The Housing Bubble

It’s Friday desk clearing time! “Just more than one year ago I wrote in this column ‘the residential real estate bubble isn’t ready to burst.’ Now I can say it already has. The process of correcting the biggest housing boom in history is under way.”

The Cape Codder. “In what real estate professionals are calling a much-needed correction, real estate prices on the Cape have begun falling as sellers try to avoid getting stuck in a glutted market. But although it’s clearly a buyers’ market, buyers aren’t exactly rushing to buy.”

“The correction was not unanticipated, everyone knew the bubble had to burst at some point as prices climbed higher. ‘It really had to become a self-fulfilling prophecy,’ (realtor) Steve Whitehurst in Harwich said. Not everyone is convinced the market has indeed hit bottom. Wilkinson, who has been in real estate for some 30 years, has seen all kinds of slumps and adjustments, and in his opinion, ‘the adjustment is not over.’”

“Last month, only 8,456 existing homes were sold in the Washington metropolitan area. That’s a drop of 34 percent compared to June 2005. It’s the largest drop we’ve seen yet this year. In fact, I looked back through 15 years of sales data, and I couldn’t find another month when sales had fallen 34 percent.”

“Such a sharp decline in home sales has sellers in the area frustrated, and the number of additional homes coming on the market is only making matters worse. In June, another 19,300 homes received for sale signs in their front yards. With less than 9,000 homes selling last month, you can see what sellers are up against.”

The Washington Post. “‘I spent the past five years listening to all of you blather on about RE. The smug attitude. The snotty ‘oh you rent’ comments. We warned you that this was a bubble. But still you bought the condo for a half mil on $80K income. And were condescending about it.’”

“‘I’m not buying your overpriced place on some silly discount. I’m buying at 2002 or earlier prices. If not from you, then from your bank when you forclose.’ Maryann Haggerty: ‘Who is sounding a little, well, smug and condescending now’?'”

The Journal Sentinel. “A decade after investors hit pay dirt in metro-Milwaukee subdivision development, they’ve struck rock. ‘I’ve been in the business since ‘61, and I’ve never seen it quieter than the last six months,’ said Mike Rosen in Mequon. ‘Things were tooling along beautifully for like the last 10, 15 years. Then all of a sudden, business dried up.”

“This is the kind of lull that often follows a boom, Waukesha developer Bryce Styza said. ‘We had a terrific 3, 4 years,’ Styza said. ‘It was naïve to say, ‘This will go on forever.’”

The Duncan Banner in Oklahoma. “Realtors in Stephens County are laughing. And, enjoying their careers. Michelle Kennedy, a Realtor-associate, describes the market as ‘God sent.’ Kennedy said she first noticed the upward trend in home sales in Duncan about a year ago. The home sale frenzy began and hasn’t let up, she said. She’s seeing an influx of..California newcomers.”

“If you want the latest news about the American real estate boom. and whether it’s about to go bust, you have plenty of options. David Streitfeld (is) a reporter in the San Francisco bureau of the Los Angeles Times. This is, he told me, ‘one of the great stories of our time, ranking with terrorism, obesity, and whatever we’re calling the Internet revolution these days.’”

“Streitfeld jumped into the market himself last summer and bought a house in the San Francisco suburbs. ‘If there is a bubble and it pops severely, I’m probably doomed, like much of California.’”

The Tampa Tribune takes us back to Florida. “My, what a difference a year makes. Builders who overestimated this summer’s new home demand face contract cancellations and slowing sales as a backlog of nearly finished houses piles up. The builders’ problem could mean big breaks for buyers.”

“Just glance through newspaper classified advertising sections to see how serious builders are to make a deal. Price cuts of as much as $75,000 off the bottom line. Deal sweeteners such as upgraded counter tops or having property taxes or closing costs paid for you. Drawings for a free, two-year lease on a new car.”

“‘Obviously we want to stay in business, but we have to sell homes to stay in business,’ said Ralph Sevelius, president of Inland Homes Suncoast. Inland is offering allowances of up to $56,000 on some homes. The money can be used to lower sale prices or pay closing costs. Some home prices have been reduced as much as $60,000.”

“Investors who bought months ago now are competing with builders to unload their homes. Analysts say some investors and consumers are leaving their contract deposits behind and walking away from homes under construction. ‘The cancellation rates builders are seeing are comparable to those builders were seeing after 9/11,’ said analyst Rick Murray. ‘Investors are bailing, and so are legitimate buyers. They fear it’s not the best time to buy.’”

