The Housing Bubble

Several readers wanted to discuss the economic effects of a bursting housing bubble. “All of the growth in the last 5 years has been driven by debt. We’ve had anemic job growth, no real wage gains, a government going more and more into the red qnd consumers with all time debt and no savings. A housing boom based on loose, unregulated, exotic loans. Which has been responsible for most of the growth in GDP.”

“So if (or when) we hit a real debt crisis, how much of a sh*t storm will we be in?”

One reader replied, “We already have a debt crisis my friend….It has not reared its ugly head because Joe Shmoe has been able to service it. Watch the jobs data. And, anecdotal evidence of deterioration like being able to get a electrician the same day you call.”

Another said, “I’d appreciate more input from people in the business on their market observations, good and bad. What are those in the business going to be doing if they decide to go back to a prior work environment. There are thousands of support staff in escrow, title, mortgage etc….that will be affected by markets slowing down. This doesn’t include the construction industry, which is vast.”

“For example, we know a wonderful husband & wife Realtor team that is really struggling in sales. They are considering alternatives to real estate and we happen to be in market that is still plugging along rather well Seattle-Puget Sound area.”

And another said, “I was wondering along similar lines this morning. Is it really a sure thing that the debt/credit crisis will become a true crisis? All around me I see people buried in debt, yet they keep piling it on without worry. I’ve known people who shrugged it all off by casually filing bankruptcy (before the new laws were in place).”

“I’ve seen people with the attitude of ‘you can’t take it with you! and they can’t come after me for the money once I’m in the grave!’ So if more people have these attitudes than don’t, what’s to put a stop to it all?”

The Business Journal of Phoenix. “The U.S. economy created 121,000 jobs in June but that number was weaker than expected and the two key sectors in Arizona, construction and retail, lost jobs last month. The construction job decline comes as the housing market has cooled substantially in Phoenix and other major U.S. markets.”

“‘Underlying the weakness in employment growth is a weakening housing market and a sagging retail sector. Construction employment dropped by 4,000 jobs in June and retail lost 6,600 jobs that same month,’ said economist Christian Weller. ‘This may reflect the fact that a weakening housing sector provides less fuel for people’s consumption due to fewer refinancing opportunities.’”

“The Business Leaders Confidence Index, compiled by the University of Arizona, showed its largest single drop, sliding 8.4 points to an overall score of 49.6. A third index reported an 8.9 percent decrease in business leaders’ views of economic conditions, bringing the index down from 62.6 in January to 53.8 in June.”

“Fueled by a sharp increase in delivery times and inventories, as well as a decline in new orders and production, the index is now approaching the 50-point line, which indicates a recession forecast. Tom Fraker, ASBA’s executive director in Phoenix, agreed that the current economic indicators are lagging, especially housing start forecasts.”

A pair of reports from California. The Union Tribune, “Shares of Brookfield Homes dipped yesterday after the company cut its full-year forecast for home sales, mostly because of slowing markets in San Diego and Washington, D.C. The company, which also builds homes in the Bay Area and greater Los Angeles, blamed the bulk of the sales decline on the San Diego/Riverside region and in the nation’s capital.”

“For the first six months of the year, Brookfield had orders for 94 homes in San Diego/Riverside, where it has seven communities actively selling. That compares with orders for 342 homes in six communities for the same period last year.”

“‘Those numbers are very consistent with the year-over-year decline in home sales,’ said Peter Dennehy, VP of a real estate advisory firm. ‘I think we’re all used to it now. Year-to-date sales levels, whether you’re looking at the new or resale market, are off about a third.’”

“Rising interest rates and buyer uncertainty are driving the slowdown. San Diego County’s median sales price was $490,000 in May, down from a peak of $518,000 in November, according to Dataquick.”

The Tri Valley Herald. “A chief economist for the California Association of Realtors said the housing market isn’t a bubble ready to burst, but more of a souffle with prices of higher-end homes coming down more than others.”

“Marian Norvis, president-elect of the Central Valley Association of Realtors based in Lathrop, said Leslie Appleton-Young confirmed the differences between seller expectations and market direction.”

“‘A lot of that seller expectation, in our neck of the woods California and the Central Valley in particular, (they) think the national (real estate) news applies to us,’ Norvis said. ‘But it doesn’t. We’re like our own country.’”

A few readers suggested a topic on what we should be expecting from the various governments/institutions in regard to the housing bubble. “I wouldn’t want this to turn into a ‘political’ discussion. Without getting into party stances, what I’m wondering what type of leadership are we looking for as this downturn plays itself out?”

“IE: Full disclosure? A call to conservation? Without bashing those in office, what would you like to see our leaders do?”

