The Housing Bubble

Bob Casagrand has this update from San Diego. “Single family detached and attached homes: Homes sold in May totaled 2,805, down 28% from May 2005. This is a little short of the 3,000 that I had hoped for, but it was a 26% increase from April. In the past few years May has usually been a slight drop from April, so the roles seem to have reversed this year. The 2 months combined are down 38% from last year.”

“The Pending sales for May were 2,930 homes, so I expect June to be slightly over 3,000 sales which will be down 23% from last year. The inventory on June 1 was 20,635, which means that in the past month the inventory has increased by about 2,000 homes. This indicates about an eight month supply of homes on the market.”

“For the previous 6 years we have averaged about 40,000 homes sold per year. This year is going to struggle to hit 30,000, at least a 25% decline in homes sold. The other two major measurements on the market are the listing sell through and the rate of expired, withdrawn and cancelled listings.”

“The sell through is the relationship of new listings in a year to listings sold in a year. Typically in a normal year sell through runs around 60%. In 2003 this number peaked at 70%, which is almost a saturation level and helps explain the shortage of inventory at the end of 2003 and the first half of 2004.”

“To see the transition in our market just track this number: 2003 70%, 2004 60%, 2005 51% and the first 5 months of 2006 35%. The larger the percentage the less time to sell and the lower the percentage the longer the time to sell.”

“The percentage of listings that expire, cancel or withdraw from the market is a key indicator of market time as well. During 2002, 2003 and 2004 the average was 8.5% of listings that went into these categories. In 2005 the number jumped to 28% and so far this year we are at about 42%.”

“The growth in inventory this year from 13,376 to 20,635 is caused by the slow sales rate which is causing it to take more time to sell the homes not by increased listing activity. The unsold listings are stacking on top of the new listings.”

“I have read reports indicating that San Diego is in a period of population decline, if correct this affects our market even more than interest rates. With new construction continuing to put new homes on the market, the effect is to reduce the occupancy rate of housing which puts pressure to lower purchase prices and also in time rents.”

And the Financial Times. “The number of unsold homes on the American market has risen by more than 1m over the past year, a gain of a third, increasing the prospect of a rapid cooling of the US property market. The inventory of new and existing homes waiting for buyers is now approaching 4 million.”

“The surge in unsold homes has been largely due to a release of new properties on the market rather than a sharp slowdown in sales. This suggests that many sellers are eager for one last payout before the halcyon days of the market draw to a close. Speculative buyers may also be trying to exit the market before conditions deteriorate.”

“‘We should start to see a stand-off as buyers offer lower prices and homeowners refuse,’ said analyst Paul Ashworth. ‘After a period of frustration, sellers should become more realistic about what their homes are worth.’”

“‘We are at a turning point in the housing market,’ said Nicolas Retsinas at Harvard. ‘But this does not mean that we are going to take a nose dive, except in selected areas of overbuilding and highly inflated valuations.’”

A trio of reports on the survey released yesterday. “America’s wealthiest have higher hopes for their stocks this year, but are worried about prospects for real estate, according to a survey. Faith in the real estate market, however, was weak: Only 48 percent said they expect real estate’s value to increase in the next year, down from 72 percent who thought it would in last year’s survey.”

“Thirty-three percent of respondents expect real estate values to decline over the next year. That number is up from 14 percent who thought that last year.”

“The survey, conducted by asset manager U.S. Trust, polled Americans with annual adjusted gross income of more than $300,000 or net worth greater than $5.9 million, including real estate.”

From Florida. “Less than half of those surveyed nationwide think real estate values will increase over the next 12 months. ‘I think they realize that the level of appreciation has slowed, but Florida will always remain an attractive place to live and buy properties,’ said Mark Stevens, CEO of U.S. Trust’s southeast division in West Palm Beach.”

“Palm City economist William Fruth said those who purchased second or third homes as investments may not turn much of a profit in the immediate future. ‘The local housing market will be hurting for the next 12 months,’ said Fruth.”

“‘If you took this survey 10 years ago, things would be very different,’ said Merle Dimbath, president of Dimbath Economics in Stuart. ‘Their top worry shows that they are concerned for their kids’ and grandkids’ livelihoods and are thinking about whether or not they’ll be able to have the same wealth they enjoyed.’”

