The Housing Bubble

Two readers suggested inventory as a topic. “‘Topic suggestions?’ How about San Diego inventory? It’s been growing steadily by a 50 to 100 homes a day. On 05/02/2006 SD inventory was 19,494, as of a couple of minutes ago it’s at a mind boggling 21,632 houses for sale.”

Another said, “Zip showed 13,896 on Jan 2, 2006. Thus inventory has grown so far this year at over a 100% annual rate of increase. This is not seasonally adjusted, but I am still guessing that by the end of this year, we will have seen a doubling of inventory from where we started (to over 28K), and this is not a big stretch, given that we are already most of the way there and the year is not even half over.”

The North County Times reports from San Diego. “Sales continued to fall sharply across the board in North County and the inventory of unsold homes on the market has now reached an all-time high for the county as a whole. ‘We are seeing a lot of downward pressure. A lot of buyers are saying, ‘Why should I pay full price?,’ said Carlsbad real estate agent Dennis Smith.”

“And buyers are making low-ball offers, Smith said. But, so far, most sellers aren’t biting, he said. As a result, prices are staying high and even edging up for the relatively few properties changing hands.”

“Every month so far this year, home sales have fallen sharply all over San Diego County. Sales declined 18 percent year over year in January, 17 percent in February, 16 percent in March and 34 percent in April.”

“Sales have declined every month in North County, too. And in May, the single-family sales total of 833 was 22 percent off the May 2005 pace of 1,063 homes. North County condo sales, totaling 370 last month, were off 10 percent from 411 in May 2005.”

“Earlier in the year, some real estate analysts expressed optimism that a busy spring would eclipse concerns about sharp year-over-year sales declines during winter. Instead, the trend has continued and the inventory of unsold homes on the market reached 8,503 in North County at the end of May.”

“Countywide, the inventory had reached 19,674 as of 3 p.m. Friday, a new all-time high that has eclipsed a previous mark set 11 years ago during the recession, Smith said. And the number keeps rising by close to 50 homes a day.”

“‘By the end of the month we should be over 20,000 properties,’ he said.”

“While economic experts suggest that the market cannot sustain its high prices indefinitely because wages have risen much more slowly in recent years, Smith said a sharp drop is unlikely. ‘Eventually, prices are going to have to come down some,’ he said. ‘What’s ultimately going to happen is, some people are going to have to sell and they may begin to take lower prices.’”

A pair of reports on the housing bubble in full-swing. “Rural Hill Country communities have become a favorite of buyers from California. High taxes, inflated property values and a higher cost of living are prompting more Californians to leave the state and buy property in other parts of the country.”

“Now there are signs that the appreciation in California home prices may be peaking, and that values could soon begin declining. If this trend pans out, then the rush to sell could accelerate.”

From My San Antonio. “Morning comes to the foothills of the Texas Hill Country, and everything appears to be in the sight line of a surveying crew. Construction began on nearly 16,500 new homes last year. That’s up 27 percent from 2004, part of a trend that has held steady for 15 years.”

“Jack Inselmann’s projections for 2006: 18,000 housing starts. It’s not just new construction. All housing, experts say, is good housing in the Alamo City. Builders and real estate officials are cautious in their description of the growth. They shy away, for example, from calling it a ‘housing boom.’”

“‘I’ve never seen anything like this,’ said Rick Barnett, who has been a builder since the 1970s. ‘All sectors are seeing tremendous growth,’ said (builder) Ralph Rodriguez. ‘The steady growth across the entire spectrum of prices has resulted in growth in all parts of town. It’s not just the North Side anymore. It’s everywhere.’”

“The city’s building renaissance has its roots in failures 20 years ago. In the late ’70s, however, a housing boom pushed the city out to Loop 1604 and beyond. The trouble, builders say, was that it was built on a foundation of bad business plans, flimsy financing and specious demand.”

“The bubble burst in the early ’80s, taking subdivisions, builders, and hundreds of savings and loan associations with it. The bubble, said (builder) Dean Morris, occurred because of cooked numbers, demand exceeded supply and housing appreciation was higher than inflation.”

“‘There was some growth,’ said Art Burdick, a custom builder who specializes in luxury homes, ‘but it was all smoke and mirrors.’”

“For the builders who survived the financial purge, this was akin to Christmas arriving early. Cheap money. Pre-fab land. ‘It was there for the taking,’ said Rodriguez, ’so we took it.’”

“The highly coveted North Side is filling up, Barnett said, pushing buyers to the east and west. Already, developers are divvying up the land west of Loop 1604 on the West Side. Until that’s ready, Kessler said, existing-home values will continue to appreciate, and that has lured out-of-state investors, who see the bargains on every block in the current housing market.”

“Those investors, in turn, drive up costs by their purchases. No one expects it to end.”

