The Housing Bubble

The Wall Street Journal has some real estate advice. “As many real-estate markets soften, speculators are finding they can’t flip their investment properties for a quick gain. That leaves them with a tough decision: Should they hang on and rent or should they bail out, possibly at a loss? Here’s a look at that agonizing choice, and why selling your investment property is likely the best strategy.”

“To find out if you’re in the ‘no choice’ camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there’s no way you can keep covering the shortfall, you’ve clearly got a problem.”

“‘You have to be able to afford to hold your properties. Most of these people ought to sell, because they don’t have the aptitude to be a landlord and they don’t have the cash flow.’ said John Schaub, a real-estate investor in Sarasota, Fla. And don’t kid yourself: If you have a cash-flow problem now, it could get a lot worse. What if you have trouble finding tenants? Imagine how grim things could get without any rental income coming in.”

“To make matters worse, you could be hit with rising borrowing costs, as the rate adjusts upward on your mortgage or as principal becomes due on your interest-only loan. ‘A lot of the people who bought investment properties are using these exotic loans,’ says economics professor Karl Case. ‘You could have the double whammy of falling prices and rising carrying costs.’”

“Even if real-estate prices simply stagnate, many property speculators will be reluctant to sell their homes and condominiums, because they will be under water once they figure in the 5% or 6% selling commission. Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline.”

“Homeowners have a target selling price, it might be the price they paid, or the price they could have got at the market peak, and they initially refuse to accept anything less.”

“But waiting to ‘get even, then get out’ could be a huge mistake. Not only will you have to cope with the property’s monthly cash drain, but also you could be hit with leveraged losses. If you bought that Florida condo with 5% down, all it takes is a 5% price decline to wipe out your equity.”

“‘When prices start to fall, they usually continue to fall for a while,’ real-estate professor Chris Mayer, a warns. ‘You want to be aggressive in setting a price that allows the property to sell, rather than slowly lowering your asking price and following the market down.’”

Inman News continues their series on faltering home markets. “Lawrence Yun, an economist for the National Association of Realtors stops short of saying that homeowners in the Sunshine State and other parts of the Southeast may have become spoiled by their years of even heftier price gains.”

“But, he admits, the mere suggestion that the pace of price inflation may slow ‘might be a little hard to swallow’ by homeowners in the region who have grown accustomed to even sharper annual increases.”

“Statewide sales in February tumbled 24 percent from a year earlier, the Florida Association of Realtors says, with declines of more than 40 percent in such market stalwarts as Naples and the Sarasota-Bradenton area. There are growing signs that many of the same speculators who have helped to fuel Florida’s long price-run-up are now getting jittery about the prospects for future gains.”

“Cendant Corp. recently reported that its company-owned offices across Florida saw a remarkable 30 percent increase in cancelled sales: It placed most of the blame on speculators who backed out of deals, apparently because they think that prices may be topping out.”

“If speculators continue bailing, Florida’s condo market could be the first to feel the pain. The number of condos for sale in the Miami area is already double what it was a year ago, according to the state’s realty group. The foreclosure rate is also twice the national level.”

“Many developers just keep on building. Roughly 25,000 condominiums are under construction in the Miami-Dade area today, an amount that exceeds the total number of condo sales in the area that have been completed in the last nine years combined. ‘It’s a scary situation,’ sums up Jack F. McCabe. ‘We are going to see severe downward pricing pressures on condos in the next few years.’”

“Builder concessions are also popping up in other parts of the East. In Virginia, Brookfield Homes Corp. recently launched a ‘FastMove’ special on about 60 homes that are already finished or about to be completed: Discounts on some of its more expensive houses approach $100,000.”

“And in Washington, D.C., developer MDC Holdings Inc. is offering thousands of dollars in free upgrades in an effort to offset a sharp 60 percent drop in local sales. ‘We’re certainly not in a ‘panic mode,’ but we’re doing what we can to sell more houses,’ an MDC sales rep says.”

