The Housing Bubble

Dataquick has the Southland numbers out from California. “Southland home sales downshifted last month to the slowest pace in nine years as the rate of appreciation fell to the lowest level since fall 1999. A total of 22,712 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month, DataQuick reported. That was down 22.3 percent from June and down 26.9 percent from July last year.”

“Last month’s sales total marked the lowest for a July since 1997. Southland sales have declined for eight consecutive months on a year-over-year basis.”

“‘Our sense has been that many who bought homes in recent years purchased them sooner than they otherwise would have because of very low interest rates and a great sense of urgency, given the fear of being priced out forever or missing out on a great investment. That phenomenon helps explain why there’s not more demand today. Whether July’s data also signal something more ominous at work in the market’ something that would cause a severe correction in home values, is unclear to us,’ said Marshall Prentice, DataQuick president.”

“The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,437 last month, up from $2,052 a year ago. Adjusted for inflation, current payments are about 6.2 percent above typical payments in the spring of 1989, the peak of the prior real estate cycle.”

“Waning sales coupled with a rising supply of unsold homes is weighing on price appreciation. The latest figures will undoubtedly rev up the debate over whether the Southland’s housing sector will be able to navigate a ’soft landing.’”

“‘Current trends suggest that the market is heading into a lull,’ said DataQuick analyst Andrew LePage. The one-month drop between June and July, a hefty 22%, was the most for that period since DataQuick started keeping records in 1988, the company said.”

The Desert Sun. “Coachella Valley’s once hot luxury-home market appears to be losing steam in line with the rest of the cooling local and national housing market, and some big-name companies have taken notice. After less than two years in the valley, Sotheby’s International Realty plans to pull up stakes by the end of August and shut down its only two Coachella Valley offices.”

“National luxury-home builder Toll Brothers is reporting a surge in local buyers having to cancel new-home orders.”

“The downturn in what is typically seen as an almost bullet-proof segment of the real estate market is due to waning home-buyer confidence, an inventory glut of more than 7,000 resale homes in the valley, a normal winding down of the real estate cycle and other factors, area real estate agents and industry officials said.”

“‘The conventional wisdom is that in the high-end market, these folks were wealthy before the interest rates went up and they tend to be less affected, in general, at the beginning of a market shift,’ said Greg Berkemer, of the California Desert Association of Realtors. ‘But as this continues to go on, they, like everyone else, have concerns.’”

“Toll Brothers would only say that cancellation rates were ’significantly higher than our historic levels’ in the Coachella Valley and northern California during the quarter ended July 31. The home builder said it experienced similar increases in new-home order cancellations in Las Vegas, Orlando and Phoenix.”

“For prospective buyers in the valley who plopped down hefty, non-refundable payments depending on the home’s price, having to cancel an order because their other home wouldn’t sell in time could be a painful financial lesson. Its homes generally sell for more than $600,000, and many are listed above $1 million.”

The Sacramento Bee. “Homebuyers may be turning sour on condominium conversions in a cooling real estate market, but five Sacramento County apartment owners are pressing for still more. They’re seeking approval for 700 new conversions.”

“The moves seem to fly in the face of lagging buyer enthusiasm nationally for apartments converted to for-sale condo units. Locally, some apartment owners who won conversion rights have held back on sales plans, while others who went forward have seen slow sales. From Florida to Folsom, some owners of conversion projects have begun a reverse trend of converting condos back to rentals.”

“But investors from Los Angeles and the Bay Area say they’re pressing ahead in Sacramento County, even though buyers already can pick from an abundant supply of new condos and sales incentives. These apartment owners hope to compete on price in an expensive market, and say if they falter now they’ll be poised for the region’s inevitable housing rebound later.”

“Experts call condo conversions a sign that real estate markets are peaking. ‘They only come around when the market is just red-hot,’ said Kathryn Boyce, a Sacramento-based analyst for a Costa Mesa firm that tracks the housing industry.”

The homebuilders association has this out today. “Reacting to what they perceive as increasing consumer uncertainty regarding the market for new single-family homes, builders tempered their views on current and expected sales activity in the Home Builders Housing Market Index for August, released today. The HMI declined seven points to 32, its lowest level since February of 1991. This was the seventh consecutive month in which builder confidence, as measured by the index, has fallen.”

“‘Two big factors are coloring builders’ perceptions of the market right now, rising sales cancellations and substantial growth in inventories of both new and existing homes,’ said NAHB Chief Economist David Seiders. ‘These factors are largely the result of an increasing number of potential buyers adopting a ‘wait-and-see’ attitude because of uncertainty about where the housing market is headed. We’re also seeing an anticipated withdrawal of investors/speculators from the market.’”

“Builders in all four regions of the country are pessimistic about the market. In August, all three components of the home-builders’ index fell. Current sales index fell to 36 from 43, the expected sales index dropped to 40 from 46 and the traffic of potential buyers’ index fell to 21 from 27.”

“Housing starts have fallen about 18% since the peak at the beginning of the year. New-home sales are down about 17% from the peak last July. As housing slows, employment in construction, real estate, banking and related retail sectors has also weakened.”

