The Housing Bubble

Rich Toscano has this at the voiceofsandiego.org. “The ’spring rally’ has certainly been a fixture in recent years. And while 2005’s springtime price increase was more subdued, it nonetheless put the rest of the year to shame. According to DataQuick, the median single family home price rose over 4 percent between March and June of 2005, and then spent the rest of the year going nowhere.”

“Now that spring 2006 is upon us, can we expect home prices to start rising again? A major headwind facing the market is an imbalance between supply and demand that San Diego has not seen for quite a while. There are, simply put, an awful lot of homes for sale. According to ziprealty.com, San Diego county sports over 16,000 condos and single family homes listed for sale on the MLS.”

“This is an increase of 87 percent over the amount of homes for sale at this time last year. That’s not a typo. Last year’s spring rally began with a supply of inventory that was barely more than half of what it is now. Meanwhile, demand has waned despite the increasing availability of homes to choose from. DataQuick’s figures indicate that recent months have seen sales volume drops of between 20 and 30 percent compared to the same period a year ago.”

“There is an even bigger hurdle on the path towards higher home prices: adjustable mortgage rates. It’s been well-documented that San Diegans overwhelmingly prefer adjustable-rate mortgages (ARMs) to their fixed-rate brethren. Last year, 80 percent of all homebuyers chose ARMs.”

“The problem facing the market today is that ARM rates have risen substantially over the past year. At this time last year, the average rate on a 1-year ARM was 4.24 percent. Last week, the same mortgage averaged a rate of 5.41 percent.”

“Let’s say you are a potential homebuyer with a $2,000 budget for monthly mortgage payments. At last year’s ARM rate, you could have afforded to take out a mortgage for $407,000. Now let’s move forward one year. We’ll give you a 3 percent raise, to account for the yearly rise in incomes, and say that your monthly payment maximum is now $2,060. Despite the increased budget, at today’s prevailing ARM rate you can only afford a mortgage for $367,000.”

“All things being equal, then, today’s ARM borrowers can handle a home price of about 10 percent less than they could have at this time last year. As inventory grows and demand remains weak, mortgage rates are placing downward pressure on home prices. This is not exactly the fertile soil from which a meaningful spring rally could be expected to issue forth.”

More housing bubble reports from the UK. “House prices jumped 1.1 percent in March, taking the annual increase to its highest in almost a year. Nationwide said house prices were unlikely to keep growing at such a strong rate, as rising fuel bills and tax increases weighed on incomes and dampened demand.”

“‘Affordability continues to be squeezed as house prices rise further,’ Nationwide said in a statement. Official data on Wednesday suggested the housing market may cool in the coming months; approvals for home purchases, a leading indicator of house prices six months out, fell in February for the first time in over a year, while mortgage lending rose by much less than expected.”

“‘Even in a market with historically low interest rates..there is a limit to the proportion of income that borrowers will feel comfortable spending on their housing,’ Nationwide said.”

“Ireland’s rapid pace of house price growth has become a problem, the head of the country’s biggest mortgage lender said. ‘There’s a general acceptance now that house price growth is a problem,’ Denis Casey, CEO of a banking division told Reuters.”

“The Fitch Ratings Agency also said on Thursday that it expected house price growth to decelerate, pointing out that a continuing increase in supply would eventually outpace demand. Currently about 80,000 housing units a year are being built in Ireland, equal to 20 units per 1,000 inhabitants. That compares with an average of about five units per 1,000 in other European countries. Inward migration stands at about 30,000 people a year.”

“Nevertheless, having spoken with developers, permanent Casey said he expected builders to complete even more houses this year than the record 80,957 achieved in 2005: ‘I think we will top that this year.’”

“According to Fitch’s Atanasios Mitropoulos, the Irish market is vulnerable to interest rate gains because the majority of people have variable or short-term fixed rate mortgage products. ‘Vulnerability is high given the fact that interest rates are expected to increase,’ he said.”

