The Housing Bubble

The Sacramento Bee reports the conversion bust has arrived in California. “A national housing trend called ‘repartments’ has hit the Sacramento area, leaving people like Violet Vernon wondering if she’ll ever be able to sell her home. The 1,100-square-foot Folsom condominium she bought in January for $318,000 is surrounded by what the Wall Street Journal dubbed repartments.”

“The owner of the 324-unit Waterford Place, on Natoma Station Drive, sold about 40 units as condominiums and then reverted the rest back to rentals. ‘The prices in Folsom were out of my range and this represented an opportunity for me to gain home ownership,’ Vernon said. ‘My concern now is that I may not be able to sell or refinance. I don’t know that I can find a buyer.’”

“Waterford Place is one of the first complexes in the Sacramento region to repartment, but the practice is more common in Florida, Las Vegas and Southern California, real estate experts say.”

“‘The occurrence of what could be called broken condo deals began in some of the markets that saw a boatload of new condo conversions,’ said Marc Ross, an associate at CB Ellis. ‘We’ve seen condo conversions that have reverted back to becoming apartments throughout the United States.’”

“Three years ago, new condominiums and apartments converted to condos were a bare 2.2 percent of new-housing sales in the six-county Sacramento region, El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties. In 2005, they reached 18 percent. Last year, the city of Folsom approved the conversion of 488 units to condominiums and had received proposals for the conversion of 944 more.”

“Waterford Place was the first, with units going on sale July 16, 2005. When sales slowed to a trickle, the sales office closed in May. Waterford Place executives said they understand residents’ concerns and never intended to have rental units in the complex, but that the slowing condominium market prevented them from following through on sales.”

“The Waterford Place condominiums vary in size, and prices started in the low $200,000s up to about $300,000. Rents range from $925 to $1,300 per month.”

“Jon Moss, senior vice president of Prometheus, said the complex ‘will be kept at a class-A level.’ Moss said his company is researching what problems, if any, owners may have with refinancing or selling their units. Ross said the challenge is not finding a lender but that the value of the unit often decreases if it is surrounded by rental properties.”

“Vernon has contacted Prometheus numerous times to no avail. She said the owners should have foreseen a slowdown in condominium sales when they purchased the complex in 2005. ‘They can always get another investor. I can’t,’ Vernon said. ‘I don’t know if I can rebound from this.’”

The Las Vegas Review Journal reports on the fall-out from failed condo projects. “Broker Beverly Lacey will show high-rise luxury condos to clients if that’s what they want to see, but she feels obligated to warn them of the challenges and pitfalls exposed by Las Vegas projects that have fallen by the wayside. Lacey said she was heavy into sales at Krystal Sands and Aqua Blue last year when developers canceled the projects. It cost her about $200,000 in commissions.”

“‘You’ve got to roll with the punches. Yeah, I ate it for a couple hundred thousand in commissions, but you have to move forward,’ she said.”

“Lacey is among a handful of brokers who worked long hours catering to clients and building relationships with developers only to be left hanging over defunct projects such as Krystal Sands, Aqua Blue, Hard Rock Hotel, Ivana Las Vegas, and Icon.”

“Several lawsuits alleging breach of purchase contract have been filed on behalf of buyers as a result of the Las Vegas high-rise fallout. Most brokers will never see payment. High-rise failures in Las Vegas reverberated to Wall Street, where financial institutions have become more leery about making construction loans. The failures have also put a crimp in brokers’ bank accounts.”

“Broker Bruce Hiatt said he only sells condos that pay advance commissions early in the process; commissions are nonrecourse, meaning they don’t have to be paid back if the project fails. ‘Very few can play in that game,’ Hiatt said. ‘This way we..earn at least part of the commission if the project doesn’t go forward. It’s time the high-rise developers realize the game rules have changed and luxury high-rise brokers are onto the game of the land flippers.’”

“Hiatt said he felt misled by developers who used his time and services to pump up the value of their land to flip it. Such situations caused agents to ‘lose face’ with their buyers, many of whom became disenchanted with Las Vegas after their negative experiences.”

“A number of top-producing brokers got stung when Related Las Vegas canceled Icon in January, said Paul Murad, developer of the proposed Gateway Las Vegas high-rise in downtown Las Vegas. Some of the brokers had purchased units and were anticipating appreciation gains. Others had clients who bought at Icon and they were counting on commissions and making purchases based on future earnings, Murad said.”

“‘Realtors were confident that their payday would arrive because companies like Related seldom cancel publicly announced projects,’ he said.”

Some housing bubble reports from Wall Street and Washington. “Zacks Equity Research, Chicago, has made H&R Block its ‘Bear of the Day,’ a stock expected to underperform the markets over the next three to six months. Block is the parent of Option One Mortgage Corp., and recently reported earnings of $490.4 million ($1.49 per share) for its fiscal year, down from $623.9 million ($1.88 per share) for the prior year.”

