The Housing Bubble

Some housing bubble reports from coastal California. “The San Luis Obispo County housing market is cooling off, say economists and local Realtors. Sales of county new and resale homes and condos fell 28 percent in April compared with the same period last year, according to DataQuick.”

“Real estate broker Shirley King said her firm is seeing probably ‘more than double’ the listings it had this time last year. There are also fewer sales, and some houses that have sold had reduced prices. ‘I see prices coming down, and I see those that have come down are selling within 98 percent of the listed price,’ King said. ‘With the prices coming down, the newer listings are being able to use better comps.’”

“Builders are also adapting to a return to a normal market, said Jerry Bunin, of the Home Builders Association of the Central Coast. Centex, one of the most active builders in the county, has locked the interest rate for buyers and is offering special financing programs designed to make the buyer feel more ‘comfortable with their payments,’ Chris Bowley said.”

The Press Telegram. ” During the four-month period from January through April, sales fell between 35 percent and 40 percent in Long Beach and surrounding areas, (broker) Randy Smith said. ‘We’re seeing price reductions all over the place,’ he added.”

“Only about 10 percent of homes are selling quickly and ‘to get the house sold it has to be really, really special or it has to be one of the best-priced houses in the neighborhood,’ Smith said. With affordability levels near all-time lows, either prices need to come down or people need to earn more money, Smith said, adding, ‘Something’s got to give.’”

“Author John Talbott says the bubble has stretched about as far as it possibly can. ‘The smart money is getting out. In San Diego, for example, the homebuilders themselves are getting out. I know a condominium developer in San Diego who had properties he was building, and he made offers for people to take them out of the market,’ Talbot said.”

“‘He hadn’t even completed the building yet, but he was selling the condominiums for ridiculously low prices like $190,000 if the buyer would just come in and finish the floors. He was minimizing his exposure for the downturn. In San Diego, condos are off around 30%, that’s huge,’ he said.”

“Brock Harris, a realtor in Los Angeles, sees changes afoot in his once-hot housing market. ‘What we’re seeing right now is a lot of overoptimistic sellers coupled with increasingly cautious buyers,’ he says. ‘That’s keeping a lot of inventory on the market.’”

“Home sales in Southern California fell 16% in April. ‘The pieces are in place for price reductions to begin soon.’ Harris says.”

One Fed president is talking about housing this afternoon. “Dallas Federal Reserve Bank President Richard Fisher on Monday said U.S. inflation was running too high for comfort, but that the central bank had until the end of June to decide how that might impact interest rates. Fisher said that while the U.S. housing market appeared to be moderating, there was still a lot of strength in the economy.”

“‘(Housing) is clearly cooling..there are other offsets; the real issue is what will be the impact on consumption,’ he said.”

“Fisher also stressed that central bankers were earnest in their pursuit of price stability. ‘Were I trendy, I suppose I could remind you that in the devout culture of central bankers, every numerary wears the cilice of inflation on his or her intellectual thigh as we pursue our avowed goal of providing the monetary conditions for sustainable non-inflationary economic growth,’ he said.”

From Freddie Mac. “The recent decline in U.S. housing prices will likely pinch consumer spending but will not dent growth dramatically, Freddie Mac Chief Executive Richard Syron said on Monday. ‘We may see enough of a softening to have an economic impact,’said Syron, a trained economist who worked at the U.S. Central Bank before moving to the second-biggest U.S. housing finance company.”

“During the real estate boom, many people bought second homes as investment properties but now those homeowners may want to look elsewhere to earn better returns, Syron said. The slowdown in housing prices might continue for a little while longer, Syron said, adding, ‘having housing become more affordable is not a bad thing.’”

The New York Post. “So now he tells us. Alan Greenspan finally said what he thinks about the housing boom he almost single-handedly created. ‘The boom is over. I think we can safely say that with a strong degree of confidence,’ Greenspan told a Bond Market Association Dinner at Cipriani in Midtown on Thursday.”

“Greenspan then added, unconvincingly: ‘It’s too early to determine what impact a slowing housing market would have on consumer spending.’”