And from the Scotsman. “Buildings expert Peter Wilson casts a critical eye over the scene laid out before him, a series of high-rise buildings on what has been trumpeted as a world-class waterfront. Wilson and others are warning promises of a waterfront to rival the best in the world may well instead deliver the ghetto of the future.”

“‘I get depressed by the quality of so much of what has been built,’ sighs the director of Napier University’s School of the Built Environment with a shake of his head. ‘Some looks as if it’s been made out of chewing gum and string. There are some good buildings around, but there are also many that are diabolically poor.’”

“This is not quite what we had been led to expect from the regeneration of a massive industrial landscape, optimistically dubbed the Forth Riviera and claimed to be the beginnings of a waterfront to rival the best in the world.”

“Wilson sighs again. ‘The developers talk a big show but they don’t understand what they are doing here. This area is being driven by property speculation, there just doesn’t seem to have been a coherent analysis of what is the biggest remaining site in Edinburgh.’”

“High-rise flats dominating the waterfront have been built first by developers keen to meet the demand for two-bedroom homes, he adds. However, there are now fears that the sheer number of properties, and prices starting at around £140,000 for a one-bedroom flat, may have saturated the market. ‘The developers may have overstretched themselves,’ Councillor Trevor Davies adds. ‘Some of the buildings are far too big.’”

“‘There’s lots of rhetoric comparison with Copenhagen and Barcelona, but no-one from abroad is making those comparisons, it’s only Waterfront Edinburgh who are saying that. What is happening to the waterfront is light years from Copenhagen, Hamburg and Barcelona,’ Wilson said.”

“Newhaven councillor Steve Cardownie warns failing to get it right at the waterfront will haunt us all for years to come. ‘What we do here has to be better than good because it has to last for generations. The responsibility to make the right decisions here is huge, future generations won’t forgive us if we make the wrong choices.’”

The mortgage industry is fighting reform. “Excess restrictions on such nontraditional home loans as interest-only and payment-option mortgages risk stifling the market, industry groups said. The Mortgage Bankers Association and America’s Community Bankers warned in separate letters that too many rules might restrict innovation.”

“‘The American consumer could suffer greatly from any guidance that imposes unduly restrictive standards on the use of these mortgage products,’ the industry group America’s Community Bankers said. ‘Such restrictions could result in lenders’ being less willing to offer alternative mortgage products and this would severely limit the flexibility in financing options that consumers enjoy today,’ the group added.”

“The Mortgage Bankers Association said lenders who took on too much mortgage risk will face market punishment in the form of price disadvantages. ‘The private market can and does correct for excess risk more quickly than can a regulator who necessarily must move at a more deliberate pace,’ the mortgage lenders’ group said.”

“‘We believe that the types of mortgages that are the subject of the proposed guidance should be referred to as ‘alternative’ mortgages instead of ‘nontraditional’ mortgages,’ the community bank group said. ‘While it is the lender’s responsibility to provide borrowers with sufficient information for them to clearly understand the loan terms and associated risks, we do not believe it is appropriate or possible for the lender to identify or dictate the best mortgage product for individual consumers,’ the group said.”

“The community bank group said it appreciated regulators’ concerns that underwriting standards may have slipped at the same time as real estate markets in some areas are softening.”

“Julie Bush, an attorney with the FTC’s bureau of consumer protection, says these alternative mortgages have been around for a while, perhaps 50 years in the case of payment-option ARMs, but were used only by the wealthy. Nowadays they’re being sold as ‘affordability products’ to typical homeowners.”

The Early Show reported on a typical homeowner this morning. “With interest rates on the rise, and the housing market showing signs of a downturn, homeowners are starting to feel the squeeze. For many, the trouble started when the market was booming, and buyers flocked to interest-only loans in order to find their way into a bigger home.”

“Meghan and Vince Jordan recently moved in to their brand new dream home in Denver, but they have one big problem, they can’t get rid of their old one. ‘A year ago, we don’t think we would have been in this situation. We think our house probably would have sold,’ said Meghan Jordan.”

