The Housing Bubble

It’s Friday desk clearing time! “Dallas’ high-rise condo boom appears to be peaking. With construction costs soaring and investors pulling out of the housing market, several residential tower deals have been killed and others are in doubt. ‘Sales at the kickoff were a bit disappointing,’ said Art Lomenick, managing director of developer High Street Residential. ‘A lot of folks are stepping back and looking at their options because of what is going on in the market.’”

“What’s going on is that investors, many of them from out of state, are abandoning the housing market. Investors have accounted, by some estimates, for more than a third of local condo presales. The declines have been worse in markets such as California, Florida and Las Vegas, where dozens of condominium deals have been canceled because of slumping demand.”

“At least 56 subdivisions have been approved since 2004. Even Bell, a Teton County resident only since February, is startled by the pace of growth. ‘People are flying in from all over the country,’ he said, adding that he’s met real estate prospectors from California, Hawaii, Michigan, Texas and New York. ‘Houses just don’t stay on the market long. They fly off the shelf. There are people coming in and paying cash.’”

The Anchorage Daily News. “It couldn’t go on forever. Analysts say the Valley’s homebuilding frenzy is cooling, leaving more than 800 homes on the market last month, more than at any time in the last 10 years. The Valley’s housing market this summer boasts a glut of new homes between $250,000 and $350,000, good news for anybody looking to buy in that range.”

The Morning News from Arkansas. “Benton County has too many single-family homes that are built but not sold, according to a study. An additional 19,783 residential lots have been approved by cities’ planning commissions. That brings the total lot supply to 39,109, or enough new lots to supply the area for 8.86 years. Sandy Heathman, an employee in the building permits and inspection department, said builders ‘went berserk’ in March and obtained more than 600 building permits for single-family homes.”

From Little Rock. “‘You can buy a home for no money down. You can buy a home with bad credit. It’s amazing what you can do,’ says Robyn Johnson with American Home Mortgage. Since May 1, Crye-Leike Realtors has seen more than 70 homes in Central Arkansas foreclosed. That’s a family almost every day that is evicted. ‘We are getting a lot of homes just like in the last two days. We’ve gotten seven homes that are over 400,000,’ says Danny Holt with Crye-Leike Realtors.”

From Washington. “Not too long ago, people would have laughed to hear it costs a half-million dollars for a new house in Snohomish County. No waterfront, no view. Just new, two-story houses shoulder-to-shoulder on cul-de-sacs. Despite the price, these are some of the smallest lots in the county. In some cases, the houses come 10 or more to the acre.”

“‘The days of new homes in the $400s are pretty much gone,’ real estate agent Dave Duncan said. ‘The days of the neighborhoods with big yards are all gone,’ Duncan said. ‘It’s not a bad thing, it’s just where we’re headed. Other parts of the country have been there for years.’”

“A correction in the red-hot Toronto area condominium market ‘cannot be far away,’ says a leading housing economist. ‘An onslaught of condo completions is just beginning and I expect that rents will start to fall late in the year with the possibility of price weakness to follow,’ said Will Dunning.”

“‘The eventual consequences (which include falling rents and rapid exits with negative consequences for prices) have been averted to date only because of construction delays,’ he said. In a worst-case scenario, ‘panic selling could emerge’ as investors sell off their condos because of oversupply, says the report.”

The Review Journal in Las Vegas. “To the editor: Regarding the article , ‘Analysts: Home prices won’t fall.’ I and others who work full time professionally in the real estate business are amazed at how these ‘experts’ manage to put a positive spin on the reality of the real estate market here. The reality is that prices are dropping all the time.”

“Builders are giving away the store in incentives. The use of ‘median price’ numbers to interpret what is going on is foolish, meaningless and serves no one, except those determined to delude people into thinking everything is OK. But like the dance band on the Titanic, they keep cranking out the same old tune.”

Some housing bubble reports from Wall Street and Washington. “Standard Pacific Corp. today reported the Company’s 2006 second quarter operating results. Stephen Scarborough, CEO, stated, “We are impacted by growing levels of both new and existing home inventories..these conditions have resulted in lower sales rates and higher levels of cancellations which have given rise to a greater use of incentives and other forms of discounting.”

“Other income (expense) for the 2006 second quarter includes a pre-tax charge of approximately $16.3 million related to the write-off of deposits and capitalized pre-acquisition costs for abandoned or uncertain projects. Net new home orders were off 56% year-over-year in Southern California on a 33% higher average community count. The lower level of sales activity in Southern California was due to..a doubling of our cancellation rate. In Northern California, net new home orders were down 48%.”

“Net new home orders were down 67% in Florida, (on) a nearly threefold increase in our cancellation rate. In Arizona, net new home orders were down 62% on a 100% higher average community count. The Phoenix market is clearly experiencing challenging market conditions for new and existing homes as evidenced by the surge in our cancellation rate during the second quarter and the increasing need for incentives to sell homes.”

