The Housing Bubble

The Orange County Register reports from California. “Talk about bad timing. Just as homebuilders start on three of the most ambitious redevelopment projects in Orange County’s history, the housing market deflates.”

“What’s a builder to do? The answer could have big implications for cities such as Irvine, Santa Ana and Anaheim, which need more housing for their workers. In a worst-case scenario, builders could abandon or delay projects.”

“On the other hand, what’s bad for builders could be good for homebuyers. A glut of homes hitting the market amid a slump could mean bargain-basement prices. The first big wave of homes from redevelopments should hit the market in 2008, builders say.”

“Lennar Corp. is spending more than $1 billion to redevelop the former El Toro Marine base and is redeveloping large sites in Tustin and Anaheim. ‘I can’t speak to the housing shift,’ CIO Emile Haddad said. ‘I don’t know how deep or long it’s going to go.’”

“Builders such as Irvine’s Standard Pacific Corp. said in releases that they are cutting back on their land holdings for future development. But so far no one expects builders to scrap major projects in Orange County.”

“Lennar and other builders have a lot riding on the fate of the three biggest redevelopment projects: El Toro, the former Tustin Marine base, and the Platinum Triangle in Anaheim. They’re investing billions of dollars on plans to build 19,582 houses, condos and apartments, including a few hundred for sale now in Anaheim.”

“That’s in addition to about 2,000 homes Lennar and William Lyon Homes are developing in Tustin, with some for sale now. They’ve offered incentives to entice buyers.”

“There’s a 50-50 chance the market will still be in the doldrums in 2008, said Edward Leamer, director of the UCLA Anderson School. ‘We expect to see a sluggish, problematic market for a considerable number of years,’ Leamer said.”

“There is another key issue with redevelopment projects, experts say. To make sense financially in an area of high land prices like Orange County, developers pack as many homes in the projects as the market will bear. Translation: condos.”

“Plans for the Platinum Triangle, for example, are dominated by condos and apartments, including high-rises. Orange County may already have more condos than buyers, said economist Jack Kyser.”

“‘The Orange County condo market has been fingered as one of the areas where there have been speculators,’ Kyser said. ‘With some of these projects where construction has started, there may be some disappointments.’”

“He said condos are the last type of home to take off in a rising market and the first type to tank. Indeed, there is some evidence of condo softening. Condo sales were down 40 percent for the 22 business days ending Oct. 12, compared with a year earlier, market tracker DataQuick said. The median condo price slipped 3.3 percent to $445,000.”

“Irvine-based developer Sares-Regis Group recently held an auction for its condominiums in Aliso Viejo. The company converted them from apartments and sold them for less than originally planned.”

“Veronica Hicks, a broker in Irvine, said buyers today are reluctant to pay the deposits housing developers want to start construction. ‘When people were buying much of the new housing that is being completed today, it was a very different market,’ she said.”

“She said owners of existing condos could face the real difficulty selling when new homes hit the market. Owners with older condos will ‘have to dump a lot of money into the condos just to sell them,’ Hicks said.”

Some housing bubble reports from Wall Street and Washington. “A gauge of future home buying fell 1.1% in September, a signal that sales will be roughly flat for the next few months, the National Association of Realtors said Wednesday. The pending home sales index fell 1.1% in September. The index is down 13.6% in the past year. Home sales are also down about 14% in the past year, while building permits have plunged 27%.”

“Regionally, the pending home sales index in the Midwest was down 18.5% year-on year. Pending sales in the West and are down 15.2% in the past year. Pending sales in the South are down 9% year-over-year. Pending sales in the Northeast are down 15.9% in the past year.”

“U.S. construction spending fell an unexpected 0.3 percent in September led by a sixth straight drop in private residential building, a government report said Wednesday.”

“The overall headline number was driven by a 1.1 percent decline in private residential construction, which has fallen for six straight months.”

From Inman News. “Lenders still like the loan-to-value odds, which have 51 percent of all equity in American households untapped. Half, then, of all ‘borrowable’ equity in residential real estate is (technically anyway) up for grabs.”

‘”Fifty-one percent: that’s an enormous amount of home equity,’ declares IndyMac Bank CEO Michael Perry. This makes Perry bullish on reverse mortgages, so far a niche product for older homeowners.”