“‘Builders are pulling out the stops in terms of incentives to try and keep inventories down, but it’s a pretty tough battle at the moment,’ said Seiders. Real estate speculators, who flocked to the market in recent years, are also abandoning their bets in droves, adding to builders’ supply, Seiders added. The NAHB’s Seiders expects industry weakness to worsen before it improves.”

“Inventories of unsold existing homes have jumped 39 percent in the year through June. The slide in builder confidence suggests the industry is ‘rolling over,’ Joseph LaVorgna, Chief U.S. Economist at Deutsche Bank AG, said.”

From MarketWatch. “ECC Capital Corporation, a mortgage finance real estate investment trust that originates and invests in residential mortgage loans, today announced (a) loss for the three months ended June 30, 2006 of $18.6 million including accounting adjustments to increase reserves $16.4 million for expected losses on repurchased loans and to mark certain loans to the lower of cost or market.”

“In addition, during the second quarter of 2006, ECC Capital disposed of certain aged and repurchased inventory at a significant discount to par, which resulted in an overall loss on sale of loans.”

“Shabi Asghar, CEO of ECC Capital said, ‘Unfortunately, overall results were negatively impacted by an increase in repurchase claims related to whole loan sales made in prior periods. We are currently in the process of managing through these claims. We’ve resold a large portion of these repurchased loans, but at a significant discount to par.’”

The LA Times. “Reflecting the slowdown in the nation’s housing market, more U.S. banks reported weaker demand for mortgages in July, the Federal Reserve said Monday in a survey of senior loan officers.”

“As the housing sector cools from its torrid pace, the Fed found that about 60% of respondents saw weaker demand for mortgages, which was ‘a significantly larger net fraction than in the April survey,’ the report said.”

“The Fed also asked about the performance of so-called nontraditional mortgages, such as interest-only mortgages. ‘Nearly 30 percent of banks, on net, indicated that they expect the quality of the nontraditional residential mortgage products currently on their books will deteriorate somewhat over the next 12 months,’ the Fed survey said.”

Some housing reports from the central US. “Downtown Chicago condominium sales fell about 24 percent in the first six months of 2006 from a year earlier. Buyers signed contracts or reservations for 3,739 Chicago condominiums through June, a decline from 4,898 in the same period of 2005, a record year, according to Appraisal Research Counselors.”

“‘I think the market has slowed down a little bit, but we don’t think the market has stopped,’ said Ron DeVries, of the Chicago consulting firm. Buyers signed contracts or reservations for 1,496 units from April through June, compared with 2,243 contracts signed from January through March, the study said.”

“The study points toward a softening in investor demand. ‘Because there is this perception out there that the market is turning–and we would agree that the market has fallen off a little bit–there is less investor activity,’ he said. ‘The speculators are still out there. But as the market cools we would expect to see the speculators buying fewer of these units.’”

“This year has been ‘extremely active’ in announcements of new-construction condominiums, the report said. Projects with more than 4,200 new condos started marketing during the first half of 2006.”

“With the large amount of new development in the South Loop, unsold inventory levels in that area have risen far above other downtown submarkets, the report said.”

The Sun Times. “Appraisers are taking the heat in Illinois and nationwide for what some see as a bloating in real estate valuations. The charges include over-inflated appraisals, underestimates and criminal fraud, according to Daniel E. Bluthardt, director of the Illinois Division of Professional Regulation.”

“Under the current system, ‘there is a tremendous amount of due process that goes into the discipline system,’ he said. ‘These folks hire lawyers who know the system and it will delay the end result. They can go on for a couple years.’”

“The nature of complaints is changing, Bluthardt said. ‘We have almost exactly the same number of pending complaints,’ he said. ‘However, the current complaints are of a more serious nature than the complaints that were pending in prior years.’”

“‘What we have seen is a trend lately to outright fraud,’ he said. ‘Some is being conducted by people who are not licensed, but are using the names and license numbers of legitimate appraisers.’”

“Real estate appraisals that come in over the ‘true’ property value threaten home owners and home builders alike. As the housing market cools, for the first time in years, Quad City sales are down on a year-over-year basis with prices weakening in the upper brackets, folks are confronting a problem that was easily ignored during the real estate boom. The problem is inflated home appraisals.”

“Critics inside and outside the appraisal business have long warned that many appraisals are too high because generous appraisals help mortgage loan officers and brokers, who often select the property appraiser, complete more deals.”

“Those with flawed credit are particularly vulnerable, says Iowa Assistant Attorney General Patrick Madigan, who coordinates with law enforcement officials from other states on a variety of mortgage-related issues. Madigan believes that the deliberate overstating of appraisals is ‘widespread’ among loans to subprime borrowers.”

“Jacquie Doty of Freddie Mac predicts that inflated appraisals will lead to higher default rates in the coming years. For sure, the inflated appraisal concern in the Quad-Cities likely is lower than in places like Florida or California, where consumers had little choice but to play along with silly appraisals if they hoped to buy a home.”

From Nebraska. “It’s a buyer’s market for Omaha-area home shoppers, expert told KETV. About 6,000 homes are up for sale around the metro, and a number of real estate experts said that is among the largest pools of available real estate in decades.”

