The Housing Bubble

The Herald.net reports from Washington. “Reflecting national trends, home sales in Washington dropped in the second quarter, Washington State University reported. The statewide decline in sales of existing homes was 12.5 percent from the second quarter a year ago.”

“‘As more homes come on the market buyers have the opportunity to choose homes which match their needs, and individual homes may be selling for less than might have been received at the market peak,’ said Glenn Crellin, director of the Pullman-based center.”

“But only buyers who purchased homes recently and now must sell them are likely to be hurt, he said.”

“Among Washington’s largest counties, King County sales declined 13.7 percent, Pierce County slipped 10.7 percent, Snohomish County slid 11.8 percent, and Spokane County declined 11.9 percent.”

“The sharpest declines were seen in Island and Jefferson counties, each of which experienced nearly a 33 percent dip in sales. Only three counties, Yakima, Thurston and Grant, reported modest increases in the number of homes sold.”

The Columbian. “The number of houses, apartments, mobile homes and other housing units in Clark County continues to grow faster than in the rest of Washington and the nation, the Census Bureau reported.”

“Franklin County saw its housing stock shoot up from 18,681 units in July 2004 to 20,433 units in July 2005, a 9.4 percent increase that ranked fifth out of more than 3,000 counties across the U.S. No other Washington county ranked in the top 100 for percentage increase.”

“Since the 2000 Census, the number of houses, apartments and other housing units in Franklin County increased by 27 percent, or 47th among counties nationwide.”

“The inventory of houses for sale in Clark County has almost tripled in the past six months. There are now about 4,000 new and preowned homes on the market, the most in six years. Prices could start to soften as sellers are forced to lower prices to unload inventory.”

The Yakima Herald. “Yakima County’s home sales jumped 9.3 percent, according to data released last week by the Washington Center for Real Estate Research at Washington State University. Center director Glenn Crellin, who notes that Yakima missed out on the huge gains that other markets, such as Seattle, have seen in the last few years.”

“When interest rates were rock-bottom, there was a heavy stream of buyers for homes in the larger urban areas in areas like California and Florida, which caused double-digit price increases.”

“Many subdivisions are in the works, but most of those homes are purchased before being finished, said Pat Strosahl, owner of United Builders of Washington, who has several subdivisions under way statewide, including several in the Yakima Valley.”

“‘We don’t know what our demand is,’ broker Doug Rich said. ‘(We know) that there’s plenty of demand to meet the supply we do have. “We’re in the middle of it,’ he said. ‘I don’t think it’s going to end anytime soon.’”

“Strosahl said his homes have attracted out-of-towners looking for more house for their money, and baby boomers ready to retire. ‘My sense is that everybody is building as fast as they can,’ he said.”

The Boston Globe reports on the latest Warren Group numbers. “Sales of single-family homes in Massachusetts declined in July at the sharpest rate for a single month since 1995, and condominium sales dropped off at the fastest pace since 2003, according to a report released Tuesday by a firm that tracks real estate transactions.”

“Single-family home sales dropped nearly 27 percent and condo sales fell 23.5 percent, offering fresh evidence that the state’s housing slump isn’t about to end soon.”

“‘We’re not pressing the panic button yet, but we are watching the trend lines very closely,’ said Timothy Warren Jr., CEO of the Boston-based publisher of regional real estate and financial data.”

“The decline was the state’s biggest in percentage terms since a 29.6 percent drop in April 1995, according to the group, which began tracking sales data in the 1980s. Single-family home sales have now declined for seven straight months measured against comparable months a year earlier, and for 17 of the last 18 months dating to February 2005. Condo unit sales have fallen each month since April.”

“In New Hampshire, a dip in property sales is being felt in the state’s bankbook. State Revenue Commissioner Phil Blatsos told the Senate’s tax writing committee Tuesday that receipts from property sales so far this month are running about ten percent below what lawmakers forecast when they wrote the state budget last year.”

“He said the state could end the year with 13 to 21 million dollars less than it counted on.”

And from the New York Times. “In the calmer market that has taken hold, brokers for sellers and buyers say that negotiation is slowly creeping back into the equation. The two sides are beginning to talk, if not to each other, then through their brokers.”

