The Housing Bubble

The Herald Tribune takes us back to Florida. “US Home’s master-planned community Stoneybrook at Venice was red hot when it was unveiled in late 2004. In November 2004, when the first Stoneybrook homes were sold to ‘lucky’ lottery-winning buyers, it was standing-room-only, recalled Realtor Greg Sheller. Getting a Stoneybrook homesite then felt ‘like winning the Lotto,’ he said.”

“No more. The day the music stopped was about eight months ago, and now some investor/owners are scrambling for a chair. The ‘For Sale’ and ‘For Rent’ signs are out in force. The completed neighborhoods sit amid acres and acres of upturned dirt awaiting construction of newer neighborhoods. Many homes appear uninhabited, few cars are evident and the traffic is light.”

“Flippers are increasingly being forced into becoming reluctant landlords. So many flippers got pinched in a situation where they could not sell profitably, or at all, for the time being. Meanwhile the mortgage payments come due month after month.”

“There are issues with Stoneybrook, Realtors say. One is that Lennar/US Home has been aggressively discounting sales prices in many of its developments, including Stoneybrook. A property that US Home sold last year for $440,000 or substantially more can now be bought for about $390,000.”

“Only about 250 of the planned 900 homes are built so far, and on a recent weekday afternoon, the Lennar and US Home welcome centers were quiet. A visitor to a Lennar sales center was greeted by a note on the unlocked model door ‘back in 15 minutes, make yourself comfortable.’”

“During the wait, visitors are greeted with tomb-like silence, no phones ringing, no foot traffic, no buzz at all.”

“‘US Home will keep the sales pace, keep the start pace and keep construction going,’ said Rob Allegra US Home division president in Southwest Florida, adding that he thinks that is the best thing for homeowners. The ‘10-20 percent price cuts’ are simply an intelligent and timely reaction to market predictions, he said.”

“Jennifer Roemer, an agent who has two homes listed on Dancing River Drive, says her sellers would be happy to get out at $359,000 for homes they bought for about $315,000 in the first auction in 2004. Roemer remembers the initial auction for Stoneybrook sites, saying that US Home ‘knew they were jam-packed with investors.’”

“‘My people are extremely upset,’ says Roemer, noting that ‘nothing has turned over’ other than what US Home is selling.”

“Kim and Chris Tritschler, husband-and-wife agents, represent two Stoneybrook homeowners who are looking to rent so they can pay their mortgages. ‘A homeowner is in no position to compete with a developer’ with hundreds of properties to sell, Chris Tritschler said.”

The Sacramento Bee has an update from California. “Nearly one in every 10 homes, apartments and condominiums started last year in California rose in the Sacramento area, led by Sacramento’s Natomas area, the cities of Lincoln and Elk Grove, and unincorporated Yuba County, according to the California Building Industry Association.”

“In fact, builders in California produced 10 percent of the nation’s housing, the CBIA said.”

“‘Twenty thousand permits is a very good number for the region, even though they trailed off some in the last quarter,’ said John Orr, CEO of CBIA’s Roseville affiliate.”

“The number is expected to drop by at least 2,000 homes this year in the six-county region, Orr said. Area builders are scaling back amid a glut of existing homes for sale and rising interest rates, among other reasons.”

“Roseville-based homebuilder consultant John Schleimer said builders have begun backing out of land deals just as buyers are backing out of new homes. ‘I don’t know of a major homebuilder who is not in renegotiations or didn’t walk away from lots in the last three months,’ said Schleimer.”

From the Napa Valley Register. “Napa County’s housing market seems to be slowing down, with fewer sales and a slight drop in the value of the median priced home, new statistics reveal. The median sale price decreased 5 percent between March and April to $609,000, while the number of units sold plunged 39 percent, according to DataQuick.”

“DataQuick reports the ‘typical’ Bay Area buyer has an eye popping $3,048 per month mortgage payment. That tops March’s $2,948 figure and the $2,659 payment reported in April 2005. Not only are homeowners taking on higher monthly payments, the days of hosting a ‘mortgage burning party’ seem to be dwindling, said Silvas.”

“Different generations have different home ownership goals, she added. ‘I don’t think most buyers today are looking at that as a goal,’ said (realtor) Jill Silvas of Morgan Lane.”

