The Housing Bubble

A pair of reports on the California housing bubble. Fresno Bee, “Jeff Davi displayed a cartoon of two men overlooking a sea of people. ‘Is this a rock concert?’ one man asks. ‘Nah,’ replies the other. ‘It’s the swearing-in ceremony for new real estate agents.’”

“One of the greatest real estate booms in recent history has swelled the ranks of licensed agents to nearly half a million, up 56% from 2000. One in every 54 adults has a real estate license — and each week brings 1,000 new applicants, Davi, the state’s real estate commissioner, told a Fresno audience Thursday.”

“Davi said he’s worried that a glut of real estate agents in a slowing market could lead to more accusations of misconduct. Sellers, he said, tend to be more forgiving when they make a tidy profit. ‘A good market cures a lot of ills,’ he said.”

The LA Daily News. “First-quarter numbers are in and the evidence is irrefutable. The residential real estate market is off to its weakest start in years. A whimper heralds the arrival of the peak buying season. And sellers are making big adjustments in their asking-price-to-fantasy ratio.”

“For the January to March period sales are well under year-ago levels across the state, Los Angeles County and the San Fernando Valley. Prices are still posting double digit annual increases not as big as a year ago, though in those three locales, but they’ve have been basically flat for months.”

“In this year’s first quarter 2,153 previously owned houses changed owners, down 22.8 percent from 2,789 sales in the 2005 first quarter. The last time sales were this weak came in the 1997 first quarter 2,120 single-family transactions. Preliminary numbers show a similar trend. Statewide sales fell 18.3 percent from last year’s first quarter. Los Angeles County sales dropped 19.1 percent.”

“It also looks like the long-predicted appreciation softening has arrived. The median price, the point at which half the properties cost more and half less, increased 1.7 percent since January.”

“There are also ample signs of the inventory build up. Neighborhoods are festooned with the most ‘For Sale’ sales signs in years, some sporting ‘Price Reduced’ tags. Sellers can no longer slap 20 percent on top of what their neighbor’s house sold for.”

“Robert Kleinhenz, economist at the Los Angeles-based state association, said that inventory can give us an idea of what directions prices will take. He tracked several decades worth of inventory (and) how many months it would take to deplete all the listings at the current sales pace and its relationship to prices.”

“Not surprisingly, the bigger the supply the more downward pressure is exerted on prices. ‘Probably the reason for the slower pace of price appreciation is the fact that inventory levels increased,’ he said.”

“His research found that when inventory levels are seven months or lower, the state median price goes up 11 percent on average. When inventory stretches nine months or more, the median falls on a consistent basis.”

And Centex Homes has this sales event in the Sacramento area coming up. “What if you could save $100,000 on a new home without feeling like you’re breaking the law? You can May 6th & 7th! Lincoln, Elk Grove, Serrano-El Dorado Hills, Whitney Ranch-Rocklin, Yuba City, Woodland.”

A homebuilder had some new out after the bell. “Hovnanian Enterprises, Inc. announced today it now expects its 2006 second quarter earnings to be in the range of $1.40 to $1.50 per fully diluted common share, compared with the Company’s previous guidance of $1.55 to $1.80.”

“In addition, Hovnanian revised projections for fiscal 2006 ending October 31, 2006. The Company now anticipates its fully diluted earnings per common share for fiscal 2006 will be in the range of $7.20 to $7.40…lower than the Company’s previous guidance of $8.05 to $8.40 per share.”

“‘Our anticipated results for our second quarter and the remainder of fiscal 2006 reflect smaller year-over-year increases in earnings than we had anticipated, primarily due to continuing production delays in several markets that have postponed deliveries, a slower recent sales pace, higher cancellation rates, more pronounced use of concessions and incentives, and material price increases,’ commented CEO Ara Hovnanian.”

“‘When we release results for our 2006 second quarter on May 31st, we expect to report approximately a 20% decline in net contracts. As discussed above, one factor that has negatively influenced our recent pace of net contracts is the sequential increase in our cancellation rates over the past two quarters,’ commented Mr. Hovnanian.”

