The Housing Bubble

Dataquick has some California numbers out. “Home sales in the Bay Area continued to slow as price increases dipped into the single digits for the first time in more than two years. A total of 9,745 new and resale houses and condos were sold in the nine-county region last month. That was down 13.8 percent from 11,310 for March last year, according to DataQuick.”

“The year-over-year decline was the twelfth in a row.”

“The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,958 in March. That was up from $2,889 in February, and up from $2,636 for March a year ago. Adjusted for inflation, mortgage payments are 18 percent higher than they were at the peak of the prior cycle sixteen years ago.”

“Sales were down 22.7 in Napa County, 22.5 percent in Solano County, 18.7 percent in San Mateo County, 17.5 percent in Marin County, 15 percent in San Francisco, 14.9 percent in Alameda, 12.2 percent in Sonoma County, 11.7 percent in Contra Costa County, and 8.9 percent in Santa Clara County.”

The LA Times. “Sales of homes in Southern California declined for the fourth month in a row in March. DataQuick chief analyst John Karevoll, and others contend that current price increases cannot be sustained. They predict that the rate of appreciation could be in the mid-single digits to zero by year’s end.”

“‘Anytime you see a volume drop, the price will be impacted two to three months from now,’ said Michael Davin, VP of a Hermosa Beach-based real estate brokerage.”

“Ventura County’s home prices continue to edge up, but it’s apparent the buying frenzy has cooled. As demand ebbs, builders might start thinking of ways to attract buyers. New-home sales generally serve as a barometer of the market. (Economist) Keitaro Matsuda said industry professionals who sell new homes are the first to act on changes in buyers’ moods. ‘The individuals (homeowners) tend to be slow at adapting,’ he said.”

And from the Daily Bulletin. “In San Bernardino County, the median price of a home in March was $367,000, down 1.6 percent from the record $373,000 set in February. Ryan and Susannah Maddox are hoping that it doesn’t take too long to find a buyer. The Loma Linda couple are in the process of buying a house in Northern California and hope to quickly sell the three-bedroom, two-bathroom house they have owned since October 2004.”

“‘We have a couple of months before we would have a double mortgage payment. We want to avoid that,’ Susannah Maddox said.”

Some housing bubble reports from Wall Street. “Home-building and mortgage-banking company NVR Inc. on Wednesday said first-quarter profit rose 12%, but cautioned it could see margins squeezed as the firm faces pricing pressure in slowing housing markets. Orders in Washington, D.C. fell 12% from the year-ago period on higher cancellation rates, which increased to 17% from 13%.”

“‘Our market checks continue to point to weak market demand and heavy incentives in [Washington], D.C., NVR’s largest market,’ said analyst Dan Oppenheim in a recent research note. He expects lower order growth and greater-than-expected margin deterioration.”

“In January, NVR said it expected 2006 gross margins would be squeezed by pricing pressure in many of its markets, a forecast it repeated Wednesday.”

Checking the press release, the firms new orders declined in Washington DC, as did the average new order price; from $401,400 to $387,600.

A reader found this item. “Comerica Inc. on Wednesday said quarterly profit fell a lower-than-expected 3 percent, but a surprise decline in lending margins caused the regional bank’s shares to suffer their biggest loss since 2002.”

“CEO Ralph Babb attributed the deposit decline to customers ‘investing in their businesses, and because of slower real estate activity in our western market.’”

“‘They make loans or pay certain expenses to title and escrow companies in exchange for deposits,’ analyst Anthony Davis said. ‘The sudden, unanticipated decline in those deposit balances raises questions about the outlook for net interest margin, especially given that the (financial services) business is concentrated in California, which has been the hottest housing market.’”

Another posted this Salon article. “Raghuram G. Rajan believes, in sum, that new developments in technology and finance have made the world better off, but ‘they may also create a greater (albeit still small) probability of a catastrophic meltdown.’ But he’s not too worried.”

“One example Rajan used was the housing sector. The great thing about credit derivatives is that they allow the banks to buy protection for the possibility that borrowers will default on loans. Since last September the market for a particular kind of credit derivative, technically described as ‘credit default swaps on subprime ARM pools,’ has taken off.”

“According to Mark Whitehouse of the Wall Street Journal, such derivatives doubled in price between mid-September and December of 2005. So who is doing the buying? According to Whitehouse, the main players are hedge funds that specialize in debt trading.”

“‘The new credit-default swap ‘allows us to express a bearish opinion’ on the housing market, says Steve Persky, managing partner at a Los Angeles hedge fund. ‘A lot of people debate whether the housing market is overpriced, but, for sure, the credit quality of home borrowers has deteriorated.’”

“The hedge funds are basically betting on the likelihood that there will be a housing sector collapse. They are short-selling the real estate business. But what happens if the defaults do start rolling in, and the sellers of those derivatives have to make good on their obligations with cold, hard cash? Will there be enough liquidity in the system to handle the shock?”

