The Housing Bubble

A pair of reports from San Diego. “July was ice-cold in the North County housing market. Continuing a slowdown that has persisted throughout the year, sales of single-family houses last month plunged 31 percent from July 2005 and sales of condominiums fell 28 percent, according to a report released Wednesday by the North San Diego County Association of Realtors.”

“Real estate analysts said the drop isn’t cause for alarm. ‘Last year we had an overheated market,’ said Pat Hunter, an Escondido real estate agent. ‘It was going so fast and furious, and appreciating at such a high rate, that it simply could not sustain itself. And we don’t have people flipping houses anymore.’”

“However, a San Diego economist who tracks trends in real estate, said the decline is a clear indication that the housing market is entering a downturn. ‘Prices have reached a point where they simply can’t go any higher,’ said Robert Campbell. ‘We are on the down side of the cycle. This movie has replayed for the last 40 years. This shouldn’t surprise anybody.’”

“When it came to the key market indicator of inventory, the number of single-family homes on the market swelled to 6,482 last month. Coupled with the 727 homes that sold, that meant North County had a nine-month supply of houses in July.”

“There is an even bigger glut of condos. With 2,645 condos listed in North County in July and only 257 of them selling, the area had a 10-month supply of town houses and other owned shared-wall housing. The median condo price fell 10 percent year over year to $359,000 in July, the report stated.”

“But Kevin Burke, a Del Mar real estate agent, suggested the condo numbers were misleading. ‘That just means we flooded the market with condo conversions. That doesn’t mean the market has come down,’ Burke said.”

“Campbell maintained that some real estate analysts are refusing to acknowledge that, for most people, the market is out of reach and no level of negotiation or creative financing will help them buy a home. ‘Basically, what has happened is, the consumer has gotten squeezed and something has got to give,’ Campbell said.”

“‘People are saying, ‘I don’t want to go naked for the rest of my life. I still have to eat.’ And, he said, they are canceling plans to buy until the market becomes a whole lot more affordable.”

The Voice of San Diego. “The 12-story BayView Suites hotel in National City won’t be a residence for temporary passersby much longer. The 172-unit BayView Suites hotel will soon be called the BayView Tower, becoming the latest brand of condominiums to hit a housing market that has seen a bounty of apartment units converted to condos in recent years.”

“The units are being prepped just as the condo market is getting shaky. As of the end of June, there were more than 3,000 unsold condos in San Diego County. The price of the average condo has dropped about $20,000 in the last year, and recently converted condos have flooded the market. Some condo conversion projects are now being reverted back into apartments.”

“Peter Dennehy, VP for Sullivan Group Real Estate Advisors, said timing of the release of the BayView Tower units will be critical for Pacifica. ‘Is the market in general glutting? Sure,’ he said. ‘But it’s not that there aren’t still condos selling.’”

“The units will be fully furnished, that means new beds, new sofas and flatscreen TVs, Dan Fissori, director for Pacifica said. That’s the only way someone like Patrick Torres would consider buying one of these units. Torres has been living on the 11th floor of the hotel for about a month. He said there’s quite a bit of fixing-up to do.”

“Indeed, a recent trip to the hotel revealed a unit without a door handle, several elevator call buttons missing, a lingering Kahlua bottle and a seventh-floor guard rail wrapped in yellow caution tape and a sign that reads: PLEASE DO NOT LEAN. ‘They’d need to fix up the interior real good,’ he said. ‘And maybe clean up the area, too. Get some good people living here.’”

The Wall Street Journal reports on adjustable rate mortgages. “The downside of the lending boom is starting to show. Rising interest rates are taking a toll on family budgets as growth in home prices flattens, and, in some areas, prices fall. The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 141 percent in the past year, according to a recent study.”

“Housing counselors say they are hearing from a growing number of middle- and upper-middle-income borrowers who borrowed heavily to finance spending or buy a house they could barely afford.”

