The Housing Bubble

A couple of rare reports on the Washington housing market. “As mortgage loan interest rates hit their highest level in nearly four years this month, not one but two housing markets are emerging in Clark County. One market is dominated by sellers, the other by buyers.”

“According to Realtor Mike Lamb, houses priced below the median number remain in short supply and high demand. By contrast, there is a growing inventory of houses priced over $250,000, particularly $400,000 and higher. ‘In the lower price ranges, this is a seller’s market, while in the upper price ranges it is becoming an increasingly strong buyer’s market,’ said Lamb.”

“Thirty-year mortgage loan rates at 6.5 percent have cooled last year’s home-buying frenzy here and pushed the county’s inventory of homes for sale to about 3,300. That’s well up from a year ago. March was the first month in which there was more inventory available than in recessionary 2003, the year inventory peaked, Lamb said.”

The News Tribune. “A tally of downtown projects for the City of Tacoma shows 774 residential units are currently being built in 13 different projects around downtown. In planning and design phases are 1,014 additional units. Hundreds more housing units are in less formal planning stages. Those under-construction and planned units will join 997 condominiums and apartments built downtown since 2000.”

“That’s 2,785 units, something akin to adding a city the size of Steilacoom in downtown Tacoma. Those who sell the downtown projects say several factors are driving the housing boom and attracting buyers to an area that just a few years ago was the new housing equivalent of the Sahara Desert.”

“Some real estate sales people wonder whether the market can absorb the hundreds of units that will go on the market beginning next fall through the summer of 2007. Privately they say they’re concerned that the biggest projects, such as the 183-unit Esplanade just under construction on the Foss Waterway, are too big to enter the market all at once when so many other projects will hit the market at the same time.”

“Had the Esplanade been built on its original schedule, some real estate experts say, it might have entered a less competitive market. The Esplanade was part of a hotel-condominium package project that has been delayed for years as developers sought financing for the nearby hotel.”

“‘Luckily, we have only a couple of projects coming on the market during the rest of 2006,’ said one veteran real estate agent. ‘We’ll have to wait until 2007 to see the blood bath.’”

Readers are interested in discussing the real estate industry and accountability. “Topic: Factual accountability and disclosure by listing services, agents and brokers. It is my opinion that the truth has been something sorely lacking in much of this bubble run up. I suspect that many of the bidding wars have had phantom opposition, that many agent representatives are investors as well and that listing facts are anything but factual.”

“How many cases have there been where a property has been taken off the list and then magically appears as a new listing a few weeks or months later.”

“What about a property described as reduced twice when no one can remember seeing it listed at the first price? And of course we have people who are being paid a hefty percentage of the transaction for their expertise who are investors in the commodity they are advising for.”

“No greater harm has been seen that that of believing that the RE and Mortgage industry can self govern. Self profit yes, self govern no. The foxes have been managing the henhouse for far too long and for some unexplicable reason we have been buying regular eggs from them at Fabrege prices.”

One reader added, “Another topic is the role of crooked appraisers in this run up. They are the ones who validated all these hige price jumps, and I’mwondering where the justification was these past few years for a house to be truly worth $55K more than the one 3 doors down that sold for 6 months prior.”

And how about economists? “Hawaii, it appears, has caught the mainland’s cold. Although the median price of homes in the state continues to rise, sales have been decreasing for several months and market observers believe it won’t be too much longer before prices begin leveling off.”

“It’s no longer a seller’s market where almost any price goes and buyers fall over themselves making offers above the asking price. ‘I think its pretty clear a buyer in the market has more choices and can take their time and make an informed decision whereas last year and the year before the market was so fast they had to jump,’ Harvey Shapiro, research economist for the Honolulu Board of Realtors said.”

“‘If history repeats, it will plateau,’ Shapiro said. ‘The ’90s were atypical where we had price decreases.’ During the mid-’90s, median prices fell about 20 percent over a period of four to five years. But Leroy Laney, a professor of economics and finance at Hawaii Pacific University, doesn’t expect a repeat of that scenario.”