“‘Typically our second quarter cancellation rates are lower than those of our first quarter, which was not the case this year. While the number of net contracts recorded in our second quarter increased compared to our first quarter net contract results, market conditions have slowed in certain markets and we did not experience as strong a second quarter sales season as we have traditionally seen.”

“‘We believe the higher cancellation rates, in addition to an increase in resale listings and increased use of sales incentives in certain markets are temporary aberrations as certain markets work through the increased level of resale homes for sale,’ he said.”

“‘As the housing market has continued to cool off from white-hot levels of previous years, we have renegotiated and even walked away from deposits on several parcels of land that we control through options. Approximately $5 million of write-offs of deposits and related costs is built into our revised second quarter guidance.’”

“‘Although we have not needed to use this tactic as much in recent years, we have employed it successfully in prior slowdowns. We are confident that our strategy to control land predominantly with options will allow us to better manage our inventories in a slowing housing market,’ concluded Mr. Hovnanian.”

“The Company is one of the nation’s largest homebuilders with operations in Arizona, California, Delaware, Florida, Georgia, Illinois, Maryland, Michigan, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia.”

“The Company’s homes are marketed and sold under the trade names K. Hovnanian Homes, Matzel & Mumford, Forecast Homes, Parkside Homes, Brighton Homes, Parkwood Builders, Windward Homes, Cambridge Homes, Town & Country Homes, Oster Homes, First Home Builders of Florida and CraftBuilt Homes.”

Inman News reports on Virginia home sales. “Home sales in Virginia dropped for the seventh consecutive month in March, while home-price growth returned to a more normal pace, according to the Virginia Association of Realtors.”

“Closed sales totaled 10,088 in March, down 12 percent from 11,464 sales in March 2005. Closed sales year to date totaled 23,871, down 13 percent from 27,719 for the same period last year.”
“‘A good sign for buyers is the fact that home-price appreciation is cooling,’ said VAR President Kit Hale of Roanoke. ‘There is better inventory on the market for buyers to choose from, and less urgency to make an offer in the competitive environment we had been experiencing.’”

And a northern Virginia realtor has this April/May report. “As we have noted here over the last several months, the metro DC housing market is clearly in transition from a strong seller’s market to a more balanced one. The number of available homes has risen significantly throughout the region, and especially so in Northern Virginia, and at the same time, the number of ratified contracts has dropped in every jurisdiction.”

“However, the market seems to be cooling at a different rate, depending on location. We have noted with some considerable interest that Washington, DC and the closer-in suburbs have not been hit quite as hard as the jurisdictions further from the city-center.”

“In Northern Virginia (Fairfax and Arlington Counties, Alexandria, Fairfax and Falls Church Cities), the number of ratified contracts in the first quarter of 2006 compared to the first quarter of 2005 is off 11%; in Montgomery County, it’s off 4%; in DC it’s off 9%. However, in Loudoun County, the number of contract has declined 31% and has declined in Prince William County by 27%.”

“Why are buyers not rushing out to pay above-list for new-on-the-market listings? Because they accurately perceive that they have more choices. Inventory has climbed substantially in all but the lowest price category.”

“The overall inventory has increased 442% from this time last year; the number of listings priced between $150,000 and $299,999 is 9 times greater than March 2005!’ “This time last year, 115 of all fully available homes on the market had a price change of at least $1,000; today, it is 29.3%, again suggesting that sellers are adjusting to new market conditions.”

Some housing bubble news from homebuilders and Washington. St. Louis, “Developer Michael Lawless is selling residential building sites, ground held for future development, the Valley Park office building where his company is based and his $2.9 million home in an effort to raise money to pay off creditors owed thousands of dollars by Lawless Homes Inc.”

“Lawless Homes’ financial problems hit as the number of home-building permits issued in St. Louis, Franklin and Jefferson counties all dipped slightly between 2004 and 2005.” “In addition to paying off secured creditors, Lawless said he is working to remove liens on homes sold to customers. (Attorney) Dudley McCarter said Lawless Homes is facing an ‘unusually high number’ of liens, in part because word travels fast through the construction community.”

