The Housing Bubble

A pair of reports from markets in California. “The inventory of homes for sale in the Visalia/Tulare Multiple Listing Service as of May 1 stands at 1541; four times the number of homes that were on the market as of May 1, 2005.”

“There has been a complete turnaround with five listings for every buyer,’ says broker Brad Maaske. The glut of homes on the market can be seen in the number of higher priced homes listed today compared to a year ago, says Maaske. ‘It was typical a year ago we might see 20 homes for sale over $500,000 in this market but now there are 191.’”

“Realtors are reporting sellers have to reduce their prices and the question is how much and how fast. ‘We have rolled back our new home price to what they were a year ago,’ a representative for one of the large builders says. That is amounting to about a 5 to 15% decline in the prices seen last year.”

From The Record. “Jim Mazzilli was out touring in his north Stockton neighborhood. He wasn’t looking to buy, though, just checking out the competition. He’s still trying to sell his house, which was still sitting after eight months on the market; ‘and I put $80,000 into the kitchen.’”

“In the summer, the number of homes on the county market began swelling by several hundred per month until the number of homes for sale, 3,300 as of March, was up more than fourfold from March 2005. ‘It’s really, really, really, really slow,’ said Marcia Ourganjian, whose home Mazzilli was touring last weekend.”

“‘Everyone says: ‘It’s so beautiful. It’s gorgeous. I love your house,’ Marcia said. ‘Then they leave.’”

“Delfino Larranza is both a buyer and a seller. He recently bought a bigger house and put his four-bedroom, three-bath house on the market seven weeks ago for $455,000. The for-sale sign in front of the 3-year-old house is already tagged ‘reduced price’ to reflect a price cut to $447,500.”

“‘We just want to get it done,’ Carranza said. ‘I cannot afford to be making two house payments. The buyer has the advantage, and it’s very competitive for the seller.’”

“Jose Plasencia was hosting his own open house last weekend for his four-bedroom, two-bath home, listed at $395,000. ‘Not a lot of people are coming to see the house, so I don’t know,’ he said. When he bought his Lucile Avenue house two years ago for $250,000, there were lots of people trying to buy, he said.”

“Out of five people who came by for an afternoon open house, one couple asked him whether he would cut the price right off the bat. ‘I said: ‘Make an offer.’ They didn’t.”

“Jamie Granada, a real-estate agent in Stockton, is relatively new to the field, launching her new career in January. ‘Now you actually have to work hard to sell,’ she said. ‘It’s to my advantage to be new.’ Buyers know it’s a buyer’s market, she said. ‘They’re in the looky-loo mood, trying to see what kind of deal they can get,’ she said.”

“Dale Gray, CEO for the Central Valley Association of Realtors, said that not only are most sellers shocked by this slower market, so are many real-estate agents. ‘You can’t just throw in on the wall and know you’ll get multiple offers in a few days,’ he said.”

“Many young agents knew only a super-active market, he said. ‘They need to adjust to a new reality from what we’ve known in the past,’ Gray said. ‘Buyers have choices now, which, I’m sorry, I think is a good thing.’”

The Miami Herald has some tips for housing bargains. “He was a government attorney making a lateral move to a federal agency in another city. Like all buyers, he hoped to get the best possible deal for his family on the home he would purchase in the new area.”

“On his first house-hunting tour, he made a happy discovery. The once overheated market in the new city had recently cooled, giving buyers more leverage. He sniffed opportunity, and so did his real estate agent, Tom Early. ‘These days, we’re finding a lot more flexibility on the sellers’ side in more spots around the country,’ says Early, president of The National Association of Exclusive Buyers Agents.”

“After a brief search in their new city, the government attorney and his family found a house very much to their liking. After three rounds of bidding and counter-bidding, the purchasers picked up their prize home at $35,000 off the list price and at least $10,000 below what Early estimated to be its present market value.”

