The Housing Bubble

The Reno Gazette Journal reports from Nevada. “Conventional wisdom might lead many to believe that sagging sales of existing single-family homes this year would be enough to send would-be Realtors to truck-driving school. But this year membership in the organization increased 13.5 percent.”

“‘People still think it’s a good business to be in, and that it is going to be an active business,’ said Reno-Sparks Association of Realtors President Stephen Haley. Haley said, about half of his members ‘have made less than three transactions this year.’”

“‘It’s a tough business to make it work,’ Haley said. ‘That realization takes about a year for a lot of people. So maybe a lot of those people that came into the business in the last 12 months will choose another course next year. But right now, there is nothing to indicate that that is happening.’”

“Sunil Joshi broke into the real estate business in 2004, during the height of the real estate boom. Joshi has had to learn to navigate a rapidly slowing market that has seen double-digit sales decreases, by percentage, in every month this year.”

“The Reno Gazette-Journal asked Joshi his opinions on the real estate profession, the changing market and what he has learned from the slowdown.”

“Q: ‘How has the real estate profession changed since the boom?’ A: ‘It’s changed quite a bit. We would go out and find some homes, and bam, it’s done. Now, when a buyer goes out you are expected to make a low-ball offer’.”

“‘Now, if I wanted to look for a home between $300,000 and $350,000, if I pull up a listing in Reno-Sparks, it will give me 500 homes. I can show 100 homes to one client, no problem. Just to satisfy a client, that has changed a little bit.’”

“Q: ‘How has buyer behavior changed since the boom?’ A: ‘Buyers are still there. The willingness to buy is not there. The problems coming up these days are the people that say that the market is going to crash, that it is going to go way lower than what it is right now. That is changing people’s mind, not anything else. As far as prices are concerned, people cannot afford to buy homes because (salaries) are still stagnant. That’s what is pushing people down.’”

“Q: ‘Have sellers changed?’ A: ‘Sellers are trying to do whatever they can. I noticed (Monday), there was a house listed (that I made an offer on) seven months ago. We made an offer on the house for $480,000, which was listed at $520,000, but they say they did not want to come down below $500,000.’”

“‘We then offered for $492,000. (Monday), I noticed they now have the house listed for $445,000. They thought at that time, ‘No, I don’t want to sell it for $492,000,’ when the buyer was willing and able to buy that house. If he didn’t stick to that pricing at that time, he would have gotten $50,000 more than what he has listed right now.’”

“‘Now, sellers are trying to cooperate with buyers as much as they can, because these new-home builders are offering way more stuff than what they used to offer. People are looking at homes that are 15 years or 20 years old, they are seeing that they can buy a new house for the same amount of payment. Sellers are trying anything possible to avoid having to pay two payments.’”

“Q: Is the slowdown a simple market correction or something more serious?’ A: ‘Looking at the market, it’s just the frame of mind that people have that that prices are just going to go lower and lower. It’s tough to say. I don’t know.’”

The Sydney Morning Herald has this report from Australia. “Sydneysiders are losing their homes at a record rate, forced out by crippling mortgage payments, exorbitant petrol prices and high personal debt. The latest NSW Supreme Court figures show repossessions by financial institutions are approaching an annual total of 5000, more than twice as many as three years ago.”

“Sydney real-estate agents have reported a sharp increase in repossession sales after home loan interest rate rises in May and August. ‘It’s very, very sad,’ said PRD Nationwide Liverpool’s Ray Dimarco, who has a number of default sales on his books. ‘We’ve had some cases where they’ve handed the keys over and they’re still wiping the kitchen down. They’re still proud of their home.’”

“Mr Dimarco said the market had slumped by up to 25 per cent in some pockets of Sydney, which had added to the panic in the market. People who had borrowed heavily to buy a $400,000 property just a few years ago wouldn’t sell it now for much more than $300,000.”

“At Annandale, a ‘mortgagee in possession’ house, bought 18 months ago for $750,000 was up for auction. But only a handful of interested parties went looking for a bargain. The Susan Street home passed in at auction without attracting a single bid.”

“Before the auction, Century 21 City West principal Matthew Meynell expected the three-bedroom, two-bathroom strata home to sell for about $550,000. Afterwards, a potential buyer offered a mere $330,000.”

