The Housing Bubble

The Napa Valley Register reports from California. “According to Trendgraphix, the number of Napa County homes available for sale almost doubled, from 450 in August 2005 to 801 in August 2006. However, the number sold decreased 54 percent, from 172 to 79, said the report. Simultaneously, the home sale price per square foot in Napa County declined 8 percent year to year.”

“Realtor Elliott Faxstein manages both buyer and seller expectations. ‘I’m telling sellers to get their prices down to a realistic market level,’ he said. ‘I’m telling buyers I don’t know whether we’re at the low point or not and I can’t predict that. Buyers are hesitant. They don’t want buy at the market peak.’”

The Pacific Coast Business Times. “Recent reports in a Santa Barbara County real estate outlook suggest that as housing sales come to a halt, tenants are going back into the rental market. The outlook, presented by Mark Schniepp, discussed the end of the Central Coast real estate bubble and its impending soft landing.”

“Comparing the first eight months of 2006 to the same period of 2005, condominium sales have dropped 35.3 percent and single-family home sales are down 20.3 percent in South Santa Barbara County. Sales have dropped 25.7 percent in the Santa Maria Valley.”

“Overall, home sales have decreased by 27.4 percent in Ventura County, and in certain areas that drop is closer to 40 percent.”

“On Sept. 18, the design for a nine-unit apartment building at was returned. ‘It seems to make sense when you look at the economy, when condos are really that bad off right now, who would build condos?’ said Craig Lieberman of The Apartment Specialists.”

The Record.net. “When the home-sales market is hot, the remodeling business usually is, too. But home sales began slowing last fall, and a downturn is starting to show up in the renovation sector, say local contractors.”

‘”I think people are a little unsure of finances,’ said Rick Fooy Stockton. ‘It’s all about money.’”

“Daniel Maloy said there’s still a lot of work out there, but he has noted that a lot of customers are concerned about the scope of remodeling projects and pushing their lines of credit. Plus, with home prices flattening or even sinking in a slow housing market, there’s more concern about whether the cost of a remodeling will be recovered when the house is sold later, he said.”

“Julie Anderson said she also has been getting calls from real estate agents looking to fix a house up for sale. During the housing boom, sellers could often sell ‘as is.’ Real estate agents and brokers now say that increasing competition is forcing sellers to get their properties into top shape if they wish to sell.”

“Fooy said he hasn’t found that most people are downsizing jobs, there are just fewer customers. ‘There were just so many people borrowing money,’ he said. ‘Everybody was in a big flurry to do it.’”

The Orange County Register. “Melanie Toranto already has the land for the dream home she hopes to build near her native New Orleans. The only thing standing in her way is her Santa Ana condo, which she needs to sell before work can begin.”

“But after two months without a buyer, Toranto hoped to enlist a higher authority in her sales campaign, entreating St. Joseph to help sell her tidy two-bedroom unit. ‘Usually, I’m skeptical about these things,’ said Toranto. ‘But the times we’re in, the market being as slow as it is … I figured I’d give it a try.’”

“‘When there’s a slowdown in real estate sales, sales in statues go up,’ said Sam Romero, owner of St. Teresa’s Catholic Gift Shop in downtown Santa Ana. ‘Right now, it’s picked up quite a bit.’ Romero says he’s selling up to 30 statues a month. That’s double the number sold four months ago, he said, and customers include real estate agents buying a dozen at a time.”

“The Catholic Gift Shop in Fullerton reported sales of two to three dozen statues a week, compared with a half-dozen per month a year ago. At Catholic Books and Gifts in Huntington Beach, sales jumped from 25 a month to 25 a week. Gaby Koo in Anaheim, said he recently put in an emergency order to keep from running out. ‘The real estate market’s … been slow,’ Koo said.”

“Among the faithful, stories of uncanny results abound. Kathy Lopez, a Washington Mutual loan consultant, said St. Joseph helped her sell her home at the height of the housing slowdown in the mid- 1990s although she did end up taking less than she paid.”

