The Housing Bubble

The Las Vegas Review Journal found some housing skeptics. “Las Vegas housing expert Dennis Smith is seeing mixed signals in the local market, which seems to be cooling like the national market. Smith, president of Home Builders Research, counted 3,632 new home sales in March, bringing the first-quarter total to 9,366, an 18.6 percent increase from the same period a year ago.”

“Activity was also strong in March with 3,022 building permits pulled. The year-to-date total of 7,773 represents a 16.6 percent increase from last year. Pretty impressive, Smith said, but those numbers don’t tell the whole story.”

“‘To suggest this translates into a wonderful, booming housing market is wrong,’ he said. ‘Ask any builder. There’s been slowdowns for a lot of builders in getting new projects started,’ he said. ‘Some of the permits that have been pulled this year should have been processed three to six months earlier.’”

“The resale market is also showing declining numbers. There were 10,914 existing homes sold through the first three months of the year, down 14 percent from the same quarter a year ago. The Greater Las Vegas Association of Realtors reported a 10.4 percent decline in home sales in January, a 12.3 percent decline in February and a 19.4 percent decline in March.”

“Realtors reported more than 17,000 listings on the MLS in March, a record, though they’re saying 64 percent of the houses are selling within 60 days.”

“Smith has his doubts. ‘We can drive through many neighborhoods and see listing signs that haven’t changed for months,’ he said. ‘One statistic we haven’t seen in print anywhere is how many of the active listings are vacant. Care to guess? Let’s just say it is probably more than you think.’”

“He calls it ‘investor hangover’ from the last couple of years.”

“Resale prices have been stagnant since August. The March median of $285,000 is 10.9 percent more than a year ago and will probably show double-digit increases for the next four months. After that, homeowners can expect gains of 2 percent to 4 percent, Smith said.”

“The slowdown in the housing market is showing up in other areas. Fewer home loans are being approved in the ’slam dunk’ category as lenders tighten the screws in a real estate market with narrowing margins of error, said Mike Ela. Slam-dunk loans are those provided with a minimum of underwriting fuss when applications are subjected to collateral review.”

“‘As appreciation rates come down, fewer mistakes will be submerged by a rapid rise in home values,’ Ela said. ‘There may be some added caution because federal regulators have told the lending industry to be more careful, especially when it comes to loans in the so-called sub-prime category.’”

Some home builder news. “Brookfield Homes Corporation today announced financial results for the first quarter ended March 31, 2006. Housing revenue totaled $122 million, compared to $143 million in 2005.”

“The decrease in housing revenue is primarily due to fewer units closed during the quarter compared to 2005, and a decrease in the company’s average home selling price to $634,000 from $645,000 in 2005.”

“Growth in earnings per share is a result of the company’s 2005 share buybacks and tender offer.”

“With the slow demand for new homes in the San Diego/Riverside and Washington D.C. markets, it will be mid-summer 2006 before a better assessment of the 2006 home closings will be made. The company’s lots owned or controlled total 29,660. Direct ownership of 12,855 lots provides strong visibility on our future cash flows, and 16,805 lots under option.”

“Total starts of California’s single and multifamily housing dropped 19.5 percent in March from the same period a year ago, the California Building Industry Association announced Tuesday.”

“‘The housing market has cooled from the levels of the past couple of years and builders are adjusting,’ said Layne Marceau, CBIA chairman. ‘We expect that once standing inventory levels are reduced we will see a stable and healthy market, and that 2006 will be a good year for home building around the state.’”

From Utah. “Washington County businesses gathered Tuesday afternoon to learn more about issues surrounding economic impacts of home building. Housing policy economist Elliot Eisenberg, Ph.D., geared the presentation toward answering one question; does growth pay for itself?”

“‘Do the taxes generated from the enterprise cover the cost of infrastructure?’ asked Eisenberg, speaking in terms of building schools, jails, fire, water and waste departments as well as maintaining the services. His answer; an emphatic ‘yes.’”

“‘People who say home building wrecks the quality of life…it’s a subjective argument,’ said Eisenberg, noting bigger cities enable citizens to enjoy more redundant infrastructure.”

From Arizona. “They’re the ones who will quadruple Florence’s nonprison population. They’ll stretch the definition of “East Valley” even farther down Hunt Highway, farther into Pinal County. Their presence will demand new retail, medical and school facilities in the county and town.”

