The Housing Bubble

It’s Friday desk clearing time for this blogger. “You buy the biggest home you can afford and use every dime to do it. Now, the worth of your home takes a nose dive. The bubble has burst, leaving you in a financial mess. Don’t be afraid, like most nightmares, this one’s a lot less scary in the light of day, where following a number of dos and don’ts can lead you to the best possible outcome. DON’T panic.”

“Use your own judgment. Are long-term interest rates going up? Are existing houses sitting on the market longer? Is it much cheaper to rent? Is the number of second homes increasing? Are people investing in the local home market to make money, rather than to live in a home? ‘One of the frequent definitions people give for bubbles is if people are buying just in expectation that the prices will rise, than out of some underlying need,’ says Andrew Leventis, an economist with the Office of Federal Housing Enterprise Oversight.”

Ghosts of S&L’s past? “It appears that the appraisal that Neil Mohamed Husani and his partners used to get bank financing for what is the proposed site of a $125 million condominium tower contains ‘wrong and misleading information.’”

“Husani created a stir in Southwest Florida’s real estate community when he got a $16.25 million loan from Fifth Third Bank on property whose value apparently more than doubled in a day. ‘I’m not concerned about my appraisals,’ Julien Stokes said. ‘If I’ve been duped, I’ve been duped. I can’t help it if people purposefully duped me.’”

“In a signal that some bargains may be just around the corner, the government reported the number of unsold new homes on the market hit an all-time high while the average price began to fall. Economist Joel Naroff says the February report has some anomalies, but could be the sign that the housing bubble is finally bursting. If so, he says, it won’t be pretty.”

“‘I have said this before but I will repeat it again: The next time a housing bubble gently deflates will be the first time a housing bubble gently deflates,’ Naroff said. While existing home sales were up in February, Naroff says that could quickly change, with the three words most feared by real estate agents; ‘low ball offer’ becoming the market’s new rule.”

“‘That time is coming,’ Naroff said. ‘Bubbles burst, they really do.’”

“The housing boom in northwest Arkansas might have reached its peak, according to a new report that suggests the Hometown housing market is overloaded. ‘When supply and demand are out of whack, usually we see prices adjust,’ said University of Arkansas economist Kathy Deck. Experts also said that bankers might change the way they loan money to builders if an oversupply problem continues.”

“Sales of detached single-family homes declined in February for the fifth straight month, according to the Massachusetts Association of Realtors, and a growing glut of supply may bring prices back down to earth. Prospective home buyers who decided to wait out the fervor of the recent housing boom may see their patience rewarded this spring.”

“Following on the heels of a slowdown in sales of existing homes in California, the sale of new houses dropped almost 30 percent in the West in February. The number of homes sold in the Fresno area fell by a third in February from the year before. Home sales fell about 33% in February.”

“Sellers in the central San Joaquin Valley are adjusting prices downward from supersonic levels. They are having to list their homes at a price similar to what competing properties sold for, rather than substantially above market rate, said (realtor) Dave Sawyer.”

And Newsday has a book review. “‘Why The Real Estate Boom Will Not Bust, And How You Can Profit From It.’ By David Lereah. $12.95. Purpose: To explain why the real estate market will continue to expand, despite media speculation about the boom, and how first-time buyers and experienced homeowners can reap the benefits from real estate as an investment opportunity.”

“Excerpt: ‘What we are seeing today is a phenomenon that takes place only every other generation: a long-term expansion of the real estate market. And that is why you need to take advantage of this once-every-other-generation opportunity now.’”

“While one might appreciate the path the book takes with all its useful information, the title may mislead readers into believing that the book is written to prove ‘why the real estate boom will not bust.’ It certainly covers the ‘and how you can profit from it’ part thoroughly.”

Reuters found the inventory statistics that the CAR economist couldn’t. “California had more unsold homes in February than at any other time in the past eight years, as sales of existing houses slowed further with rising mortgage rates and high prices. The inventory of unsold homes rose to a 6.7-month supply last month, said the California Association of Realtors.’”

