The Housing Bubble

It’s Friday desk clearing time for this blogger. “For the past five years, the housing bulls have been trotting out one rational-sounding argument after another to explain why the boom made perfect economic sense. Forget about a crash, they assured homeowners. Expect a ’soft landing’ where your three-bedroom colonial in Larchmont or Larkspur not only holds onto its huge price gains, but keeps appreciating at a ‘normal’ rate of 6 percent or so into the sunset.”

“Americans wanted to believe, and they did. Now, the giant popping noise you’re hearing is the sound of yesterday’s myths exploding like balloons pumped up with too much hot air.”

The Reno Gazette Journal. “Sara Babylon tried having open houses as a way to sell her Spanish Springs home for almost three months. But instead of a flood of interest, she barely had a trickle. ‘The last open house, not one person came by and I was like OK, that’s it,’ said Babylon.”

“So Babylon decided to offer a free 1992 Jeep Wrangler with purchase at asking price. The home once listed at $336,000 is now down to $320,000. ‘We didn’t realize how slow (the housing market) is and how hard it is to get people out (to see our home),’ she said.”

From Arizona. “There were 8,955 homes listed for sale last month on the the Tucson MLS. That’s a 120.5 percent increase over last July’s 4,062 listings. ‘Sellers are making concessions nowadays, could be price reductions or paying closing costs. Buyers are taking their time choosing from all that inventory,’ Paul Olson, MLS president said. ‘We’ve gotten to the point now where the trend is pretty doggone obvious.’”

“Olson said that he recently sold a home and reduced the price by about $15,000. ‘Many of these homes are unoccupied. Estimates are as high as 50 percent. This will cause the resale market to react with the only incentive that is available and that is price. We could, and probably will, see a softening of prices in the resale market,’ said John Strobeck, a Tucson housing market analyst.”

From Idaho. “It looks like the Treasure Valley housing boom that meant higher prices and bidding wars for homes has subsided. Lindsay Marler is anxious to see her Nampa home sell, but so far no one is interested in buying. ‘I was a little worried but our realtor has told us the market has almost come to a standstill,’ said Lindsay Marler. So they decided to lower the price.”

From Kentucky. “To get into their new house early next year, Art and Amanda Goldman must sell their 10-year-old residence on Darlington Circle. But the outlook is uncertain. Priced at $394,500, the four-bedroom, five-bath house has been on the market four months, but only a few potential buyers have stopped by.”

“The national problem has ‘trickled down to us,’ said Bobbie Johnson, president of the Lexington Realtors group. ‘We are being touched by it, that’s for sure.’”

From Ohio. “A softer housing market has taken a particularly tough toll on Highland Heights, where Bob and Germaine Deacon have been trying to sell their four-bedroom colonial on Barkston Drive since last fall. Bob Deacon will consider selling for about $40,000 less than he was asking three months ago. ‘I really don’t have the time for this aggravation,’ said Deacon, who runs a Chrysler Jeep dealership nearby. ‘It’s tough enough to sell cars. Now I’ve got to sell a house.’”

The LA Daily News. “‘Once upon a time there was a housing market that allowed homeowners to print money. Those days are gone,’ said Joel Naroff of Naroff Economic Advisors.”

From Florida. ” Guess what? It’s payback time! With no shortage of shiny new Lincoln Navigators in the parking lot of the elementary school each morning here in paradise, it serves as a vivid reminder of what we are actually dealing with in terms of the potential fallout from the ‘artificial wealth effect.’”

“Big news locally comes from a Southwest Florida stalwart in the real estate development industry. WCI Community’s net income fell nearly 70 percent. That’s right… 70 percent, year over year from 2005. Maybe it’s not just me staring the ’sacred cow’ in the face. What does it all mean? The ‘cheap money’ from the Fed helped fuel the completely irrational housing boom .”

“Don’t look at me. That is essentially the message of a new Federal Reserve study arguing that productivity, not the central bank’s own policy of rock-bottom interest rates, was behind a five-year housing boom that now seems to be ending rather abruptly.”

