The Housing Bubble

Some housing bubble news from California. “Placer County’s home were 23 percent slower than March 2005, according to the county’s realtors. The association also reported more than 2,210 homes were on the market, more than double the figure in March 2005. The county has the most homes on the market since January 1997, the oldest historical data released, and the fourth month to top 2,000 homes in the past seven months.”

“The service reported 389 existing homes sold last month in the county, far from the 507 in March 2005, and the slowest for that month in three years.”

“The median price paid for a Southern California home passed $500,000 for the first time last month as sales continued to decline. Sales have declined on a year-over-year basis the last 21 months and are currently at 2001 levels.”

“‘We still expect the annual increase in median to go down into the single digits sometime this summer. San Diego County is still the market furthest along in this cycle. Price increases there have been below ten percent the last eleven months,’ said Marshall Prentice.”

“Financing with adjustable-rate mortgages has dropped significantly during the last three months. Foreclosure activity is edging up from its bottom.”

“A total of 29,509 new and resale Southland homes were sold last month. That was down 17.4 percent from 32,674 for March last year. The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,383 last month, up from $2,037 for March a year ago. Adjusted for inflation, current payments are about 8.4 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle.”

“Housing resale prices in the Santa Clarita Valley rebounded slightly in March as the median for a single-family home hit $600,000. It’s an improvement from February’s median price of $590,000, the result of a 4.8 percent drop from the record $620,000 set in January. Listings in March soared 216 percent, to 1,704.”

“The Van Nuys-based Southland Regional Association of Realtors said San Fernando Valley sales continued declining and inventory ballooned by more than 100 percent, further proof that sellers no longer control the market.”

“‘Gratefully, the overheated, unsustainable seller’s market of years past is finished,’ association President Steve White said. The swelling inventory, up an annual 124.9 percent for houses and 212.1 percent for condominiums, seems to support that view.”

“As expected, home sales throughout the Valley during March were slower than the record-setting pace of the last several years. Sales of existing single-family homes fell 14.7 percent compared to a year ago March. It was the lowest total for the month since March 1997 and the first time in eight years that it fell below 1,000 sales. Likewise, condo sales fell 26.8 percent from the March 2005 tally.”

“Pending esrows, a measure of future sales activity, (were) down 12.9 percent from 12 months ago. The inventory of homes listed for sale increased a whopping 143.0 percent from a year ago. ‘Simply tacking on 20 percent above similar homes is unrealistic,’ said Jim Link, the Association’s executive vice president. ‘We’re back to a market where real research is needed before setting the list price of home..if you want to alert the most likely buyers.’”

“‘Over-priced properties will sit on the market,’ said Link. ‘Hoping to sell $100,000 above comparable recent sales is not going to happen anymore.’”

Inman News has this on Washington. “Home sales in western Washington fell 9.1 percent in March from a year ago. NWMLS members added 12,639 new listings to inventory last month, edging out the year-ago total of 11,808 new listings. The additions include 10,786 single-family homes and 1,853 condominiums. With those new listings, the total inventory at month-end rose to 23,533 listings. Compared to the same month a year ago, the inventory grew by 15.9 percent.”

“‘People are taking a bit longer to decide and even with the increase in inventory, there hasn’t been a reduction on selling prices,’ said NWMLS director Dick Beeson in Tacoma.”

The MLS site doesn’t provide prior monthly stats, but does show pending sales down 8 in King County and listings up 26% in Pierce County. Listings climbed 52% in Grays Harbor and 82% in Thurston.

Builders slowed down in the west. “Construction was down in all parts of the country, led by a 15.5 percent drop in the West. The Commerce Department report provided further evidence that the nation’s five-year housing boom is quieting down.”

And CNN had this report on realtors. “If the secret worries of real estate professionals are any indication, home prices could be heading for a swoon. Brad Inman recently gave real estate agents the opportunity to blog about market conditions, they almost uniformly described them as bad, and getting worse.”

