The Housing Bubble

An after hours report from a homebuilder. “Home builder Meritage Homes Corp. on Monday said it expects third-quarter results to be at the low end of its guidance, as net new home orders so far during the quarter are off 38 percent from a year ago.”

“‘Demand has slowed and resale inventories have risen in many markets, making it more difficult for our buyers to sell their existing homes, and in turn causing higher cancellations and inventories industrywide,’ said CEO Steven J. Hilton. ‘It is difficult to accurately project the impact that increased cancellations and weaker prices will have’, or the potential for additional asset write-offs,’ Hilton said.’”

“Meritage Homes Corporation engages in designing, building, and selling attached and detached homes in the southern and western United States. The company offers a variety of homes 14 metropolitan areas in Arizona, Texas, California, Colorado, Florida and Nevada.”

In Business Las Vegas. “Based on the latest survey, Las Vegas home builders have some work to do with increasing customer satisfaction to 2004 levels. Las Vegas ranked higher than Phoenix but below all of the California markets.”

“Beazer had the biggest decline, falling from 101 to 78, KB Home dropped from 130 in 2005 to 111 in this year’s rankings. Pardee fell from 114 to 97.”

“What weight, if any, these latest rankings will carry with consumers in this slow housing market, has yet to be seen. Paula Sonkin at J.D. Power, said the rankings will carry more importance with a soft market. Builders are offering incentives to get rid of inventory and struggling with labor issues and increasing building material costs, Sonkin said.”

“‘As builders fight for every sale they close in this down turned market, a reputation for customer satisfaction becomes more important than ever, as it helps builders differentiate themselves from the competition,’ she said.”

The Review Journal. “When housing values in Las Vegas ballooned 54 percent in 2004, economists couldn’t agree: Was the surge a result of basic supply and demand, or was it a speculative bubble destined for a major burst? Two national analysts say they’ve now pinpointed exactly how much hot air is in local real estate values.”

“Ingo Winzer, president of Local Market Monitor, weighed national and area home prices and the average national and local incomes to generate what he calls the equilibrium home price. Winzer’s calculations show that Las Vegas has an average home price of $296,500, well above the $231,000 average that he said economic fundamentals warrant. That means Las Vegas is 28 percent overpriced, in Winzer’s view.”

“A joint study from economic consulting firm Global Insight and Ohio bank National City Corp. portrays an even bleaker picture of housing inflation in Las Vegas. Their conclusion: Las Vegas home prices, at a median of $282,600, are 41.8 percent higher than they should be.”

“‘I was looking for the nuances in our market, and I didn’t quite see them in that 27-page (Global Insight-National City) report,’ said Linda Rheinberger, president of the Greater Las Vegas Association of Realtors. ‘I found it to be interesting reading, but I didn’t see how it pertains to our market.’”

“However, Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said real estate markets nationwide are in for a ‘rocky and rough patch.’”

“‘It was fairly clear to most observers that continued years of double-digit appreciation just weren’t sustainable,’ said Retsinas. ‘At some point, you have to leave time for incomes to catch mortgages and housing prices.’”

“DeKaser said his (National City) report’s population-density benchmark gives Las Vegas ‘the credit it deserves’ for its brisk in-migration. DeKaser likened local boosters’ defense of the market to stock-market bulls’ take on overheated share prices in 1999.”

“When bearish analysts questioned stock valuations, advocates justified share prices by pointing to low inflation and high worker productivity, DeKaser said. DeKaser said similar overvaluation might be playing out in Las Vegas.”

“DeKaser said. ‘Las Vegas has a very strong track record that I personally have no suspicion will end anytime soon. But home prices seem to be more than fully accounting for that reality. When spirits are running high, there’s always a rationale for the discrepancy between what things ought to be trading at and what they are (trading at). Sometimes that rationale will hold up to the test of time. Most often, it doesn’t.’”

“Research from Harvard’s Joint Center for Housing Studies found that 37 percent of all homes bought in Las Vegas in 2005 went to owners who didn’t occupy the properties as primary residences. That’s almost three times the rate of secondary buyers in the market five years ago.”

“‘(Secondary-home buying) is a signal of overbuilding, because you generally want to build enough homes to satisfy demand for the residential population,’ Retsinas said.”

“The number of homes for sale on the MLS reached 20,384 in August, a 32.8 percent increase from the same month in 2005. Las Vegas also has a two-year supply of condominium conversions and a new-home inventory of four months to six months, Salestrac estimated.”

“Those indicators are ’symptoms of speculative elements,’ DeKaser said, and they could soon conspire to pummel home values in Southern Nevada.”

The Capital Times reports on the condo boom in Wisconsin. “With lots of seniors ready to give up their homes, Monona seemed the ideal place for a condominium boom. Now, developers of a string of condo projects are either retooling or dropping their plans. Blamed are a sagging demand for such housing and rising construction costs.”