“‘The real estate market typically doesn’t behave like the equity or bond markets,’ he said. ‘They don’t go up or down. They usually go up and then plateau before waiting a decade and then having another rise. But that doesn’t mean it can’t go down some.’”

“Shapiro doesn’t think it’s too late to get into the housing market. ‘I would recommend people buy at this time because prices will be going up,’ he said.”

Do you have a housing observation this weekend? See builder incentives or lots of for sale signs? Here is one a reader posted. “The bidding wars are, for all intents and purposes, over in Seattle. What used to be common is now few and far between.”

“Asking prices are still very high, but most homes sell under Asking (like 85-90%). The original AP is still very inflated so don’t expect a bargain even going under asking. There is no way to know about this development , however, unless you check the county records 1-2 months after sale. So the market still appears bustling on the surface.”

“Another interesting development: inventory here had been going up and down, up and down on a daily basis, for months. So there was a steady amount of buying. But since April 14, in the zips that check, it has been going UP only. So far, only one week of that so can’t call it a trend yet. The next couple weeks could be interesting, inventory-wise.”

Another, “I was in chicago in Februrary. Condo for sale signs everywhere. And that was february. nobody in Chicago moves in February.” From Arizona, “Six months ago was pretty much the top of the prices here in Phoenix.”

One from San Diego, “I found a laughable flipper property here in San Diego last night. Small 1960’s house that the flipper had purchased for 700K in October 05. They painted, redid the flooring, added a few vinyl replacement windows and some cheap tilework on the kitchen counters. It’s still nothing great and has just the remains of some old neglected lansdcaping.”

“They have been trying to unload it since February for almost a million dollars in a non-million dollar neighborhood. Good luck to them with that 3 month /300K flip that will be turning into 6 months soon.”

The LA Times has this tale of a group of flippers. “A group of friends who set out to buy, fix up and ‘flip’ a Palm Springs tract house haven’t found the riches they were seeking. But the four Newport Beach residents, all experienced remodelers, learned some lessons about themselves, about working with others and about real estate investing.”

“In August, the four bought a three-bedroom, two-bathroom, 1,900-square-foot home that seemed like a good-enough deal at $425,000. Houses in Palm Springs had been appreciating consistently, and other homes on the same street were listed for considerably more.”

“For the purchase and all subsequent expenses, the costs were divided equally. All four names went onto the 5.5% 30-year adjustable-rate mortgage. For the deposit, each contributed $2,500. And at the end of escrow, each wired their share: $10,500. The plan was to spend $60,000 fixing up the house, then sell it in two months for about $650,000. According to Ron Haughey’s calculations, the profit would be $60,000 after all expenses, taxes and commissions, or $15,000 for each partner.”

“Spirits were high when the project began. The friends worked full time during the week and then spent weekends in Palm Springs on their project. After the house was finished in late October, it was listed. Until the talk turned to setting the sales price, there had been no major disagreements on financial issues. But at this point, the partners disagreed.”

“Eventually, they compromised on $695,000 and had dreams of pocketing about $22,000 each. The house went on the market in early November. They held open houses each weekend. In early January, the group agreed to lower the price to $669,000. When the house still did not sell, the foursome decided to stage it, and to sign up with a major real estate company in the area.”

“Their new agents, Brian and Diane Walker, suggested lowering the asking price to $649,000, and the foursome agreed. The monthly carrying cost was $2,800, or $700 each. According to Brian Walker, the market had ’softened’a lot between the time the house was purchased in August and it was listed with him in late January.”

“The house is now listed for $629,000, and if it sells for that, each partner will pocket just $5,000. ‘It’s not risk-free,’ Nina Smith said of her first foray into speculative remodeling. ‘I need to better educate myself on finding a better property.’”

“And if the house doesn’t sell for the current price? ‘We have all discussed Plan B,’ Jeanine Scalero said. ‘The possibility of turning it into a vacation rental. We’ve been told that weekly rentals go for around $1,500.’”

