The Housing Bubble

The San Francisco Chronicle. “Last week, when I received an e-mail press release from the National Association of Realtors previewing its $40 million ad campaign with the slogan, ‘It’s a great time to buy or sell a home,’ I had to read it twice. Was this a joke?”

“This ad campaign seemed to come straight from the Mad Hatter’s tea party. How can it be a good time both to buy and to sell?”

“I called the NAR to get a more thorough explanation as to why they launched this campaign. ‘We believe people aren’t aware of the realities of the marketplace,’ explained Steve Cook, VP of public affairs. ‘There’s been a lot of negative media coverage, and a lot of people are missing the boat.’”

“‘In the sense of buyers, right?’”

“‘In the sense of sellers, too. They are related. Sellers need buyers and buyers need sellers. They both need to work together.’ Cook then suggested that since inventory is constricting, it will probably become a better market for sellers. ‘But then it will become a worse market for buyers,’ I ventured.”

“There was a pause on the other end of the line. ‘Well, yes, but the most important thing is that interest rates are at all-time lows, that’s good for both buyers and sellers. Like the New York Times said, the stars are aligned.’”

“Actually, it was the New York Times quoting an NAR spokesman, but let’s not quibble.”

The Chicago Tribune. “Saying that ‘the worst may be over,’ the housing industry’s chief economist said Friday that home prices must continue to come down in some regions before the real estate slump plays out.”

“‘We need a price decline, we were overbloated,’ particularly on the West Coast, David Lereah, chief economist for the National Association of Realtors, told attendees at his organization’s annual meeting here on Friday.”

“‘In 2007, it will be a flat year, maybe 1 percent [sales] drop, and that’s it,’ Lereah said. ‘After 2007, we’ll be back to expansion again.’”

“Lereah said the national picture is positive. ‘I’m optimistic for 74 percent of the country,’ where local markets are, at worst, flat. The other 26 percent are in for some rough times.”

“Struggling the most would be California, South Florida, Arizona, Nevada, and metro Washington, D.C., he said, where sellers need to lower their prices.”

“But Steve Murray, an industry consultant who followed Lereah on the podium at the convention, said he was less optimistic about the speed of the market’s recovery. ‘Lereah said we’re at the bottom [of the slump], but in most markets we are going to slide some more,’ he said. Citing interviews with executives at more than 100 large real estate firms, he said the pending sales data could be falsely reassuring.”

“‘The fall-through rate [of contracted home sales] has gone from single to double digits,’ Murray said the executives reported. ‘Buyers can’t sell their existing homes.’”

“‘People who think this thing is going to turn around in six months are out of their minds,’ Murray said in an interview before his speech.”

The Washington Post. “There’s a bright side to the decline in the U.S. housing market, says the National Association of Realtors: plenty of choice.”

“‘There’s a big change in psychology and that’s what they’re reacting to,’ said Robert Shiller, an economics professor at Yale University, who cut out the ad and showed it to his students. The campaign is a true ’sign of the times,’ he said.”

The Dallas News. “‘The bad news is just about behind us,’ David Lereah told industry members meeting Friday in New Orleans. ‘It appears that we have bottomed out.’”

“Not so fast, say Texas housing analysts, who think that’s just wishful thinking and further cutbacks in home sales and prices are ahead. Prediction that the worst is over for housing is ‘more jawboning, hoping that they can influence things to be at the bottom,’ said James Gaines, economist with Texas A&M University.”

“‘Personally, I think the 2007 housing market will be down across the board and not make significant improvement until sometime in 2008, and that assumes we don’t have a recession or anything approaching a recession,’ Mr. Gaines said.”

“Dallas housing analyst Ted Wilson agrees that it’s too early to see an end to the housing slowdown. ‘Yes – a little bit, perhaps wishful thinking,’ said Mr. Wilson with Residential Strategies.”

“Major homebuilders are preparing for a significant slowdown, he said. ‘In Dallas, about 10 of the large builders currently are on hiatus – not committing on new lot deals,’ said Mr. Wilson. ‘There have also been some significant layoffs with many of the building firms as well – indicative of a more long-term issue than just a blip.’”

