The Housing Bubble

It’s time to wrap up the week! From New Jersey, “Middletown will be conducting a court-mandated revaluation of the township over the next two years. However, many residents are concerned with the need to revalue the town, while residences are at their peak price. Mike Boylan noted that the last revaluation was conducted at the peak of the housing market in 1991. He noted there were ‘massive’ tax appeals following the collapse.”

“However, Robert Hecht, the township tax assessor said, ‘There is no identifiable trend to indicate that housing prices will fall.’ Boylan disagreed with Hecht’s assessment of the housing market. ‘There is a larger inventory, houses are staying on the market longer, the next thing that happens (is) that prices drop,’ Boylan said.”

“Housing sales in Central Ohio have been on the rise since January. Sales of existing homes rose 9.5 percent last month to 2,344 houses, compared to 2,140 a year earlier, the Columbus Board of Realtors reported Friday. More than 5,100 houses were added to the market in March, pushing the inventory of available homes up 25 percent over a year ago, to 15,990 listed houses.”

From Maryland. “Total units settled in March this year was 122 as compared to 218 units settled in March 2005. This is a drastic decline. Average housing prices overall in Worcester County have slipped by a little more than 8 percent in the past 12 months, coming down from $433,750 last March…Simply put, personal income has not kept pace with real estate prices in general, and certainly not with the rising number of luxury homes and units in the Ocean City area.”

Some corporate executives had a busy week. One was in a giving mood. “Luxury-builder Robert Toll, along with his wife Jane have made one of the largest gifts in University of Pennsylvania Law School history: $10 million in support of aspiring students and young alumni who wish to pursue careers in public interest law.”

“‘We desperately need more young lawyers to take on society’s challenges,’ law school Dean Michael A. Fitts said. ‘Fortunately, Bob Toll has removed some of those barriers for years to come, and we are in his debt.’”

From Colorado. “Mortgage rates on Thursday approached their highest level in almost four years. ‘Clearly, this makes housing less affordable, so it will have a negative impact on sales,’ economist Tucker Hart Adams said. Metro-area foreclosures are on track to rise to the second-highest number ever.”

“‘And with less demand for housing and a rising inventory, that will put a downward pressure on housing prices,’ Adams said. Also, housing permits already have started to decline, which means builders will be hiring fewer construction workers. ‘In the ’80s, a lot of people blamed falling oil prices for our crash in the economy, but it was really caused by the construction industry leaving Colorado,’ Adams said.”

“California employment fell in March for the first time since last spring, the state reported today, a drop due almost entirely to a decline in the construction sector as the housing boom comes to a close. And the first ripples of the housing slowdown are beginning to be felt in the larger economy.”

“Over the last four years, soaring house prices generated widespread benefits. Now, fewer homes are selling, which means builders aren’t working overtime to make more of them. That means they need fewer workers, 9,400 fewer in March.”

“Christopher Thornberg, a senior economist at Anderson Forecast, said the forecast will be focusing on San Diego because its housing market is the first to follow a nationwide trend of depreciation and a cooling of the real estate bubble.”

“‘A bubble is a function of a period of time where there is expectation in the marketplace and, as a result, people cash in and it feeds up the price,’ Thornberg said.’We see depreciation starting to flow and overall sales starting to decline, and when real estate markets cool, construction jobs are lost, and real estate and mortgage brokers lose their jobs,’ he said.”

“Edward Leamer, the director of Anderson Forecast, said, ‘We’re at the initial early warning signs. He said the housing bubble is 20 to 30 percent off its absolute peak, and with another three to four months of sales volume drops, it will be absolutely clear that the housing bubble has peaked. ‘Sales volumes will drop substantially. The popping will be more in terms of sales volumes than with real estate prices,’ Leamer said.”

Some rent or buy articles. “According to survey data released Thursday, the valley remained a rental bargain compared with Riverside County, Southern California and the state as a whole in the first quarter of 2006. There’s always somebody else getting more for even less around the desert. ‘I have a friend who’s renting a four-bedroom, two-bath house near Twentynine Palms for around $600 a month,’ said Alex Bransdorf.”

“Riverside County’s average rent in the first quarter was $1,084 (up 6.7 percent from a year ago), the Southland averaged $1,355 (up 5.9 percent), and the state average was $1,288 (up 5.2 percent). Various research organizations report that home prices in the valley have recently risen at an annual rate of 19.6 percent.”

“‘I have had people say that they’re looking for homes, but then they come back and tell me, ‘My God, Todd, my house payment’s going to be this much money, I can’t afford that.’ So they’re finding out that maybe they’re just going to sit tight,’ said apartment complex owner Todd Wolfe.”

“Right now, the highest rent rates in the state are in Los Angeles, where the the average price is $1,485 a month. In Visalia, it’s $758, Fresno $747 and Merced $702. Local realtors say they’re finding some people who are selling their homes and moving into apartments temporarily, while the real estate market levels off.”

“One builder, who is building a complex off Shaw and 41, says construction is not even done and the half of the apartments are already leased.”

