The Housing Bubble

The Press Enterprise has this update from California. “Inland home builders accustomed to years of unfettered growth are reassessing their expansion plans, slowing construction, discarding options to buy new land and trying to unload lots they already own. They are also making a major push with sales incentives to eliminate their current backlog.”

“‘The downturn is here. I don’t know what kind of landing it is. But it is a downturn for sure,’ said Gary Teeters, owner of Coldwell Banker Kivett-Teeters, who has seen sales drop by 38 percent in the past year at his real-estate offices in Hemet, Beaumont, Yucaipa, Highland and Rancho Cucamonga.”

“Javier Valencia, a cabinet installer, said he was taken by surprise recently when his employer in Chino, laid him off. ‘I didn’t see it coming,’ Valencia said. The cabinet manufacturer let go 20 people, or about 10 percent of the company’s work force.”

“‘A lot of builders got very badly burned in the early 1990s when they were building on speculation and the market turned very rapidly and they were stuck with half-finished housing tracts. Now they are trying to be more sensitive to the whims of the market,’ said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.”

“Land brokers say that when home sales in the spring failed to rebound from the typical winter lull, builders started listing land for sale, something unheard of when land was quickly being converted to subdivisions.”

“‘Six months ago it was very difficult to find lots to purchase,’ said Craig Atkins, CEO of a land broker based in Irvine with offices in the Coachella Valley and Victorville. But he said now there are hundreds of lots for sale, discounted an average of 15 percent from last year’s prices.”

“Major public home builders have quietly begun to dismiss employees. Among the first to downsize in the Inland Empire was KB Home, which this year laid off 39 employees in the region, or about 10 percent of its staff. ‘Virtually all the big builders are cutting back head count. All are cutting costs and the easiest thing to cut unfortunately are people,’ said analyst Stephen East.”

“Fewer home sales means less business for mortgage, escrow and realty companies, many of which had opened or expanded during the boom years. Escrow companies have been paring staff and work hours, said Irene Genders, manager of Ontario and San Bernardino offices and the president of the California Escrow Association, an industry education organization.”

“During the peak home sales activity, escrow officers worked seven days a week and into the evening, she said. ‘We are getting weekends off now,’ she said. ‘Overtime will be nonexistent.’”

The LA Times. “Investors bailed out of stocks of mortgage companies catering to high-risk borrowers Friday, a day after an Irvine lender reported higher default rates. Some analysts say the selling wave could foreshadow more trouble for the industry.”

“H&R Block Inc., parent of Option One Mortgage Corp. in Irvine, said late Thursday that it would take a $102-million charge when it reports earnings next week. H&R said it was being forced to buy back Option One loans from big investors.”

“As home prices shot up in recent years, the industry turned to riskier loans to keep business going. With housing now slowing sharply, mortgage companies have been firing thousands of employees and putting themselves up for sale.”

“Option One caters to riskier borrowers who must pay higher interest rates and fees because their credit is flawed or their income and equity levels aren’t high enough. The company and other so-called sub-prime lenders transfer the risks by selling loans or mortgage-backed securities to other firms and investors. But if the loans quickly fall into default, or if they have been misrepresented to borrowers or investors, the originators can be forced to repurchase them.”

“Several sub-prime lenders in addition to Option One have reported having to repurchase higher quantities of loans, Friedman, Billings, Ramsey Group Inc. analyst Scott Valentin noted in a recent report.”

“H&R’s statement indicated problems of another kind: borrowers failing to make even the first few payments. In addition to ‘an increase in early-payment delinquencies,’ it said loan buyers were becoming less tolerant of problems and quicker to demand repayment when something goes amiss, noted analyst Kelly Flynn at financial services firm UBS.”

“Many mortgage lenders, including Countrywide Financial Corp. and Seattle-based Washington Mutual Inc., have announced cuts in recent months to save money. The sub-prime industry is also consolidating.”

What do you see in your housing market this weekend? Motivated sellers? Builder incentives? One from the topics thread, “Is Colorado Bucking the Trend? I found this in the Rocky Mountain News in a story on abysmal home sales across the nation: ‘A lot of the statistical information you’re going to see is coming from markets like Las Vegas and Phoenix that had such great run-ups and are now cooling off. The beauty of Denver is we never saw those kinds of run-ups. Denver has a tendency to be countercyclical to the rest of the country.’”

The Wall Street Journal. “Brian Michaud just picked up a little something for 40 percent off, a brand-new, two-bedroom condominium in Fish Creek, Wis., with a private elevator and harbor views. His method: He bought it at auction. Though the condo was new, its developer decided he wanted to sell quickly, so he put it on the block last month.”

“In Denver, auctioneer Janelle Karas has gotten so many inquiries from builders and developers worried about mounting inventories that she recently changed her business model to specialize in them. In Gadsden, Ala., auctioneer Craig King says he handled 12 auctions of new homes in 2005, and this year he’s on pace for about twice that number.”

“Wake up! Centex Homes just made the American Dream affordable again. Neighborhoods in Southern California.”

