The Housing Bubble

It’s desk clearing time for this blogger. “The housing market is now the all-consuming economic topic, and ‘prices are falling’ is the everybody-says, everybody-knows factoid du jour. I hate to give credence to those happy to see prices fall, but they are falling. OFHEO says that in the second quarter this year the overall deceleration in national prices was the most abrupt ever measured.”

“‘The boom is cooling now,’ said David Lereah, the chief economist for the NAR, who added that falling home sales have been ‘a bit worse than we had anticipated.’”

“According to the Ryland calculator, your monthly payments go toward $2,081 per month. That’s right, your payments will turn out to be 75% bigger than the teaser payment in their ad. Why is Ryland doing this? I think the answer could be that it’s desperate to sell homes. And more than that, it’s desperate to keep prices artificially inflated. Remember, much of the bubble depends on popular acceptance of the myth that home prices don’t fall.’

“The property boom has strengthened the traditional Irish desire to own a home, says Frank O’Dwyer, CEO of the Irish Association of Investment Managers. ‘Property is part of the psyche here,’ O’Dwyer says. ‘People found out if you bought property you couldn’t go wrong.’”

“‘It’s been a double whammy’ with sales falling and buyers canceling orders, Hovnanian CEO Ara Hovnanian said. Potential buyers ‘are reacting to the huge run-up in pricing we have had over the last 36 months. The Florida, Arizona and California markets are becoming very challenging.’”

“‘They’re dropping prices to keep their orders up, it’s that simple,’ said consultant John Burns.”

“Arkansas home sales were down for the fifth straight month in July, putting some home builders and developers in a difficult financial environment. There is a tremendous supply of newly built homes selling for more than $ 300,000 in west Little Rock, broker Roddy McCaskill said. ‘Builders over develop certain price points,’ said Larry Kelly, of the Arkansas Realtors Association. ‘For Sale’ signs line the sidewalks of subdivisions in the stagnant $ 300,000 to $ 400,000 price range.’”

“Home sales in the Colorado Springs area declined last month by the most in four years as the supply of homes on the market hit an 18-year high. ‘We are paying the price today because we borrowed buyers from the future yesterday and the day before,’ said Dave Bamberger, a local economic consultant.”

“It was with tongue in cheek Sunday that I wrote potential retirees to Arizona should consider New Mexico instead. But to some readers, them was fightin’ words. ‘We don’t really want them,’ wrote R.G of New Mexico. ‘They are an expensive lot and put demands on your infrastructure that are unsustainable in the long run. The best bet, really, is for retirees to stay where they are.’”

“With much of downtown Toronto’s housing stock sagging into dilapidation, builders and handymen would seem to have it made in the buy, fix-up and flip game. But just how easy is it to make money? ‘We could lose our shirts on this one,’ builder Randy MacKay says of project No. 3.”

“The steepest drops in price were for apartments in places such as West Vancouver, where the benchmark price for a condo dropped $30,000 to $584,000. ‘I think we are all in agreement that there will be adjustments in the market,’ said Dave Rishel, president of the Fraser Valley Real Estate Board. ‘We’d be fooling everybody to say that there will be a steady cycle all the way up to wherever.’”

“San Diego housing prices are reportedly dropping, but you wouldn’t know it from a real estate ad in one local community newspaper. A La Jolla condominium was listed for sale last week at $895,000,000. The line forms to the right.”

“You know the boom is over when even the brokers start predicting lower prices. That was true of the stock-market bubble in 2001, and it’s true now, as the air comes out of housing. Of course, the drop will be only temporary, the brokers’ group says, just until ‘the market works through a buildup in housing inventory.’”

“Anyone who didn’t buy a house last year in hopes of ‘flipping’ it for a quick profit should be fine, they assure us. And perhaps they’re right. But as long as ‘temporary’ lasts, we could be in for a bumpy ride.”

