The Housing Bubble

Kelly Bennett writes at the Voiceofsandiego.org. “Julie Haas financed her home with an option adjustable-rate mortgage that allowed her to pay back only the interest on the loan for two years. She watched some of her neighbors’ comparable units skyrocket. But recently she’s watched them depreciate right back to her starting price.”

“‘I’m back to ground zero,’ she said. ‘Ironically, I’m back to my worst-case scenario.’ Her mortgage is due to reset in April. Her monthly payments will double. And Haas fears her condo will have depreciated even more by then. ‘I’m very scared that I’m just going to be stuck here,’ she said.”

“Her parents, real estate agent and mortgage lenders all said, ‘Things will be so much better in three years.’ Now that they’re not, Haas doesn’t think anyone but herself should carry the responsibility of her choice. ‘It’s my job to make the decision, right?’ she said. ‘I don’t make the decision based on what people tell me. That’d be incredibly stupid.’”

“‘I see it coming on like crazy now,’ said Paul Smith at California Home Loans Professionals of the number of borrowers who will have to struggle through loan resets. ‘People don’t live that way anymore. They buy their cars with their equity; they pay their bills with their equity.’”

“Those who can afford only interest-only or negative-amortization payments, and who rely on the ‘promise’ of home appreciation to help them when the reset comes. Those are the people Craig Bramlett, president of Cal Pacific Mortgage and others worry about, and there aren’t just a few of them.”

“‘From what we hear, there’s a lot of people in that boat,’ Bramlett said. ‘They’ve chosen to do those loans, and they can’t afford them. It could be disastrous,’ he said. ‘They’re not getting good financial advice. They’re talking to a lender who’s never been through a downturn’”

“Peter Dennehy, of the Sullivan Group, agreed with Haas that there is greater transience in the current generation of homebuyers. And that contributed a lot to the acceleration of the market, he said. ‘Real estate is age and stage-related,’ he said. ‘And I’m not a big fan of people buying things they can’t afford. That probably pushed the market farther than it should have gone.’”

The Orange County Register. “Auctioneer Kevin Jepsen stepped into a ring of bidders outside the Orange County Courthouse on a recent Friday. Fifteen minutes later, three homes were taken from owners who had fallen behind on their payments.”

“It’s a ritual that’s become more frequent in Orange County as home sales decline and price gains no longer provide enough cushion to bail out financially distressed homeowners. A year ago, business was slow for Bessie Blazejewski, a real estate agent specializing in selling repossessed homes. Now, she said, ‘I’m twice as busy as last year.’”

“That increase translates into greater opportunities for bargain hunters because lenders are cutting prices, she said. ‘We usually try to price it below market value,’ the agent said. ‘We want to get rid of it quick.’”

Some housing bubble reports from Wall Street and Washington. “The economic outlook remains so uncertain that the Federal Reserve is very likely to hold rates steady again at the next policy meeting in September, according to participants at the Fed’s annual retreat. Economists said they were struck by the lack of certainty in their private conversations with central bankers.”

“‘Anyone who says they are dead certain is either lying to you or to themselves,’ said economist Lewis Alexander.”

“There is widespread agreement that the Fed finds itself in something of a box. The outlook for the housing market is a key part of the puzzle. The weaker market is expected to reduce the ability of consumers to spend, but the magnitude is uncertain. ‘The very rapid deterioration in housing is the most obvious question mark,’ Alexander said.”

The Gallop Poll. “These most recent data simply confirm the widely held perception that housing activity has slowed significantly in 2006. The August UBS/Gallup Index of Investor Optimism poll shows investors are worried that the real estate markets are continuing to deteriorate. Fifty-six percent of investors rate current nationwide real estate market conditions as ‘only fair’ (44%) or ‘poor’ (12%). This represents a significant worsening of attitudes compared with June and July, when 46% of investors held this view.”

“About 70 percent of investors believe that conditions in the real estate market are getting worse, up from 63 percent in June, the survey also found. Investor sentiment toward investing in real estate assets nationwide has also fallen. ‘The drop in confidence in the real estate market reflects the economic data for that sector and suggests that investors are feeling the pinch in their local markets,’ said Anne Briglia, strategist for UBS.”

From Danielle DiMartino. “Investors are being bombarded with arguments for and against the homebuilding sector. ‘Homebuilders have been living off high margins, high volumes and solid pricing,’ said Mark Kiesel, a portfolio manager at bond behemoth Pimco said. ‘But that’s all changing due to declining affordability, higher mortgage rates and rising inventories.’”

“Though prices are still up by a hair, 0.3 percent, buyers know it’s only a matter of months before they start to fall. Even for those willing to buy into this environment, the lenders still have to be willing participants. ‘Lending to consumers for housing will become more restrictive as mortgage lenders pull back,’ Mr. Kiesel added.”

