The Housing Bubble

Let’s clean up the loose ends and start the weekend. “Former Starwood Hotels & Resorts Worldwide chief Barry Sternlicht he looked at one hotel recently in Aruba (that) would produce a return of just 5.5%. ‘I would pay $100 million less for it,’ Sternlicht said. The situation has all the hallmarks of the Internet bubble, Sternlicht said. ‘It feels like a hot potato market,’ he said. ‘I have to think, ‘Who’s the bigger fool I’m going to sell it to?’”

“Sales of Minneapolis condominiums decreased in 2005 from 2004, and projections for this year show a more drastic drop. While nearly 1,100 units sold in 2005, only 200 have been sold so far this year, which would be a pace of just 600 for all of 2006. Market giant Opus is being cautious with new projects. ‘We’re taking a step back and looking at what’s going on, trying to figure out what is real and what is not,’ says Tim Munane of Opus.”

“Dallas-area homebuilders are on a construction binge. But a market analyst worries that they may overdo speculative construction. ‘It does appear that the homebuilders goosed the market this spring in selected areas, being overly aggressive,’ Ted Wilson. ‘The increase in start activity is stunning.’”

“In the first three months of 2006, almost 13,000 single-family homes were started in North Texas, an increase of 16.6 percent. ‘The supply of finished housing has climbed to a record level” of about 9,600 homes at the end of March, Mr. Wilson told builders. ‘This has led to incentives and giveaways. The [buyer] cancellation rate is somewhat higher this spring than in years past.’”

From Inman News. “Bernanke’s predecessor allowed the Crash of ‘87 to interrupt (briefly) one of his four inflation-fighting campaigns; in no other did he pause. That man raised rates until the work was done, and cut them later to repair damage. Bernanke says that inflation is a risk, but under control. He made no mention of the wild run-up in commodities, or the absence of risk premia. He has all of his chips on a soon-to-appear economic slowdown.”

“If he pauses, and the economy fails to follow his model, and he then has to play catch-up, there will be hell to pay. Inflation and rates the least of it.”

From Rich Toscano. “Our series on common real estate myths continues this week with a local favorite: the idea that San Diego’s limited supply of land justifies our recent home price runup. But the fact is that we have not reached that point at all. Since 2003, according to the San Diego Association of Governments, the supply of San Diego homes has actually grown at a faster pace than the population. And that trend has strengthened the entire time.”

From Newsday. “When Raanan Moshe first put his home up for sale in October, he had high hopes. He listed the three-bedroom center hall Colonial, in a section of Roslyn Heights called Norgate, for $949,000. But no one came.”

“Earlier this year, Moshe reduced the selling price to $899,000. They hope to close in June on a contract for $880,000. ‘You have to compromise,’ Moshe said. ‘A lot of houses dropped because they were way overpriced.’”

And from Arizona’s public radio station, an audio piece titled, ‘Real estate coaster leaves one man in the dumps.’ “KJZZ commentator and voice actor Jason Spisak talks about the Valley’s real estate market, and why he’s been forced to tattoo ‘Bring on the Pain’ on his forehead.”

The Arizona Republic reports on the housing bubble in the Phoenix area. “In metropolitan Phoenix, demand for new homes is expected to continue to slow from last year’s record pace as builders sell through ’spec’ or speculative-home inventories caused by buyers backing out of deals. Builders have been offering incentives to unload spec homes.”

“Many of those homes were under contract to be sold but buyers backed out when they couldn’t sell existing homes in a resale market suddenly flooded with listings.”

“One of the best ways to measure demand for new homes is to track the number of building permits for which home builders ask, and that figure fell sharply in March. The number of new home permits issued in Maricopa and Pinal counties dropped 24 percent in March to 4,716 from 6,203 during the same month last year, according to (analyst) R.L. Brown. Year-to-date permits are down 16 percent from 2005.”

“March sales of previously owned homes were off 26 percent from the same month last year. This March there were 9,594 resales compared with 12,911 during the same month last year.”

“Brown reported some builders are raising prices, but more are offering deep incentives and discounts. ‘The resale market will take longer to sort itself out than will the new home market,’ the Brown said. ‘Sellers will begin to get realistic on asking prices as time on the market moves from the present 60 days to the range of 90-100 days for overpriced properties.’”

“Builders are pulling fewer permits because they suddenly have more unsold homes in their subdivisions. People with contracts to buy those homes walked away from them when they couldn’t sell the ones in which they were living.”

“New-home closings fell 6.35 percent in March, another sign that buyers are getting cold feet. ‘Why cancel in the middle of construction?’ Brown asked. ‘if your confidence level isn’t high, you step out of the picture.’”

