The Housing Bubble

Some housing reports from California. “Though prices have stabilized in recent months, the Southland remains one of the nation’s most expensive housing markets. Still, there are pockets where home values have merely crept up instead of rocketed ahead at warp speed. You just have to know where to look.”

“Head into the San Gabriel Valley, and the best bargains are in Azusa, said Marty Rodriguez, a veteran agent in Glendora. There, buyers still can find tiny homes for $365,000 to $405,000. ‘If you like flat-roof houses and some wild colors, you can find an old fixer in 700 square feet,’ Rodriguez said.”

“Foreclosure activity in California in the second quarter jumped by 67 percent over the year-earlier period, according to figures released Monday. ‘Year over year at the end of the second quarter of 2006, foreclosure activity in California has increased more than 67 percent,’ says Alexis McGee.”

“‘Both Las Vegas and Phoenix were impacted by speculators,’ says Ms. McGee, and more than 25 percent of new home sales in both markets were going to out of state investors who had no intention of ever occupying the homes they purchased. Now those who came late to the party find themselves squeezed by rising interest rates and resulting negative cash flows, she says.”

“‘The speculators are definitely on the run, and walking away from properties they cannot afford to hold and cannot sell at a profit,’ says Ms. McGee. ‘A more severe situation, however, is in California,’ she says. ‘A primary reason is the overwhelming use of so-called creative mortgage products people were sold in order to buy ever more expensive homes.’”

“More than $1 trillion of these exotic mortgages were due to reset in the next 18 months, she says, ‘and payment shock to such homeowners would be severe if not financially fatal.’”

The LA Daily News. “Last week started on a sour note and ended the same way. First DataQuick released its sales and price report for July that showed weakness in the residential market for the eighth consecutive month. On Thursday, the California Association of Realtors reported that affordability for first-time buyers is at record low levels in most of the state.”

“And on Friday, Boeing Co. told its workers in Long Beach that production on the C-17 military cargo airplane is ending. Is this going to be an economic train wreck like the one that happened in the early 1990s?”

“No, concludes economist Christopher Thornberg in a somewhat surprising assessment since he’s been one of the biggest bears about the California real estate market.”

“The market’s in a free-fall as far as sales go. Prices have a longer event horizon, though. ‘The housing bubble pops (and) you don’t get a rapid decline in prices,’ Thornberg said. Here’s Thornberg’s take. ‘I think there is..potential to have a mild retraction in prices, nothing dramatic. Housing prices are going to go down. The key is they are going to go down slowly, not rapidly.’”

“When the last boom cycle ended, the median price fell 36.7 percent from a high of $245,000 in November 1989 to a low of $155,000. He expects sales to retreat to the level of 1993 or 1994 and price declines totaling 10 percent or more.”

“It’s not a collapse, though. ‘It had to run out of steam. All this appreciation was a function of irrational exuberance,’ he said.”

Forbes has this update on the UK. “UK asking prices for houses fell in August for the first time this year as the recent ‘mini-boom’ in house prices in the south-east of the country ran out of steam, a leading property website said. In its monthly survey, Rightmove said average asking prices fell by 1.6 pct to 214,040 stg in August. This is the biggest fall since November 2004 and the first time prices have fallen since December 2005.”

“Given the Bank of England’s interest rate rise earlier this month and expectations for further hikes to come, the record average asking price set in July is unlikely to be surpassed again this year, Rightmove said. ‘Prices have passed their peak for 2006,’ said Rightmove commercial director Miles Shipside.”

“‘The record price levels seen so far this year were driven by the south of the country. With that market cooling, and the signals from the Bank of England that interest rates may move up again, sellers may have to reduce their price expectations,’ he said.”

“Shipside added that with prices now cooling off, the housing market will ‘require no further intervention from the Bank of England’, as lower prices help buyer affordability but further interest rate rises will damage it again. ‘It’s a careful balance, but with more realism from sellers, we could be entering a period of stability again,’ he said.”

“Commenting on this month’s rate rise, Shipside added, ‘Activity in the property market virtually stopped dead after two successive rate rises in 2004 and took a year to recover. Prices are now cooling off and require no further intervention from the Bank.’”

The Sydney Morning Herald reports from Australia. “The stagnant property market has taken a toll on a favourite Australian pastime: converting bricks and mortar into cash. The boom in equity withdrawn from housing and used to boost superannuation, bolster share portfolios and buy cars, overseas holidays and plasma televisions has petered out, a report by the Reserve Bank says.”

“‘The strong growth in housing equity withdrawal over 2001 to 2003 contributed to strong growth in consumption relative to income (and a corresponding decline in the saving rate) over that period … [but] these trends have subsequently abated,’ a bank discussion paper published yesterday said.”

“Now many families who bought housing near the property market’s 2003 peak are facing negative equity.”

“The federal Opposition seized on revelations in the Herald yesterday that properties in St Clair, near Penrith, sold at the weekend for 42 per cent less than the previous sale in 2003.”