“Fortunately for ol’ Al, the bellinis were flowing freely. After one of the worst weeks for the financial markets in more than 3 years, Greenspan’s comments left many with an eerie feeling about the bad hand the Maestro’s successor may have been dealt. Amid fresh signs that inflation is percolating at an unacceptable rate, what’s a central banker to do? Raise rates of course. For Bernanke it’s double jeopardy.”

“Were we still a nation of savers, further rate hikes would actually put money into Americans’ wallets. But this is 2006. Americans, on average, have little savings and whatever wealth they do have is mainly tied up in real estate. As USA Today reported Friday, baby boomers are counting on that real estate to fund their retirement.Millions of boomers see their homes as a ‘bank’ from which to extract equity to pay for retirement.”

“Now that housing is likely headed for a soft landing, at best, Greenspan, the architect of the virtuous upward cycle, says he can’t tell if it will affect the consumer? And for this, he gets paid $250,000 a speech?”

“No doubt Bernanke is in a real pickle. The recent performance of the big housing stocks, all at or near 52-week lows, suggests that we’ll be lucky to get away with the painless easing in home prices Greenspan hopes for. But as investors sensed this week, Bernanke doesn’t have the luxury to wait and see.”

“As the folks at Bridgewater Associates note, the Fed already looks to be badly behind the curve: ‘One of the real questions facing the markets concerns the inflation picture. The classic warning signs have been flashing red, recent action in commodity prices, art prices, home prices would have made virtually everyone hit the panic button in the 1980s.’”

The Star Tribune reports on the problems with condos. “As the pace of condo, loft and townhouse construction continues unabated, some buyers are discovering myriad problems with their ‘carefree’ homes.”

“Eager for a carefree lifestyle, Sandy Obermiller proudly moved into her new condominium in St. Louis Park in 2002. She had purchased it a year earlier, before the development was even a hole in the ground, and was promised a luxury condominium for her $250,000 investment.”

“What she got was a condo where she can hear neighbors talking, phones ringing next door and other people’s washing machines draining. The windows and basement leak. The deck floor is failing. The building looks unfinished. ‘I want what I originally bought into,’ said Obermiller. ‘I feel taken.’”

“Obermiller, along with other buyers at Fern Hill Place condominiums, sued the building’s developer, architect, builder and subcontractors. Last month they settled for $1.85 million.”

“Buyers paying a premium for lofts, condos and townhouses expect high-quality construction and quiet. But often what they get behind the gleaming surfaces and lofty ceilings is an ordinary apartment in which owners can hear the clack-clack of high heels overhead and smell cigarette smoke from five floors below and moldy odors emanating from electrical outlets.”

“The building code for condos and lofts is a low standard that doesn’t always translate into high-quality construction. Nor does it ensure that all units in a building will meet even minimal standards.”

“‘For all practical purposes, actually for all purposes, apartments and condos are constructed the same way,’ said Mike Godfrey, with the Minnesota Codes and Standards Division. ‘The only difference is one you own and the other one you rent.’”

“And price doesn’t ensure better air sealing. Dave Bohac said that a two-year-old luxury condo building was one of the leakier ones in the study. The details of air sealing and indoor air quality aren’t on developers’ radar, said Marilou Cheple, a former builder and home inspector who teaches at the University of Minnesota. ‘Nobody makes them do it, so my goodness, why would they?’ she said.”"The result is that some buyers are paying top dollar for what amounts to an apartment with cosmetic enhancements. And unlike renters, they can’t just pick up and move without risking a financial hit. Some at Fern Hill Place tried, but ended up selling for less than they paid, said Andrew Marshall, the lawyer representing the owners.”

“It becomes a big-stakes game: ‘At one arbitration, there were 35 lawyers sitting in the room,’ said Steven Orfield, a Minneapolis acoustics consultant and expert witness in several multimillion-dollar lawsuits.”

Some housing bubble reports from Wall Street and Washington. “The big ‘mortgage news event’ of the week has to be the Tuesday release of OFHEO’s long-awaited report on Fannie Mae’s $10.8 billion accounting scandal. According to NMN’s Brian Collins, Treasury secretary John Snow told traders that limitations need to be placed on the size of Fannie and Freddie’ Mac’s portfolios, which have combined assets of $1.4 trillion.”

