The Housing Bubble

The Pasadena Star reports from California. “When economists start talking about cycles, it’s a good bet they’re talking about a downturn. That was the message Michael Carney delivered Wednesday when the Real Estate Research Council of Southern California held its quarterly luncheon at Cal Poly Pomona.”

“There are strong signs of slowing in the residential market, particularly on the demand side. ‘There was a strong, unanticipated decline in demand in the second quarter of 2006,’ Carney said. ‘Home sales are way down, and although prices were still up, the rate of increase has fallen a lot.’”

“‘The level of inventory on the market right now is the highest it has been since 1990,’ Carney said. ‘Why is that? Why are we seeing such a big decline in demand?’”

“In San Diego County, which has 42 percent of the u nsold inventory in the Southland, 80 percent of the inventory is condominiums and attached units. Las Vegas, Miami and Chicago also are having trouble with unsold condos, Carney pointed out. ‘I believe we will see housing prices level off or possibly edge forward a little,’ he said. ‘Do I think they will actually collapse? Well, not anytime soon.’”

“Silicon Valley executives are more upbeat about the local economy than their peers elsewhere in the Bay Area. But they are slightly less eager to hire than they were three months ago, according to the quarterly survey by the Bay Area Council. And their mood, along with that of Bay Area executives generally, seems to have soured a bit.”

“‘We’re getting some mixed signals,’ said Steven Buster, CEO of the Mechanics Bank, based in Richmond, which participated in the study. Although many Bay Area businesses are making money and some are hiring, ‘the worry in our industry is mainly real estate,’ he said. ‘Foreclosures are at an all-time high right now.’”

The Tribune. “While flipping does not make up a significant part of the homes sold in San Luis Obispo County, those buyers who did try to make a quick buck ran into trouble. More than 68 percent of county homeowners who flipped their houses during the second quarter lost money, and the median loss was $15,900.”

“‘There’s been a significant pullback in activity by flippers,” said Mike Ela, former president of DataQuick. ‘Flippers are changing their quick-flip mentality. They may be hanging on a little longer in hopes of averting a loss.’”

The Record Net. “A new survey of ‘flipping’ indicates that the levels of investors in the local and California real estate markets have shriveled from a year ago. In the second quarter, 2 percent of the sales in San Joaquin County were of existing homes that had been owned for six months or less, down by almost two-thirds from 5.1 percent in the second quarter in 2005.”

“The county had enjoyed a surge in home valuations from 2000 through last fall, but the sales market turned soft beginning at that time, with home prices throughout much of the county sliding last month to the first year-to-year sales price decline seen in years. Real estate brokers and agents attribute this largely to a continuous month-to-month jump in the number of homes for sale in the county since last spring.”

“Chris Apostolopoulos, KB Home president of the Central Valley division, said investors have indeed dropped out of the area’s sales market, which is now in a cyclical ‘correction.’ But he thinks that’s a good thing.”

The Santa Cruz Sentinel. “Buy a house. Get a car, free. That’s the deal being offered by green developer Clarum Homes. ‘Some of the people who were buying had a hard time selling their current homes,’ said agent Dana Sales. ‘We’re trying to attract people with the ability to go ahead and make that purchase without that contingent sale.’”

“Linda Haines, associate broker in Watsonville, said there’s no question the real estate market has softened from a year ago. A report showed 50 percent more homes, 1,355, were on the market, than the previous year and the number of sales during the month plunged to the lowest level in more than a decade.”

“‘A year ago sellers didn’t have to do much. That time has since gone,’ Haines said.”

“A homeowner paying a mortgage in a house they’re living in generally has more breathing room than developers with construction loans to cover. ‘It’s a buyer’s market,’ Haines said. ‘But certainly there’s no need for sellers to panic.’”

The Calgary Sun has this report from Canada. “The bubble watch is on in Calgary. According to a report released by TD Economics today, the city could be experiencing a housing bubble. ‘The market is so overheated at the moment and new home supply so tight that a bubble may be forming, or could easily develop,’ said TD’s Housing Bubble Watch. ‘The speed of the rise in prices is troubling and cannot be sustained.’”

