The Housing Bubble

More big media are jumping on the housing bubble bandwagon. “There are signs a housing slowdown that has gripped certain high-growth markets during the past few quarters, is now spreading nationwide. Preliminary reports from builders Hovnanian and Toll Brothers indicate demand is falling faster and more sharply than previously thought, and that the pullback is no longer confined to hot markets that had seen sharp home price run-ups in the past few years.”

“On top of this, some builders, such as Centex Corp. and Hovnanian, have started taking writedowns in connection with land options. In general, when builders take writedowns to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up. In past cycles, declining land values often were a sign that a market was falling fast.”

“Analyst John Tomlinson found sales fell year over year in every market during February and March. Washington, D.C., Los Angeles/Long Beach, Tucson, Ariz., Sacramento, San Francisco, and Phoenix saw the biggest declines with sales falling 22%, 50%, 50%, 46%, 30%, and 37%, respectively.”

“However, even markets that hadn’t been weak previously, such as Philadelphia, Dallas, and Las Vegas, softened in the quarter, with sales falling 30%, 15%, and 13%, respectively, he said.”

“So far, builders’ efforts to offer more incentives and discounts have ‘failed to move the needle’ in driving sales, Mr. Tomlinson said. As a result, he said some may need to resort to bigger price discounts.”

“‘We were building at a pace that we did not expect to be sustained and we’re seeing a slowdown,’ Bernard Markstein, director of forecasting at the National Association of Home Builders said. He expects builders to slow their pace of construction to meet the softer demand.”

“However, many builders aren’t cutting back, and are instead talking about opening many new communities in order to drive order growth. Toll Brothers, for example, plans to open 80 communities during the next six months, and expects to wrap up fiscal 2006 with 295 subdivisions, up from 230 in fiscal 2005.”

“Each day brings fresh evidence of peaking home prices. The worst mistake a seller can make in a softening market is to overprice a home. Even putting a high price on your home to ‘test the market’ for a few weeks (with the notion that you can always lower it later) is a bad idea.”

“Don’t cling to memories of what houses were commanding six months ago; if your area has seen a slowdown in sales, you’re not going to get top dollar.”

“The game of buying a home, or two or three or 17, holding it for a bit, and then flipping it for a handsome profit has pretty much played itself out. ‘Get out as fast as possible,’ says Mark Zandi, chief economist with Moody’s Economy.com. ‘The market is moving away from the investor, and even when it stabilizes, I don’t think it’s going to come back anytime soon.’”

“So don’t repeat the mistake that tech investors made during the dot-com bubble. As stocks spiraled downward, they held on, thinking that the market would bounce back quickly. Just accept that you’re going to lose money on that Miami deal. ‘Take your lumps,’ says Jon Duncan, a Tacoma financial planner. ‘If you’re feeding this thing cash flow, it won’t take long to make this a very bad investment.’”

Reports on Condo sales in two cities. “A planned $21 million Des Moines condominium project now deemed ‘economically infeasible’ is a sign that downtown’s housing boom has shifted from high-end to more affordable, a national expert said Monday. ‘The market has moderated somewhat on the demand side, and in some markets you have a lot of units coming on line,’ said Bernard Markstein, an economist with the National Association of Home Builders. ‘What you get is a temporary imbalance of supply and demand.’”

“Minneapolis developer George Sherman on Monday got council approval to change his planned $21 million, 80-unit condo development into a 105-unit apartment building.”

“More than 500 apartments or condos will be added to Des Moines’ downtown real estate market within the next year. Real estate agents and developers say sales remain strong across the board, city leaders acknowledge that some of the higher-priced condos have not sold as quickly as expected.”

“‘Personally, I don’t think the market is flooded,’ (spokeperson) Jackie Nickolaus said. ‘I’m very bullish about downtown housing. The question is how long it will take to absorb’ the influx.”

From the Boston Globe. “So far, Boston isn’t buying what Philippe Starck is selling. Marketing began almost a year ago, but buyers have agreed to purchase just six of the 26 condos Starck is designing. Agents in Boston’s clubby real estate community who have spoken with the developer and sales agents said even those six agreements are not firm commitments.”

“(Consultant) Stephen Chung said the slower housing market is also responsible for lagging sales, with fewer speculators quickly buying and flipping condos for profits. In the current market, homebuyers ‘are going to live there,’ he said, and ‘they bring tape measures. The market and the people are so different.’”

“But real estate agents said that because the project was initially overpriced, it also missed out on the sizzling 2005 condo market. Developers typically raise prices as a project attracts interest during construction and builds sales momentum. But some of YooD4’s asking prices have been lowered since last summer: The highest-priced unit is currently on the market for $1.71 million, down from $1.77 million in July. The price of the two-bedroom Unit 13 was cut $200,000, to $1.1 million.”

“Chung said he and the sales teams are amenable to negotiating over the details. ‘Maybe people didn’t want to pay for all that Starck finish,’ he said. ‘We said, ‘We’ll take it out. It’ll make it more attractive in terms of price.’”

