The Housing Bubble

The Florida realtors have their quarterly numbers out today. “‘Sales of existing single-family homes in Florida behaved like much of the U.S. across the 2006 first quarter,’ says Dr. David Scott, professor at the University of Central Florida. ‘The stress points on unit sales come from two key sources: One, rising inventories of dwellings for sale and two, rising mortgage rates.’”

“In the Tampa Bay area, homes sales fell 23 percent compared with the same period last year. The Sarasota-Bradenton market dropped even more, 44 percent.”

“The number of condo sales in Lee County plummeted 47 percent. In Collier, the number of home sales dropped from 1,358 to 863, a 36 percent decline. Collier’s condo market also was rocky, with sales cut nearly in half from 1,494 to 784.”

“Statewide, sales of single-family existing homes totaled 45,864 during the three-month period, a decrease of 20 percent compared to 57,532 homes sold during the same quarter a year ago.”

“Looking to Florida’s existing condominium market, sales of existing condos also decreased during the quarter, with a total of 15,386 condos sold statewide compared to 19,657 in first quarter 2005 for a 22 percent decline, according to FAR.”

“Orlando and followed the national trend of a slowdown during the first three months of 2006, with sales sales of existing single-family homes declining of 16 percent compared with the year-ago period.”

“Palm Beach County’s housing market continued to cool in the first three months of the year, FAR said. The county’s median home price was $392,900 in the first quarter, down from $415,800 in the fourth quarter of last year and $399,900 in the third quarter.”

“In the Treasure Coast, the first-quarter median was $260,200, down from $262,500 in the fourth quarter and $267,500 in the third quarter. Meanwhile, the number of sales fell, too. Palm Beach County’s first-quarter sales dropped 32 percent from a year ago, while Treasure Coast sales volumes were down 15 percent.”

“Federated National Insurance Company, today reported that the cost of its reinsurance coverage for the upcoming hurricane season is exceeding the amount previously considered in the Company’s budget for this expense.”

“Edward Lawson, CEO, commented, ‘In order to offset these increased costs, the Company is filing for a 49% rate increase in its homeowner line of business, to be effective June 1, 2006. The yearly guidance of $4.00 per share is hereby removed until our earnings picture is clearer.”

“The Company, through its subsidiaries, underwrites standard and non-standard personal automobile insurance, flood insurance, general liability insurance, mobile home insurance and homeowners’ property and casualty insurance in the State of Florida.”

The Massachusetts realtors have their quarterly numbers out. “Prices for single-family homes in Massachusetts declined slightly in the first quarter, the first such drop in more than a decade. The Massachusetts Association of Realtors reports the median selling price for a single-family home from January through March fell by about 1 percent, to $343,500.’

“The group said that that’s the state’s first quarterly decline in single-family home prices since early 1993.”

“In the first three months of the year, MAR data show that detached single-family homes sales fell 6.5 percent, from 8,604 homes sold in the first quarter of 2005 to 8,047 in the same period this year. It’s the fourth consecutive quarter that activity in the detached single-family home market has declined from the same period one year earlier.”

“‘With a much wider selection of homes to choose from this year, buyers have become more discriminating. They’re searching the market longer and negotiating harder before purchasing,’ MAR President David Wluka said. ‘With a much wider selection of homes to choose from this year, buyers have become more discriminating. They’re searching the market longer and negotiating harder before purchasing,’ Wluka said.”

“Another factor enticing buyers into the market in recent months is the more plentiful supply of homes for sale. In the past year, the inventory of single-family properties (detached homes and condos) on the market has risen 42 percent, from a monthly average of 38,871 listings in the first quarter last year to 55,338 in the first quarter of 2006.”

“At the current sales pace this represents 13.7 months of supply, an increase from 9.2 months of supply in the first quarter last year, and is the largest supply of homes for sale in 10 years, dating back to the winter of 1996 when there was 14 months of supply on the market.”

From the associations PDF file, single home sales in the following regions were down; Cape Cod -19.1 %, Central -11.4%, Northeast -6.2%. Median prices of single family homes in the following regions; Central -1.1%, Greater Boston -1.3% and Northeast -1.6%.

“A more moderate sales pace, along with softening home prices and a sharp increase in the inventory of unsold homes, all helped to signal the emergence of a strong buyer’s market in the Bay State’s residential real estate market during the first quarter of 2006. Regionally, sales activity in the detached single-family home market fell in six of seven regions of the state during the first quarter.”

