The Housing Bubble

The Tucson Citizen takes us back to Arizona. “Greed is out and fear is in when it comes to Tucson’s housing market. The psychology of the market has changed significantly from a year ago, when speculators and investors, primarily from California, descended on Arizona like locusts.”

“The formerly white-hot Tucson real estate market has cooled so much that one builder, KB Home, recently laid off 17 workers in its Tucson division, about 8 percent of its work force. The job cuts at KB were made across the board, hitting both field and office personnel.”

“Marshall Vest, a University of Arizona economist, agreed that Tucson’s housing market has cooled off considerably. ‘Things are slowing down for sure,’ he said. ‘The number of houses sold are coming off their peaks, and prices are leveling off. The median price of homes in Tucson has been steady for about six months.”

“While Tucson’s housing market is cooling, the market in Phoenix is in the deep freeze. KB Homes and Fulton Homes have each laid off workers in the Valley of the Sun, where the inventory of unsold homes is piling up. Vest said housing prices in Phoenix are tumbling. He said median home prices in the capital city have fallen from a high of $350,000 to about $300,000.”

“‘The frenzy is gone,’ Vest said. ‘The scramble to buy and get in on the action is gone. Investors and speculators have retreated from the market.’”

The East Valley Tribune. “New home permits and sales of existing homes fell sharply in April compared with the same month a year ago and they didn’t meet industry expectations they would match 2004 levels.”

“RL Brown said consumers have so far failed to buy up the growing inventory of new homes generated by an apparent wave of cancellations from consumers. He said this is because consumers haven’t been able to realize gains in their present homes in a faltering resale market.”

“And, he says, buyers have lost confidence in the current state of builder housing values. ‘It appears that ‘optional’ consumers have opted out for the moment while ‘must-buy’ consumers are searching for the deepest discounts and best buy-downs, placing the market in a holding pattern after four months of 2006,’ Brown wrote.”

“Brown said the market should be showing some evidence builders have stemmed the flow of cancellations, adjusted their pricing policies and regained some momentum in their sales offices.”

“‘It is becoming more and more unlikely that we will salvage a 2004-like year out of this quagmire, especially with rising gasoline costs, increasingly strident complaints about transportation infrastructure and the impact on edge areas, and the bumbling State Legislature, plus the buzz about rising interest rates,’ he wrote.”

“Greg Burger, who helps Brown with his research, said some areas have been hit harder than others. One is the Johnson Ranch-Hunt Highway corridor. ‘I would hedge a bet that part of it might be the transportation issue,’ he said. ‘Over the last year, the median price down there is up $100,000. All of these houses were sold, but the boulevard wasn’t created.’”

“Brown said builders haven’t been able to hold buyers to contracts even when customers are forced to fork over thousands in earnest money for cancelling the deal.”

“‘Consumers are perceiving that the deep incentives builders are offering new buyers are indeed price cuts that will leave them with homes and mortgages that are perhaps $50,000 to $70,000 higher than what a walk-in can buy,’ Brown wrote.”

“‘Builders can’t stomach giving the old buyers credits down to the ‘new price’ at closing and seeing those profits flushed out,’ Brown said.”

The South Florida Business Journal reports on affordable housing in the state. “Amid worries about a lack of affordable housing for workers in South Florida, there is no shortage of residences listed for sale for less than $200,000. That prompted us to see just what’s on the market at those price points. We found the challenge is picking out a decent property in a safe neighborhood that you can get a mortgage on.”

“$199,000. Palm Beach County: This 1,045-square-foot home was built in 1957 and needs major interior renovations and updating, as little has been done in several decades, its owner said. The house does not have central air condition. But the roof is new having been replaced after Hurricane Frances in 2004. The landscaping is bare bones. ‘I would call it a handyman special,’ owner Bernice Worley said.”

“She owns the home free-and-clear and, after living there 30 years, is selling it for a retirement home in the Ocala area so she can be near her family, she said. Worley said she is willing to wait to get her price.”

“$199,000. Built in 1959, this home is 864 square feet. The interior needs to be renovated. The carpet is worn and stained; the kitchen is outdated. Owner Marlene Ambrose inherited the home from her parents. She is looking to use the proceeds to buy a bigger home in a nearby retirement community. She is willing to haggle a bit over price, but is willing to wait to get top dollar. ‘I am anxious to sell it, but I am not going to give it away.’”

“$140,000. Miami-DadeSeveral are being offered at this two-story, 16-unit apartment building built in 1953. The property was acquired in May 2005 for $1.1 million. ‘Investors Welcome,’ the listing states.”

“However, the condo conversion lies in a Coconut Grove neighborhood with a bad reputation for crime. A couple in the neighborhood said they have complained to the police that drug dealers riding around on bikes often stop to sell crack in front of their home.”

“Built in 1936, the 865-square-foot house last sold for $67,000 in October 2003. The house had burglar bars on its windows. This single-family home listed at slightly less than $200,000 earlier this year; however, the property is no longer on the MLS. The listing agent, also listed as the owner in property records, refused to offer any additional information.”