“The first residents of Anthem at Merrill Ranch will make their homes there this summer, and, for a while at least, they’ll travel on two-lane roads to do it. Florence Town Manager Himanshu Patel said probably more than 100 of the roughly 9,100 homes in the subdivisions have been sold. He said the home construction is generating excitement in the town of 5,400.”

“John Montgomery said he was looking for a second home as an investment property. Family homes at Anthem range in starting prices from $179,900 to $449,900 and in size from 1,250 square feet to 4,223 square feet. ‘Pinal County’s booming and you’ve got the lower prices here,’ Montgomery said.”

“A discovered treasure is what Will White, a land broker for Arizona Land investors in Tucson, said Benson has become for incoming developers. One of those developments is Whetstone Ranch. The 20,000-home development covers 15,500 acres along State Route 90.”

“As developers have started looking at Benson, property values here have already doubled and tripled, White said. White said only time will tell if all the land purchases, developments and visions of greatness will actually pan out.”

“One sign of success in Benson is the number of homes being sold in the 201-home Kartchner Vistas subdivision Meritage Homes is building the development on the west side of State Route 90. Shelley Corsi, a sales assistant for Meritage, said they have already sold 26. With prices ranging from $229,900 and $279,900, the homes sizes range from 1,400 square feet to 2,280 square feet.”

“‘Meritage has the market right now because they had the foresight,’ White said. ‘”They are selling homes without even having a model up. That is a very good sign.’”

The California press reacts to the foreclosure data. “First-quarter foreclosure activity in San Joaquin County hit the highest level in two years as the slow housing market made it tougher for owners to sell homes. San Joaquin County’s foreclosure notices jumped nearly 30 percent year to year.”

“A crunch over mortgage defaults hasn’t shown up yet, although mortgage-related credit counseling inquiries have been increasing, said Richard Pittman, coordinator for a nonprofit counseling service in San Joaquin County. Many homeowners refinanced four, five or six times, using the fast-growing equity as sort of a piggy bank from which to pull cash, Pittman said.”

“‘So from that standpoint, the good days may be over,’ Pittman said.”

“In Santa Cruz County, 108 homeowners received notices of default in the quarter, according to Andrew LePage, a DataQuick analyst. That’s a 61 percent increase from the first quarter of last year, when there were only 67 notices sent out, said LePage.”

“DataQuick President Marshall Prentice said the hike was largely driven by the slowing of annual home price increases, which makes it harder for homeowners to sell their homes and pay off lenders.”

“A rise in default notices would probably not directly influence home prices in Santa Cruz County, but it could contribute to the number of homes on the market growing, said (realtor) Gary Gangnes. ‘If a lot of people are in default and they can’t make the payments, the next thing is to try to sell the house,’ said Gangnes. ‘It would affect pricing if unsold inventory index gets abnormally high. If it gets to be a 12 months’ supply, that could put downward pressure on prices.”

“Economist Stephen Levy agreed the jump is not worrisome in itself but said it could be a sign of building stress in the housing market. He said he believes that many home owners will be at greater risk for foreclosure in the coming months, as teaser rates on the adjustable-rate or other riskier loans that helped fuel the recent real estate boom adjust to higher minimum payments.”

“The percentage of East Bay buyers who opted for adjustable-rate mortgages increased from 3.4 percent in 2000 to 28.2 percent in 2005.”

“An increasing number of Sacramento-area residents are behind in their mortgage payments, putting them on a track to foreclosure. ‘We’re definitely seeing the number of calls increase related to foreclosure,” said Jennifer Harris, of Sacramento’s Home Loan Counseling Center.”

“She said people who stretched themselves too far to buy a house are seeing payments rise $150 to $200 a month and asking, ‘What am I going to do?’”

“Many lack easy options to get themselves out of trouble, said Vicky Henderson, loan consultant in Sacramento. ‘I can’t tell you the number of people who call who want to finance into a fixed-rate loan, and I can’t. They don’t have the value,’ she said.”

The Washington Post. “A greater proportion of mortgage refinancers tapped their home equity for cash in the first three months of this year than in any other quarter in the past 15 years. About 88 percent of people refinancing their homes took out loans for at least 5 percent more than their original balances.”

“‘If you are watching and listening, the Fed is telling you interest rates are going to climb,’ said Amy Crews Cutts, deputy chief economist at Freddie Mac.”

“‘Our policy of using our homes as our banks is bad public policy, and we need to think of the long-term implications of the debt we have. It’s a homeownership economy where people don’t really own their homes,’ said Ira Rheingold, general counsel of the National Association of Consumer Advocates.”

