The Housing Bubble

The UCLA Anderson School had a report out on the California housing bubble today. “Christopher Thornberg, senior economist for the forecast and author of the California forecast, said, ‘The only debate now is how hard a landing there will be and what will it mean for the general economy.’ In his report, Thornberg calls for a rise in the state’s unemployment rate. ”

“One impact, Thornberg forecasts, is that 200,000 jobs likely will be lost in the construction sector as residential construction and remodeling slow markedly.”

“Economist Daniel Blake, of Cal State Northridge, said, ‘The soft landing is good news. If the housing market really crashed and something else really crashed as well, that could lead to a recession,’ Blake said.”

“Senior UCLA economist David Shulman, who wrote the national outlook, said that in some parts of the country the real estate sector may slip into recession. ‘This is in line with what we had in the mid 1980s and mid 1990s,’ he said. ‘The primary risk to the forecast is that the slowdown we envision turns into something worse,’ Shulman cautioned.”

“Jack Kyser, chief economist for the Los Angeles County Economic Development Corp., has a slightly different perspective on the economy. ‘I think (the UCLA Anderson Forecast) is a little more pessimistic than a lot of the other,’ he said. ‘We do have some bubble markets around the state but the demand for new housing is still strong.’”

“Now, the trend is becoming clear: The housing boom that has driven the state economy has peaked and is starting to soften, Thornberg said. ‘There is no justification for the prices we’re seeing now,’ Thornberg said.”

“Jobs in real estate and mortgage banking also will start to dry up. Like construction, this sector has boomed in sync with the housing market. Financial jobs, particularly those in the mortgage industry, have been a strong source of job growth in recent years.”

“Financial activities have helped fuel a fast-growing sector UCLA Anderson calls ‘informal jobs,’ people who work for themselves, such as real estate agents and mortgage brokers. California now has 1.6 million informal workers, up 500,000 since 2000, the report said”

“The fallout for state government coffers will be serious as both sales tax and income tax receipts fall, the report said. ‘The government budget for ‘06-’07, already tight, looks to go under water by the early part of next year, and with it, much of the infrastructure dreams of the current administration,’ the report said.”

“It’s obvious the housing market is slowing in Sacramento and across the state. A new report from UCLA predicts it will dent the overall economy. A separate report from the University of the Pacific says otherwise. The university’s economic forecaster Sean Snaith said the construction sector will hold up well enough that it won’t be a drag on the rest of the economy.”

“‘I don’t see any reason for the housing sector to unravel,” Snaith said. ‘The housing soufflé reached its peak in 2005. As we look beyond 2006, the loftiness of the soufflé will begin to give way as mortgage rates rise, but barring any reversals in the ingredients..the talk of a bubble will just seem like a lot of hot air,’ the UOP report said.”

“It remains unclear how big a dip the housing market will take. The research firm DataQuick recently said Sacramento County median sale prices inched up 1 percent in February to $355,000, but that’s still well below the August peak of $372,000.”

The Virginia realtors have their February numbers out. “Home sales in Virginia dropped for the sixth consecutive month in February, as home-price appreciation posted stronger than normal gains, the Virginia Association of Realtors reported Tuesday. Closed sales fell 9.5 percent in February to 7,109, down from 7,856 for the same month last year. Year-to-date, 13,818 home sales have closed, 12 percent less than last year’s year-to-date total of 15,743.”

“Fredericksburg and Prince William County saw the largest drops, with sales down more than 25 percent in each market.”

According to the association PDF file, Prince William sales volume fell 41%, and the Richmond metro had sales lower by 39%. The Dan River region saw sales drop 50%.

“‘The number of homes placed on the market in Virginia continues to show strong market activity in a historic context,’ explained VAR President Kit Hale of Roanoke. ‘The market definitely peaked last year, growing from just over 7,000 in 1999 to the 10,716 we saw last year. As the demand settles back into a more normal range of activity, we expect to see a much better balance between buyers and sellers.’”

And thanks to the reader who provided this link showing northern Virginia active listings up 315%. ‘Although the volume of single family homes and condos sold in February 2006 in Northern Virginia was 20 percent below the units sold totals for February 2005, average sales prices have increased 6 percent, to $514,116. More than four times as many active listings were on the Northern Virginia market in February 2006 than February 2005, up 316 percent from 1,584 to 6,588.’”

