The Housing Bubble

A trio of reports on the condo bubble. “It’s sink or swim time for many condo developers throughout South Florida. Big, grand condo plans are hard to keep when the market appears to be positively FLEEING from real estate.”

“Some projects are probably dead in the water. Reports are some West Palm Beach condo developers are stirring around the few sales on their plate like so many unwanted peas at dinner, pretending things are fine while looking for an exit strategy from the closing table.”

“And then there’s Cliff Preminger. He’s the developer of the nautical-theme upscale condo planned for North Flagler Drive in West Palm Beach. Like everywhere else in South Florida, condo sales have slowed there, too. But Preminger has decided to stay onboard and wait.”

“He still believes Eighty Points’ waterfront location will insulate the project from failure, even though condos remaining for sale in the 173-unit complex start at at a pricey $700,000. (He would not say how many have sold so far.)”

“Veteran real estate lawyer Steven Siegfried thinks most condo projects will be built, eventually. ‘The market is going to be like this for some time,’ said Siegfried.”

The Herald Tribune. “Construction and development of condo projects have slowed because of lender concerns about the number of units sold to speculators. ‘Lenders want to know who the buyers are and whether they will be able to close when construction has been completed,’ said N.J. Olivieri, president of Sarasota-based Horizon Mortgage.”

“As to the condo conversion trend, Olivieri said that’s over.”

“‘One of our clients is a major New England pension fund,’ Olivieri said. ‘These guys feel that people who did recent conversions are not going to be successful. So they are trying to buy units that haven’t sold and operate them as apartments.’”

“Olivieri said the pension funds will be able to buy the units at deep discounts because converters are already desperate to get out from under their heavy debts.”

And from the LA Downtown News. “Mere months before their expected move-in date, about 40 expectant buyers were FedExed offers last week to pull out of the new condominium development Axis at Union Station.”

“The company’s parent corporation, Standard Pacific Corp., had suffered a rough start to the second quarter of 2006. According to a June 2 company press release, net new home orders dropped 41% in April and May from the same period last year, due in large part to a jump in the company’s cancellation rate and softening in the company’s larger markets, the release said.”

“But the buyout offer was not related to market issues, the company insisted last week. ‘It has nothing to do with softening,’ said Alison Banks, for Standard Pacific Homes. Instead, she pointed to ‘great uncertainty’ surrounding the project.”

“David Coplen had an appointment to view the complex the weekend before the FedExes went out. He arrived expecting a tour, and instead found the sales office closed. ‘I assume this is as a result of slow sales, but have no real information,’ Coplen wrote.”

“The refund offer marks an abrupt turnaround for the development. As late as May, Standard Pacific had touted that half the residences in Axis’ first phase had sold in their first day on the market in March. Sales in Downtown were still relatively strong that same month, said Delores Conway, of the USC’s Lusk Center for Real Estate.”

“But interest rates have risen since then, and the real estate community, Conway included, will be watching closely as the Federal Open Market Committee weighs a possible 17th straight rate change at its meeting later this month. ‘Just look at the stock market,’ Conway said. ‘There’s a lot of uncertainty out there right now.’”

The Las Vegas realtors have the May numbers out. “The Greater Las Vegas Association of Realtors recently released housing statistics for May 2006. The total number of local homes sold in May (was) down 17 percent from 2005. For condos and townhomes, 605 units were sold, which is down 19 percent from one year ago.”

“The number of available homes listed in the Las Vegas area increased 7.6 percent from April to May to a record total of 19,132. The number of available condos and townhomes reached 4,253, an 11.9 percent increase from April to May and a 67.4 percent increase from last year at this time.”

“Association leaders expect the local housing inventory to peak as summer approaches.”

And the Times Online looks at one Nevada flipper. “In a city built on defying the odds, Mark Barclay believes he has discovered a sure bet. The Dorset-based pilot is blowing half a million dollars on a flat in a Las Vegas tower block.”

