The Housing Bubble

The Press Telegram reports from California. “California’s median home price will drop in 2007 for the first time in 10 years, according to the California Association of Realtors. ‘The housing market has slowed down at a much faster pace than anybody has anticipated,’ said Robert Kleinhenz, a CAR economist.”

“The CAR forecast also calls for sales to continued to decline in 2007 by 7 percent. The projected fall off for 2006 is 23 percent, meaning the worst of the sales fall off may be behind us, Kleinhenz said. ‘I’ve become very fond of saying things will be less worse,’ he added.”

“‘While we recognize that the frenetic sales pace of the past four years could not continue indefinitely, the housing market in 2006 did not fare as well as we initially expected,’ said C.A.R. Chief Economist Leslie Appleton-Young.”

“‘Looking to 2007, we expect that some regions of the state, including the Central Valley, San Diego and Riverside/San Bernardino regions, will experience sales declines greater than the state as a whole,’ she said. ‘That also holds true for several second-home markets, including the desert areas of Southern California and the Wine Country.’”

The Sacramento Bee. “Home prices are still falling, and this time it doesn’t matter where you live. ‘Prices are dropping every day, and they’re not little any more,’ said Mike Toste, a real estate agent in Antelope.”

“‘We can see the prices coming down,’ said Diana Wallace, a Sacramento resident who hopes to buy houses to rent out for retirement income. ‘I feel sorry for these people. But I want a deal. I want to get the best value I can. But I hope they don’t drop too much because I have a home myself.’”

The San Francisco Chronicle. “Across the state, inventory more than doubled in the past year. Bay Area home prices fell last month for the first time in more than four years. ‘This is an enormous real estate bubble, bigger than we’ve ever seen,’ said economist Christopher Thornberg. ‘You’ve got to pay the piper.’”

“Claudette Center is trying to sell a Bernal Heights home that belonged to her uncle. After gutting the kitchen, refinishing the floors and putting in new bathrooms, she still hasn’t received any offers, and traffic at open houses has been slow, she said.”

“‘Last week nobody came,’ she said. ‘The first week it was mostly all neighbors.’”

“She is considering lowering her $829,000 asking price. ‘I understand that if I really want to sell the house fast, I’ll probably have to drop the price,’ she said.”

The Santa Cruz Sentinel. “What goes up must come down, according to Isaac Newton’s law of gravity, and that may tell the story of the Santa Cruz County housing market, too. The median price for single family homes in September was $743,000, the second consecutive decline from this year’s peak of $775,000.”

“‘We’re going to see every county go a little bit negative within the next three or four months,’ predicted Dataquick analyst John Karevoll.”

“‘It is definitely a buyer’s market,’ said (realtor) Dave Mann in Aptos, pointing out the record number of listings. There are 1,361 homes listed for sale, 49 percent more than a year ago and the highest in 10 years. The 132 homes sold in September represent an 11-year low. Sales were down 41 percent from one year ago at this time, and down 51 percent from two years ago.”

The Voice of San Diego. “San Diego homebuyers have to sift through nearly 30,000 new and resale homes currently on the market. The number of homes for sale is up more than 50 percent from the third quarter 2005, and up 135 percent from the same period 2004.”

“And then they face a slew of aggressive marketing techniques from homebuilders. Indeed, of the unsold units in the county last quarter, about one-quarter were newly built units. That’s about 7,600 brand new homes, sitting unsold. And more than 6,400 of those are in the attached sector, condos, condo conversions and townhomes. And that doesn’t count the number of housing units under construction, more than 10,000.”

“The county’s 4.4 percent drop in overall median prices was announced last week by DataQuick. That was driven largely by a 17 percent drop in new home prices, declining from $498,000 in September 2005 to $414,000 last month.”

“‘This cycle is pure supply and demand, just like in musical chairs,’ said Jack Haynes, a Countrywide Financial VP specializing in homebuilder loans. ‘The music stops and you have too much supply.’”

“Foreclosure activity in San Diego county last month continued to rise. September’s 403 trustee sales were more than double the 122 such sales last year. For REOs: There were zero in January 2005 and four in September 2005. But that rate increased nearly 5,000 percent to last month’s 198.”

“‘The negative-am ARMs are catching up,’ said Phyllis Ingraham of e-foreclosuresdata.com. ‘You either hang on and make the payments to ride this through, or if you can’t afford it you go into default,’ Ingraham said. ‘It could be several hundred more a month.’”

