The Housing Bubble

Kenneth Harney has this report on appraisals. “In cooling real estate markets, it’s one of the hottest questions: How do you value a specific piece of property when local home sales are down 20 percent to 40 percent from last year, inventories of unsold homes have ballooned by 200 percent or more, and all the trend lines are pointing negative?”

“‘It’s getting pretty dicey out there,’ said John D. Bredemeyer, a residential appraiser and spokesman for the Chicago-based Appraisal Institute. ‘Just looking at historical data can be perilous. You’ve got to open up the window and see what’s really happening now. You’ve got to answer the question: ‘Where are we in this cycle?’ And you’ve got to factor that into your valuation.’”

“For example, Gary Crabtree, based in Bakersfield, Calif. said, some agents increasingly are playing what he calls ‘the re-list game.’ Take the property off the market for a short period of time — and then list it again with a different price and MLS code.”

“‘Now the house no longer looks like it’s been sitting dead in the water for months on end,’ Crabtree said. ‘It looks like a new listing,’ and it’s reported in that misleading way.”

“Crabtree said one house he tracked was first listed in October at $299,900. It sat unsold for 122 days. Then the listing agent pulled it out of the system briefly and brought it back as a new listing, but this time at $269,000. When it didn’t sell in 30 days, the agent again yanked the listing and reported it as a new one with an asking price of $259,000. The house is now on the market for $229,000, ‘but it’s still not selling.’”

“Crabtree also is constantly on the prowl for concessions that may have puffed up the price of houses. ‘There’s just a tremendous number of them out there right now,’ some of them under the table and tough to detect, ‘but they’ve got to come off the valuation.’”

From the Santa Clarita Signal. “Selling your house is no longer a piece of cake. The word on the street is don’t sell unless you absolutely have to. Sellers throughout the Santa Clarita Valley are going to extremes to attract buyers.”

“Home sellers now can wait months for an offer and it is usually below their already reduced asking price. Savvy homebuyers are now playing a waiting game while scanning the multiples to find the best house for the lowest price. Overall, the situation is desperate enough to compel developers and sellers to offer incentives and perks unheard of nine months ago.”

“Just ask Cindy Schwanke, who quit her job as a pastry chef to devote herself to selling her home. She bakes cupcakes for people who come to her open houses. She and her husband listed their three bedroom, two and a half bath home built in 1990 in a quiet neighborhood in Castaic for $629,000.”

“In spite of her cupcakes, Schwanke said she had no one show up during a recent Saturday open house. She wonders where all the buyers have gone. Her current listing agent, Paul Morad, said he expects interest to pick up now that the home’s price has been reduced to $525,000.”

“Schwanke is a very motivated seller. Last year, she and her husband closed escrow on a 5-acre property in Acton. Now they are stuck with two mortgages and property taxes with no end in sight. She is ready to call in the Feng Shui master.”

“‘The buyers are definitely out there,’ said Miguel Soler, a real estate agent in Valencia. ‘It’s not a bad market, just overpriced homes,’ he said. ‘The bottom line is, selling houses is very competitive on price. People don’t care about cookies, donuts or flowers, they just want the best value and they are doing comparison shopping.’”

“He said many sellers are unrealistic about the true value of their home. ‘Buyers are now coming to us already educated about what is on the market, know what they want and know what they want to spend,’ Soler said.”

“‘It’s all a numbers game, the buyer wants to get the best bang for the buck,’ he said. ‘The toughest part of my job now is to tell people what their home is worth and dispel their false expectations. We can market till you are blue in the face, but if it is priced too high, nothing is going to work.’”

“Soler said motivated sellers are those who have relocated or have already bought a new home and are willing to drop the prices below the competition, or short sell, just to get out. In other words, he said, this is no time to sell a house with the intention of making money.”

“Tracy Hauser, a real estate agent in Valencia said the real problem is speculation inventory, people who are thinking of retiring in the next five years and just want to see what their house will bring. She advises those speculators to pull their houses off the market, because it only confuses buyers and clogs the market.”

“She said ironically buyers were afraid not to jump into the market as they saw prices going up $10,000 to $20,000 each month. Now, buyers are waiting for prices to bottom out. ‘Fear of loss drives the market up and fear of loss drives the market down,’ she said.”

