The Housing Bubble

The Record.net reports from California. “The red and white banner hanging outside the entrance to Lathrop’s Mossdale Landing housing development can be seen from the freeway advertising ‘new lower prices.’”

“In one of the neighborhoods featured on that sign, development company Beck Properties Inc. has slashed prices on some new homes as much as 11 percent, and about a dozen of their houses are still available.”

“It is likely just another indication that the ballooning housing market is slowly deflating, experts say. But growing San Joaquin County cities such as Lathrop and Manteca, where local governments depend on the varieties of revenue that growth produces, could face significant consequences if home sales dip low enough that developers scale back their massive projects.”

“City payroll costs would keep rising as revenues stagnate, raising the likelihood of staffing cuts, (and) reducing the money available to provide day-to-day city services such as police protection. ‘The housing market is what it is. There’s nothing we can do whether it’s hot or cold,’ said Manteca City Manager Bob Adams.”

“The signs of slowdown are present in San Joaquin County. Even though prices rose, second-quarter sales of new homes in the county were down by 40 percent from a year ago, according to a July report.”

“A report from University of the Pacific’s Business Forecasting Center predicted developers might cut back on building. So far, officials in Lathrop and Manteca say they have not seen any signs of cutbacks because the cities are still issuing residential building permits at a steady rate.”

“In Lathrop, for example, the city issued 682 single-family home building permits from July 2005 to June 2006, up 4.3 percent from 654 permits the year before. In the past two months, the city already is on pace to see another increase, issuing 187 permits since July.”

“Lathrop has as many as 20,000 new homes planned for west of Interstate 5 in the next two decades and charges thousands per home in fees. If housing slowed down, the city may find it difficult to fund those projects.”

“‘If developers start to slow down in the region, obviously (cities) are going to see a decrease in revenues,’ said economist Sean Snaith. But, he said, ‘I think this is a short-term situation.’”

“That is because demand in markets such as Manteca and Lathrop is not likely to fall too sharply, he said. Thank the Bay Area’s expensive homes, which continue to make south San Joaquin County attractive to home buyers.”

The Porterville Recorder. “As Tulare County enjoys a bustling economy and housing market, officials at the County Administrative Office said Thursday they are keeping their spending in check.”

“Assistant County Administrative Officer Jean Rousseau said they have learned from the state’s mistakes. ‘We have more money that we have had in the past,’ said Rousseau, who compared the counties upswing in assessed property value to the dot-com boom in the early 1990s. ‘We don’t want to put that growth into program spending.’”

“Just like when the bubble burst on the technology industry, the county is preparing for an eventual downturn in the housing market. Rousseau said that means basing their budgets on historically normal revenues as opposed to the inflated numbers in recent years.”

“‘We want long-term fiscal stability,’ Rousseau said. ‘What’s the point in spending when you will have to come back the next year and cut it?’”

The Longmont FYI reports from Colorado. “Colorado leads the nation in foreclosure rates, and Weld County leads Colorado. Weld housing officials blame the phenomenon mostly on gullible buyers who accept risky home loan packages including adjustable-rate, no-money-down and interest-only mortgages. Whatever the reasons leading to the spike, home values have dropped.”

“In the second quarter of 2006, one of every 66 households in the county was in some stage of foreclosure. ‘Wages did not keep up with the appreciation of homes,’ said Matt Revitte, a housing broker in Greeley. ‘So many buyers bought into a multitude of loan products thinking the party wasn’t going to end. But it happened. It always happens.’”

“‘They can’t pay it because they haven’t received the promotions or raises they were counting on at work. They can’t sell their house because too many similarly desperate people have also put their houses on the market, and at super-low prices in their rush to unload. ‘Now panic starts to set in,’ Realtytracs’ Rick Sharga said. And with missed mortgage payments, here comes the bank.”

“Some say the county is overbuilt and that local governments should issue fewer building permits. Others argue developers wouldn’t still be building unless they believed their homes would sell soon. The market will take care of itself, they say. In any case, Weld County residents need to start buying homes within their means, said Tom Teixeira, director of the Greeley/Weld Housing Authorities.”

The Denver Post. “The Colorado and U.S. economies appear to be gliding to a soft landing heading into 2007, although a slowdown in consumer spending could cause them to sputter, economists said Thursday at a gathering of construction-industry workers.”

“Cliff Brewis, an economist with McGraw-Hill Construction, said the economy appears stable, although portions of the construction industry are poised for a slowdown. He said the residential market has clearly softened, although ‘we don’t expect it to fall off the shelf.’”