“Builders boosted construction spending to an all-time high. That was the message coming from the latest batch of economic reports released Monday.”

“The personal savings rate rose to negative 0.3 percent in March, compared with negative 0.6 percent in February. Economists, however, caution against reading too much into the savings rate. They say it doesn’t provide a complete picture of household’s finances because it doesn’t capture gains from such things as real estate.”

“Peak Phobia? The volume of U.S. home sales is near the record high seen in 2005, but Americans are much less confident today than they were a year ago about the advisability of buying real estate. Just 52% of Americans say now is a good time to buy a house, down from 71% last April and 81% in 2003. Residents of the East and West are especially likely to consider it a bad time to purchase a new home.”

“Housing looked like a good deal in the recent past when single-family homes were experiencing back-to-back years of double-digit appreciation. Now that the increases appear to be slowing, and home values are leveling off at fairly high prices, prospective buyers are naturally more concerned about paying top dollar. The recent decline in consumer optimism about the housing market is seen with all major income groups and regions of the country.”

Paul Muolo, “Here’s something to think about: A few weeks ago Freddie Mac settled a consolidated shareholders lawsuit, agreeing to pay $410 million in damages. The plaintiffs sued, arguing that they were misled by the company about its finances.”

“Freddie’s woes were a bit different from that of its sister company, Fannie Mae. Freddie was earning so much money that it felt compelled to sock away $5 billion for a rainy day. Fannie, on the other hand, was cooking its books to hide $11 billion in losses that it should’ve been taking.”

“Now, this is where it gets interesting. Fannie, too, has been sued by shareholders. If Freddie’s settlement cost it $410 million, what’s Fannie’s going to cost? If I were a betting man (and I’m not) I’d wager that it could be close to $1 billion. I wonder how Fannie’s directors will react to that?”

“China: A surge in the number of vacant and newly constructed apartment buildings in that fast-growing (sort-of communist) nation is fueling press reports that a shakeout might be just around the corner. Speculators are playing a key role in the boom, and low- and moderate-income families are being priced out of certain markets. Sound familiar?”

“A Colorado insurance regulator told Congress on Thursday that a ‘black market’ exists in which real estate agents, homebuilders, lenders and mortgage brokers are demanding and receiving illegal kickbacks from title insurance firms.”

“The Fed is confident that this slowdown and disinflation will happen as a result of monetary tightening that has already occurred since US interest rates started to rise in June 2004. The Fed sees the softening US housing market as the main driving force of the coming slowdown. Indeed, it is so convinced about housing market weakness that Mr Bernanke’s main concern is to prevent ‘a more pronounced housing slowdown’ than is necessary.”

“But what about the awkward implication: that the Fed will sit back and do nothing, even if inflation continues to accelerate in the months ahead? Mr Bernanke did indeed seem worried about this contradiction, since inflation responds even more slowly to monetary tightening than does economic growth.”

“What will happen if inflation continues to accelerate in the next few months, while the US economy is slowing? Will this not revive the ugliest word in the economic headlines of the 1970s and 1980s, ’stagflation?’ And what impact will this have on the financial markets, especially on the bond markets?”

“The ‘inflation vigilantes’ in the bond markets have spent the past few years in peaceful slumber, but Mr Bernanke’s apparent indifference could turn out to be a rather alarming wake-up call.”

The Boston Globe has this update. “After five red-hot years, home sales have cooled north of Boston and across the state. Gone are the days of multiple bids, price run-ups, and fast sales. Falling prices, rising inventory, and longer selling periods are now the norm, industry watchers say. ‘We’re at a turning point,’ said John Bitner, chief economist at Eastern Bank of Lynn. ‘The upward movement has definitely turned the other way. It’s a buyer’s market.’”

“Home sales in Massachusetts dropped 8.4 percent from January to March, compared with the same period last year, and 13 percent over the last 14 months, according to a report issued last week by the Warren Group. In March, home sales and prices dropped 1.5 percent, with the average selling price falling to $325,000 from $330,000 in March 2004.”

