March 22, 2006

‘The Sky Is Not As High As It Used To Be’ In S. California

A blogger sent in this LA Daily News report. “Two reports out last week - one from DataQuick Information Systems and the other from the Southland Regional Association of Realtors in Van Nuys, came to the same conclusion: Sales are well off the year-ago pace. On a month-to-month basis, prices have been flat in most areas. In other words, the sky is not falling, but it’s not as high as it used to be, either.”

“In their 2006 market forecasts, analysts and industry executives predicted that sales would be off from 2005. But the big dips in January and February are somewhat surprising. So what’s the residential real estate market going to look like this time next year?”

“San Diego County probably offers the best example, since it is farther along in its cycle than either Los Angeles County or the San Fernando Valley. According to DataQuick, sales in San Diego County fell an annual 16.8 percent last month. The expectation is that we’re going to look a lot like San Diego, one of these months down the road.”

“Dan Blake, director of the San Fernando Valley Economic Research Center at California State University, Northridge, saw some of the directional signs in February’s numbers, most notably the one that had inventory soaring 77 percent to a five-month-plus supply in the Valley.”

“‘What typically happens in real estate markets is the quantity leads the price,’ Blake said. As inventory moves up, prices move down.”

“A couple of months ago Alice Chan and her husband put their home in West Hills on the market for more than $700,000 and waited for the buyers to arrive. And waited, and waited and waited.”

“Now the for sale sign is also dressed up with a ‘Price Reduced’ banner. Alice Chan is not happy, either. ‘Our agent told us to reduce the price but I don’t think so. This is a nice area,’ Chan said one day last week.”

“The 1,602-square-foot, three-bedroom, two-bath home is now priced at $663,000 and it’s the second reduction, too, said Realtor Josephine Chan. ‘We do have an offer on the house, but the seller thinks the market is going to go up so they aren’t going to sell,’ said Josephine Chan.”

“The Chans can afford to wait. They just want to move to Northridge, but are comfortable where they are. Whether they are comfortable with this new market in a couple of months remains to be seen. Their agent recognizes the fact that a significant chill has settled over what was once a hot market.”

“In June 1990, the median price of a single-family home was $240,800, down from $245,000, then a record, a year earlier. Prices then went on a protracted slide. Inventory swelled to more than a two-year supply because people losing jobs could not afford to hang onto their homes. Now as this market is turning the economy is on sound footing. That could keep prices from collapsing or the so-called bubble from bursting.”

“Of course, back in June 1990 no one could see a price collapse heading down the road. But on the upside it did create one heck of a buying opportunity.”




Cancellations Drive Down Net New Home Orders: KBH

A homebuilder has some numbers out. “Home builder KB Home on Wednesday said its fiscal first-quarter profit rose 42 percent, partly on higher home prices, and maintained its outlook for the year, despite a fall in new orders. The Company generated 8,719 net orders during the quarter ended February 28, 2006, a decrease of 12% from the 9,901 net orders posted in the first quarter of 2005.”

“‘After several years of exceptional growth and rapid price escalation in many housing markets, it is likely that we will see some markets pull back this year from their recent pace,’ said CEO Bruce Karatz. ‘Our gross orders, which were only slightly below the year-earlier quarter, reflected steady demand. However, higher cancellation rates, which rose to more normalized levels, adversely impacted our net order comparison in the first quarter. Since we are just entering our prime selling season, it is still too early in the year to forecast the longer-term sales trend.’”

“‘Nationally, it is clear that some housing markets have moderated from the over-heated and, in some cases, speculative pace of growth of the past few years,’ said Karatz. ‘There are signs of cooling in the hottest markets on both coasts and a shift in investor activity from buying to selling, resulting in less demand and increased supply in certain markets.’”

“‘We endeavor to create value for our shareholders in a number of ways (including) an aggressive share repurchase program,’ said Karatz. ‘Over the past two quarters, we have opportunistically repurchased four million shares of common stock, and we retain the authority, under our current share repurchase program, to repurchase an additional eight million shares.’”

“The Company repurchased two million shares of its common stock during the first quarter of 2006 at an aggregate price of $154.4 million. ‘We expect to use our strong cash-generating abilities in the future..to repurchase additional company common stock if market conditions and buying opportunities warrant it,’ Karatz said.”

