The Housing Bubble

The Rocky Mountain News reports from Colorado. “Real estate foreclosures in the Denver area rocketed by 32.3 percent in the first nine months of the year, as condo overbuilding, risky loans and inflated appraisals drove the number of loan defaults to near record territory.”

“Through September, 14,205 foreclosures had been filed in the metro area, compared to 10,735 in the first three quarters of 2005. The record for foreclosures was set in 1988, when 17,122 were filed from Boulder to Douglas counties.”

“Economist Tucker Hart Adams said many of the foreclosures seem to be in the suburban condo market.”

“In one troubled condo project in southeast Denver, some one-bedroom units are being sold in foreclosure for as little as $18,000 to $20,000, while they sold for $110,000 to $120,000 at their peak, said broker Rob Murphy. Many owners walked away from their mortgages after being slapped with huge assessments.” ”

“‘The problem is it has a ripple effect,’ Murphy said ‘Appraisers are already under fire because a few bad apples were overinflating them. Now, appraisers can’t justify units down the street selling for $80,000 to $90,000, when they use this for a comparable.’”

“Housing prices, slumping after a five-year boom, are projected to decline in more than 100 of the nation’s metropolitan areas. Greeley is included in a list of 30 U.S. metropolitan areas that show the largest declines in median housing prices. The community showed a 10.7 percent decline in prices.”

The Greeley Tribune. “Drive down San Mateo Avenue in Evans and you’ll see a lot of empty new houses, real estate brokers say. Most of the fresh new abodes lining the northwest end of the Tuscany subdivision sit unoccupied.”

“They have been waiting for awhile. D.R. Horton built 40-some houses in Tuscany in about a six-month span last year, putting them up for sale in January. So far, according to Shawn Golding, (who) represents the homes, only seven have sold.”

“‘They’ve been slower than expected,’ Golding said. ‘They’re running some incentives and stuff on them.’”

“The Tuscany development is not alone. More new houses are spending more time on the market. As a result, sellers say they are having to lower prices and offer greater incentives to lure buyers, and developers are building fewer houses.”

“Realtors and developers in Weld County said the market became overheated near the millennium and is now overbuilt. Builders are scaling back as a result. Dotti Weber, executive officer of the Homebuilders Association of Northern Colorado, said new housing starts are down considerably in Weld County. Builders this year got 1,457 new permits as of July, compared to 1,761 permits in the same period last year.”

“Lifestyle Homes president Brad Clarkson (said) the company does about a fourth of the business that it used to. Clarkson said large-scale national builders such as Lennar and D.R. Horton came in and built more houses than the Weld market could handle. ‘They all jumped in at a time when things were really hot, and they helped us oversupply the market,’ Clarkson said.”

“The drop in business forced the company to drastically cut its workforce, Clarkson said. About 20 people today get their paychecks from Lifestyle; Clarkson said at the company’s peak, it employed 60. He said his business isn’t the only one hurt by the cutbacks.”

“‘When you oversupply the market, you wind up putting people out of work,’ Clarkson said. ‘A lot of trades are having to reduce their prices to get their jobs, or they’re shrinking their workforce and laying off labor.’”

“John DeWitt, president of the Greeley Area Realtors Association, said, ‘What we’re seeing is that builders are backing off. ‘They’re glad to do pre-sale homes, but the days when builders go in and do 20 or 30 homes at a time are over.’”

The Nevada Appeal. “Fewer Carson City homes sold in August than a year ago. The data also shows houses are spending more time on the market and costing 11 percent less than a year ago.”

“The median cost of a single-family home in August was $309,000, compared to $348,500 the previous year. Real estate agents call this a buyer’s market. ‘There are more houses to show and sellers are more negotiable,’ said real estate agent Kathy Tatro.”

“The number of Realtor sales decreased in Carson City in August, despite the falling prices, according to the Northern Nevada Regional MLS. Forty nine homes sold, compared to 68 in August 2005 and 82 in August 2004.”

“These statistics do not include owner sales. Those sellers are also feeling the effects of the market. Donaldo Palaroan said he’s reduced the price of his home in the Silver Oak subdivision from $479,000 to $474,000. ‘We’ve been in the house for two years and we bought it in a seller’s market, now we’re selling in a buyer’s market,’ Palaroan said. ‘We’re not in a hurry to sell.’”

“Another house is for sale around the corner. The home has been on the market for about a month and its asking price is $510,000, said real estate agent Bill Dooley. This price isn’t a problem for potential buyers Doug and Patti Eisner, of Walnut Creek, Calif.”

