The Housing Bubble

A pair of reports provide an update on the housing bubble in Arizona. “New home permits in February dropped more than 20 percent from the same time last year, perhaps a signal that the Valley’s incessant new home price increases will end. The 3,729 permits issued last month marked the lowest total in the last 24 months, according to the latest issue of The Phoenix Housing Letter, released Monday.”

“Although resale market prices are decreasing, Letter publisher R.L. Brown said the new home market will take longer to adjust because ‘builders aren’t prone to lower the base prices of a product.’ However, builders have rolled out numerous incentives, including price discounts and free or discounted upgrades.”

“‘That’s happening all over the Valley right now,’ Brown said.”

“Builders are also adding cheaper floorplans to existing models within specific developments, in effect repositioning the product within the community. Brown doesn’t see the current housing conditions as a precursor to any kind a disaster. ‘We’re seeing the resale market begin to adjust,’ said Brown. ‘Housing prices reached a point to where the consumer said no more.’”

“Housing prices have skyrocketed since the beginning of 2005, eclipsing appreciation rates of 40 and 50 percent in many parts of the Valley. But those days may be over as sellers get more realistic with pricing. ‘I don’t think it will be very long before the resale (price) is reflective of what consumers are willing to pay for a home,’ Brown said.”

“Brown doesn’t believe the Valley can sustain the 1.63 percent monthly rate increase. The March average base price of all of plans offered in the marketplace was $387,000, while the median closing price was $268,000. ‘It was past time that the rapidly upward price pressures on the new housing market ended,’ Brown said. ‘I suspect that we can say they’ve ended.’”

And the Kingman Daily Miner has this report on builder incentives. “Thirty-three new houses in Mission Estates, developed by Scholl Homes at Mallory Loop off Hualapai Mountain Road, will hit the market this Saturday and Sunday. These three to four-bedroom houses will be priced at a relatively low level, focusing on local residents who have been looking to buy a house but cannot afford one, said Frank Trotman, a Scholl Homes’ manager.”

“The intent of purchase must be for the owner to occupy the property, and investors who are aiming to buy these properties and turn them over for a profit will be prohibited, said Trotman. Scholl homes is going to have loan officers on-site during the project’s grand opening on Saturday and Sunday to evaluate applicants’ qualifications, and those who are granted a loan could own a house there right away.”

“About 10 houses have been completed and are ready for people to move in immediately, and the rest will be ready for occupancy within the next two weeks.”

“Although everyone is invited to apply for the builder’s loan, Trotman suggested those who have stable jobs obviously have more of a chance to qualify. Without a stable income, Trotman said, it would be hard to convince loan officers to grant financial assistance.”

“The 33 houses are just a small part of Scholl Homes’ construction project in the Kingman area. The company will build about 200 houses in Kingman and Golden Valley each year for the next ten years. Trotman said research from his company showed the water supply would not be a problem for the area for decades to come.”

A Las Vegas developer talks about condos. “John Restrepo sat down with In Business Las Vegas to discuss the state of the Las Vegas..real estate market. ‘I think we are going to a period of a more realistic view of our high-rise condo market here. We’ve had a period of irrational exuberance on the high-rise condo market, where we thought the demand would be a lot higher than it has ultimately proven to be. Over the next five years, we’ll probably see 25 percent of the 60,000 (proposed) units actually built.”

“‘Most of the projects have been along the Strip corridor, they’re essentially projects that serve second homebuyers, investors and speculators. That’s why 80 percent of the time these units are dark.’”

“‘A lot of the speculative guys that would tie up a site temporarily and then start flipping it and using a Web site and put a trailer on a vacant lot, those guys have pretty much gone away, for the most part.’”

MSN real estate looks at ‘the great American condo glut.’ “After several years of gung-ho development in south Florida, San Diego, Las Vegas and other major markets, the once-hot condo market is headed for a slump. Condo developers say they have been forced to throw in perks.”

“‘I don’t think there’s a market out there in which developers are not offering some kind of incentives,’ said (lender) Arthur Nevid. Mountain and many other lenders say they have ceased funding most condo projects and are backing away from some projects they had already committed to. Some developers are even giving back the down payments or deposits paid by residents.”