“It’s a phenomenon being seen across the country as row upon row of unsold homes flood the market. Real estate experts said the national numbers of available homes are the highest they’ve been in half a century, and Omaha isn’t immune.”

“‘In my 26 years, I’ve never seen this many homes for sale (in) this market,’ said Omaha real estate agent Van Deeb. Deeb points to slower sales and continuing new construction among the reasons for the swelling inventories. Statistics from the Omaha Area Board of Realtors show that 5,940 homes are on the market now in Omaha and of that, about 4,400 are pre-owned and about 1,500 are new.”

“Deeb said he doesn’ t, however, believe that Omaha’s housing bubble is bursting, unlike the markets in some other cities including Phoenix and Las Vegas.”

The realtors trade group has a report out. “Appreciation in existing single-family home prices cooled to single digit rates in most metropolitan areas during the second quarter, according to the latest survey by National Association of Realtors.”

“‘David Lereah, NAR’s chief economist, said a market transition is apparent. ‘With more sellers competing for the pool of buyers, the pressure on home prices has evaporated in most metro areas,’ he said. ‘After a full year of double-digit gains in the national median price, the timing is right for a cooling in the rate of growth, we are presently experiencing a soft landing in the housing sector.’”

“NAR President Thomas M. Stevens said the growth in inventory is more pronounced in the condo sector. ‘Buyers generally have more choices in the condo market, so prices in many areas are fairly flat,’ said Stevens. ‘Speculators have left the market, meaning most buyers in the market today are serious buyers who plan to stay in their homes as a long-term investment.’”"Twenty-six markets of the 151 surveyed experienced price declines from a year ago. And at least 59 markets finished the quarter down from their highs set sometime during the previous three quarters. In the quarter, overall condo prices actually fell 0.3 percent to $225,800.

The Associated Press. “The slowdown in the once-sizzling housing market is spreading, with 29 states reporting spring sales declines, led by big drops in former boom areas of Arizona, Florida and California. Nationally, sales were down 7 percent in the April-June quarter this year compared with the same period in 2005, the National Association of Realtors said.”

“The five biggest declines this spring compared to the April-June period of 2005 were Arizona, down 26.9 percent; Florida, down 26.7 percent; California, down 25.3 percent; Virginia, down 23.9 percent, and Nevada, down 23.5 percent.”

“Industrial towns losing jobs suffered the worst. In Danville, Ill., median home prices fell 11% in the second quarter to $65,200, cheapest in the country. Condominium prices in 14 markets, including overheated areas like Virginia Beach, San Diego, and Palm Bay, Fla., also declined. The reason: Speculators who thought they could flip the properties for a quick buck are trying to bail out now.”

One economist sees a hard landing. “Bearish real estate economist Christopher Thornberg, who says the Southern California housing market is a bubble beginning to pop, has left UCLA Anderson Forecast to strike out on his own.”

“Other market observers now agree that the market is cooling but are uncertain about whether it will result in a ’soft landing’ that won’t disrupt the economy. Thornberg said his expectations are growing more gloomy. ‘My guess is we’re going to have a hard landing,’ he said. ‘It’s ugly out there.’”

“There has been large-scale overbuilding of homes and condominiums nationwide, he said. ‘And here in Southern California we have had this massive price appreciation that is just not justifiable by any kind of standards of reasonable economics,’ he said.”

“With interest rates rising in recent months and sales declining, ‘the bubble is popping, just like a bubble is supposed to,’ he said.”

The Mail Tribune has this update from southern Oregon. “Just about everything turned out as builder Jim Green had anticipated in his first two attempts at selling high-end speculation houses in Ashland, the second selling even before the roof was on. But that was October 2004.”

“Today, Green’s third house, a 3,645-square-foot structure originally priced at $1.15 million early this year, is still on the block with a current price tag of $979,000. ‘It’s fairly obvious there are more properties than there have been in the past and that’s adding to the length of time on the market,’ Green said.”

“He wonders why there are so many more houses on the market compared to recent years and if the percentage of speculation homes is higher than usual. ‘Then you wonder,’ Green said, ‘how many people went in short-term for a quick buck?’”

“Even among more modest-priced housing, it’s taking more to induce sales. John and Jani Lockwood put their 1,351-square-foot home on the market last December with a $399,000 sticker price. They slashed the asking price to $359,000, hoping to hasten their move to Medford. But with 281 houses available through the MLS, the waiting game has gotten longer.”

“‘The market is glutted I’m afraid,’ said John Lockwood, a 13-year Ashland resident. ‘People are having to adjust out of last year into this year. Things got over-inflated and when the audience left everything was overpriced.’”

“Lockwood theorizes that even though the median price has climbed, the underlying market may be in retreat. ‘Probably 10 percent,’ Lockwood estimated.”

“The inventory of available houses throughout the county surpassed the 2,000 mark and is 180 percent ahead of where it was a year ago. East Medford saw a 32.9 percent decline in activity. Central Point had its biggest sales month since last September, but still trailed July 2005 sales by 27.1 percent. Eagle Point’s activity was barely half what it was in 2005.”

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