The Housing Bubble

The Bakersfield Californian has a report on that housing bubble. “The clouds may be breaking over Bakersfield’s gloomy winter real estate market, though the number of home sales has tumbled in recent months. About 1,380 existing houses were sold in the first three months of 2006, a 13.2 percent drop from last quarter.”

“The decline was even larger when compared to the same time last year, showing a 24.7 percent drop. The dip in sales mirrors what’s been happening throughout the state and country, local appraiser Gary Crabtree said. ‘It wasn’t like Bakersfield was the Lone Ranger,’ he said.”

“Bakersfield’s median house price also took a hit during the winter months, dropping by about 6 percent, Crabtree said.”

“But new signs of growth this spring have local real estate agents hopeful. February and March brought modest home price increases. Not everyone’s convinced, however, that Bakersfield’s current prices are here to stay. The plunge in sales and rise in the number of homes on the market should be driving prices down, said broker Robin Ablin.”

“People just haven’t been calling, Ablin said. He recently had to reduce the asking price of a well-kept house in east Bakersfield’s Hillcrest neighborhood by roughly $15,000 because only four people had looked at it since September.”

“Bakersfield’s market was long undervalued, and houses have reached a price where they should be, said agent Alice Profeta. ‘(Buyers) might as well go out there and buy now while we have a decent interest rate,’ she said.”

“An agent from Florida recently told Profeta, ‘It took longer to sell a house than it does to have a baby,’ she said. Compared to that, Bakersfield’s still in good shape.”

Several readers think the non-bubble regions may have a price problem. “Any thoughts on what might happen in those areas of the country where there hasn’t been a lot of investor/flipper activity? For example, I live in Cincinnati. Not a whole lot of appreciation here the last couple years, but it still seems like an awful lot of people are stretching to buy huge houses, and I know a lot have ARMS, IO’s and HELOC’s.”

“So we probably have a credit bubble here too. And Ohio for some reason seems to have a high foreclosure rate too. Would like your opinions on what to expect in this area and others like it? Flat? 20% drop?”

One reader looks at Indiana. “I am originally from Indiana and I am curious about there like you in Ohio. Obviously, Indiana hasn’t been over run by speculation. I do wonder if there is a bit of a credit bubble with the financing for homes. If I remember, wasn’t Indianapolis one of the few undervalued areas?”

On Vermont, “I have similar questions about northern Vermont, where I’m thinking about relocating. Will prices be flat or down in places off the beaten track?”

A reply, “If it’s truly out in the boonies, away from a ski area, you should try to buy land at ‘farmer’s prices,’ not out of stater prices. Sometimes you find this two tiered rate card. If you shop carefully, you could do well. And you might be able to get a very large amount of acreage for about the same price you’d pay for a developed lot in with a lot of McMansions.”

“As for ski area prices, beware. The realtors will show you 90% of the lots are sold. They’ve been sold alright, to developers.”

Another, “The price pressure here is mostly from out of state speculators and retiring/retired baby boomer fantasyland dreamers. I don’t see anything relieving that pressure, outside of monetary/economic crises, unless fuel prices continue to explode making the commute from ParasiteLand (NJ/CT/NYC) to VT cost prohibitive. Weekends here are still like a bastardized version of Halloween for adults.”

On Ohio, “I went to college in Ohio and I still have family there (I’m in CA now). I visited them last summer. EVERYONE wanted to talk about real estate while I was back there. There is tons of new construction in the Dayton area. People told me that, ‘No one wants to buy used houses.’ And they also wondered who was going to buy all the news houses since there were so many.”

“I visited the CEO of the company where I used to work. He went on and on about the I/O loan problem and about how his employees were taking out loans they couldn’t afford. He thinks OH is in for a world of hurt, especially when you add the problems with GM and Delphi.”

“My husband and I REALLY want to move back to OH. But we’re waiting 2-3 years for various reasons. I can’t see staying in CA unless we can find a decent house for $500k in the Bay Area eventually. Best of luck to you in the Buckeye State!”

“I believe that the housing prices will fall in all areas before the bottom is reached, even in areas that have not had such high increases in prices. Since the economy is so dependent on the bubble for jobs (in construction and jobs related to selling and buying) and refinance spending money, when the bubble goes, the economy will suffer a nation wide recession, probably more like a depression, and this will affect the housing prices in the ‘non-bubble’ areas as well as the extreme bubble areas.”

“Another factor that will help to cause the recession/depression is the coming high amount of default which will affect the finances of many people, even those who are unaware that their investments are tied up to some degree in the secondary mortgage market, and also the banks and other institutions which will be in trouble from the defaults. It will be like dominoes knocking each other over.”

One reader ties the risks to the lending. “I suspect that all regions of the US will be impacted by a popped real-estate bubble. The entire economy has been propped up by housing. Also, my pet theory right now is that the degree of pain a given region will feel from a housing crash will correlate to the number of new ‘exotic’ loans that have been issued in the last few years. Regions that had high numbers of option arms and 100% interest loans would see the biggest price declines.”