“Residential foreclosure activity in California reached its highest level in more than four years in the third quarter. Lending institutions sent 26,705 default notices to homeowners in the state during the three-month period ending in September, DataQuick announced.”

“The median age of the home loans that went into default last quarter was 14 months, and more than half were originated in 2005. On primary mortgages, homeowners were a median of five months behind on their payments when the lender started the default process. The borrowers owed a median $9,829 on a median $306,000 mortgage, DataQuick reported.”

“On lines of credit, homeowners were a median six months behind on their payments.”

The Press Democrat. “For the second straight quarter, mortgage defaults jumped in Sonoma County. Default notices increased 83.3 percent in Sonoma County during the third quarter, following a 53 percent increase in the second quarter, according to DataQuick.”

“The Bay Area experienced an 89.2 percent increase, with Solano County’s 171.3 percent increase being the largest.”

“Buyers in the region, which includes Silicon Valley, were not in a hurry to buy homes last month and likely will not be over the near term because they expect home prices to flatten or tick down.”

“‘Buyers have finally taken off their rose-colored glasses. Once interest rates started to go up that made the housing market slow, which in turn made buyers wonder if this is the right time to buy,’ said Cynthia Kroll, senior regional economist at the University of California, Berkeley.”

Some housing news from Wall Street and Washington. The Commerce Department. “Privately-owned housing starts in September were at a seasonally adjusted annual rate of 1,772,000. This is 5.9 percent above the revised August estimate of 1,674,000, but is 17.9 percent below the September 2005 rate of 2,158,000.”

“Privately-owned housing units authorized by building permits in September were at a seasonally adjusted annual rate of 1,619,000. This is 6.3 percent below the revised August rate of 1,727,000 and is 27.7 percent below the September 2005 estimate of 2,240,000. Single-family authorizations in September were at a rate of 1,207,000; this is 6.0 percent below the August figure of 1,284,000.”

“”Single-family housing starts in September were at a rate of 1,426,000; this is 4.3 percent above the August figure of 1,367,000.”

“The rate of single-family housing starts dropped 20.3 percent in September compared to September 2005.”

“The Census Bureau and HUD noted that month-to-month changes in seasonally adjusted statistics can show irregular movements. It may take four months to establish an underlying trend for building permit authorizations, five months for total starts, and six months for total completions, the agencies noted.”

From CNN Money. “The disconnect between the two numbers surprised David Seiders, chief economist with the National Association of Home Builders, who said builders seemed to be working through a backlog of home permits they held for properties where they had not started construction.”

“Seiders said that a pick-up in building is not necessarily a positive for the market, which has seen the inventory of completed but unsold homes increase to record levels, pushing down prices and forcing builders to offer incentives to sell homes.”

“‘If both permits and starts were up I’d be scared because I think there are still inventory issues that we need to work through,’ he said. ‘I hope the bounce in starts is a temporary phenomenon. I think it’s inevitable that starts will be down in October.’”

From Bloomberg. “Starts increased 14 percent in the South to 975,000 and rose 3.4 percent in the Midwest to 270,000. Starts fell 14.1 percent in the Northeast to 134,000 and decreased 2.2 percent in the West to 393,000.”

“The number of homes under construction fell 1.2 percent in September to a 1.328 million pace. Housing completions rose 11.1 percent to an annual rate of 2.084 million. The number of housing units authorized, but not yet started, decreased 11.1 percent to 202,600.”

“More than half of U.S. homebuilders, 55 percent, are offering extras to entice buyers, up from 37 percent a year earlier, said Gopal Ahluwalia, at the National Association of Home Builders in Washington. Four percent are giving away cars, he said.”

“Toll Brothers reported a 19 percent drop in fiscal third-quarter profit, its first decline in four years. ‘There’s no doubt that real estate is down but certain markets are doing well,’ CEO Robert Toll said. ‘I can’t say that the worst is behind us and I can’t say that it’s not.”

US News and World Report. “To be sure, some the nation’s largest home builders have recently complained of a flood of canceled orders. As inventories of unsold homes have reached record levels, many announced that they are writing down investments on land, stopped building, and laid off both administrative and construction workers.”

“Meanwhile, the inventory glut has also pushed down prices for building materials, which have slumped by as much as 32 percent from a year ago. As a result, lumber mills from Maine to Washington State have announced that they are shutting down.”

