The Housing Bubble

The Orange County Register found some people still engaged in condo flipping. “Marcel Bruetsch is asking $1.295 million for his two-bedroom condo in Irvine, that’s 40 percent more than he paid for it three months ago. Bruetsch is one of about 70 owners of condos in two Irvine towers who are selling or renting out units they just bought. That total is about one-third of all 232 units Bosa Development finished in January.”

“Bosa is the first developer to finish a luxury tower in Orange County, and real estate experts are watching how many people move in. Developers are anxious to see how much demand there is for high-rise living, since they are building or planning 42 more towers in Irvine, Anaheim, Santa Ana and Costa Mesa.”

“The number of investors in Bosa’s towers is higher than he expected, Bruetsch said. ‘A lot of people had the same idea I did,’ said Bruetsch.”

“Investors selling Bosa units in Irvine are asking from $775,000 to $2.75 million. That’s a big jump from Bosa’s initial prices of $550,000 to $1.8 million. ‘I don’t think they will achieve those prices,’ sales director Dennis Serraglio said. ‘But the market will set where those prices should be.’”

“David Smithson is asking $2.195 million for his penthouse unit at 3131 Michelson Drive. He paid $1.56 million. Agents of other owners have called his agent asking him to raise his asking price, Smithson said. His price is right for now, Smithson said, since high-rise living is new and will take a while to catch on. And there are too many units for sale to ask more, he said.”

“Besides, the housing market isn’t what it used to be, he said. ‘It seems like real estate has hit a lull,’ Smithson said. ‘The market generally has slowed down.’ Whenever he visits the tower it feels empty, he said. His guess is only half the units are occupied, he said.”

“Jack Quinn said he bought a resale unit in March on the third floor for $759,000. Quinn said he has moved in and sees few other residents in the parking lot or hallways. He guesses only one-third of the project is occupied. ‘It’s good because I don’t really have any neighbors,’ Quinn said.”

“Veronica Hicks, an agent in Irvine, said the number of units for resale should increase as Bosa closes escrow on the final units in its second tower. Some investors will have to slash their prices, but Hicks said she’s not expecting them to lose money. ‘The prices in there have been absolutely all over the place,’ Hicks said.”

“The biggest obstacles to sales are the homeowners’ association dues, typically more than $1,000 a month, Hicks said.”

Some readers are looking at what the public homebuilders are paid. “How about the outrageous pay the CEO of some of these homebuilder took home in 2005.”

Beazer Homes USA - Ian J. McCarthy - $10,239,300

Horton (D.R.) - Donald J. Tomnitz - $18,182,600

KB Home - Bruce Karatz - $155,903,200

Hovnanian Enterprises - Ara K. Hovnanian - $45,915,900

Lennar - Stuart A. Miller -$28,851,100

Toll Brothers - Robert I. Toll - $40,889,800

Here’s how one reader saw it. “Here is a good business model: 1) Grant lots of stock options to top management. 2) Borrow lots of money. 3) Use it for share buybacks that pump up the stock price. 4) Cash out options after price gets bid up. 5) Let company go belly up after the bubble pops Does that sound like a plan?”

Another responded, “These companies had record profits. While CEO pay maybe high at all companies, these salaries aren’t out of line with how their companies did. If there are lots of people willing to buy new houses for double their cost to be built; blame those idiots; not the home building companies.”

A reply, “Private company hurray for your thinking… publicly traded… I don’t think so.”

The Philadelphia Inquirer. “As the nation’s housing market boomed in 2004 and 2005, managers in Toll Bros increased base prices by $3,000, $5,000 or even $10,000 every week or two. But Toll Bros. is paying for the good times. New orders for its homes fell almost 30 percent in the quarter that ended Jan. 31 as the housing market cooled. The company’s stock price has plunged 40 percent since early August.”

“Bob Toll said in a recent speech that profit margins were likely to decline this year. But the housing market would recover when ‘we finally stop chattering about when the bubble will burst.’”
“The company will hold prices at current levels by offering buyers incentives, Toll told the group. Experts say it is important for home builders to maintain prices in their developments as the market softens so that people who bought in the last year or two do not feel as if they are losing money on their own homes in the same subdivision.”

“‘You don’t lower the sticker price, you just start dealing so that nobody knows other than you and the dealer what you paid,’ Stephen East, home-building equities analyst.”

