The Housing Bubble

Time to clear off the desk and start the weekend. “Allow me to offer a new twist on an old gag. Question: ‘How can you tell when a home-selling industry insider is lying?’ Answer: ‘His lips are moving.’”

“Now, now. I’m not talking about specific agents here (although if you want to hear the one about the agent who tried to sell us a townhouse with a collapsing foundation for a mere half million bucks, let me know).”

“No, I’m talking about the housing industry as a whole. You know all those Sunny Jims who refused to see a single cloud in the sky. How about all those mortgage-industry mouthpieces who helped drive up home prices over the past few years to the constant drumbeat of ‘Get your foot in the door before it’s too late! No need to run the math on that loan to see what happens if interest rates go up! By then your equity increase will take care of it!’”

“Yeah, we had to tiptoe through this widespread load of manure, even as, all around us, the real story was evident. I’d like to give a round of applause to Toll Brothers CEO Robert Toll, for his unvarnished and very interesting remarks on the current state of the housing market. The speculators are moving out, and prices are falling as supply increases. Doesn’t that sound like exactly the thing all those people said wasn’t happening?”

Mr. Tolls’ master plan. “Toll’s general tone was that the housing market and the company’s sales would be okay in the end. ‘The next real estate story will be pent-up demand,’ Bob Toll said.”

“After a five year growth spurt in which it says it wrote $2 billion in home loans, Kirkland-based Merit Financial terminated most of its 300 or so employees Thursday. ‘The thought process was the refinance market would always be there,’ CFO Ryan Kidd said. ‘It was a very lucrative market.’”

“Nationwide, approximately $400 billion of first-lien (first mortgage) ARMs are scheduled to reset at some point in 2006,’ (economist) Frank Nothaft said. In fact, the ARMs with scheduled payment increases during the coming year work out to about 5 percent of all the single-family debt outstanding in the country now, he said.”

The Denver Post. “Several years ago, the average first-time homebuyer was 30 years old,’ said broker/owner Justin Juarez. ‘Nowadays, there are people who are 18 or 19 years old.’”

“Generation Y buyers are more technically savvy than the Gen-X buyers who preceded them. Generally, they’ve done their homework online before physically inspecting the house. ‘They already have their minds made up before they get in the car,’ Juarez said.”

And the Washington Post Q&A was a hoot. “Dupont Circle, D.C.: Thanks for the chat, Maryann! I bought a studio condo in Dupont in 2002. I’m happy that when I move to New York this year I will rent again. I’m selling this weekend. Any tips on further spreading news of the sale?”

“Maryann Haggerty: And as far as selling this weekend: I assume you mean putting the place on the market this weekend, right? You have bought your ad in the Post already, right? After that, I gather pretty-colored balloons out front help!”

ABC has this preview of a show on flipping in Florida. “‘Flipping’ in real estate lingo means buying and quickly reselling properties for big profits. In south Florida and other popular real estate markets, it got to the point where people were buying and flipping contracts on condos before they’d even been built.”

“Mark Zilbert, a Miami real estate broker, estimates that at one point, up to 80 percent of condo purchases were purely speculative investments, made by people with no plans to ever live in one of the tens of thousands of new condos transforming the Miami skyline.”

“By last winter the Florida real estate market had taken a dramatic turn. ‘It stopped, frozen. Selling investment property was very difficult,’ said realtor and investor Peter Celnicker.”

“Celnicker came to Florida as the market was soaring. Then, almost overnight, the market changed. ‘I mean, it was really that quick. [It] went from an absolute seller’s market where you could sell a property literally in 24 hours to a buyer’s market where it can take three, four months to sell a property,’ Celnicker said.”

“There are a lot of unknowns today in south Florida real estate, where there’s concern that words like ‘hot’ and ‘flip’ may soon be replaced with ‘chilly’ and ’stalled.’ One reason: Experts now say Miami Beach has perhaps the most overvalued real estate in America.”

“‘Construction costs have gone up, prices have gone up and so there is a point, we think, that buyers are reluctant to overpay for an apartment, especially when there’s an oversupply,’ said Zilbert.”

“He remembers the moment he realized the market was changing. ‘There was a day that I woke up at the launch of a new building, and I contacted my clients and I sent out my e-mails and I did my advertising, and not a single person wanted it. Not a single person showed up. And the feedback was, ‘I think prices are gettin’ outta control,’ Zilbert said.”

“Celnicker agrees that desperation has hit the south Florida real estate market. ‘I think there’s going to be a lot of desperate sellers,’ he said. And speculative investors who bought into the high-priced, preconstruction condo market in south Florida may be in for a rough ride, Celnicker believes.”

