The Housing Bubble

Jon Lansner at the Orange County Register took a look at what a soft landing might mean for that housing bubble. “The bubble doesn’t have to burst in spectacular fashion for housing to inflict economic pain. The much-discussed ’soft landing’ may create heartburn in the business climate.”

“Land profits aren’t just for homebuilders or real estate investors. Everyday folks have reaped rewards in several ways. Most notable: Borrowing against the profits in their home. For example, 72,000 Orange Countians last year took out $6.1 billion worth of home-equity loans, according to DataQuick. Curiously, and a possible sign of a slowing real estate market, that’s down from 88,500 equity loans worth $7.2 billion in 2004.”

“The bond traders at Pimco don’t think home prices will collapse, well, outside of a few overheated markets, they think shrinking housing profits will have far-flung economic consequences. A recent economic outlook by Pimco’s chief business-climate watcher, Paul McCulley, essentially said housing will drive the national picture.”

“And, he said, ‘property market euphoria will not go quickly and quietly into the good night, but rather on the installment plan, with much screaming of denial. Collectively, we believe the end of denial is rapidly approaching. But none of us can say with confidence whether the end will come in the next three weeks, three months or three quarters. But the end of the housing boom will come soon, we think, and when it does, sales volume in the property market will reverse wickedly.’”

“Let’s not overlook the financial clout that the real estate business has in this town. By my math, real estate of all sorts employed 253,000 in the fourth quarter of 2005. That’s up almost 80 percent since 1995. The boom turned the real estate community, so to speak, into 17 percent of all workers employed in Orange County.”

“The last time this town got into serious economic trouble, manufacturers took it on the chin. In the five years ended in the first quarter of 1995, local hard-goods factories lost 41,300 workers, a 24 percent drop. Many observers suggest that this factory rout, propelled by harsh cuts in Pentagon spending, was a critical cause of local housing’s woes. From 1990 to 1995, the median price of an Orange County home fell by 10 percent to $194,000.”

“But real estate job losses played a significant role, too. From 1990 to 1995, local real estate lost 29,700, nearly three-quarters the loss at local factories.”

“Today, real estate employs 110,000 more folks than it did near the bottom of the last housing cycle. That’s roughly one in four jobs added to the overall economy since those ugly days. If real estate simply stabilizes at current levels of activity, the loss of the wealth created by home appreciation and related employment growth will be dearly missed.”

The Arizona State University has some numbers out for the Phoenix area. “With 5,455 recorded sales in February 2006, the greater Phoenix resale market has rebounded slightly from the 5,260 sales recorded in January 2006. However, it is well below the 7,935 sales recorded a year ago and the 10,700 sales of August 2005. The 2006 year-to-date is 10,715, in contrast to 17,290 for 2005.”

“‘The basic direction of the local real estate market will probably not become clearer until into the second quarter,’ said Jay Q. Butler, director of the Arizona Real Estate Center.The primary news of last year’s housing market was the rapid rise in the median home price from $194,000 in January to $260,000 in December. Since the record of $263,000 was set in September, the growth rate had been disappearing, with the median price being $257,000 in January. A slight re-emergence of price growth occurred in February at $265,000, while it was $200,000 for a year ago.”

“‘This is not too unexpected,’ said Butler. ‘As housing markets slow, the move-up market tends to dominate activity with higher-priced homes. For example, in January 2006, 23 percent of the sales were in $300,000 to $499,999, while it was 25 percent in February.’”

“Affordability continues to be an issue. Based on an 85 percent loan-to-value, the monthly mortgage payment for the median price home increased from $945 to $1,325.”

“Phoenix recorded sales decreased from 2,235 sales to 1,680 sales. The Scottsdale resale home market declined from 635 to 400 recorded sales. Mesa’s resale housing market declined from 945 to 655 sales. Glendale decreased from 545 to 435 sales. The Sun City resale market fell from 150 to 100 sales.”

“Resale activity in Sun City West also fell from 70 to 60 sales. The resale market in Gilbert decreased from 495 to 290 sales. Chandler’s resale market slowed from 560 to 400 recorded sales. The Tempe resale market decreased from 165 to 120 sales. Avondale’s resale market fell from 170 to 110 sales. The El Mirage resale market decreased from 120 to 60 sales. Goodyear declined from 150 to 80 recorded resales. The Surprise resale market decreased from 345 sales to 200 sales.”

“For the last year, the ever higher home prices have drawn people into the market based on continued optimistic growth assumptions about future prices. Thus, both investors and owner-occupants have been buying on future expectations about continued appreciation to provide for profit and/or re-financing opportunities. If home prices continue to be stable or even decline in some areas, owners may increasingly bring homes to the market, in order to lock in profits.”

“‘As prices have stagnated since August, inventory levels have continued to grow, as we suspect an increasing number of speculators are placing their homes on the market,’ Raymond James analyst Rick Murray wrote to clients Monday. From a months-supply perspective, six months of inventory were on the market at the end of February, compared with 1.6 months in August, noted Murrary.”