“‘It’s a good time to buy,’ said Doug Eisner. ‘I don’t think it’s ever a bad time to buy.’”

The Rockford Register Star reports from Illinois. “Home sales plunged in September compared with the same month in 2005, the third straight month of declining sales in Boone, Ogle and Winnebago counties. September’s falloff was the largest in terms of percentages in more than five years, according to preliminary statistics from the Rockford Area Association of Realtors.”

“Real estate agents sold 615 houses in the Rock River Valley in September, down 12.9 percent from the 706 sold last September. The decline occurred even as the number of houses available continued to set records. At the end of September, the current listings rose to 2,852, 16 percent more than were on the market at the end of September 2005.”

“‘I’ve been watching as the inventory (of available homes) has climbed and climbed,’ said (broker) Jon Krause of Rockford. ‘There has been so much new construction and that’s pushed up supply while there’s a limited number of buyers. That’s giving the buyer a little bit of an advantage.’”

“Indeed, the average sale price was down as well. The September average sale price was $141,990, down 2.7 percent from last year. The average price has declined year-over-year four of the past five months.”

“The numbers were weak across the board. Existing- home sales were down 12.7 percent, while sales of new homes fell 13.4 percent. Sales of homes in the Rockford School District fell nearly 20 percent from last September.”

“‘The air came out of the balloon, finally,’ said Jim Barbagallo, president of the local Realtors association. ‘It’s a little bit of a return to normalcy.’”

The St Louis Post Dispatch. “Zella Harrington and her husband, Melvyn, love their West End home but wish they would have sold it two years ago. That’s when nearby homes similar to their three-story, six-bedroom house were selling for $400,000 to $500,000. But sales have since slowed.”

“The Harringtons have had their home on the market for five months without a bite, despite a couple of price reductions. It’s listed at $365,000. ‘I think it’s worth more than that, but of course I’m biased,’ Zella Harrington said.” “Economists and real estate people say home sales locally and nationwide are starting to slow, forcing sellers to lower their profit expectations and patiently wait for the right buyer.”

“‘Expectations are catching up to reality,’ said Rik Hafer, an economist at Southern Illinois University Edwardsville. ‘Housing prices are going to retreat a little bit, but even if they retreat a little bit, they’re still going to be appreciably higher than they were five years ago.’”

“‘You hear a lot about prices falling. I don’t really see prices falling, but I don’t think sellers can be as aggressive on asking prices,’ said Mike Travaglini, branch manager at Coldwell Banker’s office in south St. Louis County.”

“Most people won’t be caught in a crunch, but some will, and home foreclosures could rise as a result, said Richard DeKaser, chief economist at National City Corp. in Cleveland. ‘People were buying homes that might have been a stretch, but they started to factor in the belief that housing prices would not only sustain but increase,’ DeKaser said.”

“Gail Farwell, the Harringtons’ real estate agent, said the heightened interest in home buying a couple of years ago created a market where some properties sold for more than they were worth. ‘I think the market is really just adjusting,’ Farwell said.”

“Three years ago, Farwell helped a client buy a home in a bidding war in which he had to offer more than the asking price. Now the client is trying to sell the home, she said, and he is having a tough time making his money back.”

Some housing bubble news from Wall Street and Washington. “Goldman, Sachs & Co. said Wednesday that it has been added as a defendant in lawsuits regarding mortgage financier Fannie Mae’s accounting practices. The Wall Street powerhouse said the complaints allege that it violated laws, including U.S. securities laws, in arranging some Fannie Mae-sponsored bond deals.”

“The deals involved real-estate mortgage investment conduits, which are bonds collateralized with mortgage-backed securities. The other defendants include Fannie Mae and some of its past and present executives, accountants, and other financial-services firms.”

From Inman News. “The housing market downturn looks rougher than the soft landing housing analysts had been expecting. Although a soft landing is ‘no longer in the cards’ for housing, Nariman Behravesh, chief economist for Global Insight, said that the ‘good news is that other sectors are doing reasonably well and will continue’ to do so.”

“During the recent boom, inflation-adjusted housing prices rose to record levels, and the market is paying the price for that rapid ascent now, with ‘prices coming down off their own weight,’ Behravesh said.”

