The Housing Bubble

The California press reacts to the May numbers. The Daily News, “California’s residential real estate market continued its decline in May with the median housing price making its first single digit increase in more than six years and a trade association on Monday issuing a big downward revision in its 2006 sales forecast.”

“The California Association of Realtors now expects the sales total this year to fall an annual 16.8 percent, 14.8 percentage points more that last September’s forecast. That would be the steepest drop since a 30.2 percent plunge 24 years ago.”

“Sales fell in all 20 major markets tracked by the association. The declines ranged from a high of 44.4 percent along Santa Barbara County’s south coast to a low of 2 percent in Santa Cruz County. Year-to-date sales are down 19.5 percent, the association said.”

“Santa Barbara County’s median fell 9.3 percent to $677,630; north Santa Barbara County fell 3.2 percent to $453,330; Santa Cruz fell 0.3 percent to $755,000; and the Palm Springs/Lower Desert area declined 3.54 percent to $374,830.”

“‘This is kind of the apex..of the curve. There is no doubt we’ve been expecting this. We thought it would happen earlier,’ said John Karevoll, an analyst DataQuick.”

The Daily Bulletin. “A local real estate agent says Tuesday’s housing report from the California Association of Realtors can be summed up in one word. Yay.”

“That was (broker) Bill Velto’s reaction to the news that home prices increased only 8 percent statewide from May 2005 to May 2006. ‘It’s the first time in nearly five years that we’ve had less than a double-digit increase,’ said Velto in Upland. ‘The indicators are all good and it’s the kind of price increase that is a lot more reasonable and sustainable than what we have been having.’”

From Long Beach. “The California report shows price depreciation was seen across some Southern California communities for the first time in years. The median price in Cerritos fell 0.1 percent, though prices there are still high, with a median of over $639,000. Still, about eight other Los Angeles communities saw price declines.”

“‘We’re beginning to see more communities showing year-over-year declines,’ CAR economist Robert Kleinhenz said. ‘It’s going to take some getting used to.’”

From San Francisco. “Homeowners across most of the Bay Area stand a 55 percent or greater chance that their property values will slip in the next two years, according to a quarterly study by a mortgage insurer. Still, many industry insiders remain optimistic.”

“‘The lending community is endlessly innovative, and they’re trying to develop products to deal with the affordability problem in California,’ said Mark Milner, chief risk officer at PMI Mortgage Insurance, which released the survey”

The Record.net. “Local builders report that although prices generally haven’t been slashed in San Joaquin County, buyer incentives have become commonplace in the past several months.”

“National Association of Home Builder’s chief economist, David Seiders, said the group’s builders surveys indicate weaker demand for homes coinciding with higher interest rates, deepening affordability issues and a retreat of investors/speculators from the market.”

“‘We don’t think the cooling process for housing is over yet, and we wouldn’t be surprised to see..some decline in coming months,’ Seiders said.”

The State Hornet. “Several University of California-Los Angeles’ Anderson School analysts said a housing market dip could lead to job losses in some industries, especially construction.”

“The prediction of a slowdown in the real estate market did not come as a surprise to many forecast attendees. Addressing an audience of mostly corporate businesspeople, Mike McCook asked members of the crowd to raise their hands if they thought real estate was never going to slow down.”

“The crowd laughed at the nonexistent show of hands.”

“Edward Leamer, director of the Anderson Forecast, began the event by jokingly requesting that audience-members keep their cell phones on, in case they were called and told their house was offered a sale before house prices begin to decrease.”

Some highlights from a recent speech by Emil W. Henry Jr., Assistant Secretary for Financial Institutions, U.S. Department of the Treasury. “Imagine for just a moment if some of our most prominent complex financial institutions announced major accounting improprieties, significant restatements and serial failings and shortcomings in risk management and internal controls, and then further announced the cessation of annual reports and other standard disclosure materials.”

“Does anyone doubt the ferocity of market discipline that would sweep down upon these institutions in the form of higher borrowing costs for market-based funding and heightened counterparty scrutiny? Simply put, traditional market discipline has not applied for the GSEs.”

“That lack of market discipline is reflected in preferential funding rates that result directly from the market’s long-standing false belief that the US government guarantees or stands behind GSE debt. Of course, it is this funding advantage which drove the expansion of the portfolios in the first place.”

“Systemic events can unfold by direct and/or indirect spillovers. How could such a systemic event begin? They are many possible sparks but an unexpected sharp or volatile..interest rate ’shock’ would certainly be a distinct possibility. If such an interest rate shock occurred in a way that was not captured by the models, the results could be without precedent.”

