June 6, 2006

‘Unstoppable Trend’ Becomes ‘So Much Uncertainty’

A pair of reports on the condo market. “Turning apartments into buyable condos was supposed to be one of the biggest trends in San Luis Obispo’s red-hot housing market, but so far this year only 16 apartment units are up for the change. The trend seemed unstoppable last year, when apartment owners lined up in a fierce competition to turn rental space into condominiums. But that was before the market for homes softened up.”

“Then, because there were more units up for conversion than city policy allows, owners began offering incentives such as below-market-price units and open space to entice City Council members into supporting their plans. It was an expensive competition that may have frightened off some potential conversion applicants this time around, said the sole developer offering apartments for conversion this year.”

“‘People talk to the city and they aren’t sure if there is going to be a lot of competition this year,’ said (developer) Brian Rolph. ‘That can scare people off.’”

“The softening could be discouraging apartment building owners from going into the condo selling business because they could get less for their money. ‘It’s kind of scary, as an investor, to go into something with so much uncertainty,’ Rolph said.”

And from Florida. “Various national surveys have identified Naples as the third most overpriced real estate market in the country. Prices soared approximately 50 percent from 2004 to 2005.”

“Cornerstone Group, a developer based in Coral Gables, has recently bought an apartment complex near the corner of Airport-Pulling Road and Pine Ridge Road and is converting it to condominiums.”

“Two things stand out in this situation: In a market where the median price for a home is over half a million dollars, Laguna Bay is offering one-bedroom condos starting at $189,900 and two-bedroom units starting at $249,900; and the company is drawing customers using scantily-clad women waving to passing motorists on Airport-Pulling Road. (The women hold signboards; men are also used).”

“Lawrence Rodriguez, a representative for Cornerstone Group, said that the converted units are so affordable because buyers do not choose decor colors or materials. ‘We gutted the entire unit and we bought everything in bulk,’ he said. ‘There’s no carpet selection.’”

“As for the marketing campaign, it may be a bit risqué for generally conservative Naples. ‘Collier County has come a long way from the days when developers sold land that was underwater,’ said a long-time Naples Realtor who chose to remain anonymous. ‘The county provides lots of information for first-time buyers. I hope young people seek out that information and remain skeptical of marketing tactics that include young men and women beckoning them on the street.’”

“Representatives from the Naples Area Board of Realtors were not available for comment. Rodriguez stands by his company’s product. ‘It’s a really good deal.’”




‘Standoff’ As Buyers Want ‘Dramatically Lower Prices’

The Sacramento Bee reports on the rent ’standoff.’ “Bring on the moving vans. Renters rule the market, at least for now. By most accounts, capital-area renters are only months away from the ascending prices. ‘You haven’t had the strong rent growth yet. It is coming,’ said Greg Willett, as apartment industry consultant.”

“When, exactly, is still anyone’s guess.”

“More owners are now missing mortgage payments, a phenomenon expected to push more owners into foreclosure sales and back to renting. In recent years up to three-fourths of area buyers have used adjustable rate mortgages, and many struggle now with rising payments tied to interest rate increases. Area landlords view these as signs the rental market is shifting their way.”

“It’s a favorite new conversation of landlords and managers, said Janet Regan, president of the Sacramento chapter of the National Association of Residential Property Managers. ‘That’s one of the biggest topics every month,’ she said. ‘The market is just starting to change. We’re starting to see that we can get more for our homes as tenants move out.’”

“But it hasn’t changed so much that landlords can increase rent on existing tenants, said Regan, a broker in Citrus Heights.”

“A significant factor for demand gaining on supply: mortgage rates. They’re at four-year highs amid lofty home prices. Likewise, a mounting standoff between buyers who want dramatically lower prices and sellers not ready to offer them is bottling up even more people in rental units. Complicating that supply forecast, however, is a growing supply of homes being rented while owners try to sell them.”

“‘We’re hoping prices are going to drop in a while,’ said renter Robine Anderson of Citrus Heights. ‘It’s cheaper right now to rent than to buy so we can save more money for a down payment.’”