“Their home has been on the market since August, and so far they have dropped the price by $35,000. Now, the Jordans have taken a bridge loan to cover the costs of owning two homes. Even more nerve racking, they’ve taken out an interest-only loan, so for five years they are only paying interest. With rates on the rise, they are worried they took a bad risk.”

“‘That is the $90,000 question, what if (rates) don’t come down? You are going to see people with properties with rates that can potentially double,’ said Vince Jordan. The Jordans are highly leveraged, and their quandary is not unusual”

“First, a look at the risk that comes with an interest-only loan. If, for example, a borrower took an interest only loan of $200,000 in 2003, their monthly payment would have been around $667. After the first adjustment, those monthly payments could jump to $1,415 in 2006.”

“‘That’s why (interest-only loans) are right for some but wrong for a lot of people. That payment increase is not something the average American household can handle. The increase is a byproduct of two of things,’ Greg McBride said. ‘The initial interest rate of 4 percent when you borrowed the money now jumps to something over 7 percent. You also have to start paying back that principal. You could see another payment increase next year. After all, interest rates are still rising.’”

“McBride stresses the importance of cutting into the loan balance and starting to build up what he calls an equity cushion. ‘They were 100 percent leveraged,’ he said. ‘They need to start chipping away at the loan balance, building up an equity,’ which is so important because ‘if you have to sell suddenly, that’s what’s going to absorb your transaction cost.’”

“‘If you are the type that’s going to go out and run up additional credit card debt it’s best to leave that home equity untouched,’ he said. This means no home equity lines of credit to pay off credit card bills, no cash-out mortgage refinancing to pay for home improvements, and no tapping into home equity to pay for goodies like vacations. To do so would mean eroding your protection for when home prices decline.”

“‘You can’t bank on home appreciation to do your saving for you. It’s time to put the noisemakers and punch bowl away because the party is over on that end,’ said McBride.”

The Sun Sentinel reports on some worried real estate professionals. “The real estate industry would be ‘brought to its knees’ if homeowners aren’t allowed to take a property tax break with them when they move, Palm Beach County Property Appraiser Gary Nikolits said Wednesday. ‘We’re going to reach a point where people are not going to be able to afford to move,’ Nikolits said.”

“Nikolits also thinks portability should be restricted to a homeowner moving within the same county. Broward County Property Appraiser Lori Parrish agreed. ‘We could devastate a small community if it were to go statewide.’”

“Real estate agent Mike Kleinrichert, who attended Nikolits’ speech, said at least a third of his listings are from people who want to move out of Florida, in part because of rising property taxes here. ‘Portability would be a fantastic thing for our community,’ he said.”

From the Miami Herald. “Residential developers proclaimed last year the time had come to move Miami-Dade’s Urban Development Boundary to build new homes on hundreds of acres of land. But now the same developers are in headlong retreat. On Wednesday, developer Lucky Start became the third home builder in recent weeks to announce it is yanking its bid.”

“The three biggest residential projects are now out of the bidding. Lucky Start’s 193-acre Newest Kendall project was the latest, Shoma Homes withdrew in February and Adrian Development Group withdrew last week. ‘It’s a beautiful project, but the timing is not right,’ said Commission Chair Joe Martinez, who met with Lucky Start’s Fernandez this week. ‘Let them apply next cycle.’”

A reader sent in this press release. “Cane Island is D R Horton’s flagship development for 2006. The luxury condo resort community is centrally located on the south side of US 192, almost within sight of Walt Disney World and Celebration.”

“The developer reduced prices substantially a few weeks ago to try to get more contracts signed. The problem is that there are very few buyers around to take advantage of the reduced prices. In a further effort to get things moving in the face of a stagnant market, D R Horton has announced that they will increase co-operating broker commission for the next few days in the hope of getting brokers to push their buyers into action.”

“Hightower Realty followed the builder’s announcement with one of their own, they will add the full amount of the increased broker commission to their cashback offer. So buyers over the next few days will get $13,000 cashback on condos priced from $283,000. It is too early to say if the extended period of weakness in the Orlando property market that has followed the last two years of unprecedented price rises is past the worse.”