The Washington realtors have April numbers out. “Home sales in western Washington dropped 8.6 percent in April from a year ago, as prices posted yet another month of double-digit growth, according to the latest figures from the Northwest Multiple Listing Service.”

“‘I assure you we would have more sales if we had more inventory,’ proclaimed Mike Skahen, a board member of the Northwest MLS in reaction to April results. Just-released figures show pending sales slipped about 9 percent last month compared to a year ago.”

“The inventory picture brightened in several areas last month. Members added 12,594 new listings to inventory, improving on the year-ago total of 12,116, and falling just shy of the March figure of 12,639.”

“With those additions, the inventory at month end totaled 25,215 listings, a jump of almost 21 percent from the same month a year ago. Only three counties, King, Cowlitz and Grant, reported having fewer listings than 12 months ago, with only a slight drop in all three areas.”

“Six counties had inventory gains of 25 percent of more, led by Grays Harbor (up 63.4 percent). Other counties with sizable increases were Thurston (up 60.9 percent), Kitsap (up 35.2 percent), Pierce (up 29.2 percent), Island (up 26.6 percent) and Kittitas (up 25 percent).”

“Despite having more choices in some areas, would-be homebuyers ’should not foot drag right now,’ advises Dick Beeson, a broker in Tacoma. Noting a pause in the Federal Reserve’s interest rate hikes, he urges buyers to ‘make a move while the movin’ is good.’ He also cautions sellers to take the time and effort to price their property correctly, emphasizing, ‘They stand head and shoulders above the hopefuls who overprice.’”

Some housing bubble reports from Wall Street and Washington. “WCI Communities Inc. before the opening bell Tuesday lowered its 2006 earnings forecast on slowing demand for the company’s active-adult communities, towers and expensive homes in its Mid-Atlantic markets.”

“The company said orders, a key measure of future profits, fell 55.7% on a unit basis. ‘During the quarter, we did not see the seasonal lift in demand for homes in most of our Florida communities that we expected and demand for homes in the Mid-Atlantic region dropped from prior periods,’ said Chief Executive Jerry Starkey.”

“Starkey said the company used incentives and discounts ‘on a selective and fairly limited basis,’ but expects that to ‘moderately increase’ the rest of 2006, particularly in the active-adult and second-home products.”

“Struggling home builder Dominion Homes Inc. late Monday said it swung to a loss of $3.9 million in the first quarter. Revenue slipped to $61.8 million from $92.6 million as the company delivered fewer homes than in the year-ago period. ‘Home sales generally remained slow in the company’s markets,’ Dominion said in a statement, adding that it does not expect to be profitable in 2006.”

“Saxon Capital, Inc., a residential mortgage lending and servicing real estate investment trust, today announced its financial results for the first quarter of 2006. Saxon reported net income for the first quarter of 2006 of $26.4 million compared to $54.0 million for the first quarter of 2005.”

From Business Week. “Still more errors have turned up in Fannie Mae’s government-ordered review of its accounting, the mortgage giant disclosed Tuesday. It also said it doesn’t expect the review to be finished before the second half of the year.”

“The company also has said that it expects an upcoming internal report to show that its financial controls remained insufficient as recently as the end of last year.”

The New York Times. “If the Federal Reserve stops raising interest rates later this year, will the rest of the world go along? When Fed policy makers meet on Wednesday to set overnight interest rates, they will almost certainly increase them by another quarter-point, to 5 percent. And investors will search for any clues about a pause in further rate increases.”

“But a growing number of economists are looking at a different possibility: that changes in the global economy could keep pushing up long-term interest rates long after the Fed stops raising its benchmark rate.”

“The result would be a mirror image of the ‘conundrum’ that perplexed Alan Greenspan. Now, even as Fed bankers indicate that they may be near the end of their increases, the long-term interest rates that determine home mortgage rates and companies’ borrowing costs have crept higher.”

“Increased anxiety about future inflation has been partly to blame, analysts say. But long-term rates have edged up around the world, suggesting that global forces are at work.

“As economist Robert J. Barbera, sees matters: ‘It looks increasingly obvious that there is a boom on the globe today; it’s just not happening here. That in turn would suggest that the moderating activity here in the United States may not elicit lower interest rates. What was a conundrum for Greenspan then becomes a problem for Bernanke.’”

“An increase in global interest rates would not necessarily be bad news for Mr. Bernanke. Higher long-term rates would help cool down American economic growth, and the housing market in particular, without requiring the Fed to take more action on its own.”

The St. Augustine Record has this report from Florida. “(Realtor) Arnold DeLorenzo, a respected voice in the local real estate market for 40 years, said houses for sale here may stay on the market longer than the sellers intend. ‘We’re saturated,’ he said. ‘The (housing) market is definitely weakened.’”

“DeLorenzo said even mid-priced homes aren’t selling well now because there are just too many listed. ‘Our inventory is up five-fold over last year,’ he said. ‘We just don’t have the buyers. There’s no demand.’”

