The Housing Bubble

The California press reacts to the latest housing numbers. “Homes sales in the Bay Area fell to their lowest level in a decade last month. Bay Area home sales fell more than 30 percent compared to a year ago, and the median price was up only 3.5 percent from a year ago and were down from a record in June, DataQuick reported.”

“The slowing appreciation could be bad news for people with creative financing who are counting on home prices to climb at a good clip. In cases where the borrower has skipped or deferred loan payments, creative loans can result in a borrower ending up with a larger loan balance than equity held in the home when housing prices flatten or drop.”

“‘It’s going to bite (those) people in the butt,’ said Sue Rainwater, a loan officer in San Ramon and past-president of the East Bay chapter of the California Association of Mortgage Brokers. ‘And we are going to see more foreclosures and short sales, and we are going to see more people who are unable to refinance because they are going to end up owing more than the home is valued.’”

“‘We’ve been saying for months that the whole market is slipping into a lull,’ said DataQuick spokesman Andrew LePage, adding: ‘There’s an awful lot of uncertainty over where the cycle ends.’”

“UC Berkeley real estate expert Kenneth Rosen is bearish. ‘I think it will be a weak market for the next 18 months and prices will go down 5 to 8 percent,’ he said.”

“The housing slowdown hasn’t missed the high-end of the market, luxury homes in the San Francisco Bay Area registered a small 0.3 percent gain in the second quarter from the first quarter, according to the First Republic Prestige Home Index.”

“‘Homes are being priced more aggressively to sell because buyers have more options,’ said Katherine August-deWilde, COO at First Republic.”

“Buyers are moving to the sidelines anticipating that prices will fall. ‘Over $2 million, our inventory is up and buyers aren’t in a terrible hurry,’ said Tara Rochlin in Orinda. ‘We’re seeing more sellers willing to negotiate and lower their prices.’”

The Daily Breeze. “July served as another reminder that the South Bay’s formerly high-flying housing market has hit the brakes. Most South Bay communities saw the number of home sales drop in July compared with a year earlier, with the greatest plunge, 54.3 percent, coming in the 90274 ZIP code of the Palos Verdes Peninsula, according to DataQuick.”

“Also in July, most of the South Bay saw either a drop or stagnant growth in year-over-year home appreciation, with the biggest dip, by 10.7 percent, coming again in the 90274 ZIP code. Lawndale’s median home price still fell 1.5 percent to $512,000. Hermosa Beach’s median price fell 5.4 percent to $970,000 while Redondo Beach’s median dipped 1.3 percent to $750,000.”

“‘What it means is that this market is correcting itself faster than what people expected,’ said Patrick Duffy, an analyst for Costa Mesa-based Hanley Wood Market Intelligence, which tracks the real estate industry.”

“‘I do feel like it has turned around, that it’s more of a buyer’s market,’ said Sandra Sanders, who oversees 500 real estate agents in the South Bay. ‘It’s going to be better for us to service our buyers now that we can show them more than one house, and there’s not the pressure that they have to buy the first house they see or else the price is going to go up. It’s going to be more of a joy for buyers to buy.’ And sellers will have to show flexibility in their price expectations, Sanders added.”

“In Torrance, business has dropped for mortgage processing, co-owner Warren Snyder said. Meanwhile, business is booming at Snyder’s other venture, American Credit Repair, because ‘people are up to their necks in debt,’ he said.”

“Snyder said he expects a steep decline in home prices over the next 12 months as some homeowners see their mortgage payments double when their variable-interest-rate loans adjust to a higher fixed rate. The slowdown, and decline in some cases, in home appreciation means that homeowners may not be able to solve their financial bind by simply selling their residence, Snyder said.”

“Duffy, the Hanley Wood analyst, agreed that homeowners are under increased financial pressure. ‘You have higher energy prices, higher gas prices, you have higher interest rates for adjustable mortgages and you have a market that’s flat,’ Duffy said. ‘So, I think that’s weighing very heavily on people.’”