“‘There are a lot of people who can’t afford to buy at today’s prices,’ said John Burns, an Irvine, California-based consultant to home builders. ‘It looks to me like the market is headed for a soft landing.’”

“Existing-home sales in California last month dropped 15.5 percent from a year earlier, marking the fifth consecutive month of year-over-year declines, according to the report. February’s median price for an existing, detached single-family home for sale in California slipped 2.9 percent from January.”

“California’s housing market is slowing not only because buyers face big downpayments and rising mortgage rates, but also because sellers are holding out for top dollar and are willing to let homes stay on the market for longer times, said Leslie Appleton-Young, chief economist for CAR. ‘Sellers are not eager to sell,’ Appleton-Young said. ‘You have a marketplace where you had a surge in listings over the fourth quarter where sellers didn’t want to miss an opportunity.’”

And Inman News has this on the borrowing front. “The use of adjustable-rate mortgages for home purchases has declined significantly in California during the past three months, the result of more caution among buyers and lenders. The use of ARMs, which are easier to get and are considered by many to be an indication that buyers are stretching their finances, fell to 51.9 percent in February. This was down from 63.7 percent in January, 68.7 percent in December and 70.9 percent in November, according to DataQuick.”

“ARM usage peaked in May last year at 73.7 percent, up from the prior real estate cycle in September 1988 when ARMs accounted for 66.1 percent of all home purchase loans. ‘Some of the financing issues at play here..include this year’s higher conforming loan limit, the spread between the cost of an ARM and a fixed-rate mortgage, use of equity lines, and federal regulators who have recently told lenders to lower risk levels,’ said Marshall Prentice.”

“‘It’s a lot easier to loan somebody money when the collateral is going up in value at more than 20 percent a year than when values are going up at half that rate. What we have here is a market cycle that has passed its frenzy phase and is moving into more balanced territory,’ Prentice said.”

“The use of so-called exotic mortgages is plummeting in California as home buyers become less willing to use the riskier loans and lenders seem less eager to issue them. Some observers believe a reduction in adjustable-rate mortgages could exacerbate the housing slowdown, since the tool is widely credited with helping marginal buyers purchase a home, especially in a high-priced market like the East Bay.”

“Another report released Thursday noted that ’slam-dunk’ loans, those approved with a minimum of scrutiny, are also falling in California. The percentage of such loans dropped from 83.8 percent of the total between March and August 2005 to 79.6 percent from September to February. In the East Bay, the rate dropped from 84.5 percent to 81.8 percent.”

“‘The adjustable-rate mortgages aren’t attractive anymore,’ said Stephen Levy, economist in Palo Alto. He believes this waning allure is a big reason why the market has slowed as much as it has already. Across the nine-county region, home sales fell 16.8 percent year-over-year in February.”

“‘I think it’s a very good thing,’ said Edward Leamer, director of UCLA Anderson Forecast. ‘I never understood why (Federal Reserve Chairman Alan) Greenspan was encouraging people to go into short-term mortgages, because of the risk they entailed.’”

The Dallas News reports on the condo bust in that city, with the subtitle, ‘Three recent projects have been canceled, but no reason to panic.’ “At times it seems like all of Dallas is going condo. From high-rises in Uptown to new projects in the ‘burbs, residents are embracing the lifestyle. Even businesses have gotten into the act, buying office condo space instead of leasing.”

“But in the real estate industry, there can be too much of a good thing. Developers of an Addison condo complex have canceled the project after pre-sales failed to meet expectations. It’s the third Dallas-area condo deal to be dunked in two years.”

“Last September, an Oak Lawn condo conversion, the Rienzi, switched back to rentals after a slow sales start. Before that, the Caruth apartments near NorthPark canceled a condo conversion after months of marketing.”

“So what does this mean for the local condo market? There is no sign of a condo crash like we saw in the late 1980s. With the collapse of the regional economy back then, it wasn’t uncommon for condos to lose half their value or more.”