“The two-bedroom flat is not actually built yet: like much else in Vegas, it exists only on paper. Barclay isn’t worried: he says he hopes never to set eyes on it anyway. Truth be told, he is not impressed by modern Vegas. He finds it far too crowded.”

“This week Barclay is poised to put down more money on a second property in an obscure desert town that few outside Nevada have ever heard of. ‘There is nothing more attractive right now than Nevada,’ he said.”

“Barclay is a pioneer. For about $500,000 (£271,000), he has bought into SilverCrest, a future condo high-rise managed by Savills International. At present, SilverCrest is a dusty, empty corner of a housing estate about 15 minutes from the casino-dominated Strip. His plan is to let the apartment via Savills, ‘who will do the hard work,’ to workers at nearby casinos.”

“‘There is a massive shortage of rental accommodation in Las Vegas,’ Barclay says. ‘Most casino staff cannot afford to buy there anymore.’”

“Perhaps riskier is his $280,000 (£150,000) bet on Desert Oasis, a condo complex in West Wendover, a tiny town near Nevada’s border with Utah. The hook is the city’s five expanding casinos, patronised by renegade Utah Mormons, which have produced a sharp increase in demand for staff housing. The ground won’t be broken until later this summer. ‘If it doesn’t work out in four years’ time, I will sell it on,’ says Barclay.”

“Linda Rheinberger, president of the local realtor (estate agent) association, says it will reach 3m within a decade. By that time, Vegas will be running out of land. ‘The Strip is our beach front, where all the pricey, blue-chip condos are and will be,’ she says.”

“However promising the long-term prospects, anyone buying now runs the risk that they are coming in at the top of the market. Property prices in Las Vegas, as in the rest of America, are ‘resting’ after five years of double-digit growth. Rheinberger, who some believe may become Nevada’s governor one day, gives some conservative advice: ‘Get a good realtor, read the detail, stick in here for five years at least and hold on.’ As with everything else in Vegas, it could be a hell of a ride.”

The homebuilders association has a report out. “Confidence among U.S. homebuilders dropped this month to the lowest in more than 11 years. The National Association of Home Builders index of builder confidence declined to 42, the lowest since April 1995, from 46 in May, the Washington-based association said today. A number below 50 means pessimists outnumber optimists. The index hasn’t increased for the last eight months, the longest such stretch since 1994.”

“Builders say traffic among prospective home buyers is falling, and a measure of sale expectations declined. Confidence fell in all four regions this month, with the biggest decrease occurring in the Northeast, which plunged to 40 from 47. The Midwest declined to 25 from 29, the South fell to 49 from 51 and the West declined one point to 61.”

“The number of homes available for sale is 35 percent higher than it was a year ago, according to a Wachovia Securities report by analyst Carl Reichardt. The report said the housing slowdown is ‘worse than we thought.’ There were 565,000 new homes for sale at the end of April, a record.”

“‘These forecasts naturally are subject to a considerable degree of risk,’ said NAHB Chief Economist David Seiders. ‘The downside risks include the potential for large numbers of sales cancellations and re-sales by the investor/speculator group as well as more aggressive tightening of monetary policy than we’re assuming in our baseline forecast.’”

“‘The June drop is further evidence that housing is slowing,’ said (economist) Zoltan Pozsar. ‘Policymakers need to keep in mind not to overtighten.’”

“The president of the Dallas Federal Reserve bank, Richard Fisher, said on Monday that while the pace of activity in U.S. housing markets was slowing he did not see a crisis developing. ‘I don’t see a crisis on the edge of the table … I do see a subsiding of that (housing price) pressure,’ Fisher said. ‘The kind of 6 percent growth we had … in the first quarter just wasn’t sustainable.’”

“He said Fed policymakers were focused on fostering stable long-term growth and noted ‘we’re doing our level best to make sure that inflation doesn’t raise its ugly head.’”

The Arizona Republic looks at the housing bubble ‘ripple effect.’ “Metropolitan Phoenix’s housing slowdown is bad news for more than home-building companies and the investors who hold their stock. The region’s economy is unusually dependent on housing, so a lot of livelihoods rely on it.”

