The Housing Bubble

Let’s start the desk clearing with some breaking news. “The crucial selling season for metropolitan Phoenix’s housing market got off to a less-than-resounding start last month as sales of existing homes plunged below last year’s levels, posting their worst May performance since 2003. There were 6,870 existing houses sold in the Valley in May, down 34 percent from the 10,425 resales in May 2005, Jay Butler said.”

The Patriot Ledger. “At least a dozen ‘for sale’ signs are now sitting on the front lawns of classic New England homes along Hingham’s Main Street. ‘I’ve been here for 27 years and I’ve never seen so many for sale signs,’ said Robert Emerson, who put his five-bedroom colonial up for sale about a year ago. Emerson said he has had to drop his asking price twice.”

“‘This is symbolic of the negative press you read about the housing bubble,’ Emerson said.”

“Marketing Bill Thayer’s house has been just as tough and delayed the 71-year-old’s plans to retire. Brokers tagged the red clapboard cape at $820,000 but the asking price has been reduced to about $770,000. Thayer said he knows that savvy buyers are waiting to see how much lower the price will drop. ‘I’d do the same thing,’ he said.”

“The market has changed and that your home many not fetch as much as it would have six months or one year ago. ‘People won’t overpay for houses in this market,’ said Jim Gillespie, president and CEO of Coldwell Banker Real Estate Corp. The worst decision a seller can make is to set the price too high to leave room for downward negotiation.”

“‘If a house is on the market for a long period of time it becomes stale,’ Gillespie said. ‘People start to think something is wrong with it.’”

From the Bay Area. “Construction projects in Mission Bay are adding thousands of condos to the market, at a volatile time for the economy. This mix of economic events is hammering developers. Concerned that home buyers won’t be able to afford higher mortgages, one Mission Bay developer reportedly dropped plans to build a 100-unit building.”

“Another company already building a development is waiting to set its prices. ‘There is a lot of inventory so people are trying to figure out how best to unload it,’ said Golden Gate University President Phil Friedman. Friedman also says condo prices could come down, or developers may convert them to commercial or rental property.”

“The following is a transcript from Bloomberg Radio’s interview with RE/MAX CEO Margaret Kelly: Host: What about yesterday’s new home sales number? MK: ‘Well when you look at new home sales, there were a lot of speculators. A lot of flippers coming into the market, people trying to get new homes. And so we knew that this year for new home sales, things would kind of go up, kind of go down. Overall though the new home sales are down 11%.’”

And from a Motley Fool. “There’s nothing funnier or more satisfying than watching the National Association of Realtors change its tune these days. The latest news release from this sunny-Jim industry group finally fesses up to its past fiction, but even when it admits the bubble’s going to pop, it can’t muster the courage to just come out and say it.”

“The cracks began to show in subsequent remarks from NAR ‘Chief Economist’ David Lereah. The head outfit that ridiculed the idea of a housing bubble for years is now crying for Ben Bernanke to bring it back. ‘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,’ Lereah said.”

“The real problem here isn’t the NAR, of course. You have to expect these people to spin the facts for their industry. No, the real problem here is the uncritical press out there, which is all too happy to pepper every contrary indicator or bearish remark with an NAR official’s informed-sounding bubble denial. Never mind if what the NAR folks are saying doesnt seem to make sense (or contradicts what they said just a few months back).”

“It should have been completely obvious to anyone with a loan calculator and a glance at wage increases that those months of industry bubble denials were just wishful thinking.”

The Mail Tribune has an update from Oregon. “‘For Sale’ signs are getting thick in west Medford. A dip-stick check into the Southern Oregon MLS single-family residence inventory earlier this week showed 315 houses on the market. That’s up 453 percent from the 57 that were available through the system a year ago. Overall, there are nearly 1,750 houses available via SOMLS, not to mention sellers outside the system.”

“‘There were people who saw the market was up a year ago who weren’t prepared to sell, and now they are prepared and willing to put their house on market,’ says Rick Chezik, an agent in Medford. ‘They just didn’t choose the optimum time.’”

