The Housing Bubble

The LA Times takes us back to California. “The experts call it a market in transition. It’s not the same red-hot sellers’ market of the last three years, but it’s also not a buffet of bargains for buyers either. Regardless, neither side seems imbued with a sense of urgency.”

“Laurie McCray is one home seller mindful of the market’s new dynamic. But that didn’t stop her from pricing her Chino home sitting on half an acre admittedly on the high side at $810,000. She says she and her husband are in no hurry to sell despite making a deposit on a house under construction in nearby Chino Hills.’ We’ll see how it goes,’ said McCray, who listed her home for sale May 6 and has received one low-ball offer. ‘If it doesn’t work out, we may lower the price but there’s no need to lower it now.’”

“Clark Huang recently relocated from Florida and is looking to buy. But he’s not in any rush either. ‘Prices may not drop necessarily, but they may not go up much more,’ said Huang, who last month made a deposit on a $400,000 condo under construction in San Pedro but then canceled after feeling he made too hasty a decision. ‘We have choices. We’re not looking to rush into anything.’”

“Inland home prices are climbing at a slower pace than they were last year, and some analysts expect the upward trend to end altogether by December. April home sales in Riverside and San Bernardino counties dropped 12.5 percent compared with April 2005. It was the steepest monthly decline in 11 years. San Bernardino County’s median housing price in April was $360,000, which fell short of a record $373,000 set in February.”

“Real estate agents say sales are taking longer because a burgeoning supply of available homes is giving buyers more choice. (Agent) Karen White said the kind of condominiums in Corona that quickly sold for $350,000 to $360,000 a year ago are now listed for $325,000 to $345,000, and there are 14 of them on the market.”

“White said she does not advise potential buyers to wait for prices to come down more because by then rising interest rates mean they would face higher mortgage payments.”

The Voice of San Diego. “As investors and speculators have flocked to the downtown San Diego condo market, many of the roughly 7,000 downtown units, especially those that have come online during the last two years, have remained empty of full-time inhabitants.”

“Karen McElliott came to downtown San Diego looking for a new way of life. What she hasn’t found are neighbors. Of the six units on her floor in her new condo building, McElliot’s is the only one that’s occupied. The Pinnacle, like many of downtown’s newer condo towers, is currently only 55-percent occupied by full-time residents.”

“‘I was looking forward to meeting new neighbors, and having them over for a glass of wine or saying hello and going for walks in the morning, that kind of thing, and that hasn’t happened,’ McElliott said.”

“According to DataQuick, a local real estate information service, around 33 percent of all downtown homes have their tax bills sent to a separate address. Although the empty hallways are an unexpected consequence of the recent condo boom, experts expect the buildings to fill in over time as residents replace investors.”

“‘Go at 9 o’clock at night and stare at Harbor Club (a condo tower in downtown), those are all sold, you’ll see there’s four or five lights on. Where are those people?’ said David McQuaid, president of the HOA at The Grande, a new residential condo tower in downtown’s Columbia District.”

“Bob Edmonston, who lives in a condo development in the heart of downtown’s Marina District, said living in his building feels ‘weird.’ ‘I would definitely like to have more people around,’ Edmonston said. ‘It’s like everyone knows it’s going to be big eventually, but it’s not big now.’”

“The homeowners’ association at The Pinnacle has just launched an effort to find out what happened to all the people who bought condos in the building. With so many empty units in the building, James Roberts, president of the HOA said he’s sending out questionnaires to all the people who bought units. Roberts said the questionnaires will ask owners a simple question: Where are you?”

“McQuaid said he’s thinking of following Roberts’ lead. The Grande (has) also apparently been a favorite for investors, and McQuaid said he wants to know where all the homeowners are. ‘They’re like ghosts, they come and go,’ he said.”

Some reports on what’s happening with realtors. “A record 10,000 Realtors have convened in Washington, D.C., this week to meet with their congressional delegation to discuss top concerns for the real estate industry. Realtors are also asking members of Congress to support the act which would permanently bar big banking conglomerates from entering the real estate business.”

“Realtors are also asking Congress members to defend the tax rules that protect home ownership, especially the mortgage interest deduction. If tax benefits associated with ownership were reduced, NAR said, property values would likely decline.”

