The Housing Bubble

The Bay Area press is reacting to the new numbers in California. “Marin’s median home price dropped to $900,000 last month after flirting with the $1 million mark in April, Dataquick reported Wednesday. The median price for single-family homes, not including condominiums, dropped about 8 percent from $979,000 in April.”

“Kathy Schlegel, president of the Marin Association of Realtors, said several factors drove the median price down last month. ‘Inventory has increased and more homes are staying on the market longer, so it has become more competitive,’ Schlegel said. ‘Buyers and sellers are negotiating prices down. When we have all that working together, it will tug the prices down.’”

“The median condo price rose to $547,500 last month, up from $531,000 in April but down from $579,000 in May 2005. down from $579,000 in May 2005.”

“Like many people in the Bay Area, Shiroza Irshad is no longer in a hurry to buy a home now that the once-sizzling housing market is taking a breather. ‘We are taking our time and don’t want to rush. I don’t want to buy anything now and realize I paid too much,’ said Irshad, who lives in Newark. ‘We’ll wait and see what the market is going to be like in July and August. We want to see if prices will drop a little bit.’”

“Wait and see. Those simple words, compounded over and over and over, help explain why fewer homes are selling compared with a year ago, observers say.”

“What is certain is that there are more homes for sale now than in early 2005. The Bay Area’s unsold inventory index is almost twice what it was a year ago. ‘I think a lot of buyers out there are just holding off,’ said realtor Jackie Corey. ‘The buyers have got a lot of inventory out there and they can pick and choose. They have more negotiating power. If the seller does not want to negotiate, they can move on.’”

“Builders find they must alter their marketing strategies. Many are offering discounts of $50,000 to $100,000 and free upgrades. Layne Marceau, chairman of the California Industry Building Association, told attendees at a San Francisco builders show Wednesday that developers went on a building binge between 2003 and 2005, spurred on by what seemed like a bottomless pool of buyers.”

“‘We got a little ahead of ourselves and now we’re dealing with that standing inventory,’ said Layne Marceau, chairman of the California Industry Building Association. ‘It’s like the auto industry, which has a lot of 2006 (models) on the lot and they’re trying to clear them for the 2007s.’”

“Responding to the state’s slowdown in home sales, California builders on Wednesday lowered their forecast for new-home construction this year. ‘We are now seeing substantial changes within California on a market-by-market basis,’ said Alan Nevin, chief economist for the trade group.”

“He said construction of single-family homes has slowed in most regions of the state, particularly in Northern and Central California.”

“The chief economist for the California Association of Realtors, Leslie Appleton-Young, recently revised her own statewide forecast. Last September she said the median price of an existing house in California would increase 10 percent this year; now she’s saying 8 percent. She expected a 2 percent drop in sales volume for 2006; she’s now predicting a decline of nearly 17 percent.”

“‘Essentially, we got into a slower market quicker and heavier than we expected,’ she said. ‘It’s the first time in three years we’ve gotten the sign correct,’ she joked, referring to the fact that for the previous three years she had also called for sales volume to drop, and then it surged to new records.”

“New homes will likely face more pricing pressure than existing ones, because owners aren’t generally compelled to sell in a strong job market and builders are ever eager to ‘move inventory off our balance sheets,’ said Layne Marceau. Indeed, Bay Area builders on the whole are already offering incentives equivalent to 5 percent off home prices to move the product, he estimated.”

“Marceau and Nevin alike stressed that the market dip is short-term one, which could last anywhere from four months to a year. ‘You’re not going to see 40 percent declines in home values as some of the New York soothsayers have said,’ added Nevin.”

“Even so, some observers are far more bearish on the market’s prospects than the CBIA. Christopher Thornberg, senior economist with UCLA Anderson Forecast, said that California home price appreciation will, at best, end in the third quarter and remain flat for at least the next five years. At worst, homes values will decline. ‘The bubble is bursting,’ Thornberg said.”

Some Wall Street remarks on the housing sector. “After a pullback in the U.S. housing market sent home-building stocks into a tailspin, some observers believe that the sell-off is overdone and say the shares represent a value opportunity. Yet many bearish analysts caution that the picture is likely to get worse before it gets better.”