“‘We’re certainly not where we were in the irrational, exuberant days,’ said JoAnne Kennedy, the COO of Coldwell Banker Hunt Kennedy. ‘Sellers have become more realistic, and buyers are finding they have more time to select, and they can make an offer that’s not asking price, and it will be considered.’”

“Because so many sellers in this changing Manhattan market have overpriced their apartments, Miller Samuel appraisal company president Jonathan Miller said, negotiability can be expected to continue to rise until listing prices fall in line with current market conditions.”

“So now, it would seem, is the time for all parties to brush up on the finer points of negotiating.”

“Ms. Kennedy said that sellers are often happy to get any bid, but a buyer who submits a very low offer and then engages a seller in several rounds of counteroffers risks losing the apartment.”

“Another lesson buyers must always keep in mind is who is working for whom. Buyers often forget that while a seller’s broker may be their intermediary in a deal, the broker’s first allegiance is to the seller. Renee LePore, an agent ain New Rochelle, N.Y., recalled a recent negotiation in which she knew both how high a buyer was willing to go and how low the seller would go, and she used that knowledge to the seller’s advantage.”

“The buyer offered $380,000 on a house listed at $435,000, but told Ms. LePore that $400,000 was her limit. The seller rejected the bid and told Ms. LePore she could go as low as $390,000. When the buyer offered $390,000, Ms. LePore urged her to go higher, even though she knew the $390,000 would have been accepted. The house eventually sold for $400,000. ‘I was working for the sellers, and my job was to get the best price,’ Ms. LePore said.”

“Buyers, especially first-timers, often feel manipulated and pressured by the negotiating process. And why not? Brokers, after all, are salespeople. ‘The one with the owner was a much more positive experience because we were dealing face to face with them,’ Alex Cass said. ‘But in the other one, we felt like our broker and the seller’s broker were playing off one another just to get us to pay more.’”

“Jessica Krnc was even more suspicious. ‘I think they set us up,’ she said.”

“Author Neil J. Binder said buyers have every right to be wary. ‘A seller’s broker’s duty is to get the best price for the seller, and if I’m a buyer’s broker, my duty is to deliver a fair deal,’ he said. ‘Brokers have an agenda, and it’s different from buyers.’”

“A buyer with a long work history, significant liquid assets and the ability to put down more than the typical 10 or 20 percent deposit should play up these attributes, said Deanna Kory, a senior vice president of the Corcoran Group. ‘Especially in a co-op, sellers can be willing to take less money if the person has better qualifications and is sure to pass the board,’ she said.”

“In a new apartment building, developers are increasingly willing to pay transfer taxes, said Dawn Tsien, at Coldwell Banker Hunt Kennedy. On a $1 million apartment, city and state transfer taxes, plus the state mansion tax (which applies to all units $1 million and higher), come to about $28,000 and would traditionally be paid by the buyers.”

“Max Bazerman, a Harvard Business School professor and an author, warned against using brokers as advisers at all. ‘The broker’s most important goal is to close the deal, and that’s not necessarily your goal as a buyer or seller because you care more about the quality of the deal,’ he said.”

“Since brokers are naturally biased, he added, they also should never be told exactly how high or how low you’ll go because they might use that information against you.”

“Bazerman had one final piece of advice. ‘You should always be able to walk away from a deal,’ he said. ‘Fall in love with three houses, not just one, because if you have to have it, you’re going to pay for it.’”

Reuters reports on the comparison of international housing bubbles. “For anxious investors wondering whether the U.S. economy risks being seriously wounded by a housing market downturn, Australia’s experience of the past three years holds a potentially valuable lesson.”

“If anything, the Australian boom was far bigger than that in the U.S., with average house prices doubling between 1996 and 2003. Four interest rate increases over 2002 and 2003 took the wind out of housing, but the resulting slowdown was remarkably modest by historical standards.”

