The Housing Bubble

Let’s clear off the desk and get ready for the weekend! “The trend is becoming clear across the state, where the number of building permits and home starts has been outpacing the number of households since 2002, Orlando-based economist Hank Fishkind told the crowd of about 240. ‘Obviously there’s a housing bubble in Florida. Come on, of course there is,’ he said.”

The Arizona Republic. “Median resale housing prices kept falling through most of the Southeast Valley in March, mainly because there are so many more homes on the market. Jay Butler said most homes sold these days are by investors who flooded the market over the past two years.”

“The main exception was Ahwatukee Foothills, where prices jumped 6 percent from February to March, to $364,250. But that is still below its December median of $386,250. Median home prices from February to March fell 5 percent in Gilbert to $322,500, and almost 4 percent in Tempe to $288,400.”

“America’s biggest mortgage lenders are fighting a federal proposal they say may stifle the market for some popular loans such as interest-only mortgages. Interest-only loans that don’t reduce the outstanding balance on a mortgage ‘delay the day of reckoning’ for consumers once principal payments come due, Comptroller of the Currency John Dugan said.”

“In the Bay Area, 53.2 percent of purchasers and 35.3 percent of refinancers chose interest-only loans last year, while 22.5 percent of purchasers and 33.9 percent of refinancers chose option ARMs. Bob Visini says he has ‘no explanation’ for why so many refinancers, who already own a house they presumably can afford, are choosing these alternative loans. ‘I’d be willing to bet the vast majority are cash-out refis,’ and that people are taking alternative loans so they can take out more cash.”

“Between 1987 and 1991, Congress phased out the tax deduction on consumer loans, but not on home mortgage interest. As a result, many people today use their homes to finance cars, college tuitions, home improvements and other purchases. ‘The government almost forced people to do this when they took away the deduction for interest other than mortgage,’ Visini says.”

“Interest-only and option adjustable-rate mortgages accounted for close to the 61 percent of the non-prime mortgages sold during the first 11 months of 2005 in Nevada. Research that indicates that as many as 40 percent of the consumers holding aggressive mortgage products are unaware of the implications of the loan.”

“The number of foreclosures in Clark County, NV increased by 36 percent in the first quarter of 2006. Researchers say during the housing shortage, a lot of investors bought up properties using adjustable interest rate loans hoping to cash in as the property values went up. Now, a lot of those investors who bought homes they couldn’t afford are stuck with overpriced houses because the demand is down.”

“South County home sales jumped again in March, but the housing market is considerably cooler than it was one year ago. ‘We’re seeing price reductions because of the market we just came out of,’ said (realtor) Susan Jacobsen. Michael Giluso said he recently sold a $650,000 Gilroy home only after the price was cut three times.”

These reports on Japan show the cyclical nature of real estate booms. “Japan is entering its fourth year of robust economic growth and has an unemployment rate of 4.1 per cent, the lowest since 1998. Unlike previous, short-lived recoveries fuelled by government spending, the upward trend now is based largely on slimmed-down companies posting record profit and returning to a cycle of hiring.”

“With Tokyo real estate prices rising in 2005 for first time in 15 years, Kazuhiro Takeshima’s home-construction business has rebounded too, allowing him to reward his staff with raises. ‘There is a sense that we’re back in business, that things are good in Japan again,’ said Mr Takeshima. ‘It makes us all feel a little more confident about opening our wallets to spend.’”

“That chain reaction of spending, from houses to cars to sneakers, heralds what economists call the long-awaited return of Japanese consumers.”

“Unlike most nations, where prices rise with inflation each year, Japan has been locked in seven years of price declines, or deflation, as gloomy consumers and sceptical businesses put off purchasing, expecting that prices would continue to fall. The drag on the economy forced some companies to cut payrolls, creating what many feared would be a cycle of constantly falling prices.”

“Takuya Wakizawa recently took the plunge into home ownership. ‘I started seeing mortgage rates going up, and I realised I couldn’t wait any longer,’ said Mr Wakizawa, who locked in a 35-year fixed mortgage for a two-bedroom Tokyo apartment at 2.62 per cent last summer. Rates for similar loans have since risen above 2.8 per cent.”

“‘My generation never used to think that prices would get higher. We became used to things getting cheaper and cheaper,’ said Mr Wakizawa, who also splurged on two rooms of American-made Ethan Allen furniture and a Japanese flat-screen television. ‘But prices are going up and it makes you feel like you can’t afford not to buy now.’”