“Question: We are moving temporarily from the San Francisco Bay area to Europe. The market value of our house stands at $2.6 million, and we still have a $700,000 mortgage on it. We found pre-qualified renters who have agreed to commit to a two-year rental agreement at $9,000 a month, netting us a profit of approximately $3,100 after we deduct our mortgage, insurance, taxes and maintenance.”

“So if we rent out the house, it would be cash flow positive, although at a minimal level. But we are concerned that since we’ll be living overseas for at least three years, we may lose the $500,000 capital gains tax exclusion. Should we rent out the property, or invest the sales proceeds in the stock market?”

“Answer: What is more desirable in this day and age than positive cash flow in a softening housing market. But even though you’ve managed to find pre-qualified renters, you are wise to think twice about whether renting it out. You’re denying yourself immediate access to all of that money you’ve accumulated, which you could use to rent or buy a palais on the Champs-Elysee, as well as invest in stocks, bonds or other investments. You also take on the responsibility of long-distance landlording, or paying a property manager up to 20% of your monthly rental income.”

“So what to do? One simple way is to figure out the rate of return, also known as the capitalization rate, for your property…This gives you an investment yield, in this case, 1.4%. When this number is less than what you could receive on 10-year Treasury notes (currently hovering around 5%), you’re better off selling the property, at least financially.”

Danielle DiMartino at the Dallas News has an update on subprime lending. ” For two days running, the articles in the top right-hand corner of The Wall Street Journal’s Personal Journal section have left me scratching my head. The first was on the explosive growth of 10- to 15-year fixed-rate, interest-only mortgages – in essence, an expensive lease.”

“The second was on the return of margin loans; not to buy stocks, but to pay for anything from real estate to boats, jets, fine art, tax bills and children’s tuition. Is this what cash-hungry consumers turn to when they can’t cash out any more home equity?”

“I got yet more confirmation from John Lonski, chief economist at Moody’s: Subprime mortgages, those made to borrowers with the weakest credit profiles, skyrocketed in the first two months of this year. According to Mr. Lonski, the issuance of RMBS backed by subprime mortgages grew by an annualized rate of 86 percent in January and February.”

“Of course, the theory is that regulators will step in to gain the upper hand on lending standards before things get out of hand. But lenders of all stripes, whether they are lending against a portfolio or a home, seem to always be one step ahead of regulators.”

The LA Times. “The nation’s top bank regulator issued an alarm Thursday about mortgages with artificially low starting payments, telling participants at a Los Angeles conference that borrowers needed better warnings that their bills inevitably would jump.”

“‘After the limited initial period ends, the monthly payment for the holder of a nontraditional mortgage must increase, even if interest rates stay flat, and the size of that increase can be very substantial,’ Comptroller of the Currency John C. Dugan said.”

“Dugan’s remarks was the latest salvo by regulators who have proposed tighter restrictions on the use of exotic mortgages that are advertised as making homes more affordable.”

The Boston Herald looks at how that’s working out. “Shady mortgage operators have been flooding unbelievably easy credit into Boston’s neighorhoods. Behind the real estate trend are some very suspect mortgage companies from California and elsewhere that will give you a mortgage, whatever your history. Enough bad debt and bankruptcies to sink the Titanic? No problem.”

“If the statistics aren’t bad enough, the horror stories are even worse. There’s the poor Fields Corner homeowner who lost her two-family home, not once, but twice, to foreclosure.”

“Undaunted after Citizens Bank foreclosed on her $159,000 mortgage in 2002, she bought it back again, this time for a bargain $310,000. A well-known ’subprime’ lender provided a no-money-down loan. That lasted all of 14 months, until the Bullard Street home was foreclosed upon earlier this month, the second time in five years, John Anderson points out.”

“‘The last two days we had 28 more defaults,’ Anderson said. ‘They are just piling in, right and left.’”

Some reports on where the speculators are. “A flurry of high-end sales caused home prices in the Park Cities to jump 44 percent in the first quarter. Other areas of North Texas weren’t so lucky in the first quarter. Sales declined in more than half of the neighborhoods surveyed in The Dallas Morning News report on pre-owned single-family homes.”

“In the first quarter, 167 homes sold for $1 million or more in North Texas, an increase of 27 percent from the same period last year. With such booming demand for high-dollar mansions, real estate agents say they aren’t surprised to see California-style price hikes in the Park Cities. ‘We’ve seen some huge multimillion-dollar sales’ there, said real estate agent Bettie Abio. ‘There seems to be no end to the appreciation.’”

“(Broker) Robbie Briggs said the number of high-price speculative and custom homes being built in the Park Cities has also increased. At the end of March, there were 42,630 homes for sale in North Texas, virtually unchanged from a year ago.”

“The number of new housing starts in the first quarter of 2006 spiked dramatically over the same period last year. In the quarter ended March 31, 2006, builders put down 4,579 new single-family home starts in the Austin area, a 48 percent increase over the same time last year. That brought the annual new home start rate to almost 17,000 homes, a 29 percent increase over the annual start rate a year ago and a new record for the Austin market.”

“Eldon Rude says an influx of out-of-state families moving to Austin and a tight resale home supply have put an increased demand on the local new home market. ‘Couple that dynamic with increasing interest from out-of-state investors looking to move their capital from slowing coastal markets, and what we see is strong competition for available land,’ Rude says.”

