The Housing Bubble

Desk clearing time for this holiday weekend. “‘The price has been lowered on this unit,’ acknowledged Justin Tamblyn, a sales agent at 62-unit GreenCity Lofts. Only 11 of the 62 lofts have closed escrow since they went on sale in late 2005, he said. ‘I’ve seen the market slow recently,’ said LaToya Faulkner, who toured the development. The couple, both Oakland, Calif., residents, are looking to buy a house, but ‘we are taking our time,’ Faulkner said.”

“Reports of price reductions like those at GreenCity Lofts, though not necessarily as dramatic, and cautious buyers taking their time are growing all over the country, especially in areas like Northern California where price gains were dramatic for so long.”

“‘People who will do what they need to do can still buy a home,’ (LA broker) Tom Adams said. ‘They may not be able to buy a home, two cars and still take that expensive vacation..there are things that need to give. They need to be more flexible in their expectations.’”

“Sales of existing homes in Sacramento dropped 14.2 percent in April and are down a whopping 38 percent from a year ago, according to a report released Thursday. The median price of an existing home in the capital fell half a percentage point, which is still 1.2 percent higher than it was a year ago.”

“In deal that may foreshadow a wave of consolidation among home lenders, the parent of Aames Home Loans said Thursday that it was being acquired by Accredited Home Lenders Holding Co. for $340 million in stock and cash.”

“Aames Investment Corp., a 50-year-old Los Angeles fixture, specialize in loans to risky borrowers, charging higher interest and fees to compensate. Accredited plans ’significant cost reductions’ as it combines the two companies, CEO James Konrath said.”

“Analysts said the sale could be the first of many as the mortgage industry contracts in the face of continuing rate hikes by the Federal Reserve. ‘This deal will probably serve as a watershed event in the industry,’ said Richard Eckert, an analyst in Newport Beach. He said he expected that it would be just the first of many acquisitions.”

“Trouble sleeping or insomnia may result in turning on the T.V. and watching late-night infomercials promising get-rich-quick investments through buying and selling real estate. To help raise awareness of what some call a growing City of Buffalo problem, a handful of activists produced a documentary on flipping.”

“‘It’s overwhelming once you see it,’ said the former photojournalist Marc Odien. ‘I hope that people will understand what property flipping is, how it affects property and that (for out-of-state investors) what they’re getting into is not always the best investment.’”

“The Fed and most private observers expect an economic slowdown close ahead or in progress. Federal Reserve Chair Ben Bernanke has every chip in his dwindling honeymoon pile bet on this slowdown, and that inflation is really OK. There is no question that central banks are withdrawing liquidity.”

“If the economy slows, we may have seen the rate top for the year. If it doesn’t, and inflation moves over the edge, then the Fed will have to hike until the economy does slow, or the bond market will do the lifting for the timid. All roads lead to slowdown; some easy, some not.”

“Emotions are running high in housing and real estate, certainly more so than in most other sectors. No other stories that I have written have touched nerves like the ones on St. Joe and Beazer Homes. I was caught a little off guard by the response to my positive story on Beazer, which has admittedly been my worst call to date.”

“Here’s what some of you had to say: J.K. of San Diego opined: ‘Dude, you do not live in the real world. Homes are now on the market for over six months. New homes come with ‘perks’ or incentives attached, and they still don’t sell. I personally know of people who are literally living on their lines of credit. Homes are way overpriced, and wages have not kept up.’”

“And then there was this gem from H.F.: ‘Nice job calling BZH … got any other hot stock tips? Do they pay you to throw darts at a board? When you get canned, you can cut my grass and clean my pool.’”

The St. Petersburg Times. “Retirees Jimmy and Neltha Gibson were optimistic when they listed their year-old house for sale in January for $357,000. ‘We thought it would sell,’ Neltha Gibson said. Four potential buyers took a look in the ensuing weeks. Since then, nobody. The Gibsons have dropped the price three times, to $320,000, with little response. One real estate agent told them 85 other houses were for sale in Live Oak Preserve, and new houses are still going up there.”

“‘It’s been all in the last six months when everything has died,’ Jimmy Gibson said.” “January through March, builders in Hillsborough poured 3,100 slabs for new houses, the most ever. Experts expect more home-sellers to follow the lead of the Gibsons, triggering widespread discounting. ”

“‘A lot of sellers are still in denial about the value of their house,’ said Umesh Shah, who owns a franchise which sports the motto, ‘We buy ugly houses.’ Shah has heard from many people lately who stretched themselves financially to buy a home.”

“Also stretched are investors, who poured into the market last year as tales of quick-flip profits spread. If those in the $250,000 to $600,000 range haven’t cashed out already, they may be selling their investment houses in a glut.”

