The Housing Bubble

Let’s clear this bloggers desk for the weekend. “The inventory of homes for sale in the Washington metropolitan area climbed to 28,200 last month, meaning that buyers had plenty to choose from, but that sellers had to sit and wait for offers. Last month’s inventory was huge compared to February 2005, when only 9,800 homes were on the market.”

“As a result, sellers are going to have compete on price, something they haven’t done in years. And sellers aren’t going to be asking as much to begin with because they are beginning to recognize the perennial truth that ‘price sells.’”

“So far this year, sales of North Texas homes priced below $120,000 have fallen about 13 percent. Sales of houses costing between $120,000 and $200,000 have grown 14 percent, and sales of higher-priced houses have shot up 20 percent and more. ‘There has been a flurry of people coming in from California and other higher-priced markets buying houses,’ said James Gaines, an economist with Texas A&M.”

“To move increased inventory, builders have raised the incentives they are offering on some home models. Going into 2006, builders had 8,751 unsold new homes in the D-FW area, an all-time high. ‘We will continue to have ample speculative construction, so I wouldn’t be surprised to see another round of discounting and incentives this summer in D-FW,’ Dallas-based housing consultant Ted Wilson said.”

The Wall Street Journal reports not all lenders are opposed to the new guidelines. “Bank trade groups and financial institutions blasted proposals by bank regulators to rein in unconventional mortgages that allow borrowers to afford more expensive housing, dismissing concerns about risk as overblown.”

“Meanwhile, a few consumer advocacy groups and small banks wrote letters applauding strict guidance. ‘It is very dangerous to use mortgage products that allow borrowers to buy homes more expensive than they can afford. Add this to a slowdown in the economy and the job market and we could have a serious recession,’ said David Stone, president of the Portales National Bank in New Mexico.”

Homebuilders are beefing up their credit lines. “Stephen Scarborough, CEO of Standard Pacific Corp. today announced Standard Pacific’s increase in its revolving credit facility capacity from $925 million to $1.1 billion through the exercise of the facility’s accordion feature. In addition, the Company proposes to issue a 5-year $100 million loan and a 7-year $200 million loan.”

“Toll Brothers, Inc. today announced the expansion and extension of its bank credit facility. The $1.8 billion unsecured facility, which matures in 2011 and replaces the Company’s existing $1.2 billion revolving credit facility, is comprised of a $1.5 billion revolving credit facility and a $300 million term loan. The credit facility has an accordion feature under which it can increase to a maximum of $2.7 billion.”

From the Post Star in New York. “Green grass and grizzly bears are not the only thing coming out of hibernation this spring. Local real estate offices have noticed a surge of home owners looking to sell in the past weeks, according to Nels Crisler, president of The Warren County Association of Realtors.”

“Crisler said part of the rise in properties may be due to many people being ‘cash poor,’ which means a person has money coming in but no savings for a down payment on a home. ‘We’re finding a lot of people are financing 90 to 100 percent of the homes they’re buying, which means higher mortgages. Again, it’s still too early to tell if it’s indicative of a buyer’s market. I’d be making millions if I could predict that.’”

The Sun Sentinel in Florida. “Q: What is going to happen to all these condo developments when the developers realize that they are not able to sell them? A: Experts predict developers would try to sell at below-market rates. In other cases, lenders would take back the properties. Some condo projects also could be canceled if developers can’t get financing.”

And the Las Vegas Sun. “For now Panorama Towers is surrounded by old industrial single-story warehouses. The closest restaurant is an In-N-Out Burger to the south of the development. It’s a neighborhood that had many industry observers doubting the project in the beginning. The variety in plans also led to some oddly shaped units, and in some cases interior bedrooms with no windows.”

“Sales have been helped by young celebrities, from Leonardo DiCaprio to Toby Maguire and most recently Pamela Anderson.”

“Las Vegan Jason Smylie, 24, purchased a 1,644-square-foot unit with a friend in the first tower for $650,000. That unit is now for sale, listed through Panorama’s resale program, for $1.5 million. Smylie said if the unit doesn’t sell, he may live in it instead. ‘It has a prime view of the Strip,’ he said. ‘I’m stoked.”

A pair of reports on Californian housing markets. “Housing prices in Nevada County dropped for the third month in a row in February. The median price of house and condominium title transfers recorded at the county Recorder’s office dropped to $459,000 in February, compared to $470,000 in January.”

“‘People are starting to lower their prices, and we need that,’ said Patti Moore, broker in Nevada City. ‘Things just got too out of hand.’”

“Nevada County Board of Realtors director Skip Lusk said, ‘From my perspective, there isn’t any trend yet. My sense is, as the market tightens up a bit..people who really want to sell their house will bring the price down.”