“The number of condominiums put on sale in the Tokyo metropolitan area in March rose 13.4 percent from a year earlier to 7,596 units, the first year-on-year increase in five months. In Tokyo’s 23 wards, 2,924 condos were put on the market, up 53.4 percent from a year ago.”

“The Bank of Japan said Wednesday it will keep a close watch on real estate loans of banks and securities companies as it monitors the country’s financial system in fiscal 2006. In its annual report, the BOJ hinted at a need to forestall the possibility of an asset price bubble by enhancing the risk-management practices of financial institutions, given that commercial land prices in some areas of Tokyo have recently risen sharply.”

“But the central bank stressed it has no intention of strictly monitoring lending to the real estate sector.”

The Union Tribune has this update on San Diego. “No longer steaming, the San Diego region’s housing market continued a slow cooling trend in March. The end of the first quarter also marked the 21st consecutive month in which sales volumes were down on a year-over-year basis, DataQuick reported.”

“Kenneth Rosen at UC Berkeley, maintains that the market’s future is uncertain. ‘Prices are actually starting to decline in San Diego because of the inventory of unsold units, both single-family and condos,’ he said.”

“Tom Belway and his wife hope to purchase an investment property not far from their home in Poway. ‘We are hoping that the opportunities are starting to come back around in San Diego,’ said Belway. ‘We’re starting to see price reductions in our area.’”

“‘We definitely have noticed you getting more for your money right now, and it is not such a frenzy,’ Alexia Spivey of El Cajon said. ‘I have definitely seen the market slow down. Every single day I check the MLS (multiple listing service). Those homes are asking $950,000, and then two weeks later I see they have reduced the price to $875,000, $900,000. I don’t think they are getting top dollar.’”

“Clearly influencing the slowdown in price escalation is the growing inventory of homes on the market. In June 2004, the number of homes listed for sale was 6,657. Yesterday, there were 17,010 listings.”

“Richard Nesbitt, who manages (realtor) offices in Ocean Beach believes there is more sales activity at the upper end of the market in his area, which has helped boost the median price. But sales in general are down, he said. ‘We’re having people lower their asking prices because there are a lot of properties on the market, and buyers compare them, so multiple offers aren’t coming in at list price or over list price.’”

“While overall prices have continued to climb, one out of four of the 65 ZIP codes with at least 20 sales during the last quarter saw year-over-year declines. Experiencing the largest year-over-year drop was Chula Vista Northeast (91914 ZIP), with a median-price decline of nearly 32 percent.”

“In the new-home market, sales slowed dramatically, dropping 38 percent during the just-completed quarter. Contributing to the large decline was a big slowdown in condominium conversions, with sales numbering 801 during the first quarter, compared with 1,306 a year earlier. ‘It’s just slowed down. There’s no getting around it,’ said Alan Nevin, chief economist for the California Building Industry Association.”

A columnist at the Boston Herald thinks local realtors are missing something. “The amazing thing about the real estate market is that it’s never in a slump. Just ask any Realtor. ‘Strong?’ Frequently. ‘Red hot?’ Sometimes. And on all other occasions it’s ’soft,’ ‘flattening out,’ ‘a little bit slow right now,’ and, of course, ‘just starting to pick up again,’ especially for ‘the right properties at the right price.’”

“Which is pretty much where we are now.”

“Recently I had lunch with a young businessman who is trying to sell his South End condo. This guy’s place has been on the market since July. He’s even cut the price 20 percent, to around $400,000. And every month he writes another check to the mortgage bank. You’re starting to hear more and more stories like this around town.”

“The way to measure a slowdown isn’t in average sale prices, because higher-end properties keep selling well in almost any market. It’s in the volumes. The facts? The number of condos sitting on the Greater Boston market has doubled in the last 12 months, to 6,569. The number of single-family homes has jumped 60 percent. Among the hardest hit neighborhoods: South Boston and the South End.”

“‘It’s become a buyers’ market, because of the amount of inventory,’ admits Susan Kieley, a real estate agent in Southie. It’s just one of those cycles we have to ride out,’ she adds.”

“Realtors have a variety of ways of dealing with a slowdown. Last fall, a Boston Realtor seriously tried to blame the after-effects of Hurricane Katrina. ‘This is the Boston market we’re talking about?’ I asked. This year, expect to be told it’s the election.”

The Wall Street Journal looks at the housing bubble in resort towns. “As real-estate prices surged across most of America, some of the biggest gains swept coastal resorts. Now there are signs the tide has finally turned. In Ocean City, N.J., the median price fell 7% in March from a year before. Sellers in Ocean City, a densely populated barrier island with a long boardwalk and broad beaches, have cut prices as their properties languish.”