“The Gibsons viewed their home in Live Oak Preserve as the last one. They blessed it with upgrades. Since January, they have tried a succession of real estate agents. Even at $320,000, their house would bring a one-year profit of $62,000.”

“Last week, their agent lined up a prospect. The Gibsons stashed away every toy. Then came the phone call. ‘They’d looked at so many houses,’ Jimmy said, ‘they finally called and said, ‘we’re too tired.’”

A housing bubble report from the Milwakee Sentinel. “Home foreclosures nationwide have surged this year, amid evidence that many well-to-do buyers borrowed beyond their means. What’s startling isn’t just the higher numbers, but who they represent, the affluent, not just the down and out.”

“‘These are the ones with a bigger ability to get money, the executives, businessmen and professionals, buying more than they can possibly afford,’ said Brad Geisen, of Foreclosure.com. ‘They were banking on price appreciation continuing to go up fast, and pulling their money out in time.’”

“It didn’t work. ‘With interest rates almost double what they were two years ago, their payments are up, and they’re finding it’s not as easy to sell,’ Geisen said. ‘Some leveraged the equity in their primary residence, to the max, to buy a second home.’”

“‘I’m certainly aware of the spike,’ said attorney Peter J. Zwiefelhofer, who runs Milwaukee Bankruptcy Center. ‘A lot of people overpaid for their house in this boom and a lot of properties were appraised at unrealistically high prices, mostly by subprime lenders looking to close a deal. Plus, there’s a lot of unsophisticated people out there who look at a mortgage as just a payment and say, ‘Oh, I can swing that.’ But they can’t.’”

“Until this year, most financially strapped homeowners could count on a booming housing market to provide them a quick sale. But that’s over.”

“‘One thing I’ve learned: The more expensive the house, the more difficult it is to unload,’ said Milwaukee bankruptcy attorney Bruce A. Lanser. ‘In a case where the house is upwards of $400,000 to $600,000, I used to think, ‘Oh, great house.’ But those houses are not selling that well anymore.’”

“(Broker) Scott Heyerdahl in Hartland, said he sees no evidence of forced home sales in the heart of Waukesha County’s coveted Lake Country. ‘What I have seen that’s new is sellers with a short leash. They purchased other properties and it’s non-contingent’ on the sale of their existing residence, Heyerdahl said. ‘Those are the folks really on the edge of their seats these days.’”

“Mike Ruzicka, president of the Greater Milwaukee Association of Realtors, sees a cautionary tale in this uptick of hard-luck stories. ‘All these people who went to creative, risky financing were buying time, but it’s a house of cards,’ Ruzicka said. ‘Hopefully, everybody in these riskier adjustable loans will take a hard look at things and maybe refinance into a 30-year fixed rate mortgage before it’s too late.’”

Forbes takes a look at the returns on housing. “Evidence abounds that the national housing craze is nearly over. You can prosper in such a world. As a first step, figure out how much investment reward a property is generating compared to other properties, and also versus other types of investments. That involves calculating what’s called a ‘capitalization’ rate.”

“Now here’s the unavoidable fact about real estate, especially residential: In almost any hot market, its cap rate is low. Suppose you wanted to rent the 940-square-foot bungalow at 1149 Grant Avenue in Venice, Calif. Since L.A. rentals are plentiful, this tiny house will gross only $2,200 a month, or perhaps $1,450 after operating expenses. Built in 1940, elsewhere this would be a slightly shabby starter home.”

“But the famous surfing scene at VeniceBeach is a mile away, so the market value of this house is $730,000. This makes for a slim cap rate of 2.4%; measly, but about par for Los Angeles.”

“‘Rents are nowhere near where they’d have to be to provide adequate income for a new buyer,’ says Bruce Huntley, who manages 1,500 apartments in the area. Prices in Venice are up threefold since 2001, while rents have only edged up with inflation. Sell and put the money into stocks and bonds.”

From Rich Toscano. “Even as San Diego home prices headed to the stratosphere these last few years, local rents grew at a fairly subdued pace. (This fact should, but apparently does not, cause people to doubt the fundamental underpinnings of the housing boom; but I digress!) The end result is that it costs quite a bit more to buy a given home than to rent that same home.”

“Friends of mine recently moved into a single family home that was purchased just a few months back. They pay $1,900 per month to rent a home that was purchased for $535,000. First we will assume that, had our friends purchased the home themselves, they would have financed the entire purchase price with a 30-year mortgage at the most recent average rate of 6.6 percent. For simplicity’s sake, let’s just say they got that great rate on the full loan amount.”

“If these folks had purchased the home in the manner described above, they would have been responsible for the following monthly outlays: Mortgage principal: $474. Mortgage interest: $2,943. Property tax: $490. Insurance: $100.”