“‘There is no question that the recent dramatic price gains in Calgary and Vancouver are unsustainable and that these urban centres are vulnerable to significant moderation, including the possibility of a pullback in prices,’ said the report. ‘If prices continue to rise at a close to 40-percent rate, affordability will quickly become a problem and fear of being priced out of the market may encourage hasty decisions,’ the study said.”

From CBC News. “On the whole, housing activity in Central and Atlantic Canada has cooled down without a price correction, but the Western cities are ‘flashing warnings signs,’ the bank said. On Thursday, Statistics Canada cited the cooling housing market as one of the reasons why economic growth slowed to an annualized rate of two per cent in the April-to-June quarter.”

“‘The dominant trends in housing markets outside of the West have been weaker unit sales, greater new listings and more moderate price growth,’ author Craig Alexander said.”

The Globe and Mail. “‘There is no disputing that Canadian housing markets have been booming in recent years with extremely high levels of starts, sales and price gains in many markets,’ economists Craig Alexander and Steve Chan said. ‘However, TD Economics has consistently argued that Canada’s real estate markets have generally lacked the degree of speculation that dominated past boom-bust cycles and the excesses have been far less than those evident than in the United States.’”

Inman News. “Monthly increases in sales activity in July in Nova Scotia and Prince Edward Island were more than offset by fewer transactions in all other provinces, particularly in Alberta, Ontario, and British Columbia, the Canadian Real Estate Association reported. A seasonally adjusted total of 39,319 homes were sold via MLS in July 2006.”

“Seasonally adjusted new MLS listings reached 67,292 units in July. This represents the second highest monthly level on record for new listings, and the highest level in more than 15 years, the association reported.”

“‘The national residential market is now more balanced than it has been at any point in the past five years due to a marked increase in new listings in Alberta, and the return to more normal levels of sales activity in British Columbia and Alberta,’ according to the announcement.”

“‘Transactions continue to return to more normal levels of activity and new listings are still rising, so the resale housing market remains in a period of transition,’ said Gregory Klump, chief economist for the association.”

The Province from British Columbia. “There are finally some clouds on the horizon for B.C.’s high-flying economy, courtesy of a stumbling U.S. economy, Jock Finlayson, of the B.C. Business Council said yesterday. U.S. consumer confidence slumped in August to its lowest level this year, according to the U.S. Conference Board.”

“Finlayson said if the downturn gets ugly, it will hit the B.C. economy and may force a rethink on economic growth here. ‘It is the single-biggest risk out there for our economy,’ he said. ‘It will depend on just how long and protracted this downturn is.’”

“‘We are already seeing the impact on the lumber market, with significant price drops from the deteriorating housing market in the U.S.,’ he said.”

“The CanadaWest Foundation’s latest B.C. Economic report..says the economy is ‘in very good shape’ and growth will be bolstered by strong construction activity. But it also takes note of the faltering U.S. housing market and says the forestry sector will face a ‘very challenging” time along with tourism that faces the challenges of high gasoline prices, a strong Canadian dollar and tougher border restriction for U.S. visitors.’”

Some housing bubble reports from Wall Street and Washington. “H&R Block is due out with its quarterly earnings report today. Bob Moon: The higher that home prices climbed in recent years, the riskier the loans became for some mortgage lenders. Now, with adjustable rates going up and a growing number of borrowers failing to make their payments, H&R Block is being forced to write off a loss of $102 million.”

“Christopher Thornberg ‘We’re at the beginning of the breaking real estate bubble, we’re not at the end, we’re not near the bottom. We have a ways to go.’”

“Thornberg expects a shakeout for the mortgage industry, but he can’t predict which companies might be most vulnerable. ‘To some extent, this is going to be one of those things where we’re just going to have to let the smoke clear to find out where the bombs have landed,’ he said. Thornberg has little sympathy for companies that he says have long been riding high on such high-risk loans.”

The Street.com. “The hard landing of real estate has only begun to be felt, as the downturn is still less than a year old and new housing starts have dropped by only about 15% from their fall 2005 peak.”

“In past down cycles, the duration of the downturn has been between 25 and 52 months, and in terms of unit declines has averaged approximately 52% from peak to trough. So, stated simply, the worst is yet to come for housing.”