“In spite of the market downturn, Castaic home seller Schwanke remains optimistic. ‘After six months, we would like to sell it, just so we have peace of mind, but I am not giving away my beautiful home I raised my children in. Maybe we will rent it, but I am not going to throw it away.’”

Several readers suggested topics related to housing bubble outcomes. “A question I’ve had for some time is this… will Joe Public: * Who bought a house for $500,000, with $0 (or negligable) down ARM & Now finds finds himself underwater to the tune of $100,000 with a increasing payment.”

“Two choices: 1) Live poor, probably very poor, for many years paying more for something he could buy back for less. 2) Walk. Jingle-mail. Now his credit is ruined for 7 years.”

“Joe will walk, and although I am a moral person, I’d walk to. Here’s my logic, I walk now and I can live good, not poor. After 7 years I’ll actually have a downpayment and can start over. The two choices/paths probably meet up in 7 years, except #1 means hard, poor, living, while #2 is no real pain. (A subtopic is would those with non-recourse loans - helocs, refies? - would they walk to? How have the BK laws limited them?)”

One added, “The credit is not really ‘ruined’ for 7 years. After one year, the chargeoff has less effect and as time goes by, even less. It’s not that bad and without access to credit, Joe might actually learn to live within his means. It could be a good thing!”

Another said, “Topic: Who should be holding the bag? Who should pay? Also maybe we can have a topic on the best constructive ways the correction needed could take place.’

One looked at the size of the problem. “Do folks even realize how much a trillion dollars is? Who is going to pay? We’ve just been banking on the the fact that deficits don’t matter. Brilliant logic.”

“Let’s take our national debt of roughly 8.5 trillion. Divide that by half of our approximate population (an extremely conservative estimate of people actually producing things). That comes out to roughly 60k. I’d say that the actual percentage of people who even make 60k a year is very small. Back to the question of who is going to pay. It should be pretty obvious we, as a country, should have been asking this question 30 years ago when we went to a fiat currency with fractional reserve lending.”

“The only way it wouldn’t end badly is if the bankers holding the strings were the most honest and trustworthy people none to man. How are we doing so far?”

Another reader is looking for solutions, “I would like to see a weekend topic re: What would be the best way for this housing bubble to resolve? Best for the economy and the regular people of this country (and others) who will eventually pay in one way or another for this crazy run-up. I also would like to hear more from the bright folks here about how the next 20 years could be approached as far as dwindling energy reserves start to take effect - in regards to housing.”

“I would like to see some great ideas for the next generation. we may have an opportunity to change things for the better with this selfish bubble business finally ending.”

From a reader in construction, “I think some trends you are going to see in the future are, 1. More homes built or re-mod to have the family stay longer in one home. Also your parents in their old age will not be able to afford a free standing home with all the fees etc. and again will make it better [cheaper] for family to stay together. This will be somewhat forced because the banks in coming years will go back to old lending standards.”

“2. Fuel prices go up, think the airlines are going to be hit big time, days of going from CA to east coast for some weekend bingo party for $300 will be gone. I think in 20 years train travel will get bigger. Best cost per ton per mile there is.”

“3. Homes will have to be built or re-tooled to have more than one energy system, what I mean is your lighting will have to be split into 110 service and a battery service to help when rolling black outs happen.”

The Post and Courier reports from South Carolina. “For two years it was a feeding frenzy. What began as a pragmatic investment alternative to a shaky stock market after Sept. 11, 2001, suddenly prompted thousands of regular people to jump into real estate. In Fort Myers, the raging real estate market came to a screeching halt late last year.”

“‘The brakes went on — boom! — it stopped,’ said local builder Bart DeRosso. ‘It’s definitely, definitely dried up.’”

“Is South Carolina the next Florida? In the Charleston area, the median price of a home last year was $188,000. It had risen nearly $100,000 since 1995.”

“In Fort Myers last month, nearly 12,000 condos and houses were on the market. Too many, DeRosso said. ‘If you want to know where the market’s going, you look at inventory,’ said Denny Grimes, a Realtor in Fort Myers. ‘We don’t have a demand problem, we have a supply problem. … We had a market binge and now we’re going to suffer a little bit.’”

“In the Lowcountry, some say the housing market has started to soften. Prices are starting to come down, said (realtor) Sandy Stone. The Charleston Trident Association of Realtors reports that the average area home price has slipped from about $305,000 in October to about $296,000 in February. The number of homes sold also decreased, from 1,365 in October to 998 in February.”