“Wall Street analysts covering the sector are divided over whether builder stocks offer bargains or are a value trap for unsuspecting investors. Much of the debate centers on whether the housing market is experiencing a ‘hard’ or ’soft’ landing.”

“Many analysts have been surprised by the magnitude of the downturn and are cutting their earnings estimates for the home builders, after the hoped-for rebound during the spring-selling season failed to materialize. ‘Unfortunately as we feared, the soft-landing scenario does not appear to be unfolding as many had hoped,’ wrote analyst Alex Barron in a recent note. ‘It may not be until next year that the housing market finds a bottom.’”

“With orders falling from last year and an ugly spring largely in the books, many analysts have issued across-the-board downgrades on the sector. With the traditional spring-selling season a ‘much bigger flop than virtually anybody had imaged,’ he commented, the speed of the cooling process ’surprised even the more bearish industry watchers.’”

“Even company managements are growing more cautious, as evidenced by a builder-confidence index in June hitting its lowest mark in more than a decade.”

“Higher interest rates, which increase borrowing costs for the companies as well as mortgage rates for home buyers, are a primary driver behind the pessimism. After 16 straight rate hikes, the Federal Reserve is widely expected to raise its short-term target rate to 5.25% next week with another quarter-percentage point increase.”

“A stumbling 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,’ wrote Robert Stevenson at Morgan Stanley.”

“With mortgages moving up, housing affordability stretched and an uncertain outlook, many buyers are simply waiting on the sidelines for the housing market to stabilize.”

Some housing bubble news from Washington. “An index of U.S. leading economic indicators fell in May by the most in nine months. The Conference Board’s index last fell in consecutive months in February and March 2001. ‘The Fed is going to get exactly what it was hoping for, but unfortunately the inflation numbers are just not helping,’ said Haseeb Ahmed, an economist at JPMorgan Chase Bank.”

“Building permits, a sign of future construction, subtracted 0.06 percentage point from the index. The Commerce Department said this week that permits dropped in May to the lowest level since November 2003.”

“‘The builders have known that the boom market we’ve been in is not going to last forever,’ Mick Pattinson, CEO of Barratt American Inc., said. Carlsbad, California-based Barratt builds homes in the western U.S. ‘We have cut back our building a little bit, but not tremendously.’ Pattinson said there has been an increase in order cancellations at Barratt, though ‘not on a massive scale.’”

“U.S. home construction rebounded in May from a 13-month low as builders filled backlogged orders and offered incentives such as free landscaping to woo buyers. ‘The message the Fed’s going to take away from this starts report is that the roof’s not caving in on housing and they can keep raising interest rates,’ says economist Stuart Hoffman. ‘Housing is in a downturn, but it’s the orderly downturn the Fed wants.’”

The Milwaukee Journal Sentinel. “The U.S. economy is slowing, but is strong enough to avert a recession if the Federal Reserve Board acts responsibly, Anthony Chan, chief economist for JPMorgan Private Client Services, said. A slowdown in the housing market and a relatively flat yield curve are signs of a weakening economy, he told clients.”

“Both are consequences of the Fed having aggressively raised the short-term rates it controls from 1% to 5% since June 2004.”

“But Chan said that according to his research of historical trends, the weakness in the housing market is not large enough to indicate a recession will follow, while the interest rate inversion is also small historically.”

“Based on the public statements of Fed officials, Chan said he believes the Fed will raise rates by another quarter-point when it meets next week. Another increase in August may also be in the cards, Chan said. Neither increase is really needed based on his reading of the economy, Chan said.”

“The Fed ‘has to raise rates because there is a new Fed chairman (Ben S. Bernanke), and they have to establish credibility’ as inflation fighters with the financial community, Chan said.”

“However, Chan said that should the Fed push rates over 6%, ‘I will be talking about what kind of a recession we will have.’”

Reuters has this report from Cincinnati. “When Keith Gersin saw the perfect four-bedroom house in southern Ohio four years ago, he jumped to buy it before anyone else could snap it up. When he finally sold it last month, it went for $30,000 less than he had hoped, and that after seven months on the market.”