“It’s not the only repossessed home in the popular inner-west. ‘There are a couple coming up and we have another in Annandale in a few weeks,’ Mr Meynell said. ‘I think some people overcapitalised and it has been very easy for people to borrow money.’”

From Lew Sichelman. “The lending business is marshaling its forces on an unprecedented scale to get in front of what could be a flood of foreclosures. With mortgage rates climbing, millions more borrowers with pay-option and interest-only loans face the prospect of larger payments in the coming months. Even those with conventional adjustable-rate mortgages will feel the pinch.”

“An estimated $375 billion worth of loans will adjust to higher rates this year and $1 trillion in 2007. Add in higher energy costs, higher homeowners’ insurance premiums and higher taxes, and it’s easy to see a disaster in the making.”

A recent topic suggestion revolved around the housing bubble ‘camps.’ “How to constructively communicate with agents, sellers and Joe’s on the street about the issues. I’m no anger manager, and I’ve ranted at some possibly nice folks. Forgot they were people like me, with kids to feed, just with different abilities and tools.”

“Let’s all agree to live together. Some folks are gonna burn. Face it, but don’t push their faces in the pee just because they pissed on the rug.”

“A lot of people here are highly-educated, learned on the job or had very terrific mentors. There are regular people out there who didn’t have the same opportunities. Our schooling system has failed. They never even learned to balance a checkbook in school. Remember, they are getting their stock advice at the legion hall.”

A reply. “I think the backlash directed at many of these people is a result of their own arrogance and know-it-all attitude that they projected over the past five years. I think they brought it on themselves with all of the buy now, RE never goes down, etc. crap. They took the ARMs, HELOCs, etc. resulting in the massive price escalation, while we took normal mtges and did the what was right for us. Now, we are supposed to have sympathy/patience for/with them????”

“Sorry, I don’t think so…. They ‘rode’ the crest, they crash with the wave.”

Another said, “Not after I’ve listened to them tell ME how stupid I am for not buying a house - ‘real estate only goes up,’ ‘rent is just throwing your money away,’ ‘I’ve already made 200K’ or having to stomach the general bragging of how great they are at ‘investing.’ These morons deserve every bit of ridicule they’re getting.”

A letter to the editor. “Re: ‘High home prices, stagnant wages put squeeze on middle class’ (Business, Sept. 3): Finally the citizens are getting smart enough to not pay those ridiculous prices and getting nothing. I mean, a home in North Hollywood with two bedrooms for $1 million? Now those money grubbers who are fleecing people who long to get some of that so-called American dream can eat the debt themselves.”

A Motley Fool. “I’ve spent the past few months casting a hairy eyeball at a lot of the pro-housing hypesters out there, the folks I feel have cheered on a dangerous bubble with little regard to the potential dangers to consumers’ pocketbooks or the economy at large.”

“So I want to be sure to offer a golf clap to one of the outfits that’s been in my crosshairs, the National Association of Realtors. Yesterday, for the first time that I can remember, it appears to me that the NAR came clean on the housing bubble, right out in public.”

“David Lereah, the endlessly quoted chief economist for the organization, finally acknowledged openly that sales are tanking and prices going down. He used uncharacteristically firm language, tossing out lines such as,’…people who purchased last year with the intent of flipping are likely to get burned.’”

“Unfortunately, this may be too little, too late. But hey, baby steps. At least the NAR has snapped out of the Kevin-Bacon-in-Animal-House-squashed-flat-on-the-sidewalk mantra: ‘All is well!’”

What do you see in your housing market this weekend? Builder incentives? How about a buyback plan? “Developers of Woodland Pond at Manchester are offering new buyers a two-year price protection guarantee. ‘We’re very committed and bullish on southern New Hampshire, and for good reason,’ parnet Robert E. Shapiro said.”

The Herald Tribune in Florida. “August is typically a slow month for real estate, but this is ridiculous. According to statistics compiled by John Lafabregue in Sarasota, just 4.9 percent of listed houses and 3.1 percent of listed condominiums were sold in August by members of the Sarasota Association of Realtors.”

The Pioneer Press in the Twin Cities. “Indecision is not an uncommon problem for prospective buyers looking for property in an area where sellers outnumber qualified purchasers, says Tom Early, president of the National Association of Exclusive Buyer Agents. ‘In a buyers’ market, with more inventory available each week, these women feel overwhelmed and can’t seem to make the right decision,’ says Early.”

