The Housing Bubble

One common topic suggestion is housing bubbles in countries other than the US. “London median prices resumed their upward climb last month, particularly on upper-end houses. What is going to kick the knees out from under that market? can we offer any words of hope to our good friend nhz?”

Another said, “We’ve lived in Brussels for almost 2 years now. A few observations: My husband does quite a bit of traveling for business in Europe, and asks about housing everywhere he goes. Someone from the Netherlands just told him this week that housing is only going up about 3% a year there, and has done that for the last few years.”

“Here in Brussels, my neighbors are doing major remodeling on their home, and are having a hard time finding workers, as there is more work than workers. And I do know that a recent survey here in Brussels showed that investors are cautious about the financial markets, the stock market, etc. It just sounds too frighteningly familiar to what is going on in the U.S. But, we in no way profess to be experts over here! Just watching…..”

The Australian looks at the subject. “Whether the turbulence in commodity markets turns into a very big fall might depend on what happens to the US east and west coast housing markets, the key drivers of US consumer spending. Australians must hope the US does not duplicate the mistakes of Sydney.”

“The Australian economy boomed in the first three years of this decade thanks to an unprecedented housing boom. When interest rates were increased, that boom turned into a slow slide rather than a crash, due partly to the subsequent China-driven commodities boom that allowed big tax cuts.”

“But a large part of the Chinese demand for our commodities came because the US’s housing boom drove consumer spending to record levels as the optimism created by paper dwelling profits caused people to increase their borrowings.”

“Most young Sydney couples now simply either can’t or don’t want to pay $450,000 for a two-bedroom unit and saddle themselves with a huge mortgage. An attitude is developing among the young that says: ‘We can’t buy a dwelling, so we don’t need to own one.’”

“Those who bought inner city units in the Sydney boom have suffered. A Sydney two-bedroom unit that might have sold for, say, $550,000 at the peak is now selling for $450,000. Many owners now have little or no equity in their dwelling.”

“Dwellings are still being built, mainly because developers have low-priced land and prefer to complete the building rather than have the land idle. The biggest unit developer in Sydney for the young market, Harry Triguboff’s Meriton Apartments, concluded that if it kept selling into a depressed market where investors were absent it would send the price of a two-bedroom unit to $400,000 or below.”

“He developed a scheme to withdraw his units from sale and either rent them or tap into the serviced apartment market, much to the dismay of hotels and motels.”

“So, we have a looming stand-off and while that continues, the real estate market for Sydney’s young people will remain depressed, causing an enormous cultural change in the city. The young people who might consider buying a dwelling are also those who are moving offshore, where they find more attractive salaries and tax scales.”

“Hopefully, the experience of Sydney will be a lesson for the US as well as the rest of Australia: if you don’t treat the delicate housing flower carefully, you will not only greatly reduce your prosperity (in the absence of a commodities boom) but you will also trigger unexpected social side effects.”

A pair of reports from the northeastern US. Rhode Island, “As the prime season for selling houses belatedly gets under way, more sellers are accepting market realities, and price cuts on properties that have been sitting on the market for months are now common, agents report.”

“‘You can start to see it all of a sudden, the price changes and the new listings,’ said realtor Lynn Corey in East Greenwich. ‘I don’t think sales are up much. People are basically lowering their prices, and a ton of new stuff is coming on the market.’ On Wednesday, there were 5,990 single-family houses listed with the statewide MLS in Rhode Island, Corey said.”

“Phil Tirrell said pricing houses correctly is crucial, and he makes a point of educating sellers who may still have unrealistic expectations. Tirrell said he recently showed one seller a video presentation of the competition, houses in the local market in the same price range, and the seller immediately lowered the asking price by $10,000.”

“(Realtor) Gayle Flaherty also says that in helping sellers price their homes, she points out the prices of very recent sales, because some clients are still fixed on ‘what their neighbor got’ a year or two ago. ‘When they’re listing they just have to be more realistic. You list them close to the price they’re selling at.’”

“‘For sale by owner’ signs are less common now than they were when the housing market was hot and selling a house was an easier proposition. Steven and Jennifer Shaker, of Greenville, have been trying to sell their four-bedroom Cape-style house on their own since mid-April. Jennifer Shaker said they have dropped their asking price, initially $359,900, to $349,900.”

