The Housing Bubble

A look at how confusing issues become in a housing bubble. From Florida, “What a difference a year makes. A year ago, organizers of the Spring Parade of Homes of Brevard were working with a frenzied real estate market. One year later, the most commonly used word to describe the new-home market is ’slow.’”

“The market needs to absorb the excess of inventory now listed for sale, a result of the frenetic building pace of the past few years. ‘The big boxes went nuts,’ builder Jim Mellone said of large, production builders.”

“Investors bought up homes and flipped them for quick profit while they could. Now that the market has slowed, many of those investors are unloading their holdings and flooding the market with new homes for sale. ‘Everybody and his brother was an investor,’ (developer) Andy Barber said.”

The Sun Sentinel reports on the affordable housing focus. “Following a simple lesson in citrus economics could solve Palm Beach County’s affordable-housing squeeze, according to developers planning a new town on a Loxahatchee orange grove. Building more houses, (developer) Nat Roberts proposes 10,000 of them, in a variety of sizes and styles creates more affordable alternatives for buyers, he said.”

“‘You have to address the basic issue of supply or you will forever be chasing this problem,’ Roberts said. Developers planning 10,000 homes on former cow pastures at the Vavrus Ranch on Northlake Boulevard offer a similar supply-and-demand sales pitch.”

“Instead of creating an immediate supply that could limit prices, developers build when demand allows them to make the most, said Jaimie Ross. ‘We have heard it a million times,’ Ross said about the supply-and-demand argument. ‘It is a ridiculous notion. The homes will be priced at whatever the market will bear.’”

“Commissioner Burt Aaronson proposes building 4,000 homes, twice as many as once planned, on the county’s Mecca Farms property and reserving half of them for affordable housing. ‘That’s the way to be serious about affordable housing. Move forward in big chunks,’ Aaronson said.”

But a Commentary in the Orlando Sentinel takes a different view. “In 2004, BuilderOnline reported the Villages retirement community (had) gross company revenues of $948 million and profits of $141 million, a 42 percent increase over 2003. With all his money and connections and influence, why would company president H. Gary Morse need $4.5 million from you and me? Ask state Rep. Hugh Gibson and Sen. Carey Baker. They filed bills seeking money to widen County Road 466A.”

“Developers talk a big game about how growth pays for itself. It was a lie when they started spouting that line in South Florida decades ago, and it’s an even bigger lie today.”

“This minuscule $4.5 million is just an illustration. Growth does not pay for itself, does it, Senator Baker? ‘There’s just no way when you have high growth,’ Baker said. ‘There is a short-term infrastructure problem.’”

“So why shouldn’t the likes of Morse pay the total cost of his development’s infrastructure needs, long or short? ‘Well, the state is funding new road projects every day,’ the Baker explained. And you thought we should snag some of that cash? Baker chuckled. ‘A little, anyway.’”

“When asked whether taxpayers should spend millions so developers can keep building, Gibson, said, ‘I don’t know.’”

“When a developer sells 4,000 homes annually, more people mysteriously appear on the roads, and they tend to get jammed. That does not mean taxpayers should fix the problem. It’s time that this state started making the developer lies come true. Growth should pay for itself. Legislators should enforce it. It should start with this road.”

One reader wants to discuss how we can prevent a housing bubble from occurring again. “I think we should talk about how a false housing boom can be prevented. I can think of some protective measures that could of prevented this false run-up of prices.”

“Lenders use to have check and balances on to much speculation purchases. The flippers would not of been able to get 100% or low down loans in past markets. Can we have loose money without abuse ?”

“Since the housing market is tied to interest rates, should better protections be put in place on interest-only loans/ARM’s to prevent neg. equity potential, perhaps higher down payment requirements or insurance required to prevent loss.”

“What percentage of a society can really afford home ownership under the best of circumstances? Should the tax laws be reformed to penalize flippers/investors for short term flips? Should realtors in practice be allowed to purchase property and sell them one month later, thereby creating a false market, without a penalty tax? Just making suggestions for possible discussions.”

The LA Times looks at a firm writing exotic loans. “For much of its 77 years in Santa Monica, First Federal Bank of California led an unremarkable existence. Nowadays First Federal is stirring up more excitement, on account of its emphasis on making relatively risky home loans. In fact, to listen to some Wall Street skeptics you might conclude that this sleepy savings and loan has taken a figurative dive off the end of the Santa Monica Pier.”