“Misrepresentation claims continue to be the largest source of legal troubles for real estate brokers, said Laurie Janik, general counsel for the NAR trade group. Agents and brokers should not make any statements about future market conditions, Janik also said. ‘Don’t say anything like, ‘This well will never run dry.’ It’s a sure recipe for disaster,’ she said.”

The Wall Street Journal does a Q&A. “Question: Why is it so hard to get good data on housing-market prices, especially in major metro areas like Washington, D.C.? Are there no reliable indexes? I disagree that Realtors will help much, even for information on price cuts in your target neighborhood. Most Realtors just want to sell houses, and ‘now’ is always the best time to buy.”

“A: Wouldn’t it be great if you could get all of the information you need to buy and sell your home on one free Web site? Don’t get me wrong, there’s a lot more useful real-estate-listing information floating around in cyberspace than there was even two years ago. But much of it is controlled by Realtors, who, as you have pointed out, seemingly don’t want anything but ‘happy news’ getting out, and don’t really want consumers to be empowered.”

Realtor Magazine has some tips, titled ‘Cooler Market Ushers in Its Own Lexicon.’ “It helps to have a decoder ring when you read today’s real estate ads, newly spruced up to wow buyers in a tightening market. Here are some definitions:”

Old World Elegance. The word luxury is so 2005.

New Price. The seller dropped the asking price, but doesn’t want to put it bluntly.

Price Reduced to Sell: Sometimes the direct approach works.

Intimate: The new euphemism for small.

Grand. It suggests glamorous things like sweeping staircases in duplexes — and sweeping prices to match.

And here are some anonymous comments from the field. “We asked on our blog, ‘How is the housing market in your area?’ and readers were quick to answer. And, alas, the news isn’t good: almost every other answer either contained the phrase ‘rising inventory’ or ‘buyer’s market.’”

“One said that Northern Virginia (NOVA) is ‘overflowing’ with inventory. Noting that a lag is expected between rising inventories and price reductions, the poster said, ‘About now is when prices are expected to start downward.’”

“Southeast Pennsylvania is a buyer’s market, ‘for sure,’ according to one reader who said, ‘I’ve seen several ads by agents, ‘Buyers Wanted! Call Us!’ There have been many price reductions, the poster said.”

“In Phoenix, Ariz., ‘inventory is high,’ according to real estate consultant Greg Markov, who pegged Phoenix inventory at 40,000 active listings, compared with less than 12,000 listings a year ago. ‘Suburbs are hurting most,’ Markov said. ‘People are reconsidering driving an hour to work with $3 a gallon gas prices. Sellers are reducing prices an average of 5 to 10 percent to get the properties moving.’”

“California’s real estate market was one of the hottest in the country. But now, according to one poster, it’s a buyer’s market in Marin County in northern California, ‘especially high-end where things are selling 75 percent on the asking dollar. Bad press, high interest rates and rising stock market (are) hurting expensive homes here.’”

A pair of reports on the Orange County, CA housing bubble. “The Orange County housing market continued to slow last month, with slumping sales and annual price gains in the single digits, figures released Tuesday show. And while the median price of an Orange County home set yet another record in April, at least one local real estate agent questioned whether that figure reflects an actual increase in local home values or an increase in the sale of high-end homes at reduced prices.”

“In March and April, there were nearly 34 price cuts for every 100 home sales listed in the Southern California MLS, which includes Orange County and parts of Los Angeles and Riverside counties. That compares with 21 price reductions per 100 sales in the same period last year, the MLS reported.”

“Meanwhile, the number of homes listed for sale in Orange County increased 121 percent in the past year, rising to 12,296 listings by the end of April. DataQuick figures show that sales dropped to 3,276 homes last month, down 16 percent from March at a time of year when sales typically accelerate. And sales were down 28 percent from the previous April.”

“(Realtor) Dick Lobin in Huntington Beach said a ’standoff between buyers and sellers’ is causing prices to rise while sales decline. ‘The buyers are saying no, no, no, unless it’s particularly nice, and the sellers have an abiding faith in the market,’ Lobin said.”

