The Housing Bubble

The Voiceofsandiego.org has the latest Dataquick numbers from San Diego. “Overall median home prices dropped 2.2 percent last month from August 2005, sliding from $493,000 a year ago to $482,000, according to new numbers from DataQuick today. The number of sales in August, 3,666, dropped 31.8 percent from 5,379 in August 2005.”

“Andrew LePage from DataQuick said, ‘The main thing is, unfortunately, more of the same,’ he said. ‘The market’s entered a lull, and is spinning its wheels in the sand.’”

“LePage emphasized how much uncertainty there is in the market. But he speculated that we might see a more pronounced decline as autumn begins. ‘Anyone who was going to buy a house and move in before the kids started school, they’ve already pulled the trigger,’ he said.”

The North County Times. “For the first time in recent memory, the median price for an existing house selling in North County has declined year over year, according to a report released by the North San Diego County Association of Realtors.”

“Providing fresh evidence that the cooling trend in housing is here to stay, the North County market ended the summer buying season with single-family prices sliding down to $628,750, 1.4 percent below August 2005 and 3 percent off the all-time high of $650,000 reached in June, the report showed.”

“The number of houses sold in August declined 25 percent over the same month in 2005 and condo sales plummeted 22 percent. ‘I have noticed that in, some neighborhoods, prices are lower than they have been in quite some time,’ said Dolores Wellborn, a real estate agent in Carlsbad.”

“Robert Campbell, a San Diego economist, suggests prices could fall as much as 40 percent by 2010. ‘We’re in the first year of what is going to be a four- to five- to maybe six-year downturn,’ Campbell said. ‘This demand was artificial because it was driven by funny-money loans. When these things reset, it’s over.’”

The LA Daily News. “The San Fernando Valley’s residential real estate market continued its free fall in August with sales dropping an annual 32.9 percent. ‘Today’s market is sustainable and can be used as a benchmark, not last year’s inflated, artificial madness,’ said association President Steve White.”

“The inventory of properties listed for sale soared an annual 115.7 percent to 6,832 properties. The smaller condominium market plunged an annual 34 percent. This supply surge is allowing buyers to shop around and force many prospective sellers to reduce prices.”

From the Signal. “A total of 250 single-family homes in Santa Clarita changed hands in August, the lowest total for the month of July since 2000. The 250 homes sold in August still represents a 29.4 percent decrease from the same period a year ago. Active listings more than doubled to 2,598, the highest figure on record during August.”

“‘Some sellers cling to unrealistic price expectations and some buyers incorrectly think they can make incredibly low, equally unrealistic offers simply because sales are down from record-high, unrealistic levels,’ said Jim Link, the association’s executive VP.”

The Contra Costa Times. “Robert Burton of the Hofmann Company looks back fondly on the summer of 2005, when the home-building firm had a growing list of prequalified buyers who eagerly awaited one of its homes. All that changed this summer, said Burton, the company’s sales manager.”

“The tide began turning, and builders began posting colorful signs and advertising ‘Summer Blowout Sale!’ ‘$100,000 off!’ or ‘Save Big!’ ‘The first thing people say when they enter the sales office is, ‘What’s your incentive?’ said Burton. And Burton doesn’t disappoint.”

“If builders want to throw in a car, that’s standard marketing, and God bless the buyer for taking it,’ said Joseph Perkins, president of the San Ramon-based Homebuilders Association of Northern California.”

“‘Inventories are not going to keep building up; that would be irrational,’ said Ben Bartolotto, research director for the Construction Industry Research Board based in Burbank. ‘In my experience, it tends to fix itself, and prices change.’”

Some housing bubble reports from Wall Street and Washington. “CEO Robert Toll said the U.S. housing market got ahead of itself due to greed on the part of buyers and sellers, and that it now likely faces the highest level of speculative inventory ever. ‘Every day there’s an article about how lousy housing is now and how dumb you have to be to buy a house now,’ the CEO said Tuesday at the Credit Suisse Homebuilders Symposium.”

“Don Tomnitz, CEO of D.R. Horton Inc., Tuesday said the company is preparing itself for a tougher housing market in 2007 compared to 2006, with prices finally stabilizing in 2008. ‘We have never seen housing prices and demand slow as quickly as they have during this downcycle,’ said the CEO of the nation’s largest home builder when measured by 2005 deliveries.”