“Critics accuse First Federal and other West Coast thrifts of overindulging borrowers’ lust for artificially low initial payments. By generating so-called exotic or nontraditional mortgages, they warn, these S&Ls have allowed speculators to buy homes they can ill afford, and will be unable to resell when the mortgage payments rise and home prices take a tumble.”

“‘”I think this spring you will see housing prices crack,’ said Richard Bove, a banking analyst. That, he added, ‘is going to be terrible’ for people with mortgages that let them pay less, sometimes a lot less, than the full monthly payment during the early years of the loans. After those payments are reset to their full amounts, ‘I think you’re going to see a wave of defaults,’ Bove said.”

“Regulators, consumer advocates and skeptical investors have raised questions about the deferred-interest loans, formally known as payment-option adjustable-rate mortgages, or option ARMs for short. Many lenders larger than First Federal offer option ARMs, but First Federal has taken to them like few others. Of all the home loans that Washington Mutual held at the end of 2005, 52% were option ARMs. Golden West and Downey said more than 90% of their loans were option ARMs. At First Federal, 100% of residential mortgages were option ARMs.”

“Nationally, 26.4% of mortgages allowed for interest-only payments last year, up from 1.1% in 2000. First Federal has benefited from this trend, doubling in size from $4.8 billion in assets at the end of 2003 to $10.5 billion at the end of 2005. ‘Low doc’ and ‘no doc’ loans also fueled its boom, by the end of last year, 4 of 5 First Federal borrowers got credit without having to document their earnings, their assets or either.”

“Nontraditional mortgages have drawn attention from federal bank regulators, and the new rules have not been finalized. But federal examiners from agencies including the Office of Thrift Supervision, the Treasury Department division that regulates S&Ls, aren’t waiting for them to take effect, said banking lawyer Stuart Stein.”

“‘The OTS is already walking into shops that have these loans and is essentially demanding that these institutions take action,’ Stein said. ‘What I’m seeing from all the agencies is that they’re incredibly concerned about risk on the balance sheet, especially these low-doc and no-doc loans.’”

And a reader posted this related advice column. “Question: About a year ago, we bought our home with the help of an adjustable rate mortgage at 1.95 percent interest. We knew it would adjust after six months to 4.95 percent interest. However, when we received the lender’s Internal Revenue Service 1098 year-end report, we learned our mortgage balance has grown by about $7,800. When I called the lender, I was told the increase was ‘unpaid interest.’ What’s that?”

Several readers want to hear your April 2006 predictions. “When do people expect y.o.y. declines in particular cities, and what do we suppose the subsequent excuses will be? It’s because of the World Cup!”

One reply, “April will be the first month of YOY declines in DC.”

Another said, “It seems reasonable for us now to talk more about all of those consequences/fallout, such as property taxes, etc., that will hurt everyone whether you acquired property in the past few years or not. Most people I speak with about this are still oblivious to the fact that their neighbor’s house selling for 5x more than they paid many years ago could somehow be anything other than a good thing for them…”

“I also suspect many local governments are about to be shocked by the protests they will receive later this year, and that lots of hastily-enacted increase caps will be made where none exist now.”

One reader is looking for another bubble. “What is your prediction of the next bubble. Some say interest rates will keep rising. Some say the fed will pause and start decreasing if the economy looks sluggish. If they do start decreasing, will the stock market take off again?”

A reply, “If there are any more bubbles to be blown, it’ll be in precious metals; but despite the rise to date, we’re still a long ways from bubble territory.”

“Topic suggestion: If, as some predict, the fed tried to inflate a rescue boat for those in the bubble areas (crank up prices of everything else, including wages, so as to effectively lessen household debt loads), what would be the impact for housing prices in the non-bubble areas? Would we expect to see them rise with this inflation?, or stay stagnant, along with prices in the bubble areas?”

And another, “Which will drop more, the price of lots or the homes that are later built on them? Assuming construction materials and labor costs are constant, will lower priced lots lead to smaller less fancy construction so that home prices are not out of whack with the land they are built on?”

The Union Tribune reports on San Diegos condo bust. “During San Diego’s six-year housing boom, few neighborhoods have been more exuberant than downtown. Construction of sleek condo towers tripled the housing stock. A few buyers, meanwhile, have begun to negotiate good deals. A 15th-floor unit in Discovery on Cortez Hill purchased for $725,000 in 2004 sold a year later for $681,000.”