“‘Normally, brokers and agents tend to sugarcoat the news; they don’t want to affect consumer confidence,’ says Inman. ‘By letting them post anonymously, we gave them a way to really share their thoughts.’ Most responded with tales of high inventories, slow sales and languishing prices.”

“Here’s a sampling of their comments: ‘Portland, Oregon is mixed, more inventory, sitting longer. Sellers no longer king.’ ‘Some Realtors, Mortgage Brokers & some clients have been more testy than in months previous. Something is in the air.’ Posted by S. Crowe.”

Some housing bubble news from Wall Street. “D.R. Horton Inc, the largest U.S. home builder, said on Tuesday its fiscal second quarter earnings rose 20 percent on higher home sales, but its shares fell on a tepid outlook that was reinforced by government data. ‘The overall tone wasn’t great. They didn’t give a tremendously robust outlook,’ analyst Gregg Schoenleber said. ‘They thought the market would probably be in a better position today.’”

“For the second quarter ended March 31, Horton reported earnings of $1.11 per share, one cent short of what analysts on average had expected. Since the start of the year, Horton shares have lost 9 percent of their value, while the Dow Jones U.S. Home Construction Index has fallen 8 percent.”

“Wells Fargo said its mortgage business slumped but first-quarter profit rose 9 percent from the year-ago period. Wells Fargo, one of the nation’s largest mortgage lenders, felt the impact of the slowdown in the housing market in the quarter. The bank said home mortgage revenue declined 43 percent.”

“Downey Financial Corp. reported that net income for the first quarter of 2006 (was) down 13.5% from the year-ago first quarter. Daniel D. Rosenthal, President and CEO, commented, ‘Our portfolio of option ARMs, which represents 92% of our single family portfolio, had a weighted average loan-to- value ratio of only 72% at the time they were originated and borrowers were qualified based on fully-indexed interest rates. These loans do present greater credit risk in sustained periods of rising interest rates, as borrowers may see their loan payments increase significantly when their payments recast to fully-amortizing payments.’”

“‘In addition, credit risk increases if home values decline. In light of continued increases in market interest rates and changes we are beginning to see in the residential market, such as an increased level of unsold homes and relatively flat home prices on a sequential month basis, we recently instituted pricing changes for the option ARMs we originate for portfolio by increasing the initial start rate and thereby lowering their potential for negative amortization.’”

“‘Since our new start rate is now higher than those of many of our competitors, our production of option ARMs for portfolio may not offset loan payoffs. We are offering other types of adjustable rate product for portfolio that do not permit negative amortization, but those products are currently not as popular with borrowers.’”

The press release continues, “During the current quarter, certain segments of the California residential real estate market began to show signs of slower sales and flattening home values on a sequential month basis. In addition, increased usage of negative amortization associated with option ARM loans may result in certain borrowers reaching their limit of negative amortization permitted under the terms of their loan, thereby resulting in an increase in their minimum monthly loan payments and the potential for higher delinquencies.’”

And a Fed official spoke, “San Francisco Fed chief Janet Yellen said cooling housing prices and the impact of the Fed’s gradual tightening were behind her expectation for economic activity to simmer down after a strong first quarter. ‘While I expect the housing sector to slow somewhat, I will be highly alert to the possibility of the policy tightening going too far,’ she said.”

Newsday sees an end to the housing bubble. “Say one last farewell to the housing boom. In the clearest evidence to date of a housing market shift, the latest Long Island data showed Nassau County’s median home price rose only 4.4 percent from March 2005 to March 2006, the smallest annual price gain since May 1998.”

“Adding to the pile of evidence, the number of homes for sale is still 74 percent above last year’s levels for the three counties, while closed sales in the region are down 6.7 percent.”

“Based on the current selling pace, it would take more than eight months to sell the total supply of Nassau homes for sale, and nine months to sell Suffolk’s inventory, the highest since 1998.”

“The numbers aren’t a surprise and some are expecting more to come. (Broker) Ed Gitlin said he foresees 10 percent annual price declines on Long Island, perhaps as soon as June.”