And from New York. “Seemingly without warning, a surge of housing development proposals have hit the desks of planning officials in two western Broome County towns. Developers have revealed plans to build almost 500 housing units combined in Union and Maine, with potentially more on the drawing board.”

“The news is prompting questions, including: Who will occupy the houses, condominiums and rental units proposed for the towns, particularly at a time when Broome’s population has declined by about 3,600 since the 2000 U.S. Census?”

“Yet the questions haven’t seemed to reduce a level of demand that real estate agents claim is high. Still, a question remains: In a county where the median sale price of a single-family home is about $95,000, how many people can afford to pay two or three times that amount?”

The Fresno Bee reports on the bursting housing bubble. “The number of existing homes sold in the Fresno/Clovis area fell in March to 692 from 824 the same month last year, a drop of 16%. More than 3,000 houses are for sale in the Fresno area, which gives buyers more choice. Real estate agents say they are having trouble persuading sellers to lower prices to better compete.”

“‘I see a lot of discounting,’ said (realtor) Ron Thomas in Fresno. ‘We are in a buyer’s market.’”

“Jody and Debbie Rosen bought their ‘perfect’ house last May. Now, after being transferred to Atlanta, they are discovering that even perfection is difficult to sell. The Rosens beat out two other offers to buy the two-story house almost a year ago for $499,000.”

“This time, things are different. The Rosens, who bought a house in Atlanta and are carrying two mortgages, lowered the asking price twice from $569,000 to $535,000, and their real estate agent wants them to shave off an additional $10,000. A sale at $525,000 would net a 5% gain, but fees and commissions would eat most, if not all, of it.”

“‘My big fear is that the prices will keep going down and we won’t be able to sell it,’ said Debbie Rosen, who said an offer at $525,000 would receive serious consideration.”

“‘The market hasn’t found itself,’ said Katrina Harman, the agent trying to sell the Rosens’ house. ‘It’s frustrating for people. They want to catch appreciating value.’”

“The Rosens’ house is competing with at least seven other houses under $529,950, Harman said. ‘They need to price their house with the competition..Pricing too high and waiting for the market to reach one’s price does not work in this real estate market,’ she said.”

“Houses are coming up for sale faster than they are being sold, values are not climbing at the same rate and sellers are facing the hard reality of having to cut prices to compete. A day picked at random, last Wednesday, revealed that 125 listings came onto the market, 64 sellers lowered their prices and 62 houses went into escrow. Prices aren’t likely to climb much when the number of houses being listed for sale outpaces those being sold by 2-1.”

“Thomas said the real estate market has simply returned to normal, which is good for buyers. ‘We probably have never had a more friendly market for real estate than we now enjoy. We have a large inventory of new and resale houses, we have a mortgage infrastructure which is literally pouring money into the market with offers of 90% and 100% loans, 40- and 50-year loans, interest-only loans and more things every day,’ he said.”

“‘There is no market in which everyone is going to be happy,’ he added.”

What’s your housing market observation this weekend? Lot’s of open houses, even on this holiday weekend. Know of a builder incentive? From one reader, “What are the tell-tale sign of a visible tipping market in your neighborhood? For example, I’m renting in Sacramento in one of the many, many new mega-neighborhoods complete with Club House and HOA dues, etc.”

“I’m seeing lots more homes for rent and actually being occupied. What I see happening (slowly) is the people who are moving into the rentals are 1) More people per house and 2) Cars noticeably not in the same price range as other owner/occupants: BMW, MB, Volvos vs older mini-vans, beater commuter type cars”

“Not passing judgement because I drive an old(er) Nissan pick-up just wondering if this is the beginning of renters outnumbering owners.”

“I saw this happen once before in Palmdale during the mid-90s. Tumbleweeds across front yards of empty homes were a common sight. Neighborhoods became checkerboarded–beautiful lawn next to dirt lawn. Empty or rented house next to owner-occupied.”

Or how about local spending habits? “Can anyone see signs that consumers are tightening their belts. Is it happening yet where you can see it anecdotally?”

Another shared this, “Examples of surging inventories leading to louder yelps from Madison Ave –i.e. more hawking and squawking about homes for sale. I just rode in over Manhattan Bridge and saw a huuuuuuuuge sign on a building hawking Dumbo condos. Also this Century 21 ad is a sure sign of realtors realizing they have to push to sell. And you simply can’t listen to the radio anymore without someone barking about mortgages/loans. Any other local/national examples?”

