The Housing Bubble

The press looks at the days events. “The confidence of U.S. home builders plummeted to the lowest level in more than 14 years in July as buyers canceled contracts and investors pulled back from housing, an industry survey reported on Tuesday.”

“Builders are getting ‘a little testy’ about their rising costs of borrowing to obtain land and higher prices of raw materials, said NAHB’s David Seiders. But interest rates loomed as the major threat. ‘One of the really front-and-center issues was the interest rate structure,’ said Seiders. ‘I’ve been trying to assure the builders that the Fed may go on hold now, or if (they do) anything more, (it will be) very little.’”

“In terms of historical comparison, the downward movement of the confidence index is essentially in line with readings from the 1994-to-1995 U.S. housing slowdown period, the NAHB said. However, a recent analyst report suggests that the downturn this time around will be uglier, claiming that a comparison to the 1987-to-1991 housing downturn (which was worse than the 1994 period) is more warranted.”

“Raymond James analyst Rick Murray says the inventory levels are more challenging today, on the basis of absolute levels of inventory (565,000 today vs. 358,000 in the late 1980s) as well as months’ supply of homes on the market (5.8 months today vs. 5 months then).”

“‘We believe that, based on discussions with our contacts, most cancellations today are legitimate buyers who are walking away from earnest money deposits out of fear of declines in home prices. Furthermore, we expect inventory levels to build even further in the back half,’ Murray said.”

The Sacramento Bee looks at the Dataquick numbers. “For the first time since the late 1990s, median sales prices for homes in Sacramento and Placer counties have slid into negative territory compared with the previous year. June sales prices dipped below last year’s levels in Amador County, too, reports DataQuick Information Systems.”

“Sacramento County, as the region’s biggest real estate market, saw collective median sales prices of new homes, condominiums and existing homes dip to $368,000 in June, down 1.3 percent from $373,000 in June 2005. That was the first year-to-year decline since October 1997, according to DataQuick.”

“Placer County registered a June median sales price of $452,000, down 6.2 percent from $482,000 in June 2005. The county’s last year-to-year price decline was in January 1998.”

And Business Week reports on the group. “Facing their toughest year in more than a decade, homebuilders are coming up with a blizzard of incentives to help move houses. ‘The new housing industry is taking a page from the automakers,’ says RL Brown, a Phoenix Real Estate consultant. ‘It’s a model clearance sale.’”

“Incentives are most prevalent in cities such as Las Vegas, Miami, Phoenix, and Sacramento that have enjoyed the sharpest price appreciation in prior years. They’re also using incentives to keep existing customers from canceling contracts.”

“If you’re thinking of buying a townhouse in the Los Angeles suburb of Alhambra, David Kao would like to talk to you. The salesman for Olson Co. still has 12 units in the Gateway Walk development to sell, even though they’ve been on the market since February.”

“Kao is selling a two-bedroom, two-bath townhouse for about $50,000 below what the company was getting for similar units last year. He’ll even pay the homeowners’ association fees for six months, roughly $1,800, or include a free 42-inch plasma-screen TV. ‘It has been a little slow,’ Kao says. ‘Everyone wants a little more.’”

“‘It’s a whole new sales environment out there,’ says Builder magazine editor Boyce Thompson. As the automakers have learned, once you start offering incentives, it’s hard to stop.”

The Dataquick numbers are out. “Southern California home prices climbed to a new peak last month, even as June sales fell to a seven- year low; the result of higher borrowing costs, more inventory and less urgency among buyers.”

“‘Many view this as a great conundrum: Prices continue to rise, as sales continue to slow. It happened for two years in San Diego before prices last month finally fell slightly below year-ago levels. We view this as the normal winding down of a real estate cycle, where declining demand gradually erodes price growth until it halts or reverses. We expect more markets to see prices flatten or decline a bit in the second half of this year,’ said Marshall Prentice, DataQuick president.”

“A total of 29,237 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 17.5 percent from 35,454 in June last year. Sales have declined for seven consecutive months on a year-over-year basis.”

“Last month’s 29,237 sales were the lowest for a June since 1999, when 29,076 homes sold. The strongest June was in 2005, when 35,454 homes sold, while the weakest was in 1992, with 16,335 sales.”

“The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,437 last month, up from $2,376 for the previous month, and up from $2,021 for June a year ago. Adjusted for inflation, current payments are about 8.4 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle.”

“The remaining June results released today were highlighted by some steep sales drops: 32.3% in Ventura County, 26.3% in Orange County, 14.9% in San Bernardino County and 8.6% in Riverside County.”

