The Housing Bubble

The news this Sunday is the price-problem recognition by the media. “Around the country, houses that used to sell in days are now sitting on the market for months. After five years of paradise for sellers, once again it’s a buyer’s market. The pressure now is on sellers, and especially builders, as the market is saturated with a record glut of unsold homes for buyers to choose from.”

“‘In terms of closing sales, they have got to offer significant discounts,’ said Ivy Zelman, housing analyst for Credit Suisse First Boston. ‘I have builders right now who are advertising make me an offer, which is definitely scary.’”

“Zellman said that high prices are things of the past for now. ‘People are going to have to come to the reality that if they want to sell their house,’ Zelman said. ‘They’re going to have to lower the price.’”

“Chevy Chase is one of those Washington, D.C., neighborhoods where lots of folks want to live. Although prices have softened only slightly so far, bidding wars are now a thing of the past as buyers mull over an inventory of unsold homes that has tripled since the same time last year.”

“‘We just don’t know if it’s the right time to buy anymore,’ says Ruth Zitner, who has been shopping for a home in the neighborhood for the past year. ‘So we’ve decided to just wait and see.’”

“That attitude is fast turning the housing market on its head, in once hot neighborhoods from South Florida to San Francisco. The nation’s largest home builders are reporting rising cancellations of orders for new homes. Meanwhile, nationwide sales of existing homes fell by 8.9 percent in June, compared with a year earlier, and by as much as twice that in places like Boston.”

“With sellers increasingly anxious to unload their properties, inventories of unsold homes have swelled to more than a six-month supply, an increase of over 50 percent in a year.”

“‘Sellers have tried to hang in there and get their price,’ says David Wyss, chief economist at Standard & Poor’s. ‘But there comes a point where they’ll have to give in.’”

From New Hampshire. “The latest headlines on the subject of existing home sales confirmed what everyone connected to the residential real estate industry has known for almost a year, it’s a marshmallow soft market and getting softer by the month.”

“When I talked to a few local Realtors, they confirmed the trends. Kathy Rush said, ‘We have double the listings on the market. We don’t have double the buyers.’”

“The psychology of the buyer pool has changed. As one agent told me, the residential real estate market of the past five to six years was like a voluntary Ponzi scheme with all the participants assuming they could make hefty and relatively quick profits from their investments.”

“Pam Bailey said she underwent training initiated by Coldwell Banker earlier this year. The goal was to really educate sellers that the market had shifted and, though they won’t say it, but I will, the Ponzi carnival was, if not over, then certainly sidelined.”

“‘This isn’t rocket science,’ said Angela Stamoulos, the training manager for Coldwell Banker. ‘We do a lot of analysis and we saw the amount of inventory. We saw different things that needed to be emphasized. We used real data to educate sellers on what’s happening,’ Stamoulos said. ‘There are always buyers, but it’s that homes are most likely overpriced.’”

“Barbara, the seller of the house she’s lived in for nearly five decades and who asked that I not give her full name, (said), ‘It was very helpful that Pam explained the market to me. When we first hooked up, the market was good. Now, it’s less good.’”

The Washington Post has this report on tactics for selling in a down market. “If for-sale signs have sprouted like weeds in your neighborhood and the grass is growing up around them, it’s no time to panic, say real estate experts. It’s time to go back to the basics.”

“Some sellers also are dangling offers of vacations and cars. Others are turning to auctions, normally associated with foreclosures and fire sales. Some are just praying.”

“‘You have to look at what the contract prices have been recently, not at what the high-water mark was in 2005,’ said Linda Braley, an appraiser in McLean. ‘Those prices are gone.’”

“Even those who had their houses appraised for refinancing in the past year should look again before listing, Braley said. ‘In a market where not much is changing, you might have a shelf life of about six months on an appraisal. But in the current situation, it’s very difficult to keep up with prices.’”

“If a property sits two weeks with no interest, not even an agent dropping by, ‘it’s time to lower the price,’ said Margaret Ireland, chairman of the Northern Virginia Association of Realtors. The amount of the reduction depends on the price range. ‘If it’s in the $700,000-to-$800,000 range, you need a good $25,000 reduction,’ Ireland said. ‘For a house in the $1 million to $1.3 million range, it might take $100,000.’”

