The Housing Bubble

Some reports on Floridas’ housing bubble. “Some U.S. retailers have seen a slowdown in sales recently that could be a response to higher interest rates and a slowing housing market, a top private equity investor said on Tuesday. ‘It’s been so sudden that it could just be a temporary blip, but from a consumer’s standpoint there could be some noise out there,’ said Michael Kalb.”

“Boca Raton, Florida,-based Sun Capital’s retail holdings include Bruegger’s Bagels, Mervyns department stores, Levi’s Outlet and Wickes Furniture. ‘I question whether there’s an appreciation in the retail market of what would happen if there’s a real (economic) slowdown,’ Kalb said. ‘If we don’t come in for a soft landing there are going to be a lot of problems because of all the leverage that’s out there,’ he said.”

“Four more insurers that cover thousands of homes in Florida want to charge much higher rates, and one of them intends to nearly double customer premiums. ‘The reinsurance market is in a panic because of the storms of the last couple of years,’ said Mel Russell, senior VP for United Property. ‘The market is very volatile right now,’ Russell said. ‘Ultimately it’s going to hit everybody right in the pocketbook, because it’s starting from the top down.’”

“Magna Entertainment Corp. said it’s agreement to sell residential real estate in Palm Beach, Fla., has been cancelled by Toll Brothers Inc. Under the terms of the $51 million deal, which was announced in November, Magna was to sell 157 acres to Toll Bros. Magna said it is considering its options with respect to the property.”

And one central Florida realtor already has March sales numbers. “The March numbers are in, and they don’t make comfortable reading for the many short term rental home owners around Walt Disney World, Florida, who are looking to sell up and take a profit. There was a further massive increase in the number of homes listed for sale during March, and no sign of any more buyers to mop up the inventory.”

“The Hightower Index jumped into new territory in March to 273, up from 222, and now well within reach of the 300 ‘meltdown’ level. Hopes of more buyers coming into the market as spring approaches have so far not materialized.”

“Based on the latest figures, Hightower Realty is now predicting a further substantial drop in prices before the market can start to level out. Prices have already dropped by close to 10% from their peak of last summer, and an eventual drop of 20% in home values is a real possibility now. Serious buyers are still very thin on the ground, and they will be tempted only by the very best deals.”

Some reports on the lending side of the housing bubble. “The Seattle FHLBank said that “recent negative public policy views on the systemic risks presented by GSEs and accounting and other announcements by Fannie Mae, Freddie Mac and the FHLBanks have, at times, created pressure on debt pricing, as investors apparently perceive such obligations as bearing greater risk than some other debt products.”

“‘Any additional similar announcements may contribute to further pressure on debt pricing,’ the Seattle FHLBank continued. ‘As a result of the perception of higher risk relating to GSE debt products, as well as GSE growth, the FHLBank System may have to pay higher interest rates on its consolidated obligations to make them attractive to investors,’ it said.”

From Reuters, “China should trim its holdings of U.S. debt, a senior Chinese official said, rattling markets on Tuesday. Hong Kong’s Beijing-funded Wen Wei Po newspaper carried Cheng Siwei’s comments, made in Hong Kong on Monday. ‘China can stop buying dollar-denominated bonds, increase buying of U.S. products and gradually reduce its holdings of U.S. bonds,’ the newspaper quoted him as saying.”

And from a survey of lenders in the US. “Two-thirds of lenders nationwide believe a real estate bubble currently exists in the United States - and half of them believe it has already begun to burst or will burst in the next six months, according to the results of this quarter’s Phoenix Management ‘Lending Climate in America’ Survey.”

“A significant 93 percent of lenders surveyed expect an anticipated housing correction to result in real estate prices declining 10 to 20 percent across the country. ‘In the minds of lenders, the housing bubble has moved from ‘Loch Ness monster’ myth status to an economic reality that could have a significant, negative impact on the lives of many Americans,’ said Michael E. Jacoby.”

“‘A year ago, 46 percent of lenders believed we were in a housing bubble. Today, that number has climbed to 66 percent, and many of them believe a correction is imminent and could lead to a drop in housing prices of up to 20 percent.”

“When asked when they believed the housing bubble would burst, thirty percent of lenders said it has already begun to happen. Twenty percent predicted it would occur in the next one to six months, and 27 percent thought it would happen seven to 12 months from now. Nine percent said it would occur in 2007.”

