The Housing Bubble

Jon Lansner reports from California. “One measure of O.C. home inventory rose significantly this month, says the math of (realtor) Steve Thomas in Aliso Viejo. Thomas calculates how many months it theoretically takes to sell all the inventory in the local MLS for-sale listings at the current pace of pending deals being made.”

“So, by this logic, it would take 7.78 months for buyers to gobble up all homes for sale at the current pace vs. 2.74 months a year ago.”

“Thomas notes that if market time is greater than nine months he considers it a ‘deep buyer’s market’ with pressure on prices. Thus, the latest figures show all homes priced above $750,000 in the county facing ‘deep buyer’s market’ selling pressure.”

“Newport Beach homebuilder William Lyon Homes delivered the latest round of bad news from the new home sector, reporting that its orders fell 40 percent over the summer.”

“The firm’s preliminary statistics, released today, reported that sales fell across all three states in which the developer works: California orders were off 29 percent from the same period a year earlier.”

The Times Herald. “Housing prices in the Vallejo area may be heading into the deepest slump since World War II, according to a new national study. While acknowledging modestly declining home prices in the area, at least two local Realtors doubt the accuracy of the dire predictions.”

“‘I can see the market dropping some, but my feeling and my hope is it won’t drop that far, though I entertain the possibility that it will,’ Realtor Paul Winders said.”

“‘It could mean less buyer confidence,’ Winders said. ‘More home buyers are already walking away from their mortgages if their home is worth less than they owe.’”

“The area is already seeing less real estate speculation, or ‘flipping,’ Winders said. Another change already under way is in home builders’ attitudes. These are becoming more cooperative with the real estate community as the client pool shrinks with buyer confidence, he added.”

“Solano County Association of Realtors President Sandy Vollmer said she’s noticed that, too. ‘People could be waiting to buy until the prices hit the bottom, which I think will be in a matter of weeks or months, not years,’ Winders agreed.”

The Manteca Bulletin. “All three candidates seeking two seats in the Nov. 8 Manteca City Council election spoke before a packed crowd at City Hall. The candidates also discussed the state of the local economy and falling house prices.”

“‘Home prices are falling down,’ Samuel Anderson said. ‘We have to be cautious on how we spend money and how we save it.’”

“John Harris said the housing market is one of many other revolving trends. ‘Everything goes in cycles,’ Harris said. ‘You can’t get antsy, there are going to be down times.’”

“Incumbent councilman Vince Hernandez said the city should shift their focus on commercial development. ‘We do have an imbalance of housing and commercial development,’ Hernandez said.”

The Chicoer.com. “A study released this week by an East Coast economic research group reported housing prices will drop dramatically in Butte County by 2008. A softening in the Chico market isn’t a surprise, according to 2007 Chico Association of Realtors President Kym Campbell.”

“Campbell said she’s seen dropping prices and longer stays on the market. ‘I think there’s more inventory.’ She also suggested that homes have been overpriced because of the heated demand for houses.”

“Campbell called the past couple of years ‘crazy’ and said a softened market may be closer to what’s normal for Chico. She also suggested that there could be a silver lining to any drop. While home sellers might not be making as much profit, it would be a little easier and cheaper to buy a home.”

“Chico City Manager Greg Jones didn’t have any city data regarding future housing prices, but as far as any impacts on the city’s revenue from tax assessment, he felt they would be negligible. ‘I don’t think (dropping prices) is a bad sign. It could reduce speculative investment, which could affect the overall economy.’”

Inman News reports on Washington. “Home sales in western Washington fell for the seventh straight month in September, as rising inventory slowed price appreciation, according to the latest report from the Northwest MLS. Brokers reported 7,906 sales last month, down 15.7 percent from a year earlier when 9,380 sales were recorded, according to MLS statistics.”

“Brokers added 12,656 new listings to inventory during September. Last month’s additions included 10,697 single family homes and 1,959 condominiums to boost the total inventory to 34,443 listings, a 41 percent increase in supply from a year ago.”

“The growing inventory is giving buyers a ‘much better chance to selectively and judiciously make buying decisions without the frenzied attitude of the last four years,’ according to broker Dick Beeson in Tacoma. ‘Sellers are getting frustrated by longer marketing times with some now offering more buyer incentives than they would have previously offered,’ he noted.”

