The Housing Bubble

The Associated Press has this report on Las Vegas. “The Las Vegas housing market, the nation’s ninth largest, will be flat or slightly lower in 2006 because of a rising inventory of homes for sale, Merrill Lynch said Tuesday. ‘We do not expect selling conditions to improve until existing home listings approach their 2-year average of 18,800 units from their current level of 25,200,’ Kenneth Zener, an analyst at Merrill, wrote.”

“Affordability in the city reached a 22-year low in 2005. Homebuilders vastly expanded their work in the area since 2000, with the number of units built by MDC Holdings Inc. growing 45 percent and the number built by DR Horton Inc. growing 29 percent. Construction jobs represented 20 percent of total job growth in 2005, 29 percent in 2004 and 25 percent in 2003, Zener wrote.”

The Review Journal. “With as many as 185,000 homes now on the drawing board between Hoover Dam and Kingman, Ariz., Jim Holland, park planner for the Lake Mead National Recreation Area, warned that such development ‘could really change the character’ of the eastern part of the lake. Four of the eight master-planned communities now under consideration would fill the empty desert between U.S. 93 and the eastern end of the recreation area.”

“When Mardian Ranch and the Ranch at White Hills are finished, Mardian said, the combined developments will be twice the size of Summerlin. The nearby Rhodes Homes project, the Village at White Hills, would add another 20,000 homes to the mix.”

“Rhodes also has won the county’s preliminary approval for Golden Valley South, a 33,000-home, 5,750-acre development a few miles west of Kingman, and two proposed communities north of Kingman with about 59,000 homes spread over more than 9,200 acres.”

“Rhodes has opened four model homes and is now taking reservations from potential buyers at Golden Valley. ‘The question is, how much of this is real and how much is a mirage?’ said Kevin Davidson, a planner for Mohave County.”

“Davidson points to a census map that shows most of Mohave County, including much of the U.S. 93 corridor northwest of Kingman, as populated by fewer than six people per square mile or uninhabited altogether. ‘That tells me these developments are coming out of nowhere,’ he said. ‘It’s not like Henderson growing out of Vegas. It’s a different animal.’”

The Arizona Republic. “The drawdown of the housing bubble won’t stop this year, but the next few months may give an indication of its severity. ‘I think people are too optimistic about how quickly housing will recover,’ said developer Dennis Knight, a perceptive observer of industry trends and no doomsayer.”

“‘Most people you talk to have a vested interest in quick recovery,’ he continued. But the inventory of houses is high, and consumers are holding on to expectations about making handsome profits in selling their homes.”

“Knight also sees land as ‘vastly overspeculated.’ As happened on Central Avenue in the 1990 crash, landowners throughout the region are holding out for unrealistic prices. ‘People have been hyped into ignoring basic land economics,’ he said.”

“Meanwhile, the shakeout will affect not only the periphery of Pinal County and Buckeye, but also the central city, where every parcel lusts for a condo tower.”

“Arizona will add jobs at a healthy clip through 2007 but not at the gangbuster levels seen in 2005. Economists generally agree on that point. What they disagree on is how much the rate of job growth will slow during the next year and a half.”

“There are simply too many unknowns about the leaky housing bubble, shaky consumer confidence and fluctuating fuel prices. Workers in housing-related industries, such as construction and mortgage lending, would be hit particularly hard.”

Thw Washington Post reports on interest rates. “The U.S. Federal Reserve may need to raise interest rates again to tame inflation and the ECB can afford to hike euro zone rates further now that it has proof of solid economic recovery, the OECD said on Tuesday. The Organization for Economic Co-operation and Development said the U.S. central bank had to get to grips with stubbornly high inflation, notably fueled by rising labor costs, and this could prove a more real concern than the spectre of a housing market collapse.”

“‘There’s a trade-off. You don’t want to precipitate a crash but at the same time you want to rein in inflation,’ OECD chief economist Jean-Philippe Cotis told a news conference.”

The Chicago Tribune. “With real estate markets sinking fast and the job market in low gear, critics of the Federal Reserve are warning that the central bank has overtightened the nation’s monetary spigot. Fears are growing that the Fed has dried up too much of the economy’s activity, all in the name of choking off inflation.”

“For months, Americans have been leaning on credit cards to shell out more money than they make. But economist Peter Morici says that trend can’t last indefinitely. ‘With savings so low, higher interest rates, especially mortgage rates, could cause an abrupt change in consumer behavior,’ he says.”

“Such a risk is so worrisome, says Morici, a professor at the University of Maryland School of Business, ‘the Fed should not raise interest rates further. Sometimes the best monetary policy is to do no harm.’”