“As Whitehouse reports, the market for credit-default swaps that could be applied to pools of home mortgage loans is new, it’s only been around since last June. Any prospective homeowner thinking right now about jumping into the market with a no-money-down, adjustable-rate mortgage might want to think twice. Wall Street is betting against you.”

Danielle DiMartino at the Dallas News interviewed a professor on Alan Greenspans role in the housing bubble. “Ravi Batra is not one to mince words. Take the title of the latest of the 15 books he’s written in his 33-year career as an economist: Greenspan’s Fraud. Though the book was greeted with skepticism, it has gained greater acceptance as many of the possibilities it raises tiptoe closer to reality.”

“Q: Let’s start with the title of your latest book. A: The book focused not just on monetary policy, but also on many other areas over which Alan Greenspan had influence, such as Social Security. The idea of creating a trust fund for the baby boomers with guaranteed benefits came about in 1981 with his active support. But Greenspan knew in advance there would be no cash to fund those accounts. By April 1983, he was saying we needed to balance the budget by cutting Social Security benefits.”

“In totally contradicting himself, he deceived the public into paying higher payroll taxes. People don’t blame him, but that’s where the idea came from.”

“Q: How else has he affected future generations? A: Greenspan created a huge trade deficit. Here again, though, people don’t blame him. They just think it’s globalization. He pushed for the deregulation of the free flow of capital across countries, but the result was that the U.S. dollar would not fall anymore in response to trade deficits. In the past, the dollar would quickly eliminate trade deficits.”

“Q: So far, it would appear that the trade deficit, while at record levels, does not pose a threat to the U.S. economy. Is there a tipping point at which the deficit will matter?”

“A: The tipping point will be the bursting of the housing bubble. Much of the housing bubble has been financed by foreign purchases of mortgage-backed securities. The problem is, many of these loans have been backed by a fraud of their own, unqualified buyers have been given loans by the mortgage industry because the lenders then pass along the risk into the mortgage-backed securities market.”

“Q: Can we be sure it is a housing bubble? Many in the real estate industry are predicting a classic soft landing.”

“A: Bubble cycles can last seven to eight years, with the unraveling typically beginning in the fifth year. The housing bubble started in 2001 when Greenspan panicked and started slashing interest rates at a fast pace. Five years from then is 2006, and what are we seeing today? A slowdown, which is starting right on schedule.”

“Next year, we’ll have bigger problems as house prices fall, especially in the hot markets. Finally, in 2008, the real housing crunch will come, with price declines in much of the nation. The worst implication is that foreign investors in mortgage-backed securities will be spooked for fear they’ll lose their principal. It’s one of my biggest fears.”

“Q: So what’s the solution? Is there a way out? A: There is, and it’s consistent with free trade. I would propose a dual exchange rate system like those in Japan and China. If we could fix our export exchange rate, our exports would rise sharply as the prices of our goods fell overseas. We would let all international transactions continue to occur at the free-market dollar rate.”

“This would not only rebuild our manufacturing base, it would reduce the trade deficit sharply. We have to bear in mind that every empire, from the Romans to the British, has fallen because of a huge trade deficit.”

The Chicago Tribune reports not all builders are pulling back. “The much-predicted cooling of the five-year housing boom appears to be under way, but Chicago-area builders aren’t feeling much of a chill. Ground was broken for 40 percent more new homes in the first quarter of this year than in the same period of 2005.”

“Analysts credited several new mega-developments that are getting started, as well as intense competition and the influence of major national builders in the area.”

“‘As you see interest rates rise, they have taken a punch out of housing,’ said Timothy Rogers, a Boston-based economist. ‘New homes sales are down 21 percent from their peak in July 2005,” he said, and the latest report ’speaks more to the pace of new home sales.’”

“Rogers noted starts are down year-over-year or flat in all regions of the country except the South, which is rebuilding after the devastation of Hurricane Katrina. ‘I don’t think I am generalizing too much that starts follow sales and sales follow demand, which is slowing,’ said Rogers. ‘The real test will be in the three months of spring when we will see how dramatic the downturn is. Our expectations are for a weaker sales pace going forward,’ he said.”

“Consultant Chris Huecksteadt said in a 14-county area from Rockford to Kenosha, Wis., and to northwestern Indiana. Regionwide, ground was broken for 8,000 new houses, duplexes and townhouses from January through March, compared with 5,500 a year ago.”

“Kendall and Kane counties, home to several of those mega-developments, had the biggest gains in first-quarter starts, Huecksteadt noted. ‘Lots of stuff that has been in the pipeline and which we have been talking about for years is on the market and selling,’ he said.”

“Another factor: fierce competition and the growing local presence of national builders loath to miss monthly goals reported to Wall Street.”

“Leigh Nevers, VP of marketing for the Chicago division of Lennar, which includes Concord Homes, noted it is company policy to meet monthly start goals whether homes are sold or not. ‘There is never a reason we wouldn’t start the number of new homes that were projected for each month,’ said Nevers. ‘We will incentivize the homes if we have to sell them. We can’t miss starts.’”