“Mahesh Desai decided that because interest rates were about to rise, it was time to refinance his house in Darnestown. ‘I’m still going to have sticker shock in my next payment, but I’ve enjoyed lower rates for a while,’ Desai said. ‘Guess the party’s coming to an end.’”

“His new rate is 6.625 percent, and the monthly payment will jump 72 percent. It is an interest-only loan, but he will be pressed to afford the new payment, even without paying down the principal. ‘I’m going to work harder and sell more,’ he said. ‘I don’t have a choice.’”

Some press reaction to the Ameriquest layoffs. “The parent of Orange-based Ameriquest Mortgage said Tuesday it would lay off one-third of its nationwide workforce and close all 229 of its retail branches, in the latest sign of retrenchment in the real estate market. The move to cut 3,800 jobs from a total of 11,000 is a dramatic shift by Ameriquest, which in recent years became one of the largest lenders to people with poor, or subprime, credit ratings.”

“As the company boomed, it faced allegations that some sales agents used heavy-handed tactics and deception to persuade consumers to take its loans.”

“Some analysts said the decision to jettison Ameriquest’s branches suggested that the company might be concerned it couldn’t effectively control what went on in those offices. ‘I would guess it is very difficult to provide profit incentives to branch managers in far-flung locales and expect them to comply with all relevant laws,’ said Daniel K. Osborne, a Phoenix-based investment fund manager.”

“A number of mortgage lenders have cut staff in recent months, including Washington Mutual Inc., Aames Investment Corp. and ECC Capital Corp. Orange-based Acoustic Home Loans, like Ameriquest a subprime lender, closed its doors last month. Orange County has been home to many subprime lenders.”

“‘This is an inefficient market, dominated by many undisciplined participants’ who have been pricing their loans below cost in an attempt to gain market share, analyst Mike McMahon said. Cutthroat pricing has guaranteed a loss on virtually every transaction, he said. Irvine-based ECC Capital said that in the fourth quarter it was, in effect, making loans for $102 and selling them for $101.”

“Ameriquest slashed 1,500 jobs in December. A sister company, Argent Mortgage, laid off 640 people in January. The closures include a handful of Ameriquest and Town and Country retail branches in Sacramento, Rancho Cordova and Stockton, possibly affecting dozens of employees in the region.”

“The nine Massachusetts branch offices of the huge mortgage company Ameriquest will close as part of a nationwide cut of 3,800 jobs. The largest subprime lender in the Boston area, Ameriquest wrote $3 billion in mortgages in 2004 in Massachusetts.”

“During his first day on the job Monday, Dennis Carroll eagerly looked forward to a bright future as the new manager of the Ameriquest Mortgage Co. office in downtown Salt Lake City. Carroll and 11 other employees were told that effective immediately embattled Ameriquest was closing the Salt Lake office.”

“‘When they started courting me in February I was reluctant to even consider their offer. I was OK with the job I had,’ Carroll said. ‘But they kept making their offer sweeter and sweeter and after awhile I started looking forward to starting a new life with my family in Utah.’ Now, Carroll said, he’s stuck in Utah without a job.”

“A banking giant shut down all of its branches in Western Washington on Tuesday, leaving thousands of local customers in the lurch. Ameriquest is closing 26 branches in Washington state. Peter Demerick of Bremerton thought all he needed to do was fax his mortgage papers in to Ameriquest. But he didn’t expect to get a disconnected number, and now he’s still trying to get answers.”

“Demerick is sure his mortgage broker had no idea. ‘I’m sure he was totally shocked. If he knew about this yesterday, he was a great actor. At this point they’re cutting and running.’”

From CNN Money. “Those looking to glimpse the future of the housing market may want to start watching help-wanted ads rather than the real estate section. Experts who say the housing market is cooling, but won’t implode, argue that solid job growth should be enough to prevent a collapse in home prices. But others who see a housing ‘bubble’ ready to pop say a developing slowdown in home building itself could hurt job growth enough to put a big dent in housing.”

“‘We’ve been building too many homes in a market maintained by speculation. And job growth is not going sustain that,’ said Dean Baker, an outspoken advocate of the housing bubble theory.”

“Add job losses at mortgage firms, building supply retailers and real estate agencies and the downturn in home building could itself further weaken one of the key supports for real estate. One of those worried about just that is James McShirley, owner of Sulphur Lumber near Indianapolis. He’s already laying off staff and not filling open positions due to a slowdown in orders from his builder clients.”

