The Housing Bubble

Some housing bubble reports from Arizona. “Work has virtually stopped at the 10-story luxury hotel under construction south of Chandler Fashion Center, and the city has warned the project architect that some permits issued in January have yet to be paid for. Builders have finished eight floors, but the ninth and 10th floors for condominiums are considered a different phase of the project.”

“A cooling housing market and rising interest rates can only mean one thing. Free pools.”

“As Tucson’s housing market has returned to normalcy over the last few months, home buyers have seen more and more offers of free stuff, otherwise known as incentives. For Meritage Homes, it means offering a free pool worth up to $20,000.”

“There is some kind of incentive available in every subdivision, depending on the lot and on the home. Meritage is offering below-market mortgage rates, a fireplace, extended patio coverage, granite countertops and upgraded appliances, to name a few.”

“Incentives aren’t limited to the new home market. (Realtor) Geneie Adams recently listed a 1,569-square-foot home for sale in Vail with an asking price of $224,900. The sale comes with a $2,500 allowance for flooring replacement and new paint, Adams said.”

“The huge inventory of houses for sale, along with the deep discounts being offered by many area homebuilders, may be some of the first symptoms that Maricopa’s housing market is starting to cool. Only 1,280 homes sold countywide in the final quarter of 2005. It’s the third straight quarter for declining new home sales in Pinal County.”

“With super-deep discounts being offered by area homebuilders in an attempt to boost sluggish sales, some are finding houses at lower prices than six months ago, an usual situation.”

“Builders are anxious to complete their communities and move on. Richmond American, for example, has sold about 90 percent of the lots in its Vision at Maricopa Meadows community, but has a large inventory of ’spec’ homes; houses that have been built but have not sold. As a result, the homebuilder is offering as much as $70,000 off the list price on some of the completed homes.”

“Other homebuilders are rumored to be offering up to a $100,000 discount on spec homes, while others are trying to attract buyers with cash toward closing costs or upgrades and attractive financing offers.”

“‘The builders are really tempting buyers with fabulous incentives such as discounts, added amenities, pool incentives and lender incentives. You can get in with no money down,’ said (realtor) Ray Morrow. ‘Basically it’s all about incentives. While we have this temporary abundance of supply, builders are eager to offer additional incentives making this time, more than ever, a great opportunity for buyers.’”

Lots of housing bubble news on the lending front. “The parent company of Ameriquest Mortgage Co. and Town & Country Credit said Tuesday it will close all of their 229 branch offices and lay off 3,800 employees nationwide as part of a plan to consolidate its retail mortgage lending operations.”

“‘We are moving strategically and decisively to remain a leader in an industry that is undergoing fundamental changes,’ CEO Aseem Mital said in a statement.”

“Ameriquest is the nation’s largest sub-prime mortgage lender. ACC also operates AMC Mortgage Services Inc., formerly Bedford Home Loans. In addition to the branch closings, effective as of Tuesday, the company was also trimming positions at its headquarters.”

“Mortgage banker Accredited Home Lenders Holding Co., a nationwide mortgage company specializing in non-prime residential mortgage loans, said Tuesday Income rose to $35.8 million, slightly below Wall Street predictions.”

“CEO James Konrath said, ‘Our company delivered another solid quarter of earnings and cost discipline, along with an increase in loan originations and portfolio growth. These results were accomplished during a quarter with the anticipated seasonally softer origination volume and a number of competitors lowering interest rates to borrowers while the cost of money was increasing.’”

“Doug Duncan, chief economist at the Mortgage Bankers Association, has a knack for making people feel secure and optimistic about housing’s future. ‘The housing market is normalizing,’ Duncan said. Loan age and the growth in high-risk market lending will add pressure to loan delinquencies. ‘Over half of all loans out there are less than 3 years old,’ Duncan said. ‘Loans tend to peak in probability of delinquency in 3-5 years of their life.’”

“(Economist) Mark Zandi said that ‘builders have done a pretty good job of matching supply and demand’ and that ‘nationally, house prices and supply will go flat in 2006, 2007 and 2008,’ which implies that there will be some price declines in key markets.”

And finally, interest rate news from Wrong-Way Bernanke. “Stocks fell on Monday after CNBC’s Maria Bartiromo revealed on air that Ben Bernanke felt his testimony last week had been ‘misunderstood.’ The anchor said Mr Bernanke had told her at the White House Correspondents’ dinner in Washington on Saturday that he had not intended the markets to infer that the Fed was nearly done raising interest rates.”

“‘It comes off as a great example of over-communication and a possible attempt to over-fine-tune, assuming he was willing to go on the record with these comments; CNBC is not the Fed’s obvious port of call to correct market expectations,’ said Alan Ruskin.”

A reader sent in this rare report on Lake Havasu City. “There are almost 1,100 single-family homes on the market in Lake Havasu City, the largest number of homes for sale in about three years.”

“‘There’s no simple answer, other than we have more homes on the market than buyers,’ said (realtor) Carl Flusche. ‘We’re starting the summer season so we’ll probably have a few good months and hopefully sell off some of this inventory.’”