The Anacortes American reports from Washington. “With fewer buyers and more homes for sale, the housing market on the island is slowing down. Overall home sales were down 27 percent in Anacortes from January through July. But for buyers looking in Anacortes, that’s not entirely bad news.”

“‘We’re starting to see a ton of inventory so people have a choice and they’re taking time to make those choices,’ said broker Nate Scott.”

“As the island heads to a normal market, some sellers still have the pricing expectations of last year. With more homes for sale and fewer buyers, some sellers are having to reduce their prices. ‘We’re seeing as many price reductions as new homes on the market,’ he said.”

“Scott said there are high expectations on the sellers’ part but appreciation has changed. Sellers expect bidding wars like they had last year, which just isn’t happening.”

“‘The market is spent, Oppel said. There was a lot of activity the past two years and a lot of people who wanted to buy something have.”

“High-end homes are what’s hot. People are selling their homes in other areas, like California and Seattle, and they still see Anacortes as a bargain, Oppel said. ‘They’ve got the ability to pay more,’ he said.”

“Some people in the state are having to sell their homes or deal with foreclosures because of adjustable rate mortgages, Scott said. Esther Spence-Crabb, Anacortes Mortgage loan officer, said some buyers who opted to go with an interest-only loan are running into trouble because they bought more house than they can afford, she said.”

The Bend Weekly from Oregon. “Bob Wienk, a local real estate broker, says while people in the area have watched the prices appreciate greatly over recent years; the cost of living is still appealing to many. ‘We still look like a bargain to people coming from California, Washington State or the Portland, Eugene and Salem areas,’ he added.”

“However, Wienk says people need to pay attention to the third quarter results. ‘They will be very interesting,’ he said. ‘Since the end of June, things have cooled off.’”

“‘I have seen more decreases in the prices of homes for sale that are listed,’ he said. ‘I just tracked the month of August for curiosity sake and there are about 1,700-plus price decreases of the listed properties.’”

“It is a trend that is happening all across the nation. ‘Interest rates have gone up and speculators have gotten out of the market,’ Wienk said. Wienk thinks that may be one reason Bend is seeing more of a supply of houses for sale. ‘A recent survey done by a local company of homes currently for sale found that 50 percent of those homes are non-owner occupied and 30 percent of those homes are out-of-state owners,’ he said.”

“The majority of those homes, he believes, are owned by the so-called speculators. ‘The market here was going up so fast people were making money very fast by reselling, but that party is sort of over,’ Wienk said.”

Some housing bubble reports from Wall Street. “The housing market is looking sicker by the day. Economist Ian Shepherdson said that the housing market is so far gone that ‘it’s not rescuable anymore. The housing market is beyond the control of the Fed.’ He compared it to a football game played on a mountaintop. Once the football goes off the edge, he said, it doesn’t stop until it reaches the very bottom.”

“Even the homebuilders, long an optimistic bunch, are all but throwing in the towel on the current market’s condition. ‘We’re running our business today as if we’re in a prolonged downturn,’ CEO Ara Hovnanian of Hovnanian Enterprises told analysts.”

“Heeding the signs of a bursting bubble, St. Joe is bowing out of the Florida homebuilding market. Markets that went up too much, too soon will let gravity guide the way down. The news is unlikely to get any better in the near term. The overabundance of new and existing homes on the market will make this a buyer’s market for some time.”

“The strategy shift will result in job losses, the company said. Jacksonville, Florida-based St. Joe said it expects to take a $10.7 million charge, including $2.3 million for termination benefits.”

“Lennar Corp. Friday became the latest home builder to warn that earnings would fall short of Wall Street’s expectations. ‘The U.S. housing market has continued to deteriorate,’ Lennar CEO Stuart Miller said.”

“Miller said new orders appear to have declined 5 percent in the quarter. But higher sales incentives and ‘certain land adjustments’ were the primary factors behind the company’s lowered estimate, he said.”

“‘The market is very weak and may be staring at a hard landing,’ said Paul Puryear, managing director of Raymond James & Assoc. ‘Housing is a key driver in the economy, and consumers are in for some bad news in regards to the value of their homes.’”