“Could it be that the Treasury officials have some inside information about the OFHEO report, that it will embarrass Fannie and its supporters, clearing the way for the Senate to pass Sen. Richard Shelby’s GSE bill?”

“Treasury undersecretary Quarles (mentioned above) warned debt security traders on Friday that any traders who establish unusually large positions in Treasuries can expect close scrutiny from regulators. ‘Questionable trading behavior has consequences and can result in increased regulatory scrutiny and referrals to enforcement authorities,’ he said. Investment banks, banks, GSEs and FHLBs all are large investors in Treasuries.”

“Lowe’s shares fell after the nation’s second-largest home-improvement retailer made note of ’some weakness’ in early May sales and the ‘monetary pressures’ of rising gas and interest rates on consumers.”

“Rising interest rates and an easing housing market are starting to hurt home-improvement spending, said Nicolas Retsinas, of Harvard University. ‘The consumer’s had home-equity money and new homes to be involved with,’ analyst Eric Bosshard said. ‘As we see some moderation of that, it chokes off some of the fuel that’s been driving spending for’ Lowe’s business.”

“Slowing home sales and falling home prices led Banc of America Securities analyst Daniel Oppenheim to lower his profit expectations and price targets for home builders. ‘Even a ’soft landing’ would lead to significant earnings declines,’ the analyst wrote.”

“He noted that the builder stocks, which are off about 21% year to date, now reflect more of the likely earnings erosion. ‘We estimate that companies with a significant inventory of land, high financial leverage, [and] a high proportion of land controlled via options rather than ownership are factors that lead to increased sensitivity to changes in home prices,’ Oppenheim wrote.”

“‘We see greater risk of price declines in markets where affordability is stretched, given the limited buyer pool at current prices,’ Oppenheim said. Affordability ‘will worsen significantly if mortgage rates rise from current levels,’ he said.”

Ms. DiMartino at Dallas News has this on credit standards. “Lo and behold, housing is a concern on Wall Street. Even the stock market’s cheerleaders have had to acquiesce. The fact is, any economist worth his salt has been concerned for 15 months. That’s how long new-home inventories have been hitting record highs.”

“Maybe what we should be asking is how inventories, of both new and existing homes, grew to their current records. The answer gets to the root cause of the housing bubble, the credit binge.”

“Consider that only one of the 53 banks surveyed by the Federal Reserve through the three months ended in April said it had tightened lending standards. About 10 percent had the gumption to loosen standards further. With no lending standards to speak of, it’s been almost impossible to corral the speculation that drove sales and home prices to their bubbly heights.”

“In the meantime, the holes in the bubble continue to grow. A recent report by Moody’s Investors Service said home equity delinquencies had risen for a second straight quarter. And this is just the beginning of the trend, something Fed officials recognize. On Thursday, both Chairman Ben Bernanke and Chicago Fed President Michael Moskow voiced concerns about the potential for lax lending standards to harm the economy.”

“At issue are nontraditional mortgages that carry adjustable rates or allow the balances to grow with time. (Hint to lenders: Loans are actually supposed to be paid down.) The fact that such nontraditional terms now account for one in five mortgages outstanding suggests someone’s let the fox into the chicken house.”

The Record reports on the appraisal business. “Kirk DeJesus, a Stockton real-estate appraiser, echoes the sentiments of others in the local real-estate appraisal scene: his business is a shadow of the frantic work scene since a home-sales slowdown hit in the fall. ‘It’s week-to-week, to be honest with you,’ he said.”

“DeJesus estimates business has dropped 45 percent since the summer. ‘I knew it was coming,’ he said. ‘I kind of got the feel that prices were getting out of control. I knew something had to change.’”

“Real-estate brokers and agents said that high prices and rising interest rates cooled the hot market and also pushed real-estate investors into putting their properties for sale when they concluded that the equity escalation had topped out. Nearly 3,500 resale houses were on the market last month, up from 935 the previous April.”

