The Housing Bubble

The Review Journal from Las Vegas. “Home sales in Las Vegas, which have tumbled by double-digit percentages in recent months, fell again in October. Sales for new homes and existing homes both dropped sharply. There were 2,934 resales in October, down 35.7 percent from the same month a year ago, Home Builders Research reported. It was the seventh straight month the number of sales has fallen.”

“Sales of new homes also continued to slide, down for the fourth consecutive month at 2,606 in October, a 21.3 percent decrease from last year. The number of homes for sale on the MLS grew to 23,474 in October, a 53.8 percent increase from a year ago, according to the Greater Las Vegas Association of Realtors.”

“Dennis Smith, president of Home Builders Research, said homeowners who read that median prices are ‘x’ amount must understand that average incentive packages of $10,000 to $25,000 must be deducted from the sales prices to reflect the home’s true market value.”

“‘Appraisers know this, and that’s why many homeowners think their recent appraisal is low, when actually it reflects the true level of pricing activity in the submarket area for the subject product type,’ Smith said.”

“Smith said the October housing numbers for Las Vegas ‘indicate a continuation of the nasty cycle that has had a grip on our housing industry for almost a year.’”

In Business Las Vegas. “Any employees of homebuilders or their suppliers couldn’t have left a national housing conference earlier this month in Las Vegas with a good feeling of where the national market was headed.”

“Even the jokes about the homebuilding industry dealt with the slowdown that is gripping the nation. Bruce Karatz, the CEO of KB Home, who chaired the builder conference, described how the mood among homebuilder executives was cautious and everyone was cutting back their operations, joking that he and others were staying at the Motel 6.”

“Some reports suggested the national building business was making a comeback when September numbers showed housing starts up 6 percent and sales up 5 percent, but executives said those numbers don’t take into account cancellations. ‘In the last 30, 60 to 90 days, the cancellations among the homebuilders is by far the highest percentage in the last 20 years at least,’ said Bob Schottenstein, the CEO of Ohio-based MI Homes.”

“‘It took a long time to get in this situation, and it will take a long time to get out,’ said Schottenstein, who urged builders to lower their expectations. ‘Historically, this industry has not had double-digit operating margins, but it has in the last five to seven years. It will not return to those double-digit levels for a long time.’”

“Ken Newman, the president of Illinois-based Newman Homes, said talk in recent years about a housing bubble bursting took on a life of its own this year. Press coverage of it took consumers out of the marketplace the last two quarters, he said.”

” Newman said builders are making the market worse with price discounts and overbuilding. The demand curve is down 20 to 30 percent and it could stay down for the next four to five years, he said. He pointed at incentives and some builders continuing to add spec homes even though they see what’s happening.”

“‘When you see a house one day, and it is $20,000 off in two weeks and later it is $30,000 to $40,000, we are forcing the consumers to cancel contacts by our decision making,’ Newman said. Karatz joked that he believes the builder giveaways will settle down because ‘we are not going to give away homes.’”

“One person representing land developers and owners questioned why builders were bowing to Wall Street by dropping options and not pursuing land as aggressively as they were. ‘Just because we walk away doesn’t mean we have a short-term outlook,’ Karatz said. ‘We base it on where we see things going. We would rather have that money for future acquisitions.’”

“Schottenstein said it makes good business sense to no longer pursue such purchases because builders are eyeing a supply of three to five years. When the market slows as it is, that timetables stretches to seven to 10 years. If builders purchase land with the intent of not building on it for a decade, they will be out of business by then, he said. ‘We want to be standing,’ Schottenstein said.”

“CNN reporter Gene Randall asked those in the building industry if they thought it has hit bottom yet. No one raised their hands. Schottenstein said he didn’t agree with former Federal Reserve Chairman Alan Greenspan who said that the housing market has stabilized. Schottenstein said Greenspan isn’t far removed from his position and probably doesn’t want people to panic.”

“Karatz said there is no ’silver bullet’ to resolve the problem but he said people can only dream. That dream scenario would have builders drastically cut their production and hold prices, Karatz said.”

“‘If that were to happen, and maybe if that were to last two to three months, it would stabilize things,’ Karatz said. ‘The market sentiments would begin to rise with the moderation of market conditions. All of that is a pipe dream.’”

