The Housing Bubble

Some updates from California. “Sales of existing single-family detached homes dropped 25 percent in the Bay Area from second-quarter 2005 to second-quarter 2006, Prudential California Realty reported, while the inventory of active listings increased 34 percent. Sales of existing single-family detached homes dropped 35 percent in Napa County in second-quarter 2006 compared to second-quarter 2005, and fell 32 percent in Sonoma County and 30 percent in Solano County.”

“Despite a significant increase in multifamily housing starts, California’s overall residential real estate construction in June was down 10.9 percent from a year ago, the California Building Industry Association announced. Last month, building permits were pulled for 12,292 single-family homes statewide, down 24.9 percent.”

“‘Several metropolitan areas had a major increase in multifamily permits, predominantly related to vertical condominium construction in their urban cores.’ CBIA Chief Economist Alan Nevin said. ‘The principal areas with gains are Los Angeles, the Bay Area and Orange County.’”

“Nevin attributes the slowdown to a substantial unsold inventory of homes, both under construction and completed. He says that the depletion of that single-family inventory is under way as builders are offering concessions throughout the state.”

“San Diego County’s new housing market is beginning to look like the TV game show ‘Let’s Make a Deal,’ as builders throw in offers that include spiffy appliance packages, pet services and even a set of new wheels.”

“‘As we are now able to sit back and look at the market, I think what we’re going to recognize is that the second half of 2004 and first half of 2005 was the peak,’ MarketPointe President Russ Valone said. ‘The market peaked, and it’s now looking at where it’s going to settle in.’”

“Market watcher Sharon Hanley in Oceanside said the percentage of home-sale cancellations has run as high as nearly 40 percent certain weeks this year. ‘It’s getting tougher and tougher to get the tail-end stuff (final homes) sold,’ she said.”

“Higher cancellations are occurring at condo and conversion projects, she said, adding, ‘We’re starting to see (developers) take them off the market and go back to rental. Builders are pulling back on new phases. That’s been going on for six months. They’re cutting staff significantly.’”

The Conta Costa Times. “Long-term fixed home loan rates are getting closer to those on shorter-term adjustable mortgages, but many East Bay home buyers still prefer the riskier ARMs because they offer lower monthly payments.”

“The majority of new home buyers want the least expensive monthly payment possible, broker Jay Damato said. For many buyers, the only way to afford a lifestyle of two cars, good schools and a nice house is with an adjustable-rate loan.”

“And Jason Doolittle, loan consultant in Danville, said that these alternative loans show no signs of slowing down. ‘There’s definitely not been a run on 30-year, fixed-rate mortgages,’ he said. ‘People say, ‘I’m not ready to pay another $855 a month.’”

“For other buyers, lower payments are often the only option. Hans Johnson, a demographer based in San Francisco, said it all came down to monthly income for Bay Area home buyers. ‘For many people, it’s not a question of choosing a fixed-rate or adjustable-rate mortgage, it’s, ‘Do I buy the house with the adjustable rate or not?’ he said.”

“Local brokers said that they have seen those trends continuing. ‘Cash flow is king,’ said Bob Visini, spokesman for LoanPerformance. ‘Some people, as long as they have a house, good credit and a write-off from Uncle Sam, are as happy as clams. Maybe they don’t care about building equity in their house.’”

“Robert Kleinhenz, deputy chief economist with the California Association of Realtors, agreed that riskier mortgages today leave little financial choice. ‘There has been an increase of the number of households who have used these alternative loan products,’ he said. ‘If we had a serious economic downturn, we would see the housing market at considerable risk.’”

Some housing bubble reports from Wall Street and Washington. Paul Muolo, “This past week Merrill Lynch declared that housing is in a bear market and that a ‘buyer’s market’ for homes should last for ‘years.’ Merrill notes that the unsold inventories of homes continues to pile up, and that resale prices are flattening in the single-family market, while declining for condominiums.”

The Associated Press. “More and more developers are canceling or delaying condominium projects as home sales slow, construction costs soar and lenders balk at financing units that might not sell. What’s making the situation worse is a glut of high-priced condos and too few people who can afford them.”

“In Philadelphia, a city cluttered with condominium construction, Old City 205 won’t break ground after the housing market softened and increasingly picky buyers balked at its price tags from $400,000 for a studio to over $2 million for a three-bedroom penthouse.”

“‘We’ve gone through the biggest real estate boom in the last eight or nine years and some of these projects haven’t started yet. Do you think they’re going to start building now?’ said real estate executive Allan Domb, dubbed Philadelphia’s ‘condo king.’ Domb in Philadelphia said he’s gotten half a dozen phone calls the past four weeks from developers asking if he would like to buy their properties.”