“By Early’s estimate, buyers now prevail over sellers in more than 80 percent of U.S. neighborhoods. But he says this situation is only as advantageous to buyers as they make it.”

The Canaberra Times from Australia. “Established house prices could fall by about $100,000 if there were large-scale land releases, the author of a study on housing affordability widely quoted by government ministers has estimated. ‘Canberra is down there in the middle of a desert,’ Alan Moran said. ‘[There is] a lot of land around there and the land is worth around $10,000 a hectare. You get 10 blocks per hectare. It should be about $1000 a block.’”

From WHO TV. “You can find a ‘for sale sign’ on practically every corner here in Des Moines. While sellers cringe at the current trend, buyers are thrilled. They’re watching prices come down, and some developers are evening offering incentives to encourage them to buy.”

The Dallas News. “North Texas home sales continued to cool in August, the third consecutive month of declining residential activity. The pause after years of sales gains has caught the real estate industry’s attention. ‘People who have planned to sell at the top of the market may not get it,’ said (realtor) Sheila Rice.”

“‘Overbuilding in Texas is probably our biggest concern for the moment,’ economist James Gaines said. ‘The main thing we’re hearing and seeing is some slowdown in new home purchases and some buildup in builders’ inventory.”

“‘We don’t have a bubble in Dallas,’ she said. ‘But they are getting a steady diet of it in the media. If they keep hearing it long enough buyers will think that maybe they should wait,’ Ms. Rice said. ‘That could cause a problem if too many of them make a call like that.’”

The Tribune reports from California. “Home builders in San Luis Obispo County are scrambling to lure buyers. Incentives are being offered at a pace not seen since the early 1990s when the housing market suffered a serious downturn. Home sales are down 35 percent year-to-date. Inventory levels are high, with 2,514 homes in the county for sale and an additional 342 in escrow.”

“On top of slow sales, skittish buyers are canceling already-signed contracts, a phenomenon not seen in recent years.”

“Homebuyers aren’t the only ones getting nervous. In July, home builder Trimark Pacific backed out of a deal to develop 132 condo units that were expected to be priced in the $400,000 range. ‘They walked away from a substantial deposit,’ said (developer) Peter Laughlin.”

“‘It’s not the hot market of recent years, but we think it’s normal,’ said Jerry Bunin, at the Home Builders Association of the Central Coast. ‘Home building in the county is still not enough to meet demand.’ Bunin added: ‘However, we now have homes that are waiting to be sold. Builders are offering incentives to keep sales going at a steady pace.’”

The Hollister Free Lance. “Some sellers who saw their neighbors’ homes sold within days are now becoming frustrated at the amount of time the process is taking. ‘They’re looking to the agents and saying, ‘Well, where are the buyers?’ said (realtor) Jack Kirk Jr.”

The Valley Voice. “Housing market is tough on builders and home sellers and now banks too are seeing dramatically fewer loan applications. ‘We used to make 20 to 25 loans a month and now we are down to 1 or 2,’ says Visalia Community Bank chair Tokkie Elliott.”

“Realtors and homeowners are blaming the home builders for building too many new homes. Inventory of existing homes in the Visalia MLS is approaching 2000, about four times what it was a year ago. ‘Our inventory here and in Fresno MLS is the highest it has ever been,’ says Brad Maaske, a local realtor. Maaske suggests competition with the builders by offering incentives.”

The Sacramento Bee. “With work already well under way on his twin 54-story condominium and hotel towers, developer John Saca is obtaining an $11 million subsidy from the city and closing on his construction loan.”

“A few months ago, Saca began negotiating with the city for a subsidy, something he said he had previously viewed as ‘a last resort.’ ‘We absolutely need it,’ he said.”

“With $100 million in construction contracts signed, there’s no turning back, Saca said. ‘It will get built; it’s getting built. The question is whether John Saca makes any money at the end of the day. I could go through all this and end up making less money than I would have building a little Walgreens on the corner,’ he said.”

The LA Downtown News. “Standard Pacific Corp. announced last week that it is backing out of the Axis at Union Station condominium project. ‘With delays to get buyers into the building and the softening market, we came to the conclusion that we would not go forward with this project,’ said Steven Ross (of) Standard Pacific.”

