The Housing Bubble

The Connection asks, ‘Will Spring Grow More Buyers?’ for northern Virginia. “Buyers have quickly realized this isn’t last year’s market. ‘Buyers have been beat up for the past several years,’ said David Howell, managing broker in McLean. Howell, who has tracked movements in the Northern Virginia real estate market since 1979, added that would-be buyers this spring won’t be in a big rush.”

“Richard Hutchison, VP of mortgage lending with James Monroe Bank said he’s seen realtors recently negotiate lower mortgage rates for buyers by asking sellers to buy down the rate.”

“‘If you go to the MLS, you see tons and tons of price reductions,’ said Ernie Miller, sales manager in Springfield. ‘Buyers are asking for sales prices less than list price. They’re asking for seller contingencies, and we’re seeing very few houses go when they’re first put on the market.’ When Miller, who has 33 years of real estate experience, listed a townhouse in Alexandria, it received three offers. ‘But none for full price and without some seller concessions,’ he said.”

And here is a March/April report from an area realtor. “The market has clearly softened. There are roughly five times as many homes on the market today as there were this time last year. The number of new contracts ratified in February 2006 was down 18.1% from the number of contracts ratified in February 2005.”

“28% of all homes going under contract in February 2006 had a price reduction before going under contract; it was only 7% last February.”

“As one would also expect with the increase in inventory, sellers are dealing with a much more competitive market. 34.9% of homes settling in February received contracts in the first 30 days on the market, compared to 79.9% last February. That is the smallest percentage of homes selling in the first 30 days in any month since February 1999.”

A Federal Reserve president spoke today. “The United States faces a risk that Asian central banks which are still hungry for U.S. assets will one day reach their limit and reinvest at home, Chicago Federal Reserve President Michael Moskow said Thursday. For now, the U.S. economic outlook looks good, although inflation expectations bear watching, Moskow said.”

“Moskow’s comments on inflation and the dangers of the big U.S. current account deficit roiled stock markets and triggered selling in U.S. Treasury debt markets.”

“Eventually countries investing in the United States, such as China, Japan, developing East Asian nations and major oil exporters, ‘will reach their desired allocations of U.S. assets,’ he said. ‘They’re going to want to bring back and invest in their own countries,’ Moskow said, adding that the timing and pace of such a trend was hard to estimate.”

“Traders, who periodically fret about a messy unraveling of the current account gap that might send long-term U.S. interest rates soaring and trigger a steep fall in the dollar, keyed off this remark. ‘He said at some point Asians will bring funds home, which wasn’t very helpful. One response may be the Fed having to raise interest rates to keep the dollar from collapsing as a result,’ said Michael Panzne.”

“Moskow said a probable slowdown in U.S. housing markets ’should be an important factor in bringing growth back to potential’ as the Fed has forecast for 2006 and 2007. But if housing remained solid ‘this would heighten the risk of above-trend GDP growth’ and could be inflationary, he said.”

“Rates on 30-year mortgages rose this week to the highest level in 2 1/2 years as financial markets began to worry more about inflation. Frank Nothaft, chief economist at Freddie Mac said the economy may continue growing at a faster pace this year and if that occurs, the Fed could boost interest rates more than financial markets are currently expecting, meaning further increases in mortgage rates.”

Two California newspapers react to the PMI report. “Orange County has a 58.9 percent chance of seeing home prices decline in the next two years, the second-highest rate among the nation’s 50 biggest metropolitan areas. Only San Diego County had a higher ‘risk index’ rate.”

“San Diego’s risk of price declines was 59.8 percent, the report said. Riverside and San Bernardino counties tied with the fifth-highest risk rate (57.9 percent), and Los Angeles County had the ninth highest (56.3 percent). In addition, Orange County had the second lowest affordability ranking, meaning that the local housing market is among the most susceptible to ‘local economic shock.’”

“The area’s home prices have a 60-percent chance of dropping, one of many factors making San Diego the riskiest real estate market in the nation, according to a quarterly report put out by a California mortgage insurer.”

“‘You guys are leading the nation, congratulations,’ remarked Chris Thornberg, a senior analyst at UCLA.”

“Last year at this time, the quarterly report ranked the San Diego region as the fifth-riskiest market in the nation. That report put Boston as the riskiest. San Diego’s took a hard knock because the area’s homes are among the least affordable in the nation, according to PMI’s data, and that means the people who buy them are more likely to default on their mortgages. The area is also suffering from a slowed price appreciation.”

“Gary London said the report adds to the ‘parade of statistical indicators’ showing that the real estate market is slowing. People who have bought in the last year and who need to sell this year, or people who have entered into mortgages that they simply cannot afford..should probably be concerned at the signals the market is giving off, he said.”

“Stephanie Corns, a spokeswoman for PMI, said that people looking to buy a home need to consider how risky an area is before buying there. That’s especially important when a buyer is considering buying their home using a non-traditional loan such as an interest-only mortgage, she said.”

“‘Some of the exotic (loan) products transfer a lot of the risks to the borrower, so you really need to gauge what amount of risk you are comfortable taking on. Are you comfortable having a lot of risk in your mortgage and a lot of risk in your market area?’”

“Topping out the top five riskiest markets in the nation were Santa Ana/Anaheim/Irvine; Boston; Nassau/Suffolk, New York; Riverside/San Bernardino; and Sacramento.”

