The Housing Bubble

The Washington Post has this report on the DC area. “As ‘for sale’ signs sprout at the start of the high season for home-buying, properties are staying on the market longer, and prices have leveled off across the region. The pullback has been most marked in areas of red-hot growth such as Loudoun County. Builders have flooded the county with homes, helping temper demand.”

“The number of homes listed for sale in the region has tripled in the past year. There were about 26,800 houses for sale in the Washington area at the end of February, up from about 9,400 a year earlier. ‘Sellers aren’t getting the sun, the moon and the stars anymore,’ said Jill Landsman, a spokeswoman for the Northern Virginia Association of Realtors.”

“‘We’re coming out of a market with 25 percent to 30 percent appreciation each year, and no seller wants to accept the reality that that’s not the case anymore,’ David Howell, VP of a real estate firm in McLean. said. ‘There is clearly inventory out there that is still priced like the market of last year, and that’s the kiss of death.’”

“Many people remain astonished by the prices some sellers are asking for. ‘Even in the office, we say, ‘They want $1 million for that?’ Howell said.”

“In June, Alice Jacobson and her husband, put their spacious colonial-style house in Loudoun County up for sale for $949,000. It sold nine months later, for $150,000 less. Alice Jacobson said they learned the hard way that reaching for the high end of the market was a mistake. Pricing the house at $949,000 ‘killed us,’ she said. Because the house remained unsold for so long, it almost felt as if it ‘had a curse on it.’”

“They had bought another house and were carrying two mortgages. They needed to sell, so they lowered the price and offered to help with closing costs.”

“Diane Kohn is in a race to sell her home. The owners of a bright red rowhouse on Capitol Hill had reduced the asking price. All that stood between her and the house was her two-bedroom, two-bath condo on the other side of the Hill. She had to find someone to buy it, within 30 days. Otherwise, she risked losing the rowhouse to someone else.”

“With an asking price of $414,900, the condo made its debut amid speculation about rising inventory of houses for sale and buyer uncertainty about prices. ‘We had a turnout that was not embarrassing but not encouraging,’ said Malcolm Carter, an agent who erected for-sale signs in the snow.”

“Kohn, who got an update later from her agents, guessed most were neighbors who had come to gawk.”

“Kohn said she believed her condo was priced fairly, having compared it with other properties for sale in the neighborhood. ‘I really don’t want to sell it for less; I can’t afford to,’ Kohn said. The condo was appraised at $419,000 last year when she took out a home-equity loan.”

“So it went, and when the open house was over, Kohn’s condo was still very much on the market. But in the end, the same market forces that had left Kohn without a buyer had also played in her favor. The seller of the red rowhouse on the other side of the Hill had not been bombarded with offers, either. After 30 days, Kohn’s bid remained the only one. The seller agreed to extend Kohn’s contract until the end of this month.”

One reader is interested in Fed policy. “Ok; the housing market is rolling over. I’d like to hear from the minds on this blog if it will continue to do so, and why, if Ben Bernanke stops raising interest rates soon?”

“What if he starts cutting rates towards the end of this year like some are suggesting? Could this MONSTER re-inflate ??”

Others ask about the yield curve. “I’d like to hear some more analysis of the yield curve. People here predicted it would invert, and eventually it did, but it didn’t stay inverted for long. What do people make of the short time it was inverted and its current state?”

And, “It would be interesting to see if the current prolonged flat period was matched by points in earlier cycles when the curve inverted.”

Reuters looks at the issue. “Federal Reserve Chairman Ben Bernanke leads his first policy meeting this week, one all but certain to end with another U.S. interest-rate increase and perhaps a suggestion a 21-month run of credit-tightening is almost over. U.S. economic growth is on track for a thumping performance in the quarter of the year. But softer-than-expected new-home sales in February point to weakness in the second half.”

“‘The Fed definitely wants the economy to slow. What’s going on in the housing market now suggests that close to enough may have been done so that the Fed really doesn’t have to pound the economy over the head,’ said former Fed Governor Lyle Gramley.”