“Projects being rethought include Bert Slinde’s Watertower Plaza; Kevin Metcalfe’s Riverfront Condos and Metcalfe’s Water Crest Condominiums; and Robert Niebauer’s redevelopment of the Garden Circle apartments. In May, the Monona Plan Commission voted to allow owner Wes Crawford to temporarily rent out the remaining units through January 2008.”

“Crawford’s Landing, where 11 condominiums sit atop a retail center at Broadway and Monona Drive, also has seen rough sailing. Dane County property records show that just two of the 11 condominiums have sold since they became available last fall.”

“‘There’s no question we are very concerned about the slowdown in the market,’ Metcalfe said. ‘Construction costs are up and sales and down; the two are working against you.’”

“‘We’ve been hearing that from everybody, that the condo market’s gone soft,’ agreed Monona City Administrator David Berner.”

“John Deininger, executive vice president of the Realtors Association of South Central Wisconsin, said ‘we are certainly in a changing market. It has become more of a buyer’s market,’ Deininger added. ‘Inventories are up. It’s taking people longer to sell a house.’”

“Tonight, the Monona City Council will be asked to consider changes to Slinde’s Watertower Plaza. It was to have first-floor retail shops and 13 condominiums on the second floor. Slinde’s new plans call for the elimination of the condominiums and underground parking. Instead, the second floor will be office space. ‘The residential real estate market has really slowed down in our area,’ Slinde said.”

“Slinde said The Monona Woodlands, his condominium project adjacent to the Watertower Plaza site, is only one-third sold. That project has 47 one and two-bedroom units.”

“Metcalfe said construction of the Water Crest condominiums, which was slated to begin in October, has been put off until 2007. And the start of construction is dependent on the pre-sale of some of the 46 units over the winter. Metcalfe said no pre-sales have yet occurred.”

“On Broadway, where Metcalfe has proposed a controversial plan to redevelop a mobile home park into a mix of housing, retail and office space, the wind also is shifting. ‘We are reevaluating that project,’ Metcalfe said.”

“He said ithe said will include fewer condominiums and possibly less retail space. This is the second time that Metcalfe has changed the Broadway plans. Originally, the two-phase project included 202 condominiums. In February, he scaled that back to 116.”

The homebuilders have the September confidence numbers out. “Reflecting increasing builder concerns about conditions in the market for new single-family homes, the National Association of Home Builders Housing Market Index declined for an eighth consecutive month to a level of 30 in September. This amounted to a three-point drop from an upwardly revised 33 reading in August, and is the lowest level the index has reached since February of 1991.”

“‘Builders are adopting an increasingly cautious attitude in their near-term outlook for new-home sales,’ said NAHB Chief Economist David Seiders. ‘They’re experiencing falling sales, rising sales cancellations, and increasing inventories of unsold units. And although many builders are offering substantial incentives to bolster sales and limit cancellations, many potential buyers now are waiting on the sidelines to see how the market shakes out before proceeding with a home purchase.’”

Some housing bubble news from National Mortgage News. “This coming Wednesday two Senate subcommittees will tackle the sticky issue of ‘exotic’ mortgages, or as they like to call them, ‘nontraditional’ loans. At a hearing this past week, payment-option ARMs took it on the chin, sharing some of the blame for home prices soaring into the stratosphere.”

“Meanwhile, we’re hearing that one large POA funder selling billions of dollars of these loans to Wall Street has been, in the words of one source, ’screwing up’ the index on the mortgages, and may be forced to buy back mortgages. The problem, said the source, has been going on for two years.”

“Merrill Lynch analyst David Rosenberg on housing: ‘We know that the housing boom will inevitably be followed by a bust, and..we know that leaves the consumer exposed to perhaps a long period of balance sheet repair. We believe that home prices have become so far out of whack that it could take several years before prices realign themselves.’”

From MarketWatch. “Credit Suisse analyst Gary Balter told his clients, ‘Housing prices and spending usually only begins to be impacted six to nine months after housing peaks and we believe we are not near the worst yet.’”

“The worst of Fannie Mae’s regulatory troubles may be behind it, but one longtime skeptic of the mortgage giant thinks it could face bigger problems from trouble in the U.S. housing market. Gilchrist Berg, founder of a $2 billion hedge-fund firm, said in a recent letter to investors that Fannie Mae could lose $22 billion to $29 billion if, as he expects, the housing bubble bursts and foreclosures increase.”

“‘We are not sure the folks running the show fully embrace the risk of declining house prices,’ Berg wrote. If the housing market continues to decline ‘a major portion of Fannie Mae’s value could be wiped out.’”