“The housing market is slowing across the board as buyers rebel against rising prices and higher mortgage rates. Sales of existing homes were down 34 percent last month compared with May 2005. And home builders pulled 21 percent fewer building permits in April than the year before.”

“Housing accounts for at least $1 in every $3 generated in the Valley’s economy. When housing hits the skids, the effects ripple throughout the economy.”

“Marshall Vest, an economist at the University of Arizona, said Arizona’s real estate industry ‘took a dive’ in the late 1980s and early 1990s and the rest of the state’s economy fell, too.”

“He doesn’t expect that to be the case now. ‘This time around the economy is growing so much that less of a slowdown is expected,’ he said. ‘(But) the construction industry, mortgage brokers, real estate brokers and other industries tied to housing will all feel it. There are going to be a lot of new real estate agents who go back to being schoolteachers.’”

The Dallas News interviews a bond expert that has a similar take. “Mark Kiesel may have gotten fat from the sale of his home in Newport Beach, Calif., but he’s no longer in danger of getting slaughtered like the proverbial hog. Three weeks ago the portfolio manager at Pacific Investment Management Co. sold his house and moved into an apartment.”

“Mr. Kiesel’s specialty is corporate bonds, which he says have given him a unique perspective on the U.S. housing market. ‘Rising home prices have been the key driver of U.S. economic growth, which in turn has played a major role in the tightening of corporate bond spreads,’ Mr. Kiesel said.”

“Because housing has driven the economy for so long, the slowdown will bring, among other things, tighter lending standards, less willingness to take risk, lower asset price appreciation outside housing, less liquid financial markets and rising volatility.”

“Many homebuilders are reporting a 30- to 35-percent year-over-year slide in new orders. Add to this the frenetic pace at which builders have acquired land in the past few years and prospects dim further. ‘Over the next few years, homebuilders will either flood the market with additional inventory or be forced to write-down the value of the undeveloped land on their balance sheets,’ Mr. Kiesel said.”

“‘Anything that has to do with outfitting a house is a candidate,’ Mr. Kiesel added. ‘Housing will have a multiplier effect; that’s why it’s probably the leading indicator on the economy.’”

“Once homeowners wise up to the fact that the ‘For Sale’ sign has become a permanent fixture on their next-door neighbor’s front lawn, other industries such as luxury retail and travel and leisure will follow.”

The Free New Mexican has this rare report from Santa Fe. “Santa Fe homes are overpriced all right, but the excess is nowhere near places such as Naples, Fla., or Salinas, Calif., according to a study. In fact, Santa Fe’s overvaluation is slightly lower than Farmington’s.”

“Santa Fe real-estate agent Alan Ball, who is a board member of the Santa Fe Association of Realtors, doesn’t think there’s much to worry about when it comes to overpriced homes in Santa Fe. ‘I said previously there’s no out-of-control price appreciation, and it’s still true,’ he said. ‘It’s even more solid and true than before.’”

“Richard Mares, owner of Mares Realty, agreed that real-estate prices are high in Santa Fe, but he doesn’t believe they’ve gone up any more than can be expected. ‘In Santa Fe, we don’t have the peaks and valleys we see elsewhere,’ he said. ‘It’s pretty much steady as she goes. I keep reading about real-estate busts elsewhere, but it’s never going to happen here.’”

“The study showed the price for a single-family Santa Fe home in the first quarter of 2006 was $267,900, compared with $246,000 in the first quarter of 2005. That’s an increase of 9 percent. Another study had somewhat more sobering information to offer, it indicated New Mexico ranked 12th in a list of house-price appreciation by state for the 12-month period ended March 31. The state’s price rose by 15.88 percent.”

“Santa Fe housing prices aren’t negative, of course, but they aren’t charging ahead, either, Ball said. ‘A fractional increase is normal,’ he said. ‘Some huge jump would be very scary for me.’”