“Unfortunately, the Fed’s policy statement is about as obfuscatory as the English language will allow. Unless Chairman Ben Bernanke takes the unusual step of spelling out his intentions in clear prose, Wall Street’s uncertainty will continue. There are few market-moving economic reports due in the coming week, but there are a few that could prompt investors to change their strategies.”

“Home builder Lennar Corp. reports earnings Tuesday morning. After a strong 2005, Lennar’s stock has fluctuated widely as investors questioned whether the housing boom is over or not. The stock closed Friday at $59.92, down 13 percent from its 52-week high of $68.86 July 28.”

A reader sent in this tip. “Standard & Poor’s Ratings Services today revised its outlook on New Century Financial Corp. to negative from stable. ‘The outlook revision reflects Standard & Poor’s concerns regarding deterioration in profitability metrics that began to emerge in the last two quarters of 2005 as a result of industry-wide developments,” said Standard & Poor’s credit analyst Anne Cosgrove.”

“Like many other subprime mortgage lenders, New Century has seen profit margins erode during late 2004 and 2005, as a flattening yield curve pushed up funding costs while intensifying competition limited New Century’s ability to increase interest rates charged on loans originated.”

“Standard & Poor’s remains concerned about the prospect of asset quality deterioration in 2006, which combined with unpredictable subprime market conditions could further erode profit margins. Standard & Poor’s is especially sensitive to the adverse effect rising interest rates might have for the debt service burden of New Century’s subprime customers.”

“As a result, Standard & Poor’s can envision a scenario in which credit costs could rise at the same time the company is struggling to maintain production volumes, preventing any recovery in profitability metrics. If profitability metrics fail to improve and asset quality metrics materially deteriorate, the rating could be lowered.”

This San Francisco Chronicle report shows why the housing bubble is spreading. “For nearly 2 1/2 hours one night recently in Mill Valley, a capacity crowd of 300 people looking for the next hot real estate deal listened raptly as an insider revealed the best cities to buy bargain houses. None was in California. The back-to-back programs weren’t isolated efforts to woo investors and homeowners into taking money out of California’s pricey residential market.”

“‘The economic numbers don’t readily work here anymore,’ explained Michael Morrongiello, program director for a Sonoma investment club. ‘It’s tough for the average investor to acquire rental homes (or) multiple units, here in California and particularly the Bay Area.’”

“Not only will individual and institutional investors look beyond the Bay Area, according to the reports, they will even rummage through largely ignored tertiary cities. ‘I’m going to places the average investor doesn’t, such as South Carolina,’ said Mike Sarwri. ‘In California, you’re spending $600,000 or $700,000 for an average property..and you could take that money and buy four or five’ houses in Dallas or Oklahoma City.”

“But investing out-of-state is not without peril. Some late-to-the-game investors got singed last year when housing prices tumbled in Las Vegas’ torrid housing market. Last year’s condo craze also may have hit the wall. Preconstruction condo sales, one of the riskiest gambits for investors, left some speculative buyers with heartburn in Florida and Las Vegas. So did a glut of condo conversion projects in Miami and San Diego.”

“Other investors turn to facilitators such as Adiel Gorel, president a firm that matches investors with new-home builders. Gorel initially concentrated his efforts in Las Vegas, Phoenix and Orlando as California buyers sought refuge from the state’s sky- high prices. In the last year or two, those once inexpensive secondary regions have become ‘little bubble markets’ themselves and no longer offer good investment opportunities, he said.”

“‘Now I see a migration to the third type of market, which is a no-bubble market. Those markets did not participate in the bubble, and they’re the ones poised for appreciation,’ said Gorel. Gorel said his best bets include Austin, Houston and Dallas in Texas; Oklahoma City; Nashville; Montgomery, Ala.; and Charlotte, N.C. ‘You’re investing in the right market when you hear the name of a city and you feel utter and intense boredom,’ Gorel told the crowded room.”

“Two years ago, condominiums also started to catch the attention of investors, especially after word got out about the huge windfalls some received through preconstruction purchases. That preconstruction scenario attracted some three dozen people to the Walnut Creek meeting. The curious group saw picture- postcard scenes of warm Florida beaches and a mockup of a 15-story condo in downtown Clearwater; prices at the development; ranged from $406,000 to $1.1 million.”