“Zacks said, ‘as expected, earnings in fiscal year 2006 were at the low end of previous guidance. Competition remains intense in the tax business, while fundamentals in the mortgage business continue to deteriorate.’”

“A top lawmaker on Wednesday said he asked the U.S. Justice Department to investigate whether former Fannie Mae executives perjured themselves in testimony before his subcommittee in 2004. ‘The accounting fraud at Fannie was despicable and demands punishment, but these men also had an opportunity to come clean, swearing an oath to tell the truth, which I believe the evidence shows they clearly and arrogantly flouted,’ said Richard Baker of Louisiana.”

“Under U.S. code, the punishment for making false statements before Congress is up to five years in prison.”

“Legislative action has been stalled in the Senate over the issue of limiting Fannie and Freddie Mac’s massive holdings of mortgage-backed securities. The White House supports such limits, arguing that a crisis at either company could ripple through financial markets and the U.S. housing market.”

“But there are signs the administration may not be willing to wait for congressional legislation to reform the giant housing lender. Tuesday, Treasury Undersecretary Randal Quarles said his agency will review the process it uses to approve requests by the mortgage companies to issue debt.”

“Secretary Alphonso Jackson said separately on Tuesday that the Department of Housing and Urban Development would probe whether Fannie and Freddie Mac are improperly holding billions of dollars in assets and liabilities.”

“Federal Reserve Board Governor Susan Schmidt Bies said consumers so far appear to be handling the gradual re-setting of adjustable rate mortgages, which raise their payments. She said some industry evidence indicates that delinquencies for these types of loans ‘may be on the uptick,’ adding that delinquency rates for loans issued in 2005 in most cases are higher than those for comparable loans issued in prior years.”

“‘Some industry observers believe that the increase in delinquencies for loans issued in 2005 is directly related to the continued easing of underwriting standards and the increased use of risk layering practices,’ such as accepting less documentation for loan applications and failing to assess a borrower’s ability to cope with a higher interest rate, she said.”

“Bies reiterated her concerns that real estate loan concentrations are high relative to capital, especially for smaller banks with assets of $100 million to $1 billion. The concentration level for these banks is about 400 percent of total capital, or twice the level of the late 1980s and early 1990s, a period of considerable loan loss problems in the banking industry.”

The Union Tribune follows up on the Dataquick numbers. “San Diego County housing prices took their biggest-ever spring stumble last month as the median sales price fell to $490,000, down $15,000 from the previous month. The median price was just $2,000 higher than it had been a year earlier and was down 5 percent from the record level of $518,000 it reached in November, according to DataQuick.”

“Sales were down for the 23rd straight month and inventories of unsold homes topped 19,800, a 7.1-month supply.”

“The decline in prices was concentrated in new housing, a historically volatile category. For newly built homes, condos and condo conversions, the median dropped from $495,500 in April to $424,000 in May, the second largest drop in that category since DataQuick began its record keeping in 1988. January saw a $104,000 drop from December.”

“University of San Diego economist Alan Gin said the sudden decline probably reflects builders’ discounts on asking prices and similar reductions at the many apartment complexes that have been converted to condominiums.”

“On a neighborhood-by-neighborhood basis, DataQuick figures showed that 51 areas had higher overall prices than a year ago, while 36 were lower. Among the significant increases in the single-family-resale category was 66.8 percent in La Jolla to nearly $2.4 million on 26 sales and 20.8 percent in Poway to $777,500 on 50 resales.”

“Among significant decreases in the new category was a 60.3 percent drop in Rancho Bernardo’s 92127 ZIP code area, where prices dropped from a median $1.2 million on 29 homes in May 2005 to $491,250 on 66 homes this May.”

“On one cul-de-sac in 4S Ranch, located in that ZIP code, seven of the 13 homes are on the market, all priced at $1 million or more. Homeowner Jennifer Harper, whose 4,432-square-foot house is on the market for $1.25 million, said her husband has a job transfer opportunity in Denver. ‘If our house sells for what we want, we’re going to go,’ she said. ‘And if it doesn’t, we’re going to stay here because we actually love 4S Ranch. But we just can’t pass up an opportunity to move somewhere different.’”

“Her agent, Scott Voak, said it is simply a coincidence that half the block is selling, some to move up to even more expensive homes in the area, others to take new jobs elsewhere.”

“A couple in Mission Hills wants to move east but can’t until their buyers, a couple in North Park, sells theirs. ‘We were a little apprehensive and saw a lot of homes on the market,’ said Mara Conner, who with husband Fabio Tucci wants to move to Mission Hills for better schools for their two preschoolers.”

“In El Cajon, Michael Lopes and his wife, Sarab, put their 1,147-square-foot town house on the market in October and had no offers. Then they hired Calvin Goad last month, cut the asking price from $380,000 to $348,000 as he suggested and now are getting interest.’He’s terrific; he’s generated a lot of activity,’ Lopes said of Goad.”