“And in North Texas, it’s not the same situation you find in Las Vegas, where more than a half-dozen high-rise residential buildings have gone under before the first spade of dirt could be turned. Construction costs were rising faster than sales prices.”

“Like any real estate deal, unless the price, location and quality are a hit with consumers, the project won’t fly. Only time will tell how many North Texas residents will want to live in a high-rise. That holds for office condos, too.”

“In late 2004, developers announced they would turn the 2525 McKinnon office tower near the Crescent into office condos. But recently they threw in the towel and hired Stream Realty to lease the building.”

The Florida press is reacting to the February sales numbers. “Both buyers and sellers are struggling to adjust to the new reality that the boom days are gone. The median price for existing single-family homes in Miami-Dade dropped to $368,700, from $376,300 in January, the third consecutive month of price declines.”

“In Miami-Dade, the number of homes on the market increased from 8,811 in June to more than 20,000 in February. Broward’s jump has been even more dramatic: leaping from roughly 7,000 homes in June to more than 22,000 last month.”

“The typical price of a house in Palm Beach County dipped for the third month in a row as the housing market continued its return to reality. The median price for an existing single-family home sold in February was $391,000, well below November’s peak of $421,500.”

“The overall market, once untethered by gravity, now is weighed down by rising numbers of homes for sale and cautious buyers. ‘We’re not in a bust; we’re in the middle of a correction,’ said Douglas Rill, a longtime broker in West Palm Beach. ‘That frenzied 2005 market is over. This is the new norm,’ Rill said.”

“Investors, flippers and second-home buyers largely have disappeared from the market as soaring prices make it impossible to rent out a home at a profit, said Jim Sahnger in Sewall’s Point. ‘It’s more difficult for investors to make sense of the market,’ Sahnger said. ‘People are looking at $3,000 a month to own the property, and they can only rent it for $1,800 to $1,900.’”

“Throughout the Volusia-Flagler real estate market, people did a lot more looking than buying during February, with sales of existing homes dropping to 24 percent fewer than a year earlier. Antonio Jimenez today will conduct his fourth open house in six weeks, hoping to attract at least one solid offer on a newly built $459,000 beachside home.”

“‘I’ve had three people propose leases with options to buy, but I don’t want to rent,’ said Jimenez, who lives in Chicago. ‘I want a firm offer to buy.’ But only three or four people attended each of his first open houses and his last one drew only two people. ‘People ask me ‘Will I come down on my price?’ Sure, I’ll come down, but bring me an offer first,’ he said.”

“The median price of a Collier County house sold with the help of a realtor was $492,300, down 1 percent compared to $498,400 in February 2005. Bruce Babcock in Naples said Collier’s market is definitely in a downturn. ‘There’s still a lot more listings than there were six months ago and they’re not moving. The buyers are being cautious, they’re kind of waiting on the sidelines. I’m encouraging offers, but they’re still of the belief prices will come down and if they wait, they’ll be able to get the properties at a lower price.’ Meanwhile, he said, ‘There are plenty of price decreases, some of them two or three times’ over the past two or three months.”

“In Lee County, there’s been ‘a little more activity’ recently as buyers go after houses that have had deep price cuts, said Michael Schneider-Christians, based in Cape Coral. ‘The sellers are coming down and some people are realizing those are good prices.’ One of his clients, Carolyn Reynolds, sold her Cape house recently for $299,000, down from her original asking price of $365,000.”

“‘I was extremely relieved because I’d already bought another house outside the area and I was sweating it out,’ said Reynolds, a retired Allstate Insurance employee. ‘We put it on the market in late December and not one person came to look at it for three months,’ she said, but after cutting the price to $299,000, ‘from last Friday I showed it to three different prospective buyers and the third one bought it.’”