“Luisa Cordova-Holmes was looking to lower her monthly payments when she refinanced her $312,000 mortgage in 2004. Instead, she wound up digging herself into a ditch. Ms. Cordova-Holmes and her husband chose a so-called option adjustable-rate mortgage, which gave her multiple payment choices each month. ‘I had a lot of financial obligations,’ says Ms. Cordova-Holmes.”

“Two years later, however, the interest rate on her loan has jumped to 8.75 percent, her loan balance has climbed to $324,000 and her minimum monthly payment has risen to $2,257. She says the terms of the loan weren’t clearly spelled out.”

“Ms. Cordova-Holmes says she would like to refinance, but can’t, in part because her loan carries a prepayment penalty. Instead, she’s trying to sell her home. But with Detroit’s economy slumping, she hasn’t been able to find a buyer. When she and her husband first put the house on the market last summer, they were asking nearly $400,000. Now they’re willing to accept as little as $270,000.”

“‘We’re in a very bad situation,’ she says. ‘The payments are just killing us.’”

“Until recently, most mortgage-payment problems were an unfortunate byproduct of major life changes, such as job loss. But for the new wave of troubled borrowers, the problems stem largely, or in part, from the structure of their mortgage, housing counselors say.”

“In the past, the home mortgage ‘was a steadying influence; it neither rose nor fell over time,’ says Elizabeth Warren, a Harvard Law School professor. ‘All that has changed in the last half-dozen years,’ she adds. ‘The mortgage payment is now more variable than any other expense for millions of people. We’re working in completely uncharted territory.’”

“‘Often the reason somebody is put into an ARM or an interest-only loan..is because that’s the only way the broker or loan officer could get them qualified,’ says Jordan Ash, director of an advocacy group that focuses on predatory lending issues.”

“Edward Snyder, who bought his house in St. Paul, Minn., two and a half years ago. Mr. Snyder financed the $210,000 purchase with a $168,000 interest-only ARM and a $42,000 second mortgage. Mr. Snyder says he was stretched even before a rate adjustment on his ARM boosted his monthly payments by $200 in May. Since then, he has fallen behind on his water bills, car payments and student loan.”

“‘Now, it’s a choice of what gets paid late,’ Mr. Snyder explains. Last month, he received a letter from his lender with the words ‘rate increase’ on the envelope. Mr. Snyder says he hasn’t opened it ‘because it gets too discouraging.’ This week, he’s meeting with a mortgage broker to discuss his options.”

“‘If I had been aware both loans were interest-only, I would have probably turned the loan down,’ says Mr. Snyder, who says that the terms of the mortgage were never properly explained to him. ‘I believe this loan is built for failure. There’s no means to build up equity.’”

“Some California brokers say they are beginning to see a return of ’short sales,’ transactions in which the sales price isn’t large enough to cover outstanding loans. Patti Vaughan, an agent with in Temecula, Calif., says in recent months she has begun to get calls from borrowers looking to unload houses they can no longer afford. ‘They’ve upgraded their houses, put in a pool and bought themselves Hummers and BMWs,’ she says. ‘Now they can’t get it refinanced and they can’t sell.’”

USA Today looks at the rent versus buy decision. “In some of the nation’s priciest real estate markets, the financial reasons for renting instead of buying are the strongest they’ve been in 25 years. So how out of whack is it now? The national median mortgage payment is $1,687 a month, nearly twice the median rent payment of $868 a month. The financial gap is even larger in cities where home prices recently rose to sky-scraping heights, such as New York, San Francisco, Los Angeles and Washington.”

“Micki Seibel and Jan Leger told their friends they were going to sell their home in the heart of San Francisco and rent an apartment. Though Seibel and Leger love their home, which they bought in 2002 for about $1 million, it’s been draining them of $5,600 a month for their mortgage and taxes, when they could be renting a place just as nice in the same neighborhood for about $3,400.”

“‘We can put that savings in the bank and make it work for us and take away the risk of the unknown future of the real estate market,’ Seibel notes. ‘For what we’re paying for our mortgage and property taxes, we could be renting a mansion in Pacific Heights,’ he said.”

