The Housing Bubble

The June home sales numbers for Arizona are out. “Historically, June is one of the better months of the year for resale housing activity. However, the 5,460 recorded sales for June 2006 is truly one of the initial signs that the resale market is growing weaker.”

“This level of activity is down from the 6,870 sales of May 2006 and well below last year’s 11,545 sales year to date. For 2006, there have been a total of 36,290 sales, while it stood at 58,030 sales in 2005 year to date. This is the weakest June since 2000 when 5,020 sales were recorded.”

“Phoenix resales dropped by 1,325 sales over the year to 1,725. Scottsdale’s resale home market declined from 920 recorded sales a year ago to 465. The Mesa resale housing market fell by 755 sales to 585. Glendale decreased from 880 to 430 sales. Peoria’s resale market fell from 560 sales to 250 sales. The Sun City resale market fell from 200 to 75 sales.”

“Resale activity in Sun City West also fell from 90 to 45 sales. Gilbert’s resale count fell from 795 to 330 sales. Chandler’s resale market slowed from 760 recorded sales for a year ago to 380. The resale market in Tempe dropped from 270 to 160 sales. Avondale’s resale market fell from 265 to 120 sales. Goodyear declined from 215 to 90 sales. The Surprise resale market decreased from 535 recorded sales a year ago to 175 sales.”

“As the housing market slows, the entry-level sector basically disappears, while the move-up markets garner a larger share of the remaining activity. Thus, it is not unusual to see median prices to be stable or even increase as the move-up market works to be satisfied.”

“For June 2006, 14 percent of all recorded sales were for homes priced from $125,000 to $199,999, 44 percent for $200,000 to $299,999 and 39 percent for homes priced more than $300,000.”

“Over the last few years, the townhouse/condominium market has had increased popularity for owner-occupancy, especially for young and minority households, and investors. Sales activity followed a pattern similar to the single family market with a decrease from 1,470 sales for May 2006 to 1,035 sales for June, which is below last year’s 2,125 sales.”

“For 2006, there have been 8,125 sales recorded, while there were 10,920 sales a year ago.”

“‘When purchasing a home for investment or occupancy, the rapid growth in price that was so evident in much of 2005 is somewhat soothing to the uncertainty of the buying decision,’ said Jay Butler, at Arizona State University. ‘If home prices continue to be stable or even decline in some areas, potential buyers may be increasingly reluctant to make the purchasing decision, because future appreciation is much more uncertain.’”

The Union Tribune has the new Dataquick numbers. “San Diego County’s housing market continued to lose steam in June, with median home prices posting their first year-over-year decline in a decade and sales dropping for the 24th straight month.”

“Last month’s median home price dropped to $488,000, a 1 percent decline from a year earlier and a 6 percent decrease from last November’s peak of $518,000.”

“‘To me, this is just part of a plateauing of prices,’ said John Karevoll, of DataQuick. ‘Between now and the fall, I’d say half the months will be slightly positive and half slightly negative, but I really don’t read the drama in these numbers that most people will.’”

“Yet another indicator of the county’s flattening market is the growing supply of homes for sale. As of Wednesday, there are 22,460 homes on the market, according to Sandicor.”

“The numbers should come as little surprise to home sellers, who have watched their properties sit for months on the market while they lowered their asking prices in hope of getting offers. Similarly, builders are seeing sales slow. In response, they are dropping prices and offering generous incentives, noted industry insider Peter Dennehy.”

“‘Across the region, prices are coming down, incentives are rampant, and sellers are adjusting to longer times on the market,’ said Dennehy.”

“Todd Fleischmann moved from Escondido to Portland, Ore., in January to take a new job. He has yet to sell his Escondido condominium, but he recently lowered the price from $361,5000 to $338,000. ‘It has been a disappointment but it is what it is,’ he said of the cooling housing market. ‘I am more concerned with selling my property than trying to get top dollar.’”

