The Housing Bubble

Several readers suggested the topic of what’s been getting built in this boom. “Since there has been an orgy of building along with this bubble, I am curious how people feel about what has been built, how it has been built and where it has been built.”

“How do people feel about all these cookie cutter homes? (What has been built) I assume people are buying them, or they wouldn’t be built in the first place. HOAs are now more widespread than ever and I think they will become a nightmare, for both FBs and HOA boards who lien homes for non-payment of HOA dues and then foreclose.”

“Shoddy construction: The stories are already out there and in Florida, Mike Morgan’s litigation against a major builder/developer may be just the tip of the iceberg. What are people seeing in other parts of the country, or is this a Florida phenomenon? What corners are being cut and will these just be minor issues, or could some rise to the level of having to be condemned?”

Another said, “It’s not just Florida and not just new homes. In the Northeast, many small two- and three-family dwellings were rehabbed into condos. A handful were well done; most slapped granite countertops and polyurethane onto watery basements, wood rot, tilted floors, UFFI insulation, old wiring and old plumbing. They are a ticking time bomb, because the flippers were too cheap to fix them right.”

One from Florida. “I know Lennar is under the gun in Florida. And I seem to recall seeing that Ryland has quality issues as well. How about condo conversions? Will some of these homebuilders be put out of business because of quality problems?”

Another pointed to repairs. “Ongoing maintenance is a little discussed, hidden cost of home ownership. Some can be deferred. (ie. not replacing a roof). However, some cannot. A poorly constructed home may use way too much energy. Much like owning a old unrepairable car, at what point do homeowners throw in the towel?”

More on HOA’s. “IMHO once you’ve got a HOA, you might as well have a landlord. Either one can tell you what color your front door will be, what kind of curtains you must have, and to not have any toys in your yard.”

One reader saw an end to the trend. “We will see a lot of the cookie-cutter subdivisions HOAs go away. All it takes is one lapse and then it all goes to hell. My friends live in a subdivision with a HOA that prohibits chain-link fences, sheds, and above-ground pools. One neighbor said in essence ‘f**k you’ and put up a shed. Then the second neighbor put in an above ground pool, and the chain link fence isn’t far behind.”

“I’m pretty sure than once one thing is allowed to slide the HOA can’t legally do anything. This is a perfect reason many of the cookie-cutter subdivisions of the 1980s are now lower income housing. HOAs will fail and you will soon see McMansions with 10 vans parked in front of them and a car in the weed filled yard.”

The Miami Herald. “The signs are everywhere, stuck in the ground along U.S. 1 and plastered on construction sites: ‘Wanted: plumbers, electricians, roofers.’ What they should also say: ‘Great salary and job security. No experience? Get paid to learn.’”

“Local companies are pulling out all the stops to attract workers because they face acute shortages of skilled tradespeople. Some companies are developing their own in-house training programs or adding as many recruits as possible to traditional apprentice programs. Others have gone as far afield as China to import skilled laborers to South Florida.”

The Review Journal has this update from Las Vegas. “Some owners at Spanish View Towers high-rise condominium in southwest Las Vegas Valley are getting antsy as construction of the $800 million project has been halted for the past three weeks.”

“A couple who asked not to be identified said they want their $219,000 deposit returned after being told their million-dollar unit would not be finished until August 2007. When they bought in May 2005, the completion date was set for this month. ‘We just want out,’ the owner said. ‘It’ll be two years before it’s finished.’”

“David Pourbaba, developer of Sky Las Vegas on the Strip, said the market loses credibility when projects run into trouble.”

“‘One thing about people that start construction, and this is the old trick in the book, some of these guys start construction with their own money, but they don’t do much. They just start some work toward this and that so they can get more buyers in because most of the banks ask for a particular percentage of presold units before they release funds,’ Pourbaba said.”

“‘If you need 60 percent and you’re only at 48 percent, you take the chance of starting and hoping you get the other 12 percent right away. It happens sometimes and it can backfire as it has in other cases where lawsuits are filed,’ he said.”

“Some buyers have filed lawsuits trying to force the developer to build the project. Attorney Mandy Shavinsky said she doesn’t know what Nevada courts will do in those cases, but she doubts they can force a developer with limited funds to build something at a gigantic loss.”