The US Census Bureau. “National vacancy rates in the second quarter 2006 were 9.6 percent for rental housing and 2.2 percent for homeowner housing, the Department of Commerce’s Census Bureau announced today. The Census Bureau said the rental vacancy rate was not statistically different from the second quarter rate last year (9.8 percent) or the rate last quarter (9.5 percent). For homeowner vacancies, the current rate was higher than a year ago (1.8 percent), and also higher than last quarter (2.1 percent.)”

From the investment bank to the housing bubble. “Friedman, Billings, Ramsey Group, Inc.today announced a net after-tax loss for the quarter of $30.2 million. For the second quarter, FBR earned $126.4 million in interest on its mortgage investments compared to $135.1 million in the second quarter of 2005. The portfolio yield was 6.39% with a corresponding cost of funds of 5.38%.”

“At the end of the quarter, the unpaid principal balance of the mortgage portfolio was approximately $8.6 billion.”

The yield curve is inverting. “Treasuries rose, pushing yields on 10-year notes below 5 percent, after U.S. economic growth slowed more than forecast by analysts, raising expectations the Federal Reserve will stop raising interest rates next month.”

“‘Housing is ugly,’ said Adam MacKillop, a U.S. fixed- income trader. The impact of around half of the Fed’s 4.25 percentage points of rate increases since June 2004 hasn’t reached the economy yet, MacKillop said. There’s a lot of this tightening that hasn’t hit the mortgage refinancing.’”

From Reuters. “The shifting foundation of the U.S. housing market is sticking buyers with their old homes for longer, pushing many to slash prices and take on even more debt in the form of so-called bridge loans.”

“‘These loans are more for the individual who is in dire straits, who has bought a house and can’t sell’ the existing home, said Bob Moulton, president of Americana Mortgage Group in Manhasset, New York. ‘That person ends up carrying the new house, the old house and the bridge loan. I’m seeing the reliance on bridge loans now more than ever.’”

“‘Bridge financing is necessary in a short-term situation, but if a homeowner carries the bridge financing for an excess period of time, he could be forced to sell at a lower price, contributing to softer sales prices,’ Moulton said.”

“The rise in bridge loans ‘is further evidence of a slowing in the market, and of the lack of planning that most homeowners do in making these types of decisions,’ said Dave Savage, CEO of an Irvine, California-based company that provides mortgage-planning software to loan officers.”

Some updates from Florida. The St. Petersburg Times, “Thousands of dollars in home-closing bonuses. Commissions more than three times last year’s rates. Deep discounts and even gas card promotions. In a rapidly slowing housing market, Realtors on Thursday found themselves suddenly amid a flood of incentives to sell homes at Thursday’s Tampa Bay Builders Association Expo.”

“As the Tampa Bay housing market stumbles, sales have halved in once-hot home producers like Pasco County for the first six months of 2006, compared with the same period last year. With fast-rising property insurance rates seen as the chief culprit, builders are fighting back with a range of incentives to get real estate agents back on the horse.”

“Beazer Homes handed out 5 percent. Lennar hawked 6 percent. Standard Pacific offered 10 percent on the second closing.”

“‘Last year, we did not have any inventory,’ said Lorrie Glover, at the booth for one of Pasco’s major planned communities. ‘Last year, we used to have a lottery for buyers. The market’s changed now.’”

The Orlando Sentinel. “During the frenzied real estate market of recent years, 29 condo towers with a combined 7,000 to 8,000 units have been announced for locations in downtown Orlando. Most of the projects have been postponed, however, because of the softening market and because of fast-rising construction costs.”

“Braving a cooling real estate market and volatile construction costs, developers of the 24-story Monarch condominium tower in downtown Orlando said Thursday they will launch sales in September with an eye toward starting construction as quickly as possible.”

“‘The faster we can stick a shovel in the ground, the better off we’ll be,’ said David Reed, a partner in the project.”

The Herald Tribune. “Concerned that student enrollment may not be as large as projected this year, Superintendent Gary Norris on Thursday instituted a hiring freeze for most elementary school teaching positions. The district also is not filling classified staff positions.”

“A continuing lag in enrollment this year may signal that housing costs in the county, particularly the Sarasota area, are driving away families, school officials said. ‘I blame it on home values,’ said Al Weidner, the district’s budget director who forecasts student enrollment. ‘It’s all the factor of the cost of living down here.’”

The Palm Beach Post has this letter to the editor. “Home ownership in Palm Beach County is in jeopardy. Out-of-control insurance premiums and taxes assessed on homes purchased during the past three years for twice their true value and more due to designer mortgages has resulted in hardworking middle-income and lower-income homeowners being pushed beyond their financial limit.”

“Foreclosures are increasing by the week, and the number of homes on the market has ballooned, as anxious homeowners try to bail out and move somewhere they can afford to live. Add the obscene tax rates on these homes and soaring insurance rates, and homeowners have no choice: Leave or be foreclosed on.”

“When they leave, the banks will be stuck with tens of thousands of homes that they will not be able to sell. Home values will plummet, and the county tax office will be left with huge gaps that cannot be collected. Tourism will vanish if there are no service staff. In the end, we will have created a ghost county that only the rich can afford to live in. This is a reality; it is here and it is now.”

