The Housing Bubble

Some housing bubble updates from Florida. “Former Orlando Magic star Tracy McGrady recently unloaded some of his local holdings. McGrady sold his 18,000-square-foot home for $5.1 million. Curious thing: At a time when real estate prices have gone sky high, McGrady unloaded the property for about $875,000 less than he paid for it six years ago, according to Orange County records.”

The Naples Insider. “The majority of sellers in the area and their listing brokers refuse to accept the fact that the Naples real estate market had been over-priced, and that a correction was/is occurring. These sellers should have a big sign in their yard reading ‘Not for Sale.’”

“Overall the majority of homes for sale remain overpriced for the market trend, but a significant number of sellers have reduced prices. Some sellers have reduced pricing from an outrageous amount to just an absurd price. But others have reduced prices to year 2004 levels.”

“Let’s examine the group of homes that closed during the two week period ending May 26, 2006. In this group 35% of sellers accepted offers that were 6% to 10% below the sellers’ asking price. And 13% of sellers accepted offers 11% to 20% off of the asking price.”

“But that doesn’t tell the whole story. The majority of sellers had already reduced asking prices before getting the offer. Take the group that got a full price offer for example, sellers in that group had previously reduced their asking price by an average of 9% and some by as much as 25%.”

“Some sellers have to sell, and instances are appearing were they have sold at extremely low prices. I’ve seen some properties sell for 40% off of original list price and 25% off of peak prices.”

“A comparison of actives (homes for sale) vs. pending (homes under contract and waiting to close) is a good measure of the health of the housing market. In a healthy real estate market, pendings might equal 50% of of homes listed for sale in the mid price ranges, and 20-25% in the higher price ranges.”

“In the winter of 2005 that ratio was near or over 100% for many areas and communities. In May 2006, the actives vs. pendings ratio for the Naples area was in the 9% range. An indication of low buying activity.”

“Year-to-date the pace of sales is suggesting total sales for year 2006 will be 30% to 40% less than the previous two years. With a record number of homes for sale, trends suggest that unless bus loads of price-insensitive buyers start arriving, or prices drop significantly, or a combination of both, the Naples real estate market will remain a buyers’ market for a very long period.”

Hovnanian has some numbers out. “Hovnanian Enterprises Inc. on Wednesday said fiscal second-quarter profit fell versus a year ago as three months of slower sales, higher cancellation rates, and greater concessions took their toll on earnings.”

“Second-quarter 2006 results included land-sale profit of 18 cents per share and write-offs of $5 million from land option deposits Hovnanian decided not to exercise.”

“During the quarter, the number of net new contracts, after cancellations, including joint-ventures fell 18.5 percent to 4,342, with the Southeast and West seeing the greatest declines. The value of the contracts fell 18.2 percent from a year earlier.”

“‘As many of our housing markets have continued to cool off..we have renegotiated option contracts on numerous land parcels, primarily those negotiated within the last twelve months that no longer adequately reflect the pricing and returns available in the current sales environment,’ CEO Ara Hovnanian said.”

“‘We also walked away from about $5.6 million of deposits on land parcels that we controlled through options when we were unable to successfully renegotiate the purchase terms,’ he said.”

Some housing bubble news from California. “Total building permits issued for single-family homes in California were down about 25 percent in April compared to April 2005, while total permits for the first four months of the year were down about 18 percent compared to the first four months of 2005, the California Building Industry Association announced today.”

“The number of single-family building permits dropped the most in Napa (-71.4 percent), Yuba City-Marysville (-61.3 percent), and Salinas (-60.7 percent) metro areas in the first four months of 2006 compared to the first four months of 2005, the association reported.”

“Residential building in April edged up a slight 2% to a seasonally adjusted annual rate of $688.7 billion, according to McGraw-Hill Construction. With homes taking longer to sell, the inventory of new homes for sale has been rising, contributing to what has been so far a modest slowdown for construction.”

“April included the start of 18 condominium/apartment projects valued at $50 million or greater, with 8 of these projects located in Florida. Robert Murray added, ‘Although there’s emerging concern that some markets are being overbuilt, especially in Florida, the volume of new multifamily construction to this point in 2006 remains very strong.’”

From Reuters. “America’s booming housing market has clearly slowed, and that cool-down could last at least another year before homeowners see a pick-up in the pace of house price increases again, economists say.”

