The Housing Bubble

It is Friday desk clearing time for this blogger, starting in Virginia. “Local sellers stuck in the mindset of 2005 are learning a new mantra in the world of real estate: reduction, reduction, reduction.”

“Since last year, the area’s available housing inventory swelled to more than 12,000 listings. With an increase in competition like that, sellers with expectations based on last year’s market have had to make sliding adjustments to sale price. Here are just a few price reductions that have brought asking prices below $500,000.”

“The day of reckoning has come for Fairfax County and the Town of Vienna. The real estate bubble has burst. No amount of gloss and rosy forecasts by the real estate industry can mask the truth. It appears that the real estate industry is behind the curve or does not want to publicize the downturn, as will be realized by Fairfax County when it does its assessments this coming year.”

“The president of the Maryland Association of Realtors said he expects the cost of homes to drop later in the year. The county’s inventory of available homes has steadily risen since last year, up to nearly 1,100 in June, according to MAR. One year earlier, about 570 homes were available for sale.”

From Texas. “The number of properties going up for sale in Hidalgo County is growing as fast as real estate agents can pound in ‘for sale’ signs. As of Aug. 1, there were about 4,767 houses on the market in the greater McAllen area. And with real estate agents selling about 282 homes a month on average this year, it would take nearly 17 months to sell all the homes currently on the market.”

“In Edinburg alone, 346 new home permits were issued through May of this year, about a 25-percent increase from a year earlier. The high volume of homes on the market is driving prices back down from when they were rising at fast rates. ‘I guess right now we are headed towards a buyers’ market,’ said Don Martin, a real estate agent in Edinburg.”

From Illinois. “Builders and Realtors last week assailed a proposed $12,000 tax on those tearing down homes in nearby Wilmette in order to rebuild. ‘There’s a big oversupply of housing on the North Shore,’ said Bob Dekker, a Wilmette resident and officer in the Chicago Association of Homebuilders. ‘You add what amounts to a 1 percent tax on top of that, and it only exacerbates’ the downward pressure on prices.”

From Colorado. “Housing construction in El Paso County last month fell to the lowest level in nearly four years, the Pikes Peak Regional Building Department reported Tuesday. ‘We are paying the price for borrowing buyers from the future,” said Dave Bamberger of a local economic research firm. ‘The pool of buyers is smaller now, because many who would have bought now, instead bought in the last year or two.’”

From Canada. “Lower Mainland real estate markets experienced a dramatic drop in sales in July, which is a possible sign that they’ve hit their limit for overall growth, an analyst says. The Real Estate Board of Greater Vancouver reported its July MLS sales declined 25.2 per cent. ‘[The statistics] are certainly suggestive of a market that has stopped its rate of excessive growth of transactions,’ Tsur Somerville at the University of B.C. said.”

A realtor in Las Vegas. “Oddly, the summer has been quite a bust for Las Vegas and the Southwest US. We have seen an increase of 200-230 available homes a WEEK. Compounding this issue are the truly unbelievable incentives being given by the builders.”

“The Arizona Republic. “Pinal County’s resale housing market was in a state of flux in second-quarter 2006 as prices fell. Colleen Bechtel, an associate broker, said resale buyers are making offers lower than asking prices and want the few thousand dollars in closing costs paid for as well.”

“Bob Rucker, president of the Arizona MLS, said some homes are lingering for half a year or more on the sales block. ‘There is a lot to choose from,’ Rucker said. ‘It’s not like last year.’”

A pair of reports on California homebuilders. The Press Democrat, “Feeling the blow from the housing market’s downturn, Sonoma County’s largest home builder, Christopherson Homes is laying off 18 percent of its employees over the next three to six months, company officials said Thursday. ‘We hope this downturn will be short-lived but we will continue to make adjustments deemed necessary,’ said George Casey, the company’s CEO.”

“Five years ago, the company opened a division in Roseville to expand into the Sacramento market as home building boomed in the Central Valley. But a strong, eight-year run of sales peaked last year, hitting first in Sacramento and then in Sonoma County and the market has been coming back down. Christopherson has slowed housing starts in response.”

“‘Climbing interest rates, increases in energy costs and longstanding affordability issues in California’s metropolitan areas are all factors that have combined to slow the market down. Christopherson Homes is not immune from macroeconomic trends,’ Casey said.”

“Home builders across California are starting fewer homes and pushing to sell those both under construction and completed. The aim is to reduce inventories of unsold homes so construction can meet current demand, according to the California Building Industry Association.”

The Victorville Daily Press. “In response to a slowdown in home sales, builders in the High Desert are reacting in different ways, some predictable, others not. Dallas-based Centex Homes, after watching its stock price fall from the mid-$70 range to the $50 range, has sold land, with one 23-acre parcel near Luna Road going to a private developer.”

“KB Home laid off 25 of its 275 employees at its Pomona office in June. Other builders, according to contractors and agents, are scaling down their floor plans, causing subcontractors to worry about whether they will have to make layoffs themselves.”

“Local builder Frontier Homes has decided to make a commitment to do none of the above. In a meeting this week with about 60 subcontractors, CEO James Previti asked them to join him in streamlining operations so they can all offer affordable homes and stay in business.”