Paul Muolo kicks off a look at housing bubble news from Washington and Wall Street. “In a brief interview with National Mortgage News last week, Countrywide CEO Angelo Mozilo predicted that the industry’s correction will last at least another two years. He believes that significant consolidation is now underway. Another executive told us that ‘we’re about one-third of our way through this mess.’ Profit margins continue to be tight in both the prime and subprime sectors.”

“When the going gets tough the tough start exercising their stock options. Fannie Mae directors Ann McLaughlin Korologos and Joe Pickett in early May each exercised stock options valued at $126,250.”

“Both are current board members and served under former chairman Franklin Raines. Mr. Raines, Mr. Pickett and Ms. Korologos, and other executives and directors (past and present), are defendants in a shareholder lawsuit that accuses them of turning a blind eye to the company’s accounting woes because they were involved in ‘mutually beneficial relationships’ with the GSE. The plaintiffs charge the group did not operate as independent directors. Fannie Mae is trying to get the lawsuit dismissed.”

“The Enron convictions were big news this past week and mortgage executives are starting to wonder if criminal charges might be brought in the Fannie Mae case. The Office of Federal Housing Enterprise Oversight and Securities and Exchange Commission formally accused the company and its former top executives of fraud.”

“Of primary interest to criminal investigators are the 1998 bonus payments. One industry veteran who has worked on fraud cases told us that breaking the rules to make money is a ‘criminal act’ and adding that ‘people go to prison for that.’ (Millions of dollars in bonuses were paid that year.) The obvious question in the Fannie case is who was responsible for bending the accounting rules and what did they do, and when.”

Bill Fleckenstein writes about the next big scandal. “‘Make money risk-free!’ That’s usually a costly come-on, as ordinary folks know. But corporate chieftains who sit on their stash of stock options have found a way to turn this unattainable fantasy into reality. The public..outrage will only intensify when folks who’ve speculated in the housing market start to feel the real pain, which will bring about the next big scandal: fraudulent appraisals and bogus financing schemes.”

And the NAR has their latest sales tactic out. “Apartment rents are expected to increase 5.3% this year - about double last year’s increase, the National Association of Realtors says.”

“When the housing market was at its blazing peak, many investors who owned apartment buildings kicked out tenants and sold the units as condos. One out of three apartment buildings sold last year were converted into condos for sale. That took 191,400 apartments off the market, according to the NAR. In addition, the number of new apartment buildings under construction is down this year.”

Inman is going along. “As the housing market cools down in many areas, rental housing is heating up, with rents rising and the amount of available rental housing dropping, experts say.”

“There are two reasons rents have gone up so much in Southern California, Conway said, one of which is interest rates. ‘First of all, now that the housing market is cooling and interest rates are moving up, more people are choosing to live in apartments,’ Delores Conway, director of the Casden Real Estate Economics Forecast said.”

“‘Demand for apartments has gone up as the adjustable mortgage rates everyone was using to try to qualify for mortgage loans are going up. Now lenders are tightening qualifying criteria as well and adjustable-rate mortgages are moving up. They are almost up with fixed-rate loans,’ the director said.”

“Hence, there is more demand for apartments now, Conway said. ‘The second thing is more interesting. Because the housing market has been white-hot and there have been so many condo conversions, the supply of apartments actually went down and the demand went up,’ Conway said.”

The National Post has this update from Canada. “Consumers in Alberta are now putting down deposits on housing lots without knowing what the final price for the finished home will be, in the latest example of the desperation for housing in the province.”

“The bizarre situation in which consumers are contractually bound to pay a final price yet to be determined has been going on for the past few months, said Allan Klassen, president of the Alberta chapter of the Canadian Home Builders’ Association.”

“‘That’s how people are securing housing now,’ said Mr. Klassen, adding the situation is being driven by demand for housing as opposed to greed from builders.”

“To combat price worries, builders are now willing to let consumers guarantee themselves a space in a development if they are willing to put a deposit on a lot. Mr. Klassen said that deposit can sometimes be about 20% of the value of the lot.”

“For that deposit, consumers are usually signing a contract that binds them to buy the house once it is completed. The final price is dependent on what type of costs the builder incurs. The prices rise as costs rise. The deposit contracts vary from builder to builder but Mr. Klassen said most builders are willing to let consumers have their deposit back if they are unhappy with the final price because the current market conditions are strong.”

“It’s a dangerous game for consumers, according to Brian Hollohan, manager of market analysis for CMHC in Calgary. ‘There are a lot of unusual transactions taking place and people are taking unusual measures to secure a home. It’s not something I would do,’ he said.”