Gary Shilling at Forbes. “The housing bubble is deflating rapidly. I expect at least a 20% decline in median single-family house prices nationwide, and that number may be way understated.”

“A bursting of the bubble would force many homeowners to curb their outlays in order to close the gaps between their income and spending growth. That is, unless another source of money can bridge the gap between consumer incomes and outlays, just as house appreciation seamlessly took over when stocks nosedived. What could that big new source of money be?”

The Boston Globe. “Rising incomes should support the US economy even as the housing market slows and consumers lose the boost they were getting from home equity, Federal Reserve chairman Ben Bernanke said.”

“‘The rapid pace of house price appreciation in recent years likely contributed to the decline in the saving rate,’ he said. ‘Similarly, the cooling of the housing market and associated reduction in capital gains on housing will probably provide some upward impetus to the saving rate.’”

From Bloomberg. “European Central Bank President Jean- Claude Trichet signaled the bank will increase interest rates in October, saying economic growth and inflation will exceed its previous forecasts.”

“‘Strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained,’ Trichet said. The ECB said it expects inflation to stay ‘elevated.’”

CNN Money. “A year ago, with the real estate market booming and stocks at or near all-time highs, executives at the 12 major homebuilders were quick to cash out, selling just over 6.5 million shares of their stock as a group, pocketing just over $500 million in proceeds.”

“But homebuilder executives have held onto their shares this summer, while their value has continued to fall. ‘This definitely tells me insiders are relative more bullish than a lot of investors in these stocks. But that being said, we’re not seeing any buying. If they really wanted to show the faith, they could be buying shares,’ said Jonathan Moreland, director of research at a service that tracks insider stock activity.”

From USA Today. “As sales slow and inventories jump, large publicly traded home builders are trimming landholdings or renegotiating deals, according to earnings reports and industry officials.”

“The development illustrates the fact that some previous land deals done at the height of the housing boom no longer make business sense. It also reflects the fact that builders see the slower market as giving them leverage to force sellers to cut prices.”

“‘Land sellers are at a disadvantage right now, and some, because of the way they’re financed, can’t really hold on and wait for the market to normalize,’ says Mackey O’Donnell, CEO of the largest land-acquisition firm in California. Builders tell O’Donnell they are seeing up to 10% to 20% reductions in land prices from recent highs. As large builders reduce their holdings.”

“Toll Bros. said in its third-quarter earnings report last week that it now owns or controls about 82,900 lots, compared with 91,200 at end of the second quarter. ‘Those deals that are not at the extremely profitable end of the spectrum are being looked at again,’ says Kira McCarron, for Toll Bros., adding that if they don’t add up and ‘can’t be renegotiated, then they would be dropped.’”

Inman News has this on New York. “Sales of existing single-family homes in New York fell by double digits between July 2005 and July 2006, according to preliminary single-family sales data accumulated by the New York State Association of Realtors.” “There were 9,392 sales recorded statewide in July, a decrease of 11.3 percent from the 10,681 homes sold in July 2005, according to the preliminary data. Last month’s sales total was down 7.6 percent from June’s level of 10,166 sales.”

“The statewide median selling price rose 3.7 percent in July to $269,700, compared with the $260,000 median recorded in July 2005. The July 2006 median price, however, was down by 3.3 percent compared to the previous month.”

“‘There is no ‘housing bubble’ bursting in New York state,’ said Charles M. Staro, NYSAR chief executive officer. ‘The data through July 31 simply show the expected softening of sales and slowing in median sales price increases after several years of exceptional growth. After years of a hot sellers’ market, we are seeing a return to balance, if not a tipping toward buyers as sales prices level.’”

The Providence Journal from Rhode Island. “The recent downturn in condominium sales statewide doesn’t concern the developers of three luxury condo towers in downtown Providence. Intercontinental Real Estate Corp., The Procaccianti Group and BlueChip Properties are in the midst of constructing 426 high-end condos that are priced between $400,000 and $2.5 million each.”