“A breakdown of Orange County sales by price show that lower-priced homes have been hit the hardest. For example, the number of homes selling below $600,000 dropped 40 percent or more last month, DataQuick said. Above $700,000, sales were down just 9.5 percent, with $1 million-plus homes off just 5 percent.”

“‘Who gets hurt the most when there’s pressure on the economy? It’s not the people with money,’ said Lobin, who focuses on the Garden Grove-Westminster area. ‘It’s tougher on the entry-level homebuyer.’”

“Cary Hairabedian, an agent who sells homes in Cypress, questioned whether home prices have gone up or high-end home sellers were more motivated. ‘So what happened? Overpriced, expensive homes slashed their prices,’ he said. ‘You’ve got this pendulum swinging back and forth. It skews things.’”

“Scott and Kristan Bruce took that into account when they priced their Tustin home to sell at $744,900. The Bruces, both teachers, decided to move to Cleveland because the price of a move-up home here is out of reach. ‘We’re listing it a little bit low compared to other homes to sell a little bit quicker,’ said Scott Bruce. ‘Now it’s a buyer’s market. The homes around here have been on the market a little bit longer.’”

“(Realtor) Bob Hunt in south Orange County said the last time he saw rising prices and declining sales was just before the housing bust of the 1990s. But that doesn’t mean history is about to repeat itself, he said. ‘I’m not saying we’re heading into the ’90s again. Certainly not,’ the veteran agent said. ‘It’s an anomalous market right now. You’d think (the prices) would be down.’”

And from Jon Lansner. “Six straight months. Six times Orange County couldn’t sell as many homes as last year. A losing streak of this length has occurred only three other times since DataQuick began tracking the market in 1988. Two of those times fall into the ‘too painful to recall’ department.”

“What’s clear is this slump is more than a blip. Last month’s 3,276 sales marked the slowest April since 1995, when an 11-month string of sales declines was in the works.”

The Street.com looks at the future of the public homebuilders. “Homebuilder stocks remain dismal performers of late. The question remains: How do you extract that value? The answer for builders, according to some industry watchers, is through large land sales, mega-mergers or share buybacks, which would make it clear to investors that it is cheaper to buy land on Wall Street than on Main Street.”

“Analyst Gregg Schoenleber has a unique take on the matter. ‘If the market is not willing to pay for the value we see in homebuilders, we think the builders themselves should do so, through buybacks. In essence, the companies would begin to ‘LBO’ themselves,’ Schoenleber wrote.”

“‘We estimate this would enhance annual EPS growth by 13 percentage points per annum from 2006-2010,’ he wrote. ‘At that point, when the industry has consolidated or the last share is for sale, the market may finally collectively proclaim, ‘Now we believe you!’”

“The difficulty is that builders report only the costs of land on their balance sheets and typically don’t break out exactly when that land was purchased. What compounds the problem is that public builders themselves have made up a large percentage of the buyers driving up the land prices in recent years, so it’s hard to tell if the whole group is overpaying.”‘

“‘The question to ask any CEO of a public homebuilder is why it would be more attractive to buy land right now than their own stock,’ says (fund manager) Michael Elrad. Investors looking for undervalued land on Wall Street should pay attention to which builders bought land many years ago at a lower cost rather than solely in the overheated market of the past few years, Elrad says. The older a company’s land holdings, the more investors can find comfort in paying premiums to book value.”

“Investors’ best bet may be to eye the builders with older land holdings and an aggressive buyback program. Because it’s the public builders who’ve bought most of the land in recent years, the buyback plan would demonstrate to the market just how undervalued their own land is.”

“For larger builders, however, harvesting such value isn’t as easy, because none appear to be looking to sell off large tracts of valuable land.”

Looking at Tolls balance sheet, one sees that close to two billion in inventory has been added since 2003 and well over one billion since last spring. And what good are share buybacks as the firm is issuing stock to insiders at under $5 per share and then they sell it?

Looking at their cash flow statement; where will they get the cash to do these buyback?

The Idaho Statesman reports on the fading housing bubble in that state. “Relief may be in sight for Treasure Valley consumers struggling to find affordable single-family housing in a market where a dwindling inventory has driven home costs to record levels.”

