The Housing Bubble

The LA Times reports form California. “It’s not easy being a seller today, what with homes on the market seemingly everywhere. Should owners underprice or stick with neighborhood comparables? How long should their homes be on the market before they consider lowering the price? It’s all about pricing, pricing, pricing. Not last year’s. Last month’s.”

“That’s the word from sellers and agents across Southern California facing the realities of this fall’s buyer’s market. ‘Pricing is critical,’ said Sean McLin, a Los Angeles-based agent. ‘Buyers start their search from there.’”

“Forget about pricing your home higher with wiggle room for negotiating. The higher the price, the more likely the property will sit on the market gaining white-elephant status. It’s also better to be at the lower end of a neighborhood’s price range than the top.”

“Forial Zaken took agent Larry Heller’s advice to drop the price when her 2,100-square-foot home in Granada Hills received no offers at $929,000 after one month on the market in August. Two price reductions later, it sold for $810,000 a month ago.”

“‘When you’ve done everything to make the house desirable and it’s accessible to buyers, but they aren’t choosing it, then we know what the house is not worth,’ said Syd Leibovitch, a broker (in) Beverly Hills. ‘It’s time to lower the price and make sure you out-compete others in the marketplace.’”

The Fresno Bee. “Home builders are cutting back because sales have dropped off dramatically. ‘It’s simple math,” said Mitch Covington, president of the Building Industry Association of the San Joaquin Valley. ‘If you are down to building 80 homes from 300, you only need half the people.’”

“Home builders have excess inventory because many would-be buyers cancelled contracts, either because they could not sell their existing houses, got cold feet or were investors who pulled back when activity slowed, builders say. In October, 13% of new home sales in Fresno County fell through, according to Hanley Wood.”

“‘Everyone is cutting back,’ said Alan Newman, VP of Beazer Homes in Fresno. As a result, Beazer laid off 12 employees in Fresno, or 25% of its corporate staff, Newman said. Two other national builders, D.R. Horton and Centex, are among those that cut staff.”

“‘The market is terrible,’ said Steve Lutton, regional VP of Lennar Homes, a nationwide company that builds in Fresno under the Cambridge banner. ‘Buyers were standing in line a year and a half ago. Now you have to find the buyers. You have to aggressively market your homes.’”

The Press Democrat. “Pacific Lumber Co. on Friday terminated 90 employees, citing declines in timber harvests and lumber prices. Brian Connors, an 18-year employee who was laid off, said he wasn’t surprised. ‘We could see the writing on the wall. Lumber sales were down, housing starts were down,’ he said.”

The Union Tribune. “San Diego County’s leading economic indicators declined for the seventh month in a row in October, dragged down by the continuing decline in home building and a rise in unemployment filings, according to a report released by the University of San Diego.”

“The biggest hurdle in the coming year, said USD economist Alan Gin, is the continuing decline in the local real estate market.”

“‘The weak housing market will hurt the local economy in three areas: slow or negative job growth in construction and real estate-related jobs, weaker consumer spending due to lower home equity and a reverse wealth effect, people feeling poorer as the values of their homes decline, and more homes lost to foreclosures,’ Gin said.”

“One sign of the real estate weakness is that residential building permits declined in October for the third month in a row. Only 259 single-family units were authorized in October, the lowest number since November 1994.”

“The decline in housing permits is reflected by layoffs at construction and real estate firms. Since hitting a peak in June, construction firms have shed 3,400 workers. In October, there were 1,400 fewer construction workers than there had been the previous year, the first year-to-year decline since June 1994.”

“Real estate and credit remediation firms have dropped 400 workers in the past two months. Stan Sexton, a real estate broker in La Mesa, said that more job losses are in the offing. ‘It’s still a little early for the job losses,’ Sexton said. ‘The blood is not in the streets yet. You’ll see more job losses in February or March, when the agents have to pay their annual dues.’”

“Gin warned that the national economy will also be hurt by the real estate slowdown in coming months. ‘Policymakers, particularly at the Federal Reserve, find themselves in a quandary trying to balance concerns about inflation with worries about the impact of a rapidly slumping national housing market,’ he said.”

The Press Enterprise. “Inventories of unsold condominiums began climbing nationwide during the past year, causing a glut of unsold units in formerly hot markets. Developers have quickly shifted gears and started either canceling condo projects or converting the planned units to rental apartments.”

