August 1, 2006

‘On The Deflation Side’ Of The Las Vegas Housing Bubble

The Review Journal has these updates from Las Vegas. “While several construction projects in Las Vegas have failed to secure adequate financing, not all lenders have turned bearish on the declining real estate market. Jeremy Aguero, principal of a research firm in Las Vegas, said the financing of Sullivan Square separates it from a flurry of proposed developments that lacked the wherewithal to proceed beyond the drawing board.”

“‘I think the capital markets have tightened up substantially lately,’ Aguero said. ‘The broader markets, venture capital and private money coming in has taken a step back, a wait-and-see toward Las Vegas and how much money they’re willing to put into the high-rise market. With the escalation in the price of land and construction and per-square-foot pricing, the upside of the reward is not what it was 24 months ago,’ Aguero also said.”

“Gaming industry investors found themselves snorkeling in July, as casino company stocks closed down for the third month in a row. Bear Stearns analyst Joe Greff said gaming stocks have been on a downturn since at least mid-May because of broad concerns that the industry is weakening.”

“Gaming analyst Matthew Jacob with Wall Street-based Majestic Research, said evidence is accumulating that weaknesses in consumer spending are beginning to bleed into spending patterns at casinos.

“The timing doesn’t seem right for Ian Peltier to be developing a high-end custom home community on the lower slopes of Black Mountain in Henderson.”

“A reduced pace of home construction is expected in four of five U.S. regions covered in McGraw Hill’s Construction Outlook 2006. The West is forecast to drop 9 percent from a very healthy 2005 as overpriced housing markets in that region are affected by reduced demand arising from higher mortgage rates.”

“Dennis Smith, president of Home Builders Research, said it’s not a good time to be opening a new home subdivision in Las Vegas, which is on the deflation side of the housing bubble right now.”

“‘If you had your choice between doing it now and a year ago, I’d do it a year ago,’ he said.”

“For some custom home builders, especially smaller builders, the time line for development may have played out, Smith said. ‘The clock’s ticking on financing, investors want a return. So it’s basically at the point of either pull the permits and start construction or he sits tight,’ Smith said. ‘Some larger builders are basically sitting tight and selling what they’ve got. They’ve been told not to go out and buy new land right now.’”

“Pulte Homes, the second-largest home builder in Las Vegas, is showing discipline by aggressively changing its strategy on land acquisition and speculative building, Susquehanna Financial Group home building analyst Stephen East said.”

“‘On the land side, there is virtually a moratorium on new land purchases,’ he said. Pulte CEO Richard Dugas commented that the company has land positions it ‘can capitalize on for years.’”




‘Digging A Deeper Hole’ With HELOC’s

CNN Money has this report on home equity loans. “During the past few years, millions of Americans fell in love with home equity lines of credit. These ‘helocs’ are easy and inexpensive to obtain and they carried very low interest rates, until recently. But what was a bargain two years ago can be a burden today.”

“Consider: The monthly interest payment on a loan of, say, $50,000, has more than doubled in two years, to more than $333.”

“The ease of obtaining a Heloc makes them very tempting. ‘It means mostly just walking down to the bank and asking for one,’ says Keith Gumbinger, vice president at a publisher of consumer loan information. ‘Many people are using it for day-to-day expenses. For them, the danger is they’ve been given a new tool, for digging themselves a deeper hole.’”

“In some high-priced housing markets, according to Ted Gross, a director of the National Association of Mortgage Brokers, people used Helocs to afford pricey homes. ‘A lot of people took out Helocs because it’s the only way banks would allow them to purchase with less than 20 percent down,’ says Ellen Bitton, CEO of Park Avenue Mortgage Group.”

“She explains that some banks would extend a conventional mortgage loan for only 80 percent of the purchase price. Borrowers had to come up with the rest as cash downpayments. The bank would extend a Heloc, which was backed by the equity of the home, for all or a portion of that downpayment.”