“‘We’re holding off as much as we can because qualified people are hard to find,’ he said. ‘But there will come a point where we have to face that (more layoffs) and it could be soon.’”

Some reports on falling prices in Hawaii. “Some 332 single-family homes and 584 Oahu condominiums changed hands last month, compared to 418 single-family hones and 754 condominiums a year earlier, according to statistics released yesterday by the Honolulu Board of Realtors.”

“The significant drop in sales transactions also has been linked to the 5 percent or so drop last month in median prices for both houses and condos. Oahu’s median single-family home price fell to $615,000 in April from $650,000 in March. Condominium prices fell to $296,500 in April from $312,000 in March.”

“For the full year, prices are expected to increase between 10 percent to 15 percent, said Harvey Shapiro, economist at the Board of Realtors. ‘We’re still on our way up,’ Shapiro said, though an increase in the number of homes for sale combined with a rise in prices and interest rates is expected to create further slowdown in the marketplace.”

“Last month, 1,644 single-family homes were on the market, more than double the 814 that were listed in April 2005. The number of condominiums that were on the market last month, 2,278, was nearly 2.5 times the inventory recorded during the same period last year.”

“‘The market is a supply and demand model and right now supply is expanding but demand is not,’ Shapiro said.”

“Some in Honolulu’s real estate industry blame April’s dampening in home sales on the rain. While weather could have played a factor in the market last month, it’s unlikely that it could have been responsible for such dramatic fluctuation, said (broker) William S. Chee. ‘I’ve never heard anyone here blame the real estate market on the weather, that sounds like something you’d hear from a much colder climate,’ Chee said.”

“Honolulu’s residential real estate market has been cooling since last October, he said, and sales are expected to continue softening with prices appreciating at a slower pace.’

“Experts say home buyers are finally gaining an edge. The saying goes that patience is a virtue, and for home buyers, patience may finally be paying off. ‘You can’t just put anything at all on the home and ask any price you want to like you could a couple years ago,’ says Mary Flood, Honolulu Board of Realtors president.”

“A property in Makiki Heights has been on the market for five months. The owners, who live in Virginia, were originally asking for $1.2 million. The price today for the four-bedroom, three-bath property is $988,000. Industry insiders say there’s plenty to choose from, especially new condo projects.”

The Florida press notes a report calling on builders to stop building. “Home construction throughout the Treasure Coast soared in the first quarter, pushing inventory levels to a record high, according to an industry report released Tuesday. The number of starts adds more inventory to an already saturated market for existing single-family homes, said MetroStudy.”

“‘Historically, these are very high figures. They’re actually the highest amount of finished inventory I have ever seen,’ said Brad Hunter, a housing economist for MetroStudy. ‘I think builders should be concerned.’”

“Levels were high in St. Lucie County, with 747 homes started during the first quarter, compared to the 528 during the first quarter of 2005. There were 844 finished vacant homes in the county on March 31.”

“‘This is not the time to build commodity homes unless they (developers) can build them better and/or less expensively than anyone else,’ Hunter said. ‘Speculators have an overabundance of commodity homes, all at competitive prices.’”

“There were 897 homes under construction or finished and vacant in Martin County, about a 14-month supply. Indian River vacant homes rose to 598 units during the first quarter, which drove the inventories to a 13-month supply.”

“Housing experts said the numbers don’t bode well for builders on the Treasure Coast. ‘This is the reason we’re seeing builders offer so much in incentives,’ said Richard Hope, president of Treasure Coast Builders Association. ‘Buyers are seeing a widening of choices, so builders are really having to stand out with their products.’”

“Builders also are competing with investors who want to flip properties they bought at lower prices last year, said Jack McCabe. A stagnating re-sale market isn’t helping builders, he said. ‘Builders who continue to put up spec homes without a signed contract, well, that’s just foolery on their part,’ McCabe said. ‘There has been a dramatic shift in the market since the speculators left the market.’” .

“McCabe said that with sellers no longer able to push up prices, the rental market is changing. He said the growing trend of South Florida re-conversions, apartments converted to condos and put back on the rental market by their investor-owners, has entered the Treasure Coast.”

“‘The Treasure Coast is just saturated with for-sale and for-rent signs. What does that tell us about the reality of market conditions?,’ McCabe said.”