“Even a low price isn’t necessarily going to do the trick, said Candy Clanton, an agent in Fairfax. She says buyers are bargain-hunting. ‘My clients have reduced their prices 50, 60 and 70 thousand in some cases, but they’re just not seeing any traffic right now,’ she said.”

“If cutting the price doesn’t help, perhaps offering to give some of that money back to the buyer will work. Financial incentives come in many forms. There’s help with closing costs. Seller contributions can also be used to ‘buy down’ or reduce lenders’ interest rates, or to pay bonuses to agents.”

“Some sellers are going for the exotic in hopes of standing out. Vici Boguess in Old Town Alexandria has one set of sellers trying to tempt buyers with a week’s vacation on Kiawah Island near Charleston, S.C. The townhouse near the King Street Metro station has been on the market since January, dropping in price from $575,000 to $542,000.”

“The vacation ‘probably won’t sell the house, but the owners thought that it might make an agent take an interest in it, enough to bring a client to see it,’ Boguess said.”

“Owners of a million-dollar house in Alexandria offered a free Mini Cooper as a bonus, ‘but it didn’t work, and they sold the car when they had to move,’ said Dave Hawkins, broker in Alexandria. The house is still on the market, but the owners may rent it if it doesn’t sell soon.”

“Though many agents say auctions are stigmatized by their association with foreclosures..Homeland Auctions President Gloria Gardner said she ‘can’t keep up with all the calls these days.’ ‘We’re doing for real estate exactly what a Fourth of July sale does for retail.’”

Readers want to talk about adjustable rate mortgages. “ARM is pretty scary stuff. One may say ‘oh the interest rate only went up by a few percent!!’ (1) Say, you purchased an over-priced but normal $750K house in California with 2.00% APR interest only ARM… (just to be cool, of course, no downpayment). Your monthly payment is only $1,250. not bad… not bad.”

“(2) Come ARM reset, say additional 2.00%, bringing the total rate to 4.00% or 2x the original. (3) Now your payment’s $2,500 (4) Soon, it will be 6.00%; that’s $4,500… INTEREST ONLY…oops. Ps: don’t forget to add $700/month for tax, a few hundred more for blah, blah, blah..ouch!”

Another put a finer point on it. “Here are the actual numbers for your example. $750,000, 2.0% year one $1250 (actual accrued rate 7.7% current), year two payment $1343 (7.5% increase in the payment, balance up to $792,000), year three payment $1443 (balance up to $837,000), year four payment at 7.7% for 27 years- ———$6,147 ouch.”

Another replied, “I was a Math major in college so when I shopped for a mortgage it was easy to see through the ‘adjustable’ problem (especially because if you have a fixed mortgage you could always re-fi if rates dropped. And if you’re not stupid you’d refi for the remaining balance and not try to pull cash out.)”

“Adjustables only make sense if you actually have the cash in the bank to pay off the loan if you need to! Then you can take advantage of a low teaser rate for a few years. The mortgage industry simply takes advantage of the fact that people don’t do the math and realize that their $1250 payment can become $6147 in a couple of years….”

One had this to say, “Don’t mistake a plain vanilla adjustable rate mortgate with the exotic ones, such as the option-ARM, interest only, and teaser rate loans. A regular ARM makes a lot of sense when interest rates are high.”

And lastly, “Should figure NegaAm for five yrs with a recast of the loan if and when it gets to 110% to 125% (depends on bank) of the original loan. The bank can authorize an appraisal at any time.”

“The cap on the loan could be as low as 9.95% or as high as 12.95%, in a rising interest rate, declining house value - expect to see more recasts as a result of value. Eg, I buy in housing development for 500K cash, friend buys similar unit same development 95% NegAm 5% down. I hate the 1 hr drive and decide to sell at any price. First offer is 425,000 I accept! All negam borrowers in the same development are subject to the new appraisal. Sayonarra.”

