The Housing Bubble

A pair of reports on developers trying to catch the last of the housing bubble. “Imagine a grain elevator, once the biggest and fastest in the world, jutting 290 feet in the air. Now imagine that elevator sheathed in glass and metal and converted into about 230 condominiums. Hard to picture? Not for Baltimore developer Patrick Turner, who envisions a residential reincarnation of the boxy elevator building and silos.”

“‘You can live in a historic condo anywhere in the world, but there is no other grain elevator in the world where you can live,’ Turner said.”

“The Baltimore complex, Silo Point, sits in Locust Point, a once-gritty blue-collar neighborhood. A deteriorating terminal is across the train tracks from the complex on the harbor side, with abandoned piers and a rusting hospital ship, but Turner says the tracks are no longer used and the ship will soon be removed.”

“In a recent interview, he gushed about the condo units in the elevator building itself, he calls them ‘lofts in the sky.’ Silo Point is still a bit hard for visitors to comprehend initially, Turner says. But he’s taken ‘hundreds of them’ through the abandoned ‘lobby’ and then up 130 feet in an old claustrophobic workers’ elevator.”

“It is a jolt, though, to see the thin, boxy concrete structure now, standing in a mud field, with its crown of corrugated metal and steel girders and its banks of broken windows, which start halfway up the building.”

“(Architect) Chris Pfaeffle plans to reinforce the ‘industrial aesthetic’ with other touches, including landscaping with grasses or wheat. He also plans to build a mound of dirt on one side to show ‘the amount of grain that could be stored in one silo. It will be sort of like an obelisk in Rome.’”

And in Orange County. “A growing number of consumers who are buying condos at resorts, a trend that Orange County developers see as a way to make a quicker buck. With condos, a developer gets paid as soon as the units are sold. Lenders realize that and are more likely to extend money to a builder who plans some homes, said developer Paul Makarechian.”

“Though more popular, the condo-hotel mix remains limited. There are several reasons. The once-robust housing market has seen sluggish sales of late.”

“Also, cities enjoy tax revenue from hotels and are reluctant to see any revenue reduced. That’s especially important because hotel sites may lack zoning for condos. Developers and cities have struck a compromise. In some cities, a hotel owner can sell condos, but a buyer can only stay in the units 45 to 90 days per year.”

“Yet as projects mature, hotel developers could face lawsuits from homeowners just as traditional condo developers have seen, said (hotel broker) Alan Reay. ‘It’s inevitable,’ Reay said.”

“Some buyers just aren’t going to understand what they’re getting into, he said. ‘You can’t pick furnishings or paint. You have no say on management.’”

The Las Vegas Sun reports on the housing bubble. “Home sellers better prepare for whiplash. Buyers are in the driver’s seat these days, steering for bargains that haven’t been offered in years. A record number of resale houses, 18,467 in April, are on the market, along with another 4,000 new homes. Additionally, another 6,000 condominiums are, or will soon be, for sale after being converted from apartments.”

“Some incentive packages have been valued by builders at up to $100,000. Builders are offering higher commissions to real estate agents, up to 6 percent in some cases. With contract cancellations reaching 38 percent in some new subdivisions, builders are cutting staff and prices on new homes by tens of thousands of dollars.”

“With about 30 houses entering the market daily, one broker expects the number of resale houses for sale to reach 20,000 this year, a first for the valley. The increase in the housing inventory is largely attributable to real estate investors and speculators who are now trying to cash in before the market cools too much, said Dennis Smith, president of Home Builders Research Inc.”

“With the market softening, buyers are aggressively trying to push prices down even further, said real estate agent Shelley Brown. ‘Some buyers are making offers of $20,000 to $30,000 less on homes that are priced right, and they can’t do that; sellers won’t sell,’ she said. ‘Buyers with unrealistic expectations are not getting houses.’”

“The market fluctuations are bittersweet for homeowners like Mason and Bonnie Hall, who purchased their 3,200-square-foot home in the northwest Las Vegas Valley five years ago for $248,000. They listed it for $699,000, but accepted $660,000 in April after the house had been for sale for almost three months. The Halls bought a new home in Enterprise, Utah, that cost about $200,000.”

“Price drops are occurring already in the Las Vegas new-home market. Some homebuilders are reducing prices of their high-end homes by as much as $100,000, according to Larry Murphy, who monitors real estate trends. KB Home recently reduced prices up to $30,000 at 16 of its 38 subdivisions.”

“‘We had to make sure that we were priced correctly to the market,’ said KB Home division President Don DelGiorno. ‘The amount of competition out there, especially in the resales, is in reaction to that.’”

A couple of readers suggested this article and topic. “Topic: Article on 50 yr mortgage. Buy a house when your 15, and it may or may not be paid off when you retire.”