“There hasn’t been a condo boom like this one, economists say, since the late 1980s when rising home prices and out-of-sight interest rates spurred developers to begin churning out a flood of condominiums. Many of these properties wound up back on the market, pushing prices down further. Economists are concerned that this same pattern is repeating itself in markets such as Las Vegas, San Diego and Miami, where investors, rather than residents have bought many of the units.”

“And more condos are being added this year, analysts say, putting more pressure on prices. In San Diego, 5,217 condo units were built since 2001, and another 7,235 are under construction or approved. Meanwhile, sales and prices in San Diego have peaked, agents say, and prices are beginning to head south.”

“Owners are now taking price cuts, or renting out their unit until the market improves. San Diego Realtor Cindy Davis is now leasing out a client’s condo that has lingered on the market for 80 days. ‘I’ve told him now he’s not going to get his price. Keeping it on the market and hoping for a miracle is stupid,’ she said. Likewise, Hamrick said, prices have stalled in Las Vegas, and are poised to dip, should more units come back on the market.”

“Even low-key Minneapolis, has been rocked by a condo boom that is threatening to go bust. Last year, 1,326 units sold in the area, up from 557 the year before. And there are currently 4,518 condos under construction or approved for downtown Minneapolis alone, said Mary Bujold.”

And Inman News has the results of a related study. “Single-family homes have the most appeal for aging baby boomers, according to a survey released today. Of those planning to move, 63 percent said they are looking to purchase a single-family home, while 18 percent would purchase a condo or townhouse.”

A pair of reports on the mortgage industry. “A crackdown by regulators of the Federal Home Loan Banks threatens to shrink a subsidy long enjoyed by thousands of lenders, including giants such as Washington Mutual Inc. and Citigroup Inc. The Federal Housing Finance Board proposed rules this month that would require the banks to retain more of their earnings as capital to build up a bigger cushion against potential losses.”

“The proposed rule probably will force most of the home-loan banks to slash their dividends, a big source of income for many of the more than 8,100 commercial banks, thrifts, credit unions and insurers that own the banks. The proposal may discourage the home-loan banks from purchasing mortgage loans made by their members.”

“In effect, the congressional charter that created the home-loan banks is a federal subsidy for banking, though one that doesn’t involve government spending. Because investors assume that Uncle Sam would feel obliged to bail them out in a crisis, at the expense of U.S. taxpayers, they can borrow cheaply in the international bond markets.”

“Many bankers are furious. Diane Casey-Landry, CEO of a trade group, calls the proposed rule ‘misguided’ and says it would damage a system that supports housing. Regulators have been clamping tighter constraints on the home-loan banks for the past several years. ‘What is their ultimate goal?’ Ms. Casey-Landry asks.”

“The home-loan banks’ rapid expansion in recent years has been fueled by intense global demand for bonds issued by U.S. government-related entities. The bulk of the home-loan banks’ assets are advances to their members. But the banks also invest in mortgage loans made by their members as well as in mortgage-backed securities and money-market instruments. Some critics deride the investments in securities and money-market instruments as mere ‘arbitrage’ trading activities that have little to do with the banks’ housing mission.”

And from the LA Times. “A little-known reward for brokers who arrange home loans at high interest rates is drawing scrutiny from law enforcement authorities. Lenders pay the bonuses to independent brokers who sign up borrowers for mortgages at higher interest rates than they qualify for. With these brokers now writing an estimated 60% of home loans in the U.S., regulators are concerned that many people are being steered into higher-rate loans.”

“‘With the growing role of mortgage brokers, my office and attorneys general around the country have focused increased attention on these lending arrangements,’ California Atty. Gen. Bill Lockyer said.”

“The bonus, typically worth thousands of dollars, is included in most loans written by independent brokers, some industry experts say, and may be especially prevalent in costlier mortgages that brokers arrange for borrowers with weak credit. The payments to brokers are known in the industry as yield spread premiums. The terms vary by company but generally work the same way.”

“Brokers fiercely defend the incentives. The National Assn. of Mortgage Brokers contends that brokers should not have to disclose the payment at all in part because lenders who don’t use brokers are not required to do so. Mortgage bankers who make loans without brokers often sell them for a profit in the financial markets, earning larger premiums for loans with higher interest rates. HUD, however, lacks the authority to regulate those transactions.”

