April 30, 2006

The Million Dollar Question For Condos

A pair of reports on condos. “Home prices in much of the Washington region will likely drop 10 percent or more because prices have far outpaced affordability for first-time buyers and investors, according to a forecast this week by Mark Zandi, chief economist of Moody’s Economy.com.”

“Condominiums will be hardest hit, Zandi predicted Thursday at the National Association of Home Builders’ spring construction forecast. He said that the growing inventory of condo units that are for sale or being built here suggests that the slide would be worse for that sector.”

“Zandi predicts declines of 10 percent or more in the area made up of the District, Northern Virginia and suburban Maryland excluding the Bethesda area. Northern Virginia is susceptible to the risk of price declines because it has the highest concentration of condos and has seen the most building generally, Zandi said.’”

“He pinpointed six areas where prices have exploded as the most likely to see crashes. In addition to the Washington area, they were Atlantic City-Ocean City, N.J.; Las Vegas; Miami; Orlando; and Phoenix.”

“More than 40 percent of home buyers last year were in the market for the first time. Until recently, lenders had still been able to entice borrowers with loans that required no money down, interest-only payments or other terms that kept monthly payments low, but regulators and lenders themselves have gotten increasingly nervous about exposure to defaults, he said. ‘This game is up,’ Zandi said.”

From the Dallas News. “As construction cranes fill the Dallas sky, some are wondering whether there are enough buyers to fill the opulently appointed properties. Dallas has about 15 high-end projects on the market with a total of more than 1,700 units. Most of the units start at $400,000, more than three times the average value of a single-family home in Dallas. An additional 1,000 units are on the drawing board.”

“Are the ranks of the Dallas wealthy stout enough to fill them all? ‘That’s the million-dollar question,’ said Paul Nelson, (developer) in Dallas. ‘The answer is, we don’t know.’”

“Indeed, one effect of sluggish price appreciation in this area is that some longtime residents say they don’t have enough equity in their current homes to afford to move into the pricey new condos. For example, Dan Koop and his wife might consider moving to the city, but he doesn’t think he could recoup the $325,000 that he paid in 1985 to build a home in Plano. ‘We would have to take a $25,000 to $30,000 loss on it,’ he said.”

“Mortgage payments, taxes, insurance and fees on a $500,000 unit could add up to a monthly payment of almost $4,000, based on a 20 percent down payment, said Dallas real estate consultant Mike Puls. That doesn’t factor in monthly homeowner dues. A 2,000-square-foot unit could have monthly fees of more than $1,200.”

“In Dallas, the buyers come from three groups, each represented about equally: empty-nester baby boomers, well-heeled young people and out-of-town investors. Relatively speaking, Texas real estate is cheap, giving investors more of an upside compared with overheated real estate markets across the country. The interest from out-of-town investors over the last year has validated Dallas’ attempts to revitalize the center city, said (consultant) Michael Granfield.”

“Bernard Weinstein, at the University of North Texas, said he’s concerned that most of the buildings are aimed at the top end of the market, with little available at lower levels. ‘I think they’re missing a market for pre-baby boomers like me,’ he said. ‘I don’t want to take out a $300,000 mortgage. I don’t see a lot of construction of what I call ‘multifamily for grown-ups,’ Mr. Weinstein said.”

“‘I’ve seen the ebb and flow, and something is different now,’ Dallas chef Stephan Pyles said. ‘There’s such an excitement here. I’ve not felt it since the early ’80s. We’ve finally become the city that we hoped and thought it was going to be in the ’80s.’”

‘What’s It Like Being A Housing Bubble Leper?’

One reader wants to know if you’ve taken some personal flak for your housing bubble views. “How could I forget the most personal issue probably facing many on this blog? What’s it like being a Housing Bubble Leper?’ Even now with all the evidence on the streets!!”

“My personal example is with my wife’s family. Her brother’s getting ready to buy a house in Utah for over $300K and her Mother won’t listen to my advise to sell her Vegas home and rent even though she wants to sell in 2 years.”