“Unlike the past few summers, patience appears to be a virtue for buyers. West Medford mirrors much of what is going on throughout the county. West Medford eked out a 1 percent gain of $1,500 for a median price of $207,000. East Medford’s median sales price dropped 2 percent to $280,000 on 73 sales, the most transactions since September.”

“‘When the sales volume consistently drops for 14 months, eventually prices have to react to that,’ said appraiser Roy Wright. ‘When the sales volume is down, I don’t get too excited about that, it’s just a cycle. But I’d be concerned if there were three months of decreased prices, that would be an identifiable trend, especially when considering we’re going into the best sales months of the year. If that were the case, I’d say things are going south.’”

“Chezik believes Ashland and Jacksonville are candidates for a change of pace. ‘I think both areas are terribly inflated,’ Chezik says. ‘It doesn’t take a CPA to see what you’re paying in Ashland and Jacksonville and that you could buy an equal property for less than 13 miles away. You are paying more per square foot and what are you gaining? Probably a higher tax base and an older structure.’”

“The Phoenix-Talent area saw a 12 percent uptick in median price even though the number of transactions dwindled 45 percent. In Central Point, there were just 18 sales, a 61 percent drop from May 2005. Eagle Point, perhaps the most erratic of the county’s urban real estate areas, saw a 13 percent decline in its median price to $250,000 on 11 sales.”

“New home sales, representing 23 percent of the total deals in the county, are nearly 40 percent off from last year. Rural home sales fell 34 percent.”

A pair of reports on the California housing bubble. “Southern California’s housing boom is running out of steam, but the slowing pace of sales won’t erode the huge gains in equity that many homeowners have realized in recent years, says a report by Harvard University.”

“Not all economists share the report’s optimism. In recent months, some analysts have warned that price drops are possible as inventories of for-sale homes grow in Southern California. Economist Mark Schniepp of the California Economic Forecast said yesterday that those who embrace the ’soft landing’ scenario may be engaging in wishful thinking.”

“‘It has become a popular notion simply because people really want it to happen,’ Schniepp said. ‘We know that happy endings don’t always happen. We may be in the midst of a hard landing. . . . Interest rates are rising, and relatively sharply since March.’”

“Economist Zoltan Pozsar holds that the lack of affordable housing and the broad use of adjustable-rate mortgages make California’s pricey housing markets vulnerable to corrections. California ‘is at the highest risk of seeing downward pressure in home prices,’ Pozsar said. ‘You are more exposed because housing is most unaffordable in California of all states. Home prices have been in a much sharper run-up than elsewhere, but median incomes have not kept pace.’”

“In April, San Diego County’s housing prices slipped in some areas. The overall median sales price was $505,000, down from the peak of $518,000 in November. The year-over-year increase was 4.3 percent from a year ago. Overall sales were down nearly 31 percent from April 2005 to 3,705 transactions.”

“Harvard’s housing center attributed continued price gains around the country to the lending industry’s development of adjustable loans that enable people to buy costlier homes. The report was optimistic about the ability of home buyers to handle adjustable loans. For most homeowners, increased mortgage payments are still several years off. Homeowners generally have ’sizable equity stakes to protect them from selling at a loss, even if they find themselves unable to make their mortgage payments,’ the report said.”

The Valley Voice. “The Tulare County Association of Realtors reports as of June 1 the inventory of existing homes for sale reached 1690, up from 1541 in early May of 2006. These numbers compare to just under 400 homes for sale this time last year.”

“A second more detailed report done by Icenhower Real Estate of Visalia focuses on both new home builders in the Visalia area as well as the market conditions for existing homes. ‘We needed to get a handle on what was going on,’ says Brian Icenhower who worked on the report.”

“‘We found there is an excess of 70 subdivisions being marketed in the Visalia area alone,’ says Icenhower and the competition in new homes and volume of product ‘has driven down prices for both new houses and existing homes.’”

“The pace of building has not let up in Visalia, the city reports, with an expected 1400 to 1550 new homes likely to built this year.”

“The Icenhower report details that of the 845 existing homes for sale in Visalia, 283 or one third of them are vacant. Icenhower says that’s due largely to the fact so many homes in recent years were purchased by investors.”