And the new affordability index is out. “The percentage of first-time buyers in California able to afford a median-priced home stood at 23 percent in the second quarter of 2006, compared with 30 percent for the same period a year ago, according to a newly developed index released today by the CALIFORNIA ASSOCIATION OF REALTORS®.”

“In the more than two decades since CAR first conceived the HAI, the mortgage finance landscape has changed dramatically. The range of mortgage products available to buyers as well as underwriting criteria has changed. CAR developed the new index measuring affordability for first-time home buyers to better reflect the realities of today’s real estate market.”

Some housing bubble reports from Wall Street and Washington. “The pace of activity in building new homes fell in July to the lowest level in nearly two years, adding another piece of evidence indicating a slowing U.S. economy. Housing starts, tracking the nation’s rate of construction on new homes, fell 2.5% last month to 1.8 million on a seasonally adjusted annual basis, the Commerce Department said.”

“Meanwhile, building permits, an indicator that foreshadows future construction activity, plunged 6.5% to 1.75 million annual units for July. This was the sixth straight monthly decline and the largest drop seen since September 1999. Permits are at their lowest level since August 2002.”

“Economists generally agree that the housing market’s rolling over. There remains a debate about the magnitude of the decline and its impact of the overall economy. Economist Joel Naroff said it is no longer correct to describe the weakening housing sector as a slowdown. ‘Rout’ is now the proper word, he said.”

“‘Things seem to be getting worse. By the end of the year, we will likely be looking at starts off at least 20% and permits 25%. Is that a bubble bursting? You tell me,’ Naroff said.”

The Globe and Mail. “National Bank Financial economists don’t buy the idea that the housing market in the United States is coasting to a soft landing. And they aren’t the only ones pointing to the increasingly disturbing statistics on that market.”

“Clément Gignac, chief economist and and Eric Dubé, an economist, noted that U.S. housing starts are already down 20.7 per cent from their January, 2006 peak ‘and some leading indicators are suggesting more declines are to be expected in the months to come,’ they warned.”

“These indicators combined with the skyrocketing inventory of new homes for sales are more consistent with a hard landing, rather than a soft landing scenario for the U.S. real estate sector,” the economists said. ‘While baby boomers are likely to be forced to scale down their irrational exuberance about home prices appreciation, they should soon feel the need to restore their savings rate,’ they added.”

“David Rosenberg, economist at Merrill Lynch, referred to data from the National Association of Realtors. It showed that 26 metropolitan areas in the U.S. recorded year-over-year price declines in the second quarter. Moreover, he pointed out that ‘an increasing volume of homes are being put up for auction, one sign of an increasingly distressed market.’”

“Also this week, the Wall Street Journal published a chart showing the percentage of listed homes in various markets across the U.S. whose prices had been reduced as of Aug. 2. Boston topped the list; 46.4 per cent of the houses listed for sale in that area have had their prices cut. Sacramento, Orange County and San Diego, all in California were the next three on the list.”

“‘That we are seeing price quotes coming down in areas like Baltimore and Minneapolis is a sign that, contrary to popular opinion, the mania in residential real estate this cycle was more national than local in scope,’ Mr. Rosenberg said.”

“Residential loans that have raised eyebrows at the Federal Reserve and other regulators are increasing in popularity with lenders as a way to buoy profits in a shrinking market.”

“So-called payment-option adjustable-rate mortgages have become popular in the $10 trillion U.S. home-loan market as borrowers facing high prices try to lower early payments at the risk of later payment shocks.”

“‘Option ARMs are the best-executing product in the market right now, despite the market noise,’ said Brad Morrice, CEO at Irvine, California-based New Century Financial Corp. At Countrywide Financial, margins on sales of loans to the secondary market increased in the second quarter, ‘with pay-options playing a significant role,’ it said in its earnings report.”

