The Housing Bubble

Long time readers of this blog will remember Bill Fleckenstein. It sounds like he’s been reading your comments! “A recent story in the Wall Street Journal offered lots of its useful vignettes that serve as a microcosm of manic markets. That’s the mentality often seen in manic markets, the belief that you can’t possibly lose, and, when the price goes against you, you don’t have to deal with it, because it will come back.”

“I loved the point that what seems to be really alarming is how ‘real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly market conditions have deteriorated in the past few months.’ Of course, that’s what happens when manic markets and bubbles turn. Prices change radically and, seemingly, for no reason.”

“Many people will say that the real-estate market has turned due to higher interest rates, and rising rates have hurt. But the real-estate market ignored rates going up for quite some time. Its topping was caused by exhaustion.”

“As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.”

“A recent edition of The Liscio Report put into perspective how wacko the current climate is. It said that the ratios of (a) stock value to GDP and (b) real-estate value to GDP are both nearly twice their averages from 1952 to 1970. As the report noted: ‘If mean reversion still has any role in market valuations, then both markets have plenty of room to fall.’”

And a letter writer in Florida must post here, too. “While the market moves to correct the ‘irrational exuberance’ of housing, governments are considering ‘fixing’ the disappearing problem with subsidies. These subsidies will serve to benefit certain groups of homebuyers while harming other potential buyers through artificially maintaining still irrational prices.”

“Government created the bubble through cheap money and Freddie Mac and Fannie Mae buying recklessly issued mortgages with unsustainable terms for grossly overpriced houses. Mass speculation and panic-driven buying fueled the classic bubble, prices far in excess of value.”

“House prices have been falling for six months and will continue as excess supply created by the speculative binge is liquidated and terrible mortgages come to roost.”

“As the march back to equilibrium continues, many hardworking people are caught with speculators. The real challenge for government is not to find ways to subsidize certain buyers at the expense of others, but what to do with the recurring expenses and debt recently created, once the housing bubble revenue windfall of the last five years evaporates.”

MarketWatch has this update on the homebuilders. “UBS cut its earnings projections for home builders Monday, with several companies reducing their home-delivery targets as the steam continues to come out of the U.S. housing market. ‘The long-anticipated housing slowdown appears to be finally upon us,’ wrote analyst Margaret Whelan, citing new-home sales down 21% from their July high, while new-mortgage applications are off 23% from their peak in June.”

“Whelan’s long-standing expectation was a ’soft-landing’ scenario. ‘Of late, however, the more rapid rate of decline in demand, down 21% in eight months, has led us to rethink our thesis for the near term,’ she said. ‘Given tough comparisons and a proliferation in for sale listings in some of the hotter markets, demand has fallen more quickly than we expected.’”

And a reader sent in this example of a homebuilder taking care of business in Antelope Valley. “Gang problems, open drug sales and threats from rowdy neighbors aren’t part of the lifestyle residents anticipated when they purchased large new homes in west Lancaster. The residents say the company sold many homes in the neighborhood to investors, who rented them out to problem tenants or left them vacant, with tall weeds filling the yard.”

“It was clearly not what the home buyers paying premium prices expected. ‘We bought what was billed as a family-friendly subdivision, and that is not what they delivered,’ Christopher Yaussy said. ‘They have stuck homeowners into investment hell.’”

“Not long after moving in last spring, problems began, things one wouldn’t expect in a move-up neighborhood where homes originally sold for between $325,000 and $360,000, and now go for $100,000 more than that.”

“A D.R. Horton development company sales manager said the company has the right to sell their homes ‘to whoever we want.’ ‘It’s not the builder’s job to keep things safe,’ said Jim Blake, a VP of sales and marketing. ‘We sell homes. We sell them to legitimate buyers. A builder can’t keep Lancaster safe.’”

“In the company’s Desert Sunsets tract, where homes range from 2,000 to 3,000 square feet, neighbors relate accounts of groups of young men milling around in the street, not moving aside for passing vehicles, instead making obscene gestures and slapping the vehicles.”

“What is most aggravating to the Yaussys is that they were directed to sign owner-occupancy contracts promising they would live in the home as their principal residence for one year or pay a penalty of 10% of the base purchase price. Using real estate records, the Yaussys estimate that more than 40% of the homes in their neighborhood were sold to buyers who had no plans of living in the tract.”

“Six months after the homes were ready for occupants, many still sat empty, with knee-high weeds, dead lawns and lack of window coverings giving away their vacant status. One resident said when he was considering a purchase, he specifically asked sales agents if the company sold to investors and was assured that only owners would occupy the homes. Other residents say they were asked if they wanted to buy an extra home as an investment.”

“In recent months, Yaussy said, a number of the homes have been put up for sale, including homes that were occupied by problematic tenants.”

