The Housing Bubble

Another look at the California housing bubble, first in Santa Barbara. “Home prices cooled throughout Santa Barbara County in February. For the first two months so far this year, appreciation in all areas of the county has dropped to single digits or even gone negative.”

“On the South Coast, one of the most expensive markets in the nation, the February median for existing single-family homes slipped 3 percent, from $1.2 million last year to $1.16 million. Sales of South Coast homes tumbled by 16 percent both in February and for the year-to-date.”

“More homes and condos are available for sale these days, according to data published recently by the Santa Barbara Association of Realtors. Combined inventory of South Coast homes and condos has increased by 22 percent over the past month. Active listings for sale totaled 466. The most recent report, published March 12, showed current active listings at 570. The association refuses to provide sales and median price information to the News-Press.”

“Santa Maria’s home sales were down 37 percent last month and 20 percent so far this year. In the Lompoc Valley, the median price last month dropped by nearly 2 percent. Inventory of homes for sale has started to pile up in the Lompoc area. The Santa Ynez Valley median decreased 4 percent in February. For the year so far, the median dipped slightly from $832,500 to $810,000. Sales were down 25 percent last month.”

And from San Diego. “In San Diego County, the median price for newly built homes in February was $468,500, reported DataQuick. In December, the median for newly built homes in the county set a record of $539,500. DataQuick’s prices for new homes includes condo conversions, a segment of the new-home market that the national figures do not include.”

“Newly opened escrows in San Diego County during for the first two months of the year totaled 610 single-family houses, down 40.8 percent from the same period last year, according to Sharon Hanley. She said the inventory of new houses stood at 1,055 at the end of February, about double the rate at the peak of the recent boom. The inventory of unsold new condos stood at 4,967, or 36 weeks of supply. The overall inventory of new housing at the end of February was 6,022, up 34.6 percent from the same week a year ago.”

“As for potential buyer traffic visiting local housing tracts, the numbers were down 23.5 percent, according to Hanley. There were 99 sales cancellations that week out of 306 transactions, a 32.4 percent rate. The normal rate is about 20 percent.”

“To combat the market’s apparent lethargy, owners have cut prices and builders have begun offering extra upgrades and financing incentives.”

“Centex Homes reduced prices late last year by 20 percent, $100,000 off the $500,000 models, at its 65-unit Element project in downtown San Diego. ‘Buyers are getting a little bit nervous by all that they have read and are starting to see the realities that come with a changing market,’ Joseph Cuffaro, a longtime Coronado appraiser said. ‘There is more inventory. They’ve become more emboldened to negotiate harder with sellers.’”

“Building permits for the first two months of the year were down 24.4 percent to 1,801 houses and condos in the county. Single-family home permits were down 28.8 percent, and new condo permits were down 20.3 percent. ‘I’m so bullish on San Diego, still, though a lot say there is a real high risk right now,’ he said.”

A pair of reports provide an update on the Arizona housing bubble. “National new-home sales took their worst drop in nearly a decade in February, and early indications are that it also wasn’t a good month for builders in metropolitan Phoenix. February numbers for metro Phoenix’s new-home market will be out early next week and are expected to show a similar, or greater, decline.”

“‘Looking at the preliminary numbers, obviously February was a disappointment compared to last year and year-to-date,’ said Valley housing analyst RL Brown.”

“Builders now are requesting fewer building permits because they are trying to clear inventories of speculative, or ’spec,’ homes on which buyers didn’t close, Brown said. Some buyers waited too long to list their existing homes, thinking those properties would sell quickly, as they did in last year’s selling frenzy. The deadline to close on the new home passed, and the builder took it back.”

“Brown said the resale market also is being pressured by investors unloading their houses. With more spec homes available on the new-home side and a growing inventory of existing homes for sale, consumers have more options and can be more picky in finding and buying homes. ‘The bottom line is it is a market in transition now,’ Brown said.”

And in the northern part of the state. “Theme park speculation seems to be the reason so many new real estate offices have appeared in Williams in recent months, though the fate of the theme park itself remains to be seen.”

“Three real estate offices opened in January alone. According to John Rushton of Bankers Real Estate, this brings the total number of agencies in Williams to 13. Rushton said there were only three or four real estate offices in Williams three years ago.”

“Debbie Campbell said the theme park has contributed much to land speculation in the Williams area as well. ‘Just because it’s gotten so high up there (in Flagstaff), I think,’ said (realtor) Debbie Campbell. She said a lot of buyers are also looking to relocate to cooler climates. ‘Our second-home market is booming really,’ said Zecchin. ‘It seems like most of our buyers are from Phoenix, Lake Havasu, and California of course.’”

Some readers want to discuss lesser known bubble areas of the US. “I am interested in a thread on ‘non-bubble’ areas, like North Carolina, Georgia, the midwest, etc. We all know that California, New York, Boston, Florida and DC are in for a world of hurt, but what about the non-bubble areas?”

Another added, “The midwest is in an unaffordable housing crisis with the same mania as the west and east coasts. It is just that the dollar amounts to purchase a house or condo are not as high as on the coasts. The same false wealth is going to result in foreclosed houses.”