“Here are several tips for home purchasers: Don’t suffer guilt over opportunism. Although sellers still hold sway in some neighborhoods around the country, these are decreasing in number. An increasing number of properties are going up for sale, causing a shift in the supply-demand ratio. ‘It’s a simple matter of economics. When there are many more sellers than buyers, the pendulum swings toward the buyer,’ says Sid Davis.”

“Occasionally, would-be purchasers shopping in a buyers’ market will feel guilty about pressing their newfound advantages when bargaining. But Davis says such feelings are groundless. Sellers are not accustomed to showing pity when they have the leverage, and he asks why buyers should behave differently when the roles are reversed.”

“Consider waiting for stubborn sellers to drop their price. In a neighborhood where the market has recently shifted in favor of buyers, some sellers take a while to adjust to the new realities, Davis says. A price drop is often a signal that once-stubborn sellers are ready to bargain in earnest, maybe because they face a deadline of their own.”

“A price drop may be just the beginning. When a seller drops the price, it may be a signal that he is facing a deadline and will negotiate still more.”

“Never insult the owners of a house you’d like to buy. Sensing they have more power than before, Davis says, some prospective buyers take liberties that could easily backfire. One type of misstep involves any statement you might make about a property that wounds the sellers’ pride in their home. Another involves making a ridiculously below-market bid, which so shocks the owners that they may refuse to deal further with you.”

The Sacramento Bee has this report on a rush for the exits. “When seven homes on one street are up for sale on a half-mile stretch of Aubergine Way, you get the idea a lot of area sellers want to collect on their investment. On another street nearby are three more homes for sale. Aubergine reflects an astonishing 600 percent growth in homes for sale this past year inside its ZIP code, 95655.”

“‘I think it’s because of the fact that we have so much equity in this community,’ added Tiffany Lunnie, a real estate agent who lives on Aubergine Way. Even as prices have cooled and remain below their late 2005 peaks, Lunnie said many of those selling are people like her.”

“This street, with its views of broad swaths of empty grasslands and air freight carriers landing at Mather Field, also clearly reveals the region’s utterly changed post-boom real estate market: 10,316 existing homes in El Dorado, Placer, Sacramento and Yolo counties were for sale in March compared with 3,799 a year ago.”

“Buyers have gained power to deal amid one of the largest inventories of existing homes for sale in the four-county Sacramento region in a decade. In all three Mather-area ZIP codes, sidewalk conversations and calls to agents listed on For Sale signs reveal countless stories of investors trying to cash out.”

“Dianne Slutsky, too, is selling a house she bought years ago with a San Ramon couple. ‘It was bought mostly with the intention of long-term appreciation, which we’ve gotten,’ said Slutsky, a real estate agent. So on the market it’s gone, After 50 days Slutsky’s three-bedroom house awaits the right offer.”

“So far, the ‘For Sale’ signs are increasing at a greater rate than the ‘Sold’ signs in a capital region where only a year ago sellers thought ‘waiting a week was forever,’ as Lunnie on Aubergine Way recalled.”

Some housing bubble news from Wall Street to Washington. “Golden West Financial Corp., one of the last major savings and loans in California, agreed Sunday to be acquired by North Carolina-based Wachovia Corp., the nation’s fourth-largest bank, for $25.5 billion in cash and stock.”

“‘The mortgage business is weakening across the country. I think the California housing market is due for a crash, prices could drop at least 20% and housing starts fall by 30%. And their mortgage portfolio is characterized by these untraditional loans, these payment-option ARMs, and interest-only mortgages,’ Richard X. Bove, an analyst for Punk, Ziegel & Co. said. The risk to Wachovia comes if the housing market suffers a crash. That may be why the Sandlers chose to sell their thrift now, he said.”

“Golden West is a heavy borrower from the San Francisco Home Loan Bank. Bove said that bank was likely to curtail lending because of proposals that would restrict the federal housing-finance system. ‘So the deal could be problematic, and we’ll just have to wait and see if in fact the housing market in California does blow up before we know if Wachovia is overpaying,’ he said.”