From New Jersey. “Builder Charles Panahi, like many builders and Realtors, sees the signs of a weakening market in North Jersey and beyond. Jeff Zilahy, an agent in Hoboken, says the numerous condo buildings sprouting up along the Gold Coast are adding to the supply of available dwellings and making it difficult to find enough buyers.”

“And Realtors are competing for fewer deals, he said. He left teaching in 2004, near the peak of the housing boom, to become a Realtor. ‘I got into real estate to make money,’ Zilahy said. ‘Now, ironically, I’m going back to teaching.’”

Several readers want to know what potential buyers think about the market today. “I’d like to see a discussion about what buyers ‘on the fence’ are really thinking right now. What exactly will it take to get them to buy a home?”

“For example, I’ve noticed that several people who post here are eager to buy a home but believe that prices are too high to justify a real estate purchase right now. Presumably, they would purchase a house if prices dropped sufficiently.”

“Just a few months ago I would have counted myself among that group. Falling prices would have been enough to change me from a Looker into a Buyer. Today, that’s no longer true. I’ve simply learned too much about the lax lending standards and shady dealings that drove the current run-up in housing prices. I would need to see both a return to normal prices as well as a more conservative lending environment in order to feel comfortable purchasing a home. Does anyone else feel the same way?”

A reply, “I think you are on target. I own (since 1973), but I have children that would like to buy houses and I advise agin it. I am paricularly stunned by DTI ratios needed to purchase at current prices. For many reasons, I expect housing prices to drop by 50% or more over many, many years. This drop can occur by a real drop in price or by inflation allowing wages to justify current pricing levels. Either way it occurs, there is no housing market until house price correction event happens. I have no interest in catching a falling knife.”

A reader from New York City, “In my area, I would start thinking about buying if the prices dropped half the distance they rose between 2001 and today. Obviously if they were tumbling down I would wait, but I think we are going to see a long slow drop.”

Another said, “Here’s the problem. We don’t know if there ARE many fencesitter fish, really. We don’t know true inventory, because all casual fisherman haven’t pulled in their lines and taken their houses off the market yet. In other words, the sediment has to settle.”

“In our case, we’ve decided we really LIKE renting. So we’ve created a value = $212.50 per hour on my husband’s and my time saved by not doing ANY of the HGTV nonsense. This equals approx. $1,000 a month in additional savings we would have to see on a home purchase over renting.”

“Therefore, for us to buy, we would have to be able to purchase the house (same we currently rent) for MUCH less than our rent. this is approximately 1999 pricing. This considers net tax gain, investment loss on our 20% downpayment over 30 years, insurance increase, maintenance, etc.”

“We were active bidders, never won a bid, and ended up in a nice rental instead. So current rental happiness plays a part here.”

And another, “If my house had sold, we’d definitely rent. The biggest message I’ve gotten from this blog is that Cash is King and keeping liquid is strength as we go forward into this thing. I’d also feel I was still buying at the top if I purchased within 1 year of the peak.”

“A quote from the Studs Terkel book ‘Hard Times’ about people’s memories of The Depression gave me the chills the other night. During a panic your home suddenly becomes worthless because nobody wants it.”

The Casa Grande Dispatch has this report from Arizona. “Residential real estate has become a lot more calm in the last year, experts say. That doesn’t mean homeowners are stuck with houses they can’t sell. It just means the time in which they can expect to sell their house will be longer, and they should expect to negotiate on an offer at less than their asking price.”

“‘Sales are off 27 percent for the whole Phoenix area, from here up to Cave Creek, but prices are up 10 percent,’ says Debbie Yost, broker in Casa Grande. ‘I would estimate that 40 percent of sales last year were investor sales.’”

“The bad news is that the number of homes on the market has mushroomed. There (is) a staggering 14-month supply of inventory. ‘Sellers are slow to react,’ Yost says. ‘They don’t want to hear that the house they bought last year isn’t worth as much as it was a few months ago. Some of them are angry.’”

“The glut of existing homes on the market this year doesn’t seem to have slowed construction of new homes. Rick Miller, planning and development director for the city of Casa Grande, says that as of mid-June, building permits for new homes were 358 ahead of the same time last year. That has Casa Grande on pace for a record 2,200 to 2,400 new home permits for 2006.”

“The number of homes for sale this year is in large measure due to the number of investor purchases made in the last couple of years. Many buyers who purchased houses a year or two ago are ready to turn a quick profit in 2006. And many resident homeowners are hoping to leverage recent price increases and trade up.”

“‘Unless you bought last year (when prices peaked), you’re probably in good shape,’ Yost says. ‘The people who are caught are the ones who pulled their equity out (with a home equity loan), or financed with an adjustable rate mortgage (ARM) or an interest-only loan. We tell people, ‘If you’re just selling your home to make a killing, you might as well take it off the market.’”