“‘Stretched beyond the limit by three interest rate rises, they are being forced to sell,” labor spokesman, Kim Carr, said. ‘Plummeting property prices mean that hard-working families are confronting the financial catastrophe of negative equity.’”

“Such a prospect may not be confined to Sydney’s outer suburbs, Tom Western, a valuer and NSW president of the Australian Property Institute, said yesterday. ‘Anecdotal evidence suggests the market is slowing down in areas closer to the city, and not just in investment units,’ Mr Western said. ‘Over the past six weeks, the second-home buyer market in the inner and middle rings has shown signs of price weakness.’”

“The spring market would be testing. ‘There are owners in the inner and middle ring suburbs in negative territory now. But they have been withdrawing their properties from the market. People have thought they can get their money back, but after the marketing campaign it is obvious the market has hit them between the eyes,’ he said.”

“Robert Mellor, of BIS Shrapnel, said Sydney house prices might fall a further 5 per cent this financial year because of higher interest rates, pushing more households into negative equity. The Reserve Bank study showed the bulk of housing equity withdrawal was undertaken by older households.”

Some reports from Wall Street and Washington. “Toll Brothers Inc., which earlier this month said its quarterly new-home orders slipped nearly 50% on a slumping housing market, may again reduce its 2006 profit forecast when it reports earnings Tuesday. Analysts will also be looking for details on write-downs Toll said it plans to take for land options it is walking away from.”

“The National Association of Realtors is expected to report existing-home sales Wednesday morning, and economists will be watching median prices to see if they fall from the previous year. That would be the first year-over-year decline in over a decade and would damage buyer sentiment, according to Banc of America Securities analyst Daniel Oppenheim.”

“Also, the analyst sees the supply of existing homes for sale to rise from 6.8 months in June to more than seven months in July. ‘This excess supply will continue to put pressure on home prices,’ Oppenheim said.”

“The Commerce Department on Thursday is slated to release sales of new homes for July, and economists are predicting a 3% decline. Read more on the outlook for July home sales. Oppenheim noted home builders ‘likely limited the decline by increasing incentives or reducing prices.’”

“Lowe’s Cos. shares lost as much as 5.5% Monday after second-quarter earnings that came in below analysts’ average forecast and cut its profit forecast for the full year. ‘Like Home Depot, Lowe’s is experiencing the deceleration in sales that typically follows a slowdown in housing turnover,’ Goldman Sachs analyst Matthew Fassler, who has Lowe’s rated at neutral, wrote in a research note.”

“Delisting is a scary prospect for shareholders. Once stocks are off the major exchanges, they’re usually much less liquid. Fannie Mae, which finances one of every five home loans in the United States, has been out of compliance with New York Stock Exchange listing standards since 2004, the last time it filed a quarterly earnings report. Yet NYSE hasn’t delisted the stock.”

“NYSE deciding it was too big to remove. The Exchange sent a proposal to the Securities and Exchange Commission saying that in very rare circumstances, delisting a company would be ’significantly contrary to the national interest and the interests of public investors, notwithstanding a delay in an annual report filing that extended beyond one year.’ In January, the SEC agreed. Fannie Mae did not immediately return a call seeking comment.”

“While the possibility of delisting is a threat that makes companies take listing requirements seriously, ‘the perception is that if you’re big enough, like so many things, you are more or less in the drivers’ seat,’ said Maureen O’Hara, a professor at Cornell University.”

“Loans requiring no income check have been around for many years, with the initial intention of offering convenience, time savings and financial privacy to self-employed borrowers with high credit quality and large down payments.”

“The desire to simplify and quicken the loan-origination process has led more lenders to extend stated-income loans to borrowers with lower credit scores, higher loan-to-value and debt-to-income ratios than traditionally allowed.”

“‘The industry is trading risk for convenience,’ says Larry Goldstone, at Thornburg Mortgage Inc. in Santa Fe, N.M. ‘That may be mistaken at some point in the future.’”

“In the case of Martha Aikens, when she went to the broker to refinance her home, she had a monthly income of about $1,400, including $800 from Social Security and $600 from working part-time. However, her loan application, prepared by the broker, said she made $7,225 a month, according to the complaint filed on May 16, 2005, against the broker in Cook County, Ill.”

“A month later, through the broker, Aikens received a loan of $149,000 with a monthly tab of roughly $1,029, almost three-quarters of her entire monthly income. She was never able to make a single payment, says Daniel Lindsey, a supervisory attorney. Her lender, Countrywide, filed a foreclosure action against her in January 2004.”

“Standard & Poor’s warned last year that it was observing disturbing numbers of minimum-payment loans being extended to borrowers with sub-par credit profiles. To head off potential problems, the largest mortgage originator in the United States, Countrywide Home Loans, has begun sending out letters to thousands of borrowers who have been making only the minimum payments on the company’s popular PayOption adjustable-rate mortgages.”

“The letters explain that ‘this is an early message to alert you that, based on your current payment trends and potential future interest rate changes, the monthly payment you will be required to pay may increase significantly.’”