“What’s scary about this theory is that even some of the supposedly ‘non-bubble’ regions have seen the use of these new loans balloon as well.”

One reader noted the relatively lower price increases. “Syracuse was recently cited as one of the least ‘bubbled’ areas in the country. Lest I get too lulled into any sense of security, I just call to mind the prices when we first scouted this area in 1998. Prices were about 40% lower then. I see no reason w/the financial situation coming why we couldn’t return to 1998. In fact the local news reported 3 manufacturers shutting down in the local area just this week.”

The Boston Globe reports the condo boom is ending. “Sales of multifamily properties in Massachusetts dropped 15 percent last year, ending a four-year run of rising sales and signaling that the market for condominiums converted from duplexes, triple-deckers, and four-families has peaked.”

“Sales were fueled by contractors’ converting them to condos, investors’ buying them as long-term holdings, and homebuyers who would rent the spare units to help pay the mortgage. But last year, multifamily sales declined to 7,980, the MAR said yesterday. ‘There’s been a tremendous amount of condo conversion, especially in recent years,’ said (realtor) Arthur Foley in Quincy. ‘The market’s getting saturated with condos.’”

“Builders, small developers, and investors rushed to buy two- and three-families in Somerville, Quincy, Waltham, Dorchester, Worcester, and other communities. They could purchase the properties relatively cheaply and renovate and resell them as condos for far more than they paid for the properties.”

“Multifamily sales in Greater Boston decreased 7.6 percent last year. Declines were worse in other regions: 24.1 percent less in northeastern Massachusetts and 19.3 percent less on the South Shore. In some markets, rising mortgage interest rates caused condo prices to flatten or drop.”

“Paul Campano, an agent who works in in East Boston and Somerville said sales of converted condos have probably peaked. ‘If you want to buy a Somerville condo and you’re going to be there four or five years, I wouldn’t worry. But if you buy and may have to move in a year or two, I’d have some concern,’ he said.”

“A record 379 condos are for sale in Dorchester, Ken Osherow said, and investors are scrambling to sell their units because they now realize overbuilding caused a glut. ‘Would you invest in a three-family and convert it right now?’ Osherow said. ‘Probably not.’”

Some readers what to stop a housing bubble bail-out. “A few times Housing Bubble blog readers have adamantly expressed their opinion about no government bailouts when this mess collapses. I would love to see more discussion about how we can get that message to Congress in an organized and systematic way.”

Another added, “Good idea. This needs to be talked about now. Not after the fact, when various and sundry plans are already being drawn up to prop the bubble.”

And another, “The hardest thing in democracy is attempting to stop transfer of wealth from the politically powerless to the politically powerful. That is why the bubble happened in the first place. Homeowners, builders, realtors, mortgage holders and banks will demand a bailout.”

“These are all politically very powerful groups who make huge donations to all political candidates, and who receive in return for their donations laws that grant their wishes. Congress and Presidents ignore everything except raw political power and cash. The only way to fight back is organize a web campaign, and slowly and steadily build organized support.”

“Politics being what they are, the government will probably bail all the politically connected until their borrowing power is exhausted. The USA is already borrowing a fairly huge portion of the savings of the entire world. When we hit 100% the real trouble begins.”

The Washington Post has this on speculators. “Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos. What is becoming apparent, market watchers say, is how big a part speculators played in the region’s real estate boom of the past few years.”

“They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.”

“Sales of new condos fell 43 percent in the first quarter of the year, and there are almost four times as many existing condos for sale than last year. ‘We think the softness of the market is largely due to the pulling out of investors,’ said Gopal Ahluwalia, at the National Association of Home Builders. ‘They have not only pulled back, they are canceling purchases.’”

“While condominiums were the product of choice for investors, luxury neighborhoods also fell prey to real estate speculation, leading to the prospect of price drops even in affluent subdivisions. ‘Here we had it even in $1 million homes,’ said Kenneth Wenhold.”

“There are about 25,853 new condos being marketed locally now. But only about 1,996 new condos were sold from January to March, down from 3,520 in the first three months of last year. And the area’s MLS, which lists mostly previously owned properties, showed about 5,500 condos and co-ops for sale in March in Washington and the close-in suburbs. That was about a fourfold increase from about 1,400 listed in March 2005.”

“The situation has made home shoppers more wary about making purchases. Some buyers are even walking away from transactions. Lawyer Angana Shah almost bought a new one-bedroom apartment in Adams Morgan last month for $454,000, but as the settlement date approached, she found herself ‘petrified’ over the high price and worried that values would fall.”

“She decided to walk away from the sale and got her money back. She was glad she did because prices have flattened and she can now afford a two-bedroom instead. ‘I don’t want a one-bedroom anymore,’ she said. ‘I want a two-bedroom. Now people are begging people to buy one-bedrooms. The market is better. I couldn’t have bought a two-bedroom last fall and prices for one-bedrooms are falling.’”