“Metro-area home prices dropped and the number of sales rose as the peak homebuying season came to a close in August, according to a report released Thursday. ‘Everybody who had to be in a home before school started is done,’ said Gary Bauer, an independent real-estate consultant in Denver. ‘Now comes a cooling-off period.’”

“Bauer attributes the price declines to pressure from new-home builders, who overestimated demand and have had to offer large incentives and price reductions to move their inventory.”

“The inventory of unsold homes, which reached a record 31,989 in July, fell about 1 percent to 31,664 in August. Bauer attributed that to unsuccessful sellers pulling their homes off the market with the start of school.”

Some housing bubble reports from Wall Street and Washington. “Citigroup on Monday cut its price targets on nine U.S. homebuilders. Citigroup said industry demand had pulled back more sharply than anticipated and that the brokerage was now more conservative about its sales and margin assumptions for all the builders.”

From Paul Muolo. “A few days after Merrill Lynch inked a deal to buy subprime giant First Franklin for $1.3 billion, a company analyst issued a report declaring that the ‘yield curve has now completely inverted,’ while predicting a profit ‘recession.’”

The New York Sun. “The ability of the housing market to withstand actual price losses looks like it may be soon coming to an end. In other words, because the housing boom has now evolved into an undeniable housing slump. A futures contract traded on the Chicago Mercantile Exchange, based on the S&P/Case-Shiller Index, shows that traders are pricing in a 2.3% decline in nationwide home prices in November and an additional 1.3% dip by February before reaching the expected 6.3% decrease in May.”

“S&P’s homebuilding analyst, William Mack, notes that if potential buyers aren’t able to finance with lower mortgage rates, they at least want to see lower prices, Mr. Mack points out. The buyers, he adds, are saying, ‘We think we can get better prices. Why should we lock in now?’ And those who are putting deposits down are backing out because they see indications the prices may fall, he says.”

From Business Week. “The U.S. economy should slow in coming months, which should slowly ease inflationary pressures, Federal Reserve Bank of Boston President Cathy Minehan said Monday.”

“One ‘obvious concern’ to the economic outlook, Minehan said, is housing. While she’s ‘comfortable’ with forecasts for a ‘moderate downturn’ in residential building, Minehan cautioned that recent data, including ‘gloomy assessments’ by home builders, ‘remind me that this assessment could well be optimistic.’”

“‘There are clear risks to the baseline housing outlook,’ she said, citing the effect of higher mortgage rates on borrowers, particularly sub-prime borrowers.”

From Holden Lewis at bankrate.com. “If you have an option ARM, here are (some) warning signs that you are assuming a lot of risk. One: You don’t understand how an option ARM works, but you have one anyway.”

“You exaggerated your income on your application. A lot of option-ARM borrowers have stated-income loans. If you puffed up your income, you are more likely to default. You regularly have been making minimum payments, not paying down your debt and, in fact, increasing it.”

“‘It’s a monthly toll,’ says Bob Moulton, president of a brokerage on Long Island, N.Y. ‘I mean, they’re angsting over this change happening each month. This is what I’m seeing,” Moulton says. ‘The worst is if you have that and the home equity (loan) on top of that. You see that going up every month and you’re dying.’”

“House prices in your neighborhood are falling. The danger with falling houses prices is that you could end up owing more than the house is worth. ‘Basically, what you’re going to have on a lot of those pay option ARMs is you’re going to see a lot of customers giving the keys back,’ says Mark Lefanowicz, president of E-Loan.”

The USA Today reports on September 11th and the markets. “Since the attacks hit during a recession, it forced the Federal Reserve to slash short-term interest rates more than expected, says Liz Ann Sonders of Charles Schwab. Short-term rates hit an almost unheard of low of 1% in 2003, which helped inflate a housing bubble, she says. Now that bubble’s deflation is haunting investors, she says.”

The Street.com. “Could there have been a U.S. housing boom without the events of 9/11? It’s a matter of much debate. Most experts agree that the U.S. housing boom was caused by a confluence of factors set in motion in 2001, including very low mortgage rates and a newfound desire for tangible assets like real estate.”

“It’s a mistake, though, to think that 9/11 alone created these factors. In fact, the Nasdaq’s plunge in the spring of 2001 first put the ball in motion for the Federal Reserve’s rate cuts and the flight to hard assets after millions of Americans saw their paper wealth evaporate in the dot-com bust.”

“Prior to the attacks, the U.S. housing market was floundering with the rest of the economy. It’s hard to imagine a time when housing wasn’t a dominant topic on Americans’ minds. But in 2000 and early 2001, housing sales were flat and residential spending was slow.”

