The Housing Bubble

A trio of reports from California. The Monterey Herald, “Speaking this week, Leslie Appleton-Young, vice president and chief economist for the California Association of Realtors, painted a picture of a changing housing market, where for-sale homes linger, multiple bids no longer push prices skyward, and homeowners are more likely to hold onto what they have.”

“Last year was a milestone, with 480,000 homes sold in California at or above the $1 million mark. ‘Many in California have reached the dream of living in a million-dollar home without moving,’ said Appleton-Young.”

“Appleton-Young said Realtors can’t afford to misprice homes or to take on clients who aren’t serious about selling. ‘This is not the kind of market where we need excess inventory,’ she said.” “J.R. Rouse, Monterey County Association of Realtors past president, said it is still a good time for buyers to act. ‘When you look at the market as a whole, you can buy a lot more house for less than you could six months ago,’ he said.”

“Another chapter of the state’s real estate story, yet to come, is the fallout from an oversaturated market of real estate professionals. The road up to the Tehama Golf Club for the annual Realtors meeting spoke volumes; no shortage of Escalade, Mercedes-Benz, Lexus and Jaguar emblems, some BMWs.”

“But there’s already been fallout: 110 members have left since January, with more expected to follow as sales remain sluggish.”

The Fresno Bee. “Property in the Valley appears to be holding its value better than some other parts of the state, especially around the capital. Prices in parts of Sacramento and Placer counties fell from a year previously.”

“The median price in Placer County declined 2% from May 2005, with Auburn showing the sharpest drop; 8% to $439,000. In nearby Fair Oaks, values fell almost 16%. Joan Jolly, president of the Fresno Association of Realtors, said, ‘We’re just having a little air coming out of the balloon.’”

The Sacramento Bee. “Sacramento home shopper John Daniels said the thought of falling prices worries him less than buying a place at current prices that consume too much of his pay. ‘I kind of like to have golf weekends and things of that nature,’ he said, ‘and having to pay outlandish amounts for a mortgage, that’s what’s scaring me more than anything.’”

“Todd Cramer, who has been building homes since the 1960s, said the market has been fueled by years of risky borrowing. A slowdown, he said, would actually help bring prices in line with the typical buyers’ finances. ‘I think we’re at large risk here, but it’s good for Sacramento,’ Cramer said. ‘We need to see prices coming back down for our economy. I think it would be a good adjustment.’”

Thw Washington Post reports on the pending Fed decision. “The Federal Reserve is on track to lift its benchmark interest rate again today for a 17th consecutive quarter-percentage-point increase over 25 months, making this the longest sustained campaign on record of raising interest rates.”

“So why isn’t the economy choking by now? The short answer is that money is still pretty cheap, in historical terms.”

From MarketWatch. “Evidence is mounting that the global property cycle is turning down, as rising interest rates and heightened inflationary pressures combine to put the brakes on demand for real estate, according to a Morgan Stanley report.”

“‘Due to deflation shocks, global inflation has been low, which allowed major central banks to keep interest rates very low, in turn fueling property,’ economist Andy Xie said. ‘As inflation picks up simultaneously around the world, interest rates are rising everywhere, and the property boom is turning into a bust.’”

“Unlike in previous property cycles, Xie said institutional property investors have been active in shifting capital between different cities, leading to the rare situation where prices gained in unison around the world.”

“‘Innovations in the global financial system have led to a rising correlation of property markets to each other and central bank-policies. It has essentially turned deflationary shocks of the past 10 years into a global property bubble,’ Xie said.”

“He cites some telling statistics to illustrate his point. The value of U.S. housing has risen to 173% of gross domestic in 2005 from 135% in 2000. And in Australia, housing values rose to 347% of GDP in 2005 from 271% in 2000.”

From the Reuters summit. “U.S. real estate executives hope the Federal Reserve Bank signals interest rate hikes are complete after the latest expected increase this week. Inflation and potential Federal Reserve interest rate hikes, and how many of them, are the top concerns among the executives, who spoke at the Reuters Real Estate Summit.”

“Beazer Homes CEO Ian McCarthy does not think the Fed has been too aggressive so far, but worries about more increases beyond this week. ‘If there’s one more increase..that would probably be good. Do we need any more than that? I’m not sure that we do,’ he said. ‘We don’t want to tighten the economy down so far that it impacts the markets.’”

“However, Robert Toll, CEO of Toll Brothers said the repeated quarter-point interest rate increases have been somewhat maddening. ‘This Chinese water treatment of a quarter of a point (hikes), it hasn’t had its desired effect,’ he said. ‘Do I think the Fed has overdone it? No,’ Toll added. ‘I think the Fed has underdone it in the past.’”