“While only the wealthiest individuals were surveyed, Dimbath said the results reflect the financial concerns of everyone. ‘We’re all in this boat together and we all want to float,’ he said.”

From Newsday. “Wealthy investors’ involvement in the real estate market does not reflect their dreary expectations for its performance. As in last year’s survey, they reported that real estate investments comprise 15 percent of their portfolios.”

“‘We felt they have not yet adjusted their portfolios along with their beliefs,’ said U.S. Trust regional president William J. Porter Jr. He said his firm advises ‘trimming that portion of the portfolio’ and investing in alternative assets.”

“Louis Altfest, a financial planner in Manhattan, said ‘the possibility of a decline in real estate is a residential phenomenon.’ Investors may be holding real estate assets despite their expectations because these investments are fundamentally less liquid than stocks and other products, Altfest said. ‘You can’t turn on and turn off real estate in the same way,’ he said.”

“Steven Rogé agreed, saying that a client who purchased a Florida condominium against his firm’s advice had been unable to sell it recently despite reducing the asking price several times.”

“Rogé said investors’ concern over real estate is driven by ‘what they hear in the media and the covers of magazines. It went from a housing boom to a housing bust in probably a year and a half.’”

Style weekly has this rare report from Richmond, Virginia. “Richmonders are supposedly lining up to buy new condos. So why are some buildings dark and parking lots half empty? Drive by the buildings just after dusk and look for cars and lights in the windows.”

“Case in point is Riverside on the James. One of the city’s highest-profile condo projects, the 122-unit tower on Brown’s Island was draped in darkness on a recent weeknight, about a quarter of the lights were on.”

“But wait. Didn’t all of these 122 condos sell within months of hitting the market in early 2005? Yes, but many were purchased by investors looking to make a quick profit by selling, or flipping, to empty-nesters and young professionals.”

“Local developer Sam McDonald was one such investor. He bought two units and sold the smaller one earlier this year. ‘I was able to get my asking price,’ he says. The larger condo is still on the market.”

“No one has lost money on their investment, says (developer) Bill White. But the dark nights on the James offer a tempered look at the region’s oft-reported condo boom. ‘People who bought looking for a quick flip may have missed that frenzy by about six months,’ says McDonald, who is developing 25 new condos in Jackson Ward. ‘Now you’ve got to find buyers. That takes time.’”

“It’s too early to declare a bubble in Richmond, but real estate observers say the condo market is quickly reaching a point of saturation. Some of them worry that the market, following the national condo-bubble trend, is already overbuilt. Sam R. Worley says as a region Richmond is overdone. He counts more than 2,000 new condos and townhouses on the way along a three-mile stretch of West Broad Street, engulfing Short Pump. That’s too many, he says.”

“‘Basically, you are seeing a glut coming onto the market, nationally and local,’ Worley says. He recently considered buying a condo for his retirement, he adds, but decided against it: ‘Quite candidly, I don’t feel like buying into a bubble.’”

“According to Integra Realty Resources, the condo market is the only real estate segment in Richmond that didn’t see prices increase from March 2005 to March 2006. ‘It doesn’t mean the condo market is overbuilt,’ says Robert E. Coles, of Integra’s Richmond office. ‘But it’s certainly an area of concern.’”

“Flat prices are an ominous sign. But Integra measures only actual closings and doesn’t account for soon-to-be-built condos under contract. White says Richmond, with its diverse economy, is faring far better than Northern Virginia, Atlanta and other large cities across the country that are experiencing a massive oversupply. ‘It’s not a runaway market,’ he says, ‘but there is not a bubble.’”

“Local developer Robin Miller concurs. He is, however, starting to see an oversupply in the upper end of the condo market, where units are priced $450,000 and up. ‘In the past couple of years the demand has exceeded the supply of condominiums and that ended probably six months ago,’ Miller says, adding that the market has leveled out. ‘There might even be an oversupply for the moment.’”

