The Housing Bubble

A pair of reports on housing speculators. “Even as the market for single-family homes cools in much of the country, individual real-estate investors are seeking out profits by snapping up rental properties far from their home markets. Rather than sticking with their home markets, as they tended to do in the past, apartment owners increasingly are scouring the country for what they see as the most promising deals.”

“Landlords in California, for instance, are moving torrents of money into Arizona, Nevada, Texas and other states. Many Californians believe property values in their own market are peaking. So they want to take profits there and invest in less-expensive areas with better long-term prospects.”

“The rush by investors to expand geographically has already spurred something of a buying frenzy in some markets, which has pushed up prices in such places as Phoenix. That in turn has pulled in more investors, eager not to miss out before prices go even higher.”

“Venturing into unfamiliar turf can be treacherous, though, as some of these investors are finding. ‘These guys used to be local,’ says Dan Fasulo, director of a research firm. ‘They used to buy what they could drive to. Now state lines don’t matter anymore.’”

“Tracy Tippetts, who lives near San Diego, decided in 2004 it was time to take profits on about 55 rental units he owned in that area. ‘I knew that Phoenix was going to be the next big market,’ he says. Mr. Tippetts then invested $2.3 million in four buildings managed and partly owned by Eddie Klugman.”

“Mr. Tippetts says the value of the buildings has jumped as much as 50% since he invested. But, he says, the rental income he has received so far has been far lower than what was projected, and that Mr. Klugman has failed to respond to questions about the performance. When Mr. Tippetts made an unannounced visit to one of the properties in March, he saw police making arrests and wrecked cars in the parking lot.”

“Phoenix police confirmed the building had more than 400 police calls in the past two years, including more than 20 involving gunshots or assaults. Mr. Tippetts says he now is reviewing his options on what to do with the investments.”

“Mr. Klugman concedes that income from some of the properties has been lower than expected. But he says Mr. Tippetts should be happy because the value of the properties is up sharply. ‘The bottom line is Tracy is stupid’ to complain about the situation, Mr. Klugman says.”

The Wall Street Journal. “The adjacent towns of Bryan and College Station, home to Texas A&M University, were ranked as the most ‘undervalued’ housing market in the country in this year’s first quarter by economists.”

“Larry Mariott, president of Mariott Homes Inc., which builds in this area, says that there are more builders there per capita than in most other places and that builders are willing to work for lower margins.”

“The locals are hopeful. California speculators have noticed the phenomenon and waded in, buying houses sight unseen. ‘We’ve sold properties through FedEx and the fax machine,’ says Eric Walley, a sales manager at Stylecraft Builders Inc.”

“But Janet Higgins, a veteran real estate professional in the area, doesn’t think these speculators should get their hopes up. Anyone expecting mammoth price gains ‘isn’t thinking it through,’ she says.”

Some homebuilder news. “KB Home, one of the largest homebuilders in the United States, today reported financial results for its second quarter ended May 31, 2006.”

“‘We are now operating in a more difficult market environment,’ KB CEO Bruce Karatz said. ‘The country’s current-year home sales will likely fall well short of the record rates we have seen in the recent past as the market works through inventory build-ups, including a spike in investor/speculator resale inventory, higher interest rates and higher cancellation rates.’”

“New orders during the quarter fell 19 percent to 9,908 chiefly from more prospective buyers canceling their orders. ‘The impact of higher cancellation rates is evident in the substantial year-over-year decline in our net orders in the second quarter. These conditions will likely persist at least through the remainder of 2006,’ Karatz said.”

“‘KB Home generated solid second-quarter financial results in a progressively more challenging housing market that is struggling to find equilibrium,’ said Karatz. ‘In many regions across the country, market performance has receded from the all-time highs established in recent years, largely due to a sharp reduction of speculative purchases and an over supply in new and resale inventory.’”

“‘Given the decline in new home demand and increase in new and existing home supply, we believe it is prudent to revise our 2006 earnings forecast downward,’ Karatz said.”

“The Company repurchased two million shares of its common stock during the three months ended May 31, 2006. Over the six-month period ended May 31, 2006, the Company repurchased four million shares. The Company currently is authorized by its board of directors to repurchase up to an additional six million shares and plans to continue repurchasing its shares through the remainder of the year.”