“‘Things have changed, and it’s now edging toward a buyer’s market,’ Beeson said. ‘Sellers can’t remain frozen in time, place or price when it comes to selling their homes.”‘

The Bellingham Herald. “A glut of supply in the past few months is cooling off what had been a hot real estate market. ‘It is a great time to buy and a challenging time to sell,’ said Lylene Johnson in Fairhaven. Johnson prepares a quarterly report after analyzing data from the Northwest MLS. ‘It was inevitable that price appreciation would slow down because of all the new homes now on the market.’”

“‘I wouldn’t be surprised if home prices continue to soften over the next few months,’ Johnson said. ‘But I think that means we’re just returning to a more normal market. We’ve had a couple of years of an unusually hot market, so when we go back to a more typical year, it feels worse than it is.’”

“At the end of September, the number of homes for sale in five of Whatcom County’s major markets (Bellingham, Lynden, Ferndale, Blaine/Birch Bay and Sudden Valley) was 1,450, more than double what was available two years ago.”

“‘I can’t remember a time when there were so many homes on the market,’ said Johnson. ‘It has resulted in some potentially great deals out there, especially the new homes that developers need to sell now.’”

“Realtor Gragg Miller estimates that the housing inventory (the number of homes left if no more homes came on the market) has enough supply for almost six months. That number of homes for sale is creating more of a buyer’s market.”

“‘Even with the oversupply, you still see strength in the number of buyers out there,’ said Miller. ‘It’s a different market now than a year ago.’”

“Also, the number of homes sold is down significantly this year, according to statistics compiled by First American Title. In the first eight months of 2006, 3,062 homes and condominiums sold in Bellingham, Ferndale, Lynden Blaine, Deming and Sumas. For the same period last year, 3,634 homes and condominiums were sold.”

Arizona State University has the September numbers out for the Phoenia area. “In September 2005, the local resale home market began to slow down with 9,815 recorded sales leading to 4,875 recorded sales in September 2006. This is the lowest monthly level since 4,090 sales were reported in February 2003, and the lowest September since 2000, with 4,134 sales.”

“So far in 2006, there have been a total of 52,390 sales, while it stood at 88,750 sales in 2005 year to date.”

“For the first time in the last 10 years, the year-to-year median home price has declined from last year’s $263,000 to $256,900, while it was $264,900 in July 2006. The record to date was June 2006 at $267,000.”

“Although the median home price showed a decrease from a year ago, mortgage interest rates are higher than a year ago, 5.5 percent versus 6.0 percent for September 2006. Thus, affordability continues to be an issue. Based on an 85 percent loan-to-value, the monthly mortgage payment for the median price home increased from $1,270 to $1,325.”

“‘Even though mortgage interest rates have been declining for the last few months, limited home appreciation and household income continues to raise concern about the ability of some homeowners to maintain their homes,’ said Jay Q. Butler, director of the Arizona Real Estate Center at ASU. ‘This may be especially evident for those that have used some of the more creative financing instruments, such as option payment plans and initially low interest rate adjustable mortgages.’”

“Townhouse/condominium sales activity showed a decrease from 1,100 sales for August 2006 to 930 sales for September, which was below last year’s 1,770 sales. So far in 2006, there have been 11,280 sales, while there were 16,575 sales a year ago.”

“For September 2006, 14 percent of all recorded sales were for homes priced from $125,000 to $199,999, 46 percent for $200,000 to $299,999 and 37 percent for homes priced over $300,000. Last year, the distribution of all recorded sales was 29 percent for homes priced from $125,000 to $199,999, 34 percent for $200,000 to $299,999 and 32 percent for homes priced over $300,000.”

The Arizona Daily Star. “An investment partnership is planning to spend more than $112 million to buy 11 Tucson-area apartment complexes. Jerry Finney, one of Bascom’s partners and a manager with Multifamily Advisors, said apartment complexes in Arizona have become a better investment as home prices have soared.”

“‘Two years ago, people could buy a house for less than they could rent an apartment. Well, those days are gone,’ Finney said.”

“Such large apartment deals are rare for Tucson, said Omar Mireles, executive vice president of HSL Properties, Tucson’s largest apartment complex owner. With thousands of apartment units converted to condominiums in the past two years and few new complexes slated for construction, rents should continue to rise, he said.”

“At the end of the second quarter this year, the average Tucson rent was $591, according to David Wesson’s calculations. A year before, it was $573.”

The Arizona Republic has this update. “Mesa single family home resales dropped 14 percent last month, compared to August. The month was down 57 percent from September 2005.”

From Commercial Property News. “Multi-family developer Wood Partners shifted its new Phoenix residential development from condos to luxury apartments with the opening and leasing of the project starting this month.”

