The Housing Bubble

The St. Petersburg Times reports on one analysts’ suggestions to local homebuilders. “So what will it take to get the housing market back to normal? Yes, this housing market, where prices have skyrocketed, but where builders are now offering incentives, everything from free granite countertops to a year’s worth of homeowner association fees to help with closing costs.”

“In the Tampa Bay area, sales of existing homes in June were down 34 percent from a year ago. For new homes in this area, ‘finished, vacant inventory,’ homes ready to sell with no buyer, increased 58 percent in the second quarter of this year over last, the highest on record.”

“This market, in which we’re seeing ‘builders who build for no profit,’ according to housing analyst Brad Hunter, and in which he defined an investor as ‘a speculator who couldn’t find anybody to flip to.’”

“‘Get out of hurricane season” was Hunter’s first suggestion. ‘They won’t buy now,’ Hunter said. ‘They’ll be back in the market in December.’ What can builders do to overcome that sales resistance? Throw in a generator as an incentive, he suggested. Offer a safe room.”

“Hunter’s other suggestions for returning the market to normalcy: Address buyer anxiety. ‘People fear buying at the top of the market,’ he said. Some builders have combatted this by guaranteeing buyers that if the price drops after they sign a contract, they’ll get the lower price.”

“Use up or undercut investor inventory. Builders bemoan the rows of ‘For Sale’ signs in new subdivisions, where investors are trying to sell the homes they bought preconstruction at prices that undercut the builders but still allow a nice profit. It is proving harder to flip the properties than some of those investors expected.”

“Find the correct price. ‘And it’s lower than today’s,’ Hunter said.”

“Resume the old sales patterns. In years gone by, builders could reasonably expect to sell 10 percent of a project preconstruction, then see a nice pickup in sales after models opened. In the past few years, projects have been selling out almost before the dirt is turned. Those overheated days are gone, Hunter said.”

“Like others, he is concerned about what will happen when millions of adjustable-rate mortgages start to adjust next year. Take a typical $300,000 adjustable-rate mortgage at 4.75 percent. A buyer is now paying $1,565 in principal and interest. When the rate adjusts to 6.5 percent, that buyer will pay $1,896, an increase of 21 percent.”

“And that’s an ‘A’ borrower, with terrific credit, Hunter pointed out. A subprime borrower with blemished credit could see a mortgage adjust by a full 3 percentage points, doubling the payments when taxes and insurance are included.”

“Someone who bought only last year, who has no equity, ‘is going to find it tough to refi,’ he said. ‘That’s the amateur speculators’ story.’ He predicts rising foreclosures by 2008.”

“‘It’s time for land sellers to wake up,’ realize that the inflated prices of yesteryear are gone and price their land more realistically, Hunter said. ‘And it’s time for builders to say no’ to exaggerated land prices.”

“It’s hard to know what the ‘right price’ for a home is, ‘but builders can close in on it by offering incentives,’ Hunter said. Buyers will begin to realize that those incentives are really just a way of lowering the price of a home, ‘and pretty soon they’ll realize that this is a great time to buy.’”

Readers suggested this article as a weekend topic. “Convinced home prices will fall? So are a lot of other Americans. Some, known as bubble sitters, are acting on their conviction. They’re cashing out by selling their homes and renting, figuring they’ll return to the market after prices have fallen.”

“Bubble sitters also include those people who have never owned a home and are waiting to take the plunge, along with folks who are relocating and holding on to their cash until the market in their new hometown softens.”

“Many experts have labeled the majority of U.S. housing markets either overvalued or severely overvalued, but is it wise to count on prices falling?”

One reader says, “There is a first time for everything, and I believe this will be the first time postwar prices go down. It’s also true that home prices in San Diego have fallen during the period since this time last year.”

“If the Feds stop raising rates, the bond market could anticipate a lack of resolve to fight inflation, resulting in runaway long-term interest rates and a need for Bernanke or his successor to crash the economy into a wall in order to prevent a total meltdown. It happened in 1980-1982, but I realize this time is different.”

“Real estate always goes up in the long run, blah, blah, blah… But so do stocks, right? What happened, then, from 1929 through 1945? Lots of folks learned what Keynes meant when he said, ‘In the long run, we are all dead,’ as the protracted market downturn outlasted their staying power.”

“Something similar happened in the Japanese real estate market between 1990 and 2006, a sixteen year period of bubble unraveling. So the question is not whether housing prices go up *eventually*, but soon enough for it to make sense for an owner (especially a new buyer) to endure a protracted period of falling prices.”

Another replied, “16 years and the last of the baby boomers are retired or ‘dead.’ The ones who rented and SAVED the extra median $800.00 a month (difference between median rent and mortgage) will retire o.k. The ones whose houses finally get up to the price that they paid will be wishing they had not thrown that money away.”

