The Housing Bubble

From In Business Las Vegas. “‘The market sucks.’ With those three little words, Las Vegas real estate guru Richard Lee elicited laughs from real estate agents and those in the development and building industry waiting for some insight on which direction the housing market is heading. Lee urges them to be patient.”

“‘Just remember that we have a shortage of land and that’s what caused the appreciation of new homes,’ Lee said.”

“With new home closings falling four of the last five months in the valley, builders have cut way back on home construction. During the last four months, new-home permits have fallen between 30 percent and 48 percent per month from 2005.”

“Mandi Lindsey, of the Framing Contractors Association, said builders have backed out of projects they intended to go forward with, dropped permits and even moved more slowly on projects under way, she said. Some framers who were doing 16 houses a month are down to six to eight a month.”

The Reno Gazette Journal. “The Reno area could be the second-hardest hit community in the nation in slumping housing prices, according to a report by Moody’s.”

“Inventory of resale homes in the Reno-Sparks area has been at more than 5,000 for the majority of this year, extremely high for this market. Broker Ken Wiseman said that flippers, ‘investors who buy new homes hoping for a quick sale and profit’ have been a big reason for the large amount of inventory on the market.”

“‘With existing homes, we will get bit in the ass by the investors who tried to make that flip and got caught short,’ analyst Brian Bonnefant said. ‘That will drive the prices down. That will put the pressure on that decrease even more so than the people just trying to move and buy a better house.’”

“‘The areas that grew the most (during the boom), those areas are going to probably fall the most,’ Bonnefant said. ‘If Reno was one of the top five in growth, they are definitely going to be one of the top five in decreases.’”

“Susie and Gary Inouye of Reno are getting to see Reno’s housing market from both a buyers’ and sellers’ perspective. The Inouyes are trying to sell their present home in northwest Reno and buy a larger one.”

“The good news is home prices are going down, which will help prospective home buyers. Sellers, on the other hand, might not be getting as much for their homes as they were a year ago.”

“The Inouyes are Bay-Area transplants who plan to sell their existing home first and have done considerable research in setting the price. It’s been on the market about a month.”

“‘We’ve had quite a bit of interest,’ Susie Inouye said. ‘We feel like we’ve priced pretty good. On the flip side of that, what we’re struggling with is the other people like us are having a difficult time selling their houses. Their asking price is more reflective of where (prices were) six months to a year ago.’”

“Inouye said she and her husband are looking at buying a new home rather than an existing home, because existing home sellers might be asking too much. ‘The market has changed so quickly, that’s what people aren’t aware of,’ she said.”

“Some home sellers say the abundance of new homes on the market is making it more difficult for them to sell their own homes. ‘I feel that the new homebuilders in the area are mostly to blame for this,’ said Tina Tubridy of Dayton. ‘They have overbuilt, and anyone trying to sell an existing, fairly new home is having to compete with the drastically reduced prices builders are offering to move their inventory.’”

“Tubridy said she listed her 5-year-old home in Dayton last February for $389,000 based on her Realtor’s advice. ‘It did not sell, not even any lookers,’ she said. ‘The builder is now advertising my home in the high 200 (thousands) to low 300s,’ she said.’”

“‘I am not being greedy. I just want fair market value for my home. I don’t think my home should be devalued because the builder has overestimated the need for new homes,’ she said.”

“Some sellers are willing to wait to get their price. Jay and Fern Walton have had their four-bedroom home on an acre in Pleasant Valley for sale since June. ‘I think we’ve only had about six people look at it,’ Jay Walton said. ‘We didn’t know how tough it was (to sell) because we’re just a seller. (The market) is pretty tight right now.’”

“The Waltons have owned the 1,700-square-foot home since 1964 and have it listed for $434,000. ‘We’re not in a hurry,’ Jay Walton said. ‘If we don’t sell this year, we’ll still be here.’”

Readers suggested a look at rents and home prices as a topic. “Does anyone have linkable data that shows that historically that median income can afford median home price, and also, that median home payment equals median rent?”

“I know both of these mantras are just ‘common sense,’ but I was wondering if there was a graph out there anywhere, or a linkable source with that data.”

“The reason I am asking, a few family members have told me that I am crazy, and that those ratios never existed. Rent has never covered the mortgage on homes… They drank too much kool aid, and I need to help them on the road to recovery.”

A reply. “If you Google the US Census Bureau website you can see median income/ home prices for all states and metro areas. I checked Palm Beach County awhile back. I believe on 1/1/00 the median income was about $45K and the median price was $135K. I think we will see a ratio of 3:1 again as our economy doesn’t warrant $400K median prices.”

Another, “You can look at a chart that shows the ratio of home prices to rent. As you can see the ratio has never been so high as far as the chart tracks, back to the 70’s.”

“This site has a price to earnings graph.”

Another wants more graphs, “Weekend topic: Favorite statistics, charts & graphs!!!”