Some readers suggested a topic on phases of the bubble. “I’d be curious to discuss the phases of a housing bubble. By this I mean the media coverage and the general public’s perception of our situation. In my mind, when the public’s perception changes, this will be the beginning of the end. So far I think people aren’t buying because they can’t, not because they think it’s wise. I think we’re marching through the phases of the HB pretty quick here the last 6 months.”

Media & Public Phases of a HB:

1) Real estate is wonderful (July 05)

2) There is no bubble (Fall 05)

3) Let’s ask NAR if there’s a bubble - nope, no bubble, just soft landing (Jan 06)

4) Media actually prints pessimistic articles while also mentioning NAR babble (March 06)

5) Public poll shows people acknowledge bubble, but not in their area (classic denial phase!)

6) WHAT’S NEXT?

A reply, “Add this to your timeline: ‘The time has come to put this issue to rest…the nation’s home builders have said it, the Realtors have said it, and now Alan Greenspan has said it once again, in no uncertain terms: there is no such thing as a current or impending house price bubble.’ - David Seiders, Chief Economist of the National Association of Home Builders, July 2002.”

Another, “This is so true. I was talking with a friend who said that homes in his area have gone up because of the Seattle bubble, he lives 45 minutes south of Seattle, but he says Seattle prices will go down again, but the prices in his area won’t!”

From Delaware Online. “This spring selling season, the urgency is gone, real estate agents said. Not only are houses taking significantly longer to sell, the supply of homes for sale is burgeoning. In New Castle County, for example, the number of homes available for sale in March jumped 35 percent higher than the same month in 2005, while the number of new listings that month rose by 24 percent. And in what could be a sign of things to come statewide, the average price of a single-family home sold in Sussex County declined by 1 percent during the first quarter from the same quarter in 2005.”

“Ben Levit and Mia Muratori have been looking for a bigger home near downtown Wilmington for two years. Last week, Muratori, visited one property where the owner had tacked a 26 percent increase onto the previous sale price. The house last sold in December 2004. She said the house hadn’t been updated since the 1950s and needs about $100,000 in renovations. ‘That seems like speculation to me,’ Muratori said.”

“Because real estate prices tend to go up very quickly and come down slowly, agents predict it will take six months to a year for sellers to back off in their pricing. Shanon Passmore just put her semidetached house in Wilmington up for sale. She backed off $10,000 from what she originally planned to ask, but the $215,000 asking price is still a 44 percent increase over what she paid for it in June 2004.”

“‘I don’t think we’re being aggressive at all considering what other houses in the area are selling for. I’d rather be a little higher and have more flexibility,’ Passmore said.”

“‘I think it’s human nature for people not to know when the party may be over,’ said Lyman Chen, (broker) in Brandywine Hundred.”

The Orange County Register reports on that housing bubble. “Orange County home sales have fallen for a fifth month, and the number of homes on the market is rising. Multiple offers and bidding wars still occur, real estate agents say.”

“But there have been sporadic reports of sellers dropping their prices, especially for homes above $1 million. And, yes, sellers are starting to offer bigger buyer-agent commissions and buyer incentives, agents said.”

“As of mid- April, Orange County had 10,755 houses and condos listed for sale, more than double the number a year ago. Gone are the days where houses sold in a couple of days with multiple offers. Gone, too, are the days of agents inking hasty bids on the trunks of their shiny new sedans. ‘We’re slowly turning into a buyer’s market,’ Chuck Wood, an agent in Anaheim Hills, said.”

“Orange County real estate agents say the market isn’t crashing. It’s just returning to a ‘normal market’ after years of explosive growth. The phenomenon of rising prices and declining sales may be caused either by sellers not realizing that the market has changed, or by unmotivated sellers testing the market, they said. If they don’t get their price, they won’t sell.”

“(Realtor) Barbara Greenfield said that rather than pricing homes above recent sales of similar homes, she now sets prices equal to those of earlier sales. ‘There are a lot of price reductions,’ she said.”