“Even with 11,344 homes in the four-county region for sale in April, Anderson and her husband expect to rent until sometime next year. ‘Personally, I’m just kind of waiting for things to even out a little bit and get a good deal,’ she said. ‘We’re just trying to be sensible about it.’”




‘Soft-Landing Thesis Is Dead’: Analyst

Some housing bubble news from Wall Street. “Stocks plunged after Federal Reserve Chairman Ben Bernanke vowed to combat the recent ‘unwelcome’ pickup in inflation, even as he told an international bankers’ conference that an economic slowdown ’seems now to be underway.’ ‘He came right out and said we’re worried about inflation,’ said market analyst Arthur Hogan. ‘Just what the market didn’t need to hear.’”

“The second quarter is proving to be troublesome for homebuilders. They have been cutting their full-year earnings projections in droves as orders look weak and cancellation rates rise. ‘If it is not already painfully apparent, the soft-landing thesis for the homebuilding industry is dead,’ wrote A.G. Edwards analyst Greg Gieber.”

“One hedge fund manager, who plays the sector long and short, said that Monday’s selloff could point to a worse-than-expected downside scenario for builder stocks, where the news gets bad at a very fast pace, rather than a slow shakeout over an extended time frame.”

“‘If things get really bad at the time when the Fed will not bail out (and stop raising rates), people might just say, I’m not catching anything with a falling knife,’ the manager says. ‘People are saying, ‘I don’t see this thing turning anytime soon.”’

From the Toll Brothers 10-Q release today. “We have continued to experience a slowdown in new contracts signed. This slowdown, which began in the beginning of the fourth quarter of our fiscal 2005, has continued throughout the first six months of fiscal 2006 and into the third quarter of fiscal 2006.”

“The value of new contracts signed for the six-month period ended April 30, 2006 and for the three-month period ended April 30, 2006, (was) a decline of 26% and 29%, respectively, compared to the value of new contracts signed in the comparable periods of fiscal 2005.”

“We believe this slowdown is attributable to an overall softening of demand for new homes as well as an oversupply of homes available for sale. We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices and interest rates.”

“In addition, speculators and investors are no longer helping to fuel demand..We have been impacted by an overall increase in the supply of homes available for sale in many markets as speculators attempt to sell the homes they previously purchased or cancel contracts for homes under construction, and as builders who, as part of their business strategy, were building homes in anticipation of capturing additional sales in a demand driven market attempt to reduce their inventories by lowering prices and adding incentives.”

“In addition, based on the high cancellation rates reported by other builders, and on the increased cancellation rates we have experienced, non-speculative buyer cancellations are also adding to the supply of homes in the marketplace.”

From Origination News. “Employment in the mortgage industry fell in April for the second month in a row. The U.S. Bureau of Labor Statistics reported that employment in the mortgage banker/broker sector slipped by 2,500 jobs, from 503,600 in March to 501,100 in April.”




Sellers ‘In A Scramble’ For Buyers: Appraiser

A pair of reports on the housing slowdown. “Buying a house in New Jersey this spring? You’ve got a lot more choices than buyers have had in recent years, according to a new report from an appraiser who tracks the housing market.”

“The inventory of unsold homes was up 71 percent in April compared with April 2005, according to Jeffrey G. Otteau, an East Brunswick appraiser.”

“While buyers used to bid against each other for houses, now sellers are ‘in a scramble to gain the interest of buyers,’ Otteau wrote in his latest report. The report echoed his findings for the first quarter.”

“Sales contracts in April ran 20 percent below the April 2005 level, and there is now a seven-month supply of houses for sale in the state, up from a three-month supply in the spring of ‘05.”

“The most expensive houses sit on the market the longest. A house costing more than $1 million is likely to be on the market for an average of 12 months in Bergen County, 24 months in Passaic County, 11 months in Morris County and 40 months, more than three years, in Hudson, Otteau estimated.”

“After doubling from 1999 to 2005, North Jersey housing prices had to cool off at some point, because there’s not an endless supply of buyers able to pay half a million dollars for a starter house.”

The Star Tribune has this update from the Twin Cities. “Dogged by too many homes for sale and higher mortgage interest rates, Twin Cities-area home builders last month posted the steepest decline in construction activity in at least a decade. Last month, home builders were issued 769 permits to build 1,052 new units. That’s a 27 percent decline in permits and a 44 percent drop in new units from May 2005.”