Readers suggested the topics of price drops and and statistics. “Is anyone else starting to see early signs of capitulation? In 2 DC area zips which I follow I’ve recently seen a few homes offered at considerably lower prices than the others.”

“Ex.: In one neighborhood $339,000 for an older 3 bedroom 1 bath where $369 had been on the low side — or, in the other neighborhood $399,000 for a gorgeous townhouse, where the cheapest unrenovated had been $410,000. (The latter is where we sold our townhouse as is in June 2005 for $395.)”

“In both cases I’m seeing some prices begin to drop in response, while other sellers hold out stubbornly for last year’s highs. The result is there are some really nice places available for quite a bit less than some much worse ones. Seems to me it can’t be long before the sellers begin to wise up — or at least their agents get fed up with carrying them!”

Another said, “Yes, two of the condo communities I’ve been tracking are listing their properties at about 10-15% less than when I started looking in June ‘06. But in the more desirable condo and TH communities, the prices downward have been very sticky.”

“A lot more inventory on Craigslist, though. In my area, the only thing that will drive up prices again is out of town investors…and that crowd has left the room. The newly minted flipper types are starting to cut prices, some are even slashing and burning. But overall, the old RE adage holds true: LOCATION, LOCATION,LOCATION. Prices in the fringe areas are dropping faster and more dramatically than in the traditionally stable and ‘hot’ areas.”

One pointed out statistical matters. “I was wondering what actual prices are compared to the % drop being reported. Here in Queens NY, the prices of homes my wife and I are looking at went from around $250,000 -$300,000 in 97-98 to $700,000-$800,000 in 05. That’s close to a 300% increase.”

“These houses are now down around 20%. I have not seen these kind of numbers reported. What do you think real world price changes are compared to these ‘average’ and ‘median’ changes being reported. I expect prices in Queens to go down 40% in real terms. But I don’t think the stats will show that.”

“What I’m saying is that when there is a YOY drop of 3%-4% reported in real world terms that may translate to 10%-15%. As I said, there has been a tripling of prices in Queens, But I see numbers of 50% - 60% reported. A real disparity between the stats and the real world.”

Another notes the time lag. “Keep in mind the reported data trails the real world by a few months. Example: The price is negotiated and put under contract in early June and closes 60 days later (in August). The Augest numbers are reported in Late Sept.”

“So the data you read in Late Sept is from negotiations that occured a few months before.”

One poster said, “This has mostly to do with statistics and manipulation. In the Netherlands the price increase for individual homes in my area over the last 15 years is +600-1000% (hardly anything below 600%, some exceptions at +1500% already; current appreciation in my area is still +10% from last year).”

“However, the national realtors (NVM) stats - which are the most widely publicized - show appreciation at just +90% or so over the last 10 years (most of the price jumps occurred in this period), and the official ‘Kadaster’ which includes all homes sold in the country shows an increase of +300% or so over the last 10 years. Go figure.”

“The major problem is that with the national averages we are not talking about the same homes: big homes from 1990 were split into maybe 3 or 6 small apartments, a lot of rental (old, flimsy and relatively cheap) stock entered the market around 2000 and until 2000 all homes that went over EUR 450K were removed from the statistics because they were supposed to be used ‘for business investment.’”

“On top of that, the realtors now define the average national home price as ‘the average price of the median 50% of homes sold by NVM realtors’ (so the 25% cheapest and 25% most expensive properties no longer count). All these factors have masked the surge in prices, and they will probably mask the downward trajectory as well.”

“I think the housing stock in the US is a bit more ’stable’ than in Europe, but probably some of the same statistical problems apply. Don’t trust the statistics!”

The Journal Sentinel reports from Wisconsin. “Hard bargaining and a molasses pace mark the home-selling trade these days. ‘So many people have had their houses up for sale for months and months,’ said appraiser Paul Vozar in West Allis. ‘I’m seeing concessions anywhere from $1,000 to $5,000 in recent weeks, given as a credit at closing. Or sellers just drop their asking price.’”

“The cost of stubborn resistance: Buyers snub your property, said Donald J. Moore, president of Houses.com in Elm Grove. ‘It’s the old ‘irresistible force meets immovable object’ law. A black hole forms and all real estate gets sucked into it,’ said Moore.”

