The Housing Bubble

Inman News reports that the slower housing market is a ‘boon’ for some buyers. “Growth in home prices slowed across the country in the first quarter of 2006, Freddie Mac announced today. And pending real estate sales fell nationally for the third consecutive month in April. While these reports and stories of growing inventory in a number of markets are not good news for sellers, first-time buyers like Rebecca Nathenson and Eric Kline may have an easier time of it as the market slows.”

“‘We can afford more house now,’ Nathenson, a product manager in San Jose, CA. said. Back in August, when Nathenson and Kline signed the lease on their apartment, ‘Buying wasn’t an option for us. We knew that trying to find a place within our price range where we could win a bidding war wasn’t feasible. It was the slowdown that made us start thinking, ‘Maybe this is really possible now.’”

“Now, Nathenson said, ‘we can stretch a bit more and get a house we want to stay in longer term, whereas before the same amount of stretching would not have gotten us this much.’”

“In a comment that seemed to encapsulate the character of the California real estate market, the product manager said, ‘Our Realtor says he feels very confident he can find us a single-family house in Palo Alto for $900,000.’”

“First-time home buyers definitely have a better chance now in Baltimore, Md., according to Margaret Rome, an agent in the area. Rome said agents in her area are now complaining, ‘There is too much inventory on the market, and where are the buyers? Last year they were complaining that there wasn’t enough inventory and there were too many buyers,’ the agent said.”

“‘I do see sellers starting to panic a bit. If their house is on the market two months, they are taking their house off the market or reducing it right away. They don’t need to reduce it right away. They just need to have some patience,’ Rome said.”

“In Albuquerque, N.M., (realtor) Linda DeVlieg said, ‘first-time home buyers..have to be fully aware of what they are about to get into so they can make their decision quickly and erase some of those romantic notions. Now is not the time to get overly emotional. Just get into a property so you’re not a renter any more.’”

From the Indy Star. “If you rent it out, you could pay. That’s according to the mayor of this middle-class Indy suburb, who tonight will propose what could be one of the first ordinances of its kind in the nation: a ban on the rental of any newly constructed home for a three-year period.”

“Mayor Charles Henderson says his plan, motivated by what he describes as a sour housing development deal, is designed to help maintain property values. ‘I want to send a message that people deserve some protection and that anybody that buys into an addition can feel comfortable it isn’t going to be turned into a rental community,’ said Henderson. ‘It would help protect folks that get crossed up.’”

And the Kansas City Star. “The number of home foreclosures in Kansas has increased over the past year, a new report says. Kirk McClure, associate professor of urban planning at the University of Kansas, said he thinks declining home values in western Kansas contributed to many of the foreclosures. For example, McClure said someone holding a $100,000 mortgage on a home valued at $90,000 has little incentive to keep making payments.”

“‘One of the best tools for our housing market in western Kansas is a big bulldozer,’ he said. ‘We’ve got too many units.’”

The Union Tribune has a look at rent costs in San Diego. “The cost of renting a place to live in San Diego County has increased by nearly 10 percent over the past year, according to a report to be released today by the San Diego County Apartment Association. The poll differed sharply from recent surveys by real estate research firms RealFacts and MarketPointe Realty Advisors. Their reports found that rents in the county had been flat for the past year.”

“The conversion of thousands of apartments to condominiums in recent years is driving rent increases, said Richard Lawrence, chairman of the Affordable Housing Coalition of San Diego County. New construction is not replacing rental units lost to conversions, he said, adding, ‘That is the most significant factor.’”

“‘I think we will have people bunching up in the rental market until single-family homes and condo prices drop,’ Robert Pinnegar, director of the association said. ‘The interest rates are going up. Home prices are going to have to come down. Something has to give here.’”

“‘Folks with kids who hope to be homeowners one day are leaving the area,’ said Sue Reynolds, president of a lender and developer of affordable rental properties.”

A member of the PIMCO team put this out today. “Three weeks ago my wife and I sold our house and moved into a rental apartment. I believe the U.S. housing market is set to cool given the current level of prices and fundamental trends.”

“Recent price gains have likely come primarily from rising speculation and ‘creative financing’ because affordability is declining and inventories are rising. When asset prices diverge from fundamentals, I favor taking the other side of the trade, even if it involves moving.”

“The main forces driving housing price appreciation in the past are now softening. Declining affordability, resulting from rising prices and interest rates, has become a significant headwind facing new buyers. Despite the persistence of creative mortgage financing, prices have now risen to a point where demand is slowing.”