“The report details what new home builders are marketing in their Visalia subdivisions with most now offering a 3% commission (some go to 4% commission) as well as incentives that range from $2,000 to $20,000.”

“MLS figures for June show pending sales are about 50% of what they were last June signaling slower sales even as the home selection grows for both new and existing homes.”

“Icenhower says the ‘the numbers kind of shocked me’ especially when you add in the amount of residential land and lots already available in the city.”

The Arizona Republic has this rare report on the housing market in the north. “The slowdown that has hit the Valley’s housing market is spreading. Home sales are down and so are some prices in central and northern Arizona’s second-home communities. The number of homes for sale in Payson, Sedona, Pinetop-Lakeside and Strawberry has shot up this year as the number of buyers plummeted.”

“As in metropolitan Phoenix, overly zealous homeowners in these smaller towns are cutting prices to sell houses.”

“‘Last year, a lot of buyers mainly from Phoenix were clamoring for the same homes in Payson,’ said (realtor) Susan Keown in Payson, where the number of homes for sale has tripled in the past year. ‘Some were willing to pay more than what the houses were appraising for.’ But, she said, those buyers and bidding wars are gone.”

“That is partly because many potential buyers for houses in central and northern Arizona are homeowners from the Valley who can no longer afford second homes. Higher payments on adjustable-rate mortgages and home equity lines are cutting into the monthly budgets of more Phoenix-area homeowners. Some people trying to sell in Payson, Pine and Pinetop-Lakeside have primary residences in metropolitan Phoenix but can no longer afford two homes.”

“Also putting a damper on second-home demand is shrinking home values because of dipping prices in some Valley neighborhoods. Then there are those who want to buy but can’t because their houses won’t sell in the slowing Valley market.”

“Home listings in Arizona have quadrupled in the past year to reach almost 43,600. Valley home prices have been flat since October. Through May, used-home sales were down 34 percent from last year.”

“Home prices overall aren’t down in many central and northern Arizona towns, but sales are closing for less than the listing prices, primarily because some sellers are overpricing homes. ‘The slowdown here hasn’t been as pronounced as the one in the Valley,’ said (realtor) Cliff Potts in Payson. ‘Prices are holding, but sellers have to be more realistic.’”

“High-end home listings in Flagstaff have climbed during the past year. And, in Sedona, listings were up 129 percent in May from last year. ‘We have already seen some price reductions,’ said (realtor) Ray Jegge in Sedona.”

“But it’s still not clear whether this is the time to find the best second-home bargains in Arizona’s high country. As in the Phoenix area, real estate market watchers are still guessing when the housing market will hit bottom. ‘This is prime season for buying in northern Arizona,’ said John Foltz. ‘I doubt we will see anything definite on how much that market will slow until fall, when demand traditionally falls off.’”

The Idaho Statesman has this update on speculation. “Out-of-state investors have driven Treasure Valley single-family home sales to record levels. Soon they could be the market’s undoing, some local housing-industry leaders say. Since 2004, California investors have poured millions into homes here. Their plan: rent out the properties until prices were high enough to resell the homes at a profit.”

“There are no definitive statistics indicating exactly how many area homes are owned by investors, according to the Idaho Home Mortgage Association. But Ada County Assessor Bob McQuade offers a clue.”

“A home not occupied by the owner is ineligible for the state’s property-tax exemption, he said. Statistics compiled by McQuade’s office show that 28 percent of 128,388 homes in Ada County, or 35,948 single-family units, did not qualify for the homeowner’s exemption this year. That’s up from 22 percent, or 25,375 out of 115,345 homes, in 2004. That’s an increase of more than 10,500 ineligible homes in two years, more than 40 percent.”

“‘All we can do is assume then that a large portion, maybe in excess of 90 or 95 percent, of the non-occupied residential properties are investor-owned,, McQuade said.”

“George Tallabas, a veteran real-estate agent in Nampa, said, ‘We had people from California coming here, buying up entire blocks of homes, and writing checks for $2 million or $3 million.’ That’s not happening any more, he said.”