“Sales were essentially flat on the South Coast, but more significant double-digit declines occurred in Worcester County and Cape Cod.”

The Voice of San Diego has this update on that city. “In 2006, spring has seen record numbers of people lining up to sell their homes, but there’s been no subsequent rise in the rate of sales. Indeed, sales activity in April 2006 was down 30.7 percent from April 2005, despite the existence of almost 20,000 homes for buyers to choose from. That’s the biggest year-on-year decrease in sales rates since April 1995.”

“According to figures from DataQuick, median prices in the county have actually dropped over the last six months. And they’ve been dropping throughout what is usually the market’s boom season: Spring. DataQuick’s figures show that the price of all new homes, condos and single family homes combined, in San Diego has decreased 8.8 percent since December 2005.”

“For existing single family homes, the median price has dropped 1.8 percent since November 2005, and for existing condos, the median price has dropped 1.3 percent.”

“The discount real estate brokerage ZipRealty said some 33 percent of the San Diego County homes currently listed for sale on its Web site have reduced their prices.”

“Greg Speaks, (who) provides most of the For Sale signs seen in the county, said business has been booming in the last few months. That’s not surprising, given the recent spike in inventory, but Speaks said what’s more interesting is that he’s not been getting too many signs back from customers.”

The Union Tribune. “A recent spike in default notices may be a sign that some homeowners are struggling to pay the adjustable-rate mortgages that now dominate lending in San Diego County’s residential real estate market, analysts warn.”

“Notices of default, the first step toward mortgage foreclosure, jumped 60 percent in the San Diego region in the first three months of this year, compared with the first quarter of last year, DataQuick reported. Neighboring Riverside County had a 64 percent jump in default notices over the last year.”

“David Berson, chief economist for mortgage-investment giant Fannie Mae. However, Berson is troubled that foreclosure activity is rising during a period of economic growth. ‘Normally this is a situation in which housing problems tend to go down, not up,’ Berson said. ‘If it continues, it could be a sign that borrowers are in financial distress.’”

“Longtime San Diego mortgage broker Ed Smith Jr. Smith has seen too many people who are willing to take financial risks for their slice of the American Dream. ‘You have a hardworking family trying to buy home in a market where a starter home costs $500,000 to $550,000,’ said Smiths. ‘They are all looking for the lowest monthly payment. They don’t plan for when the freight comes due on that ticket.’”

“In La Mesa, Erik Weichelt, a real estate agent who specializes in marketing or real estate owned properties acquired through foreclosure, said business is good. ‘We have more REOs now than we have in the past three years,’ Weichelt said. Until recently, ‘there was no need for the foreclosure process; appreciation was so strong. People were able to refinance or sell the property and get a fresh start. Now, because of limited appreciation and some stagnation in the market, that is just not available.’”

Another California realtor is also doing well. “A year after shedding her blazer and slacks in favor of a bikini for a billboard advertisement in Belmont Shore, real estate agent Wendy Heath is doing just fine and then some. Visitors flocked to Heath’s Web sites, either to view her advertisement or check out her listings.”

“‘Every once in a while you’ll have an agent mention, ‘Oh, you’re the bikini Realtor,’ Heath said. What’s next? ‘I never stop thinking, but I don’t know what’s next,’ she said.”

The homebuilders are turning negative. “Rising mortgage rates, deepening affordability issues and the retreat of investors/speculators from the marketplace are prompting single-family home builders to further adjust their perspectives on the new-home market, according to the National Association of Home Builders.”

“The HMI declined six points from an upwardly revised reading in the previous month to hit 45 for the latest report, its lowest mark since mid-1995. All three component indexes declined in May. The index gauging current sales and the index gauging sales expectations for the next six months each fell five points, to 50 and 54, respectively. Meanwhile, the index gauging traffic of prospective buyers declined seven points, to 32.”

“The decline in builder confidence was broad-based and registered in every region this month. The HMI fell three points to 47 in the Northeast, two points to 30 in the Midwest, six points to 51 in the South and eight points to 61 in the West.”

“The index shows more builders say the market is ‘poor’ than say it’s ‘good.’ The index has fallen 23 points in the last seven months. A year ago, the index was at 70.”

