The Housing Bubble

The Boston Herald takes us back to Massachusetts. “Boston’s waterfront, the epicenter of a high-rise condo building boom, is starting to see a trend that might make even the most bullish real estate investor flinch, skydiving prices.”

“The average price of a harborside condo perch plunged nearly 40 percent during the first quarter compared to the same period last year, falling to an average of $564,944, according to the Listing Information Network.”

“That’s down from $902,644 in the first three months of 2005, widely considered to be the high-water-mark of the recent, record run-up in real estate prices. The price declines came even as the number of waterfront condos sold more than doubled.”

“The disturbing data emerges against a backdrop of frenzied construction activity, with developers racing to open a pair of glitzy new waterfront towers, one near Rowes Wharf and the other on the North End’s harborfront. ‘The overall market is still very slow,’ said (broker) Brian Rugg.”

“Would-be home sellers clinging to dreams of a real estate jackpot amid a down market now face a surprising new foe, their friendly local real estate agent.”

“With a growing backlog of unsold homes and condos across the Boston area, some brokers are declining to take on new listings that involve sellers with outsized dreams of real estate riches. In a down market, brokerage shops have to be more selective. For every home or condo that doesn’t sell, brokers still have to shell out money to list and advertise, note real estate executives like John Ford, who runs a small Beacon Hill shop.”

“It is a tactic that one well-known local real estate researcher, Wellesley College’s Chip Case, believes harkens back to the last big real estate downturn that began in 1989. ‘They need deals, bad,’ Case noted. ‘We certainly haven’t seen it since the mid 1990s.’”

“The brokerage shops turning to this tactic range from one of nation’s biggest residential real estate firms to small and mid-sized local shops. Traditionally, brokers aggressively went after every listing, outrageous or not. With the business in hand, the broker felt he or she could later talk down the seller, executives said. No more.”

“While Rugg told brokers they are to go all out in the pursuit of homes and condos to sell, they were also told not to come back with grossly overpriced listings.”

“Ford, whose Beacon Hill firm specializes in high-end properties, recently found himself turning away prospective sellers for the first time. ‘I am getting killed on advertising costs,’ Ford said.”

The Union Tribune in San Diego has this on predicting the housing bubble. “Although the Anderson Forecast has long been dour about the housing market, the most recent data suggest that the recent home-price boom is coming to an end. The Anderson Forecast has been predicting a slowdown in home prices since mid-2003. To many of its critics, such warnings sound a bit like the boy who cried wolf.”

“‘We’ve gotten lots of hate mail,’ Thornberg said. ‘The letters go something like this: ‘Dear Mr. Thornberg, I listened to your prediction and sold my house a month ago, and now home prices are up 35 percent. My wife hates me. You’ve ruined my life.’”

“Thornberg added that in an irrational market, as real estate has been for the past few years, it’s hard to make an accurate prediction of when a slowdown will occur. ‘It’s like trying to predict what a crazy man will say next,’ he said. ‘If you could do that, it would probably mean the man wasn’t crazy.’”

And Rich Toscano takes on the issue. “A recent article on the endless housing bubble debate quoted California Association of Realtors economist Robert Kleinhenz’s criticism of the UCLA Anderson Forecast: ‘in 2002, 2003, 2004 and 2005, they said ‘housing bubble, housing bubble, housing bubble, housing bubble.’ So they got it wrong four years in a row.’”

“Kleinhenz’s reference to past Anderson Forecast analyses reminds me very much of a typical reaction I have observed when talk turns to San Diego real estate. ‘They’ve been talking about a housing bubble for years,’ says the listener with a dismissive wave of the hand. And thus, like magic, are fears of a home price decline put to rest.”

“This attitude makes little sense. For one thing, it’s not exactly clear how what ‘they’ said in the past is pertinent to what’s actually going on now. This is, or at least should be, a question of facts and evidence, not of who said what and when they said it.”

“But more importantly, people who employ this reasoning are misunderstanding what one actually means when one claims that there is a bubble in the housing market.”

“To say that there is a speculative bubble in a given asset class is to say that prices of that asset have been driven to unreasonable heights based on exaggerated expectations of further price gains. It is also to say that when those lofty expectations finally fade, prices will revert to more reasonable levels. But what happens between now and then is anyone’s guess.”

“If further price increases take place after a bubble is identified, it doesn’t mean that there wasn’t a bubble in the first place. It simply means that, as overpriced as the asset may have been in the past, it’s even more overpriced now.”

“Those who have asserted the existence of a San Diego housing bubble in the past few years may end up being wrong. But they may also end up being right. There’s simply no way to be sure until this whole thing plays out.”