“Federal regulators are beginning to crack down on risky lending practices. Speculators are shifting from buyers to sellers. Mortgage application growth is slowing. Finally, and most importantly, the supply and demand imbalance in the housing market is turning sharply for the worse as inventories soar.”

“Land acquisitions made by homebuilders over the past few years will not help the current situation. Such purchases are made with the intent of development after a time lag. Therefore, over the next few years, homebuilders will either flood the market with additional inventory or be forced to write-down the value of their undeveloped land on their balance sheets.”

“If homebuilders continue to build, new home prices are likely to fall. While good news for potential buyers, it is an unwelcome transformation for would-be sellers, who are probably approaching the point where it is too late to sell.”

“Investors in homebuilder companies should pay close attention to liquidity. Real estate is about to become less liquid as turnover volumes soften. Sellers needing cash will likely be hitting bids below the market as buyers turn more cautious. In addition, financing for both homebuilders and homebuyers will become tighter. The period of ‘cheap money’ is over.”

“I am not suggesting that everyone should sell their house and move into an apartment. However, for the reasons discussed above, housing should not be a source of economic stimulus going forward. Watch the ‘for sale’ signs, in both the housing and corporate bond market, my sense is more of both are coming as the market transitions from a mode of risk taking to that of risk aversion.”

The Fed chairman shook up the markets today. “Although the anticipated slowdown in growth is underway, financial markets shouldn’t question the inflation-fighting credentials of the Federal Reserve Bank, Chairman Ben Bernanke said Monday. ‘There is a strong consensus’ among FOMC members to keep inflation low, Bernanke told an international banking forum here.”

“Recent core inflation readings ‘have been higher in recent months’ and ‘has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth,’ Bernanke said.”

“These core readings ‘are unwelcome developments,’ he said. ‘Therefore, the FOMC will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained,’ Bernanke said.”

From the Feds website. “‘It is reasonably clear that the U.S. economy is entering a period of transition. As had been expected, recent readings..indicate that the housing market is cooling, partly in response to increases in mortgage rates.”

“Overall, housing activity has softened relative to the high levels of last summer, and the rate of house-price appreciation appears to have lessened.’”

“‘In addition, the Committee must continue to resist any tendency for increases in energy and commodity prices to become permanently embedded in core inflation. The best way to prevent increases in energy and commodity prices from leading to persistently higher rates of inflation is by anchoring the public’s long-term inflation expectations.’”

And Danielle DiMartino is watching Fed data too. “Households’ fanciful notions of their financial health could soon awake to the reality of the longest Federal Reserve rate-hiking campaign in more than 25 years. A report due out soon, though, could finally call into question the strength of what has up to this point been the economy’s bulletproof vest.”

“The Federal Reserve releases its flow-of-funds data for the first quarter on Thursday. While it will surely reveal that household net worth has reached an all-time high, it will also write a few other records into the history books.”

“We know from reports on house price gains that after peaking in the last year’s second quarter, gains fell to their slowest pace in two years in the first quarter. And mortgage activity is sitting at a four-year low. At the same time, the so-called lag effects of the Fed’s tightening campaign have begun to visibly take hold of U.S. households.”

“The collision of these two factors, a slamming door on cashing out home equity and rising interest rates, will be most evident in one little line item of the Fed’s report. Some of us will be gleaning the other news in the flow of funds data, that households’ debt-to-asset ratios hit a new record; in other words, that debts grew at a faster rate than assets, as they have for years.”

“I checked in with the Northern Trust Co.’s Paul Kasriel. He is the first person to point out the most revealing of line items in the release; ‘Net Financial Investment.’ The best way to view the line item is as the surplus or deficit households are running. The figure has traditionally been positive. These days, which started in 1999, when net financial investment turned negative, households rely on the rest of the world financing their expenditures.”

“This is nothing new, you might be thinking. Think of the game of musical chairs. Now turn the music off. ‘House prices are no longer rising as rapidly so the home-ATM machine can no longer be tapped,’ Kasriel said. ‘And households are devoting a record and rising level of their incomes to servicing their debts.’”

“This means that the backstop households have relied on for the last four years is fast disappearing. It was ever-increasing rates of price appreciation that allowed households to continue cashing out their home equity.”

“Evidence of the strain was in Wal-Mart’s news that store sales were disappointing in May, sentiment that was echoed by auto dealerships. ‘We’re at a major turning point right now,’ Kasriel added.”