“Median home prices declined slightly in the Dallas-Fort Worth area during both September and October. Home sales in North Texas have been down in each of the last five months. In many U.S. cities home prices are already falling.”

“‘Don’t be afraid of prices coming down,’ Mr. Lereah said. ‘When prices come down, it brings back buyers. If they see sellers are more flexible, they are more apt to come back to the marketplace.’”

“There will also be fewer real estate agents. ‘We are actually predicting an 8 percent drop in membership,’ Mr. Lereah told Realtors, who enthusiastically applauded the news. ‘Productivity will get better as we have less members and the quality will improve. It’s an overall good thing for the industry.’”

Readers suggested a topic surrounding construction problems arising from a housing bubble. “I think in the coming months and years we will see more stories like this. It was only a matter of time before builder cost-cutting began to cause problems for buyers.”

One said, “In the early 1990s in San Diego, construction defect litigation was a real cash cow. Looking for that to fire up again, partly legitimate, and partly as a ploy for FBs to try to get out of their obligations.”

Another, “I bought new from Fulton Homes in 95 in Gilbert. A class action was filed a few years ago for improper slab prep (not post-tensioned) & poor grading on expansive soil. Luckily I only had minor damage, like settling cracks. Some people had huge problems. It took over 2 years to play out. $5 mil judgement. The lawyers took a third. Yeah, there’s some money in it if you target the big HBs. Given all the recent building, they should be quite busy for the next few years.”

One reader added, “My work in the construction defects business sent my kids to college.”

One from California. “Back in the mid-80’s, I lived North San Diego County. There had been a mini-boom in the late 70’s which, like all booms usually busts at some point. One weekend I drove around the Oceanside area and came across a whole street of SFH’s which were empty and the street was overgrown with weeds. I ignored the ‘danger’ signs and ventured into one of the houses and saw huge (6″ in places) cracks in the floor of the kitchen caused by subsidence.”

“Someone who’s father was a small builder told me that when there’s a boom, it’s hard to find various things like good building material (wood especially) because, for instance, the wood is being cut so fast and seasoned in kilns so badly, that’s it just a matter of time before problems show up in ‘rushed’ construction.”

“In these boom (and eventual bust) times, EVERYONE is grabbing for the money as fast as they can. The list includes (starting with the main offenders), real estate brokers and their sales people, mortgage brokers, speculators, building material suppliers, inspectors of all kinds, termite companies doing as many jobs as they can, because the realtors and owners and buyers want a termite inspection certificate quickly to satisfy mortgage requirements.”

“Most of the builders employ sub-contractors to do the plumbing, air conditioning, roofing, etc. In boom times, they too rush to complete the job in order to get onto the next job to keep the money pouring in but, for the new home owner, many of these bad construction don’t appear for several years until the shoddy plumbing and roofing starts leaking and the termites find some tasty timber which wasn’t treated correctly.”

“The end result is, there are going to be a lot of very busy lawyers in the next 10 + years but a lot of people are going to be unlucky because (like the building company Kara) many of these builders will be out of business or will have found protection in bankruptcy.”

One added, “Bottom line … pre-bubble the argument to ‘invest’ was: Even if rent doesnt cover mortgage + other expenses, profits will come from ‘appreciation.’”

“Sooo post-bubble the logical approach shall be: Even if rent is above mortgage + other expenses, better dont buy because of the ‘depreciation’ factor!”

The Wall Street Journal. “With once-hot condominium markets across the country in sharp decline and many real-estate professionals predicting a further weakening, some developers are facing more than a glut of unsold inventory. Angry condo buyers from Boca Raton, Fla., to San Diego are taking them to court, alleging everything from breach of contract to fraud.”

“In Florida, 2,557 individual complaints against developers were filed in fiscal year 2006, ended June 30, up from 1,825 two years ago, according to the state’s Department of Business and Professional Regulation.”

“In Colorado, at least 18 lawsuits have been filed by attorneys representing condominium-owners’ associations in the last two years. Most involve complaints of shoddy construction or faulty repairs in recently completed developments.”