In Business Las Vegas. “Even in summer’s hellfire heat, an estimated 5,000 to 8,000 people will continue to move here each month. So why does Wall Street think the sky is falling?”

“Lukewarm earnings results for locals casino operators Station Casinos and Boyd Gaming Corp. have some analysts all a-quiver about whether the supercharged Las Vegas economy is finally sputtering. Station Casinos, the dominant locals operator and the company poised to profit the most from Las Vegas’ continued job and population growth, has found itself in the wrong place at the wrong time. The company on Tuesday reported a 34 percent decline in profit.”

“Station executives say they are frustrated that their company has become a hotbed of speculation by short-sellers. CFO Glenn Christenson said the company is bullish on the long-term growth in the locals market. The company recently said locals casinos are expected to win some $3.8 billion from gamblers by 2010, up from previous estimates of $3.5 billion.”

“Executives at Boyd Gaming, which has also been bit by the short-selling bug, attempted to reassure investors Tuesday after reporting (a) 79 percent decrease in profit.”

“Stephen Bottfeld, who gauges the Las Vegas market, said his polling of the home buying public has uncovered some troubling signs. Only one-third of those who purchased homes believe that economic conditions will improve.”

“That’s important because it’s a 12 percent drop from the first quarter and the lowest level of consumer confidence he has recorded in the history of the survey dating to 1994. ‘It did not get this bad the quarter after 9/11,’ Bottfeld said. ‘That means we have a buying public that is very leery of what is going on economically.’”

“He said, however, even if the country goes into recession, he believes the Las Vegas economy and its housing market will remain healthy given its job growth.”

“With the region running out of land, Bottfeld offered another prediction. ‘Within the next decade, there will be no more single family home tracts built in the Las Vegas Valley,’ Bottfeld said. ‘I think personally it will be seven years. Land costs are driving this Valley vertical. You can’t afford to build single-family homes on land that costs $700,000, $800,000 or $1.2 million an acre.’”

Several readers suggested a topic that many newspapers are reporting on after yesterdays GDP numbers. “It is official. The economy is grinding to a halt while inflation is jumping. Stagflation part II coming to a neighborhood near you.”

Another replied, “My take on this is that the actual inflation (increase in the money supply) happened while the interest rates were so low, and the housing boom is the main source of the inflation. The increase in prices we see now is a direct result of the increase in the money supply that was a result of the easy credit on housing.”

“It would have been much better to ‘take our medicine’ without creating this housing boom first which just increased the imbalances. I am expecting deflation; others on this blog expect more inflation or hyperinflation. If housing prices drop significantly this will be deflationary and people will have to cut back on their spending and generally think about saving money wich will be deflationary. I am expecting all classes of investments to drop, even gold, although perhaps I am wrong there.”

And another said, “I am of the inflationary persuasion with regard to the economy. If the hedonic figures are removed from the CPI (eg. the Cavalier that you purchased for $10,000 in 2001 now costs $14,000 - that is not inflation; per the government, the car has improved by $4000). IMHO the Fed will tighten to try to stop inflation, but then will open the flood gates to stimulate the economy then hyper inflation.”

And finally, “I think we’ve been in a stagflationary period for a long, long time, from the 70s on, in varying degrees.”

The LA Times. “The cooling housing market may be undercutting overall consumer spending as fewer people count on rising home equity to finance trips to the mall. Consumer spending grew by only 2.5% in the second quarter, down from 4.8% in the first quarter, according to the Commerce Department report Friday.”

“‘People were selling part of their house to finance dinner at Olive Garden,’ said Dirk van Dijk, at Zacks Investment Research. ‘You can play that game as long as the price of housing is going up. You take that away and it becomes a scary proposition.’”

The Washington Post. “Some retailers and industry experts say the cooling housing market is directly related to weak performance in home furnishings. Fewer houses sold means fewer to decorate, and slumping sales for retailers. ‘The softening in the housing market is definitely having an impact on what consumers perceive they need to buy,’ said Janet Hoffman.”