“In the meantime, before dismissing the claims of seemingly premature housing bears, remember the Economist magazine’s two rules of asset bubbles: that they always last longer than anyone expects; and that they always eventually burst.”

This Fortune piece has people talking about the housing bubble. “The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others. The stories keep piling up. In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials.”

“The message is clear. Five years of superheated price gains rescued America from stock market collapse, put billions in consumers’ pockets, and ignited a building boom that bolstered the nation’s economy. But it’s over. The great housing bubble has finally started to deflate.”

“Contracts are being canceled, deals are drying up, prices are starting to drop. The psychology is shifting even as thousands of new homes and condos join the for-sale listings each day, so the downward pressure will only get worse.”

“Things are suddenly looking very chilly indeed in four coastal cities; Boston, Washington, Miami and San Diego, as well as three Western boomtowns: Phoenix, Las Vegas and Sacramento. So far this year, monthly sales have fallen 11 percent to 25 percent in Miami, Boston, northern Virginia and San Diego.”

“The prognosis is even worse in Phoenix, where only 4,500 homes sold in the first three months of 2006, vs. 6,100 for the same period last year, and in Sacramento, where new-home sales plunged 57 percent in the first quarter.”

“The problem is as basic as beams and trusses: The triple threat of soaring prices, higher mortgage rates and relentlessly rising property taxes has drastically increased the cost of ownership and put many homes out of reach for a huge number of potential buyers.”

“With houses hovering beyond the reach of most potential purchasers, formerly frantic markets grow eerily calm. Sales shrink as buyers float low-ball offers, and sellers refuse them. Realtors and mortgage brokers find other jobs. The bubble areas turn into Dead Zones.”

“There’s no mystery about what it will take to close the affordability gap and bring the markets back to life: Prices will have to come down, and incomes will have to move up. The only question is how much of the adjustment will come from rising incomes and how much from falling prices.”

“Many individual homeowners have nothing to worry about: They can simply stay put and ride out the cycle. The only thing they’ll lose is the opportunity to brag about their paper profits. The real losers will be those who bought recently at inflated prices and are forced to sell, usually because they’re taking a job in another city or can’t make the payments when their adjustable mortgage rate jumps. And speculators who bought overpriced condos in hope of a quick killing are going to get hosed.”

Reuters reports that the layoffs in the mortgage business may just be starting. “The decision by the parent of Ameriquest Mortgage Co. to fire one-third of its employees may be the most sweeping recent overhaul by a mortgage lender as rates rise and borrowers retreat. It may not be the last.”

“The announcement by Ameriquest’s parent ACC Capital reflects an industry groaning as loan growth slows, competition rises, margins narrow, and some 500,000 people hope to keep their jobs. ‘A year from now, I expect employment in this industry to be 20 to 25 percent lower,’ said Michael Moskowitz, president of a New York lender. ‘This will be driven by a need for increased efficiency, and lower production.’”

“‘We think 40 percent of the people who are buying homes are merely speculators,’ said David Olson, co-founder of Wholesale Access, which tracks the industry. ‘It would be good for prices to burst, because sooner or later no one will be able to afford a house.’”

“Olson said: ‘We’re hearing that many of the medium-sized lenders are dropping out or are for sale, and most subprime lenders are struggling. If you can find buyers for these firms at all, the prices are not high.’”

“Mike Fratantoni, senior economist at the Mortgage Bankers Association, expects originations to fall to $2.4 trillion this year from $2.8 trillion in 2005, and $4 trillion in 2003. Jobs may follow suit.”

“Equity Now, which employs 40 people, recently made its business entirely electronic to improve efficiency. ‘From a mortgage banker’s point of view like mine, I’m being squeezed when I offer a mortgage, and then squeezed when I try to sell it,’ Moskowitz said.”

The New York Post reports on how the Ameriquest move played out in one office. “In the bloodbath yesterday employees were assembled in their offices with security guards and fired en masse by a telephone recording from Ameriquest CEO Aseem Mital.”

“‘It was cold, and short and sweet; we were told to turn in our keys, empty our desks and get out by the end of the day,’ said mortgage broker Carl Edgett, one of nine brokers left jobless in the firm’s South Ferry, Conn., office. ‘If we had questions about our severance and commissions due us, we were told to call a number, but when we called it was just an answering service’s voicemail box.’”

Update: Readers sent in this breaking news from the Seattle Times. “Kirkland-based mortgage company Merit Financial will meet with its 300 employees this morning to let most of them go as executives decide whether to file for bankruptcy, according to two people familiar with the company’s plans.”

“Merit was founded in 2001. It grew quickly from a company with 12 employees and $50 million in loan volume its first year to passing the $2 billion mark in cumulative loans last May. At that time, it had 430 employees and planned to hire more.”