The US News and World Report. “Call it the worst worst-case scenario. The interest rate on your adjustable-rate mortgage jumps just as the housing market enters a prolonged slump.”

“Then something really bad happens: You lose your job. There’s a medical emergency. You get divorced. You fall behind on your mortgage payments, and the bank forecloses on your home. Those scenarios are now playing out for growing numbers of homeowners.”

“In the past, foreclosures have largely been the result of a bad economy. Yet this time around, with a record number of borrowers exposed to rising mortgage payments through adjustable-rate and subprime mortgages, the increase in foreclosures could be a bad omen.”

“Adjustable-rate mortgages worth over $1 trillion are due to reset in the next two years. ‘We’ve never had such a high percentage of loans come due at the same time, so no one really knows what will happen,’ says RealtyTrac’s Rick Sharga.”

Some housing bubble news from California. The North County Times. “Higher rates have had an great effect on buyers who hold homes as part of their investment portfolio, real estate agents say. Many such investors plan to rent out the houses for a year or two before selling for a profit, and people in the industry are divided over whether those investors’ reactions will tilt the rental market toward tenants or toward owners.”

“Danny Morris, who rents a house in Menifee, said tenants are in a pretty good position now, at least compared with people who own their house. Morris pays less than $1,400 a month to live in a 1,450-square-foot house. The average Southern California homebuyer, meanwhile, committed to a $2,437 mortgage payment last month, according to DataQuick.”

“‘It’s better for a renter right now than for a buyer,’ Morris said. ‘I know some of them have humongous payments, and there’s no way they can get that out of a renter.’”

“‘Right now you can’t go rent out a house for a positive cash flow or even break even,’ said Marsha Swanson, a longtime real estate agent who has also owned and rented out several houses over the years.”

“Pat Davis, who manages roughly 100 local rental houses, said she actually expects more houses to come onto the rental market in the next year. That’s because many investors are finding it more difficult to ‘flip’ houses, to sell them quickly for profit without renting them out. When the houses don’t sell, such investors are being forced to find renters just to cover the mortgages on the houses, Davis said.”

The San Diego Business Journal. “A risk that could sink the local economy is a housing slowdown, followed by more energy cost jumps and fallout from the city’s pension fund scandal.”

“‘The condo market is where most of the major correction is taking place,’ economist Lynn Reaser said. Another certain sign that the housing boom is over is the length of time houses are staying on the market, Reaser noted. ‘People who have their house on the market can’t believe they aren’t getting their asking price.’”

The LA Daily News. “It looks like this unwinding real-estate market is going to make more of a mess than expected. ‘I don’t think there is any doubt it’s going to be a harder landing than was originally forecast,’ said financial analyst Greg McBride. ‘The forecasts were made with the rose-colored glasses still firmly in place.’”

“In some places prices in June did something not seen in a long time, fall under year-ago levels. Of the 101 markets in Los Angeles County, the median price in 16 fell under the year-ago level, including Tarzana ($567,000, down 27.2 percent) and Calabasas ($1.1 million, down 17 percent), according to DataQuick.”

“A tipping point may be fast approaching here in the Valley, too. ‘The fact is appreciation has pushed affordability beyond the bounds of many buyers and that, coupled with a rising interest-rate environment is bound to have an effect on people,’ McBride said.”

The Orange County Register. “Orange County’s hot real estate markets led to the county’s biggest boost in property tax bills in 15 years. The county charged property owners $3.8 billion for the year ending June 30, a 10.5 percent jump from a year ago and the biggest year-over-year increase since 1991.”

“There was one troubling trend in the numbers, county treasurer John Moorlach said. The percentage of unpaid tax reached its highest level in eight years. Owners stiffed the county out of 1.52 percent of taxes owed. In dollar terms, the $57.7 million in unpaid taxes increased 44 percent vs. a year ago.”

“Lenders last month mailed 462 notices of default to borrowers who had missed several home mortgage payments, a 90 percent jump from a year ago, DataQuick says.”