“A big part of the problem is that many condo projects are priced high, in part because developers have to recoup the high prices they paid for land. But most buyers can’t afford it. ‘The sweet spot of the market is probably $250,000 to $700,000,’ Domb said. ‘That’s what the majority of the population can afford. Many condos are priced higher. That’s part of the problem.’”

“As if investors in homebuilding stocks need more to worry about. Now add this concern: Companies writing down their land values because they aren’t worth what they paid for them. It’s not a matter of if that could happen, but how serious and widespread those write-downs turn out to be.”

“Not only would that reduce already weak earnings, but it could lead to further erosion in the ‘book value’ of many homebuilders. Analyst Rick Murray notes that during past housing-cycle slumps several builders took impairment charges totaling as much as 5 to 10 percent of their book value on an annual basis for several years.”

The Washington Post. “The current federal funds rate is ‘in a vicinity’ of the right level even though news on inflation has been ‘disappointing,’ San Francisco Federal Reserve President Janet Yellen said on Monday.”

“‘It might be thought that policy should continue to tighten until the inflation data move back to a rate consistent with price stability. But I would argue that a gradual approach is likely to be better,’ said Yellen, a voting member of the Federal Open Market Committee this year.”

“Yellen said the two-year string of rate increases..should cut demand in interest-rate sensitive sectors such as housing, autos and consumer durables. In particular, ’significant moderation in the rate of house-price appreciation’ is likely to restrain growth, she said.”

From Bloomberg. “Federal Reserve Bank of St. Louis President William Poole said he’s undecided on whether the central bank should raise interest rates at its next meeting in eight days. Poole (described) his stance as ‘50- 50. I’m still totally noncommittal.’”

“Recent data show slowing economic growth, while inflation has ’tilted’ upward, Poole said. Containing inflation is the Fed’s ‘primary’ goal, he added.”

A pair of reports from the Arizona Republic. “State and local officials are investigating a months-long work stoppage that has left about 200 unfinished houses in Casa Grande and Maricopa withering in Arizona’s summer as home buyers wonder whether they’ll ever be able to move in.”

“As the Valley’s housing market ebbs, smaller builders like Turner-Dunn, which may have arrived late to capitalize on Pinal County’s gangbusters housing market, are more prone to failures, said Jay Butler, at Arizona State University. Unlike big builders, they can’t absorb rising labor and materials costs, struggle with credit and sometimes lack experienced management that can deal with a cooling market, Butler said.”

“‘If you look at the numbers nationally, the market is slowing tremendously,’ Butler said. ‘With small builders, the problems just cascade.’”

“It’s unclear with Turner-Dunn whether there was fiscal malfeasance or the company was knocked down by the market. But one thing is fairly certain: Turner-Dunn is unlikely to step in and help buyers and owners solve their problems, consumer real estate attorney Chris Combs said.”

“‘If a builder doesn’t even have the money to build a house, I’m pretty sure the buyer isn’t going to see their earnest money,’ Combs said. ‘And if they paid for home upgrades, those are probably long gone too.’”

“In the meantime, insulation yellows in the sun, motorists slalom through streets with 4-foot piles of decorative gravel, wood frames warp and twist like rubbery candy, sun-bleached work orders stapled to walls show work last performed in March. Frustration builds with buyers whose contracts have no timelines for completion while nearby, half-finished homes are cannibalized by new residents for doorknobs and other fixtures.”

“At least eight subcontractors have filed about 100 liens for more than $1 million on finished or unfinished homes in Turner-Dunn Construction Inc. developments in the Pinal County cities of Casa Grande and Maricopa.”

“With liens, the homeowners’ credit can be ruined, and they can’t sell their houses, Richard Marsh, former president of the Land Title Association of Arizona said. ‘This happens a lot when the residential real estate market slows down and smaller builders become overextended,’ Marsh said. ‘It penalizes the homeowner, but the idea is to protect the (subcontractors).’”

“David and Sharon Bickford, who moved into their Casa Grande house in April, have been hit with two liens totaling about $4,000. ‘They could actually take our house,’ said David, who hopes his title insurance will cover the liens.”

Some housing bubble reports from New York. “Doctors Patricia Sheiner and Michael Silver loved their dream house in New York’s suburban Westchester County. But they’re not living the dream anymore. The family put the 7,000-square-foot home up for sale and moved to a smaller house in December to save on their mortgage payment, utilities and taxes. Now, it’s an albatross they can’t sell despite dropping the price.”

“‘We bought our other house feeling our other house would sell quickly,’ Patricia Sheiner said. ‘And then the market suddenly died. It died. It’s a hardship for anybody to pay two mortgages,’ she said. They didn’t believe one of the hottest real estate markets in the country would cool off so quickly.”

