The Housing Bubble

It’s desk clearing time for this blogger. “U.S. homebuilders’ shares dropped, led by D.R. Horton Inc., the latest to cut its earnings forecast after Federal Reserve interest rate increases lifted mortgage costs to a four-year high. ‘If the Fed wanted to cool housing, they certainly succeeded,’ said Dan Poole, of National City Corp., holder of 382,000 shares of D.R. Horton. ‘It’s like a bombshell went off in the housing industry.’”

“The surge in North Texas home foreclosures shows no sign of abating. Next month, 2,961 homes are scheduled for foreclosure. That’s a 26 percent jump from the number of foreclosure postings for August 2005. Dallas County had the largest number of homes facing foreclosure in the latest survey. More than 1,400 residences are scheduled for sale at next month’s foreclosure auction. That’s 30 percent more than in August 2005.”

“Harris County, Houston’s most populous, suffers from dramatic foreclosure increases from May-July. Last month, HoustonRealNews reported a 54 percent foreclosure spike from May to June.”

From Las Vegas. “Interim managers at bankrupt USA Capital on Wednesday said they have not started foreclosure on properties that secured delinquent loans and have ‘not yet’ filed lawsuits to recover assets from the owners of the bankrupt private lender.”

“The private lender solicited money from individual investors to use in funding short-term mortgage loans secured by real estate. Investors were attracted by double-digit interest rates and the relative security of having real estate as collateral.”

“Bank of Canada Govenor David Dodge met the national housing agency late yesterday to take it to task for its recent offering of incentives for interest-only mortgages. Such incentives could be inflationary and may work against the Canada Mortgage and Housing Corp.’s stated aim of making housing more accessible to Canadians, Mr. Dodge said before the meeting.”

“‘We’ll have to see, but if we look elsewhere in the world where there has been a major move to interest-only mortgages or other innovations of that sort, that has had an influence on housing prices,’ Mr. Dodge told reporters.”

From Omaha, Nebraska. “A real estate market that went nowhere but up for years is showing signs of calming down. Local builders and real estate agents say the housing market in Omaha is cooling off but that doesn’t mean it’s going bad.”

“(Realtor) Brian Carlin says, ‘The market before was euphoric. We’d have a buyer, take them out to look at a house and they’d make an offer that night. Buyers today take a few days to sit on it and decide what they want to do.’ To help push that decision-making process, Rockbrook Builders is offering new incentives on some of its spec homes; houses they’ve already built without a buyer lined up.”

“Rockbrook president Tim Lowndes says, ‘We’ve dropped prices $5,000 to $15,000, just trying to move some inventory.’”

From Arkansas. “‘Average home prices are rising and sales are slipping,’ Ethan Nobles with the Realtors association said. ‘It concerns everyone who looks at it.’”

“The fact that growth has slowed doesn’t surprise Larry Kelly, a broker and a member of the Bentonville-Bella Vista Board of Realtors.’I think we’ve overbuilt in this market,’ Kelly said. ‘That’s a typical and normal cycle. It’s done that in every area I’ve been in.’”

“In summer rental spots around the country, a number of houses sit vacant and owners may be ready to make a deal. Prices have dropped by as much as 25% in Cape Cod, Mass. In New Jersey’s oceanside-resort towns, Sotheby’s International Realty is giving discounts of as much as 25% for some homes. In South Carolina, Hilton Head has cut 15% to 20% off its remaining one-to-two-bedroom listings.”

“One factor: oversupply. In Aspen, Colo., Five Star Destinations added 30 properties this summer, for a total of 100. Occupancy is about 80%, from full last year. Nationwide, rental inventory is up 12% this year, mostly due to new second-home construction, says Michael Sarka, of the Vacation Rental Managers Association.”

“Sacramento-area home builders sold 3,124 homes during the in April, May and June, down about 25 percent from (the period) in 2005. Builders are sweetening deals to lure buyers. The average second-quarter incentive was $15,200 worth of freebies, with some ranging as high as $120,000.”