“Among the 92 lenders who participated in this quarter’s survey, only nine percent said they did not believe a housing bubble existed. When asked which area of the country was likely to be most affected by a housing correction, 30 percent of respondents named the Northeast, followed closely by 27 percent who predicted the West Coast. Fourteen percent named the Southeast, and five percent, each, named: the Mid-Atlantic, the Mid-West, or said all regions will be affected equally.”

“Half of all lenders believe a housing correction will result in real estate prices dropping up to ten percent. Forty-three percent of lenders said the decline would be as high as 20 percent.”

The alarm bells keep ringing for the US housing bubble. “Forty-eight of the nation’s 50 largest metropolitan statistical areas face a greater risk of declining home prices this quarter, an industry report found today. House-price appreciation has slowed in nearly half of the metropolitan statistical areas compared with last quarter, according to PMI Mortgage Insurance Co.’s latest risk index.”

“Fourteen of the top 50 metro areas now have risk scores above 500, meaning they face a 50 percent or greater risk of home-price declines in the next two years, up from 11 metro areas last quarter.”

“In addition to Minneapolis, metro areas that saw significant increases in risk were Virginia Beach, Va. (+65 points to 274); Baltimore, Md. (+62 to 279); Newark, N.J. (+61 to 427); New York (+58 to 506); and Washington, D.C. (+56 to 401).”

“The San Jose area, which includes Sunnyvale and Santa Clara, ranks No. 11 among the 50 metropolitan areas that PMI analyzed using data from the fourth quarter of 2005. It was the third consecutive quarter that San Jose’s risk rating rose, climbing from 53 percent and 47 percent in the previous two quarters.”

“The risk of a downturn is slightly higher elsewhere in the Bay Area, with a 58 percent chance of a decline in the Oakland-Fremont-Hayward area and a 55 percent risk in San Francisco-San Mateo-Redwood City area. ‘You really can’t have a situation where something as basic as home prices gets that far away from economic fundamentals for that long a period of time,’ said Beth Haiken, a spokeswoman for PMI Group. ‘It’s just not sustainable.’”

“Eight of the top 11 areas are in California, led by San Diego with a 60 percent chance of a decline. Areas near Boston and New York round out the list of 14 places where there’s at least a 50-50 chance of a price decline.”

“When the end of the Cold War caused consolidation of the defense industry, the number of home sales in the Los Angeles area peaked in November 1988, but home prices didn’t top out for nearly 2 1/2 years. ‘Then the prices began this gradual, painful, slow deterioration’ of about 5 percent a year, Edward E. Leamer, director of the UCLA Anderson Forecast said. ‘Don’t watch the prices,’ he said. ‘Watch the volume.’”

“In Santa Clara County, sales of new and existing houses and condos dropped 14 percent from the record mark set the previous February. It was the slowest February since 2001, according to DataQuick.”

Some News from the FDIC. “Nearly three out of four of Atlanta-based banks are heavily weighted in construction and development loans and could face trouble if the housing market continues to cool. Eighty-seven of the 118 banks with headquarters in Atlanta have high concentrations of construction and development loans, the vast majority for residential projects, according to the Federal Deposit Insurance Corp.”

“Atlanta banks are significantly more invested in real estate than they were during the last real estate downturn. In 1991, only 29 percent of Atlanta banks, versus 74 percent today, had C&D loans totaling more than 100 percent of their capital.”

“New data released from the FDIC shows that the same banks have concentration of real estate-related loans that are well above that of previous boom years. More than half, or 56 percent of community banks in Florida had an exposure of construction and development loans that were 100 percent or more of capital. In contrast, just 22 percent of banks had such exposure during 1987, the last boom period.”

“Construction and development loans grew 66 percent during 2005, a record increase and the 10th consecutive year of double-digit growth. ‘The majority of C&D lending is for residential housing, and continued strong absorption of new housing units will be a crucial factor,’ the FDIC said.”

“At 421 percent, the median commercial real estate exposures (CRE) loan-to-Tier 1 capital concentration among California-based institutions ranked fourth highest among the states as of year-end 2005. Elevated concentrations of CRE loans may leave institutions more vulnerable to adverse changes in market conditions.”

“Innovative mortgages and investors may be buoying California housing demand. Interest-only and negative amortization loans accounted for 69 percent of non-prime mortgage originations in California in the first 11 months of 2005. During the same period, investors and second-home purchasers accounted for 15 percent of California Alt-A mortgage originations.”

“Residential permit activity declined in 2005 for the first time in ten years, possibly signaling a change in housing markets with important implications for the state’s construction-dependent job growth.”

