The Housing Bubble

A reader found this St. Petersburg Times article on flippers. “As the real estate market blasted into high orbit last year, Jeff Lilly sank some of his savings into four investment homes in MiraBay. But Lilly is feeling less like a real estate genius this month. About a fifth of the neighborhood is for sale, many of them homes that have never been lived in, snagged by fellow investors last year.”

“‘You trying to ruin my day?’ Lilly joked when reminded about the thicket of ‘For Sale’ signs in his neighborhood. ‘If I was smart I wouldn’t have bought with so much competition.’”

“Figures gleaned from area Realtors associations show listings have jumped 250 percent, from 10,414 homes in February 2005 to 24,253 homes in February 2006. Tampa Bay area home sales were off an estimated 29 percent in February versus a year earlier. But that dip can’t entirely explain skyrocketing inventories.”

“The explanation is investors. Investors gobbled up the record-setting new home construction in 2004 and 2005. Now, hoping to turn a buck before interest rate hikes sour the market, many are dumping their vacant homes at the same time. As Kevin Robles, an executive with McCar Homes put it: ‘The real estate investor sees the flattening of the market. Now it’s time to unload.’ Boomeranging back on the market, those properties are causing localized gluts.”

“Robles suspects builders are victims of their own success. By selling so many homes last year, builders cannibalized sales for this year. ‘Some of the buyers in the marketplace last year were overly stimulated with the frenzy of it all,’ Robles said. ‘We vacuumed those folks into home ownership, so where’s the steady stream of buyers behind them?’”

“Speculators scooped up so many properties, some streets look half abandoned. Surrey Oak Drive, a short stretch of attached villas in Covington Park, has 16 of its 39 homes for sale. Katus Watson bought a Surrey Oak villa as an investor, but is reluctant to sell with so much competition on the block. Instead, he’s renting it out for less than it’s worth, hoping happier days return. ‘I’m not worried yet,’ Watson said. ‘My wife is, though.’”

The Connecticut Business Journal reports on the housing bubble in that state. “Whether an anomaly or a harbinger of spring, the housing market appears to be cooling, even at the high end of the spectrum. ‘Throughout New Haven County as well as throughout Connecticut there is a softening, which affects the luxury home marketplace,’ explains James Porto, president of the Greater New Haven Association of Realtors.”

“Connecticut Association of Realtors President Mark Foreman reports January and February home sales down this year at every price level. ‘The agents I’ve talked with over the past couple of months say there’s definitely a reduction,’ he says. ‘What we have seen is a rise in the level of housing stock and time on the market.’”

“Guilford $1 million-plus luxury home listings skyrocketed from 11 in 2004 to 42 last year, a 281.8-percent increase. The number of sales remained the same, ten each in 2004 and 2005, but the average sale price dropped 20.4 percent, from $1,772,250 to $1,689,997.”

“In Milford, the number of luxury listings rose 253.8 percent, from 11 in 2004 to 42 last year, with 11 sales in 2005 versus ten the year before. Madison luxury home listings likewise soared, from 29 in 2004 to 67 in 2005, a 131-percent increase. Twenty-three sold in 2004 and 27 last year.”

“‘I’ve been shocked at the number of multi-million-dollar houses that have come on the market in the last month, from $3.5 million in North Haven to $5 million in Madison,’ says (broker) Barbara L. Pearce. However, ‘I haven’t seen houses in that price range closing, so I’m kind of wondering what’s going on there.’”

“She has a theory. Pearce says she suspects that ‘Things are coming on [the market] as though prices were going up at the same rate they were a couple of years ago. But I don’t think that buyers believe it.’”

“‘In 2004 and 2005, we would see houses go into multiple offers within hours,’ (agent) Lory Walz recalls. ‘Since last summer, we’ve been seeing price reductions, and more inventory is staying on the market a bit longer.’”

“Upward creeping interest rates are having an impact, on builders as well as buyers. ‘While they’re still low, every time they go up a little, it takes out a sector of the market,’ says John Shwecky, president of the Home Builders Association of New Haven County. ‘The market has been falling down for homes $1 million and up,’ Shwecky adds, ‘and some builders are actually having to give a little more options when they sell.’”

“Rising interest rates have transformed the mortgage lending landscape over the past 12 months. ‘Volume is down in the 25-percent range,’ says Christopher Danner. Danner notes that interest-only loans are popular now, as are reverse mortgages for older people with liquidity ‘who can’t afford’ to live in their homes.”

The Arizona Republic interviews a homebuilder in the Phoenix area. “Fulton Homes started in the East Valley, but it is developing property around the Phoenix area. Doug Fulton, president, talked with The Arizona Republic about home building in the Valley and where he sees it going.”

“Q: How do you see the market now? A: This is just a small correction that needed to happen. The velocity (of sales), the appreciation of the homes, was not sustainable. Last year was a complete anomaly. It’s not normal. You can’t compare last year to anything.”

