The Housing Bubble

The New York realtors have their march numbers out. “Sales of existing single-family homes in New York gained strength in March compared to the previous month. The March 2006 sales total fell 3.4 percent from the March 2005 sales total of 7,007.”

“While sales were up, the preliminary data showed a decline in the median sales price from February 2006. The median remained unchanged in March 2006 compared to the same period a year earlier.”

The group reports each month as preliminary, and the numbers are revised the next month. According to the printouts from January 2006, the statewide median of $319,000 was revised down to $300,000. Now the February 2006 statewide median of $300,000 has been revised down to $278,000.

The March 2005 statewide median is reported at $259,900. The preliminary number for March 2006 is $260,000.

Some county medians from the NYSAR files: Nassau is down 5.1% from the previous month. Putnam is off 8.5% from the previous month and 11.7% from a year ago. The Rockland median dropped 9.1% from the previous month. And Westchester declined 9.45 from February 2006 levels.

About Westchester. “A Westchester real estate agents’ group is declaring that the local housing boom has fizzled. The median selling price of a house in Westchester this winter was $650,000, up just 5.7% over a year, the Westchester-Putnam MLS announced yesterday.”

“It was the sixth consecutive quarter of single-digit increases, and the real estate group proclaimed that after eight years, ‘The boom is over.’”

“The number of houses sold was down 14% from a year ago, and the number of available houses was up by a third. The record median price for Westchester was set last summer at $711,700. In the fall, the median price was $652,250.”

“In Putnam County, the median price for a house was $375,000, down 8.5% from the year before, the group said.”

Wall Street is becoming skeptical about the housing bubble. “Centex shares headed for the cellar, dropping 9% in midday trading, after the Dallas-based home builder missed quarterly earnings estimates, lowered guidance and announced it was walking away from land deals in some markets. The warning offered clear evidence that rising interest rates are pulling the choke chain on the housing market.”

“Management also slammed the door on robust growth for 2007, slashing earnings forecasts. Orders fell 11% year over year for the March quarter, an important precursor to actual revenue that gets booked three to six months later when home sales close.”

“A $28 million charge stemed primarily from the forfeiture of land option deposits in the Washington, D.C., San Diego and Sacramento, Calif., areas. The land options writedown is a big deal, says analyst Stephen East. ‘I think what’s significant is the signaling effect of it. This is the first big builder that said, ‘When we promised to buy some land we had some assumptions about what we thought we could get for the land when we put a house on it, and that’s no longer the case,’ he said.”

“Pulte Homes Inc. CEO Richard Dugas warned that the company’s second quarter would likely come up short. Hardest hit are markets that experienced huge price increases over the past two years. Dugas said markets such as Sacramento, San Diego and Northern Virginia, appear to be in the midst of a material correction where house prices are falling, cancellations are surging, traffic is slowing and incentives are up.”

“‘Your first quarter came in light and it looks like your second quarter is going to be light relative to our expectations. So, it’s just not clear why you would be re-affirming the guidance,’ said analyst Margaret Whelan, during the conference call. ‘It seems like we’re going to be disappointed later in the year, she said.”

“Beazer Homes also reported double-digit declines in home orders as rising mortgage rates and housing prices pressured buyers. ‘This whole space, I thought it was bottoming out,’ said portfolio manager Keith Gangl. ‘Maybe it will take a little longer.’”

“Orders for homes, which are not reflected in the revenue, fell 19.4 percent to 4,224, and were off 46.3 percent in the West. Sacramento, California, was particularly hard hit, as orders fell and cancellation rates rose.”

And Holden Lewis reports on efforts to keep the bubble going. “The Methuselah of mortgages has arrived: the 50-year home loan. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents. Advertisements have yielded a lot of phone calls and ‘quite a few applications,’ says VP Alex Diaz Jr.”

“‘There are two markets for this,’ Diaz says. ‘One is if they’re looking to purchase a home, because of how expensive housing is. And the other is payment-option ARMs, borrowers are making minimum payments and they’re starting to panic a little bit and look for vehicles to get out of these loans.’”

“Bystanders are dubious of the half-century loan’s benefits. ‘If you run the amortization out, it basically is an interest-only loan, in all practical terms,’ says Jason Flurry, a certified financial planner. ‘If a person is considering something like that, they’re probably trying to squeeze into too much house to begin with.’”

“But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470.”

Some reports on a changing mindset from the NAR’s chief economist. “David Lereah said he was still looking for a gradual slowdown in housing that would result in a drop of around 6 percent in home sales this year and a slowing in price gains to around 6 percent, compared with the double-digit gains in prices in recent years.”

“The U.S. economy has digested surging energy costs in the past few years with little more than a hiccup. But now, some economists are warning, energy prices have gotten so high that the economy could lose steam. Not helping is the fact that the latest gains are coming as some economic cushions for consumers that have been in place for several years, such as a strong housing market, are slipping.”