And another, “I have been wondering about the midwest . I have been feeling all along that the fever/boom took the Nation.”

One had an example, “My brother lives in a suburb just north of Indianapolis, IN. He bought his brand new 2400 SF+ home about 5 years for about $120k. The homebuilder bent over backwards to get people from this largely blue collar area into their homes and now many have been foreclosed.”

“The homes in his community are now going for roughly $110k and the local housing inventory keeps growing due to continued building and foreclosures. He would be happy just to have any equity in his home.”

The Chicago Tribune has this report today. “The Commerce Department Friday reported that the Midwest was the only region to eke out a year-to-year increase for the month, 1.1 percent, compared to February 2005. Sales fell 27.8 percent in the West year-over-year, 9.6 percent in the South and 13.4 percent in the Northeast.”

“In Chicago sales are holding even or are down slightly from last year. Some builders are turning to buyer incentives, which amount to discounts, to keep sales humming. ‘In certain areas of the suburbs incentives are increasing, so it is keeping inventories in line,’ said Mark Gianopulos. Heavier incentives are in the Yorkville and Plainfield markets because a lot of big builders have inventory coming on line, he said.”

“‘With the slow start this year, some [builders] may have panicked,’ said Phil Walters, vice president of a Libertyville-based division of D.R. Horton. ‘There is a lack of urgency on the part of buyers. They are shopping around,’ said Walters.”

“‘It’s getting difficult to get your arms around who is shopping for new homes right now,” said Mark Malouf, COO for Montalbano Homes in Oak Brook. ‘The environment in Chicago has gotten very competitive in terms of incentives.’”

“His company also operates in Arizona, part of the Western region, where February new-home sales took a dramatic dive. He said speculators became a big part of the market in Phoenix, and, when builders realized the extent of their investor influence, many made an effort to limit their purchases.”

“However, ‘it was closing the door after the horses had left the barn.’ Malouf said. Activity by speculators drove prices so high ‘that we left the true buyers, the owner/occupant who wanted to live in the homes, on the sidelines,’ he said.”

“‘We are trying to understand what it will take to get buyers back into the market,’ Malouf said.”

One reader has posted a topic idea patiently for several weeks that has a little edge to it. Let’s make it more a question of ‘fitting’ a just deserve to possible personal responsibility for the housing bubble. “My favorite topic is ‘What is the most fitting form of punishment for David Lereah?’”

To which another responded, “Game show host.”

A reply, “Game show host..for satan.”

One was a little more specific, “Used car salesman in Bakersfield.”

One reader was more harsh. “You guys are too nice. Food server at a truck stop!”

And this, “Tech support person.” Or, “Fluffer.”

It’s a good question; does anyone have personal responsibility for some part of the housing bubble and what is a fair outcome for the actions taken?

Another reader wants a debate. “My weekend topic suggestion is this: How many housingbubble bloggers would like David Lereah to come here and field our questions?” “If he really believes what he says, he wouldn’t have a problem talking to us, would he? It’s time for the HB blog to debate David Lereah. The stakes have never been higher, the outcome never more unpredictable.”

“Would Lereah ‘convert’ us, or would we ‘convert’ him? Would he refuse to come here? And if so, why? I’d like the blog to debate inviting David Lereah here to become an active participant.”

“First- we need to debate whether we should invite him here. Then, we need to figure out what to do, based on the consensus. After that, we either invite him- or don’t invite him. And…if he comes here, and kicks our butts- we don’t whine about it.”

“I, for one, promise to be civil, and refrain from ’spitballing’ if he comes here. From my point of view- it might be an ‘Intervention’. And it just might do some good.”

The Washington Post has this viewpoint of the housing bubble. “The real estate market has become an obsession for a lot of people in this region, and James Cave is one of them. He has spent the past eight years saving for a down payment. Cave navigates smoothly through the congested streets of Arlington on a recent workday afternoon. Shaking his head and waving his arms in frustration, he points out what he sees as the rising signs of insanity all around him.”

“He gestures to one newly built condominium tower where he had considered buying. ‘$350,000 to $1 million,’ he snorts. ‘Next to a gas station and a fast-food restaurant. Smell it! Smell it! You can smell the fast food cooking!’ Cave points to another rising edifice. ‘You can see the signs; luxury condos for $800,000. What could be so luxurious in a condo?’”

“He spends at least part of every day thinking about real estate. He worries most about what would happen to him if values were to fall after he finally bought, possibly draining years of his savings.”

“When Cave does the numbers, he finds it hard to justify the expense. A couple of years ago, he noted, one-bedroom condos were selling for $175,000, and now they are listed at twice the price. Take the Arlington condo he rents for $1,400 a month. Units similar to his have sold for $480,000. Recently the investor who is his landlord offered to sell him the place for $440,000. Cave turned down the offer. He figured out it would cost him more than $3,000 a month to own the place, assuming a 20 percent down payment, taxes, insurance and the condo fee.”

“He can’t see spending twice as much to own as he does renting. That would leave him constantly strapped for cash and stripped of his savings, he said. ‘It seems like the moorings are coming undone from reality,’ he said. ‘It’s like the Internet stock craze, you’d sit there and say something doesn’t compute here. What’s happened in the last three years? My salary hasn’t gone up anything like that.’”