“Once we make (some) final tweaks, we see that the purchaser of this home would be divesting himself of just a bit over $2,500 per month. In addition to the assumption of very favorable tax and insurance rates, this $2,500 per month figure is predicated on the idea that the 80-year-old home will require no maintenance.”

“The renter who is shelling out only $1,900 each month seems to be getting a deal. Even under our unrealistically cheerful assumptions, it would cost 32 percent more each month to own the place than to rent it. Put another way, the buyer would be out an extra $7,200 each year.”

“The standard objections to renting make little sense in a situation like this. Take the old saw that ‘renters are just paying their landlord’s mortgage.’ In fact, they are not coming close. They are only paying enough to cover the after-tax mortgage interest, hardly the renter-to-landlord transfer of wealth that the saying would imply.”

“Similarly, renters are often told that they ’should be building equity.’ But who is the one building equity in this situation? I would posit that it’s the renter who saves $7,200 each year by choosing not to own. A yearly savings of $7,200, wisely invested, will make for a nice little down payment when home prices finally move back into line with rents. (Remember down payments? Yeah, they’ll be back eventually.)”

“What arguments of this type fail to take into account is that homebuyers are themselves renters, it’s just that instead of renting homes, they are renting money from the bank. And when homes cost so much that the ‘rent’ on the money required to purchase a home, otherwise known as the mortgage interest, is more than the rent required to simply live in that same home, aphorisms like these cease to apply.”

A pair of reports from Canada serve as reminders of how housing bubbles are built. “Pinder Bains is a 30-year-old cashier taking courses towards becoming an accountant, but she has other ideas for making a living. That’s why, on Vancouver’s sunniest Saturday of the year, she is cooped up with almost 500 others in a conference room, listening to speakers on the general topic of earning ‘passive income.’”

“‘I’d like to, you know, not work.’ she says.”

“Wouldn’t we all. And that’s the lure of Ozzie Jurock’s popular spring conference, LandRush 2006. ‘You can create any life you want if you invest in real estate!’ Mr. Jurock promises. ‘I believe that.’”

“A host of vendors outside the conference room are also offering their market know-how, with tantalizing promises like How to Buy an Apartment Building with No Money Down! Realtor Randy Friesen, whose truck bears the logo ‘If you’ve got money in the bank, you’re not buying enough real estate,’ hands out a phone book-sized package of properties he considers potential cash-flow generators.”

“It doesn’t take long for Ms. Bains to realize that the promise of income without work is beyond her means. Calculating a $400,000 mortgage with 25 per cent down, she would need a tenant to pay at least $2,000 a month to cover the payments and property taxes. That still leaves maintenance costs. ‘I think you really need to do your investigating,’ she says. To that end, she’s thinking of taking Mr. Jurock’s upcoming $1,497 weekend seminar course.”

“Rudy Nielsen, another Landrush speaker owns and develops land across the province. Most of the properties he is selling now are parcels he bought two decades ago. Mr. Nielsen also shares the story of his own spectacular bankruptcy in 1982.”

“‘I was cocky and brash,’ he says, recounting how he bought more than he could handle and found himself $1.5-million in debt. After his wife and banker left him, he took his dog and a canoe to a lake as far north as he could go and lived in the woods for two weeks.”

“All day he fields calls from people asking if they should buy. ‘I can’t believe some of the people who have phoned me up and said, ‘I’ve got a mortgage on my house, I’ve got a second, and I’m making payments with my credit card.’ he fumes. ‘I just feel sorry for those people. For Chrissakes, keep a safe fort!’”

The Toronto Star. “More than 17,000 new condos sold in Greater Toronto last year, the most ever in the history of the area. The good news for realtors is that Toronto is the hottest market in North America. The potentially bad news (if you’re an investor) is that Toronto is the hottest market in North America.”

“‘We know that everything that goes up must come down. When anything seems too unbelievable, it usually is,’ says economist Frank Clayton. ‘And the longer the sales go on and prices appreciate, the bigger the adjustment we’re going to have.’”

“There are already signs that developers may be hedging their bets. Several new projects in Toronto have been offering bonus commissions to agents. By the end of this year, housing economist Will Dunning estimates, 14,700 units will be completed and ready for occupancy. He expects more than 14,000 units to be completed in 2007.”

“‘We won’t start seeing a lot of the effects until early 2007, but there will be a wave coming,’ he said. Dunning has repeatedly warned that he thinks there is a ‘high risk’ that the market is overbuilt.”

“One thing he and Clayton agree on is that there are a significant number of investors in the market, anywhere from 25 to 40 per cent. If the market softens, many will be placing their units back on the market. ‘Things are totally out of whack; the numbers of condos being sold don’t support demographics,’ Clayton says.”