“‘The housing boom has not been driven by unusually loose monetary policy,’ wrote John Fisher and Saad Quayyum. ‘We view our findings as supporting the view that the current housing boom may be a temporary transition toward an era with higher home ownership rates in which spending is temporarily higher than historical norms but will eventually return to such norms,’ the Chicago Fed study said.”

Bill Fleckenstein. “Alan Greenspan managed to make folks’ lives ultimately even worse, in attempting to bail out his equity bubble with a real-estate bubble. Let’s never forget who the un-indicted architect of this mess was: Alan Greenspan and the other merry pranksters at the Fed.”

“Of course, those folks who didn’t learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning, all of this was going to be wonderful until it wasn’t. That moment in time is upon us.”

The Denver Post has this update from Colorado. “Metro Denver also is seeing a slowdown in activity. New home sales fell 5.3 percent in the first half of the year, with a 16.7 percent decline in the second quarter compared with a year ago. Now it appears that a weak resale market is biting back at new-home sales. One of every five new-home contracts in metro Denver was canceled in the second quarter before the sale, typically because buyers had difficulty selling their current homes.”

“In Colorado right now there are 24,326 single family homes for sale. Last year at this time there were just under 18,800. In 2002 there were about 17,000 homes on the market. And on top of it all, Colorado has the highest foreclosure rate in the country.”

“Rebecca Zirkel’s job relocated nearly a year ago. She’s been trying to sell her home in the Hill Top/Mayfair neighborhood ever since. ‘Two years ago you’d get an offer in a week or two. Now you are lucky to get a showing in two weeks,’ Zirkel said.”

“The house directly across the street from Rebecca Zirkel’s is also on the market. There are a few more for sale signs down the block. That is a big part of the problem. ‘There are so many houses on the market now, there is so much more competition than there used to be two years ago,’ said Zirkel.”

“In July, home sales dropped to their lowest level since January 2004 as the number of unsold homes rose to a new record.”

The Rocky Mountain News. “The Denver-area housing market is experiencing far more weakness at the lower end of the market than at the upper end, in contrast to the cooling of luxury-home sales in many other parts of the country. Economist Michael Kone said the Denver market is ‘behaving a bit differently’ from the overall U.S. market.”

“‘The bottom end of the food chain is where there is a lot of pain,’ Kone said. ‘We’re looking at some real weakness in the lower end and pockets of strength in the upper end.’ In Adams County, for example, his analysis indicates that 20 percent to 25 percent of the lower priced homes on the market are in foreclosure.”

The Denver Post. “Timothy Lewis knew he could not save the house. So when the foreclosure notice came, he packed. Lewis, a 43-year-old craftsman who makes house doors for a living, can no longer afford the ranch house he bought with help from the Federal Housing Administration. ‘I just can’t make it. The mortgage is too big,’ he said. ‘It’s so far behind now, I’d need $15,000 to save it.’”

“A key factor in the state’s record-setting wave of foreclosures, critics say, is an FHA program that allows people to borrow more than their houses are worth with little or no money down. Nearly 6,000 FHA loans have wound up in foreclosure in Colorado in the past two years, and during that time the program allowed more than 25 percent of FHA buyers to use gifts as down payments.”

“Recent studies say HUD itself exacerbated the problem by sanctioning the gift program, which lets home sellers cover a required 3 percent down payment by routing it through a nonprofit organization. The seller then typically raises his price to recoup the money. An appraiser OKs a slightly inflated house value. Closing costs and FHA insurance premiums get folded into the home loan, and the buyer ends up borrowing more than the house is worth.”

“‘If it wasn’t FHA, it would be fraud,’ said John Head, a Denver lawyer who represents victims of mortgage-fraud schemes.”