“In retrospect, the 41-year-old physician admits he overestimated the U.S. housing market, which has begun cooling. ‘I was naive,’ said Gersin, who sold his Cincinnati-area home in May to move to North Carolina with his wife and son. He made about $60,000 on the sale, but had hoped for better.’”

“‘Everyone thinks their house is the most beautiful in the world, so it comes as a bit of a shock when it doesn’t sell right away.’”

“The housing slowdown, sharp in some regions and more gradual in others, is seen by many economists as an inevitable and even healthy moderation to an overheated market. Even so, for many homeowners, real-estate agents and builders, the market’s new direction is not particularly welcome.”

“The rising supply of unsold homes makes it that much harder for homeowners to get the sale price they hoped for. ‘In our neighborhood, on our street, there were three houses that went up for sale within months of each other,’ said Gersin.”

“Cincinnati real-estate agent Jeff Schnedl has seen a shift in the market. ‘It is absolutely slower. Some areas are still chugging along but even those are chugging along more slowly than they used to,’ said Schnedl, who has been selling homes five years.”

“A drive down any street in Cincinnati, whose suburbs straddle Ohio, Kentucky and Indiana, turns up plenty of ‘For Sale’ signs, with the occasional ‘Price Reduced’ addendum slapped on top.”

“Schnedl said homes are staying on the market longer. ‘There is a lot more inventory on the market this year than last year, about 25 percent more. So buyers have more homes to choose from and that slows the sale cycle down. Plus with rising interest rates, people are thinking harder. That slows it down, too,’ he said.”

“The housing slowdown is also being felt by home builders. In Cincinnati, builders have felt the chill already. ‘It has slowed a bit, not to a screeching halt, but some momentum is not there,’ said Dan Dressman, of the Home Builders Association of Northern Kentucky, which represents about 1,280 building companies.”

“Dressman said job losses will come in about six months if the slowdown persists. ‘I haven’t seen where there actually have been layoffs but if there is a continuous downturn that is one of the likely results,’ he said.”

A pair of reports from California. “Loma Linda resident Bradford Botanes expected the market to be slower now than when he bought his three-bedroom, two and one-half bathroom house 18 months ago. ‘It’s slower than what I expected,’ he said, noting that no one has toured the house, on the market since April, in about a month.”

“The once-sizzling Southern California housing market is cooling. ‘The froth is definitely out of the market,’ said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. ‘There are a lot of price-reduced stickers on those for-sale signs.’”

“Many potential sellers not wanting to miss the top of the market have listed their properties for sale. Real-estate listings for much of San Bernardino and Riverside counties and the San Gabriel Valley, excluding Pasadena, increased 46 percent to 56,371 for the first five months of 2006 compared to the same period last year.”

“The last four months have been record-setting months for new listings since the listing service began tracking in 1999, said spokesman Gordon Maddock. ‘May was the strongest month for listings when 12,000 residential properties were placed on the market,’ Maddock said.”

“‘I’m torn between wondering if we are going to be alright or is this going to be a train wreck,’ said (realtor) Ken Scott. Scott, like many in the industry, is concerned what will happen when some of the dicey creative mortgages convert to market rates next year: ‘Will households find themselves in trouble?’”

“For the first five months of this year, the number of notices of default, the first step in the foreclosure process, increased 34.8 percent to 2,853 in San Bernardino County, said John Karevoll, an analyst for DataQuick.”

“‘The key word is that the ARMS are ‘starting’ to kick in,’ economist John Husing said. ‘Most of them have a two-year kick, so the ones that are hitting this year are the ones that were taken out in 2004. The ones who are potentially in danger are the ones who took loans out in 2005,’ Husing said. ‘They could have problems in 2007.’”

The Daily Bulletin. “There is no question home prices have skyrocketed during the past few years. Cities such as Fontana, where the median price was $135,000 in the spring of 2002, had a median of $430,000 in April. ‘The boom is over,’ Kyser said. ‘There really is not a lot to enjoy about the housing market right now.’”