“The slowdown has left a glut of homes sitting idle, and hundreds of homeowners waiting impatiently for the chance to downsize, trade up, or move closer to family or even out of state for a job. Currently, 2,279 single-family homes are for sale north of Boston, a 48 percent increase over April 2005, when 1,538 homes were listed.”

“Eric and Denise Kerble of Swampscott put their spacious Colonial on the market in January for $399,900, betting it would sell fast in a seaside town where the average price tag on a single family house is at least $100,000 more. Now, after more than 100 days without an offer, the Kerbles have dropped their price to $394,900.”

“The couple paid $206,000 for the gray, 1,586-square-foot house eight years ago, outbidding several other prospective buyers. They said they have since spent more than $25,000 on upgrades.”

“‘We hope this does the trick,’ said Denise Kerble. ‘Lots of people have looked at it, but nobody takes the next step.’ The Kerbles are one of the many Massachusetts families living in limbo, trapped in a suddenly stagnant real estate market that has forced them to put their dreams on hold.”

“In Middleton, competition from new homes for sale on East Street prompted Patrick and Susan McIntire to drop the price on their Colonial that they first listed at $419,900 in November. The house is priced at $399,900, but still has received no offers.”

“‘We don’t want to give our house away,’ said Susan McIntire, who hopes to find a house with more land in New Hampshire. ‘We’ve put a lot of sweat into it. But it’s also very frustrating trying to sell a house now. There are more places to live than people looking to buy.’”

“Local realtors say the falling prices and longer marketing periods show the market has come back down to earth after years of skyrocketing sales. With inventories climbing, sellers no longer can name their asking price. ‘Things are much more realistic now,’ said Claire Dembowski, a broker in Swampscott, who is also the listing agent for the Kerbles’ house. ‘Sellers had the advantage for a long time, but now the cycle is going the other way.’”

A pair of reports on the Florida housing bubble. “More proof of the South Florida housing slowdown: roughly a quarter of the 379 condominiums at The Moorings in Lantana are for sale. A real estate agent with a listing there says many of the sellers are investors looking to bail. Analyst Jack McCabe doesn’t have specifics on The Moorings but said some condo projects have even a larger percentage of units for sale.”

“The Moorings was one of Palm Beach County’s hottest condo developments when Related began marketing it a few years ago during the real estate boom. Buyers camped out overnight for chances to buy there. Related even needed a police presence to maintain order.”

“Plenty of real estate speculators across the region are getting nervous because they can’t afford the payments on these investment properties. The time may come when they’ll have to dump the condos for a loss, McCabe said. A lot of people are on the hot seat,’ he said. ‘They got into real estate but were not that solvent.’”

The Palm Beach Post. “For anyone not convinced that the housing market has lost some pep, now there’s this: A growing number of the ‘condo conversions’ that eroded South Florida’s supply of rental housing during the past two years are reopening their doors to renters.”

“With the condominium market flooded, at least three Palm Beach County complexes have abandoned their conversion plans and turned back to renting, said Jack McCabe. In all, they represent almost 1,300 units.”

“McCabe documented another 284 units in Broward County, and he suspects there are 500 more would-be condos reverting to rentals in the two counties. ‘We’re undergoing a tremendous transition in the marketplace right now, and the sales velocity has slowed,’ McCabe said.”

“With condo sales slowing, the need for another source of revenue is especially pronounced, since most condo converters went with 12- to 18-month financing, McCabe said. To refinance with longer-term loans, developers will need income. ‘I think that some developers and owners have decided that the best route to go is to go back to apartments, to fill them up,’ he said.”

“The Treasure Coast also has seen hundreds of apartments converted to condos, and, now, some returning to rentals. The Estates at Stuart, a 237-unit complex that converted to condos last year, has opened a leasing office and is advertising its rentals. Stuart real estate broker Mike Morgan said he thinks the owner was forced to return to renting because the condos didn’t sell as quickly as expected. The company set a Martin County record when it paid $45 million for the complex early last year.”

“‘I think it’s going to take some time to go through this adjustment, maybe it’s a year, maybe it’s a year and a half. Nobody knows for sure,’ Brad Hunter of MetroStudy said. ‘It kind of depends on the psychology of home buyers.’”