“Tallabas said: ‘We had some very brash investors come in here thinking that it (the boom) would last for another five years. They scare me now, because they could begin dumping all those homes.’”

“Higher home prices, rising interest rates and stagnant wage growth are making it difficult for investors to get the rents needed to cover their loans, housing-industry leaders say. And that could cause thousands of single-family homes to be dumped on the market, lowering housing prices and undermining a building boom that has been propping up the Treasure Valley economy.”

“‘Those things have all the makings to cause investors to sell out and take their money someplace else,’ said Don Hubble, owner of one of the first builders in the Valley to stop selling to investors.”

“A recent survey of 1,237 investor-owned single-family rental homes managed by 51 local members of the National Association of Residential Property Managers found that that 11 percent of the units were vacant.”

“The signs of a national slowdown are adding to local concerns. The National Association of Realtors this week predicted that U.S. housing sales will be off 7 percent this year. ‘I attended a recent real estate class where one of the instructors said there are currently 35,000 single-family homes for sale in Phoenix,’ Tallabas said. ‘And a third of those are owned by Californians.’”

“For investors who have been bankrolling their investments in Idaho by selling homes in other states, a slowing U.S. market is creating problems that are already affecting Idaho, said Rob Rose, a California investor with multiple properties in the area. ‘All the people that I’m associated with that purchased (investment housing) in Idaho are doing well with their investments, although, none of us are interested in purchasing anything else at this time,’ Rose said.”

A pair of housing bubble reports from Florida. “The real estate bubble may be showing signs of bursting around the country, but Realtors in Alachua say there’s nothing to fear. ‘The bubble or whatever you read about in the national news was driven by investors,’ said broker Tommy Macintosh. ‘Our market has never really been an investor-driven market.’”

“Last year’s housing market was feverish, said Lorraine Handler. ‘(Houses) were selling almost before you could get the sign up,’ Handler said. Since then, the market has slowed in some respects but several factors are keeping it strong.”

“Tony Boothby said houses are staying on the market longer and listing prices are going down, but for the most part selling prices aren’t. ‘It’s been a seller’s free-for-all the past couple of years,’ Boothby said.”

“Even though local prices have risen dramatically in the past few years, they’re still attractive to buyers from other areas, Handler said. Brenda Forrester recently showed a $279,000 townhouse to a couple from California. They remarked that a similar home would sell for at least $700,000 where they were from. ‘There are still bargains to be had in our area,’ Jim Forrester said.”

“The future of the market looks bright, they said. Realtors don’t expect the flow of buyers to slow any time soon.”

The Herald Tribune. “Homeowners here in Manatee County are selling before they go into foreclosure and are able to because there is still a demand for housing, real estate agents say. (Realtor) Dorothea Sandland helps do just that. She said she frequently sees people in financial difficulty.”

“‘These people don’t have a home but at least they’re not going into foreclosure,’ she said. ‘It’s always better to sell than to go into foreclosure and have something bad behind your name.’”

“Broker Leland Wallace said he has seen an increase in the number of homes listed for sale and clients have dropped prices on investment homes and condos when they have not sold quickly. He said he has not personally seen an increase in the number of foreclosures in Bradenton.”

“‘Whether or not that changes in the next few months, that’s hard to say,’ he said. ‘There are so many investors who bought last year.’”

“Steve Schneider, president of the Florida Association of Mortgage Brokers, said supply and demand will dictate whether properties will move. ‘Properties are sitting a lot longer on the market than they were,’ he said. ‘With all the inventory out there, I think people are going to be taking a lot less for their property than they thought they would.’”

“Speculative buying could get people into trouble, he said. Some people buy homes with the intention of flipping them, he said, and they have trouble making the mortgage payments when insurance rates, interest rates and taxes increase and they cannot sell the house in the time they had anticipated.”

“Kevin Gill, a mortgage broker in Bradenton, is optimistic that the future rate of foreclosures won’t increase. ‘People want to move here. People want to live here. There’s never going to be a housing bubble in Florida or California because the demand here is too great.’”

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