And here is a builders incentive in Queens Creek. “SPEC Homes Currently Available Move-in Ready! Special Offer! With purchase of one of our finished spec homes at Skyline Ranch Scott Communities will provide buyer with a voucher for a FREE CAR!”

The Sacramento Bee reports on the new 40 year loan. “Today, first-time buyers trying to stretch financially to purchase that house with a 40-year mortgage, instead of the standard 30-year loan, must turn to the private sector. Not to be outdone by the private mortgage market, the California Housing Finance Agency says it plans to offer its own 40-year home loan this spring with a fixed, below-market interest rate.”

“Residents won’t even need a down payment, though they will have to qualify as first-time buyers and meet CalHFA’s income requirements and other criteria.”

“An example: A household using a zero-down, 30-year CalHFA mortgage would need to earn about $72,500 a year to buy a $355,000 house. The same family using a 40-year loan could qualify with an income of about $68,400.”

“Though they’re new for CalHFA, 40-year loans are old news among private lenders, who last pushed them in a big way during the height of the previous real estate cycle in the late 1980s and early 1990s. And many lenders are simply searching for something different to attract borrowers amid the recent slowdown in refinancing and home purchases.”

“‘It’s safe to say that in mortgage originations..desperation breeds innovation,’ said Keith Gumbinger, vice president of a mortgage research firm in New Jersey.”

“Someone buying a $355,000 home with no down payment could shave about $150 a month off the mortgage payment by using the CalHFA 40-year loan, compared with a 30-year loan, agency figures show.”

“But CalHFA’s 40-year loan does have real drawbacks. Borrowers won’t pay down the principal nearly as fast when compared with a traditional 30-year mortgage. Someone paying the full $355,000 asking price with no money down and using the 40-year mortgage would pay about $168,000 more in interest over the life of that loan, compared with the agency’s 30-year mortgage.”

“Leslie Gordon has been trying to sell her house since August. She started at $393,000, dropped it to $375,000 within about six weeks, then took it off the market in early December. She put it up for sale again three weeks ago at $355,000.”

“Gordon is rooting for today’s first-time buyers. Several have shown interest in her home, but none has made an offer. ‘It wasn’t because the people weren’t interested, or because of the price,’ Gordon said, ‘it was qualifying’ for the loan that held them back.”

An update on the global housing bubble. “Britain’s housing market showed the first signs of renewed weakness last month with an easing in demand for home loans, according to figures out yesterday. City analysts said the unexpected dip in mortgage lending suggested that property was becoming too expensive for many buyers and that activity in the market was starting to suffer as a result.”

“Signs of a sharp downturn are emerging in Shanghai’s once-sizzling property market with prices slumping more than 30 percent for some apartments and increasing reports of mortgage defaults. Like so many other sectors of China’s super-charged economy, massive investor speculation led to a real estate boom in the nation’s financial hub of 17 million people that saw prices double in the three years from mid-2002.”

“Since then developers have cut prices, small real estate shops have gone bankrupt and many first time homeowners have begun feeling the squeeze on mortgages now worth more than the homes purchased.”

“One example of rising home-loan defaults, Song said, was in Xianfeng district, a 40-minute drive southeast from the center of Shanghai. One hundred-meter flats there which were selling for 500,000 yuan (62,000 dollars) in the middle of last year had now dropped by more than 33 percent, according to Song. ‘Most investors borrowed 350,000 yuan from the bank but due to the shrinking market and the poor location, these houses are just not worth that much any more,’ said Song.”

“The most common result is that investors are returning the property to the bank and waiting to see how much the bank can get for it. Unfortunately, many investors will still need to pay back loans since the houses just cannot sell for what they were bought,’ Song said.”

“Last year bad housing loans hit 1.55 billion yuan, up from 558 million yuan in 2004, according to official statistics. ‘It’s a systemic risk if you are a Shanghai bank,’ warned UBS economist Jonathan Anderson.”

“Yet it was not so long ago that the Shanghai housing market was so tight that prospective buyers had to queue for tickets to enter a bid for a new apartment in an unfinished block. It was usually a foul tempered affair too. People jostled as they waited for hours, sometimes days, only for many to be turned away.Those lucky enough to secure bid tickets also often found that the best units had been pre-sold to those with inside connections.”

“At times even the tickets themselves became a saleable commodity but now the party of irrational exuberance is over.”

“The full extent of Australia’s housing downturn is becoming clear. Construction started on significantly fewer homes in the three months to December. The first concrete was poured on 35,846 new homes during the December quarter, that is almost 9,000 fewer than the recent peak in the March quarter of 2004. It is down a very sharp 7.5 per cent from the September quarter. In six out of the past seven quarters now, housing starts have been falling. Housing construction activity has fallen to its weakest point since the GST took the wind out of its sails in mid-2001.”

“On a state-by-state basis, the number of housing starts fell everywhere except in the Northern Territory, where they rose 16.8 per cent. For the December quarter, starts were down by 21.1 per cent in the ACT, 13.1 per cent in Tasmania, 12.6 per cent in NSW, 12.5 per cent in Victoria, 6.8 per cent in SA, 4.5 per cent in Queensland and 3.2 per cent in WA.”

