The Housing Bubble

Some housing bubble reports from California. “Bay Area home prices are slowing, an indication that the housing market has entered a post-boom era in which buying a home no longer guarantees a profit. ‘A few more people are hitting the affordability wall,’ said Ron Gable, (broker) in Half Moon Bay and San Mateo. ‘And more people are feeling they’ve seen the (price) peak for the near term.’”

“In several markets, prices dipped slightly. For instance, the median price for a detached home in Napa County dropped 1.6 percent in the past year, from $599,000 to $589,000, DataQuick found.”

The Contra Costa Times. “Home sales in the East Bay plunged in June compared with the year before, in the largest annual decline since sales began to droop 18 months ago.”

“‘The number of transactions continues to drop,’ said Christopher George, president of a San Ramon-based mortgage company. ‘And now they are dropping at a pretty significant rate. There also could be a stopping, or even a reversal, of the cycle of appreciation of home prices.’”

“Chuck Aydelotte, an agent in Pleasanton, remembers the days when an open house would almost always draw 20 to 25 house hunters. ‘Now if you can get six or seven people, that’s considered a good open house,’ Aydelotte said.”

“‘This could be a perfect storm,’ George said. ‘Interest rates are going up, payments are going up, more homes are on the market, and prices are flattening. With all of the homes that are on the market, those homes have to be sold at a cheaper price.’”

The St. Helena Star. “What is going on with the upvalley real estate market? The large amount of inventory (has) contributed to an overall market malaise. On any given day there are 8 to 15 new listings and 10 to 20 price reductions on single-family residential properties.”

“Of the 194 upvalley listings, about 160 are active and only 34, 21 percent, are in contract. Napa County listings are up 87 percent and sales are down 40 percent. Translation, like it or not: It’s a buyer’s market.”

“Recognizing the shift, sellers are starting to accept significant reductions from their asking price. A ranch house on St. Helena Highway recently sold for $975,000, $320,000 off of its asking price. Joel Toller, who represented the seller, says that his clients ‘understood the market shift, got a bona fide offer, took it and ran with it.’”

“Buyers have been inundated with media news about the market shift and are expecting to see prices plummet and to get a bargain. If a first offer is accepted, buyers are feeling they offered too much and want to go back for another bite of the apple.”

The Modesto Bee. “After six years of rapid appreciation, home prices in the Northern San Joaquin Valley have started to sputter. Houses are languishing on the market, often for months. Sales volume fell 36 percent in June in Stanislaus County compared with last year.”

“John Nelson, Modesto branch manager for a mortgage bank that funds home loans, advocates dropping all home prices by 10 percent to make them more affordable. Craig Lewis, president of the Modesto-based Prudential California Realty, agreed houses are too expensive. ‘What we have is an affordability crisis,’ Lewis said. ‘There’s a gap between the average sales price and the average income.’”

“Lewis said demand is still there for homes, but buyers won’t buy what they can’t afford. He said sales are off so much that times are getting tough for real estate agents. Last Friday, ReMax of Oakdale shut its doors. ‘We were given no notice,’ said Tom Van Ruiten, who was one of eight agents at the office.”

“Van Ruiten has been selling real estate for more than 25 years, so the current market slump doesn’t surprise him. ‘With home prices going up 20 percent a year and wages going up 3 percent a year, what did you think was going to happen?’ Van Ruiten asked. ‘Give me a break.’”

The Wall Street Journal has this report on the housing market. “The Wall Street Journal gathered data on inventories of homes for sale at the end of the second quarter from a variety of local sources. Metro areas showing large increases of homes for sale and relatively weak employment growth include Boston, Los Angeles, Philadelphia and New York.”

“A June survey of real-estate agents..found that home prices had weakened from the prior month in 30 of the 42 metropolitan areas covered. The markets with the weakest pricing trends included Boston, Detroit, Phoenix, St. Louis and Washington, D.C.”

“The number of homes on the market in Orlando, Fla. is nearly five times the year-earlier level, while the inventory has quadrupled in Phoenix and Tampa, Fla., and nearly tripled in the Washington, D.C., area.”