“Developers and officials with local industry say dozens of new housing developments in the area, along with more than 30,000 building lots in the regulatory pipeline, may help hold the line on runaway costs that are pricing potential home buyers of the market. The increased inventory could give buyers the upper hand when negotiating to buy new homes.”

“According to the Intermountain MLS, there were 3,841 new and existing homes listed for sale in the Treasure Valley this week, 43 percent fewer than the 6,749 on the market during the first quarter of last year.”

“As more acreage become available for development, builders will no longer have to pay exorbitant prices for land, said Don Hubble, owner of Hubble Homes. He said his company recently had to pay $165,000 an acre for land in Meridian that had been appraised at $125,000 an acre.”

“Hubble said much of the available land for sale is being gobbled up by out-state-developers eager to benefit from the Treasure Valley housing boom.”

“‘That makes it more difficult for the rest of us to find land to build on,’ he said. ‘But if there are more than 30,000 lots coming online, that’s going to make a big impact.’”

“And the high number of new subdivisions in the works will mean more inventory for buyers, who now feel they must buy immediately or risk losing out on single-family properties, said Trey Langford. His most recent survey found 69 subdivisions with 15,041 potential lots in the works in Ada County. Canyon County had 96 new subdivisions with 7,195 lots.”

“The more homes available, the better for the consumer, Langford said. ‘Right now, if you don’t buy a home upon seeing it, you can figure you’re not going to get it,’ he said. ‘But with more homes on the market, consumers will have more choice, and the current seller’s market will become a buyer’s market.’”

“Home prices rose last year by 24 percent in Ada County and 31 percent in Canyon County. Wage increases in the area averaged 2.7 percent for the year. ‘A 20 percent increase in home prices is sustainable for a couple of years,’ said Jim Archer, of Hubble Homes. ‘But then what happens is you lose your market because people have been priced out.’”

A pair of reports from Inman News on the housing bubble. “Globalization appears to be in full swing for the real estate industry, with foreign buyers playing a significant role in some U.S. markets. While prices continue to escalate in Florida, sales have been sliding. In March, sales were down 22 percent compared to March 2005, the Florida Association of Realtors reported.”

“Foreign buyers, just like domestic buyers, are concerned about the sustainability of price increases in Florida, (broker) Alex Shay said. ‘Foreign buyers are just like everybody else, everybody is talking about a real estate bubble.’”

“Real estate speculators, both domestic and international buyers, have a lot to do with the current slowdown in the real estate market, said (consultant) Jack McCabe. ‘Speculators were just rampant down here,’ he said, and particularly with luxury condo projects in South Florida.”

“‘Speculators and speculative development and speculative lending created an oversupply in multi-family units, many of these are luxury. A lot of these purchases, both internationally as well as U.S., were done over the phone through brokers. Now a lot of properties are getting cancelled,’ McCabe said.”

“But as speculators have left the market, the timing is good for serious foreign buyers who are purchasing a second home, McCabe said. ‘It has become more of a buyer’s market for them. Sellers are now willing to negotiate. We’ve seen sales velocities in a lot of markets come to a standstill, with inventories two and three times what they were 12 months ago.’”

“Lewis M. Goodkin, a real estate and financial industries consultant in Miami, said that international buyers got caught up in the fever of the U.S. housing boom just like domestic buyers. ‘The level of speculation had been at a record high. It just dwarfed anything we’ve had in the past.’”

“During the most heated days of the housing boom in Florida, it was common for new projects to sell out long before ground had been broken at the development site, and foreign buyers were among the participants in these sight-unseen purchases, he said. ‘It was the first time in all the years I’ve been in business that residential developers were outbidding commercial developers for a site.’”

And this on standing inventory. “In January, we commented on how rapidly rising home sales have masked the fact that there are more than 500,000 unsold new homes under construction. Now, 128,000 unsold homes are completed and ready for immediate move-in. This is the highest level in history, and an increase of 22 percent from one year ago.”

“Annualized new-home sales rebounded in March to 1.21 million units following a dreadful February. Still, sales are down more than 7 percent from one year ago. The median new-home price fell to $224,200. The Housing Market Index continues to decrease, reaching 50 in April, its lowest value since November 2001.”