“According to the Census Bureau report released Monday, Florida topped the list of the states adding the highest number of housing units, gaining 247,000 homes over the period. Following Florida were California (182,000), Texas (179,000), Georgia (98,000) and Arizona (87,000).”

A pair of reports from Arizona. “For the first time in a long time, it’s a buyer’s market in Tucson. Realtors say they haven’t seen this many homes on the market in years, and that means prime real estate for first time buyers in the area.”

“Those in the market have the pick of the litter these days in Tucson. ‘Tucson has too much inventory, but that’s great for the buyer, so I would consider this a buyer’s market certainly,’ says Realtor Andrew Moya.”

“‘For sale’ signs are hanging outside about 9,000 homes in Tucson right now alone. Moya says, ‘With 9,000 homes, the seller has to realize, and is realizing, the first-time buyer is an integral part of this market.’”

“‘The incentives are really big right now with a lot of the home builders,’ says Moya.”

The Arizona Daily Sun. “Flagstaff’s overheated housing market has finally cooled off. Home sales inside the city fell from 152 units in July 2005 to just 84 last month, a drop of 44 percent. For the first seven months of 2006 vs. 2005, total sales are off 24 percent.”

“Houses are also taking longer to sell. That’s probably because there are more houses to choose from: 794 were listed for sale inside the city last month vs. 254 total listings in July last year.”

“Realtor Ann Heitland said the increase in the number of single-family homes on the market is a sure sign of the transition from a seller’s market to a buyer’s market. Heitland said the city has almost 10 months’ worth of homes for sale locally, three times last year’s number at this time.”

“But some Realtors refuse to call it a buyer’s market, pointing to other economic indicators that have not been triggered. Steve Brighton isn’t ready to call Flagstaff a buyer’s market. Even though there has been decline in the number of homes sold, the price continues to climb.”

“Michael Kerski, the city’s community investment director said sellers are still getting nearly what they ask for, another indicator that suggests Flagstaff has not become a haven for home buyers, yet. Using NAAR statistics, the average price of all homes sold this year in Flagstaff is between 97 percent and 98 percent of the average list price.”

The Herald Tribune has this update from Florida. “Back in December 2004, when David Holland paid $315,700 for a new home in an east Venice Centex subdivision, the granite-and-tile beauty looked like an easy flip. But as Centex’s sales slowed down, his property turned into a flop.”

“Last week, Holland cut his losses. He put his house up for an ‘absolute auction,’ meaning no minimum and no reserve. He walked away with $255,000, a painful reminder that real properties, like stocks, do not always go up.”

“‘I knew I would probably lose money,’ said Holland. ‘But I thought it would sell for at least $300,000. The problem is there aren’t any buyers. I think the people coming to auctions today know that, and they are looking for just incredible deals.’ That’s exactly what they are looking for.”

“Auction specialists find their phones ringing almost non-stop from would-be sellers desperate for some action. ‘With the current state of the real estate market, sellers see the attractiveness of knowing they will sell it on a given day versus keeping it on the market for months and sometimes years and incurring costs such as taxes, insurance on the home, upkeep and marketing,’ said Erica Brown, a spokeswoman for the auctioneers’ association.”

“Auctioneer Daniel DeCaro found himself turning away so much real estate auction action this summer that he formed a new division to handle it. DeCaro has formed a new division handling homes as low as $800,000. ‘We are getting five to six calls a day to sell homes in that price range,’ DeCaro said. ‘It is just unbelievable.’”

“Others taking the auction route have not been so fortunate. David Douthitt’s canal-front home in east Bradenton near Interstate 75, stalled in the midst of renovation with a stop-work order, drew one lonely bid of $100,000 on Saturday, far below the seller’s reserve.”

“Douthitt had previously been successful in having Herron’s firm unload his other waterfront investment home, in Ellenton. With the north Manatee County home, ‘It was a pretty substantial loss for me, but I needed to sell it,’ Douthitt said.”

“He could not believe the lack of interest in his Bradenton property. It is situated on a deep-water canal in the midst of $500,000-plus homes. ‘Today’s was absolutely stupid, $100,000,’ Douthitt said. ‘You can’t even buy a vacant lot for $100,000.’”

“As is the case with the Holland’s Venetian Falls Centex home, the seller at the downtown Marquee never moved in, and now wants out. The 29 units were originally priced at $800,000 and up. As at Venetian Falls, the developer still has units to sell, making life tougher for those trying for a resale.”

“‘That auction there, if somebody buys it at the bottom line, they are stealing it,’ Herron said. ‘The man is going to lose a tremendous amount of money.’”

“Herron’s reserve auction in downtown Sarasota drew only one bidder. The auctioneer was able to start the bidding with a written offer for $500,000. The man in the room stopped bidding at $650,000, leaving the person on the phone with the final bid of $660,000.”

“That price didn’t meet the seller’s reserve, Herron announced. But within an hour of the auction, the bidder came back with a slightly bigger offer and the seller accepted it. The seller, Herron said, ‘wasn’t happy about it but he signed it.’”

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