“Christopher Shaxted of Lakewood Homes in Hoffman Estates said builders ‘need to be smarter. The consumer has a little more time to look around.’ Shaxted said he doesn’t foresee a glut of new homes and ‘we certainly won’t see price decreases.’”

The Voice of San Diego has a tip for speculators. “California’s wealthy investors are choosing to invest less and less in real estate, a trend that local experts say should serve as a beacon to all real estate investors in the county. In San Diego, financial advisors who work with some of the region’s wealthiest people are advising their clients to sell their investment properties.”

“The message some financial advisors in San Diego are giving wealthy investors is clear: Those clients who can afford to sell their investment properties should do so. ‘If you have an investment property, this is a wonderful time to get the heck out,’ said Richard Ashburn, an investment manager and financial columnist in La Jolla.”

“Ashburn said that unless a residential property is paying for itself through the rent it is generating, an owner should sell. Any owner paying $1,000 or $2,000 a month to cover the mortgage payments and taxes on their investment property should realize that it’s time to get rid of that investment, he said. ‘If you’re in a negative cash flow situation, you’re nuts to hold onto it,’ he said.”

“Michael Dorvillier, another La Jolla-based investment advisor sings the same tune. Dorvillier said the wealthy investors he works for have recently been moving to liquidate their real estate assets. He said the situation is analogous to what happened during the dot-com crash. ‘A lot of those affluent investors learned their lesson with their Qualcomm stocks and their Enron stocks, and they don’t want to see that happen again,’ Dorvillier said.”

“Anxious investors are likely to unload their additional homes or condos rather than their first homes. ‘There’s a worry that if people start selling [investment properties] then there will be a depressing effect,’ (economist) Alan Gin said. ‘It won’t just be the million dollar mansion, but if people own $700,000, $800,000 homes that they’ve bought for investments, and they suddenly put them on the market, that will have a dampening effect.’”

“Ashburn said it is not what affect wealthy real estate investors could have on the market, but what their activity could signal about the future of home prices. If wealthy people are shying away from real estate, he said, it’s probably for a good reason. ‘They don’t need to go knock themselves out for another $100,000, they’ve got all the money they need. What they want to do is be safe with their money, be wise and safe and cautious,’ he said.”

The Associated Press reports on pricing in the housing bubble. “Spring is typically the busiest time of the year for home sales. But with mortgage rates rising and sales slowing, sellers find they have to work harder to get a sale. In February, there were 3.03 million previously owned homes for sale, a level not seen since 1991, when 1.91 million homes were up for sale.”

“‘Business is tough. The inventory of available properties has increased,’ said Martin Bouma, an Ann Arbor real estate agent. ‘You are looking at (the number of) buyers going down, and inventory is going up.’ Pete Montero first listed his Ann Arbor, Mich., nearly a year ago at $379,000. The 2,600-square-foot home didn’t attract buyers so Montero dropped the price in $10,000 increments, he’s now asking $329,900, and he’s even considered remodeling the kitchen.”

“Some incentives offered by sellers include a year’s worth of free landscaping or lawn care, free snow removal for a year or a year’s worth of alarm service. And, that’s just from the owners of existing homes, builders sitting on a mound of inventory have also had to come up with new ways of wooing buyers.”

“The first signs of an ebbing in demand appeared last summer and have continued into this year. Applications for home loans, a gauge of future home sales, are down 20 percent from last year. ‘I have seen it transition from a seller’s market to a buyer’s market,’ said Bob Moulton, a mortgage broker based in Manhassett, N.Y. ‘Buyers are putting in bids but they are not counter offering.’”

“While some homes can be taken off the market place by their owners, home builders cannot afford to hold on to empty homes. So, some have offered their own incentives, such as helping to pay mortgage closing costs or upgrading kitchen appliances. ‘This year we’re being a little more aggressive from the advertising and incentive standpoint,’ said Paris Reese, CFO of MDC Corp., a Denver-based builder. ‘Incentives are an important part of our business,’ but Reese is quick to note, ‘we’re not doing any fire sales.’”

“Dallas-based Centex Corp., meanwhile, has kicked off a series of 12-hour sales in Seattle, Las Vegas, Houston and Denver, among other markets. In Sacramento, Calif., Centex lopped off $100,000 from some multimillion dollar homes.”

“Toll Brothers’ marketing involves staging Easter egg hunts, Halloween parades as well as charity events or PTA meetingsBut aside from special events and upgrades to kitchen appliances, the single factor determining whether a home attracts buyers likely will be its price. ‘You can have the biggest circus on the street, but it comes down to price and having the right price,’ said Bouma.”

“Maria Janeidas, an information technology consultant based in Manhattan, looked at about 24 homes in six weeks on the north shore of New York’s Long Island, but didn’t find any bargains. ‘There is still a disparity between what a seller believes their home is worth and what buyers are willing to spend,’ Janeidas said.”