“You, too, can own a home in California, with 600 easy monthly payments! Just get a 50-year mortgage! With any luck, you’ll have paid it off before you die!”

“The 50-year mortgage won’t keep monthly payments very low because it’s not really a 50-year mortgage at all. It’s an adjustable-rate mortgage with a 50-year amortization (meaning it’s paid off after 50 years). The interest rate is fixed for the first five years, then moves up or down thereafter, meaning the monthly payment fluctuates as well.”

“‘The monthly payment on the 50-year mortgage would actually be higher than it would be on the 40-year, because the (higher) interest rate overwhelms the (longer) term,’ Kieth Gumbinger explains. Someone who takes out a 50-year, $300,000 mortgage will repay $300,000 in principal and $714,000 in interest over the life of the loan. That compares to $382,000 in interest for a 30-year fixed-rate loan, and $543,000 in interest for a 40-year fixed-rate.”

The Sacramento Bee. “Last year there was no place where people stretched their pay harder to buy one than California. A new analysis of housing and financial data portrays the state’s homeowners as the nation’s most financially stressed.”

“Moody’s survey shows the growing financial pressures on California households by ranking 10 more Golden State areas in the nation’s top 11. All are places where housing prices have skyrocketed ahead of wages since 2000. The findings have implications in a state where nearly three-fourths of recent homebuyers have adjustable-rate mortgages that are scheduled to take even bigger chunks of their monthly pay.”

“None of this is new in a state where both gushing happily and fuming over rising home prices have become part of the psyche. ‘We had a campaign 25 years ago called, ‘Where will our children live?’ said Leslie Appleton Young, chief economist of the California Association of Realtors.”

“Sandy Sargent, a Sacramento real estate agent, believes many new Sacramento-area homeowners spend 60 percent of their paychecks for housing-related expenses that include a mortgage, utilities and taxes. ‘People will do almost anything to get themselves in a home,’ she said.”

“‘We lost 900 kids this year in the Salinas school district,’ Salinas Mayor Pro Tem Jyl Lutes said. ‘Where I teach, we lost 30. It has that ripple effect. It hurts everything.’ Salinas, like much of the Central Valley, is home to thousands of employees with hourly wages that are no match for escalating home prices.”

“‘Nobody who cleans hotel rooms is going to move into a $3 million house,’ Lutes said.”

“‘We bought six years ago for $200,000,’ said Lutes. ‘The same house is selling for $900,000. You’re either getting three or four families together or several generations together or the houses are just sitting on the market. There’s no magic wand you can wave over this and it all goes away.’”

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A pair of reports on homebuilders. “Lennar, the builder of U.S. Homes houses, is scaling back operations in the Northern Colorado market. ‘We’ve heard we’re not the only national builder that is consolidating,’ said Laurel Followell, who, along with her co-workers, will be looking for a job.”

“It’s all part of the real estate cycle, said Eric Nichols, president of the Fort Collins Board of Realtors. ‘National production builders have a business model that won’t survive without the high-volume demand to keep their machine running,’ Nichols said.”

“When asked if the Northern Colorado market is overbuilt, Nichols said, ‘Segments definitely are.’ Local home builder Steve Spanjer agreed that national builders probably have overbuilt their products.”

“Another major factor is the high rate of foreclosures across the state. In Larimer County, 17 percent of the 1,100 homes in foreclosure were new homes, while in Weld County, 16 percent of 1,400 foreclosures were new homes.”

From California. “The scent of baking scones wafts through the house as children’s feet pound the floors. ‘Dad’ rushes to get things ready as ‘Mom’ lounges on the couch. It’s a birthday party for Camille Chen. ‘Husband’ Jason Simmons has a surprise: He and the kids remodeled the den into a game room and won’t Mom, a notorious poker fiend, be pleased.”

“Except Chen and Simmons aren’t married, the kids aren’t theirs, they don’t really live in the house and they’re all Centex Homes marketing director Amanda Larson’s employees.”

“Welcome to the new reality of real estate. They’ve been hired to lounge around a model home, read magazines and occasionally pretend like they’re having breakfast.”

“Centex has 166 homes to sell in its Milestone development, starting at $507,500 and heading into the $600,000 range, and figured it needed just a little something extra to entice people to come check things out. Centex built four model homes, filled them with furniture, then took things one bizarre step further. The company hired four actors to play the role of a family, in a role that’s half improv, half sales demo.”

“‘Where does the reality end and the..good God, reality begin?’ mused (publicist) Jim Garfield. ‘It’s exciting, scary and really unique, all at the same time. You sit at your desk and wonder, will people come, will it work, will people find it interesting and, most importantly, does it get the client’s story out?’”