“To buy the house he is losing, Lewis said he participated in a down-payment gift program to sell his previous home. The buyer’s agents ‘asked me to sell it for more,’ he said. He agreed to raise his price by $4,000 and donate an equal sum to a third party providing the buyer’s down payment for an FHA loan. The family ‘lost it a year later,’ Lewis said.”

“A small number of mortgage brokers account for a large number of Federal Housing Administration loan foreclosures in Colorado. All passed what federal officials call a rigorous application process for the right to originate federally insured loans.”

“Michael Richardson, said his business was effectively closed by December 2004, six months before the Denver field office terminated its right to approve FHA loans. ‘My company got infiltrated by a mortgage-fraud ring,’ he said. ‘In about seven months, they did enough damage to me to put me out of business.’”

“Richardson said he fired five employees in one day after discovering they had been recruited by a man who supplied false loan-application information, Social Security numbers, driver’s licenses, pay stubs, to qualify buyers for homes. ‘Anything that particular borrower was missing, they’d fix it,’ he said.”

“Richardson, who had been in the mortgage business for 26 years, said the people who ruined Primero and put many buyers in homes they could not afford have not yet been charged with any crime. ‘I’m out of business. Two-and-a-half years later, they’re still committing fraud every day,’ he said.”

Some housing bubble reports from California. “The foreshadowed bubble burst of the real estate market could soon be a reality with home sales dipping to their lowest level in 2 1/2 years nationwide. ‘The days of just putting a sign on the lawn and selling a house and getting four offers in two days for $10,000 over asking price are gone,’ said local seller, Don Weagle.”

“Realtor Diane White in Bakersfield said, ‘Sellers have in their head last year’s prices, and sellers really have to get last year out.’ She adds, ‘They really have to sell their home, today.’”

The Fresno Bee. “Existing home sales in Fresno County continued their downward slide in July, tumbling33.5% from a year previously. Values also were under pressure, with the median price of an existing house falling 5% to $297,840 from June. Competition among sellers is fierce in the Fresno area, so families wanting to move have to be realistic about pricing, agents say.”

“Sacramento-area home prices dipped lower last month, and sales tumbled by almost 45 percent from a year ago, according to a report. The region’s median home price dropped 2.4 percent to $378,590 in July, compared to the same month a year ago. West Sacramento had the area’s largest one-year drop at 16.5 percent, while home prices in Lincoln and Rocklin fell 13.8 percent and 12.5, respectively.”

“Santa Barbara County, from Santa Barbara to Santa Maria, had the largest one-year drop in home prices of about 17 percent.”

“Local foreclosure rates are skyrocketing as the real estate market continues to cool, and hundreds of Northern California families are suddenly seeing their homes going on the auction block.”

“At the Sacramento County Courthouse, it used to be that foreclosure auctions happened once a week. Now, several times a day homeowners are seeing their American dream turn into a nightmare. In Sacramento County during the second quarter of this year, the number of homes going into foreclosure stood at 1,866. That compares to 857 forclosures for the same time last year, an increase of 118 percent.”

“Mortgage experts said former owners are often in denial until someone shows up ordering them to move. So, does this mean the housing bubble has burst?”

The Ventura County Star. “Home inspector George Blair doesn’t need numbers to know that home sales have slowed. He sees it in his own business. ‘There are way fewer people looking for home inspectors now,’ he said. ‘It’s the slowest it’s ever been for this extended period of time.’ ‘Everybody is unbelievably slow right now,’ he said. ‘Houses are sitting on the market a really, really long time.’”

The LA Daily News. “The median price of a home sold last month in the San Fernando Valley was just 1.2 percent more than in July 2005, and 2.9 percent, or $18,000, lower than in the month before. Only 809 homes were sold this July, the fewest for that month since 1993, amid the last housing downturn.”

“‘Coming off of several years of very strong sellers’ markets, this looks shocking. And it is a dramatic turnaround, no doubt about it,’ said Steve White, president of the Southland Regional Association of Realtors.”