“Following an unsustainable boom in housing starts, sales and price appreciation in 2004 and 2005, ‘we need a period of below-trend performance to work off excess inventory and improve housing affordability,’ said National Association of Home Builders Chief Economist David Seiders. ‘Mortgage rates are dropping; builders and sellers are offering all sorts of incentives and upgrades, energy costs are retreating and the national economy is moving ahead, making it a very good time to buy a home.’”

From Bloomberg. “Service industries in the U.S. expanded at the slowest pace in more than three years in September as the housing slump deepened. Homeowners extracted a net $497 billion at an annual rate from home equity in the second quarter, down from $649.2 billion in the first three months of the year, according to figures from Federal Reserve researcher James Kennedy.”

“‘We’ve had a major bubble that’s bursting before our very eyes and it’s going to take a big toll on growth prospects going forward,’ said Stephen Roach, chief global economist at Morgan Stanley in New York.”

“‘The economy is slowing, but not at a great pace,’ economist Joel Naroff said. ‘The slowdown in housing has implications not just for construction, but also for finance, real estate; lots of ancillary places.’”

From MarketWatch. “Home and tower builder WCI Communities Inc.said it anticipates third-quarter new orders plunged 80% from a year earlier. WCI said it expects third-quarter earnings ’significantly below’ its prior forecast.”

“CEO Jerry Starkey in a statement said a $13 million write-off for options on land the company decided not to purchase was the biggest reason for the expected deficit. ‘With the current slowdown in demand, we believe we own sufficient land to support our operations through the foreseeable future,’ the CEO said. ‘We have concluded that it is more prudent at this juncture to apply our cash flow from operations primarily towards debt reduction and stock repurchases.’”

“WCI said higher traditional and tower defaults are also expected to hit profits, while about 80 traditional homes valued at roughly $48 million had been slated for delivery in the third quarter but failed to close.”

“‘We think the most worrisome aspects were the rising cancellations in the tower business and what appears to be a lack of net orders,’ BofA analyst Daniel Oppenheim said. ‘We estimate that cancellations in the tower business essentially offset new orders, resulting in essentially no net orders for the quarter in the tower business.’”

“JMP Securities analyst Alex Barron said the 80 percent lower orders imply that tower orders were down about 99 percent in the quarter to about five units. ‘These low order numbers are driven by a low level of demand for homes in Florida, increasing cancellations, and only one recently launched tower that converted to contract last quarter,’ Barron wrote in a client note.”

From USA Today. “Investors hurt by the sharp slide in home-builder stocks might now wish they’d kept a closer eye on what industry executives were doing with their own holdings.”

“CEOs of three of the top eight U.S. home builders sold large amounts of stock last year and avoided some of the financial pain since the shares peaked. There’s nothing wrong or illegal when a CEO sells company stock, says Todd Henderson, professor at the University of Chicago Law School. ‘There can be a ton of reasons why executives may be selling,’ he says.”

“Still, some say the timing of the selling in the industry gives reason for pause. ‘It’s always a question: Is the timing lucky or is there something more?’ says Jill Fisch, professor at Fordham Law School.”

Moody’s has this report. “Housing prices, slumping after a five-year boom, are projected to decline in more than 100 of the nation’s metropolitan areas, with the Northeast, Florida and California among the areas hardest hit. The forecast, ‘Housing at the Tipping Point,’ by Moody’s Economy.com, presents one of the starkest views yet of the housing slowdown that has been gathering force in recent months.”

“The firm projects that the median sales price for an existing home will decline in 2007 by 3.6 percent, which would be the first decline for an entire year in home prices since the Great Depression of the 1930s. The forecast is included in a 195-page report.”

“‘Prices are going to go down and stay down for awhile. It will take at least a couple of years to work off the excesses of the last decade,’ said Mark Zandi, chief economist and the principal author of the report. ‘Housing’s downturn has turned even more dramatic with the rapid flight of the flipper from the market,’ the report said. ‘These investors have gone from sending home sales and prices shooting higher to driving sales and prices lower.’”

The News Press. “The Fort Myers area is second on a national list of metropolitan areas where housing prices are expected to plunge. In Fort Myers, the decline in prices will be caused by factors including ‘a collapse in housing affordability because of a surge in housing values,’ said Zandi.”

“Also, he said, ‘Speculation became rampant particularly in 2005 and 2006. Those flippers are getting wrung out of the market as expectations are swinging from wild euphoria to dark pessimism. Those hopes are being dashed and they’re exiting the market rapidly.’”

“‘There are signs of too much building. The market is strong, demographics are excellent, but builders are getting ahead of the market, Zandi said.’”