“Back in Santa Ana, Toranto’s already dropped the price once, from $409,900 to $399,000. But hers is one of at least a dozen units for sale in the Hillview Regency complex where she lives.”

From Ben Stein. “In March of 1990, after two years of looking for a house during a hysterical real estate boom, I bought a modest home in Malibu for exactly $600,000. The real estate crash to end all real estate crashes began the next month. Within three years, I couldn’t have given that house away. If I’d been able to sell it, I might have gotten $350,000 for it.”

“The price languished in the same miserable range for a few years, then revived, and then took off for the moon. By early 2005, I might have been able to sell it for $1.8 million.”

“Then, in the early months of 2006, the real estate boom collapsed. I could put the house up for sale, but there are few buyers out there. I certainly couldn’t get anywhere near what I could have gotten for it in early 2005.”

“There’s a bit of a moral here. When real estate crashes happen, they rarely involve that elusive creature called ‘the soft landing.’ Yes, friends, when real estate starts to fall after a meteoric rise, it tends to fall hard.”

The News Democrat reports from Illinois. “Local home sales numbers are down throughout most of the metro-east, and for the first time in many years, prices are starting to fall. Chad Doyle, president of the Belleville Area Association of Realtors, said that adjustable rate mortgages, or ARMs, are hitting their 3 percent caps. He said consumers have been affected by subprime lending and adjustable rates.”

“‘The loan officer doesn’t ask you if you go to the grocery store, if you go to the movies or do any activities,’ Doyle said.”

“‘The bubble has burst,’ said economist Peter Morici. ‘Interest-only mortgages were a time bomb,’ Morici said. ‘They were the first to go off when the housing market slowed because lots of people were betting on perpetual appreciation. The people were betting the market would keep going up because they weren’t paying off any of the debt. Some of these folks are faced with the prospect of their home values declining.’”

The Chicago Tribune. “For farmers eager to sell land for development, the phones have fallen silent. An unseasonable chill has settled over the housing market, and farmers and middlemen who were waiting for deals that would yield bundles of money have been left holding the bag, said real estate consultant Steve Hovany.”

“‘There have been some cries of agony as buyers renege on agreements,’ he said. ‘National builders have sold off some land as a way to make their bottom lines look better.’”

“Farmer David Bengtson says the market for those seeking to sell their land ‘appears to be just about dead. Everyone has pulled in the reins. It was so crazy for several years that a downturn had to happen.’”

“Not far south of Joliet, realty agent William Arbaugh said a multimillion-dollar deal to sell 400 acres of farmland fell apart earlier this month. ‘The buyers didn’t show up for the closing,’ said Arbaugh.”

The Indystar from Indiana. “Federal, state and local authorities received warnings, some dating back two years, about the Fishers man at the heart of a mortgage fraud lawsuit involving the foreclosure of scores of Indianapolis-area homes.”

“Yet the operation continued, according to court documents and observers. Now several Hoosiers say they, too, got roped into the alleged scheme and insist that 400 homes is just the tip of the iceberg.”

“One of Robert Penn’s neighbors, Ed White, suspected Penn of mortgage fraud in his own subdivision. So, as a real estate agent, former mortgage broker and member of the homeowners association, he said he did some digging and reported Penn to the FBI and Argent Mortgage back in 2004. From the FBI, he said he got nothing.”

“Larry Cowell, a partner in Kensington Carriage Homes in Westfield, said Penn bought 39 of the development company’s 90 units. But only six now have tenants in them. While Cowell thought Penn’s purchases would help Kensington sell all its units faster, now the empty houses are a hindrance to further sales.”

The Missourian. “Take Scott Boulevard south to Thornbrook, or Nifong Boulevard west to Mill Creek Manor, or take a short drive to any of the new subdivisions surrounding Columbia, and you’ll see empty houses.”

“It’s not that new homes aren’t selling. But 2005 brought a significant increase in newly built homes in Columbia, and there are just not enough prospective buyers to match the number of vacant houses. ‘In general, every new subdivision probably has more new homes on the market than needs be,’ said Brent Jones, a Columbia real estate agent.”