“Orange County’s housing market is losing steam. The median price of $646,000 was up 7 percent from a year ago, the smallest annual increase in nearly seven years, DataQuick said. The rate of appreciation has decreased each month since February’s 11 percent. It should drop to zero by the end of the year, said DataQuick analyst Andrew LePage.”

“Buyers closed on 3,608 homes last month, a 26.3 percent decline from a year ago and the eighth straight month of sluggish sales.”

“A slip in home prices in San Diego as demand for condominiums slackens is giving the chills to some in this sun-drenched California city. San Diego is experiencing a ‘condo-led decline’ because owners are putting units on an already glutted market, said consultant Alan Nevin. ‘In a lot of parts of San Diego, there is no give at all on the single-family side,’ Nevin noted.”

“John Burns, an Irvine, California, consultant to home builders, notes San Diego area prices for existing single-family homes have been flat for a year. ‘There are no desperate sellers in the resale market with two exceptions,’ Burns said, pointing to investors who overestimated demand for high-end condos and apartments converted to condos.”

“Home prices across San Diego will plateau, (economist) Alan Gin predicted. ‘The conditions aren’t there for a big rebound in prices or for a big drop,’ he said. ‘We would need a big drop in interest rates to get any significant movement on prices on the upside. We would need to see some significant job losses, a recession at the national level, to get a big drop in prices.’”

“The market’s median price for resale condos fell 2.1 percent to $386,750 in June from $395,000 a year earlier. The month’s median for new homes, which includes new condos and buildings converted to condos, dropped 8 percent to $422,000 from $458,750 a year earlier, according to DataQuick.”

The homebuilders association has their monthly report out. “Increased concerns about interest rates and housing affordability caused builder confidence in the market for new single-family homes to slip three more notches to 39, according to the National Association of Home Builders.”

“‘The HMI is down from its most recent cyclical high of 72 in June of last year, and reflects growing builder uncertainly on the heels of reduced sales and increased cancellations related to eroding affordability as well as an ongoing withdrawal of investors/speculators from the marketplace,’ said NAHB Chief Economist David Seiders.”

“‘But just as concerning to many builders is the potential for more monetary tightening by the Federal Reserve that could drive interest rates, and thereby homeownership costs, even higher,’ Seiders added.”

“All three component indexes fell in July. The largest decline was in the index gauging sales expectations for the next six months, which fell five points to 46. The index gauging current sales of new single-family homes fell four points to 43 and the index gauging traffic of prospective buyers fell two points to 27. Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.”

From MarketWatch. “Home builders’ confidence plunged to a 15-year low in July. It’s the fastest decline in the 21-year history of the index, which has had a fairly good record of predicting the number of new homes started.”

“Sentiment of builders in the West, who have been the most optimistic, plunged nine points to 51. Sentiment fell five points to 36 in the Northeast and fell four points to 21 in the Midwest. Sentiment improved to 50 from 48 in the South. The index peaked at 72 last June and has fallen in 11 months since then.”

A trio of reports on the borrowers situation in California. “Orange County’s foreclosures nearly doubled in June, rising to 65 property sales from 35 in May. Overall, foreclosure activity, including default warnings to delinquent homeowners, was up 60 percent last month, the report shows. The county had 639 new foreclosure filings last month, up from 399 in May.”

“Riverside County had one new foreclosure filing for every 438 households, the area’s highest ratio and the third-highest in California.”

“About 3,350 homes in Riverside County, representing one in 175 of its households, were in foreclosure proceedings at some point in the second quarter, according to the firm. The U.S. Federal Reserve Bank has implemented 17 quarter-point raises in the so-called Federal Funds Rate since late 2004. The result has been that even initial payments on fixed-rate and adjustable-rate mortgages are considerably higher than they were a couple of years ago.”

“‘They haven’t gotten 18 pay raises,’ said Victoria Johnson, president of the North San Diego County chapter of the California Association of Mortgage Brokers.”

“The increase in foreclosures was just as dramatic in San Diego County. About 2,600 homes were in foreclosure proceedings at some point between April and June, compared with 945 in the same period last year.”

The Sacramento Bee. “After tapping their home values for $22 billion in consumer spending during the recent housing boom, Sacramento-area residents have slowed their use of home-equity borrowing at twice the rate of Californians as a whole.”

“The use of home-equity loans or home-equity lines of credit fell by about 10 percent from January through April compared to the same period last year, reported DataQuick.”