“‘There’s just so much out there right now,’ Jennifer Shaker said. ‘The buyers have a lot to choose from’”

From Massachusetts. “Massachusetts’ housing market has been scorching hot for years, but now experts say it’s cooling off, which could be a benefit for buyers. Barry Cunningham, the president of the North Central Massachusetts Association of Realtors, said the slowdown was inevitable.”

“‘What’s happened is, prices had increased rapidly over the last 10 years,’ he said. ‘That type of increase of price could not continue forever. We’re at a point where the market’s taking a breather. It’s healthy.’”

“A year ago, there were 1,270 properties for sale in North Central Massachusetts, according to Richard Healey. Today, that figure has increased almost 50 percent to 1,808. ‘The general trend is more homes on the market,’ said (realtor) Mark Cavanagh. ‘In Fitchburg, right now, there are 522 properties on the market,’ he said.”

“In April 2006, 47 properties sold in Fitchburg, with an average price of $206,000. In the same month last year, 63 properties sold, with an average price of $231,000, according to Cavanagh.”

“David Wluka, president of the Massachusetts Association of Realtors, said the current market cooldown is not the same as the bubble burst of the 1980s.”

“‘That happened for a whole bunch of different reasons that are not going on in the market today,’ he said, citing less speculation and more stringent banking standards. ‘It was a very, very different situation. The fundamentals of real estate are very different today.’”

“The question for buyers now is whether to wait and see if prices drop, or to make their move now. Experts say interest rates are a huge factor. ‘The rise in interest rates is going to change the landscape some over the next few months to a year,’ Cunningham said. ‘(Buyers) might be better making (the move) sooner rather than later.’”

“Wluka said sellers need a more realistic view on what their houses can sell for. ‘When there are four or five homes in a neighborhood that are similarly priced, you have to make it stand out,’ he said. ‘There’s resistance. Everyone knows what their neighbors sold their house for three months ago.’”

What’s your housing market observations this weekend? Did you overhear a motivated seller? See an unattended open house? Here are some from the topics thread. From Arizona, “I was playing golf last night with a group I have know for several years. One of them told me that KB Homes laid off 45 people this week. He said that the employees were escorted off the property by uniformed police. No severence package. Queen Creek just went over 2,800 houses for sale!”

One from Florida, ” I am noticing that in Titusville/Palmbay Florida, last month they were talking about the something like 9.8% YOY price increase is still great. This month they said the something like 5% increase is still good. What is going to happen when they get to August? The median last year was around 255k and will probably be near 215K this year. How are they going to spin this one? I think this will be the reality check the housing builders, seller, and realestate agents that they really need. HOW IN THE HELL ARE THEY GOING TO PUT A POSITIVE SPIN ON THIS?”

From California, “For the past several days a Agent in Sacramento has been running a ad in the San Jose Mercury News under Income Property for sale 1-4 units”…She’s proclaming that; ‘Invest In Sacramento, #1 in Growth’….But, she went over the top today…She now has her mug shot in the ad….This is better than the mug shot of the pimp in Arizona….I think Suzanne moved to Sacramento.”

“‘We’ve been reading about bubble headlines since 2002,’ he said, but the Manhattan condo market could be at risk. ‘In Manhattan, we’re seeing a lot of construction, which is going to slow, if not turn prices down a little bit,’ Christopher Mayer, a professor of real estate at Columbia Business School said. ‘I wouldn’t be surprised to see a 5 percent drop next year.’”

“The five year boom in local housing prices appears to be finished. Numbers released Thursday by the California Association of Realtors for April 2006 shows the median home price in Riverside-San Bernardino at $394,220. That’s a drop of 2.2 percent from March’s all-time high of $403,000, but more important, it’s only an 8.7 percent increase from the median of $362,780 in April 2005.”

“That’s the first time in more than five years that year-over-year prices have risen by less than 10 percent in the Inland Empire. ‘I think we’ll still see some more year-over-year price increases, but the heyday of the housing boom is over,’ said regional economist Jack Kyser. ‘We’re in a more normal market right now, and the sellers are not in charge.’”

“New housing figures released Friday suggest that May will be Orange County’s seventh straight month with falling home sales, but prices still appear to be holding at record levels.”

“Meanwhile, real estate economist Gary Watts backed off slightly from his forecast that home prices will go up 15 percent this year but told Realtors at a Buena Park gathering that he still expects double-digit appreciation rates for all of 2006.”