“Richmond’s market is stable, for now, says David H. Downs, a real estate professor at Virginia Commonwealth University. Nationally, higher interest rates and a glut of condos are creating massive headaches for many larger cities overinvested in condos. ‘Still, I don’t think we are as anywhere as far out on the crazy curve as we see in some other cities,’ Downs says.”

Lew Sichelman at Realty Times looks at appraisal fraud. “A faulty or even fake appraisal is said to be at the basis of every fraudulent mortgage transaction. But not every appraiser is at fault, or at least willingly so. James Blaydes (owner) of a Peru, Ill., appraisal firm says that in many cases, appraisers can’t stand up to pressure put on them by mortgage brokers.”

“Either they ‘hit the numbers’ as instructed, he said at the Mortgage Bankers Association’s National Fraud Issues Conference in Chicago recently, or they are blackballed. If an appraiser refuses to inflate a valuation, Blaydes said, he won’t be getting any more business, at least from that particular broker.”

“Speaking for the Appraisal Institute, which has been calling on lawmakers to address mortgage fraud since 1981, when the problem was believed to be in its infancy, the Illinois appraiser said there are plenty of ways to fudge a valuation besides packing the final number.”

“Among other things, appraisers can ignore the best comparables, or use properties in better neighborhoods as comps, he said. They also can mis-describe a property. Or they can fail to mention physical problems.”

“But appraisers aren’t the only ones who commit such flagrant fouls, Blaydes told the conference. Sometimes loan brokers do their own dirty work. They have been known to alter an otherwise honest appraiser’s work by changing the values of each comparable, he said, deleting noted physical issues or other undesirable influences impacting the subject property or even forging their own appraisal reports.”

“The AI spokesmen said, lenders can help themselves by separating the appraiser selection process from loan origination and by preventing loan officers from having any contact with loan officers. ‘That’s something we can do ourselves,’ agreed Erik Stein, executive VP and director of fraud risk management at Countrywide Home Loans. ‘Loan officers shouldn’t get to pick the appraiser.’”

“Stein said faulty appraisals are ‘the single most important issues in collateralized lending.’ ‘All fraud is bad, but the reality is, if the house is worth what the appraiser says, if I have value in the collateral, I’m going to break even.’”

“Emblematic of the scope of the mortgage fraud problem throughout the country is what’s going on in Illinois, where three out of ten appraisals are found to be forged, according to Robert Gorman, an East Hazel Crest, Ill., appraiser. ‘That’s a significant number,’ he told the meeting. ‘And that’s only the ones we know of. Who knows what we don’t know?’”

“Gorman said in some cases, appraisers who have had their licenses lifted continue to make valuations using someone else’s identification. In other instances, he also said, the ‘appraisers’ were never licensed at all.”

“Gorman told of one crew of 13 fake appraisers who are working out of a factory on Chicago’s South side. The authorities would like to shut down this appraisal factory, he said, but they can’t. ‘They’re not licensed, so there’s nothing we can do,’ he said. ‘So they are still there.’”

The Idaho Statesman reports on the fading housing bubble. “The Treasure Valley’s housing boom is starting to slow, some housing-industry leaders say. Area industry experts say the runup in prices may not be sustainable now that out-of-state investors are apparently losing interest in the Valley. Nampa real-estate agent George Tallabas said developers can no longer count on having half of the homes in a new subdivision sold before construction has been completed.”

“The industry is now having to depend more on local buyers because runaway housing costs and rising interest rates have combined to chase off the out-of-state investors who have been driving the housing boom, he added. ‘We’re starting to see a definite correction in the market,’ Tallabas said.”

“Developers are starting to reduce prices because the cost of home is now beyond the income earned by many Idahoans, he said.”

“(Mortgage broker) Marianne Wake in Boise, said the number of loans her company issues is falling as high prices keep some homebuyers out of the market. The increase in loan values has offset that decline, she said.”

“‘We only have to do half as much as we used to because the loans are so big now,’ she said. ‘It used to be that a $200,000 loan was a big loan. Now it’s just average.”

“Wake said her confidence in the local market remains high enough that she plans to add five new loan officers. ‘We’re going to have to make connection with the high-end home buyer, if we’re going to survive,’ she said.”

“Corey Barton, whose company is one of the busiest builders in the Pacific Northwest, said his recent rollback in some prices is attributable to overestimating this year’s increase in the cost of building materials.”