The Pasadena Star News. “Los Angeles County home sales fell more than 25 percent last month compared with a year ago. ‘I think we’re seeing roughly the same amount of buyers that were out there before but about twice as much inventory,’ said James Joseph, (broker) in Whittier. ‘Buyers have more to choose from and are taking longer to make up their minds. That’s what’s causing the decline in sales.’”

“Joseph’s advice to would-be sellers was simple. ‘Call your Realtor and adjust your price so your house is the best deal in the area,’ he said. ‘If you don’t want to do that, do everyone a favor and take your property off the market. Unless you are a socialist, you believe in the market..and you have to be a realist.’”

The Washington Times has this report. “Last month was the best month for buyers since 1997. All over the Washington area, buyers could negotiate from a position of strength when making an offer on a home. Sellers, many of whom didn’t want to believe the seller’s market was over, seem to be finally accepting this truth. And that’s causing sales prices to drop.”

“Compared to June, there were 700 more homes for sale and 600 fewer sales. Median sales prices in Arlington fell 15 percent from June to July, and July’s figures were down 9 percent compared to July 2005. Other jurisdictions saw prices fall by single digits last month.”

“In fact, sales prices fell in every Washington-area jurisdiction between June and July. The fact that median prices fell throughout the region in July does seem to indicate that the slower market is causing sellers to accept lower offers. Sellers were reluctant to do so earlier in the year. But now that homes regularly take two to three months to sell, home sellers seem to be willing to take a hit to make a deal.”

The Baltimore Sun. “After a couple of heady years of soaring demand and accelerated building of homes, sales are down, inventories are up and buyers are canceling new-home contracts at twice the rate of a year ago. So builders are enticing buyers by offering to throw in extras. Such packages haven’t been seen in more than a decade, experts say.”

“In the Baltimore area, cancellation rates jumped in Baltimore City and the five surrounding counties in the first half of the year compared with the first half of 2005. Chris Wood, a mortgage lender in Severna Park, said he has seen new-home contracts fall through because the buyers are having trouble selling their existing homes first.”

“‘The package of incentives builders are reporting to us now look similar to the early 1990s, when the market had a bona fide economic recession and housing took a heavy hit,’ said David Seiders, chief economist for the National Association of Home Builders. ‘The incentives clearly cannot stop a bona fide housing downswing, but they certainly can help limit it.’”

The Fairfax County Times. “According to the Northern Virginia Association of Realtors, housing sales slowed locally in July, dropping 39 percent from a year ago. As a result, the number of homes available in the market shot up 147 percent compared to this time last year.”

“A main factor for the slowing sales, according to one agent, is negative media attention about the housing market and the economy. ‘There is a psychological fear out there that things are going to slow down, and it’s stimulated by the media,’ said (realtor) Alica Yowell. But she said sellers are starting to get fed up and are no longer bowing to pressure to lower their asking prices.”

The Leesburg Today. “Veteran industry experts frequently point out that real estate prices are falling, but only from the over-inflated heights to which they had climbed in recent years. Most agreed there is a definite cooling of the super-heated Loudoun market.”

“Their advice to sellers? Don’t expect anywhere near the astronomical prices of a year or 18 months ago. You won’t get them. Instead, price your home realistically, while being prepared to lower it by $100,000 or more. And expect it to take longer to sell.”

“Jeanette Newton, director of the Dulles Area Association of Realtors, said..people should remember real estate is a long-term investment, and she has no patience with ‘all that trash about I lost money.’ ‘They never had it,’ she says forthrightly, claiming Loudoun is still a strong market.”

“Susan MacNamara Gonzalez, who specializes in helping homeowners prepare their home for sale, gets a close up look at sellers’ emotional distress. Some look as if they’ll yell or burst into tears, she said.”

“Attorney Eric Zimmerman in Leesburg, who does a lot of real estate closings, quipped ‘What real estate market? Is there one out there?’ He is seeing significantly fewer closings. ‘The market may be off 25 percent, but it’s 50 percent for us.’”