“Buyers who had to cope with a supply-tight market just 18 months ago, now have plenty of ‘for sale’ offerings laid out before them. In metro Milwaukee, 34,805 existing homes came up for sale in the first 10 months of this year, more than double the 16,766 sold, according to Metro MLS in Wauwatosa.”

“‘We don’t have an economic problem. We have a confidence problem,’ said Maddente, who is executive VP of Wisconsin-based First Weber Group. By looking long and hard without making any offers, she said, ‘buyers are waiting to see how low prices will go.’”

“‘You can tell if a property is overpriced. It sticks out like a sore thumb,’ said Realtor Bonnie Duffin, who works in Milwaukee. ‘Buyers are going down too low on some properties.’”

“The Gaber family of Muskego sees things differently. ‘We have looked at so many places over the last six months,’ said Faith Gaber, sounding weary. She and husband Greg are helping their son Garrett hunt for his first house. Among under-$200,000 offerings, she said, ‘everything seems either overpriced, or big fixer uppers.’”

“As the ambitions of sellers and demands of buyers collide, Maddente said, ‘our biggest difficulty is holding deals together.’”

The Star Tribune from the Twin Cities. “In April, Marie Senn found the home of her dreams, a condo that hadn’t even gone on the market yet. Then she fell into a nightmare of a mortgage, a type of adjustable-rate mortgage known as an option ARM. ‘I was a young buyer,’ said Senn. ‘I’d never heard of this loan,’ she said. ‘There are so many things that I wish I knew then.’”

“‘If I was in charge of the world, they wouldn’t exist.’ said Kris Wilson, a loan officer in Bloomington. Wilson said she has seen a growing number of lenders put people like Senn into option ARM”s by enticing them with the possibility of extremely low payments.

“‘It sounds like the streets are paved with gold,’ Wilson said. ‘But people don’t realize how big a trouble they can get into, and then they quickly end up upside down.’”

“That’s where Senn was headed. Her payments eventually would have tripled from a low payment that came with her option ARM if she hadn’t just refinanced into a fixed-rate mortgage, which still leaves her strapped with higher monthly payments than she had planned. ‘I want to put this behind me,’ she said.”

“‘There are risks with a loan like this, but it’s still a good product,’ said Ewald, of the Minnesota Mortgage Association. ‘In an ideal world, you’ve got wonderfully educated consumers working with caring loan officers.’”

A housing report from the New York Times. “In the last few years, renowned architects and enterprising developers have rushed to put their stamp on Manhattan with contemporary condominium buildings that have seemed far more inventive than the staid old co-ops of the Upper East Side. But now, they are looking at the horizon and fearing that there will soon be a glut.”

“There are currently 28,258 new condominium units either under construction or being planned in Manhattan, according to Cushman & Wakefield. Real estate experts do not believe that all of these projects will be built, or at least built as condos.”

“‘I’m getting five calls a week from people who own sites and want to sell them,’ says Michael Forrest, who works in the New York office of a real estate investment brokerage. ‘I’m surprised at how many developers are running for the hills.’”

“Real estate brokers are advising developers to turn some of these projects into anything other than condominiums. And some major banks that lend to condo developers are cutting back on loans for proposed projects or for land that developers want to buy.”

“The developers of a condo conversion project at 485 Fifth Avenue (41st Street) returned deposits to prospective buyers and sold the project to the Global Hyatt Corporation, which will convert the office building into a hotel. The Related Companies has turned seven apartments in its new 39-unit building called Astor Place into rental apartments.”

“Still, the inventory of unsold Manhattan condos has jumped by more than 70 percent in the last year. As of Oct. 31, Manhattan had 4,115 condos available for sale, compared with 2,381 a year earlier, according to the Miller Samuel appraisal company.”

“For the most part, (developer) Veronica Hackett said, she says no to the weekly calls and e-mails she gets from other developers trying to sell her their problematic condominium projects. ‘I think today people are having enormous difficulty getting their costs in line,’ she said.”

“Developers are considering other sites only if they can profitably use them for something other than condominiums, said Robert Knakal, the chairman of Massey Knakal Realty Services Inc.. As he put it: ‘Some developers are not willing to build condos anymore unless they really get a great deal on the land.’”