The firms cash position is less than half of what it was one quarter before, at $71 million. The accounts payable is $945 million, versus $722 million a year before. They are basically borrowing to buy back the stock.

Revenue was up by $559 million, yet net income rose only $52 million. Of course, KBH was able to capitalize $46.8 million of the total interest of $51.5 million, meaning it was added to inventory instead of reducing the net income. About that inventory: it grew 48% over the past year; from $4.7 billion to $6.9 billion.

New orders were down significantly on the west coast and in the southwest and central regions, and flat in the southeast. The only sigificant increase in new orders was in France.




‘The Inventory Is Going Through The Roof’ In Phoenix

The Arizona Republic looks at the numbers that came out yesterday. “Home buyers and sellers and real estate agents all can find something to like about the latest numbers from the ASU. Yet, the figures also show the conflicting forces roiling a market still struggling to regain the equilibrium it lost in last year’s selling frenzy.”

“Jay Butler believes that the higher prices are caused by more people buying move-up homes. He said that is typical in a slowing housing market. ‘Everybody is sort of in transition,’ he said. ‘Some people say this is just a hiccup. Some are arguing a disaster scenario. But I don’t think we are going to have a disaster scenario. If we do, it won’t come from the housing industry itself. It will come from outside the industry.’”

“Many people close to the housing market say it has begun to slow from what some analysts said was an unsustainable pace. A big reason, according to real estate agents: Investors are taking their profits and moving to other cities. Listings are up, as is the time it takes to sell a house as buyers no longer are forced to jump at the first deal they see or get into bidding wars.”

“‘We’re getting a few more buyers coming out and looking around, but the inventory is going through the roof,’ said (broker) Floyd Scott. ‘Investors are rotating out, going to Dallas and Austin. They bought the resale market last year, took the inventory right out of the market and everyone raised prices. We’re still trying to find our legs on whether these prices will hold up or there will be a small decline this year. It might soften a little bit because of the price increase last year.’”

“Julie Bieganski, a real estate agent and investor, said, ‘Things are still selling but the price has to be right. You can’t overprice now. There are too many houses.’”

“Ahwatukee Foothills had its second decline in recent months, with prices falling $43,800, or 11 percent, since December’s $386,250. Butler cautioned that it is too early in the year to say if these numbers reflect trends or if they will continue.”

“Ahwatukee Foothills and Tempe are such small markets, with about 120 sales in each last month, their numbers may not reflect what is really going on, he said. ‘Tempe only had 120 sales. I suspect a lot of that is higher-end housing areas like Oasis,’ Butler said.”

“‘Both Tempe and Mesa are popular because they are well located and have reasonably priced housing,’ he said. A separate report from the MLS shows that the number of home sales rising to 2,360 from 2,061 in January. That is lower than the 3,019 sales in February 2005, when the housing market was hot.”

“But the number of single-family homes on the market jumped about another 1,000 in the month to 12,578.”

“The new-home market is feeling the effects of longer selling times and pickier buyers on the resale side. Some builders say that some of their inventory of speculative homes comes from contracts canceled by buyers who couldn’t sell their resale home. That has led builders to offer incentives to unload these properties, creating short-term buying opportunity for bargain hunters.”

“But Butler also said that he thinks builders are starting construction on houses that don’t have sales contracts just to keep the action moving in subdivisions.”

“Larry Seay, CFO of Scottsdale-based Meritage Homes, said buyers have gotten accustomed to a red-hot resale market. They think they can wait until the last minute to sell their current home, expecting the rush of buyers typical in last year’s market. Then the house doesn’t sell before the time to close on the new house. That can be costly in terms of lost earnest money.”

“‘We’re definitely counseling people that as soon as they sign a sales contract with us, sell their current home so they don’t get squeezed,’ Seay said.”




‘Flood Of Homes Impacting Prices’ In Wisconsin

The Capital Times reports on the housing glut in Wisconsin. “The flood of homes and condominiums hitting the market in Dane County appears to finally be impacting prices, according to the latest statistics from the Realtors Association of South Central Wisconsin. The 1,133 homes and condominiums listed for sale for the first time with the South Central Wisconsin Multiple Listing Service in February were 9.2 percent more than a year ago.”