“Still, pay-option loans may not always command high prices. Ratings companies last year started requiring issuers to spend more on credit enhancements on bonds backed by the loans. ‘We perceive a need for more credit enhancement that a lot of these deals are getting done with,’ given chances for payment shock, said Glenn Costello, at Fitch Ratings. Investors appear to have a ‘disconnect’ with the risks involved, he said.”

“The credit make-up of pay-option ARM borrowers is eroding, Costello said. While the average borrower had a credit score near 740 a few years ago it is now closer to 700, he said. Credit scores range from 300 to 850, worst to best. New Century’s Morrice conceded that mortgage loan defaults may rise.”

The Associated Press. “A member of the Federal Reserve’s policy-making arm said yesterday that inflation is gaining momentum, making it impossible to say whether the Fed is done raising interest rates.”

“Richard Fisher, president of the Federal Reserve Bank of Dallas, believes the previous rate hikes are beginning to tamp down inflation but that no one can tell when their full impact will hit. ‘If anybody tells you with absolute conviction that the Fed is done raising interest rates or with equal conviction that they have only paused..they are only guessing,’ Fisher said.”

The Wall Street Journal reports on a way to get home sales moving. “As a glutted real-estate market makes homes harder to sell, some sellers are trying a different approach: putting their house or condo on the auction block. In some areas along the East and West coasts and in Florida, the number of homes listed for sale has more than doubled from a year ago and prices are eroding. The market has chilled so fast that sellers have little idea how much their homes are now valued at or how to attract buyers. That creates a perfect opening for auctioneers.”

“Bill Loper put his house in Destin, Fla., on the market with a real-estate broker last year, asking about $510,000. With lots of other homes for sale nearby, ‘we were getting no lookers, no offers,’ Mr. Loper says. In March, with still no prospects, he put the home on the block in an auction. It sold it for $435,000. ‘I feel like we got the fair market value of the house on that day,’ he says.”

“Some online auction services say they also are benefiting from the weaker housing market. Real-estate agent Glenn Mayernik used RealtyBid to help one of his clients sell a three-bedroom home on Long Island, N.Y. The house was originally priced at $440,000 and then dropped to $365,000 on the conventional market, where it stayed for three months. The house finally sold for about $340,000 at the end of a 14-day online auction.”

The Christian Science Monitor looks at what makes a buyers market. “Real-estate reports all point to a slowdown after a long boom, but don’t assume that it’s suddenly a buyers market out there. Yet in most metro areas, the current cool-off doesn’t mean a surplus of bargain deals.”

“Experts have a warning for today’s home shoppers: It often takes a year or two for prices to adjust downward in a slowdown. So far, many areas appear to be in a ‘topping out’ phase more than a ‘bottoming out.’”

“So far, the market shift is visible more in the behavior of buyers and sellers than in the prices. ‘In the past, buyers were taking properties just as they were..because they were afraid of prices going up,’ says Linda Behnke, assistant manager at a (real estate) office near San Diego. ‘They were just happy to just get the house.’ Now, by contrast, buyers are ‘going to a store that’s fully stocked.’ It’s unusual to sell a home within 30 days near her office in Rancho Bernardo.”

“‘We’re trying to settle in to where prices should have been’ without some of the recent froth, Ms. Behnke says. That means it feels like a buyer’s market now, even though the median price, the middle price of all homes sold, hasn’t yet dipped.”

“Some builders are throwing in free granite countertops, while ordinary sellers are making sure their homes don’t need obvious repairs.”

Myrtle Beach Online reports on builder incentives in South Carolina. “Big builders, taking cues from the auto industry to sell their oversupply of homes, are offering big incentives. The deals are aimed at making cautious buyers during this real estate slowdown take the plunge and purchase.”

“‘[National builders] are seeing sales falling in general, seeing cancellation rates pick up, and they’re using the incentives to help drive sales and use it to sell inventory that they didn’t plan on having,’ said Todd Vencil, who covers eight publicly traded home builders.”