“Home prices are on the rise as well, with the average price for a single-family home selling for $307,383. That’s up 23 percent from last year when the average price was $250,908. Meanwhile California home sales fell in March, the sixth month in a row of slumping sales in that state, down 12.5 percent from the same time last year.”

“It’s conventional wisdom among builders and Realtors that Lake Havasu City follows the trends of southern California, generally six months to one year later. But Bill Ullery with DBU Homes said slumping California sales and higher Havasu lot costs have not slowed local construction. ‘With the increase in the price of lots here, the type of house that’s going up is quite different now. You don’t put a $120,000 house on a $170,000 lot,’ said Ullery. ‘Our business is almost all large custom luxury homes now.’”

“‘My sense is that a lot of the customers coming in from southern California, about two-thirds of our market, are coming in with adequate financial resources,’ Ullery said.”

“Instead low-to-moderate income buyers seem to be moving north, Ullery said, and many Lake Havasu City residents mirroring the actions of the Southern Californians, selling their Havasu home high and buying a bigger home cheaper in the proposed subdivisions in the unincorporated areas of Mohave County, Bullhead City or Kingman.”

The housing bubble blues have hit the homebuilders. “Wall Street analysts pared back profit expectations for home builder Hovnanian Enterprises Inc. on Tuesday, reacting as the company warned that slowing housing markets, delays and materials costs would hit earnings this year.”

“‘While we have expected weaker trends in orders, we were surprised by the magnitude of the 20% decline in the quarter given the significant community growth,’ Daniel Oppenheim said. ‘The sharp decline in orders results from both lower gross orders and a significant uptick in cancellations, likely in the Southeast, Southwest and West,’ said Oppenheim.”

“The company ’seems to be underscoring that builders are being especially aggressive in liquidating inventory created by order cancellations, which is impacting margins sooner and more substantially than we had forecast in the short term,’ analyst Carl Reichardt said. ‘While the slowdown in many markets reflected in orders taken in [the second half of 2005] and later, many of which are yet to close, we are surprised by the magnitude of the earnings shortfall relative to guidance just two months old, highlighting the minimal visibility in the industry,’ analyst Ivy Zelman wrote.”

“‘Hovnanian is the first builder to report a quarter than includes April orders (since its fiscal quarter ended April 30), perhaps demonstrating that April continues to be weak,’ said Reichardt.”

“In another sign that the housing market is pulling back faster than expected, Hovnanian became the second major builder to take write downs in connection with land. Last week, rival Centex Corp. (CTX) took a charge of 14 cents a share in connection with the write down of certain option deposits and land parcels in Washington, D.C., Sacramento and San Diego.”

“The write downs sent up red flags for investors, who worried this was a sign that land values were sharply deteriorating, which could mean the housing market was falling fast.”

“The St. Joe Company today announced that its Net Income for the first quarter of 2006 was $3.7 million compared to $15.4 million for the first quarter of 2005.”

“‘We could generate additional quarterly earnings by slashing prices for our low-basis land. But those short-term earnings would be at a significant cost to shareholders,’ said Rummell. ‘It appears that speculators are no longer a major demand element in this market,’ said Rummell. ‘There are also a larger number of resale units on the market, providing further options to potential buyers. The size of the resale inventory suggests it will be some time before we return to a favorable balance between supply and demand in this market segment,’ he said.”

Some observers fear that Toll Brother’s focus on the fragile upper end of the housing market could mean further setbacks ahead. The stock has since fallen about 48% off its 52-week high of $58.67 last summer amid worries of a housing-bubble explosion.”

“What separates Toll from the rest of the major builders is its heavy focus on the higher end of the housing market. Targeting this affluent segment has been an attractive niche for Toll in recent years, but there’s worry now about how this strategy will pan out in a slowing housing market in which inventories are rising and discretionary housing sales might seriously slow.”

“The market will get the latest update when Toll releases new-home orders for its fiscal second quarter Friday, and the company could once again drag down the sector if the numbers look worse than expected. The stock fell below $30 in early February, when Toll posted a 29% drop in new orders for its first quarter. Toll pulled its fiscal 2007 earnings guidance in December and gave little comfort to investors in its first-quarter earnings report in late February.”

“‘One key thing hurting them is the inventory of existing homes for sale. That has surged,’ says analyst Greg Gieber. ‘Anybody who is buying a Toll house most likely has a house that they are selling or will have to sell in order to close on the Toll house.’”

“Big Builder Magazine released its annual report card of 21 top public builders today. The survey found that by the end of 2005 sales were slowing in the fourth quarter and cancellations were up. ‘”I’ve been saying on the record for the last five years that I didn’t think the next year was going to be as good. I was wrong for five years. Unfortunately, this year I’m going to be right,’ says Don Tomnitz, president and CEO of D.R. Horton.”

“The annual report also found that California-based KB Home had the biggest order backlog in 2005; a whopping 6,764 backlog, a 26 percent increase over the previous year. And Michigan-based Pulte Corp. had the largest number of lot inventories, 369,300, a 52 percent increase.”

