble. “Analysts are in wide agreement that the market in San Diego and Riverside counties is caught in a so-called ‘housing bubble,’ but they disagree on the implications. The region’s swelling inventory of unsold houses, a sharp decrease in home sales and flattening prices all point to a much cooler housing market in the next few years, economists and real estate analysts say.”

“Being in a ‘housing bubble’ essentially means that home prices have ballooned beyond what a region’s income levels can sustain in the long run. And that, analysts say, is precisely where Southern California finds itself. ‘What you’re really asking is, ‘What is an asset bubble?’ (UCLA economist) Christopher Thornberg said. ‘That is when a market price of an asset is completely out of whack with the fundamental value of an asset.’”

“It is inevitable, said Ed Leamer, director of the UCLA Anderson Forecast, that the housing market gradually will fall back in line with the rental market, which for the most part has been keeping pace with income growth. ‘It can’t sit there in a stable, expanded state the way it is now, just because the home prices are fundamentally unaffordable,’ Leamer said.”

From the Orange County Register. “In the past year, $100 billion was lent against Orange County property, a sum equal to the gross domestic product of nations such as Iraq or New Zealand. Certainly we’ve seen noteworthy layoffs at local lenders. You cannot overlook the fact that the number of local bankruptcies, late property taxes, defaulted mortgages and foreclosures all rose in the past year.”

And the Fresno Bee. “This year, the mood is different, as Valley agents and home builders, fresh off the greatest real estate boom in recent history, anxiously await the next batch of sales figures. The number of houses listed for sale exceeds the number selling, which puts pressure on prices. Values have slid in some neighborhoods. Likewise, builders are staring at a slowing market while the number of competitors and lots have climbed.”

“The 2,400 or so houses for sale are far more than 900 during the peak years. ‘Price reduced’ signs are starting to creep into the landscape as sellers scale back expectations in a market where more houses are for sale than sold.”

“‘Someone can create a market by adjusting the price. I’ve had several sellers make big price adjustments,’ (agent) Ken Neufeld said. ‘Most have been in the 5% to 10% range.’ Some of the increased supply is probably coming from investors trying to get out at the top. ‘I’ve seen people who bought last summer who are selling now,’ Neufeld said.”

“Add to that the increase in home builders, at least seven entered the marketplace in recent years, and developers are starting to pull back or offer incentives. Centex Homes shook things up when the nationwide home builder slashed the price by as much as $60,000 in select subdivisions from Fresno to Bakersfield. Centex has held similar sales in other areas, including one this weekend in Sacramento.”

“Veteran real estate broker Ralph Strachan noted the houses became available after a deal fell through, possibly because the prospective buyer couldn’t sell an existing home or because an investor backed out. ‘They are cleaning up the inventories and battening down the hatches for a normal market,’ Strachan said.”

“Lennar Homes has stopped doing deals that are contingent upon the purchaser selling an existing house. ‘We are not cutting prices,’ Steve Lutton said. ‘But we are offering incentives and reductions only on those that are finished and ready to close [escrow] in 45 days.’”

“Luxury home builder Gary McDonald acknowledged the surplus of lots controlled by builders and said he expects land prices to start drifting down. ‘There are too many builders in the market. Think about what happened in the last three years from Dinuba to Reedley to Selma to Fowler to Kerman to Fresno and Clovis. Thousands of lots are coming on in the next few years, and sheer supply will cause land prices to level,’ he said.”

One reader wonders which housing bubble is in the worst shape. “Can we discuss the worst market today? There are some strong candidates such as Phoenix, Miami, Las Vegas. My immediate candidate is Phoenix with soaring inventory, punishing drought, ready buildable land available in all directions, and huge numbers of SFR’s owned by speculators. Perhaps posters could argue the case for their candidates.”

Another replied, “My neighbors put their Northern Virginia house on the market today. They are retiring to Phoenix! They have already bought new construction, being built as we speak. They bought here in 92 and according to tax records are asking 2.5x orig. price.”

Here is an article on the Phoenix new home market. “It only takes scanning the local newspaper advertisements to see how some new homebuilders are dealing with a softer market in 2006. Despite often putting down thousands of dollars in earnest money, more people are walking away from deals they signed during the whitehot market last year, leaving some builders with higher stocks of homes under construction.”