“Developers haven’t sold off all the houses built during 2005, a year of record production. The city issued 1,239 permit applications for single-family residential construction in 2005, up from 743 in 2002.”

”The number of new homes started last year was significantly higher than in previous years,’ Columbia real estate agent Rob Wolverton said. ‘The growth in sales didn’t keep up with the growth in production.’”

“While buyers in an overbuilt community enjoy lots of options and reduced prices, sellers face tight competition to win buyers. Each month, with another interest payment, the builder loses more money. And in a market where supply outweighs demand, the builder can’t pass that expense along to the buyer by raising the list price of the house.”

“The result, Boone County real estate professionals say, is that the situation could squeeze builders out of the business. ‘I think we’re having a correction,’ said Brent Gardner, a real estate agent. ‘I don’t think you’re going to see any experienced builders take it on the chin. It’s going to be the people who thought, ‘Hey, let’s make a lot of money.’”

“While some builders worry about an already saturated market, Andy McVey continues to build. He has five houses under construction, and says he plans to start at least two more before the end of the year. ‘I’m starting another house down the street,’ he said. ‘I wasn’t going to start that until I had this one under contract. But I … have a feeling this house is going to move.’” ”

McVey has had trouble moving some of his houses in medium price ranges. He said he has lowered the list price of several of his houses from $204,000 to $199,000, hoping they will sell before the end of the year.”

“‘I do well the first part of the year, run to the end of summer,’ he said. ‘Then you’ve got a decision to make: Do I give a better deal and just try to sell it? I hate to lower prices,’ McVey said. ‘It’s not fair to the people who bought the houses at the original list price. But I saw a couple of builders go in and lower prices. There’s a point where I have no choice.’”

“C&C Construction scaled back its production to cut its losses in anticipation of a potential slowdown. Kas Carlson, co-owner of the company, said he could go the rest of the year without breaking ground on a new house. ‘Unless something changes, we’re not going to gear up for next spring,’ he said. ‘If (the market) doesn’t turn around, when the end of the summer comes, we’re going to be sitting on all these houses.’”

“Carlson has co-owned C&C for nearly 28 years. He said he hasn’t seen a new-homes market this bad since the early 1980s. Carlson said one indicator of the glut in the market is the fact that work has slowed down for his subcontractors. ‘They’re usually booked up two to three months in advance,’ he said. ‘They’re just out there beating the bushes for work. For my framer, it’s just day-to-day now.’”

Some housing bubble news from Wall Street and Washington. “The Pending Home Sales Index,( see note 1 below) based on contracts signed in August, rose 4.3 percent from July, but is 14.1 percent lower than August 2005.”

“David Lereah, NAR’s chief economist, said, ”The Pending Home Sales Index shows home sales should be fairly stable over the next two months, although a minor decline is possible,’ he said. ‘We should be able to draw down the inventory supply early next year to the point where home prices will rise.’”

From Paul Muolo. “Well, it’s out; the long-awaited final regulatory guidance on those wild and crazy mortgages that former Federal Reserve chairman Alan Greenspan likes to call ‘exotic.’ Of particular interest to payment-option ARM servicers is a mandate that the monthly mortgage statement sent to Joe and Mary Sixpack contain an ‘explanation’ that if they choose the minimum payment, which they do 80% of the time, it would increase their loan balance.”

“One veteran investment banker told us that he believes the guidelines will force some regulated depositories out of the market, allowing private-equity firms to step in and buy all of the dozens of nontraditional lenders that are on the auction block.”

From Newsweek. “NEWSWEEK’s Daniel McGinn asked Century 21 CEO Tom Kunz how he’s leading his company as the housing market turns. ‘Is it hard for agents to tell would-be sellers their homes are worth less than they think?’”