“‘At some point, we can’t absorb it,’ NAR chief economist David Lereah says. If oil prices stay at current levels, or go higher, ‘confidence is really going to come down. It is possible that this economy can get hit.’”

“The housing market’s chief cheerleader has a surprisingly stark message for Florida Realtors: 2006 is going to be a tough year. The region’s real estate economy must recover from a hangover wrought by a spasm of speculation and easy money, David Lereah, told Realtors at a West Palm Beach hotel today.”

“‘We’re in a cleansing mode right now,’ Lereah told about 400 people. ‘It’s gonna hurt.’”

“While Lereah compared the housing boom’s excesses to the stock market bubble of 2000, he doesn’t foresee a Nasdaq-like crash for home prices. Rather, he calls real estate ‘the new gold standard’ for safety-minded investors and predicts a period of sluggish activity followed by a return to a stronger housing market next year.”

“‘If you have a healthy local economy, it’s almost impossible to have a bubble burst,’ he said.” “For the near future, though, home sellers will have to contend with a glut of properties for sale and reduced interest from buyers. Lereah called the slowdown healthy: ‘Prices got a little too high. We got ahead of ourselves. We needed to catch our breath.’”

“Lereah dismissed widespread concerns about the lack of affordable homes in Palm Beach County and the Treasure Coast. Lereah said, that number isn’t so steep compared to other parts of the country such as New York and northern New Jersey.”

“While Lereah is bullish on the long-term future of Florida’s housing market, he warned that hurricanes and soaring insurance premiums pose threats. ‘If we have another bad hurricane season,’ he said, ‘all bets are off.’”

The realtors association reported existing home inventor was up 39% this week. The Dallas News has more detail. “The inventory data were even more revealing in Tuesday’s existing-homes report. At 2.7 million, single-family home inventories are up 33 percent since last year. Drilling down even deeper, at 494,000, the number of condos on the market is up 85 percent.”

“When you examine the local data by price, it looks as if we’ve gotten caught up in the frenzy after all. Starting with the average condo price in the country of about $250,000, our growth in unsold inventory is right up there and then some on the highest end.”

“‘The market for condos above a $250,000 price seems to be way out of balance,” said Jim Gaines, research economist at Texas A&M University. ‘I don’t know where all of these million-dollar condos are coming from, but if you own one, you’re going to have a heck of a time selling it.’”

“If there’s one thing about San Diego that does trouble Robert Kleinheinz, the deputy chief economist at the California Association of Realtors, it’s downtown. Kleinheinz doesn’t have a view over the dozens of condo towers and cranes in downtown. He agreed that the condo market troubles him.”

“The spread of condos in downtown San Diego is similar to what’s happening in his home town of Long Beach, Kleinheinz said. ‘We’ve got lots of condos, and I’m not quite sure who will be buying those,’ he said.”

“Told of the current high inventory levels in downtown San Diego and the thousands of condos that are planned for the city, Kleinheinz said what happens downtown will depend on when the properties come on the market and whether there is a sudden flood of condos coming online at the same time.”

“Just finding an affordable home in the East Bay can be a serious challenge. Liz Humphrey and her fiance, Harold Joe Smith, lined up with other homeowner hopefuls shortly after 7 a.m. on a Saturday to submit an offer at Reflections, a recent apartment-to-condo conversion in San Ramon.”

“Their names were not called until that afternoon, and they were forced to settle for their second choice. For $379,000, they are set to buy what Humphrey said amounts to a ‘two-bedroom apartment, basically.’”

“They’re not making a down payment, so the monthly mortgage will run more than $2,300. That’s quite a leap from their previous living situation: paying $650 a month to share an Antioch apartment with roommates. To make the monthly mortgage, the couple, who are set to wed in early June, plan to dramatically curtail their spending.”

“‘We won’t be able to go out to dinner every weekend or take a trip whenever we want,’ Humphrey said. ‘We’ll have to get a Costco card and buy in bulk. Anything and everything that we can reduce, we plan on doing.’”

One realtor has this in a letter to the editor. “I’ve noticed the nightly news running this same story for what seems like an eternity: ‘Real Estate: Will the bubble burst soon?’ It’s a self-fulfilling prophecy that many media outlets have latched on to.”

“But one only has to look at the countless housing developments in progress to think otherwise about the future of real estate. For example, Standard Pacific Homes, a publicly traded company and the nation’s 11th largest developer will soon complete a 250-home development with prices upwards of $600,000. Toll Brothers is following suit with a 60-home development with prices starting in the $700’s.”