The Dallas News reports on the housing market. “North Texas homebuyers took a vacation in July. Sales of preowned homes were down 10 percent during the month, the largest decline in more than two years. ‘Buyer traffic is good, and we are doing better in the city than out in the suburbs,’ said (realtor) Darren Dattalo. ‘Outside the LBJ Freeway loop, houses are sitting there for a while. There are houses still on the market in Plano that I was showing in January.’”

“At the end of July there were 47,391 preowned single-family homes on the market in North Texas. That’s about 8 percent more than a year earlier. July’s fall-off in home sales in North Texas was the biggest decline since November 2003, when sales were down 14 percent.”

“When Fox & Jacobs recently decided it was time to move some houses, the Dallas-based homebuilder knew just how to catch women’s attention. It offered a year’s free maid service with the purchase of one of its North Texas houses. Builders are using enticements including free swimming pools, appliance upgrades and cut-rate financing to keep buyers interested.”

“With interest rates rising, the prospect of getting freebies with a new house has helped keep sales strong. And it’s lured some buyers away from the pre-owned home market.”

“‘These incentives are almost required at this point because there is so much unsold, finished inventory on the ground,’ said housing analyst Ted Wilson. ‘They are trying to move units, and they have been on a marketing blitz.’”

“And with good reason. While new-home sales in North Texas are still at record levels, the number of unsold houses is also soaring. Almost 10,000 unsold new homes were on the market at the end of June.”

“Along with freebies to buyers, builders are also offering bonuses and gifts to real estate agents who bring them a sale, he said. ‘There is a sea of houses for sale out there, and you do everything you can to stand out.’”

“That’s what Fox & Jacobs hoped to do with its recent limited-time giveaway of maid service. ‘We are trying to offer some things that appeal primarily to female buyers,’ said Lee Darnold, vice president of marketing in Centex Homes’ DFW Division. ‘Women have the biggest impact on the purchase decision.’”

“Nancy Grant, who bought one of the company’s homes in Wylie, said the service ‘will definitely come in handy. I can also use it to clean up the house I’m selling,’ she said.”

“North Texas’ two biggest public homebuilding companies, Centex and D.R. Horton, cited high incentives among the reasons for their recent declines in financial performance. ‘Discounts kind of go hand in hand with [purchase] cancellations,’ Centex chief executive Tim Eller said. ‘So if cancellation rates are fairly high, you can anticipate that discounts, in one form or another, will also be commensurately high,’ he said.”

“Almost a third of Centex’s nationwide home sales fell through during the most recent quarter, usually because buyers couldn’t sell their current home.”

The Union Tribune follows up on the Dataquick numbers. “San Diego County’s housing market weathered its second straight month of price declines in July, when overall prices dropped 1.8 percent from a year ago to $487,000, DataQuick reported. Taken together, the two summer months showed the first back-to-back downturn in prices here since May and June of 1995.”

“Last month’s figure put the county’s median housing price 6 percent below the all-time peak of $518,000 set in November. Prices for newly built houses, resale condominiums and condo conversions all were down, as they had been in June.”

“Even more telling of the market’s pronounced shift was the rapid slowdown in sales. There were 3,370 closed escrows last month, down 29.3 percent from year-ago levels, and off 21.7 percent from June, the biggest retreat from any June to July since DataQuick began keeping records in 1988.”

“‘We need to watch the sales pace closely because that was an unusually sharp decline between June and July,’ said DataQuick analyst Andrew LePage. ‘Maybe it’s a one-month deal or it’s the beginning of a more forceful slowdown; we don’t know.’”

“San Diego is not alone. LePage said the market slowdown is evident in Sacramento and is spreading to other areas. ‘The sense of urgency is gone. The sense that buying a house is the fast road to riches is gone. There are fewer people out there buying a house, and a good chunk of people who sense the cooling are going to wait for a deal,’ LePage said.”

“The role reversal shocked some sellers. Heidi and Wade Shields put their 1,410-square-foot San Diego townhouse in Murphy Canyon on the market five months ago. After dropping the price on the home once, they still have received no offers. The house on West Canyon Avenue hasn’t interested buyers at its $619,000 price. They bought the home two years ago for $480,000.”

“‘I’ve been really surprised at how dead it’s gotten,’ said Heidi Shields. ‘We’ve hardly had any lookers at all.’ The Shields are in a tough spot. With 18 homes listed, their street appears to have more single-family resale homes on the market than any other in the county.”

“Their agent, Tim Skoglin, said he confronts a growing feeling of negativity toward home buying outside the realty community. ‘It’s kind of spread like fire,’ he said. ‘All your buddies you work with are not feeling good. It creates a wave opposite from when people said, ‘Get out of the stock market and get into real estate.’”