One found a tax observation. “I’ve been playing around with my county assessors’ web site and my local newspapers sold homes section. For homes 700K to 1.8M sold in the last 12 months, 6% have not paid their December tax bills and 38% missed their 4-10-06 deadline. This stat was for California.”

One saw the bust in the classifieds. “I think the housing crash is right around the corner; in the car section of the online paper here in Reno, more cars and gas guzzling SUVs for sale all of a sudden, saw one, where the guy is desperate to sell his truck in a hurry-and taxes due next week. Gas hitting $3 a gal soon. I think this thing is going to blow up before summer.”

One reader from Europe had a question about the holiday. “Is Easter normally a big selling weekend for RE in the US, and if so has it been different this year?”

One reader wants to know how you are getting ready for a cooler housing market. “How about a thread on how each of us, or someone we know, is specifically preparing for the housing crash, or in many of our opinions, a recession? As for preparations, my wife and I have been downshifting into a lower consumption lifestyle as fast as two small children will allow.”

“A couple weeks ago, I sold my second car while keeping an older car as my daily driver. We used some of the proceeds from the car sale to retire a little debt that we had accumulated, leaving us with our mortgage as the only debt we have. We’ve also put some money into making our home much more energy efficient. We are hoping to stay put until the kids are gone, so we’re playing for the long term.”

Another sees a disagreement on the home front. “How do you keep your spouse from dragging you to the marriage counselor because she’s threatening divorce because you don’t want to buy an overpriced house and she does (I am assuming that is the typical case; maybe in some unions the female is the bearish one)? Any relationship counselors out there who are also renters? I think you are very needed!”

Then came the replies, “No couselor here, just observation. I find a high correlation between people (both men and women) who have poor spending habits and those who are not paying the bills. If your spouse understands math, then make sure that they are involved in the family finances.”

“My wife is excellent in math, but I ended up with the finances in the division of labor. I find that a monthly plot of net worth and a discussion of what it would take to retire early is quite effective. Now if your spouse doesn’t understand math, then you have quite a problem.”

“The husband and I talk about RE a lot and both read this blog, and we are very much in agreement that we don’t want to buy an overpriced house. One thing I would really appreciate is a more gender-neutral approach to this discussion. I’m getting a little tired of seeing women get cracked on for making irrational housing decisions. Is there any hard data to indicate that this is, in fact, frequently the case?”

“Actually the only research I have seen about gender and investing suggests that men are more prone to make stupid investing mistakes (and my wife would probably concur!). You may be misled by real estate industry propaganda which stereotypes the smart wife who knows now is the right time to buy a home and the dumb husband she is trying to convince. My wife and I had no trouble agreeing that 1996 was the right time to buy a home in CA, and that now is not.”

“I’m not buying that propaganda, but I see that attitude reflected a fair bit here and elsewhere. I’m sure it’s just a reflection of the old stereotype that women are irresponsible with money and like to shop. For some reason that persists even though women are often, now as in the past, the ones who end up managing family finances. Still, as cereal pointed out, both the mister and the missus have to sign the loan papers, and I have a hard time believing that there are that many henpecked hubbies out there.”

“I’m not sure why that assumption is here. The only time the spouse HAS to sign is when 2 incomes are needed to make the mortgage payment. Otherwise it has more to do with ownership (divorce, inheritance) issues.”

The Atlanta Journal Constitution has this report on the housing bubble in the Florida panhandle. “Panama City Beach looks like a beach boom town with high-class intentions. Construction cranes sprout from the sand like enormous sea oats. More than 20 new high-rise condo towers already are open. More are under construction.”

“Almost as quickly as Panama City Beach’s boom began, it hit a trough. Several developers have put plans on hold in this Florida Panhandle town, some after starting construction, waiting for better times. Condo prices have, hold onto your beach umbrella, stagnated or even dipped. Much of Panama City Beach is for sale.”

“Real estate agents say there is a backlog of over 2,200 of beach condo units on the market. Median prices for condos sold in Bay County slid 12 percent in the first part of this year, compared with 2005, according to the county property appraiser’s office. The crunch comes even as 1,400 new condo units are expected to be completed by year’s end.”