Some reports on the Florida housing market. “Boca Raton — Frustrated by the snail’s pace of Eden Condominium construction, city officials will not rule out requiring that the community be demolished if the apartment-to-condo conversion continues to drag on. The city ‘is evaluating the merits’ of the firm’s explanation as to why gutting and rehabbing the 204-unit complex has lagged since spring 2003, when the sales office opened for business.”

“Some Eden sales originally expected to be closed last summer have been pushed back to this September, or even January, according to buyers.”

“Still reeling from 2005 hurricane losses, Atlantic Preferred Insurance Co. said the company won’t renew more than 140,000 homeowner policies in Florida. With few insurers willing to take on new homeowner policies, many of Atlantic Preferred’s former customers could end up in state-backed Citizens Property Insurance Corp. That will put even more stress on the already-burdened company, said Steve Burgess, Florida’s insurance consumer advocate.”

“Two years of catastrophic hurricane seasons have drained the state’s insurance industry, and now the reserve fund that backs up the insurers is $1.55 billion in the hole. That means virtually all Floridians could pay for as long as 10 years to cover the fund’s shortfall.”

“These storm-related charges come on top of surcharges all state homeowners are paying to bail out Citizens Property Insurance Corp., the state-backed home insurer, and the higher prices individual property insurers are charging Florida residents.”

From Realty Times. “Large gluts of inventory spell great news for buyers, and not so great news for sellers. Take Cape Coral, Florida, for example. Our experts have reported that there is nearly 2 years worth of inventory to sell.”

“Our experts report that there is a wide spread between asking prices and actual sales prices in this area? A possible cause? With a larger inventory on hand, while a home may be figured in at a market value of $150,000, with so much competition sellers may have to lower their price if they are needing to sell in a hurry.”

“Prices for houses and land are on the down trend. Inventory is increasing dramatically: about new 400 listings and about 600 + price reductions every DAY!!! Sellers have to adjust their asking prices down, while buyers make low offers.”

“Overnight, it has turned into a BUYER’S MARKET. Lately, I have been selling MANY REAL investors who are ‘thinking outside the box.’ WHAT DO I MEAN? Now that these ‘investors’ have their new houses nearing completion, they reallize they cannot afford double mortgage payments. They are panicing & figure.. ‘well, I’ll settle for $40,000 profit instead of $60,000– just to get out!’”

“Many of you have e-mailed me asking, When will the buyers market end in Cape Coral? At this time we are finding investors would rather reduce their price for a quick sale rather than carry a mortgage payment. Some investors have taken their homes off the market and put renters in place hoping to cover some of their expenses. The problem is so many of these homes are hitting the market at the same time (approximately 25 to 30 a day) and there are not enough buyers to keep up with the inventory.”

The Olympian in Washington reports on the now familiar signs of a housing bubble bursting. “The South Sound real estate market is beginning to evolve from a seller’s market to more of a buyer’s market as inventory levels rise and home prices decline, according to Olympic MLS data released Wednesday.”

“Active home listings in March stood at 1,047, well above the 568 active listings for last March, the data showed.”

“As a result, the median price of a home dropped slightly from $248,475 in January to $244,575 in March. ‘We are seeing some stabilization in pricing based on the inventory in the marketplace,’ said Olympic MLS Manager Jerry Wilkins.”

“With more homes coming on the market, buyers don’t have to react as quickly to the home of their choice, resulting in fewer multiple offers for the same property, said (broker) Jeff Crandell of Lacey.”

“‘There has been a leveling of our market that we’ve all been anticipating for some time now, but it’s taken longer than I would have thought,’ Crandell said.”

The Boston Herald reports on the ‘affordable’ part of town. “New figures show house prices in Boston’s traditionally affordable neighborhoods rising at a double-digit clip even as foreclosure woes in those areas soar. The Boston Department of Neighborhood Development reported yesterday that median house prices rose 10 percent to 17 percent during 2005 in East Boston, Mattapan and Roxbury.”

“But at the same time, figures also show a rising number of Hub homeowners in mortgage trouble. The city said banks seized 60 Hub residences last year for mortgage non-payment, a 140 percent increase from 2004.”

“An even larger number of properties faced ‘notices of default,’ the first step banks take when homeowners fall behind on loans. Citywide, 385 homes faced such notices in 2005, a 53.5 percent rise from 2004.”

“Problems particularly worsened in traditionally working- and middle-class neighborhoods, with default filings doubling in Hyde Park, Roxbury and Jamaica Plain. Filings also rose more than 50 percent in Mattapan, East Boston and South Boston.”

“Experts blame much of the problem on the wide use in recent years of risky loans like interest-only mortgages. These loans offer low monthly payments for a time, but costs often rise sharply after a few years.”

“City spokesman DeWayne Lehman said mortgage bills can shoot up as much as 50 percent when such loans’ introductory periods end. ‘Interest rates are going up on many of these loans at a time when..wages are not increasing, where jobs for blue-collar homeowners are diminishing,’ he said.”

“Jeremy Shapiro added that banks loosened lending standards during the recent housing boom. ‘When a housing market is appreciating as rapidly as Boston was, banks tend to be a lot more lax, because they can make up (for default risks) through price appreciation,’ he said.”