“Bob Patterson, vice president in the Ontario office of CB Richard Ellis, said the condo conversion market died in Inland Southern California earlier this year and it is possible that units in buildings that were not sold out will become rentals.”

A condo report from the Washington Post. “With tens of thousands of new condos entering the market, some developers are moving beyond luxury cars, plasma televisions and other inducements to lure buyers. Instead, they’re starting to negotiate the base price of homes, a tactic unimaginable during the condo-selling frenzy of recent years.”

“‘There’s now an offer/counteroffer mentality, a back and forth,’ said David Mayhood, president of a McLean firm that has marketed condos since 1983. ‘That would have been unheard of as recently as six months ago.’”

“Newly engaged Bryan O’Keefe (and) his girlfriend spotted a two-bedroom condominium they liked at the Four Winds at Oakton for $345,000, about $30,000 less than the original asking price. The deal got even sweeter when the developer offered to give back 6 percent of the sales price, or about $20,700.”

“And the concessions kept coming, even after they signed a contract in October. ‘That’s when they called to say they lowered the price on our unit and they gave us a $5,000 price reduction, just like that,’ said O’Keefe.”

“The price of new condos fell 4.6 percent in the District and 2.6 percent in Northern Virginia in the third quarter of this year compared with the same period a year ago, according to Delta Associates.”

“But many condo units remain to be sold. At this point, if no other condos were added to the market, it would take another three years to sell them all, and builders are eager to find buyers for the units already available. There are also thousands of units available for resale by their owners.”

“Bush Construction has slashed prices twice since it began marketing the Arlington condos in June 2005, said VP Andrew Viola. Condos originally marketed for $380,000 to $660,000 now sell for $317,000 to $565,000. Even with price reductions, some potential buyers stayed on the fence, waiting for prices to drop further, Viola said.”

“Developers usually hate reducing the base prices of condos because it hurts profit and often angers previous buyers who forked out more money for similar units. ‘For them, it comes down to taking less profit or not paying off a bank loan,’ said Michael Larson, an analyst in Florida. ‘Lower prices are the third stage after they’ve tried incentives and then more aggressive incentives.’”

“Most developers are courting the real estate agent community they once shunned. ‘They’re offering us bonuses, paying us commissions and serving us lunch,’ Charlene Lois Schaper, an agent in Old Town Alexandria.”

“The marketing spree aimed at consumers and agents is more a sign of the changing market, PN Hoffman VP DeSantis said.”

“‘If you had come in two years ago and tried to offer less than the asking price for one of our condos, we would have been polite about it, but we would have said: ‘Sorry, there is somebody right behind you willing to offer full price,’ DeSantis said. ‘Now, it’s no secret we’re willing to entertain offers.’”

The Virginia Pilot. “Associate broker Charlie Laurens, said the pressure on prices was greatest for homes selling for $500,000 or more. That’s because buyers in Hampton Roads have many more choices, including a large inventory of new homes, he said.”

“‘Gone are the days when you could throw up a sign in your yard, and someone would pay you more than you were asking,’ Laurens said.”

“Prices in Hampton Roads have come under pressure because of weak demand, said Steve Rockefeller, VP of SunTrust Mortgage in Virginia Beach. ‘I’m seeing a ton of concessions being made by the sellers,’ said Rockefeller.”

Readers suggested a topic about psychology and home prices. “How long did the ‘psychology’ of the market continue to push home values up even after fundementals were out of line? How long will the ‘psychology’ of the market continue to drive home values down even after fundementals get back in line?”

One said. “I also would also like to know how much will people overpay for a property based on psychology, and it would be interesting to know how people plan to make the payments when they go up, (do they think they are going to get raises, do they count on refinancing etc., do they believe real estate always goes up ?)”

Another, “There was a book written almost 150 years ago called ‘Extraordinary Popular Delusions and The Madness of Crowds’ by MacKay, that chronicles various bubbles (Dutch tulip bubble, South Seas bubble, etc).”

“Although these bubbles took place 200 to 400 years ago, human nature has not changed 1 iota, so the stories read no diffferent. (aside from the toxic loans… ha).”

One replied, “If I recall correctly this topic was addressed as ‘resonance’ and the ‘feedback loop’ in Robert Shiller’s book Irrational Exuberance. Probably not a bad idea to give Shiller’s book another reading at this stage of the bubble.”

Another said, “It’s kind of like reading the crazy revolutionary predictions about the Internet in 1998. Or Ross Perot’s rantings from 1992. Now we can see how foolish we were to believe any of it.”

