The Housing Bubble

The LA Times reports from California. “KB Home has started pruning its land portfolio in Southern California, a byproduct of a slumping housing market that is forcing big builders to reevaluate their property holdings. The Westwood-based builder said Tuesday that it had sold its 49% stake in the massive Anaverde master-planned community in the Antelope Valley.”

“With demand for new homes declining, major builders are under pressure from Wall Street to justify their ownership of land that isn’t already primed for building and that doesn’t have a prospective buyer lined up. ‘Under current market conditions we are focusing our attention on our core business, which is home building,’ said KB spokeswoman Caroline Shaw. ‘The sale of our interest in Anaverde furthers that objective.’”

“Some analysts also worry that builders could be forced to write down the value of their land if they can’t unload it, or if land values start to decline.”

“Like other Southland locales, the high desert has seen home sales drop dramatically. In the first six months of 2006, new-home sales in the Antelope Valley fell to 1,307, down 41% from the 2,222 sold in the year-earlier period. Yet builders obtained permits to add 11,851 additional houses, up from 8,478 the year before.”

“Less demand for new homes mirrors the soft demand for land in the area, said Michel Faris, a land broker (who) specializes in Antelope Valley real estate. ‘A lot of the market is psychological,’ he said. ‘Buyers are not willing to take risks now, whether with raw land or finished lots.’”

The North County Times. “A report showed a dramatic slowdown in residential construction, both in Riverside County and across California, as builders continued to eye large numbers of unsold homes. Builders received permits to build 2,051 houses and 106 apartment and condominium units in Riverside County last month, according to the California Building Industry Association. Compared to July 2005, that represents a drop of 37 percent, the largest such decline in at least five years.”

“Across California, builders started 11,121 new houses, condominiums and apartment units, a 43 percent decline from 2005, according to the group.”

“Builders have put up hundreds of houses in Temecula’s Wolf Creek neighborhood in the last two years; when the houses didn’t sell as fast as expected, Temecula Valley Unified School District responded by postponing the opening of nearby Temecula Luiseno Elementary School.”

“Dave Gallaher, facilities manager for the district, said it is adding fewer students each school year than in the year before. ‘We’ve seen recently that (annual increase) drop to 2,000 from 3,400, which is a dramatic drop,’ Gallaher said.”

The Union Tribune in San Diego. “The runaway home prices and building boom of recent years put lots of money in the pockets of real estate agents, loan officers and construction workers. If there is a real estate slowdown, which many experts say has already begun, San Diego may be disproportionally hurt.”

“Already hit hard is construction worker Sergio Curiel. Curiel hasn’t worked for a month. ‘Income is really bad right now,’ Curiel said. ‘I’m living day by day, check by check.’”

“Local real estate agents are incensed after code-enforcement officers collected more than 100 open-house signs and threw them in the trash behind City Hall. Real estate agents say that without the ability to post clear signs directing potential buyers to open houses, properties will languish unsold in an already tough real estate market.”

“Escondido real estate agents and sellers say they saw proof Sunday of how important their signs were, reporting that attendance at open houses was much lighter than usual.”

“Donna Davis wondered why only one person showed up for a viewing of a single-family home in north Escondido. At the end of the disappointing day, she realized her four signs were gone. Davis said she later found them and about 150 others in a garbage bin outside City Hall. Code-enforcement officers told her to leave them because the city would be liable if she got hurt in the bin, she said.”

“Real estate agents said Councilman Ed Gallo, who is an agent himself, warned them about the code crackdown at a Realtors association meeting last month, and that they tried to comply. Gallo said they planned to meet next week to try to resolve the real estate agents’ concerns.”

“‘I’m hoping to come to terms and make sure everyone’s happy,’ Gallo said. ‘We don’t want to shackle one of the city’s major industries.’”

“Agents all over the county are facing a sluggish market, with about one-third fewer homes sold last month than in the same period the year before.

The Review Journal reports from Las Vegas. “Dennis Smith, president of Home Builders Research, counted 2,869 recorded new home sales in July, compared with 3,071 sales in the same month a year ago. The slowdown is really being felt on the resale side, Smith said. Sales of existing homes in July totaled 3,512, down from 5,361 a year ago. For the year, resales have slid 22 percent to 26,817.”