The Miami Herald. “Sellers face a transformed housing market. ‘There is a much bigger inventory on the market this year,’ said Leslie Kliger, co-owner of Assist 2 Sell. According to Kliger, there are an estimated 350 single-family homes on the market in Cooper City, compared to just 150 this time last year.”

“Steven Wall is trying to sell his four-bedroom, three-bath home in the Le Cristal section of Rock Creek for $549,900. He already has dropped the price because potential buyers have been few and far between.”

“Lynn Puccio has had her Flamingo Townhome property on the market for two months. At $334,000, potential buyers have not been knocking down her door. She is prepared to wait it out because she would like to let her son finish the school year in South Florida before moving to North Carolina. ‘However, if I already had a house waiting for me there, I would really be knee-deep,’ she said.”

The St Petersburg Times. ” It has been a profitable ride for St. Petersburg’s Signature Bank, which has hitched itself to the real estate rocket of the past few years. Eighty percent of its loans are in real estate, mostly commercial loans financing offices, shopping strips and housing developments.”

“So when the Federal Reserve and other regulators proposed tightening standards for such loans, citing potential volatility in the property market, Signature shot off a letter of protest. So did about 20 other lenders in the Tampa Bay area.”

“Alex Sanchez, head of the Florida Bankers Association, predicts dire results for development-reliant Florida if regulators start requiring banks to unload commercial loans. ‘If you take commercial real estate out of the equation, it would have a chilling effect. The economy in Florida? You might as well forget about it. Our economy is going to sink fast,’ Sanchez said.”

“‘Most of our banks - commercial loans is all they do. And if they don’t do that, what will they do?’ Sanchez added. Bankers such as Sharp fear their options will narrow. They could boost their bank’s capital by luring more deposits or else delve into other types of lending, such as car loans.”

“But after reaping big profits over the past few years in real estate, options such as financing a customer’s new Mustang holds less allure. ‘Car loans? We don’t want to do them if we don’t have to,’ Sharp said.”

The Boston Globe reports on the condo market. “International design superstar Philippe Starck and his partners in a Boston condominium project, struggling to sell their luxury units in a stagnant market, have dropped their asking prices an average of 12 percent and hired a new real estate agent.”

“Dan LaBarre, a South End agent, said D4’s main problem was always the unit prices. With some priced as high as $950 per square foot, D4 missed out on a hot downtown condo market in 2005, agents said. ‘Unless they’re doing a substantial price adjustment to reflect the current market,’ he said, ‘it’s still not going to sell.’”

“Coldwell Banker plans, for example, to relist a three-bedroom penthouse at $1.65 million. It was first priced at $1.77 million and dropped in July to $1.71 million. A one-bedroom will be reduced to $600,000 from $670,000.”

From Newsday in New York. “For the first time in nine years, Nassau County’s closed median home prices dropped over the last year, leaving experts to wonder whether the housing market’s downturn could be more significant, and longer-lasting, than first thought.”

“‘This is the turn that we’ve been waiting for for a long time,’ said Pearl Kamer, the chief economist of the Long Island Association. ‘This is only the beginning of the downward cycle and only the beginning of the unwinding of the housing bubble. The price declines could continue for a long time.’”

“Part of the problem for the Island, said Prudential Douglas Elliman CEO Dorothy Herman, is that much of the available inventory is somewhat ‘run of the mill.’ If all the homes are too similar, Herman said, it becomes very difficult to sell when there’s a glut.”

The Journal News in new York. “Spurred by slower sales, homeowners and their Realtors are turning to a Roman Catholic tradition of burying a small statue of St. Joseph in yards of properties for sale.”

“Single-family home sales in Westchester and Putnam counties fell 14.9 percent and 5 percent, respectively, during the second quarter.”

“In White Plains, G. Siccardi & Family sells about a dozen St. Joseph figurines a week, with real estate agents sometimes buying a half dozen or more at a time. ‘Our suppliers are out of stock,’ said owner Gerry Siccardi. ‘Apparently, all over the United States people are buying them.’”

“Mount Vernon real estate agent Elvira Castillo said faith in St. Joseph can help move a house, but not counteract an unreasonable asking price. ‘You can bury 10 St. Josephs, and it’s never going to sell,’ Castillo said of some sellers’ unrealistic expectations.”

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