The Housing Bubble

In Business Las Vegas has this update from Nevada. “Renters worried about losing their apartment to a condominium conversion or looking for an apartment in a tight market with rising rents might be able to breathe a little easier in the coming months.”

“Condo conversion closings have fallen sharply during the last three months. It’s part of a trend in which apartment complexes are more likely to remain as rentals rather than be converted into condos, analysts said. The limited supply of apartments should increase as some condos under construction or conversions will be put back on the market as rentals, according to an investment brokerage firm.”

“That additional inventory should create competition for traditional apartments and slow rent growth for the next 12 to 18 months, according to the brokerage firm. In addition, developers will bring on 2,315 apartment units in 2006, more than double the 1,040 brought on line in 2005. Another 1,800 units are scheduled to come on line in 2007.”

“SalesTraq reported condo conversions between April and June fell 44 percent in comparison to the first quarter. Conversions are off 29 percent from the second quarter of 2005. That drop is evidence that the Las Vegas City Council was correct in not implementing a moratorium on condo conversions, said SalesTraq President Larry Murphy.”

“‘The fear was they were going to convert all of these, and there wouldn’t be any apartments left,’ Murphy said. ‘The market is making its own correction. I don’t think you need any legislation prohibiting apartments to condos. The demand has slackened.’”

“Consultant John Restrepo said as the housing market cooled, the demand for conversions cooled as well. ‘Right now we have a weird market. You are better off renting a single family home because of a shortage of apartments. You can find a house in the southwest with 2,600 square feet and a yard for $1,400 a month in a nice neighborhood. You can’t find an apartment for that right now. Right now, it is definitely a renters’ market,’ he said.”

“Because of the improvements, the rents will be higher than what was charged when they were apartments, but the growing supply in the coming months could create some bargains if people don’t pay the higher rents demanded. ‘There could be some deals if owners are looking to bring in any kind of revenue,’ Nadji said. ‘For condos already in the pipeline, it is too late to stop them from coming in the market. Some developers will end up with a combination of units.’”

“With the added supply, Chris Lobello, Marcus & Millichap’s regional manager, said he wouldn’t be surprised if at some point apartment owners return to the days when they offered the first month free as a way to attract tenants.”

The Review Journal. “Already reeling from slowing housing sales and worries about the economy, home builders face another issue: the value of the land on their books. Land values are becoming a flash point for investors and analysts who watch the building sector. Bears say the companies’ land might not be worth what they paid for it, which could lead to painful write-downs.”

“‘People are looking at book value as a possible floor for the stock prices,’ said Banc of America Securities analyst Daniel Oppenheim. ‘The question is, should that be a floor? There could be some risk to that book value from land recently acquired or put under option contract.’”

“Write-downs are ’starting to happen,’ says Credit Suisse analyst Ivy Zelman. ‘I don’t think you can define what (the scope) is today and capture the risk.’”

“Builders operating in Las Vegas wouldn’t discuss whether their local property portfolios are shedding value, and they said federal disclosure laws prohibit them from talking to the media about potential write-downs.”

Several readers suggested a topic about the Fed rate decision this coming week. “I think that the most important driver is the Federal Reserve. There’s pressure to raise a quarter given what has happened with other central bankers this week. And there is pressure to pause due to pressure on ARM folks. Which way do we go? As a saver, I’d prefer a hike.”

A reply, “One more interest rate raise of 25bps on August 8th. Also, a statement basically saying that a pause is coming at the next meeting.”

And another, “Since I believe that a recession is nigh unavoidable, I’d rather see them fight inflation. Of course the market prediction has been ‘one more quarter point, they they’re done’ for the past 6 meetings or so.”

One said, “Track record of the FED is to put off the day of reckoning for another time. I’d like to see a couple more rate hikes, but believe that they are finished for the time being.”

One agreed, “Unfortunately, I am of the same opinion. I believe Paulsons comments earlier this week about a ’strong dollar’ have evaporated. China believes that it is now able to float the Yuan without impacting its export economy.”

