The Housing Bubble

Some housing bubble reports from California. The LA Daily News, “The inventory of unsold new homes in Southern California soared to its highest level since 1990 by the end of the second quarter, and construction activity has dropped dramatically as builders adjust to the slowing market.”

“At the end of June, there were 16,595 new houses and condominiums for sale from Santa Barbara County to San Diego County (excluding Imperial County), up 171 percent from the end of July 2005.”

“In Los Angeles County, the unsold new home inventory rocketed an annual 375 percent, to 1,975 properties at the end of June. That’s the most since 2,054 new homes were on the market at the end of 1995. The most distress, however, is in San Diego County, where a record 6,927 properties were on the market at the end of June.”

“Southern California now accounts for 3 percent of the unsold new home inventory in the U.S. and 14 percent in the West. ‘There is no question in my mind there’s a number of indicators showing a large unexpected decrease in the demand for housing,’ said Michael Carney at California State Polytechnic University, Pomona. It’s happening in lots of other places, too, he said.”

The Desert Sun. “Joining the rest of Southern California, the Coachella Valley continued its housing market cool-down of the past several months, with the July sales count of 795 properties down 36.4 percent from a year ago. It also marked the first time in 2006 that the valley’s monthly median dipped below $400,000.”

“The last time that occurred was December 2005, when the median was also $390,000. Since hitting a peak price of $418,500 in February, the local median has generally trended downward.”

“The valley’s unsold inventory as of Monday was 7,261, more than twice the level of a year ago.”

The Long Beach Press Telegram. “We’re in a housing slump, if you look at the latest data. It may be the sellers themselves who are partially to blame. The problem is, many sellers haven’t realized that it’s a seller’s market no more, real estate agents say. Consultant Rose Voss’ message: in an emerging buyer’s market such as this, the home needs to come with a reasonable price tag if you want it sold anytime soon.”

“‘The problem is more inventory is on the market than it was three months ago,’ she said. There are nearly four times as many single family-homes and condos in the Lakewood, Signal Hill and Long Beach area than there were a year ago. There are about 2,300 homes currently for sale, compared with about 600 listings at this time a year ago.”

“A continuing plunge in enrollment is cited as the basis of a plan to sell or lease four school campuses in the San Juan Unified School District in Sacramento County. At the heart of the proposal is a drop in enrollment for the district as the district’s population ages and families with school-age children opt for other districts where housing costs less, school officials say.”

“Investors who once hoped to make a quick buck on rising home prices are now pulling back from Sonoma County’s housing market, according to a study issued Tuesday. Almost half of the Sonoma County sellers who flipped their homes in the second quarter lost money.”

“The flipping of homes in California declined to its lowest level in more than three years, according to a company that offers information on real estate sales trends. Investors are apparently pulling back, and ‘chances for a quick turnaround and profit are diminishing’.”

“During the second quarter, 2.4 percent of the existing homes that sold statewide had been owned for six months or less. That was down from 3.2 percent for the first three months of this year and down from 3.5 percent for last year’s second quarter.”

From Realty Times. “As of 8/28/06 over 1370 homes for sale in Murrieta. It really is a BUYER’s market. If you like the home, but think it’s over priced..just write the offer for what you think it’s worth. And don’t worry about hurting their feelings. They want to sell their home. It’s been sitting there because it’s overpriced (or has a transformer in the back yard…)”

“There is a lot of truth to the saying that Buyers determine the selling price of a home, not the Sellers. Sellers can set an asking price, but if no one is willing to pay it, then it is just a dream.”

DNR Online has this report from Virginia. “The housing market has flattened, those who work in real estate say. ‘The housing inventory is the highest in years,’ said Don Earman, financial consultant with CTX Mortgage Co. of Harrisonburg. ‘Many sellers are actually lowering their prices since it is taking longer to sell homes.’”

“Home sales were down 5.9 percent in July and down 1.7 percent in the first seven months of the year, according to the Harrisonburg-Rockingham Association of Realtors. Other parts of the state have taken severe hits. In Winchester, home sales were down nearly 30 percent for the first seven months of the year. In the Dulles area, that number is 36 percent.”

“The biggest declines will be the high-end homes, because fewer buyers are willing and able to make the purchase, experts say. Builders will suffer because they can’t afford the carrying costs of finished houses sitting on the market.”

