The Housing Bubble

Well it’s desk clearing time and it’s going to be a lu-lu! “Dominion Homes Inc., which sells homes and offers mortgage financing services, said revenue from home sales dropped 46.2 percent in the second quarter, compared with the same period last year.”

From Hawaii. “The median home price on Oahu was $639,000 in June, short of the record of $668,300 set in May. There were 1,836 single-family homes and 2,582 condominiums actively being marketed in June, significantly higher than the inventory at the same time last year. Inventory levels are back up to the same levels as 1999, said economist Harvey Shapiro.”

“Inventory levels for condominiums more than doubled in June of this year compared to last year, with 2,582 condos actively marketed last month compared to 988 at the same time last year.”

“Local home prices are dropping a bit. Interest rates may soon escalate. ‘It may cause a little more foreclosures than we’re used to in the past,’ said Steve Higa, with the Hawaii Association of Mortgage Brokers. And that’s what some hungry home buyers are banking on. ‘You could get a better deal,’ said Higa.”

From New York. “The plateau of home prices in Dutchess County has now stretched more than a year, and, for the first time in what has been a long streak of year-over-year gains, average and median prices failed to exceed those posted a year earlier. The median price, $349,500, was down 2.2 percent from a year ago, and down $500 from May.”

From England. “House prices suffered their biggest one-month drop in June for more than five years. The drop of 1.2 per cent is significant, but not massive. The housing market has been enjoying a period of unexpected health recently, dubbed a ‘mini-boom’ because it was not expected to last that long. If the mini-boom is fading it will be no surprise.”

From Canada. “One of the country’s longest housing booms is finally running out of steam in Central Canada. After a string of record years characterized by heated bidding wars and double-digit gains in prices, major markets such as Toronto, Ottawa and Montreal are taking a breather.”

From Washington. “New construction and new listings have pushed inventory levels higher, broker Jeff Crandell said. ‘I don’t want to characterize it as a glut, but we’re substantially higher,’ Crandell said.”

“Since January, active residential listings have risen from 931 to 1,452 in June, according to Olympic MLS data. Median home prices hit a six-month high in May, rising to $254,950, but dropped again in June to $250,000.”

“One house Natalie Paige found in the Ballard neighborhood where she rents was about 800 square feet and cinderblock construction. ‘I’m not willing to pay a $1,700 mortgage for that,’ she said.”

“One bit of good news for buyers is an increasing number of homes for sale. King County reported 6,489 single-family homes for sale. That’s an increase of 951 from June 2005 and 462 from May.”

“Snohomish County had 3,483 detached homes on the market last month, up from 2,747 a year earlier and 3,255 in May. In Pierce County, 5,098 single-family homes were available last month, up 1,634 from last June and 381 from May.”

“Compared with a year earlier, condominium availability last month showed double-digit increases in King, Pierce and Kitsap counties.”

And from the Washington post real estate discussion. “Ashburn, Va.: I’m so mad at my neighbor. I bought my new home here in Ashburn last summer and plan to sell it next year (after holding two years to avoid taxes) to make a nice return on my investment. The problem is my neighbor is trying to sell his house (very similar to mine) right now and he keeps lowering his asking price.”

“Each time he lowers his price, I see my potential profits next year getting squashed. Doesn’t he realize he’s hurting the comps for all of his neighbors by doing this? I want to say something to him and tell him he should stop putting his interests ahead of his neighbors. What can I do to stop him?”

“Kirstin Downey: There’s nothing you can do. It’s his house. He may just be desperate to sell. Perhaps he has an adjustable rate mortgage that is rising, or maybe an option ARM that is resetting to a much higher monthly payment.”

“I hear from many, many buyers and sellers each month, and many sellers are finding the only way to sell a home amid this growing inventory is to cut the price. Perhaps last year’s prices were just illusory after all.”

The Capital has this report on the Annapolis, Maryland housing bubble. “Anne Arundel County home sales dropped 31 percent last month, as owners continued to cut prices in a softening real estate market, area real estate agents and analysts said this morning.”

“But that’s the bad news. The good news is that even though the median price of a home sold in June was more than $9,000 less than the previous month, things are much worse elsewhere in Maryland and around the country.”

“The median price for a county home was $351,750 according to a Rockville-based listing service. Since last month, the median dropped from $360,000. But in a telling sign of the continuing slowdown, only 750 county homes sold last month, a 31 percent drop from the same period a year ago, according to MRIS. The total value of those homes was $317,922,308 last month, a 30 percent drop from a year ago.”

“‘We’re seeing the same trend,’ Frank Nothaft, chief economist and vice president at Freddie Mac said. ‘Now we’re moving into a more typical market and a sharp slowdown.’”

“Candice Friday sells homes just outside Annapolis, where condos go for between $350,000 and $1.9 million. Many homeowners have become frustrated because they want to sell faster. ‘It’s taking quite a while,’ Ms. Friday said. ‘I have two listings here, and they’ve been sitting two to five months.’”

“Broker Butch Kline said homes are staying on the market longer because sellers don’t want to come down on their prices. The ones that do will sell more quickly, he said. For example, an Annapolis single family home listed for $439,000 sold within three weeks, he said. Last year, he would have listed the home for $475,000.”