“‘So much manufacturing capacity has moved to China that foreign-owned firms now account for 51 percent of China’s trade surplus, up from 3 percent in 2000, according to Lehman Brothers.’ Trade surplus may defy orthodox currency cure.”

The Washington Post. “Federal Reserve policy-makers haven’t provided a wink, a nod or even a coded phrase to telegraph what they plan to do with interest rates when they gather Tuesday, the first time in three years the outcome has been uncertain so close to their meeting.”

“The reason, analysts say, is simple: Fed members themselves don’t know, with some pressing for the 18th consecutive increase in interest rates and others ready for a break.”

“Bernanke used his most recent public appearance (to) outline the collective goal of the policy-making Federal Open Market Committee: a so-called soft landing in which the economy slows down just enough to tame inflation without sliding into recession.”

“And he said the forecast represents what the policy-makers expect to happen if they adjust interest rates just right, without saying specifically how they will do so. This approach is called ‘inflation forecast targeting’ by Fed economists and academics.”

“Now, Fed policy-makers are divided about what to do. They do not know if the housing market slowdown is going to continue to be ‘orderly,’ as Bernanke has described it, or worsen sharply.”

“With the economy losing steam and inflation accelerating, the Fed does not want to raise rates too much and tip the economy into recession, or raise rates too timidly and let inflation get out of control. ‘If you don’t know which way you’re going, it’s hard to send up a flare,’ said former Fed vice chairman Alan S. Blinder. ‘This is pretty close to a 50-50 call.’”

The Washington Post has this update on the DC area. “A giant development company is withdrawing its offer to give a Virginia town an unprecedented amount of money in exchange for approval to build a subdivision, citing the cooling housing market for the change of heart. Centex Homes said it can no longer afford to offer Warrenton $22 million, almost half the town’s annual budget, to approve 300 luxury homes for seniors within its borders in Fauquier County.”

“‘It was possible to consider such [an offer] as remotely feasible only in a rising market,’ wrote Robert K. Davis, the company’s division president. ‘[We] would not have made that agreement had it been possible to predict the timing of the current residential downturn.’”

“Centex officials declined to comment beyond the letter. Warrenton officials said they will continue to negotiate with the company. ‘The tooth fairy brought us a lot of money,’ said John Lewis, a Town Council member.”

“Last month, Centex defended the concessions, which industry specialists called a bribe, saying they were the ‘cost of doing business’ in Virginia. In this week’s letter, however, Davis said the compromise would be an untenable loss because it ‘represents a 56 percent decrease in the potential yield of the property.’”

“The outlook for home sales has changed in recent months. Home prices in the Washington area declined this summer for the first time in five years, and some economists predict that the trend may deepen in the coming years.”

The Washington Times. “Strong demand for rental housing in the Washington area is making developers who switched their apartment buildings to condominiums during the red-hot real estate market rethink their business strategies.”

“About 25 percent to 40 percent of the housing units being built as condominiums instead will be sold as apartments in the next 18 months, according to Marcus & Millichap. In addition, some apartments that were converted to condos are likely to be switched back to rentals.”

“The cooling market is creating concerns among Washington-area real estate developers who were betting their investments on condos. ‘We have clearly entered a period in which the supply of condominium housing exceeds demand, particularly in certain submarkets where significant development has occurred over the last two to three years,’ said David DeSantis, for developer PN Hoffman. ‘It is not clear at this point how long the oversupply condition will last.’”

“Other developers do not want to wait for their condominium markets to improve, preferring instead to auction their projects to the highest bidder. ‘We’ve noticed a definite surge in calls from developers in the D.C.-Baltimore area who are looking for a way to sell units they thought would be long gone by now,’ said Carl Carter, of J.P. King Auction Co. ‘Some tell us they’re being hurt by ongoing costs like interest, taxes, maintenance and marketing costs they didn’t plan for.’”

“Some of them built condos thinking they would sell promptly but did not plan for a slumping market. ‘Now they want to stop the bleeding, recover their investment and move on to the next opportunity, and an auction lets them do that,’ Mr. Carter said.”