“Watts called his original forecast that home prices would go up 15 percent this year ‘a little optimistic.’ But, he added, ‘It will be well over double-digit appreciation.’”

“He said he won’t know if he should consider revising his forecast until the end of July. Although real estate sales are taking their lumps so far this year, he said, ‘It’s an inverted year. There’s going to be a good second half.’”

A couple of readers want to know what were your favorites on the housing bubble blog this week. “What was your favorite post/topic this week?”

“Which comment/reply scared you the most?”

“What made you laugh out loud?”

One answered, “I liked the ‘this looks like the bottom’ with David Lereah pointing at his bottom. And May is better (meaning Mae West’s (?) bottom is better. That was brilliant!”

Post off topic links and Craigslist finds here!

The LA Times reports Californians are still looking for housing bubble gold. “Californians, unable to afford the already mightily appreciated residential property market here, are taking their investment dollars elsewhere. Small investors are heading for the plains of Texas, the coasts of the Carolinas and parts of Georgia and Idaho in search of tomorrow’s realty geysers.”

“Killeen-Ft. Hood, Texas. For $80,000 to $100,000 and nothing down, you can buy a three-bedroom house and rent it out for about $800 a month to one of the 8,000 transfers coming to the Army post, thanks to base closures elsewhere, says Realtor Ann Elizardo-Shreder. But before you don your camouflage fatigues, take note. Although 8,000 soldiers are being transferred in, 9,000 are being transferred out.”

“But is it a good investment? Housing in Killeen is very inexpensive, and if you can hold on for the longer term, it eventually could become a bedroom community of Austin. Remember, Riverside County wasn’t always considered a bedroom community of Anaheim.”

The Kansas City Star reports on one market in middle America. “After years of record-breaking home building and surging sales and prices, the Kansas City-area real estate market is awash in homes for sale.”

“Inventories for new and existing homes are at historic highs while demand is reverting to historic norms. The result is that homes are sitting on the market longer than they have in years, price appreciation is ebbing and stealthy incentives increasingly are becoming part of the negotiating process.”

“On the supply side, there were a record 21,104 new and existing homes listed for sale in April, a 30 percent increase from a year earlier, according to the Kansas City Regional Association of Realtors. That figure did not include homes being sold privately by owners. On the demand side, the Realtors reported 3,090 closed sales, down 13.5 percent from a year earlier. The average sale price for a new or existing home in April increased 2 percent, to $180,128, from a year earlier.”

“Some industry experts have warned that sales competition would make it tough for people trying to sell larger, recently built homes near outlying subdivisions where similar larger houses continue to be built. That appears to be what is hampering the Kings in selling their home in Shawnee. ‘There are so many new spec homes sitting out there, which I think is hurting resell,’ Joey King said.”

“Tim Underwood, executive vice president of the Home Builders Association of Greater Kansas City, said builders had noticed the shift in the market. So far this year, permits for future construction are down 13 percent from last year, but inventories remain high. The local industry is coming off four consecutive years of building more than 10,000 houses annually.”

“‘The number of finished unoccupied homes is 35 percent higher than a year ago,’ Underwood said.”

“The local real estate market is adjusting to the new supply-and-demand equation. One early indicator is the appearance of stealthy incentives to attract buyers. Homebuilder Bruce Rieke, for example, is offering buyers a free two-year lease on a BMW 325. ‘There’s more competition than before,’ said Rieke.”

“Some see that as a buying opportunity, if would-be buyers can sell the houses they already are in. ‘Some of the consumers who haven’t bought the past four or five years will find better values, but their challenge is getting out of their existing houses,’ (researcher) Dan Whitney said. ‘Many have taken cash out of their houses by refinancing, and they don’t have as much room to negotiate a price.’”

“Real estate agent Teresa Booker detects a growing nervousness among some colleagues. ‘Some agents feel they’ve already hit a summer slump,’ Booker said. ‘People are best served by talking to agents who are candid, honest and realistic about the condition of their property. Then they’ll get accurate and competitive pricing.’”

“Kathy Copeland, the president-elect of the local Realtors association, said how well the local housing market does this year may depend as much on psychology as supply, demand and mortgage rates. ‘We need to be very positive,’ Copeland said. ‘If we believe it will slow down, then indeed it could. I’m telling agents it’s a very decent market.’”

The Palm Beach Post has two housing bubble reports this morning. “Easy money has led to hard times. More than $106 million in home loans collapsed in Palm Beach, Martin and St. Lucie counties in the first quarter of this year alone. In terms of real people, that translates to about 2,100 families in danger of losing their homes.”