“The boom-based pricing is ending because housing shortages no longer exist, Earman said. Some buyers may be waiting for prices to drop, which has happened in Northern Virginia in recent months.”

“Earman doesn’t think that will happen here; he says the appreciation rates will just return to a more normal pattern. ‘The boom is over,’ he said. ‘And the boom-based pricing is going away.’”

And Morningstar has a new report out. “Sales and home prices fell at a faster clip than expected and inventories climbed further in August as the housing market continued to deteriorate, according to a Banc of America Real Estate Agent survey.”

“‘Consumers are shifting from a mindset of waiting for a better price to one where they do not want to buy at this time, no matter what the price is,’ the study said.”

“The study also found that prices fell sequentially for the 11th consecutive month. Prices tumbled in 82% of the markets surveyed. In July, only 79% of the surveyed markets fell. The use of incentives continued to rise, hitting record levels. The amount of inventory rose in all markets, except Austin, in August.”

“‘Consumers are just of the mindset at this point that it is not the time to be buying a home and this becomes increasingly problematic for housing,’ Raymond James analyst Rick Murray said. ‘Inventory levels right now would suggest that this downturn is probably going to last a period of years as opposed to quarters,’ the analyst said.”

Some housing bubble reports from Wall Street. “First Horizon National Corp. said it expects a $1 billion reduction in its mortgage originations in the third quarter, which will help drive earnings down. The Memphis-based lender said that in addition to reduced production, earnings are down because of lower gains on sale margins and increased costs to hedge the risk of servicing its loans.”

“Margins, which were 122 basis points in the second quarter, are expected to range between 85 and 90 basis points this quarter. Hedging costs are up $5 million over the last quarter.”

“The recent drop in the 10-year treasury rate and the resulting inversion of the yield curve have changed the dynamics within the mortgage secondary market. As a result, First Horizon Home Loan’s gain on sale margins fell significantly below second quarter levels.”

“Although we currently expect some modest improvement in mortgage banking in the fourth quarter, the current operating environment suggests that mortgage banking operations will only be in the range of break-even in the fourth quarter while our other two businesses should continue to perform in line with expectations.”

From USA Today. “It’s not just companies that build houses that are seeing their stock prices crumble under the weight of a weakening real estate market. Shares of mortgage lenders who provide the cash to finance deals are also sinking.”

“The outlook for lenders has become gloomy amid growing signs that the five-year housing boom is over. The fallout: Fewer people are taking out mortgages. Overall applications are down 25% vs. the same period a year ago, the Mortgage Bankers Association says.”

“Also weighing on home lenders is the potential financial fallout from the use of exotic mortgages. ‘Borrowers are missing more of their payments than before,’ says analyst Matthew Howlett. ‘A downturn will hit the subprime market first,’ says Jay Brinkmann, an MBA economist.”

“Another headache for mortgage lenders is the constant drumbeat of negative news on the housing sector.”

From Danielle DiMartino. “The bulls insist homebuilders are safer than in prior down cycles because they’ve consolidated into a group of stronger players. ‘I don’t buy it,’ said Mark Kiesel, bond portfolio manager at Pacific Investment Management Co.”

“The flaw, he explained, is that their newfound critical mass emboldened builders to be overly aggressive with land commitments. Land is where things begin and end for builders; it’s where they take their longest-term, and therefore riskiest, gambles.”

“‘The builders have finally realized they’ve been hit with a truck, and they’re trying like mad to get out of their land commitments,’ he said.”

The Deseret News in Utah. “Speculative real estate investors could ruin Utah’s happy housing market, sending home prices nose-diving, according to Clark Ivory, chief executive officer of Ivory Homes, Utah’s largest homebuilder.”

“Behind the soaring prices, which are pushing homes beyond the reach of many working families, are speculators, Ivory contends. And he is blunt when it comes to homebuilders selling out to speculators, saying their motives amount to ’short-term greed and thoughtlessness.’”

“‘I basically have let my people know that if they sell to an investor and they knowingly do it, they are going to have trouble with management, and that means their job,’ Ivory said. ‘That’s how serious it is to us. I just think we ought to be careful and not let our market become artificially inflated so that we then have to see adjustments,’ Ivory said.”

“Ivory concedes there is no way of knowing how many speculators are out there. However, it is true that total unsold new housing inventory in the greater Salt Lake region is climbing. In the second quarter, unsold new housing inventory rose to 12,102 units, a 29 percent increase from 9,418 units in the second quarter of 2005.”