“(Realtor) Don Palmer in Placentia said sellers no longer are agreeing to make deals contingent on the buyers selling their own homes before escrow closes. With homes staying on the market longer, he said, there’s a greater chance the deal will fall through because buyers won’t find their own buyer, he said.”

“Home shopper Richard Fleming wonders, however, if home sellers really are getting the message..in Irvine. The architect-real estate agent is looking for a bigger home, but so far discovered that most sellers are expecting top dollar for houses with minimal upgrades and lean landscaping. ‘I think sellers are being unrealistic,’ said Fleming. ‘The house I’m looking at down the street, the (recent comparable sale) is $1.5 million, and they’re asking $1.98 million.’”

“So now, he’s considering a newly built home. Some homebuilding firms, Fleming said, are offering incentives, bigger commissions for the agents and free landscaping for the buyer. Deals offered by owners of existing homes can’t compare. ‘Basically, I think people are testing the market with unrealistically priced homes,’ he said. ‘And the buyers are not interested in going into homes when they’re that high priced.’”

The Palm Beach Post has this report on that Florida real estate market. “The gavel slammed down almost as soon as the bidding had started. In minutes. As fast as the words could tumble out of the mouth of the auctioneer, whose voice buzzed like a bumblebee: Sold for $165,000.”

“‘We’re in the basement, folks,’ the auctioneer said. ‘What a bargain.’”

“And that was just the beginning. About 200 people turned out Saturday for a reserve auction at a hotel near Stuart, where the Graham Auction Company took bids on 43 properties in two posh Ginn Co. developments: Tesoro Club and Tesoro Preserve.”

“Promising ‘prices we have not seen in years,’ auction organizers said the sea of sellers looking to unload properties was anything but a poor reflection of the Tesoro communities.”

“Rather, this is a case of novice investors who got caught up in a hot housing frenzy and now can’t afford to carry their properties, auction organizers said. ‘This is definitely a reflection of the type of real estate market we’re in now,’ said Ann Cusa, an agent of the Treasure Coast who worked the event. ‘Things have just slowed down.’”

“But not every bid was accepted, even after the auctioneer’s gavel slammed on the podium. Sellers reserved the right to decide whether to accept the bid. One property with a home, reportedly worth more than $1.5 million, was taken off the auction block when no registered bidders appeared willing to shell out $800,000, the seller’s minimum.”

“Not all those who attended the auction were looking to bid, anyway. Some were Tesoro property owners curious about how low the bidding would go. Most people seemed to agree the bids were even lower than expected.”

From the News Press. “Homeowners, real estate agents and appraisers alike are finding it hard to tell as prices and the number of sales plummet in Southwest Florida’s volatile real estate market. And if you figure you’ll just ask for a wildly inflated price and negotiate down, forget it. With 12,000 homes listed for sale in Lee County, buyers aren’t even bothering to look at houses that aren’t already priced to sell.”

“Determining what’s a good deal can be a tricky thing these days, said W. Michael Maxwell, a Fort Myers-based appraiser; with a huge inventory of houses for sale, the usual way appraisers work has been turned on its head. Now, he said, ‘We have to ferret through the listings’ of properties that are still for sale to determine what the market will bear.”

“‘Most lenders aren’t going to want to have sales that are too old’ used as the basis of an appraisal, he said.”

“Don Kelly, of the Chicago-based Appraisal Institute, said it’s not clear whether the current market is exacerbating the problem. ‘The pressure to deliver a predetermined value, most often higher, or ignore defects in the house, structural problems, the pressure to use one (comparable sale) outside the neighborhood, is unfortunately nothing new and appraisers across the country face it almost daily,’ he said.”

“There’s legislation pending in the U.S. House of Representatives that would make it a crime for anyone involved in a transaction to pressure an appraiser, Kelly said. ‘Since the beginning of time everybody’s tried to influence or hope the appraisal will come down or up,’ he said. ‘The fundamentals of that have not changed at all.’”

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