The Housing Bubble

The St, Petersburg Times reports on the FDIC study. ” Amid a generally bullish report on the U.S. and Florida economy released Tuesday by the Federal Deposit Insurance Corp., banking regulators cited two potential, and related, trouble spots. First is the growing inventory of unsold homes, up sharply from a year ago.”

“Second is the fact that the loan portfolios of community banks, those with assets of $1-billion or less, have become increasingly concentrated in commercial real estate loans. At more than half of the state’s community banks, commercial construction and development loans now equal 100 percent or more of the institution’s capital. Most of those loans are for housing projects.”

“‘As goes housing, so goes Florida’s bank performance because of its concentration in this product line,’ the FDIC’s Jack Phelps said. ‘We think most of these loans were prudently underwritten, but economic circumstances can change. And historically, we’ve seen that cyclical downturns in the real estate market contribute to higher levels of (bank) loss.’”

“Veteran banking analyst Dick Bove’s negative outlook is based on his belief that migration to Florida will slow as the housing market weakens nationwide. Speculators holding multiple properties also will be under increasing pressure to get out of the market as interest rates increase, he predicted. ‘It’s going to be a very hard landing,’ he said.”

“Bove scoffed at suggestions that banks will be insulated from the effect of a real estate crash because of stronger underwriting requirements. ‘Interest-only loans were not prevalent a number of years ago,’ he said, ‘and selling multiple homes to one buyer wasn’t in existence. Any banker who says underwriting standards are tougher today is flat-out lying.’”

“Ken Thomas, a longtime bank investor in Miami, said he fears a credit crunch if regulators focus too much on the loan-to-capital ratio. ‘You don’t want banks to interpret this as an indicator to stop investing in commercial real estate, because that’s Florida’s growth engine.’”

Also from the Times. “One month after its ceremonial groundbreaking and 21/2 years shy of completion, Trump Tower Tampa has broken with its builder, a company it praised last year as one of the best in the business. Turner Construction Co., the New York contractor pegged in December to build the $260-million luxury condominium high-rise, backed out of the deal March 17, Turner spokeswoman Shannon Eckhart said.”

“But Trump Tower might have a higher hurdle: It has yet to announce a financier to lend it $200-million. SimDag’s principals, including Frank Dagostino and Jody Simon, have had to dig into their pockets for startup money.”

One homebuilder had this out after the bell. “Homebuilder Brookfield Homes Corp on Wednesday said net orders for the first quarter fell to 227 units from 517 units a year ago, saying the decline was primarily in the San Diego/Riverside and Washington D.C. markets.”

“In January 2006, the company forecasted 3,125 home and bulk lot closings for 2006. The company continues to anticipate bulk lot sale closings of 1,500 units during 2006, of which 386 units have been closed to date. With the current San Diego/Riverside and Washington D.C. market conditions, it will be mid-summer 2006 when a better assessment of the 2006 home closings will be made.”

“Our portfolio includes 30,000 lots owned and controlled in the San Francisco Bay Area; Southland / Los Angeles; San Diego / Riverside; Sacramento; and Washington D.C. Area markets. We design, construct and market single-family and multi-family homes primarily to move-up and luxury homebuyers.”

The balance sheet shows very little cash at year end of 2005 and $930 million in inventory, up from $592 million at the end of 2003. The cash-flow statement reveals some stock buybacks.

And all that inventory must be why the firm has so many reduced prices at this website, some as much as these in Bristow, Virginia: “Was $825,021! Over $225,000 in Model Home upgrades! Was $849,565! Save $150,000!.”

Update: “William Lyon Homes, which builds homes in California, Nevada and Arizona, on Wednesday said first-quarter new home orders fell 26 percent. The company said orders fell to 647 homes in the quarter compared with 873 the prior year. The Company’s cancellation rate for the three months ended March 31, 2006 was 28%, compared to 12% for the three months ended March 31, 2005.”

National Mortgage News has a link to an American Banker story on option ARM’s. “For home lenders, 2005 may go down as the year that disclosure of details on option ARMs began to achieve critical mass. Information on activity in the niche had long been elusive; among the biggest participants, Downey Financial Corp. was notable for the amount of information it had provided in past years.”