“Experts say the worst is yet to come. ‘We know the whale is coming, we just don’t know how big the whale is,’ said Mike Flagg, of the Center for Responsible Lending. As the state’s red-hot real estate market grew hotter, thousands of new brokers and brokerages obtained licenses. That coincided with the availability of new types of loans, which gave far too many middle-income buyers who couldn’t afford it a shot at living in a half million-dollar home.”

“‘I think the reason we are going to see so many foreclosures, so many more than we have ever had in the past, is because a broker or loan originator has gotten people into these crazy kinds of loans,’ said Steven Schneider, president of the Florida Association of Mortgage Brokers.”

And it’s a renters market. “According to local real-estate agents, condominiums and single-family homes throughout Palm Beach County and the Treasure Coast are leasing for 30 to 50 percent less than the monthly costs, including property taxes and sky-high insurance premiums, of owning the same property.”

“In Riviera Beach, for instance, three-bedroom townhomes are renting for as low as $1,150 a month. Owning one would cost about $1,800 to $3,000 a month, after a 20 percent down payment.”

“This spring, Michelle Lewis and Rudolph Maragh of West Palm Beach were preparing to buy a condo when they took one last look at the local housing market. And decided to rent.”

“The couple and their two kids leased a 2,000-square-foot, three-bedroom house in the gated West Palm Beach development of Briar Bay for $1,500 per month, about 40 percent less than the monthly mortgage payments on a comparable home. ‘It was the same price as an apartment, so we might as well get the house,’ Lewis, said of their decision.”

“Welcome to the flip side of the housing boom, where renters can afford brand-new dream homes while landlords struggle to meet their monthly mortgage payments.”

“In West Palm Beach, $400,000 townhomes are renting in the $1,500 range. Owning one would cost nearly twice that per month. In Lantana, a $450,000 three-bedroom condo with an Intracoastal view is available for $1,850 per month. In Port St. Lucie, three-bedroom, $450,000 houses are renting for about $2,200, a third less than they would cost to own.”

“And in Wellington, $800,000 homes that would cost nearly $6,000 per month to buy are renting for about $3,000.”

“According to many real-estate agents, potential home buyers are now in a wait-and-see mode. Before they commit to buy, they want to see whether prices will fall, and whether the region will be hit by a hurricane this year. The result is a rising inventory of homes for sale, and, increasingly, for rent, at relatively low prices.”

“‘A lot of sales are turning into rentals,’ said Steven Saines, an agent who specializes in Treasure Coast homes.”

“Discussion of the strong rental market makes some real-estate agents uneasy. Several refused to comment publicly, fearing it would further erode sales in an already slow market. ‘People are walking away from sales contracts’ and renting instead, said one who didn’t want his name used. That agent said he sold his own investment property and plans to rent a $2 million house for the bargain price of $3,500 a month.”

“Speculators in particular seem to be fueling the renter’s market. As buyers drag their feet, people who thought they could turn a quick buck by buying real estate last year have been left with empty houses and expensive mortgages. ‘They were hoping to flip their properties but they didn’t, so now they’re trying to rent them out,’ said Putnam.”

“Terrence McManus, president of Florida RentFinders, said now that the interest-only periods have ended on many investors’ mortgages, ‘they’re trying to get income out of their houses any way they can.’ McManus said that most of the landlords he works with are renting at a loss. ‘None of them is cash-flow positive,’ he said.”

“Some agents are advising landlords to slash rents in order to create even a trickle of cash. ‘If it takes seven months to rent at $4,000, you’re better off getting $2,000 right away,’ said Saines.”

“The situation is creating sleepless nights for investors, such as Dena Webster of Wellington, who hasn’t been able to sell any of the 14 houses that she purchased at the peak of the boom. Eleven are in Olympia, a Wellington development where houses routinely carry price tags of more than a million dollars, but where rents are in the $1,800 to $3,000 range. ‘I’m upside-down on every one of them,’ Webster said of her properties.”

“To help make her monthly mortgage payments, which total $50,000, Webster has renters in four of her houses and is advertising for tenants for two more. Still, she’s taking large losses every month. ‘I’m not sleeping,’ she sighed.”

“Renters such as Michelle Lewis and Twanya Robinson, on the other hand, are slumbering soundly.”