The Housing Bubble

The Barrons article seems to be the housing bubble talk of the day. “The vacation home in Naples, Fla., hasn’t been drawing much interest from buyers, so a seller recently threw in that most modern of amenities: the $1 million price cut. That’s brought the asking price down a full 25%. ‘If you want to sell, you’ve got to go back to ‘04 prices,’ says Chip Harris, who is handling the property.”

“Naples-style discounting is starting to spread. It hit the town of Pocasset, on Massachusetts’ Cape Cod, just as retired executive Jack Reen was trying to sell his four-acre, six-bedroom beachfront home. He cut the price several times, for a total of 42% off the listing price, before striking a deal at $3.95 million.”

“While pundits debate when the bubble might burst in the primary housing market, the air already is whooshing out of parts of the second-homes market.”

“Vacationers long have been attracted to Naples’ proximity to water, the Everglades and shopping. Today, about the most visible activity in that area is the 400 or so daily additions on the MLS, and price reductions by the dozens. In the 35 years that (broker) Charles Ashby has been in the business, this is the first downturn he’s seen, even counting recessions. ‘The mule died,’ he says.”

“The area’s sales of homes costing less than $1 million declined 45% in unit volume in the first four months of this year. All along the pricey Gulf shore, builders still are tearing down old ranch houses and replacing them with two-story mansions, pushing the market toward a classic glut.”

“In a variety of other vacation hot spots, from Palm Desert, Calif., to Phoenix, Ariz., to Ocean City, N.J. Phoenix in recent years has been overrun by property flippers from California, says (broker) Mike Messenger, in Scottsdale. But unit sales now are down by 40%-42%, and the city’s inventory of unsold homes has shot up more than five-fold, to 39,000.”

“Likewise, the number of homes for sale on the MLS for the Falmouth area of Cape Cod is up about 65% from a year ago, says Lynette Helms of the local Real Estate Associates. With numbers like that, more price cuts can’t be far behind. In fact, the Cape Cod town of Barnstable is among the first of the second-home meccas to show a decline in median prices.’

“A Wellesley, Mass.consulting firm, shows just how big a role can be played by investors. In Myrtle Beach, S.C., investors owned a full 58% of properties in 2004, the last year with available data. Though Florida communities accounted for eight of the top 10 investor-owned hot spots, Wilmington, N.C., clocked in at 38%, Las Vegas at 26%, and Honolulu at 23%. The normal level is closer to 14%.”

“Says Ingo Winzer, president of the firm: ‘This makes me very worried because it implies that the price increases have been driven more by speculators than by people who are going to hold onto these properties, and indicates to me that there’s a speculative boom.’”

“Behind all this is a fervor eerily reminiscent of the late 1990s on Wall Street. An eye-popping 64% of investors with four or more properties planned to buy another property within two years.”

“People don’t believe in the laws of supply and demand anymore,’ says Alan Skrainka, chief market strategist at Edward Jones. ‘We’re not saying it’s a bubble, but we’re saying prices are overstated and will likely correct 20% to 25% over four or five years.’”

“He rejects a notion advanced by housing bulls that shore communities in Florida and California will be protected because of the limited supply of coastline. ‘Japanese real estate and land prices went down for 15 years and Japan is an island,’ Skrainka says.”

“In Palm Beach County, inventories of unsold homes have more than tripled in the past three years, to more than 25,000. Some brokers in South Florida are reporting a quadrupling of inventories over the past year. In what some see as a sign of the times, Coldwell Banker recently closed four of its 31 offices in the Palm Beach region.”

“Tucson, Arizona could face a 33% decline in home prices. Mike Messenger, a Scottsdale, Ariz., broker, sounds considerably more glum. He says this is the first time in 16 years that the lower end of the market, always the driver for the area, has weakened. The culprits? Mainly the flippers; Messenger figures investors account for 35% to 40% of the market.”

“Las Vegas is causing concern, too. It’s ‘a classic example of an overheated market where there’s too much proposed and the reality of the absorption isn’t such that it could work in the near term,’ says developer David Wasserman.”

“The tough conditions in the second-home market are no small matter for the people who own the homes. And the so-called mass affluent, folks with investable assets of $100,000 to $1 million, will probably take the brunt of any price declines. A Chicago-based consulting firm says this group has more than one-third of its assets tied up in real estate. In general, these home owners are more vulnerable than the ultra-wealthy, both because they can ill afford to wait out a prolonged downturn and their losses can hurt if they’re forced to sell into a glut.”