“Stanis Furniture, based in Fairfax, is closing its second location, in Chantilly. Mastercraft Interiors is liquidating its four stores after filing for bankruptcy in May. Brown’s Wood Stuff closed two of its three Virginia stores. Even Georgetown’s home design hot spot Cady’s Alley has taken a hit, with upscale retailers Hollis & Knight and the Ambiente Collection going dark.”

The New York Times. “The housing industry, which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices, has lost its vigor in recent months and now has begun to bog down the broader economy.”

“‘It hasn’t slowed down a little bit, it has slowed down a lot,’ said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, FL.”

“The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. Just as rising housing prices during the boom added to Americans’ sense of wealth and well-being, the reverse could dampen sentiment and lead consumers to pull back on their purchases.”

“Going forward, many economists say, the biggest question is whether the orderly real-estate slowdown the Fed has engineered thus far will continue. ‘Outside the threat of surging energy prices,’ economist mark Zandi said, ‘the most significant threat to the expansion is that the housing correction turns into a housing crash.’”

“When the American economy fell into recession five years ago, it was the strength of the housing market that kept the downturn short and mild. Home sales kept rising throughout the downturn, and then took off when the recession began. But now home sales are falling and the number of unsold homes is at the highest level ever.”

“To be sure, over the 12 months through June more than 6 million single-family existing homes and 1.2 million new homes were sold. It is conceivable that the market will stabilize at levels that look weak only when compared to last year’s extraordinary numbers. But with sales weakening and the number of available homes rising, those who warned of a housing bubble must be wondering if their fears are finally becoming reality.”

The Tracy Press has this update from California. “The winds of change have hit the housing market, according to real estate agents and analysts. According to agent Grace Alvarez, who was born and raised in Tracy and has watched the city’s market the past 18 years, this is the time to buy. As of Thursday, there were 764 homes and condos for sale in the Tracy area, not including Mountain House. ‘It’s the highest (number) that we’ve ever seen here in Tracy, in my experience,’ Alvarez said.”

“The huge surplus of unsold homes means that sellers are lowering their asking prices. Which means those searching for new homes can get a lot of bang for their buck.” “In Tracy, though, one wonders how low housing prices can go. Despite the glut of homes and condos on the market, Tracy won’t stop being a hot spot for Bay Area commuters looking to save on housing.”

“Alvarez and other real estate agents expect the rate of foreclosures to jump in the coming months. That’s because in the extreme seller’s market that preceded recent falloffs, many people stretched beyond normal means to get into a home. For many who are finding they can’t make their astronomical payments, losing a house is a real possibility.”

“And trying to get out of trouble by selling in a depressed market, where properties are sitting unsold for months, not weeks, is almost impossible.”

“Nearly 350 homeowners in Tracy are on the verge of losing their homes because they’ve fallen behind on their repayments, and auction dates have been set for 63 of the properties.”

“San Joaquin’s foreclosure rate was the highest in the state between April and June, with one out of every 154 homeowners behind on repayments at some point during the three-month period. That’s more than double San Joaquin’s foreclosure rate at the same time last year, and three times the California average.”

“Karl Enzman, a director at the Central Valley Association of Realtors, said many homebuyers bought their properties ‘with too rosy an outlook of the market.’ He said many of these buyers couldn’t afford to make their repayments when bond-market pegged variable interest rates rose, forcing them into foreclosure.”

“Countrywide Home Loans consultant Lynda Mendoza said that some homeowners lose their homes after becoming unemployed but that many foreclosures are the result of poor financial planning. ‘They’re talked into buying a house that they can’t afford,’ said the loan agent, who claimed none of her clients have gone into foreclosure.”

“Real estate agent Tony Nance said many homeowners pulled equity out of their homes as house prices rose, and as some house-prices dropped they were left repaying loans with higher values than their homes.”

The Union in California. “For the first time in many years, median prices for real estate in Nevada County dipped, declining 3.6 percent in June compared to median prices a year earlier. Rather than the bubble bursting, however, sellers are bringing prices closer to values as the supply of available houses swells, local real estate agents said.”

“Prices also are being pressured by more supply. More than 1,400 properties in the county are on the MLS, compared to 400 a year ago, Greg Seghezzi in Grass Valley said.”

“‘The bubble has not burst,’ said agent Sandy Wilson. ‘Sellers should not panic, although they need to be more realistic on their prices.’”