The Housing Bubble

The Review Journal from Las Vegas. “Home sales continued to slide in Las Vegas during August, dropping 37 percent from the same month a year ago to 2,097, the Greater Las Vegas Association of Realtors reported Friday. It’s the 11th consecutive month of declining single-family home sales, starting with a 1.2 percent drop in October to a 38.5 percent drop in July.”

“‘What you’re seeing is a few things,’ housing analyst Stephen East said. ‘On the existing (resale) side, while the price may not change, sellers are willing to pay closing costs or put money in escrow. On the new side, it’s incentives. Builders want to keep prices up so people who bought six months ago don’t feel like they suddenly have a big loss on the house.’”

“Sellers are beginning to understand the housing trend and fewer speculative sellers are putting their homes on the market, Rheinberger said. ‘If they’re not players, get out of the way,’ said Linda Rheinberger, president of Greater Las Vegas Association of Realtors. ‘Either delist the house if you’re just testing the waters or maybe sit back and wait.’”

“Dennis Smith of Home Builders Research said Las Vegas is not alone in the throes of a declining housing market. Resales have dropped 25 percent in Phoenix and inventory has surpassed 45,000. ‘Homeowners refuse to believe their home is worth less than it was a year or two ago,’ Smith said. ‘It’s hard for anybody to give up even part of the 30 (percent) or 40 percent appreciation gain realized over the past year or two.’”

In Business Las Vegas. “A growing number of home sellers are mimicking builders in offering everything but the kitchen sink to entice buyers. With more than 20,000 homes on the MLS, a nine-month supply, more and more sellers are turning to exotic incentives to lure buyers.”

“‘In this market, we are competing head to head in a big way with new home inventory,’ said (realtor) Linda Rheinberger. ‘We are responding directly to competitive conditions and assisting the buyer where it counts, which is the wallet.’”

“As the inventory of new homes has swelled, homebuilders became aggressive. Homeowners putting their properties on the market suddenly found themselves competing against builders offering swimming pools, washers and dryers, moving expenses, free lawn maintenance and other incentives valued at tens of thousands of dollars.”

“‘The problem is that the builders are giving away all kinds of things to the buyers and the agents both,’ said agent Geri Monticelli. ‘Resale homes have to be able to compete. If a person is trying to sell a home and a new home is built in the same subdivision, it is difficult to compete with the builder.’”

“Sellers, however, won’t be able to break the bank. Mortgage lenders typically limit the buyer to accepting incentives of no more than 3 percent and other deals would have to be done outside of escrow, agents said. Some homeowners are even turning to sell their homes on contract over time because they can no longer afford the payment themselves and fear a disclosure.”

“Some sellers are being unrealistic in pricing their homes too high, agents said. Rheinberger said some sellers would rather turn to incentives than lower the price of their home as a matter of pride. They have their own idea of what their home is worth and don’t want to go below that mark, even if they have owned it for several years and will profit handsomely.”

“‘They want to tell people at cocktail parties how much they made on their house,’ Rheinberger said.”

“Broker Ron Haze called such incentives ‘flash and sizzle’ that won’t woo savvy buyers. He said a more traditional incentive such as contributing to closing costs is more effective, but there is one incentive that works best. ‘Pricing the home correctly is better than any incentive you throw out,’ Haze said.”

The Star Bulletin reports from Hawaii. “Median home prices on the Big Island, saw a 14 percent price drop (from) a year ago. On all the neighbor islands, much like Oahu, the pace of home sales declined dramatically, reflecting a deceleration in the market during August.”

“On the Big Island: Only 169 homes were sold in August, compared to 256 at the same time last year. On Kauai: Sales dropped to 35 in August compared to 56 at the same time last year. On Maui: Sales fell to 95 compared to 129 in August 2005.”

“‘Whether the market turns, whether up or down, resort areas are always the ones to feel it first,’ said broker Dana Kenny in Hilo. ‘The market has slowed here, and you’re seeing some price adjustment.’”