“All three developers said this week that interest from buyers has remained strong and they are confident condos in the complexes will continue to sell. ‘I’m not worried about [the market] at all,’ said (developer) Nicholas Iselin with Boston’s Intercontinental Real Estate, which is putting up two towers next to the Providence train station that will contain 193 condos.”

“Buyers have already signed purchase-and-sale agreements on eight of the units, said Iselin, and in total, 33 are under reservation. While that’s down from the 80 units under reservation last year, he said, the developer doesn’t see it as a problem.” “‘There’s not a huge incentive to jump off the sidelines and I think people can afford to have a wait-and-see attitude. And that’s fine,’ said Iselin.”

“Condominium sales across the state were off significantly during the second quarter of the year, dropping 22.6 percent compared with the second quarter of 2005, according to the Rhode Island Association of Realtors.”

“For BlueChip Properties, about 19 of the 130 condos it is under agreement, said Jerry O’Connor, development director for the project. ‘There’s been a traditional summer slowdown, but we’re happy where we are on sales,’ he said.”

MSNBC has this report on exotic loans. “‘Joe’ is a homeowner who did not want to give his full name for this story because he’s ashamed to admit that he soon won’t be able to afford his monthly mortgage payments. In order to get the $800,000 house he bought early last year in California’s Silicon Valley, Joe got an ‘option ARM.’ The unpaid interest was tacked onto the principal, creating ‘negative amortization.’”

“He initially thought his salary would rise along with his home’s value. But when a lost deal closed the company and ‘For Sale’ signs popped up, and stayed up, in his neighborhood, a now-unemployed Joe is wondering how he will afford those higher payments when his rates adjust.”

“Joe is not an atypical homebuyer in the Bay Area or other now-bursting bubble markets across the country. Nearly half of the homebuyers and thirty percent of people refinancing mortgages in California chose interest-only loans last year.”

“Now these cheap mortgages that fueled the real-estate boom are beginning to hurt the homeowners they once helped. Higher interest rates and the end of honeymoon periods for too-good-to-be-true teaser rates are increasingly causing payment shock for borrowers.”

“‘Nationwide, approximately $400 billion of [home-purchase adjustable-rate mortgages] are scheduled to reset at some point in 2006,’ said Frank Nothaft, chief economist with Freddie Mac. ‘A significant number of homeowners will face some adjustments.’ In fact, the ARMs with scheduled payment increases this year work out to about 5 percent of all single-family debt outstanding in the country now, he said.”

The Wall Street Journal. “Looking back at past housing booms, the first sign of the end is when a goodly share of buyers stop making offers and eventually stop looking, seeming to just disappear. In the spring of 1987, during another U.S. housing-market boom that was starting to lose speed, Nora Moran, president of the Greater Boston real estate board, said ’someone blew a whistle that only dogs and buyers heard.’”

“Across America today, it is as if the whistle has again been blown. Why is this happening so suddenly? The market spoiler was in place some two years ago. At that time, we felt that the spectacular price increases could not be justified. The psychology of that time could not continue indefinitely, and indeed it has not.”

“Talk is part of what changes the mood and actions of buyers, and the air is now full of talk of a bust. The covers of the New Yorker, the Economist, The Wall Street Journal and virtually every news magazine and newspaper in America has heralded the bursting of the ‘housing bubble.’”

“New construction, initiated in response to high home prices, has reached unprecedented levels, and new houses are still hitting the market just as demand is dropping. But the housing construction boom can’t go on forever.”

“Beyond all these factors there is the simple psychology of expectations that is part of any speculative boom. These expectations can turn suddenly when alert home buyers get the sense that something might be amiss. Americans haven’t changed their basic views on housing as a great long-term investment. Not yet, at least. That won’t happen unless there is a protracted housing price decline.”

“Buyers do not want to pay prices that are significantly higher than a year ago. Buyers are waiting and low-balling. Sellers want to get a price increase of the kind they’ve observed in the recent past. The result is that fewer agreements are reached, and sales fall.”

“As always, the future is uncertain. Many of the underpinnings of the boom are still strong, and the soft-landing scenario so widely promoted by economists and industry leaders is a possibility. But that possibility is not enough to give great comfort to all those who worry today about the housing market.”

“Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out.”

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