Readers want your opinion on how low will real estate go. “Topic Suggestion: How far down is down? Stated in terms like this; return to 2004 prices, 1997 prices, 1985 + 20% prices for your local market.”

A reply, “My own opinion, based on observing a couple of downturns here in Australia. ‘Soft Landing’ - Average real price falls (either mean or median). ‘Hard Landing’ - Average nominal price falls. ‘Crash’ - Average nominal price falls more than 10%.”

And another said, “Some believe you need a new bubble to fully burst the old one; probably this is main reason why we dont see ‘panic’ selling, yet.”

One reader points to Japan. “For those that believe the collapse will be short with only a 30% drop from todays news: Japan Times.”

“The gap in land prices between large and small cities continues to widen even though the average price in select areas has moved higher for the first time in 14 years. The National Tax Agency said Tuesday that land prices in Tokyo and Nagoya rose more than 20 percent as of Jan. 1, while the pace of the drop in nine prefectures expanded.”

“But the area in front of JR Akita Station stands in stark contrast, as it is quiet even on holidays. Some shops are closed and have notices asking for tenants. One female shopkeeper said, ‘The area in front of the station is always deserted.’”

“The land price per square meter in front of the station is 230,000 yen, sharply down from 1.4 million yen in 1993. The price has fallen for 13 years.”

The New York Times has this report titled, ‘The Houses That Wouldn’t Move.’ “Lynn and Frank Balducci’s house in Bethpage, N.Y., should be a real estate agent’s dream. The Balduccis put their 1951 colonial on the market in early May. They held seven open houses, but they still had not gotten a single offer as of early August, even after they dropped their asking price to $539,000 from $589,000.”

“‘It’s very depressing,’ Ms. Balducci said, adding that at least seven houses in her neighborhood had been on the market for at least as long as theirs. ‘It’s a little scary for us, too, because we very shortly may be in a position where we have to carry two mortgages.’”

“The Balduccis’ agent, Peggy Chugkowski in Massapequa, tells a story that is becoming increasingly familiar around the region. ‘A year ago, this house would have sold within two weeks maximum, and they would have easily gotten close to $600,000,’ she said. ‘This really shows you what’s going on right now. It’s like the market just collapsed.’”

“The inventory of available houses in New York, New Jersey and Connecticut has soared. Some houses in the $1 million range and higher have dropped in price by more than $200,000, while lower-priced homes have had smaller percentage decreases.”

“In many cases, buyers and sellers have reached a wary stalemate. ‘We’re at a point where sellers don’t want to lower their prices and buyers don’t want to raise their bids,’ said Roberta Baldwin, a broker in Upper Montclair, N.J. ‘Buyers are now saying, ‘Wait a second, the market is stabilizing, so why should I pay $20,000 more when I could pay less?’”

“Thomas Gallagher, a broker who owns eight Century 21 offices on Long Island, called it a buyer’s market. ‘I’ve never seen as many open houses as I see now,’ he said.”

“Mr. Gallagher said that real estate agents have been pushing harder in recent months to convince sellers that they cannot expect the kind of price increases they saw in recent years. ‘People are finally starting to understand that even if they could have gotten more for their house last year, it’s not last year.’”

“Another clear sign that home sales are undergoing a market correction is the growth in inventories. In Nassau County, the inventory of homes for sale was up by 75 percent in June 2006 over the previous year, to 9,934 from 5,662. Inventory in Suffolk County went up by 65 percent to 13,724 homes in June, compared with 8,318 in 2005.”

“In Westchester County, inventory was up by 38 percent over the previous year, to 6,585 residential units.”

“Richard Gross, an investor from New York City who bought a three-bedroom house in New Rochelle in February 2005, hoping to resell it at a profit after making renovations, said he had had trouble getting the price he wanted. He bought the house for $315,000 and put in more than $100,000 in repairs and renovations, he said. Now, despite having had the house appraised at $555,000 and putting it on the market three months ago, he has yet to receive an offer that exceeds $500,000.”

“‘It seems like the boom kind of ended with everybody’s talk of the bubble bursting,’ he said. ‘I think all the talk actually made it happen.’”