“Jim Clark, an appraiser in Stockton, said that before last summer, business was so good that ‘it was chaos. It slowed down very fast,’ he added. Though business is still good, he said, it’s down by half.”

“One part of the appraisal business is starting to pick up, though, he said. ‘Foreclosures are becoming the new thing now,’ he said. ‘We hadn’t done any foreclosures for three or four years and, now all of sudden, we’re getting hit with them.’”

“Ron Simon, who said he has done 22,000 single family home appraisals in 20 years in the business, thinks the market is going through a necessary adjustment. ‘We actually needed this to make the real-estate market healthy,’ he said. ‘The way it was going was a formula for disaster down the road.’”

“This spring and summer will be not too bad, he said, while fall and winter will have some ‘falls and trips.’”

Some housing bubble updates from Florida. “According to Barbara Raney, North Port Building Department manager, in the fiscal year ending in September 2005 the department issued 4,114 permits for new residential housing. Raney said, ‘On the average, there are 350 permits issued each month.’”

“In March, 344 permits were authorized, but in April only 88 permits were issued. ‘They’ve stopped building,’ Raney said.”

“The recent scramble for lots In North Port by out-of-state buyers, and the county’s abandoned lot auction, have taken some land off the market. But overall, the real estate slowdown and the glut of lots that are not moving mean lower lot prices and a more favorable situation for home buyers. While investors high-tail it out of town, North Port is gradually becoming a buyers’ market.”

“According to the Palm Beach Board of Realtors, there were 31 closed sales of single-family homes between October and April, for a total sales volume of $161.89 million. For the same period the year before, there were 70 sales for a total volume of $312.2 million. Palm Beach broker John Pinson referred to ‘more and more for-sale signs’ all over the island, fewer sales through MLS and a flurry of price-reduced notices climbing the facsimile tree.”

“Speculative-buying days ‘are over’ in West Palm Beach condos, where the inventory is at an ‘all-time high,’ Pinson said. As a result, brokers see ‘developers undercutting prices on those who bought already.’”

“Earlier this month, David Lereah, chief economist for the National Association of Realtors, said the boom is winding down to an expansion, one in which 2006 is a ‘down year’ and 2007 will be up. ‘Where [Lereah] and I may differ is more on extremes. He calls ‘the bubble’ a balloon. But the next time a housing bubble slowly deflates will be the first time a housing bubble slowly deflates,’ said (economist) Joel Naroff.”

“But if a buyer has read about a slowdown and thinks he can get the unit for $750,000, ‘they’ll offer $650,000,’ he said. ‘What we haven’t seen are the three most dangerous words in real estate: low-ball offer. Not yet. When a market turns and buyers have the upper hand, we see low-ball offers,’ Naroff said.”

“Unlike Lereah, Naroff expects ’significant price cuts in some markets.’ Looking at West Palm Beach and other Southeast coastal markets, Naroff said many new condominium projects were targeted by speculators. ‘Those are areas that at first glance, run the potential for being under real pressure for the next six months,’ Naroff said.”

“The rise in foreclosures that analysts predicted would follow an easing in lending restrictions, low interest rates and creative mortgage products has emerged in metropolitan Jacksonville. The five-county metro area experienced a 39 percent increase in foreclosures over last year’s first quarter, or 3,579 foreclosures for the first three months of this year compared with 2,570 for the same period in 2005.”

“‘Part of this is also about consumer spending,’ Barry Chandler, CEO of Oceanside Bank in Jacksonville said. ‘You’ve borrowed your way into a home with all the trimmings and before you know it, there’s a big life adjustment and you’re in trouble.’”

“‘A good number of national builders have captive mortgage companies, which I suspect means a lot more creative financing programs,’ (banker) Bill Hammel said. ‘The good is it means more affordable housing, but it also means some people got into more than what they could afford.’”

“‘More money became available for risky borrowers and you only have to be in a house six months before refinancing,’ said Patrick, co-owner of First Coast Trust. ‘Banks and lenders have been doing what the government wants, getting people into homes.’”