“‘There are people who say, ‘I only charged the guy 1 point.’ But no you didn’t. You’re getting 2 points more through the yield spread premium,’ said (mortgage broker) Randy Johnson.” “Consumer advocates have long challenged the payment as an illegal kickback. ‘I never met a consumer who knew what it is,’ said Ira Rheingold, general counsel with the National Assn. of Consumer Advocates. ‘I never had a client who knew they were paying a higher interest rate because of that charge.’”

A housing bubble report on Orlando, Florida. “Competition has thickened in Central Florida’s residential real estate market during the last year. Existing and new home inventories have grown exponentially, forcing properties to remain on the market longer and sellers to do more to get their homes sold. The result: The region’s once red- hot housing market has morphed from a seller’s Shangri-la to a haven for home buyers.”

“‘The market has definitely transitioned from a sellers market to a buyers market, and it did it rapidly,’ says Jack McCabe.” “Existing home inventory in January totaled 12,015, a 262 percent increase in the last year, according to Orlando Regional Realtor Association’s January Roth Report. ‘The last time we saw inventory levels this high was in the mid-1990s,’ notes Scott Hillman.”

“New homes have not been immune to these market mood swings either, says Anthony Crocco. Metrostudy noted a marked 18.3 percent increase in the inventory of new single-family homes to 16,067. The largest spike was recorded in the finished vacant new homes category, where the number of available units rose more than 97 percent from 1,709 in 2004 to 3,372 last year.”

“‘Usually, developers want to see only about 20 percent of the homes in their communities finished and vacant,’ says Crocco. ‘Today, some are seeing as much as 80 percent.’” “Industry insiders point to a mass exodus of investors and speculators from the Central Florida market. ‘The investors and speculators who flew through our market fueling the growth in sales and running up home prices have taken their profits and moved on for better investment opportunities elsewhere,’ explains Crocco.”

“For-sale and for-rent signs pepper the front yards of many Central Florida neighborhoods, wreaking havoc in new communities where these homes compete with new construction for the attention of home buyers.”‘

“As a result, home prices appear to be leveling off, if not turning slightly south. Despite growing by 35 percent in 2005, the median sale price of an existing home in Orlando actually dropped by $10,000 between November and December 2005 to $239,900, and the median price grew less than 1 percent from December 2005 to January 2006 to $242,050.”

“‘The market really reached its pinnacle last August,’ says McCabe. ‘I really believe we will see downward pricing corrections in the near future. This is just a correction, a temporary situation, but it will probably be three to five years before the over-supply is absorbed.’”

Danielle DiMartino has this at the Dallas News. “The mortgage market remains a mystery to virtually every American. For starters, the sheer size is inconceivable; it’s hard to get your mind around a fast-growing $8.7 trillion market. Even saying it’s more than twice the size of the U.S. Treasury market doesn’t put things into perspective for the layman.”

“Try this bit of context, then: The mortgage market is so big that it has the ability to introduce systemic risk into our financial system. The last time systemic risk reared its head was in 1987, when a steep sell-off in stocks triggered a huge number of Wall Street firms’ portfolio insurance.”

“Reactionary, simultaneous, automated selling pressures succeeded in overwhelming a stock market that was supposed to be impenetrable. Similarly, every time there are large swings in the Treasury bond market, automatic sell or buy orders are triggered in the mortgage bond market.”

“Sound too alarmist? Consider a few facts: The collateral backing mortgages is stretched precariously thin, one in 10 homeowners has zero-to-negative home equity. Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That’s well above the 13 percent average share for the decade through 2005.”

“Mortgage delinquencies ended last year at 4.55 percent, an 18-month high. And subprime delinquencies are pushing 12 percent. Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments. In the next two years, about a quarter of all outstanding mortgages, or more than $2 trillion worth, will reset at higher rates. A record 62 percent of commercial banks’ earning assets are mortgage-related.”

“For good measure, Goldman Sachs recently recognized the elephant in the room: ‘These are the early days. An ongoing deterioration in credit quality in an environment of improving labor market performance and rising home prices is therefore quite significant.’”

Paul Muolo at National Mortgage News has this inside report. “Nonprime wholesaler MILA Inc. of Washington state has been quietly trimming its staff through attrition and layoffs. Since year-end, about 100 jobs have disappeared.”