“Combine that with a strong push to meet sales projections and it’s clear buyers jumped from a fastpaced merry-go-round last summer to the driver’s seat.”

“Buyers who can’t sell their current homes in the cooling market are backing out of move-up home purchases. And investors who are worried they bought at the top of the market are also ripping up contracts. Buddy Satterfield, president of Shea Homes’ Arizona division, said the company’s cancellations over the last month are double normal rates.”

“‘We’re getting some homes that aren’t all the way through to completion because people haven’t sold their existing homes,’ Satterfield said. ‘That’s the primary driver. Resale listings have increased, so people have a lot of options out there.’”

“At Scottsdale’s Meritage Homes incentives are being offered at certain locations for homes under construction. ‘The closer it gets to completion, the more interested we are in getting it sold so it can close once it’s finished, because we don’t want to have a bunch of finished unsold homes standing around,’ said Larry Seay, CFO.”

“The extra money can make up for having to resell the home in a slower market, Seay said. The deposits can be enough to make some money on the deal, and sometimes the home has to be discounted to sell it, he said. ‘That deposit money we keep winds up kind of covering our discount,’ he said.”

“It’s still too early to say if fewer new homes will be sold, RL Brown said. New home permits issued in the Valley in January, the latest numbers available, were down just 2 percent from those the month before when there were 4,500 permits. ‘Anecdotally, I don’t think any panic has set in,’ he said.”

The LA Times has this look at the mortgage industry. “Real estate has been a swell deal for just about everyone who owned a home in California during the last few years. For hundreds of Orange County homeowners, it’s been even better. Thanks to their mortgage broker, they essentially get paid to borrow money.”

“Mark Gallagher, the founder and president of Park Place Funding in Laguna Hills, uses a technique that unscrupulous brokers employ to bilk clients. Gallagher’s innovation was to cut his customers in on the action, giving them a share of the premium he earns for placing loans with high interest rates. The case opens a window on a bigger issue: In a mortgage system that is loosely regulated but increasingly complicated, who is responsible for ensuring its integrity?”

“‘In boom times, all sorts of crazy things happen,’ said James Croft, executive director of the Mortgage Asset Research Institute near Washington. ‘New programs are invented that have no history. You say, ‘This is going to work,’ and then you find out three years later it wasn’t such a great idea.’”

“With the housing market cooling off, the evaluation period Croft is talking about seems set to begin. The mortgage industry, and some mortgage holders, may be in for an extensive period of second thoughts.”

“One way lenders make money is by making loans at high interest. They are so eager for these loans that they pay brokers a bounty for them. In California, the bounties must be noted on the closing papers of the loan. But many brokers don’t talk much about them, consumer advocates say, and therefore few home buyers are fully informed. In the worst cases, a high premium can tempt a broker to put unwitting clients into expensive loans. Such fraud occurs regularly, according to authorities.”‘

“Most of Park Place’s loans in 2004 and early 2005 were provided by National City Mortgage, a division of National City Corp. in Cleveland. National City became Park Place’s favorite mortgage supplier because it paid the richest rebate: as much as 5% of the loans. Like most lenders, National City doesn’t keep all the loans it makes. The loans were sold to Freddie Mac. Freddie didn’t keep the loans either. It repackaged them into investment pools.”

“And here is where it all fell apart. One investor, Gallagher said he was told, bought an investment pool with an unusually large number of Park Place loans in it. This investor apparently thought he was going to get nice, fat interest payments for at least a couple of years, courtesy of a bunch of foolish Southern California homeowners who were inexplicably paying more than they should have.”

“Instead, the investor got a surprise. The homeowners refinanced, and the investor’s rich yield disappeared almost instantly. He complained, which started a chain of accusations and recriminations. An executive with National City Mortgage, interviewed before it was sued by Park Place, said the lender was victimized by an unprincipled broker trying to pump up volume.”

“Paying people to refinance, said John Gellhausen, ‘created a lot of additional new business without finding new customers.’ National City said it would no longer do business with Park Place.”

“Said a Freddie Mac spokeswoman: ‘We are the real victim here.’ Calling National City ‘an extraordinarily valued customer,’ Freddie put the blame on Park Place. At the end of January, Freddie put Park Place on its exclusionary list, meaning that it will no longer buy the broker’s loans.”