“Active listings in the Greater Northern Virginia area were significantly higher in February this year than in 2005. February’s total of 14,662 active listings were more than 250 percent greater than the number last year, which was 4,173.”

Going back through these reports, the average sales price has been falling.

$550,069..October 2005

$543,170..September 2005

$545,311..November 2005

$552,621..December 2005

$524,314..January 2006

$514,116..February 2006

The Charlotte Observer is one of the few newspapers looking into appraisal fraud. “Members of the home mortgage industry took their turn Tuesday to explain to a special committee of the North Carolina House why so many state residents are losing homes to foreclosure. They said most foreclosures are the result of turmoil in borrowers’ lives, and the rising numbers are a natural consequence of increased lending to people with lower incomes or credit problems.”

“They acknowledged that some of their colleagues have inflated the cost of loans or the price of homes, or imposed unnecessary fees. But most speakers argued against sweeping new laws, saying most of the problematic conduct is already illegal, and the focus should be on increased enforcement.”

“‘I think there’s some level of increased foreclosures that we’re just going to have to live with in exchange for making credit available to more people,’ said Bill Bost, general counsel of the N.C. Association of Mortgage Professionals.”

“‘We need to be held accountable and there need to be consequences,’ Bob Ipock, a Gastonia appraiser, told the committee.”

“The committee heard from representatives of the banks who provide money, the brokers who sell loans and the appraisers who value homes. They said high-interest loans have played a key role in raising home ownership rates to record levels. They also urged the state to spend more on educating borrowers so they can defend themselves. ‘I’m not sure counseling helps that much because I’m not sure people listen to what they don’t want to hear,’ said Rep. Robert Grady.”

“At times Tuesday, the testimony veered into finger-pointing, as representatives of one industry group told the committee the problems lay elsewhere. Appraisers pointed at lenders and brokers, and they pointed back at the appraisers.”

“Members of the committee at times appeared incredulous, or amused. ‘Would you agree that at least some appraisers might be less than honest?’ a legislator asked an appraiser who had just finished a defense of his industry. Yes, the appraiser conceded, that was possible.”

A check in on the global housing bubble. “A decline in real estate prices was recorded in Croatia last year in almost all districts as the decline reached as much as 50% in the city of Split. Speaking about real estate overpricing, Dubravko Ranilovic, president of the Real Estate Association said that sellers expect up to 25% higher prices than actually achieved.”

“The Central Bank reported last month that Irish residential mortgage lending continued to expand at a rapid pace in January. With the exception of AIB Bank, all Irish lenders are providing 100% mortgages and many also provide interest-only loans. In recent years, more than 75 per cent of Bank of Ireland investment customers have availed of the bank’s ten-year interest-only mortgage.”

“A report produced by Rossa White says that the frenzy in the Irish property market has intensified. But rents have only recently recovered after a three year period in which they were in decline. As a result, yields have been driven down to unprecedented depths. Something does not feel right.”

“White says that a line frequently trotted out by estate agents is that ‘buy-to-let investors are not worried about rental yield; they are in it for the long haul of capital appreciation.’ That is fundamentally unsound investment advice.”

“The Davy report says that the evidence refutes the theory that supply shortages are leading to rocketing prices in ‘desirable areas.’ If that was the case, residential rents would be rising rapidly, but they are not. Since April 2001, house prices are up 52% on average nationwide but rents are down 2%!”

“The report also says that the proposition that scarcity of land close to the city-centre makes residential property a low-risk investment is not supported by evidence from other countries. The same argument was made in Japan in the late 1980s. The fundamentals suggest that it will be an adjustment in prices, rather than rents, that will eventually bring valuations down to more realistic levels.”

“The Wrigleworth Consultancy hosted a debate yesterday on the future of house prices in the UK. Several leading economists were present, and, surely a first in a room full of economists, they more or less agreed that ‘there will be no real growth in house prices for the foreseeable future.’”

“Quebec’s housing affordability eroded in the fourth quarter of 2005 in the wake of rising mortgage rates, weaker income growth, and higher utility costs, according to the Housing Affordability Index report released today by RBC Economics. ‘Quebec’s housing market had already begun to cool last quarter,’ said Derek Holt, assistant chief economist, RBC.”

“Australia has become a nation of spendthrifts, as people now choose to save for a rainy day instead of going on spending sprees. Some of the spending softness was attributed to the continued threat of an interest-rate rise, falling housing prices and larger mortgages.”