“That brought the total number of homes and condos listed for sale to 4,523 at the end of February, 75.3 percent more than a year ago and 113.7 percent more than February 2004. The 356 reported sales in February were 8.2 percent fewer than a year ago.”

“The median sale price in February of $215,445 was just 2.6 percent more than a year ago. ‘It’s pure basic economics’ of supply and demand, said Kevin King, RASCW executive director. The booming inventory is mostly due to the increasing number of condo developments in the Madison area, King said. ‘It seems like you can’t go too long without reading or hearing about another new condo project,’ he said.”

“The south central Wisconsin market has been stronger outside Dane County than in the county. King attributed that to the much lower prices in surrounding counties. ‘When you look at the median prices for the counties surrounding Dane County it’s almost $50,000 at a minimum lower,’ he said. ‘And depending where you work in the county your commute out of Dane County can be relatively short. ‘This is going to be a very interesting year to see unfold,’ King said. ‘I don’t know what to expect.’”




Undercover Reporter Finds Rampant Fraud In UK

Many readers sent in this BBC report on fraud in the real estate business. “An undercover investigation reveals the secret world of estate agents’ dirty tricks. My boss congratulates me on getting an offer on a flat that has been overvalued by £60,000. The newly-wed young couple viewing the property are stretched to their financial limit. But my manager is happy.”

“He takes me aside and explains how to convince a surveyor that the flat in London’s fashionable Notting Hill is worth more than it is. He calls it ’slightly simmering,’ I call it cooking the books. The scenario is not uncommon, in fact the manager himself boasts: ‘This kind of s*** happens all the time, that’s why we estate agents are here.’”

“Under-performers are heckled and those who have done the most deals are applauded and given champagne and £50. Young agents in Foxtons exchange high-fives as they swap tales of gazumping and over-valuing. But I can’t stop thinking back to the hard-working young family who dream of getting on the property ladder and have wasted their money unnecessarily.”

“According to the Sunday Times Rich List, Jon Hunt is worth £345m. I soon discovered his mortgage brokers work closely with Foxtons’ agents. They openly discuss potential buyers’ budgets so they can squeeze as much money out of them as possible. In another Foxtons office, lettings staff jump up and down in delight after they successfully fake a signature on an absent landlord’s paperwork.”

“Faking documents is something of a habit in the St John’s Wood office, where Emma Clarke worked undercover in the lettings department. I was shocked when she played me her secret footage which showed staff cutting, pasting and gluing signatures onto contracts. They call it ‘chop chop.’”

“When we embarked upon the investigation, I would never have suspected that an estate agent would go to such lengths to make a sale. There are more than 12,000 registered estate agencies in the UK, and not all of them are as murky as the ones I came across. But during my eight-month investigation, I discovered a litany of dishonesty, deception, deceit and outright criminality.”

“The industry desperately needs better regulation and perhaps, like in the United States, estate agents should be required to have a qualification other than a sharp suit.”




Florida Lawmakers Ignore ‘Quiet Little Secret’

The press in Florida reports on the confusion surrounding the housing bubble. “A key House committee on Tuesday advanced a package of new programs, new spending and new mandates for local governments to address a housing crunch driving workers from the costliest corners of Florida. Palm Beach County’s affordable housing talk grew teeth Tuesday, with county commissioners agreeing to force developers to limit some new home prices.”

“‘The builders are going to hate it. The realtors are going to hate it. Too bad,’ Commissioner Warren Newell said. ‘We have to do what’s right for the community.’”

“Florida lawmakers are scrambling to find an election-year fix to a law that was designed to help save people from skyrocketing property taxes but has instead made many of them financial prisoners in their own homes. Across the state, Floridians are finding that they can’t afford to move into a new home because of rising prices and property taxes, a legacy of the red-hot real-estate market and the unintended consequence of a constitutional amendment called Save Our Homes.”

The answers are there to see. “Bucking the condo-conversion trend of the past few years, a California investment firm that paid $27.57 million for a 376-unit apartment complex in North Miami plans to maintain it as a rental community.”