“Utah’s strong population and employment growth is fueling a home-buying bonanza along the Wasatch Front, driving up home sales and selling prices. Homes are being bought days and sometimes hours after they hit the market. ‘The good news is that we’re seeing healthy increases in sales and prices but not unrealistic increases that could lead to a housing ‘bubble’ like they did in other states,’ said Deborah Sjoblom of the Salt Lake Board of Realtors.”

“Realtor Marilyn Briggs said buyers are making full-price or more than full-price offers only to see someone else get the home they want. Investors also are pushing sales and prices higher, Briggs said. Out-of-state investors are snapping up properties along the Wasatch Front, especially in the Salt Lake City area, either for rentals or to fix up and resell at a profit.”

“‘There are investors that are buying homes in the Salt Lake area sight unseen,’ Briggs said. ‘They are telling their Realtor to just go ahead and make an offer.’”

A pair of reports on the California housing bubble. “Bay Area home values are expected to decline next year because of rising interest rates, a glut of homes on the market and lower affordability levels, a housing economist said Thursday. ‘We’re not talking about massive house price declines but giving up some of the gain we’ve had’ of the last few years, Ken Rosen, chair of the University of California, Berkeley’s Fisher Center for Real Estate & Urban Economics.’”

“In coming up with his outlook for next year, Rosen cited an increase in the number of homes on the market as measured by what’s known as the unsold inventory index. ‘The decline (in home price appreciation) will happen because unsold inventory is getting so high,’ he said. Housing prices have risen dramatically relative to income. ‘Low interest rates and easy credit is what caused housing prices, relative to income, to rise so fast,’ Rosen said.”

“‘Inventory has increased dramatically over the last couple months. It is now in the normal range,’ California Association of Realtors chief economist LeslieAppleton-Young said. ‘Only one factor can lead to a significant decline in prices, and it’s too much inventory.’”

The Sacramento Bee. “Sales of existing homes in the Sacramento area jumped sharply in March from February levels, but the 2,489 homes sold across the four counties were still the lowest for a March since 1999. In El Dorado, Placer, Sacramento and Yolo counties. But home buying still was off 29.5 percent in March 2006 compared with the same month in 2005.”

“A closer look at the region’s performance shows: Sacramento County, with a $359,000 median sales price in March remains below the August peak of $372,000. (In) Yolo County prices fell to $410,000 from February’s $421,500. The county’s median sales price remains below its November peak of $436,500.”

“El Dorado County posted its third straight monthly gain, reaching a median sales price of $451,00, highest since December’s $455,000. The county remains below its September high of $475,000. Placer County, too, showed gains for a third straight month, with median sales prices of $477,000. That’s the highest since December’s $485,000, but still below August’s $502,000.”

“The number of homes for sale in the four-county region continued to swell in March, reaching 10,316 compared with 3,799 at the same time in 2005.”

“‘My guys are telling me we are building 30 to 40 new signs a day,’ said Jim Eggleston, owner of a Sacramento firm that builds front yard ‘For Sale’ signposts for the region’s real estate listings. ‘Where it’s going is the big question,’ Eggleston said. ‘Are we going to reach 15,000? Are we going to reach 20,000? I don’t know.’”

The Sun Sentinel reports on affordable housing measures. “After the county’s voluntary affordable housing program failed to lure many developers, Palm Beach County commissioners in March decided to make it mandatory. That means as much as 20 percent of new neighborhoods could be reserved for affordable housing, despite developers’ opposition.”

“Reduced price homes are planned next door to Alejandro Manzano, but he said they would not come fast enough to keep him in Palm Beach County. After failing to find a larger house he can afford, Manzano said he and his wife plan to move to Iowa to start a family. ‘Prices are just unbelievable,’ Manzano said. ‘It is not affordable here. Too much.’”

The writer of a letter to the editor has a different solution. “Taxpayers to subsidize housing market speculators?”

“Say that again? Did I read that our leaders in Tallahassee, in the name of ‘trying to ease the housing affordability crisis in Florida,’ want to use taxpayer money to essentially subsidize and prop up the insane level of housing prices? Has there ever been a bigger crock in state political history?”

“Let me see, we’re going to give taxpayer money to certain selected professions (police, firemen and teachers, because they only make around $60K), in order to afford a house ‘at the current prices.’”

“Secondly, who are you kidding? The problem of overinflated housing prices was caused by greedy speculators and developers that have made millions over the last four years. So now we’re going to prop up housing prices with taxpayer money, so that those who are responsible for these insane prices don’t have to fear losing anything if prices begin to fall? Is it any wonder that a ‘coalition of builders’ is behind this bill?”

“The problem is that prices are too high, period. The current prices are unsustainable, and need to come down, a lot, a whole lot.”

“The answer is to seek ways to bring the prices back down to reasonable and sustainable levels, not to prop them up with taxpayer subsidies. Yes, if prices fall, some people stand to lose some money, most of whom either deserve it for feeding this frenzy, or who will still see a profit but only a lesser amount, or who have already made a killing and are way overdue for a significant correction in their investments.”

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