“Mike Buchanan and Michael Vaknin, economists at Goldman Sachs..looking at the experience of Australia and the U.K., concluded that, while they were relevant for the U.S., the wrong lessons were being learned. They argued that a downturn in housing would have a far greater impact on U.S. consumption than in Australia since American consumers had largely used equity withdrawn from their homes to fund spending.”

“While Australians had withdrawn just as much equity as Americans, equal to about 10 percent of disposable income, they spent far less of it.”

“Just as importantly, Australia’s housing market peaked right as the country began to benefit from the global commodity boom. What it gets for its exports compared with what it pays for imports, has climbed over 30 percent since 2002. That was the biggest rise in half a century and has percolated right through the economy.”

“Company profits have surged. Since more than half of adult Australians own shares, that has been a boon for personal wealth and cushioned the blow from a flat housing market.”

“Clearly the same could not be said of the United States, the world’s largest net consumer of energy. There, a string of budget deficits had lifted the U.S. national debt to $8.5 trillion, 13 times Australia’s annual economic output.”

“‘The global commodity boom came just as the housing market was tipping over and saved Australia from a likely recession,’ said Su-Lin Ong, senior economist at RBC Capital Markets. ‘What will save the U.S. as their housing market turns? Consumers are in debt up to their eyeballs and fiscal policy is maxed out,’ she warned.”

The International Herald Tribune. “Red-hot property stocks in Germany might be headed for the deep freeze. A rush of private equity funds into German real estate, adds up to a bubble, according to the money manager Heiko Bienek. ‘The more a wave is rising, the more dramatically it will break,’ said Biene.’The first U.S. private equity funds who were the main drivers of the property boom in Germany are looking for the exit.’”

“‘The recent real estate spending spree of private equity investors was based on too much fantasy,’ said Robert Mazzuoli, an analyst with Landesbank-Rheinland-Pfalz in Mainz, Germany. ‘Now it seems companies like Fortress want to cash out as fast as possible.’”

“Share prices have begun to decline. Colonia shares are down 35 percent from their high spot for the past year, Adler is 43 percent lower and Franconofurt is 41 percent lower. ‘The big hype is over,’ said Matthias Born of Allianz’s Deutscher Investment Trust in Frankfurt.”

Some housing bubble news from Wall Street. “Toll Brothers Inc. early Tuesday cut its 2006 profit outlook again, blaming a glut of homes on the market and a decline in buyer confidence. The company is scaling back its land position as demand for new homes continues to deteriorate.”

“CEO Robert Toll said, ‘builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are canceling contracts for homes already being built.’”

“Meanwhile, buyers are waiting on the sidelines to see how the market shakes out, the CEO added. ‘The continuing malaise in the housing market, we believe, is the result of an oversupply of inventory and a decline in confidence,’ Toll said.”

“The company cut its land holdings by 2.2 percent in the third quarter from the previous three months, to 82,800 lots. The company wrote off $21.1 million in so-called ‘options,’ or contracts to buy land at pre-set prices, according to the report.”

From Dow Jones Newswires. “Watch out, California. Your housing market is about to get smacked. The Southern California housing market is ‘in the early stages of a tsunami wave of cancellations and price cuts,’ predicts JMP analyst Alex Barron. Home builders with big exposure to this market could potentially take a hit that’s even bigger than the beating many took in Florida.”

“‘Demand has hit a wall’ in Southern California as skyrocketing prices over of the past few years have made homes less affordable, said Barron. Builders have responded by offering higher incentives and steep price cuts, and by allowing buyers to put down shockingly small deposits, of less than 1%, on homes, he said.”

“‘Deposits below 1% are a very ominous sign as it signals to us that demand is very weak and homes have now become very unaffordable,’ said Barron.”

“‘One of the more troublesome developments we saw in Southern California was that most builders were spec building entire communities at a time, with very few sales to support this level of construction,’ said Barron. ‘In one instance, we saw a community of about 100 homes where there were over 20 complete unsold homes, and yet the builder was already building the next 100 homes in the community next door with five sales.’”

“‘It appears to us in Florida, the one left holding the bag was the flipper or speculator,’ said Barron. ‘In Southern California, it appears to us the one left holding the bag is the homebuilder.’”