“One reason for IndyMac’s interest in boutique products may stem from major changes in store for the mortgage market next year, changes described in vivid terms by none other than Fannie Mae’s CEO Daniel Mudd. ‘There is going to be some dislocation,’ he warns. ‘There are going to be some unforeseen twists and turns in the market in 2007, because the ‘pressure dome’ is just too big for that not too happen.’”

“Mudd says, ‘Nobody knows exactly what it’s going to be,” but he sees both crisis and opportunity coming as a result. The question is whether ‘the structure of the market is sufficiently robust to deal with the uncertainties.’”

“Applications for mortgage loans dropped last week by 3% compared to the prior week, as consumers shrugged at lower interest rates, the Mortgage Bankers Association reported Wednesday.”

“Mortgage applications are down 11.2% in the past year. Applications for loans to buy a home declined 1.8% on a week-to-week basis, to the lowest level in nearly three years. Purchase applications are down 29% from their peak in the summer of 2005. Also lower, applications to refinance a current loan fell by 4.5% last week. Refinancing loan volumes are down about 42% from the 2005 peak.”

“Compared to July this year, the S&P/Case-Shiller composite index showed prices fell in six of ten major cities tracked by the index: Miami, New York, San Francisco, Washington, San Diego and Boston.”

“‘Home price gains definitely appear to be wearing away,’ economist Robert Shiller said. ‘Not only do we continue to see shrinking gains but actual declines in most cities.’”

From Seattle PI. “At least 1,000 Washington homeowners paid higher mortgage rates than they had to without getting proper notification, according to a lawsuit that a federal judge certified for class-action status.”

“The lawsuit says NovaStar notified the borrowers of the ‘yield spread premium’ arrangement the day of closing, or not at all, despite federal and state laws requiring such disclosure within three days of a loan application.”

“Matthew Geyman said lawyers randomly reviewed 153 loan files and found nearly 70 percent did not properly disclose yield spread premiums. Based on this, they estimate at least 1,000 people across Washington, and possibly several thousand, were affected from July 30, 1999, to now.”

From Fortune. “‘I don’t think we’ve felt anywhere near the brunt of all the adjustable-rate-mortgage resets and the massive increase in defaults and foreclosures in states like California,’ says Liz Ann Sonders, chief investment strategist at Charles Schwab. ‘Housing downturns happen in a fairly slow-motion way, and I really think we’re just at the beginning.’”

“‘I don’t think the macro statistics reflect accurately what’s going on in many local markets,’ says Bruce Karatz, CEO of national home-builder KB Home. In many once-hot regions, order cancellation rates are running above 40 percent, new-home sales volume has dropped 50 percent, and new-home prices are down 10 percent to 25 percent.”

“Karatz says the current downturn is worse than any he has seen, even the early 1990s market that left so many big builders reeling.”

The Associated Press. “An AP-AOL Real Estate Poll found that more than one-third - 36 percent - of those surveyed with adjustable-rate mortgages worry that they won’t be able to afford their monthly mortgage payments if their interest rates increase.”

“The future is gnawing at homeowner Scott Klimek. Klimek bought his home in Brighton, Colo., with a five-year ARM. ‘If it was, like, this year that it was going to adjust, then I would really be worried, but I’m just moderately worried,’ says Klimek.”

“Joann Clapp of Cynthiana, Ky., has suffered a double whammy. She recently moved and hasn’t been able to sell her old home, so she is paying on two adjustable-rate mortgages. The rise in interest rates has hurt her finances ‘big time,’ she says.”

“‘Many Americans have lost the view of the so-called starter house,’ says Lynn Reaser, chief economist at Bank of America. ‘People may want to take a more conservative view of that first home before they move to the mega-mansion.’”

The Loudoun Times Community reports from Virginia. “In another sign of the slowing residential housing market and mirroring a national trend, Loudoun builders reported 15 percent of new-home contracts were canceled last month. In September 2005, 2.4 percent were canceled, according to research conducted by Hanley Wood. The January-to-September period in 2006 shows about five times as many cancellations in Loudoun than the same period in 2005.”

“‘A lot of the cancellations we are seeing are people who can’t make the financial equation work,’ said Jonathan Dienhart at Hanley Wood. Many home buyers may have not been able to sell their previous homes, he said, and therefore don’t have the cash to carry out the sale of the new house.”