“First Horizon National Corp. has laid off about 350 loan officers as the slowing housing market has taken a toll on its mortgage operations. At the same time, the holding company of First Tennessee Bank has decreased its staff by nearly 6 percent since the end of last year, a total of 759 employees.”

“‘What management appears to be doing is eliminating some of the cost in the infrastructure,’ (analyst) Kevin Reynolds says. In this case, the costs are people.”

“New Century Financial said August loan production fell 5% from a year ago to $5.8 billion. The company said interest-only loans fell to 17% of nonprime production in August from 35% a year ago. California-based loans slipped to 32% of nonprime production from 37% a year ago.”

“Washington Mutual said it is dealing with a tough interest rate environment, softening housing prices, an overcrowded mortgage business and overall economic uncertainty by placing less emphasis on residential home lending, pulling back on the number of branches it opens, closing others and continuing to cut employment.”

“WaMu CEO Kerry Killinger said he’s been cautious about the housing market for 18 months, feeling that prices had gone up more than fundamentals justified.”

“The market also has been plagued by too much capacity chasing declining demand, leading some lenders to aggressively price their loans which, when combined with the current squeeze on interest-rate margins from actions by the Federal Reserve, meant ‘the whole industry is earning a substandard return right now,’ Killinger said.”

“Killinger said WaMu recently has been selling 71 percent of its Option ARMs; in good years it would have kept most of that production. ‘I do expect delinquencies rates to rise because they’ve been at unsustainably low levels,’ he added.”

The Voice of San Diego reports from California. “If you want to know how a home building company is holding up in an uncertain housing market, just peek in its break room. ‘We used to have amazing food in our break room for free,’ Lennar Corp intern Travis Carter said. ‘Starbucks every morning with choice of five different creamers.’ Now, he said, it’s pizza once a month and Folgers instant coffee.”

“After many in the industry saw years of double-digit revenue increases, some are now scaling back their land holdings and number of projects, which has often meant laying-off employees. Executives at San Diego homebuilder Hallmark Communities noticed an estimated 40 percent decrease in traffic between the second and fourth quarter 2005. They laid-off half their staff in two waves of cutbacks earlier this year.”

“The effects of the cooling market haven’t been felt only in the construction industry. Many analysts are concerned that the job growth in construction, real estate sales and mortgage brokering while the market was booming will mean corresponding job losses as the market cools further. ‘During this big boom, a lot of people went into real estate,’ economist Alan Gin said. ‘I think there’s likely to be a shakeout there.’”

The LA Daily News. “Scheduled sales of foreclosed properties increased 11 percent in Los Angeles County during the second quarter from the prior three months, with the distress concentrated in the Antelope Valley and South L.A.”

“‘The Antelope Valley and Norwalk would both be entry-level markets. Sometimes people have really stretched’ to buy a house, said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp.”

The Ventura County Star. “It’s clear that the housing market is losing altitude, but debate continues about how everyone along for the ride is going to land. Ventura County’s real estate market is probably in a better position than many communities, economist Mark Schniepp said, because there was less investor speculation in the market.”

“His report shows that at the peak, less than 10 percent of purchases in Ventura County were pure investments, where the buyer had no intention of living in the house. In markets like Sacramento and San Luis Obispo, the rate was more like 18 percent.”

“‘The question is: Do we have enough momentum in all other sectors of the local economy to neutralize the severe weakness demonstrated by the residential real estate market?’ he said.”

The Union Tribune. “Each of the six economic indicators, residential building permits, unemployment filings, local stock prices, consumer confidence, help-wanted ads and national economic growth, has been in negative territory at least three of the four months from April through July. ‘What’s been frightening over the past four months is how negative all of the indicators have turned, reflecting general weakness in the economy as a whole,’ Alan Gin said. ‘In April and May, all six categories were negative.’”