“Some people wait to buy, expecting builders to offer a better deal later, said Beth Day, (in) marketing for Bruce Williams Homes, based in Bradenton. ‘We want to help the consumer who’s really ready to buy but fear they’ll miss out’ by not waiting, Day said. So Bruce Williams Homes is experimenting with guaranteed pricing. If the price goes down on the same house in the same neighborhood after you sign the contract and before you close on the home, the builder will give you the same discount.”

“They’re not the only ones trying to beat the incentive game with guaranteed pricing. Mike Southward, Tampa Division President for Lennar Homes, said his company is offering it, too. ‘We feel we’re already offering buyers the lowest price we can,’ Southward said. ‘So we’re giving buyers this insurance.’”

“Since January, Lennar has lowered prices on some homes by as much as $65,000 on a $315,000 home, but Southward said Lennar can’t afford to lower prices further. Instead, it’s sticking with guaranteed pricing. ‘When you’re negotiating, one guy gets a better deal, and that’s not fair.’ Southward said.”

“Kevin Robles, division VP for McCar Homes, based in Atlanta, said he has seen some builders discount homes as much as $100,000, ‘but they probably had the home overpriced by $50,000.’”

“There are just under 30,000 homes on the market, according to the Greater Tampa Association of Realtors. That’s nearly four times the amount in spring 2005.” “All the builders’ incentives could make the existing home market worse since most sellers aren’t in a position to offer the kinds of incentives builders do. They’re trying unique approaches. In Westchase, Daniel and Cynthia Lobb are frustrated by the lack of buyer interest. They lowered the price to $414,900, but still got no takers. Now they’re telling prospective buyers that 1 percent of their profit will go to charity.”

“‘There are so many houses in supply in our area,’ Daniel Lobb said. ‘We thought, ‘What can we do differently to set us apart?’”

A pair of housing analysts have predictions out today. “Real estate economist Gary Watts has revised his optimistic forecast for the Orange County housing market, telling an industry gathering this morning that he expects prices to go up 11 or 12 percent in 2006, and saying the gain could even be smaller.”

“Watts, who had forecast that local home prices would go up 15 percent this year, now believes that annual appreciation could be as low as 8 or 9 percent. ‘It’s been an absolute miserable six months in terms of real estate,’ Watts said.”

“‘I think we probably are not going to see 15 (percent), but I think 11 or 12 (percent) is still realistic.’”

The Review Journal in Las Vegas. “Despite historically high inventory, the cost of housing in the Las Vegas Valley increased in the first half of 2006 and will continue to rise through the end of the year, according to housing analysts.”

“‘There never was a bubble in Las Vegas, and there isn’t one in the future,’ said Larry Murphy, president of real estate monitoring firm SalesTraq.”

“Steve Bottfeld, a senior analyst with research firm Marketing Solutions, said the price increases should continue through the end of 2006 even as sales decline. The overall falloff in closings will come as the market grapples with substantial inventory. About 20,000 resales are on the market in Las Vegas as investors and homeowners with adjustable-rate mortgages look to trade in their properties.”

“‘Speculators and people who bought homes with (adjustable-rate mortgages) in 2004 are in a lot of trouble and they’re trying to get out,’ Bottfeld said.” “Bottfeld..noted that his market research in the second quarter uncovered for the first time local consumers who have canceled out of up to three new-home deals as they leave their existing home on the market in search of higher offers.”

“Housing supply is also abundant in the new-home sector. Area builders were actively selling 503 subdivisions in June, a record high for the market and a 17.2 percent increase over the 429 communities they were marketing in June 2005, Murphy said.”

“The condominium-conversion market has a two-year supply of homes, with 15,785 apartment units designated as potential conversions, Murphy said, though he added there were no guarantees that all those rentals would change over to for-sale properties.”

“In the high-rise and mid-rise submarket, 37,307 units are in planning, marketing or under construction, SalesTraq’s numbers show. But Murphy said that glut of supply isn’t alarming because developers will take up to four years to finish those projects.”

The Herald Tribune reports from Florida. “When it comes to competing to land manufacturing jobs, Florida just doesn’t stand a chance. Never was that reality clearer than on Thursday, when the state received a double-barreled message: North Carolina will gain not only a new Chris-Craft Corp. boat plant, but an Indian Motorcycle Co. factory as well.”

“‘It’s frustrating that we are not able to make it financially feasible for them to continue expanding here,’ said Nancy Engel, of the Economic Development Council in Manatee County, where Chris-Craft is based. ‘We try to work with the state, and we look at incentives, but when it comes to the cost of land in a high-growth area, and the impact that has on affordable housing, there’s not a lot we can do.’”