“My wife says things like ‘oh, you and that silly bubble,’ ‘quit scaring my family.’ ‘It’s their money,’ etc.”

‘All Buyers Pull Back’ From Phoenix Housing Bubble

An Arizona Republic editorial on the Phoenix housing bubble. “Speculators supposedly have fled metropolitan Phoenix’s housing market, so it’s no surprise that home sales have dropped as that demand has dried up.”

“What is surprising is that home sales and building are down more than the rate at which investors were buying last year. New-home building permits were down 16 percent for the first three months compared with a year ago, reports real estate analyst RL Brown. Resales plummeted 34 percent during the first quarter.”

“Roughly combine those two figures, and the housing market is off more now than the boost investors gave it last year.”

“As many as 35 percent of all home sales Valley-wide were investor-driven deals last year, according to recent figures from mortgage giant Freddie Mac. That’s almost 10 percent higher than previous estimates.”

“Not all of the investment deals were for new homes. But in metro Phoenix, investors flooded the new-home market first. Home builders tried to crack down on speculators, but that didn’t deter their binge buying. Speculators then poured into metro Phoenix’s resale market and drained inventory and hyperinflated those home prices.”

“Look at what’s going on now. New-home deals are falling through because people who signed to buy one can’t sell their existing home or can’t sell it for enough to buy the new one or pay off the debt on their old one.”

“Valley home listings hit 36,000 in March, an all-time high. Housing analysts say as long as listings keep climbing, the housing market will keep slowing. Who is trying to sell now? If it’s the less-experienced local investors who got into the game late, then the Valley’s housing market isn’t done hurting.”

“Phoenix apparently no longer is the darling market for big home builders. From Scottsdale-based Meritage Home’s recent first quarter earnings report: ‘In Phoenix speculative activity and high price appreciation in 2005 has recently contributed to higher-than-average cancellation rates.”

Is Your Housing Bubble At A Standstill?

What’s happening in your housing market this weekend? Lots of open houses, probably. Here was one readers’ request. “I want to know how everyones local markets are. I’m outside of Philly (West Chester) and the market is at a standstill with sellers refusing to lower prices just yet and the houses that are selling are the ones priced reasonably.”

“Also inventory, natually, is building up. But just in the past few days of noticed alot of very, very overpriced houses come on the market. I’m talking about houses that are barely $300,000 with an asking price of $400,000 plus. That kind of overpricing hadn’t been to evident so far this spring.”

And one economist sees a weak housing market in New York. “Merrill Lynch & Co. Inc., chief North American economist David Rosenberg says better-than-expected U.S. new-home sales in March are partly a result of price cuts offered by builders.”

“Mr. Rosenberg sees many ominous signs: Over the past 12 months, actual sales are down 0.7 per cent in the United States, but the inventory level has ballooned 39 per cent and an astounding 85 per cent in the condominium market. This backlog of unsold inventory will only get worse before it gets better, he warns.”

“Meanwhile, spending on home renovations is slowing, mortgage applications have taken a dive in April, and a recent survey of home-buying intentions recorded the lowest reading since November of 2004.”

“In New York, Mr. Rosenberg..thinks (housing) is already rapidly deflating in price and resale prices will likely start to deflate this summer.”

Housing Bubbles And Japans’ ‘Lost Decade’

One reader wants to compare the current US housing bubble with Japan’s. “I don’t know if you’ve ever discussed this but I’m interested in hearing about the differences & similarities between the U.S. today and the peak and decline of Japan’s real estate.”

From the Times Online. “After a decade and a half of recession, deflation and national funk, Japan may be bouncing back. If so, it has much to do with couples like Masaaki and Mikiko Isozu. Like young Japanese families across Tokyo, they have just reached a momentous decision. After years of renting, they have decided to buy a home.”

“But the Isozus’ excitement is tempered by a deep caution. The anxiety can be summed up in a single word, ‘bubble,’ the period of high growth in the late Eighties that burst so disastrously in the early Nineties and pitched Japan into 14 years of economic stagnation. ‘When it comes to property, we can’t shake off the memory of the bubble,’ says Mr Izozu. ‘Could this be another bubble? We can’t be sure of the recovery yet.’”