The Associated Press. “Some mortgage lenders are feeling the heat from Wall Street to tighten their lending standards and cut their exposure to riskier loans. The force at work is the increasing demand from investment banks for lenders to buy back the loans due to borrowers’ failure to make their first few payments on those loans.”

“At subprime lender Fremont General, the amount of home loans repurchased and re-priced reached $238.4 million in the second quarter, up from $67.7 million in the year-ago quarter. The Santa Monica, Calif., company said it had cut back on ‘certain higher loan-to-value products and lower FICO’ loans during the second quarter to reduce early payment defaults and thereby loan repurchases from investors.”

And Paul Muolo at National Mortgage News. “Investors are starting to eye the default management services market. With an anticipated boom in defaults, some buyers are hoping to get in on the ground floor. Two former Goldman Sachs executives have raised $50 million to buy DFM companies.”

“Super-jumbo lenders take note: Life-style guru (and former inmate) Martha Stewart is selling her home in Westport, Conn. The asking price is $8.9 million. The home has been on the market two months. So far, there have been no bids.”

“Two decent-sized subprime lenders, both based in Southern California, are expected to announce layoffs in the next week or so.”

Some housing reports from around the US. “Home sellers in Portland, Maine, are having to cut their asking prices by about 10% because buyers won’t pay more than they did last year, says agent Michael Flaherty. The inventory of homes on the market keeps rising. Realtors are also seeing a slight uptick in the number of foreclosures and distressed sales by owners who are ’struggling to sell their home for (the value of) their mortgage,’ he says.”

The New York Post. “Manhattanites are starting to feel the pinch from rising interest rates and fears about the economy. The Manhattan real estate market has always been a law unto itself, but increasingly apartments are sitting on the market, unsold for months. The number of units on the market is at its highest in more than 10 years, according to Miller Samuel. The inventory in Manhattan rose from 3,922 units at the end of 2004 to 7,640 in the second quarter.”

“‘We have a classic stand-off between buyers and sellers in New York,’ said CEO Jonathan Miller. ‘Housing inventory is at the highest level since the late 1980s and demand has cooled off.’”

From MSN Money. “Margot Ray, a radio-ad saleswoman in Stockton, Calif., put her five-bedroom, three-bath house on the market in February for $480,000. There it sat, along with about 3,000 other homes for sale. She dropped the price to $465,000 in April. Nada. ‘We’d have an open house and maybe one or two people would come by. I had an open house where nobody came,’ Ray says.”

“The price is down to $427,000 and, at a recent open house where Ray raffled football tickets and a spa day, 15 groups of potential buyers showed up on a 107-degree day. But it still hasn’t sold.”

“Ray has a new house with its own mortgage. ‘Am I to the point of desperation? Not yet,’ she says, ‘but I want this house sold.’”

“‘We have sellers not only competing with an onslaught of resale houses on the market, but we also have home sellers competing with new developments, where they are offering tens of thousands of dollars in incentives, or even making mortgage payments, buying down loans, putting in swimming pools or paying points,’ says Raylene Miller, Margo Ray’s agent.”

“Real-estate agents are giving stunned sellers crash courses in marketing. In the toughest markets, including the Florida cities, Detroit, Atlanta, Dallas, Stockton, Sacramento and San Diego, incentive is the name of the game. One Florida agent offered a Mercedes-Benz with a house sale. Others dangle vacations or gift cards with thousands of dollars in gasoline.”

“People who bought recently and have little equity are in the most difficult situation, says Vince Rizzo, broker for HungryAgents.com. ‘There are so many people now that borrowed 95% or 100%, and with the market slipping back a little, and you have to pay 6% commission, you are going to have to bring money to the table,’ Rizzo says.”

“Short sales have become increasingly common. Sue Hunt, of Consumer Credit Counseling Service of Greater Atlanta, says that her nonprofit is currently advising ‘50 or so’ clients to short-sell their homes to try to avoid foreclosure.”

“Margot Murphy, a Portland, Ore., real estate agent, trains brokers in short sales through her company. It’s not easy to negotiate a short sale in which the bank must swallow a loss. Mortgage bankers are often slow to recognize how slow their markets have become, Murphy says.”