“Downtown ‘is probably one of the only places in Southern California where you can buy a house for less than you could a year ago,’ said (broker) Jim Abbott. Abbott said, ‘we’ve got a huge amount of inventory in a segment between $550,000 and $900,000 that is very tough to move.’”

“In the fall of 2004, George Hadjis of Carlsbad purchased a 1,027-square-foot condo in Little Italy’s Palermo for $504,000 as an investment. Hadjis. Today, he’s asking $489,900. The unit lacks a spectacular view. It has been listed for about six months with no offers. If it doesn’t sell in the next three months, Hadjis may take it off the market and rent it, likely at a rate that would not cover his mortgage payment.”

“Hadjis calls the experience frustrating. ‘I ask myself should I have dropped the price another $10,000 six months ago?’ he said. ‘Do I really drop it right now or do I take the slow bleed (by renting.) That’s what I’m struggling with.’”

“Carol Cavanaugh bought a condo in The Grande south tower for $623,000 in late 2004. She thought she would like the convenience of being close to the office, but she doesn’t like high-rise living. She put the unit on the market for $570,000 to $599,000. She has received two low-ball offers, both from real estate brokers. But Cavanaugh is going to stick it out until she gets what she wants, even if it is a loss.”

“Already, a handful of proposed projects have been put up for sale. Developers of The Elle, an 179-unit condo tower planned in Little Italy, are selling the site and development plans. The asking price is $17.5 million. It is now a parking lot.”

And in Orange County. “High-rises for residential living, which were barely whispered about a few years ago, are now the hottest development trend in Orange County. Orange County, on paper at least, is getting 44 such towers, including two already built. That could translate into 5,000 new condos.”

“Bosa Development, an outsider from Vancouver, Canada, built and sold two towers in Irvine. Other developers are scrambling to be next, he said. That rush could flood the market with a niche product. ‘They all jump in at once and sink the boat,’ Walter Hahn, a longtime county real estate economist said.”

“Developers with projects under way are skeptical their competitors will follow through. ‘I’d be shocked if 50 percent of planned projects actually happen,’ said Matt Montgomery, an executive in the Irvine (firm) that is constructing two towers in Irvine and plans a third.”

The Miami Herald reports on falling prices in Florida. “Around South Florida, many are doing what would have been unthinkable six months earlier: They’re slashing the asking price of their houses, townhomes and condos, and even throwing in incentives. The Florida Board of Realtors reports that prices of homes were lower in February than in January in Miami-Dade and Broward counties.”

“Take an owner of a 1,400-square-foot pool home just west of Coral Gables. The owner had already dropped the asking price by $62,000, asking $588,000 for his remodeled home. But when Juan Saiz came to tour the ranch-style three-bedroom home at an open house, the owner had knocked off another $10,000. Saiz himself settled for $35,000 less when he recently sold his Coral Gables condo for $390,000.”

“In the last few months, the market has begun shifting to buyers, who have more than double the number of homes to choose from than they did a year ago. ‘The market has definitely shifted,’ says Keyes real estate agent Luisa Mackay. ‘Nowadays, there is so much more inventory.’”

“Some owners have been steadily dropping prices. Sellers of a 2,700-square-foot home south of Bird Road near the Palmetto Expressway, for example, have dropped their asking price twice, from $749,000 to the current $660,000.”

“Philip J. Spiegelman, who represents dozens of condo developers, says the current market is likely to discourage many from building additional condos in the near future, even if they have done pre-construction sales, because they would lose money.”

“Even apartments being turned into condominiums have been affected. Many developers are resorting to creative incentives to lure buyers. The Marquesa condominium in Pembroke Pines recently was giving away a 27-month lease on a Jeep Liberty with any purchase of a two-bedroom unit. ‘No strings attached. Buy the unit, get a car,’ says Israel Kreps, a spokesman for the development.”

“Others are just resorting to the basic discount. In one gated community in western Miramar, Keyes real estate agent Nancy Remedios was telling prospective buyers at an open house that her client had lowered his asking price from $929,000 to $898,000 for his 5,700-square-foot luxury home. Plus, he had just called to tell her he would help pay closing costs. That’s a good tactic, real estate agents say.”

“After all, buyers ‘are looking for the best deal they can find,’ says (agent) Tony Rios Jr.”