From MarketWatch. “Morgan Stanley on Thursday lowered its industry view on home-building stocks to cautious from attractive, citing order declines and rising inventories. ‘A cooling housing market coupled with higher mortgage rates (especially on the shorter-term ARM products) prompted significant levels of inventory to enter the market, which in turn, overwhelmed demand,’ Morgan Stanley said.”

“In spite of solid employment data, higher inventories created a ‘domino effect’ as potential buyers are sitting on the sidelines to see how the market shakes out, the analysts added.”

“Analysts at Susquehanna Financial Group and JMP Securities also Thursday lowered their estimates on the builder group. ‘Late May and early June became the season of confession for builders, as one after another lined up to spill the beans on a very pathetic selling season,’ Susquehanna said.”

“JMP knocked down its estimates on several builders, saying it sees 2007 earnings falling between 20% and 40%. ‘Although we had anticipated sales would decrease at a faster rate than the market’s expectations, we too were surprised by the magnitude of the drops and in particular by how quickly margins have deteriorated,” the broker said.”

From TheStreet.com. “The Washington D.C. housing market continues to see far fewer home orders because of the rising inventory levels in the region, which is hurting homebuilders. Contracts in the greater metro region fell 40% in May, and closings declined 32%, according to a research note from Raymond James analyst Rick Murray.”

“‘Conditions appear to be deteriorating in the D.C. market and we suspect stabilization will not come for some time as immense speculation over the past few years will weigh on the market for some time,’ Murray wrote.”

Some housing bubble reports from California. “Orange County’s skyward trend in new housing is getting another boost with the construction of two condominium towers in Santa Ana. Orange County condo tower development has so far been successful in part ‘because they have attracted some speculative investors,’ said economist G.U. Krueger Irvine. ‘It remains to be seen if these buildings will be occupied by real living people.’”

“Despite a national study that concluded Chico homes are ‘extremely overvalued,’ members of the real estate industry here see a buyers’ market. The high prices have plateaued, (realtor) Brewster Beattie said, and there is an increasing number of homes on the market. In May 2005, there were 163 homes up for sale in Chico. Now, there are 492.”

“‘I think right now the inventory is escalated because people are putting homes on the market too high,’ he said. ‘They’re not selling. It has turned into a buyers’ market.’”

“Carlee Shannon said the market in Orland is showing a similar trend. There are now more than 90 homes up for sale, whereas a year ago there were only 20 to 25. ‘I think it’s because our prices are too high. I believe it’s softening and becoming a buyers’ market,’ Shannon said. ‘There are so few buyers at this time and so many listings out there, so it influences the seller to be motivated. We’re seeing price reductions.’”

“The standoff between thousands of Sacramento-area homeowners and buyers sharpened in May, as 1,800 new listings added to a mounting inventory of homes for sale in El Dorado, Placer, Sacramento and Yolo counties. The newest influx of ‘for sale’ signs contributed to a near-record pileup of 13,146 homes on the market at month’s end.”

“‘What we have is a lack of inventory priced right,’ added (broker) Michael Lyon. ‘We have absolutely a ton of overpriced homes.’”

“As the ‘for sale’ signs pile up, buyers like John Daniels of Sacramento and Alison Munro of Vacaville are holding back, waiting for lower prices. They’re key players in what experts now call a ‘buyer’s market.’ ‘We’re probably going to wait longer than three months just to see,’ said Daniels.”

“Munro, a Fairfield teacher considering a move back to her Sacramento hometown, said, ‘We are looking actively, but I’m kind of watching the prices come down. We’re just waiting it out a little bit longer.’”

The Santo Cruz Sentinel. “Evidence of a cooling trend in the housing market is popping up at several street corners: large clusters of brightly colored ‘for sale’ signs. These real estate signs are staying up longer, and new ones are being planted next to them, creating what some people in the unincorporated parts of Mid-County call ‘visual pollution.’”

“‘It looks like all of Rio del Mar is for sale,’ said county Supervisor Ellen Pirie.”

“Some real estate agents say it’s not so easy to eliminate the clutter. While the abundance of signs doesn’t look good, they say the changing housing market demands aggressive tactics. ‘You have to market the property and you have to work,’ said (realtor) Gregorio Magana. ‘It’s the first time in 40 years that you have such a large inventory of product available.’”

MarketWatch has some news from Washington. “A senior Treasury official warned that Fannie Mae and Freddie Mac shouldn’t expect government assistance if they get into financial trouble. In a speech to a real estate group, Treasury Undersecretary Emil Henry said past government bailouts don’t mean the government will act again.”