Several readers see an Enron like situation in the real estate business. “As most know, yesterday former Enron executives Ken Lay and Jeff Skilling were convicted of fraud. Regular readers of this blog know about reports of illegal activity in the world of Real Estate, such as appraisal and lender fraud.”

“Also, based on a OFHEO report released earlier this week, governance at Fannie Mae appears to be a bit shaky. My question to my fellow bloggers is: Will such a high profile conviction put the ‘Fear of Jesus’ into unethical/dishonest appraisers, loan officers and other officials involved in the real estate/industrial complex? Or, will business continue as usual?”

A reply, “Very interesting, as Fannie pressured congress into investigating OFHEO through their purchased reps. If they pressed that hard, I do not want to imagine what OFHEO dared not investigate!”

Another, “It WOULD be interesting to know more about the background/history of the FNM fiasco. Pretty nervy to want OFHEO investigated. I’m wondering which side different congressmen have fallen on over this issue in the past several years.”

One saw others involved, “Don’t forget borrower fraud, e.g., stated income? The mortgage insurance companies are going to lobby government for the FB’s to be dragged before a judge for their greedy ways.”

One restated the topic, “Will The RE Fraud Eclipse Enron and Worldcom? I have a feeling that there is a lot of fraud by the FBs, lenders, realtors, appraisers, title companies, hedge funds, and organized crime. How much fraud is out there?”

Another made a comparison to the 80’s. “A veteran of the FDIC/RTC 1980s-1990s fiasco here. Been there, seen that, done it all, but something tells me that we’re going to see new and improved scams this time involving foreigners, illegal aliens, 20 people in a house and god only knows what else. Should make for very entertaining Congressional hearings, magazine articles, etc. not to mention beaucoup bargain for the patient down the line. We’re en route at the moment btw.”

The Christian Science Monitor. “When a company chartered by Congress to help finance affordable housing for lower-income Americans cooks its books to line the pockets of its managers, one might hope Congress would seek quick reform. It’s worth asking why it hasn’t.”

“A sudden meltdown of this ‘government sponsored enterprise,’ as former Federal Reserve chief Alan Greenspan warned, could bring down America’s financial markets, dwarfing the impact of Enron’s collapse, and require billions in tax dollars to clean up the mess.”

“Scaling back Fannie, improving its oversight, altering its governing board, and other such steps are fine. But more root-and-branch reforms will be needed.”

The Associated Press. “While the federal government has garnered its biggest victory from the business scandals of recent years with the conviction of former Enron Corp. chiefs Kenneth Lay and Jeffrey Skilling, prosecutors could have their sights on a new crop of potential targets.’

“Regarding Fannie Mae, the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight are looking at the roles of several current and former executives, including ousted Chairman Franklin Raines, in the accounting failures and whether they should be forced to return millions in compensation.”

“A criminal investigation of the company by the Justice Department is continuing.”

The Herald Tribune has this update on the Florida housing bubble. “Like many other sellers, Tara Fizer has come to realize what every real estate agent in Southwest Florida now knows: After three glory years, capped by a period in which homes were being bid on like an eBay auction, the residential market has entered a no-mans’ land in which sellers listings are stacking up at prices higher than buyers want to pay.”

“Fizer and her husband now own two new houses in Sarasota. It is one more than they want. When they were moving to the area from Orlando in mid-2004, they signed up for two homes being built near University Parkway, one in Sarasota County, the other in Manatee. The idea was to decide later which one to keep, and sell the other for a sweet profit in a fast-climbing market.”

“‘This could have been a killing,’ Fizer said of the 4-bedroom, 21/2 plus loft house in Manatee that they are now attempting to sell for $389,000. ‘We could have pocketed a lot of money.’”

“Instead, they have the home priced at $7,000 less than the builder’s base price in the same subdivision. ‘We know the market is pretty slow right now, so somebody can get a pretty good deal from us right now. We did a lot of upgrades.”

“It does not help that the media keeps writing about the problem, and it is not just the Sarasota Herald-Tribune. For example, Sarasota was held up as a market in which housing is 43 percent overpriced in a recent article published jointly by BankRate.com and MSN.com. Naples is characterized as being 72 percent overvalued in the survey.”

“This trend reversal from sellers’ market to a virtual standoff is occurring in most Florida metro markets, but it is more pronounced in areas such as Sarasota-Bradenton where prices rose the most, statistics from the first quarter compiled by the Florida Association of Realtors show.”