“A: ‘The real price of your home is what somebody is willing to pay for it—that’s the bottom line. A lot of times people look at this and say, ‘I’m losing all this money,’ but until you sell the property you haven’t lost anything, even though they saw that paper equity sitting out there. The reality is you have to deal with what you bought it for and what you’re going to sell it for at the time you want to sell it—you can’t look at what [you] may have missed out on.’”

From Barrons. “Unlike in past housing cycles, when they borrowed heavily from banks, home builders today also use options and off-balance-sheet joint ventures to buy land. ‘The home builders are going to abandon a significant amount of their options and attempt to dissolve the joint ventures that no longer meet their return requirements,’ Ivy Zelman, an analyst at Credit Suisse, predicts.”

“For some companies, the problems of Technical Olympic USA may be a sober warning. Last week the U.S. unit of the Greek construction company announced that, because of softness in the Florida real-estate market, the revised sales and delivery projections of one of its residential joint ventures won’t be adequate to support the JV’s capital structure. The company is requesting waivers from its lenders regarding potential defaults, among other things.”

“The company’s senior and junior debt fell to levels implying its equity in the JV and loans and advances to the JV, which total $141 million, could be wiped out. ‘This won’t be the only company that will affected,’ says housing analyst Alex Barron. ‘All the other home builders will have writedowns of joint ventures, option deposits and land on their balance sheets.’”

“If home builders walk away from land options, the impact is likely to be widespread. The land owner presumably would shop the property anew, and at a reduced price, particularly if it has associated debt. Jeff Barcy, CEO a San Francisco-based land banker with access to $4 billion of equity capital, cites a deal in which a publicly traded home builder recently walked away from an option to buy land in Florida for $60 million. The parcel recently was resold for $32 million.”

“The Florida deal ‘definitely put pressure on the broader market, and affects all the deals’ in that market, Barcy says. ‘Everything is connected in a local market. We’re seeing more weakness across the U.S. on a daily basis.’”

From Bloomberg. “The U.S. economy has slowed more dramatically than most economists expected just a few weeks ago. Forecasters at Goldman Sachs Group and AllianceBernstein Holding have cut their growth estimates for the just-ended third quarter. Auto-production cuts and slumping home sales are likely to overwhelm any boost the economy gets from lower gasoline prices, they say.”

“‘We’re decelerating fairly significantly,’ says Peter Hooper, a former Federal Reserve official who’s now chief economist at Deutsche Bank Securities.”

“Growth is getting closer to what Macroeconomic Advisers President Chris Varvares describes as the ’stall speed.’ Housing market conditions ‘have continued to weaken,” Stuart Miller, CEO of Miami-based Lennar Corp., the third biggest U.S. homebuilder by market value, told analysts. ‘August might have been the weakest month yet.’”

“‘The one-two punch of a slowing housing market and the large announced auto-production cuts by GM, Ford and Chrysler is really going to slow the economy,’ says Mark Vitner, a senior economist at Wachovia Corp in Charlotte, North Carolina. ‘It’s going to be a bit of a rough landing.’”

A housing report from the New York Sun. “Soaring construction costs are putting the squeeze on the city’s private developers, real estate experts say, threatening New York’s housing boom. The president of Newmark Knight Frank Capital Group, James Kuhn, called construction costs ‘the single biggest problem in New York right now.’”

“He added that the costs will put pressure on the bigger, more ambitious, and long-term projects, including Forest City Ratner’s Atlantic Yards. ‘When it was started, we were in a very, very bullish condo market,’ Mr. Kuhn said. ‘When it gets approved, will we be in a market that justifies construction at a number where you will be able to sell units?’”

“A residential developer, Jane Gladstein, said that increasing cost and softening demand means developers have to evaluate opportunities more conservatively. ‘The buoyancy of the last several years gave a false perspective on reality,’ Ms. Gladstein said. ‘We’ve had a sobering six months.’”

“The president for the Partnership for New York City, Kathryn Wylde, said that construction costs are a problem born from the city’s recent success, and that eventually the market would correct itself as construction drops off and prices fall.”

