April 11, 2006

‘Buyers Reclaiming Bargaining Power’ In The Northeast

Inman News has this report on the changing markets in the northeastern US. “Only a few months ago Joseph and Kianna Jackson made a resolution for the coming year: They vowed to make an offer on their first home by March 15, their daughter’s second birthday. But like so many other New Year’s resolutions, their promise has so far been unkept.”

“As mortgage rates crept higher in the first two months of 2006 and sales in their local market slowed, the Jacksons decided to postpone their home-buying plans because they think prices could be a lot lower in the summer or fall than they are today. While real estate agents from Brooklyn to Boston say that the Northeast’s housing market will remain strong, it’s the decisions made by families like the Jacksons that will ultimately determine whether the region’s sales and prices gains simply moderate or come to a screeching halt.”

“‘A year ago, the market was super-hot and it was hard to find a Realtor or builder who would even return our calls,’ says Joseph Jackson. ‘But now, I’m getting a couple of calls a week from people who want to sell me a home,’ Jackson says. ‘I just tell them to call back in a few months, and I’ll let them know whether I’m interested in buying again.’”

“With inventories nearing 10-year highs in some Northeastern markets, ‘buyers are reclaiming some of the bargaining power that they had lost as prices soared over the past several years,’ says Lawrence Yun, an NAR economist. ‘The most softness in values will be felt in the priciest markets, like Boston and New York City,’ the economist adds. ‘Those are the areas most at risk from rising interest rates, their prices are already so high that a lot of buyers who could qualify for a mortgage at 6 percent won’t be able to qualify as rates move toward 7 percent later in the year.’”

“As price gains cool, a handful of Northeastern markets have found themselves at the top of some dubious lists. Foreclosures in pricey Connecticut had leapt tenfold from a year ago.”

“Further proof that many Northeast markets are shifting came in a conference call that publicly held Cendant Corp., the New York-based parent of realty giants Century 21 and Coldwell Banker, placed just a few weeks ago. In the call, Cendant execs said that its company-owned real estate offices in New England (as well as Florida and Southern California) had seen a staggering 30 percent sales-cancellation rate in December.”

“The softness in the Northeast’s resale side is also being felt by builders of newly constructed homes. Northeast building giant Toll Brothers Inc. recently announced that its orders for new homes plunged 29 percent. To stimulate sales, the company is offering free upgrades at many of its projects and has even slashed asking prices at a few. CEO Chad Dreier of development giant Ryland Group Inc. said his company’s sales in some East Coast markets during January and February were down sharply from year-earlier levels.”

“Dreier said it was ‘too early to tell’ whether the recent slowdown in sales represented a mere pause in housing’s long run-up or the start of a long-term decline. ‘The year,’ said Dreier, ‘is going to depend on what we sell from March to July.’”




Lower New Home Prices With Builder ‘Focus On Volume’

A homebuilder had first quarter numbers out. “D.R. Horton Inc., the No. 1 U.S. home builder, on Tuesday said quarterly orders rose about 10 percent, but the average sale price fell on softer demand for more expensive homes. The decline in new order prices was a further reflection of a softening U.S. housing market and the company’s focus on volume versus price, analysts said.”

“‘We attribute the lack of price appreciation to the weaker market conditions and Horton’s efforts to maintain a strong pace of sales,’ securities analyst Daniel Oppenheim wrote. Oppenheim warned he expects earnings declines in 2007 and 2008 based on margin erosion. ‘We believe that the focus on developing and pricing homes to maintain a high level of affordability will limit the decline in earnings relative to other homebuilders,’ he said.”

“‘A moderation in sales of $1 million-plus homes in California and lower-priced products in (Las) Vegas, New Jersey and (Washington) D.C., contributed to the West’s and Mid-Atlantic’s declines,’ Janalyst Michael Rehaut wrote. The value of the new orders rose 7 percent to $4.4 billion. Yet, the average sales price fell 3 percent.”

“Some expect order growth to become more difficult for home builders, such as D.R. Horton, which have seen gains slip from 26 percent to 16 percent to 10 percent in the past three quarters. Additionally, many home builders have reported declines or small increases in first-quarter orders.”