Several readers suggested a discussion of the housing bubble and ‘flyover country.’ “How about a topic about large cities in flyover country that are NOT part of the bubble? Where you can still (today) get the dream home for under $300K. I’m thinking say Columbus,OH, Memphis, Fort Worth, Houston, Albequerque(?), Pittsburg, Richmond, Charleston, etc. Plenty of places other than DC/SF/NYC with all the quality of life you could want.”

“I moved from DC. When my previous employer asked me what it would take to make me stay I said, ‘Double my pay or pay off my mortgage.’ They declined (obviously) and I moved. Kept the same pay, dropped the state and local taxes (even my real estate taxes dropped (rate up, how much I pay way down)), commute went from 1 hour to 15 minutes and got a much better house.”

“Most big companies do not adjust pay scales for differences in cost-of-living (at least not enough). I pay my engineers the same reguardless of them living in LA, Fort Worth, or Atlanta. My last company payed their people almost the same (within 5%) no matter if you lived in San Antonio or DC. You don’t have to take a pay cut, or much of one, that’s a myth.”

“‘Plus I get to go to my kids soccer games, swimming lessons, and put them to bed. Something I missed a lot of working in DC, spent that time stuck in traffic. Can’t trade that time for money. ”

One replied, “Agreed. A quality of life decision vs. staying in the rat race. Does the Cost of Living adjustment b/w cities justify the monthly mortgage payments? Are you a richer person on 50k/yr in MI than you are as a 100k/yr person in San Fran?”

Another said, “I live in NJ. My brother pays $11,000/yr. in property taxes alone. I think it’s time to leave, even if the home prices do go down.”

From Boston, “Good to hear. My wife and I are considering a move from Boston to near her family in MI. I don’t know if I want to wait 2+ years for things to bottom out here…” From California. “I doubt there is any place in the US that is not part of the bubble. And as goes California so goes the nation.”

From Ohio, “Ohio IS bubble central. They have done nothing but build new homes over the past several years. My family in Ohio actually believes there is a bubble, unlike most people I know in CA. I keep a close watch on Ohio because I want to move back there (Oakwood in the Dayton area specifically). I’m waiting for this GM thing to play out though. I have an agent in Columbus (my other area of interest) who calls me constantly with ‘investment opportunities.’”

Another agreed, “Ohio is also one of the most lax states when it comes to lending regulations, and leads the nation (I believe) in foreclosures at the present time (due to lax regulations and job losses in manufacturing).”

A reply, “I don’t think you’ll find 2+2 condos, like the one up the street from me, on the market for $1.3 million in Ohio. Your family in Ohio doesn’t know how good they have it.”

From Tennessee, “I live in Memphis, and there is a housing ‘bubble’ on the outskirts; places like Germantown and Southaven (technically in MS) where houses are going for a million change, but these are huge houses, usually on a good bit of land. I still think that there isn’t enough granite countertop in the world that would make living in houses that all look alike worth it, but then I’m one of those ‘crazy’ people who believe that a house is a shelter, not an investment.” ”

‘We just purchased a house for 96K, 4bd/2bh, 2300sqft, on 1.68 acres of land, less than 20 minutes away from downtown and from both of our jobs. *smiles* we took out a 100% loan, but it was a fixed 30 yr, despite my friends and coworkers advice to take an an I/O Arm. I politely told them they were out of their damn minds, but I don’t think my message really got across.”

The Sacramento Bee has this update on the California housing bubble. “As Sacramento’s housing slowdown continues and more existing homes sprout ‘For Sale’ signs, home builders are ramping up the deals. What started late last year with free granite countertops now has escalated at places like Antelope’s Winncrest Homes, where upgraded carpets, kitchen cabinets and lighting are in the offing.”

“Beazer Homes is promising $20,000 to $65,000 off. Some Centex Homes buyers can get a $125,000 price break. KB Homes has run ads offering $1,000 gift cards for buying in Yuba City, Natomas and Woodland. Pacific West Cos. hands out $10 gas cards for touring condos in Elk Grove and West Sacramento.”

“‘We’re going to look at every objection and we’re going to overcome that objection,’ said Vince Brennan, at D.R. Horton’s Sacramento division. ‘No secrets,’ he said, ‘it’s a buyer’s market.’”

“Greg Gross of Metrostudy say Sacramento-area builders are competing with a glut of resale homes at the same time they’re seeing more canceled contracts for houses already started. Meanwhile, they continue to build, even after selling 2,371 fewer homes during the first four months of 2006 than in the same period in 2005.”

“Greg Paquin estimates 20 percent of the region’s new homes are ’standing inventory,’ finished houses without buyers. Many come with $40,000 to $80,000 worth of buyer incentives. ‘The builders don’t want to carry it so they will make incentives to get it off the books,’ Paquin said.”

“In some ways, builders have begun imitating car dealers, advertising 48-hour ‘House Hunts’ at KB Homes, ‘Zero Days’ at Meritage Homes and the ‘biggest new home sale in the history of D.R. Horton.’ Others quietly send cards to ’special guests’ with offers of backyard landscaping and no closing costs.”