“In California, developer Crescent Heights is being sued by condo owners in three of its projects, including the Metropolitan, a recently completed 342-unit development in San Francisco’s Rincon Hill district. Ben Bedi, who filed the suit, says he put down a 5 percent deposit on a $1.7 million condo during preconstruction in 2004.”

“In his complaint, the 41-year-old attorney alleges that when he moved in at the end of 2004, he found defects such as screen doors installed backwards and water pipes that leaked. The complaint also alleges that the developer misrepresented the size of the apartment. ‘I paid a lot of money for what I thought would be a brand-new home,’ Mr. Bedi says. Instead, he says, he has spent thousands of dollars just on repairs and other labor.”

“Real-estate professionals attribute this latest wave of legal actions to the surge in preconstruction purchases during the recent market surge. ‘You’ve got buyers out there who paid one and two million dollars or more for a condominium and are now dealing with everyday construction defects,’ says Ross Feinberg, a California attorney who specializes in construction litigation.”

“‘Right now, the condo market is a disaster,’ says Lewis Goodkin, a Miami economist and real-estate analyst. The crash in some areas was inevitable, he adds. ‘These markets were essentially propped up by speculators.’ Indeed, investors accounted for as much as 80 percent of the preconstruction purchases of luxury condos in Miami.”

“Dried-up demand and rising construction costs have forced many developers to stall or cancel projects, particularly in formerly hot markets that are now overbuilt. In Las Vegas, an estimated 6,900 condo units have been suspended in the sales process, while another 1,900 have been canceled officially.”

“As the number of scrapped projects increases, so too do the complaints. In Florida, many condo suits involve severely delayed, cancelled or recently completed projects in the southern part of the state.”

The Herald Tribune reports from Florida. “Ripping up a contract, abandoning a deposit and running away from a new home is a painful and expensive exercise, but it is one that more people are doing today than ever before. Jerry Starkey, CEO of Bonita Springs-based WCI Communities, told investors this week that ‘home cancellations were about twice our historical rate” during the third quarter.’”

“Economist Patrick Newport figures that is about the average nationally, though precise figures are difficult to pin down because ‘they are not tracked by anyone.’”

“He did an analysis recently that concluded ‘if cancellations were being counted, sales would be lower and inventory higher than currently estimated. How big of a problem are cancellations? No one knows for sure.’”

“Most vulnerable are the ‘national builders, who sold homes for as little as 5 to 10 percent down,’ said Lee Wetherington. Some builders made offers for $1,000 down or less and now are experiencing cancellations because the buyer has less at stake and sees new home prices falling below his or her own contract price.”

“‘A lot of people are afraid of the fall off of pricing,’ Wetherington said. ‘Almost any builder now is pricing at 10 to 15 percent less than during the summer of 2005,’ including Wetherington’s company.”

“‘It’s those people who signed contracts in the summer of 2005 who are the most likely to walk away,’ he said. ‘They bought at the peak,’ and are faced with closing now at a price that may be underwater for three years.”

“In Southwest Florida, Lennar, with about 1,000 housing starts in the region each year, is experiencing a 10 percent cancellation rate in this region so far in 2006, said Rob Allegra, the company’s Sarasota division president. He thinks many of the home buyers who walked away from their homes were investors.”

“‘We’ve found that a lot of them were flippers who may have had two or three houses under contract,’ he said. Walking away from a contract is typically very expensive: from $30,000 to $40,000, Allegra said.”

“Even without cancellations, the slowdown in demand for new homes is going to take a big bite out of the bottom line for most Southwest Florida builders, Wetherington said. His sales have dropped 35 to 40 percent, and Wetherington. ‘Most people ain’t going to make any money next year,’ he said.”

“New homes must be moved and will be discounted until they do. ‘We have to move these homes,” Allegra said.”

From TC Palm. “The fastest growing portion of the county also recorded the highest number of foreclosures during the recent quarter. Vero Beach was second on the Treasure Coast with 179 during the same three-month period, part of a 259 percent increase in foreclosures in Indian River County from the second to the third quarter.”

“Bill Glynn, a Realtor in Vero Beach, attributed the higher foreclosures to investors walking away from contracts on the mainland because of a slump in sales. ‘Unfortunately the market is depressed and sellers decided that the idea that you could flip for a nice profit is not a logical possibility anymore,’ Glynn said. ‘Some people are just walking away from deals completely.’”

