The Housing Bubble

Some housing bubble reports from Arizona. “The latest numbers show consumers have had it with high home prices. According to the Phoenix Housing Market Letter, permits for new homes fell more than 20 percent in February. ‘The drop was considerably more than most observers had anticipated and the industry hoped for,’ the authors wrote. ‘The 3,729 permits issued was the lowest total in the last 24 months. Cancellations were rampant.’”

“Homes that were resold also dipped more than 11 percent from 8,722 in February 2005 to 7,774 during the same month this year, the newsletter said. The newsletter said, ‘The average base price of all of the plans was $387,000. The median closing price in the market this month was $268,000, or $119,000 less than the current base price. Could a case be made that the current new home market offerings are over-valued in the consumers’ eyes by that or some similar amount?’”

“In the Johnson Ranch area, only 26 of 303 plans had price increases. ‘In those edge areas it appeared that the majority of the builders are holding prices steady, a reflection of the empty parking lots that sales folks are buzzing about,’ the newsletter states.”

“One factor driving builders to pull fewer permits: Buyers cancelling their contracts because they can’t sell their existing homes in the slowing resale market. Analysts say that builders won’t ask for additional permits until they clear out their standing inventory.”

“‘It’s certainly a concern,’ said Ross Smith, a land broker in Phoenix. ‘Things are moderating. But I think a lot of it (last year’s run-up) had to do with investors in marketplace.’”

“Doug Fulton, president of Tempe-based Fulton Homes, said there is additional pressure on public home building companies whose fiscal year’s close at the end of this month. He said companies are pushing to book sales and clear inventory to make their numbers as attractive as possible to Wall Street.”

“‘You’ve got a bunch of divisional presidents trying to beat last year’s numbers,’ he said. ‘I wouldn’t want to be in their shoes.’”

“Fulton said some builders fell for the euphoria of last year’s selling frenzy, which was driven in part by housing investors. The result, he said, is too many unsold homes. ‘They took the ‘Build it and they will come’ attitude. No matter what we build, people will stand in line to by it,’ Fulton said. ‘Now, they’re like, ‘Oops, we have to get rid of this stuff at year end.’”

“Fulton just started work on 300 spec houses, figuring that his company will have homes ready for move-in when other builders have gotten rid of that backlog and are cautious about building more spec homes. ‘There’s still lots and lots of activity out there,’ he said. ‘It’s truly a market becoming more normalized. There still is a significant shortage of land out there.’”

The press reacts to a homebuilders results today. “Is this the long-awaited demise of the new housing boom/bubble/occurrence? We’ve seem some pretty dicey new order numbers from the likes of KB Homes and Toll Brothers, and there’s plenty of chatter about what incentives builders might be forced to provide to prevent the cancellation of existing orders and/or drum up new ones.”

“Into this mess come Lennar’s fiscal first-quarter earnings. New orders were up just 4%, the weakest result I’ve seen here in a while. What’s more, the company reported that gross margin in the first quarter came under a little pressure from incentive programs in the West and Central operating areas.”

“I apologize for sounding like a broken record here, but I’m miffed once again that the company still does not include a balance sheet or cash flow statement with its release. If a company is going to talk up its balance sheet (as management did several times on their conference call), it’d be nice to actually, you know, see it.”

“Lennar Corp. CEO Stuart Miller said he remains optimistic about the company’s earnings prospects for the rest of the year and into 2007 despite cooling market conditions. ‘Market conditions have been slower in many of our major markets across the country,’ said Miller. ‘Not only have price escalations slowed materially in most markets, but traffic has been cooling down as well.’”

“Indeed, Lennar, like other builders, faced weaker housing demand, a surge in cancellations and more incentives and price discounting in the latest quarter. Orders rose only 4%, which is significantly slower than the 25% increase enjoyed in the previous quarter. The company’s cancellation rate rose to 24% from less than 20% a year ago, and the company’s average discounting and incentive program amounted to 4% of the average home price, up from 2.75% a year ago.”