“Master Builders Australia chief economist Peter Jones said if the trend continued it could create a housing shortage. ‘While general confidence remains solid, uncertainty related to house prices and interest rate speculation may hold back new home buyers in the short term, with the risk of a more protracted and steeper decline in housing,’ he said.”

The press reacts to last nights speech by the new Fed chairman. “U.S. two-year Treasury note yields rose for a third straight day after Federal Reserve Chairman Ben S. Bernanke suggested that the central bank will continue to raise interest rates. Thirty-year bond yields fell as he also said low long-term yields don’t signal an economic slowdown.”

“Two-year yields rose above 10-year yields as traders increased bets on the number of times the central bank will lift borrowing costs.”

“‘We’re a little bit more bearish than what’s built into the market,’ said Donald Ellenberger, who oversees about $5 billion of government and mortgage-backed securities. He said there is a ‘decent probability’ the Fed increases its target rate to 5.25 percent from 4.5 percent now.”

“Bernanke said he doesn’t interpret the narrowing gap between short and long-term rates as ‘indicating a significant economic slowdown to come.’ ‘Many, many variables go into making the forecast,’ and the yield curve alone is not ‘by itself a useful benchmark for policymaking,’ Bernanke said. He added the increase in mortgage debt from the housing surge of the last five years ‘may not be a particularly serious problem’ because families have replaced higher rate consumer debt with home loans.”

“A slowdown in the U.S. housing market would still be entirely consistent with economic growth at or near potential, Bernanke said. ‘There has not been but there may be in the future some stress in some areas, but broadly speaking I think that consumer finances are consistent with continued reasonable growth in consumption and enough to keep the economy at or close to its potential output growth rates,’ Bernanke said.”

“‘This increase in mortgage debt may not be a particularly serious problem. First, there has been on the other side of the balance sheet, significant increases in assets, so that balance sheets in general are looking stronger,’ he said.”

“Bernanke said that, even if short-term interest rates rise, the impact on the growing number of people who hold adjustable-rate mortgages would occur with a lag since many of them have fixed-rate ‘lock-in periods’ of three, five or seven years before the adjustable feature kicks in. ‘Our best estimates at the Federal Reserve are that the repricing of these instruments is actually going to take place relatively slowly,’ Bernanke said.” “He said U.S. saving rates were likely to rise over the next year or two, especially if housing prices moderate.”

“Bernanke’s comments yesterday showed he isn’t worried about slowing growth, said Ethan Harris, chief U.S. economist at Lehman Brothers. ‘He’s continuing to be pretty bullish about the outlook for the economy,’ Harris said yesterday. There’s ‘maybe a tiny bit more hawkishness here.’”

The Christian Science Monitor has this report on the housing bubble in Massachusetts. “More than one-quarter of Boston’s mortgage-holders appear to be stretched thin financially, spending at least half their income on housing, according to an analysis of census figures. That’s more than twice the national average and the highest of any major city except Miami.”

“The number of homes sold in Massachusetts dropped a whopping 21 percent in January compared with a year ago, the largest year-to-year decrease in monthly home sales in a decade. As a result, home values have begun to soften. Statewide, they actually fell slightly in January compared with a year ago.”

“Such pressures are forcing a rising number of homeowners to erase their debts by forfeiting their homes. Foreclosure filings in the county that includes Boston nearly doubled in January from a year ago. ‘Homeowners ‘call us and are heartbroken,’” says Robert Pulster, (who) works with Boston residents on the brink of losing their homes. ‘They thought it was their dream.’”

“More trouble lies ahead, some experts warn. ‘I would suspect that as home prices soften, you are probably going to see a ramp-up in defaults, delinquencies, and foreclosures,’ says Nicolas Retsinas of Harvard University. ‘It is not that they were not stretched before, but if you couldn’t make the mortgage payments, you would sell. If the market is softer, it is not as easy to do this.’”

“‘This is the first decade that we have had this culture of pricing risk in home lending,’ says Susan Wachter, professor of real estate at the University of Pennsylvania. ‘What happens if someone loses a job? If you are already spending 50 percent of your income toward a mortgage, there is no cushion.’”

“The number of homeowners with mortgage trouble is rising, says Saul Perlera, who owns a real estate firm in East Boston. Some were scammed by lenders, he says. Others were too quick to buy. ‘A lot of them just do not listen. They want a house,’ he says. ‘I try to advise them: You can get a house, but you might not be able to stay in it.’”

Other experts say not to worry. “‘The air is coming out of the balloon,’ David Lereah said, who argues a balloon is a better metaphor than a bubble to describe a market he characterized as going through a temporary price correction rather than a collapse. ‘The bubble is not bursting. The solid fundamentals in our economy will keep the real estate expansion alive,’ Lereah told about 250 real estate agents at the New England Realtors Conference.”

“Lereah said predictions of a housing bubble are based largely on data showing a widening gap in personal income growth compared with more rapidly rising housing costs. He said such comparisons ignore the fact that interest rates remain historically low despite recent increases, putting monthly mortgage payments within reach of most consumers. ‘You have mortgage rates below 7 percent,’ Lereah said.”