The Housing Bubble

Some reports from the Arizona Republic. “Although there is a record number of homes on the market in the Southeast Valley, including about 4,000 in Chandler, realtors say the city is well positioned to hold its housing values. But while the city’s housing market has a lot going for it, it’s still a tough market for sellers in Chandler. The city faces the same problem as the rest of the Southeast Valley with too many sellers chasing too few buyers.”

“The number of homes for sale hit a record 17,550 in the Southeast Valley in July, according to the Arizona Regional MLS. Only two years ago, the last time the market was ‘normal,’ as opposed to overheated, there were about half that many.”

“Realtor Pamela Watson Brown, also of Chandler, said, ‘It definitely is a buyer’s market. But I have been through a lot of buyer’s markets where everything was a lot more affordable. Now everything is a lot more expensive.’”

“She called it a frustrating situation for sellers and listing agents. ‘I have had open houses where maybe I would get one person coming through,’ she said.”

“Even in the Ocotillo area, it’s not easy to sell a house. Realtor Carol Royse, who specializes in luxury homes, said this past week there were 133 homes priced at $450,000 to $600,000 in the Ocotillo area. ‘That’s just too many houses. As a Realtor, how do you pick out what you are going to show the buyer?’ she said.”"

“Homes built in the 1980s or earlier have been losing their values. And those built in the 1990s are not as popular as those built after then, real estate agents say.”

“Struggling Phoenix builder Turner-Dunn, which has stranded home buyers for a year or more after walking away from about 200 unfinished homes in Pinal County, has filed for Chapter 11 bankruptcy protection.”

“The bankruptcy is the latest in a string of problems for the small builder, which pocketed thousands of dollars in earnest money from each home buyer and left homes unfinished for months in Casa Grande and Maricopa. Unpaid subcontractors have claimed they’re owed millions of dollars and slapped liens on Turner-Dunn’s housing lots and in some cases on new homes that buyers moved into a few months ago.”

“The commitment means little to home buyers like Tony Tellez and his family, who’ve waited 18 months for their Maricopa home. ‘We’re jaded,’ Tellez said. ‘That entire neighborhood has a stigmata.’”

“Arizona State University’s plan to move the School of Journalism to downtown Phoenix has hit a major snag. Phoenix officials were forced to start looking for alternatives late last month after the developer, Al Iudicello, failed to give them a guaranteed maximum price for the construction of the ASU space.”

“‘He (Iudicello) also couldn’t commit to a definitive time frame on the condos and the office components,’ Deputy City Manager David Cavazos said.”

“City officials say that the combination of rising construction prices and the Valley’s cooling housing market has made it impossible for Iudicello to build the ASU space for a manageable price. In other words, it not only will cost more to construct the entire complex but the developer also is likely to lose needed revenue if he can’t sell the condominiums because of a glut of similar properties.”

The Washington Post has this report on exotic loans. “Despite regulators’ warnings that some popular types of mortgages are risky, lenders are still making them, and mortgage insurance companies have begun pleading with federal banking agencies to act quickly to restrict them. The loans under scrutiny include interest-only mortgages and ‘option’ mortgages, in which borrowers decide each month how much to repay.”

“The risk comes because eventually these loans ‘reset,’ meaning the payment is adjusted upward, sometimes as much as doubling,- to repay the full interest and principal owed.”

“‘We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans,’ Suzanne Hutchinson, of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ‘The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk.’”

“Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the FDIC.”

“Late last year, regulators began telling the industry that some of the new loan types put some buyers in jeopardy and lenders at risk of loan losses. But lenders continued making the loans at a fast clip.”

“In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did, about the same percentage as in May 2006, according to new data. These loans are even more common in the expensive Washington area, where about half of home borrowers used them in May 2006.”

“Regulators also told lenders last year that they were considering an advisory called a ‘guidance,’ setting new rules on these nontraditional loans. Regulators say the final version of the rules will be announced within a few months.”

“The rule change has few supporters in the lending industry, and much opposition. In written comments to regulators, the Mortgage Bankers Association called the proposed ruling ‘overly prescriptive’ and said heavier regulation might stifle product innovation.”

“But the mortgage insurers, which cover the losses when loans go bad, see big problems. Their trade group, in a plea to regulators delivered in a comment letter last month, alluded to its fear of widespread foreclosures if some of these new borrowers default on their loans. An increase in such problem properties could weaken the real estate market and drive down home values even for those who bought conservatively and diligently paid their mortgages.”

“Not all lenders agree with the big banks and industry trade groups. David Dowling, a loan officer in Tampa, asked regulators to ‘ignore the lobbying efforts of those in my industry about keeping lax lending standards.’”

“He said he has had a string of elderly clients come to him for help after lenders placed them in adjustable-rate, interest-only or option loans. He said these borrowers did not understand that they had placed themselves at risk of losing their homes. Dowling said he has met people who had owned their homes free and clear and who lost them to foreclosure after taking out these loans.”