“‘These slower conditions, however, have not amounted to the feared bursting of the bubble or a meltdown in the industry,’ Miller said. Miller is predicting a ’soft correction’ rather than a crash in the home-building world.”

“Miller acknowledges the company has faced some oversupply issues due to speculators, or flippers, deciding to sell, rather than buy, homes. This has created an ‘overhang’ in certain markets that saw huge price increases over the past few years.”

“Gross said demand has slowed in Sacramento, San Diego and Tucson, and the company significantly boosted incentives in Minnesota, Illinois, Colorado, Northern Virginia and Nevada in order to move sales. Among Lennar’s stronger markets in the quarter were Florida, the Carolinas and New Jersey, while some sections of the West, such as the Tucson, Ariz., area, saw a fall in new orders, the company said.”

“The company also plans to repurchase 2.5 million shares in the coming months. ‘While there might be shifts and jogs along the way due to economic factors and other things, people still need a place to live, and we think that the prospects for the home-building industry ultimately become good,’ Miller said.”

A pair of reports on condos. “Prominent Florida economist Henry H. Fishkind said referred to the controversy about whether a housing bubble exists in Florida as a given. ‘There’s definitely some over-building,’ Fishkind said. ‘But it’s concentrated in condominiums and in Miami and Fort Lauderdale.’”

“Walchle Lear Multifamily Advisors expect apartment occupancy to reach 96 percent this year and the J. Turner Butler Boulevard corridor to see more new rental units as the per month cost for a two-bedroom apartment has dropped $600 lower than the $1,700 average mortgage payment for a condominium or townhome in that area of the Southside.”

“‘The Jacksonville area isn’t exempt from a surplus of housing starts as compared to population increases, Fishkind said.”

The Las Vegas Sun has this breaking news. “Sales have been suspended at another luxury condominium project in Las Vegas, as analysts said interest had dwindled in properties that were not close to the Strip. Letters were sent to nearly 100 buyers at the Curve project, located in southwest Las Vegas, offering to refund their deposits or extend their contracts by 150 days, said vice president Paula James.”

“Developers had set a 180-day period to sell 75 percent of the units before beginning construction, but the first tower of the project sold only 53 percent, or 97 units, James said.”

“‘We’re looking forward to building the project,’ she said. ‘We just need to regroup. We ran out of time .’”

“At least seven projects have now publicly folded or stalled in a little more than a year, a fraction of the more than 100 once proposed. Sheila and Bob Joseph, business owners from California, bought into the project soon after it was announced last year and canceled their contract in January when they didn’t see construction beginning as scheduled at the 45-acre site.”

“Construction of the $300 million first phase of the Curve, which would include two 18-story luxury condo towers and 12 commercial buildings, was supposed to start late last year. ‘We were just reading a lot about real estate in that area and taking a look while we were there at what wasn’t moving,’ Sheila Joseph said. ‘Not only reading, but the gut feeling we got about the project.’”

“(Realtor) Bruce Hiatt said his clients had little interest in the Curve because of its location. ‘It was quite expensive. What could you sell it for later? My clients decided they’d have better appreciation on the Strip.’”

“Paul Murad, a condo developer and author of ‘Manhattanizing Las Vegas,’ said the city was not ready for a high-rise project in the suburbs. ‘You can’t blame it on construction, you can’t blame it on architecture,’ he said. ‘We’re finding that people who like the suburbs like the suburban lifestyle and that means a single-family home. A high-rise in a suburban family setting is a bit premature.’”

“It’s much tougher to convince developers about projects in the suburban market, said (developer) Tim Sullivan. ‘My thought is if we had the Curve developed, it would be highly successful,’ he said. ‘But they’ve got to prove it. Right now, there’s a lot more hype than reality.’”

“The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent. In a related action, the Board of Governors approved a 25-basis-point increase in the discount rate to 5-3/4 percent.”"The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace.”