“Economic data on mortgage applications, sales and construction all point to consistent and sustained easing in the market in 2006.”

“Sales of newly built homes are down too versus a year ago, according to the Mortgage Bankers Association. That trade group’s data also show fewer people are applying for mortgages. In fact, purchase applications year to date are down 10 percent from the comparable period in 2005.”

“‘We’re running at about 2003 levels,’ said Mike Fratantoni, senior economist at the MBA.” “The number of houses up for sale offers a telling sign too, said economist Jeff Taylor. Indeed, inventories are soaring. The number of new homes and existing houses on the market both hit records in April, according to the National Association of Realtors.”

“At the current sales pace, the number of homes up for resale amounted to a six-month supply, the largest in more than eight years.”

Some housing bubble news from Washington. “Worried about the potential for inflation to get worse, Federal Reserve policy-makers at their May meeting considered raising a key interest rate by half a percentage point before opting for a quarter-point increase.”

“(Economist) Douglas Porter said there were no major surprises in the notes given recent signs of economic strength and high oil prices. However, ‘the overall impression the minutes leave is that there’s a bit more concern about inflation that in previous minutes,’ Porter said. ‘I think it comes across loud and clear that these concerns are starting to weigh heavily on the Fed’s members.’”

And on Fannie Mae. “Fannie Mae and Freddie Mac should retain records to allow regulators an on-demand look at the books of the two big mortgage companies, a federal agency said Wednesday. Rep. Richard Baker said he hopes that the Ofheo report will spur legislation tightening rules on the companies, which buy mortgages and free up lending capital at banks.”

“‘OFHEO’s examination of Fannie Mae revealed breaches of propriety and judgment so deplorable in nature and pervasive in reach that it’s almost as if we were barely scratching the surface,’ Baker commented Wednesday.”

From the USA Today. “In early 2004, Fannie Mae’s then-CEO Franklin Raines came to USA TODAY to talk to editors and reporters. He was furious over an editorial that had run a few days earlier criticizing his company for, among other things, its ‘questionable accounting practices.’”

“With barely a ‘good morning,’ Raines launched into a criticism of the editorial and a defense of his company.”

“Last week, government officials said the company engaged in ‘extensive financial fraud’ by doctoring earnings so Raines and other executives could earn ‘unjustified levels of compensation.’”

“These are extraordinarily damning assertions. They show a company whose top executives were contemptuous of criticism and imbued with a sense of entitlement to enrich. According to the report, Raines pulled in more than $90 million in his six years as CEO, $52 million of which was performance pay triggered by bogus accounting.”

“Fannie Mae is no average company. It has a standing letter of credit from the U.S. Treasury. It is exempt from many of the reporting requirements of other public corporations. It can borrow money at lower interest rates than other companies can.”

“It also creates special risks. The company, which pours money into the housing market by buying millions of mortgages from banks, is crucial to the functioning of the economy. For that reason, taxpayers would almost certainly be called on to bail it out if it ever got into serious financial trouble. That makes an honest accounting of its profits, assets and liabilities a vital public trust.”

“That is not what the public got under Raines and his associates. The company overstated its earnings by $10.6 billion over six years. When people questioned the company’s extraordinarily complex accounting, they were treated to angry rejoinders reminiscent of those delivered by Enron executives at their arrogant heights. When lawmakers or government officials argued that the company needed tighter oversight or fewer privileges, they were outgunned by Fannie’s lobbying machine.”

“The battle against corporate fraud did not end with the Enron verdicts last week. Federal agencies are still evaluating whether to bring civil or criminal charges against individuals. These are not pleasant things to contemplate. But they are the facts.”

The head of the Massachusetts realtors did a Q&A. “The red hot housing market in 2005 has begun to cool down this year. But David Wluka, owner of Wluka Real Estate in Sharon, says the market is returning to normal and not crashing. He said the roughly 20 percent decline in sales volume from January 2005 to January 2006 is a sign that prices are stabilizing.”

“Why did the housing market cool down this year? Well, you just can’t maintain an overheated market forever. It’s a natural thing, (housing) markets go up and they go down.”

“Expectations are different. People up until 2000 were looking at houses as an investment (where they would) retire and pay off the mortgage. The cycle of appreciation started and they started looking at it as a source of income.”

