The Housing Bubble

The Warren Group has a jump on the April numbers for Massachusetts. “Sales of homes and condominiums plunged in April, the heart of the spring selling season. In Massachusetts, 4,142 single-family homes sold last month, a 16.5 percent drop from the same month last year.fewer homes than the 4,961 sold in April 2005, The Warren Group, a Boston real estate data firm, reported today.”

“Single-family home sales in April are the lowest for that month since 1995.”

“While sales were down sharply, prices remained stable. The median price for a single-family home held steady at $335,000. Condo sales fell by 15.3 percent last month when compared to a year ago, while prices fell 0.4 percent, to $272,340.”

“‘The pace of sales has slowed,’ CEO Timothy Warren. ‘That remarkable bull market is coming to an end,’ he said. Warren said that ‘unrealistic, stubborn sellers’ will need to take some of the blame for the sales drop.”

“‘Realtors work awfully hard to get people to understand the market and to re-set their expectations,’ Warren said. ‘But a lot of sellers have a number in mind, and they hold on for their price.’”

“The numbers are even more dire for Lowell. Single-family home sales fell from 83 in April 2005 to just 48 last month, a 42.2 percent drop; condo sales were even worse, falling from 87 to 44 (down 49 percent). Median single-family home prices in the city fell 11.1 percent, from $269,900 to $240,000.”

“Warren said a legitimate fear for government officials and residents is to be tagged with the reputation that housing is overpriced in the state. ‘Two decades ago we were labeled ‘Taxachusetts,’ and that hurt us for a long time,’ he recalled. ‘I think now we’re better than we were, but labels have an impact. If we don’t moderate affordability, we could get another bad rap.’”

“Rising home prices and rents in Massachusetts could continue a trend in job losses and out-migration unless more housing and particularly more affordable housing is made available, according to a reported prepared by Barry Bluestone, at Northeastern University.”

“The report, commissioned by the Massachusetts Association of Realtors trade group, notes that the total population in Massachusetts shrunk by about 19,000 from July 1, 2003, to July 1, 2005.”

“The study suggests that there is correlation between rising housing costs and job losses in some markets. For example, employment declined 4.9 percent from 2000-04 in Boston. ‘Other high-cost housing areas also saw employment loss. San Francisco, with the highest cost of housing in the nation, lost 10 percent of its employment base; San Jose (lost) 15.4 percent.’”

“‘We also found some evidence suggesting that if the employment and migration trends were to deteriorate further, we could experience another sharp decline in housing prices, as rising out-migration could lead to rising housing vacancy rates,’ the report said.”

The Sun Herald has this second half of a series on home sales. “When asked who is looking at homes in North Port, the answer is mixed. What is missing are the investors looking to get in and out quickly. ‘The people looking to ‘flip’ houses are pretty much leaving the market,’ (realtor) David Schertle said.”

“‘We are offering 50-year mortgages, and the interest-only loans, and there are buyers showing interest in different types of financing,’ said Nora King, mortgage broker in Warm Mineral Springs.’The credit market has certainly tightened up; the qualifications alone are harder,’ King said.”

“‘The ‘affordability’ of housing is directly related to the availability of financing, and creative alternative financing is what is driving the market,’ King said. ‘It used to be that the borrowers could have a 30 to 35 percent debt to earnings ratio, now it’s closer to 41 percent,’ King said. ‘That is, borrowers can spend 41 percent of their monthly income on housing cost.’”

“North Port realtor Bob Mason thinks the housing market has definitely slowed down. ‘There are a lot of resales, older homes, back on the market,’ Mason said. A search of the MLS in North Port shows approximately 670 new houses (built in 2005 and 2006) for sale in North Port. A second search brings up a total of 1,335 available homes, including existing older homes.”

“‘There is no question that the growth in North Port has slowed down and leveled off. There are basically a lot of houses on the market,’ Mason said.”

“According to Mason, a lot of houses were sold to investors in the range of $180,000, with the expectation of doubling their money. Some builders were securing the new construction investments with minimum down payments. When the prices started to level off, the investment buyers simply told the builders to keep the house and the $1,000 down payment.”

“‘A $1,000 forfeited is a write-off, not a loss for a land speculator,’ said Mason. ‘It’s not a good practice for the builders, though.’”

“‘I agree with the general consensus around town, that the housing feeding frenzy is over,’ confirmed King.”

The Honolulu Advertiser reports there is no shortage of housing on one island. “Carmen Leal was so frustrated in her search for a home to rent last summer that she remembers the experience with horror. But as Honolulu’s rental market enters a much different summer this year, conditions are so renter friendly that Leal feels she’s the one in control as she searches for an apartment.”

