The Housing Bubble

The Time Herald Record in New York reports on an end to a trend that accompanied the housing bubble. “Builders who came through local planning boards carrying plans for a dozen 3,500-square-foot homes and visions of $700,000 price tags are chopping hundreds of feet off those homes and tens or even hundreds of thousands off their price tags.”

“‘We find ourselves doing homes that I never would have thought of two years ago,’ said Dan Fini, a local builder who just began work on an eight-lot subdivision in Hamptonburgh. Fini had banked on building homes 3,200 square feet or larger. Now, he’s planning to keep those homes under 3,000 square feet, and the prices below half a million.”

“Fini is not alone, and that, it turns out, is one of the reasons he’s lowering prices. In Orange County, there are a lot of 3,000-square-foot homes for sale. ‘There’s a lot of them sitting,’ said Frank Nutt Jr., another local builder. Nutt is reducing the sizes and prices of homes he’s building in Montgomery and Goshen.”

“It’s a phenomenon that’s taking hold across Orange County and in some of the country’s hottest housing markets. ‘I’ve seen it in Los Angeles. I’ve seen it in Las Vegas,” said John McIlwain, at the Urban Land Institute. ‘We’re at a turning point in our housing, where the median size of the home is going to start declining, and that would be the first time in a little over 20 years that that’s happened.’”

“The median size of new homes has steadily increased over the past two decades, according to the National Association of Home Builders. In 1987, the mid-sized new home was 1,755 square feet. By 2004, it was 22 percent larger at 2,140 square feet. Now, the tide might be turning, in part because homes have gotten too expensive for prospective buyers.”

“Single-family home sales in Orange County declined slightly last year, the first time that’s happened since 1990. The first three months of 2006 were even slower than the first quarter of 2005. Now, it’s the builders’ turn to give a little. To begin with, their profit margins are shrinking. Nutt said he’ll be happy to make $40,000 apiece on his next few houses, about half the profit of a year or two ago.”

“Builders are also cutting out some amenities. The two-story entryway, a major selling point just a couple of years ago, has fallen out of favor because it wastes space and pumps up heating and cooling bills. ‘It’s a snowball effect. It’s not just the cost of a house. It’s the taxes. It’s the upkeep,’ said (realtor) Theresa Budich.”

“Nutt has reduced the starting size of the homes to about 2,100 square feet, from 2,400 or 2,500 square feet. Prices will start at $390,000, down from $430,000. A $40,000 price cut translates to a $250 per month reduction in the buyer’s mortgage payment.”

“The tax bill on a 2,100-square-foot home should run about $2,000 less per year than the bill for a 2,500-footer, Nutt estimated. That’s another $166 a month.”

“The builder has to sacrifice some profit to sell at $390,000 instead of $450,000, Nutt said, but it’s worth it. ‘It’s either that,’ he said, ‘or you build a $450,000 house and you might sit on it for awhile.’”

Several readers want your opinion on this: “How about, which type of housing will lose more value, and which will hold up better?:

1) Condos in established urban centers (NY, SF, Chic, Phil, Boston)?

2) Condos in recreated urban centers (LA, Milwaukee)?

3) Exurban McMansions in developing areas far from the urban core? 4) Older suburban houses in communities reaching 50 years old?

5) Suburban or vacation area condos (Las Vegas, Miami, Glendale)?

“Believe it or not, based on demographics, I have the most hope for condos in recovering urban areas. They aren’t overpriced, and the demographics are in their favor. Demographics are in favor of condos in established markets as well, but the prices there spiked too high.”

“Perhaps it’s Brooklyn bias, but I’m more worried about the suburbs. People aren’t going to choose suburban condos when the real thing is available. The exurban areas, too, will not be attractive when there is value closer in. And the older burbs are reaching the age when city neighborhoods suffered blockbusting, subdivision, and the beginnings of abandonment.”

“I’d say if you want to live in the burbs, you have to go with the blue chip towns — those with good schools, good quality homes, and rail stations in regions that have them. When the bubble is over, that’s what the market will contract to.”