“As the housing explosion that occurred during the last few years in the Phoenix metro begins to slow, apartment owners find themselves in a very favorable position, according to the Marcus and Millichap. As new residents move to the Phoenix metro, they are finding a widening gap between mortgage payments and asking rents, making renting an attractive option.”

Some housing reports from Wall Street. ” The nation’s largest home builder, Ft. Worth, Tex.-based D.R. Horton said fourth-quarter net sales orders for new homes dropped 25% from a year earlier on sluggish demand for housing. ‘The current selling conditions in the home-building industry continue to be challenging, with higher-than-normal cancellation rates and increased use of sales incentives in many of our markets,’ said Chairman Donald Horton.”

“Its cancellation rate for the latest quarter rose to 40%, up from 29% the prior year. ‘As fundamentals continue to deteriorate and buyer sentiment sours further, we think Horton and other builders will continue to have a primary focus on working through inventory by reducing prices and increasing incentives,’ wrote Banc of America Securities analyst Daniel Oppenheim.”

“Also Tuesday, KB Home said quarterly orders fell 43% from a year earlier.”

“In the filing, KB Home reported new home orders slid 43 percent to 5,989 in the quarter, weighed by a 53 percent drop in U.S. orders.”

“The company’s housing backlog slid 14 percent to 23,878 units at the quarter’s end, while the value of the backlog fell 8 percent to about $6.53 billion as home prices fell across the country.”

“KB Home said it plans to file the delayed 10-Q on or before Dec. 24, in order to avert defaulting on its debt. The company said the delayed filing could trigger a default on some of its debt and impair its ability to borrow against its credit facility, but was in talks with its lenders to get extensions.”

“William Lyon Homes announced today new home orders for the three months ended September 30, 2006 were 501, a decrease of 40% as compared to 834 for the three months ended September 30, 2005. New home orders for the nine months ended September 30, 2006 were 1,698, a decrease of 41% as compared to 2,861 for the nine months ended September 30, 2005.”

“The Company’s cancellation rate for the nine months ended September 30, 2006 was 33%, compared to 13% for the nine months ended September 30, 2005.”

“The Company’s backlog of homes sold but not closed was 1,040 at September 30, 2006, a decrease of 55% as compared to 2,299 at September 30, 2005. William Lyon Homes is primarily engaged in the design, construction and sale of single family detached and attached homes in California, Arizona and Nevada.”

“M/I Homes, Inc. announces homes delivered for the 2006 third quarter decreased 11% to 927 from 2005’s 1,047. Robert H. Schottenstein, CEO, commented, ‘Market conditions continue to be challenging in most of our markets and are reflected in our unit results. The macro-economic factors giving rise to these conditions are well documented and, at this point, there appears to be no evidence that conditions will improve in the near-term.’”

“Mr. Schottenstein, continued, ‘With respect to the quarter, our new contracts were negatively impacted by increased cancellation rates, the impact of inventory oversupply in most of our markets and weak demand.’”

“The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and West Palm Beach, Florida; Charlotte and Raleigh, North Carolina; Delaware; and the Virginia and Maryland suburbs of Washington, D.C.”

From Paul Muolo at National Mortage News. “For years, Friedman Billings Ramsey was the ‘holy roller’ of mortgage REITs, preaching the benefits of using the structure when taking residential lending firms public. And for years, some firms bought the speech, went public, and paid out a lion share of their earnings in the form of dividends.”

“Then a ‘correction’ swept the subprime sector in mid-2005, a correction that is still occurring. But what about FBR itself? Last week the investment banking firm shut down he division that gathered residential product for securitization into ABS. But guess what? FBR, a spokeswoman confirmed, also shut down its mortgage trading desk. She said the company, however, has not closed the group that takes mortgage firms public. (There were rumors to that effect.)”

From Fitch Ratings. “Fitch believes the recent rise in U.S. loan repurchase activity serves as a reality check for mortgage originators rather than the beginning or acceleration of a troubling trend according to a new Fitch special report.”

“Although early payment defaults were the root cause of the increased repurchase activity, the Fitch report contends that secondary market behavior was largely responsible for the unexpected repurchase provisions recognized by some mortgage originators.”

“Although the impact of alternative mortgage products and adjustable-rate mortgage resets have yet to be felt, Fitch views the recent repurchase uptick as a rational self-correcting mechanism.”

“‘Mortgage companies are quickly playing catch-up with the changing rules of the game,’ said Vincent Arscott, a director in Fitch’s Financial Institutions group, referring to mortgage originators tightening underwriting guidelines. The report revealed that ‘risk-layered’ products, lower FICO, second lien, stated income loans, were the biggest loan repurchase offenders.”