“The implications for margins, and, more important, cash flow, are plain. ‘Right now margins are falling off a cliff, because builders have to offer such huge incentives,’ Mr. Kiesel said. ‘That’s where you get to the cash flow drain.’”

“Completed homes sitting in current inventory don’t pose near as big a threat to builders as those in midconstruction. ‘That’s why they’re doing everything they can to liquidate their existing inventories to raise cash,’ Mr. Kiesel said.”

The Daily Reporter Herald from Colorado. “Home builders are feeling the pinch from the slowdown in sales across Northern Colorado. Sales for new homes have plummeted 20 percent, said broker Steve Kawulok.”

“This puts builders with new homes on the market in a crunch. Earlier this month, one builder told the Berthoud Board of Trustees that he is losing money every day on his unsold homes at Gateway Park off Colorado 56 and County Road 17. ‘Sitting on all seven homes for two years has nearly bankrupted me,’ Eddie Mirick said.”

The Denver Post. “Businesses that serve the homebuilding industry are starting to feel the ripple effect of a slumping housing market. Architect Layne Bennett in Westminster has seen his revenue drop about 25 percent in the past year. The company’s three largest clients are production builders Ryland Homes, Continental Homes and Advocate Homes.”

“‘We’ve just gradually gotten less and less work,’ Bennett said. ‘They’re not selling their houses, so they’re not building more.’ The slowdown has forced Bennett to cut his advertising budget from about $100,000 last year to $40,000 this year. ‘I just don’t have the money to do it,’ he said.”

“Suppliers to the homebuilders also are seeing a dip in business. Steve Walters of Bel Shower Door Corp. said, ‘More than one major builder has brought in its subcontractors and asked the question of what we can all do to lower expenses,’ he said. ‘With the market slowing, the prices of homes have to come down. They have to lower expenses because their margins aren’t huge.’”

“Jim McFarland, a foreman for STK Framing at a KB Home development at Stapleton, said he has noticed there isn’t as much work available to the trades as there was a year ago. ‘It was hard to get help a year ago,’ he said. ‘Now, there are more people running around looking for work.’”

The New York Post has this update from the Big Apple. “Not only is the inventory of available housing in New York at a 10-year high, prices for properties are sliding in the opposite direction, as the sellers’ market has all but faded into the sunset.”

“‘Buyers have been telling us it is now fairly common for the brokers to tell them that the price is negotiable even before they ask,’ said Jonathan Miller of Miller Samuel appraisal firm. ‘That’s not something we have seen until very recently.’”

“With the glut of new construction flooding the market with condominiums and co-ops, developers and their publicists are upping the ante to help move inventory, not to mention formerly unheard of negotiability.”

“Things are getting so competitive throughout the city that one condo development at 55 Berry in Williamsburg is reportedly throwing in the towel and switching from sales to rentals after posting numerous price reductions. ‘Sellers who were unable to move their properties in the spring may be feeling more pressure to be realistic as inventory builds, despite the easing off of mortgage rates,’ Miller added.”

“The price slashing isn’t just affecting the average buyer; even the high-end market is feeling the heat. NBC anchor Stone Phillips had to drop the price of his co-op just off Central Park West over $1 million to $4.45 million before he was able to unload it earlier this month. He first listed it last fall for $5.5 million.”

“Britney Spears had to wait even longer before someone snapped up her NoLita apartment, which she listed for $5.5 million in 2004. The 4-level pad eventually went to contract a few weeks ago for about $4.45 million. And Star Jones has just taken her Yorkville triplex apartment off the market after it sat for over a year and a half, with a last asking price of $2.25 million, down over $300,000 from her original price.”

The New York Sun. “Investment crazes come and go, invariably bloodying the eager buyers who are 100% convinced they’ve latched on to a sure-fire winner. The latest is the housing boom, which some Wall Street professionals insist has already evolved into a housing bust.”

“The chief investment strategist of Raymond James Financial, Jeffrey Saut, is warning clients that the ongoing collapse of residential real estate has far-reaching implications for both the economy and the stock market. The associate editor of a monthly investment letter, Michael Larson, tells me the market is on the verge of realizing the third phase of the housing bust, which he believes has very negative implications for stock prices.”

“The first two were the stiff declines in homebuilders and suppliers of home products. Next on the list, Larson says, are the financial institutions, notably those banks and sub-prime lenders that provided the financing for super high loans on inflated properties.”

“Larson notes that a lot of people on Wall Street seem to think the likely end of higher interest rates in the current credit-tightening cycle is a significant plus for the economy as a whole since it should ensure a soft landing. Our housing bear disagrees. On what basis, he asks, is it rational to expect a soft landing in a period that has produced the biggest real estate bubble in history?”