“The evidence suggests that, after several false dawns, Japan’s economy is expanding once again. Yesterday the Government announced that consumer prices were rising for the first time in eight years. Unemployment is sinking. Across the capital, old buildings are being demolished to make way for new shops, offices, hotels and homes.”

“But, however encouraging the figures, this will be a recovery very different from Japan’s last period of high growth. No one of the Isozus’ generation can forget the disastrous popping of the bubble economy in 1992. Intoxicated by surging asset prices, banks lent money on the back of apparently unquenchable property values.”

“When the bottom fell out, debtors found themselves unable to meet repayments. Bankruptcies, unemployment, homelessness and suicides soared. The job of writing off bad loans, streamlining companies and dealing with the surge of dismissals and bankruptcies took more than ten years, the so-called ‘lost decade’ in which the economy was further damaged by a spending slump.”

“Little wonder, then, if many people are watching and waiting. Japanese are the world’s most assiduous savers, but after 14 years of recession, a quarter of households have no savings. Such families are likely to use their salary rises and bonuses not to buy new cars and flat-screen televisions, but simply to replenish bank accounts.”

The Weekend Bits Bucket And Craigslist Thread

Please post off topic links, insights and Craigslist finds here. This thread will be forwarded through the weekend and is not intended to discourage off topic posts elsewhere.

Pre-Construction Buyers ‘Put The Lawyer On Speed-Dial’

The Palm Beach Post has this on pre-construction condos. “Did you buy a condo pre-construction? Remember these words: Buyer beware. Some buyers moving into two new condos in downtown West Palm Beach say things are oh-so different from what they expected. Others are exasperated by what they say is shoddy interior workmanship and unfinished punch lists.”

“New condo owners say promises were made, and they don’t want to hear excuses. ‘I should not have to go into this and worry!’ said Wendy Oats, who lives in a $750,000 penthouse at One City Plaza.”

“It’s gotten to the point where developers such as Kolter and BAP Development are on the defensive with residents. Kolter and BAP need to keep folks happy: Bad reviews could hurt nearby condos they’re building.”

“Experts say the problem with pre-construction is you can’t see what you’re getting. So some owners of One City Plaza who thought ‘European style cabinetry’ meant wood were surprised to learn it really means laminate. ‘There’s nothing redeeming about this building, other than the location,’ said Kevin Landers, who bought a $600,000 condo.”

“Valet parking was promised at first, but along the way was taken out during a redesign. Kolter execs say they disclosed the change, but Kenneth Pincourt, owner of two $750,000 penthouses, disagreed. The missing valet and doorman hurt the building’s image, Pincourt said, and he hates the unfinished entry from the garage. ‘I’ve never seen a building finished this way,’ he said. ‘It’s a damn shame.’”

“Karen Zarif is unhappy her unit is 100 square feet smaller than sales brochures promised. Now she says her dining area isn’t big enough for even a bistro table. ‘I’m so upset, I get sick to my stomach,’ Zarif said. In an e-mail, Bermello wrote that Zarif’s unit type ‘was subject to ‘facade movements… ins and outs to create architectural interest.’ Bermello said Zarif’s final square footage was fully disclosed.”

“Owner Dwain Wall, who owns an $800,000 condo, says he’s realizing ‘decorator ready’ means the building will be in a perpetual state of construction. Nearly half the building’s units are unfinished, and some of those are owned by investors who plan to resell them.”

“Several buyers say they wish city hall would get involved. But Neil Melick, West Palm Beach’s construction services director, said the city only oversees building infrastructure, such as plumbing and electrical. Issues between builders and buyers are ‘contractual,’ Melick said.”

“Put another way: Time to put the lawyer on speed dial. That’s probably where things will end up for some buyers. Others are pondering lessons learned. One buyer says he’s reached this conclusion: ‘I will never buy pre-construction again.’”

April 29, 2006

Is There A ‘Mad Dash For The Exits’?