“Consumers looking for more price certainty in the existing-homes market are out of luck. Kevin Clark, president of the Calgary Real Estate Board, said the average price of a home in the city was rising as much as $500 per day.”

“‘The resale market is quite insane,’ said Mr. Clark. Mr. Clark said it’s no wonder people are willing to put deposits on new homes without knowing the final price. ‘If they don’t there is another person right behind who will,’ he said.”

The Tucson Citizen has this update from Arizona. “For sale signs are a more frequent sight in the yards of midtown Tucson houses. Some even advertise reduced prices. Those who check will find that many of the houses on the market are empty of furnishings and have no cars on the driveway.”

“‘A good percentage of the resale inventory is vacant, which is an indicator that an investor owns that property and has put it up for sale and is moving on,’ (realtor) said Judy Lowe.”

“Investors and speculators, primarily from California, fed record housing price increases in the metro area a year ago. Now they have left or are getting out of the Tucson market, said University of Arizona economist Marshall Vest.”

“The numbers tell the story. In April 2005, 3,640 houses were listed for sale in metro Tucson, according to the Tucson Association of Realtors’ MLS. Last month, the number was 8,131.”

“Real estate executives say many Tucsonans, after seeing housing prices rise dramatically over the past two years, put their homes up for sale in the hope of cashing in on the real estate bonanza. ‘So many people have put their homes on the market that it has increased the supply significantly and is actually slowing the market,’ said (broker) Laura Mance.”

“Lowe said the increased supply is resulting in buyers becoming more critical of a property’s asking price and condition. ‘When property owners aren’t able to sell a home after 30 days, they need to consider making cosmetic improvements to the property or dropping their price,’ she said.”

“Vest said it’s way too early to conclude the housing correction won’t turn into a fire sale. Changing from a boom to a bust mentality takes a while, he said.”

“‘The market psychology has to go from ‘this thing is going to go on forever’ to ‘this thing is never going to get any better,’ Vest said. ‘That doesn’t happen overnight. It takes a long time, as measured in years, to go from one extreme to another.’”

Some housing bubble updates on Florida. “It may be hard to imagine with all the construction around Brevard County that the local housing market is slowing down. But that’s what the latest figures show. There were 577 housing permits issued throughout Brevard in April, up from 433 permits in March, but down from 735 permits in April 2005.”

“‘I think you’re going to see a continued slowing of permit activity,’ said Franck Kaiser, CEO of the Home Builders & Contractors Association of Brevard. ‘What we’re seeing is a market adjustment. The spiraling increases in prices had to stop.’”

“The median sales price for a single-family home in Brevard rose 1 percent from March to April to $224,800, down from the peak of $248,700 in August 2005, according to new figures from Florida Association of Realtors.”

“Prices at Heritage Isle range from about $230,000 to more than $400,000. The project includes more than 200 condos, which originally were going to be priced above $300,000, but are now priced between $230,000 and $276,000, Lennar representatives said.”

“‘There’s such a glut of condos on the market’ countywide, Kaiser said.”

“In an effort to stimulate sales of the last remaining units at Trump Tower Fort Lauderdale, Donald Trump and his partners are offering the agent who makes the first three sales a little added reward: either a pair of handmade platinum cufflinks, or a signature platinum and diamond necklace worth $10,000. Trump is also boosting commissions.”

From Fort Meyers. “A new car, vacations, money, sounds like a lottery dream but it’s actually the latest marketing ploy to get you to buy a home. The cooling real estate market is giving rise to some hot ticket perks for home buyers.”

“Ashley Dostal got a whole year’s mortgage free, plus closing costs and other giveaways. It convinced her to buy now. ‘The first year, I expect to save about $15,000,’ Dostal said.”

“Sellers of existing homes have started offering free landscaping and lawn care for a year, but that’s nothing compared to what realtors and homebuilders are offering, you think of it, they’re serving it up.”

“The source of this buyers’ grab bag is a dip in home applications, which are down 20-percent from last year. That means too much supply and not enough demand. ‘In a market that has a lot more inventory, many brokers and many sellers have looked to incentives to draw attention to their property,’ Ron Phipps of the National Board of Realtors said.”

“While almost all of the local home builders say they’re not ready to jump on the incentives bandwagon yet, a few of the bigger companies are offering deals that affect the bottom line. Many local companies think the incentives trend may be short-lived, depending on what the market does. But industry insiders say if home sales flounder, buyers will be able to get very creative about the perks they want.”