“Any rapid price increase, similar to what happened in housing booms in Phoenix and Denver, would be unwelcome in Santa Fe. ‘Developers here don’t build more than they can sell,’ he said. Developers would build more than they do now, but the City Council ‘controls everything,’ Mares said.”

“In other cities, municipal government helps with infrastructure, which lowers the cost of development for home builders. Not in Santa Fe, Mares said. ‘Unless we do it any differently, high home prices ‘are always going to be the case,’ he said.”

“As for high-end homes, they may not be drastically overpriced, but they tend to stay on the market for months because there are so many of them for sale, Mares said. ‘Buyers have a lot to choose from.’”

The Orlando Sentinel has this update from Florida. “Home buyers and home sellers are in a virtual stalemate in Central Florida, with housing prices holding at lofty 2005 levels while more properties are hitting the market and lingering longer. Many sellers are clinging to unrealistic price expectations, Central Florida agents say.”

“‘They not only think it’s still 2005, they think it’s the summer of 2005, the peak of the market,’ said Barbara Brady, a Realtor in Orlando.” “So far, local sellers are not making drastic cuts in their asking prices, Realtors and other industry experts say. But the pressure to do so is building. ‘The trend is definitely downward,’ said Chris McCarty, economist at the University of Florida. ‘And it’s going to continue.’”

“Nationally and throughout much of Florida, median home prices are beginning to slip, especially in places where the price escalation was most rapid, such as Naples, Miami, Fort Myers and Fort Lauderdale, McCarty said. Speculators who bought homes with riskier financing, such as interest-only mortgages, have been selling despite the declining market, adding to the inventory and downward price pressure.”

“A Harvard University study released last week found that nearly one-third of U.S. home buyers last year used riskier mortgages. Many of those homes were bought by speculators, McCarty said, and as those properties are unloaded for less than top dollar, ‘it lowers the value of other homes around them.’”

“Certain homes, particularly those priced $300,000 or more, will be tough to sell, McCarty said. ‘How many people can afford to live in $300,000 homes without an interest-only loan?’ he said. ‘By the fourth quarter and the first quarter [of 2007], you’ll see the full brunt of the declining real-estate market.’”

“Agent Pamela Ryan has been selling homes in Central Florida for 25 years and said she is ‘definitely working harder, 12 to 15 hour days, seven days a week.’ That’s because while there are many more listings, and some agencies are turning down potential listings after analyzing the offering and concluding that the odds of a sale were not good in today’s market.”

“‘People can take their time. They [buyers] don’t feel that sense of urgency,’ said agent Ellie Musgrave. Sellers are beginning to respond to the growing inventory and lengthening time on the market by setting prices at more competitive levels. ‘Reality is setting in,’ she said.”

“Builders of new homes and condominiums..ave been pouring resources into marketing and deals in recent months. Cambridge Homes has been offering buyers a Mini Cooper automobile with certain homes, or upgrades of similar value. Other new-home sellers have been pitching discounts on certain lots of $10,000 to $99,000, though such deals have strings attached.”

“Orlando has seen an explosion in new-condo construction in recent years, especially downtown; last year it was the second-biggest condo-conversion market in the nation, according to one study. ‘Developers [of condo conversions] will pay your closing costs and homeowner-association fees for the first year,’ agent David Tanner said. ‘So you can have someone with $1,000 down, and they can get into a condo. Where else can you do that?’”

“Tanner said he recommends that existing-home sellers use deal sweeteners as well. ‘Clients need to help with the closing costs, maybe a home warranty. Throw in some kind of incentive.’”

“Nationally, some home builders are scaling back on projects, profits are slipping and stock values are taking a hit. UF’s McCarty said home foreclosures are rising, and will continue to rise as many homeowners with adjustable-rate mortgages face higher payments they will be hard-pressed to afford.”

“‘People will start lowering prices even more’ to sell in the weakening market, McCarty said. ‘A lot of people knew this would happen, but a lot of people were just hoping that it wouldn’t.’”