“The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”

“The Federal Reserve is indicating at least one more rate hike, according to analyst Peter Cardillo. ‘There is very little change in the statement and the fact that they didn’t elaborate on the slowing housing market means that they remain focused on the possibility of higher intermediate good prices.’”

“The Fed’s move gives the U.S. the highest central bank rate among the Group of Seven industrial countries, surpassing the Bank of England’s 4.5 percent benchmark. The Fed’s rate is 2.25 percentage points above the European Central Bank’s refinancing rate and 1 percentage point higher than the Bank of Canada’s overnight rate. The Bank of Japan’s rate is close to zero.”

“The Fed’s cycle of increases has lasted longer than most forecasters expected: A year ago, economists predicted the rate would be 4 percent this month. The central bank’s next two interest-rate meetings are scheduled for May 10 and June 28-29.”

“The Fed’s goal has been to reach a neutral level for the funds rate, the point where interest rates are neither stimulating nor depressing economic growth. Many analysts believe the Fed is very close to that level but may feel the need to push the funds rate up one more time to 5 percent from moving to the sidelines for the rest of the year.”

“However, other analysts who are more worried about inflation pressures said the Fed may feel the need to boost rates not only at the next meeting on May 10 but also at perhaps two more meetings after that, leaving the funds rate at 5.5 percent. Analysts who believe the Fed will push rates higher are more worried that the surge in gasoline prices and tight labor markets will soon start showing up in increased inflation pressures.”

“‘The real question is not what he does, but what he says,’ said David Wyss, chief economist at Standard & Poor’s. Lyle Gramley, a former Fed board member said he believes the central bank will keep lifting rates until there are definite signs the economy is slowing. ‘A combination of a downturn in housing and a slowdown of consumer spending should do the trick, but the Fed does not know for sure right now whether that will occur,’ Gramley said.”

“European Central Bank president Jean-Claude Trichet said the ECB favours a ‘gradual and measured’ response to inflation shocks. He said the ECB will continue to carefully monitor all risks to price stability. ‘Clearly we have a number of indications that require careful monitoring and, among these, the ones pertaining to housing market developments,’ he said.”

“‘The buoyant loan and house price developments at the euro area level warrant close and continued monitoring, not least as they could imply a risk of price misalignments,’ he said. The ECB started raising rates in December and economists expect further rate increases over the course of this year. ”

“The ECB therefore does not react to the immediate or first round effects of such shocks, but concentrates on preventing the transmission of these effects to other sectors of the economy, he said.”

The Las Vegas Business Press has an update on that housing bubble. “As the home-loan delinquencies rise nationwide, Nevada’s numbers remain surprisingly strong. However, the pending interest-rate hikes by the Fed, the day-to-day fluctuations in oil prices, and the Silver State’s high percentage of interest-only and adjustable-rate mortgages have left some lenders and analysts wondering if the bubble will burst.’”

“‘Where you will probably have problems is with the no-down-payment, 100-percent-financed ARM (type of loans), and interest rates go up,’ Nevada State Bank Senior Vice President Jeff Bargerhuff said. ‘It’s kind of like the perfect storm of mortgage lending.’”

“Nevada ranks second in the nation at 61.3 percent, behind only California (69 percent; in 2004, it was 46 percent), in the percentage of potentially negative-amortizing mortgages, including interest-only and products with ARM options, according to the FDIC. Nationwide, 49.5 percent fall into that category. ‘ARMs tend to have a higher rate of foreclosure,’ said an official from the MBA.”

“The year-end 2005 FDIC statistics show a sharp jump from the same time 12 months before, when Nevada’s interest-only and adjustable-option loans were more in line with the rest of the country. The state had 39.5 percent of its mortgages in that category at the end of 2004, compared with 31.1 nationwide.”

“Problems can show up when underwriting standards are relaxed, Nevada State Bank President Bill Martin added, ‘It just depends how tight the lender tied it and if they just didn’t care because they wanted the loan. You have to realize people have car payments and other things to pay.’”