“‘We have about 15 left’ to pre-sell, said realty agent Karin Udolf, representing the developer. The developer already has announced plans to raise prices by 15 percent once the construction loan closes, she said, with ‘instant equity for the investor of 15 percent.’”

“Both Emerging Trends and Marcus and Millichap’s 2006 apartment forecast urged investors to keep a close eye on the condomania, especially in regions where overdevelopment has produced an excess of properties. Almost 150,000 apartments were sold nationally for conversion into condos last year, according to the Marcus and Millichap report. The brokerage firm called condo conversions ’something of a wild card,’ because thousand of units could return to the rental market if buyer demand, and consequently prices, decline.”

“But the Emerging Trends report was less sanguine. While ‘Orlando and Tampa have lower-grade condo conversion fever than South Florida markets,’ the report said, ‘South Florida and Las Vegas may be disasters waiting to happen.’ Such downturns could hurt short-term condo investors who expected to sell quickly. And rental owners could see an increase in empty apartments and lower rents.”

“Emerging Trends also offered another word to the wise: 2006 is not the year for speculators and their ‘buy and flip schemes.’ ‘Tune out those infomercials,’ the report said. ‘Buyers should bypass neighborhoods and projects where speculators have been active until prices settle or bottom out.’”

What’s going on in your housing market this weekend? Open houses? Price reductions? Here are a few observations from the press:

“Many Tampa Bay area real estate agents and builders say local new home sales began slowing this fall, and some think it’s because the investors who helped launch the market into the stratosphere the past two years have gone away. (Broker) Bob Memoli said speculators built homes in the Key Vista community of southwest Pasco County with hopes of flipping them at big profits. Many, however, have been left holding the bag, thanks in part to higher interest rates and posthurricane insurance rates.’”

“‘My partner and I listed one of them,’ Memoli said. ‘It’s a beautiful house and priced right, but we just can’t move it.’ Tarpon Springs housing analyst Marvin Rose also cited the role of speculators. ‘The common wisdom is investors are leaving the market, rapidly,’ he said.”

According to the Tucson Association of Realtors MLS, active listings increased by 120 percent from 3,262 in February 2005 to 7,174 last month.”

“‘For Sale’ signs have become a common lawn fixture in Sacramento. Diane Anderson’s home in North Natomas is no exception. After two years, she’s ready to sell. But lately, selling your home is proving to take some patience. ‘We haven’t has as much traffic as we hoped for, there are still a few coming every week,’ said Anderson. Despite new homes springing up at every corner, Sacramento is holding up better than the national average. ‘We are glad we sold our house when we did,’ said one homeowner.”

“Real estate agents are forecasting a buyer’s market for the next three to five years in the Santa Maria Valley. Development has outpaced the demand, giving home buyers too many choices. Agents say the market won’t become competitive again until all the housing projects in the Santa Maria Valley are filled. As a result, they predict it could take eight to ten years before homeowners benefit from double digit appreciations.”

“Some realtors say this may not be the right time for short-term residents to purchase a home.’A short-term deal like that, you really need to look at your costs and what you can afford to do and understand the market’s gonna fluctuate and do the cyclical deal,’ says realtor Jeff Gibbs.”

“‘There are no fire sales going on here,’ said Greg Berkemer, executive vice president of the California Desert Association Realtors. ‘This is not yet the classic buyer’s market where people come in, low-ball the price and pick up anything they want.’”

“Analysts believe that the growing backlog of unsold homes will add to downward pressure on prices in the months ahead. ere’s how 2006 is shaping up so far compared with a year ago in the Coachella Valley. UNSOLD PROPERTIES: March 2005: 3,140, March 2006: 7,351, Change: 134 percent increase. HOMES SOLD (Jan. 1-March 20) 2005: 2,288, 2006: 1,701. Change: 26 percent decrease.”

Or maybe your observation is from a letter to the editor, like this one from Florida. “OK, we get it, the house-selling market has had a big slowdown! Do we really need our favorite paper to write the bad news almost every day? Do we really want such a negative attitude for our area?”