“More tidbits from the Rudman report: On Nov. 29, 2004, a few weeks before Fannie Mae’s board found the courage to can then-chairman/CEO Franklin Raines and CFO Timothy Howard, ‘presiding’ Fannie director Ann Korologos sent a broadcast e-mail message to all GSE employees, asking them to come forward in regard to ‘any unusual or atypical transactions’ that had transpired over the past five years. In response to that e-mail, 10 employees and one seller/servicer came forward. One allegation became the ’subject’ of a ’significant, standalone review.’ What was the allegation? The report doesn’t say.”

“Genworth Financial of Canada soon will begin insuring 30- and 35-year mortgages in that country.”

Garth Turner thinks that is significant. “The real estate boom is over. You may or may not like that news, but it is now official. I am calling the eight-year-long housing lovefest, finito. Done like dinner. Toast.’

“My friend Peter Vukanovich, who came to visit me in my riding office, pulled the trigger. His company, Genworth Financial, has now become the first mortgage insurer to cover 35-year home loans. And the country’s best-known mortgage guru, whom I spent time with as well last week in the boardroom of a Toronto law firm, told me in hushed tones he is preparing for the advent of the 50-year mortgage.”

“So, why does this show the real estate market has peaked and is about to hit the down escalator? Simply because this is the third major indicator that housing prices have passed the ability of the average family to afford them. And anytime that transpires, the writing is on the garage wall. amortizations which have gone from 25 years to 30, then to 35 years and quite possibly now to 50.”

“This is irrefutable proof that houses at these levels are unaffordable if you play by the rules that have influenced real estate supply and demand for the last three generations. And layer on top of that the effect of five recent mortgage rate increases, with the prospect of a couple more to come, and you can see what’s going down.”

“Over the last year, Vancouver house prices rose 26 per cent. In Calgary, 24 per cent. In Toronto, just six per cent. I would argue that the inevitable correction in real estate prices has already started in the GTA and will soon be spreading west. The only way they’ll make money on those houses is if they find somebody to pay even more. And behind that indebted buyer will be a generous lender. And behind that lender, a creative insurer. And you don’t want to know what’s behind him.”

The Enterprise has this report on a housing market in Massachusetts. “Across the region, real estate agents and assessors say home prices have been on a downward trend for several months. And the ‘for sale’ signs are staying up a lot longer. And nowhere is that more apparent than in Brockton.”

“When Richard Breault put his three-bedroom Brockton Cape on the market last year at $279,900 for several months, the home did not sell. He took the house off the market for the winter months and recently put it back on sale. About two weeks ago, Breault knocked $5,000 off the asking price, and on Tuesday reduced it another $5,000, hoping to attract a buyer. The home now lists at $259,900, his real estate agent said.”

“‘It seems like the market has slowed down,’ Breault said. ‘I certainly don’t want to go down any further.’”

“‘The pendulum in this market has swung from a seller’s market to a buyer’s market,’ said real estate agent Bill Carpenter in Easton. ‘It is not a bubble bursting. My view of this is there is a correction going on in the marketplace.’”

“The median single-family house sale price in Brockton dipped from January to February by $12,000, sliding from $270,000 to $257,900. That’s the lowest it has been since July 2004. In a city that is trying to revitalize its downtown with condominiums, the median sale price for condos plummeted $40,000 from January to February, going from $222,900 to $182,500.”

“Denise Higgins, a real estate agent in the Bristol-Plymouth area, said pricing is everything right now. ‘The absolute key is you must price it right,’ she said. ‘If it’s priced right, there’s a buyer for absolutely anything.’ Higgins estimated housing prices in this region began to decline last August.”

“‘We probably didn’t see the signs. We in New England hunt for reasons like ‘The Pats are playing,’ ‘It’s too hot,’ ‘It’s too cold,’ Higgins said. ‘When you get to August and don’t have any reasons to point to, you realize things have begun to change.’”

“While the housing market is cooling off for sellers, real estate agents say they remain optimistic. ‘We’re getting pretty good activity,’ said Brockton real estate agent Paul E. Clancy. ‘People aren’t jumping, but they are looking.’ After knocking off $20,000 from his original selling price, Richard Breault is hoping someone will do more than just look at the house he and his wife have lived in on Gladstone Street in Brockton for 30 years. If not, he has a plan. ‘If we don’t sell it this time, we’re going to stay,’ he said.”