“The industry group expects new home sales to fall 12% this year from the record 1.28 million in 2005. They expect housing starts to fall about 7% from 2005’s record 2.07 million.”

“‘Any really further setback (in the index) is just going to continue to reinforce the picture and people will then begin to question how big of a magnitude we’re going to see in terms of a correction,’ said (economist) Glenn Haberbush.”

“‘The days of double-digit price appreciation are over,’ said Greg McBride, senior financial analyst at Bankrate. ‘It is very much a buyer’s market rather than a seller’s market.’”

“On Tuesday, the Commerce Department will report on April housing starts. Economists are looking for a small increased to about 1.97 million annualized starts from 1.96 million in March. It used to be that the builders’ index tracked housing starts quite closely, but the relationship has broken down in this decade. Starts have been much stronger than would be implied by the builders’ index.”

And the Downtown Journal has this on a developer in the Twin Cities. “Jim Stanton was building in the North Loop before most of Downtown’s condos were a glimmer in a developer’s eye. Stanton, says he’s learned a few things over the last 44 years in the development business. And all those years, he’s been churning out projects Downtown and around the metro.”

“‘I’ve never had long-range plans,’ Stanton said. ‘When the opportunity is there, I take it. I think most developers are like that.’”

The Fredrick News Post reports on the housing bubble in Maryland. “Thousands of Frederick County’s so-called ‘McMansions’ could be back on the market in coming years as deadlines on interest-only loans come due, mortgage payments skyrocket, and homeowners’ pocketbooks are stretched to the breaking point.”

“It’s a real concern for Mary Christine Jackman, director of the Frederick County Treasury. It should be a concern as well to the buyers of those high-end houses who pushed their financial limits five or 10 years ago to buy big. Principal payments will kick in for buyers who took out interest-only mortgages during the recent housing boom, Ms. Jackman said in a recent interview.”

“That $300,000-plus home, bought with the expectation of a return on the initial investment, could become a white elephant. ‘There could be thousands of homes on the market at the same time and nobody’s quite sure if there will be enough equity to take the houses off the market,’ Ms. Jackman said.”

“A flood of vacant houses ‘is one possible outcome,’ said Thomas Shaner, executive director of the Maryland Association of Mortgage Bankers. ‘I don’t want to say it couldn’t happen. It absolutely could happen, and that kind of stuff worries everyone.’”

“He was ’shocked’ to find out more than 50 percent of mortgages taken out in the past several years were interest only. Impractical expectations played a part, he said. Many homeowners used an interest-only loan to buy a larger house than they really needed, instead of seeing what they could realistically afford. ‘If you were stretched to the last dollar to make that work, you’ve got issues,’ Mr. Shaner said.”

“Filing for bankruptcy, or defaulting on taxes, are two of the choices homeowners could be left with. This year’s tax sale was Monday. On offer for auction were 306 properties whose owners had defaulted on their annual property taxes. Despite Ms. Jackman’s best efforts to reduce that number, it’s a sharp increase over 2004’s 235 properties and 232 properties sold in 2005. Twenty-five properties on the list were valued at more than $300,000.”

“‘People don’t have the money, whatever the reason, and that’s only going to get worse as the interest-only loans come due,’ Ms. Jackman said. Twenty-five properties on the list were valued at more than $300,000. The most expensive of those, worth $510,946, is from in the Villages of Urbana subdivision. The owner owes the county $11,739.”

“Thousands of empty high-end houses will have an unknown impact on Frederick’s property tax revenue. The effect on the treasury, Ms. Jackman said, ‘I’m very nervous about.’”

“Mr. Shaner said that from the standpoint of a county treasurer, as housing prices come down, assessments come down, and the county tax base declines. That affects the county’s bottom line. ‘The local governments have been riding on a wonderful windfall with everybody else as the housing market has risen,’ Mr. Shaner said. ‘They’ve had an increase in their revenues, and they haven’t done a darn thing to do it, and they’ve got more money’ without having to raise taxes.”

The realtors association has some numbers out. “Real estate gains came to an abrupt halt in the first quarter of 2006, with the median price of a U.S. home falling 3.3 percent from the fourth quarter of 2005, according to a report by the National Association of Realtors.”

“Prices were basically flat or lower during the quarter as inventories of houses for sale rose and their time spent on the market lengthened. Median prices nationwide fell from $225,300 in the fourth quarter of 2005, to $217,900, a drop of 3.3 percent.’