“Jennifer Atkisson-Lovett, president of the Realtors Association of Martin County, faulted creative financing and exotic loans offered by some banks during the peak of the market last year. She also theorized that some buyers over stretched their finances with large mortgage payments because home prices were skyrocketing in 2005. When their property tax bills arrived, budgets collapsed.”

“‘Unfortunately, interest rates are adjusting and it’s catching up to some people,’ Atkisson-Lovett said.”

The Sun Sentinel. “Broward County had the second-highest mortgage foreclosure rate among the nation’s top 100 metropolitan areas during the third quarter, according to a report. Broward had 8,431 foreclosures in the July-to-September quarter.”

“Miami-Dade County had the fourth-highest foreclosure rate, with 9,380 in the quarter. Palm Beach County was ranked 13th, with 3,643 foreclosures.”

“Speculators couldn’t find buyers as the housing market slowed and were stuck making the mortgage payments. ‘They’re the people who don’t have an attachment to the home and are the quickest to give up on a property if the profit motive isn’t there anymore,’ said Mike Larson, an analyst in Jupiter.”

“Louis Spagnuolo, a mortgage banker in Boca Raton, said his office has received a spate of calls recently from novice speculators looking to refinance their loans. They can’t afford huge increases in their insurance premiums and property-tax bills. ‘They were blindsided,’ Spagnuolo said. ‘We’re in for a bumpy road for the next nine months,’ Spagnuolo said.”

From Tampa Bay Online. “Deutsche Bank Trust Company America, the U.S. arm of one of the world’s largest banks, wants its money back from the parent company of a home builder active in the Tampa Bay area.”

“The bank is demanding Technical Olympic USA, based in Hollywood, Fla., repay money it borrowed last year to buy Transeastern Homes, the home builder involved in a handful of local developments, including Live Oak Preserve and the Hammocks in Tampa, and Tampa Bay Golf & Country Club in San Antonio. The total purchase price was $857 million.”

“The poor real estate market conditions have hit Live Oak especially hard. Karyn Glubis, a real estate agent who lives there, said Transeastern stopped offering lots in its phase two areas this year.”

“People don’t know what’s going on with Transeastern, but they’re concerned about how it might affect them, she said. A few weeks ago, TOUSA told investors that Transeastern was performing poorly and the home builder laid off 130 workers in September.”

Newsday reports from New York. “For the first time in eight years, the median price of a home in Suffolk County dipped compared with the same month last year. Suffolk County dropped 2.5 percent to $390,000 last month from $400,000 in October 2005. Nassau’s median home price, which dropped about 5.5 percent last month to $472,300, had already begun its decline. In August, its median price fell 1 percent, to $495,000, and in September, it fell 4 percent, to $480,000.”

“Along with decreasing prices, the housing inventory has increased, the data showed. It would take 12.4 months to sell the existing housing supply in Suffolk County last month. In Nassau, that figure was 10.6 months, and in Queens, it was 11.5 months.”

“Bethany Marten, a buyers agency in Baldwin, views the readjustment as a needed correction. ‘It’s no longer ‘My house is an endless source of cash for me, and every year I can expect my home to go up 10 to 20 percent.’We had a great party, and the party’s over.’”

The Northender. “The word on house prices has rung loud and clear in recent months: the bubble’s burst, the party’s over, the fat lady’s sung, Elvis has left the building. Long Island is feeling the sting of a decline. The disagreement centers around the causes, extent and duration of the decline.”

“The Long Island Board of Realtors puts average closing prices at approximately $595,000 for September 2006, down from $635,000 twelve months earlier. The median closing price fell from $500,000 to $480,000 for the same period.”

“‘Everything was fine until the media got involved,’ says (broker) Terry Sciubba. Joyce Styne, VP for Century21 (which has 16 offices throughout Long Island and Queens), agrees that the decline increased significantly when it became a media focus roughly two months ago. She mentions, however, that brokers had seen it coming over the summer.”

