The Housing Bubble

A housing bubble report from northeast Florida. “The first quarter revealed a frightening indicator for Jacksonville’s real estate investors. Sales volume was off more than 33 percent, according to DataQuick. Realtors say listings are increasing, but it does mean fewer people are buying.”

“‘It’s the classic beginning of a bust,’ said Sid Rosenberg, a real estate professor at the University of North Florida. ‘Next, all of a sudden, people who can’t sell begin to reach a point where they must sell and drop prices.”

“Investors in the region won’t be happy about what could happen next, Rosenberg said. Lagging sales can herald sagging prices. They did just that in the last busts in the 1980s, he said. ‘A lot of people haven’t accepted the market is going to drop and are holding out,’ he said.”

“As the number of buyers decreases, homeowners looking to unload their investments are letting their property spend longer amounts of time on the market. When adjustable mortgage rates kick in, sparking higher payments, the need to sell will become more urgent, and sellers will start discounting prices, he said.”

“Anecdotally, several Realtors said they’re already seeing that trend. The owners of an oceanfront lot north of Vilano Beach that listed for $1.2 million in September marked it down to $998,000 in March but still haven’t been able to sell, said (realtor) Barbara Jenness in Ponte Vedra Beach.”

“‘The owner is motivated, but people just aren’t calling,’ she said. ‘Almost everybody is starting to lower their prices.’”

And from Inman News. “Charlotte Chipps, an Ohio schoolteacher, bought a condominium-hotel unit last year in Daytona Beach, Fla. A developer had bought up a couple of hotels in the area and converted the buildings into condotels.”

“‘It was sort of a whim,’ she said. ‘I do own a house in the Daytona area that I rent. I had just that little bit of experience. I’m not a person with any money. I just thought that this would perhaps be an investment for me. If values continued to go up, I would keep it for two or three years and make $20,000 or $30,000.’”

“Condotels are not just a flash in the pan, says Dante Alexander, CEO for the condotel association, though they aren’t typically a cash cow for owners, either. ‘People like to refer to it as a trend,’ said Alexander. ‘Now, admittedly, it’s a segment. But it is really going to be much more than a segment.’”

“There is a risk of over-building in some popular condotel markets, and lenders have heightened requirements for projects. ‘Everybody is pulling back a little and appropriately so. There is a little bit of oversupply going on. It shouldn’t be a frenzied environment, and it has been a frenzied environment,’ he said.”

“While attending a real estate conference, Alexander said another attendee asked, ‘What if (the condotel market) implodes?’ Alexander’s response: ‘What if it doesn’t?’ Alexander said he expects that in the next couple of years ‘we’re going to wish we had more’ condotels.”

“A common misconception is that the rental profits of a condotel unit will generate profits for the owner. But with insurance and maintenance and mortgage costs, owners shouldn’t expect to earn any money in the short term, Alexander said. ‘It’s an expense. It’s going to be like owning any other piece of property.’”

“Robin Charles Glass, a real estate agent in Honolulu, said, ‘Generally these units don’t generate cash flow (for owners),’ Glass said. Resale activity lately has been slow for condotel units in Hawaii. ‘Seldom do I ever see someone selling these things these days.’”

“Charlotte Chipps, the Ohio schoolteacher, said that the Daytona area real estate market has slowed to a crawl since she bought her unit, and she may hold onto it longer than she expected. ‘Unfortunately I paid top dollar. I bought it last year when prices had gone up. The whole Florida market has sort of stalled now. It is something that I will probably try to hold onto for my grandchildren.’”

“Instead of enrolling in the hotel program offered through the building, which gives back about 45 percent of the room rental proceeds to unit owners, Chipps makes her own arrangements for room cleaning and rents her unit directly to guests. The rental rates are low in the area, it’s not uncommon for hotels to rent for $40 a night.”

“It has not been a cakewalk for owners of condotel units in the same building. Chipps said that owners have engaged in a legal battle with the developer, who controls some commercial and common areas of the property. But she is hopeful that the investment will pay off in the long run. ‘As Daytona continues to grow that property is going to continue to be more valuable.’”

Dataquick has some new numbers out. “Home sales in Southern California slowed for the sixth month in a row, making last month the slowest May since 1999. Homes are appreciating in value at their slowest pace in almost six years. A total of 27,286 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month.”

“That was down 11.7 percent from 30,886 for May a year ago, according to DataQuick. The median price paid for a home in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties was up 6.4 percent from $456,000 for May last year. The 6.4 percent year-over-year increase was the lowest since July 2000 when the $205,000 median was up 6.2 percent from $193,000 a year earlier.”