“Drive around almost any wealthy suburb these days and you’ll see a lot of very big houses, so-called ‘McMansions,’ under construction everywhere. But the once red-hot housing market has cooled off and the big homes are starting to give a lot of people some serious headaches. As for doctors Sheiner and Silver, realtors say their empty house may be on the market for months more, even if they drop the price again.”

The New York Times. “In what may be a ‘rude awakening,’ as one real estate agent put it, the number of Long Island homes being put up for sale, combined with those sitting on the market, is climbing skyward, according to a report from the MLS of Long Island last month.”

“At midyear, there were 75 percent more homes on the market in Nassau County and 65 percent more in Suffolk County than a year earlier. Brokers report far fewer buyers in recent months.”

“More homeowners with adjustable-rate or interest-only mortgages are trying to refinance their homes with fixed-rate mortgages as their payments begin to rise, said Bethany Marten, a Baldwin-based broker, who is also a mortgage broker.”

“Many of the ‘option’ adjustable-rate mortgages that were popular with cash-poor buyers when home values were rising rapidly are no longer available, according to Robert Campbell, a professor of real estate financing at Hofstra University.”

“Georgianna Velardi, a broker in Long Beach, said she had recently seen more sellers looking for a way out of high mortgage payments. A couple in their late 30’s came in to price their three-bedroom ranch. The interest rate on their mortgage had risen to 9.5 percent, from 3.5 percent three years ago. They didn’t have the equity or good credit to qualify for refinancing at a lower rate.”

“To make matters worse, the City of Long Beach raised property taxes 25 percent. ‘They needed to get out because they were so overwhelmed,’ Ms. Velardi said.”

“‘It’s not going to bottom out immediately,’ Ms. Marten said. ‘We’re going to see, I believe, what we saw in 1988: a flattening, a gradual downturn and then down and down until it hits bottom.’”

The Sun Sentinel reports housing starts are up in parts of Florida. “Despite all the talk about a dearth of buildable land in South Florida, Broward County recorded an increase in housing starts during the second quarter. Broward had 900 starts, up 54 percent over the second quarter of 2005, according to West Palm Beach housing analyst Brad Hunter.”

“‘I don’t know specifically what explains it,’ Hunter said. ‘But land is scarce, that story hasn’t changed.’”

“Broward has 2,724 finished vacant homes and homes under construction, which represents a 16-month supply of inventory. In other words, that’s the amount of time it would take to fill up those homes if no others were built.”

The St. Petersburg Times. “Only half as many homes were sold in Pasco County in the first six months of this year compared with the same period last year, figures released Tuesday by the county’s property appraiser show. For the first time in five years, the county’s median home sale price inched down.”

“Meadow Pointe, Ballantrae and Wilderness Lake Preserve still rank among the top 10 communities for ‘housing starts’ in the Tampa Bay area. Pasco’s annual figure for housing starts through May still shows 14 percent growth.”

“‘Supply has caught up with demand,’ property appraiser Mike Wells said. ‘When that happens, sellers have to become realistic, and what they’re asking for their product. The investor has moved on. I do think that builders are probably competing with investors that they sold houses to a year ago.’”

“As prices soften, market watchers say investors are getting burned off. The number of investor homes is difficult to quantify. About a third of Pasco homes are listed as nonprimary residences. Wells said that number has grown to 30 percent currently.”

The News Press. “Two out of three Floridians live in areas so risky that State Farm and regulatory loss models conclude rate increases of more than 50 percent are needed to cover losses. Realtors say Florida’s housing market is suffering. Reports last week showed single-family home sales in June were down 29 percent from 2005, off by as much as 48 percent in Naples.”

“Combine inflated home prices with tripled insurance premiums, and, ‘My gosh, your first-time homebuyers are priced out of the market,’ said Pensacola broker Dan Gullahorn.”

“Rather than pay a $2,300 insurance bill, Harold Cameron has put a ‘For Sale’ sign in front of his St. Petersburg home. He says he’ll head to Georgia, where Social Security is more likely to cover the cost of living. ‘This was going to be my home when I moved here 23 years ago, but I’m not going to suffer that kind of a loss,’ Cameron said.”

The Miami Herald has this roundtable discussion. “Dulce Suarez-Resnick: ‘Some colleagues in my office are leaving, some of my customers and even some family and friends. They are selling their home and moving to Central Florida because they can afford to live there on their fixed income.’”

“State Sen. Steven Geller: ‘They’re moving to North Carolina, they’re moving to Georgia. They’re getting out of Dodge.’”

“Heather Carruthers: ‘Usually in Key West, there are about 400 homes on the market. There are 1,400 homes on the market right now. Every time you pick up the paper, the prices have been slashed.’”

“‘People can’t even get out now with the equity. Nobody’s buying. A gentleman gave his son a house in Key West. The guy’s a cop. He can’t afford to stay there because his windstorm is so high.’”

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