“‘Demand has evaporated to the extent of about 20% to 30% for the industry, and in a tighter timeframe than we’ve seen before.’ The use of incentives by builders to move homes in a slower sales environment will continue for the next three to four quarters, Tomnitz estimated.”

“The CEO of home builder Hovnanian Enterprises Inc. said housing markets are changing ‘quite dramatically’ and that new-home prices have effectively reversed through the use of concessions and incentives. Speculators and investors were a greater part of the market than anyone realized, and are now contributing to the inventory overhang of homes as they stop buying and relist homes, said Ara Hovnanian.”

“‘Buyer psychology has shifted..buyers are more content to wait on the sidelines than they were,’ the CEO said. ‘Cancellation rates have been creeping up.’”

The Motley Fool. “The publicly traded homebuilders were amazingly aggressive in their land acquisition strategies over the past several years, and they are paying for it now in interest expense and write-downs.”

“On their income statements all but 3 of the smallest builders are still showing large profits. However, cash flow statements show that the builders are burning through cash and increasing borrowings at an alarming rate. With sales in the early stages of a long, steep decline, they are putting themselves at the mercy of creditors, which I expect will result in bankruptcy for some of them.”

From Inman News. “It’s altogether too easy to blame real estate’s excessive number of newbies for a variety of ills in the industry that include intense competition, downward pressure on commissions (a boon to sellers, though not brokers) and unethical behavior. But the newbies themselves, as a group, aren’t at fault for these conditions.”

“Rather, the responsibility lies at the feet of state lawmakers, real estate brokers, trade associations, licensing schools and, admittedly, the media.”

“A slowing U.S. housing market and the possibility of a major oil supply disruption are two of the biggest risks to the world’s economy, International Monetary Fund head Rodrigo Rato said Tuesday.”

“‘With the housing market in the U.S. cooling faster than anticipated, there is a risk of an abrupt slowdown in the U.S. which could derail the global expansion,’ Rato told a conference.”

“U.S. lawmakers will question some leading government and industry economists about the perils of a possible ‘housing bubble’ in a Wednesday hearing. Lawmakers wanted the session ‘because we’ve heard a great deal about the possibility of a housing bubble for several years now,’ said Sen. Wayne Allard.”

“The hearing, ‘The Housing Bubble and its Implications for the Economy,” will be held in an open session of the Senate Banking Committee at 10 a.m.. Next week, the same committee will hold a hearing on the growth of innovative mortgage products that have mushroomed along with the housing sector.”

“‘The economy has been buoyed for some time by unrealistic expectations about the appreciation of housing prices,’ said Jack Reed, from Rhode Island, who is helping sponsor the meeting. ‘Now that the housing market is cooling, the economy may be headed for a bumpy landing.’”

The Mail Tribune reports from Oregon. “For the first time since 1984, the median price of a home sold in Jackson County went down, spurred by declines on both sides of Medford. High inventories, fewer first-time buyers and a wait-and-see attitude on the part of newcomers to the market pulled the plug on the heretofore relentless price increases, representatives in the housing industry say.”

“‘People are waiting around because there are so many houses to choose from,’ says (realtor) Sandie Malot in Central Point. ‘It’s like a candy store.’”

“East Medford was the epicenter of the drop, with the median price on 58 sales plunging 10 percent, from $295,950 to $267,000, in August 2005. ‘Overall, there is no catalyst for buying right now. The buyers don’t want to buy into a falling market,’ said John Russell of Rogue Valley Realty Group.”

“The countywide inventory of houses available through the Southern Oregon MLS is up 120 percent to 1,971 single-family residences over a year ago. In west Medford the number has climbed 176 percent.”

“Realtor Kathy Tinsley in Medford says the reluctance of sellers to follow market conditions has contributed to the glut of housing stock. ‘Some people didn’t come down right away in their prices,’ Tinsley says. ‘I have a listing with two houses on one lot that was at $399,000 that would’ve been gone last year and it has dropped to $379,000 now.’”

The Statesman Journal. “A section of South Salem has seen new home prices spike to an unprecedented level for the Cherry City. James Dalfin plunked down $495,000 for a home at Bailey Ridge. He wasn’t overly concerned about the price, having used the proceeds from the sale of his father-in-law’s house in Southern California. ‘We sold it as a fixer-upper for $500,000,’ Dalfin said.”

“Agent Eric Larson, who is marketing houses at Bailey Ridge, said buyers have been a mix of local people and those relocating from out of state. Those flush with cash after selling their old homes don’t seem to mind the prices, he said.”