“Longtime Leesburg Realtor Ron Resnick, noted a vast difference in today’s sales numbers. ‘If you’re looking at a year ago, you’re going to be pretty disappointed,’ he said, cautioning that anyone who bought a year or so ago to flip it quickly for a huge profit should ‘expect a rude awakening.’”

“(Broker) Chuck Anderson is forthright on what he sees as one reason for the huge swings in the market. ‘Greed has run the whole market,’ he says. ‘You still will probably make more than you should.’”

“Purcellville Realtor Carl Fischer agrees that ‘greed drove the market to a point it could not succeed.’ ‘Buyers were buying properties they couldn’t really afford, caught up in the hope they could hold for a year and gain $100,000,’ he said, while sellers were not satisfied with better than average gains, unhappy they couldn’t get more.”

“‘Townhouses at present are a nightmare.’ The bloated upper end single-family home market means a drop of at least $100,000 is needed, he said.”

The New York Times reports on the collapsing housing bubble. “In California, the Northeast, South Florida and parts of the Southwest, deal sweeteners are playing an increasingly important role in supporting home prices. From large national home builders to individual homeowners, many sellers are offering thousands of dollars in perks, including straight cash, so they do not have to slice deeply into asking prices.”

“The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be.”

“Economist Mark Zandi estimated that incentives might now be equal to as much as 3 percent of the effective prices of houses across the country. But he and other economists said there was simply no way to know for certain. ‘We don’t have any house price indexes that get it right,’ said Todd Sinai, at the Wharton School. ‘Sellers are..not willing to lower prices enough in downturns; they don’t do it very quickly.’”

“Incentives are most common in the new-home market, where builders are under financial pressure to sell empty homes and have the ability to absorb the financial hit. Executives at the nation’s biggest builders say the giveaways can equal 3 percent to 8 percent of a home’s sale price. If builders instead reduced asking prices by that much, it would be enough to wipe out the year-over-year price gains in many markets.”

“‘If you were going to sell the house exactly the way it was before, you would be looking at a price decline,’ said David Seiders, chief economist at the National Association of Home Builders.”

“Consider a three-bedroom house not far from the Golden Gate Bridge, in San Rafael, Calif. Reluctant to cut the price from its current listing of $1.54 million, its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000, or an equal amount toward lease of a car.”

“‘Location and value will give the buyers a reason, this will give them a sense of urgency,’ said Tom Wessling, who owns the house and is being transferred to Atlanta. The Wesslings have cut the price of their house twice, by a total of $160,000, since they put it on the market in May. Mr. Wessling believes the home is now ‘competitively priced’ and hopes the perks, which also include a $10,000 reward for referring a qualified buyer, will be enough to clinch a deal.”

“On the west coast of Florida, builders are advertising incentives totaling $40,000, or 6.6 percent to 8 percent of the sales price, on homes that sell for $500,000 to $600,000, said John Dew, a real estate agent in Naples. Builders tend to choose discounts because they worry that reductions in the list price would send a clear signal that the market is in trouble.”

“‘They already sold the same product to the guy next door and if they reduce the price he is going to scream,’ Mr. Dew said. He added that many builders were also offering agents bonuses worth tens of thousands of dollars in finders’ fees for bringing in buyers.”

“Mr. Zandi said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. He predicted that the home-price data released by the Realtors association would show a year-over-year decline, relative to the same month a year earlier, before the end of this year. If so, that would be the first such drop since 1993. The Realtors have never reported a drop in the annual average of national home prices, a fact frequently cited by real estate analysts.”

“‘The reason the Realtors’ data has never showed an outright decline’ before, he said, ‘might be that they’re not measuring the effective price.’”

“In effect, the incentives have become a quiet way to cut the price of houses without further damaging the market. Sellers ‘don’t want to create this environment of fear in the market that prices are going down, so you should wait to buy,’ said Dean Baker, co-director of the Center for Economic Policy Research in Washington, who believes that prices will fall in coming years.”

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