Some housing bubble reports from the northeastern US. “During the past several years, many homeowners secured disposable income to cover their bills or make purchases by refinancing or taking home-equity loans. That money translated into new cars, new decks and extra lines of credit. New housing statistics released this week have some North Jersey bankers worried.”

“‘The equity line was very helpful in driving a purchase market,’ said Tom Cosentino, who oversees mortgages for Greater Community Bank in Totowa. ‘Now people are coming back saying they spent all that money and didn’t realize it would stop.’”

“Mercedes Pedrick, who oversees mortgages at in Elmwood Park, said that luxury homes are still getting snapped up, but sales of single-family homes generally have sagged in Passaic and Bergen counties. ‘They haven’t been moving as much,’ she said.”

“Local bankers say that new mortgages, and the refinancing of existing ones, have dried up, especially over the past several weeks. ‘It has been quiet, unfortunately,’ said Steve Hoogerhyde, a lending officer.”

“Pedrick says that prospective homebuyers, especially those in the single-family home market, will continue to sit on the sidelines until the situation stabilizes. ‘Those people are riding the wave to see how low values will go,’ she said.”

The Home News Tribune. “The number of homes for sale in Central Jersey is up 20-to-25 percent from a year ago, said (realtor) Marc Laurano in Highland Park. Fewer speculators and investors and banks and appraisers making stiffer reviews have contributed to it taking longer for homes to sell, according to Laurano.”

“Bill Hanley, president-elect of the New Jersey Association of Realtors, said the ratio of homes available changed from 10 buyers for every house a year ago to 20 houses for every buyer this summer.”

The News Transcript in New Jersey. “These days it seems like it’s just not enough to put a house on the market if you’re not willing to throw in a little extra incentive for a buyer; perhaps a Mercedes-Benz. Thino and Susan Cacciolo, of Manalapan, have decided to take a more unconventional route, mainly due to the increasing difficulty in selling a high-end house in the current real estate market.”

“‘It’s called marketing. We’re going to do whatever it takes,’ said Thino Cacciolo. ‘The lack of traffic is because of the tremendous inventory increase in larger, more expensive houses,’ he said.”

The Daily News Transcript in Massachusetts. “The MetroWest housing market has bucked national trends for months, but figures from June indicate the region has stepped onto the residential real estate bandwagon. Sales dropped in 12 of the 16 communities tracked by HomeFind, while prices dropped as buyers sought out lower-priced properties in 10 of those towns.”

The Cape News. “Home foreclosures on Cape Cod, and in two Upper Cape towns in particular, have increased at a dramatic rate according to a new report. Statewide, 4,292 foreclosure notices were filed in land court between April and June 2006, up from 2,585 filings during that same period last year.”

“The increase is being blamed in part on rising interest rates and utility costs, but also on the housing boom of the 1990s, when prospective homeowners took out interest-only loans and no-down-payment mortgages in order to get into large houses. That perhaps explains why Cape Cod, known for its lavish seasonal and retirement homes, is recording record-high foreclosures.”

The Bridgeport News in Connecticut. “According to second-quarter statistics, single-family home sales in Bridgeport dropped almost 27 percent from 2005 to 2006. Local real estate agent, J.J. Garamella, agreed the market isn’t as strong as a year ago. Garamella said he worries that too much new construction is taking place, leading to excess inventory if the economy slows down. ‘That’s when everything will hit the fan,’ he said.”

“Too many young people today purchase expensive homes without thinking about what could happen if the future isn’t as bright as anticipated, according to Garamella. ‘They over-extend themselves,’ he said.”

The Washington Times has this report on the DC area. “The housing slump reached a new milestone this spring as home prices started to decline in many once-booming areas, recent reports show. The rapid slowdown in housing has particular repercussions for areas such as Washington, where the local economies are driven in part by real estate.”

“‘We’re seeing a shakeout’ in the mortgage industry, said Christopher Cruise, who trains mortgage loan officers. ‘People were just answering the phone during the refi boom and making six-figure [incomes]. Now, the phone’s not ringing any more.’”

“The slowdown is healthy in a market in which prices climbed too high, homes became unaffordable for young buyers and too many people were rushing into home purchases thinking that prices could go nowhere but up, he said. ‘It was like the greater fool theory, there has got to be a fool out there who’s willing to pay even more than me for this house. At some point, you run out of fools,’ he said.”

“Job opportunities are declining in housing-related areas such as architectural and engineering, according to an employment index.”

“Paul Yalnezian, president of the real estate firm Right Home, said the housing slump has been precipitous in California. ‘The number of able, ready and willing buyers has dwindled significantly. We are seeing more and more price reductions,’ he said.”

“Some industry observers fear the fast-declining housing sector is headed for a bust this fall when sales and prices typically decline from high-season levels. ‘August will begin the buyers’ market,’ said Donna Evers, president (a) real estate brokerage.”

“”Robert Dye, analyst with Economy.com, said areas where housing soared the most are the ones most likely to see outright price drops in the months ahead. Among the areas where he sees a ‘risk of correction’ are the Washington area, California, Florida and Arizona.”

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