The Housing Bubble

The Daily Bulletin has this from California. “In a sign of the cooling housing market, KB Home has laid off nearly a tenth of its work force at its Inland Valley office, officials said Wednesday. The company let go 25 of the 275 employees in its Pomona office, said KB Home spokesman Ray Gomez.”

“‘It’s a normal part of the business cycle,’ Gomez said. ‘The past few years have been red hot in the Inland Valley in terms of new home construction. The market is normalizing now, and the staffing levels have been adjusted.’”

“The move by the Los Angeles-based home builder comes amid difficult times for the residential construction industry. Several companies’ stocks dipped earlier this week when brokerage firms downgraded their ratings for the industry. Wachovia Securities predicted a ’substantially more negative’ demand for new homes in a recent report that downgraded KB Home and other home builders.”

“Home sales dipped less in the county than any of the other six Southern California counties. KB has also made recent layoffs in its Las Vegas and Phoenix divisions. ‘It’s unfortunate when you have to cut positions,’ Gomez said. ‘It’s been so strong; it’s been record-setting levels (of new home construction) for the past few years.’”

“The company’s stock closed at $45.44 Wednesday, a 52-week low and down 47 percent from its high of $85.45.”

From Inman News. “The number of foreclosures have jumped 29 percent in Southern California since January 2006, according to a real estate research company. Riverside had the highest increase of 56.5 percent, followed by San Diego County at 49 percent and Los Angeles at 16.2 percent.”

“‘The real estate bubble continues to deflate in Southern California,’ said Serdar Bankaci, president and CEO. ‘This is not surprising at all because home prices are leveling off.’”

“About 76 percent of the foreclosure activity involved single-family homes, while 12 percent were condominiums and 4 percent were duplexes and triplexes, the company reported.”

“‘To add insult to injury, the job growth in May was the lowest it had been since October 2005,’ said Bankaci. ‘Combine that statistic with the rising interest rates, and you see that the average family suffered financially two times, putting a tremendous strain on families already stretched to the max.’”

The Arizona Republic reports on an economic study. “The University of Arizona’s Eller College of Management said Wednesday that the state’s economy will experience a major slowdown in the second half of 2006 as inflation pressures mount, interest rates rise and the housing market cools.”

“‘Consumer budgets are also being squeezed, and that’s going to force (them) to curtail their spending as we go forward,’ said Marshall Vest, director of Eller’s Economic & Business Research Center. ‘Housing is backtracking as it returns to some sense of normalcy.’”

“Vest said the best-case scenario has Arizona’s economic growth continuing at a ‘fairly high level,’ just slower. His worst-case scenario: The economy sinks into a short, mild recession.”

“‘The economy has been growing well beyond its potential and now we’re feeling some inflationary pressures,’ said Vest. A slowdown is normal and overdue, he said. Last year, Arizona experienced its largest economic activity surge in history, Vest said.”

“That momentum lasted into early 2006, but Vest predicts a rapid slowdown that will result in a ‘growth recession,’ or growth at a rate slower than the long-term trend, in 2007 and 2008.”

“As consumers begin to worry about jobs, they’ll cut spending and repay debts, he said. ‘The party is over for consumers,’ Vest said. ‘They’re going to have to pay back some of that debt.’”

“The ‘housing market mania’ is ending, becoming a neutral force or a drag on the local economy, Vest said. Tucson markets will spend the next couple of years ‘adjusting to a frenzy-less environment,’ he said. ‘It’s an orderly retreat from the excesses of the frenzy days,’ Vest said.”

“The number of homes sold in Tucson is down, representing fairly significant, almost scary declines, Vest said.”

“Tucson, Phoenix and Flagstaff made national lists of overvalued housing, becoming some of the only inland cities to earn that distinction.”

“Current economic conditions strongly favor renting, which means rents could quickly soar, Vest said. Rents haven’t gone up significantly in five years, housing is less affordable and condo conversions have shrunk the supply of apartments. Builders will soon see demand for new apartment complexes and could change some condos back to apartments, Vest predicted.”

Some housing bubble news from Wall Street and Washington. “The slowdown in the housing market is being driven by growing inventories of homes from overbuilding and by speculators leaving the market, Toll Brothers CEO Robert Toll said Thursday. ‘The housing market is experiencing an oversupply, to put it mildly,’ Toll said during the luxury-home builder’s annual analyst conference.”