“Depending on the type of contract the builder used, home buyers can expect to lose part or all of their deposit when they back out of contracts. In the Washington market as whole, cancellation rates have tripled in the past year, to 17 percent, said Dienhart.”

“According to Laura Hampton, communications director at the Northern Virginia Building Industry Association, builders are using a whole range of incentives to keep home buyers to their contracts.”

From Style Weekly. “Richmond’s skyline looks stunning from the future second-floor terrace of Rocketts Landing’s Skyline condo project. The city’s evening glow, however, owes little to the recent influx of downtown condos.”

“The irony seems lost on a crowd of future residents of the latest riverfront condo development: If the market is so attractive, where are the flickering living-room lights? Is it bedtime already at these much-touted projects? Or is lights-out a telling market indicator?”

“‘We’ve seen a lot of — quote, investor sales, unquote,’ says Sam Worley, partner at real estate brokerage firm Commonwealth Commercial Partners. Richmond’s quick-selling condo projects can be misleading. In many of the projects, the condos were first sold to investors who bought into a hot real estate market pre-construction, and wound up in the cold after the sawdust cleared. Nationally, Worley says, the condo market has ‘dried up.’”

“‘A lot of that was because of the investor coming in on the pre-sale and never intending to move in, and hoping he could flip out,’ Worley says, expecting that some of the same might be said — though to a far lesser extent — for certain segments of the Richmond condo market. ‘If you go down [to Riverside on the James] at night … count how many lights you see in those projects.’”

“Dr. Steve Booth and his wife, nearly bought into a riverside condo project, Vistas on the James in Manchester, Lynn Booth says. ‘But when we went to buy over there, well, there was a lot to buy.’”

“They say they pulled out of their Vistas contract-signing at the 11th hour. There was little substance to buy into, the pair thought, concluding that the project just seemed more focused on the investor and less on the prospective resident.”

“Some experts estimate that as many as 5,000 condo or townhouse construction starts are planned or in the pipeline locally. The Richmond market typically absorbs only about 1,000 condo and townhouse units each year, meaning the potential for a surplus that could last four to five years. ‘But the problem is we have only a temporary oversupply,’ says developer Robin Miller. ‘I don’t think prices are going to go down.’”

“Some builders were willing to take the risk and rush into the market knowing their condos eventually would sell, even if they couldn’t take advantage of the brisk selling spree of the last two years.”

”I don’t see where [builders] could have expected it to keep going at the 2005 level,” analyst Tom Tyler says, speculating that many builders may have worn rose-colored glasses during the recent building boom, but few wore blinders. ‘I would expect that they would have had some contingency there.’”

From Leesburg Today. “The local housing market’s double-digit declines in sales and volume are taking its toll on area banks, and research analysts who track banks in the region and the rest of the country are seeing the trend affect the bottom line at some institutions.”

“In Loudoun, the latest housing figures to date indicate a 38 percent year-to-year decline for August in residential building permits, according to information from county agencies.”

“For home resales, the number fell 41 percent in September from a year ago compared with 650 in September 2005, according to the Dulles Area Association of Realtors.”

“‘This is one of the most difficult periods that banks have experienced in at least five years and probably 10 years, it’s been a very long time since we’ve had a period where the earnings outlook has looked so unfavorable,’ said James Abbott, a research analyst with Friedman Billings Ramsey.”

“‘Virginia Beach has also been experiencing somewhat of a slowdown, more so than Raleigh, but less so than the Northern Virginia area,’ said Megan Malanga, with Ryan Beck & Co.”

“Abbott noted that the housing slowdown and its effect on construction lending is just one factor contributing to the banking industry’s current issues, pointing to interest rates as another influence. ‘It’s not just the level of one particular interest rate but the level of all interest rates are flat or inverted. The short-term rates are higher than long-term rates, and banking doesn’t work in that environment,’ he said.”

“‘Many, many banks are missing Wall Street consensus earnings estimates, and by a wide margin-substantial misses, not just a penny or so, but three, four, five cents a share-and then the outlook is substantially reduced for each of these companies,’ Abbott said.”

From the Examiner. “As the housing market continues to slow in the Washington region and across the country, the number of real estate agents leaving the field is expected to grow, said industry officials.”

“There are currently more than 26,000 agents in the area, according to combined membership numbers from the Greater Capital and Northern Virginia associations. But many of those are new to the profession and have never experienced a down market.”

“Nearly 50 percent of NVAR’s members have been a part of the organization for less than three years.”