A reply, “I think the price of gas may come into play here. If condos become somewhat reasonable in urban centers, that market will hold up better as people will choose them for commuting purposes.”

Another, “My husband, an architect with a great interest in urban planning, has said for years that the suburbs will eventually be the ghettos. I think with the rising gas prices and the tendency here in CA for multiple/hugely extended families to live in one home (creating density where it was not designed to exist), he may be right sooner than we think.”

Another concurred, “I agree with your husband and have felt that way for years. In Chicago the Cabrini Green housing development is 1 mile from the Oak St Beach, 1 mile from the Board of Trade and the loop. It has always been to valuable a location with quick and easy public transportation to be kept as a public housing facility. In Chicago they have already moved a lot of tenants to Schaumburg, Round Lake etc.”

From Texas, “That’s a great point. They WERE the ghettos in Houston and Dallas in the aftermath of the 89s bust. Some of them still are.”

One said, “IMHO is its going to depend on the state of individual city. Basically if the cities are clean and have a lot to offer, upper income groups will go back. We’ve already read how many retirees are already heading back to some urban areas. Still other cities are too much in a state of deterioration and probably won’t be getting a lot of investment in the near future.”

What are you observing in your housing market this weekend? Here are some from across the US, starting with posts from the topics thread. “We are down 5-10% here in Northern Virginia / DC Area suburbs. I have friends selling a townhouse in Ashburn asking 400k when similar comps from fall of 2005 were 430-450k. Who knows what the closing price will actually be? It has been on the market for about 6 weeks.”

“We will see a much better downward trend in a few months because it takes awhile for the comps to be updated. New homes are also starting to be reduced to similar to the asking prices on existing homes on MLS. A few more price reductions and we will see new home pricing undercutting the existing inventory. This is more pronounced for the exurbs where lots of huge developments are underway and inventory is piling up.”

From LA. “Depending on the area, I’ve seen (smaller) price increases, stagnant prices, and price decreases. It seems like this whole thing only started to ‘turn’ last fall, and is only now starting to pick up steam.”

From Florida. “Florida is in a transition period now, David Lereah said. ‘Sales are coming down, but prices are staying up. So don’t get that false sense of security. A cleansing is taking place,’ Lereah said. ‘(The market) is getting healthier. We are getting rid of the germs, speculative germs.’”

“‘The market is being cleansed,’ Lereah said. Lereah predicts prices will slip in many parts of Florida as a buyers’ market takes hold and sellers revise their expectations downward. ‘Someone always takes the punch bowl out of the party.’ Lereah added. ‘We’re not supposed to go crazy in the real estate world,’ he said. ‘We’re supposed to go crazy in the stock market.”

From Denver. “Foreclosures have had an impact on the home selling market by driving housing inventories up to record levels. By most accounts, it’s a buyers market in metro Denver. There’s a record 29,000 homes for sale. ‘If you’re a seller you’ve got to put your best foot forward,’ (broker) Jim Hatfield said. ‘You’re house needs to be tricked out and detailed out and landscaping needs to be fresh and the paint needs to be fresh and you need to have a competitive price.’”

From Nebraska. “The U.S. real estate market is clearly slowing, especially in areas that used to be the hottest, Berkshire Hathaway Chairman Warren Buffett said Saturday. Buffett said at the annual meeting that ’significant downward adjustments’ in house prices are possible, especially at the high end of the real-estate market and in situations where homes were purchased as investments.”

“‘We’ve had a bubble to some degree,’ he said, noting that Berkshire has a good view of the market through the thousands of real estate agencies it owns. ‘We see a slowdown every place.’”

A poll in California. “Is this a good time to stay away from real estate? Are people scared away from the housing market due to these factors? An informal Los Angeles Business survey asked this very question this week.”

“An overwhelming majority, 67 percent, said that, yes, the low sales and high prices are keeping them out of the housing market.”

“Comments from readers backed the results: ‘Absolutely. The real estate market is overdue for a massive correction, particularly condos and single-family homes.’”