“Some of the riskiest of loans, the subprime ARM loans, showed an increase in delinquencies at the end of 2005. The Mortgage Bankers reported 7 percent of such loans were 30 days or more past due in Nevada, compared with 5.2 percent the year before. The U.S. averaged a 12.6 percent delinquency rate in subprime ARM mortgages as of December 2005, which was up from 10.7 percent the year before. ‘It’s what we have been expecting,’ a MBA representative said. ‘There are so many new loans out there that haven’t been seasoned. Interest rates may play a role in the future, but right now, it is just the economy, job loss and low (home) appreciation.’”

“One realty broker, Linda Rheinberger believes there might be too much emphasis put on Nevada’s interest-only loan numbers anyway. ‘It’s just to maximize return,’ she said of the financing’s popularity among investment buyers. ‘If you don’t hold the properties that long, it doesn’t make sense to put money down.’”

A mortgage REIT has earnings results out. “Mortgage lender Aames Investment Corp. on Monday said its losses narrowed in the fourth quarter. The company said it raised rates on production during the quarter, a trend that is continuing into the first quarter.”

“Cutting costs in reaction to a tough mortgage market, Los Angeles-based sub-prime lender Aames Investment Corp. said Monday that it would close offices in Deerfield, Fla., and Parsippany, N.J., and eliminate 100 jobs in its wholesale lending division. Aames is a specialist in higher-cost loans to borrowers with imperfect credit.”

CNN Money reports on lending trends. “Millions of mortgage borrowers are entering their ‘danger years,’ when delinquencies peak and owners risk losing their homes. Delinquencies have historically reached their highest points during the third and fourth years of mortgages, according to Doug Duncan, chief economist for the Mortgage Bankers Association.”

“The number of Americans affected by the coming danger years could be huge. Half of all mortgage loans are three years old or less, according to the MBA. Nearly $3 trillion in mortgages originated in 2002, $4 trillion in 2003 and $3 trillion again in 2004.”

“In addition, many of these transactions involved risky loans, such as interest-only ARMs and no-down payment loans. A recent report from the NAR found that the median new home buyer put down just 2 percent in 2005. Forty-three percent put down no money at all. And according to SMR Research, some 25 percent of loans were interest-only, do nothing to reduce the debt on the house.”

“‘People are really stretched,’ says Dean Baker, macroeconomist for the Center for Economic and Policy Research. ‘They’re betting that the housing market will continue to appreciate. The problem is that few people recognize it for the gamble that it is,’ says Baker.”

And Danielle DiMartino continues her series on systemic risk. “For many people, the concept of systemic risk has never been experienced outside a textbook. But many financial experts worry we’re closer than ever to experiencing it, thanks to stresses on the ubiquitous mortgage market.”

“Lately, lax mortgage lenders have all but maximized the potential for systemic risk. Encouragingly, regulators are finally stepping in. ‘Regulators are obviously very concerned,’ said Paul Kasriel, chief economist at Northern Trust Co. ‘They’ve issued guidelines with regard to home-equity lending and are working on guidelines for nontraditional mortgages.’”

“Mr. Kasriel said he’s been concerned for some time that banks had too many chips on one bet. ‘U.S. commercial banks have a record exposure to the mortgage market,’ he said.”

“When you add mortgages they hold on their balance sheets, you get to mortgage-related assets making up a record 62 percent of commercial banks’ earning assets. As recently as 1985, banks’ holdings were south of 30 percent. We’re talking about a huge bet that housing stays afloat here. If the housing bubble bursts, it is safe to say banks’ ability to lend will be seriously pinched for a time.”

“Recall that many mortgages are sold off by those doing the lending. That explains the letter you got shortly after you closed on your home that asked you to make your monthly check out to someone else. So-called smart mortgages have risen in popularity, the no-document, no-down-payment, no-principal; heck, no-payment-every-once-in-a-while, adjustable-rate jobbers.”