The Honolulu Advertiser. “Sales of previously owned Neighbor Island homes fell sharply in August as demand continued to weaken. Maui’s condominium market saw the greatest slump with 66 sales, down 65 percent from 187 in August 2005. There were 95 Maui single-family home sales in August, down 26 percent from 129 a year earlier.”

“On Kaua’i there were 35 single-family homes sold sales, down 38 percent from 56 in the same comparable period. There were 29 Kaua’i condos sold, down 52 percent from 60 in the same period.”

“In North Kona district, there were 145 vacant lots sold in August, but was that a fraction of the 597 that sold a year ago. A rush to buy lots in Puna district has lost steam, 88 lots sold last month compared to 377 in August 2005. The same thing happened in Kau district, which saw 124 lots sell in August 2005 but only 24 last month.”

“The pace of sales in Oahu’s residential real estate market declined dramatically in August. The number of houses sold fell 22.8 percent from the year-earlier. Condominium sales also declined 30.2 percent last month.”

“‘We had an exceptionally long period of expansion — more than eight years starting from the second quarter of 1997 through the third quarter of last year. Historically, previous ‘up’ phases in Oahu real estate cycles lasted no longer than five years before normal conditions were restored,’ said Harvey Shapiro, research economist at the Board of Realtors.”

“While there’s no sign of an impending bubble burst in Oahu’s housing market, air is slowly seeping out of yesterday’s hottest markets such as Kahala, Hawaii Kai and Kailua.”

“‘We’re seeing downward price adjustments in some of the markets that led this cycle’s acceleration,’ said Scott Higashi, VP for Prudential.”

“The median price paid for a single-family home in Waialae-Kahala dropped 12.5 percent in the three months that ended Aug. 31 from the same period a year earlier. Oahu’s other most-popular neighborhoods also showed significant declines in prices, with Kailua experiencing a 6.8 percent downturn, Hawaii Kai falling 4.6 percent and the North Shore beginning to flatten, Higashi said.”

With all the home builder news out this past week, readers suggested related topics. “How about a ranking of public homebuilders in order of likelihood of implosion i.e. weakest to the strongest? Nominate your ‘favorite’ HB below for inclusion!”

One nomination, “From the bigger builders i vote for WCI. The first quarter 07 will be the make or break for them. They think they can sell the new condos. Good luck.”

Another said, “The homebuilders are screwed a lot worse than many think they are, especially smaller private developers and builders. Not only will they have massive inventory write-downs when they can’t sell the land for what they bought if for, but they also have massive interest expense built into the homes they are building.”

“I was just looking at KB’s latest 10-Q and saw that the amount of capitalized interest this quarter almost doubled from last quarter (up $50m+) and inventory climbed by over $2b. That ‘additional’ capitalized interest..represents an unusual high level of inventory on the books. Writing down their inventory by 30% would wipe out nearly all of the companies equity. And KBH is one of the stronger companies.”

“This same dilemma is also affecting smaller home builders across the country. Massive bankruptcies with developers all over the place. They simply can’t sustain the level of inventory they have. They have to move it quick.”

And another, “Why does the stock market have such a hard time figuring out the obvious? Why does the market not quickly price in common knowledge? When the conundrum ends, you can be sure the homebuilder share prices will have reverted to pre-Y2K levels.”

One on Ryland Homes. “I know that Ryland is discounting inventory homes heavily & renegotiating deals with current contract holders to keep them in line, after only offering incentives in the spring. So maybe they can ride it out if they play it smart and build smaller & cheaper homes to keep the first time home buyers in their niche.”

The LA Times. “Irvine-based Standard Pacific, which builds houses in California, Texas, Arizona and Colorado, will lower its earnings forecast for the third quarter and 2006, after new-home orders fell 58% in July and August from a year earlier.”

“‘We expected to be down year over year, but not to this degree,’ said Andrew Parnes, Standard Pacific’s CFO. ‘Clearly it’s turning out to be a more difficult situation than we thought at the beginning of the year.’”