“In Miami prices have been about flat in recent months, says Ronald A. Shuffield, president of (a) brokerage firm. Mr. Shuffield says he expects prices of condos in less-attractive parts of the Miami area to fall slightly in coming months.”

“So many new homes are available on the outskirts of Phoenix that it is ‘a total bloodbath,’ says Ivy Zelman, a housing analyst for Credit Suisse Group. She doesn’t see a recovery in most major metro areas in the near term. ‘It could actually get worse before it gets better,’ she says.”

“Sherry Chris, COO of Prudential California Realty, says condo prices in downtown San Francisco are about level with a year ago because new buildings have helped supply catch up with demand. Overall, the number of homes on the market in the Bay Area has more than doubled from a year earlier.”

“Orlando shows the biggest surge in inventory. Beverly Pindling, president of the Orlando Regional Realtors Association says prices in the Orlando area generally are down about 3 percent to 7 percent from a year ago. Home builders, eager to make sales, are ‘romancing the Realtors,’ she says; some are offering agents who bring in buyers commissions of up to 10 percent.”

“Kent Fowler, a real-estate agent and investor in Washington, is bracing for an extended period of pain. Construction was recently completed on a condo near the city’s Chinatown district that he bought in 2004 for $629,000. Mr. Fowler believes the two-bedroom condo now is worth at least $800,000. But potential buyers are scarce in today’s glutted market.”

“So he is trying to find a renter for the condo for the next year or two at around $3,500 a month, even though that rental income would fall about $900 short of his monthly loan payments, condo fees, taxes and insurance.”

“‘I do think we’re going to see some tougher times ahead,’ says Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. By August, he says, most cities in California will be showing modest declines from a year earlier in home prices, and prices also may decline further in parts of Florida, Nevada, Arizona and the Northeast.”

“Headlines about falling prices could make buyers more aggressive in negotiating and persuade some sellers to ‘get out with what they can,’ Mr. Anderson says.”

The largest homebuilder in the US had a conference today. “D.R. Horton Inc., the nation’s top residential builder by units, said Thursday its third-quarter profit dropped 21 percent due to a tighter housing market. ‘Selling conditions are very difficult in the homebuilding industry,’ Chairman Donald R. Horton said. ‘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.’”

“Chief Executive Don Tomnitz in a conference call Thursday said the company is operating in a more difficult and challenging housing environment. Speculators have left many markets which has led to higher inventories, while builders are offering more incentives to buyers as cancellation rates rise, he noted.”

“Also Thursday, M.D.C. Holdings said second-quarter profit slumped 25%. ‘During the first six months of 2006, the generally robust demand characteristics of the last several years have given way to an increasingly competitive environment in many of the country’s key markets,’ CEO Larry A. Mizel.”

“The company said it is scaling back its investment in land as profit margins shrink, and it noted increased competition and inventory pressures in its California market. The company also took a $7.9 million write-off for project costs, including option deposits and other costs related to lots it has decided not to acquire. The company said orders for new homes dropped 43% from last year to 2,738 units.”

“The cancellation rate surged to 43% from 19% the prior year, reflecting jitters over the housing slowdown. ‘The cancellation rate is the highest we have seen from the publicly traded builders due to M.D.C.’s high concentration in weakening markets,’ said Banc of America Securities analyst Daniel Oppenheim.”

“The company focuses on first-time and move-up buyers with significant operations in Arizona, California and Nevada.”

“Like other builders, NVR said Thursday orders for new homes fell in the quarter as activity continues to slow in the U.S. housing market. The company said orders fell 13%. Orders in its Washington, D.C. and Baltimore markets slipped 27% and 24%, respectively. Cancellations also rose as more buyers backed out of contracts as mortgage rates ticked steadily higher.”

“‘Housing demand reached a state of frenzy last year, driven by investors,’ said Rick Murray, a housing analyst at Raymond James & Associates. ‘With a flick of a switch, the investors no longer have an appetite for real estate.’”

The Union Tribune has this update from San Diego. “Widely seen as a forerunner in national real estate trends, San Diego County is being viewed ‘with some trepidation’ by lending giant Fannie Mae as its housing market cools. ‘Inventories have surged in San Diego and the surrounding areas,’ Fannie Mae Chief Economist David Berson said. ‘Home price gains…are certainly down from their peak and perhaps will fall.’”