“Bill Beible had listed his four-bedroom, two-bath condominium for $1.35 million last spring. After getting no takers, he cut the price to $1.25 million. So last week he cut again, to $1.059 million, down 28% from his initial price. ‘I wish I had priced it lower from the beginning,’ he says.”

“Some real-estate agents have started cutting prices on their own homes. Broker John Melton listed his 10-year-old house in Bend, Ore., for $549,000 in December; now he’s lowered the price to $524,000. In Naples Fl., Al Lazzaro cut the price twice on his four-bedroom lakeside house, to $699,000 from $747,000, after getting dozens of email blasts every day from fellow agents shouting, ‘owner motivated.’”

“On Cape Cod, the total number of homes for sale has risen 62% since this time last year. The dearth of buyers means sellers must consider every offer, even if it gives them little profit, says agent Jim Kalweit in the Cape Cod town of Hyannis, Mass. ‘Offers that would have been an insult a year ago are now being accepted,’ he says.”

“In Naples, inventory levels have reached a 21-month supply. That’s about three times the supply at this time last year. ‘We’re flooded with inventory,’ says Tripp Champion, a Naples real-estate agent. He represents a German buyer who’s just slashed the price of his four-bedroom mansion three blocks from the beach by 15%, to $3.3 million.”

“The market for Santa Barbara properties under $5 million is weakening; agent Nell Eakin says the price of one of her listings was just reduced by $315,000, to $2.5 million. Erik Eyman couldn’t snag a tenant for his three-bedroom ocean-view house, which he estimates is worth about $1.7 million, until he lowered the monthly rent to $2,900 from $3,500. He says that over the last few months, both selling prices and rents (are) softening now.”

“The number of single-family homes sold in Bend, Ore. last month fell 28% from a year earlier. Sellers are getting the message. On one street in Bend, a seller dropped his asking price by $40,000, to $1.359 million, after less than two months on the market; down the street, another house has gone to $998,000 from $1.033 million.”

“The fact that some sellers are trimming prices has made some buyers wary. Nancy Rawls, a hospital-benefits coordinator, is looking to buy a two-bedroom vacation condo in Pensacola, Fla., but thinks prices may continue soften through the summer as inventory levels build. ‘You have to sit, wait and watch,’ she says.”

My San Antonio reports that speculators are buying into that city. ” Some real estate agents say out-of-state investors, mostly from California, Arizona and Florida, now account for half their clients, while traditional families were their bread and butter up until the beginning of the year. For real estate agent Tina Ross, investors have accounted for 100 percent of her clients since January.”

“‘If they’re seasoned investors, they’re quick,’ said Ross. ‘There’s no emotion involved. They fly in. We go look. They make offers and they’re gone.’”

“Kayvan Kazemeinejad from West Sacramento, Calif., recently sold a California home and saw San Antonio as an undervalued market. Kazemeinejad couldn’t remember the subdivision he just bought a house in (Whisper Hollow) and had to look up the street name (Oak Briar). He has only seen the home once. But he loves it.”

“‘I wish I could move it to California and live in it myself,’ said Kazemeinejad, who also wants a four-plex and another single-family home.”

“San Antonio’s ‘hot market’ hype might make some prospective home buyers feel pressure to hurry up before they get priced out of the market. Randall Allsup, manager for a real estate research firm, said the bottom line for buyers is this: Move quickly. ‘If you find a house today, you’d better make an offer on it or it won’t be there,’ he said.”

“Realtors and home sellers may welcome the added sales from investors, but not everyone in San Antonio is thrilled by the attention. Builders fear neighborhoods full of renters or a slew of investor-owned resales that might compete with their own businesses as they complete subdivisions over the next few years.”

“To prevent such scenarios, builders have instituted caps on what they’ll sell to investors, rules to limit the amount of rental property allowed in a subdivision, and even contracts requiring owner occupancy.”

“‘People are saying they want to buy five or 10 houses for rentals,’ said Rick Kuper. ‘They’re eating up the inventory.’ Since October, (realtor) Aneeta Bhalla has closed 100 sales to out-of-state investors who have sold homes and must reinvest quickly to avoid capital gains taxes.”

“‘Sometimes I go and tell my husband, ‘We should be doing this and buying rental homes,’ Bhalla said. ‘It makes you feel like you’re going to miss the boat.’”

“Not to worry, says James Gaines, economist with Texas A&M. As long as the builders keep producing new homes it will put a constraint on how high prices can go, Gaines said. ‘People shouldn’t worry about price spikes,’ he said.”

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