The New York Times has this on public awareness. “A pyramid scheme is a foolproof way to make money, until it isn’t. What is the breaking point? Probably about the time some spoilsport whispers ‘pyramid scheme,’ and there’s a mad dash for the exits.”

“Echoes of housing prices? Not exactly. Still, an almost pyramid-like frenzy has engulfed some areas in recent years, with buyers convinced that within months they will find someone who will pay even more for them.”

“If there are whispers of a ‘housing bubble’..most people still haven’t heard them. As recently as a year ago, Gallup (found) just 23 percent of Americans were even moderately familiar with the term. In the latest survey, that jumped to 40 percent.”

“24 percent now say that a bubble is likely within a year..only 7 percent expect it in their own backyard.”

And here’s some info on a pricey backyard from the Santa Maria Times. “The UCSB Economic Forecast, delivered in Santa Barbara Thursday, said that overall, the state and region’s economies are strong, and are likely to stay strong for the near future. But the Forecast Project’s 2006 report was not without a few red flags.”

“There are several unknowns, and then there is the uncertainty surrounding the national, state and local housing markets. Locally, the folks at the Forecast Project predict the housing market will remain firm. a distinct departure from recent years, when the market could only be described as meteoric.”

“The report shows a very slight movement away from a seller’s market, to one perhaps a little friendlier to buyers, but not much friendlier. Median home prices for March tumbled significantly from February figures.”

“Here in the North County, for example, the median-priced home in March was $461,700, which is down more than $18,000 from February. Countywide, the dip was even more pronounced, the March median was $750,000, down $37,500 from the previous month.”

‘Which Area Gets Hurt Least And Why?’

Several readers suggested . “Which area gets hurt least and why? Upper NYS because there’s no place to fall from the bottom? Boulder? The New Urbans like Austin? Ultra high end places like Aspen because nobody would notice a million off the top? Charlotte, Memphis types because of energy concerns?”

Another said, “It seems clear that certain areas (SD, Florida, NoVA) have begun to tank, while other areas seem OK (NYC, SF). Delayed reaction or are some areas just different?”

One added this, “A related topic…Which areas were barely affected but may still get splattered with froth as the bubble pops?”

“For example, I’m seriously looking at acreage out where my dad lives in boondocks Arizona. Land is still available for $1,000/acre. Will even this price go down? Or will a lack of RE buyers from California eventually motivate some land sellers to become desperate for a low-ball cash offer?”

One reader had an answer. “I’d say it will go back to being ’speculative land’ in the old-fashioned sense. That is, don’t buy any old rectangle of dirt unless the offer looks particularly compelling and don’t plan on selling it within 10 years.” A reader from Texas.

“The only the thing banks in Texas won’t allow a 0 down loan on is raw land (in fact some won’t loan at all). I think raw land will fall the hardest (even though they are not making any more of it).”

From Colorado, “Flippers have been buying land too and are starting to get itchy.”

“I’ve been looking for some land in Colorado; one real estate guy in Pueblo has thirty or forty listings and six or seven at least say ‘motivated seller’ or ‘just reduced’ or somesuch. I think one might have come right out and said ‘offered below owner’s cost.’ These are just over the $1,000/acre range as well, for 35-40 acres, so the sellers are almost certainly not in foreclosure, they just want to get out of an investment that ain’t going anywhere. What the heck, go for a low-ball.”

Another added, “One thing about this bubble is the true high-end areas didn’t go up anywhere near as much as the middle/lower end areas. Places such as Marin County, Greenwich/Darien CT, Winnetka/Glencoe IL, Jackson WY etc. did OK, but it was really the Baskerfields and Vegases that went completely loony. The rich actually have the means to afford (in the traditional sense) $1-2-5 million houses and they’re far more diversified across other assets. A few hundred thousand off their house is just an ordinary bad day in the market.”

One looks for value, “I think any non bubble area that has a good public school system, good colleges, universities, and hospitals, and is attracting major companies won’t burst.”