“Credit Suisse First Boston has become so cautious that it is generally not lending to developers who want to build condos on midblock sites in Manhattan or on sites that do not have a supermarket or dry cleaner within three blocks. ‘We’ve turned down several projects based on their location, whether it’s a certain part of town or a certain location on the street,’ said Robert Brennan, a managing director.”

“Some real estate brokers are encouraging uneasy building owners to abandon the condominium market entirely. Mr. Forrest of Marcus & Millichap was hired last month to advise the seller of a 20-story office building five blocks north of Madison Square Park who was considering selling the building and marketing it for potential condominiums. But Mr. Forrest quickly saw that there was too much competition from other projects. ‘I’m telling him to sell it as an office,’ Mr. Forrest said.”

“In the financial district, Mr. Forrest finds few buyers for building sites. One of his clients, a developer who was buying a five-story office building on Stone Street, wanted to sell it before he even closed on it. After six months of shopping the location for $16.5 million and not getting offers he liked, the owner decided to convert it to condos himself, although he’s entering a neighborhood heavy with inventory.”

“‘He paid a price that won’t allow him to keep it simply as a five-story commercial building,’ Mr. Forrest said. ‘He will lose money if he doesn’t build.’”

The East Hampton Star. “The fact that the number of sales on the South Fork has declined, along with the overall volume in dollars, does suggest a market in transition. ‘Prices have gone down a little,’ said Susan Breitenbach, a senior VP with the Corcoran Group’s Bridgehampton office.”

“The number of sales of houses priced between $1 million and $2 million went down 50 percent this quarter, and sales of houses priced between $2 million to $3.49 million went down 32 percent. The number of sales of ‘entry-level’ houses (those priced under $500,000) decreased by 46 percent, according to (broker) Judi Desiderio. ‘I attribute it to a sheer lack of inventory, certainly not a lack of interest,’ she said.”

“HREO.com, which deals in East End real estate, lists 5,528 houses for sale. Of those, 2,628 are priced between $1 million and $3.5 million.”

“A majority of improperly priced inventory sits on the market. It is a situation that has, in some cases, led to deep price cuts. ‘A flawless 5,000-square-foot new traditional on 1.4 acre, well landscaped with a pool, started at $3.2 million and is now down to $2.4 million,’ said Ms. Desiderio.”

“‘After January, prices will increase,’ Ms. Breitenbach predicted. ‘The market is only going to get better.’”

“In some parts of Westchester, the market is clearly in a downturn, if not a full-blown real estate recession. In most towns, villages and cities, real estate agents report flagging sales and increasingly frustrated sellers. Homes are staying on the market longer, inventory is building and buyers are biding their time.”

“At smaller in-fill projects, like the new town houses for sale on the south side of New Rochelle on Pelham Avenue near the Long Island Sound, none of the 10 units at AnnMar Gardens have sold since they went on the market early in the summer.”

“Agent Rose Bulfamante said that because of the slow market, the developer was considering dropping the asking prices, $779,000 to $849,000, on the three-bedroom units and offering the incentive of a year’s membership at a local beach club.”

“‘Even a community like Bronxville doesn’t exist in a vacuum when it comes to this market,’ broker Leah Caro said. ‘Some places may be more insulated than others, but only a rare few are altogether immune.’”

“Sean and Lynn Leary, whose vintage 1920s colonial in Pelham Manor has been on the market since July, many have had to adjust their sights. The Learys’ house came on the market for $1.289 million and sat without offers throughout the summer and early fall. The couple have since lowered the asking price to $1.199 million, and Mr. Leary has torn down the original two-gar garage and is building a new one in its place.”

“‘Some people say it’s an ego thing with sellers not wanting to accept lower offers,’ said Mr. Leary, a commercial real estate broker, ‘but that’s not really the case, at least with us. It’s more about sellers like us who are just trying to understand what’s happening. Sometimes, it feels like we’re trying to catch a falling knife. We’re trying to anticipate what’s going to happen next.’”

“‘It’s pretty clear to me that nationally we’re seeing a pullback in the real estate market. In some places, it’s truly a burst bubble; in other places, like in Westchester and Putnam, it’s more like a correction,’ said P. Gilbert Mercurio, CEO Westchester County Board of Realtors in White Plains.”

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