“‘Past actions, especially in the case of government bailouts, are not a good predictor of future actions,’ Henry said in prepared remarks to a real estate roundtable. ‘And,’ Henry asked, ‘do we really want to continue down a path that could lead to irresponsible calls for an unnecessary and preventable GSE bailout?’”

“Legislative action has been stalled in the Senate over the issue of limiting Fannie and Freddie Mac’s massive holdings of mortgage-backed securities. Signs are emerging this week that the administration may not be willing to wait for congressional legislation to reform Fannie Mae.”

“On 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 Mae and Freddie Mac are improperly holding billions of dollars in assets and liabilities.”

From Reuters. “Fannie Mae’s $11 billion in accounting errors cost shareholders some $25 billion to $30 billion in losses, the acting director of the Office of Federal Housing Enterprise Oversight told a Senate panel on Thursday.”

“The acting director of Fannie Mae’s regulator on Thursday said the agency continues to find control problems at the mortgage finance company. James Lockhart, acting head of the OFHEO, said he agreed with studies from the Federal Reserve that conclude that the investment activities of Fannie and its sibling government-sponsored enterprise Freddie Mac provide little if any benefit to homebuyers.”

“U.S. Assistant Treasury Secretary Emil Henry Thursday cited ‘new and troubling revelations that Freddie Mac’s accounting and internal controls continue to be in disarray.’”

“Henry said of Freddie Mac that ‘they have recently reported that they can ‘begin’ the registration process’ with the Securities and Exchange Commission only after releasing full year 2006 results. ‘Is it reasonable for Freddie Mac to begin this process over five years after announcing that they would register with the SEC?’ the Treasury official asked.”

“Just as troubling, he said, is Freddie Mac’s recent announcement that it needs to limit the number of internal controls initiatives and defer ‘lower priority’ internal control efforts.”

“‘As a former Wall Street banker, I can tell you that I cannot imagine any non-GSE company being able to maintain its status in the capital markets with such an unremedied speckled past,’ Henry said. ‘Indeed, one (sad) irony of this situation is that the two entities that impose some of the most systemic risk to our system are held to some of the lowest standards of accountability.’”

“Fannie Mae’s top regulator said Thursday that his agency has discovered new ‘control problems’ at the mortgage giant as recently as several weeks ago. James Lockhart said both Fannie Mae and Freddie Mac will take several years to correct their internal control problems.”

“‘Neither of these companies are timely reporting at this point,’ he said. He said Fannie Mae and Freddie Mac ‘are not even close to conforming with Sarbanes Oxley, at this point.’ ‘These companies were so poorly run that it is going to take many years to fix,’ he said.”

“‘Fannie and Freddie, along with their trade association allies, cannot continue to block the Senate from taking up this bill,’ said Sen. John Sununu. Sen. Chuck Hagel said Congress has been continually warned about the risks posed by Fannie Mae’s and Freddie Mac’s activities. ‘We have been warned time after time, year after year, about the systemic failure that’s at risk here. And my goodness, when will the Congress act?’ he said at a Banking Committee hearing.”

The Boston Globe looks at ‘conflicting’ data on rents versus buying. “Gregg Croteau wanted his own place, but as he started looking at property in Lowell, he was so stunned by sky-high asking prices that he decided to keep renting and wait for a bargain. Selling prices, he reasoned, had to come down at some point.”

“Croteau’s case illustrates how conflicting forces are pulling down the region’s housing market, meaning rents are likely to rise more slowly here than in other parts of the United States.”

“Although the Boston area has more competition for apartments, Walter Moloney, the NAR’s spokesman said, that hasn’t translated into heftier rent hikes, because ‘we are losing population as a state and have been for the last several years, so there is less demand in the existing rental stock.’ Also, he said, there is a significant amount of new rental housing becoming available. After ‘underproducing rental housing for years,’ several significant rental developments are now under construction, he said.”

“Jutta Donahue owns a rental property in Stoneham, and in recent months she’s watched as her landlord-related costs have soared. ‘My condo fees have gone up because of fuel costs, and my insurance has gone up, too. Water costs, everything,’ she said from her Woburn office last week. She thought about raising the rent, and then she thought about the consequences of doing that.”

“‘Do you raise the rent and risk a possible vacancy or keep the rent low to keep someone in there?’”