The Chicago Tribune. “If you believe the surveys, small-business owners are growing less optimistic as they see the economy slowing. Some business owners are upbeat because they’re in industries that stand to benefit from a downturn.”

“Lew Freeman, whose Miami-based businesses include forensic accounting and real estate consulting concerns, specializes in helping lenders who are worried about borrowers who look like they’re heading for default. Business is up right now because lenders are seeing more signs of trouble as the economy slows and they don’t want to wait for an actual default to occur.”

From Bloomberg. “Washington Mutual Inc., the largest U.S. savings and loan, is heading to Europe’s corporate debt market for cheaper financing in its biggest bond sale. The slowdown may prompt investors to demand a higher yield than they would on covered bonds sold by European companies, said Max Beinhofer, who helps manage 12 billion euros of covered bonds.”

“‘We expect a risk premium for the U.S. collateral,’ said Beinhofer. ‘The advantages for European investors of diversification might be offset by the risk of a slowdown in the U.S. housing market.’”

The Globe and Mail. “Craig Alexander, a Toronto-Dominion Bank economist who has been tracking Canada’s residential real estate market, said Monday the U.S. housing-led slowdown has become a reality. ‘Real estate activity has come down quickly and the economic fallout will be felt over the next several quarters,’ he said.”

“The housing correction has become the dominant topic of conversation, fuelling talk about a possible U.S. recession. ‘For Canada, the timing of the U.S. slowdown is rather unfortunate,’ he said.”

“The fragile U.S. housing market probably weakened further in August and early September, economists said, looking ahead to the coming week’s economic data. Home builders have turned very sour on their industry as inventories of unsold houses soar, canceled orders pile up and prices sink.”

“‘The situation in the housing market is precarious,’ said Brian Bethune and Nigel Gault, economist for Global Insight. ‘Emotions could start to play a greater role in builders’ decisions, adding downside risk to the numbers.’”

“‘Demand and supply conditions have been deteriorating rapidly,’ said Jay Feldman, an economist for Credit Suisse. New home sales are off 22% from the peak, while the inventory of unsold new homes is up 22% in the past year. Not surprisingly, prices are flat and probably down significantly considering all the extras builders are throwing in for free to sweeten the deal.”

“‘Speculators, who drove the market for new homes over the past few years, have now fled, said Drew Matus, an economist for Lehman Bros. ‘Home builders are reacting to an increase in cancellations,’ he said. A record 1.73 million homes are vacant and awaiting a buyer.”

“The pace of the decline in starts and permits so far this year is the largest since the recession of 1991. The reaction of builders to the slowdown has been extreme. The NAHB-Wells Fargo index of builder sentiment has plunged at an unprecedented pace. A year ago, two thirds of builders were upbeat about the market, but now only one third are.”

A housing report from the Arizona Republic. “Metropolitan Phoenix’s housing market is “somewhat” vulnerable to a real estate bubble. But that’s not necessarily a bad thing, because if home prices dip a little, affordability will climb and the area’s growth has a better chance of continuing.”

“That was Joel Kotkin’s message to the Valley’s real estate executives last week at an annual real estate seminar. It wasn’t the typical real estate forecast citing past figures and predictions for how rosy metro Phoenix’s future will be. Speakers took a hard look at where the Valley was headed and what could halt its long-cherished growth.”

“Unlike many national experts, Kotkin knows Phoenix and not just the older cities of the East and Midwest. ‘Lower home prices are a necessary correction for Phoenix,’ Kotkin told the crowd.”

“As the real estate market slows, causing some cooldown in the overall economy, he said Phoenix must stick to the basics that made it grow: affordable housing.”

“Many in the audience and on the panel with Kotkin agreed. Grady Gammage, real estate attorney and a firsthand observer of Arizona’s evolution, said that for years, people have debated what’s behind metro Phoenix’s growth. Cheap housing or jobs? He thinks it’s cheap housing.”

The Arizona Daily Sun. “Alec Wroblewski of Phoenix said he wasn’t surprised it took two months for his summer home here in Flagstaff to sell. Wroblewski said his home would have sold more quickly last year. ‘It’s sluggish,’ said Wroblewski of the housing market.”

“In Flagstaff, more homes are staying on the market longer than last year, according to the Northern Arizona Association of Realtors MLS. The average time a home stayed on the market so far in 2006 was 69 days, up 10 days from the 2005 average.”

“The number of homes sold in Flagstaff and the surrounding areas during the summer months has declined from last year’s totals. For the months of June, July and August, total single-family sales were 442 for 2006, down 29.4 percent from 2005’s total of 626 sales during the same period.”

“‘These figures demonstrate that our market is making some adjustments,’ said Ginny Britt, spokesperson and president for NAAR. ‘Buying a home is still the best cash on cash investment people can make.’”