“The median single-family home price in the Fort Pierce-Port St. Lucie area fell in February to $248,400. That was $13,500 less than the January average of $261,500 and $15,000 below the December average of $263,300. Martin County had 2,224 homes for sale in January versus 935 a year earlier, (broker) Stephen Dutcher said. ‘The MLS had 93 homes sold, but in 2005 that was almost double at 161.’”

“Higher prices have increased the inventory of unsold homes, said Brad Hunter, who follows housing trends on the Treasure Coast and South Florida. As a result, owners have to drop prices if they want to sell their properties. ‘I think there’s also a psychology behind this. Buyers think that since there are a lot of good deals now, if you hold out the deals may get better later,’ he said.”

“‘Prices will go down further,’ said (broker) Deborah Ray in Fort Pierce. ‘I think people need to be very concerned about this downward trend. (Broker) Dave DeWitt in St. Lucie County, agreed. ‘I think we’ll see slower sales for the next couple of years,’ DeWitt said. Prices have reached the point that the person with an average income can’t afford to buy a home, he said. ‘When people bought their homes two years ago, they didn’t expect to get a property tax bill of $5,000 to $6,000,’ DeWitt said. ‘You combine that with higher insurance rates and that makes it impossible to buy a home.’”

“There’s trouble in the bubble. After three years of rapidly inflating real estate, loose credit and dicey financing, the number of court filings notifying Palm Beach County property owners they are facing foreclosure is rising.”

“‘You are going to start seeing a lot of squirming and shaking now,’ said David Levin, a Delray Beach real estate consultant. In Palm Beach County, the troubled properties run the gamut, from a $1.3 million loan on a home assessed at $590,000, to a modest home equity loan with a hefty price tag: 12.2 percent.”

“Martin County filings include a pair of million-dollar homes. Of those Martin and Palm Beach county filings that identify the kind of home loan, roughly half are some form of adjustable-rate mortgage, or ARM.”

“Some of those high-risk buyers have either counted on more income or on ‘flipping’ the property to another buyer for more money before a higher rate kicked in. But as prices have come down, would-be flippers are finding themselves stuck with those homes.” “‘We have been looking at some numbers as well, and we are extremely concerned,’ said Michael Flagg, a spokesman with the Washington-based Center for Responsible Lending. ‘Our guess is that this is only the small wedge compared to what happens if interest rates go up.’”

“‘If they (investors) get stuck, I am not going to feel very sorry for them,’ said Muriel Siebert. Some mortgages do not even require proof of income. ‘If you can fog a mirror, you can probably get money,’ said Levin, the Delray consultant.”

“Such willingness to lend can add up to trouble for a borrower. Take the Wellington couple who faced foreclosure on a $425,000 mortgage in 2003. According to court records, the couple took out a $1.3 million mortgage with another lender. The original foreclosure threat went away, but last month the new lender filed its own notice to foreclose and collect on the newer, much larger debt.”

Please post your topic suggestions here. Especially wanted are localized topics with specifics or links.

The new home sales numbers are out. “Sales of new one-family houses in February 2006 were at a seasonally adjusted annual rate of 1,080,000, according to estimates released today by the U.S. Census Bureau. This is 10.5 percent below the revised January rate of 1,207,000 and is 13.4 percent below the February 2005 estimate of 1,247,000.”

“The median sales price of new houses sold in February 2006 was $230,400;. The seasonally adjusted estimate of new houses for sale at the end of February was 548,000. This represents a supply of 6.3 months at the current sales rate.”

“Sales of new homes plunged by the largest amount in nearly nine years in February while the median price of a new home dropped for the fourth straight month, providing fresh evidence that the nation’s once-booming housing market is cooling off.”

“The Commerce Department reported that sales of new single-family homes dropped by 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08 million homes. It was the second straight monthly decline and was much bigger than the small 2 percent dip that Wall Street was expecting.”

“The number of new homes on the market increased 4.4% to a record 548,000, representing a 6.3 months supply. The months’ supply is the largest in a decade. Sales in January were revised lower to a 1.207 million unit pace from 1.233 million previously estimated.”