“What was a seller’s market last year has become a buyer’s market in 2006. ‘Because there’s so much inventory, there are some bargains out there,’ Yost says. ‘We’re back to a market where (in order to sell quickly) houses have to be clean, in good shape and at or under the appraised value. I don’t think this is going to be a short-term thing. People are going to have to get realistic about the price.’”

“‘The builders are major corporations, not small companies,’ Yost points out, adding that they wouldn’t keep building homes if they weren’t turning a profit. ‘A lot of the spec homes they’re selling are canceled sales where people bought last fall or winter. They’ve pocketed the (buyers’) earnest money, and they use their affiliated mortgage company that they make money on.’”

The Arizona Republic. “Realtor Adam Swaney, with R.J. Springer Homes in Maricopa County, discusses the Valley’s housing market and its future. Question: Are recent worries about the Valley’s cooling housing market justified? What is the current state of the market? Answer: The market is tempering right now, and there really is every indication that people are out there buying and selling homes. There’s a large amount of listings on the market.’”

“Q: What is a common question or concern you hear from clients? A: The most common question I get is regarding home values and whether the value will hold. My answer is: Typically, yes, it will. Typically, Phoenix has been known for having inexpensive housing, and it still exists, just a little farther out of town.’”

“Q: Do you have any other advice for buyers or sellers? A: ‘The good deals are still out there, they just aren’t in the center of town.’”

A housing report from the Tallahasse Democrat in Florida. “It’s almost becoming cliche, of late, to say ‘real estate market downturn.’ However, sales numbers for July released this week by the Florida Association of Realtors continues to confirm the slowdown in sales of existing homes. The glut of more than 2,600 single family homes listed for sale in Tallahassee has forced sellers to lower their prices, another trend exposed by the July numbers.”

“Local Realtors expect sellers to continue to drop their prices as the market continues to favor buyers.”

From the Ledger. “Maybe it was the heat. Home permits dropped sharply in July and Polk County’s jobless rate ticked upward. Local builders pulled 409 permits for new home construction last month, a drop of 56 percent from 932 permits in July 2005. It was the largest year-to-year percentage decrease since The Ledger began keeping records in 1994.”

“Polk also had 462 existing homes sold in July, down more than 24 percent from the previous year. Sales were down about 25 percent in both Lakeland and East Polk. Buyers are becoming more educated and, because of the economic market, they are waiting for prices to adjust, said Richard Castret, a Realtor (in) Lakeland.”

“‘Obviously when you look at general economic conditions, we’ve reached the peak of activity,’ Economist Gordon Kettle said.”

The News Press. “The sales price and number of homes sold in Lee County tanked in July. A house sold with the assistance of a Realtor dropped 8 percent to $264,600 from $287,500 a year ago, and the number of homes sold dropped 32 percent from 1,026 to 694.”

“Those buying homes now are often getting deep discounts. Real estate agent Christa Brooks’ client Roger Lolly closed recently on a Gulf-access canal-front condo in Cape Coral for $189,000, $60,000 less than its assessed value.”

“‘There are some sporadic sales, but boy, you have to have an outstanding piece of property. Never mind marketing; price is what talks right now,’ Brooks said.”

The St Petersburg Times. “Educators across Florida are scratching their heads over a new phenomenon: Far fewer students than expected are showing up for school. After more than a decade of rapid growth, school enrollment slowed last year. Educators thought the dip was an aberration, but early indications show enrollment growth has slowed again this year, even in traditionally high-growth areas of the state. Enrollment is down by thousands of students in Miami-Dade, Duval and Broward counties.”

“William Person, who oversees Hillsborough’s student enrollment, said it’s too soon to say exactly why the numbers are off, but he has some theories. ‘Generally speaking, the housing market has cooled,’ he said. ‘You’ve seen increases in property values in what was moderate housing,’ he said. ‘Now the average home is $250,000. For many families who move into this area, to purchase a single family home that is $200,000 to $250,000 is prohibitive.’”

“In nearby Palm Beach County, enrollment slowed to a crawl last year. The district expected 5,000 new students but ended up with only 400.”

The Sun Sentinel. “When it comes to South Florida’s pillow-soft housing market, certain real estate agents and industry professionals are fed up. The market’s downturn is pitting agents against the analysts, with the media caught in the middle.”

“From 2000 to 2005, agents made gobs of money when homes sold quickly. But now fewer homes are selling and prices are falling, causing agents to, well, shoot the messengers.”

“One reader this week criticized Mark Zandi, saying the chief economist for Economy.com ‘has been attacking real estate in every newspaper in the country.’”

“The same reader finds fault with Deerfield Beach housing analyst Jack McCabe. ‘The analysts … didn’t build all these buildings,’ McCabe said. ‘We did not finance the buildings. We did not speculate on the buildings. All we have done is count the numbers and report our findings.’”

“Bill Hardin, director of real estate programs at Florida International University in Miami, said few people complained about media coverage of the souped-up South Florida housing market during the past five years. ‘Losing hurts more than winning feels good,’ Hardin said. ‘In today’s market, people are feeling that they’re not getting the return they thought they would get, and that sense of loss is magnified.’”