From Reuters. “Leading U.S. home builders appear to have adopted one of two strategies to endure a rapidly deteriorating housing market, based on differing bets on just how long the slump will last and how bad it will get.”

“In one camp, which includes Hovnanian, Lennar and D.R. Horton, are companies that will prop up home sales by cutting prices.”

“In the other, including Toll Brothers, KB Home and Ryland, the companies plan to hold prices steady but sell fewer homes, to protect operating margins.”

“‘You don’t want your customers to get used to aggressive incentives,’ J.P. Morgan analyst Michael Rehaut said. ‘Obviously, the auto industry has continued to find itself in that position and it’s not a good position to be in.’”

“Hovnanian discounted prices in weaker markets, such as southeast Florida, which went from one of last year’s hottest markets to what Chief Executive Ara Hovnanian called either ‘the worst market in the country’ or one of the worst.”

“‘It is clear that the significant decline in our pace of net contracts per community has been partially offset by our growth in communities, which has kept our absolute number of sales from falling more substantially,’ CEO Hovnanian said. But net contracts per community stood at 7.7, down almost 40 percent from a year earlier and the lowest in 10 years.”

“On Friday, Lennar warned that its use of incentives was one of the reasons that earnings for the most recent quarter would fall short of its prior forecast. But it also said orders declined only 5 percent for the same reason. Horton and Lennar are two of the most tenured management teams, said UBS analyst Margaret Whelan. ‘You would think they’d be the best operators in a correction like this. It’s the worst strategy. They’re going to have the most margin erosion because of that.’”

“‘But if the market gets much worse in ‘07 and ‘08, Horton is going to look like the smartest guy in the room,’ Whelan said.”

“Toll offers ‘incentives.’ Although gross margins declined 410 basis points, they still topped 29 percent, analysts said. However, Toll issued a forecast that implied new orders will start to significantly improve over the next two quarter.”

“But Raymond James’ Rick Murray had his doubts, given that Toll’s orders fell 48 percent in the most recent quarter. ‘We believe a rebound in fundamentals is not in the foreseeable future,’ he said.”

The Baltimore Sun reports from Maryland. “The number of houses sold in the Baltimore area fell more than 25 percent in August compared with August 2005, leaving frustrated sellers with houses sitting on the market longer than expected. The area has not seen such a sharp decline in sales in any month since the MRIS began tracking data in the region in March 1999.”

“The number of sales slipped at least 19 percent in all jurisdictions, with the biggest declines, just over 30 percent, in Baltimore City and Carroll and Howard counties.”

“‘The market is returning to normal, before it became a crazy market,’ said Lisa Edleman, a real estate agent in the Baltimore area. ‘Everything can’t continue to go up by 25 percent a year. I’m not sure anybody could afford it.’”

“Economist Anirban Basu and some real estate agents said sellers are still expecting increases and refusing to negotiate, even after the market turned in buyers’ favor. ‘The housing bubble was not necessarily forming during the time of rapid appreciation in recent years,’ he said. ‘The housing bubble formed because sellers have been so slow to respond to the reality of an emerging buyer’s market. And because they have been so slow to respond, the active inventory has continued to climb and climb and climb.’”

“Stephanie Bamberger, a real estate agent who works a territory from Harford to Prince George’s counties, said, ‘Sellers are not wanting to budge, and buyers are becoming very adamant about wanting sellers to budge.’”

“She said she recently represented a couple that decided to hunt for a house over the summer when prices started coming down. ‘They wanted closing costs, they wanted a reduced price,’ she said. The couple made offers on two houses, and both sellers rejected the offers. The couple ended up buying a new house from a builder offering buyer incentives.”

“Darlene and Robert Johnson put their two-year-old, four-bedroom house in Nottingham on the market in April for $550,000, and have reduced the price to $469,900. Despite cutting the asking price, the couple hasn’t had a single offer on their home.”

“‘It’s very frustrating,’ Darlene Johnson said, adding that she sold her previous home, a townhouse in Abingdon, in a day two years ago. ‘The market is not anything like it was two years ago. This is definitely a buyer’s market, and they have quite a few to pick and choose from. I expected a couple of months, but I didn’t really expect for it to go on this long.’”