The Post again. “In a year when politics is being roiled by angry debates, it might seem odd to imagine the midterm elections being waged over square footage and closet space.” “Flat wages and rising debt nationally have converged to leave millions of middle-class households feeling acutely vulnerable to bumps in their financial planning. The most visible of these are rising energy prices and a softening housing market.”

“A less obvious but powerful variable is the interest paid by people carrying credit card debt or mortgages whose monthly payments vary with interest rates. People buffeted by these trends have given rise to a new and volatile voting block. ‘People like this are making a large ripple across the body politic,’ said pollster Bill McInturff.”

“This year could mark the emergence of what might be called mortgage moms, voters whose sense of well-being is freighted with anxiety about their families’ financial squeeze. Among the most exposed are those who bought into one of the great fads in mortgage lending in recent years, adjustable rates. Next year, $1 trillion worth of adjustable-rate mortgages is scheduled to readjust to a higher interest rate for the first time.”

“The political implications of these trends are obvious. ‘A large number of voters have a definite foreboding about the economy, and that isn’t good news for incumbents,’ said Gregory S. Casey, CEO for a nonpartisan electoral analysis organization. ‘They feel disappointed in government institutions that they think have let them down.’”

From MSN Real Estate. “Those easy-mortgage chickens are coming home to roost. For many Americans, this is scary news, if hardly unexpected. Everyone who took out an ARM or another equally appealing low-rate mortgage over the past few years to buy a house, at times beyond their means, knew that someday their payments could balloon.”

“Those home buyers may have thought they would be able to flip their houses quickly and avoid the rise in their mortgage payments. But now, many of them are finding themselves stuck in a house they may soon no longer be able to afford, and, as the real estate market peters out, there’s little they can do about it.”

From Bloomberg. “The news isn’t all bad if you are looking to buy in this market. Between builders eager to discount and homeowners needing to sell, there may be as many as 4.7 million homes for sale now, according to Friedman, Billings, Ramsey Group.”

“‘Since homebuilders have financial incentives to sell new houses in inventory promptly, we expect them to aggressively offer incentives and discounts to homebuyers,’ writes Michael Youngblood, Friedman’s managing director of asset-backed securities research. ‘Given the average industry profit margin of 25 percent, they have ample latitude to do so.’”

“While buyers will see some heavy discounting if the current slump is prolonged, sellers should beware. More foreclosures put more homes on the market and sink prices further.”

A housing update from the Australian. “The scourge of negative equity has spread to Brisbane as the property downturn continues to slug investors and the lower end of the housing market.”

“According to Australia’s largest mortgage broker, falling property values in parts of Brisbane has led to an increase in the number of owners with mortgages bigger than the value of their homes.”

“‘In some of the outer Brisbane suburbs we are seeing valuations for house-and-land packages purchased mainly for investment purposes falling short of purchase prices,’ AFG executive director Malcolm Watkins said.”

“AFG said some new construction projects in that state were being independently valued at 20 per cent below asking prices. ‘That’s your first classic sign that things are slowing right off and people are becoming far more cautious,’ Mr Watkins said.”

“However, it is Sydney where prices have fallen the most, with the highest proportion of families facing the prospect of negative equity. ‘Many owner-occupiers, seeking to refinance their homes, are being disappointed by the lower-than-expected valuations being achieved,’ Mr Watkins said. ‘If larger numbers of owners are forced to sell, this will trigger even greater declines, affecting more property values.’”

“Apartment values had fallen by as much as 20 per cent in Green Square, where developers were opting to rent out apartments rather than sell them for fear of further price falls.”

“Figures showing a reduction in new home approvals in Western Australia have prompted suggestions that the state’s housing boom is coming to an end.”

“The Master Builders Association director Michael McLean says, ‘The bubble seems to be bursting in WA’s housing sector with capacity dwelling units of around 21,000 being met with these latest statistics, which I might add are prior to the latest interest hike, and so that’s also going to exacerbate affordability for new home buyers.’”

CNN has this report from a Federal regulator. “New evidence of a housing market slowdown emerged Tuesday - growth in the price of a single family home was just 1.17 percent in the second quarter, a decline of one percentage point from the prior quarter.”

“The Office of Federal Housing Enterprise Oversight (OFHEO), which released the report, said it was the slowest quarterly increase since the fourth quarter of 1999 and was the sharpest quarter-to-quarter pullback since OFHEO began the index in 1975.”