“Horace Hogan, president of the Building Industry Association of San Diego County, said builders are cutting back on building new homes. If they continued building at a quicker pace, he said, builders would lose money because of the amount they have spent already on land and materials.”

“Gin, the USD economist, said he would call the present market a ‘plateau,’ following the proverbial ’soft landing.’ ‘There are two questions,’ he said. ‘Are we going to fall over the cliff or if we don’t, how long is the plateau going to be. I’m not in the ‘crash’ category. I see things relatively flat for the next couple of years at least.’”

A pair of reports from the north-eastern US. Connecticut, “Facing tougher competition, Greater Hartford homeowners hoping to sell their property may have to consider lowering their asking prices as the number of homes on the market increased for the ninth month in a row.”

“The Greater Hartford Association of Realtors reported that the number of single-family homes on the market in its 57-town area rose to 5,296 in May from 4,011 in the same month a year earlier, a 32 percent increase. ‘We haven’t seen that number of houses on the market since the late ’90s, so this is a big number,’ said Ronald F. Van Winkle, a West Hartford economist.”

“The inventory continues to inch closer to that of the mid-1990s, when the number in Greater Hartford grew to more than 6,000 as the market struggled to pull through a housing collapse.”

“Real estate agents said sellers may have to lower their expectations about what their home may sell for, and buyers are starting to gain a bit more leverage in negotiations. ‘If a home is on the market and has several showings, and nobody’s making an offer..then the reality is they are going to have to look at the pricing on it,’ said (realtor) Cile Decker in South Windsor. ‘The sellers have to face that reality at some point, and perhaps lower the price.’”

“New listings increased about 12.3 percent from April to May. Van Winkle said the jump could mean that sellers are beginning to anticipate the slowing market.”

“‘I guess if you’re thinking about selling your house in the next year, you’re thinking, `Let’s get our house on the market before it slows more.’ That’s part of what’s causing the inventory to go up,’ he said. ‘If you’re thinking about retiring or considering selling your house, this might be a good time because we are nearing the peak of the housing market in Connecticut.’”

The Long Island Business News. “Buyers and sellers appear to be in a standoff, according to the latest numbers provided by the MLS of Long Island. Homebuyers are awaiting a price plummet, and now sellers, too, are holding off, many demanding the selling prices everyone recently bragged about.”

“The rapid ascent of housing prices appears to be over, at least for now, and while both sides wait for the other to budge, Islandwide inventory is rising. Regional housing inventory spiked more than 50 percent in the last year.”

“May’s residential inventory soared to 27,174 regionally, up almost 52 percent from a year ago. Suffolk buyers can pick from 11,817 available residences, up 50 percent from the 7,862 available a year ago. Nassau, meanwhile, has 8,351 available, a 57-percent rise.”

“(Broker) Mark Malsky says business is picking up. ‘I’m not going to say it’s anything like last year, but it appears to be moving in the right direction,’ Malsky said.”

“Another agent disagreed. ‘This is supposed to be the busiest time of the year and it’s real, real quiet,’ said Bart Bleiweiss, an associate broker. ‘Buyers are real slow pulling the trigger.’”

Some housing bubble reports from Florida. “The housing standoff between buyers and sellers in South Florida will continue for another six months, and then prices in some areas will fall, a well-respected economist predicted Tuesday. In some cases prices may fall by 10 percent to 15 percent, said David Lereah, the National Association of Realtors’ chief economist.”

“‘We are not in a crisis but a transition,’ said Lereah. ‘I am very bullish in the long term for real estate in Florida.’”

“Lereah pegged the end of the housing boom to August 2005. That’s when mortgage rates crept up and speculators fled. Now, he said, home sales are declining. And the inventory of homes for sale has ballooned because stubborn sellers refuse to lower prices and buyers are ever willing to wait it out. Ultimately, he said, sellers will relent.”

“‘When a transitioning market cools, it’s the sales that drop first, and then prices,’ Lereah said. Lereah said speculators are fleeing the market. He contends that speculators are most to blame for huge price hikes. ‘Florida will be better for it with them gone,’ he said.”

“Higher interest rates could pinch. Lereah calls raising rates ‘a mistake right now.’ Many recent buyers, especially in extra-pricey California, financed properties with interest-only loans at adjustable rates. Some buyers could lose their homes, if rates go up even half a percentage point over the next year, he warned.”

From Florida Today. “Single-family homes in Brevard County were over-valued by 54 percent in the first quarter of this year, according to a new study. An economist involved in the study said that could mean a sizable adjustment in the housing market is on its way.”

“Broker Betty McCluskey said she might quibble with Brevard being 54 percent overvalued as the study claims, but there’s no question area prices escalated too quickly recently. ‘Our market got out of control,’ McCluskey said, adding that sellers are cutting prices because of growing inventories.”

“‘On a daily basis, we have properties’ selling price reduced, reduced, reduced,’ she said.”