“‘The supply is coming from speculators who bought in 2004 and 2005 who are now sellers, and to make matters worse aren’t buyers anymore,’ he added, noting that many homes built by more aggressive builders also are sitting unsold now.”

“Toll management said that the company plans to continue to grow the number of its selling communities and buy back more shares. ‘We’ve been using excess cash flow to repurchase stock, and will continue to opportunistically buy back more,’ said Joel Rassman, chief financial officer. So far this quarter, Toll Brothers has repurchased about 1.65 million shares through Wednesday.”

Peter Coy writes this at Business Week. “It’s getting harder and harder for real estate agents to put a happy face on the market. And now it’s suddenly looking like the Federal Reserve will raise interest rates again.”

“Bernanke’s gladiator-like aggressiveness on inflation is producing scowls at the National Association of Realtors, which worries that higher mortgage rates will make the housing market even softer. The group put out a public statement on the issue this week.”

“Mortgage bankers also see the market slowing, but they aren’t echoing Realtors in asking for a pause in rates. ‘We’ve never publicly given the Fed instruction on how to conduct monetary policy,’ Douglas Duncan, chief economist of the Mortgage Bankers Assn. said.”

“Most economists don’t think Bernanke is actually trying to reinforce a bear market in housing, but they do say that the market has turned decidedly bearish. (Economist) Richard DeKaser, calculates that over the six months through April, median sales prices have fallen at a 4.4% annual rate for new homes and at a 5.6% annual rate for existing homes.”

“‘If employment falls, that could precipitate price declines and all the speculation that’s supported the market would be expunged,’ says DeKaser. ‘You could see things swing the other way to where there’s an irrational fear.’”

“To put it differently, some economists say: What goes up must come down. One housing bear, (economist) Ian Shepherdson wrote June 6: ‘Ultimately, we expect the level of home sales to head down to, or even below, the long-term trend. When bubbles burst, they usually burst properly. Gentle deflations are rare.’”

A reader posted this report from earlier this year. “(Fed) governor Donald Kohn hammered home the Fed’s hawkish strategy in blunter language during a speech in Frankfurt. ‘If real estate prices begin to erode, homeowners should not expect to see all of the gains of recent years preserved by monetary policy actions,’ he said. In other words, no mercy now, and no bail-out later.”

TheStreet.com reports on the slowdown for one Florida homebuilder. “St. Joe operates mainly in northwest Florida, which had seen a boom in development. St. Joe hoped that demand would continue, as it sold homes away from the beach and even in the woods. To put it plainly, it ain’t happening, judging by recent events at a few St. Joe developments.”

“St. Joe was scheduled to release 12 condo units to the public last week in its Watersound Beach development. However, the sale was postponed, according to a St. Joe sales associate. The sales office does not yet have a date when the release will take place and was not given a reason for the delay.”

“It was due to a lack of demand, according to a real estate agent in the area, who requested anonymity, as he primarily sells St. Joe properties and is in litigation with the company.”

“Meanwhile, prices are plummeting in the development. The real estate agent is currently listing a lot for $465,000 that his client bought for over $800,000. He said he’ll be lucky to get $450,000 for it.”

“A look at the prices of lots for resale shows either some desperate or unrealistic sellers. For example, one lot is being offered at $1.3 million, while the one next to it (which appears slightly larger) sold for $660,000 in March, and we know prices haven’t doubled in the past three months. Next to that one, a larger lot is being offered at $1.285 million, while an adjacent and similarly sized property is listed at $595,000.”

“At Rivercamps, a 1,500-acre community in Bay County, Fla., with permits for up to 450 homes, sites have ranged from $84,000 to $849,000 and have averaged roughly $200,000. Assuming a 3,000-square-foot house, the cost to own is well over $1 million.”

“‘Rivercamps is a total joke,’ according to one hedge fund manager who is short St. Joe. The source, who requested anonymity, questions who is in the market to spend that kind of money and to be stuck in ‘a buggy pine forest on a bay,’ or at other St. Joe developments that are off the beach, when beach property is available in other parts of the country for roughly the same price or less.”

“He believes the company parlayed its success in the Gulf of Mexico to entice previously successful speculators to buy up lots in much less desirable locations.”

“Demand was certainly high at Rivercamps when the company had its initial release in October 2003. At that time, 314 buyers submitted offers for 23 lots, according to a company press release. The fervor was still there in February of last year when 281 buyers submitted offers for 37 home sites.”

“However, there are currently only three houses (including one that’s a model home) completed. ‘Nobody is building,’ according to the fund manager, who said he did not see a single new home under construction when he visited Rivercamps last month.”

