The Housing Bubble

The North Tahoe Bonanza has this report from Nevada. “It is the beginning of June and more than 220 single family homes (and counting) are on the market. Open your real estate guide today and guess what you’ll see, less than a half-dozen of these homes are priced under a million dollars, and the lowest priced of these is an A-frame painted barndoor red listed for the bargain basement price of $675,000.”

“Is this skyrocketing average home price here a realistic number with interest rates continuing to rise, the media jumping on the ‘bubble’ bandwagon and speculation-driven weekend real-estate-course investors starting to catch up to the real numbers?”

“In other words, is it time for Incline to push the panic button? The answer, quite simply, from some long-time Realtors in town is, ‘no - with an asterisk.’”

“‘It is what it is,’ said Tanager Realtor Tom Bruno. ‘This is gut feeling, but having been here since ‘71, I’ve seen the market go up and down. After spikes in the market, typically there’ll be a fall-off on the backside.’”

“And what of that fall-off? ‘My gut feeling is values will drop 3 to 6 percent by the end of the summer,’ Bruno said. ‘We may experience a period of flatness and then it’ll probably go back up again.’”

“But, that doesn’t mean Incline hasn’t gone through its fair share of down times. ‘Back in the early ’80s, in the ‘83 range, there were 900 homes available on the market,’ Bruno said. ‘You know there was a slightly off-color joke then: ‘What doesn’t belong here? Gonorrhea, syphilis or an Incline home?’ - the answer was (the latter) because you couldn’t get rid of an Incline home.’”

“While nobody’s predicting the long, cold winter of the early ’80s market saturation or even the ‘bump in the road’ that was the recession of the early ’90s, it is impossible to ignore prognostications that Incline, like the rest of the West, is due for a dip.”

“Many erstwhile ‘hot’ markets, including the Bay Area and Sacramento are now cooling off, even if that means the absence of the once ubiquitous bidding wars over every condo, bungalow and split-level.”

“With interest rates still on the rise, banks have started to curb the five-year interest-only loans that so permeated the real estate landscape since 2000; concern, not panic, is perhaps the name of the game on the Nevada side of North Lake Tahoe, some local Realtors and mortgage brokers said.”

“‘It’s becoming a buyers’ market and in a buyers’ market people can be more selective,’ said Mark Case, a mortgage planner. ‘But, in a buyers’ market, people are still going to be buying so they’re still going to need loans. In the re-financing portion of the industry is where we’re going to feel it.’”

“Case noted that with the Feds looking to raise interest rates again in the upcoming months, now may, in fact, be a season to buy. ‘There are going to be more Fed hikes,’ Case said. ‘So it may be a case of people wanting to get in the market now.’ Of course, many Incline Realtors agreed that now may be the time to buy.”

“‘People have to live in the now,’ said long-time Incline Realtor Syd Brosten. ‘So many people think their home or condo is worth more because they saw a neighbor sell their property for more and they say ‘well, our place is nicer so it should sell for more They price it according to that and are surprised when they don’t get it. People that have to worry are those who have their houses overpriced and they have to sell.’”

“Brosten said some people may be disappointed if they think returns are going to be congruous with the last couple of years. ‘It is still cheaper (here) than in the Bay Area and other parts of California,’ Brosten said. ‘We are not Reno and Vegas where they’ve overbuilt and it’s rampant speculation.’”

What do you see in your housing market this weekend? Has the spring rally fizzled into a summer slump? Here are some observations from the topics thread. “There’s an ad running in the free weekly paper for a new condo complex on the beach in Biloxi. Unit prices are in the $350-$500k range. The developer is promising discounts to families displaced by Katrina, but since we’re talking an area where the average family income is $36K a year, there seems to be a bit of a disconnect going on.”

Another added, “I’ll report on specific projects here in Southern Delaware. The beaches here are beautiful. But, the over building (IMO) is vast. The speculators are now stuck. They thought that prices can never go down because they were on/near the beach. The listed prices here are still very high, but try selling for the list price. The prices are just starting to go soft, but I believe that this is just the start. Stay tuned.”

A reader in Arizona. “As I was continuously driving along 40 around Flagstaff, I was noticing how it looked like tinderwood ready to burn. I guess I was right, and it has started early. It is going to be a long hot summer for those folks living next to tinder-trees. AKA So Cal fires about 5 yrs ago.”

One heard this on-air. “Have the Rob Black show on in the background (Financial advice show in Bay area). His quote was ‘the housing boom is over, the housing boom is over, the housing boom is over.’ And compared it to the tech stocks in 2000. More media confirmation.”

From an ad. “Still hearing Eric Estrada pimping WA real estate and some idiotic informercial from JG Banks saying how easy it is to make a fortune in probate real estate, come to our free show and ‘BUY my OVERrated, OVER priced, and will BK your program if you actually do what is written.’”