“Many people who bought property a few years ago thought, ‘Rates are so low, I’ll just [buy it with] a Heloc.’ Now they’re going to pay for it,’ Britton said.”

“Even though the cost of having a Heloc has soared, their popularity hasn’t declined. According to the FDIC, the dollar volume of these loans hit $531 billion in March, the last figure available, up 28 percent form $416 billion in June 2004.”

“According to David Barr, a spokesman for FDIC, homeowners had turned away from refinancing their primary mortgages recently because of higher interest rates. ‘But they keep turning to Helocs to extract cash from the equity in their homes,’ he says.”

“If the value of their house declines sharply, borrowers could wind up owing more than the house is worth. If they have to sell, they would have to pony up cash.”




‘Going Bust In Record Numbers’

A trio of reports from outside the US. “Struggling Britons, who are weighed down by loans and credit card debt, are going bust in record numbers. HSBC today revealed that it has been forced to write-off £2 billion in the first half of this year, much of it loaned to British customers.”

“While the bank said it has deliberately reduced its share of the unsecured lending market, loans and credit cards, as a result. However, the decision looks like closing the stable door after the horse has bolted. There is a raft of evidence that high street banks have been guilty of reckless lending over the past 4-5 years.”

From Australia. “The number of Victorians being sent to the wall by their mortgages has jumped dramatically, with home-loan defaults up a massive 50 per cent this year. Most of the claims, upwards of 95 per cent, relate to private home owners defaulting on mortgage repayments.”

“Ian Mackintosh said another rate rise would push many people into financial crisis. ‘A lot of people have next to no disposable income once their mortgage and other repayments are met, they simply have no room to move,’ he said.”

“(Credit counselor) Carolyn Bond, said: ‘We see a lot of people who are right on the edge, and it’s not going to take much to tip them over. But if an interest rise is going to worry you, or is going to cause you to default, it’s a message you are already in trouble.’”

The Australian. “Perth house prices have soared 10.1 per cent in the past three months. BankWest rejected suggestions that Perth was experiencing a housing bubble. David Willis, CEO of BankWest’s owner, said he was ‘reassured by the substance’ of the state’s growth.”

“Perth couple Brian and Eileen Bowden are among thousands reaping the benefits of the state’s robust economy as they prepare to extract a $100,000 profit on their home in just six weeks. ‘The people who we bought this house from made $100,000 off us, so it’s a non-stop cycle,’ Mr Bowden said.”

“BIS Shrapnel building services director Robert Mellor said the Perth market was in danger of overheating. ‘If we see another 10 per cent or 15 per cent growth in the next six months, I would be running very fast from the Perth market,’ Mr Mellor said.”




‘No Return To Normal’ In San Diego

Bob Schwartz at Realty Times has this report on San Diego. “Reviewing the recently released real estate sales data for San Diego, the lay person might conclude that the June home appreciation figures were down approximately 1 percent as compared to June 2005. The reality is the decline is probably much closer to three or five times the published figures.”

“The appreciation figures cited are the median sales prices. The sales of these upper-end luxury estates skew the median appreciation sales data.”

“The reported sales data does not take into consideration incentives used by not only major builders, but, in today’s market the majority of home sellers, to entice scarce buyers to purchase their properties. Just open up the Sunday real estate section of your local paper and the magnitude of these incentives becomes quite apparent.”

“You must understand that the builders are not being altruistic. No, they just want to move standing inventory, and move it now before any further declines!”

“It was just a little over a year ago that the majority of builders were not even co-operating with real estate agents. Now, the builder/agent cooperation has gone 180 degrees plus. Agents are being invited to catered brunches and offered co-op commissions up to 5 percent, as advertised in the July 23, 2006, Union-Tribune!”

“A $500,000 home sale with a $25,000 interest rate buy-down/closing costs package incentive will be recorded as a $500,000 sale. Yet, the $500,000 sale, in reality was only $475,000 or 5 percent below the reported sales data! So if the $500,000 sale was just 1 percent below the June 2005 median appreciation, you can see that the ‘real’ difference was 6 percent below last year!”