Some homebuilder news is out. “The Florida home builder said preliminary home-building revenue for the first quarter was flat from the year-ago period and warned it expects to post a loss for the first quarter.”

“Standard Pacific Corp., an Irvine-based homebuilder reported record earnings during the first three months of the year, but forecast that demand for housing will slow this year.”

“Stephen J. Scarborough, CEO stated, ‘our unit orders were down 8% year over year reflecting a number of factors including (1) decreased affordability and increased loan qualification issues in markets that have experienced significant price appreciation, (2) increasing supply in the resale market, and (3) aggressive use of incentives by many of our competitors to reduce inventory levels and to stimulate demand resulting in a general uncertainty relative to value in the marketplace.”

“The Company’s cancellation rate for the 2006 first quarter was 24%, up from the year earlier rate of 17%. The Company’s cancellation rate was generally higher year over year in California, Florida and Arizona, ranging from approximately 20% in Arizona to 30% in California.”

“Analyst Greg Gieber on Friday lent his voice to Wall Street’s chorus of bearish calls on the homebuilding sector this earnings season as declining orders highlight the cooling housing market. ‘Over the past several weeks, we have felt increasingly uncomfortable with our investment ratings on select homebuilders given the current environment in the housing industry which we think will only get worse before it gets better,’ Gieber wrote.”

“‘Contrary to what some may believe, it is our opinion that the current inventory correction in the housing market is far from having run its course,’ the respected analyst said.”

And from the builders conference. “‘After topping out in the third quarter of last year, it is pretty clear that the housing sector is in a period of transition. Sales and starts are trending lower toward more sustainable levels,’ said NAHB Chief Economist David Seiders. ‘Hopefully, most of this decline will be due to investors and speculators stepping out of the market. What we don’t want to see is investors dumping homes on the market,’ said Seiders.”

“Addressing a question that has generated endless speculation in recent years, Thomas Lawler, a housing and mortgage market consultant who worked for Fannie Mae for 22 years, said ‘Was there a national bubble? Nationwide, no, but in some regions, absolutely.’”

“Lawler noted that in some areas, ‘all of the signs of a bubble were present: a surge in speculative investing; a surge in innovative financing; easy credit and loose underwriting; home inspection waivers; and home purchases sight unseen. You had to be ‘on something’ not to see a bubble in some areas,’ he said.”

A pair of reports provide a rare look at the New Jersey situation. “When interest rates fell in April, sales surged ahead at a record pace through August, when the industry hit a wall, said Jeffrey G. Otteau, president of an appraising and consultant company from East Brunswick. Otteau attributed the stagnation to a decline in affordability and a loss of purchasing power.”

“2005 also ended with inventory up 41 percent in the final four months to go along with a 15 percent differential in sales compared to the first eight months. ‘That has set the tone for 2006,’ he said. Sales are down 12 percent from the pace set last year. And inventory is up 65 percent. Buyers are waiting to see if there really is a bubble, Otteau said.”

“‘71 percent of the population expect a price collapse in the next 12 months. That won’t happen. But the fear of that drummed into the public has buyers worried. They have no sense of urgency,’ he said.”

“The once-sizzling New Jersey real estate market is showing signs of going flat, according to an expert who presented his findings Thursday at the Atlantic Builders Convention. It appears to be shifting from a buyers’ market to a sellers’ market, with home listings outnumbering home sales by 2-to-1 in the first quarter of this year, said Jeffrey Otteau.”

“‘The clear message to sellers is that the party is over,’ Otteau said after the talk to a standing-room only crowd of builders. ‘The days of increasing asking and selling prices have passed.’”

“‘We aren’t looking at a market that is going to crash,’ he told the builders. ‘We are absolutely looking at a market that is going to adjust.’ He said a glut of homes for sale might limit the appreciation of property.”

“He said the slowdown is most dramatic in the luxury home market and in Cape May County, the state’s most concentrated second-home market. But there are signs buyers are taking a ‘wait-and-see’ attitude throughout the state, he said.”

“The average number of Bergen County home sales dropped by 11 percent compared with the first quarter of last year, and the average number of listings increased 84 percent. In Passaic County, the number of sales dropped 15 percent, and listings were up 65 percent.”

“Statewide, the average number of sales dropped by 12 percent and the average number of listings jumped by 65 percent in the first quarter.”

“Otteau said that builders should be more disciplined in the prices they pay for land. He attributed the slowdown to several factors; Investors, who made up more than a quarter of buyers in 2005, have largely dropped out of the market..People are nervous because they’ve heard a lot of talk of a housing bubble and the possibility of a collapse.”