“‘You have to have a seller who is reasonable,’ he said. ‘If they price higher, because they say, ‘well the house next door sold for this,’ than it will sit.’”

“Home prices dipped in Queen Anne’s County. The median sale price for a home there was $329,000, a nearly 11 percent plummet from that month a year ago. Only 79 homes were sold last month.”

“Realtor Mary Thompson said although inventory piled up, homes that are priced fairly are getting more attention, she said.”

“‘The houses that are priced even at 5 percent (more than worth on the market) are being looked over,’ she said. ‘Price is everything and the prices are correcting and that’s good for the market. Because the bigger the boom, the bigger the crash.’”

The Las Vegas Review Journal has the June numbers. “The number of homes for sale in Las Vegas topped 20,000 in June, an all-time high and up 32 percent from the same month a year ago, the Greater Las Vegas Association of Realtors reported Thursday. Climbing inventory, as well as a flattening of median prices, has caused great concern among local and national housing analysts.”

“Another 4,630 condominium and townhomes are listed for sale, an 82.7 percent increase from a year ago. Single-family home sales decreased 1.1 percent from May and nearly 24 percent from a year ago. Condos and townhome sales slid 22 percent to 592.”

“‘I actually thought the stats would be worse because home builders have gone crazy with their incentives,’ said Linda Rheinberger, president of the Realtors association. She said Beazer Homes was ‘bribing’ brokers with commissions of 11 percent to 13 percent on standing inventory.”

“(Researcher) Dennis Smith said a lot of the condos and townhomes that have come up for sale are apartment conversions that have been held by investors for a 12-month period to get capital gains treatment and have never been inhabited.”

“Larry Murphy, president of SalesTraq, said the big story is the number of incentives being offered by builders, including paying higher broker commissions, putting in free upgrades and paying for closing costs. ‘The list is getting longer every day, and for the last two months incentives are getting bigger,’ he said.”

“The FDIC noted that home prices in Las Vegas, Reno and Carson City appear overvalued in the context of economic fundamentals. ‘Las Vegas multifamily vacancies could rise if the converted condominium units return to the rental pool because of rising interest rates,’ the FDIC said.”

“The agency implied that higher interest rates could cause owners to sell or to lose their condos in foreclosures.”

“Add the lengthening inventory of unsold homes, and the big drop in existing home sales in May, and the outlook for banks seems none too rosy. Colonial Bank President Mark Daigle thinks a little weakening wouldn’t hurt because the housing frenzy of recent years was ‘frankly unsustainable.’ ‘The opportunity to take a breather wouldn’t be a bad thing,’ he added.”

“Nevada State Bank President Bill Martin said he could count 14 climbing cranes. He, too, had noticed ‘a little softness in our pipeline.’”

“Wells Fargo Senior Economist Scott Anderson noted that the rapid run-up in prices means that the exodus from California will slow because the equity gains and comparative advantage of moving here for cheaper housing has narrowed.”

“Anderson said the local drop in first-quarter sales was nearly double the national average. ‘And a good part of it is that speculators have left the market and that has brought prices down faster than the national average,’ he said.”

Some housing bubble reports from Wall Street and Washington. “Federal Reserve vice chairman Donald Kohn said the US central bank must heed the lessons of the 1970s by keeping inflation and public expectations about inflation in check. Kohn said the US central bank had a key role to play in reassuring the American public that their spending power would not erode ‘unexpectedly.’”

“‘The lesson from the 1970s..is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars,’ Kohn said. ‘Such an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments,’ he said.”

From Ken Harney. “Wall Street is sounding the alarm on one of the most popular ways to buy a house in many high-cost areas around the country, so-called ‘piggyback’ programs.”

“As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s, has upped the ante for lenders who seek to fund piggyback deals through capital market financings. The move is likely to raise interest rates and fees for some homebuyers this summer, mortgage experts say, and could reduce the volume and availability of piggyback programs overall.”

“The reason for the change is that an exhaustive study of the performance of piggyback loans found them anywhere from 43 percent to 50 percent more likely to go into default than comparable stand-alone first-lien purchase transactions.”

“Piggyback plans were developed as a creative response to soaring home prices and borrowers’ desires to stretch their down-payment cash. According to a study, piggybacks quadrupled their market share between 2001 and 2004. In a sample of loans in California markets the percentage of piggybacks exceeded 60 percent in some cases.”

From Reuters. “The regulator for U.S. government-sponsored housing enterprises expects to complete talks on possible mortgage portfolio limits for Freddie Mac, by the end of July. Freddie Mac’s portfolio in May shrank for the first time in four months, decreasing by an annualized rate of 1.2 percent to $723.1 billion. The company attributed this to lower mortgage purchases due to reduced mortgage origination volumes.”

From Fitch Ratings. “Fitch acknowledges that Freddie Mac’s business strategy has been undergoing a gradual shift towards increased purchases of floating-rate and alternative mortgage products, reflecting the greater significance of private-label issuances in the secondary market.”