“Private investor Neil Weisman..thinks it will take the housing industry at least five to seven years to work off its excess inventories, rather than the one to two years many Wall Streeters are projecting.”

The Hawaii Tribune Herald has this update. “A glut of houses for sale combined with rising interest rates have turned a once-booming market in East Hawaii into something else for sellers. The situation is most noticeable in places like Hawaiian Paradise Park, where numerous speculative houses line the red cinder roads, waiting for buyers. In a one-mile stretch on 15th Avenue, five ‘For Sale’ signs can be seen along their respective properties.”

“After Susan Rosario put her family’s two-house lot on the market ‘a few months’ ago, they’ve had with just two visits and no offers. ‘I’ll just wait,’ she said. ‘If you can find me a buyer, go right ahead.’”

“‘There’s a lot more supply and a lot less demand. Economics 101,’ said real estate agent Henry Correa Jr. Asked whether he thought home prices have reached bottom, he said, ‘I think it’s early.’”

“‘I was saying this was going to happen a year ago. I’m surprised it took so long,’ he said. He cited one property, originally listed for as much as $900,000, that had to be discounted 14 percent to $770,000 before someone made an offer. (the final selling price was not disclosed).”

“(Broker) Nancy Cabral wrote a letter to her rental investment owners in April informing them of the market conditions. ‘The State of Hawaii, the Big Island and more specifically East Hawaii have experienced unprecedented real estate growth over the past several years. At this time, two years ago Day-Lum Rentals had virtually no rental units available and rent increases were common. Since that time, thousands of new homes have been built in East Hawaii and the supply of homes for sale and for rent has increased substantially.’”

“The letter continues: ‘Our sister company..feels this market adjustment will continue for the coming year or more, as more homes are added to the market.’”

“People are still moving to Hawaii, Cabral said, and supply remains tight around Hilo, toward Mountain View and the area north of Hilo, though it’s not hard to find ‘For Sale’ signs there. ‘Some of your bigger subdivisions will have a bigger surplus of inventory,’ she said.”

“‘What we’re seeing now is that the market is adjusting,’ said Realtor Pat Halpern. ‘The market is beginning to decline into a more reasonable situation, and hopefully it will allow more of the local people to buy,’ she said. ‘We’re sitting with a lot of homes and fewer buyers,’ Halpern said.”

The Age reports from Australia. “Between 1997 and 2003, the price of a home in Australia’s capital cities doubled. But a new mega tax break in the May budget means this probably will never happen again. Instead, house prices from here on are likely to at best flatten out, at worst fall somewhat.”

“It will jeopardise the value of the $160 billion invested in rental Housing by the million or so landlords who are negatively geared. house prices in Australia are essentially driven by investor demand. The long surge in investor housing in Australia has been driven essentially by a cocktail of tax breaks. The negative gearing rules allow investors in effect to push part of their losses onto other taxpayers.”

“Renting out housing has become Australia’s most unsuccessful business, and by a long way. Two-thirds of landlords now tell the taxman they are losing money. A lot of today’s housing investors could face years of operating losses without ending up with much in capital gains.”

“Reserve Bank governor Ian Macfarlane told The Age last week that property prices in parts of outer Sydney had fallen by 20 to 30 per cent since 2003. ‘A lot of small-time investors who came in in 2002 and 2003 are probably way under water,’ he said.”

“Negative gearing has a lot wrong with it as an investment strategy. For a start, it involves losing money. Even in 2003-04, preliminary tax figures show, 938,000 rental owners declared losses of $6.1 billion. Given rising interest rates and house prices since, by now they are probably losing $10 billion a year. That’s a lot of money to throw away.”

The Journal & Courier reports from Indiana. “When Ron Aldridge and his wife, Alice, bought a new condominium on Lafayette’s south side in 2001, they were glad to be rid of yard work once and for all. The retired steelworker, however, soon found that just climbing the stairs in their two-story, three-bedroom condo was laborious. So they put it up for sale two years ago.”

“Now, after reducing the price a second time and showing their home to fewer than 12 people in the past year, they’re looking at a potential loss. ‘We’re not having any luck selling ours,’ he said. ‘The housing market is just saturated right now.’”

“Len Wilson, broker in Lafayette, said after a fairly busy first quarter, the spring and summer months have settled into a classic ‘buyer’s market.’ ‘Business has been going down steadily, even from the standpoint of new construction. I don’t understand why,’ Wilson said. ‘Starting prices on homes are starting to come down.’”

“‘Upper end houses are (selling) very slow. Those in the $275,000 to $400,000 range are very slow right now. I’m not seeing a lot of turnover in existing homes in that range,’ he said.”