Some housing bubble updates from California. “Oroville realtors say house sales dropped during the first quarter of the year. Gordon Andoe, broker and appraiser, gathered statistics from a data base for the area including Thermalito, Las Plumas, Oroville, Kelly Ridge, Palermo and the east foothills. In 2005, 210 single-family homes sold in the price range of $200,000 and $375,000.”

“In comparison, from January 1 to March 31, 2006, 31 homes sold in the same area and price range. That would be the equivalent of 124 homes if sales remained the same throughout the year, which reflects a considerable slowing in home sales.”

“Last year, out-of-town investors were buying up rental property in the Oroville area, which drove up the cost of housing, he said. Talking to other realtors, Andoe said he has surmised the housing market is the same in Chico, Gridley, Paradise and surrounding areas.”

“(Broker) Cindy Peebles speculated the cause for slow down could be over-priced houses. She expects some houses that have been listed at too high will drop in price.”

The Desert Sun. “Coachella Valley home prices, sales counts and appreciation rates continued their recent flattening-out patterns in March. The median selling price of $400,000 remained historically high for the region, but was down from the all-time high of $418,500 set the previous month.”

“‘The market is turning in favor of buyers,’ said Greg Berkemer, VP of the California Desert Association of Realtors. ‘It just means it’s getting more important for sellers to set their prices right.’”

“For now, however, there are few signs that buyers are biting at current prices. According to the desert Realtors’ group, there are currently 7,467 unsold properties on the valley market, more than twice the number seen a year ago and more than five times the level of April 2004.”

“The situation is frustrating for homes sellers like Joe and Linda White. They’ve been trying to sell their 2-year-old La Quinta home for the last six months, and have had to drop the asking price three times, and are probably looking at another 25 to 30 percent price cut in the coming weeks.”

“Berkemer and White both noted that the current inventory glut can be attributed in part to non-resident investors, some of them quick-sell ‘flippers,’ now looking to sell off properties they purchased in the past year. And like the Whites, many sellers are competing against newly built homes coming on the market in their own subdivisions.”

The Tracy Press. “Tracy’s slowing real estate market is far better for buyers than for sellers. First quarter home sales slowed from 442 in 2005 to 319 in 2006, and local real estate agents report a seven-month backlog of homes for sale.”

“‘For every two homes coming on to the market, only one is going off,’ (agent) Donna Baker said. In the 10 days before Monday, 72 homes came on the market in inner-city Tracy, while 41 were sold. ‘If they don’t have to sell, they shouldn’t be selling.’”

“Educated buyers are forcing sellers to list their homes at realistic prices. ‘A year or two ago, if a neighbor’s identical home sold for $500,000, you could have listed yours for $525,000 or $550,000,’ said real estate agent Karl Enzmann. ‘Now, if you put it on (the market) more than two to three percent higher, you’re going to be living in a ghost town. Nobody’s going to be looking at it.’”

The Sun Sentinel reports on the reaction to one economists speech yesterday. “Florida’s housing market probably won’t improve in 2006, but the long-term outlook remains promising, the chief economist for the National Association of Realtors said Thursday. ‘Is this a bad year? Yes,’ David Lereah told more than 400 people in West Palm Beach. ‘Are you going to bust? No.’”

“Lereah predicted that price increases for existing homes in South Florida will fall to about 5 percent and that sales declines in many markets will continue at double-digit clips. The state’s housing industry should pick up in the middle of 2007, Lereah said. ‘Particular markets may not, depending on inventory levels,’ he said.”

“Listings have more than doubled in Palm Beach County. The situation is even worse in Broward, where listings have more than tripled.”

“Lereah blamed Wall Street analysts and the media for perpetuating negative hype regarding the housing slowdown. ‘They’re telling us we’re in a bubble and that we’re going to come crashing down,’ he said. ‘There is nothing that could be further from the truth.’”

“Some question the economist’s alliance with the Realtors trade group and the fact that he wrote a book titled ‘Why the Real Estate Boom Will Not Bust; And How You Can Profit From It.’ But Lereah insists he’s not being unfairly optimistic. Although he remains positive about Florida, other areas, such as San Diego, could face sustained slowdowns because of flawed market fundamentals, he said.”

“Mike Morgan, a Stuart broker with clients in Palm Beach County, said it could be two years before the housing market rebounds. He said it’s so slow that builders are paying buyers’ mortgages for six months and giving agents double commissions. Individual sellers also are offering incentives. Lereah is not preparing the industry for rough times ahead, Morgan said. ‘It was more of a pep-rally speech than anything else.’”

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