The Seattle PI. “Real estate experts expect to see slowing sales and price gains and increased inventory, but nothing resembling a bursting bubble, when the Northwest MLS releases its August numbers today. Jill Jacobi Wood said she is looking forward to having local numbers to balance the grim news from areas such as California. ‘It’s kind of dismal in some of these places,’ she said.”

The NWREeporter. “July marked a definite change in pace from previous months, according to Northwest MLS director Dick Beeson. Beeson said the most telling statistic for Pierce County is the surge in inventory, which is up almost 53 percent from a year ago.”

“‘It’s like a buyer woke up from a five year nightmare of no presents under the Christmas tree and discovered a tree brimming with choice gifts,’ said Beeson in Tacoma. With an abundant selection, buyers are now picking and choosing, he remarked.”

The August numbers are out for Arizona. “It was no easy summer for home sales. May was the worst May in three years. June was the worst June in six years. July was the worst July in seven years. And now August is checking in as the worst August in four years, according to the Arizona Real Estate Center at ASU Polytechnic.”

“‘Slow sales activity is spreading across the Valley,’ said Jay Butler, center director. ‘Median prices are continuing to drop in some communities, especially in the West. It’s probably a little more investor-driven.’”

“Through August of this year, there were 47,515 sales, a nearly 40 percent decrease from the same time period in last year.

“Valley homes prices dipped again in August, marking the first time that the median price of an existing home fell below last year’s levels in some areas. If August median price of $262,500 holds steady or declines this month, the region’s median home price will be below the September 2005 price of $263,000.”

“Jay Butler, at ASU, estimates the median price for an existing home would have likely hit a high of $205,000 last year if speculators hadn’t invaded the Valley’s housing market and sparked bidding wars that artificially inflated home prices.”

“Some parts of the Valley are feeling the housing market’s slowdown more than others. In Scottsdale, existing home sales during August fell to 390, almost half the 780 recorded during August 2005. In north Scottsdale, the city’s priciest area, the median price of a home was $661,000 in August, down from $705,000 in July of this year. North Scottsdale’s median used home price is also down 1 percent from a year ago.”

“Matt Keller, an agent in Scottsdale, said some investors are deciding to sell and take what they can get in the current soft market. ‘They’re pretty much saying, ‘Take it. I want to get rid of it,’ Keller said. ‘They’re still making good money..just not as much as they were hoping.’”

“Jim Rounds, a senior economist with a Scottsdale-based consulting firm, said price declines in many parts of metropolitan Phoenix are just beginning and could continue until early 2007. Also, he said, ‘new-home price reductions are right around the corner’ for the Valley as the housing market’s oversupply issue is corrected.”

“Valley homeowners who bought at the peak of the market or tapped all their equity based on higher home prices could find themselves owing more than their house is worth now.”

“R.L. Brown, who tracks the local housing market for homebuilders and real estate clients, said data through July show Valley housing starts are down 20 percent from last year, new home closings are down nearly 10 percent and sales of existing homes have fallen 28 percent.”

“‘I didn’t think it would get this low, and it is,’ he said of new home permits. ‘Frankly I don’t think there’s much expectation of dramatic improvement now through the rest of the year. It would be wishful thinking to think things are going to change in the next three months.’”

“Until the pricing drops, inventory will continue to grow and buyers will continue to stay away. ‘In a sense, that drives the new home market,’ Brown said. ‘If they can’t sell their present house, wherever it is, then they can’t buy their new house.’”

“‘We’re sort of at a drift right now,’ Butler said. ‘The only good thing is interest rates are somewhat lower. They seem to be on downward track, but lenders have tightened their underwriting guidelines.’”

A housing report from the Philadelphia Inquirer. “Call it a chill, call it a lull, but don’t describe the Center City housing market as a ‘bubble about to burst. At least not to Paul Levy, president of the Center City District. Center City has shown it has the ability to annually absorb 1,500 to 1,800 new units of owned and rental housing. ‘The sky is not falling,’ Levy said.”

“Levy argued that recent announcements that several Center City condominium projects had been put on hold had been exaggerated in the media as evidence that Center City’s hot residential real estate market was a bubble about to burst. Among major projects put on hold within the last two months are the 30-story Marina View Towers, a second luxury condo tower south of Penn’s Landing, and Opus Group’s proposed condominium tower.”