Some housing bubble reports from Wall Street. “William Lyon Homes announced today preliminary new home orders, closings and backlog information for the three and six months ended June 30, 2006. New home orders for the three months ended June 30, 2006 were a decrease of 52% as compared to the three months ended June 30, 2005. New home orders for the six months ended June 30, 2006 a decrease of 41% as compared to the six months ended June 30, 2005.”

“The Company’s number of new home orders per average sales location decreased to 11.2 for the three months ended June 30, 2006 as compared to 27.5 for the three months ended June 30, 2005. The Company’s cancellation rate for the three months ended June 30, 2006 was 32%, compared to 13% for the three months ended June 30, 2005.”

“The Company’s backlog of homes sold but not closed was a decrease of 46%. William Lyon Homes is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada.”

From Reuters. “The U.S. mortgage-backed securities market languished on Tuesday, with yield spreads versus comparable Treasuries ending mostly unchanged from the previous session as scant demand offset moderate supply from originators.”

“With the summer doldrums in full force, the mortgage bond market is in a particularly vulnerable position right now since many of the market’s main participants are sidelined awaiting a clearer picture on where the U.S. Federal Reserve is headed.”

“Investors out of Asia have been quiet for several months and Wall Street dealers hold hefty inventories. On top of that, demand from banks, large holders of mortgage bonds, appears to be fading.”

“Barclays Capital recently downgraded its recommendation for mortgage bonds to neutral from a tactical overweight. The overweight stance was driven by expectations of real-money buying after June’s Federal Open Market Committee meeting and expectations that greater clarity about the Fed would help the sector.”

“‘Neither factor seems valid anymore,’ the company said in recent research.”

“The Mortgage Bankers Association released its Weekly Mortgage Applications Survey for the week ending July 7. The Market Composite Index was an increase of 1.0 percent on a seasonally adjusted basis from 561.0 one week earlier. On an unadjusted basis, the Index decreased 29.1 percent compared with the previous week and was down 36.3 percent compared with the same week one year earlier.”

From Inman News. “In a conference call with reporters Tuesday, Freddie Mac’s chief economist Frank Nothaft offered some insight into when and why people refinance their mortgages.”

“Not only are fewer families refinancing, but they are doing so for different reasons. Freddie Mac’s surveys reveal that back in 2003, just 20 percent of families refinanced to cash out some of the equity in their homes. The rest were moving to lock in low interest rates or shorten the terms of their mortgages.”

“‘That’s very different today,’ Nothaft said. ‘In the first half of this year, close to 90 percent of those who refinanced also engaged in cash out.’”

“Interest rates on some $500 billion in first-lien ARMs, or approximately 6 percent of all mortgage debt, will reset in 2006, Nothaft said. Factor in variable-rate home equity and second-lien loans, and the total amount subject to repricing this year is nearly $1.2 trillion, or about 15 percent of outstanding loans.”

The Morning Call has this report from Pennsylvania. “In June 2005, many homes on the market in the Lehigh Valley drew competing offers and sold in a matter of weeks, if not days. A year later, it’s a different story. Homes are staying on the market longer, the rate of year-over-year appreciation is shrinking and the number of homes offered for sale is soaring, creating a glut in some areas.”

“The number of existing houses sold in Lehigh and Northampton counties fell 7.5 percent compared with June 2005. ‘It appears the slowdown has started,’ said Bethlehem economist Kamran Afshar. ‘A year ago, people were saying the best thing to invest in is a house. I think people are still saying it is a very good thing to invest in. But as time goes by, it will regain its status as it always has been, one of many things to invest in.’”

“Real estate agents say they have to market properties harder than they did last year, when often merely listing them was enough to entice buyers. Agents are now counseling sellers not to overreach when setting their asking price. In some cases, sellers have had to cut their initial listing price.”

“Gary Elbert, a real estate agent in Allentown, said that once buyers see homes are not selling, they realize they have options. ‘It is becoming evident buyers are being more discriminating in how they are evaluating the asking prices and the properties,’ Elbert said. ‘We are seeing some ridiculous asking prices.’”