“Add rising interest rates, and it’s easy to see why many would-be home buyers are sitting on the sidelines and why even some homeowners are cashing out. By renting, they gain the flexibility of a lease and freedom from home repairs. They can also invest more money in other assets that could appreciate faster than real estate over the next couple of years.”

“‘For someone debating whether to rent or buy in a market that’s experienced recent and substantial house-price run-up, it may be better to delay the home purchase and see what the market looks like a year or two down the road,’ says Stuart Gabriel, at the University of Southern California.”

“A homeowner in Orange County, Calif., for example, would have to stay in his or her home for a decade before breaking even on out-of-pocket costs compared with renting, according to Marcus & Millichap.”

“‘Real estate is probably the best investment any young person can make,’ says Yadiris Ferreira, who bought a condo last month in Pembroke Pines, Fla. Still, her mortgage, including homeowner association fees, totals $1,800 a month, more than half the money she takes home as a high school math teacher. ‘It’s crazy,’ Ferreira concedes. But, she explains, ‘If I didn’t buy something soon, it was going to get to the point that I couldn’t afford anything.’”

“Lots of other people thought the same way during the boom years. But now home sales are falling, and in some cities, prices have started dropping, too. In June, condo prices fell 2% nationwide, and single-family home prices dipped in several markets, including San Diego, Boston and Washington.”

The Times Standard in California. “According to the Humboldt Association of Realtors’ latest affordability index, home prices dropped in every community except McKinleyville. In May the median home price in Humboldt County was $319,500, with around 11 percent of Humboldt County residents able to afford a home. June’s median price was $307,500, representing a one-month price drop of $12,000.”

“Local economist Erick Eschker said that he still expects a ‘large downturn in local real estate’ in terms of prices and number of homes sold. One indicator he looks heavily to is the housing price-to-rent ratios. Currently, rent prices in the county aren’t capable of covering property owner mortgages, he said, and owners are banking on the ability to make up for the loss in appreciation.”

“Eschker expects that appreciation to come a lot slower or even fall off in coming months, which would even out the rent-to-purchase ratio. ‘Landlords are doing renters a favor right now in comparison to the cost of buying a home,’ he said.”

The News Press reports on the WCI numbers in Florida. “Bonita Springs-based WCI Communities said Wednesday that orders for its condominium towers have screeched almost to a halt, and businessmen across Lee County said the residential construction industry as a whole is slowing dramatically.”

“‘We are backing down on the tower business, we can’t offer the incentives or financially motivate people’ to buy, said CEO Jerry Starkey. Total new orders were down 62.4 percent, but towers were down 82.6 percent to $57 million, and the number of units ordered fell 88.8 percent.”

“‘We don’t think the bottom is here yet, we think the bottom is six months away,’ said Ed Bonkowski, a Fort Myers-based real estate broker who said he represents $25 million from investors. ‘The sellers of property are in denial right now that they’re not going to lose money on their deals, and they will. The main thrust is the speculators: They have completely disappeared off the face of the Earth.’”

“The signs are everywhere that the downturn is taking place throughout the industry. ‘The answer is an unequivocal yes,’ said Rad Hazen, (who) provides landscaping plants for builders locally and around Florida. ‘It’s statewide. Almost everybody is saying there’s a downturn in major projects. A lot of the business seems to have dropped off.’”

“Underlying the doldrums, said real estate broker John McWilliams, is the huge 2005 run-up in prices that came to an abrupt end early this year. ‘All day, every day I’ve been in price-reduction meetings with the sellers,’ many with lots or houses in Lehigh Acres, he said. Sellers are finally coming to their senses, McWilliams said. ‘The obstinance is over with the sellers who didn’t want to believe this.’”

“The numbers bear out the coming hard times, said Lee Building Association VP Michael Reitmann, who notes ‘new permits (have) slowed quite dramatically.’ Only the strong will survive, he predicted. ‘It’s going to affect those people who are not good businesspeople and aren’t watching very closely what they’re doing. The days of just being order takers in the residential market are over,’ he said.”