“The shift testifies to both fierce corporate competition among the nation’s biggest publicly traded builders and to the region’s growing accumulation of resale homes.”

“There, too, real estate agents and sellers are testing incentives. In El Dorado Hills, Don and Suzi Garofano are offering a new $35,800 Jaguar automobile as enticement to buy their $1.67 million home on 10 acres overlooking Folsom Lake. ‘You gotta be real creative,’ Don Garofano said.”

“As May began, new-home builders were competing with 11,344 existing homes for sale in El Dorado, Placer, Sacramento and Yolo counties. That’s expected to climb another 1,000 homes when numbers for the entire month are released next week. ‘We put up 900 more signs in May than we took down,’ said Jim Eggleston, who installs more than 90 percent of the region’s For Sale signs.”

“Another 1,000 homes on the market would rival the 12,361 homes for sale in June 1993. The record is 13,507 in April 1992, according to a Sacramento researcher.”

“These competitive factors have driven home builders in Sacramento to marathon flexibility. ‘Some buyers want it off options. Some want it off the sales price. Some need help with closing costs,’ said Pautsch of Centex, which builds as many as 900 homes in the region each year. ‘We’re very flexible on that.’”

“‘It may be they don’t have money for a down payment,’ said D.R Horton’s Brennan. ‘We have 100 percent financing. We can incentivize on closing costs. If they can’t qualify, we have a homebuyers club for credit repair. If they can’t afford the payment, we bought like $84 million at 4.85 percent and can use that as needed. If that’s the problem they have, we can use our concession money for lower interest rates.’”

“Texas-based Horton, the nation’s most productive home builder, sold 1,021 homes in the Sacramento area last year out of a nationwide stock of 51,000. Despite the backlog of unsold homes, the company aims to boost production 20 percent in the region this year.”

“‘We have our business plan and we’re keeping pace,’ Brennan said. ‘If we slowed down our building, we would have to abandon our goals.’”

The Arizona Republic reports on the May numbers. “Stubborn home sellers holding out for big money are clogging metropolitan Phoenix’s housing market. Too many of these homeowners haven’t shaken off the hangover of last year’s home-buying binge. Market professionals say many owners continue to believe that the neighbor who sold for top dollar last year set the market price, not the other neighbor who cut thousands from the listing price before selling last week.”

“‘People are unrealistic about what their homes are worth,’ said (realtor) Brooke Castaneda. ‘A lot of sellers thought their homes would have these phantom profits. They’re not accepting that that isn’t the case anymore.’”

“The Valley’s housing market is unrecognizable from a year ago, when there were about 9,400 houses on the Arizona Regional MLS system in May. Now, the figure exceeds 43,000, a record.”

“Housing experts blame some of the longer selling time on overpriced houses, which linger on the market and push up inventory. That sends a message to buyers: There are plenty of houses. Keep shopping. Hold out for a bargain. With sellers not selling and buyers waiting, the market can falter. That’s not good news in metro Phoenix, where at least $1 of every $3 generated in the economy comes from housing.”

“Some owners have put their homes on the market simply to see how much they can get for them. Those sellers stick to their unrealistic sales prices because they don’t need to sell. Motivated sellers are beginning to drop their prices, in some cases by tens or hundreds of thousands of dollars.”

“But some sellers must stick to their prices even if they are too high because they tapped their home equity with credit lines, assuming last year’s big gains in appreciation would continue. Now, these owners must sell for a certain figure to pay off all the home’s debt. Some of them have contracts to buy new homes and are expecting to make a target amount on their existing home to keep their new mortgages affordable. They’re stuck in an equity trap.”

“‘They have to be more stubborn,’ said Joel Auernheimer an agent in Phoenix. ‘They have to sell it at market price plus $20,000 so they don’t have to bring cash to the closing.’”

“Buyers see listings climbing, houses lingering on the market and price being reduced and conclude that the signs are pointing to an eventual drop in prices. So they wait.”

“Agents say investors are dispassionate and realistic about setting prices. Typical homeowners may have a stronger connection. Those sellers use a different method to calculate value and can be insulted when a potential buyer disagrees. ‘It’s an emotional thing,’ said (realtor) Diane Watson. ‘It’s a matter of pride. They think their home is going to defy the law of supply and demand.’”

“Tricia Urata of Queen Creek and her husband are trying to sell their house, but they think they set the price too high based on an agent’s advice. The couple listed the house for $339,000 in March and signed a six-month contract with the agent.”

“Now, Tricia Urata says no serious buyers have looked at the house and the agent won’t cancel the contract or lower the price, which Tricia thinks should be about $289,900. She is worried that buyers will ignore the house during the crucial summer selling season and wonders if she and her husband will be able to move into the new home being built for them.”

“‘We are very unhappy with our own experience,’ she said. ‘I don’t think we’ll ever sign with a Realtor for more than 60 days, and we won’t sign with anyone who says we can’t cancel at any time.’”