“‘Inventories have built up a lot and that’s a leading indicator, it’s not a trailing indicator. The first thing that happens is that the inventory of unsold homes decreases. The price decline is the second thing that happens,’ says Robert Campbell, a Professor of Real Estate and Finance at Hofstra University who jokes that he is not altogether popular with realtors.”

“‘When you can no longer assume that you’re going to have a capital gain, you start to look at fundamentals. What can I afford to pay? How much is this house really worth to me?’ Professor Campbell says.”

“Part of the problem is that option ARMs have put houses into the hands of many people, especially during peak market times, who later decide that they can’t afford them after all. Owners can feel compelled to sell, further increasing inventory and driving down prices.”

“A related danger, he says, is the large number of ‘piggyback’ home equity loans taken out in recent years. ‘Ten years ago, we didn’t have piggyback home equity loans. In 2001, 20 percent of new purchases included piggyback home equity loans. Last year, it was 42 percent,’ Professor Campbell says.”

“Terry Sciubba believes the worst will be over as soon as the media eases up. She tells the story of a client who recently accepted a bid of $1.4 million dollars on a house on High Farms Road in Old Brookville. ‘Newsday came out saying the prices had dropped ten percent.”

“‘My customer read the article, called me up the next day and dropped her price $140,000. Of course my seller would not sell, because her house was priced correctly. But that’s what going on, the news media has created this frenzy,’ Sciubba says.”

“‘Prices have come down a bit, but that’s okay because they needed to readjust. It’s not like a house that lists for 600,000 is ever going to be 200,000,’ she says.”

“The party is over, but there are still refreshments left,’ Styne says. Even if declines continue in the coming couple of years, most people…might also agree, however, that a Zen attitude will serve the investor well.”

The Long Island Business Press. “At the height of the residential real estate frenzy in 2004, Christine Boccio traded a six-figure software sales job for a gig that should have let her set her own hours and paycheck. But the career change to real estate agent wasn’t as smooth as she had hoped. Deals unraveled at the last minute, and sometimes Boccio earned only 10 percent of her former salary.”

“‘You get to a point where [you] need to make your move. It became impossible for me to survive,’ she said.”

“She’s not the only one getting out. Several weeks ago, Renee Weinberg posted an ad for a new clerical assistant to cover weekend open houses and order baby gifts for potential clients; three real estate agents applied, including one from her Long Beach office.”

“For the 12 months ending in September, the Island’s real estate industry lost 600 jobs – largely agents bringing the total still standing to slightly less than 17,750, according to economist Pearl Kamer.”

“‘We have more people, probably, than we need,’ said Bob Herrick, whose agent count has dropped from 80 to 60 in three years. ‘The booster rocket has run out of fuel and now it’s going to coast.’”

“Double-digit appreciation is over, and there are plenty of houses to go around. In September, regional inventory rose 52 percent above 2005 numbers. Now that buyers have plenty to choose from, they’re waiting, leading to a standoff between buyers and sellers. Sales suffer. ‘I know a lot of people were really having a tough time, and they were people who were agents for much longer than me,’ said Boccio.”

The Times Union. “Foreclosures have been rising this year in the Capital Region as overextended homeowners struggle to keep up with higher interest rates and rising property taxes. For the first nine months, 471 properties entered some stage of foreclosure in the five-county metropolitan area, more than quadruple the number a year ago.”

“At least one long-time real estate broker expects things to get worse. ‘This is just the start,’ said D. Wallace Bryce of Bryce Real Estate Inc. in Troy. ‘I’m getting more and more calls. People have to sell immediately. The guys on a shoestring, it’s going to be a washout.’”

“Bryce blames job loss, people who tapped into their home’s equity and now can’t keep up with payments, and property taxes that in Rensselaer County are expected to climb 25 percent next year.”

“People who bought at or near the top of the real estate cycle are the most vulnerable. As houses have grown more expensive, mortgage brokers came up with new types of loans to make the early years of a mortgage more affordable.”

“For the first time since November 2000, house prices in the Capital Region in September declined from the year before. The median price was down 4 percent, to $187,000, according to the Greater Capital Association of Realtors Inc. ‘Folks are overextended,’ said Anthony Gucciardo, an associate broker in Latham. He said those who bought more house than they could afford are now struggling.”

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