“Believe it or not, these mortgages too are sold off. In a world plagued by low interest rates, they’re gobbled up by investors hungry for yield and not so concerned about risk. Many of these investors are hedge funds. Here’s where things get tricky. To juice returns, they’re buying these investments on credit. And where do they get the loans to buy? Well, who makes loans?”

“In the worst-case scenario, banks could get it coming, in the form of defaults that directly impact their highly concentrated holdings, and going, in the form of bad loans to hedge funds.”

The Wall Street Journal reports the ‘new rules of real estate.’ “As the spring selling season moves into high gear, the cooling housing market is upending the conventional wisdom that guided buyers and sellers during the housing boom. Some brokers are advising sellers to price their homes in the bottom 25% of comparable properties. People looking to enter the market for the first time are being told not to overly stretch their finances because rising home prices may no longer bail them out.”

“Employees who are relocating are being advised to steer clear of new subdivisions where competition from brand new construction could make reselling soon difficult.”

“Such strategies aren’t entirely new, but they had fallen from favor in many markets as home sales heated up early in the decade. In New York City, where the housing market has begun to cool, some buyers are now getting condo developers to pay city transfer taxes and certain other expenses that can total 3% to 4% of the purchase price, says (appraiser) Jeffrey Jackson.”

“Say goodbye to the days when sellers could simply look at what their neighbor’s house sold for and then list theirs for 10% more. Brokers are advising sellers to make sure their house comes across as a good value relative to other homes on the market. ‘Pricing is absolutely critical right now,’ says Rosey Koberlein, (broker) in Tucson, Ariz., where sales are off 20% so far this year.”

“David D’Ausilio, a broker-associate in Westport, Conn., is counseling his clients to price their homes in the ‘bottom 25%’ of comparable homes and to cut their asking price by 3% to 5% if the listing doesn’t generate several showings or written offers within three weeks.”

“Jill Green, a realtor in Carlsbad, Calif., a coastal community north of San Diego, has been making offers that are 1% to 5% below the low end of the seller’s price range. ‘Sellers are entertaining the offers and are taking them,’ she says.”

“Some brokers are advising first-time buyers to leave a financial cushion instead of stretching as much as possible and counting on rising home prices to bail them out. They are also asking sellers to help with closing costs. Elise Owen, a program manager for a nonprofit group in Washington, recently purchased a one-bedroom condo for $178,000. The seller threw in $5,000 toward closing costs. ‘It allowed me to feel like I was on more secure ground by keeping some of my savings available’ for emergencies, Ms. Owen says.”

“In some parts of the country, such as California’s Silicon Valley, cooling is most evident in the higher end of the market, good news for homeowners looking to trade up. ‘For an extra half-million dollars, you can get quite a bit more for your money than you did before,’ says (broker) Richard Calhoun in San Jose.”

“Employers are looking for ways to ensure that homes don’t languish on the market when an employee relocates. The number of company-ordered appraisals is growing as employers seek to get the price right before a house goes on the market, says H. Cris Collie, executive VP of an association that relocate employees.”

“Going forward, Mr. Collie expects employers to more aggressively enforce policies that require transferees to price their homes close to the appraised value. He is also seeing renewed interest in ‘loss on sale’ programs, which compensate people who are relocating for losses if they sell below the purchase price. Some relocation experts also advise transferees to shy away from buying a home in a brand-new development. ‘If you’re buying in a new subdivision…you’re competing with new construction’ when you sell, notes Pam O’Connor.”

“In some new Tampa Bay, Fla. subdivisions, dozens of similar investor-owned homes are competing for buyers, says (broker) Craig Beggins. ‘If you have any way not to sell right now, don’t,’ Mr. Beggins tells investors. ‘If the neighborhood is brand new and no one is living there, my advice is to rent it if they can.’ But the decision to sell or rent can be tricky, particularly if the rental income isn’t enough to cover the mortgage and other carrying costs. Rental homes typically don’t show well, says Bob Hamrick, broker in Las Vegas, and often must be vacated and given a fresh coat of paint and new carpet before they are put back on the market.”