“Price cuts and other concessions are also spreading among new housing tracts in the key building markets of Atlanta and Dallas. Builders who’ve been active in the region for decades are taking it all in stride. ‘We’ve been around for 52 years,’ Lennar Corp. CFO Bruce Gross said. ‘So, we know that housing has a downside scenario.’”

Some housing bubble news from Wall Street and a former central banker. “MDC Holdings Inc. shares fell on Wednesday, weighed on by a bearish call from Bank of America Securities that cited expected earnings declines over the next two years due. As for the rest of the homebuilding industry, analyst Daniel Oppenheim said he was cautious based on declining traffic trends, slower price appreciation and rising inventory levels.”

“Along with declining housing activity and increased stock trading, the latest data reinforce the suspicion that aggressive investors are moving out of real estate and heading back into stocks. But equity strategist Scott Wren says that’s not happening en masse yet. Most real estate speculators ‘haven’t come to grips yet with what’s happened.’”

“Mills Corp. shares gained as much as 7% Wednesday morning after the company said its bank group issued waivers of default through year’s end and that it has refinanced the mortgage on one of its properties, the REIT said. The troubled company, which has seen its shares plunge more than 35% so far in 2006, is looking into a possible sale and has yet to restate previous financial results due to accounting errors.”

And the former Fed chairman spoke in Korea. “Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices. He said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.”

“‘A good part of this expansion is a direct function of the decline in real equity premiums,’ Greenspan said. ‘That cannot go on indefinitely.’”

“He said asset prices would begin to fall, but did not predict when that would happen. ‘I am reasonably certain that what we are looking at today is an abnormal situation,’ he said.”

A pair of reports provide some examples of problems with risky home loans. From Ohio. “Janice Lattimore Brown faced a mountain of bills after her son’s car crash. So when a broker told her she could reduce her monthly house payment with a specialty mortgage, she signed on without reading the fine print. For the first three years, she paid about $700 per month on a fixed rate.”

“But then an adjustable rate indexed to mortgage trends kicked in. Last year, just when she was laid off from her clerical job, her monthly payment climbed to $1,200. A non-profit agency, helped her refinance at an affordable fixed rate. ‘You live and you learn,’ she said.”

“In the past five years, millions of Americans joined the home ownership and refinancing boom by signing up for riskier mortgages with adjustable rates and low initial payments. But now the tease is becoming the big squeeze.”

The Denver Post. “In Douglas County, one of the nation’s fastest-growing and most affluent counties, the call of the needy is getting louder. Requests for energy assistance, food stamps and welfare have risen by staggering rates over the past five years. Food stamp cases alone are up 660 percent.”

“Douglas officials worry that the worst is yet to come, pointing to an unknown number of ‘almost-desperate’ residents, people living off credit cards and the equity of their homes. Already, the county anticipates about 1,400 foreclosures this year, up from 270 homes in 2001 and 912 last year.”

“‘Linda’ is one of Douglas County’s new poor. She grew up in Castle Rock. Just two years ago, her life was stable. But then Linda was laid off just as her husband’s computer business began to slip. Meanwhile, the interest-only, adjustable rate mortgage on the family’s two-bedroom duplex swelled from $750 to $1,550 a month.”

“The burst of the metro region’s high-tech bubble left many Douglas County residents paying for more house than they can afford. Families have milked the equity in their homes and maxed out credit cards.”

“‘It does no one any good for anyone to go under,’ said County Commissioner Melanie Worley. ‘It’s a drain on our economy; it’s a drain on our social-services budget.’ While struggling residents can receive money for rent, power and food through Hand-Up, most will have to sign a contract promising to participate in counseling and meet career, money-management and family goals.”

“‘We’re going to continue to help people, but we’re not going to continue to spend money just to allow people to tread water,’ said George Kennedy, director of human services for Douglas County.”

“For Linda, she’s done all that the experts would recommend: After she lost her job, she got a teaching degree, then a master’s degree. Until it closed in March, she taught at a private school. Now she is hopeful that the county school system will give her a job.”