The Orange County Register. “Ladera Realtors are saying, in the words of realtor Ron Luna, that the news is ‘not bad news, but certainly realistic news.’”

“‘Sellers have the expectations that are a little unrealistic, given the number of homes out there,’ (realtor) Angelina Kirkpatrick said. Kirkpatrick reported that in January there were 198 homes available for sale in Ladera. Now there are 354. Luna said it could grow to 400 by June.”

“‘There is so much more inventory,’ Kirkpatrick said, ‘Buyers have more to choose from.’ As an example she notes that Ladera Ranch is having an average of 12 homes go into escrow every month.”

“‘The reality is most homes are worth almost exactly what they were 6 months ago,’ Luna said. ‘Moderate appreciation is the way it’s going to be probably for the next few years until people’s income catches up to housing prices.’”

Several readers suggested a topic on acceptable home prices. “I’m curious as to what people feel are reasonable home prices, you know, at what price range would they jump in (and do they expect to see those prices)? I’m sure west coast folk would consider much higher prices reasonable than I would in the Philly `burbs (and much, MUCH higher than a midwestern dweller would). But I struggle with what I think is reasonable (because I’m ultra-conservative and frugal [not cheap).”

“I’m particularly interested in the following categories: 1) condos (non-luxury); 2) townhouses (non-luxury); 3) starter SFH.”

One replied, “I don’t expect prices to go back to 1999 prices, houses were probably undervalued then, and there’s been a lot of inflation since then. 2002 prices would be fair value.”

“Then again, the sheeple have pushed this thing so far that a mass foreclosures are practically inevitable. So maybe 1999 prices will return.”

One was brief, “I don’t care so much about the absolute price, but I’m looking for 1997 valuations (on annual rents) or lower.”

One had a formula, “I’d say 10x annual rents is a pretty reasonable valuation, it also corrects for the differential between Philly burbs and Urban San Fran. You probably should adjust that valuation for specific cases that are more unique (for example, the homeowners tax credit in DC probably means that a DC home will be worth a slight premium to other markets based on rents).”

Another looks at percentage terms, “IMHO the realtor who said a while back a 15-20% decline was probably reasonable may not be too far off. The problem is greed. If a 600K house drops 20% to 480K, so many speculators would jump back in the market and new ones would enter you would have the same bidding wars you had a year ago. I am amazed that so many people have so little concept of risk as evidenced by the number of speculators and flippers still buying properties everyday.”

Another countered, “I think it may be more accurate to say that people will want to jump in. I think that there won’t be enough people with the means and credit standing to be able to buy all the property that likely will tumble.”

“If it were true that they would have jumped on based on greed, then why would they not have done it before 2002-3?”

One reader concurs, “I agree, there are not many qualified buyers remaining that can buy at these prices and interest rate. The remaining first time buyers would need the low down ARM loans. If the interest rate goes up to 7% that knocks out alot more potential buyers because of these high prices. Thanks to a high speculation market alot of people got pushed out from being able to buy. The speculators won’t be able to sell to the first time home buyer or the locals. The greater fool can’t even buy.”

“The flippers will not jump in again if the prices go down to 2002 /2003 levels because so many of them will lose money going down.”

One notes buyer anxiety, “There may be some speculator activity but I think normal market psychology will take over. People usually do not buy into a falling market. They buy in a rising one and sell on the downturn.’

One couple looks at historic measures. “My wife and I are looking for a return to the mean. I don’t know if it’s a 25% or a 60% decline. What we want to see is a rent to price ratio that is within the historic average and an affordability index back to what it was for the past 100 years before this bubble.”

Five more also look at rents. “5-10% premium to own over rent. I have got a long way to go, my rental is currently 71% more expensive to own than rent.”

“Should actually be cheaper to own than rent, why else would rentals exist?”

“I’m no RE shill, but I can see paying more to own the place you live in, as even modest rent inflation will take care of this descrepancy soon enough. (But of course, the 300% differential between renting and owning my current rental is completely ridiculous).”

“Exactly, when I bought my first house it was much cheaper to own than rent. BUT I had to prove that I was a good with my finances and responsible enough to make the payments AND have the money to also keep up the property for the bank. The gatekeepers were very strict back then and your reward for jumping the hoops was lower monthly housing costs, in the form of PITI vs. rent.”

“In my case with this forumula, prices need to drop by 75%. Renting at $2000, Purchase at about $1M.”

Another homebuilder had disappointing numbers out last night. “Irvine-based Standard Pacific reported after the stock market closed that it expected to cut its earnings and delivery guidance for the full year. Standard Pacific said net orders were off in California, Florida and Arizona, contributing to a 41% drop in April and May compared with a year earlier.”