And a March report from that realtors website. “Any hope of an early return to a balanced market were firmly dashed by February’s statistics. The inventory of short term rental homes surged again to by far its highest level, bringing our in-house index well into the red zone for the first time.”

“The number of vacation homes added to the inventory increased by almost 15% as more owners decided the time was right to take the capital gain on their homes. Buyers, meanwhile, remained thin on the ground, with only half as many sales closing compared to the heady days of last summer.”

“Based on these figures it is difficult to see how a more balanced market could re-appear for several more months. Prices have already dropped by 6 or 7% from their peak of last summer, and it now looks as though my earlier guess that the market would bottom out at 10% down may be optimistic. An eventual drop of 15% from the peak is a real possibility now, still a long way above prices of even two years ago, but disappointing for sellers who were already getting ready to count their capital gains.”

“For buyers, of course, the latest statistics are much more comforting. Prices are already well off their peak, and there are some exceptional bargains where sellers are desperate to sell before things get worse. Now is the time to start looking seriously, although you don’t have to rush, as there will still be plenty of homes to choose from for several months at least.”

The Arizona Republic reports on the housing bubble in Phoenix. “Home builders are wheeling and dealing like county-fair carnies trying to win over nervous buyers. They’re offering incentives like free cars or thousands of dollars to knock down closing fees or to put toward flooring, cabinets and other decorative touches for anyone who will buy an unsold house or sign a contract to have one built.”

“Builders now must offer bigger and bigger freebies to keep shoppers coming to the sales office. The biggest discounts are on standing inventory of homes called ’spec,’ or speculative, houses. Builders have more spec homes on their hands as buyers back out of contracts, many because they can’t sell their existing homes.”

“There’s even more pressure right now for publicly held builders to book sales. The end of March marks the close of the fiscal year for some of them, and they want their annual numbers to look good to Wall Street.”

“‘This is proof that the market has turned from a sellers’ market to a buyers’ market,’ said RL Brown, a home-building analyst.” “In February, Scott Communities began offering a Honda Civic, Honda Element or $15,000 off the base price of a home. Another home builder was selling a completed spec home with such upgrades as granite counter tops, for $386,000, while the base price of the home in the builder’s brochure was $415,000.”

“Incentives give builders a way to cut prices without actually reducing the base cost of their homes. Earlier customers could be upset to learn that the base price of the model they bought months ago now has fallen several thousand dollars because the builder miscalculated the market. Offering incentives is ‘better than having a crisis of dramatic oversupply,’ said (broker) John Foltz. ‘It helps to protect neighborhoods pricewise by making adjustments gradually. The worst thing they could do is not recognize a change in the market and let gross oversupply produce a fire sale later on.’”

“Even with incentives, consumers are being very cautious, said Margie O’Campo de Castillo, a broker who represents buyers seeking new and existing homes. ‘The incentives help, but I don’t see people jumping up and saying, ‘Let’s go buy,” she said. ‘Right now, there’s a lot of gun-shy buyers.’”

A pair of reports provide an update on the housing bubbles in the northeast. “Home buyers in New Hampshire, the nation’s most livable state, are getting a boost from growing inventories of homes for sale. Blame higher interest rates, escalating home prices and a media feeding frenzy for scaring off buyers, leaving the market flush with homes for sale and depressing the rate of home price appreciation.”

“‘During a three-month period last fall there were articles about the bubble (bursting) and all that got people nervous and they wanted to wait and see what happened. There were a bunch of different contributing factors,’ said (broker) Patty Harpin.”

“Home sales tumbled 10 percent, the Northern New England Real Estate Network said. ‘With the amount of inventory, buyers have no choice but to take more time. It used to be they had six houses to look at in their price range and now you may have twice as much. It really does give buyers more options,’ said Harpin.”