From Inman News. “Federal regulators recently suggested new guidelines for banks that originate certain types of high-risk mortgages. The banks, predictably, were not enthusiastic about the regulators’ suggestions. But the regulators have it right: It’s high time for banks to limit access to these mortgages and disclose the real risks to borrowers.”

“Interest-only and payment-option loans were supposed to be intended for sophisticated borrowers who could take advantage of the greater flexibility. The fact that so many of these loans were sold to people for whom they weren’t intended begs an obvious yet important question: Why didn’t regulators insist on tougher guidelines a long time ago?”

The Orlando Sentinel reports from Florida. “Rising land costs have some developers of vacation homes in the Walt Disney World area focusing more on condos and town homes to entice buyers with lower prices. The market clearly has cooled, but single-family vacation home prices are still high enough that the rents owners can get pale in relation to their mortgage-carrying costs, according to several developers.”

“The answer for many, they say, is a lower initial investment. ‘Rental income hasn’t kept pace anywhere near buying costs,’ (developer) Garrett Kenny said.”

“Kenny is developing a vacation-home condo project near ChampionsGate and said most of the sales were completed before the market slowed sharply. ‘The market from the U.K. has really slowed down,’ Kenny said. ‘You have to be priced right these days.’”

The Sun Sentinel. “After years of handing out millions in incentives to downtown developers, Hollywood officials think they are poised to see profitable returns. But first they needed to borrow $20.5 million.”

“Driving the refinance package are delays in completing most of the proposed downtown redevelopment projects. ‘A couple years ago we stood here and we expected a number of those projects would already be generating those tax dollars,’ said Bryan Cahan, agency finance director. ‘But because of the [housing] market, some of those projects have taken a bit longer.’”

“Some criticize city leaders for previously promising so much to developers without any guarantees of success. ‘If all of this doesn’t work or all of this collapses, what’s going to happen?’ activist Howard Sher said.”

“Earlier this year, the developer of Young Circle Commons, one of the largest downtown projects, said he might have to scale back its size after his bid to obtain a nearby private property through eminent domain failed. The developer of SoHo Lofts also has asked for more incentives, citing rising construction costs.”

“And the developer who at one time planned to bring a condo project featuring a theater and charter school to Young Circle is on the verge of defaulting on a $5.2 million loan the CRA gave him, officials announced last month.”

The St Petersburg Times. “Most Floridians, actually, most Americans, have the vast majority of their personal worth tied up in their homes. So when that value stops growing, starts to look vulnerable or even starts shrinking, people need to turn off the TV and focus.”

“According to one particular type of market analysis conducted by Economy.com, a belt of Gulf Coast metro areas from Sarasota in the north to Naples in the south better brace for some dramatic drops in housing prices. It’s only natural since these are the same speculative-investing, hot-spot cities that enjoyed surreal runups in home prices in the past five years.”

“A neighbor wasted no time in telling us her family had had it with the squirrelly economics and hurricane threats of Florida. Her husband traveled west to scour parts of Colorado for a better housing market. I wish them well but they may have missed the window of escape. Selling out now could take some time and a painful financial toll.”

The Marco Island Sun Times. “According to Marv Needles, the construction aspect of the company will soon stop its building operations. ‘I’m not taking any more business,’ he said. ‘I haven’t been since June.’”

“Needles said there were several factors that led to the decision to phase out the construction part of his business. ‘It’s very difficult to keep a reasonable handle on costs in today’s market,’ Needles said. ‘Most customers aren’t willing to sign a contract that’s open-ended with the price, so it becomes kind of difficult to do business.’”

A Motley Fool. “My wife and I are Realtors and associate brokers who live and work north of Atlanta. The Atlanta Board of Realtors held a luncheon, when I learned that our guest speaker would be David Lereah, chief economist with the National Association of Realtors.”

“We would have a chance to chat with him over lunch before he spoke to our group. It seems he had just spoken yesterday to a Realtor group in south Florida and he told us the mood there was pretty grim. He told us that their business is off 60% from last year.”

“Lereah’s bottom line is that by next year most markets, including here in Atlanta, will be much more back to normal. Pockets of weakness will remain in California, south Florida, and some of the east coast resort areas like Hilton Head. But for most of us, better days are ahead. Is he right? My crystal ball lies irretrievably shattered on the floor. I have no idea.”

“In our personal business, we are still stuck at twelve transactions year to date. Over the past five years, we have averaged twenty five deals a year, so, we are obviously deep in the hole.”

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