“Many major metro areas showed slight declines, including Boston, Washington D.C. (down 2.4 percent), Los Angeles (down 0.8 percent) and Chicago (down 0.8 percent).”

“The report quoted NAR’s chief economist David Lereah saying, ‘With the supply of homes picking up very nicely in many areas of the country, pressure is coming off of home prices.’ Lereah is optimistic that the market will soon return to growth. ‘By the time we report second quarter data, I expect most areas will be returning to normal rates of price growth in the single-digit range.’”

“Existing home sales are down more than 15% in five states that have had the hottest housing markets, the National Association of Realtors said Monday. Sales were down 22.2% year-over-year in Arizona, 19.2% in California, 18.2% in the District of Columbia, 15.7% in Florida and 15% in Nevada.”

“The hot markets now are New Mexico, Louisiana, Montana and Mississippi, with sales up more than 15% in each of those states.”

“NAR President Thomas M. Stevens said the sales pattern is expected to level out. ‘We project home sales may soften a little further before picking up in the fourth quarter.’”

“‘Condos have good fundamentals given the demographics of buyers, with baby boomers focused on the high end and their kids on more affordable units. However, in a handful of areas where there may be an oversupply, prices may level-out, so the longer your time horizon the better your investment,’ Stevens said.”

The Daily News has this update from coastal North Carolina. “‘For Sale’ signs are sprouting like dandelions at homes along N.C. 210. ‘The size of the MLS book is twice the size it usually is, said (realtor) Richard Baker in Sneads Ferry. ‘The sales equation has doubled since a year ago in January. The numbers are there. We’ve got a surge of inventory, no question in my mind.’”

“This year’s property revaluation in Onslow County estimated the value of beach properties in some Topsail Island areas at close to 400 percent more than a year ago. But are the higher prices starting to scare buyers off?”

“‘There is a combination of things, first of all, if you read the national press, you constantly hear about real estate being overvalued, and they think the bubble is going to burst. It’s a thought process nationwide,’ Baker said. The media have been predicting a downward trend in the ‘housing boom’ of recent years, Baker said, thereby scaring some possible buyers away until the market becomes more stable.”

“‘People are concerned about buying at the beach,’ Baker said. ‘But because of the excellent growth and appreciation over the last few years, we had a lot of profit-seekers. When the market slowed down, they didn’t stop building.’”

“‘There are more than 400 (agents) on this sliver of beach marketing it,’ he said. ‘More agents are calling sellers up saying, ‘Hey, I can get you a million dollars.’ They call people up and paint the sky blue and the water deep and as a result we’ve got a lot of listings in the MLS.’”

“Chris Rackley, president of the Topsail Island Association of Realtors, said he thinks the reasons people are selling are age-old. ‘This island is an investment and some people are ready to cash in, while some are upgrading or downgrading,’ Rackley said. ‘There are tons of reasons.’”

And nearby, an economist had this presentation. “More than 50 people turned out for an investor seminar recently hosted by a community of luxury condominiums and townhomes in Boca Raton.”

“The featured speaker for the evening was David Lereah, chief economist for the National Association of Realtors. Lereah was quick to make his message clear: ‘You don’t need a boom for real estate to roar. The real estate boom is over but the real estate expansion is still here.’ Although homes are not selling as quickly right now, prices are still up. ‘There are no real estate bubbles, only balloons that expand and contract,” he said.’”

“He said the real estate boom was caused by factors such as lenders being able to reduce financing costs; baby boomers reaching their peak earning years and trading up or buying second, third and vacation homes.”

“‘Real estate is not an irrational investment, but speculators purchased irrationally during the boom, especially in areas like Miami. This drove prices up, and many speculators took out interest-only loans. This produced a vulnerable real estate market,’ Lereah explained. ‘In 2006, we are cleansing the market of speculation.’”

“He added that he is bullish on Florida, Arizona and Nevada because of even greater population increases. ‘The law of supply and demand works.’ All of Lereah’s real estate investments are in condominiums and townhomes because he doesn’t want to be involved in maintaining them. ‘If you’re Mr. Fix It, then it’s okay to invest in a single-family home,’ he said.”

“Lereah also pointed out that he has invested in several condominium conversions. ‘Condo conversions are good because the property is already there.’”