The Arizona Republic looks at the states housing economy. “With millions of dollars on the line, several East Valley cities are appealing last year’s mid-decade U.S. census after early estimates showed thousands fewer residents than expected in Maricopa County.”

“Meanwhile, the Census Bureau has agreed to resurvey a sample of vacant housing units and is expected to be working in the county until the end of May.”

“‘The cities are very hopeful this will make a difference and increase the population number,’ said Heidi Pahl, census coordinator for the Maricopa Association of Governments. ‘”We’re all keeping our fingers crossed.’”

“Town officials in Gilbert were trying to evaluate how the state’s fastest-growing community was undercounted in the survey. The estimate for Glendale came up more than 2,700 residents short of the city’s own estimates. Paradise Valley, which filed a protest letter April 11, believes its current population to be 14,500, rather than the 13,397 indicted by the preliminary census figures.”

“Town officials believe the undercount is due to the survey not properly addressing the occupancy rate for guesthouses and the timing of the survey, when many residents were away on vacation.”

“‘In terms of job quality as defined by wages, Arizona is in the middle of the states, though below the national average,’ said Tom Rex, a researcher at Arizona State University. ‘If job quality is defined more broadly as total compensation including fringe benefits, the state may not compare as well, but good data on this are lacking. However, as an example, the state has a higher proportion working temporary and contract jobs, which typically do not receive much in the way of benefits.’”

“During 11 of the past 12 years, 100,000 or more people have moved to metropolitan Phoenix, creating booming demand for new construction and services, according to Moody’s.”

“Gina Gordon of Chandler was laid off from a job at a mortgage and finance company that paid $34,000 a year. She recently visited with job fair recruiters at the Maricopa Workforce Connections center in Gilbert and was disheartened to discover the low starting pay. ‘People are paying between $8 and $9 per hour, and I’m standing here thinking that won’t pay the rent,’ she said.”

“On one hand, state workforce officials quickly laud Arizona’s 5.2 percent job growth rate between January 2005 and January 2006, the second fastest in the nation behind Nevada. Yet tens of thousands of new jobs don’t automatically mean increased pay and benefits.”

“Take Wal-Mart Stores Inc., for example. With nearly 30,000 employees in Arizona, it ranks as the largest employer in numbers. Its average pay for full-time store associates in Arizona is $10.09.”

Checking the Census numbers, one finds the rental vacancy rate in Arizona at 11.6% in 2005, above the national average.

“And checking this 4th quarter 2005 table, the Census Bureau found 4% of vacant homes in the west that are for rent have never been occupied. And of the vacant homes for sale in the west, 13% have never been occupied.”

And a reader sent this Republic article in recently. “The Department of Economic Security updated its population projections just last month. The fresh DES figures are raising eyebrows. They show net migration, the population change due to people moving in and out of Arizona falling every year from now until 2055.”

“Are people from other states really going to stop flocking here? Will the outflow, the number of people bailing out, really overshadow the inflow? DES says yes.”

Some housing bubble news from Washington and Wall Street. And Chicago, ” Ken Neumann, president of Warrenville-based Neumann Homes, lashed out at other builders in connection with speculation the company is for sale or on the verge of bankruptcy. The firm is among the 50 biggest builders in the United States, with operations in Wisconsin, Colorado and Michigan as well as Illinois.”

“Neumann recently raised eyebrows in local building circles when the company took the unusual step of auctioning 1,000 acres of land in high-growth suburban areas such as Huntley, Sugar Grove and Montgomery. Builders routinely buy and sell land, but most transactions are through brokers; so the decision to opt for a public sealed bid sale caused speculation that it was a way for the builder to raise fast cash.”

“The auction came on the heels of reports that Neumann early in 2006 had advised some suppliers and subcontractors it would be late making payments. ‘In January, we ran a little bit short of cash, and we called some of our better trade partners, nine in this market area, and only in this market’ to advise them of the situation, Ken Neumann said.”

From Long Beach. “Federal guidelines cap standard, also known as conforming, loans at $417,000. Anything above that is considered a jumbo loan, and it allows lenders to boost interest from between .25 and .5 percent to help cover their increased risk. There are efforts in Congress to boost the cap, and if successful, future California homeowners, or those who refinance, will save between $100 and $200 per month on their mortgages.”

“HR 1461, passed through the House of Representatives, would move up the cap in high-cost areas as much as 150 percent. It’s part of a package aimed at reforming Freddie Mac and Fannie Mae. However, there are those that argue that changing the gap won’t making housing affordable to those who need it most, and that it would put public-private lending authorities Freddie Mac and Fannie Mae in roles they weren’t intended to play.”