The first quarter financials aren’t available yet, but a look at the previous quarter is instructive. At the end of 2005, the firm had $225 million in cash, and had accounts payable of $1.9 billion. Small wonder they are doing this. “D.R. Horton, Inc. sold $750 million in two-part notes, UBS Investment Bank said on Tuesday. The size of the deal was increased from an originally planned $500 million.”

Inventory had surged over $1.5 billion in ththe last three months of 2005, up to $10 billion. A look at this statement shows that cash outflow for ‘change in inventory’ made up the entire gain, and dwarfed all other cash catagories.

And with over $7 billion in debt, the small $21 million in recorded interest expense reminds us that the homebuilders capitalize the interest by adding it to the inventory, rather than reduce net income.




Lenders ‘Pump Up The Volume And Keep The Party Going’

Inman News reports that one mortgage firm isn’t letting up. “Countrywide Financial reported operational highlights for March, saying that mortgage loan funding totaled $40 billion, an increase of 10 percent from the prior year period. Adjustable-rate loan fundings for the month of March were $19 billion. Home equity loan fundings for March rose by 22 percent from March 2005 to $4.2 billion.”

“Nonprime loan fundings in March were $3.3 billion. Consolidated pay-option loan fundings for the month were $7.2 billion, as compared to $6.6 billion in March 2005. Interest-only loan volume was $8.3 billion for the month of March 2006, compared to $6.4 billion for the same period a year ago.”




‘Really Everything Is Up, Except Units Sold’

The Baltimore Sun reports on that housing bubble. “Home sales in the Baltimore region dipped in March, the sixth straight month of decline over the previous year, and the buildup of inventory escalated as the market headed into the crucial spring selling season. Sales dropped in every jurisdiction except Harford County.”

“‘There is no burst,’ said Katie Grove, president of the Greater Baltimore Board of Realtors. ‘Really everything is up, except the units sold. The higher-priced homes are not being sold in the numbers as before,’ Grove said.”

“Baltimore is not seeing the cooling in the housing market that the Washington region is experiencing, said John McClain at George Mason University. ‘Where prices are affordable, we’re still seeing double-digit price increases,’ McClain said.”

“‘We seem to have entered a soft landing cycle,” said Anirban Basu. ‘Gone are the dramatic month-to-month increases in home prices, gone is the period of dwindling inventory of homes for sale. In its place is a sharp increase in inventory from month to month, which suggests that demand for housing continues to wane in the face of rising interest rates. If anything, further softening is likely,’ Basu said.”

“And from the Virginia Pilot. “The number of houses sold in Norfolk, Virginia Beach, Chesapeake, Portsmouth and Suffolk declined last month compared with the same time in 2005, an 11 percent decrease in overall sales for the month.”

“Realtors such as Steve Ballard have had to adjust their approach in dealing with buyers and sellers. ‘Our buyers are not as disappointed as they have been in the last few years,’ Ballard said. ‘There is more inventory. It isn’t becoming a bidding issue to buy the house of their choice.’”

“‘When they ask for us to give them a price for their house, we give various numbers,’ Ballard said. ‘One is if they are not in a rush; that is the top end. If they are anxious to sell, we would put an attractive price on it to move it quickly.’ The difference between those two prices is usually about 5 percent, Ballard said.”

“‘Only in a few cases have they been really disappointed,’ he said of sellers.”




The Housing Bubble Gets A ‘Pink Slip’

The NAR has a press release out this morning. “Existing-home sales are projected to drop 6 percent to 6.65 million this year from a record 7.08 million in 2005, according to the latest annual forecast by the National Association of Realtors. New-home sales, meanwhile, are projected to fall 10.9 percent to 1.14 million. Housing starts are forecast at 2 million in 2006.”

“‘Home sales will move up and down somewhat over the remainder of the year but stay at a high plateau, meaning this will be the third strongest year on record,’ said David Lereah, NAR’s chief economist. ‘Economic growth and job creation are providing a favorable backdrop for the housing market,’ he said.”

The Herald Tribune reports on the jobs front. “The long-lived national economic expansion, largely fueled by the housing boom, has more than likely overpopulated the state and Southwest Florida with real estate-related payroll checks. When residential real estate closings dry up, as they did in the fall and winter, big lenders like Washington Mutual start looking for ways to prop up profits.”