“While some sellers seem to be lowering their prices to appeal more to wary buyers, others are digging in their heels, real estate agents said. In many cases, the prices that homes fetched six months ago don’t square with many buyers’ perceptions of where the market is headed.”

“‘(Sellers) still think that, because the house across the street sold for $50,000 to $100,000 more than theirs, that theirs should be worth that, plus some,’ David Kerr, a Bay Area agent. ‘What’s happening is, it’s not happening.’”

And the Merced Sun Star follows up on the LA Times article. “Real estate is a driving force in Merced’s economy. Five of seven members of the City Council draw their livelihoods from it, four are licensed to sell homes, including the mayor.”

“It’s little wonder that an in-depth Los Angeles Times article spotlighting the city’s rapidly cooling housing market has made the rounds. ‘I think half the town has read it,’ said Mayor Ellie Wooten, a veteran real estate broker in Merced.”

“The article follows the city’s real estate market from the heady days of the past few years to the grinding slog of today. ‘It’s changed rapidly,’ said Wooten. ‘It boils down to supply and demand, and right now apparently we have an oversupply.’”

“But the city’s historic housing boom continues, in spite of slowing sales numbers. While many newly opened subdivisions sit empty, developers in Merced have 7,000 new houses in the works. Hundreds are expected to go on the market this spring. Councilwoman Michele Gabriault-Acosta said about 200 resale homes were on the market when she got her license to sell homes in July. The number has since grown to more than 600.”

“Gabriault-Acosta said she thinks too many homes on the market were overpriced.”

“Councilman Carl Pollard, who got his license to sell homes in August 2004, said the days of multiple offers above asking price are definitely gone. He said $30,000 and $40,000 breaks on homes are not uncommon. ‘Sellers are giving concessions, but if you look at the market, they’re still not moving property,’ he said.”

The Aspen Times has a rare report on that Colorado town. “Getting the straight poop on Aspen real estate from most brokers is impossible. Unable to get at the truth, I contacted my old friend Turner Hicks to shed light on the local real estate market.”

“Q: Do you think owning a house in Aspen is a good investment? Turner: No.”

“Q: Ah, could you be more specific? T: You can read as well as I can. The City of Aspen 2005 Cost of Living Index Study revealed that real estate in Aspen has appreciated by only about 2.5 percent annually for the past six years. That’s far below the national average of almost 12 percent per year over the same time period. Those trend lines haven’t inverted since the silver crash.”

“That report you cite; nobody gives it any weight. It’s obvious that our local governments don’t know anything about numbers, finance, or economics. The signs of a booming real estate market are everywhere. Those paltry appreciation figures can’t be correct. T: You’re right. Actual appreciation was likely less than reported. The city simply compared average home sales prices over the years. But, Aspenites are addicted to home improving. Those never-ending upgrades and remodels figure into a rising average for home prices, but their costs are not real appreciation.”

“Q: You talked then about how Aspen was no longer an unknown quantity, thus the speculative qualities of real estate here were crap. Aspen is becoming more like every other small city with its chain stores, traffic jams, and even the same types of crime emerging. Aspen was no longer setting trends, but began chasing them. Has anything changed in that regard?”

“T: No, those tendencies towards conformity continue. Listen to the town’s leaders; the common argument is that we have to do this, that and the other thing to compete with everyone else. And, like everywhere else, we are now designing and building homes that will only exacerbate our sluggishness.”

“R: For example? T: Well, there is a simple axiom in real estate: Land appreciates in value; sticks and stones and even gold-plated bathroom fixtures don’t. Manmade components of real estate lose value with each passing day. Even steadily escalating replacement costs (you know, inflation) are usually not enough to offset the natural deterioration and obsolescence of whatever is ‘in’ now.”

“Back when properties in Aspen were truly appreciating at astronomical rates, houses were relatively inexpensive in comparison with the cost of the land. That trend is completely haywire now. Like modern suburban development, most Aspen properties are comprised of houses built lot line to lot line that cost up to three times as much as the underlying land that they sit on.”

“In this scenario, even if the land appreciates at a brisk 10 percent a year, the entire property only increases one-quarter that much, or 2.5 percent. Factor in normal wear and tear on the buildings, and you can easily end up with a property worth less than it was the year before, even in a strong economy!”

“R: What about second homes? T: They’ll be the first to go since they are totally discretionary. I think a shift is already occurring and manifesting itself in the popularity of time shares. They are incredibly lousy investments, but people are willing to risk the smaller outlay at this point in the game. At the same time, this temporary manic rush into time shares inflates all local real estate prices to unsustainable levels.”

“R: So, are you predicting a crash, then? T: Well, I will say this: It’s more likely to occur when everyone at the party is intoxicated.”