“Real estate professionals point to a record inventory of 20,273 homes on the market as the reason why homes aren’t selling as quickly and prices are being reduced in many neighborhoods. ‘Can the housing market get much worse? Yes,’ Smith said. ‘Will it? Probably.’”

“SalesTraq President Larry Murphy said the ‘traditional new construction segment’ of the market, excluding apartment conversions and high-rise condos, showed a median price of $335,315, up 5.5 percent from a year ago. ‘It would be prudent to point out that these prices do not include the many incentives that are being offered by most builders,’ he said.”

“Values of the inducements will vary and the focus has changed from decorating upgrades and closing costs to financing, Smith said. Some of the larger builders are offering interest rate ‘buydowns.’”

“If an average value of 6 percent on the incentive packages were reflected in the price, the median for July would be in the range of $318,000, or less than 1 percent increase, Smith said. He speculated that the incentive factor is probably much higher, so ‘net’ median prices are at or below what they were a year ago.”

“‘Basically, the market is on the back side of the cycle,’ said Josh Seime, regional manager for Metrostudy. ‘When you start seeing a buildup of inventory, you know it’s going to get competitive.’”

“Detached production is declining as builders look to reduce their inventory, Seime said. Housing starts fell to 6,834 in the quarter, compared with 7,061 in the same period a year ago.”

The Nevada Appeal. “Incline Village’s predominant second-home market this summer felt the aftershock of slumping job and real estate markets in Southern California, the Bay Area and Southern and Northern Nevada.”

“A slowing job market (statewide, California added just 900 jobs last month; its recent average has been 17,400 per month), combined with recent hikes in interest, have led to a basin-wide real estate slowdown.”

“The proof may be in the numbers. From January to August 2005 348 homes, condos and PUDs sold in Incline. At press time, only 180 homes, condos and PUDs have sold thus far in 2006. ‘The numbers you see are off about 50 percent, which is actually an improvement from a month ago, so we’ll see, the real story will be after September and October,’ (broker) Chris Plastiras said.”

“Many Incline Realtors said this summer’s swoon and uncertain future to follow is a picture that is highly interpretive and speculative. Three things seem certain however: It’s not 2003 anymore. The ‘condo boom’ is over, for now; and there are more than 400 homes, condos and PUD (free-standing homes with lots collectively owned) properties on the market, the most in the past half-decade.”

Some housing bubble reports from Wall Street and Washington. “Shares of homebuilders declined in midday trading Wednesday, led by Hovnanian Enterprises Inc., after JPMorgan issued a note on the builder raising questions about stock options practices and forecasting weaker earnings per share growth.”

“Merrill Lynch issued a bearish note on the homebuilding sector, predicting a slowdown already under way will get worse before it gets better. ‘We are neutral on the homebuilders because fundamentals are still too strong to call a bottom,’ Merrill analysts wrote. ‘In short, housing starts remain too high, margins are declining and rate cuts will provide little benefit from here.’”

“The Mortgage Bankers Association today released its Weekly Mortgage Applications Survey for the week ending August 25. On an unadjusted basis, the Index decreased 2.3 percent compared with the previous week and was down 22.4 percent compared with the same week one year earlier.”

“More subprime borrowers are defaulting in the early months of their home loans, a trend that has led to greater fear among investors and lenders of rising delinquencies and losses.”

“‘If those borrowers are finding themselves in trouble very early on, it may give lenders an indication that the underwriting criteria or quality control are not sufficiently tight,’ says Damien Weldon, at LoanPerformance. Based on the year-to-date data, Weldon says early payment defaults on subprime mortgages are expected to increase this year.”

“The secondary market, where lenders sell the new loans, could also see more pressure from rising delinquencies. Merrill Lynch analyst Kenneth Bruce wrote in a recent report commenting on H&R Block’s announcement that ‘if the fixed-income market anticipates further losses, it could begin to pressure spreads on lower rated bonds, thus undermining whole-loan pricing.’”