“The slower market could affect the overall economy, too, as some consumers may slow spending to make up for higher interest rates or lower housing values. ‘Borrowers were using their houses like ATM machines,’ said Bob Moulton, a mortgage broker in Manhasset. ‘They were taking the money out to buy cars or go on vacation, and it’s got to have some trickle-down effect.’”

The Naples News has this report on another failed condo project. “In a sign of the times, the for-sale sign has come down at Intermezzo, a luxury waterfront community in Naples. The developer, Phil McCabe, has closed the sales center and temporarily suspended sales at the mid-rise condominium, saying he will wait for the market to improve before opening his arms to buyers again.”

“‘It was just my judgment that the market was too much in turmoil for me to proceed at this time,’ said McCabe. ‘It’s the market. The market has totally collapsed.’”

“He’s returned deposits worth about $40 million. That was for 20 units. ‘My goal was to get 50 units under reservation to go full-speed ahead, 100 miles an hour,’ McCabe said. ‘We obviously didn’t achieve that.’”

“In March and April, the Naples market continued to soften, and so did demand, McCabe said. ‘I am most concerned about the future,’ he said. ‘It’s a major real estate correction going on.’”

“Following a national trend, there has been a shift in the Naples market. Home sales have slowed, listings have grown and investor interest in buying real estate has waned. In February, existing single-family home sales in the Naples metro area dropped 47 percent from the same month a year ago.”

“McCabe considers the waterfront location superior, however. ‘It is not the case that there are buyers not wanting to buy there because of the location,’ he said. ‘It’s because there are simply no buyers period.’”

“Ross McIntosh, a Naples land broker, said he wouldn’t be surprised to see more condominium developers following in McCabe’s footsteps in Collier and Lee counties. He said condominium builders are pulling the plug on projects in other markets, such as Miami and Las Vegas, because of changing conditions in the real estate market nationwide.”

“High-rise and mid-rise developers have to put up entire buildings at once, making financing trickier, especially when demand isn’t that strong, he said. ‘In this coming year, we will see further announcements or further evidence of projects not going forward,’ McIntosh said. ‘Some people are not going to make a big announcement. They are just going to quietly crawl away with their tail between their legs.’”

“He expects to see projects fail and be taken over by their lenders or investors. ‘Heads will roll,’ McIntosh said.”

Bloomberg has the housing starts data. “Builders started work last month on the smallest number of new houses in a year, as rising mortgage rates and record inventories of unsold homes discouraged new projects. Housing starts declined 7.8 percent in March to an annual rate of 1.96 million, from 2.126 million in February.”

“Building permits, a sign of future construction, fell 5.5 percent to an annual rate of 2.059 million from 2.179 million.”

“Builders are breaking ground on fewer projects after new home sales declined in three of the last four months, falling in February by the most in nine years. ‘It’s clear that the housing market is cooling,’ (economist) Joel Naroff said before the report. ‘There are areas of the country where we are going to see pretty sharp declines in construction and in housing prices.’”

“Starts fell in all regions of the country. They decreased 16 percent in the West to an annual rate of 486,000, 8.2 percent in the Midwest to 291,000, 4.8 percent in the South to 994,000 and 0.5 percent in the Northeast to 189,000.”

“‘Buyers are going to be in a sweet spot in about three to six months,’ said (economist) Anthony Chan. ‘The speculators who are still holding properties will be panicking by then as their carrying costs mount. It won’t be a bloodbath, but that’s when prices should be at their lowest.’”

“Federal Reserve policymakers have been encouraging banks to tighten lending standards in recent months and make less use of tools favored by speculative home buyers, such as adjustable-rate and no-interest mortgages. These loans become more costly as the federal funds target rate increases.”

“‘We’re seeing that the investment side of housing looks like the edge is coming off because the carrying cost of doing these investments is getting higher,’ Federal Reserve Governor Susan Bies said.”

“KB Home reported a 12 percent decrease in orders in the December-February period. The decline was the first in four years at KB Home. ‘Some housing markets have moderated from the over-heated and, in some cases, speculative pace of growth of the past few years,’ Bruce Karatz, CEO said.”