“Some visitors seemed a little taken aback, but others joined right in with the birthday celebration. One family played along with the whole thing, asking how long Simmons and Chen had lived there, then turned chilly when asked questions by a reporter. Centex employees sat on the periphery, but no one seemed to question who they were or why they were there.”

“This seems odd, and the company acknowledges as much, but with the formerly white-hot real estate market looking decidedly cooler of late, nothing’s too unusual to hook buyers. Just putting in leather couches and baking cookies won’t do it anymore, at least in Centex’s mind. To make the home-buying experience more real, the company felt it had to employ a very unreal strategy.”

“‘You imagine yourself in this situation,’ MacInnis said. ‘If you have a beautiful experience, that gets people to think, oh, I want to live like that!’ And, by extension, ‘I want to buy this place.’ With houses sitting unsold longer these days, it might not be such a crazy idea.”

Some housing bubble reports from Florida. “Today’s tough housing market is pitting neighbor against neighbor in the selling wars. Ken and Wilaiwan Koch have had their home on the market for five weeks and already lowered the price $10,000. Their neighbors to the right have dropped their price from $345,000 to $269,900 since November. Their neighbor to their left reduced his home from $344,500 to $309,900.”

“Competition is stiff. Inventory is at an all-time high, 50,000 homes for sale in Lee County, according to (realtor) John McWilliams.”

“‘There are no stinking buyers around here and these people are panic-stricken, everyone can smell the fear,’ (realtor) Debbie Elentrio said. ‘If you don’t have to sell, now is not the time.’ But her client’s panic impacts the homes around her. Her neighbors, who live six houses away, dropped their price from $549,000 to $499,900.”

“But homeowner Christopher Jacob, who also is a realtor’, doesn’t blame that on his neighbor. ‘I think people who are mad at each other want to make the most money and that’s not going to happen right now,’ said homeowner Christopher Jacob, who also is a realtor.”

“‘The market got out of whack,’ he said ‘Now it’s coming back into reality. Your house is only worth what someone will pay for it.’”

The Palm Beach Post. “Joe Passarelli wakes up anxious and sweaty some nights, wondering how much longer it will take to sell his never-lived-in townhouse south of Stuart. Despite slashing his asking price by $55,000 to $285,000 and keeping vigil at sparsely attended open houses for six months, he still has no takers.”

“‘They come, they look, they give a low-ball offer and they leave,’ said Passarelli, a New York native.”

“If he doesn’t sell the four-bedroom home, he’ll have to walk away from contracts on two other investment homes, one in the new Port St. Lucie community where he lives and another in West Palm Beach. If he pulls out of those deals, he’s down $80,000. ‘I was never much of an investor before this wild craze began, and somehow I backed into it,’ Passarelli said.”

“Meanwhile, the communities’ builders, Centex Homes Inc. and Lennar Homes Inc., also are continuing to jockey for buyers. Passarelli said the builders are undercutting him and other sellers as they try to unload their inventory.”

“Passarelli made out well last year, grossing about $100,000 on a home he flipped in St. Lucie West and an additional $50,000 from his mortgage and real estate business. But this year is emerging quite differently. ‘The end result is it may have to all be given back,’ he said.”

“‘For Sale’ signs peer from curtainless windows, and real estate agents’ lockboxes are affixed to doorknobs. For full-time residents, the result is downright depressing. Lou and Marie Cucci have few neighbors. Across the street and on both sides of them, homes sit empty. ‘There are more places for sale than occupied right now,’ Lou Cucci said.”

“In Newport Isles, Passarelli said he and his wife take walks after dinner to count the lockboxes. As an investor who’s also living in an investor-laden community, he sees all sides of the fallout.”

“We thought we were going to meet new neighbors and new friends, and it’s been like a terrible ghost town,’ Passarelli said. ‘This is not family living as they advertised it.’”

“Fearing they’ll lose more if they hang on to homes in the community, some investors are walking away from deposits of $30,000 to $50,000, said Stuart-based real estate broker Mike Morgan. ‘What happened there is no different than what happened in the condo market and everywhere else: greed, greed, greed,’ Morgan said.”

“Elizabeth Weed and her cousins got sucked into the craze. ‘The exact words that were told to us were, ‘Oh, you’re going to make money. It’s just a matter of how much you want to make,’ said Weed. Within days, each of the four women plunked down a $25,000 deposit on a Lennar townhouse in Martin’s Crossing, locking in the $249,000 price.”

“Now, three of them are considering a lawsuit against Lennar and Centex, claiming the developers misrepresented how visible a nearby trailer park would be from their homes, and the fourth lost money on the home she finally managed to resell. ‘It’s not as if we were these great big investors. The four of us said, ‘Let’s get together and do this.’ Never, ever, ever again,’ said Weed.”