“Levy, however, argued that these developers were only following the normal cycle of supply and demand. ‘This doesn’t mean they are abandoning these projects,’ he said. ‘It just means they’re not going forward in this cycle.’”

“Even with a lull, the report notes, construction of new housing units in Center City increased 12 percent from 2004 to 2005. At 2006’s current pace, 1,932 new units by Sept. 1 and an additional 1,189 completed by year end, Levy said Center City will see a 59 percent increase in completed units over last year.”

“Levy said his optimism was also founded on results of a survey showing that Center City’s new homeowners are different from the buyers in other major cities.”

“As reports center on a housing bubble that is beginning to fizzle in red hot markets such as parts of Florida, Arizona, Las Vegas and Northern Virginia, Levy predicted Philadelphia will not dramatically suffer from the cooling market but ease into it. ‘The demand for Center City housing is quite strong and quite sustainable,’ Levy said. In fact, he blamed ‘media hyperbole’ for promoting the idea of a so-called ‘bursting bubble.’”

“Though the city has managed to absorb the new construction at a rate of 1,500 to 1,800 housing units per year in recent years, it’s projected there will 3,121 new units in 2006, 3,269 in 2007 and 3,211 in 2008. It noted real estate experts predict just 20 percent to 30 percent of announced projects that have not yet started construction will move forward in the near term.”

“The ‘equilibrium’ experienced in the market, where supply meets demand, isn’t expected to continue, he said. Philadelphia developers have already begun to react to those trends, Levy said. Levy also said that developers who initially intended to construct housing may react to the market cycle as well as demand and instead proceed with those projects in another form, such as a hotel or rental housing.”

The Palm Beach Post reports from Florida. “For Bob Healey, the city’s $2.4 billion waterfront redevelopment plan is like a yacht stalled at sea. His company was picked a year ago this week to turn 400 acres of blight into a dazzling waterfront. There is little to show, after 12 months and more than $50 million, Healey said.”

“‘We’re not going forward on anything,’ a frustrated Healey said. A glut in the condominium market..contributed to the project’s lack of progress.”

The USA Today. “With a median sales price of $177,900, homes around the central Florida city of Ocala are a steal compared with those in many housing markets on the East Coast. ‘We’re getting a lot of buyers from New York and the Northeast who are selling their houses for $500,000 to $600,000 and coming down here and paying cash and putting a wad in the bank,’ says agent Tom Rath.”

“But the trend has likely peaked, judging from the number of ‘just reduced’ signs around town. A big problem is the seven-month supply of properties on the market. The inventory of homes is up more than 300% from last summer.”

“‘Folks are still thinking they can get top dollar for their homes,’ Rath says of his recent clients. ‘I don’t think reality has set in.’”

The Sun Sentinel. “Florida leads the nation in the number of condominium-hotel rooms in the pipeline, but analysts fear an oversupply could prove troubling for developers and consumers. The Sunshine State has more than 31,500 condo-hotel rooms under development.”

“South Florida is a hotbed for condo-hotels, which investors consider a good alternative to second homes. Investors buy the individual hotel rooms from developers, who use the money to help finance the projects. Prices for condo-hotel rooms typically range from $200,000 to $3 million.”

“When the owners aren’t there, they can rent their rooms, charging fees of $275 a night or more at upscale properties.”

“Experts say developers are building too many rooms, just as they flooded the market with residential condos during the housing boom of 2000 to 2005. ‘I’m definitely concerned about overbuilding since some of these projects were fueled by the real-estate hype,’ said Richard Hollowell, a Fort Lauderdale consultant. ‘There are only so many bodies that are coming to certain areas to fill up rooms.’”

“There’s no guarantee that owners will have a steady stream of rental income, and many find that they don’t have enough money to cover their mortgages, insurance and other expenses. In addition, condo-hotel owners face restrictions..and owners who try to resell units within five years have trouble recouping their money.”

“‘Just like any investment, it doesn’t work out for everybody,’ said Bob Goldstein, president of a Boca Raton-based company that oversees troubled properties for banks. ‘Condo-hotels are not really designed to improve the net worth of the people who are buying the individual units. The owners are there to provide financing to developers.’”

“Condo-hotel buyers should expect that rental programs will pay 50 percent to 75 percent of their annual costs, excluding mortgages. ‘A lot of owners expect to have their unit paid for by the rental program,’ said Shadi Zaki, development director for the condo-hotel association. ‘That’s almost impossible.’”

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