Dozens of readers spoke up on the topic of what the real estate downturn means to the economy. “Northwest Airlines passes out tips for living on a tighter budget including dumpster diving and never shopping while hungry. A sign of things to come?”

“Although I’m a big proponent of making hard choices if you’re serious about your goals, I’m thinking even with home price reductions the availability index is still going to be heading south for quite a while. I was wondering if we might do a thread on signs of the downshifting economy.”

A reply, “A lot of stories about TJ and Costco being relatively empty lately (I’ve noticed my shopping cart doesn’t bump as many people in both lately, too!).”

Another said, “Not having any problem getting any work done….Just signed a contract to re-roof 10 houses yesterday…They are starting on Tuesday….Try that a year ago….”

One pointed to plant closings. “Boeing planning closure of C-17 plant in Long Beach, CA, and laying off 6,500 high paid employees. Raytheon in S. Cal also laid off few hundred employees last month. Looks like the defense industry is going to exaggerate the downturn in S.Cal RE, just like it did in the 1990s.”

A reply, “How many of those Boeing employees [and subcontractor employees] invested in second or third home because they had a ’steady’ job? How many flipped homes? How many bought homes recently and was dependent on two incomes?”

One answered, “If its anything like where I work (also Aerospace engineering), it is an amazing number. I have one coworker with 5 ‘investment’ properties. Another coworker with 4 investments. We then have a smattering of those who will be smacked down in various geographic ‘condo crazes.’”

“But what’s scary is the shop floor… There are people who earn a fraction of what I do and ‘own’ two or three homes where I dream of buying but feel I’m priced out (as I’ll only use a 30yr fixed rate, etc.). I’ve found out that almost all of them put 2 or 3 homes where I dream of buying. But what do they own? With them typically putting 0% down, only their appreciation and so much of that has be HELOC’d to death. 1 in 4 of my coworkers is in speculative real estate!”

Another saw the effect in Texas. “C-17—–Texas takes a small hit, too. ‘In Texas, Vought Aircraft is the largest subcontractor for the C-17. Texas has more than 5,600 workers whose jobs are directly tied to the C-17.’”

The Phoenix Business Journal. “A national economic index is on the decline as a slowed housing market in Phoenix and other major cities begins to take a toll on the overall economy. The housing market in Phoenix, Las Vegas and other major metro areas has slowed down substantially in recent quarters with houses sitting on the market longer and prices declining.”

“The real estate and construction sectors very important to the Valley and state economies, accounting for significant business investment and job growth in recent years.”

“Los Angeles County’s civilian labor force receded by 30,000 to 4,850,000 in July, according to the state Employment Development Department. The job market may dip into negative territory as housing continues to cool, said economist Christopher Thornberg.”

“Real estate prices will likely trend down slowly and be weak for a long time to come, he said. When the real estate market falters, construction and other industries take a hit. Consumers were spending like mad over the past couple years because of the wealth from their homes, Thornberg said.”

“The economy in recent years was driven by real estate and consumer spending. ‘There needs to be more balance,’ Thornberg said.”

The LA Times. “Overall, the construction sector, which includes residential building, shed 2,100 jobs in July. That’s up from an average monthly loss this year of 1,843. Commercial builders attribute the net decline in construction employment to layoffs in home building that involve workers who have not moved on to commercial projects because they lack the skills, are discouraged by longer commutes or are otherwise uninterested.”

The Fresno Bee has this update from California. “For-sale signs litter the landscape, but sellers are still reluctant to lower their prices to better compete, real estate agents say. Prices of existing houses are falling a minimum of 1% to 2% per month, much to the consternation of homeowners, and any would-be sellers are in a state of denial, agents say.”

“‘I have been through three cycles, and I have seen this kind of downturn before,’ said (realtor) Cliff Lloyd in Fresno. ‘The sellers chase the market for months and months instead of biting the bullet and reducing the price now.’”

“Lloyd said sellers would have more success if they lowered prices 5%. ‘Meanwhile, the market is depreciating..and they fall farther behind the competition,’ he said.”

“More than 3,700 existing houses are for sale in Fresno and Clovis, and that number does not include properties owners are trying to sell without an agent or the abundance of new homes offered by builders, some using enticing concessions.”

“With so much competition, sellers have to be aggressive when it comes to pricing. ‘If you list your property at what everyone else lists theirs, it won’t get shown,’ said (realtor) Ralph Strachan. Strachan said the missing 20% at the bottom of the market has the effect of artificially propping up the median price. ‘The statistics are skewed to the higher end of the market that doesn’t go away when interest rates go up,’ he said.”

“Agent Ken Neufeld said: ‘I’m telling clients that they have to be 10% less than what they thought prices should have been four months ago.’ He cited his daughter’s house as an example: It went on the market four months ago for $330,000, was lowered to $319,000 and then sold at $299,000.”