Some housing bubble news from Wall Street to Washington. “Technical Olympic USA Inc., a homebuilder operating in 10 states, on Monday said it expects combined sales orders in the second quarter to decline sharply on lower demand, higher cancellations and competitive pressure. The company forecast combined sales orders, which include consolidated results and unconsolidated joint ventures, to be down 25 percent to 40 percent from the second quarter last year.”

“‘We are experiencing a more challenging housing market, characterized by higher inventory levels, softening demand, and increased competition,’ said Antonio Mon, CEO. ‘We expect these conditions to continue to impact most of our markets for at least the remainder of 2006.’”

“Shares of planned community developer Levitt Corp. and homebuilders fell Monday following an analyst downgrade on Standard Pacific Corp. ‘What the industry is going through appears to be much more brutal than most had anticipated even just a few short months ago,’ wrote AG Edwards analyst Gregory Gieber. ‘Last year, our view was that it would be a soft landing, but as 2006 started to roll forward, our concerns grew and we abandoned the soft-landing view.’”

“Continuing a wave of layoffs, Washington Mutual Inc. will close its Austin, Texas, call center by 2007, a move that affects more than 200 employees, media reports said.”

From Paul Muolo. “Insurance giant American International Group’s residential division, American General Financial Services of Indiana, is making mortgage news. About two weeks ago AGFS shuttered its correspondent division. One of its key products was a 100% loan-to-value ratio prime mortgage, said one executive.”

“Former OFHEO chief Armando Falcon Jr. said Fannie Mae officials pulled a ‘Keating Five’ in their attempt to discredit his investigation of the mortgage giant. In a speech last week, Mr. Falcon said the GSE’s behavior reminded him of the K5 scandal of the late 1980s when five U.S. senators pressured thrift regulators to go easy on his rogue S&L.”

“In the Fannie saga, the K5 role was played by Sen. Christopher Bond, R-Mo. As the chairman of VA-HUD appropriations subcommittee, Sen. Bond included language in OFHEO’s $60 million budget that penalized the agency if Mr. Falcon remained at the helm. Why did Bond do this? Because Fannie executives asked him to. Did Sen. Bond receive campaign donations from Fannie officials? Are the Mets in first place? One of Bond’s donors was current Fannie CEO Daniel Mudd.”

From Business Week. “You might think there couldn’t be any more bad news about Fannie Mae, the mortgage-finance giant accused of manipulating earnings and defrauding investors. But additional disheartening revelations could be on the way as regulators focus on the major Wall Street firms and other advisers that gobbled up Fannie business and allegedly aided in a $10.8 billion accounting fiasco.”

“SEC staff members are looking into deals in which Goldman Sachs Group, among others, allegedly helped Fannie rearrange earnings to maintain the appearance of steady profit growth, according to people familiar with the inquiries. Investigators also are scrutinizing KPMG, which, as Fannie’s outside auditor, approved financial statements since deemed misleading. And the SEC staff is examining deals designed by Lehman Brothers Inc. and later executed by KPMG that the Internal Revenue Service has determined improperly deferred taxes.”

“The list goes on. Referring to one arrangement that could come back to haunt insurer Radian Group Inc., a Fannie official wrote in a Jan. 9, 2002, internal e-mail: ‘I am terrified of the negative public-relations aspects of a disclosure of a transaction like this.’”

“Veteran observers of corporate excess say the Fannie saga is unfolding according to script. ‘When a company has engaged in wrongful conduct, the inquiry [inevitably turns to] who knew about it, who could have prevented it, who facilitated it,’ says former SEC Chairman Harvey Pitt.”

And one consultant is down on the sector. “The speculative housing craze is crashing from its own excesses, not Federal Reserve action.”

“Inventories since last year have jumped 91% in Boston, 236% in Miami and 149% in Los Angeles. Asking prices have been cut on one-third of listings in Boston, San Diego, Sacramento, Los Angeles and Miami.”

“Nationwide median prices will probably fall at least 20% before the break is over. It will take a 35% fall to return prices to their long-run link to the Consumer Price Index; markets overshoot on the downside as well as the up.”

The Tracy Press reports on a return to the old days in California. “To woo an ever-dwindling number of well-heeled buyers to developments like Mossdale Landing in Lathrop, builders of new homes are offering incentives such as swimming pools or $20,000 in free upgrades.”

“In the Bay Area, some developers are even offering new cars, said Susan State, owner of a monthly insider’s look at the Bay Area and Central Valley housing markets. The one thing they have yet to offer is lower prices, State said.”

“‘If pricing doesn’t come down, we’re going to have houses that don’t sell,’ said real estate agent Sid Reams.”