From Paul Muolo, “This past week was one of the ugliest in recent memory for the industry. Ameriquest Mortgage, once the nation’s largest subprime lender, laid off 3,800 workers, and closed its traditional retail network; all of it. Washington Mutual shut its traditional correspondent division, and late this past week Merit Financial of Washington State was on the verge of going bust. Meanwhile, sources tell us that two publicly traded mortgage REITs are on the auction block.”

“Lennar Corp. has cancelled a contract to buy a full city block in Oakland for between 500 and 850 units of housing, raising questions over whether the city’s downtown development boom is losing steam.”

“Real estate players widely acknowledge that the Bay Area condominium market is cooling. ‘It’s no secret the market has slowed and there seem to be fewer buyers,’ said Adam Lubow with a Pleasanton firm that helps developers set prices and otherwise market their properties. ‘A lot of product has gotten priced out of the realm of affordability.’”

From Bloomberg. “Federal Reserve Chairman Ben S. Bernanke is trying to do something the central bank has never accomplished: engineer a perfect three-point landing for the high-flying U.S. economy.”

“‘If he pulls it off, it will be a first for the Fed,’ says David Jones, a former New York Fed economist, author of four books on the central bank.”

“There’s reason for skepticism. Even under Chairman Alan Greenspan, who came the closest to avoiding the mistake of over- tightening, the Fed almost brought the economy to a standstill in 1995. The bank’s rate increases helped set the stage for the 1994-95 Mexican currency crisis, followed by a slowdown in U.S. growth to 0.7 percent in the second quarter of 1995.”

“‘Right now, I’m not as concerned about the Fed overshooting on interest rates,’ says Susan Phillips, a former Fed governor. ‘The key risk is inflation.’ John Ryding, chief economist at Bear Stearns, says the declining dollar and rising prices for gold and other commodities underscore that the Fed is running the risk of having too easy a policy. ‘The Fed is still providing too much high-powered liquidity to the economy,’ Ryding said.”

“‘The committee has gotten very nervous about overshooting,’ says Laurence Meyer, a former Fed governor. ‘They want a slowdown in housing, but they worry that it may get out of control.’”

Danielle DiMartino has this on declining home ownership. “The evidence of a deflating housing bubble is spreading to places less visible to the naked eye. The evidence has segued to the subtle in three ways; mounting mortgage interest expenses, a declining homeownership rate and a rising owner-occupied vacancy rate.”

“According to Moody’s chief economist John Lonski, the yearly increase in mortgage interest paid by households rose to 15.8 percent in the first quarter, a 24-year high.”

“Interest rates aren’t soaring. How can households’ interest payments rise that much? Here’s how Mr. Lonski put it: ‘The steep advance by household interest costs amid relatively low fixed-rate borrowing costs is unusual and reflects an earlier atypical reliance on variable-rate mortgage debt for the purpose of affording costlier housing.’”

“In other words, the chickens are coming home to roost on the variable-rate mortgages.” “And then there is the homeownership rate. After more than a decade of rising to the highest levels on record, the homeownership rate declined to 68.5 percent in the first quarter of 2006 from 69.1 percent in the same quarter last year.”

“But that’s not the whole story, according to Goldman Sachs chief economist Jan Hatzius: ‘The decline in homeownership..has occurred in the face of strong rental-to-condo conversions of apartment buildings, which have expanded the supply of owner-occupied units. Thus, declining homeownership is very likely due to a decline in demand, not a decline in supply of owner-occupied units.’”

“And finally, the owner-occupied vacancy rate is rising sharply. At 2.1 percent, the current rate is the highest on record. This is, of course, an unintentional consequence of speculators realizing there’s no place to take a seat now that the music has stopped.”

The Lowell Sun has a related tale from Massachusetts. “Despite a booming housing market for several years, area landlords are now finding themselves in a bind, a shrinking tenant pool has made them unable to raise rents.”