“Everyone has heard the stories, anecdotal and otherwise. The guy down the street who listed his house six months ago, has cut the price twice and still can’t get anyone to buy it. The neighbor who has open houses every weekend and still hasn’t been able to sell. The streets with sign after sign, FOR SALE.”

“‘We have reached a transition point in the market,’ said Bill Velto, realtor in Upland. ‘We are at a point where buyers are more cautious and sellers are more aware of buyers’ concerns.’”

“Or to put it a little more bluntly…’To sell a house right now, you’ve got to want to sell,’ Velto said. ‘You’ve got to need to sell.’”

“Indeed, it appears that a good bit of the excessive inventory on the market isn’t really on the market. Numerous sources have suggested that many of the homes that are for sale are listed at unrealistic prices.”

“Locally, Velto speculates that roughly 60 percent of the homes currently listed for sale aren’t priced realistically. ‘Take any sample of 10 homes and the chances are six of them are priced higher than they should be,’ he said.”

“That price, he said, can be anywhere from about 7 percent up to 20 or even 30 percent above current market value. It’s a price set by sellers afraid they’ve already missed the crest of the market and fear they’re losing money every day they don’t sell.”

“But taking a long-range view, Redlands resident Karen Oliver still thinks buying a house will pay off as an investment. She and her husband are planning to buy a second home in Redlands as part of their retirement portfolio. By renting it out, ‘long term it will be good deal,’ she said.”

The Journal News has this update from New York. “It’s over. The crazed phase of frenetic home buying in Westchester, Rockland and Putnam counties has screeched to a halt, leaving some industry experts wondering if the sound they hear now is the housing bubble bursting.”

“‘The market isn’t soft. It isn’t even slow. It’s dead,’ said Liz Rosenblatt, an agent in New Hempstead. Scott Stiefvater, a broker-owner in Pelham, said prospective homeowners are still looking at properties. ‘They just aren’t buying,’ he said. ‘I’m getting a little worried.’”

“It’s gone from multiple offers for more than asking price just hours after properties were listed for sale to no offers at all, even after price reductions. In Wesley Hills, for instance, Rosenblatt recently dropped the price on a four-bedroom, 2.5-bath raised ranch to $495,000 from $545,000. ‘There still aren’t any offers,’ she said.”

“Christine Garafola, an associate broker in Armonk, dropped the price on a four-bedroom in Mahopac from $949,000 to $889,000 in less than three months. The owner still isn’t getting what he’s asking.”

“Stiefvater said potential buyers are looking for value but skeptical of bargains. He cited an impeccably maintained four-bedroom Cape Colonial recently reduced to $659,000 from about $700,000. ‘The current list price is below market value. But now buyers think something is wrong with the house,’ he said.”

“The number of homes on the market in Westchester and Putnam counties has swelled from about 1,000 at the end of the first quarter of 2005 to about 1,500 at the end of the first quarter this year. In Rockland, inventory soared from 734 at the end of the first quarter of 2005 to 1,325 at the end of the first quarter this year.”

“Real estate brokers have concerns because inventory continues to grow, at an average pace of five to 10 listings in most communities each week. Stiefvater said there usually are about 25 homes for sale in Pelham. Now, he added, it has climbed to more than 80. In Clarkstown, Rosenblatt said, there usually are about six residential properties for sale. ‘Right now, we have about 45,’ she said.”

“Data for the second quarter won’t be available until July, but signs of a slowdown already were evident in the first-quarter numbers. Real estate agents and brokers speculate that second-quarter statistics will show an even steeper decline in sales.”

“At least some homeowners are panicking. Worried that increased supply will lead to rapid price deceleration, they are rushing to put their homes up for sale. Some of them think the market will only get worse, real estate agents said.”

“Peter Bell, broker-owner in Mamaroneck, said most sellers are willing to negotiate and are eager for offers. ‘Last year, only about 10 percent of all homes in this area had been on the market for more than three months. Now, at least a third have been on for more than three months. Since more properties are on for a longer periods, you see more price reductions,’ Bell said.”

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