“It doesn’t look like they’re too worried about a ‘bubble.’ If large-scale developers such as Standard Pacific, Centex, and Toll Brothers, with multimillion dollar budgets and a finger to the pulse of the economy in a way that the media doesn’t, what do they know that the media doesn’t?. When it comes to predicting real estate trends, watch the developers, not the nightly news.”

“Home-builder stocks pulled back Thursday as investors reacted to a string of earnings reports littered with order declines, missed expectations and lowered outlooks. A trio of the largest companies in the sector released quarterly results before the markets opened Thursday, and the disappointing results sent the group into a tailspin.”

“Centex Corp. started the trouble shortly after Wednesday’s closing bell when the company said that it took a 14 cents a share tax write-off on land that has fallen in value. The company’s backlog of homes awaiting construction dropped 6% and orders tumbled 11%.”

“‘The deterioration in home-building trends is materializing more rapidly than many had anticipated, including ourselves, and is likely to continue to put pressure on earnings expectations for the sector,’ wrote Raymond James analyst Rick Murray.”

“Pulte Homes Inc. also released quarterly earnings after the closing bell Wednesday, saying profit rose 20% from the previous year. Yet new-home orders, which analysts closely monitor to predict revenue, fell 11% from the year-ago quarter to 10,725 homes. Orders fell in the company’s Northeast, Southeast, Midwest and West markets.”

“More bad news hit the home-building sector Thursday morning after Beazer Homes USA Inc. trotted out its quarterly numbers. The company lowered its 2006 earnings forecast as the builder sees sales and prices slowing in several of its housing markets. ‘In a number of markets across the country, we have seen the pace of sales decline and price appreciation moderate relative to that experienced over the past several years, as evidenced by the lower net orders this quarter,’ said Ian McCarthy, Beazer chief executive.”

“Orders fell 19% on a unit basis and the company’s chief executive said sales are slowing and price appreciation is moderating. Cancellation rates also moved up from the year-earlier quarter and Beazer lowered its 2006 profit forecast.”

“Orders for homes, were off 46.3 percent in the West. Sacramento, California, was particularly hard hit, as orders fell and cancellation rates rose.”

“Pulte Homes (posted) a drop in new home orders. New orders fell 4% to $3.8 billion. The company’s backlog of sold homes stood at $7.1 billion at the end of the quarter, up from $6.5 billion a year earlier. Orders fell 29% in the Northeast, 15% in the West, 13% in the Midwest and 9% in the Southeast.”

“In the company’s conference call Thursday, Pulte management attributed the large drop in Northeast orders to declining demand in the New York metro region and the New England area. In Arizona, sales have been slower because of..competition from the growing inventory of existing homes. Buyers have been much more cautious in Arizona of late, the company said.”

“Pulte said the competition from the growing amount of existing homes for sale is a national issue, but it is most pronounced in Orlando and Phoenix, where builders are exacerbating the situation by adding more inventory to the market. ‘The investors that were buyers two to three years ago have been sellers today … and that’s presenting some inventory issues in certain markets,’ management said.”

The Palm Beach Post reports on another failed condo project. “When a Las Vegas lender plunked down money from retirees, investors and even a medical research firm’s pension fund to finance construction of a West Palm Beach high-rise condo, everyone gambled that red-hot Florida real estate was a sure thing.”

“Low-income residents of the apartment complex moved, heavy construction equipment rolled in, millions of dollars were borrowed and dozens of investors saw double-digit returns on investments. Now, all bets are off.”

“Lender USA Commercial Mortgage Co. and its related companies, better known as USA Capital, filed for Chapter 11 bankruptcy protection in Nevada on April 14. ‘Up until last week, we had no inkling that anything was wrong,’ said Virgil Birgen of Nevada, who invested $150,000 to build Sail Club at Clear Lake.”

“About 200 people from across the country gave Nevada-based USA Capital or a sister company money to fund the four-tower, 590-unit luxury high-rise. Just six months after the mayor and two city commissioners donned hard hats and wielded shovels for an October groundbreaking, Sail Club has stalled.”

“One apartment building has been leveled, but two others remain open, their ovens and water heaters pulled from the wall. A refrigerator stands in the middle of one parking lot, an abandoned portable toilet is in another. Mattresses rotted to their springs lie on the ground. Windows are broken. Yellow flowers have begun to grow up the side of 20-foot-high piles of rock and sand left undisturbed since Christmas.”

“So, why has construction ground to a halt? ‘To be blunt, we are a handful short’ of sales needed to nail funding for the first phase of construction, Richard Kohn said.”

“Investors said they weren’t aware of progress, or the lack of it, at Sail Club, or any other projects. But their checks from USA Capital with the promised returns always came. ‘We have always gotten paid,’ said an investor in the local property who asked that her name not be used. But when she recently asked to withdraw her $100,000, there were weeks of delays. Then the company went into bankruptcy court. ‘I didn’t get anything back,’ she said.”