From USA Today. “As coastal residents nervously await the start of a new hurricane season in June, they’re confronting another fright: the exorbitant price and short supply of insurance for wind damage. Since 2004, insurers have paid $30 billion in Florida hurricane claims, wiping out years of profits here.”

“In Key West, homeowner Teri Johnston’s wind storm premium has more than doubled from last year. The cost this year to insure her 1,500-square-foot home against fire, wind and flood: $14,742.”

“After years of extraordinary insurance rate increases, Johnston, the Key West homeowner, can’t bear the thought of another. ‘People think we live in million-dollar mansions,” says Johnston, president of a homeowners group pushing for lower rates. ‘I’m living in a little concrete block house.’”

“Florida Chief Financial Officer Tom Gallagher, the state’s former insurance regulator, advocates a federal catastrophe insurance plan financed by homeowners insurance premiums everywhere. ‘This is a national problem,’ says Gallagher, a candidate for governor. ‘We need national answers.’”

The Sacramento Bee has this update on area defaults. “A new survey released Tuesday confirms what steadily has become more obvious to local real estate experts: More homeowners in the four-county Sacramento region are drifting toward foreclosure. That means the area ranked higher than every other California metro area except neighboring Stockton-Lodi.”

“‘We’re not seeing a lot of people at that foreclosure stage yet, but we’re sure seeing a lot of people who are headed that way,’ said Jeff Tarbell, president of Sacramento-based ATM Mortgage. Tarbell said that many people can’t afford both rising mortgage payments and their cars, credit cards and other amenities. ‘We’re starting to see the beginning stages of a little panic about not controlling your spending,’ he said.”

“After a five-year boom that saw many homes double or more in value, the Sacramento-area housing market has cooled significantly. Sale prices of existing homes remain below their 2005 peaks in all four counties, while inventory of homes on the market climbed to 11,344 last month.”

“Housing experts said some level of foreclosure activity at 2,514 homes in the four-county area during January, February and March likely stems from households struggling with adjustables. Last year, about three-fourths of Sacramento homebuyers used adjustables, and two-thirds of buyers were still using them in March.”

“‘The difference between a payment that’s $1,700 a month and an adjustment that brings it up to $300 more is huge,’ said Linda Bennett, a real estate agent in Sacramento.  Agents are seeing more homes listed by people who are struggling with payments, she said.”

“It’s a similar story in the Stockton-Lodi metro area, which has swelled in recent years with Bay Area commuters priced out of their hometowns. ‘It’s not like it’s some adverse turn in the economy,’ said Sean Snaith, at the University of the Pacific. Snaith attributed the region’s foreclosure activity to ‘people getting caught in transition’ as rising interest rates hike their monthly payments.”

“‘I’m not sure what else it could be at this point,’ he said. ‘It’s not massive declines in jobs.’”

A report on what’s booming. “The California Department of Real Estate announced today that there are about 500,000 real estate licensees in the state, which means that one in every 52 adults in California has a real estate license.”

“In 2005, the number of licensees grew 14 percent over the previous year to a then-record 476,000 licensees. That total represented a 57 percent increase compared to the number of California real estate licensees in 2000. The number of licensees reached 495,000 as of April 2006.”

“To accommodate the demand for licenses, the department has conducted several ‘mega-exams’ in which thousands of applicants took the real estate license examination, according to the announcement.”

“Jeff Davi, commissioner for the Department of Real Estate, said in a statement, ‘The level of interest in real estate licensure is unprecedented. With so many new licensees, the DRE has also increased its consumer protection efforts.’”

The Boston Globe has this follow up on yesterdays numbers. “Across Massachusetts, the average number of single-family homes for sale each month during the first quarter of 2006 rose by 16,467, to a record 55,338 homes, the Massachusetts Association of Realtors said. Homes are piling up on the market because sales have slowed dramatically in the past year. Sales of single-family homes fell to their lowest April level since 1995.”

“‘Prices are going to decrease,’ predicted Alan Pasnik, a Warren Group analyst, though he declined to speculate by how much. ‘Large inventories depress prices, because buyers have more choices, and you have a larger pool of possibly desperate sellers,’ he said.”

“As sellers’ anxiety rises, house-hunters such as Hannah Welsh take it slowly. She is looking, with her husband, for a single-family in Shrewsbury, where they own a condo. Welsh is noticing that more sellers are dropping their prices. ‘We’ve been able to look in a leisurely way,’ she said. The glut ‘is great for us.’”

“People in the real estate industry attribute the larger inventory to a return to a ‘normal market’ after years of sizzling demand. But (researcher) David Iaia said the cause is an unusual convergence of demographic, psychological, and market factors. ‘It’s a lot of factors working together,’ Iaia said. Housing supply ‘can spiral up faster than you would think.’”