“Sales were 66 percent lower in Yuba County and down 60 percent in Sutter County the first six months of this year. Year-to-date sales were also down 60 percent in Elk Grove over last year. ‘Bay Area traffic (in buyers) has declined and that’s one of the areas that benefited most from that,’ Greg Paquin said. ‘Pricing is an issue down there as well. There’s a lot of product above $450,000.’”

“Slower sales, growing inventories and values that may not measure up to prices are conditions that should send a signal to Silicon Valley buyers to take more control of the market. Broker Richard Calhoun says the combined inventory of single family homes and condos swelled to nearly 5,100 homes on the market in June, up from 3,500 a year ago.”

“Sales plummeted too. From 2,270 a year ago to 1,670 in June this year. ‘There is no need for a buyer to race out and buy a home..All buyers should realize the market has been slowing since October and will continue to do so,’ said Calhoun.”

A pair of reports from the northwest US; the Bellingham Herald, in Washington. “Even with more houses on the market, home prices continue to rise in Whatcom County. ‘Looking at the sales more closely, I found that the attractive, well-priced properties are getting full-price offers, while other properties are languishing because buyers think the price is too high. Generally speaking, if a property doesn’t sell in its first two weeks, it will be on the market for several months,’ said Lylene Johnson.”

“Buyers can choose from significantly more homes on the market. Bellingham, Lynden, Ferndale, Blaine/Birch Bay and Sudden Valley had 1,357 homes for sale on June 30, compared to 655 a year ago. (Realtor) Mike Kent thinks a couple of factors are affecting the average sales price: The number of sales has fallen 13 percent, while more homes have been selling above $1 million this year.”

“‘When you have a few more $1.9 million homes being sold, it will really pull the average up,’ Kent said.”

“Peter Roberts, president of the Whatcom County Association of Realtors, said he’s also noticed an increase in the sales of higher-end homes. ‘There are more people moving to this area, starting at a higher price point than what we’re used to seeing,’ Roberts said. ‘However, these buyers understand the market, so a house that is slightly overvalued will just sit.’”

From the Oregonian. “June appeared to repeat a trend of prices rising, even as sales volumes decline and the supply of homes on the market grows. Economists and local real estate agents say housing in the Portland area seems to be in a transitional period.”

“‘You’re starting to see everything that you’re expected to see except for the change in pricing, that tends to come in last,’ said Jerry Johnson, an economist in Portland.”

“Real estate observers have been betting for years that the Portland-area’s robust housing market was headed for a slowdown. Most differed only in how soon they thought it would slow, and whether it would result in prices actually dropping or simply more modest appreciation.”

“While June’s figures didn’t resolve that debate, they did begin to substantiate observations by real estate agents that their buyers are finding more houses for sale now than they did a year ago.”

“Housing supply rose sharply. The number of active listings, comprising newly listed as well as homes on the market in previous months, rose to 8,575 by early this month compared with 5,423 a year ago, an increase of 58 percent.”

“The disconnect between rising inventory and higher prices suggests the market is in transition, when sellers are trying to stick to a high price they feel they should get, said Bill Conerly, an economist in Lake Oswego.”

“‘They haven’t yet accepted the idea that the market has softened,’ Conerly said. ‘And certainly, if I had a house on the market and saw the median up 17 percent and my house wasn’t selling, I think I’d leave it on the market a little longer.’”

“Already, veteran real estate agents say they’ve adjusted their expectations down from last year. Dave Hrabal, a top producing agent with The Hasson Co., said last year he would set an asking price above recent comparable sales prices and receive full-price offers. This year, he and others have said they’re sticking closer to the prices achieved by recent comparable sales.”

“Eventually, homeowners who need to sell a house quickly will lead the market downward, Conerly predicted. Those sellers, who perhaps need to relocate to start a new job out-of-state, can’t afford to wait for a buyer to come in at their price. They could set a precedent for lower prices, he said.”