“‘We’ll lose some, but we’re not expecting the bottom to fall out,’ said Jill Landsman, a spokeswoman for NVAR. Landsman said some agents have taken on second jobs, such as substitute teaching or retail, to make up for decreased income, rather than leave the field all together.”

The Orlando Sentinel reports from Florida. “New-home construction, one of the engines of Central Florida’s growth, slowed dramatically during the third quarter as builders adapted to lower demand and focused on moving unsold inventory. New-home starts in the Orlando area fell during the third quarter to 6,853, down 32 percent from the same three months last year.”

“Housing starts retreated to levels not seen since mid-2003 in the Orlando area, according to Metrostudy. The new-home inventory, 22,794 units, represented an 81/2-month supply. The category of ‘finished but vacant’ homes was up sharply from a year ago for a second straight quarter, surging 123 percent to 8,179 units.”

“Anthony Crocco, Metrostudy’s Central Florida director, said many potential buyers have ‘effectively withdrawn from the market’ as they wait to see if housing prices are going to continue to fall. ‘There is a malaise out there’ on buyers’ part, Crocco said.”

“‘We’ve had a lot of backlog’ as a result of ‘artificial demand,’ said George Glance, president of the Orlando division of KB Home. ‘There was some speculation,’ new-home purchases made by investors hoping to make a quick profit during last year’s frenzied sales activity.”

The Tallahassee Democrat. “Florida’s stagnant real-estate market slammed hard into the St. Joe Co.’s third-quarter earnings, dropping net income to dismal numbers compared with the company’s report from the same period last year.”

“‘We continue to face challenging conditions in our Florida residential markets, but particularly in St. Joe’s resort markets,’ St. Joe CEO Peter Rummell said. ‘The inventory of new and existing homes in the marketplace remains high. We continue to believe it could take until 2008 before a supply-demand balance begins to return.’”

“St. Joe’s slowdown in activity reflects broader market conditions in Florida and across the nation, Rummell said.”

The Charlotte Observer from North Carolina. “Developers in the Charleston metropolitan area have more than 135,000 homes on the drawing board or under construction, a huge increase since last year, a new analysis by The Post and Courier shows.”

“Eleven months ago, builders had 113,000 homes planned or in the works, the newspaper found. That figure quickly became obsolete as developers unveiled dozens of new projects, more than 20,000 housing units in all.”

“Put another way, it’s as though developers said they wanted to build another Mount Pleasant, in addition to the five Mount Pleasants they already had in the pipeline.”

“Still, some area officials and business leaders are seeing a slowdown in construction activity and a buildup in the inventory of homes for sale. But no one knows whether this is a temporary phenomenon or a real estate bubble.”

“Meanwhile, all bets are off if MeadWestvaco unloads its vast land holdings, as one of its top executives recently suggested the company might do. The paper industry giant owns 145,000 acres on the outskirts of the metropolitan area, two massive plugs damming up growth west of Charleston and north of Goose Creek.”

From the State in South Carolina. “Skyrocketing insurance costs are being blamed for the tanking coastal housing market that threatens to drag statewide home sales to their first year-to-year decline in six years.”

“South Carolina is on track to have its first year of declining home sales since 2000. The state showed a 3.6 percent decrease for the first three quarters of the year, compared with the same period last year.”

“Four of the regions in the state, all along the coast, reported declines. The industry is significant in South Carolina because it supports a range of other businesses. For consumers, a drop in sales could lead to lower home prices.”

“‘We’re losing some sales. I don’t know how many yet,’ said Charlie Brindel, CEO of the Coastal Carolinas Association of Realtors in Myrtle Beach, who is conducting an informal survey of Realtors to determine how many home sales they are losing because of insurance rates. ‘The price increases have been severe.’”

“‘Agents are pre-qualifying buyers for insurance before they pre-qualify them for a mortgage,’ said Nick Kremydas, chief executive of the S.C. Association of Realtors.”

“Hilton Head saw the biggest year-to-date hit, a 42 percent drop in home sales. Myrtle Beach and Beaufort also saw double-digit declines; Charleston fell more than 5 percent.”

“Realtor Todd Beckstrom speaks to Realtors groups throughout the nation, and agents in those markets are seeing sharp declines in both sales and prices. The Columbia market isn’t ‘bulletproof,’ he said.”

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