“Like others in the mortgage business, Merit fell on hard times as the refinancing market dried up. Six months ago, it laid off about 20 people in its lending division and stopped making loans itself, acting only as a broker. The problems at Merit are peaking just two days after Ameriquest announced the elimination of about a third of its work force, 3,800 people.”

“Rising interest rates and declining demand for mortgages are expected to lead to more job losses at mortgage firms.”

A Boston TV station is reporting on the ’sea change’ in that housing market. “Say goodbye to the inflated prices in the housing market. There’s a sea of change in the real estate market in Masschusetts. Median prices are down and so are house sales and inventory is up, so it’s a buyer’s market. The landscape has changed a lot, even in the past few months, so if you’re in the market to buy, how low can your offer be?”

“The Duffys just closed on a four bedroom home in Norfolk. Compared to last summer’s asking price, their dream home is a bargain. ‘We were looking at houses that were more expensive, knowing we could go in there and offer less,’ Danielle Duffy said.”

“In July, the home listed for $729,900. ‘We ended up buying it for $630,000,’ Duffy said.” “With prices dropping and inventory high, many buyers feel the market is theirs to manipulate. For the first quarter, sales of single-family homes were down 8 percent, and the median sales price was down 2 percent from last year.”

“The industry calls the soft market a correction, not a bubble burst. Sellers can still make a healthy profit, but those fat sale prices must slim down. ‘For the seller, I would say price the property according to the market. Don’t have an inflated number. That doesn’t work. What happens is you carrying the property, and 99 percent of the time you end up having less,’ Realtor Dee LeBlanc said.”

“Gail Peckham is hoping to make the most of this new real estate reality. She’s been shopping for a condo in Waltham for 12 months. ‘I wouldn’t offer asking price today as I would have last year, because I know I could get less,’ she said.”

A new survey on south Floridas’ housing bubble. “Softness dating back to the end of the third quarter has continued in the first quarter, the South Florida (Metrostudy) division has reported. The division, which includes Palm Beach, Broward, Miami-Dade, Martin, St. Lucie and Indian River counties, said the slowdown was influenced by a number of factors, including buyers’ concerns about purchasing homes at the height of the market, as well as investor supply.”

“‘The increased supply of finished, vacant homes illustrates the slowing market, with 4,141 unoccupied homes, an increase of 57.6 percent compared to 2,627 units one year ago,’ said Bradley Hunter.”

“Metrostudy said it is also tracking more than 207,000 future lots in subdivisions soon to begin development or in existing communities where new phases of development are about to start. Nearly half of that new supply is in St. Lucie County and more than one-quarter is in Palm Beach County, the company said.”

“There are 831 active subdivisions in South Florida and 759 future subdivisions planned for home construction, Metrostudy added.”

“The supply of finished, vacant homes in Palm Beach County was only 353 units, but Metrostudy said there were 5,623 units under construction. ‘There are 20,000 single-family and multi-family units on the resale market, suggesting that a large number of sellers who are not in brand-new homes are testing the water,’ Hunter said.”

“With 349 finished, vacant units and 2,515 homes under construction in Broward County, Metrostudy said there is a 13.2-month supply of inventory. Hunter said, ‘How long the investor supply will depress absorption will vary greatly by submarket and product type.’”

“In Miami-Dade County, Metrostudy said the 10-month supply of vacant, finished homes and units under construction is slightly high.”

From Reuters, “Keys homeowners are also socked with Florida’s highest insurance premiums. Citizens Property Insurance proposed a base windstorm rate of $20.91 per $1,000 of insured home value for this year. Key West resident David Lane and his wife recently listed their historic 2,000-square-foot (186-sq-m) home at $1.5 million and plan to head to Asheville, North Carolina. Their windstorm insurance premium: $12,700.”

“‘If a really bad storm hit here, a big part of the value of our house is the land. What would the land be worth?’ David Lane said.”

“On Big Pine Key, resident Pam Henry said she is struggling to pay $16,000 a year in property taxes and home insurance, and is moving to central Florida. ‘The hurricanes put the icing on the cake,’ Henry said.”

“‘You pay $400,000 for a trailer that’s going to be junk soon. It’s incredible,’ said Jose Cuevas.”

The News Press. “Southwest Florida pawn shops have become stop-offs for some residents looking for a few extra bucks to fill their gas tanks. ‘The biggest thing right now is gas and real estate taxes,’ said Tim Velasco, owner of Gold & Pawn, Fort Myers. ‘They’re pawning TVs, VCRs, DVDs to get from Fort Myers to Naples.’”