The Las Vegas News Journal has some news on land prices. “Housing prices are flat, high-rise condo projects are canceling sales, and now land values have dropped by almost half in Las Vegas, local research firm Applied Analysis reported. The average price for an acre of vacant land in the valley was $376,200 in the fourth quarter, down 47 percent from the previous quarter and down 28 percent from the same quarter a year ago.”

“Several factors contributed to the decline in land prices, Brian Gordon said Wednesday. Foremost is the sale of 2,675 acres in North Las Vegas by the Bureau of Land Management. Olympia Group paid $639 million, or about $239,000 an acre, for the land.”

“Secondly, there was a shift in investment activity toward other Las Vegas Valley locales that have below-average pricing, Gordon said. ‘We saw significant investment in the north and northeast part of the valley that traditionally carry lower-than-average prices,’ he said.”

“Land prices that shot up by as much as 99 percent during the past 18 months are ‘clearly unsustainable,’ Gordon said. ‘The economics of land pricing, escalating development costs and modest increases in interest rates will not allow for average land valuations to reach well beyond the recent peak, at least not in the near term,’ he said.”

“Jeremy Aguero said parcels that have the ability to capitalize on density and develop ‘new urbanism’ projects will allow pricing levels to reach in excess of $1 million an acre. Creative, risk-taking developers will likely hold land values up early this year, while speculative investors are finding it difficult to ‘make the leap,’ he said.”

Carol Lloyd got an odd feeling at the recent real estate expo. “It is ecstasy. It is apoplexy. It is beyond believing and yet painfully familiar. It’s an aging real estate mogul who has found a second career as a trash-talking, self-help guru. Welcome to Woodstock for the equity generation, headlined by none other than our own national real estate idol, Donald Trump.”

“The Expos have gathered ever larger audiences, but San Francisco’s first Expo, which took place last weekend at the Moscone Center, was the best attended yet. The theme song for Donald’s keynote speech more or less sums up the Expo’s raison d’etre: ‘Money-money-money-money.’ The marketing billboards plastered with Donald’s smug mug up the ante with specific numbers: ‘One weekend can make you a millionaire.’”

“But as I wandered the halls, visiting workshops on tax evasion (er, I mean, avoidance) and the wonders of pre-foreclosure fortunes and flipping luxury homes to Florida condos (some are still available, get them while hot (not!)), one question kept nagging at me: Why now?”

“Real estate has always been a national obsession. In the six years since the Nasdaq imploded, it’s been floating the American economy. But why now in a moment when even the most maniacally optimistic of real estate agents is admitting that the market may be showing signs of decline? Why would over 61,000 people in one of the most overpriced housing markets in the world spend good money to learn about real estate investing?”

“The Learning Annex (press release) offered one possible explanation: ‘Real Estate in San Francisco is now the drug of choice.’ This metaphor, of course, suggests that it’s a dependence that has grown to be as unhealthful as it is irresistible. Perhaps we’re just hooked: We can’t stop ourselves from indulging even when we see signs that the party is over.”

“And perhaps the very success of the Expo is an ominous sign of the bubble popping, rather than a sign that the real estate boom is continuing.”

“As the saying goes, When your taxi driver starts giving you stock tips, you know it’s time to sell. Well, isn’t a convention of this sort simply a collection of all the stragglers to the real estate boom? When dancers have ‘fun’ inscribed over their gyrating bosoms, isn’t that a sign that the boom has reached its irrational peak?”

“As I sat in the front row and listened to Trump, who is paid $1.5 million for his talks, I couldn’t help but feel this frenetic carnival of high-flown cash-flow churn uncomfortably in my gut. Trump is nothing if not an expression of our ids. As he regaled the audience with his own shameless candor, ‘When I walked out here tonight I said to myself, it doesn’t f–ing matter!’ And as he dispensed hard-bitten business pointers (Be paranoid, get even and always, always get a prenuptial agreement). I felt the audience’s visceral appreciation of his willingness to articulate what they wanted to say but didn’t dare.”

“Perhaps it was the perfect embodiment of this cultural moment. The masses had gathered and together they were learning to look out for No. 1.”

The Washington Times reports on the DC housing bubble. “The Washington metropolitan area’s housing market cooled off during the latter half of 2005. For the first time since 1999, buyers began to be on equal footing with sellers. How much more will the market cool? Will home prices fall, or just stabilize?”

“Despite a growing job market, the supply of homes for sale has ballooned since August. Excessive supply can lead to a softening, or even decline, in home prices. ‘Prices have pretty much been flat for the last four months,’ (realtor) Michael Turk says. ‘Prices came down between June and November and have been stable since then. Some of the people who pulled out of the market last year have returned. Today they are getting the home they want, while last year they couldn’t.’”