“Despite the year over year rise, the median price was the same last month as it was in April, and was a tick below March’s median of $486,000, which was the Southland’s record. In some places, the rate of appreciation was even lower. San Diego County posted virtually flat growth at 0.4% and Ventura County saw a 3% rate of year-over-year appreciation.”

“The latest housing statistics reveal a new constant: The Southland’s real estate market is in the midst of a slowdown.”

“Accelerated listings and declining sales in the first five months of 2006 combined to expand the supply of resale homes in Inland Southern California to the highest level in at least eight years.”

“The Multi-Regional MLS, which tracks real estate activity in the two Inland counties and the San Gabriel Valley, reported that from January through May there were 56,371 home listings in that region, a 46 percent increase over the same period a year earlier.”

“Comparing that to the first five months of 2005, the number of home sales dropped 12 percent to 18,331.”

“The supply of unsold homes, measured by how long it would take to deplete the region’s unsold listings at the current sales rate, more than tripled from 2.4 months to 7.6 months, which the listing service said reflects the largest supply since it began recording such data in 1999.”

“‘We have had a growing supply of listings since the middle of last year. But last year the sales were strong and this year the supply of listings has continued to grow and sales have slowed,’ said Gordon Maddock, the service’s secretary treasurer. Maddock said the 48-day listing average may be misleading because it only reflects houses that have sold. He said some houses are unsold after six months.”

“The number of listings, Maddock said, probably has been bolstered by ‘a lot of investors dumping properties,’ people selling to tap built-up equity, and small home builders putting new homes on the multiple listings in an effort to speed sales.”

“The listing service reports that the average sales price of homes in the first five months of this year was $467,898, up 13 percent from a year earlier. Maddock said the regional price increase is due in part to a shift in sales toward the pricier San Gabriel Valley and away from the Inland Empire, where resale homes face stiffer competition from new home tracts.”

“President Richard Tegley said, ‘With a growing inventory of homes in the (listing service) plus a large new-home inventory we will probably see prices level off.’”

“Garey Teeters, (a broker with) real estate offices in Hemet, Beaumont, Yucaipa, Highland and Rancho Cucamonga, said the market has slowed ‘back to normal’ after years when home buyers had to endure bidding wars. ‘Last year, the sellers were in control. The buyers are in control now,’ Teeters said.”

A roundup of foreclosure reports. “Massachusetts homeowners are falling into mortgage foreclosure at the fastest clip in 10 years, new figures show. The Mortgage Bankers Association reported yesterday that during the first quarter, roughly one Bay State homeowner in 294 entered foreclosure, the process banks use to seize properties for loan nonpayment.”

“That’s double the foreclosure rate recorded less than three years ago, as well as the state’s worst showing since first-quarter 1996.”

“MBA Senior Economist Mike Fratantoni attributed the problem to the state’s shrinking population, weak job growth and slowing housing market, which make properties hard to unload fast. Fratantori said Massachusetts appears to only face ‘a mild slowing of the housing market.’ He said the current slowdown doesn’t look like ‘a repeat of the early 1990s.’”

The Miami Herald. “More Floridians are falling behind on their home loans, as interest rates on adjustable mortgages rise. One potential problem looming: The soaring popularity of adjustable rate mortgages in recent years. A faint uptick appears to be taking place, said Stuart Gitlitz, a South Florida attorney who specializes in foreclosures. ‘What was a trickle is now becoming a drop,’ said Gitlitz.”

“Other experts say the issue certainly doesn’t appear to be a looming threat. ‘It takes at least a year’ for economic problems to manifest into foreclosure actions, said (banker) Vivian Sierra. And while there is unceasing speculation about the South Florida real estate market, she doesn’t see any major problems with the residential market. ‘I don’t see a bubble bursting.’”

“Ken Thomas, a Miami banking analyst, concurred. ‘The bubble may be seeping,’ Thomas said of real estate. ‘But my gut feeling is that there’s no evidence of major problems.’”

From a press release. “Notice of Trust Sale filings in Maricopa County, Arizona increased 19% in May and pre-foreclosure inventory crept up after 16 months of decline according to Tim Rocho, a foreclosure data provider. Notice of trust sales filings increased from 624 in April to 745 in May, the number of Auction properties increased from a historic low of 35 to 55 and cancellations of pre-foreclosures decreased from 701 to 690, turning the tide of consistent declines to increase outstanding pre-foreclosures from 2243 to 2272.”

“‘I certainly wouldn’t call this a steep reversal in the market but it does signal that the number of foreclosures are about to increase. With average house prices above $300,000, MLS inventory around 40,000 and interest rates topping 6.5%, the market is beginning to level off and defaults will follow,’ Tim says.”