“The median sales price fell by 2.9% year-over-year to $230,400 in February. The average sales price rose 2.6% to $296,700. The sharp drop in home sales may be confirmation to some economists that the higher mortgage rates may bring an abrupt end to what they see as a bubble in housing, with prices higher than justified by fundamentals.”

National Median Prices:

Oct. 05..$243,900

Nov. 05..$237,300

Dec. 05..$236,800

Jan. 06..$234,200

Feb. 06..$230,400

The Massachusetts realtors have their February numbers out; the monthly data at the link are PDF files. ” After two consecutive years of record-breaking sales in 2004 and 2005, activity in the detached single-family home market has started to return to more normal levels, with the 2,254 homes sold in February 2006 nearly identical to the 2,255 detached homes sold in February 2003.”

“The decrease in sales activity this February marks the fifth consecutive month detached single-family homes sales have declined in Massachusetts from the comparable month one year earlier. A more encouraging sign is the fact that the 1.7 percent drop in sales between February 2006 and last February is the smallest year-to-year decline in sales to occur in the five month period of sliding sales. The sales decline of 3.7 percent that took place between January and February is largely seasonal in nature.”

“The supply of detached single-family homes on the market rose for a twelfth consecutive month in February, climbing 40.5 percent over the past year from 25,558 homes for sale in February 2005 to 35,907 this February. Inventory, as stated in months of supply, also rose steadily from 11.1 months last February to 15.9 months of supply in February 2006. With the spring approaching listings are up from January as well, when there was 33,627 listings and 14.3 months of supply. The state’s inventory of unsold homes rose for the 20th consecutive month.”

“In Massachusetts, the market is at equilibrium for buyers and sellers when 7.5-8.5 months of housing supply exists, thus a strong buyers market has emerged over the past two months due to surging supply levels and more moderate demand.”

“The 1,168 (condo) units sold in February set a new state record for the month, eclipsing the prior record of 1,133 condos sold in February 2005. Condo sales have improved for 25 consecutive months vs. the same month a year earlier. The number of condos for sale has increased 60.7 percent in the past year, from 11,584 units last February to 18,613 in February 2006. Inventory, as stated in months of supply, also has risen in the past year, climbing to 15.9 months of supply this past February from 10.2 months of supply in February 2005.”

“Similar to the detached home market, condo listings have increased 6 percent from January when there were 17,495 condo units on the market and 14.1 months of supply.”

“Predictions of steep price declines in home values made this past fall remain largely unfounded. While the current median price is 9.5 percent below the record high monthly median of $375,000 set in July and August 2005, today’s prices largely reflect healthier inventory levels, which has eased upward pressure on prices, rather than plunging property values.”

“Condo prices also have begun to moderate, with the statewide median selling price rising 2.2 percent in February from year-ago levels. This marks the tenth consecutive month of single-digit annual price appreciation in the condo market, and the 86th consecutive month selling prices have risen vs. the same month the prior year (dating back to Dec. 1998). The median price of $275,000 is down 4.5 percent from the record high median selling price of $287,900 set in July 2005.’”

“The decline marks the first time since June 1996 that prices have fallen for any 12-month period as a whole.”"

“‘Today’s improved supply levels have brought much needed stability to home prices,’ said MAR President David Wluka in Sharon. ‘The days of bidding wars and double-digit price appreciation are over. This spring, we expect to have a strong buyer’s market for the first time in more than a decade,’ said Wluka’”

“‘There’s definitely some bargain shopping going on right now,’ said Brenda Beaudoin, a realtor based in Dracut.”

“There are ‘too many’ Dorchester condos on the market due to a spree of three-family conversions by investors and developers, said Lee Robinson, an agent in Milton. ‘People are sitting with their hands in their pockets waiting to see if the bubble’s going to happen’ so they can ‘get a better deal,’ said Robinson, who specializes in luxury homes in Dorchester. ‘My voice mail is full of sellers’ brokers making price adjustments,’ including one house price that was slashed 11 percent, to $1.15 million.”