“Leal posted a request on the Internet for a two-bedroom unit at around $1,600 per month and landlords are suddenly coming to her. ‘I’m just getting flooded with responses,’ said Leal, now emboldened to negotiate for a better price.”

“The Advertiser Sunday classifieds listed 1,074 units for rent on Sunday, May 14, compared with 752 on Sunday, May 15, 2005. ‘All of us are experiencing vacancies unlike a year ago, where that was very limited,’ said Cathy Matthews, property managers on O’ahu.’”

“Landlords and property managers say the increased supply is being fueled, in part, by military families moving back to the Mainland while their military members are deployed; and by real estate investors who can’t resell their properties at the prices they want and have to add them to the pool of rental properties already on the market.’”

“The addition of even more rental homes means that some landlords, already facing rising property appraisals and property taxes, have to cut rents just to keep properties occupied and cash flowing through their units.”

“‘Inventory is definitely higher than before,’ said Carl Frazier, owner and property manager. Frazier has been unable to find a tenant for a luxury two-bedroom, two-bath condominium. The condo has sat on the market for more than a month. To try to generate interest, Frazier has dropped the price $100 to $2,800 per month. ‘It would have gone very quickly one year ago. Now lots of inventory is driving prices down,’ Frazier said.”

“For investors, Frazier often has to tutor them on the change in Honolulu’s rental market. ‘I have owners that want me to raise the rent because their property taxes went up,’ Frazier said. ‘They don’t understand that I can’t arbitrarily raise rent under a lease. Their monthly bill has absolutely nothing to do with what we can get for rent. What the market will bear is what the market will bear, even if their monthly negative (cash flow) is too high.’”

The Fannie Mae review is out. “Employees at mortgage giant Fannie Mae manipulated accounting so that executives could collect millions in bonuses as senior management deceived investors and stonewalled regulators at a company whose prestigious image was phony, a federal agency charged Tuesday.”

“‘The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,’ James Lockhart, the acting director of OFHEO, said. ‘Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.’”

“The report also faulted Fannie Mae’s board of directors for failing to exercise its oversight responsibilities and failing to discover ‘a wide variety of unsafe and unsound practices’ at the largest buyer and guarantor of home mortgages in the country.”

“Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.”

“‘By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,’ the report says. The manipulation ‘made a significant contribution’ to the compensation of former chairman and CEO Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including about $52 million directly tied to the company hitting earnings targets.’”

“Fannie Mae’s ‘arrogant and unethical’ corporate culture led to an $11 billion accounting scandal at the mortgage giant, federal regulators said Tuesday in announcing a $400 million settlement with the company.”

“It said Fannie (Research) used its enormous political power in Washington to lobby Congress in an effort to interfere with OFHEO’s examination of the company’s accounting problems. According to the report, Fannie overstated income and capital by about $10.6 billion, in line with the estimates of the company’s potential restatement.”

“‘A combination of factors led Fannie Mae senior management, through their actions and inactions, to commit or tolerate a wide variety of unsafe and unsound practices and conditions,’ the report said.”

“OFHEO said Fannie’s corporate culture encouraged a false perception that the company took so little risk and was so well managed that it could hit announced earnings per share precisely almost every quarter. That view, OFHEO said, led to the belief that senior executives deserved to be handsomely compensated for the company’s ‘extraordinary performance.’”

“The regulator found that $52 million of former Chief Executive Raines’ $90 million in compensation was linked to earnings. ‘The OFHEO report shows that Fannie Mae’s faults were not limited to violating accounting and corporate governance standards, but included excessive risk taking and poor risk management as well,’ said Treasury Undersecretary Randal Quarles.”

A pair of reports on the Arizona housing bubble. “According to East Mesa real-estate agents E.T. and Lauri Saffon, Mesa is a hot housing market compared to the rest of the country. ‘Homes are selling for just below asking price,’ Mrs. Saffon said. ‘The days of higher list price offers are gone. Homes are priced at market value.’”

“However, in the May 5 article, Fortune magazine disagrees, calling the Phoenix/Mesa market one of the country’s worst real-estate ‘dead zones.’ Citing average home prices, the magazine said Mesa is overpriced.”

“‘Sellers are trying to maintain pricing from last summer when inventory was one-eighth of what it is now,’ Mrs. Saffon said. ‘Last year approximately 5,000 homes were on the market and now we have approximately 40,000. Since there is an over-supply of homes versus buyers, the demand has fallen as have prices.’”