From California. “With many interest-only and other ‘non-traditional’ mortgages set to adjust upward, some local real estate and lending professionals think the end of the year might bring some unpleasant news. In late 2006 or early 2007, many homeowners will see introductory fixed rates expire on interest-only and other types of adjustable loans they first took out over the past five years.”

“‘I’m not necessarily seeing a panic, but I am seeing people come in here wondering how they’re going to handle those higher payments,’ said (mortage broker) Patricia Chill in Palm Desert. ‘People are nervous, because some of them are in programs they shouldn’t have gone into,’ she added. ‘Some of them are going to be paying taxes and insurance that they didn’t figure into their original payments.’”

“In the Coachella Valley, in the first quarter of 2006, there were 305 notices of default issued, according to DataQuick. That was up 41 percent from the first quarter of 2005.”

The Associated Press. “This year, more than $300 billion worth of hybrid ARMs will readjust for the first time. That number will jump to approximately $1 trillion in 2007, according to the MBA.”

“In 2002, Christopher Jones refinanced into a hybrid ARM with plans to refinance again when the rate started to readjust. At the time, his downtown Atlanta house appraised for $108,000. Now, his monthly payments have shot up, but Jones can’t sell his house for more than $84,000 and he can’t get an appraisal for more than $85,000.”

“The appraisal firm told Jones that the value of houses in his neighborhood have fallen victim to a cooling market. With no other options left, Jones has decided to pack it in and foreclose on the house. ‘I’m just going to take the loss,’ he said. ‘That’s all I can do.’”

“Some homebuyers, especially first-time buyers, may not have fully understood the risk of ARMs. In the rush to close on a house sale, especially in the frenzied market of the past few years, many first-time buyers often failed to get the full details of their loan from their mortgage broker.”

“‘Sometimes buyers are very optimistic of how much mortgage they can handle, especially in a strong housing market with aggressive marketing of riskier mortgages,’ said (credit counselor) Suzanne Boas.”

“When Dora Angel of DeSoto, Texas bought her first home in 2003, she paid $141,000 for the brand new home. At the time, her mortgage payment was $1,400 a month. DeSoto originally thought that she had a fixed-rate loan. But about five months ago, she noticed that her monthly payment kicked up to $1,900. She only made the monthly payments by sacrificing payments on her credit cards, which pulled down her credit rating.”

“Now, DeSoto can’t continue paying $1,900 each month, but, because of her credit ranking, she doesn’t qualify for a fixed-rate mortgage. ‘I was a first-time buyer. I was blind. I didn’t know what questions to ask,’ she said. ‘And the mortgage brokers are there telling you what you want to hear just to get you in the mortgage.’”

The Orlando Sentinel reports on the areas May numbers. “Condominiums have finally joined single-family homes in the Orlando area’s sales slowdown and are contributing to the year-over-year decline in existing-home deals overall, according to a report released Monday.”

“The number of condos resold in May slipped to 419 units, down 12.2 percent from the same month a year ago; the first time this year the condo sector has turned negative, according to the Orlando Regional Realtor Association’s monthly report.”

“‘People all around us, units are just not moving now the way they did,’ said James Colligan, sales manager for The Azur at MetroWest. To keep sales moving, the converted apartment complex in west Orlando is ‘the lowest-priced in the MetroWest area,’ he said, with two-bedroom units starting at about $180,000.”

“‘We’re working with people, first-time buyers, to make it work for them,’ Colligan said.” “The number of single-family homes resold in the Orlando market, down every month so far this year, dipped again in May to 2,070 houses, a 4.4 percent decline from a year earlier.”

“Nearly 7,000 more homes of all types were added to the local Realtors’ MLS in May, pushing the inventory of properties for sale in the Orlando area to a record 18,179, the group reported. ‘I wouldn’t be surprised to see us at 20,000 by the end of the year,’ said (broker) Scott Hillman in Winter Park.”

“For some property owners in South Florida, the Orlando market still appears to have value, particularly in condos, said Leanna Fruin, who has a contract pending on a unit at a condo-hotel planned near the Orange County Convention Center. ‘I see potential for growth in the Orlando market,’ said Fruin. She said she is buying a one-bedroom unit with a price ‘in the mid-$300,000s’ and plans to use it for herself, family and friends for part of the year, then renting it out the remainder of the time.”

“May was the third month this year in which the inventory represented more than six months’ worth of sales, the biggest such buildup of housing stock since early 1998.”

“‘In the past years, we’ve had trouble finding enough adjectives to describe the torrid pace of homes sales,’ says ORRA President Beverly Pindling. ‘In many cases a slowing from a hot market is a good thing because a solid housing sector is needed to provide an underlying base to an area’s economy.’”