The Naples News. “Once one of the hottest places in the country for real estate, Southwest Florida has turned into one of the slowest markets for WCI communities. ‘Active adult (communities) in Florida was the largest decline,’ Starkey said. ‘The east coast of Florida is down, but less so than the west coast. West coast continues to be the weakest of all areas.’”

“The company also saw a spike, almost a doubling, of cancellations, up to 30 percent from about 15 percent. The decline is causing the company to look at cost-cutting measures, including recently announced layoffs. ‘It continues to be a tough environment. We don’t know if it will continue for three quarters or seven or eight quarters,’ Starkey said.”

“Other builders in the area are feeling the same pains. Last year, Mercedes Homes sold more than 300 homes. This year, said Lisa Perry, VP of sales, ‘I would like to see 175. We are pushing for that. With the investor influx we had in the last two years, it was great for sales then, but now we’re competing with our own inventory,’ Perry said.”

“A market correction to some extent was in order because the pace of the last couple of years was unsustainable, said Alan Foster, of Divco Construction. His company builds primarily high-end single-family homes and even that segment is feeling the impact of investors dumping homes. ‘We are competing against homes that we sold to investors before,’ Foster said.”

“Any market segment where there was speculative building is now facing hardships, said Mark Raudenbush, a general contractor. ‘It’s reverse musical chairs. Anyone left holding a chair when the music stops is the loser because they have a chair they couldn’t sell,’ Raudenbush said.”

The New York Times has this report on second homes. “The brand new 6,000-square-foot vacation home has been on the market for more than a year. After plenty of showings, but no offers, the investor who built the house recently cut the price twice, by a total of $600,000, to $4 million.”

“It has still not been sold. The price reductions have created more interest, and he now hopes that it will be sold right after Labor Day, a prime season for home transactions in the Hamptons. ‘My feeling is that everybody is waiting for the dust to settle before they make their big decision,’ said the agent, Ira Birns. But, he acknowledged ruefully, ‘there is a lot to choose from.’”

“It is not just the most expensive vacation homes that are going begging. A wide variety of popular locations for second homes, areas like Florida, the Jersey Shore and Lake Tahoe, as well as the high-price playground on the East End of Long Island, has slowed markedly in recent months.”

“As the overall housing market weakens, the interest in buying vacation homes appears to be falling faster. ‘Second-home buying is very discretionary,’ said Edward Leamer, an economist at the University of California, Los Angeles. ‘There is no force of demographics that is pushing people into buying homes as there is in primary home markets.’”

“Prices at all levels are softening, and in a few places recently have begun dropping. In Florida, price declines have been most pronounced in areas dominated by second-home sales. In June, median prices fell 8 percent from a year earlier in Naples and nearby Marco Island on the west coast and 10 percent in Panama City in the Panhandle.”

“Paul Ciotti has had his two-bedroom beachfront condominium in Naples on the market since late last year. He first asked $999,000, when ‘everybody was going for pie in the sky.’ He has since cut the price to $799,000. Mr. Ciotti bought it for $515,000 in 2004.”

“This spring and summer, median home prices in the Ocean City, NJ., area have fallen by 10 to 15 percent from a year earlier. Sales have slowed and more houses are sitting on the market, according to Nicholas J. Marotta, president of the Ocean City Board of Realtors.”

“He blames speculators for rapidly inflating and then depressing the market by trading in condominiums and oceanfront homes that they bought with low-interest loans requiring only small down payments.”

“A local developer added that new construction had flooded the market, with more than 100 homes priced at $2 million or more. ‘We believed in our own confidence,’ said the developer, Raffaele Pansini, who has been building homes for nine years. ‘And in a way, we proved ourselves wrong because we don’t have 100 buyers coming in.’”

“Anecdotal evidence suggests that vacation homes might have reached a new high-water mark in 2005. ‘I saw a lot of clients buy first, and ask questions later, on second and third properties,’ said Leo Grohowski, at U.S. Trust, which caters to affluent families.”

Please post off-topic ideas, links and Craigslist finds here!