“In my opinion, this is no ‘return to normal’ or ’slight correction’ to the San Diego real estate market. By year’s end there will be no denying we will experience a double digit appreciation decline. A decline that will take years, not months, to work itself out.”

From Inman News. “What a difference a year makes. The San Diego real estate market is now experiencing a much slower sales pace, and home prices are retreating.”

“The San Diego Association of Realtors reported that the sales volume of attached, existing-home unit sales in San Diego County fell 38.9 percent in June 2006 compared to June 2005, while the average sales price dropped 4.6 percent and the median sales price dipped 5.2 percent in June 2006 compared to June 2005.”

“Deborah Sortino, a Realtor in Oceanside, Calif., said the last two months have been very slow in her market area. ‘It’s like someone switched off the light, (properties) are not moving one way or another. There are a lot of people looking but I don’t see a lot of sales pending.’”

“Rustin Rulenz, a Realtor in Pacific Beach, Calif., said,’You can drive down the street and see 15 yard signs in the first three blocks. There are a lot more open houses. It makes me laugh to see so many open house (signs) pointing in so many different directions,’ he said.”

“Real estate professionals are getting back to basics in this new market. ‘A lot of agents say they are going door-knocking again,’ he said.”




‘Non-Investment Grade’ Builders ‘Vulnerable’: S&P

Some housing bubble reports from Wall Street. “Investment-grade homebuilders are well positioned to face the current slowdown in the U.S. housing cycle thanks to more conservative business practices, according to Standard & Poor’s. But the outlook is less rosy for speculative-rated homebuilders.”

“‘Several non-investment-grade homebuilders will find the going difficult because of aggressive inventory investment and share repurchases that will limit future flexibility and leave them vulnerable to credit pressures,’ S&P said.”

“A drop in orders for new homes, especially in markets known for speculative buying, and an increase in cancellations of existing orders have hammered homebuilders in recent months as rising interest rates curb demand for homes.”

“St. Joe Co., one of Florida’s largest real estate companies, said Tuesday its second-quarter profit fell, weighed by lower sales in the weakening Florida property market. The company also cut its full-year financial forecast for the second time this year.”

“‘At established Joe resort towns, sales remained slow during the second quarter, which had a significant impact on revenue and earnings,’ said CEO Peter S. Rummell. ‘Considering the high levels of resale inventory available in many parts of Florida, including Joe’s core markets in Northwest Florida, we believe activity in our resort and seasonal markets will remain slow for at least 18 to 24 months before there is a return to supply-demand equilibrium.’”

From MarketWatch. “Freddie Mac said Tuesday that it will limit the annual growth of its retained mortgage portfolio to no more than two percent above the level at June 30, 2006. The unpaid principal balance of the company’s retained portfolio was $722 billion as of June 30.”

“‘This voluntary, temporary growth limit is in response to a request of the Office of Federal Housing Enterprise Oversight (Ofheo), the company’s safety-and-soundness regulator,’ the company said in a press release.”

“The move by Freddie Mac follows a similar action by Fannie Mae, which limited its portfolio to $727 billion. Both companies are emerging from accounting scandals. Analyst Jaret Seiberg said the move by Freddie would contribute to congressional efforts to finish a bill putting in place new rules on Fannie and Freddie.”




Condo Houseboat Proposed For The Mississippi

The St Paul Pioneer Press has the latest on the condo craze. “David Nelson came up with an idea: Why not build a..floating retirement community, that could treat its residents to nautical adventures similar to his own? The St. Paul native has finally translated that dream into the most unusual condominium proposal the city has ever seen. His River Cities concept is a cross between a river barge and a four-level, 200-unit cruise ship.”

“Condo buyers would tour Nelson’s favorite haunts, from the sand bars of Destin, Fla., to the riverfront parks in Memphis, without ever leaving home.”