“That has a lot to do with the supply of homes for sale. Buyers in February had 28,000 homes to choose from. Last February, there were only 9,800 homes for buyers to see.” “‘In March of last year, there were only 45 condos available in Alexandria,’ says Mr. Turk. ‘Now, there are 333 available. So buyers are finally getting what they want. The demand is still there, there’s just a lot more supply now.’”

“One tool used by competitive buyers is the escalation clause. When added to a purchase offer, the escalation clause automatically raises the buyer’s offer to beat other offers. In some cases last year, the winner of the home was the one with the highest cap in their escalation clause. However, as buyer competitiveness has softened, escalation clauses have become less common.”

“‘We are still seeing escalation clauses today. I’d say probably 1 in 10 offers contain one right now,’ says Dale Mattison, associate broker in the District. ‘Last year, we were seeing the clause in 5 out of 10 offers, and in 2004 I would say 9 in 10 buyers used an escalation clause.’”

“Buyers aren’t the only ones who change their strategy when a housing market slows. Sellers need to rethink their pricing plan. ‘The more sophisticated Realtors are telling sellers not to be aggressive like last year,’ Mr. Mattison says.”

“Many home buyers use pricing to decide which homes they want to see, but once they’re in your home, how it shows is what matters. ‘Sellers need to make sure the house shows well,’ says Mr. Mattison. ‘A year or two ago, you didn’t have to do anything to sell a property. You’d just open the door and it would sell regardless of how it looked. But we’ve spent the last six weeks getting my mother-in-law’s home ready so it will shine when it hits the market.’”

“And how do things look for buyers this year? Mr. Turk says, ‘Buyers should be able to negotiate most strongly in the condo market. This market will remain very, very flat and soft this year, so certain people should take advantage of the low interest rates and the abundant supply, and buy now.’”

Bloomberg reports on the housing bubble in the US. “Sales of new homes fell 10.5 percent in February, the biggest drop since 1995, and sales of existing homes slipped in five of the last six months, leaving a record 3 million unsold houses on the market. Sales will fall further this year and price gains will slow, predicts the NAR.”

“Signs of the cooling market aren’t hard to find on Bradford Street in Boston’s South End, where Victorian townhouses are listed for as much as $4.5 million. ‘Last year, houses were snapped up as soon as they were put on the market, so you never even saw a sign,’ says Kenneth Kinna, who owns a 10-room townhouse in the neighborhood. Now there are three ‘For Sale’ signs on his block.”

“The trend is most pronounced in affluent neighborhoods in the Northeast . Maryam Safai’s 5,000-square-foot, five-bedroom colonial in Mahwah, New Jersey, has been on the market for a year, even after three reductions in asking price. ‘I’m not going to give in to the market,’ says Safai, 44, a dentist. ‘I’m not selling below our current asking price’ of $1.69 million.”

“Buyers of houses in the $1 million to $4 million range are ‘particularly sensitive to interest rates because the monthly payments on houses in that range are substantial,’ says Anthony Hsieh, CEO of LendingTree.com. While damping price growth the most at the high end of the market and in the Northeast, rising rates have also reduced demand for riskier forms of financing and begun a shift of power from sellers back to buyers, economists and brokers say.”

“In Montgomery County, which includes the affluent Washington suburbs of Bethesda and Potomac, unsold homes were on the market an average 58 days in February, compared with 37 days a year earlier, according to Metropolitan Regional Information Systems Inc. The 3,030 homes for sale in the county in February were almost triple the 1,190 listed a year earlier.”

“Partly as a result of the Fed’s 15 consecutive increases in interest rates, adjustable-rate and interest-only loans, closely tied to short-term rates, are on the decline. Such loans were popular with buyers trying to stretch their dollars and with speculators seeking to minimize the cost of buying property for short-term profit.”

“‘That’s probably a good thing,’ says former Fed Governor Edward Gramlich, who left the Fed in August. ‘When you raise rates, and we knew what we were doing, one of the consequences is fewer people getting involved in riskier short-term mortgage products,’ says Gramlich.”

“Buyers are looking for more than peace of mind. They’re looking for a deal. ‘It’s switched to a buyer’s market,’ says Karen McCormack, (broker) in Boston’s Jamaica Plain neighborhood. ‘Homes are still selling, but the buyers have much more say in prices this year.’ On a Boston street, lined with a dozen ‘For Sale’ signs, McCormack is trying to sell a three-bedroom house listed at $535,000. She’s holding ‘commuter hours’ open houses on Monday nights to lure would-be buyers on their way home from work.”

“‘When the market was hot, we never would have had to do this,’ she says.”

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