From Inman News. “After eight consecutive monthly declines, the National Association of Home Builders/Wells Fargo Housing Market Index gained one point in October, a level of 31. A score over 50 indicates that more builders view sales conditions as good than poor, and the reverse is true for scores below 50, the builders group reported this week.”

“David Pressly, NAHB president said, ‘More than three out of four builders are offering substantial sales incentives to move their product and limit cancellations, and this aggressive strategy is working.’”

“Comptroller of the Currency John C. Dugan told members of the American Bankers Association that a recent underwriting survey showed a ’significant easing’ in residential mortgage lending standards.”

“The survey showed lenders are doing the opposite of what regulators would expect them to do in a cooling housing market: allow longer interest-only periods, more piggyback loans, higher loan-to-value ratios, and more reduced-documentation loans.”

“‘Frankly, that concerns me,’ Dugan said. ‘We don’t want to see the lending decisions bankers make today result in excessive foreclosures, and reduced affordable housing credit, tomorrow.’”

From Lew Sichelman “A lack of enforcement at the state level is a major reason appraisals remain at the root of mortgage fraud, said panelists at a symposium sponsored by the Appraisal Foundation earlier this month.”

“During an 18-month period between 2001 and 2002, Fannie Mae referred 860 cases to state regulators. Of those, some action was taken in 391. But as of this month, nothing has been done regarding the remaining 469 cases.”

“A recent Appraisal Institute study found that more than half its members felt pressured to overstate their valuations. And the over-riding reason they go along, said attorney Rachel Dollar, is to keep from being blackballed by brokers, lenders and realty agents.”

“AI president Richard Power said, only four states, Utah, Michigan, North Carolina and Arkansas, have made it illegal to coerce appraisers into making false valuations. And while 33 states require licensing, there are ‘a lot of holes’ in many of the regulations.”

The Charlotte Observer from North Carolina. “Following slowing sales and falling prices in cities across the country, monthly home sales in the Charlotte area were down in September, the first drop in more than three years.”

“Veteran real estate agents say they’ll wait to see whether the September drop is a monthly blip or signals a deeper decline. Either way, they agree that buyers and sellers must adapt to new market demands. Sales of the most expensive homes have been especially hard hit.”

“Agents say slower sales in other cities have stalled business in Charlotte. Their clients can’t buy here, they say, until they sell homes in the cities they’re relocating from. Dot Munson said she had a stack of files on her desk representing families that can’t sell homes in Florida, California or the Northeast.”

“‘That’s the biggest downturn in our business right now,’ she said.”

“Slowdowns elsewhere affect sales here in other ways. Some buyers want to offer dramatically less than the asking price in Charlotte, Munson said, because they’ve seen prices fall where they’re moving from. A buyer who sold for 20 percent less than he thought his house was worth might offer 20 percent less than the asking price for a house in Charlotte.”

“Sellers also have to be realistic, say Munson and other experienced agents. They have to price homes fairly, and offer incentives such as decorating allowances and help with closing costs.”

“(Broker) Dan Cottingham of Cottingham-Chalk said business has been slowing gradually for a year or more in some segments of the market, especially the upper end. He said most sellers have adjusted to the slowdown by negotiating more willingly. ‘Price is king …,’ he said, ‘but we’re seeing sellers offering decorating allowances that they wouldn’t have a year ago.’”

“‘This (slowdown) doesn’t mean that sellers are going to give their homes away, but there are more for buyers to choose from,’ said (realtor) Donna Anderson.”

“As the market slows, more sellers entice buyers by offering to help with closing costs. Agents say the tactic is used at all price ranges, but especially below about $300,000. Offering help with closing costs helps sellers of existing homes compete with new-home builders, who often offer such incentives as upgraded appliances.”

“Agent Bill Balatow said his business has ‘flattened’ a bit, especially for homes costing $1 million-plus. Four of 11 pending sales he’s working on include seller assistance with closing costs. Also pending: Three sales that have to wait until clients sell homes back in Florida.”

The Daily Record from Florida. “Randy Shelton says there is one major misconception about the first condo tower built on the Southbank — The Strand is not, and was never sold as, an apartment building. In fact, there hasn’t been a sale yet.”

“Buyers will also benefit from the decision to go with condos. Because the project started more than 18 months ago, construction prices for the Strand were locked in at a time when construction costs were lower. ‘Our prices reflect two year old construction prices,’ said Shelton.”