“San Diego is one region that is experiencing low affordability after a rapid and unsustainable rise in home prices, Berson said. ‘The strong presence of investors in the housing market makes it subject to price fluctuations, he added. ‘We view it with some trepidation. It is one of the areas we are concerned about.’”

“Berson said the condo market here is at risk ‘because the supply has gone up dramatically.’ There have been ‘lots of condo conversions. The investor share probably has been far more active in the condo market.’”

“In the fourth quarter of 2005, about 24 percent of condominium buyers here were investors, estimates John Karevoll, analyst for DataQuick. That fell to about 21 percent in the second quarter of this year.”

“In a related report yesterday, there were new signs that the housing industry has lost steam. ‘Our reports from builders and census data and reports from public builders all show the market is falling off,’ said Michael Carliner, an economist with the National Association of Home Builders. ‘Builders don’t want to build more than they are selling.’”

From MarketWatch. “The chief of Fannie Mae and Freddie Mac’s federal regulator said his office needs more power to oversee the giant companies. ‘There is a strong need for legislative reform now,’ said Office of Federal Housing Enterprise Oversight Director James Lockhart.”

“In a question and answer session Wednesday with senators, Federal Reserve Chairman Ben Bernanke said legislation shouldn’t set a hard cap on portfolios and that it’s very important Congress pass a bill this year. The administration and the Fed have worried that meltdowns at either Fannie or Freddie could ripple through the U.S. financial system.”

From Reuters. “The U.S. government is seriously considering limiting debt issuance by mortgage giants Fannie Mae and Freddie Mac if Congress fails to strengthen supervision of them, Treasury Undersecretary Randal Quarles said on Wednesday. ‘If a legislative solution is not achieved, Treasury will have no choice but to consider additional action,’ he said.”

“Eliminating any systemic risk at Fannie Mae and Freddie Mac would only transfer risk to the banking system, which is itself growing, David Dreman, chairman of Dreman Value Management, said on Wednesday at a Reuters panel. ‘There are terms being tossed out there, but I would like to see (that) there’s a lot more proof that there is danger. Maybe we should stop our banking system from growing..we might endanger the entire free world,’ he said.”

Some housing bubble reports from Florida. “Incomes throughout Florida have failed to keep pace with runaway home prices. Since 2003, median home prices in Florida have soared 77 percent as the real estate boom swept the state, but incomes grew a meager 1.4 percent. One West Palm Beach man doesn’t have to read Tuesday’s report, called ‘Florida Priced Out’ — he’s living it.”

“Jamie Dryer, a 48-year-old consultant, is also an experienced securities broker and a former budget adviser to President Ronald Reagan. ‘I am surprised at the lack of outrage by the voting public, and especially businesses, which will suffer unless something is done,’ Dryer said Tuesday. ‘It’s unacceptable.’”

The Palm Beach Post. “Following a year in which local builders couldn’t build fast enough to keep up with demand, new-home sales are slowing and cancellations are rising. The shift is prompting builders to offer everything from status automobiles to free granite countertops, stainless steel refrigerators, cash incentives and discounts.”

“‘Hurry Home One Day Sale!’ shouts an ad in Wednesday’s newspaper by giant home builder Lennar Corp. ‘Buy a home on Saturday, July 22, and claim your share of the 8 million dollars being given away! Any reasonable offer will be accepted!’ Looking more like a Macy’s end-of-season clearance sale than a typical real estate ad, it also offers special financing and ‘food, fun and amazing savings!’”

“But a leading new-home expert says buyers expecting to be handed a million dollars are going to be disappointed. ‘Lennar is not giving $8 million away,’ Bill Hall says emphatically. ‘They’re a public company and their stockholders would go ballistic.’”

“‘Builders are trying to combat a lethargy that’s probably caused by people being afraid of buying a house today and finding out the same house is priced less in two months,’ said housing economist Bradley Hunter. ‘Lennar is basically saying ‘make an offer,’ figuring that’s a good way to make people feel comfortable that they can get a good deal.’”

“Buyers are not going to see prices tumble, said Hall. ‘Builders might offer cash at closing instead of upgrades, or buy down the interest rate,’ he said. ‘The buyer out there is in a little bit of fantasyland thinking he will get a reduced price.’”