“‘At some point there will be a collapse and a lot of suffering, and contractors and labor will be available at relatively low cost,’ Ms. Wylde said.”

The South Coast Today reports from Massachusetts. “SouthCoast sellers, like their counterparts across the state and the nation, are waiting longer to sell, and buyers are waiting longer to buy. ‘The fact is prices went up so fast so quickly, it was almost like a boom for the market. To balance itself took a while,’ said Mattaposiett Realtor Judy Perry.”

“In New Bedford, the inventory of available homes climbed from 270 in August 2005 to 374 this August, said Monica Dupre, a Realtor in Lakeville. ‘That is a huge increase in inventory,’ she said.”

“Much like the old gag line, ‘We’re not a gang, we’re a club,’ some housing experts assert, ‘This isn’t a bust, it’s a correction.’”

“Home sellers want the price climb to continue now that they have pounded ‘For Sale’ signs in front of their own homes. Simply, they want to make a killing, too, real estate sellers said. Buyers , however, got much pickier over the last 12 months, looking at two and three times the number of homes as they did a year ago in the hope prices will fall even farther, area real estate agents say.”

“‘It took a while for sellers to understand they need to reduce prices; now I am seeing bi-weekly reductions in the under $400,000 homes,’ said Ms. Perry.”

“‘Buyers are being cautious, they are taking their time and looking,’ Ms. Perry added. ‘In the past, they would look at maybe five houses. Now, 10 to 15 houses, because they think the market will come down further.’”

“‘The added value of low supply, high demand and lower interest rates fueled the prices that sellers today remember their neighbors getting a year ago,’ said Maggie Tomkiewicz of South Dartmouth, a former president of the statewide Realtors group. ‘Today the supply is high, the demand low and interest rates are higher. The added value is gone.’”

The Portsmouth Herald from New Hampshire. “The once-hot condominium market at the beach is slowing with the rest of the housing market. For sale: 200 condominiums near Hampton Beach, ranging in price from $100,000 to $750,000. Last year, 202 condos sold in Hampton at an average price of $229,334. In the second quarter of 2006, only 36 were sold.”

“Agent Hank Therriault said there are so many condominiums on the market because there have been a lot of older cottages and motels converted into condos in the last two years. There also have been new units coming onto the market. ‘They are selling — just not as fast as the owners would like to see,’ he said.”

“In Hampton, the condo boom started in early 2004 when there was an increase in condo conversions of existing properties. Therriault said it appeared that no property at Hampton Beach was too old, too derelict or too small to be turned into a condo. ”

“Condo conversions started to occur because the demand was there, Therriault said.”

“Now, the number of new condominium projects is slowing down, according to Town Planner Jamie Steffen. ‘It has slowed down somewhat in the last few months,’ Steffen said. ‘I think it has to do a lot with the economy and the fact that home sales are down.’”

“Steffen said the new trend appears to be condominium/hotel complexes, such as the new Ocean Club on Ocean Boulevard, which sold 24 of its 28 units within a few weeks. Ocean Club manager Angela Moore said investors purchase the condo units and allow management to rent out their units when they’re not using them, sharing the revenue.”

“‘It’s a lot like a timeshare, but better because the unit is yours,’ Moore said.”

The Daily Times reports from Maryland. “Rows of new houses sit for sale in neat, upscale new subdivisions like Decatur Farms and Glenn Riddle, but a glut of new projects like them and a slowing real estate market in Worcester County has left them feeling a little lonely.”

“In February 2005, there were 396 houses listed with Realtors in Worcester County, but in August 2006 there were 765, a 93 percent increase. Condos on the market have grown at an equal rate with 1,870 being on the market in the county in February 2005 and 3,541 in August 2006, an 89 percent increase.”

“‘We’re a little saturated right now, but I think we’ll catch up,’ said new Coastal Association of Realtors President Kevin White. White said he felt inventory was up because of the combination of so many new projects, such as Decatur Farms and Glenn Riddle, but said the inventory wasn’t ‘completely out of whack.’”