“A month ago, the company began paring its Florida and California loan-processing operations. Less visibly, job vacancies in the mortgage and title field that were hard to fill only last year are now creating nice stacks of resumes.”

“Economic consultant Jack McCabe sees some big employment hits in the offing. ‘We are liable to see Florida job losses in the 15 to 20 percent range for construction workers, title companies, appraisal companies and other real estate-related businesses.’”

“You can take just about any set of multi-year statistics and see that the real estate slump has arrived. Last week, the Florida Association of Realtors reported that February sales of existing homes fell 20 percent from a year ago.”

“Longtime Sarasota mortgage broker Marta Grande thinks there will be some broad pain in the short term. ‘Those mortgage people and anybody in real estate who didn’t sock their money away, they’re going to be in deep doo-doo until next year.’”

“At the request of the Herald-Tribune, Joseph Kalish ran some numbers for Florida, finding that from November 2001 to November 2005, the state’s private-sector work force has grown by 705,000 to 6,855,000. Out of that 705,000, 210,700, or nearly 30 percent, were related to housing. ‘Residential housing has played a very big role,’ said ‘Kalish. ‘If housing slowed down, what would replace housing as a growth driver?’”

“(Appraiser) Tom Ponrich gets a bird’s-eye view of the lower prices every day as he tries to figure out what a fair price would be for a given house. The bulge in the inventory of Southwest Florida homes for sale is easy to see when you drive around. ‘As the bubble bursts, so to speak, inventory rises,’ Ponrich said. ‘You just drive down the road and count the for-sale signs on your street.’”

“In his own neighborhood in south Venice, Ponrich estimates that during most of the past five years, there were five or six homes for sale at any one time. ‘All of a sudden in the last couple of months, it is 15 to 20 homes. The inventory rises, it becomes a buyer’s market, and what generally sells are the ones that are the most attractively priced.’”

“As long as transactions don’t come to a standstill, Ponrich figures his appraiser’s job is safe. ‘It is just a matter of what price they buy it at. It doesn’t matter to us whether they buy it for half a million or $300,000, somebody is still going to have to do the appraisal.’”




Homeless Man Gets Five Fannie Mae Loans In Florida

The St. Petersburg Times found a homeless man who had bought a few houses. “After struggling much of his adult life with unemployment, homelessness and drug addiction, Johnny Moon Sr. died last year on a dirty mattress on the floor of a small home near Tampa’s College Hill district. Moon left behind a watch, a flashlight and a wallet containing a solitary dollar bill. And more than a half-million dollars worth of real estate.”

“The St. Petersburg Times (inquired) about how the elder Moon had qualified for the mortgage loans. A high school dropout with no job history who got by on food stamps, Moon morphed into a real estate investor. Within a year, he bought five properties and signed for mortgages in excess of $614,000.”

“Those familiar with Moon’s background have doubts about his abrupt transformation into real estate investor. Linda Johnson, Moon’s sister, thinks he was an unlikely candidate for easy credit. ‘He never had nothing much, no bank accounts or nothing like that,’ she said.”

“Records show Moon bought a 12th Street property from for $147,000, triple what the county property appraiser said it was worth, and paid for it with a $147,000 mortgage loan. The Federal National Mortgage Association, commonly called Fannie Mae, ended up with the home after Moon died and the loan went into foreclosure. For Fannie Mae, the loan has become a loser.”

“The lender’s representatives discovered the 86-year-old home with the tin roof has leaks, flooring problems, no sink in the bathroom and no kitchen. As is, it is uninhabitable. The home is listed at $88,500, but so far, no takers.”

“In November 2002, Moon Sr. signed for an $85,000 loan to buy the home at 2204 E Chipco St. Six days later, Moon was arrested and charged with petty theft. A few months after being released and reporting meager income, Moon Sr. signed for four mortgage loans, totaling $529,300, to buy four more properties. The four purchases occurred in a two week period. Three homes eventually went into foreclosure.”

“He somehow got himself to all four closings, records show, and presented a Florida driver’s license as identification, though the state had revoked his license indefinitely during the 1990s when he was classified as a habitual traffic offender.”