“Another factor in the stalled market is home sellers’ difficulty in letting go of last year’s prices. ‘If you tell someone in San Diego that they will only get 12% (profit) for their property, they look at you like it’s a disaster,’ says San Diego agent Steve Faulkner. ‘They are so conditioned to a 25% increase that they just think that’s what they should get.’”

“Faulkner says speculators are being blamed for running up San Diego prices. Now, with home sales down by 24%, many investors want out. ‘If you own 10 properties and your interest rate is going up, it’s better to just sell the home and get out of it,’ Faulkner says.”

“A recent search of Craigslist.org’s San Diego’s real-estate listings for ‘motivated seller’ yielded 77 listings. ‘Must sell’ turned up 68. Another 21 listings appeared in a search for ’short sale.’ Some of those desperate-sounding sellers are probably agents like him, Faulkner says.”

The Orlando realtors have the July numbers out. “The relative slowdown in housing sales predicted by economic experts has begun to show itself in Orlando, where the 2006 year-to-date tally has dropped slightly below that of the red-hot record year of 2005. The number of homes sold in July of 2006 did drop by 26.5 percent when compared to July of 2005.”

“‘After the tremendous two years we had previously,’ says Orlando Regional Realtor Association President Beverly Pindling, ‘it would be nearly impossible for 2006 to not exhibit a slip.’ She says the proliferation of condo conversions on the market is absorbing housing demand”

“The increase in inventory continued its upward trend in July, with 6,862 homes listed in the MLS contributing to a total of 19,827 homes on the market. ‘We expect to see the MLS inventory to increase or hold steady,’ observes Pindling.”

The Orlando Sentinel. “At the recent, slower sales pace, the inventory ballooned to the equivalent of 9.38 months’ worth of homes on the market — a figure not seen in more than nine years. The last time a backlog topped that was in February 1997.”

“More homes plus slower sales equals mounting frustration for many home sellers. Ron Resch has been trying to sell his Lake County home for the past four months but conceded Monday that he is making no headway. ‘I haven’t had a single showing,’ said Resch, who recently changed sales agents and cut his asking price from $425,000 to $395,000.”

“In Seminole County, Susan and Bryan Teabout are trying to sell their Heathrow Woods home for about $1.3 million so they can relocate to Virginia Beach, Va. Although they have attracted only one offer since putting the home on the market in May, they are not ready to start worrying. ‘There are a lot of homes out there, but not at this price range,’ Susan Teabout said. ‘We’re in good shape, but obviously we would like to sell our house.’”

“Even sellers in great locations are having to cut their ambitious asking prices, often multiple times, yet many of them are reluctant to do so, said George Stringer, a sales associate with in Orlando.”

“‘We’re having a time with sellers,’ Stringer said. Even those homes in upscale areas such as Bay Hill in southwest Orange County, where Stringer lives, are not immune. Stringer noted that one Bay Hill house recently sold for $1.2 million, just above the asking price of $1.19 million, a rarity for a listing in today’s weaker market.”

“‘But the full story on that property is that the price was reduced, numerous times,’ Stringer said, and it still took nearly two years to sell. The original asking price was $1.45 million when the home was first listed, in November 2004.”

“‘The location is great,’ Stringer said, but even so, the five-bedroom, four-bath golf-course home, built in 1978, is expected to be extensively remodeled to bring it up to date. ‘Age is a question for a lot of these homes,’ which were built in the 1970s and ’80s, Stringer said.”

“Developers at a shopping center conference in Orlando said Monday they expect more retail growth statewide, particularly in Central Florida. ‘There are some clouds in the sky, but I don’t think the sky is falling,’ said Duane Stiller, during a panel discussion on the Florida market.”

“Still, some developers sounded a note of caution. Seth Layton said he’s concerned that rising interest rates, declining housing values, burgeoning credit-card debt and high gas prices may curb consumer spending. ‘I did not drink any of the Kool-Aid back stage,’ joked Layton. ‘The question is,’ he added, ‘how long are people going to spend more than they make?’”

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