One replied, “Our leaders = misnomer.”

And another said, “I would like to see the dollar return to being on some type of standard, such as gold or silver, instead of it leaving it’s exact value up to people’s imaginations. With some of the prices that people are paying for homes, especially when you tack on what they’ll pay in interest, people here don’t seem to think their money is really valuable at all.”

One reader looked at the tax angle, “Now that Fall elections are looming, I wish we could have a thread that skewers all the politicians who have failed either to bank all of the windfall property taxes the bubble generated, or to reduce the millage (rate) to compensate.”

“The electorate is going to be really pissed when, in the middle of all their other coming financial woes, local governments raise property tax rates to support the bloated bureaucracies they bought with the falsely-based revenues of the housing bubble.”

“I’m sure that somewhere, some local governments acted responsibly, but I don’t know where they are. For the rest, throw the bums out.”

The New York Times has this report on Manhatten condos. “Condominiums have become a familiar sight in Manhattan in the last couple of years. But as these condos are marketed, each carrying sky-high prices and a competitive list of amenities, and still more are breaking ground, it is hard not to wonder whether there are enough buyers to go around.”

“Not only are there thousands of condos currently on the market, but the state attorney general’s office shows that this building binge has not yet slowed down and may produce a supply of new apartments that could be around for a while.”

“So far, applications have been submitted for more than 24,000 condominium apartments since January 2004, 7,000 of them in the first half of this year alone. This increase in filings comes as supply in the current market has been rising steadily, with broker listings nearly doubling since 2004. And since many developers list only a sampling of apartments in new buildings, the numbers of apartments available for sale is probably significantly larger than the inventory listed with brokers.”

“Sales slowed sharply at the beginning of the year, when buyers hesitated because of the uncertainty about the direction of housing prices. Jeffrey Jackson, the president of an appraisal company, said he had been consulted on half a dozen projects that may be postponed or converted to rentals.”

“The bullish view of the Manhattan real estate market is based on the belief that it is unique. As Gary Barnett of Extell put it, ‘New York is the epicenter of the world, and everybody wants to own something here.’”

“Susan Petri said that she and her husband have been shopping for a condo and that they found the same high prices at every place they looked. ‘This is New York, the demand will always exceed the supply,’ she said. ‘Everyone wants to live here.’”

“But her husband, Roland, was more skeptical. They are trying to decide whether to settle in New York, where she now works, or in Scottsdale, Ariz., where he practices emergency medicine. He observed that the amenities touted in buildings in Manhattan were not that different from those found in new homes in Scottsdale and wondered whether they should wait to see if prices came down.”

“During the years when prices were rising sharply and apartments were scarce, buyers were conditioned not to ask for concessions. If the price was too high, they would walk away. Today, appraiser Jonathan Miller has this advice to buyers: ‘Always try to negotiate. Developers may be more open than in past years to negotiating.’”

“At 170 East End Avenue, brokers were saying earlier this year that sales were slow. Orin Wilf, Skyline’s president, disputed this but added, ‘We have been negotiable on our prices. We are willing to work with customers,’ he said. ‘If a customer walks into our sales office and wants to spend $5 million on an apartment, and the apartment they want is $5.4 million, over 99 percent of the time the deal gets done.’”

“At another smaller project, the Abbey, a former parish building on East 16th Street being converted to condominiums, one apartment, a duplex on the top two floors, sold at a discount of $500,000, or about 27 percent below the asking price. Eight of 31 apartments are still listed as available.”

“‘From the developers’ standpoint the market talks to you,’ Herbert Hirsch said. ‘The market tells you what your property is worth.’”

“The New York Times reviewed condominium plans for larger projects, those with at least 30 units or those valued at more than $20 million. The review found that applications for 24,400 apartments in 240 larger projects in Manhattan and 5,000 apartments in 75 projects in Brooklyn had been submitted since January 2004. Of these, by the middle of June more than 13,000 had been approved for sale in Manhattan and 2,900 in Brooklyn.”

“The 24,400 applications far exceed the number of apartments actually on the market.”

“Last week, a report put the current inventory at 7,640 apartments, both co-ops and condominiums, up from 3,922 in 2004. In recent years, the total number of annual apartment sales in Manhattan has been estimated at 10,000 to 12,000.”

“Many newer projects, including conversions of rental buildings, are also in the works. There were 10,800 apartments in large Manhattan projects still awaiting approval for sale, including the 7,250 apartments in 59 projects submitted this year. About 2,300 apartments in Brooklyn are also awaiting approval for sale. If all these apartments are actually built, they could weigh on the market for several years to come.”