“There are 12,000 new homes planned for the Central and Mossdale-areas of Lathrop, and that has agents like Reams concerned. In some cases, developers are offering incentives of $30,000 or more for upgrades, said (broker) Jim Muthart.”

“But incentives are only a temporary solution to a deeper problem, Reams said. ‘Incentives can work in the short term,’ he said, ‘but you have to help buyers with lower prices and lower monthly payments. Prices have to come to at least 10 percent.’”

“‘If not, he said, foreclosures are sure to continue to grow. Since the start of last year, there have been 404 foreclosures in Manteca and Lathrop.”

“Reams warned that prices are too high for new buyers and investors. Meanwhile, inventory is booming. There are more than 300 homes for resale in Manteca and 102 in Lathrop. People are waiting for the price bubble to burst, or looking for cheaper homes, Reams said.”

“That’s good news for Pulte Homes in Mountain House, which sold 48 town homes in the Cambridge Place section of Mountain House last month alone. At $300,000 and $400,000, they’re affordable enough for first-time buyers or investors. With high prices, the new-home business relies on well-heeled buyers from the Bay Area. At the moment, there just aren’t enough of them to absorb the inventory.”

“In the meantime, buyers are foregoing pricier new homes and even second-guessing the half-million price tags on older homes for resale, prices that sellers knew they could get in the boom times. ‘We’ve gotten spoiled over the last few years,’ State said.”

“Manteca-based real estate agent Cheryl McFall agreed. ‘We’re done with the market where you stick a sign in the yard and the property is sold,’ she said. ‘It’s kind of like the old days.’”

The Record Spotlight. “Home sales in Shasta County dropped from 574 in the first quarter of 2005 to 365 for the same quarter this year. Shasta County mortgage banker Darrin Johnston said sales are down because not as many speculators are buying homes in the area.”

“‘Investor participation has dropped due to the increase in (mortgage) rates,’ said Johnston. Redding was a hot spot for housing speculators last year, with 22 percent of all homes sold in the area going to investors, according to LoanPerformance. For the first two months of 2006, 19 percent of all homes sold in Redding went to investors.”

“Foreclosure activity in Shasta County jumped from 78 homes in the fourth quarter of 2005 to 93 in the first quarter of 2006. Mortgage specialist Tina Parisotto surmised that speculators who helped Redding lead the nation for much of last year in the percentage of homes sold to investors, could be the problem.”

“‘If they don’t have any equity and they can’t rent for what their monthly (mortgage) payments are, I could see those (investors) going into foreclosure quicker than the people who own a home,’ said Parisotto, who is president of the California Association of Mortgage Brokers Greater North State Chapter.

A pair of reports on Donald Trump from Florida. “Donald Trump’s handyman special is No. 1 on Forbes magazine’s list of “Most Expensive Homes in the U.S. 2006. Trump paid $41 million at a bankruptcy auction for the 18-bedroom French Regency-style mansion, now in the final stages of renovation. Its $125 million price tag is a record asking price for a U.S. residence, ‘and perhaps the world,’ Forbes notes.”

“Trump says he won’t accept a penny less than his asking price.”

“Perhaps that belligerent stance is what lands The Donald at the bottom of American Affluence Research Center’s recent poll of the wealthiest 10 percent of U.S. households”

“The Trumpster was the only businessman to receive negative ratings from the rich, 60 percent of the sample rated him thumbs-down.”

From the Sun Sentinel. “In a departure from his large endeavors, Trump has announced plans to build the Trump Las Olas Beach Resort, a $100 million condo-hotel with just 95 units on Fort Lauderdale beach.”

“Partnering with Trump will be Stuart Kessler. Kessler’s targeting buyers from the Northeast as well as Canadians, South Americans and Europeans and said Trump’s name will be a boost to sales. ‘It lends a tremendous amount to the value of the property,’ Kessler said. ‘Everybody wants to have a piece of Trump.’”

“Kessler expects the project to help spur redevelopment in the Fort Lauderdale beach area. ‘Right now that end of town seems to have all the T-shirt shops, and the project will start to improve that section,’ he said.”

“Many in the brokerage community seem to be bullish on this project. ‘It is high-end and opulent,’ said Jeff Kahn, a broker. But Kahn questioned whether potential buyers will pay top dollar on a stretch of the beach that has not yet been fully redeveloped.”

“‘With all of the efforts to revitalize Fort Lauderdale, it will be interesting to see if the potential buyers find this particular location enticing enough for the price,’ he said. ‘I’m sure the developer has done its studies, but I don’t see all of these buyers.’”