“‘We’re quickly becoming more of a buyers’ market than a sellers,’ said Michael Keller, an appraiser who estimates price reductions at a more gentle 1% per month. Real estate agents also say that many would-be buyers are waiting to see whether prices fall even more.”

“Declining values are something that new homeowners, and some agents, have not experienced. ‘We can’t say that just sellers have been in denial; a lot of agents have been in denial, too,’ said Joan Jolly, president of the Fresno Association of Realtors.”

The Herald Tribune reports from Florida. “Some home builders in this region “have not had any sales this year” and are working off unfinished backlogs to survive, said John King, president of the Homebuilders Association of Sarasota County. King said he is starting to see signs that ‘things are picking up’ and that sales incentives are working.”

“Lakewood Ranch-based Neal Communities has made sales in recent weeks and its namesake credits ‘new products with substantially reduced prices.’ Pat Neal, who owns enough land in the region to accommodate about 9,000 new houses, might be in a better position than some builders: He has land with a lower cost-basis that he can pass along to buyers without hurting his profits significantly.”

“The home construction industry had a ‘long run of overconfidence in which it could build anything and sell it,’ said Derrick Barwick, of Palmetto-based builder de Morgan Communities. Those days ‘are gone. It’s no longer the go-go market.’”

“Incentives to make sales abound, even among Southwest Florida’s big players. Lennar Homes is launching a four-day-long ‘26 Hour Sale’ this weekend featuring reduced prices in 13 neighborhoods in the region. The effort includes the lowest prices offered by the big Miami-based home builder so far this year, said Rob Allegra, president of the Sarasota/Manatee division.”

“Allegra said the current downturn is a six- to 12-month proposition. If he or his bosses thought it was more severe, Lennar would be ‘leaning the machine and laying off people, which we’re not.’”

The Daytona Beach News Journal. “Which causes Floridians more worry, rising gasoline prices or falling real estate prices? The man who measures the state’s consumer confidence every month says most Floridians aren’t that worried about gasoline costs. Uncertainty about real estate values is a bigger concern.”

“Chris McCarty, survey director at the University of Florida, predicted unease about real estate values will push down confidence levels for the next several months. We expect a fairly pronounced effect from the decline in the real estate market,’ McCarty said. As prices soften, there will be a ‘leveling or decline’ in home equity, a loss of construction jobs and slower sales of appliances and building products, he said.”

“Area homes marketed by Realtors sold in June for a median price of $221,300. While that was $12,600 higher than the median price of a year ago, it was $10,200 below May’s price level. ‘There’s clearly a lot more inventory on the market now, but sellers haven’t come to grips with that yet,’ McCarty said. He expects prices to fall farther in higher-priced coastal markets like Naples, Fort Lauderdale and Sarasota, but he was uncertain whether Daytona Beach will follow suit.”

“One local seller who recently bit the bullet and lowered his asking price is Bill Fletcher, an Ormond Beach resident who had been trying to sell a two-bedroom starter home for $147,900. After four months of waiting for a buyer, he’s lowered his price to $143,900.”

“‘My theory is that the market is very saturated right now, and interest rates are going up,’ Fletcher said. Fletcher bought the 50-year-old fixer-upper in March for $96,000, painted inside and out and replaced its roof and heating and air-conditioning system. Fletcher owns two other rental homes, but this is his first attempt to do a quick resale.”

“Mark Soskin, an economist at the University of Central Florida’s Daytona Beach campus, can understand why sellers are nervous about empty properties. Speculators trying to flip expensive new condominiums while juggling interest-only mortgages are perhaps at greatest risk, he said. ‘The foreclosures that are likely will dump a lot more of that product on the market,’ he said.”

The Tampa Tribune. “Trump Tower Tampa, the 52-story riverfront project trumpeted as downtown’s crowning luxury condominium building, is still at ground level and without construction financing, its project manager acknowledged Friday.”

“Spokesman David Hooks would not say where the financing stands and would not answer general questions. For days, construction appeared to have halted at the Ashley Drive site. Friday afternoon, three workers were on the property.”

“Since plans were announced January 2005 for a 600-foot, $220 million tower, which would be Tampa’s tallest, the project completion date has been moved several times, and developers parted ways with at least two contractors. Frank Dagostino, SimDag’s CEO, said 80 percent of the 192 units were spoken for. The majority of those buyers had contracts, he said, and had put down 20 percent nonrefundable deposits.”

“At least one buyer, Stephen Page, of Clearwater, said he’s unconcerned. ‘I’m looking forward to this going vertical,’ Page said, noting he paid just under $1 million for the two-bedroom condo he wants on the 34th floor. ‘Knowing the Trump people, I have a lot of confidence they’ll get it done.’”