“Shelton said the Jacksonville market has been wonderful, relatively speaking. ‘The rest of Florida is just paying for its sins.’ ‘The rest of Florida is like a dead zone and Jacksonville stayed insulated because it never got out of hand building,’ said Shelton.”

From the Virginia Pilot. “They are signs of the times: red placards standing in front of two homes on one block in the Coleman Place neighborhood. ‘For Sale. Price Reduced.’ From Virginia Beach to Suffolk, much of the momentum in the local real estate market has shifted to buyers after years of rip-roaring price increases and speedy sales brought hefty gains to sellers.”

“The number of properties sold in South Hampton Roads fell to 1,506 in September, a 20.2 percent drop from the same month last year. The number of units sold in Virginia Beach shrank by 23.7 percent in September.”

“Many sellers are reluctant to lower their asking prices. Still some are offering enticements such as picking up closing costs to attract buyers. ‘We’re seeing lots of reductions, we’re seeing lots of incentives,’ said Andi Helfant-Frye, an associate broker in Virginia Beach.. ‘We’re seeing all the things that people used in the normal markets to entice people to look at their properties.’”

“Some worry that too many sellers still expect unrealistic prices. ‘In some areas home sellers are not making sufficient adjustments in their listing price, so their homes are staying on the market and contributing to the build up in inventory,’ said Thomas M. Stevens, the president of the NAR.”

“‘There are unrealistic expectations’ among sellers, said Dave Macklin, an associate broker in Virginia Beach Macklin said. ‘They’re looking at, ‘My neighbor sold his house last year for X dollars, so I have to sell my house for X-plus.’ And that’s not what has happened to the market - it may be worth more, but it’s not worth that much more.’”

The Washington Post. “NVR Inc., the region’s largest home builder, said yesterday that four out of 10 of its new-home sales in the Washington area were canceled last quarter. Around the Washington market, cancellation rates have tripled in the past year, to 17 percent. In August alone, that meant about 250 cancellations.”

“In its most recent earnings report, builder Toll Brothers Inc. said cancellations in the quarter that ended in July had more than doubled, to 18 percent nationally, while numerous builders said in interviews that their cancellations locally had increased.”

“Developers and builders say buyers are abandoning five-figure deposits on their future homes because they cannot sell their existing homes or did not sell them for nearly as much as they had counted on.”

“In an effort to reverse the trend, builders are helping buyers sell their old houses, delaying closing dates or offering favorable loan terms — or even cash.”

“It is difficult to put a price tag on how much in incentives builders are giving to buyers with existing contracts because they tend to be worked out on a case-by-case basis. But both cancellations and builders’ efforts to stop them have generally been more prevalent in markets where prices increased rapidly during the housing boom, including Washington.”

“With little success in selling their home and a settlement date rapidly approaching on a new $900,000 house in Clinton, Irica and James Cheeks last month decided to walk away from that dream house and their $60,000 deposit.”

“The Cheeks said that when they signed the contract to buy, in spring 2005, they had no idea the market would turn as quickly as it did. They decided on the house from Ryan Homes after they grew tired of losing bidding wars for resale homes, said Irica Cheeks.”

“They figured they would sell their house, also in Clinton, for about $725,000. That factored in the way the value of the house had been climbing. But now, after three months on the market, the house is priced at $670,000.”

“But after the couple notified the builder that they wanted to cancel the deal, the company agreed to push back the settlement date, the Cheekses said. The company also offered more money toward closing costs.”

“‘Overall, the company was very understanding,’ said James Cheeks, who now plans to settle on the new 8,000-square-foot house next week. ‘I think they were more flexible than they wanted to be, but I think they had to at this point. They realized that they needed us as much as we needed them. And they started throwing in more incentives.’”

“When sales are slow, large builders can control the number of homes they have to sell by not building or by backing out of contracts to buy land. For example, NVR recorded an $81 million write-off of deposits on land in the third quarter.”

“However, cancellations are a big headache for builders because they have already spent the money to build houses and are responsible for carrying costs. ‘Standing inventory’ in the Washington market had roughly tripled, to 3,600 homes, by August, the latest figures available, compared with a year earlier”

“Deborah Rosenstein, VP for a local builder, said her firm tries to work with every buyer, but she expressed frustration at some ‘outrageous’ demands. ‘Home buyers are really taking home builders to the carpet. ‘They just want to get out of contracts,’ she said. ‘Sometimes consumers are unrealistic. When the market was good, they weren’t saying, ‘You know, it’s too low; let me give you another $50,000.’”