“It comes after a runup of home-equity borrowing in El Dorado, Placer, Sacramento and Yolo counties that began at $3 billion in 2002 and more than doubled to $7.6 billion by 2005. Statewide, home-equity borrowing fell 5.2 percent during the first four months of 2006, to $39.6 billion. Analysts blame the decline on stagnating home values and rising interest rates.”

“‘Keep an eye out. It’s going to get worse and worse,’ said Christopher Thornberg, senior economist of UCLA’s Anderson Forecast. Describing most potential borrowers, especially in regions like Sacramento, Thornberg said: ‘Their home appreciation has gone to zero.’”

“Despite the drop, more than 27,000 homeowners in the eight-county area borrowed nearly $2.5 billion against their home values from January through April. Mortgage strategist Angela Talent said she has received more, not fewer, requests for home equity loans in recent months. Many applicants, she said, are financially stressed and need to rein in credit card and other debt.”

“Even amid rising interest rates, home-equity loans are still far cheaper than credit cards, and interest rates are often deductible from federal taxes.”

“That’s why (banker) Andrew Mastorakis believes the loans will prevail, even reaching into 40 percent to 50 percent of households within five to 10 years. Currently, about one-fourth of households use home equity lines of credit or loans, he said. ‘I think it’s a temporary setback,’ he said of the decline.”

Some housing bubble reports out of Florida. “Midtown Miami, the massive mixed-use residential development is up for sale. Real estate broker Edie Laquer said they always planned to sell after construction started. But market watchers immediately questioned whether this is another example of a residential developer trying to limit risk at a time when the housing market has cooled.”

“‘This is another sign of where this market might be headed,’ said Jay Massirman,with real estate brokerage CB Richard Ellis in Miami. ‘It says to me that they’re worried about the market.’”

The St. Petersburg Times. “How long can a house fail to sell and still be called ‘Simply Irresistible?’ There may be no better illustration of the real estate glut than a 2,800-square-foot house, which debuted at $710,000 in December. The house’s price tag recently was cut to $675,000. But after more than 200 days on the market, the listing, and its signs, persist, raising doubts about the home’s compulsive appeal.”

“Delays are hitting a few of the region’s major condominium projects, but not every developer is blaming high construction costs. Nautico, what will become part of St. Petersburg’s ‘Aquaplex’ district, was supposed to have broken ground last March. The earliest ground will likely break now is March 2007, and it could be 2008 before anyone is living there, said Frank Maggio, CEO.”

“‘Long gone are the days when you could put up a circus tent, have a couple people juggling balls and some expensive hors d’oeuvres, and walk away with $20 million worth of presales,’ Maggio said. Nautico was expected to hit its presale threshold to begin building by this month, but he said potential homebuyer traffic is only a third of what was projected.”

“Nautico isn’t the only property affected. ‘Any project that requires presales is hindered,’ Maggio said. ‘I’m hearing that everywhere.’”

“Foreclosure paperwork began on 156 homes along the Treasure Coast last month. In St. Lucie County, 77 homes were in foreclosure proceedings in June, the most on the Treasure Coast. Martin County had 47 properties registered.”

“Jerry Mabus, president of the Realtors Association of St. Lucie County, said, ‘Some speculators came in with the intent of flipping, but now they are just walking away from them.’”

“Brad Hunter of Metrostudy, said the report is a reflection of the creative financing made available to those who over stretched themselves financially and bought a house in late 2005. ‘This upward trend of foreclosures is occurring because some people bought homes they had no business buying,’ Hunter said. ‘People that bought near the peak of the market on an adjustable rate (mortgage) are getting squeezed out of their homes now.’”

“Foreclosure filings in Palm Beach, Martin and St. Lucie counties jumped in June as rising mortgage costs and skyrocketing insurance rates combined to squeeze homeowners’ wallets. Palm Beach County also is notorious for overzealous homeowner associations, Jim Sahnger said. ‘In some cases, I have seen up to 35 percent of some properties being foreclosed on by the homeowner association,’ Sahnger said. ‘Many of them have pretty short fuses.’”

From Florida Today. “Holiday Builders has cut jobs, and Mercedes Homes indicated it is considering it, as Brevard County’s two largest homebuilders move to contain costs amid a slowing housing market.”

“Industry officials are bracing for an impact. ‘New construction for 2006 is leveling off from the boom in recent years,’ said Jade Bulecza, a spokeswoman for the Florida Home Builders Association in Tallahassee. ‘The real estate market is going to come in for a landing. It’s just a question of whether it’s going to be bumpy or soft.’”

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