“Donahue decided to absorb the added costs herself because she has a good tenant and wants to keep him. Increasing the rent, she said, would probably force him out. ‘Then my place could go empty for a while, but I’d still have to pay the bills,’ she said.”

“During the not-so-distant housing boom, many property owners in Massachusetts converted two- and three-family homes into condominium buildings, a move that took many rental units off the market. Now there is a glut of condominiums on the market.”

“Tom Meagher, the president of Northeast Apartment Advisors, said that this spring there were 16,372 condominiums for sale throughout the state, an 81 percent increase from the same time last year. Also, he said, 46,000 condominiums are in various development stages.”

“These days, potential homeowners are carefully monitoring the swollen housing inventory and watching as the cost of borrowing money for a mortgage gets more expensive. Croteau has been searching to buy a home for a little more than a year and has noticed two emerging trends. First, homes are on the market longer than they were a year ago.”

“‘There used to be this feeling that if you didn’t grab it, it would be gone in two days,’ Croteau said. Now, he said, prices are starting to come down. ‘I’m confident that I’m going to get something good sooner rather than later.’”

“Many renters feel that time is on their side. ‘There are lots of first-time home buyers who are waiting to purchase, and they are continuing to rent,’ said Jason Weissman, president of Boston Realtors Advisors.”

“Then there are people who have sold their homes and are waiting to buy another but are renting for now. They are waiting to see if prices drop. (Broker) Arthur Horiatis in Cambridge, said that ‘wait-and see’ approach could eventually trigger drops in rents in the suburbs northwest of Boston.”

“‘I think that the rents will stay flat or possibly go down,’ because when homeowners can’t sell their property, they have to choose between lowering their selling price or renting their home, he said.”

The St. Petersburg Times has this housing bubble report from Florida. “For the first time this year, a chill in May’s housing market sent Pasco’s year-to-date building permit growth into retreat, compared with that of the same period last year. As demand cools and speculative investors burn off, inventories are bulging, especially in west Pasco, increasing sixfold from this time last year.”

“In east-central Pasco, inventories are doubling in some listings, by some real estate firm’s rough estimates. In what may be the tail end of a stare-down between sellers and buyers, a buyers’ market may just be coming into full bloom.”

“In May, just 505 permits were issued. In the same month last year, 700 permits were issued. It’s a small dip compared with deeper and longer troughs in the southern Tampa Bay area. But the chill confirms fears of a spillover from a national cool-down, and it shows signs of creeping north.”

“The slowdown follows a trend of growing inventory that began last fall. In west Pasco, inventory ballooned from 800 resale homes and condominiums this time last year to 4,900 currently, said Jennifer France, a past president of the West Pasco Board of Realtors.”

“She blamed insurance rates that have reached $2,300 on a $100,000 remodeled block home. Rates like these have knocked first-time buyers out from qualifying under mortgage debt ratios, France said.”

“In east Pasco, a two-partner Dade City realty had maintained 30 to 40 listings for the past eight months. The inventory has roughly doubled there. There’s just one or two buyers a month, and a six-month inventory. The trend may take its toll not just among investors, but also in one key Pasco industry.”

“‘All those who got into real estate because of the easy money, you’re going to see a lot of Realtors leaving the market,’ said Gregory DeLaRue, president-elect of the East Pasco Association of Realtors.”

“The chill seeped in from South Florida and Orlando. ‘It shows the changing marketplace,’ said Jack McCabe of McCabe Research Co. ‘Every market has seen a drop in sales and an increase in inventory. Pasco is one of those.’”

“In the Tampa-St. Petersburg-Clearwater area, the first quarter saw a 23 percent drop from 11,740 sales of single-family existing homes in the same period last year to 9,087, according to Florida Association of Realtors numbers quoted by McCabe.”

“‘Pasco is not as severe, although this may be just preliminary,’ McCabe said. ‘Their time is coming just a few months down the line.’”

“In Pasco, sellers are throwing out concessions to lure buyers that range from $2,500 to $10,000 in value, McCabe said. Agents are still advising sellers to pay buyers’ closing costs rather than underprice their homes.”

“The thing that’s causing a slowdown is that housing prices have gone up so dramatically,’ said Marvin Rose of Tarpon Springs’ Rose Residential Reports. But prices may slip. ‘It’s always several months later that they go down,’ McCabe said. ‘The sellers and buyers are in a stare-down process.’”

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