The Housing Bubble

Time Magazine looks at the housing bubble. “When Holly Schiller bought a town house in Fort Lauderdale in the fall of 2004, she figured she would pocket a profit before the place was even finished. Schiller, 51, and her husband had already flipped several properties in Florida’s sizzling market, and this one sounded sweet. ‘As with any ‘limited edition,’ the pitch stressed, ‘demand always exceeds the supply.’”

“Well, maybe not always. The housing market in parts of South Florida is melting faster than a snow cone on Miami Beach. Schiller’s town house has languished on the market for 18 months. She has slashed the price by $75,000, to $565,000, offered a $2,500 bonus to the selling agent and threw in a $2,500 store credit for home furnishings, all to no avail.”

“She’s renting out another property at a loss, while trying to sell that one too, and has a deposit down on a second town house under construction. ‘They keep telling me 1,000 people a day move to Florida,’ she says. ‘I don’t know where they’re going. They’re not buying.’”

“The house party had to end eventually, even if sellers refuse to believe it. Many remain defiant to the point of delusion. ‘We’ve had sellers’ markets for the last five years, and they’re transitioning to buyers’ markets,’ says David Lereah, chief economist for the National Association of Realtors. ‘Sales go down and prices follow. Sellers are stubborn, so there’s a standoff.’”

“Home builders, whose stock prices have tumbled, were late to cut production, a bad sign for new-home inventories. KB Home says its cancellation rate shot up to 37% in the second quarter, from 25% a year earlier. ‘People are making arguably the most significant economic decision in their life,’ says CEO Bruce Karatz. ‘They want to feel like they’re being smart, and in some markets it’s unclear whether it’s smart to buy a home.’”

“In Miami there’s a 17-month supply of single-family homes for sale, according to the NAR. Some 75,000 condos are coming on the market in Miami–Dade County, many purchased by speculators with no plans to live in them. ‘There will be lots of foreclosures, lots of auctions,’ predicts real estate agent Rob Rose.”

“The mood isn’t any brighter in San Diego. ‘$579,000–Getting Desperate!’ reads an ad posted on Craigslist in the metro area. ‘There are three times as many houses on the market as there were a year ago,’ says Vikki Kuick, a broker who placed the ad.”

“Some sellers figure they’re lucky to be getting out. Hewitt Hymas, a Navy commander reassigned from San Diego to Annapolis, Md., just sold his four-bedroom home for $476,000 (which he bought for $280,000 in 2002). Hymas relandscaped the yard, spent $7,000 on kitchen upgrades and eventually dropped the price by $18,000. ‘People around us still live with a heyday mentality,’ he says. ‘They got used to the boom and were asking ridiculous prices.’ He made a command decision not to be greedy and moved on.”

“Experts in market psychology say stubborn sellers have a classic case of denial. Richard Peterson, a San Francisco psychiatrist who specializes in financial decision-making behavior, points out that ‘people would rather gamble and hope prices come back. They ignore information suggesting that prices are dropping.’”

“Conversely, when investors see prices rising, they get overconfident, the hot-hand bias that leads folks to think a basketball player will sink his fourth shot after making the prior three, even though probability says the odds are the same for every shot. That explains sellers’ reluctance to cut prices, Peterson says.”

“Perhaps most unsettling is that cracks are emerging in the Midwest, a region supposedly insulated from real estate madness. In Glen Ellyn, Ill., a suburb of Chicago, Deb and John Tritt have tried to unload their house for seven months. They’ve spruced up the place, knocked $58,000 off the price, to $739,000, and offered a week at their Hawaii time-share to an agent who delivers an offer.”

“None of it has paid off, and two more houses in the neighborhood are for sale. ‘We’re moving to a town home,’ says Deb, ‘and the only saving grace is that it’s not finished yet.’”

A pair of reports on housing from middle-America. The Columbia Missourian, “Columbia has too many new homes on the market, which some builders and Realtors say might force anxious builders to cut prices. Some of that anxiety is typified by (builder) Rhonda Carlson. She said the new construction market is overbuilt. ‘In certain subdivisions, there’s just a lot of For Sale signs,’ Carlson said.”