“The GSEs make use of a considerable amount of short-term funding. Short-term instruments account for more than 20 percent of all outstanding debt for both Fannie Mae and Freddie Mac. In a financial crisis, the GSEs might face difficulty in accessing debt markets. This difficultly might force the GSEs liquidate some MBS holdings, putting excessive downward pressure on prices in a market that the GSEs are supposed to be stabilizing.”

“There are virtually limitless scenarios. But you get the point. We already know the lessons here. There is no need to endure the test. I feel compelled to remind you that the federal government has taken steps to assist a troubled GSE in the past. Do we really want to be faced with unwarranted and irresponsible calls for bailing out another failed GSE?”

“What I hope you ask yourself after hearing this is ‘Why?’ and ‘What can we do about it?’ The answer to the first question is unsatisfying. Ignoring all the rhetoric and spin, the simple truth is that there is no need for our financial markets to be exposed to this risk. Passionate statements made by the GSEs to the contrary, the GSE investment portfolios are not necessary for them to stay true to their mission.”

“The answer to the second question is much more satisfying, we can address this risk rather easily. As long as the portfolios of the GSEs are reduced gradually and responsibly, the overall impact to the housing market should be trivial.”

Bloomberg has this report on the ‘housing decline. “Ko Ueno hasn’t found a buyer for his one- bedroom condominium in Cambridge, Massachusetts, even after cutting the price three times since October and offering a $6,000 cash rebate. Ueno, whose apartment near Harvard University went on the market for $329,000 and is now listed at $299,000, is caught in the first U.S. housing decline since 1999.”

“‘The housing market isn’t just cooling, there is a decided chill in the air,’ says economist Chris Rupkey. ‘Market power is shifting from sellers to buyers as unsold inventories continue to rise.’”

“Many sellers are finding they must cut their initial asking prices by 10 percent or more to entice buyers, according to brokers. Real-estate agents sound more like car dealers as they use phrases like ‘cash back,’ ‘buyer rebates’ and ‘must sell.’ They speak of being ’skunked’ at open houses, meaning, no one showed up, even after the sellers made ‘price improvements.’”

“‘I’ve learned to bring a good book with me,’ says agent Christopher Rotondo, as he sits alone at an open house in Newport, Rhode Island.”

“Investors who buy homes to resell at a profit are rushing out of the market, putting more pressure on prices, says David Berson, chief economist at Washington-based Fannie Mae. Such investors bought a record 2.34 million homes last year, according to data from the realtors group.”

“‘Investors can put their money in any asset they want, and with returns slowing, it makes it more likely they will pull out of housing,’ Berson said.”

“Shelley Grandy says investors ‘dumping’ their properties have stalled her efforts to sell her four-bedroom brick townhouse in Sterling, Virginia. Grandy reduced the price of her home to $435,000 this week, after listing it for $455,000 in February. In addition, she’s offering $10,000 for ‘closing cost help.’”

“‘The flippers turned it into a buyers’ market because they’re now desperate to sell,’ Grandy says. As for her townhouse, ‘this is pretty much my bottom price,’ Grandy said. ‘I won’t go any lower than this. I’ll just hold it and rent it, like a lot of people are doing.’”

The Boston Herald. “A new study finds Boston housing remains at its highest risk ever for price declines, with a nearly 60 percent probability that home values will fall during the next two years. Meanwhile, the Massachusetts Association of Realtors reported yesterday that the number of unsold properties on the market has reached an all-time high.”

“MAR said sellers had 68,574 houses and condos listed for sale statewide in May, a 5.1 percent jump from a previous record set just one month earlier. All told, unsold inventories have set fresh records in each of the past 15 months.”

Some quotes from the Reuters housing summit. “A potential housing bubble and rising inflation are the two biggest threats to the U.S. economy, the head of General Electric Co.’s vast real estate operations said on Tuesday. Excessive interest rate hikes by the Federal Reserve also pose a danger to an economy that’s currently growing well, Michael Pralle, CEO of GE Real Estate, said.”

“‘If you have a significant value decline in major markets like New York, Boston and San Francisco, that could significantly impair confidence in the economy,’ Pralle said, adding that he did not think there was a national housing bubble.”

“U.S. home builders are adding incentives to lure buyers but are keeping prices steady, real estate executives said this week. ‘In the latter part of 2005 and 2006, we’re learning how to creatively lower prices in those communities that are having a tougher time,’ said Robert Toll, CEO of Toll Brothers Inc. ‘Incentives are all over the place,’ he said.”