“Even if the conservative estimate of 25 per cent is applied, that means there will be at least 3,000-plus condo rentals coming on the market every year for the next several years. Those condos are expected to compete with apartments and other condos to drive rental prices down and vacancy rates up. When investors can’t rent their units, they tend to unload them.”

“Some investors believe the Toronto market has legs because it isn’t Miami or New York, or even Vancouver, where prices have gone up considerably more, argues Israel Schwartz, who is considered one of the shrewdest wheelers and dealers in the market. ‘There is no such thing as a first-time house buyer in the Toronto market any more,’ he says. ‘It’s about being a first-time condo buyer, because most people don’t have a choice if they want to live downtown. That’s what’s fuelling this.’”

“Toronto developers have managed to boost their bottom line by building smaller units, says Schwartz, who sees shrunken condos as an inevitability. ‘Ten years ago, you paid $250,000 for a 900-square-foot place, and now you’re getting 600 square feet for the same price,’ he says. ‘But at least you’re getting your foot in the door.’”

The Florida Press reacts to the home sales numbers. “Sales of existing single-family homes and condominiums plummeted in Broward County last month. With more than triple the number of homes for sale compared with last year at this time, buyers have become selective and unwilling to make full-price offers.”

“‘Buyers are a commodity right now,’ said Joanie Villanti, a real estate agent in Broward and Palm Beach counties. ‘When they walk in, it’s like, `Let me kiss your ring.’”

“The market was destined to slip because local wages couldn’t keep up with the enormous price hikes, experts say. More than 20,300 homes and condos were for sale in Broward last month, an increase of 321 percent over April 2005.”

“Sellers, though, are struggling to stay positive. Bruce Sherter finally found a buyer this week for his $599,999, five-bedroom Parkland home. It took six months and five price reductions. ‘If you want the home to sell, you have to be aggressive with the price,’ Sherter said.”

“Sales of single family homes in April in Miami-Dade and Broward counties were down 12 percent from March and more than 30 percent from this time last year. The number of unsold homes on the market has tripled in the past year.”

“‘It’s a stand-off,’ said Andre Dandeneau, who has tried unsuccessfully to sell a two-bedroom condominium in Hillsboro Beach since December. ‘Buyers want sellers to come down, but sellers aren’t capitulating.’ Dandeneau bought his 2,000-square-foot waterfront condo last year for $600,000 and spent about $100,000 to renovate it in hopes of quickly reselling for a tidy profit.”

“In December he put it on the market for $915,000. Buyers showed little interest, so he dropped the asking price to $895,000. Now he says he won’t go lower, but he has yet to receive an offer. ‘I am not selling a piece of garbage,’ Dandeneau insisted. ‘This apartment is to die for. I am not going to give it away.’”

“Palm Beach County posted the biggest sales drop of all metropolitan markets in the state. Local buyers closed on only 804 resales last month, a staggering 43 percent decline from the same month a year ago. A look at the Regional MLS shows the number of single-family homes and condos for sale in Palm Beach County more than doubled in the past six months.”

“‘The growing number of condos for sale is truly shocking,’” said Jack McCabe. ‘We’re going to go through some real pains from this previous boom, and it’s statewide. The next five years won’t be pretty.’”

“Homes sales in the Sarasota-Bradenton market fell 44 percent in April when compared with the same month a year ago while Charlotte County-North Port fell 33 percent. With 11,653 listings in just the Sarasota-Bradenton market, real estate agent Steve DuToit, who owns five condominiums and 19 single-family homes, is bearish about the next 12 months. He is bullish about real estate on the five-year horizon.”

“Something has got to give ‘when listings are up 300 percent and closings are down 50 percent,’ DuToit said. ‘There are a lot of overpriced homes out there and the market won’t recover until the market again feels there is value,’ he said.”

“DuToit expects a decline in the number of real estate agents in the region, a figure that has roughly doubled in the past five years. ‘There is less than one sale per year per Realtor,’ he said.”

“The number of houses sold by Realtors in the Volusia-Flagler market plummeted 37 percent in April, even as the median price for the houses stayed up. Sandy Miller, president of the New Smyrna Beach Board of Realtors said she’s also seeing lower sale prices. ‘Some prices are dropping, but they were overpriced to begin with,’ she said.”

“Home sales on the Treasure Coast dropped significantly in April. Jerry Mabus, president of the Realtors Association of St. Lucie County, said speculators who bought Treasure Coast homes with the expectation of flipping for more money are in for unpleasant surprise. ‘They will have to adjust their prices to the market,’ Mabus said.”

“Jack McCabe said speculators are to blame for the housing fiasco as higher inventory levels pushed prices beyond what local residents could afford. ‘St. Lucie County will feel this the most because Martin and Stuart were relatively conservative when it came to growth and building new subdivisions,’ McCabe said. ‘The speculators were playing the market like stocks, they artificially inflated prices.’”

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