“A survey of top option-ARM lenders’ 10-K filings by American Banker shows that much more data is now available, including figures on topics to which regulators and investors are paying close attention: deferred interest and related negative amortization.”

“All the leading lenders in this niche provided evidence that principal-balance growth on such loans surged last year as many borrowers made only minimum payments. In their 10-K filings released last month, Downey along with Washington Mutual Inc. led the pack in giving details about option ARMs.”

“Salient figures in the Downey 10-K: Ninety-seven percent of the $133 million of deferred interest outstanding came from loans with balances above the original principal amounts, and the company generated 62% of its profits from noncash income from deferred interest.”

“About $13.4 billion, or 91%, of Downey’s one-to-four-family residential loan portfolio could experience negative amortization, up from 82% a year earlier. By balance, about 10% of the loans experienced negative amortization without exceeding their original balances, while 64% negatively amortized above them.”

“By offering the average age of the loans with this breakdown, Downey revealed its older option ARMs were less likely to amortize negatively; those not using negative amortization were, on average, 21 months old, versus 15 months for those that were.”

“This may be surprising, considering the common teaser periods, which generally preclude balance growth. But it could be taken to mean borrowers who took out the loans after the recent home price surge did so because they needed to rely on the minimum payments.”

“As of July 31, 2005, Downey operated 173 branches, of which 169 were in California and 4 were in Arizona.”

The Washington Post looks at that areas reliance on the housing bubble. “The U.S. economy is more dependent on housing than it has been in a half-century, as the sector fuels consumer spending and has accounted for nearly three-quarters of the nation’s job growth in the past five years.”

“As a result, economists worry that the housing slowdown that began late last year could hurt the broader economy more than past real estate downturns. Now the companies that have benefited from this expansion are bracing for the great unwinding.”

“‘People know they can always refinance or flip their houses, so they are willing to spend more,’ said Matt Ross, sales manager in Falls Church, who figures that at least 20 percent of his sales of motorcycles, motor boats, and jet skis are to people who pay for their purchase using home equity.”

“Economy.com figures that mortgage refinancing put money in Washington area residents’ pockets equivalent to 14.5 percent of personal disposable income. That’s the 14th-highest rate among major metropolitan areas, behind mostly cities in California and Florida.”

“‘Those economies where housing has gone skyward are most vulnerable as housing comes back down to earth,’ said Mark Zandi, the Moody’s chief economist.”

“By almost any measure, the U.S. economy is built on housing more than in the past. In 2005, investment in housing constituted a higher proportion of the goods and services the nation produced than it has since 1950, when the nation was experiencing a massive postwar housing boom. The proportion of jobs in real-estate-related fields is the highest it has been since at least 1970.”

“Case Design/Remodeling Inc., in Bethesda, has doubled to 300 employees since 2001, fueled in part by homeowners’ confidence in investing in their homes and cheap money available through mortgage refinancing and home equity loans. President Mark Richardson said he is confident that business will keep growing strongly even with the housing slump.”

“So what happened in 1989, the last time the housing market entered a slump? ‘Oh, that was painful,’ said Richardson, who had to cut his staff as sales of remodeling services declined. ‘The market dropped off so dramatically and so quickly. People became very gun-shy. But then during that era, you had home appreciations that were double-digit in the 1980s, and all of a sudden, it went into negative territory. It made people say ‘time out’ and not want to do anything.’”

The NAR has this press release with details on the speculator numbers. “Most investment home buyers are in the South, 38 percent of the total. Buyers in the Midwest and Western regions each purchased 24 percent of investment property, and the Northeast, 15 percent.”

The Houston Chronicle reports on that trend. “Drive almost any direction from the city center, and one thing remains constant: home building, and lots of it. While new-home sales are dipping nationally, builders are putting up, and madly selling, thousands of homes around Houston.”

“Charlotte Gilpin, a real estate agent, said builders trying to unload their unsold inventory are offering plenty of extras. One company is letting buyers choose between a swimming pool or $15,000 off the home’s price, she said.”