The Chicago Tribune reports on efforts of homebuilders to move the inventory. ” For new-home buyers, it’s time to be wooed: Up to seven months before first payments are due. A mortgage-rate program promising to save ‘up to $83,000 over 30 years.’ Up to $10,000 in free upgrades. $20,000 off the price of a home.”

“These kinds of incentives long have been used to drum up business during the winter doldrums or to jump-start activity at a moribund development. But the frenzy of deals, which some national builders rolled out in late 2005, is snowballing into summer.”

“As the business plummets, buyers, aware that they are in the driver’s seat, are demanding, and getting, price breaks or special financing. Many local and regional builders have joined the major players to offer incentives right through the industry’s key spring sales months, into the beginning of summer.”

“‘This is probably the first time we’ve seen them through the peak selling season. It’s unusual that the incentives have continued all year,’ said housing consultant Tracy Cross. According to Cross the relatively even-keel Chicago market has become more important to major builders as sales have slowed or plunged off a cliff in other parts of the country.”

“‘National builders look to Chicago as a stable market. They look to Chicago for help to bolster sales. You can’t milk a cow that’s dead in California or reduce homes by $200,000 in Washington,’ Cross said.”

“In Washington, D.C., Centex Corp. offered $100,000 off the sales price to those who bought a house within a 12-hour period. And Lennar Corp. is giving Tampa buyers a lowest-price guarantee. Traffic in suburban Chicago sales centers is off as much as 30 percent from a year ago, according to consultant Jim Colella.”

“Slow sales forced Lennar to drop the tax assessment for a special service area at the Summerfield development in southwest suburban Minooka. Deer Point Homes has dropped prices by $20,000 for a limited time on all its homes at The Ponds of Bull Valley in northwest suburban Woodstock.”

“The suburban sales strategies reflect ‘the slow shift to a buyer’s market,’ said consultant Steve Hovany in Schaumburg. ‘Nobody ever lowers their price in new homes, but an incentive, in effect, lowers the price,’ said Hovany, whose firm advises builders and developers. With shareholders and Wall Street weighing on them, builders, especially publicly owned national companies, have ‘to grow or die,’ said Hovany. They ‘are fighting the market share game.’”

“Feeling the heat of national competitors, several local builders, big and small, are hustling to match the special offers. Warrenville-based Neumann Homes has been advertising incentives competitive with some of the larger companies.”

“Jim Colella said using incentives to keep or grab more market share is a desperate, risky game. ‘Discounting is a last-case resort,’ he said. ‘It is a slippery slope. It’s pretty tough to start discounting and then stop. Once you open it up, it’s hard to close. Look at the automakers. They started discounting. It has diminished the product.’”

“Leigh Nevers, VP of marketing for Lennar’s Chicago division based in Hoffman Estates, said her firm’s aggressive June promotional package is aimed at trimming the company’s unsold inventory of nearly 70 homes and keeping the builder near the No. 1 position in the market.”

“‘We stumbled a little bit in April,’ she said. ‘We want to get as close to No. 1 as possible, and we don’t want to slip to No. 3. It is a cutthroat industry right now,’ she said. ‘We project starts and closings to Wall Street,’ she noted. ‘We need to stay on track in this market.’”

“Nevers conceded that the costly incentives are affecting margins, and expressed uncertainty about how long Lennar’s strategy will last. ‘The market will tell us how long this will continue,’ she said. ‘We can’t afford not to be doing some kind of program.’”

The new home starts numbers are out for May. “Construction of new homes and apartments, after posting three straight months of declines, increased in May, helped by dry weather. The Commerce Department reported that builders started construction at a seasonally adjusted annual rate of 1.957 million units last month, an increase of 5 percent from the April construction pace.”

“The better-than-expected increase came after declines of 5.5 percent in April, 7.5 percent in March and 5.9 percent in February.”

“Analysts cautioned that construction activity is likely to slide further in coming months as the housing industry slows under the impact of rising mortgage rates. In a sign of that expected slowdown, permits for new construction dropped by 2.1 percent in May to an annual rate of 1.932 million units.”

“For May, construction of new single-family homes was up 2.1 percent to an annual rate of 1.586 million units while construction of multifamily units was up an even stronger 19.7 percent to an annual rate of 371,000 units.”

“The strength in May was led by a 15.8 percent jump in construction activity in the West. Construction rose by 8.5 percent in the South and was up by 1.7 percent in the Northeast. However, construction fell by 15.8 percent in the Midwest.”

“The National Association of Home Builders reported Monday that its builder confidence index fell in June to a reading of 42, the lowest point in 11 years. David Seiders, chief economist for the home builders, said that sales could fall by 13 percent from last year’s record and that construction of single-family homes is likely to drop by about 9 percent from last year’s record level.”