A writer for the Kansas City Star compares his housing market to California’s. “There’s nothing like a quick trip to la-la land to reset your calibrations on the real estate market. After hearing some of the chatter about California real estate, I was more thankful than ever to live in the heartland.”

“Within the span of 24 hours, I heard the following stories: An established resident of San Francisco, who just happened to be raised in Rolla, Mo., went on about how his 1,400-square-foot home, less than two-thirds the size of my home, was in fact worth more than three times mine. The reason, he explained with supreme confidence, is the fact that housing supply is so tight, as if the nation’s housing supply stops at the western slope of the Sierra Nevadas. I suggested that he should get home to Rolla a little more often.”

“I was told about a sobering story in the San Francisco Chronicle detailing the prevalence of interest-only mortgages in that market. The newspaper reported that nearly 70 percent of Bay Area home buyers last year used interest-only mortgages to obtain their homes, up from just 18 percent in 2002.”

“A recent transferee to Los Angeles, who commutes 90 minutes one way in rush-hour traffic, explained why he’s a renter and not a buyer. His rent is roughly 60 percent of what it would take to buy a similar house, and he’s just waiting for the bubble to pop. Smart guy.”

“My point is that coastal real estate markets really are much bubblier than in these parts. It’s something to keep in mind as we sift through the local numbers. But make no mistake, folks. We’re increasingly in a buyers’ market right here in Kansas City.”

“In February, for example, the inventory of unsold new homes in the area stood at 5,488, up 9.6 percent from a year earlier. During the month, there were 476 new homes sold, down 2.2 percent from a year earlier. As a result, there was 11.2 months of inventory at the current sales pace, up from 10.3 months a year earlier.”

“‘It was a similar story when it came to existing homes. In February, the inventory of unsold existing homes stood at 12,578, up 31 percent from a year earlier. Existing home sales totaled 1,712 during the month, up 1.7 percent from a year earlier. In February, there was 7.3 months of inventory at the current sales pace, up from 5.7 months a year earlier.”

“It would appear that the inventory buildup is beginning to restrain sales price growth in the area. In February, the average new home sales price was $267,173, up a modest 2.3 percent from a year earlier. The average existing home price, meanwhile, stood at $147,795, virtually unchanged from a year earlier.”

“The message in the numbers is clear. We’re in a buyers’ market, which is defined by the industry as having more than six months of inventory on the market. Don’t expect the sort of knee-knocking market tremors that seem likely in California. But this is shaping up as a year of adjustment in the long-booming housing industry, even here on the home sod.”

The New York realtors have their February numbers out. “Sales of existing single-family homes in New York slowed in February, according to preliminary single-family sales data accumulated by the New York State Association of Realtors. The February 2006 sales total decreased 6.4 percent to 5,197 compared to the February 2005 sales total of 5,554. The February 2006 sales total fell 16.1 percent from the January 2006 sales total of 6,193.”

“The boom in luxury housing may be reaching its crest and market saturation could drive lenders to cut back on the funding of new projects, first-quarter real estate statistics to be released today by some of the city’s largest firms suggest. ‘With the inventory coming on, we are reaching a saturation point,” an appraiser who is an author of one of the reports, Jonathan Miller, said. ‘There’s a lot in the pipeline.’”

“‘Without Wall Streeters’ spending, we were looking at a fairly flat market,’ said Jonathan Miller, CEO of Miller Samuel. ‘This is further evidence that the housing market is not seeing the big price gains we’ve grown accustomed to in the past several years,’ Miller said.”

“The inventory of apartments available for sale in the first quarter rose 15.8% from December, and a hefty 59.6% from a year earlier. It’s at the highest level since Miller started tracking it in 1999. That’s a cause for concern, because it means there are more apartments competing for buyers, he said.”

“‘Bigger Wall Street bonuses shifted the mix to larger apartments during the quarter,’ Miller said, lifting the median. But, he noted, price per square foot was mostly unchanged, at $1,004.”

“Another sign of weakness is inventory and time on the market. The average apartment now spends 138 days on the market, compared with 98 a year ago. Part of that is, with prices so high, there’s a lot of building going on. ‘New developments have added a lot to the inventory,’ said Pam Liebman, CEO of the Corcoran Group.”

“The 2005 market started out with a bang: plenty of Wall Street bonus money, lots of demand for housing and historically low inventory of available property. By the end of the year, stagnation had set in, leaving the numbers, which had peaked in June, ending approximately where they began.”