“‘We’d have to see falling prices before people start accepting low offers,’ Conerly said. ‘They’re not at that stage now.’”

Some housing bubble reports from the northeastern US. “Kim Bronson’s West Windsor, Vt., home has everything a buyer might expect in a pastoral North Country property. The only thing the property doesn’t have is a buyer. Ms. Bronson put her home on the market more than a year ago at $4.9 million, then shaved the price by $1 million in April.”

“‘I’m really surprised it hasn’t sold,’ she says. ‘I don’t think Vermont and New England is going with the same real-estate flow as the rest of the universe.’”

“Andrew Heiblien has been trying to sell his four-bedroom home in Mystic, Conn., since January. As in many of the small towns that dot the Connecticut shore, the number of for-sale signs in tiny Mystic (pop. 4,001) has doubled since then, area brokers say.”

“Mr. Heiblien says he ‘never dreamed’ he’d need to cut the home’s asking price four times before finding a buyer. The property went under contract last week for $405,000. ‘I really thought the market was stronger when I put the home up for sale,’ says Mr. Heiblien. ‘I had to adjust.’”

The Westborough News in Massachusetts. “For sellers today it can be even more stressful with homes sitting on the market on average from 3 to 6 months. The inventory of homes available is building across the state because more people are moving out of Massachusetts than in.”

“Westborough’s Candy Owen has seen houses come down in price about 10 percent over the last two years. ‘If sellers adjust homes down 10 percent they sell right away. But, if they’re thinking the market isn’t different and they don’t lower the price the homes are staying on longer,’ she explained, saying a home on the market a couple of years ago for $700,000 should now be priced around $630,000.”

“Homes have to be priced competitively, agreed (realtor) Richard Hutner. ‘Prices have come down considerably from anywhere between 5-10 percent,’ he said.”

“‘The Westborough real estate market has definitely changed. There is a lot more inventory which means buyers have more choices, which means sellers that are motivated to sell need to price realistically or consider price reductions. Buyers have a lot more leverage (than) they ever had,’ said (realtor) Susan Flynn.”

The Cape News in Massachusetts. “Volume at the Barnstable County Register of Deeds is down for the 17th straight month. In April the number of property sales dipped by 28.3 percent compared to April 2005. Sales were down 21.3 percent in May and 18.2 percent in June this year. This week in Falmouth there were 513 single-family homes on the market, along with 68 condominium units and 12 multi-family houses, said (broker) Robert B. Dugan. ‘Those numbers have doubled since last year,’ he said.”

“Cape-wide, the number of property sales dipped drastically in the wake of Hurricane Katrina. In October of last year sales were down 17.6 percent over 2004. By December the figure was 20.7 percent, and in January of this year it ballooned to 26.3 percent.”

“(Realtor) Megan Patrick agreed that there is a glut of homes, but has seen activity picking up. ‘The market is saturated, but houses are still moving,’ she said.”

“Ms. Patrick noted that mortgage foreclosures have increased. Many of those were initially bought by buyers who overextended themselves, she said. When they are unable to meet their obligations, she said, their homes hit the market at depressed prices in an attempt to generate quick cash. ‘Now we’re seeing five pages of foreclosure notices, where you used to see just one,’ she said.”

“One of the brighter spots in the market is that lower-priced homes are softening, making it a good situation for first-time home buyers, Mr. Dugan said. ‘We’ve finally started to see some listings for less than $300,000 over the last two months,’ he said. ‘Before, anything under that figure was a fixer-upper,’ he said.”

The USA Today reports on failed condo projects. “There’s relief in sight for some renters as the oven-hot real estate markets cool off: A huge number of new condos could be converted into rental properties over the next 18 months.”

“In Las Vegas, Phoenix, San Diego, Washington, D.C., and much of Florida, an estimated 25% to 40% of condos under development or apartments that were converted into condos for sale will be put back on the market as rentals, says an investment brokerage firm.”