“‘What has become evident is that there really are some significant values among the mostly overpriced listings that clutter our MLS, and those homes sell pretty fast. Where there is still a level of greed (unrealistic financial expectations left over from the last few years’ banner markets), or a lack of motivation to prepare the home for sale, or to negotiate, the homes just sit,’ said (broker) Dane Hahn in Stratham, NH.”

“Buyers who took an investor’s or more speculative approach to New Hampshire home buying in the past year or two are also beginning to sweat smaller returns. ‘The slowing of price appreciation means that sellers need to start relying on the equity they have paid into their home more than on appreciation when it comes time to sell. They need to think carefully before taking out a home equity loan. If home values don’t increase enough to cover closing costs and the mortgage is too close to market value, sellers could end up bringing money to the closing table instead of from it,’ (realtor) Linda Allen.”

“Experts say a spring shake out is in the works, but waiting may or may not be the name of the game, depending upon varied individual circumstances among buyers and sellers.”

“‘For investors who are grabbing an opportunity to sell (because the market may go lower, or their adjustable rate mortgage may go higher) their motivation to sell at almost any price could be quite strong (waiting won’t help.). For move-up buyers, who need another bedroom, or a better school system, there are some great values, but they will probably not get all the money on the resale of their existing house (waiting probably won’t help). For old-time Yankees who heard their farm might be worth a couple of million dollars, that was last year (waiting didn’t help.),’ said Hahn.”

And the Wall Street Journal has this on Long Island. “Long Island’s Nassau County boasts beautiful beaches and an easy commuting distance to Manhattan. Recently homebuyers could still find exclusive waterfront properties but bargains have been scarce. But there may be some relief on the horizon for buyers.”

“The supply of homes on the market has increased in recent months, giving potential purchasers more options. Some brokers characterize the market as balanced while others say they are seeing a complete shift in favor of buyers. (Broker) Peter Gentile says his company has ordered more for-sale signs to meet demand caused by the uptick in homes on the market.”

“He says he expects to see more home sellers sweetening the pot by reducing prices. ‘The market has completely changed,’ Mr. Gentile says.”

Another Las Vegas condo tower has halted operations. “The $3 billion Las Ramblas luxury condominium-hotel project backed by actor George Clooney is no longer taking reservations at its sales office on Convention Center Drive. ‘The sales office is not closed,’ Related Las Vegas President Marty Burger said Tuesday. ‘There are lots of rumors. Don’t believe everything you hear. When something is concrete, we’ll call you. I can’t talk about it now. Sorry.’”

“Related canceled its twin-tower Icon project on Convention Center Drive earlier this year and pulled out of a proposal to develop the 61-acre parcel in downtown Las Vegas. When he announced Icon, Related CEO Jorge Perez said he’d ‘never given a project back to the bank.’”

“‘Rumors are flying and I know that,’ Jim Stuart, principal of Centra, responded to an e-mail inquiry about the status of Las Ramblas. ‘I think we will have some answers that I can publicly put out in a week or two. Right now, it is all speculation.’”

“Owner Peter Morton planned to add 1,500 condominium and hotel units to the Hard Rock in a project called the Residences, Flats and Bungalows. That project has also been put on hold while Morton negotiates a sale of the Hard Rock.”

And an update on the recently halted Curve project. “Paula James, vice president of the Curve, said sales have been suspended, but the project has not been canceled. Developers had a 180-day contingency period to reach 75 percent presales required for financing and failed to meet that goal, she said.”

“Most lenders want to see at least 60 percent in presales before signing off on financing. ‘It (presale percentages) kept going up as the media got more negative,’ James said. ‘The number kept going up as other properties continued to not be built. It just made lenders nervous.’”

“Bob Joseph said he liked the looks and location of the Curve, but he didn’t like the contract. The deal, he said, allowed the developer to change the floor plan specifications and required the buyer to pay the escrow fee and seller’s tax. ‘That’s when I started to say it’s not the right deal,’ he said. ‘We were looking at it as a rental. If there’s going to be a glut of condos built in Las Vegas, it’s not going to be a seller’s market.’”