“Carol Van Gorp, CEO of the Columbia Board of Realtors, said the MLS indicates that 437 of the 1,528 homes available in Columbia are new. Realtor Rob Wolverton said excess supply simply makes it harder to sell new homes. ‘It increases the amount of competition that there is for buyers that are in the market,’ Wolverton said. ‘People producing the product are going to have to do a little bit better job.’”

“‘The market will correct itself to some degree, but I don’t know that it will be without some pain,’ Carlson said. ‘Some builders won’t be around next year.’”

“Wolverton said selling a property for a reduced price cuts down on the costs of holding vacant property, including interest, insurance, utilities and lawn care. ‘If you get prideful and hold on to your product until winter, you should prepare for a significant haircut,’ he wrote.”

“Wolverton said the current market is ‘the most unusual market’ he has seen since he began selling real estate in 1995. He said ‘it’s unusual because of the amount of anxiety that is in the market.’ He compared Columbia’s situation with the correction in the stock market in 2000.”

“‘My advice to builders is to view 2006 as the end of an incredible cycle in the Boone County real estate market,’ he wrote.”

The Quad Cities Online in Iowa. “There are 1,338 homes for sale in the Quad-Cities, and with growing inventory, it’s a buyer’s market. ‘The problem is we have so much inventory. Our inventory is at a 17-year high,’ (broker) Caroline Ruhl said.”

“‘Where the buyers are coming from; that is somewhat of a mystery since our market is relatively flat, not a lot of people coming or going,’ (realtor) Bonnie Sparks said of new homes. ‘Upgrades and divorces account for part of the movement. But keep in mind as well, that not all of the new construction has been sold.’”

“‘Many new additions are going up and houses are being built without the structure being purchased by a buyer to date,’ she said. ‘There really is a risk of saturation and the risk of over-building.’”

Bob Casagrand at Realty Times has a July report on San Diego. “Homes sales continue to decline, sales for July were 2,396 versus 3,779 for last July. This is a drop of 37% from last year and a 19% decline from this June. July Pending sales were a dismal 2,310, which is a predictor for a continuing decline in home sales.”

“The inventory at the end of July was 22,919; this is almost a 10 month supply of homes and an increase of almost 1,000 homes in the month. Approximately 65% of this year listings have gone off market by expiring, cancelling or being withdrawn, approximately 90% of those re-list and are kept on the market.”

“In seller market years the expired, cancelled and withdrawn listings represented about 8.5% of the listings. I think this gives us some idea on how long it is taking to sell homes.”

“The pricing picture is a little more complicated. Sellers were asking for more and not getting the increase. The Active inventory has an average asking price of $747,845 while the homes that sold were at $667,336 and the Pending sales had an average asking price of $639,199. Part of this difference is the Actives are a little large.”

“I believe that another explanation is two tier pricing. Condo prices have taken the biggest hit so far. The average price in July was $399,000 down about 8% from last year. While the sfd prices remained flat. If I take the sfd sold between 1700 and 1800 square feet the average price this July is $551,000, down 6.6% from last year and if I take the homes between 2000 and 2100 square feet the average price of $646,000 is up 0.6% from last year.”

“The same thing is happening by neighborhood as well. It is very important for buyers and sellers to know what is happening in their respective neighborhoods and with their house styles to make sound decisions.”

The Wall Street Journal has this look at the housing markets ‘landing.’ “Home prices in some parts of the country are falling. Builders are scaling back. Bubble or not, the biggest housing boom in recent U.S. history is coming to an end. Now here is the big question: How bad will the aftermath be?”

“‘We could be underestimating the dark side,’ says Mark Zandi, chief U.S. economist at Moody’s Economy.com and among the first to seek to quantify the housing boom’s broader effects. ‘Euphoria could turn into abject pessimism very quickly.’”