“Builders are not only competing with each other, but with ballooning inventory, said home builder analyst Jeremy Pinchot. ‘The result is that some builders who want to satisfy Wall Street with the best results possible, even in a declining housing market, are offering higher incentives to capture market share and drive volumes,’ Pinchot said.”

“Lennar Corp. is offering no payments until 2007 in its Brighton Woods single-family subdivision off S.C. 707 in Murrells Inlet. The company is also offering no closing costs. ‘The way the market is right now, everyone’s offering something. We’d make the payments until 2007. It’s working pretty good,’ said Donnie Long, Myrtle Beach division president. Long said he is expecting more spec homes in Brighton Woods in the next few months.”

“Once builders start offering these kind of large incentives, it can be a competitive cycle, Pinchot said. ‘Sometimes, the high cancellation rates for one builder are because another builder began offering better incentives on a similar product as the market deteriorated, then the buyer jumped ship. Eventually the original builder will have to increase incentives to lure buyers from the other builder,’ he said.”

“Builders aren’t saying how long they’ll be touting incentives, but analysts expect the enticements to stick around a while.’

The Belmont Citizen Herald reports from Massachusetts. “Despite the proliferation of ‘For Sale’ signs, Belmont realtors say there’s nothing wrong with the local housing market. ‘It’s not a crash, it’s a slowdown,’ said Peter Boyajian. He said there are a lot of reasons for this occurrence, not the least of which is a dramatic increase in inventory, ‘probably double to triple what we were seeing a year and a half ago.’”

“Boyajian said his company refuses to take overpriced listings or to work with sellers who expect an unreasonable price for their home. ‘You have to take into account what you’re selling,’ he said. ‘Marginal properties won’t sell. There’s no room in this market for junk, unless the price reflects it. It used to be that you could look at the past six months for price comparison, but by now that information is out of date.’”

“And if an offer is made? ‘Grab it and run,’ (realtor) Gerard Natoli advises. ‘If it’s a reasonable offer, take it. The competition is fierce and you might not get a better one.’”

The Patriot Ledger. “The median single-family home price on the South Shore dipped 1.4 percent to $360,000, the Massachusetts Association of Realtors reported yesterday. The condo sales volume fell 6.2 percent on the South Shore, compared with the statewide drop of 8.9 percent. The median condo price fell 3.1 percent to $255,000 on the South Shore.”

“The sluggishness of the market is reflected in rising inventories of unsold properties. There are now 63,433 residential properties for sale statewide, a 27 percent increase from the second quarter of 2005. ‘There’s a lot of inventory out there,’ said Mary O’Brien, manager of Century 21 in Hanover. ‘Buyers are looking at 20 to 30 properties and they’re in no hurry.’”

“Steve Fuller, an agent in Hanover, said many home-sellers have unrealistic expectations of a selling price in the current market. ‘They always have it in their head about the things that sold last year. They won’t listen to what we tell them about prices,’ Fuller said.”

“David Wluka, president of the Massachusetts Association of Realtors, agreed that convincing sellers of the new reality is currently agents’ toughest job. ‘It’s very hard work to do current market pricing, and then to convince sellers what current market pricing is,’ he said. ‘The buyers are out there, but because there’s more inventory out there, they’re still not in a hurry.’”

The Boston Globe. “Brockton-area banks are banding together to slow a rapid increase in foreclosure filings in their community. The initiative is a reaction to soaring foreclosure rates in Brockton and across Massachusetts in the wake of a housing boom during which many homeowners took out loans with low introductory payments to buy houses they could not, in the long run, afford.”

“Brockton homeowners received 298 foreclosure notices from mortgage lenders between January and June 30, a 148 percent increase in two years. That exceeds the 88 percent statewide increase over the two-year period. ‘We’re headed toward crisis,’ which could hit ‘in the next six months to a year,’ said Carol DeLorey, who heads an affordable home project.”