From Las Vegas. “Which area will get hurt least? Las Vegas, of course. I’m predicting another wave of hyper appreciation. Not yet, but… soon.”

‘Flood Of New Homes’ To Produce ‘Discounts’: Polk Co., Fl.

The Online Ledger has this update on Florida. “Homes aren’t selling like they used to back in the good ol’ days of mid-2005. But make no mistake, Polk County’s housing bubble isn’t bursting, it’s just losing a little air. And that can mean more competitive pricing to attract buyers.”

“‘Most of last year, new home construction was lagging the population increases so sellers of homes could ask and receive some very high prices,’ said Ben Crosby, president of the East Polk County Realtors Association. ‘That has changed and is evidenced by numerous price-reduced signs on houses.’”

“Crosby advises that Realtors should counsel their clients to review their asking prices and adjust where needed.”

“‘There is a little bit of a surplus,’ said Beverly Page, a Realtor in Lakeland. ‘I have seen some listings for investors coming down in price. Some purchased these homes last year to put on the market to sell. But the trend is that they are going down in price and are not going to make a profit like they anticipated.’”

“It has also impacted the amount of time a home remains on the market before a sale is final. ‘It is a lot longer now,’ Page said.”

“‘The flood of new homes coming on the market should offer an opportunity for new home buyers to take advantage of some discounts coming their way,’ Crosby said. Realtors say that this is just a way of the market regulating and correcting itself.”

What A Buyers Market Really Is’

Several readers are interested in what makes a ‘buyers market.’ “Can we have a thread on what a ‘buyer’s market’ really is. There seems to be a misconception going around that a ‘buyer’s market’ is when the price only goes up 5%, or maybe even if the price is flat.”

“I don’t agree. A ‘buyer’s market’ is when an asset trades beneath its intrinsic value. Just because buyer’s right now can get some small concessions from a seller that they couldn’t get a year ago doesn’t mean that it’s a ‘buyer’s market.’ In the bubble areas, prices will have to go down 40% or more for it to be a ‘buyer’s market.’”

Another added, “Exactly, this market is far from being a true buyers market.”

And another, “Substantially BELOW asset value AFTER inefficiencies and transaction costs and lost opportunity costs are subtracted. That means markets like Buffalo. Zip or Zill or Real the Buffalo area for thousands of houses for sale below the cost of demolition.”

Condo ‘Highrollers Folding’ In Las Vegas

The LA Times reports on the condo bust in Las Vegas. “In the last several months, at least seven marquee Las Vegas condo projects have either been canceled or put on hold, causing a dust storm of rumors to swirl through the city and elsewhere as investors wonder if this is a harbinger of a slowdown.”

“The reasons for the projects’ retreats don’t bode well for the larger picture: lack of buyer interest and escalating land, construction and labor costs.”

“Speculators have played a role in the current high-rise slowdown. Buyers looking to flip units for a profit, rather than make Las Vegas a first or second home, flooded the market in 2004, raising prices. Most are expected to sell the units when the projects open their doors, some as early as this summer, said (developer) Bruce Hiatt. At least 20% to 30% of the units were sold to speculators.”

“Then about six months ago, speculator interest shifted to other markets, which created a shortage of buyers for the latest Vegas projects. Rising prices and a glut of condos contributed to the exodus. ‘The market needs more first, second and third-home buyers, rather than flippers,’ Hiatt said.”

“To launch most condo and condo-hotel projects, a percentage of the units typically are pre-sold by developers to help finance the construction. The Curve ran into trouble when the developers couldn’t sell their pre-construction target of 75% of the units, said Paula James, Curve’s vice president.”

“With the sales office now dark and the well-dressed sales force gone, the company has returned deposits to the 97 buyers with a note saying sorry.”

“Without question, the change of course of the marquee players has rumors flying that investor exuberance for high-rise luxury projects is on the wane. ‘It raises everyone’s eyebrows when this happens,’ said (consultant) John Restrepo. For now, with apologies to the city’s well-known marketing slogan, real estate investors elsewhere are hoping that what happens in Vegas stays in Vegas.”