“From the perspective of a landlord, ‘the rental market in Lowell is terrible. I would say the biggest problem is there just seems to be no tenants out there. You can advertise, but you don’t get very many calls,’ said Dick Macdonald, president of the Greater Lowell Landlords Association.”

“Vacancy rates in Lowell are around 20 percent, about double the rate nationwide. One Lowell landlord said a vacancy that lasts a month or so is ‘within their comfort zone,’ but in recent times apartments that have been vacant for four or six months at a time are not uncommon.’”

“Landlords also say that many properties, especially duplexes and three-family homes, have been converted to condominiums. Also, construction of rental properties has increased as well. ‘How they plan on filling them, I don’t know,’ said Macdonald.”

Some housing bubble updates on Florida. From the Palm Beach Post, “Amid the month’s first cluster of mortgage defaults and property liens are four Tiara condos lost to post-hurricane rehab bills. The condo association charged 320 unit owners $48,000 to $72,000 each to begin reconstruction. But the towers remain unlivable almost two years after the storms, and some residents have not been able to keep up mortgage payments, the cost of temporary housing and repair bills.”

“In fact, some who moved in back in 2001 paid only a little more for their unit than the higher-end repair bills they are being assessed. The units may not even be worth that much now. Property tax bills for 2005 were largely based not on the condo structure, but on the value of the sand beneath it.”

From Realty Times in Naples. “As the height of the season begins to come to a close, I am seeing housing prices lower and savvy buyers trying to pick up property at low levels. Not many transaction are getting done as greedy and unrealistic Buyers and Sellers are looking for ‘their’ prices. I am still seeing numerous price reductions throughout town, but not many properties are actually being sold.”

“A price retracement of 20% to 30% is currently happening. There is a tremendous amount of supply on the market (Over 9,300 properties as of 5/7/2006), especially the further east you go off the beach. Sales in March declined 64% from the previous year and it will take some time to get through the large amount of supply we have on the market before another leg up in prices occurs.”

“Demand for property declined as 665 properties were sold in April versus 1,502 the previous year, a decrease of 55.7%. Sellers are slowly realizing they cannot get last year’s prices for their homes and prices are decreasing. In Naples, I have seen numerous price reductions over the last two months; the low end of the market ($200,000 to $500,000) is weak as too many investors flooded into the market over the past 3 years.”

The New York Times. “Until the summer, investors were crawling over each other trying to get their hands on Southwest Florida homes. Now that lemminglike rush seems to be operating in reverse. Listings are stacking up, prices are going flat and words that haven’t been heard much in some time are being spoken: ‘non-performing loans’ and ‘foreclosures.’”

“Southwest Florida Realtors are faced with four times as many listed homes and three times as many condos as in July, when the market began falling apart after a brilliant longterm run-up. The empty dwellings worry Realtor Steven DuToit. He says that as some of those sellers cave in to the pressure of two mortgages and other carrying costs, their departure will drive prices down further.”

“‘This whole market has been driven by investors,’ said DuToit.”

“For the last two years, Fishkind & Associates, an Orlando-based economic consulting firm, has been advising clients that the Florida residential real estate was approaching a market top that needed to be heeded.”

“Now we are past the peak and in the downside of the cycle, and all the things we said would happen are happening,’ said Fishkind economist Stan Geberer. ‘That includes a reduction in prices, a drying up of investor activity, nonperforming loans, condominium projects that will not be built, and certain projects in certain locations seeing dramatic and significant reductions in price.’”

“In the first quarter of 2006, the state knocked out 29,636 foreclosures, a 14 percent decline from a year earlier. What the statistics don’t show are deals in which investors have simply walked away from their deposits on newly built residences. The developer is stuck with continuing to carry the construction cost loans until he can resell, and is newly saddled with paying the property taxes on a finished residence.”

“‘You just look in the Sunday real estate section to see `All closing costs paid. We will give you $15,000 in upgrades. We will throw in the fancy appliances and the marble counter tops,’ said Geberer.”