“Previti said he wanted to keep his sights on Frontier’s main goal: affordability. ‘Prices have pushed more and more people out of the marketplace,’ he said.”

“‘I can afford to work on a little less profit margin too,’ (subcontractor) Randy Becker said. ‘I’ve had steak and potatoes, but maybe it’s time to eat hamburgers sometimes and stay in business.’”

Some homebuilder news. “The homebuilder Hovnanian Enterprises said Friday third-quarter earnings will come in below its previous targets, as the housing slowdown is leading to slower sales and higher cancellations. ‘Our anticipated financial results for the remainder of 2006 continue to be negatively impacted by a slower sales pace, high cancellation rates on contracts in backlog that were projected to close this year, and more pronounced use of concessions and incentives, particularly on the resale of those homes which have experienced contract cancellations,’ said Ara Hovnanian, CEO.”

“The homebuilder said it is renegotiating a ’significant number’ of its land options contracts, which is expected to result in walkaway costs.”

“Dominion Homes today announced..a net loss of $5.9 million. Douglas Borror, CEO, commented, ‘While we are disappointed with reporting a loss for this quarter, we also recognize that overall home sales conditions remain challenging in our markets. New building permits declined 27% in Columbus, 39% in Louisville and 20% in Lexington during the first six months of 2006.’”

“A $6 million impaiment charge connected to operations in Tennessee led to a second quarter loss for Fort Lauderdale-based Levitt Corp. in the second quarter 2005. Because of reduced demand in Tennessee and other markets, Levitt reduced its workforce by 9 percent in July.”

And National Mortgage News has this round-table discussion from some lending executives. “Broker magazine editor Brad Finkelstein had an interesting discussion with subprime industry participants at (a) symposium in Las Vegas, with participants Ken Logan, WarehouseUSA Capital Corp.; Michael McQuiggan Lenders Direct Capital Corp.; and Brenda White, Deloitte & Touche Capital Finance LLC.”

“BRAD: Our morning keynoter said we are about to see a second wave of subprime companies crashing. Do you agree? BRENDA: I agree with that. I think we are seeing it already. What I am seeing, is that buybacks, in particular November and December that were really, really tough. It caused people to lose money.”

“KEN: The really larger ones, the investor level, they are taking losses. As a warehouse lender, I see a lot of the balance sheets. I can’t tell you the last time I’ve seen a loan-loss reserve account on a balance sheet from a company. For somebody who doesn’t have a big safety net in the first place..they are just playing with fire at that point. Sooner or later there is going to be a repurchase and they’re totally unprepared for that.”

“KEN: Before, it used to be a lot of kicks on appraisal reviews. You are not seeing as much or hearing as much about that? MICHAEL: Companies are not adjusting to the softening of the market, and they’re still taking appraisals and not bothering to see if the value is holding.”

“MICHAEL: A high percentage of our appraisals in the last 45 days are getting cut. So we’re lowering the values and everybody is screaming. But we’re not going to go with increased values, and everybody is pushing to get the highest value out of the house.”

“BRAD: Who is cutting the appraisals? MICHAEL: The review companies. When the appraisal gets cut, and they document, ‘here are some more comps two doors away that you didn’t utilize that sold for $15,000 less,’ they have the opportunity to go back to the original appraiser and have him try to support his value. Nine times out of 10 it is the lower value that ends up staying, at least in our organization.”

“MARK: Are you seeing more fraud? MICHAEL: It has been a long time that I have been doing this, and I’ve got the first two fraud loans in the past year that were total appraiser, title company, everybody involved. The biggest fraud issue that I see..is dealing with the stated income and making the stated income reasonable for the right profession. BRENDA: It is usually collusion.”

The Beverly Citizen has this from Massachusetts. “Second-quarter home foreclosures are up across the state and in Beverly, according to figures tracked by ForeclosuresMass.com. The combination of a cooling housing market, increased interest rates and creative financing like no-interest mortgages has put a fiscal squeeze on homeowners and left some unable to pay ballooning monthly mortgage payments.”

“‘What we’re seeing is a perfect storm,’ said Jeremy Shapiro, president of ForclosuresMass. That perfect storm is behind the foreclosure increases, say both Shapiro and Thomas McElligott, vice president and senior lender at Beverly Cooperative Bank.”

“Statewide, foreclosures are up 66 percent over the second quarter of 2005 and up 114 percent over 2004. In Beverly, the city has already recorded 53 foreclosures through June 30 of this year. That’s more than all of 2005, which saw 42 foreclosures. In 2004 Beverly recorded only 36 foreclosures for the year.”

“Homeowners who gambled on dropping rates and increasing housing prices find themselves in a financial vise that is squeezing them with mortgage payments increasing anywhere from $300 a month to almost $1,000 per month.”

“A homeowner with a $300,000 mortgage and an adjustable-rate mortgage has seen payments go up about $240 a month, McElligott said. If that homeowner, with the same $300,000 mortgage, had an adjustable-rate, interest-only mortgage, that monthly mortgage payment would go from about $1,250 to $1,980.”