An update. “The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5-1/4 percent.”

“Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”

“Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

“In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.”

The Herald Tribune has this update from Florida. “For months, real estate pundits have been talking about..an erosion of pricing. In May, in Southwest Florida, it happened. Prices in the Charlotte County-North Port market dropped 2 percent when compared with the same month in 2005. It might be the first drop in pricing since the early 1990s, long-term market observers said.”

“In the Sarasota MLS, for example, there are now 7,304 houses available for sale, three and a half times the level of a year ago. The average weekly sales rate is now 97, down 38 percent from a year ago.”

“‘The rate of deterioration has accelerated,’ economist David Scott said. ‘For every house that was available for sale last year at this time, there are four or five times as many now.’”

“Peter Schiff, an acknowledged long-time real estate bear who runs an investment firm, said home prices are at the beginning stage of a fairly lengthy decline that will leave many homeowners, investors and lenders hurting. ‘The market has topped. We haven’t had the bursting yet. There is still complacency out there, and denial,’ he said.”

“Statistics show the market is absorbing 15 percent of the available supply, Schiff said. He figures that by the end of the year, less than 10 percent of the houses now for sale will sell, leaving record-high supply. ‘If you figure prices started getting out of control three or four years ago, prices are going to fall back below what they were when the whole thing started,’ he said.”

The Wall Street Journal. “In some markets, such as South Florida, vacancy rates for large apartment buildings are down and rents are up. However, the supply of condos and homes available to rent in the region is growing as investors clamor to rent out properties they are having trouble selling.”

“Owners of large rental buildings fear that this ’shadow supply’ of rental properties could eventually put a lid on rent increases in some markets where speculation has been rampant.”

“‘We’re having a flood of rental properties coming back into the market simply because the investors who bought with the intention of flipping them have not been able to,’ says Brenda F. Gerdes, broker-owner of a property-management firm in Port St. Lucie, where average rental rates for properties owned by individual investors have fallen about 20 percent over the past year.”

“Real-estate agents say individual investors need to be realistic about their asking rents, even if the rent isn’t enough to cover their monthly costs. Robert Fowler, owner of a rental Web site, tells clients to base their asking rents on what similar properties are fetching, not the rents charged by large apartment complexes. If tenants aren’t forthcoming, ‘don’t wait too long before making adjustments,’ he adds.”

“J.P. Johnson has been trying for the past three months to rent out a four-bedroom, 31/2-bath home in Palm Beach Gardens, that he purchased for $661,000. He recently dropped the asking rent to $3,000 from $3,300 but has yet to find a tenant. ‘The market has slowed down,’ he says. ‘We have had a few phone calls, but nothing solid.’”

The Patriot Ledger reports they are still talking about a shortage in Massachusetts. “Where have all the buyers gone? A single-family home on the market now takes an average of 121 days to sell, compared with 96 days a year ago. Condo sales are almost as sluggish. Those trends have led to a record number of housing units on the market in Massachusetts for a second month in a row.”

“‘This trend is going to continue to a flattening-out of appreciation to the 3, 4, 5 percent range,’ said David Wluka, the president of the Massachusetts Association of Realtors. Wluka said more than two-thirds of the homes on the market are priced above what someone with a median income in the Bay State can comfortably afford.”

“‘The mismatch (between incomes and home prices) continues and it’s another concept that’s hard to get across to people,’ he said. ‘Here we have double the inventory we had last year and we still have a housing shortage.’”

“Richard Cahill, president of (a) Norwell-based real estate agency said he believes the market may actually be reaching its bottom. ‘People try to figure out where is the end and where is the beginning’ of a trend, he said. ‘The next thing people will be saying is, ‘Heck, I wish I bought when it was there.’”

The Needham Times has this report. “Needham’s median price fell from last year by $59,000 to $582,000. Many local real estate agennts consider the fall in prices an adjustment to the double-digit increases seen over the past few years.”

“‘Prices moderated slightly since late winter or early spring,’ said (agent) Rich Gatto. ‘It feels as if sellers are getting more realistic.’”

“Gatto said clients were trying to fetch prices as high as their neighbors received a year or two ago. But the properties were remaining on the market month after month. Eventually, sellers were convinced to lower their list prices.”

“A couple of years ago, an ‘all-time’ high for numbers of properties listed was 116, according to (broker) Louise Condon. As of last Sunday, 231 single-family homes were for sale in Needham. ‘The stock just doubled,’ Condon said. ‘People had their choice.’”

“Despite the price adjustments and plethora of options for buyers, though, (consultant) Harriet Lieb said properties just sit, unsold. ‘There are some really good buys out there, but they are just not going,’ Lieb said. ‘There should be a run on these houses, but there isn’t.’”

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