One said, “I believe the NAR Affordability Index shows how much median house the median income buyer can afford on a nationwide basis. As you would expect, it is at a record low now.”

A look back at the Economist, “The most compelling evidence that home prices are over-valued in many countries is the diverging relationship between house prices and rents. Just as the price of a share should equal the discounted present value of future dividends, so the price of a house should reflect the future benefits of ownership, either as rental income for an investor or the rent saved by an owner-occupier.”

“Calculations by The Economist show that house prices have hit record levels in relation to rents in America, Britain, Australia, New Zealand, France, Spain, the Netherlands, Ireland and Belgium. This suggests that homes are even more over-valued than at previous peaks, from which prices typically fell in real terms. House prices are also at record levels in relation to incomes in these nine countries.”

The International Herald Tribune. “To buy or not to buy? (It) is being performed more frequently at kitchen tables and real estate offices around the world. That is because the math associated with the rent-versus-buy debate has grown a lot fuzzier lately, and the numbers threaten to swamp long-held convictions about the value of buying property.”

“Measured by cash flow, the cost of renting seems cheaper than buying: Even without the need to scrape together a down payment or pay closing costs, the monthly outlays of not only the mortgage payment but also local taxes, insurance, utilities and maintenance in many markets have actually tilted the balance toward renting rather than buying.”

“With house prices softening in many markets but not yet hitting bottom, and with higher tax assessments lifting the cost of ownership beyond more households’ ability to pay, more people are deciding to rent - at least until market conditions improve.”

“Noel Whittaker, a joint managing director of a financial services company near Brisbane, Australia, cited the example of a property that costs $300,000 and which can be rented for $300 a week. ‘If you rent it, the total cost is $15,600 a year,’ he said. ‘But, if you buy it, you will be up for at least $24,500 a year when you take interest rates and maintenance into account.’ That’s nearly $9,000 a year in favor of the renter.”

“A couple that rented for two years ‘will have an extra $18,000 to use as a deposit when they eventually do buy,’ he said.”

The Seattle Times reports from Washington. “At the beginning of the year, local housing experts predicted the Puget Sound area’s super-heated real-estate market would slow. What they couldn’t predict was exactly when or how much. It’s now, and the drop-off has been marked.”

“After rising for seven consecutive months, King County’s median single-family home price hasn’t risen since June. In fact it declined $10,000 from August to September, to $425,000. Four months without an increase is a signal of a trend.”

“Plus, inventory is building and homes are selling more slowly. The number of houses and condominiums for sale last month increased 42 percent in the 17 Washington counties in which the MLS tracks sales.”

“Meanwhile, the number of pending sales, those signed but not closed, declined almost 19 percent compared with a year earlier. ‘This doesn’t mean that a ‘bubble’ has burst and property values are declining,’ said Redmond appraiser Alan Pope. ‘It means we’re moving to a more-normal market where buyers have more choices. If buyers have more choices, they’re less likely to pay in excess of the list price to obtain a property.’”

“‘They’re saying, ‘Wait a minute — this is getting out of my comfort zone, and unless we have to buy or sell, let’s just sit it out,’ said (broker) Bill Riss, a real-estate veteran who has been through many housing cycles.”

“Fewer sales and more homes to choose from are causing many more sellers to reduce prices, real-estate agents say. ‘There’s no doubt about it,’ said Chris Pauling, president of Prudential Northwest Realty. ‘There’s more competition, and [sellers] are having to be more realistic in their expectations.’”

“Compared with a year earlier, September buyers had 32 percent more properties to choose from in King County — some 9,890 properties compared with 7,496 in September 2005. Snohomish buyers had 27.6 percent more, and Pierce County buyers had 54 percent more.”

The Seattle PI. “Seattle’s median home price in September was down from both July and August. It’s the lowest year-to-year increase and the first time prices have dipped two months in a row since January 2004.”

“But, the median does not account for people taking advantage of lower prices to buy nicer homes than they might have before, said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.”

“Crellin’s message for sellers? ‘Don’t panic. Yeah, it’s going to take a while to sell a home,’ he said.”

“It’s easy to find nice homes still on the market despite reductions in asking prices. At an open house in Greenwood last month, agent Deborah Arends was having a hard time understanding why the three-bedroom cottage was still on the market after six weeks and a price cut from $379,000 to $365,000. ‘It should be gone because it’s too cheap,’ she said.”

“Before putting an updated two-bedroom Capitol Hill bungalow on the market for $699,000 in May, agents Meredith Erickson and Anne Willoughby Nelson went through the usual exercise of comparing the prices of recently sold, comparable homes. Nelson noted two nearby homes that attracted multiple offers and sold in April for $700,000 or more.”

“In August, Erickson and Nelson dropped their asking price to $679,000. Nelson agreed the slowing market might be making buyers choosier. During peak times in the market, buyers might have set aside qualms about the floor plan and jumped at the place, she said. ‘Maybe that sense of total urgency has lessened a little bit.’”