“‘During the run up over the past few years, the tendency has been to look at these companies as a synchronized sector, but that’s all changing now,’ says John McManus, editor in chief of Big Builder. ‘In the next 18 months, underneath all the rhetoric that good markets will offset deteriorating ones, nearly everyone expects there’s going to be casualties among home builders of various sizes. The every-man-for-himself era among big residential construction companies has arrived.’”

A pair of reports on Florida. “After the developer of a downtown Naples condo project suspended sales and closed the sales center, a Fiddler’s Creek chef approached Naples developer Aubrey Ferrao in a panic two weeks ago. The chef told him he had just recently purchased a $450,000 home down the road from Fiddler’s Creek, and thought he could lose his substantial deposit.”

“‘I told him, ‘Don’t worry about it.’ But people like this are panicking, and that’s not good,’ Ferrao said. ‘The market is nowhere near what it is made out to be.’”

The News Press. “‘Stop packing.’ That’s the message from a south Fort Myers developer who has had a change of heart about turning apartments into condos. Experts say it’s the start of the reversal of a trend to convert apartment complexes into condominiums in a softening real estate market. Condo converters around the state are changing their plans.”

“Tenants of the Promenade, at Summerlin Road and Cypress Lake Drive in south Fort Myers, got fliers from managers last week saying ‘Stop Packing’ and urging them to renew their leases. ‘We are staying a rental community,’ the flier states. ‘For those of you who have given notice and would like to stay, we would love to have you.’”

“Competition from converters already in the market is fierce, Jack McCabe said. ‘What we’re finding is that concessions are now rampant with 70 percent offering some kind of incentive,’ he said. ‘They range anywhere from discounts on prices of as much as $20,000 to the first year’s mortgage payments made to the first year’s homeowner’s association dues paid.’”

“Converters are also wooing real estate agents, he said: ‘They’re offering broker commissions. ‘Bring us a buyer please, we’ll pay anything.’”

“While some Promenade tenants were relieved they could stay, for at least one couple renting there it’s too late to reverse course. Teddy and Alan Hogle, who have lived there for three years, decided two months ago to move when plans to go condo were announced.”

“They weren’t interested in buying their apartment and had been thinking of a move to Delaware to be closer to their children. Now they’ve decided to move to Newark, Del., said Alan Hogle. ‘Of course, by now, we’ve made our decision,’ he said. ‘Once you’ve decided on a course of action, then you get committed to following up.’”

The Washington Post has this update on the DC housing bubble. “Misty and Steven DiPietro have had a for-sale sign in front of their house for 83 days now. A neighbor’s has been there seven months. Down the street, there are two more houses for sale, and around the corner, four more. The 20176 Zip code area, where their two-year-old house stands, has the highest number of homes for sale in the region.”

“What’s happening in 20176 reflects a dynamic at play throughout the region. Homes on average are sitting on the market longer, in many neighborhoods, much longer than they did a year ago. Those who study local real estate markets say the homes are lingering for two main reasons: because of a housing glut in areas where builders put up large developments during the housing boom of the past five years and because of buyers who are counting on better prices as the market cools.”

“The neighborhoods with the most single-family houses and townhouses for sale are concentrated in Loudoun and Prince William counties. The Zip codes with the most condos on the market are closer in, most notably in Northwest Washington, the southwest portion of Alexandria, northern Reston and Aspen Hill.”

“‘If I’m a buyer, I would probably come in and try to lowball me,’ said Steven DiPietro.”

“(In) Potomac Crossing, where the DiPietros live, people talk about the latest adventures of sometimes-desperate home sellers, with neighbors trading tales about how much the asking price was reduced, friends keeping track of each other’s foot traffic. But making a house stand out can be tough when three others of similar style, size and age are up for sale on the same block. When her real estate agent made follow-up phone calls to potential buyers, Misty DiPietro said, they could only vaguely recall her house. ‘It’s a little discouraging,’ she said.”

“The DiPietros are moving to a larger house in Hamilton, to be completed in December, and have shaved $20,500 off their original $650,000 asking price after watching neighbors across the street reduce theirs and get a contract for that amount.”

“Ken Wasserman sat lamenting just how quickly the real estate landscape has changed. The house next door, he said, sold in a week last summer for $700,000. Wasserman and his wife, put their house on the market in November for $716,000. They waited. And waited. Aware of developers offering tens of thousands of dollars in incentives on new homes in the area, the couple recently reduced the asking price to $680,000. Any nibbles? ‘Nothing. No offer,’ Wasserman said.”

“Chris Downs, 25, a potential buyer, is considering buying his second townhouse and renting out the first, which he bought in 2004. Downs plans on negotiating hard. ‘There are a lot of choices,’ he said. ‘When you look at these brochures, they’re just slashing prices.’”

“Alicia and Jeff Hennie, whose Columbia Heights condo hit the market Thursday with a $399,000 price tag, say they are prepared to wait it out, at least for a few months. Their one-bedroom unit is in the 20009 Zip code, which has the highest inventory of condos in the region. The couple is looking at a May 20 move-in date for a brand new condo downtown in the 20001 Zip code, another area with high condo inventory.”

“‘We don’t have to have it sold right away,’ said Alicia Hennie. ‘But we don’t want to carry two mortgages. We’ll see what happens.’”