“‘It’s a question whether some of these loans fall within the low-and moderate-home buyers’ reach,’ said Steven O’Connor, of the Mortgage Bankers Association, which has taken a position against raising the cap. Boosting the cap in high-cost areas will create a geographic concentration of large loans issued in places like the East Coast, metropolitan areas and California. A slight downturn in the economy, a rise in defaults that increases housing stock could wreak havoc on markets that are already considered overpriced, he said.”

“‘Economies are cyclical, and all those housing markets at various times experience rough patches,’ he said. ‘”Your risk exposure’s going to be greater.’”

From Paul Muolo. “Citigroup is doing away with its CitiFinancial subprime brand. The company will continue funding subprime loans but the name CitiFinancial will be retired. Company official William Magee wrote to us saying ‘the line between prime and subprime has become blurred.’ Citigroup will no longer disclose to NMN (and other trade periodicals) its subprime fundings each quarter.”

“Wall Street is becoming a bear on loan buybacks. One warehouse executive told us recently that sellers are being offered a choice: either repurchase early defaults or the correspondent buyer will renegotiate the price, resulting in what could be a hefty cash payment. Also, sources tell us that loan buybacks played a role in the recent collapse of Acoustic Home Loans.”

“Former OFHEO chief Armando Falcon Jr. said in a speech last week that he didn’t have much of an opinion on whether the GSEs should shrink their portfolios until his last year or two on the job. His official position is now: shrink those babies.”

A report on realtors provides some insight into California’s housing bubble. “As California’s once-broiling housing market cools and inventories of unsold properties grow, veteran agents expect real estate rookies to start looking for easier ways to make a living. It’s a cycle that has repeated itself again and again, said Diana Lusk, a longtime East County home seller.”

“Based in Mission Valley, agent Anne Christensen says agents motivated chiefly by profit have hurt the industry’s image. Many who purchased in a fevered market now find themselves in homes that don’t suit their needs, she said. Some who invested in homes in hopes of turning a quick profit have been disappointed. At the peak of the market, people ‘were so gung-ho to buy they were willing to grab anything that you threw at them,’ said Reed Colwick, who became a San Diego agent about three years ago. ‘Now buyers are more skittish.’”

“According to the San Diego Association of Realtors, the county’s inventory of homes listed for sale was 6,657 in June 2004, when the boom market was still at its peak. Recently, the county inventory topped 17,000 dwellings.”

“Lusk fears that the widespread use of loans with adjustable interest rates during the boom will leave many buyers financially stressed. ‘They have paid top dollar for their houses,’ she said. ‘In most cases they have to refinance within five years. If they lose their jobs, they are in trouble.’ Lusk said the real estate downturn of the mid-1990s taught her to be cautious. Sales dried up as home values dropped steeply, she recalled. ‘I owed my charge cards a lot of money.’”

A housing bubble report from the Treasure Coast. “It could well be the inevitable result of the recent housing boom. Many Treasure Coast homebuyers caught up in the go-go, building-buying frenzy have binged on a smorgasbord of interest-only and adjustable-rate mortgages. With interest rates rising, their payments are increasing and some are winding up in foreclosure.”

“A total of 139 homes in Martin, St. Lucie and Indian River counties entered some form of foreclosure in March. said, ‘Some people took out $60,000 home equity loans as a speculative buyer to buy a condo,’ said (Economist) Stanley Geberer. ‘The market for condos has softened and people are willing to just walk away, even if they lose money.’”

“Patrice Yamato, president elect of the Florida Association of Mortgage Brokers, said she wasn’t overly concerned about the local and statewide foreclosure figures. ‘Considering that we have 3,000 people move into the state every day, it doesn’t look as bad as it seems,’ Yamato said. ‘Florida is like the land of milk and honey right now, and people will continue moving here. So I don’t think this is a reflection of an economy in danger.’”

“Those who work with land-rich, cash-poor homeowners see the situation differently. ‘We knew this was coming at some point,’ said Jessica Cecere, president of the Treasure Coast and Palm Beach division of Consumer Credit Counseling Services.”

“Cecere said her office has seen an increase in local residents seeking help with mounting debt. ‘It’s really unfortunate but a lot more people have come to us with problems,’ Cecere said. ‘So many people have overextended themselves and they don’t realize it until those adjustable rates go up.’”

“Brad Hunter, who follows housing trends on the Treasure Coast and South Florida for Metrostudy, warns that that the March’s foreclosure report may just be the tip of the iceberg. ‘Unfortunately, it’s going to get worse before it gets better,’ Hunter said. ‘The first shock was probably their new tax bill, then their insurance bill.’”

“Hunter said some foreclosures may be a result of novice investors who bought spec homes with adjustable rates and then watched the market slow. ‘They bought hoping to turn around and sell quickly,’ Hunter said. ‘Now they’re holding on to properties that they can’t afford.’”