“‘Last year was way over the top,’ Barton said. ‘So 2005 is not a good year to set the bar. If prices were up 20 percent last year, and are down 10 percent now, you’re still ahead.’”

“Barton conceded, however, that his sales were off an estimated 10 percent in the first quarter, which he attributed to ’sticker shock’ experienced by consumers. ‘If I was going to buy a pair of sneakers that cost $20 last week, and they cost $30 this week, would I still be interested in a buying a pair of shoes?’ he asked.”

The Wall Street Journal has this report on ‘repartments.’ “One of the first signs that the Gateway Club was going condo was when the owner of the Boynton Beach, Fla., apartment complex closed the gym within the past year.”

“Their fears turned out to be well founded. Residents complain that they were later offered steep ‘insider’ prices to buy their units, $400,000 for a $1,500-a-month rental in one case. Some declined and moved out. When would-be buyers were wooed at a luau at the pool, existing tenants were excluded. ‘It was like we were the redheaded stepchildren,’ says Jack Carney.”

“Now, Gateway’s owner, faced with slow sales, is reversing course and reverting to apartments. Although one-third of the 319 units had been upgraded in anticipation of sales, no deals were closed. The owner had to refill the complex with renters, so incentives, like lower rent, were offered.”

“Mr. Carney was told he could purchase his $1,500-a-month, three-bedroom unit for $403,000. He has 16 months left on his lease and plans to assess his children’s school situation before deciding whether to move even though the complex will remain as rentals. He thinks some of the new renters aren’t desirable neighbors.”

“‘They’ve always tried to rent to the family type, but with all these promos and things,’ he says, some new tenants play loud music and drink beer at night in the parking lot.”

“Michael Cohen, a research strategist, dubs the reversions ‘repartments.’ ‘It’s definitely becoming a problem,’ he says. ‘Some of these projects probably don’t look as attractive as they did six months ago when developers were buying the conversions.’”

“An emerging trend is evident as developers stuck with slow-selling condo units struggle to recoup part of their investment and as tenants gripe about being caught in the middle when their building swings from apartments to condos and back again.”

“‘It was the wrong market, wrong time,’ Jenny Reidy, said Gateway Club’s rental manager who recently left the company.”

“In south Florida, eight converted complexes containing 2,156 units have reverted to rentals in Broward and Palm Beach Counties, according to Jack McCabe. That compares with about 62,904 units that have been converted or have begun to be converted into condos in the area since 2004, he adds.”

“The San Merano at Mirasol, a 476-unit apartment complex in Palm Beach Gardens, Fla., is a case in point. The luxury development adjacent to a country club was built and developed by Kolter Communities. Not too long ago, Kolter had started running newspaper ads pitching the units as condos and sending letters to existing residents alerting them of the switch, but it called off plans a few months ago after getting nervous about the rising number of competing condos. None of the units were sold as condos.”

“‘I knew we were in trouble when the guy who delivered my television a few weeks ago said he had bought two conversions [in the area] and was trying to flip them,’ says Kolter COO Peter Donnantuoni, pinning most of the blame on speculators for driving up prices to unreasonable levels.”

“The financial pressure on would-be condo converters can be intense, analysts say. Typically they’ve been willing to pay 35% to 40% more than their value as rental apartments. If the project cannot be converted, it becomes a substandard investment being run as a rental property. And if the investment was highly leveraged, the converter risks losing the property.”

“Earl Kratzer bought his unit at the Estates at Stuart last year for about $263,000. Like other buyers intent on immediately selling for a quick profit, he put it up for sale for $295,000 right after he closed in October. No luck. Then he tried to rent it for $1,400 a few months later. That didn’t work either.”

“Mr. Kratzer later discovered the owner of the Estates was renting units as well as selling them, but some at a much lower price. He says he was ultimately forced to drop his rental price to around $1,100 to match the Estates listings. He finally found tenants last month. ‘It was just a mess,’ he says.”

A mid-week reminder to take some housing bubble photos and email to:

photos@thehousingbubbleblog.com

May as well make this post a Wednsday bits bucket for off topic items and Craigslist finds, as well!