“Aldridge, for one, points to rapid new development of residential subdivisions on the outskirts of Lafayette. ‘I think the county people have let the housing market run away from them,’ he said.”

“In the past 10 years, the number of new single-family homes built in Tippecanoe County has outpaced the estimated number of new households. According to census records, Tippecanoe County added approximately 5,900 new households from 1995 through 2005. The total of all new residential units built surpassed 16,000, or well more than the total population growth.”

“(Builder) Bruce Gunstra, offered this assessment: ‘I would be hesitant to say if that is universal or something we created on our part. What seems to me to be the case is, in certain price points in housing this market has been overbuilt, and there are a lot more (houses) for sale than the market can (absorb).’”

“Wilson, a Realtor since 1989, anticipates some of the next round of home buyers in Greater Lafayette will be coming from areas outside the Midwest. ‘We’re getting a lot of inquiries coming from out of town. A lot of people are coming from the West Coast and East Coast, even from Florida,’ he said.”

“The Aldridges hope that’s the case. Visible from their driveway are two other condos for sale in their same complex. The price they are currently asking for their property is $110,900, which is reduced from $115,900 they asked originally when they listed it for sale themselves.”

The Island Packet reports from South Carolina. “There’s a slowdown this year in the number of homes sold in southern Beaufort County, but those that have sold fetched prices only slightly lower than last year’s. Several factors are driving the cool-down, real estate experts said, including higher interest rates, insurance costs, overreaching investors, increased property taxes, fear of hurricanes and more competition in the market.”

“Several Realtors agreed that the roughly 5,000 total properties on the market in southern Beaufort County are between two and three times the number available at the same time last year.”

“‘People were buying homes for the wrong reasons the past few years,’ (broker) Bob Clarkson said. People saw real estate as a get-rich-quick scheme and not as a place to live, he said. Those who missed selling at the crest of that wave now are discovering they may have to give 20 percent of those profits back, Clarkson said.”

“Just 5 percent of the homes on the market are being sold in any given month, Realtors said. ‘There is a ton of inventory, and prices have not hit the bottom yet,’ a real estate veteran Bobby Sandell said.”

The Palm Beach Post. “The biggest secret in Boynton Beach may be the status of two projects once heralded as the benchmarks of a revitalized downtown. Board members will consider next month whether to continue to offer millions of dollars in incentives to 500 Ocean and Promenade, as neither developer has begun construction.”

“CRA member Marie Horenburger said market changes have affected most development projects and that she didn’t think a lot needed to be changed in the current agreements. ‘Everybody is in the same boat,’ Horenburger said. ‘There’s been a real slowdown in the market.’”

The News Press in Florida. “The hurricanes that tore through Florida in 2004 and 2005 have caused insurance companies to raise their rates and some have discontinued coverage for many in coastal Florida.”

“‘We may see an increase in defaults and delinquencies due to increases in the cost of owning a home because we have seen homeowner’s insurance premiums double and more,’ said Tom Tatro, recently retired VP for residential lending for Fifth Third Bank in Southwest Florida.”

“Some see a potential rise in foreclosures as a business opportunity but don’t think the real bargains are here yet even though some property owners are starting to consider bailing out. ‘We’ve raised $25 million to go after it but we still think we’re six months from the bottom,’ Fort Myers-based real estate broker Ed Bonkowski said. ‘It’s going to take that long for the lenders to file their actions.’”

“He recently passed on a foreclosed canal-front lot on Fort Myers Beach that sold at auction for $400,000, probably $100,000 down from what it would have sold for a year ago. Still, Bonkowski said, ‘We didn’t think the value was there.’”

“Lee County Property Appraiser Ken Wilkinson said some real estate investors will be hit with a double whammy this year. Even as the value of their assets fall, taxes may go through the roof because they’re based on the sky-high prices that prevailed in 2005.”

“He expects a storm of protests from the notices of proposed property taxes that were mailed out Thursday, but his hands are tied: legally, he must use last year’s prices to calculate taxes.”

A letter to the editor at the Sun Sentinel. “In reading the South Florida Sun-Sentinel lately, I could not help but wonder if some of the ‘journalists’ slept through the class where journalists learn the ethics of reporting the news and not creating the news.” “If you read the front page, one would get the idea that the real estate world has already gone to hell in a handbasket.”

“I grant you that the market has some selective problems and justly so due to reckless investments and not due to the people needing housing. These investors are going to get what is deserved for their actions in selective areas of the market, but the market as a whole is far from the doom and gloom that is headlined in the Sun-Sentinel lately.”

“Our country is in enough of a mess today from this type of activity by some leaders. Don’t put the Sun-Sentinel on the same train. That may not be a light at the end of the tunnel, it could be another train.”

Please post off-topic ideas, links and Craigslist finds here!