“Although fixed rate product still comprises over 60% of the total retained portfolio, the percentage of floating-rate product, particularly alternative mortgages, has been increasing.”

“Fitch expects the firm to expand its acceptance of alternative mortgage product and hedging instruments. The net interest margin may remain pressured with a flat yield curve.”

Also from Fitch Ratings. “While Fitch Ratings continues to project a soft landing for the U.S. homebuilding sector in the intermediate term, recent new home sales data and major builders’ orders, net of cancellations, have registered sharper declines than expected.”

“‘Increasing credit costs and the higher energy prices will take their toll, and revenue and profit growth among the major homebuilders should slow and most often mildly decline during the second half of 2006,’ said lead homebuilding analyst Bob Curran. ‘Despite steady Fed increases in short-term rates, which are likely to continue in the near term, U.S. interest rates remain below the historic norm and housing activity in the aggregate has continued moderately above trend.’”

The Rocky Mountain News has some numbers for June. “Home sale prices soared to record levels in June, as buyers continue to snap up expensive houses in the Denver area, even while the number of unsold houses on the market also set a record, according to reports. The number of unsold homes rose to 31,900, a 23 percent increase from the 25,934 in June 2005 and a 4.7 percent increase from the record of 30,457 set in May.”

“The supply is rising along with interest rates, which makes it more difficult for first-time buyers to qualify for mortgages. Also, the number of foreclosed homes is rising near record territory, adding to the supply of unsold homes clogging the market.”

“Typically, this would mean that prices would drop because sellers would be forced to lower their prices. But sales activity at the top of the market remains brisk, skewing the overall average and median prices, Realtors agree.”

“‘The law of supply and demand have to be taking over at some point,’ (agent) Steve McGuire said. ‘You have these ultra-high properties carrying the market for the past few years. I think the lower end of the market is going to just get tougher and tougher for sellers.’”

“Independent broker Gary Bauer said the market was going to perform better in June ‘even though a lot of records were broken.’ But the number of unsold homes was expected, he said. ‘I still think it is close to its peak, but it would not surprise me if they don’t creep up by another 1,000 homes or so in July,’ Bauer said. Bauer said prospective buyers have no sense of urgency and are looking at a lot of homes.”

“(Broker) Darrel Evangelista of Cherry Creek said that with a half-year’s data to analyze, ‘The market is a little slower than last year. The inventory is increasing, and there are not quite as many buyers in the market. Hopefully, interest rates will not climb much more and stay fairly steady.’”

“He said the record number of unsold homes on the market doesn’t trouble him because with the metro area’s growing population, he would expect the inventory number to increase. ‘I’m not concerned about a housing bubble or prices crashing like they did in the 1980s,’ he said.”

A pair of reports from Florida. “Only 221 builders applied for new-home permits in Port St. Lucie last month, compared with 752 in June 2005 and monthly averages above 500 each year since 2003. The city’s new-home starts have dwindled nearly every month this year, with 375 permits issued in February and 325 in May.”

“City officials knew this slowdown was coming. They just didn’t expect it to hit so hard, so suddenly. ‘I think things were overpriced,’ assistant building official Bob Kymalainen said.”

“With a seven-month supply of vacant homes on the market in St. Lucie County, real estate analyst Brad Hunter in West Palm Beach doesn’t expect the slowdown to subside any time soon. If the slowdown continues, the building department will abandon its six-day workweek in favor of five days, Kymalainen said. Three new inspectors planned for the upcoming budget year won’t be hired.”

The Herald Tribune. “After three years of happy times and quick sales, real estate foreclosure is back. The U.S. real estate market has cooled, and foreclosure rates are notching upward and are almost certain to head higher. The distress isn’t limited to Joe Six-Pack. Many pros and semi-pros are starting to wish they owned fewer homes than they do, especially if they bought recently.”

“In May, there were 1,441 homes listed in North Port, but only 80, or 5.5 percent, sold, says Dave Hofer, who keeps statistics on the area. In Port Charlotte things were worse: 1,543 listings and 72 sales, or 4.6 percent.”

“Down in Venice, George Huhn, a commercial real estate broker with an investor following, helped a couple of banks by taking over problem loans in 2001-02. Now, banks are starting to call him again, asking him to relieve them of problem first mortgages they held onto, before they become foreclosure actions.”

“Banks do it for two reasons. ‘No.1, for reasons of negative publicity and image, the banks don’t want to be involved in foreclosure actions,’ he said. Secondly, during the boom years, some lenders all but disbanded the departments performing the difficult work of foreclosure. ‘Now they are looking at some hard choices, and what they are electing to do is outsource, and that is where we come in,’ Huhn said.”

“Even the pros and semi-pros in the Sarasota Real Estate Investors Association are feeling some distress these days. At one recent meeting, investor Peter Magnuson acknowledged the issue in a pep talk to the 75 or so members present. ‘There’s a little bit of blood in the streets,’ Magnuson said. ‘I think that is the people who overcommitted themselves and are looking for a way to unwind what they got into.’”

“‘People who bought these pre-construction deals hoping to make big money on them and now they’re stuck with them and it is eating them out of house and home,’ he said.”

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