“Gallagher’s silence until now enabled National City and Freddie Mac to portray him as an anonymous rogue running a scheme just this side of fraud. ‘National City encouraged us,’ he said. ‘Now they’re demonizing us. We want to do as much business as we can, as often as we can, and make as much money as we can,’ Gallagher said. ‘But we play according to the rules. If a lender says, ‘You can do this loan, get this high rebate, and 120 days from now redo it,’ why would we not want to do that?’”

“To prevent brokers from churning loans, lenders have restrictions on how quickly they will refinance. It’s unclear how many brokers use techniques similar to those of Park Place, but Freddie warned its lenders in September to be on the lookout for ‘inappropriate refinancing arrangements.’”

“John Marcell Jr., president of the California Assn. of Mortgage Brokers, said the refinancings wouldn’t have worked unless everyone benefited. ‘The customer got money, the broker and National City increased their volume,’ he said. ‘Freddie had their head up their hind end. Everybody along the line was happy as a lark.’”

“Gallagher still thinks he had a great idea. So do his customers. It’s almost like being paid to live in Orange County. David Eulberg’s last refinance on his Fountain Valley house raised his payments $176 a month but gave him a $3,596 rebate. ‘It costs me nothing,’ he said. ‘That’s the beauty of the deal.’”

“But he does have misgivings. Not about the refinancing but what he spent his rebate on. ‘My wife talked me into going to Montana to see my sister-in-law,’ he said. ‘We drove 3,600 miles with the price of gas above $3.’”

What do you see in your housing market this weekend? Notice any builder incentives on the web? Visit an open house this weekend?

Here’s an observation sent in by a reader. “The Central Valley of California (Visalia to Redding) is literally piling up with unsold new construction. Just a massive number of very large developments all rushing to build out. I’m near Merced, Ca. and a single middling builder has 140 homes built and unsold, and in a town of 17,000 homes there could be as many as 2,500 under construction as I write.”

“And they are just not selling. Inventory has gone from 157 (6/1/05) to 815 today. Anyway, I truly believe (yeah, right, everywhere is special) that this region will see THE implosion soon.”

And another wrote. “A local Santa Cruz real estate radio guru just sent this to me: ‘Special Financing, Grants, low and NO interest rate loans ARE available! Do you qualify? Hello everyone, hope you are all staying dry in this weather! I wanted to bring to your attention a very special workshop that we will be holding to discuss and explain some incredible financing programs that exist today YET many people do not know about. The following people qualify for many of these programs: School Teachers, District Emplyees, City & Public Employees, First-time buyers (you can own a home now and STILL qualify!)”

“There are currently many programs such as: LOW Interest Rate Financing, NO INTEREST loans - SERIOUSLY! Down-payment assistance programs, Closing costs assistance programs, Grants.”

“Seriously folks, this is no joke. You can make well over $100,000 per year and still qualify. Don’t believe me? Tune in to my TV Show as a lender who currently specializes in these loans and a City REPRESENTATIVE comes on my show to explain some of these incredible programs!”

One reader wants to hear the current sales pitch. “I would like to know what sale pitches the realtors are using right now to even get buyers to buy in a down turning market. Buyers have more inventory to look at, but so what, homes are still over priced. I suspect the agents are selling based on get in now before the interest rates go up more.’”

One called this tactic ’sick.’ “I think realtors are playing up the emotional factor–that buying a home is an emotional decision, not an investment, and let’s face it we all want to have a home of our own.”

A reader is Florida saw this, “There was an article this week in SW FL about how the population has increased in FL a significant amount between July ‘04 & July ‘05. Not a day later, I see articles with Realtors proclaiming how the housing market will pick right back up after this ‘pause’ because of ‘all the people still moving to FL despite the hurricanes.’”

Another asks, “I am curious about the possible climate for Realtor resentment and backlash as the bubbles’ mighty hiss starts to blow down strapped homebuyers that had listened to advice and analysis from realtors.”

“For better or worse, the majority of homebuyers get their ‘take’ on the RE market from Realtors or RE affiliated economist from these main sources: Stories in the local/national newspapers and on the nightly news with ‘RE expert’ quotes. RE related Internet sites with the ‘local market conditions/forecast’. And self education aside, it’s difficult to lay all the blame on them for believing these realtors because the complicit and/or lazy media give these spokespeople credibility by quoting them in NEWS ARTICLES as ‘real estate experts’ which they may be, but biased ones to be sure.”