“In recent months, though, the inventory of condos for sale has swelled. And buyers have vanished. Developers are turning condo projects into apartments or canceling them. Some landlords are inviting back tenants because they can’t sell the units.”

“The ‘reconversion’ trend is accelerating. In Atlanta, Lane Co. is all but abandoning condo development. Two of its current projects are now destined to be apartments.”

The LA Times. “The recent craze for converting apartment buildings to condominiums, which is drawing political heat in Los Angeles and elsewhere, may be slowed by market forces before City Hall has a chance to act.”

“One possible indication of a coming slump was the number of people willing to pay $1,800 for investment advice on the topic. Only about 50 signed up for a two-day West Coast Condo Conversion Conference.”

“‘Even six months ago, this room would have been packed,’ said Delores Conway (of) the USC Lusk Center for Real Estate, as she glanced around at dozens of empty chairs in the chilly auditorium.”

“With interest rates up, real estate prices stagnating and many new condo units coming on the market, the easy money possible for conversions two years ago is a thing of the past, Conway said. ‘The whole market has slowed down. The speculators are gone,’ she said. ‘I think condo conversions are always the last part of the cycle.’”

There is big news from Wall Street this morning. “The largest U.S. homebuilder said that its orders for the quarter ended June 30 fell 4.4% to 14,316 homes from 14,980 a year earlier. The value of the homes sold dropped to $3.8 billion from $4.1 billion.”

“‘The current home sales environment is characterized by an increase in both existing and new homes available for sale, higher than normal cancellation rates and an increase in the use of sales incentives in many of our markets,’ said Chairman Donald R. Horton.”

“‘We think the sharp deterioration in earnings throughout the end of fiscal 2006 likely reflects sharply lower closings and significantly lower margins,’ Bank of America analyst Daniel Oppenheim wrote.”

“Raymond James released a report that said contracts for housing sales fell 42% year-over-year in June in the greater Washington area, according to an area realtors groups. Closings declined 38% and the inventory on the market now represents 7.1 months of supply, compared with 1.6 months in June 2005, and 5.9 months in May.”

“‘We continue to believe the Washington, D.C., market is headed lower as excessive speculation and overbuilding will weigh on the market for the foreseeable future,’ Raymond James analyst Rick Murray wrote.”

“Not even price cuts could save Horton from the forces of higher mortgage rates and a rising inventory of unsold homes. ‘It’s pretty brutal out there,’ JMP Securities analyst Jim Wilson said. ‘The strategy they’re trying is to move product no matter what it takes. Their margins are getting clobbered.’”

“Some analysts following the industry were caught off guard by the magnitude of D.R. Horton’s profit warning. ‘To say our initial reaction was surprise’ would ‘heavily underestimate the impact; we were shocked,’ wrote analyst Stephen East. ‘Cancellations have taken a mighty toll on D.R. Horton’s ability to deliver on its forecast, which has reduced its revenue and pressured margins as incentives have jumped substantially,’ he said.”

“‘Even this housing bear is stunned,’ said A.G. Edwards analyst Gregory Gieber in a note Friday. ‘This is an industry epidemic, and we believe others could get hit worse.’”

And from Washington Mutual. “Washington Mutual Inc. said on Thursday it was planning to cut 900 jobs as part of a bid to match capacity with ‘current and anticipated market conditions.’ Spokeswoman Olivia Riley said 350 of the job cuts would be in its home loan group as it moves to outsource residential appraisals.”

“Employees were informed on Wednesday about the job cuts, Riley said, the latest in a series of payroll reductions at the largest U.S. savings and loan. Like its rivals in the home lending business, Washington Mutual is dealing with a drop in activity as interest rates rise and the housing market cools.”

The LA Daily News. “Washington Mutual’s big Chatsworth campus took another hit Thursday, losing 140 more jobs as the bank continued its aggressive cost-cutting plan. Since January, the Seattle-based banking company has cut its Chatsworth work force by about 34 percent.”