The Washington Post. “The president of the National Association of Realtors, Thomas Stevens of Vienna, admits he didn’t follow his agents’ advice when the real estate market started to cool. That, he says, is why his old house in Great Falls has now been on the market for a year at the price of $1.45 million.”

“‘What I should have done,’ confessed (Stevens), ‘was listened to my agent and cut the price by $50,000 to $100,000 early on, and the property would have sold last October.’”

“Now Stevens, like so many other home sellers in the Washington area and around the nation, is waiting for a buyer in a market that has totally reversed course since a year ago. With two or three times the number of properties listed this year as last in some neighborhoods, agents are urging sellers to lower their expectations, put on their best face and offer incentives such as closing cost help.”

“But, he noted, in his defense: ‘Who knew last September how long this down trend was going to continue,’ after so many years of climbing upward?”

The St Petersburg Times reports from Florida. “Evidence is mounting that the downturn in Florida’s real estate market may be broader than experts had expected. St. Joe Co., the largest private landowner in Florida, is exiting the homebuilding business in the state. Giant homebuilder Lennar Corp. of Miami is reducing its third-quarter earnings estimates. And the National Association of Realtors predicted home sales will be lower than projected throughout the remainder of the year.”

“‘Given difficult market conditions, we have limited our land purchases while we have remained focused on..minimizing completed inventory,’ said Lennar president and chief executive Stuart Miller, who said his company is limiting land purchases and minimizing inventory because of market conditions.”

“But analyst Alex Barron said he remains unconvinced that other builders, who are also feeling the strain of slow sales, will jump on St. Joe’s offer of sites. ‘All homebuilders find themselves with too much land and are in the process of writing off land options and trying to shrink their land portfolios,’ said Barron. ‘Joe’s decision to exit the homebuilding business is a clear indication that builders are now losing money by building homes in Florida.’”

The Tallahassee Democrat. “St. Joe’s departure, and the entry of national home builders into the region, could mean stiffer competition among subcontractors resulting in lower home prices, said David Wamsley, CEO of K2 Urbancorp in Tallahassee. ‘When they come in and see some of the pricing they have had to see with subcontractors in this market, I think it’s going to shock the system a little bit,’ Wamsley said. ‘Ultimately it will reduce the price of a house.’”

“The Miami Herald. “Signs the once-hot housing market continues to cool keep coming: Homebuilder Lennar said Friday its third-quarter earnings will be much lower than projected. The Miami-based company blamed a decrease in new orders, increased use of sales incentives, and certain land adjustments.”

“While many builders believe the South Florida market’s long-term prospects are very bright, the ‘duration of this transition is unknown,’ said Antonio Mon, CEO of Hollywood-based homebuilder Technical Olympic USA.”

“The Miami City Commissioners expressed skepticism about using any community redevelopment funds to assist the developers. The developers have requested $200 million in such funds.”

“Developer Mark Siffin wrote to ask for help to pay for a parking garage and street improvements near the arts center. He said the project would provide public benefit and cited the ‘current environment of increasing construction costs and high land prices.’ Miami Mayor Manny Diaz said the developers approached him earlier this year and asked for $200 million from city coffers. He said it would be a poor use of public funds.”

“‘The answer was very clearly no,’ Diaz said. ‘I couldn’t see government putting money into that kind of a private project. In a property like this that is right next to the PAC, where every major private developer in the world submits a bid, and they want a subsidy? I flatly rejected them.’”

The Tampa Tribune. “Real estateagents Bethany Ezell and Kesia Thompson didn’t set out to manage rental property. But the sluggish housing market has turned them both into quasi-landlords.”

“They were among more than 50 students attending The Landlord Academy’s recent eight-hour property management class. Ezell and Thompson attended because the glut of houses on the market has turned some would-be sellers into accidental landlords. ‘It’s kind of fallen into our laps,’ says Thompson.’

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