From Florida Today. “A key annual survey takes stock of Brevard County manufacturing firms to identify industry trends and challenges and, hopefully, produce more jobs. That’s needed because Brevard is seeing its manufacturing shrink. The county lost 1,500 manufacturing jobs in the past year.”

“The annual report is all the more important because one benefit Brevard used to boast is a card that can no longer be played: lower housing prices.”

The Orlando Sentinel. “The figures released Thursday show that June’s inventory was up by only 258 listings from May, far less than the April-to-May jump of 2,143 homes, the Orlando Regional Realtor Association said.”

“For Christine and John Rombough, who are nervously trying to sell their north Orlando home because of an out-of-state job transfer, the easing of the record buildup in inventory is encouraging. ‘We’ll take any ray of hope,’ Christine Rombough said.”

“Their four-bedroom, two-bath home has been on the market for more than a month, with few signs of buyer interest. They recently trimmed the asking price from $320,000 to $314,900. Her husband is commuting between Orlando and Charlotte, N.C., while they try to sell the home in what this year has become a buyer’s market.”

“‘We didn’t get to pick’ when to list the home for sale, she said, because of the surprise transfer. ‘Last year, the neighborhood was just hopping’ with quick sales. ‘Now, there are no flocks out there, she said.”

“Existing-home sales in the Realtors’ core Orlando market, mainly Orange and Seminole counties, fell 14 percent in June compared with June 2005, which was the peak month of last year’s record home-sales market. The June dip was partly the result of this year’s record buildup in homes available for sale, said Beverly Pindling, the local Realtor association’s president.”

“New homes are also providing more competition for the resale market, as builders offer a range of incentives and marketing deals to stimulate interest as mortgage-interest rates continue to rise.”

“Stephen and Chandra Smith recently decided to renew their apartment lease in Avalon Park in east Orange County rather than try to buy a home or condo, once they got a look at high asking prices. One condominium unit they considered was priced at $325,000, even though it was about the same size as the two-bedroom apartment they are leasing for $1,080 a month.”

From a Jacksonville television station. “Jacksonville real estate agents say the market is turning in favor of the buyer. University of North Florida economics professor Mary Borg thinks house prices will drop soon. ‘A lot of sort of average income people were priced out of the housing market, so now that prices are coming down it’s good for the average consumer and will spur economic growth,’ said Borg.”

Housing industry insiders are talking in California. “Leslie Appleton-Young is at a loss for words. The chief economist of the California Assn. of Realtors has stopped using the term ’soft landing’ to describe the state’s real estate market, saying she no longer feels comfortable with that mild label.”

“‘Maybe we need something new. That’s all I’m prepared to say,’ Appleton-Young said Thursday.”

“The Realtors association last month lowered its 2006 sales prediction. That was when Appleton-Young first told the San Diego Union-Tribune that she didn’t feel comfortable any longer using ’soft landing.’ ‘I’m sorry I ever made that comment,’ she said Thursday.”

“For real estate optimists, the phrase ’soft landing’ conveyed the soothing notion that the run-up in values over the last few years would be permanent.”

“The state Department of Real Estate recently reported that (there is) one agent for every 55 adults in the state. Appleton-Young had no qualms about predicting a hard landing here: ‘We’re expecting a fairly significant shakeout.’”

“D.R. Horton CEO Donald Tomnitz was telling analysts that the home builder’s sales in June ‘absolutely fell off the Richter scale.’ Horton, the nation’s largest builder of residential housing, has numerous projects in California.”

The Union Tribune. “In the latest signs of a softening local housing market, Del Mar-based Brookfield Homes reported a steep drop in revenue from home building yesterday while the nation’s largest home builder said business in San Diego has been particularly weak.”

“Both Brookfield and Texas-based D.R. Horton said they are experiencing an increase in cancellations across the country – where buyers who have entered a contract to purchase a home decide to walk away.”

“‘I know every time we’ve gone into a downturn in the home building industry, they’ve always been longer and deeper than we’ve all imagined,’ D.R. Horton CEO Tomnitz said. ‘So we’re preparing for the worst, and we think this one will be longer and deeper than just the last six months.’”

“DR Horton said that in the past 60 days it had cut the number of lots it has under contract in San Diego County and elsewhere earmarked for future development. The company didn’t say exactly how much deposit money it lost in San Diego County. But companywide, the home builder wrote off $57.2 million in the quarter for deposits on land that it now isn’t going to buy.”