“Q: We’re at record prices. Have prices gone too high? A: That’s where it needs to be compared to not just Phoenix, because we were undervalued to begin with..We caught up to where we needed to be. I think it’s very healthy. It’s a good thing. Last year was scary.”

“Q: In what way? A: My analogy of sales in the Phoenix market area in 2005 is ‘fishing with dynamite.’ When the fish, being the customers, floated to the surface, they were still begging to get in the boat. We had a bunch of order takers. That’s all you needed. There were people standing in line begging to give you their money.”

“Q: Why is that? Supposedly, the home builders weeded out all the investors. A: Not until probably August, September of ‘05. We were creating our own feeding frenzy. People were standing in line because of the increases. If you slowed down your increases, it slowed down sales. Tell me that isn’t scary. The key wasn’t so much the overall price as much as the increasing price. Some people thought the price increases would never stop.”

“Q: Have investors caused permanent damage to the Phoenix market? A: No, I think we caught it in time. There was more sustained damage in Las Vegas than there was here. We learned from their mistakes.”

“Q: You don’t think prices have spun out of control? A: No, I don’t think it’s going to correct more than 10 percent from where we are today.”

“Q: How could builders overshoot on the most basic thing: their price? A: Pure greed. Not only that, but you can get an overzealous sales manager. These guys get paid on commissions and division presidents get paid on units closed.”

“Q: Are investors mainly out of the Phoenix market? A: No, the investors are still here. The unsophisticated speculator is gone. I’m still buying property.”

USA Today has this report on adjustable rate home loans. “The real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages, 10 million, carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates.”

“‘Within the last year, I would say 60% to 70% of calls to our hotlines are issues related to ARM (adjustable-rate mortgage) loans,’ says Chris Krehmeyer, executive director of a non-profit group that offers homeownership support services in St. Louis. ‘That’s significantly higher than in years past, because the ARMs are coming home to roost.’”

“The number of borrowers in trouble will rise this year and peak in 2007 and 2008 as the largest number of mortgages reset to higher rates. Already, in West Virginia, Alabama, Michigan, Missouri and Tennessee, about one in five homeowners with a high-interest (subprime) ARM was at least 30 days late at the end of last year. After 90 days, the foreclosure clock starts ticking.”

“What worries experts such as Christopher Cagan are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That’s the highest such rate in the country.”

“Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won’t be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan’s research.”

“The losses to the banking industry, he estimates, will exceed $100 billion. That’s less than the damage from the savings-and-loan crisis in the 1990s, which cost the country $150 billion. ‘It will sting the economy, but it won’t break it,’ he says.”

“When Paul and Sandra Wilson moved from California, where they couldn’t afford to buy a home, to Georgia in May 2004, they bought a house with an interest-only loan. But Paul has had a tough time finding work. They refinanced to an ARM with a lower rate but one that reset every six months and that charges a $20,000 penalty if they refinance within three years.”

“‘The loan broker ‘convinced us that it was in our best interest, and in most likelihood within six months our financial situation would turn around and we were going to look at selling,’ says Sandra.”

“In less than a year, their loan payment jumped from $2,275 to more than $2,800. The couple filed for bankruptcy and will lose their home next month. ‘This was our fourth home,’ Sandra says. ‘It’s not as if we weren’t aware, but we’d never had an adjustable-rate mortgage before.’”

The Orlando Business Journal reports on bankers concern about the condo conversion rush. “Concerned about too many units going up for sale at once, lenders on Central Florida condominium conversions apparently are tightening some requirements while being more selective about borrowers and projects. Lenders and real estate observers say they are not yet seeing a major increase in problems with those condo-conversion loans, including defaults, but note that other factors may come into play before too long.”

“‘We have seen some folks pulling back,’ says (banker) Joe Losch. ‘Some lenders got in and may be getting out. There may be a time when there’s a lot of supply in the market.’”

“A leading real estate expert warns that South Florida is already seeing a fallout from the condo-conversion craze, and the Orlando area could be headed down the same road before year’s end or in early 2007. ‘Those that rise fastest experience corrections long-term,’ says (analyst) Jack McCabe.”

“In the past two years, Orlando rapidly rose to one of the top five condo-conversion markets in the country. McCabe’s research shows 23,800 conversions were announced during the last 18 months, seven times the amount for the previous 18-month period. The trend is not unique to Orlando. South Florida’s condo market rose in a similar fashion and now is saturated, McCabe notes.”

“Concerned about borrowers not being able to pay their loans, federal regulators in the meantime are reviewing lenders’ condo-conversion portfolios in Central Florida, South Florida and other parts of the country, McCabe says. In addition, they are telling lenders to tighten requirements, and want not just pre-sales but stringent, firm contracts, he says.”