“Citigroup, Bank of America, and JPMorgan Chase are among the biggest losers in the bond market, where the largest U.S. banks’ borrowing costs are the highest in three years. ‘We’re probably at the top of the mountain for loan quality, and it’s going to start falling pretty soon,’ said James Hannan, who oversees $3 billion in fixed-income securities.”

“Higher borrowing rates have contributed to shrinking lending margins, a measure of profitability for banks. S&P said this month that those margins were at their lowest since 1991.”

“Federal Reserve Bank of Dallas President Richard Fisher said inflation has been running higher than he’d like to see, and said the central bank must make sure price pressure remained contained. ‘Our current inflation indicators are not presently as well behaved as I would like them to be,’ Fisher said.”

“He counted himself as unworried by the slowing housing sector. ‘The declines are moving housing markets from very high and unsustainable levels toward more normal levels, unwinding some speculative activity,’ Fisher said. He added ‘not all the consequences of the unwinding of a bull market in housing are bad.’ Fisher explained ‘as prices cool off, we may finally begin the long process of allowing income to catch up with housing costs.”

The Washington Post. “In the latest sign of the cooling home sales market, a luxury home builder in Rockville has begun resorting to the kind of tactic usually reserved for screaming electronics discounters, the Lowest Price Guarantee..from the time a customer signs to 45 days before settlement. The thinking goes, jittery buyers shelling out $500,000 to more than $1 million for one of the builder’s single-family houses can rest assured that they’re not sinking money into a depreciating asset.”

“‘That’s a very real fear,’ said John J. Lavery, for the home builder. ‘Obviously, there’s been a big correction in the market. Our view is that it’s the lowest point in the market cycle now.’”

“Builders offer such enticements because they are reluctant to upset previous buyers by cutting their base prices. But in some places around the country, builders have begun cutting those prices, too. Mid-Atlantic has not reduced its base home offering price, but it has increased incentives to as much as $55,000.”

“Lorenzo Wooten Jr. said that even in his Prince George’s County neighborhood, he has noticed more houses on the market and longer sales times. Wooten and his wife, Courtney, signed a contract last month to buy a $1.2 million house in Woodmore North. ‘I feel pretty comfortable where the Washington, D.C., market is,’ said Wooten, 33, a regional manager for Fannie Mae. ‘I really don’t think that they would have offered this price guarantee if the prices weren’t fairly priced currently.’”

The St Petersburg Times reports on the consumer survey. “Floridians’ confidence in the economy plunged this month to its lowest level in 13 years, University of Florida economists said Tuesday. The chill in the housing market, higher interest rates and fuel prices appear to be taking their toll. National confidence numbers also fell in August, but not as much as they did in Florida.”

“The Florida Consumer Confidence Index fell 11 points to 76, while the national index went from 107 to 99.6.”

“Chris McCarty, director of survey research at the University of Florida thinks the changed outlook for housing is at least partly responsible. ‘Florida is in a position to really be affected by a decline in housing,’ McCarty said.”

“‘There are a lot of overvalued markets in Florida, and there are a lot of risky loans, some of which are going to readjust right about now,’ he said. ‘Also, a lot of employment increases over the last few years have been related to housing.’ When projects get canceled or put on hold, that has a direct impact on jobs and a secondary impact on sales of appliances and furniture, he said.”

“‘The feedback I get from people when they cancel their appointments at the last minute is that they’re broke,’ said (hairstylist) Valerie Bohr in Largo. ‘Just this week I had two people tell me they got electric bills over $400. People can’t afford to come in and get their hair done if they’re working to pay an electric bill like that.’”

“The Florida survey showed the biggest drop in confidence was among working-age people. They feel a pinch from rising interest rates on credit cards and home-equity loans. ‘We’ve got an adjustable-rate home-equity loan, and every time the prime rate goes up, our payment goes up,’ said Mike Della Penna, a flooring contractor in Land O’Lakes. He said he and his wife continue to pay more than required because they’ve set a target for paying off the debt.”

“‘But there may be a squeeze on some people whose incomes are marginal,’ he said.”