“Realtors also say stories about the slowing market, particularly nationally, have some holding off. ‘They’re just nervous,’ said (realtor) Jill Allen. ‘They want to feel like they’re getting some sort of a deal.’”

The News Tribune. “The number of houses for sale continue to go up in Pierce County. The county measured 2,116 new listings in September, for a total of 6,341 homes on the market. That’s a 54 percent increase in the number of active listings compared to this time last year.”

“The number of pending sales has dropped 25 percent compared to last year’s record pace. Sellers might be frustrated by the length of time their homes are spending on the market, and some are now offering buyer incentives, said Dick Beeson, broker in Tacoma.”

“Brokers added 12,656 listings in Western Washington during September. September finished with 34,443 total listings regionally, up more than 41 percent from a year ago.”

“Mike Larson, a Northwest MLS director and broker in Tacoma, said he was ‘a bit concerned’ about the condo market, particularly in downtown Tacoma, ‘where they seem to be going up everywhere.’”

The Asbury Park Press from New Jersey. “Kara Homes’ bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is going to complete the developments it has under construction and make good on its debts.”

“East Brunswick-based Kara Homes, one of the biggest home builders in Monmouth and Ocean counties, filed for Chapter 11 bankruptcy Thursday night. Under Chapter 11, Kara will be allowed to remain in business, and creditors’ claims will be frozen while it comes up with a reorganization plan and tries to regain its footing.”

“Experts said Kara is an example of what can go wrong to an aggressive builder when the real estate industry collapses. After paying top dollar for land, it is not able to sell its homes at a high enough price to pay off its debts, they said.”

“‘This was part of what we were looking for, and I don’t use the word ‘bubble’ — but a housing sector slowdown,’ said David H. Downs, a professor at Virginia Commonwealth University School. ‘The question is, who was going to be overleveraged?’”

“The fallout from Kara’s bankruptcy is far-reaching. The filing lists thousands of creditors. Some homeowners said they have been left in the lurch. Ira Cohen had hoped the builder would complete the clubhouse, swimming pool and landscaping to the entrance of the development. ‘We’re concerned whether or not they’re going to complete this development at all,’ Cohen said.”

“Ellen Voltolino of Dover Township put down $12,500 on a Kara house in in Lakewood with the caveat that the money would be returned if she couldn’t sell her old house, she said. Her house was on the market from January to June but didn’t sell, she said. She asked for her money back but hasn’t received a response.”

“‘It’s like they stole my money,’ Voltolino said. ‘I don’t have $12,000 to throw away in the garbage.’”

“Some customers are not waiting to see if Kara makes good on its debts. Ocean Township lawyer Douglas Katich said Friday that he would file civil lawsuits on behalf of several customers charging company officials with fraud, a charge he said would be appropriate ‘if they are soliciting deposits when they knew the business wasn’t viable.’”

“Kara might find other developers willing to buy some of its undeveloped land. Home-building giant Hovnanian Enterprises of Red Bank has looked at a number of Kara’s parcels and has purchased one in Shrewsbury, said J. Larry Sorsby, Hovnanian’s chief financial officer.”

The Star Ledger. “Faced with rising inventories of unsold homes, Hovnanian Enterprises said it plans to ax executive and field jobs to improve its bottom line and weather what the Red Bank-based home builder describes as ‘the steepest decline in new-home sales in our memory.’”

“In an internal memo to employees, CEO Ara Hovnanian said an unspecified number of staff reductions were necessary in order ‘to remain healthy,’ as the nation’s eighth-largest U.S. home builder grapples with the broad downturn plaguing its industry.”

“‘In many locations, including corporate headquarters, we have been forced to face the fact that we no longer have enough work for all of our Associates,’ Hovnanian wrote. ‘We consider this action to be a last resort.’”

“News of Hovnanian’s job cuts comes one day after East Brunswick-based Kara Homes, one of the state’s largest private home builders of condominiums and active adult communities, filed for protection from creditors under Chapter 11. ‘The company ran out of cash,’ said Kara Homes bankruptcy attorney David Bruck.”

“Bruck blamed the builder’s financial meltdown on ’slowing sales..brought about by a slowing economy.’”

“‘I believe it was the economy, the market itself, and some lack of projecting (by Kara Homes) to some degree,’ said Anthony Garofalo, president of Vintage Contracting of NJ in Belmar. Other factors, such as a slowdown in sales and massive incentives the homebuilder was offering, also contributed to the bankruptcy, he said.”

“In its memo, Hovnanian told its employees it is working to renegotiate the terms of some of the company’s land options, in the hope of reducing purchase prices or extending the time periods in which they agreed to exercise them. Builders can either own their land outright or hold options to buy land, which are easier to walk away from, according to analysts.”

“Typically, when builders take write-downs to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up, said Robert Curran, a senior housing analyst at Fitch Ratings.”

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