“His concept has also raised questions about property taxes, docking rights and the size and scale of each boat, Nelson envisions them the length of five football fields, making them the largest passenger vessels on the Mississippi River. ‘I talk to a lot of people, and they say, ‘Wow, what a cool idea,’ said Nelson. ‘But whether it actually grabs people enough that they’ll say, ‘Yeah, I want to buy,’ that’s always the key.’”

“Nelson’s prices range from $275,000 to $474,000 for units that go from 528 to 924 square feet. He said he designed his model, comprising four adjoining barges, to appeal to buyers who lack the means to own a private yacht. ‘I’ve got prices on this thing where middle-class people can participate in a millionaire’s dream,’ he said.”

“Nelson has reacted to a host of challenges while developing his plans over the past two years. Each boat, powered by motors in back, would be designed to split in half to pass through tight channels.”

“Perhaps the biggest challenge will come from the market itself. Nelson is readying to launch his idea at a time when gas prices have skyrocketed and condo sales have sagged. He estimates it would take at least $80 million to build each boat over roughly 2½ years.”

“Given the novelty of his dreams, Nelson has struggled to find financing for construction and individual mortgages. Residents would share annual maintenance and cruising costs, ranging from $8,200 to $21,700 per unit.”

“‘What’s unique about this is that these people will have a sense of ownership of the entire Mississippi River that few other people would,’ said Patrick Seeb, head of the St. Paul Riverfront Corp. ‘These projects are never easy,’ he said, referring to ambitious riverfront proposals that include the Bridges, which Seeb has criticized. ‘You have to hand it to people for being creative and trying to find ideas unique in the marketplace.’”




The ‘Tables Have Turned’ For Buyers In Florida

A housing report from Florida Today. “If there was any doubt that Brevard County’s housing boom has ended, a new construction report should squash it. Housing construction permitting in Brevard dropped in June to its lowest one-month level in nearly four years.”

“After two years of sharp increases, local housing prices have leveled off in the past year, and some housing industry officials think it could be 2008 before the dynamics of the market change.”

“With price increases drying up, investors and so-called property ‘flippers’ are canceling their purchases, forgoing their security deposits and backing out of deals, instead of taking on mortgages while waiting for prices to go up again so they can turn a profit, Dave Armstrong, secretary of the Florida Home Builders Association said.”

“‘You see ‘For Rent’ signs up in front of $500,000 homes,’ Armstrong said.”

“For home buyers, the bright side is that builders, now with an excess of inventory, are more willing to negotiate on price and other perks. ‘Plain and simple, the sudden slowdown in the housing market has created excess inventory,’ said Mark Neubauer, for Mercedes Homes, Brevard’s largest homebuilder.”

“‘In Brevard County, Mercedes Homes has nearly 100 homes that are completed and ready for move-in,’ Neubauer said. ‘A few months ago, a buyer was lucky to get on a list to buy a home. But, now the tables have turned, and we’re experiencing a buyers’ market.’”

“A slowdown in housing construction has led to widespread staffing reductions among homebuilders, as well as a marked decrease in work for subcontractors in Brevard County and other areas of Florida.”

“‘We’ve experienced more people looking for work in the trades in the last three month than we’ve seen in the last four years,’ said Armstrong. ‘We had a great market, and it’s amazing that it lasted that long.’”

From The Ledger. “Realtors across Polk County sold 554 existing homes in June, down 16.3 percent from a record 662 in June 2005. Sales in Lakeland fell 10.5 percent to 366, while East Polk sales dropped nearly 27 percent to 177.”

“In June, Polk builders pulled 571 permits, a decrease of nearly 49 percent from 1,119 last year. ‘Higher mortgage rates are finally starting to cut into the housing market. I think it’s not an unexpected slowdown,’ said Kevin Brickey, an economist who follows Polk.”




Bits Bucket And Craigslist Finds For August 1, 2006

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