“But Realtor Sarah Mazor oin Boca Raton says it’s still a good time to buy. “‘This is the time to do it before the market gets back to a normal pace and these incentives disappear,’ said Mazor. A lot of condo conversions are waiving developer fees or paying the first year’s mortgage, she said. One large home builder is offering $30,000 at closing, she added, while others are pledging to sell homes at lower prices if they go down after buyers sign contracts.”

“‘It’s up to consumers when they decide it’s safe to go back into the water,’ said Hunter. ‘They will go back to thinking of a house as a path to a lifestyle and not a way to get rich.’”

The Fairfax County Times has this update from Virginia. “Oh what a difference a year makes in Northern Virginia’s once red-hot home real estate market. For most of 2005, Realtors were bemoaning a lack of inventory as desperate buyers all but wrestled each other to make the first offer. Ask those same Realtors. Or better yet, ask this year’s home sellers whose properties have been on the market six weeks or six months instead of six minutes-with no buyer in sight.”

“The overriding reason for what Realtors insist is a cooling market, rather than a market free-fall, appears to be the burgeoning inventory of homes for sale.”

“Even a cursory count of ‘For Sale’ signs in many neighborhoods suggests the change. According to the Northern Virginia Association of Realtors’ figures, in Fairfax County there were 2,184 active listings, year-to-date, in June 2005 and 6,506 in June 2006, a 198-percent increase.”

“In Loudoun County, during the same period, there were 1,473 actives in June 2005 and 4,052 in 2006, a 175-percent increase. Prince William County and the cities of Falls Church, Fairfax and Alexandria saw similar gains.”

“Although many sellers are dropping their asking price, affordability remains an issue for many prospective home buyers throughout Northern Virginia. Potential buyers, for their part, are often looking for bargains, and many of those buyers who for one reason or another can delay their purchase are doing exactly that, experts say.”

The Rappahannock News. “Last year, Rappahannock County and Northern Virginia experienced a surge in real estate sales. Referred to in the media as a real estate ‘bubble,’ this surge created a seller’s market. Now, home sellers and real estate firms are experiencing a ’slowdown’ and indications seem to show that the ‘bubble’ has popped.”

“‘Eventually it just got down to the point that people recognized that things had gotten out of hand,’ explained Sam Snead, a longtime student of Rappahannock real estate.”

“The majority of real estate on the market in that area caters to buyers interested in living in sub-developments with easy access to Washington, D.C. Generally the Rappahannock County real estate market is considered to be a separate entity. ‘Our buyers and our properties are different,’ pointed out agent Thorne Auchter.”

“According to MRIS, in June 2005, the total dollar volume of sold real estate in Rappahannock was $1,399,800. This year, the same month yielded $525,500, a decrease of 62.49 percent. In addition, the average sold price of those homes has decreased by almost 25 percent. ‘The number of people calling the office is definitely less,’ said (realtor) Denise Chandler.”

“Snead believes that the strong competition between real estate consumers was exacerbated by news coverage about the ‘real estate bubble,’ debating when it would end and what the consequences of the artificially raised prices might be. ‘I blame it on the media,’ said Snead.”

“Most prospective home buyers have to rely on the sale of a current home in order to be able to afford the purchase of a new one. With prices artificially inflated by the ‘bubble,’ these consumers are having trouble selling their old homes, which slows sales down. ‘Ninety percent of people have to sell a house to buy a house. It’s a Catch-22,’ said Snead.”

“Although the market is slowing down, and a slower market means less sales and less commission, area realtors were united in their lack of concern about the perceived bursting of the bubble. Auchter compared the exaggerated seller’s market of the bubble to ‘picking vegetables before they are ripe.’”

“According to Snead, as demand drops and homes sit un-bought, prices will drop until they reach a range more comfortable for home buyers and the banks that loan to them. ‘The market is correcting itself, and that’s what will bring prices back into line,’ said Chandler.”

“Snead also believes that a market which has swung back to favor the home buyers is not necessarily a bad thing. ‘There’s opportunity in a good market, but there is also opportunity in a bad market. Now, there’s going to be some bargains out there,’ said Snead.”

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