“So (the housing market) is cooling down, but the plane is not crashing. It’s going to land. Maybe a bump or two on the way down, but the plane is going to land.”

“How does a cooled-off housing market affect the seller, and on the other side of that, the buyer?”

“We’ve had a major problem educating ourselves as to the realities of the marketplace. And again, this is the short horizon versus the long horizon. All they see is what the neighbor sold their house for last month. For the sellers, even though it’s a short horizon and it’s money they’ve never really had, it’s money they saw come and go.”

“For example, they say, ‘I could have sold the house for $600,000 three months ago and now it’s only worth $550,000, I’ve lost $50,000.’ No, they didn’t and its difficult to (educate them) to overcome that thought in their head.”

“The buyers need education also (because) they were afraid of the (housing) bubble. I must say that I spent most of my last six months talking about the bubble, for which there’s no statistical proof.”

“What kind of role will interest rates play in the housing market over the next year? The (Federal Reserve) is continuing to try to cool a market that’s heating up for non-housing-related issues. People become potential victims of getting into financial trouble. Because you have an expectation, the rates have gone up and there is a great temptation to take a mortgage vehicle that would let you still have (an expensive) house, but become dangerous on such things as zero-interest mortgages.”

“Will we see more foreclosures because people can’t afford to pay their mortgage payments anymore? People who are on the margin and couldn’t afford conventional financing and probably shouldn’t have bought a house or should have reduced their expectations, which is more the case, those kinds of loans are going to be in trouble.”

“It’s important to get the buyers to understand that just because the bank said they can afford it, doesn’t necessarily mean that they can.”

The Lowell Sun. “Until this spring, Northern Middlesex County had managed to buck the statewide trend of increased foreclosure filings. That has now changed in a big way, according to Middlesex North Register of Deeds Richard Howe Jr.”

“In March, the foreclosure process was started on 48 homes in the region, double the number from last year in that month. In April, 58 homes were threatened with foreclosure, up 76 percent from 2005. And during the first 30 days of May, 71 properties were hit with foreclosure filings, a startling 294 percent year-over-year increase.’

“‘It was like a gas pump going up,’ Howe said of tracking the foreclosure numbers this month. Howe suggested that because the housing boom was late in coming to the region, the wave of foreclosures may also have lagged.”

“The conventional wisdom is that buyers, seduced by the booming residential real-estate market of recent times, entered into risky and unconventional mortgages that became huge liabilities when the market cooled.”

“ForeclosuresMass reported that there were 1,227 foreclosure filings in the state in April, 44 percent higher than last year and almost 90 percent more than in 2004. Jeremy Shapiro, president and co-founder of ForeclosuresMass, said things are getting worse.”

“Lowell Realtor Brian McMahon of ERA Morrison said that most properties being targeted for foreclosure belong to first-time homebuyers who do not have the resources to weather a fiscal crisis. ‘They’re used to paying $800 to $1,000 a month for rent, and now they’re paying $1,500 to $2,000 a month,’ said McMahon.”

“Consumers who entered into ‘interest-only’ mortgages will not be affected until five years after signing the agreement, Howe said. Interest-only loans require that buyers pay only the interest on their home for five years, then they start paying off the principal and monthly payments skyrocket.”

“‘The interest-only phenomenon is kind of a ticking time bomb,’ Howe said. ‘The real crisis will hit in 2008 when all of those … loans convert and people start defaulting in massive numbers.’”

A reader posted this Review Journal article. “A slowdown in the housing market is rippling through Las Vegas, with layoffs by home builders, mortgage and title companies and other real estate-related occupations. Don DelGiorno, president of KB Home’s Nevada division, said the company has reduced its local staff by about 10 percent, though it would be difficult to nail down an exact number.”

“‘Sales are being challenged and different builders are feeling different kinds of pains,’ DelGiorno said. ‘With in-migration and jobs, we’ll move through this inventory when people are buying their homes to live in. Now there’s a concept.’”

“Dennis Smith, president of Home Builders Research, said of the layoffs: ‘It’s normal in this part of the housing cycle we’re in, the back side of the hump. Anytime you have that, there’s going to be some cutbacks. That’s the result of added staff that was put in place on the upside of the hill.’”