“Reg Delponte said that the project is already starting to lease units as rentals. Occupancy will begin within a month. ‘We always thought that Downtown needed more rental inventory,’ he said.”

The LA Times. “Sobered up from frenzied exuberance over last year’s housing gains by this year’s declining sales, price reductions and increased housing inventory, a growing segment of Southland buyers are waiting on the sidelines for a significant downshift in prices.”

“And they appear to have a reason to wait. DataQuick Information Systems reported that the Southern California median price slipped (and) the number of sales dropped. With an estimated one-third of Southland properties currently ‘wildly overpriced,’ according to John Karevoll at DataQuick, patience could be a home shopper’s best virtue.”

“‘If you’re a buyer, there’s no hurry at all,’ said Edward Leamer, of the UCLA Anderson Forecast. ‘Prices are going to be a little weaker a year from now, and there’ll be more listings and more choices.’”

“Karevoll said there are many sellers stuck in a get-rich-quick fantasy. ‘You’ve got all kinds of people trying to gain the peak of the market by putting properties on the market at fantasy prices.’”

A housing report from the Chicago Tribune. “As the housing boom winds down the finger-pointing is just warming up. Last week, home builder Robert Toll, CEO of Toll Bros., one of the country’s largest builders, jumped on the blame bandwagon, pointing to terrorism, the war in Iraq and Hurricane Katrina as reasons for the weakened demand for housing.”

“Among the leading suspects: a bubble-obsessed news media; overly cheery housing-industry economists; zealous real estate agents; and bankers offering low mortgage interest rates that carried on too long. Overly lax lending standards that made homeowners of people who could not afford it; the horde of neophyte investors who overpaid for their acquisitions; and builders throwing up too many houses.”

“Without doubt, the market has slowed. David and Erin Kerpel of Deerfield are representative of those statistics. In July they bought a bigger house across the street from where they have lived for three years. They expected a quick sale of their former residence. But after a few showings they are still waiting for an offer.”

“‘It’s dead. The market is dead,’ David Kerpel said recently. ‘There are no buyers.’ ‘I’m tempted to say that, yes, the market is dead,’ said North Side broker Bruce Theobald.”

“That’s probably because there is an avalanche of homes for sale. In the Chicago area alone more than 95,000 properties are on the MLS of Northern Illinois, fully 40 percent more than a year ago.”

“Area sales prices were still on the plus side in July, the Realtors said. That may be about to change.”

“‘I’m probably going to say that prices turned negative [in numerous metro markets] this month,’ when September sales data are released in October, David Lereah, chief economist for the National Association of Realtors, said Tuesday.”

“‘For a couple of quarters you’ll see price drops from 2 to 5 percent,’ he said in an interview. ‘It’s going to be short-lived, though. If there’s any national downturn, it will probably last a quarter.’ That’s because Lereah predicts the market will pick up again next year after sellers begin to cut prices this fall.”

“‘They will have to, he says. He says that all talk of the Fed’s role, shaky mortgages and irrational speculators aside, what’s at the root of the market stall is sellers’ reluctance to budge on their asking price.”

“Lereah focuses on speculators who acquired properties too high and mortgage products whose interest rates have begun to reset at unaffordably higher rates. ‘Basically the speculators and the exotic mortgage instruments, interest-only loans and zero-down payment loans that permitted households to purchase at lofty prices, they emptied the punch bowl at the party,’ he said.”

“‘This boom would have gone on a little longer if not for them,’ Lereah said. ‘They took prices up higher than they should have been.’”

“Broker Theobald said ‘the non-stop volume of articles on the housing bubble, well, it seems like it did become a self-fulfilling prophecy.’ Lereah sees some truth to that. ‘A lot of Realtors are very angry at the media,’ he said. ‘By discussing the boom building and by anticipating the boom busting, I think it did add to some of the negative psychology.’”

“Lereah and his fellow housing industry economists don’t come out unscathed. Critics say they generated unfounded optimism that the housing market would soar perpetually. Lereah counters that he has been forecasting a change for some time. ‘I’ve been wrong for three years in a row. I’ve said we’re about to get a correction. For three years, I’ve said, ‘This is the year that sales will come down.’”

“‘But now, it’s not because mortgage rates went up, it’s because of the psychology of the marketplace,’ he said. ‘The prices just got too high.’”

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