“Homeowners who have been using their home equity as a piggy bank find their borrowing power is no longer growing now that property appreciation has come to a standstill. ‘A lot of people unfortunately built that into their personal finances,’ said Stan Close, of Riverview, a banker. ‘That probably is a key contributor to people not feeling as good about their wealth.’”

From Reuters. “Costco Wholesale Corp on Wednesday warned of lower-than-expected quarterly profit because of disappointing gross margins. ‘This could be an early sign that the higher-income consumer is finally starting to feel a bit of a pinch,’ said Anthony Chukumba, an analyst with Morningstar.”

“Those higher-income shoppers have proved resilient in the face of steep energy prices over the past year, but as the housing market slows, Wall Street has been worried that upscale retailers would start to suffer.”

“‘The company could begin to suffer from a decline in higher-margin discretionary spending due to slowing economic growth and a deceleration in the housing market, causing a less favorable sales mix and pressuring margins,’ Lazard Capital Markets analyst Todd Slater wrote.”

From Bloomberg. “‘The tide is going out for all retailers at the moment,’ said Christian Holland, who helps manage about $1 billion in London. ‘Unless you’ve been on Mars, everyone’s aware that the housing market is rolling over, and that does have obvious implications on the consumer’s ability to prop up spending,’ Holland said.”

The Boston Herald looks at home sales reporting. “A bad storm is brewing in the once high-flying real estate market, and the Boston area, is right in the eye of it. For many hapless home sellers, desperately scrambling to find living, breathing buyers, this tempest appeared to come on as quickly as a Gulf Coast hurricane. Or did it?”

“The monthly home sales reports put out by the Massachusetts Association of Realtors for years have been the main indicator of the health of the Bay State’s real estate market. And as recently as last fall, the trade group was crowing about near-record sales.”

“However..a steady decline in home sales across the state began in the spring of 2005 and has been building steam ever since, data released by the Boston-based Warren Group shows.”

“Year-over-year declines in home sales of roughly 10 percent or more began in April 2005 and continued steadily, hitting nearly 14 percent in October and nearly 27 percent in July. Meanwhile, median home prices peaked at $364,000 as early as June 2005 and began dropping steadily after that.”

“By last summer, let alone last fall, anyone following the Warren Group data would have been well aware of the real estate storm clouds on the horizon. Yet, except for a few experts and insiders, no one was.”

“As the real estate market began to turn sour last year, MAR was still the main source of statistics for most news outlets. And the Realtors group saw more evidence for optimism than concern.”

“No increase was too modest to celebrate. A 0.5 percent increase in single-family home sales in September. Roll out the barrels. ‘Sales of single-family homes remain strong last month, climbing to their second highest level on record for the month of September in state history,’ the group touted in a section of its Web site called ‘talking points.’”

“That was a badly timed fit of happy talk. Since October, the market’s downhill trajectory has been too steep for anyone to ignore, with prices, not just the number of sales, falling.”

“But there are no apologies from David Wluka, MAR’s president. And Wluka further contends that MAR has always offered a sober appraisal of the market.”

“Not everyone is convinced of that, though, including Wellesley College’s Chip Case, one of the nation’s top experts on the residential real estate market. ‘They (Realtors) have a stake in high (home sales) volume,’ Case said. ‘They care if people are trading. They have a huge stake in optimism. When optimism goes away, people don’t spend money on big-ticket items.’”

The Worcester Telegram. “Foreclosure actions initiated against Massachusetts homeowners rose 56 percent in July, to 1,348, compared with the same month a year ago. For the 12 months ended July 31, foreclosures statewide were up 43.5 percent, to 14,552, with Barnstable, Bristol and Suffolk counties posting the biggest increases.”

The Sun Chronicle. “North Attleboro recorded 61 foreclosure cases in July, up 118 percent from July 2005. ‘The vise grip of rising interest rates and soaring energy costs are squeezing thousands of Massachusetts property owners out of their homes,’ said Jeremy Shapiro, presidentof ForeclosuresMass.com. ‘The dramatic increase in foreclosure filings is symptomatic of our slumping housing market and tightening economy.’”

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