From Marketplace. “Homeowners at risk include those who used adjustable-rate mortgages to get into the housing market in the last few years. Zandi says those rates are now going up, but workers’ incomes aren’t keeping pace. ‘As you go back to the start of the decade, the household in Miami earning the median income could afford 125 percent of the media-priced home. Today, that same household earning the median income can afford to buy only half the median-priced home,’ he said.”

“The DC area is predicted to be among the regions taking the hardest hit. The Washington area, including Arlington and Alexandria, is Number 14 on the list, with housing prices predicted to drop by 12%.”

The Arizona Daily Star. “Tucson’s median housing price is projected to drop by more than 13 percent by the second quarter of 2008, according to a forecast. University of Arizona Economist Marshall Vest said a 13.4 percent decrease over the next 18 months or so is plausible. Vest in a speech last week said he wouldn’t be surprised if Tucson prices dropped up to 20 percent in the next year or two.”

“‘It’s possible. I am a little surprised they rank Tucson ahead of Phoenix because every other indicator says the metro Phoenix area was more ‘overbought,’ if I can use that term, than Tucson,’ Vest said.”

The Tucson Citizen. “Publisher and consultant John Strobeck said Tucsonans shouldn’t worry. ‘Yes, we are going to see a decrease in existing homes (prices) because we saw a run-up in 2004 and 2005,’ he said. ‘We have to look at this not as a crisis. It’s merely an adjustment. It’s perfectly normal.’”

The LA Times. “In Southern California, the report predicted declines of 11.4% in Riverside and San Bernardino counties, 10% in Orange County, 8.5% in San Diego County and 4.8% in Los Angeles County.”

The Press Enterprise. “Moody’s conclusions met immediate criticism from several Southern California economists who said they believe local home values will be supported by the strength of the local economy and the infusion of higher-income home buyers from Los Angeles, Orange and San Diego counties.”

“‘My own feeling is they are wrong,’ Inland economist John Husing said. ‘If we were only selling houses to each other, they might be right. But we are a market for the people in the coastal counties with substantially higher incomes than the people who live here.’”

“Alan Nevin, chief economist for the California Building Industry Association, said an 11.4 percent loss in home value would be ‘a fairly dramatic downturn.’ He questions whether Moody’s has enough data to make such a local projection. ‘I can’t understand what methodology you would use that would result in that statistic,’ he said.”

“But Moody’s economists are not alone in predicting a downturn in home prices. Esmael Adibi, an economist at Chapman University, said he expects home prices to start falling by the end of the year and to continue in 2007, declining by 4 percent on average in the Inland Empire.”

“Steve Cochrane, senior managing director at Moody’s, said homeowners who will get hurt are those who bought their homes very recently at the top of the market and are forced to sell because of life changes such as sickness or job change. Those who financed home purchases with adjustable rate mortgages, that they can no longer afford as rates increase, also could be hurt, he said.”

“Jennifer Langrill said she fears that the prediction of falling prices could mean that she and her husband will have to lower the $479,000 sale price of their house in Indio. They have been trying to sell it for three weeks. She said they bought the house in December and intended to stay, but a job opportunity in Anaheim has them heading back to Riverside.”

“Talk of sliding prices doesn’t concern Pete and Janet Mills. The couple, who were moving into a new home at Suncal’s Terra Lago lake development in Indio on Tuesday, said they would be renting out their former home in Indio and holding onto it as an investment. ‘People always need to buy,’ Janet Mills said.”

The Union Tribune. “A new report predicts that housing prices will fall in San Diego. The report projects prices for new and resale single-family homes to drop 8.5 percent in San Diego from the market peak at the end of 2005 to the first half of 2008.”

“Prices have already declined locally in the first and second quarters of this year, said Brian Carey, an economist with who worked on the report. Sellers, particularly new-home developers, have been cutting prices as homes have lingered on the market and buyer demand has slowed. ‘They do have a lot of excess supply right now,’ Carey said of San Diego.”

“Condos were excluded from Economy.com’s forecast because it lacked good data, Carey said. Condos may be more vulnerable than single-family homes to steep price declines because of the unprecedented construction of new units downtown and elsewhere, as well as a glut of condo conversions either for sale today or planned in the near future. ‘We realize the condo market could be hit harder,’ Carey said.”

“Real estate consultant Nathan Moeder said it’s not surprising that home prices would be falling now that buyers are being cautious. But he doubted that any forecast could accurately predict how much prices might drop. ‘We’ve already seen adjustments by developers, not only with incentives but also price decreases because they have to sell their units,’ said Moeder. ‘But is it going to drop zero or 10 percent? Who knows?’”