“‘The slowdown that the RBNZ (Reserve Bank of New Zealand) wanted is now here, and in spade,’ economist Brendan O’Donovan said. O’Donovan said consumers were becoming more circumspect as the housing market goes sideways and employment growth slowed.”

“Iceland’s central bank will probably raise its main interest rate by half a percentage point tomorrow after the krona tumbled and a housing boom drove up inflation, a survey of economists shows. Soaring house prices have fueled consumer-price growth, which has surpassed the central bank’s target for two years. The central bank is ‘going to have to deliver the goods,’ said Lars Christensen, an economist at Danske Bank in Copenhagen. ‘If we don’t get 50 basis points, it will spark renewed pressure on the krona.’”

General Motors may have problems selling it’s mortgage division. “General Motors Corp. on Tuesday restated nearly four years of results for its GMAC finance unit, a subsidiary in which it’s trying to sell a controlling stake to raise cash and boost its finances. The company also disclosed that its complex accounting relationships with suppliers are now the subject a criminal probe, in addition to the previously disclosed civil investigation.”

“The finance unit is by far the most profitable operation at General Motors, producing net income of $2.8 billion in 2005, while GM as a whole reported a loss, Reuters reported.”

“GM has been counting on the sale of a 51% stake in General Motors Acceptance Corp. as a way to raise as much as $15 billion in badly needed cash for the struggling automaker. But GM warned anew Tuesday that a deal might not happen.”

“GM had hoped a new parent for GMAC would bring investment-grade credit ratings to the finance business, which was cut to junk status last year alongside its sliding automotive parent.”

“GM’s regulatory filing showed that the company was concerned about the effect of the restatements on its ability to draw from its $5.6 billion standby line of credit, which it could tap if it ran short of cash for operations.’

“While the automaker said it believed that it would be able to make a ‘good- faith borrowing request’ to use the credit line, ‘in view of GM’s recent restatement of its prior financial statements, there is substantial uncertainty as to whether the bank syndicate would be required to honor such a request.’”

And in case you didn’t know why this matters to the housing markets, check these links.

The Rocky Mountain News reports on the big changes in Denvers’ housing market. “Rising interest rates, a glut of unsold homes on the market and falling home prices in some submarkets drove up Denver-area real estate foreclosures by more than 30 percent in the first quarter of this year compared with the first three months of 2005. The 31.5 percent jump is the largest year-over-year percentage increase for a quarter in almost two years.”

“The jump to 4,764 foreclosures compared with 3,624 in the first three months of 2005 took some experts by surprise. Public trustee offices in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas and Jefferson counties estimated the number of foreclosures they expect to open this month. ‘That is disturbing,’ said economist Patty Silverstein of the soaring number of foreclosures.”

“She said that a main culprit appears to be interest-only and other variable-rate loans that homeowners have taken out in huge numbers in recent years to reduce their monthly mortgage payments. ‘A lot of people have taken out these different types of mortgage products during the past couple of years, and now people are discovering that their payments are starting to ratchet upward with rising interest rates,’ Silverstein said.”

“(Broker) Sean Healey said he was not surprised by the number of foreclosures and believes the market has a couple of years of pain ahead. ‘What I see is not pretty,’ said Healey.”

“He said the number of unsold homes on the market has been growing by an average of 2.5 percent a week. The increasing supply is putting downward pressure on sale prices, especially for the lower-priced homes most likely to go into foreclosure.”

“That’s a vicious cycle because it forces more sellers to lower their prices, driving even more houses into foreclosure, Healey said. ‘Primarily, I see a huge glut of homes priced under $300,000,’ Healey said. ‘Under $200,000, it is just a blood bath, a path of devastation. It is just ugly.’”

“In some areas of Adams County, sellers of lower-priced homes are finding that the market value of their home is down 15 percent to 17 percent from what they paid a couple of years ago, Healey said. When the mortgage is worth more than the home and the owner is forced to sell, it is almost inevitable they will end up defaulting on their mortgage and lose the home to their lender, he said.”

“Healey said some people have lived in homes for six to 12 months without making a payment before the lender forecloses.”

“Economist Tucker Hart Adams said she recently was a guest on Healey’s radio show and received a call from a woman who said she and her husband have good-paying jobs but are in danger of losing their home because they had borrowed all of the equity from the house and their credit cards are maxed out. She wanted advice from Adams. ‘I guess you just have to spend less on everything else’ in order to keep the house, Adams said.”