“The time on market is lengthening largely because many more homes are for sale. In May, a record 1,611 new listings were recorded. In June, the total number of homes for sale, including new listings, rose 41 percent compared with the previous June. ‘When you look at the numbers, it is just skyrocketing how many listings are being offered,’ said Afshar, the Bethlehem economist. ‘My guess is that will further put pressure on prices to go down.’”

“While listings grew, pending sales, a measure of future house closings, fell 7.7 percent last month from the same period last year. It was the second month that pending sales fell.”

“People are also becoming wary of non-traditional mortgages such as those that charged only interest in the first years. ‘Previously, people were jumping into buying houses, using adjusted-rate mortgages, because they could buy more house for their dollars,’ said Ryan Sweet, an economist in West Chester, Chester County. Now, Sweet said, ‘first-time home buyers are being crowded out, because they can’t afford these exotic mortgages.’”

“Economists say there is no danger the Lehigh Valley housing market will crash. Even if home appreciation continues to slow this year, the gains of the last few years won’t be rolled back. And the gradually slowing rate of appreciation resets the meter to ‘normal,’ experts say. ‘At this point, it appears to be a very healthy correction,’ Afshar said. ‘This does not concern me. This is somewhat welcome.’”

A pair of reports from Florida. “In March, Russell Patterson bought a one-bedroom unit in the apartment-to-condominium conversion complex Oxford Place at Tampa Palms. Now, the developer has decided to turn the units it hasn’t sold, about 180, back into apartments.”

“The rents on those units are less than the $995 a month Patterson needs to charge to pay his mortgage and homeowner’s association fees. Even more frustrating, he said, his contract forbids him to sell his unit before the developer sells all of its own. ‘I’m stuck, and this complex is not what I was sold,’ Patterson said.”

“Nearly every converted apartment property has empty units, and some developers are changing course and renting units instead to keep from losing money or being forced into foreclosure. Some are taking drastic measures to compete with other condo sellers, a move that leaves people who purchased an apartment feeling trapped and fearing their property values will go down.”

“‘I’m not crazy about this. We’d rather have owners’ in the complex, said Matt Carter, who bought a two-bedroom converted condo in New Tampa. ‘At the same time, though, owners are renting out, too, so I guess this is going to happen one way or another.’”

“There is a glut of converted apartments, (developer) Tony Martin said, because too many developers jumped in on the condo craze. ‘It’s a tough business today,’ he said. ‘I don’t think anybody predicted this.’”

“The conversions led to a reduction of 18,000 rental units in 2005. The result is predictable. Apartment rents have soared. Because many of these investors will be renting out their units, Bernard Markstein said, the inventory will swell again, and competition will force rental rates down. ‘Real estate is cyclical,’ Markstein said. ‘This is the way it works.’”

From the News Press. “Bonita Springs-based builder WCI Communities has slashed an undisclosed number of jobs as the residential real estate market continues a rapid cool-down in Florida and across the nation.”

“Asked about the geography of the layoffs, spokesman Steve Zenker said they had occurred to some degree in WCI’s primary markets of Florida and the Northeast and mid-Atlantic states.”

“The job cuts came as no surprise to people following the real estate and construction markets. They said builders couldn’t scale back production as quickly as investors in new, multifamily developments got cold feet. ‘In Florida, we have the potential for seeing a downturn that could rival that of the ’70s,’ said Jack McCabe.”

“Florida isn’t alone in its vulnerability. ‘It’s soft everywhere,’ said Ed Bonkowski, a Fort Myers-based commercial real estate broker. ‘I was just in northern Virginia and in Cleveland,’ he said. ‘Both of those (residential real estate) markets have come to a standstill.’”

“Sluggish home sales in northern states have a trickle-down effect in Southwest Florida, Bonkowski said. Many baby boomers want to retire here, but some of them need cash from selling their northern homes to realize their dream. These days, ‘cash is king,’ Bonkowski said. ‘For those who have cash, there are going to be some good buys.’”

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