The Gazette.net reports from Maryland. “The financial incentives that homebuilders are dangling before suddenly reluctant buyers may get even more enticing as the slumping home sales market crawls to 2007. ‘Builders will find every conceivable way to boost their sales’ to unload inventories during the slowdown, said Gopal Ahluwalia, for the National Association of Home Builders.”

“Some builders in Maryland are offering luxury cars, said John Kortecamp, CEO of the Maryland Home Builders Association. Such gifts, while they may seem significant to buyers, are minor expenses to builders charging $1 million or more for a house, Kortecamp said.”

“The program eases the concerns of gun-shy buyers, said John Lavery of Woodmore North homes. ‘We found that the concern among buyers was that there might be a better deal later,’ Lavery said.”

“Incentives are also being offered to condominium buyers. Builders lost ’significant’ confidence in that market in the second quarter, according to Ann Marie Moriarty, a spokeswoman for the association. ‘Responding to a set of special questions, 82 percent of condo developers said they had noticed buyer resistance to current prices and, of those, more than one-fourth reported that they have reduced prices,’ she wrote.”

“Ahluwalia said, ‘Lots of investors came into the marketplace and pushed the prices up the past few years and now prices are coming down to where they should be maybe.’”

The Baltimore Sun. “Greg Siciliano first put his Ocean City bayside condo on the market for $699,000 in May. By August, he had dropped the price of the two-year-old, two-story condo to $550,000, and had thrown into the package two WaveRunners and the pier out back. ‘I’m just a little discouraged with the lack of interest,’ said Siciliano.”

“He and other sellers have found their properties stuck in a glut of condos and townhouses that have flooded the market. Siciliano’s condo is one of nearly 1,700 condos for sale in Ocean City, and there is nearly twice as much inventory as in July 2005. In the first half of this year, 528 condos were sold in Ocean City, 42 percent fewer than in the first half of last year.”

“Linda Moran, a real estate agent in Ocean City, said she started noticing the slowdown in October. ‘It progressively has gotten worse, with more and more people putting properties on the market and less and less buyers,’ Moran said. ‘We’re at the saturation point of listings at this point, but they’re not selling.’”

From the Connection. “Statistics show the exurbs have been hardest hit by the region’s cooling housing market. ‘The further out you go, the more significant the decline in contract activity is,’ said David Howell, broker in McLean.”

“In Washington, D.C., home contract activity fell 7 percent in July compared to a year ago. In Montgomery County, Md., activity slowed 24 percent. In Arlington County, activity slowed 23 percent. In the City of Alexandria, activity fell 28 percent. For Fairfax County, activity was cut by more than a third. In Loudoun County, contract activity slowed more than 40 percent. In Prince William County, activity slowed nearly 50 percent compared to last year.”

“Ernie Miller, a broker in Springfield, said the market decline started from the outside and worked its way inward. ‘I’ve been doing this for 34 years, and when it slows down, we see slowing from outlying regions, and then it starts to creep in,’ said Miller.”

“He thinks the real estate boom of the past five years pushed prices up too fast. When homes were selling at the peak of the market, buyers overreached, taking out adjustable mortgage loans and buying at the top of their ability. In addition, speculators entered the market hoping to profit off higher home appreciation rates.”

“Last month, inventory was more than double what it was the same time last year. Together the two trends have put buyers in the front seat, but many are being patient. ‘Some [buyers] are just waiting for all this to settle down,’ said Miller. According to MRIS, home appreciation in July dropped 4 percent in Northern Virginia compared to last year.”

“‘Some people are forced to put their homes on the market,’ said Lawrence Yun, senior economist with the National Association of Realtors, adding that many sellers may no longer be able to cover their mortgages after being squeezed by adjustable interest rate loans that had extremely low introductory rates. ‘They may not be able to service these debts,’ said Yun.”

“Several realtors have noticed the same thing. ‘All of a sudden interest rates have jumped up and it’s just taking its toll. There’s nothing left for groceries and so on,’ said Miller. ‘We’re seeing foreclosures now like you can’t believe.’”

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