“Washington Mutual, a home mortgage company with a large presence in Las Vegas, notified 1,400 U.S. workers last week that they would be cut from the payroll as part of a ‘cost-saving strategy.’ Most of the layoffs were in Washington and Florida.”

“Nevada Title Co. has reduced its staff by about 25 percent since peaking at more than 300 employees during the refinance boom of 2002 and 2003, President Robbie Graham said. ‘We’re a locally owned company. We have to stay lean and mean,’ she said.”

“Another field seemingly poised to shrink through attrition is real estate agents. ‘There’s going to be a lot of them cryin’ the blues,’ Smith said.”

“The Greater Las Vegas Association of Realtors doubled its membership to about 15,000 over the last five years as people from all walks of life saw an opportunity to cash in on the housing boom. ‘It was a new challenge,’ (realtor) Debbie Smith said. ‘It seems like you come out here and everybody’s in the business. Realtors, title companies..everything revolves around real estate and development.’”

“Although sales of new homes in Las Vegas slowed 9.1 percent in April, the median price rose 18 percent to $133,117, statistics from Las Vegas-based SalesTraq show. One major difference that’s keeping new home prices up today from last year is that almost every builder is offering buyer incentives, ranging from a few thousand dollars on entry-level homes to $100,000 on luxury homes, SalesTraq President Larry Murphy said.”

The Arizona Republic has this housing bubble update. “Pinal County’s molten housing market continued its recent cooling trend in first-quarter 2006, as existing-home sales volume fell and prices stumbled. Sales volume for used houses fell 22.6 percent from first-quarter 2005, to 1,110 transactions, and marked the third consecutive quarterly decline, according to a report by Arizona State University.”

“The median price dipped by about $10,000 (3.9 percent) from $220,000 in fourth-quarter 2005.”

“Bob Rucker, CEO of Arizona Regional MLS, said the number of existing houses for sale in Pinal County had risen to 4,342. The report said new-home sales and prices were up over first-quarter 2005, although 1,000 fewer houses were sold than in fourth-quarter 2005, the first significant slip since the county’s housing market took off a few years ago.”

“‘The Pinal County resale market is slowing as is the overall housing market,’ said Jay Butler, director of the ASU center. ‘The problem is that this market doesn’t have a history so we don’t know what’s normal. This housing market only came into existence five years ago.’”

“The housing boom in the Southeast Valley spilled over into Pinal County. And, sales in the once-rural county will have a ’significant impact on how (the Valley’s housing) market plays out over time,’ Butler said.”

“Pinal County and its municipalities issued a record of nearly 20,000 home building permits last year. Sales dipped by 22.8 percent from 4,715 homes sold in fourth-quarter 2005.”

“Housing analyst RL Brown said the Pinal County market is in the midst of finding normalcy after a bustling 2005. Houses are staying on the market 60 to 90 days or more, which creates a buyer’s market. ‘We haven’t seen ‘normal’ around here in a long time,’ Brown said.”

“Some buyers were eschewing existing homes because they can often get a new house for close to the same price and a builder’s warranty. They also can frequently get purchase incentives from builders, such as free swimming pools, that are worth thousands of dollars, Brown said.”

“Real estate agent Mary Grube recently sold a new home in the San Tan Heights subdivision after builder Richmond American Homes offered incentives of about $50,000. Incentives can be used for upgrades or to reduce the price of a house.”

“The incentives are playing major role in buying decisions as are dwindling price gaps between large new and existing homes. ‘It makes it a lucrative investment to buy new, and most people want to buy a new home,’ Grube said.”

“Deborah Farhat, a broker in the city of Maricopa, said builders in the area are offering commissions to real estate brokers that are reaching 6 percent and 7 percent, and slashing speculative home prices. (Realtor) Joanne George said builders are even offering gas cards to get agents to bring clients to the county.”

“‘They’re pretty much hitting everyone on the buyer’s side,’ Farhat said. George said Pinal County is still affordable but was experiencing the ‘lull after the storm.’ Market pressures were driving sellers to list homes at fairer prices.”

“Butler said when mid year numbers come out in a few months that will give a better perspective on the market’s direction. ‘It will probably either remain stable, or decline a little bit more,’ Butler said. ‘But we really don’t know. Lots of different things are happening.’”