“While you can be the only Porsche dealer in town, if people aren’t in the market for Porsches, it doesn’t matter that there’s no competition. That’s the situation St. Joe is in. Many properties are very costly and targeted toward the second-home buyer, most of whom are not buying in this environment (in fact, some are bailing out).”

The Rocky Mountain News looks at the May housing numbers in the Denver area. “The record number of unsold homes in the Denver-area market topped 30,000, and the inventory glut is expected to drive down home prices in an already soft market. That eclipses the record set in April, when 29,045 homes were on the market, and it is almost 21 percent more than the 25,198 homes available in May 2005.”

“The ever-growing number of ‘for sale’ homes competing with one another is being fueled by foreclosures. Blame overbuilding, a loss of high- paying jobs and rising interest rates, experts say. In 2005, 2 percent of all homes in the metro area ended up in foreclosure, the highest rate in 15 years, and that trend has continued this year.”

“‘I’m just floored by these numbers,’ said (broker) Kurt Poole in Highlands Ranch. ‘It’s hard to find anything positive to say about the home sales market.’ Poole noted that he has been saying for the past two years that the market is at the bottom and should start to creep up. ‘But clearly it is not at the bottom yet,’ he said. ‘It seems bottomless.’”

“The huge number of unsold homes is causing a bottleneck in sales and likely will drive down home prices and make homes tougher to sell, (realtor) Steve McGuire warned. ‘It’s really the basic law of supply and demand,’ McGuire said.”

“It now appears that the price of homes in upscale areas such as Cherry Hills Village and Greenwood Village are starting to soften, McGuire said. ‘And there’s no support for the low end of the market,’ McGuire said, which is being hammered by near-record numbers of foreclosures, especially in Adams County and parts of Aurora.”

The Denver Post. “‘The foreclosures are causing things in the lower price ranges to really stop (selling),’ said Steve McGuire. In May, 6,459 homes were put under contract and 5,010 sales were closed. Both of those measures fell from last year.”

“High gas prices also are a factor, said Mike Rinner, a real-estate analyst in Englewood. ‘Supply and demand are more out of whack in neighborhoods that are older and farther from jobs, and in remote areas where commuting times are longer,’ Rinner said.”

“(Broker) Judy Templeman said 2006 ‘is what we call a cleansing year.’”

The Washington Post reports the air is coming out of the local condo bubble. “Citing slow sales and a cooling real estate market, two major developers are abandoning plans for two condominium projects in the Washington region. The decisions are among the strongest signs yet of how much, and how quickly, the market for new condos has softened here.”

“Monument said it would not go forward with its plan to convert the 574-unit Park Center apartment complex in Alexandria to condos. Wood Partners said that it would continue building its 300-unit building in Annapolis but that the apartments would be rentals, not condos as planned.”

“What happened at the two projects could be just the beginning as developers who had counted on continued rising prices realize that their numbers no longer work, said Gregory H. Leisch, chief executive of a real estate consulting firm in Alexandria. ‘It’s a precursor of more to come.’”

“Leisch estimated that developers would take 1,200 more units out of the pipeline by year-end. About 25,000 condo units are being marketed now, 16,000 of which are under construction, according to Delta. ‘The development community is seeing the handwriting on the wall,’ Leisch said.”

“Russell Hines, VP of Monument Realty, said financing for the $170 million Park Center project required that buyers be in place for 25 percent of the units before settlements could take place. But by the time the company started selling the units in September, the market had started to slow. Ultimately, only 50 units were sold before Monument notified its buyers last month that it would not convert the complex, he said. Apartments in the buildings will remain rentals.”

“‘We’re still pretty bullish about the residential market in the long run,’ Hines said. ‘It’s just that right now, there are some markets where we probably got a little bit ahead of ourselves.’”

“Wood Partners, a national developer of multifamily housing, said its project had generated buzz, with 4,000 potential buyers signing up over the Web and more than 1,000 showing up at its sales opening party at a restaurant in Annapolis on March 9. But only 27 contracts were signed over the next 30 days, said Dean Wilson, director for the Mid-Atlantic region for Wood.”

“‘That’s not where we needed to be,’ he said. ‘We’re opening the leasing doors this week as we speak.’”

“Wilson said: ‘We have some patient capital that can ride the ups and downs. We have to be more sensitive to market swings and.. make sure that when the music stops, we always have a chair to sit in.’”

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