“‘What we’re seeing is a supply-side response to current market conditions,’ said Curt Swanson, president of the Builders Association of the Twin Cities. ‘With all of the homes on the market, potential buyers have more options.’”

“The number of homes for sale in the Twin Cities metro area has been at record levels. Inventory for sale is more than 40 percent higher than last year. Pending home sales have fallen 18 percent.”

“‘Like every industry going through a slowdown, everyone is a little concerned,’ said Wendy Danks, marketing director for the Builders Association. ‘Our members have to watch their inventory and should be selling rather than taking orders.’”




‘Some Housing Markets Have Become Vulnerable’: NAR

The NAR is calling for the Fed to hold rates steady. “The National Association of Realtors on Tuesday lowered its forecast for U.S. home sales in 2006 and called on the Federal Reserve to stop raising interest rates because parts of the housing market are ‘vulnerable.’”

“‘Experiencing a slowing from a hot market is a good thing because we need a solid housing sector to provide an underlying base to the economy, and slower appreciation will help to preserve long-term affordability,’ said David Lereah, the group’s chief economist.”

“‘But this is a time for the Fed to pause on rate hikes because we have some interest-sensitive housing markets that have become vulnerable,’ he said.”

“The trade group, in its monthly forecast, said sales of existing homes should fall 6.8 percent to 6.60 million this year from the 2005 record of 7.08 million. Sales of new homes should decline 13.4 percent to 1.11 million from a record 1.28 million in 2005.”

“That is below the group’s earlier forecast of 6.62 million existing home sales and 1.13 million new homes sales in 2006.”

“NAR President Thomas M. Stevens said rising interest rates have slowed home sales in many high cost markets, while job growth has boosted sales in some moderately priced areas. ‘Broadly speaking, rising inventories have taken the pressure off of unsustainable home price growth,’ said Stevens. ‘For most of the nation, this means future home price gains will be much closer to the normal returns we expect from housing.’”

“‘Historically, home prices rise 1.5 to 2 percentage points faster than the rate of inflation, so the rise we anticipate in existing home prices this year is actually a little above the high end of historic norms,’ Lereah said.”




Las Vegas Condo Developers Throw In Their Hand

The LA Times reports on the latest Las Vegas condo cancellation. “Some of the newest high-profile luxury condominium projects in Sin City have been folding like a house of cards. The latest to throw in his hand was actor George Clooney, who announced an agreement with his partners Monday to sell his stake in a proposed $3-billion condo-casino project near the Strip.”

“New York-based developer Related Cos. cited rising construction costs and slowing sales in unloading its 25-acre, 11-tower Las Ramblas condominium. Only about half of the 31,000 condo units under construction or planned in the so-called resort corridor that includes the Strip are expected to be completed, said Brian Gordon of an independent Las Vegas real estate market research firm.”

“‘There is a shortage of qualified developers with the financial wherewithal to pull these projects off,’ Gordon said. Also, he said, ‘a significant number of sites may not have the resources to bring some of the projects to fruition.’ About 50 projects are planned for the resort corridor within one mile of the Strip.”

“Like most other once-scorching housing markets, Las Vegas is cooling off, particularly for new homes including condos, townhomes and single-family residences. Year to date, sales were down 31% in Clark County, and the cancellation rate rose 25% from the same period a year earlier.”

The Miami Herald. “The sale marks another failed attempt by the Miami-based developer Jorge Perez to build in Las Vegas. Perez, whose privately owned company was recently ranked by a builder trade publication as the biggest condo developer in the country, ventured out to Las Vegas in recent years aiming to replicate his South Florida success.”

“But earlier this year, again citing exorbitant construction costs, Perez pulled the plug on a two-tower project called ICON Las Vegas near the Las Vegas Strip.”

“‘There is always disappointment when you don’t build a project you announce,’ Perez said. ‘But is it better that we made a lot of money by selling the land rather than building and losing a lot of money? Of course it is better.’”

“Edge Group bought the land in a deal that closed last week. The company said it’s considering a hotel on the site.”