“Slowing sales are one reason: As properties sit unsold, new properties come on the market, expanding the inventory. Last fall’s sudden chill in the market prevented many people from selling their homes, so they put them back on in spring.”

“Even with the slower sales, investors and homeowners are still motivated to try to sell now, with prices still at near-peak levels, to cash out ‘while the gettin’s still good,’ Iaia said.”

“Michael Tuttys’ neighborhood is a microcosm of a powerful force at work in Massachusetts’ real estate market: a record glut of homes for sale, which is likely to cause prices to fall in coming months. Tutty endlessly sizes up his competition. He learned that one house in his Shrewsbury neighborhood has the same floor plan but lacks the upscale light fixtures, maple cabinets, and Jacuzzi tub he and his wife paid extra for.”

“He watches prices like a hawk: One seller recently dropped the price of a two-bedroom, like his, by $10,000, to $399,900, dangerously close to his $389,900 asking price.”

“He got a blunt reminder recently of how fierce the competition is. One prospective buyer stepped into his home for a showing, having viewed three others in the neighborhood. ‘He walked in,’ Tutty said, ‘and said, `This is number four.’”

The new home sales numbers are out. “Sales of new homes rose unexpectedly in April to the fastest pace this year as the housing sector showed resilience in the face of rising mortgage rates. But the price of homes sold last month fell and the level of unsold homes rose to a record high.”

“The unexpected jump in April home sales was not likely to change the overall view that the booming housing industry is beginning to cool off. Even with the increase in the April sales pace, the median price of a new home sold in April dropped by 7.3 percent from the March level to $238,500.”

“The backlog of unsold homes rose by 2.4 percent to a new record of 565,000 homes on the market at the end of April.”

“Sales increased 4.9 percent to an annual rate of 1.198 million. Builders broke ground on at an annual rate of 1.849 million, the Commerce Department said last week.”

“Federal Reserve Chairman Ben S. Bernanke and fellow policy makers are watching the housing market as they weigh whether to extend a two-year cycle of interest-rate increases. ‘The housing market is not cooling as much as Fed officials were anticipating,’ Said (economist) Chris Rupkey.”

From the Commerce Department PDF; US New Home Inventory.

4.04..383,000

4.05..445,000

4.06..565,000

From the Wall Street Journal. “An estimated 107,000 homes were actually sold last month, down from 110,000 in March, based on figures not seasonally adjusted.”

The April 2005 number sold was 116,000, not seasonally adjusted.

The Arizona Republic has this on the new home market. “There’s no good news in metropolitan Phoenix’s new-home market, unless you’re a buyer. The latest numbers show that home builders pulled 21 percent fewer permits for new houses in April than the same month last year. Builders have not been successful persuading consumers to take speculative homes off their hands, said analyst RL Brown.”

“Brown calls the new-home market a ‘quagmire.’ He had forecast a downturn of about 5 percent this year from last year’s record 63,570. But with 17,050 permits through April, he’s preparing a revision and said it’s unlikely that the market will equal 2004’s performance of 60,872.”

“Stuck with houses they can’t sell even with huge incentives, builders have been slow to build more homes. That will hurt them later this year, Brown said, because it soon will be too late for builders to restart production and book sales this year. ‘I think they (builders) are in denial,’ Brown said.”

From Realty Times. “It now takes longer for Queen Creek homes to sell, and the number of homes on the market has climbed, which gives buyers more to choose from with a little leverage. The number of homes for sale in the Southeast Valley hit 14,782 in March. There are currently 2167 resale homes for sale in Queen Creek.”

“The number of spec homes on the market has increased because people have had to let their new homes go back to the builder because they can’t sell their existing homes.”

“Other realtors I have spoken with say the market is very slow. There are so many resale houses on the market from investors who bought last year plus the builders are offering huge incentives to buy new so the competition for buyers is fierce. The builders have had a lot of cancellations as speculators bail out so they are selling these cancelled homes at bargain basement prices to reduce their inventory.”

“The most saturated segment is the smaller 3BR, 2BA house which was a favorite of investors. These houses are not upgraded and the investors are trying to cash out. Some investors are feeling the pinch of house payments as they did not expect to have to hold these properties for a long period of time.”

“Many investors have unrealistic price expectations and start way too high. In some subdivisions every third house is for sale because the builder allowed investors to purchase. The higher end houses seem to fare a little better. However, they must be very upgraded to justify the price.”

“Gas prices also hit hard as Queen Creek is a horrible commute with no signs of getting better.”

“Sellers are advised to add some basic upgrades like window coverings, back landscaping and a garage door opener. Most investor properties do not have any of these upgrades so this would be a big advantage over the competition. Also, as summer approaches it is important to have the air conditioning on. Buyers won’t linger in a hot house.”

“I wish I had better news for my Queen Creek sellers. I recommend doing basic upgrades, putting the house on the market at a competitive price and see what happens. If it doesn’t sell either rent it out for a year or wait until next summer to see if the market has improved.”