“Real estate agents turned again and again to the same pool of investors, especially those from metro Atlanta and Birmingham. ‘It became a feeding frenzy,’ says Jeanie Zepponi, a Destin-based real estate agent. ‘They drove it up to a point where it could not continue to rise at that speed. It was beginning to become unrealistic. Some of these investors just got greedy,’ she says. ‘They were putting in reservations on four or five different projects, knowing they didn’t have the wherewithal to close it.’”

“With sales prices soaring, many investors couldn’t make enough renting out the units to cover a condo’s monthly mortgage. Some investors began walking away from down payments rather than closing. Others completed the purchase even as they continued to seek someone to buy the unit. Few owners live in the units. Property owners have applied for homestead tax exemptions on only about 2 percent of the area’s new condo units, says Mel Leonard, Panama City Beach’s director of building and planning.”

“If the number of pre-construction investors walking away from projects increases, it could put a real hurt on developers, says Leonard. ‘That seems like a ticking time bomb.’”

“Real estate agents in the Panama City Beach area say some banks are putting fresh limits on pre-construction sales in hopes of avoiding investors’ becoming overextended. Projects have been halted. Motels or other businesses that were closed after they were sold to make way for development sit vacant.”

“Says Janet Roan, a local real estate agent, ‘Now is the time to buy. It’s a buyer’s market.’ But she offers a caveat. ‘If you are looking to buy something to flip it, don’t even try it right now.’”

“Zepponi advises condo owners to avoid putting their units on the market now if they can avoid it. ‘If people would stop this panic, things would turn around sooner,’ she says.”

A pair of reports provide an update on the housing market in Washington. “Whatcom County housing prices took a strange turn in the first quarter of 2006, rising dramatically in several communities despite more homes being listed for sale and fewer being sold compared to last year.”

“‘I would expect housing prices to level off as the inventory stabilizes and that the number of days a home is on the market will increase,’ (realtor) Lylene Johnson said. ‘Buyers have more choices now, and can take more time to make an offer.’”

“Johnson said that the number of homes listed for sale on March 31 was more than double last year’s March 31 totals in Bellingham, Lynden and Sudden Valley. Listings were also higher in Ferndale, Blaine and Birch Bay compared to a year ago.”

“Real estate agent Chet Kenoyer agreed with Johnson’s assessment, adding that he’s seen quite a few out-of-the-area buyers who are interested in housing, especially new homes just coming on the market. ‘Around 18 months ago, when inventory was very low, a seller could get away with just throwing a higher price on a house just to see what would happen,’ Kenoyer said. ‘Now there is a lot more inventory, and more competition, so a seller has to be realistic when it comes to setting a price.’”

And the Seattle Times found a housing bubble believer. “Seattleite Matt Rivett, 32-year-old aerospace engineer, ran the numbers on renting versus buying earlier this year after his first foray into house hunting. ‘I decided I didn’t like what I was looking at,’ Rivett said. He found houses overpriced and balked at busting his budget to get a house he liked.”

“But what really shut down his search was doing the math. Why buy, he reasoned, when steep house prices and rising interest rates make owning so much costlier than renting. Instead Rivett’s happily committed to a rental duplex near Ballard that has ‘a beautiful view, all the amenities, for about half of what a mortgage would have been in a neighborhood further out, in a house I wasn’t particularly fond of,’ he said.”

“‘The monthly mortgage payment on the median-priced home today is more than double the average monthly rent in the county,’ apartment expert Mike Scott says. Renters are staying put, saying they’re ‘willing to pay $2,000 in rent, but not willing to pay $3,000 in mortgage for the same type of housing, same carpets, same finishes, same lifestyle,’ said Carmen Esteban, a commercial-mortgage loan underwriter.”

“‘I think they’re examining their lifestyle choices. Yes, there’s the investment piece of it,’ Esteban said, referring to homeownership, ‘but it doesn’t get you a cup of coffee in the morning.’”

“As for Rivett, he was ‘very relieved after I made the decision not to buy. Now, I’m not house poor like I would have been after a home purchase. I’m not tied down and can afford to maintain my lifestyle. I’m willing to wait it out for a few years.’ In the meantime, he’s investing more than $1,000 a month, the difference between his rent and a mortgage payment, for an eventual down payment.”