“Pulte Homes Inc. and Standard Pacific Corp. on Friday became the latest major home builders to warn of lower full-year earnings as the housing market continues to cool across the country. Hovnanian Enterprises Inc. and Toll Bros. Inc. lowered their forecasts within the last month.”

“All four companies cited large drops in new orders and jumps in cancellation rates in the second quarter on top of rising interest rates and larger inventories of unsold properties. Home prices could slip as companies offer incentives and discounts, said anaylst Rick Murray. Investors, who bought many homes during the boom, could sell their assets as the market cools.”

“‘I think it’s safe to say the housing boom is over,’ he said.”

“One of the Phoenix area’s biggest home builders told Wall Street on Friday that earnings would not meet expectations because of a plunge in orders. Pulte Homes, the Michigan-based company that owns the Del Webb brand, said that orders for new homes fell nearly 30 percent across the country in April and May.”

“The financial health of home builders is vital to the Valley’s economy. Housing is the area’s top industry and a major employer. It’s clear that buyers are revolting against high prices and rising interest rates. ‘We’ve been in a housing bubble and now we’re seeing the downside of that,’ said Dawn McLaren, a research economist at Arizona State University. ‘A lot of our job growth has been in construction, and now we have to worry about that. When you look at job growth numbers, that is the measure of the economy.’”

“The slowdown comes at a time when Pulte is rolling out several big new projects in Arizona, including two new Sun City communities and an Anthem community. Housing analyst RL Brown, publisher of the Phoenix Housing Market Letter, said builders need to unload spec homes and keep production moving.”

“‘This is not unique to Pulte, and I would expect that any builder that is being straightforward today about this region to be in a similar situation,’ he said.”

“(Analyst) Stephen East said he expects Pulte orders to be down a “disturbing” 21 percent this year. ‘(Pulte’s) over-reliance on Florida and the West region is now coming home to roost,’ he wrote.”

The Herald Tribune. “In one of the strongest signs yet that the real estate market has cooled, the city of North Port issued fewer building permits last month than anytime in the past four years. North Port, the fastest-growing city in the region, expected to permit more than 5,000 single-family homes this year. But in May it issued just 74 permits. That follows only 88 permits issued in April.”

“It represents a virtual standstill in a market. Sales of existing homes in the Sarasota-Bradenton market fell 44 percent in April when compared with the same month a year ago, while Charlotte County-North Port’s sales fell 33 percent. Statewide, sales decreased 31 percent from 2005.”

“Still, the May numbers for North Port were among the most dramatic that have been reported. ‘That’s kind of shocking, but it was due to happen,’ said Barbara Gross, a North Port City Commissioner. ‘I think if you checked every place, all the permits are down.’”

“Charlotte County, too, is feeling a slowdown in sales. According to the Florida Association of Realtors, condominium sales plummeted 98 percent in April, with two sold, compared to 81 in 2005.”

“Commissioner, Richard Lockhart, said the city’s economic model has fundamentally changed. ‘We can’t depend on the housing market to sustain what we had going,’ Lockhart said.”

The New York Times has this update on the local market. “The smoke may have cleared from the last of the Memorial Day barbecues, but two months into the second quarter, many New Yorkers are still hazy about the state of the local real estate market.”

“Some concerns may be well-founded. Inventory in Manhattan is up 67 percent for May 2006 over May 2005, according to Jonathan J. Miller, of the Miller Samuel appraisal firm. Co-op inventory is up 53 percent and condominium inventory is up 87 percent, he said, adding that the condo figure is mainly attributable to new development.”

“Also, apartments are staying on the market longer. In the first quarter, the average was 138 days, according to Miller Samuel. It is now approaching 150 days, Mr. Miller estimated, adding that he thinks that a lot of the inventory is overpriced.”

“So far this quarter, which began on April 1, those most affected by the market are the people who are first-time home buyers. These would-be buyers (the kind who made up a good part of buyers in the real estate frenzy of the past few years) are often now renting instead.”

“‘There’s been a tremendous surge in people signing leases,’ Mr. Miller said. The upturn in the rental market makes sense, he said, because mortgage rates and rental demand correlate almost directly.”

“Several new luxury condominiums are selling well, though as Pamela Liebman, the CEO of the Corcoran Group said, some ‘have taken off like crazy’ while others ‘are floundering.’”

“The wild card right now, he said, is new construction, which developers seek to sell at a premium. ‘A lot of this new construction stuff is going to have a daunting time,’ (broker) Niel Binder said. Signs of scaling back seem to be manifesting themselves more in second homes and vacation rentals than in primary residences, according to Mr. Binder. ‘That’s were the line is being drawn,’ he said.”

“At a 48-unit development in the Berkshires, in Massachusetts, where he owns a condo, he said there has not been a sale all year. ‘I’m trying to sell a place,’ he said. ‘I’ve owned it for 20 years and I’m going to own it for another 10, whether I want to or not.’”