“According to Jonathan Miller, an appraiser in New York, ‘The index may not reflect what’s really happening out there.’ He believes that many sellers are holding out for unrealistically high asking prices, and the buyers actually purchasing homes are only the ones willing to pay the higher prices.”

“To close deals with the on-the-fence or reluctant buyers, sellers will have to drop their prices and the index will only then reflect that. The effect could snowball if sellers get a bit panicky and try to sell their properties before prices erode further.”

“‘These data are a strong indication that the housing market is cooling in a very significant way,’ said James Lockhart, OFHEO director. ‘Indeed, the deceleration appears in almost every region of the country.’”

“It’s the fastest deceleration in the index in its three-decade history, OFHEO said.’

MarketWatch reports on Bakersfield, California. “Just 12 months ago, this sun-baked Southern California city was one of the hottest real-estate markets in the country. Those days now are dust in Bakersfield’s gusty winds. ‘Yeah, we miss those times,’ Darrell Muhammed, a local agent, said of last year’s market.”

“Concern mounts that an ever-increasing housing inventory, coupled with coming hikes for variable rate mortgage holders, could send the market south in a hurry. Trouble signs are everywhere. At Lennar Corp.’s Artisan/Terra Vista tract on the city’s west side, about 20 homes only a year old are back on the market.”

“They compete with dozens of other new houses Lennar is building in later phases of the same development, which agents say makes the older homes tougher to sell. Six of the resales are within view of each other on the same street. ‘It’s very tough market,’ said Joginder Gill, the agent trying to sell one of the six houses. ‘If you look at past history, it’s going to go way, way down.’”

“Leslie Appleton-Young, chief economist for the California Association of Realtors, said, ‘It’s been completely unsustainable.’ To many, the Bakersfield situation was inevitable. ‘Why shouldn’t there be retrenchment in housing?” said Stuart Gabriel, of the University of Southern California. ‘It’s appropriate that housing take a breather.’”

“Gill, the real estate agent trying to sell the home in the Lennar tract, says it was about a year ago that the market started turning. He’s about to take over as agent for one home that was put on the market a year ago for $950,000. It, like many other homes, has been reduced several times. He’s about to re-list it for $785,000.”

“Despite the more competitive climate, it doesn’t seem as if builders intend to slow down at all. Jim Eggert, a city planner, says there only are about 300 to 350 fewer building permits taken out throughout Bakersfield when compared with last year. ‘They’re still out building, but I don’t know if they’re selling,’ Eggert said. ‘These prices have to come down a little bit. They have to.’”

“The next 12 months should be revealing, said appraiser Gary Crabtree. ‘I do think we’re in for a period of some foreclosures in 2007,’ Crabtree said. A flood of resold homes could also hit the market. ‘It could very well be that some of these people are looking at these interest rate increases and are trying to get out,’ he said.”

“‘It’s what I would say is balanced,’ said Don Cohen, president of the Bakersfield Association of Realtors. ‘You’re seeing what I saw in the ’90s but you haven’t seen since 2000.’ Others, however, wonder whether the Bakersfield real estate market..will keep heading down. Agent Ryan McDonald said the jump in inventory is disturbing. ‘I don’t think it’s normalized,’ he said. ‘I definitely think it’s reverted to the buyers.’”

The Monterey Herald. “July was a record month for Monterey County home sales. But it’s not the kind of record anyone would want. As prices slipped and sales slowed compared to the previous month, unsold home inventory for July jumped to its highest level yet, and sales slumped by 50 percent over the previous summer’s sales volume.”

“July’s single-family home inventory was at an all-time high of 2,502. Median home prices dropped to $659,000 in July, down from $687,5000 the previous month, according to numbers provided by the real estate association. That median home price for July also slipped behind the median price of $698,000 for the same month a year ago.”

“But while prices in Monterey County haven’t dropped as drastically as in some regions of the country, the number of homes selling, or not selling, is the most dramatic shift in the local real estate environment. For Monterey County, July’s unsold inventory index was 14 months; Salinas was 15.”

“Buyers continue to gain ground compared to recent years, some sellers are resorting to incentives to lure buyers in. ‘There’s a lot of that going on,’ said Sandy Haney, CEO of the Monterey County Association of Realtors.”

“And skittish buyers, fearing they might be paying too much as prices drop, are becoming bolder in escrow, even asking to renegotiate. ‘Sellers don’t know what hit,’ said Haney, ‘and buyers are trying to figure it all out.’”

“(Realtor) Pam Panzis concedes that it’s a tough market right now. ‘I know there are new agents who are wondering, ‘Why did I get into this business?’ she said.”

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