“Buyers, Zilbert says, are becoming more cautious. ‘There’s not a day that goes by that I don’t take a buyer to a property he or she will find something he absolutely adores, wants to purchase it, but at the end of every conversation is, ‘I think I’m going to wait six months and see what happens.’”

“If you’re ready to buy a south Florida residence right now, the market could be working in your favor. Take those Delray Beach condos launched last summer. It turns out 40 percent of those units are still available, and some of the prices have dropped dramatically. That’s good news for new buyers, but not so good for those who paid $100,000 more just eight months ago.”

The Arizona Republic has these updates on the states’ housing bubble. “Skeptics might question the depth of the Valley’s luxury condominium market but developers in downtown Scottsdale remain confident their projects will succeed. Townhouses, lofts and condos are stacking up on the downtown skyline like chips in a no-limit poker game.”

“The first 300 of about 1,500 downtown condos under construction will open as early as next month, and at least 500 more are planned in downtown Scottsdale. About 8,000 condos and lofts are planned or under construction Valley-wide. Housing analyst RL Brown has predicted that only about 20 percent of those units will be built.”

“Scottsdale’s condos are ’selling reasonably well, but not as quickly as promoters would have you believe,’ he said. ‘We’re getting about one sale per week,’ said Bob Flaherty, a vice president of luxury homebuilder Toll Brothers.”

“Thousands of people used the non-traditional mortgages last year to afford a house in the Valley, where home prices increased nearly 50 percent from 2004. They’re paying for that decision today.”

“Economists say nearly 40 percent of all home loans in metropolitan Phoenix are adjustable. Making the situation potentially worse for Arizona’s housing market, the number of subprime ARMs jumped by 50 percent in the state last year, the Mortgage Bankers Association of Arizona reports.”

“The number of people making late payments on ARMs in Arizona climbed during the second half of 2005. At the end of the year, almost 10,000 homeowners across the state were behind on their payments for adjustable mortgages. That is almost double the rate from last summer.”

“Making matters worse for those homeowners who can’t make higher ARM payments or refinance fast enough is a slowing real estate market. Now, it’s more difficult to sell a home quickly or make enough off a sale to pay off a home than it was during last year’s housing-appreciation frenzy.”

“Foreclosures in metropolitan Phoenix are already beginning to climb. ‘If interest rates continue to go up and housing prices don’t, more people will be squeezed,’ said Elliott Pollack, an Arizona economist and real estate investor. ‘When the next recession rolls around, many people are going to be set up for a very bad situation.’”

“Home builders are still dangling the incentives to attract buyers. Tne Valley builder is offering as much as $75,000 off its spec homes. DR Horton is offering free weekly maid service for a year. Free swimming pools are pretty standard these days.”

“All are signs the housing market is slowing more than builders expected. But home builders still aren’t hurting. Most can offer the deals and still make money because they jacked up prices so much last year.”

Another Fortune piece on the housing bubble. “The most troubled sector of the housing market, the one that will fall first and fastest, is the condominium market. Typically cheaper than houses and easier to buy, sell or rent out, condos are catnip for investors. ‘I estimate that 80 percent of the sales in Miami went to investors at the peak of the market,’ says Lewis Goodkin, a consultant to condo developers.”

“Gary Bahadur, who owns a computer networking company in Los Angeles, bought six condos in California over the past few years. Now he’s putting them all up for sale. ‘I’m getting out of California because it’s topped out,’ he says, ‘The prices are so high that investors can no longer buy a condo and rent it to cover the mortgage.’”

“Yet even as speculators flee, developers keep throwing up condos at a breakneck pace, in part because if they have already bought the land and poured the foundation, they have no choice but to finish the project. In the Miami area 25,000 new units are under construction, and another 25,000 are approved. Yet the Miami market absorbed only 10,500 new condos in the past decade.”

“Tanya Wagner is caught in the squeeze. She paid $335,000 for a two-bedroom condo when she moved to Miami in 2004. In November she put her unit on the market for $485,000, the price that apartments in her building had sold for a few months earlier. But Wagner missed the peak. She’s now dropped her price to $415,000, and she still hasn’t had an offer. ‘My belief is that prices will drop even more,’ she says.”

“Builders don’t have the luxury of waiting out a slump; they need to sell for what they can get. At first they hold the line on base prices by offering incentives. Then, as unsold units collect, they move merchandise with huge discounts.”

“Builders also pitch in when potential customers are having trouble unloading their current home. Pedro Kritselis had to sell his house to afford to buy a new one in Bristow, Va. But the market is so soft that he couldn’t get the price he needed, so he told the builder he’d have to walk away. To keep the sale, the developer shaved $25,000 from the price of the new house. That enabled Kritselis to sell his house for $25,000 less and still afford the new home.’