“He quickly notes that there are now 47 new complexes being advertised for sale, which strikes him as a lot. He had been noticing that prices seemed to be dropping, and now he notices that the listed prices are no longer available. ‘It’s like they’re hiding the prices now,’ he said. ‘They’ve all taken the prices off the list.’”

“The MLS lists 462 condos available for sale in Arlington, he said. There are several hundred more units available in new buildings and new condo conversions that aren’t listed on that service. In February 2005, 94 condos and coops were for sale in Arlington; in February 2006, that number had increased more than four-fold to 444 units.”

“‘There are probably the same number of buyers as before, but they are not in any rush to buy,’ said Rick Bosl, a real estate agent who specializes in the Arlington condo market. And there are just so many more homes for sale, he said. ‘In some markets, we’ve seen prices go down, and nobody wants to buy in a falling market,’ he said.”

The LA Times reports on one town where the housing bubble has burst. “Merced, CA. Where did everyone go? Real estate agent Mark R. Gregory is holding an open house to sell a nearly new three-bedroom on a corner lot, and it’s as if the Earth had been emptied. Last year, this Central Valley city enjoyed the state’s hottest real estate market. Three hours quietly pass. At 4 p.m., the agent pulls up the sign and locks the door. Total visitors: zero.”

“‘It’s like everyone got together and said, ‘Let’s not buy for a while,’ Gregory says.”

“The good times have already ended here, in the same way slamming into a wall reduces your speed. A house will fetch 20% less today than it did last summer, brokers say, assuming it finds a buyer at all. Just a little while ago, Merced was an investor’s dream. Prices in the city and surrounding area increased 31% in 2005. First in price appreciation in California and ninth in the nation. That already feels like ancient history.”

“(Economist) Andrew Leventis contemplated this ascending arc in a region that is not a tourist destination or retirement haven, where incomes are not growing and unemployment is perpetually high. He then used an un-economist word: ‘Shocking. It’s difficult to know what was driving these high rates of appreciation,’ Leventis said.”

“To people in Merced, however, there’s little mystery. This was a classic bubble, where people paid increasingly higher prices because they were sure that someone would come along and pay even more. Economists call this the ‘greater fool’ theory. In 2003 and 2004, carloads of investors would come down from the Bay Area and up from Los Angeles. They would see a $200,000 house and say, ‘Wow, if this were on the Westside or in Berkeley, it would be worth $750,000, easy. Let’s offer $225,000 to make sure we get it.’”

“Then the seller across the street would say, ‘If that place was worth $225,000, I’m going to ask $250,000.’”

“‘The demographics never changed here, but people bought as if they did,’ said Ray Rodriguez, president of the Merced County Assn. of Realtors. ‘It got real wild.’ Then last September came, when the first portion of the university opened. ‘The market shifted in two weeks,’ said Gregory, the agent. ‘All of a sudden, nothing.’”

“Officially, this city of 77,000 has 640 homes for sale, about 10 times as many as last summer. But agents say that if you add homes for sale by their owners, new homes being sold by builders and the dwellings that would-be sellers have pulled off the market in despair, the real number is at least twice that. The Merced Sun-Star’s Sunday real estate supplement has 40 pages of ads.”

“Many of those ads are for new developments. The city lists 47 active subdivisions where 7,173 homes are going up. For builders with excess inventory, it’s let’s-make-a-deal time. At the sales office of Shadow Creek, signs on the front door and walls proclaimed: ‘Ask us how to save $40,000 off a new home!!!’ ‘If you want to ask for more, just do it,’ the saleswoman advised. She said a $60,000 break would probably be fine.”

“Ryan Burchard, a San Luis Obispo radio host, examined one of Summer Creek’s model homes. ‘Some of these salespeople seem a little jumpy, a little desperate,’ he said. ‘It’s like walking onto a used-car lot.’ ‘Every other house here is for rent,’ he said.”

“Brenda Rodriguez (and) her husband were able to buy a place in November through a county program for low-income families. The house has its problems, but she’s glad to leave renting behind. ‘A house is something you invest in, it belongs to you,’ she said. ‘You hand it down to your family. Renting is just throwing your money away.’ Merced is going to grow, Rodriguez said, which means house prices will keep going up. And if they don’t? ‘Then I’m screwed.’”

“Many homeowners have been treating the equity as if it were income and spending it. In Merced, they would go down to the car dealers even before their refinancing cash-out check came through. Before the escalation began, 8 out of 10 home buyers in Merced County got a fixed-rate loan,. By last summer, 80% of buyers in Merced got adjustable-rate loans.”

“The only thing worse than the real estate market here is the market for real estate agents. They’ve been coming down to the Auto Toyz and Auto Store used-car lots looking for work. ‘Everyone who applied recently, about eight people, they all were Realtors,’ said Nico Pineda. ‘But things were slow for us, so we had to turn them down.’”

“This is a very good time to be a renter in Merced. A new $450,000 house, owned by an investor waiting to flip it, can be had for less than $1,000 a month.”