“In Sarasota-Bradenton, the median price was hanging in there at $331,100, one-third higher than the state average. Conversely, sales had slowed by 44 percent from the year-ago level.” “But medians can be misleading.”

“If a consumer compares what a given home would sell for during the market’s hey-days in 2004 and early 2005 to now, they would likely see declines ranging from 15 percent to 20 percent, and in some cases even more.”

“A broker who specializes in the posh island enclave of Anna Maria provided what is probably an extreme example of real-world pricing. He is sitting on a two-bedroom, two-bath home with all the trimmings, including a dock on a canal with easy access to the Gulf of Mexico.”

“‘You could have paid $800,000 a year ago, and people would have been bidding against you on it. And today that same house would be $550,000-$600,000, and you might have to work to get that,’ he said.”

“The subject of price decline is so touchy that he insists on not having his name attached to this dark appraisal of declining values. ‘It would be bad for business. Somebody would read me being negative on the market, and take their listing to another broker,’ he said.”

“What is bad for sellers is good for buyers, says one (realtor) in the field. ‘It’s an absolutely delightful time to be a buyer,’ said Kathy Scott, as she baby-sat a condominium listing on Longboat Key where she already has gotten the owner to agree to two price reductions. I think sellers are becoming more educated and realistic. I’m hearing a lot of buyers say, ‘I’m just going to wait a little bit longer and see how low it gets.’”

All across the US, people are editorializing on the housing bubble. “I’m buying a home in Buckeye. I see an awful lot written about the real estate ‘bubble’ bursting, but I’ve yet to see evidence of this happening in Phoenix. In the overall Phoenix market, inventory is up more than 10 times year-ago levels; prices are up 70 percent over 2004 levels; yet sales dipped only 7 percent in the first quarter of 2006. Is this evidence of a bubble bursting? I think not.”

“The media’s bubble talk could become a self-fulfilling prophecy. It’s easy to write about the doomsday scenario because it makes for dramatic reading, but the problems start to arise when it has no basis in fact and readers actually start to believe it, much like the overhyped Y2K bug.”

The LA Times. “Month after month, as interest rates rise and building starts stumble, we hear that the sky is falling. Alan Greenspan and his successor, Ben Bernanke, in separate speeches, announced the end of the housing boom. They are certainly correct that the market is slowing. But the sky still isn’t falling.”

“Unless you’re a real estate agent, mortgage broker, builder or go-go speculator, and nowadays, we realize, that includes a distressingly large number of people, this housing slump isn’t going to bonk you on the head like a falling acorn.”

Another said, “Thanks to the real estate bubble, Monterey could become ‘Salinas-adjacent.’ Earlier this month, the New York Times gave Salinas, if not a raison d’etre, at least a dubious claim to fame: It’s the least affordable place to live.”

“I know the bubble’s about to burst when my fellow twentysomethings, recent college grads who just a generation ago took on roommates to make rent, start obsessing about interest rates and property values.”

“The problem is, people who can’t afford overpriced homes are gobbling them up thanks to interest-only and sub-prime loans. Los Angeles County residents spend, on average, 40% to 50% of their monthly household incomes on mortgages. And with the newly acquired home comes collateral for more loans; in other words, an inflated sense of self-worth. On paper, of course.”

“Thinking of a house as a home instead of a get-rich-quick opportunity shouldn’t be such a quaint idea. Nor should buying what you can actually afford.”

And from Florida. “The top executive of the Orlando area’s Realtor association is warning members that they may be in for a shock and some pain if the residential real estate market continues to soften. ‘For some of you, it will be a scary thing,’ Belton Jennings said to several hundred members during an association luncheon this week.”

“Jennings noted that about 86 percent of the more than 11,000 local Realtor members have been in the business less than 10 years, and existing-home sales in the Orlando area have set annual records for the past 13 years. During the past year alone, the local association’s membership swelled 26 percent to 11,897 people. So any softness in the market will be magnified.”

“As the inventory rises to record levels, mortgage rates edge up and pay raises trail home prices, everyone ‘is becoming edgier,’ Jennings said, buyers, sellers and agents. If it continues, he said, some real estate offices will close.”

“‘Marginal agents will retire faster,’ he predicted, and consolidation within the industry will continue. ‘The big get bigger,’ he said, and midsize offices will be squeezed out.”

“‘There is no [housing] bubble in Orlando,’ he said. ‘We still have demand for housing, and jobs are being created.’”