“Delinquencies are already rising rapidly. Since early 2005, delinquency rates have jumped almost 14 percent, to 2.5 percent for prime mortgage loans. ‘The banks will be forced to take back a lot of properties and sell them for the amount of the loan,’ says (economist) Mark Zandi. ‘That will add to the already huge supply on the market.’”

“As painful as it will be for many people, the looming correction may turn out to be welcome news for young couples now priced out of the market will once again be able to buy a ranch or colonial without forking over half their income for mortgage payments. Lauris Lambergs and his wife, Ginta, want to move from a condo in South Boston to a single family home.”

“‘Now the buyers have some leverage. When we go to open houses, we’re the only ones all day!’ exults Lauris. It’s the bright side of our gloomy outlook: The bargains are coming.”

Some housing bubble reports on Denver. “The number of unsold homes on the Denver-area market hit a record 29,045 in April, according to reports released Thursday. Rising foreclosures were the driving force for the skyrocketing inventory, which is 19.2 percent higher than a year ago, experts said.”

“Buyer representatives are telling (realtor) Ed Jalowsky that about half the homes priced under $250,000 are either in foreclosure, are owned outright by a lender or the U.S. Department of Housing and Urban Development, or are selling for less than the amount owed on the mortgage.”

“Jalowsky blames rising payments on adjustable-rate mortgages, which are squeezing home owners.”

“‘The logjam of homes is increasing each month,’ said (realtor) Steve McGuire in Highlands Ranch. ‘It is similar to back in the 1980s when we had a high number of foreclosures. The market was impacted greatly.’ In Denver said he urges potential sellers to be realistic about the price they can get or expect to spend a long time on the market.”

“‘Foreclosures definitely are having an impact,’ said McGuire.”

“Competition from foreclosures will drive down prices in the lower- end market, ultimately causing more homes to end up in foreclosure, Jalowsky said. ‘It is a real shame,’ said. ‘It’s a battlefield out there for homes under $200,000. I just hope the blood flow will slow.’”

“Despite the glut of unsold homes, the median price was $250,000, up from $247,500 in March and $241,687 last year. (broker) Doug Pierce noted two homes in Cherry Hills Village recently came on the market in the high $900,000s, and within a week they were both under contract for full-price cash offers, with others standing in line to buy them.”

“‘Flying in the face of that activity, I have a listing in south Aurora,’ Pierce said. ‘The house is in good shape and has been updated. It was on the market in the $180,000s last summer and it didn’t sell. We now have it at $164,900. We have not even had a showing in 10 days.’”

“Prices are up because of the mix of homes being sold and because the Metrolist data overstates the sale prices to an unknown extent. That’s because it doesn’t adjust the sale prices for seller incentives, such as down payment assistance, according to real estate agents.”

“‘This is the standard time of the year when people start putting their homes on the market, so they can move into a new home by the time the kids go back to school,’ Independent broker Gary Bauer said. Bauer said he expects the number of unsold homes to continue to rise for the rest of the summer.”

Toll Brothers has some numbers out. “Toll Brothers, the Horsham, Pa.-based luxury home builder, said the value of signed contracts declined 29% in the quarter ended April 30. Toll Brothers also cut its estimate of home deliveries for the year, as speculative buyers quit the market and ordinary demand slackens on concerns about the direction of house prices.”

“Toll Brothers Inc. on Friday cut its forecast for the number of homes it expects to sell in fiscal 2006, as quarterly orders fell 32 percent. It was the third time since November that Toll slashed its forecast for the number of homes it expected to sell in the year.”

“‘I think the Street was looking for weakness, just not this weak,’ said (analyst) John Tomlinson.”

“The decline in orders reflects softening demand and a build up of homes on the market, especially by speculators who are unloading their investments as their anticipated profit evaporates.”

“Orders fell sharply in Toll’s biggest market, the Mid-Atlantic states of Delaware, Maryland, Pennsylvania and Virginia, where they were off 45 percent. ‘Speculative buyers are no longer fueling demand,’ Robert Toll, CEO said in a statement. ‘Instead they’re putting the homes they’ve recently acquired back on the market, or are canceling contracts in mid-construction.’”

“He added that the oversupply is being ‘aggressively discounted by others.’”

“Would-be buyers also were spooked, as the cancellation rate for the quarter was 8.5 percent, above Toll’s historic average of 7 percent, the company said.”

“To help prop up the company’s sagging stock price, Toll bought back 1.3 million shares during the quarter, for a total of 3.9 million, or 2.5 percent of its outstanding shares. Since July, shares of Toll Brothers have lost 47 percent of their value, as its high-end customers are considered more knowledgeable about the housing market and have more discretion not to trade-up from their existing homes.”

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