“The jobs are among 900, 350 of them real estate appraisers, that the company is eliminating across the country. Further job losses are possible, said company spokesman Tim McGarry.”

Some housing bubble reports from Colorado. “For the sixth consecutive month, Colorado has the highest foreclosure rate in the country. Colorado Attorney General John Suthers said he thinks the state will be grappling with the foreclosure problem for at least another year or two.”

“Suthers said that ‘creative financing,’ such as interest-only loans and the lack of home appreciation, are bigger culprits in rising foreclosures than fraud. ‘But in a market like this, where homes are going up 3 percent or 4 percent, you face losing your home to foreclosure if your mortgage adjusts upwards by hundreds of dollars each month,’ Suthers said.”

“Denver City Council member Michael Hancock said there are so many vacant homes on some streets, it is ‘going to change the shape and profile of some neighborhoods for a very long time. It really is a sad situation.’”

“‘I do not think there is a greater issue threatening the economic and social vitality of our communities than the rising foreclosures in our city,’ Hancock said. ‘I think predatory lending has played a role. However, I think the lack of buyer education has played a greater role in the increasing rates.’”

“Investors, especially those from California, who recently have been accounting for 70 percent of the bidders, are willing to pay record prices for Denver office and retail buildings because they look cheap.”

“Asked if investors are concerned that real estate foreclosures in Colorado are leading the nation and heading toward record territory, investment broker Patrick Deveraux said: ‘We hear about that some, but not as much as you would think. It may sound crazy, but a lot of investors are dealing with OPM, other people’s money.’”

“He said the question he increasingly is getting from ‘really smart guys who are investing for their own accounts is, ‘Hey, are you buying houses?’ It sounds like a good time to buy houses, sit on them for a while, let the job growth kick in, and make some money.’”

From the Brighton Standard Blade in Colorado. “With more houses for sale than buyers, some local homeowners are no longer seeing their largest asset appreciate. Three conditions are driving the problem: more owners filing for foreclosure, higher rates of new home building and rising interest rates.”

“Distressed property is not selling at distressed prices. ‘We’re seeing banks just sit on repossessed property,’ said Adams County Assessor Gil Reyes. ‘They’re waiting for full value.’”

“The old adage, a house is only worth what someone will pay for it, has become a rude awakening for many local homeowners. Despite modest gains during the last five years, existing homes are not selling for what homeowners believe they are worth.”

“One owner who wished anonymity, said she and her husband want to sell their 35-year-old home in a neighborhood near East Bromley Avenue. The home’s last tax assessment was $210,000. ‘Our house is worth $240,000,’ she insists.”

“Not if a buyer can get a better deal. And that’s the problem.”

“Existing owners are competing head-to-head with new builders who offer incomparable loan packages. ‘They (builders) will do anything to get someone into their homes,’ said Realtor Dee Durland.”

“While the county’s next tax assessment will provide a better gauge of values, Reyes predicts more established neighborhoods will see stagnant appreciation. ‘Perhaps even declines in more older neighborhoods,’ Reyes said.”

“In May, the number of new single-family permits increased 38 percent from the same month in 2005. ‘Brighton’s problem is the number of new homes being built,’ Reyes said, agreeing existing homes are probably not moving very fast. Likewise, many new houses are being bought with unconventional loans, which portend further bad news for foreclosures.”

“The largest chunk of adjustable rate mortgages and zero-interest loans in Colorado have yet to explode. Observers like Jeannie Reeser, Adams County public trustee, says she see no end in sight for foreclosures.”

“Adams County Treasurer John Lefebvre agrees. ‘We hear 2007 will be the year of reckoning in the mortgage industry,’ he said.”

Please post you weekend topic suggestions here! And don’t forget to send in housing bubble pictures to:

photos@thehousingbubbleblog.com