“A state study of the market from February 2005 to February 2006 indicated that in some parts of Florida, such as Punta Gorda, home sales are down 90 percent. ‘(That study also says) the Jacksonville market is doing well, but it’s flat,’ DeLorenzo said. ‘Some developers are taking $40,000 to $50,000 off the price of new homes. I just hope the market doesn’t go into a tailspin.’”

“‘The market can’t go straight up forever. This is actually a good sign,’ he said. ‘Everyone’s perception (of what their house is worth) was too high. That’s got to change.’”

“(Broker) Roy Barnes Jr. said much of the chill on home prices is caused by the “fear factor” caused by Hurricane Katrina along the Gulf Coast and by four hurricanes hitting South Florida. ‘I don’t feel that the values have dropped. Prices are being adjusted. Many properties were unrealistically priced,’ Barnes said.”

And the Naples Insider has the May report up. “Naples is currently a strong buyers market for most property types and price ranges. There are many instances where sellers have dropped their asking price by over 20%. Without significant price adjustments, trends suggests that Naples will be a buyers market for years to come.”

“Unlike second home buyers, investors were in the market for the profit potential and had no emotional tie to the property or the Naples area; just a financial tie. Once the slowing trend began to emerge, they wanted out and in big numbers. Beginning in November 2004 the area starting seeing record number of new listings added each month.”

“Year-to-date the pace of sales is mirroring year 2003, suggesting total sales for year 2006 will be 30% to 40% less than the previous two years. With a record number of homes for sale, trends suggest that unless bus loads of price-insensitive buyers start arriving, or prices drop significantly, or a combination of both, the Naples real estate market will remain a buyers’ market for a very long period.”

“Some sellers have to sell, and instances are appearing were they have sold at extremely low prices. I’ve seen some properties sell for 40% off of original list price and 25% off of peak prices.

“A comparison of actives (homes for sale) vs. pending (homes under contract and waiting to close) is a good measure of the health of the housing market. In a healthy real estate market, pendings might equal 50% of of homes listed for sale in the mid price ranges, and 20 to 25% in the higher price ranges. In the winter of 2005 that ratio was near or over 100% for many areas communities; an indication that the market was on fire. In April 2006, the actives vs. pendings ratio for the Naples area was in the 10% range. An indication of low buying activity.”

The New York Times reports on the ‘chill’ in home buying. “Many Americans who planned on real estate as their path to wealth are beginning to find that there are limits to how high is up. As higher interest rates dampen demand, sellers are grudgingly lowering their prices to drum up interest.”

“A house at 57 Marina Boulevard in San Rafael, across the bay from San Francisco, was originally listed at $1.45 million. The owner recently dropped the price to $949,000 when a competing house on the same street lowered its price to $959,000, from $989,000.”

“In Marin County, the prices of about a quarter of all listings have been reduced. County records show that 57 Marina Boulevard was sold in February for $700,000, so the owner, Dan Marr, is unlikely to lose money even at the lower price. ‘I don’t want to talk about it,’ he said.”

“Nearly a year after the sales of homes peaked, buyers are wresting control from sellers in many areas as inventories of unsold homes have grown, in some markets doubling. The most widely used statistic to measure home values, the median home price, shows that once-hot markets like San Mateo, Calif., and Mercer County, N.J., are now registering year-over-year declines.”

“‘It’s going from a seller’s market to a buyer’s market,’ said David Lereah, the chief economist for the NAR. In March, ‘price appreciation went down to 7.4 percent, from over 10 percent,’ he added. ‘That most probably reflects that sellers are bringing their prices down.’”

“ZipRealty has found widespread price reductions in the MLS’s used by all agents to advertise homes. Prices have been trimmed on 35.7 percent of all homes currently listed for sale in the Boston area, for example. The same is true for homes in San Diego, Sacramento, Los Angeles and Miami. And prices have been snipped on a quarter of the homes in Chicago, Washington and Baltimore.”

“In Silicon Valley, (realtor) Richard Calhoun said that the number of homes sold was now 85 percent of the 25-year average. A year ago, it was 30 percent above that average. In Santa Cruz, inventories have tripled. A result is that the median price of homes in San Mateo County dropped 2.7 percent, to $875,000, in March, from $899,000 a year earlier.”

“Elsewhere you can smell the anxiety. The listing agent for a four-bedroom home on Scripps Trail in San Diego informed other agents in the MLS that a ‘very, very motivated seller will entertain all reasonable offers’ and ‘will help with closing costs.’ The house was listed in September at $810,000. After a previous price cut, the seller is now willing to entertain offers as low as $685,000.”

“The seller bought the house for $730,000 in 2005, according to county property records, for what the listing agent said were investment purposes.”

“Robin L. McCarthy, a real estate agent who works in Princeton, N.J., said homes were sitting on the market three to four months, when houses sold in as little as a few days a year ago. Houses that would have been the subject of intense bidding wars now sell for slightly less than asking price.”

“‘Buyers are afraid that real estate prices are going to go down, so they are very careful,’ Ms. McCarthy said. ‘They don’t want to pay too much.’”