Newsday reports from New York. “Two months ago, Chuck Davis finished building a new three-bedroom, two-bath ranch in Shirley, and he put it on the market for $315,000. So far, however, Davis hasn’t had any calls on the house, which, although new, is competing with 1,000 existing-home listings in Mastic and Shirley.”

“Buyers are holding out for better prices and, in some cases, are worried about selling the home they already own. So, even with limited new housing inventory, builders like Davis are feeling the downturn, and are, in turn, slowing their production. ‘I’m maxed out right now until I unload some of these homes,’ Chuck Davis said.”

“Similar stories abound, and the incentives are growing. Builder Alec Ornstein in Garden City, is offering buyers an upgraded kitchen or, in some cases, a year of paid real estate taxes. Steven Klar, an East Meadow developer, is throwing in a Mercedes with some of his homes. ‘It’s a buyer’s opportunity right now,’ Klar said.”

“But for many would-be new home buyers, it’s not that simple, said Centereach resident Phyllis Lombardi. Last spring, Lombardi and her husband were to close on a new $612,000 home in Mount Sinai built by Pulte Homes.”

“After putting their home up for sale last November, the Lombardis found that they had hit the market with exactly the wrong timing. May approached, their new house was ready for closing, and they still hadn’t sold their existing one, even after dropping the price twice.”

“So they pulled out of their deal with Pulte, which refunded all but $20,000 of their deposit. ‘I essentially feel like I paid $20,000 for the fun of picking out my colors and watching the house being built,’ said Phyllis Lombardi.”

“Now, the Lombardis are trying again, especially since Pulte said it would put the $20,000 toward another house if they buy within a year. This time, though, Phyllis Lombardi said she’ll sell first. ‘Even if you had to find temporary housing, it’s better than what we went through,’ she said.”

“Robert Wieboldt, executive VP of the Long Island Builders Institute, said some builders may be forced to drop their prices. Others are holding off buying any new land.”

“‘It’s a little tenuous right now,’ said Victor Irizarry, president of Whitford Homes in Ronkonkoma. ‘You’re always anticipating moving forward, but right now, I’m holding back a little bit.’”

“Experts said they’re hoping builders and bankers remember lessons of the early 1990s to prevent severe losses. And they’re hoping for a spring 2007 comeback. Said Ornstein: ‘If you didn’t overleverage and overpay for land, you … should be in a strong position to be able to hold on.’”

From Inman News. “‘There’s a very big standoff going on … It’s like a buffet table at a banquet where they keep bringing more plates from the kitchen,’ said David Michonski, CEO of a large brokerage firm in Manhattan. It’s as if buyers are thinking, ‘I like this shrimp, but maybe there’s lobster coming out,’ he said.”

“The slowing market in Manhattan, he said, is being driven more by an oversupply of new properties than by the resale market. Inventory is up 65 percent from last year in Manhattan and the majority of those properties are new construction, he said.”

“Today buyers in many markets know they have the upper hand and are letting homes sit on the market longer in hopes of finding a better deal. There’s a lack of urgency in pushing buying decisions, brokers say.”

“‘I don’t see a lack of confidence (in home buying),’ said Jeffrey Bastress, broker in Sterling, Mass. ‘I see it more as they know they have choices so they think, ‘why rush into it?’ With interest rates remaining low, buyers today are more likely to wait on the sidelines until they find a good deal, he said.”

“Once buyers do make offers, they’re being tough in what they ask for, Bastress said, referring to a recent client who at the last minute demanded another $5,000 off the home’s asking price for no reason other than knowing the seller had no choice but to agree.”

“Bastress said the reason buyers aren’t moving quickly comes down to the fact that they have no compelling motivation to do otherwise. They know they have the upper hand and though Bastress said he hates to use the phrase ’sweet revenge,’ ‘that’s exactly what they’re doing.’”

“Home sellers, meanwhile, see the future as the unknown and some think that next year’s market may be worse so they feel they have to sell now, he said. ‘The advice I give sellers is that you’re going to have to put a price on your home that you won’t regret selling for and also a price that if you don’t sell you won’t regret keeping it,’ Bastress said.”

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