“Mortgage brokers Robert Dockerty and Shannon Rex in Delray Beach expect some lenders might have to turn to investors to buy large numbers of units, which they would rent out. Those investors would include ‘vultures’ who buy a bulk of condo units at discounted prices.”

“Dockerty says some condo converters and developers turned to that investor option during previous condo cycles. ‘I have not seen it yet this time, but that doesn’t mean it is not going to happen,’ he says.”

“McCabe says if too many apartment buildings convert to condos, Orlando could see project delays of nine months or more, foreclosures, and even developers and unit buyers suing lenders. If delays lead to problems with unit sales and cash flow for a converter, economic fundamentals make it unfeasible to turn a project back to a rental community and convert the development loan to an operating loan, he adds.”

“As a result, McCabe predicts foreclosures will rise. And developers and condo unit buyers will sue their lenders. ‘When properties get returned, they will sell at pennies on the dollar and lenders will lose millions on the loans,’ he says.”

Some economic numbers are out this morning. “Construction spending rose to a record level in February as home building hit an all-time high despite a weakening in home sales, the government said Monday.”

“Economists believe the housing sector, which has been booming for the past five years, will slow gradually this year under the impact of rising mortgage rates and slowing sales. New home sales posted a big decline in February while sales of existing homes have been down five of the past six months.”

And the pending home sales data. “Pending home sales are showing signs of leveling out, indicating that the housing market is entering a period of stabilization, according to the NAR. The Pending Home Sales Index,* based on contracts signed in February, slipped 0.8 percent to a level of 117.7 from an upwardly revised index of 118.6 in January, and is 5.2 percent below February 2005. David Lereah, NAR’s chief economist, said most of the cooling in the housing market has already occurred.”

“‘We can expect a historically strong housing market moving forward, earmarked by generally balanced conditions across the country and fairly stable levels of home sales with some month-to-month fluctuations,’ he said. ‘This normalization is healthy because it is taking a lot of the pressure off of the decision process for both home buyers and sellers, pressure that was driving abnormal rates of price growth across much of the country over the last few years.’”

“Regionally, the PHSI in the Northeast jumped 6.8 percent in February to 107.9 but was 1.2 percent below February 2005. In the Midwest, the index held even at 114.3 and was 6.0 percent below a year ago. The index in the South slipped 0.1 percent to 129.3 in February and was also 0.1 percent lower than February 2005. The index in the West fell 7.6 percent to a level of 110.9 in February and was 14.8 percent below a year ago.”

“Yield on benchmark U.S. Treasury debt climbed through 4.905 percent early on Monday to the highest since June 2002 amid general expectations the Federal Reserve Federal Reserve will continue to raise interest rates. Benchmark 10-year notes were down 13/32 in price for a yield of 4.907 early on Monday from 4.853 percent late on Friday. Bond yields move inversely to prices.”

The Pittsburg Business Times reports on a new trend for realtors. “Looking to head off a sustained dip in the real estate market, some of Pittsburgh’s largest real estate agencies are asking home sellers to do something that will mean less money for them and their agents: reduce their asking prices.”

“‘Ninety-nine percent of the Realtors are doing that right now,’ said Ron Croushore, president of the West Penn Multi-List and the Realtors Association of Metropolitan Pittsburgh. ‘Inventory’s beginning to build. There’s..probably 10 percent more listings this year than the same time last year.’”

“In addition to Prudential, executives with Coldwell Banker Pittsburgh and Northwood Realty Services said this week that they, too, have implemented price-reduction strategies. If the market begins to tolerate the reduced prices, there won’t be a need to continue seeking reductions. However, none denied that the local effort to lower prices has been deliberate and is intended to jump-start sluggish sales.”

“(Broker) Tex Weston said high-end properties were having the most difficulty selling, and were most likely to be suggested for a price reduction. ‘If they’re overpriced, hoping for some windfall or that the market is real hot and going to carry them, that’s not happening,’ Weston said.”

“In southwestern Pennsylvania, many sellers have watched prices rise over the past few years and decided to list their homes at the high end of the reasonable range, hoping they can squeeze more out of potential buyers, Croushore said. Homes that could be expected to sell for $70,000 were being listed at $100,000, he said.”

“Now, agents are just trying to bring the market back to reality, Croushore said. ‘We’ve been in a real escalating real estate market,’ Steve Cook, a spokesman for the NAR said. ‘What’s happened is everyone’s prices have been pushing up. A lot of sellers begin to push the upper limit on the price. We want to get sellers listing the price realistically.’”

“Coldwell Banker even has an incentive for agents who get the most reductions in list price, entering them in a raffle for a football autographed by Pittsburgh Steelers wide receiver Hines Ward.”

“(Broker) George Hackett said real estate agents should be just like stockbrokers, keeping clients constantly informed as to where the market is going. ‘If they’re priced right, people would be looking at it,’ Hackett said. ‘Maybe it was priced right six months ago, but it’s not priced right now.’”