“‘San Diego is our weakest market in California,’ Tomnitz told analysts. ‘California continues to be a challenging market for us. There continues to be a small percentage of affordability out there.’”

“‘We are experiencing the impact of the long-anticipated slowdown in housing markets, particularly in the San Diego and Washington, D.C., areas,’ said Ian Cockwell, Brookfield’s CEO.”

Some housing bubble reports from smaller markets. The Salt Lake Tribune, “The Wasatch Front’s residential real estate market began to take off in early 2005, years after housing markets in other states such as Arizona, Nevada and California began to heat up. Those markets have now begun to cool while Utah is booming. ‘It’s amazing to see how much prices are increasing,’ Bryan Kohler, CEO of the Salt Lake Board of Realtors said. ‘We’re finally catching up with the rest of the country.’”

“And many buyers are willing to pay above the asking price. ‘Half the time you can’t get a home in the neighborhood you want because there are five other people making an offer on the same place,’ said Kohler. ‘Some homes are sold even before the sign goes up.’”

“Many Utahns are doing whatever they can to buy now. Some are taking out adjustable rate mortgages with low introductory rates or interest-only loans. Others are accepting smaller homes with fewer amenities or buying farther out in the suburbs or on the west side, where prices are more moderate.”

“‘There’s definitely a feeling among buyers that they need make a move now before prices and mortgage rates increase even further,’ said Salt Lake City Realtor Troy Burnett. ‘There’s some concern, especially among first-time buyers, that they will be priced out of the market if they wait” to buy.’”

The Arkansas Democrat Gazette. “Arkansas home sales declined from a year earlier for the sixth-straight month in June as the housing inventory and mortgage rates crept up, the Arkansas Realtors Association said Wednesday. ‘There is so much new construction that the buyer has so much more to choose from,’ Tom Rasmussen, president of the Rogers Board of Realtors said.”

“‘All markets have ups and downs and corrections,’ Rasmussen said. ‘Nothing goes up forever. This is just a normal economic cycle based on supply and demand.’”

The Morning News. “‘Huge price reductions! The agent will include a brand new side by side refrigerator with the purchase of any of these homes,’ a newspaper advertisement for homes in Spring Creek subdivision, along Arkansas 265 in Springdale, said.”

“Past reports on real estate markets in Benton and Washington counties have said the market was oversupplied with higher-priced homes, which were selling slower. The trend has spread.”

“The average Benton County home sold for $192,854 in January through June, a 9.51 percent increase from the same six months of 2005. Benton County’s steep price rise, coupled with the double digit percentage drop in home sales, left local economist Kathy Deck without a good explanation.”

“‘I would have expected that (price increase) to be a smaller number, because the oversupply should be putting some pressure on housing prices to go down,’ Deck said. She said home prices likely will have to come down in the future. ‘I sit in restaurants and I am hearing people say, ‘No, no, no, you don’t want to buy a house now. Six months from now, there are going to be some great deals,’ Deck said.”

“That soft market means buyers already can get some better home deals. Another newspaper ad indicated a home in West Fork was now listed at $259,900, ‘price reduced $20,000! Seller says sell!’”

“Builder Ron Payne said there’s no doubt there are too many homes on the market. He said builders are to blame. ‘I think that the builders are behaving like lemmings,’ Payne said.”

“What he meant was one builder constructed a subdivision full of large homes and made huge profits several years ago. Other builders blindly followed, and built more homes that were higher priced, and so on.”

“‘Instead of looking at the numbers and seeing that times have changed since that first builder built a big home and made a big profit, they (other builders) keep doing the same thing, until they all contribute to the oversupply,’ Payne said. ‘If the numbers did not back that up, it would simply be an opinion, but facts are kind of stubborn things.’”

“Payne said builders need to construct smaller homes that more people can afford and stop building large ‘McMansions,’ unless they are custom homes that already have buyers whose checks or loans have cleared the banks.”

“Banks who have made construction loans to builders or mortgage loans to home buyers don’t need to worry about a mass of loan defaults in the slowing market, according to Tim Yeager, the Arkansas Bankers’ Association chair in banking at the University of Arkansas.”

“He said construction loans tend to carry more risks for banks, because there are no federal entities like Freddie Mac or Fannie Mae to guarantee construction loans in the same way as individual mortgage loans. ‘Usually, when the bank sells the individual home loan, they get rid of the default risk,’ Yeager said.”

“Executive broker Brad Bruns based in Springdale, said the slowing real estate market does not bother him, because ‘people have to live somewhere. They may just have to live in smaller homes that cost less.’”

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