“Those of us who have a house to sell know that the feeding frenzy of the last year is over, but we have seen many houses in our neighborhood sell for good prices too.”

“Why not compare the real estate market this year to that of two years ago, when things were more ‘normal’ for our area. It will make all those people looking for homes feel they are making a good investment.”

One reader suggests that housing prices have hit an all-time high. “Here’s a topic for debate: IMHO, residential real estate may never again reach the same price heights, adjusted for inflation, as during this bubble. [Nominally speaking, of course they will; future inflation is a lock.]”

“Why? Even after the economy recovers from the inevitable depression, the demographics of an aging population combined with globalization pressures will conspire to cap prices for the rest of our lives.”

Another concurs, “Agree. I think this is a good topic because even the bears seem to be in a rush to buy homes. IMO, this will be a L-O-N-G slide down.”

“Based on the last downturn in CA, my parents’ house didn’t reach bubble price until around 2000, over TEN years. This time, I think it will be much, much worse.”

Florida is struggling with it’s housing market. “Florida lawmakers, desperately seeking a fix to the state’s troubled homeowners insurance market, could force the wealthy to pay more for coverage by kicking thousands of them out of Citizens Property Insurance Corp., the high-risk insurer of last resort. An estimated 6,750 homes would be kicked out of Citizens if the $1 million cap becomes law, cutting the troubled insurer’s exposure by about $16.7 billion.”

“In Palm Beach County, nearly 1,703 homes worth at least $1 million would be affected, more than any other county.”

“John Pinson, a real estate broker in Palm Beach, said people buying an expensive home as an investment don’t want to pour a lot of money into insurance and taxes, both of which are skyrocketing here. ‘Insurance is one of the number one things people look at today, especially in the upper-end market,’ he said. ‘They’re interested in the cost to carry, the taxes and insurance and electricity.’”

“While sellers of existing homes have previously paid buyers’ closing costs and broker bonuses to drum up interest, they’re taking the incentives game to another level now that South Florida’s five-year housing boom has ended. ‘You have to do something to stand out in this market,’ said Brian Boles, an agent for in Boca Raton.”

“February’s used-home sales were down by more than 20 percent in Palm Beach, Broward and Miami-Dade counties. With the number of listings skyrocketing across the region, sellers simply can’t stick for-sale signs in their front yards and expect the homes to attract interest, agents say. Although the perks are getting attention, some agents think they are unnecessary, even in a slow market. They say the best incentive to buying is a fair price.”

“‘I don’t think sellers have to offer the moon,’ said Inez Fleming, a Delray Beach agent. ‘People will buy it if it’s properly priced.’”

“Holly Schiller, an investor in Weston, has tried to sell a three-bedroom townhouse under construction near Fort Lauderdale beach for about six months. Schiller first dropped the price by $41,000 to $599,000, then decided about two weeks ago to make it even more interesting. Schiller said she doesn’t mind forfeiting more than $5,000 in profit, if it results in a sale. ‘There are a lot of listings right now,’ she said. ‘I want my property to stand out from the masses.’”

“Schiller’s agent, Rob Rose of Fort Lauderdale, said her furniture credit is not a bad idea. But he generally discourages clients from offering perks. ‘If a house doesn’t have a dining room or a fourth bedroom, offering a cruise isn’t going to make up for that,’ Rose said. ‘Honestly, it’s all about price.’”

“The Florida real estate market is definitely showing signs of getting back to normal. One area where that is becoming more evident is pricing, which has so far been almost unshakable bedrock in Southwest Florida’s real estate market.”

“‘We have started to see decreases in prices now,” said Jim Petche, broker in Punta Gorda Isles. The 40 or so real estate agents at his office have to submit a form whenever a client is extending a listing or changing a price. ‘I will tell you of all those forms that come across my desk, I can’t think of the last time I saw a price increase on one of those forms. They are all price decreases.’”

“Terry Hart and his brothers have been trying to sell an extensively remodeled home on Hope Street near Sarasota’s Riverview High School for about a month now, with no bites. ‘We haven’t had an offer on it,’ Hart said. ‘But there’s what, 6,500 homes for sale in Sarasota County?’”