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From Arizona. “Metropolitan Phoenix’s new-home market continued its slowdown in June. Demand from buyers continued to wane and builders pulled fewer housing permits again last month, down 26 percent from last year’s record pace, according to RL Brown. Some people who signed contracts to buy new houses are canceling deals because they can’t sell their existing houses.”

The Hartford Courant. “June is normally a robust month for home buying in Greater Hartford, but not this year: Sales of single-family homes took a 16.5 percent dive, and the median sales price barely budged, compared with a year ago.”

“‘It’s a significant number, and June is usually a pretty good month,’ said Ronald F. Van Winkle, a West Hartford economist. ‘But there isn’t anything that says to us the market is in a downward spiral, by any means.’”

The Reporter in California. “Inventory levels in Solano County rose 56 percent, year-over-year, according to a second quarter report. Sales for the county experienced a 29 percent decline over the same period last year.”

“‘Sellers have been surprised to see the lack of traffic coming by their homes and we’re starting to see the value in making price reductions in order to stand out on the market,’ said (realtor) Scott Kucirek. ‘Buyers are in no rush and were waiting to get the right deal, however, the properties in great condition or with sellers willing to make concessions spent significantly shorter time on market.’”

The Arizona Republic has this update on Phoenix. “The business of buying and selling houses provokes extreme emotional outbursts. People yell, they lose sleep, they cry, they’re stricken with buyer’s and seller’s remorse. That’s especially true these days in metropolitan Phoenix’s post-boom housing market, where nearly everything has reversed since last year’s frenzy.”

“The number of homes for sale on the Arizona Regional Multiple Listing Service increased nearly four times from June 2005 to last month, when it hit a level nearly double what experts consider healthy. Many homeowners had their assumptions of what a house is worth and how quickly it should sell recalibrated by the buying craze.”

“Real estate agent Neil Brooks was getting the feeling that his client was about to completely lose it. He’d seen it before. He had just broken some bad news about her house deal, and she wasn’t taking it well. ‘I was thinking, ‘OK, here we go,’ said Brooks. ‘Something’s going to happen. Something’s going to blow.’”

“He was right. The client whirled suddenly and whipped the phone at him. But he was ready. He ducked, and the phone shattered against the wall behind him. The client stormed out of the house.”

“Home prices have become a touchy subject. Builders are discounting speculative homes, and resale prices are flat, or down, in a lot of neighborhoods. Buyers are submitting lowball offers. Even some sellers and their agents are having trouble agreeing how much similar homes in the same neighborhood are worth.”

“Two houses on the same north Valley street, similar in size and age, are for sale. One lists for $749,000 and the other for $775,000. A third house came on the market on the same street a few doors from the other two. The new listing was similar to the others in size and age but priced at $659,000.”

“‘The neighbors were really mad,’ said (realtor) Thomas Stornelli in Scottsdale. ‘They knocked on the door and asked, ‘What are you thinking?’ For a lot of people, their home equity is their bank. It’s like taking money out of someone’s bank, their retirement account. People (future buyers) are going to use that house as a comp, even if it doesn’t have the same upgrades. It’s going to leave a mark.’”

“The owners of the least expensive home were equally upset. They were in the midst of a corporate relocation and wanted to sell quickly. Suddenly, angry neighbors were confronting them. One night, someone tore down their for-sale sign.”

“The market has proven everyone wrong. None of the houses had sold as of the third week of this month.”

“A woman walked into Barry’s Realty Executives office about nine weeks ago, sat down and began crying. She said she bought two houses last year, fixed them up and quickly sold them, making a $50,000 profit on each. She took her profits, threw in some extra money and bought five more houses. She spent money fixing them up, but when she put the houses on the market, she realized she had bought at the peak, Barry said.”

“‘Her eyes just started to well up, and she just started bawling,’ Barry said. ‘She said she couldn’t sell them for what she bought them for. She said her monthly payments were about $20,000.’”

“Barry suggested turning them into rentals. She told him she couldn’t get enough rent to make it worthwhile. ‘She was expecting to flip them,’ he said. ‘The market flipped her. She was devastated. People have forgotten that houses are not a liquid asset. They never were meant to be.’”

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