“‘Now is a great time to buy. Inventory is up and options are available,’ said Russell Paperman, Mesa real-estate agent. ‘Buyers can get a deal now. Now is also a great time to purchase new construction. The builders are now offering fantastic incentives.’”

“Contrary to the surface appearance of its most recent sales figures, the Chandler resale home market is not, repeat, not, in the midst of a headlong plummet.”

“‘The market is simply normalizing,’ said Jay Butler, of the Arizona State University. Mr. Butler uses that same verb to describe the resale market across metropolitan Phoenix, which ‘normalized’ from 7,264 sales in March 2006, and from 8,735 sales in April 2005, to 5,980 sales in April 2006.”

“‘This was the weakest April since 2000,’ Mr. Butler said. ‘But we’re just following a very typical pattern. The activity in April represents a lull from the end of the holidays and preparation for the stronger summer months ahead.’”

“Mr. Butler’s observations are identical to those of at least two Chandler real estate professionals, down to slight variations of the word ‘normalizing.’ ‘People are still buying homes, man,’ said (mortgage broker) Desmond Cooley in Chandler. ‘There are tons of people buying homes.’”

“‘It’s just that we are back to a normal market, back to where we were about three years ago. This is just the same fallout that every major, West Coast city has gone through over the last 10 years. They get that huge spike, then they get that little lull, then they come back strong,’ Cooley said.”

“The primary reason the resale market’s ‘normalization’ may resemble a plummet to some, Mr. Butler said, is that ‘Everybody assumes last year was a good year, and it really wasn’t. In a sense, it was like we were running a high fever, and now we’re just returning to a more normal temperature for your body. That’s really the key thing.’”

“That, however, is not a promise the Valley’s real estate temperature will not drop to even lower levels. ‘The market may go down a bit further, because these things don’t just adjust on a dime,’ Mr. Butler said. Also headed south, at least in some areas of the Valley, are median home prices. ‘Not significantly over a year ago, but they are showing a downward trend,’ Mr. Butler said.”

“For Chandler residents with ‘For Sale’ signs gathering cobwebs in front of their homes, Mr. Butler said, the message of the Valley’s declining sales is simple: Do not panic.”

“Again, Mr. Cooley agrees. ‘I’ll tell you something,’ he said. ‘We have a huge growth in South Chandler, there are so many new businesses coming to the area construction can’t keep up with them. I’m going to buy as much real estate as I can get my hands on right now.’”

Toll Brothers has the latest numbers out. “Toll Brothers Inc. lowered its earnings forecast for the fiscal year, a further sign of the slowing U.S. housing market. While the economy remains healthy, the new-home market is beset by a glut of units created by investor and builder speculation and buyer cancellations, CEO Robert Toll said.”

“‘Demand, while obviously diminished, has not disappeared,’ he said. ‘We believe many customers currently feel a lack of urgency to purchase due to their uncertainty over the direction of home prices. This has contributed to keeping many potential buyers on the sidelines.’”

“Toll said it expected full-year earnings of $4.69 to $5.16 a share, down from a prior forecast of $4.77 to $5.26, excluding items. On May 5, Toll lowered its fiscal-year sales forecast to a range of between 9,000 and 9,700 homes from a previous range of 9,200 to 9,900.”

“The sales warning, the company’s third since November, came after Toll saw the number of new-home orders in the quarter drop 32 percent, while the value of the contracts fell 29 percent. Orders fell 45 percent in Toll’s biggest market, the states of Delaware, Maryland, Pennsylvania and Virginia.”

“Second-quarter revenue rose 17 percent to $1.44 billion. Analysts, on average, expected $1.45 billion. Revenue from land sales totaled $2.1 million in the quarter, down from $9.8 million the year earlier.”

“Rising rates and record prices have cut demand at the height of the spring selling season, traditionally the busiest time for U.S. homebuilders. Orders for Toll houses, which sell for double the U.S. average, plunged 33 percent from February through April.”

“‘If builders aren’t able to achieve order volume during the spring, there’s little chance to make it up in the back half of the year,’ said Rick Murray, an analyst at Raymond James & Associates.”

“Toll’s orders dropped to 2,076 from 3,120 a year earlier, the second decline following 10 quarters of gains. The company reiterated its view that speculators are throwing in the towel and the housing market will rebound once it works its way through the excess inventory.”

And the word on the Fannie Mae report. “Federal regulators said Tuesday that their report on accounting problems at mortgage giant Fannie Mae, originally scheduled for release at 10 AM ET, will be delayed until 1:30 PM ET.”