“Jeff Hansen, CFO of Sandy-based Liberty Homes, said he believes the percent of speculators in the market is much higher. Like Ivory, Hansen said such speculators can be damaging to the real estate economy by artificially pumping up prices.”

“‘Will there be a correction in the future here in Utah? I think there will be,’ Hansen said. ‘We are riding a high right now.’”

The Wall Street Journal reports on South Carolina. “Oh, how the world has changed. Along the coast, which includes Myrtle Beach, July sales of new and existing homes were off 42.7% from the same period last year, according to the South Carolina Association of Realtors. Here’s another clue to the state of the market in Myrtle Beach: Developers aren’t pushing away presale buyers anymore, they’re courting them.”

From the State. “An insurance crisis along the S.C. coast could drive people from their homes, devastate the real estate market and slow tourism. Mary Lewis shakes her head in disbelief. The letter has to be a misprint. She’ll have to find a way to pay an initial increase of $690. Lewis and her husband live on a fixed income, and the increase might force them to move out of their Waterway Village condo, which they bought seven years ago for $77,000.”

“‘We’re seeing nightmares across the board,’ said Bruce Langston, certified public accountant at a Myrtle Beach management company. ‘It’s every condo, no matter whether the condo costs $100,000 or a million dollars. This is going to result in foreclosures or people forced to sell.’”

“Growth along the coast and rising real estate values have tightened the state’s insurance market, said S.C. director of insurance Eleanor Kitzman. Every time a new home is built, more insurance is needed.”

“With skyrocketing reinsurance rates, and forecasts of severe hurricane seasons, the problem has worsened, she said. ‘A large part of this is the fear that insurance companies have of another Katrina-like event,’ Kitzman said. ‘That has really caused a lot of companies to reconsider how much business they want to write.’”

“Kitzman acknowledged that a 700 percent increase is ‘certainly a lot,’ but added: ‘If no one else will write it for less, I don’t know how you can think it is too much.’”

“A once-booming real estate industry could take the biggest hit. Condo owners can’t afford to pay an HOA fee that is almost as large as their mortgage. And when potential buyers find out what the insurance payments are, some might back out. Investors are finding they can’t raise rents enough to cover the increased cost.”

“The Myrtle Beach area has seen the number of condos on the market triple since last year and condo sales have fallen by 27 percent. ‘This is not going to help that. This is without the massive insurance scare. It’s just going to add to that problem,’said Tom Maeser, local market analyst.”

The Philadelphia Inquirer reports on the condo bust. “A major condominium developer put plans for his 30-story Marina View Towers on hold yesterday, complaining that a softening market has made it hard to hold prices high enough to cover rising construction costs. ‘It has suddenly become a buyers’ market,’ said developer Louis Cicalese.”

“Site preparation had started for the $119 million building next to the Benjamin Franklin Bridge overlooking the Delaware River. The decision is the strongest sign yet that the Center City residential condominium market, red-hot for two years, has cooled.”

“The DePaul Group of Blue Bell, meanwhile, said in a recent interview it would wait until January to decide when to build a second luxury condominium tower.”

“While two major developers are pressing ahead, others are becoming cautious and complaining that media coverage of whether the condo market is in a boom or a bubble is causing the problem. Tim Mahoney said yesterday he was looking for ways to ‘take some of the risks out’ of a 57-story condo skyscraper that he and partner Brook J. Lenfest have planned at 15th and Chestnut Streets.”

“Mahoney and Lenfest put the project, which has cleared all government hurdles, up for sale in June, when the market was hot and brokers were predicting it would fetch $60 million.”

“Yesterday, Mahoney said he was exploring new ways to build the tower himself, adding that it is still on the market, but that ‘I don’t think we’re going to get a number that appeals to us.’ Mahoney grumbled that media coverage pondering whether the boom would soon cool has, at least for now, produced a ’self-fulfilling prophecy.’”

“Joanne Davidow, manager of the office of the Prudential Fox & Roach real estate firm, said ‘the demand is still there’ but the market has quickly changed. ‘One minute we’re amazingly busy, then there were a lot of articles asking, ‘Is this a boom or bubble?’ I’m not surprised some are taking a step back..to see if prices will go down,’ Davidow said.”

“For now, Marina View developer Cicalese said, At times like these, he said, ‘the fact is you need to be careful.’”

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