“McElligott said his bank stays away from such ‘creative’ financing precisely because of that built-in financial time bomb. ‘At some point you have to pay,’ said McElligott. ‘Many consumers are only looking at their monthly payment. They don’t look ahead.’”

“Worse, said Shapiro, once in a creative-financing bind, many homeowners can’t get out by refinancing, even if they do look that far ahead. ‘They are damned if they do and damned if they don’t,’ said Shapiro. ‘They have an adjustable rate and see down the road and try to get into a 30-year fixed. But they either can’t afford the 30-year payment or they don’t qualify. Sometimes, both.’”

The Wellesley Townsman. “Demand for housing nationwide is down and that includes Wellesley, said Wellesley resident Karl Case, a nationally known real estate expert who teaches economics at Wellesley College. Buyers are concerned about rising interest rates and worry about the housing bubble bursting, Case said.”

“A local banker agrees. ‘There’s a lot of inventory and buyers are waiting for prices to fall,’ which hasn’t happened yet, said Brian Lynch, senior VP at the Wellesley Bank.”

“‘The most remarkable news is what has happened to the ’under $1 million’ market,’ said (broker) Elaine Bannigan. There is a glut in the category compared to last year, she said.”

“The lower-priced homes are smaller and may need work, and buyers are not as willing to work on them as they have in the past, broker Gail Lockberg said. ‘Properties that need work and are perhaps priced on the high-side are getting low-balled,’ added Steve Palumbo, executive at Hammond GMAC Real Estate.”

“‘Right now we’re selling the inventory on the shelf. In the fall, more will come on and we’ll still be heavy in the $400,000 to $800,000 range,’ Lockberg said. ‘Sellers are starting to get it, that it’s not their house, but the market,’ she said.”

“One of two things will happen: Prices will drop, or sellers will become more flexible when they get an offer and more willing to negotiate, Lockberg said.”

“‘People are making price adjustments,’ Palumbo said. ‘We’re recommending to our clients that we review [the price] after two weeks and determine if price adjustments need to be made.’ He added that he has not seen any ‘collapse in the market. We’re not in a state where we are seeing bankruptcies or foreclosures.’”

The Miami Herald reports on a failed condo-hotel offering. “The Royal Palm hotel missed its loan payment last month while facing a cash squeeze amid its stalled plan to convert 160 rooms into condominium units, an owner said Wednesday. The hotel’s troubles come as Robert Falor rethinks plans to convert both the Royal Palm and Coconut Grove’s Mayfair Hotel into condo-hotel complexes, efforts once expected to generate sales well in excess of $100 million.”

“But analysts question whether developers can wring enough profits out of running hotels to justify the sky-high prices they paid for the properties during a booming real estate market. ‘The question remains as to whether [the] debt on these complexes could be extinguished as an operating rental facility,’ Standard & Poor’s said in a report warning of problems in Florida’s condo-hotel market.”

“Added Francis Nardozza, an investment banker in Fort Lauderdale: ‘There’s a lot of soul-searching going on right now.’ ‘We all know buyers aren’t rushing in the door,’ Falor said.”

The Sun Sentinel. “The 28th Southeast Building Conference convened here Thursday, and some of the 18,000 participants blamed the recent housing downturn for what they say is a more subdued trade show. ‘Last year it was the sky’s the limit,’ said (homebuilder) Ray Puzzitiello of West Palm Beach. ‘Now this year, people are wondering how long this is going to last.’”

“‘Builders’ biggest problem right now, is the canceling of contracts,’ said Len Tylka, a West Palm Beach builder and president of the Florida Home Builders Association.”

“The Local Planning Agency might vote to recommend a land-use change that would enable developer Bill Reily’s condo development to go up where there is now an RV park. ‘We already have condo homes for sale that aren’t selling. Why do you want to add to the current inventory?’ said Mike Cilurso, the president of the Jensen Beach Group opposing the project.”

The Herald Tribune. “Ever since the residential real estate market fell out of bed last summer, staging has taken on even more importance as a way to accentuate the positive in what has become a very crowded field. A local real estate agent has begun posing a family selling the home in professional shots of the staged house.”

“‘If you look at a picture and there’s a human being in it, you’ll look twice,’ said Sarasota real estate agent Candy Swick. ‘They had no sales. I said, ‘Let’s let people know there are people who live in the building.’”

“As South Florida’s housing market slows down, there are more houses for sale on the high end than buyers who want them. But there’s still a severe shortage of mid-priced housing that doesn’t require buyers to live on the fringes of the region. So private developers are starting to shift gears.”

“‘The private sector is suddenly saying, wait a minute, no one is serving the middle class, and that is where we need to be,’ said Rafael Kapustin, who has a hand in two downtown Miami mid-priced projects and plans a third. ‘In today’s market developers also may not have much choice.’”

“The new race to the middle is nationwide, and it comes largely because home prices have risen far faster than wages in recent years, creating large numbers of professionals and middle-income earners who are priced out. ‘This sector has been left unaddressed for so long that need has become greater and greater,’ said Oscar Rodriguez, of Related Group.”

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