A housing report from the New York Post. “The top-heavy Manhattan residential real-estate market is teetering toward a long downward slide, new sales data show. Third-quarter market reports released today by the city’s top four real-estate companies show that apartment prices have dropped, while two of the surveys say prices have sunk below last year’s third-quarter numbers.”

“‘My phone has nearly stopped ringing,’ said one high-end broker who requested anonymity. ‘It’s a scary time in this business.’”

“A chilling report by Brown Harris Stevens shows the average sale price for cooperative apartments slid by 4 percent in the past 12, while condos fell 6 percent, compared to the third quarter of 2005. Halstead Property notes that the average apartment price is4 percent less than a year ago, and 10 percent lower than the second quarter 2006.”

“Weighing particularly hard on the market is the average sales price for a Manhattan co-op, which has dropped 16.1 percent in just the last quarter, according to figures by Prudential Douglas Elliman.”

“The negative numbers represent a stalemate between buyers and sellers, an overabundance of properties for sale and a boom in the construction of condominium developments. The Corcoran Group reports a 17 percent drop in deals closed in the past 12 months from 3,597 to 2,996. Corcoran CEO Pamela Liebman says there are fewer deals being struck because sellers are still sticking to their asking prices while more buyers are taking a wait-and-see attitude.”

“‘Buyers don’t feel the same urgency as in the past,’ she said. ‘They feel more empowered to make low offers or just wait.’”

The Daily News. “The average sale price of a Manhattan apartment fell 7%, the latest indication that the city’s housing market is cooling. The statistics reflect the frustration of apartment sellers, who struggled to find the right strategies now that they no longer have the upper hand.”

“Some had to cut their asking prices. Others decided they didn’t want to play the game at all. ‘We were just putting our apartments out there to see what we could get.’ That’s what some clients told Jonathan Miller, the CEO of appraisal firm Miller Samuel, when they yanked their flats off the market.”

“Inventory has increased 94.4% since the runup began in the 2004 fourth quarter. It’s 32.3% higher than a year ago.”

The Associated Press. “Inventory levels reached their highest level in more than 15 years in the third quarter, according to a report by Mitchell, Maxwell & Jackson Inc., an appraisal firm. ‘I think we’re seeing the beginning of a buyer’s market that hasn’t fully manifested yet,’ said Michael Martin, director of research at Mitchell, Maxwell & Jackson. ‘We’ve still got sellers who aren’t willing to dramatically cut prices and buyers are simply taking their time and being much more discretionary.’”

“The higher end of the market, which includes apartments valued at $2.5 million or more, took the biggest hit as the number of sales transactions plunged 40 percent, and prices declined 6 percent for three-bedroom units and 14 percent on average for four bedrooms and larger between the second and third quarters, the report said.”

“Martin blames a buildup in inventory for much of the slowdown. He said the surge in new condominium developments, and flurry of condo conversions in the past four years have resulted in large amount of unsold apartments sitting in the market.”

“In the past 12 to 24 months, developers brought a record 24,000 new apartments onto the market, the report said. In September, there were 9,990 units listed for sale, up 8 percent from 9,279 in August and up 21 percent from 8,280 units a year ago.”

“‘That’s really the biggest factor in the market because it all comes down to supply and demand,’ he said.”

“Demand for condos started to cool in the second quarter, said Martin. ‘The first part of the year was really carried through with bonus money from Wall Street because bonuses were at record levels, so that really kept things moving,’ he said. But inventory began building in the second quarter as demand started to die down, he said.”

“Martin said he hasn’t seen inventory this high since the late 1980s. The inventory glut, high interest rates and weak economy back then subsequently led to a housing crash in the early 1990s, that saw prices sharply tumble. Martin said home prices fell 38 percent on average between the time prices peaked in the second quarter of 1989 and the time prices troughed in the third quarter of 1993.”

The USA Today. “At the end of the second quarter, there was an 11.9-month supply of condos and co-ops for sale, up from a 6.6-month supply a year ago. About 60% of that increase was from the construction of new condos, says appraiser Jonathan Miller.”

“‘There are a lot of deals right now in the very high end,’ he says. ‘The remainder of the market is quiet. Volume is dropping. We are seeing sellers be a little bit more realistic in pricing.’ At current prices, it makes more sense for a lot of renters to remain tenants.”

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