“A variety of mortgages are causing the financial difficulties, including adjustable rate, interest only, and no-down-payment loans; but all had something in common: easy financing with low initial payments that made it possible to buy a house as prices were climbing. Now that interest rates are going up, monthly payments are increasing, causing some homeowners to fall behind.”

An editorial at the Republican. “Remember the housing boom? It won’t be all that long before someone asks that question, without the slightest trace of irony in his voice. The housing boom is over. It’s over in Massachusetts and it’s over across much of the nation.”

“Despite what some would have had us believe, the housing boom of recent years could not have been sustained. There are those who argue, quite convincingly, in fact, that the Federal Reserve created the housing bubble after the collapse of the stock market early in 2000. The hyperextended rally on Wall Street, of course, had some cheering that the old rules had been replaced by a new paradigm. They hadn’t.”

“Now, that movie is playing again, this time with the deflating of the real estate bubble. It is possible that the wild ride that the housing market had been on will come to a tamer end. What’s indisputable is that the once white-hot real estate boom is no more. And that there is no next bubble that is evident on the horizon.”

The Sacramento bee has this update from California. “State Assembly candidate Kevin Jeffries of Riverside County could have bought a Sacramento-area condominium last month in anticipation of winning his election in November. The would-be legislator was smart to wait.”

“‘Some of the places we were looking at a month ago have already been discounted $10,000,’ said Jeffries. ‘We don’t want to lose equity overnight as soon as we start escrow on it.’”

“As buyers wait out a slumping market and sellers increasingly show a willingness to cut and run, Sacramento County saw California’s steepest year-over-year fall in median home prices during July, according to DataQuick. Median sales prices for new and resale homes and condominiums in Sacramento County fell 5 percent below July 2005 levels. For existing single-family homes, prices fell 3.2 percent below July 2005.”

“The drops weren’t limited to Sacramento County. Median sales prices for all homes and condos fell below the same time last year for a second straight month in Placer and Amador counties and for the first time in Sutter and Yolo counties.”

“‘It seems pretty clear to me that buyers in Sacramento are more or less on strike,’ said economist G.U. Krueger.”

“Others blamed sellers for clinging to unreasonable boom-era price expectations in a market where thousands of unsold homes are piling up. ‘If you don’t need to sell, get it off the market. If you do need to sell, don’t wait until winter because it’s going to get worse,’ said (broker) Mike Lyon. ‘I can see us dropping 5 or 10 percent if we don’t get this inventory down.’”

“July represented the second straight month that sales prices in Sacramento County fell below last year’s levels. Among urban areas, Sacramento joins San Diego and San Mateo counties and San Francisco with median home prices now below where they were a year ago.”

“July also saw the biggest drop yet in year-over-year sales of existing homes in El Dorado, Placer, Sacramento and Yolo counties. Sales were down 41 percent from July 2005. July marked the 16th straight month in the four counties that sales of existing homes were down from the same month a year earlier, according to DataQuick.”

“The newest statistics, gathered from county property records, again showed the mounting advantage to buyers in a market once ruled by sellers. The number of homes to choose from in El Dorado, Placer, Sacramento and Yolo counties climbed to a record 15,474, more than twice the inventory in July 2005.”

“Though sale prices of most existing homes are falling, most new-home builders have yet to join the price cutting, said industry consultant John Schleimer. Instead, they’re offering up to $120,000 in freebies, everything from landscaped backyards to financing incentives.”

“Buyers who once felt pressured to take any home they could afford before prices climbed higher now say they’re willing to wait. ‘In terms of time we don’t feel rushed any more,’ said buyer Mark Aizenberg.”

“Aizenberg, seeking a capital-area home in the $500,000 to $600,000 range, calls himself thankful that he didn’t buy during the past eight months. ‘We’re basically now not compromising on layouts and getting 800 square feet more house for the money,’ Aizenberg said. ‘I feel prices are going to come down significantly more.’”

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