The Arizona numbers for March are out. “Metropolitan Phoenix’s resale housing market continued to slow in March. There were 7,265 existing homes sold in the Valley last month, a steep decline from the frenzied pace of March 2005 when buyers snapped up 10,035 resales. The price for a typical Valley resale home was $263,000 last month. The median is down only $2,000 from February.”

“Last year, sellers had the upper hand. Now, buyers have the leverage and, agents say, they are making sellers suffer. ‘Sellers got greedy last year,’ said (realtor) Diane Watson in Scottsdale said. ‘Buyers are greedy now. For buyers to bite right now, they need a really compelling reason,’ she said. ‘They’ve either got to move, or it’s a job situation. Other buyers, they just want to wait.’”

“Jay Butler noted that the first quarter of this year was the weakest since the first quarter of 2003. ‘Prices will start to come down in certain areas,’ he said. ‘Some of the older areas will hold prices better. We will see some decline.’”

“The Mesa resale housing market dropped from 1,125 sales a year ago to 830 sales in March. Butler said that while the trend toward normalcy continues, the overall direction of the local resale housing estate market would probably not become clearer until the second quarter.”

“Among causes for concern; interest-only and negative amortization loans accounted for 55 percent of sub-prime mortgages in Arizona in the first 11 months of 2005. That figure appears to have increased compared with the full-year figure for 2004, 42 percent.”

“Charles Ruscher, a lecturer at Eller College called the state figure horrendous. ‘When you have kind of a bubbled real estate market, you’re looking at probably inflated values. Even if the bubble doesn’t pop, if it starts to deflate, those people are going to be in a position that’s going to be impossible to repay the loan,’ Ruscher said. ‘If the real estate market stalls, slows down or starts to decline, then they’re stuck with an asset that isn’t worth as much as what they owe on it.’”

“Recorded sales in the city of Phoenix decreased from 2,835 sales to 2,300. The Scottsdale resale home market declined from 810 to 550 recorded sales. In Glendale, the resale home market decreased from 695 a year ago to 570 sales. The Sun City resale market fell from 215 to 150 sales; resale activity in Sun City West also fell from 95 to 65 sales.”

“The resale market in Gilbert decreased from 605 to 355 sales. For the city of Chandler, the resale market slowed from 680 to 510 recorded sales. The resale market in Tempe decreased from 230 to 190 sales. Avondale fell from 235 to 160 sales. El Mirage decreased from 120 to 60 sales. Goodyear declined from 225 to 95 sales. Surprise decreased from 450 sales to 285 sales.”

The Wall Street Journal has this report on flippers. “Home sales have been slowing for several months, but real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly market conditions have deteriorated in the past few months. But for cities like Fort Lauderdale, Fla., Phoenix and San Diego, the dropoff in sales and rising supply of homes on the market could soon put downward pressure on prices.”

“Todd Linsley, a 37-year-old investor, bought a three-bedroom house in Stuart, Fla., for about $318,000 in late 2005. His original plan was to quickly flip the property by selling it for as high as $425,000. But when he saw that the market was turning, he decided to list the home for $379,900. It’s been on the market since early January with no takers.”

“Mr. Linsley says home builders keep discounting unsold houses in the neighborhood, sometimes axing as much as $100,000 off the original asking price. He says he can’t afford to go that low. So now he’s renting his investment house out for $1,000 a month, while paying a $2,045 monthly mortgage and a $108 monthly homeowner’s association fee. ‘My Plan B was always to rent it out. I am not going to lose my shirt,’ says Mr. Linsley.”

“Some Floridians blame the media and even Wall Street for scaring people away. Mr. Linsley recalled a headline in a local paper declaring that the local housing market was overvalued. The headline type was so bold that it looked as if the nation had just declared war. ‘The media is killing the investors,’ Mr. Linsley says.”

“‘Things have slowed to a crawl,’ says Mike Morgan, a broker in Stuart, Fla. Mr. Morgan says that ‘we went three days this week with not a single showing. That’s incredible. I have 35 listings. We usually get 2-6 showings a day….I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their ‘life savings’ if they sell the homes in today’s market.’”