“Houston’s lower new-home prices are enticing to a wide range of buyers. This year, Gilpin has seen an increase in buyers from out of state looking for investment properties. She’s already sold five homes to Californians who bought new homes here with the fortunes they made selling their West Coast properties.”

“‘They’re just blown away at the square footage and the kinds of houses they can get,’ she said.”

“Builders use a variety of techniques to turn a profit in this tough market. Trendmaker avoids shrinking profit margins by building higher-end homes. The majority of the new construction has been in the entry-level market. ‘That’s where there’s more of a blood bath in the margins,’ Holder said. ‘We’re not doing anything below $200,000.’”

“Rising costs for land and materials are shrinking profit margins in Houston’s booming housing market, where competition limits price increases, and a couple of builders are leaving to focus on other cities.”

“‘Lack of barriers to entry in this market leads to high competition, which in turn drives a high use of incentives,’ Richmond American Homes said in an e-mail responding to questions about its exit. ‘Consequently, margins are low, thus driving the need for high volume in the market.’”

The USA Today reports that speculative home buying is through the roof. “Americans snapping up second homes, as investments or vacation properties, accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.”

“Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. ‘Real estate has outperformed virtually every other investment vehicle,’ said (broker) Ron Peltier. A lot of people have just speculated in real estate.’”

“Sales of vacation homes rose 16.9% to a record 1.02 million, while sales of homes owned for investment purposes increased by 15.7% to a record 2.32 million, the real estate industry group said.”

“The trend really started after 1997, when Congress changed the tax code, allowing most homeowners to duck capital gains taxes when they sold their homes. Under the old system, the only way to avoid the tax was to ‘roll’ the gains into another home of equal or greater value. Americans bought bigger and costlier homes. But now, they can downsize and use the equity built up in their homes to buy second homes.”

“‘That’s what spurred all this on in the beginning,’ says David Lereah, the NAR’s chief economist. ‘It’s like all the stars are aligned.’”

“He thinks the trend crested in 2005. With rising interest rates, tighter lending standards and slower price appreciation, Lereah expects second-home sales to drop this year to 30% of all existing-home sales, and maybe into the 20% range. ‘What’s going to be leaving the market right now are the speculative investors who came into the market and were trying to flip homes,’ he said. ‘They were buying one, two, three or four properties at a time, and that was distorting the numbers.’”

“More than three-fourths of the buyers had no interest in renting their property. About 20% said it would one day be their retirement home.”

“Joe Klein and his wife bought their first vacation home last year on Lake Wabedo in Minnesota, three hours from their primary residence. He says he might like to retire there but might have to persuade his wife. ‘It’s something that we could hand down to the kids,’ says Klein. ‘But secondly, I see it as an investment.’”

The Star Bulletin has an update on Hawaii. “Even Oahu’s heavy rain couldn’t dampen the island’s residential real estate market, although it’s anyone’s guess why March sales volume rose from the previous year. The March rise in sales volume wasn’t great enough to offset the losses in January and February. ‘I would really think that it was just a blip, because the trend is down and we have passed the peak of sales,’ said Harvey Shapiro, Honolulu Board of Realtors research economist. ‘A rest is clearly in order.’”

“The momentum of last spring has long gone and some homeowners have found it more difficult to sell their properties at a premium, (broker) William Chee said. ‘The very high appreciation rates that we once enjoyed have certainly slowed down and we’ve seen the number of transactions drop,’ he said.”

“Despite signs of softening during the past six months, prices stayed constant in March, causing real estate professionals to disavow any talk of an impending bubble. ‘This market doesn’t really favor one side or another, it’s normalizing,’ Chee said. ‘It will still be good for the people who are ready to sell, but it won’t be as wild and crazy.’”

“As a result of softening in the market, which began back in October 2005, buyers can more easily find inventory that suits them and negotiate a better deal than they could in the frenetic market of two and three years ago, said (broker) John Riggins. ‘There are a lot more properties on the market and there is a lot more price adjustment going on,’ Riggins said. ‘Sellers aren’t pricing property 25 percent higher than the last sale anymore, those days are gone.”

“Sellers who want to fetch top dollar for their properties or move them quickly in this market must now clean, repair and stage their homes, Riggins said. ‘It’s going to take more to sell properties,’ Riggins said.”