And a letter to the editor sees through the fog. “Everyone knows that housing prices are out of sync with reality. It’s the quiet little secret no one wants to talk about. I have been watching the real estate market for over three years nowby going to realtor.com. I have been putting in the same numbers for over two years. They are a single family home between $300K and $400K in Boca Raton. Last year at this time, there were only about 95 houses for sale; as of this writing, there are 237 houses for sale. That number has climbed every week since December.”

“There are a total of 5,039 properties for sale in Boca Raton alone, this is almost 2.5 times the number of houses that were on the market a year ago. What does this tell you? It tells you the investors are starting to bail out of the market, it tells you buyers do not want to buy in a market that is going down. It tells you home prices are out of kilter. Who in their right mind is going to spend $400,000 on a house with 1,500 square feet under air with a carport? Taxes alone are at least $6,000 a year and insurance is another $5,000 a year. You can move up the coast and get a new home for $250,000.”

“The reason the bubble is popping: Interest rates are going to keep going up. Those interest-only loans are coming home to roost and people cannot afford them anymore.” “Insurance rates will only keep going up, taxes will only keep going up. Investors cannot make a profit anymore.”

“My advice to people selling their homes and who really want to sell their homes: Lower your price so that you are the lowest-priced home with the same square footage in your area. You will be rewarded by selling your home quicker and those people who kept their prices high will kick themselves when they have to sell for lower than your selling price.”




More ‘Ill Omens’ For The Housing Bubble

Reuters reports on the loan volume numbers. “U.S. mortgage applications fell last week to their lowest level this year despite a marked drop in interest rates, an industry trade group said on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week ended March 17 decreased 1.6 percent to 565.0 from the previous week’s 574.4, its lowest level so far this year.”

“The group’s seasonally adjusted index of refinancing applications decreased 0.6 percent to 1,574.5 compared to 1,583.6 the previous week. A year earlier the index stood at 1,894.4.”

“The MBA’s seasonally adjusted purchase mortgage index dropped 2.3 percent to 393.6 from the previous week’s 403.0. The index was only a few points above its two-year low of 391.7 reached during the week ended February 10. The index was also below its year-ago level of 446.4. The index, considered a timely gauge of U.S. home sales, was also below its year-ago level of 446.4.”

“Historically low mortgage rates have fueled a five-year housing boom, helping support the U.S. economy’s recovery from recession despite uncertain business investment. Despite last week’s rate drop, most analysts say that mortgage rates are on the rise. While they may differ on whether or not there is a housing bubble, most agree that the market is now cooling off from its record run.”

The Canadians look at the trend. “The downdraft has been gentle, but the winds have finally shifted in favour of a cooling U.S. housing market, and worry about a slowdown in consumer spending is mounting. ‘We knew that the market was flying too high for way too long,’ economist Beata Caranci said.”

“Ill omens have been building: Housing construction fell in February, the inventory of unsold homes has risen, and indicators of home-builder and home-buyer sentiment have turned down. As for mortgage applications, Ms. Caranci said the index has fallen a little less than 20 per cent since hitting a peak on June 10.”

“That seems like a mild slip compared with refinancing activity, which has tumbled about 50 per cent since its peak last summer. Ms. Caranci said the more muted decline in mortgage applications is ‘as positive as we can expect;’ It means that the air is coming out of the U.S. housing market slowly, at least so far.”

“Just as expected, Ms. Caranci said, numbers are declining faster in the U.S. West and Northeast, where economists saw more evidence of frothiness. A more significant harbinger will be tomorrow’s report on existing home sales. While housing starts and mortgage applications tend to swing wildly, Ms. Caranci said that the much larger and less volatile resale market has certainly come off its peak.”

“Ms. Caranci expects the downward trend in prices and transactions that have been seen for about five months will continue. Prices have remained more stubborn, but the number of homes changing hands has fallen markedly.”

“Meanwhile, Merrill Lynch & Co. Inc. has been monitoring how the slowdown in the real estate market is influencing Wall Street. Executives at some of the big brokerages say revenue from mortgage bonds in that $6.9-trillion (U.S.) market is dropping as rising rates depress home sales. Moreover, Lehman Brothers is cutting nearly 200 jobs at two home-lending units in California.”