“How far sellers will have to go is still a matter of considerable debate. ‘What goes up must come down,’ said (broker) Al Deering. Like Petche, he expects fairly widespread price declines to start showing up in the regional market soon. ‘The areas with the biggest increases will now see the biggest decreases,’ Deering said.”

The Deseret News reports on the housing bubble in Utah. “Land speculators, a wave of retiring baby boomers and second-home buyers are fueling the biggest real estate rush in the Washington County’s history. ‘In absolute terms there has been no period like the past three years in Washington County history,’ James Wood said. ‘It’s a frenzy. That’s all anyone talks about is housing prices and how much money they have made.’”

“‘We are probably 20 to 30 percent cheaper than the average view lot around the county,’ (developer) Doug Rogers said. ‘I’m sure that over the next six months there could be some price raising. Any lot that is bought right now, my guess would be that they’ll gain 20 to 30 percent over the next one to three years.’”

“But with runaway appreciation, even modest homes in Washington County are becoming expensive. Home prices in St. George increased an average of 35.27 percent in the fourth quarter of 2005 compared to the same quarter in 2004. Many homeowners are wondering how long the party will last. According to some experts, it may be over already.”

“Allan Carter, of Southern Utah Title Co., said you don’t have to look far to see that real estate price growth has slowed. ‘As you go up in the price of a home, it is taking longer and longer to sell,’ Carter said. ‘For example, if you’ve got a home to sell at $1 million right now, it will take you 27 months to sell it. In November, it took nine months to sell that same home. We have a huge glut of overpriced homes on the market.’”

“By the end of this year, Carter expects 6,000 more building lots to be recorded in Washington County, a 62 percent increase over the 3,710 lots that were platted in 2005. ‘We will need 3,500 of them,’ Carter said. ‘Already we are seeing a deduction in pricing on lots of about 10 percent. There are selected areas where lots will fall 20 percent.’”

“Vardell Curtis, CEO of the Washington County Board of Realtors, said a glut of new real estate inventory has flooded the market over the last six months, which may result in a ‘tapping on the brakes’ in 2006. ‘We’re transitioning from a period of time where you might have had eight people that wanted to buy your home, now to a period where you might have to have a little help to find a qualified buyer,’ Curtis said. ‘With more inventory, I think what that’s going to mean to sellers are they might now have to allow for a contingency or wait for a buyer’s closing until they sell their home.’”

“(Developer) Joe Larsen said some people are blaming high-end buyers for Washington County’s escalating home prices. ‘People would come out here and say, ‘Gee, they’re getting $700,000 to $800,000 for a 2,300-square-foot house.’ In other parts of town a 2,300-square-foot house was $300,000. So people would say, ‘Look, they’re the ones that have made this happen.’ But obviously not all 2,300-square-foot homes are created equal.’”

“James Wood, of the University of Utah, said most people in Washington County blame the presence of investors and speculators over the past 18 months for high land and housing prices. ‘Unfortunately, there are no data on speculators or investors,’ he said. ‘Those working in the market are convinced that hundreds of people have made big money buying and selling land. However, the bloom is off the rose. Since prices have escalated so fast, it is very difficult to find developable, cheap land or to rent investment property and generate enough revenue to cover high mortgage payments. And the farmers have wised up. They want top dollar for their land.’”

“Brett John, vice president a St. George-based excavation company, blames last year’s land speculation partly on people who took out home equity loans and bought up land in hopes of flipping it at a profit. ‘It’s been artificially inflated, but it’s going to correct itself without a doubt,’ John said. ‘It’s absurd to think that a $125,000 home in 18 months rocketed in value to $460,000.’”

“Stephen Wade, who sits on the board of directors for Sun First Bank, said St. George’s real estate market is overvalued right now. ‘There are people out there that are speculating, and they don’t know what they’re doing. Our bank is really nervous about that,’ Wade said. ‘I had a guy call me from Salt Lake and say, ‘Stephen, I’ve got an extra $30,000 to $40,000. Will you help me invest it in St. George so I can make some money? But I’ve got to have my money back in six months.’ Well it doesn’t work that way. You may have to get it back in six years.’”