“The vast preponderance of comments by Realtors in the past few years have been decidedly declarative and never stated as ‘This is my opinion’ or ‘This is how I see the market headed.’ There’s nothing even close to a disclaimer amongst the babble. Realtors, both nationally and locally all steer us in the same optimistic, almost utopic direction. They play to our aspirations with guaranteed home price appreciation and to our fears with being priced out forever.”

“There are without a doubt, professional, competent Realtors out there working hard in all kinds of markets that will not deserve the scorn and retribution that may come their way. However, when the leadership of the NAR is responsible for the quotes nationally and so many of the rank and file falls into step with their rhetoric, how will they be able to convince the pitch-forked angry mob that they’re one of the good ones.”

“So I ask you fellow bloggers: How do you think the Realtor profession will be viewed in the post bubble era? And what, if any changes will come about in the aftermath, such as regulation similar to stockbrokers under the oversight of the NASD? Will the NAR choose to voluntarily change their culture of propaganda to remain credible or will it be done for them by public sentiment or legislation as the duped masses catch on that the guarantees that were promised are not the ‘money back’ variety.”

The New York Times has a pair of reports on the housing bubble. “As clusters of open-house balloons bob across the suburbs of the metropolitan area, from the New Englandy enclaves of Fairfield County, Conn., to the salt-sprayed boroughs of the Jersey Shore, the question remains: whither the housing market?”

“Inventory is expanding, sales volume declining and bidding wars, once commonplace, increasingly rare. In short, the boom is over.”

“‘A few years ago, sellers were not making their beds and leaving dishes in the sink, and buyers were still coming and buying,’ said Cindy DeRose, a sales agent in Irvington. ‘It has cooled down enough that sellers just have to do a little more work, frankly.’”

“On Long Island, the number of unsold houses in January stood at 23,470, a 67 percent jump from the year before. In Fairfield County, Conn., the number of houses for sale at the end of last year was 35 percent higher than in late 2004. Inventories in some communities (Norwalk, Easton, New Canaan and Darien) were up more than 50 percent. New Jersey’s inventory swelled, too, up 46 percent in January over the previous year.”

“For sellers, the new market dynamic can lead to frustration. Gary Harman put his house, in East Hanover, N.J., on the market for $539,000. None of the more than 25 people who came to see it made an offer. He has since dropped the price twice, to $519,900.”

“Carol Ann Decker put a town house, in Fairfield, Conn., on the market for $535,000. ‘We sold it instantly,’ she said. But the buyer got ‘cold feet,’ she said, and failed to move forward with an inspection. Then three other buyers expressed interest. ‘I thought, ‘Oh, wow, this is going to be great,’ Mrs. Decker recalled. ‘But it’s been a number of weeks and they’re all just sitting and waiting.’”

“Falling for a house is a lot like falling in love. Their love may be blind, but their home inspectors and appraisers are not. ‘When prices of homes were accelerating the past few years, people were more willing to accept problems with houses they knew were in bad condition because they could turn it over and make a profit,’ Dave Zappulla said.”

“According to Mr. Zappulla and other real estate experts, as the market has become less frenzied, buyers and sellers are leaning more on the opinions of inspectors and appraisers and paying closer attention to problems. ‘Up until about May or June, people were going ahead and buying homes even if the appraised value did not support the sale price,’ Mr. Carter said. ‘But the buyer mentality has shifted, and people are no longer in a hurry.’”

“‘In fact, we’re starting to experience people wanting appraisals before they go to contract’ instead of waiting for mortgage lenders to order them, he said.”

“(Appraiser) Anthony Messina said that as the market cooled, disappointed sellers were beginning to steam. ‘We had one person who had his house in Atlantic County listed for $325,000, and when we appraised its value at $270,000, he started getting angry and calling us stupid,’ Mr. Messina said. ‘The problem for buyers is that the market is starting to change; you can’t just blame an appraiser.’”

“From where Mr. Zappulla sits, which is often in a crawl space or an attic, the bottom line is that buyers are not willing to accept certain things that they let slide a few years ago. ‘Nobody wants to pay a million dollars for a piece of junk,’ he said.”