“The problem is that saturation of the market with new homes isn’t about to stop. Glenn Riddle has only built about 100 of 600 planned homes. Summer-field developer Mark Odachow-ski plans to build its first 300 homes in Snow Hill in the next 15 to 21 months while the entire development is planned to be 2,000 homes.”

“If the downswing goes beyond the next year, an ADC Builder’s Inc.-proposed 1,000-home development in Showell, developer Troy Purnell’s proposed 150-home development in Berlin and a Highland Development Corp.-proposed 127-home division near Pocomoke City could all see slow returns on their substantial investments.”

“‘I would not want to be sitting on a big project right now,’ Realtor and County Commissioner Bud Church said. ‘One of the things we’re seeing with major projects and developments is a lot are dropping their prices $100,000, $150,000, even $200,000 (per house).’”

“And the slowdown is going to start affecting jobs, experts predict. Part-time real estate agents will drop out of the industry because of the difficulty to sell and construction workers will have less work as builders trim back the size of planned projects.”

“‘There are currently 1,300 members of the (Coastal) Association (of Realtors),’ said Church. ‘A few years ago that was 700 and it doubled because of the market. But we’re going to see a thinning out of agents.’”

“In Worcester County, the average listing price of homes in August 2006 was about $361,000, while the selling price was much less at $341,000. The average condo was listed at $457,000 and sold at $431,000; a drastic change from the boom when Church said units were literally going for above the listing price.”

“‘What happened nationally and in our market, prices have gone up so dramatically that people got sticker shock,’ Church said. ‘(The market) is like a skydiver jumping out of a plane and falling, and you’re waiting to see when they’re going to open the chute. I don’t think we’re going to hit the ground, but I don’t think we’re going to see the market change into next spring or summer.’”

The Evening Sun from Pennsylvania. “Karen Berube stood at the kitchen counter, looking through a pile of papers. ‘I’m just looking at the mortgage,’ she said, sighing. ‘And that depresses me.’ Her husband, Louis, explained, ‘We just had another house built, so now we have two mortgages.’”

“The Berubes put a ‘For Sale’ sign up in front of their current house and tried to sell it themselves this June, in time for the traditional peak of the real-estate season. They are asking $319,000. The couple never had any problems selling on their own before. Other houses they had lived in and sold went in a couple of days.”

“But the ‘For Sale’ sign stood in front of the Littlestown house for a month and no one called.”

“A real-estate agent, who has been advertising the house, showing it and holding open houses since July. Only two people came to the open house last Sunday, and neither made an offer. The Berubes are supposed to settle on their new house next week.”

“‘It’s just a bad time right now – that’s what they keep tellin’ us. It’s a buyer’s market, not a seller’s,’ Karen Berube said.”

“Home values across southcentral Pennsylvania, like those across the country, have soared in recent years. The median value of homes sold in Franklin County has climbed 65 percent in the past four years. In seven years it has doubled, from $92,325 in August 1999 to $185,000 in August 2006.”

“But with interest rates going up and higher gasoline prices, a lot of buyers these days are waiting in the wings, watching for prices to drop. ‘Prices are still a little high for the way things are going,’ said Joe Tondo, who is shopping for a home near Chambersburg.”

“Already, there are plenty of houses on the market. More than 1,000 homes were listed for sale last month in Franklin County alone, nearly twice the number available a year ago.”

“The buyer’s market has also been fueled by the number of new houses being built, adding 25 to 30 percent to the number of homes traditionally available, according to broker Bob Hickey. ‘National builders from the south have been moving in during the past three years,’ Hickey said. ‘They probably built too many at once.’”

“One market force that appears to have slowed is the rush of Maryland buyers who, in the past, have helped drive the area’s residential real estate sales. Real estate agent Dominic Arcuri said higher gas prices have caused some potential buyers from Maryland to rethink their moves.”

“‘I don’t think it (the switch to a seller’s market) will happen until winter,’ said Margaret Byrd, broker in Hanover. ‘And it’s going to be a long winter.’”

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