“In summer 2001, the U.S. faced a weak economy, a weak stock market and a meandering real estate market. The Fed had already cut short-term rates from 6.5% at the beginning of the year to 3%. ‘The Fed was cutting rates because the economy had slowed dramatically; 9/11 most likely worsened that recession,’ says economist Phillip Neuhart.”

“Sales did not immediately boom, though. Five weeks after the attacks, Jonathan Miller, head of New York City real estate appraisal firm Miller Samuel, thought about changing careers because the market was so slow. But near the end of 2001, Miller began noticing some of the beginnings of the boom.”

“Around this time, Miller witnessed a five-way bidding war for a one-bedroom apartment in a nondoorman building in the East 50s, an unusual phenomenon, since this was not a luxury property but a fairly generic one.”

“This trend began to repeat itself, and bidding wars became the norm in New York City and areas of California in late 2001.”

“By February 2002, the National Association of Realtors was reporting that January’s existing home-sales data had hit a record monthly high. By April 2002, Federal Reserve Chairman Alan Greenspan was already addressing the issue of a possible bubble forming in real estate prices.”

“As the housing bubble deflates, no one knows for sure how dramatic the boom would have been if the terrible events of 9/11 had never happened. Still, it’s hard to imagine any sort of housing boom happening without the dot-com bust first occurring.”

The Palm Beach Post reports from Florida. “Big home builders have been warning Wall Street for months that housing demand just isn’t what it used to be. They’re slashing profit targets as stocks slide and would-be home buyers try to make sense of it all. Even in Port St. Lucie, the country’s third-fastest-growing city, the trend is playing out.”

“For proof, look no farther than the 203 single-family home permits in August, down 70 percent from the 669 permits issued in August 2005. The figure has been dropping all summer.”

“With the real estate market showing little signs of revival, some condo converters are facing this dilemma: Should I keep trying to sell these units as condos, or just give up and go back to apartments? Folks who bought units in condo conversions are starting to realize their new homes still operate more like a rental apartment than a condo. Short-term renters are being cultivated, even as sales continue slowly.”

“As condo conversions limp through the summer, it seems the longer sales go on, the more some buyers become skittish and cancel their reservations. At the 160-unit Pineapple Grove Village in Delray Beach, for instance, sales and/or reservations stood at 104 in September 2005. But as of July 1, that figure had dropped to 85, Jack McCabe said.”

“Another Strand condo has unraveled completely. Developer Cary Glickstein has canceled The Strand condo in downtown Delray Beach and returned $15 million in deposits. A factor that ended the project: Glickstein’s buyers were tired of the waiting game. The final straw was seeing one buyer, ‘near tears,’ come into the sales office, Glickstein said. The buyer had used his daughter’s college tuition for his down payment.’”

The Sun Sentinel. “Michael Perlmutter’s someone who spots homes in foreclosure or preforeclosure and then resells them. ‘Eighty percent of the part-time weekend investors who dabbled in real estate have folded,’ he said. Perlmutter said he gets five to seven calls a day from people in financial difficulty looking for someone to buy their houses. ‘There’s never been a better time than right now because of the supply,’ he said.”

“Gone are the campers, the speculators who lined up, sometimes for days, to snap up prime condo units at early prices. Local expert Mark Zilbert in Miami Beach, said that half the buyers who hold contracts on preconstruction condos, most of them real estate speculators, don’t want to complete the purchases on their condos.”

“‘They just want their deposit back to get out of it,’ he said. ‘So an opportunity lies for someone approaching a buyer who bought an apartment in 2003 or 2004 and offering them their contract price.’”

The Pensacola News Journal. “More than a dozen Perdido Key condominium associations are alleging the county has overvalued their property. In 2005, values shot up as supplies dwindled and demand for housing surged. This year, properties are languishing for months on the market, if they sell at all.”

“‘The actual values for 2006 are going down because of a glut of condos,’ said Chuck Hoffman, who owns property on Perdido Key.”

The Naples Insider. “New construction developments (and apartment conversions) released in 2004 and much of 2005, that would normally take several years to sell, took just a matter of days to sell to investors. When built, many investor owners wanted out, vs. waiting for some future date to sell. Basically, rolling several years worth of future listings of homes, forward to today.”

“The market has homes that would not normally even exist, listed for sale. And if they did exist would be owned by an end-user buyer, and not be for sale. Overall, Naples has about a 19 month supply of homes for sale. At least 50% of homes are listed significantly above current market prices and have only a lottery’s chance of selling.”

“When sellers realized they could not get 20% higher than peak, they lower their prices to the peak price levels, when they could not get peak prices, then some sellers listed below peak pricing. I can site hundreds of examples were homes have sold by 30% or more off of original list price.”

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