“‘Absolutely not the time to buy a home! Climbing interest rates, high prices,low rental income; the investment isn’t even long term, it’s potentially disasterous at this point.’”

“‘The high price of housing was one of my top 3 reasons why I moved out of the state of CA. I was looking in the condo market, but I was pushed out of that market by people who were pushed out of the single-family home market. So the high price of housing also created a domino effect for some buyers like me.’”

The Chicago Tribune announces, ‘It’s a buyer’s market.’ “It’s been a long time, at least five years, since the Chicago area’s real estate market worked this way. Homes sell in months, not hours. Prospective buyers actually browse. They drift back for a second look at a place weeks later, confident that it still will be available. They want the price cut. And they get it.”

“That means it’s time for a seller attitude adjustment, real estate agents say. Think about making a mere profit rather than a killing. ‘I tell sellers, this is not the market we used to have,’ said Gold Coast agent Jeri Dry. ‘I tell them to be prepared for a six- to nine-month marketing time, and that’s if they’re priced correctly. It could be a year,’ Dry said. ‘Lots of condos have been on the market for 300 days.’”

“What has changed in terms of verifiable statistics is that the inventory of homes on the market has surged, even for the traditional spring selling season. Faced with so much competition, many sellers are being counseled to settle in for a longer wait, and think hard about their asking prices.”

“‘You tell them, `Tighten your belt as tight as you can get it,’ said Deerfield real estate agent Honore Frumentino. She said that North Shore homes in the $2million to $4 million range, which already had been selling slowly in 2005, are getting even less attention now. ‘We had a three-year supply of those homes last year, now it’s up to five,’ she said.”

“In the first four months of 2006 the Chicago-area market took on about 97,000 new listings of single-family homes and condos, up from 83,000 new listings in the year-earlier period, according to the Multiple Listing Service of Northern Illinois.”

“A leading concern is that while the number of homes on the market is higher, the pace of sales has not changed. That translates into an advantage for buyers. ‘I’m worried about selling,’ said (appraiser) Chip Wagner, whose home in Naperville went on the market about two weeks ago. ‘There are 30 percent more listings this year than there were at the same time last year, and 20 percent fewer homes under contract,’ Wagner said.”

“‘This is a year when I’ve had more low-ball offers, people coming in $60,000 to $80,000 below asking prices,’ said Oak Park agent Donna Karpavicius, who recently took over another agent’s languishing ‘needs work’ listing of a home in Riverside. She immediately got the price reduced to $429,900 from $489,500 but has received little response, other than a couple of too-low offers around $350,000.”

“‘There’s a type of seller who expects they’ll be able to finance their 2-year-old daughter’s Yale education on the sale of their two-bedroom, two-bath,’ said North Side agent Lino Darchun. ‘They don’t understand the concept of ‘comps.’”

“Mike Malloy took a long, hard look at the ‘comps’ last weekend when he met with Downers Grove agent Veneris. ‘If this were last year at this time, I’d be telling him to go $10,000 higher,’ said Veneris. Malloy said he is philosophical about the $10,000 difference that a year can make. He’s not greedy, he said.”

“He paid $199,000 in the heat of the boom; the home had been on the market just one day when he bought it in 2003. He figures he’ll do well if it sells anywhere near his $274,000 asking price. ‘I’ve only been here three years, so either way, that’s a lot of money,’ he said.”

“Some industry analysts see other factors at play. Analysts say that some buyers have gotten skittish, they’ve heard the word ‘bubble’ so many times that they are holding back, waiting to see what happens. At some point enough people start to think things are slowing down that they behave differently, creating the self-fulfilling prophecy of a slower market.”

Some readers are guessing what phase of the housing bubble we are in. “Have we finally passed the denial stage in the unwinding of this bubble?”