“Jim Snook, a real estate broker in Flagstaff, said he believes home prices could dip in the near future, following trends across the country. ‘This is not last year’s market,’ said Snook, adding he thought prices locally have not begun to fall because sellers are reluctant to lower prices. Snook sold Wroblewski’s home, helping the Phoenix-based owner sell it to another second-home owner.”

“Realtor Stephen Brighton said the sense the price of homes in Flagstaff may begin to fall in the near future is natural. ‘It makes sense, Arizona led the country on the upside; now we are leading the downside,’ said Brighton.”

“Tom Brewster, a member of the Northern Arizona Association of Realtors, believes the local real estate market has softened. ‘People are sitting on the fence, waiting for a better deal,’ said Brewster, who is also a member of Northern Arizona Building Association.”

“For Wroblewski, the decision to sell was more sentimental than to take advantage of market forces: He moved back to the San Diego, where he grew up.”

Bloomberg reports on the US housing market. “Nancy and Brian Christopherson are asking $389,900 for their eight-room Colonial Revival home in Westford, Massachusetts, featuring a new kitchen with maple cabinets. Even at that price, they’ll lose $14,100. Monthly price reductions since they listed it in May for $429,900 have lured no offers for the house, bought for $369,000 in 2004. ‘It’s getting scary,’ says Nancy Christopherson.”

“The National Association of Realtors may report on Sept. 25 a decline in existing home sales for the fifth straight month, says David Lereah, the group’s chief economist. ‘For the next couple of months, we’re probably looking at between zero to a five percent drop in prices,’ Lereah says. ‘The only way for home sales to come back, and for inventories to start to diminish, is for sellers to start to bring prices down.’”

“Not all homeowners are willing to accept less. Roxy Allen listed her four-bedroom house in Littleton, Colorado, for sale in May. She dropped the price once to $339,900 from $352,000 and has refused to go lower. She hasn’t received a single offer.”

“‘The Realtor wants you to just make a deal with somebody and sell it for cheap,’ Allen says. ‘Why would I sell my house for less and buy one for more?’”

“Peter Francisco, who owns a three-bedroom ranch in East Harwich, Massachusetts, on Cape Cod, has fewer options. The U.S. Coast Guard lieutenant was transferred in July and put his house on the market in August at a price lower than he wanted: $379,900. ‘If you have to go, you have to take what you can get,’ says Francisco. So far, he has no offers.”

“‘It’s called `How low can you go?’ says Doreen Kelly, who has dropped the price three times on her Westport, Connecticut, farmhouse to $799,900 after listing it in May for $938,000. ‘The gains the real estate market made in the last three years just got wiped out on this particular house.’”

“Edward Brown, a Florida real estate investor, says he’s financially overextended and needs to sell a three-bedroom house in Cape Coral, Florida. He’s asking $579,000. $20,000 less than he paid for the property a year ago. ‘No one expected the market to drop so quickly,’ he says. ‘There are a lot of people like me who are caught in a pickle.’”

The New York Times. “To hear some people in the real estate industry tell it, one of the biggest problems with the housing market is what is being said about it in the news media.”

“Agents and industry executives say reporters, editors and news anchors are making a cooling market sound worse than it is. ‘There was a ‘constant flood of media that is so negative’ that it was discouraging many potential buyers and sellers,’ said Richard Smith, president of the nation’s largest residential real estate broker.”

“‘Nobody wants to be foolish in this kind of market,’ he said. ‘No one wants to sell too low or buy too high.’”

“But exactly how much the press influences mass consumer behavior is subject to debate. Robert J. Shiller, the Yale economist, said the news media played an important role in molding public opinion as markets both rise and fall. He said he generally approved of the skeptical tone of many news reports about both the real estate boom and subsequent downturn. ‘The media has been pretty on top of this story, that this might be a psychological event,’ he said.”

“Many journalists who cover the real estate market said they expected, and were not worried by, criticism from the industry. They said they were more concerned about whether the news media were skeptical enough about the boom while it was continuing.”

“‘We were late to the savings and loan crisis and we were definitely late to the dot-com crash,’ said Bradley Inman, publisher of a real estate news service, who said he believed that the news media have done a better job covering the housing boom.”

“Some critics say the news media did not include enough contrary viewpoints during the run-up in home prices. ‘Obviously, people get carried away,’ said Dean Baker, of the Center for Economic Policy Research in Washington. ‘But if there are voices that challenge it, it stops some people.’”

“But Mr. Shiller said he was not so sure it did. In reviewing historical news clips, he said, he found that the press had frequently questioned the premise of booms, including the 1920’s stock market boom. ‘Newspaper people do that more than their audience demands,’ he said. But it appears, he added, that people ‘read it blandly and it doesn’t sink in.’”

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