“After years of quick and easy sales, a slowdown in the U.S. housing market has home building executives reconsidering their advertising plans. ‘When times are very good, you tend not to put as much effort into advertising and you just trust that it’s working,’ Ian McCarthy, CEO of Beazer Homes. ‘When times are getting a little tougher, as they are today, you put more effort into it,’ he added.”

“Cancellation rates among U.S. home buyers are running above last quarter’s levels as the housing market slows, the chief executive of Toll Brothers Inc. said on Tuesday. ‘I think our cancellations are running higher than on the last call,’ Robert Toll said at the Reuters Real Estate Summit in New York. Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset.”

And MarketWatch reports on a sector downgrade. “Banc of America Securities analyst Daniel Oppenheim on Wednesday lowered his profit estimates on several home builders with a June survey of real estate agents pointing to further weakness in the housing market. The spring selling season ‘ended without ever starting,’ he said.”

The Florida Press reacts to the May numbers. “Local sales of existing single-family homes and condominiums in May continued their double-digit downward spiral for the fifth straight month, the Florida Association of Realtors said Tuesday. ”

“‘When prices have been artificially increased by speculators flipping units back and forth, always at a higher price, that works fine until you reach the end of the ‘greater fool theory,’ when there’s nobody out there to pay a higher price than you paid,’ said real estate consultant Jack McCabe. ‘We reached that point at the start of 2006,’ McCabe said.”

“‘Thirty percent of the market is investors, and they got burned at the end,’ said Mike Dooley, president of the Florida Association of Realtors. ‘It takes a lot for their properties to be absorbed.’”

The Miami Herald. “Fewer homes are selling, as reflected in the numbers released Tuesday. The result: a ballooning number of homes with ‘for sale’ signs across South Florida. The big question now is just when the stalemate will end and where the market will then go.”

“‘This is probably the precursor to prices finally starting to come down and sales activity picking up again,’ said (broker) Pat Dahne in Coral Gables. She predicts prices for single-family homes will drop early next year and spark renewed buying, but the condo market will take longer to recover.”

From Florida Today. “Kevin Manuel, who is in the process of moving to Brevard County from the Cleveland area after taking a new job, said he is proceeding slowly as he shops for a home. ‘All the people I’ve talked to are extremely motivated, ‘price negotiable,’ Manuel said. ‘Week to week, I see the prices dropping.’”

“The news was bleak for condominium sales in Brevard. Sales fell 76 percent for the year, with 60 sales in May, compared with 246 in May 2005. The median sales price for condos fell 11 percent to $196,700 in May, from $220,000 a year earlier.”

The Naples News. “Some agents, such as Naples Area Board of Realtors President Jo Carter, said she’s telling people if they don’t need to sell right now, then don’t do it. On the flip side, she said, she’s letting buyers know they have a lot more opportunities now.”

“MLS numbers show the average price of all Naples-area homes and condos peaked at $794,353 in April and have declined to $682,443 in June, Carter said.”

“(Broker) Joe Ballarino said the number of people getting into the real estate business appears to have leveled off. ‘There’s just not enough money to go around,’ Ballarino said.”

From Daytona Beach. “The ever-rising prices for existing houses in the Volusia-Flagler market are little comfort for Florence Flint. The Ormond Beach resident has been trying to sell her house in Lake Walden Cove since May 25. ‘I don’t think the Realtors here know how to go after customers now. They are not assertive enough,’ she said.”

“Sales of existing condominiums locally also fell in May, down 64 percent to 73 units, compared to 200 in 2005. The median sales prices of condo units also dropped to $222,500, compared to $266,700 in May 2005.”

The News Press. “The number of homes sold in Lee County plunged 24 percent as the inventory of houses on the market hit a record high. ‘I think you’re going to see a little bit of coming down in the market in Fort Myers. It can only boom so long,’ said Gordon Burnam, who is closing this week on a new home in south Fort Myers.”

The Sun Sentinel. “South Florida’s housing market continued its yearlong slump in May. ‘They’re seeing prices reduced and they say, `Maybe it’s just as well that I wait a few more months and see how good the deals get,’ West Palm Beach analyst Brad Hunter said.”

“The market was bound to cool as prices rose to unsustainable levels, analysts said. They also cited rising mortgage rates, insurance prices and property taxes, as well as a glut of homes for sale. Sean Robertson and his wife decided to rent. ‘That’s going to be better for us,’ he said. ‘I didn’t want to get stuck with outrageous rates for insurance and property taxes. And I’d like to see the market soften a little bit more.’”

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