Four reports on Florida’s housing bubble. “North Port - The real estate bubble hasn’t exactly burst, said several people involved in the business, but it’s being squeezed a bit. Bunny Jones observed prices went up right after Hurricane Charley as people sought rentals. For the next year, she said, ‘it was nothing to get three offers on a house. Houses were being overpriced and moving at those prices.’”

“‘But people who bought then are now in trouble if they want to sell at the same price they paid,’ Jones said.”

“(Developer) Bill Bracken said in some respects the media created a self-fulfilling prophecy. ‘During the boom,’ Bracken said, ’some builders had investors buying up a lot of houses, and then they could not afford to pay for them. So the builders were left with a lot of product on their hands. In some ways, that helps buyers because some builders are eager to deal.’”

“(Realtor) Arthur Broslat said in North Port more than 2,500 lots are available, and only 30 sold in February (other than the Sarasota County-North Port lot auction). In South Gulf Cove, some 500 lots are available. ‘During a good week now,’ he said, ‘one of those lots might be sold. It was like someone just rang a bell in October. All of a sudden, everything came to a halt,’ Broslat observed. Last year he had a handful of listings and every one sold. ‘Now, I have a hundred and they keep coming in the office; I can’t stop them.’”

“Ted Allen said, ‘This is not just in North Port, houses aren’t selling in Boston either. If they can’t sell their homes up north, they aren’t able to come down here and buy.’” “Broslat observed that some of the area’s major builders are offering huge financial discounts and incentives. He sees banks cutting off loans to builders until they start selling the inventory they already have on the market.”

“Last week, the Pensacola Association of Realtors listed 5,642 properties for sale, a five-year high and nearly four times more than the 1,487 homes listed in March 2005. As surplus has mushroomed, selling prices slowly are beginning to drop, witnessed by the many ‘Reduced’ signs that are being added to the ‘For Sale’ signs throughout the two-county area.”

“In February, 406 homes were sold in the Pensacola area.”

“Real estate agents say the single biggest factor behind the high inventory is overpriced housing, driven largely by speculators who were hoping to capitalize on pricing jumps after Hurricane Ivan. ‘Some prices were inflated after the storm, and a lot of people saw that and wanted to cash out,’ said Robert Montgomery, a real estate broker. ‘Some prices were unrealistic, and prices are a little inflated now, but they are beginning to come down.’”

“It’s gone from sizzle to fizzle. That’s how some local analysts characterize the market for new home construction on the Treasure Coast. As homebuilders see sales slow, many large firms are spicing up their offers. The incentives are highlighted in full-color, full-page newspaper ads, but rarely discussed.”

“If the incentives are public knowledge, why won’t builders talk about them? Tod Buyers for Mercedes Homes, declined comment, saying, ‘the stuff in the media is not favorable to builders.’ Mercedes spokeswoman Joyce Wilden did not return calls for comment. Rich Brown, South Florida division manager for Maronda, did not return calls for comment. Jane Sonet, of Centex Homes Southeast Florida Division, did not return calls for comment.”

“Builders are also trying to rid themselves of a glut of inventory, Brad Hunter said, because speculators may have put deposits on homes, but backed out of contracts because of lackluster demand from end users.”

“Southwest Floridians who have homes or condominiums on the market are waiting longer for properties to sell because of the current lull in activity. Fiona Finn, broker in Fort Myers, said in mid-February she had 110 listings, compared with 20 at the same time last year. ‘There’s an overwhelming supply,’ she said. ‘It’s one of the slowest seasons I’ve ever seen.’”

“‘If you need to sell today, you need to price accordingly,’ Finn said. ‘I always tell the sellers to take the position of the buyer.’”

“In many cases, homeowners have lowered the original price more than once. Brokers cite reductions from $10,000 to $150,000. ‘Two-thirds of my listings have had to make price reductions to match the market,’ Judy Ramage said.”

“If the price is too high, owners should be willing to reduce or wait. Some listings expire, evident in the 111 that expired in Lee County on Feb. 16. ‘If you’re not getting any showings, there’s only one problem,’ broker Denny Grimes said, ‘and that’s price. They need to get realistic and quit getting greedy.”