“Economists, however, have few clues on which to base their predictions. Today’s housing boom differs radically from its predecessors. For one, it has been bigger and longer-lived. House prices are still more than twice the level of 1991, when the boom began.”

“Much of the recent increase has been driven by an unprecedented flood of cash into U.S. capital markets. Global demand for U.S. mortgage bonds, competition among big national lenders and the advent of exotic loans have made it easier than ever to borrow money to buy a house, and to turn rising home values into cash.”

“There is reason to believe home builders will have to pull back more sharply. That is because the leveling off of house prices changes the equation of homeownership. Inflation-adjusted mortgage rates, the interest rate on a typical 30-year mortgage minus the percentage rise in home prices, are on track to turn positive for the first time since 2001.”

“When housing took a similar turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50%, says economist Ian Shepherdson. He estimates that the resulting decline in residential construction would subtract about 1.5 percentage points from annual GDP growth in each of the next two years. ‘It’s a 15-year bubble unwinding in two years,’ Mr. Shepherdson says. ‘It’s going to hurt.’”

“Economists can’t quantify some risks, including the biggest: the chance that a sharp drop in house prices, what economists call a ‘disorderly downturn,’ would leave many homeowners owing more on their mortgages than their homes are worth. If that led to a wave of foreclosures and losses on riskier mortgage-backed securities, banks and investors could get spooked and cut back on all kinds of lending, a move that could snuff out economic growth.”

“‘For me, the risk of a disorderly downturn is the greater one,’ says Jan Hatzius, chief U.S. economist at Goldman Sachs. ‘That’s a scenario that people would worry about a lot, because typically recessions are the result of a general unwillingness to lend.’”

The Herald Tribune has this update from Florida. “The Southwest Florida market for rental properties is all whacked out. In the affordable segment, the supply of apartments and rental houses is tight. But at the higher end of the market, there is a glut of properties aching for tenants. Observers say speculative fever, which gripped the real estate market during the past few years, is to blame.”

“Most of the neophyte landlords figured it would be easy to rent their properties at prices that would cover their costs until it was time to sell. But it is now dawning on them that the rental market is not a no-brainer, and selling out during the current sales slump is not an option unless owners are prepared to dump their properties at significant discounts.”

“‘Eventually, the market will adjust,’ said Al Holmes, the president of the Sarasota Landlords Association. ‘But during that time, low-end renters and landlords who bought properties at high prices are going to get their butts kicked.’”

“The problem, is that the new owners of the units want to cover their mortgages, taxes, insurance and maintenance costs. So they are offering units for as much as $200 more than the market will bear. As renters refuse to pay such high prices, the units remain empty.”

“‘There’s a six-month supply of condos on the market right now,’ said Scott Corbridge of Sarasota Management and Leasing. ‘That means that if no new rental units come to market, it will take six months to rent all the units we already have.’”

“One way to resolve the glut would be for owners to sell their properties and get out of the rental business. ‘But there’s no one buying,’ said Holmes. Sales have slowed sharply and the real estate market is flooded with inventory.”

“Sales have slowed sharply and the real estate market is flooded with inventory. ‘Owners will either have to drop their prices to a point where it makes sense for the next landlord to invest, or hang on until rents rise or real estate sales pick up,’ he said.”

“Another way to solve the oversupply problem would be for landlords to drop rents. ‘Instead of making money, landlords will see money going out.’ Holmes said. ‘It’s called an alligator, and it will eat you every month.’”

The Palm Beach Post. “For the past few years, the chatter has been about the torrid housing market. One Realtor we know says three waiters at a moderately priced restaurant were discussing their real estate deals when she lunched there recently. ‘And my doorman wants to know if he should hold on to three condos in a Boynton Beach development that he bought last year,’ she said.”

“But amid this frenetic buying and selling, eventually there needs to be an end user, a buyer who actually intends to live in the home, or someone will get caught holding the bag, in this case, the condo contract. Many of those pre-construction contracts signed at the height of the boom are now coming due. ‘It could get ugly,’ condo king Jack McCabe says.”

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