Another said, “I was thinking the same thing. My take has been that lately I have noticed the media as well as ‘experts’ who have been bubble doubters (or deny-ers) in the past have been jumping on the band wagon. The latest of course is the CNN-Money article declaring ‘the bubble is over.’ How many of these past naysayers will jump on this band wagon, and say they knew it was a bubble all along as this thing unfolds? Ah, memories of the tech bust, can you say Jim Cramer?”

Yet another replied, “Have we finally passed the denial stage in the unwinding of this bubble? Alas, not. A very good friend of mine just informed me she bought a condo in Lafayette, CA on Sunday! Hasn’t even listed her home yet. Plans on getting a bridge loan or equity loan to buy this condo. Whats worse, is she cant transfer her prop 13 tax base, and now she will have HOA dues.”

“Oh well, I will just keep my mouth shut from now on. And no, sheeple are still buying homes.”

The Telegram reports that denial depends on where you live, in a article titled ‘Realty Check.’ “The Central Massachusetts housing market has cooled as available inventory has risen and interest rates nudge upward. ‘From what people are telling me, the housing market has (hit a plateau),’ said (builder) Paul A. Gemme. ‘We went through the transition from a seller’s market to a buyer’s market late last fall.”

“‘Sellers feel they have to lower the price. When inventory is plentiful, it’s a buyer’s market,’ said Mr. Gemme. ‘You’ve got to keep prices down,’ he said. ‘I’d hate to be sitting on specs right now. Some developers are.’”

“Judy Leonell, a realtor in Mendon said the slower market is having an effect on building, as builders shy away from competing with a larger inventory of homes. ‘Things are hanging around a lot longer,’ she said. ‘Builders are no longer in a hurry to purchase land. They used to call and ask, ‘What’s available?’”

Here’s a place to put off topic links and Craigslist items. As mentioned before, this is not intended to discourage posting elsewhere

Also, don’t forget to snap some housing bubble photos and mail them to:

photos@thehousingbubbleblog.com

An editorialist is changing his forecast in Orlando, Florida. “Back in February I said your house would not be worth any more by the end of the year. I am updating that to say it may be worth less. Our economy and job market is booming. These are not conditions conducive to a real-estate meltdown. There, feel better? If so, stop reading now.”

“Our hot market attracted speculators. They bought up homes, bid up prices and created huge demand. Now they have reversed course and are selling. This means fewer buyers, more sellers and a glut of inventory.”

The Pensacola News Journal. “With a record 6,150 houses on the market, and prices falling in many neighborhoods, the once red-hot Pensacola Bay Area housing market is trying to fight its way out of a worrisome slump. For every 400 houses that sell, another 800 go on the market.”

“As a result, a preliminary estimate of the Pensacola Association of Realtors’ April inventory of homes for sale shows an approximate 350 percent surge over April 2005 numbers, and by a similar amount over the 2004 figure.”

“‘It’s a buyers’ market,’ Auby Smith, president of the Pensacola Association of Realtors notes. ‘The good news is there are a lot more houses to choose from, and prices are not dropping that rapidly.’”

“The condominium market is a separate concern. ‘The condo market is where we’re really seeing a slowdown,’ Al Mueller said. ‘One month we’re seeing 150 sales, and the next month 10. The condo market is going to be very interesting to watch.’”

“Sam Rogers, a veteran Realtor, notes that of the approximately 6,150 dwellings that were on the Pensacola area market in April, some 1,700 are condominiums. (Realtor) Joe Endry said the current condo market ‘has really slowed down for the spec buyer.’”

“But he believes the condo market, like single-family homes, will bounce back. ‘I’ve been in the beach market for 34 years,’ Endry said. ‘And I’ve seen all kinds of downturns, during the ’70s, the ’80s and after the 1986 tax reforms.”

“Perhaps the biggest factor holding back the condo market is the weather, and the threat of future hurricanes. ‘If we have another direct hit, I think we’ll see a lot of people move north,’ Endry said.”

“And that prospect is clearly affecting sales of waterfront homes and condos. ‘Anything near the water is slow right now,’ Rogers said. But he is quick to add that the good thing about real estate is, ‘if you hold on long enough it will always come back.’”