A new reader added, “Being a total newbie, I have the following question: I realize that prices should eventually come down in places where there is a lot of excess inventory, but what of areas like the LA Westside, where I would like to buy a house?”

“There’s no denying that there are quite a few ugly McMansions and more than a few suspiciously new monster SUV’s. But for the most part, houses are sensibly sized and people drive sensible cars that look a few years old. The Mc Mansion owner is certainly in for some rough times, but I don’t want his/her house anyway.”

“Is it reasonable to expect that a significant number of people who own sensible homes are leveraged to the hilt and will have to sell in a market depressed by the speculators? For the time being, I don’t see that happening. If they are sensible, they will try to hold on to their house unless they absolutely have to move, won’t they?”

“So far, in my area, there are a couple of crappy houses up for short sale, a sure sign of trouble. But they both look like your typical flipper who flopped, nothing like a real house coming into the market at a reasonable price….”

Some reports from the Arizona Republic. “The 1,276-acre parcel of state trust land in Fountain Hills has been re-appraised at $95 million, about 27 percent less than the original appraisal. The Arizona State Land Department was forced to abandon the first appraisal of $130 million this year when the Valley’s housing market slowed and developers no longer were interested in the property.”

“The hottest topic of conversation in most Tempe neighborhoods is home prices and how they skyrocketed during the hot sales time of 2004-05 and how they seem to be in the doldrums now.”

“Real Estate agent Doug Roys says that the fact that Tempe, ‘is landlocked, has the biggest university in the United States, has a two-mile lake, is near the airport and has a small-town feel,’ makes it one of the most attractive destinations for home buyers in the Valley.”

“Did you experience a significant drop in business during the sales slowdown?”

“‘Yes, we all did. I saw the market begin to cool last fall, and saw it get real cold last May and June. I know there are market forces at work, but I also think the media contributes to the problem with negative articles predicting a downturn and people believe it because it’s in print.’”

In Business Las Vegas. “What’s up with the Las Vegas housing market? Steve Bottfeld of Marketing Solutions, argues that Las Vegans can be thankful that the housing market defies the laws of gravity and economics.”

“Dennis Smith makes no mention of smiling in his prognosis. Just looking at the number of sales per subdivision paints a picture of what’s happening, he said. That number dropped to 0.6 and 0.7 in the first two weeks of November, a level of demand that hasn’t been seen for 10 years.”

“One of the deterrents is the continuation of the soft resale home market, he said. Without the equity from selling their home, consumers can’t buy a bigger and pricier home, he said. ‘A strong resale segment is the only way we can reclaim our new-home move-up market segment,’ Smith said.”

“Resale closings have dropped for three consecutive months and are down 27 percent for the year, Smith said. Las Vegas, Clark County, Henderson and North Las Vegas reported 864 new home permits in October, the lowest monthly total since January 1993, said Smith who added he never thought the number would ever go below 1,000 again.”

The Review Journal. “Nothing effectively generates a buzz about the launch of a condo-hotel project like a powerful Web site and an experienced, knowledgeable sales and marketing team, a panel of experts said at a two-day IMN Condo Hotel Symposium at The Mirage.”

“Even with the folding of projects such as Aqua Blue, Las Ramblas and Hard Rock, Las Vegas is a hotbed among leading condo-hotel markets, said Joel Greene, president of Condo Hotel Center in North Miami.”

“‘You discover more about what people want and you always keep that vibe that if you don’t buy today, the price could increase tomorrow,’ said Michael Landau, vice president of marketing and public relations for the Edge Group, which is developing the $1 billion W Las Vegas.”

“Another panel at the conference focused on the ‘dirty words’ that can’t be used in sales and marketing in compliance with the Securities Exchange Commission.”

“‘Legally, we’re not allowed to mention the ‘R’ word (return) on investment. Never ever do we discuss numbers,’ David Schwartz of The Management Consortium said. ‘Our buyers are sophisticated, college-educated people with lots of disposable income and they like to vacation. We’re selling them a vacation experience.’”

“Greene said any buyers who are disappointed with anticipated cash flow from rental of their units may have been misled during the purchase process.”

“‘The SEC specifies that you cannot sell the investment aspect of the hotel, only the real estate and the lifestyle,’ Greene said. ‘You can’t get into occupancy rates or return on investment. It’s basically meant to be sold as a condo. You want an 8 percent return, buy a shopping center with Wal-Mart as your anchor.’”

The Nevada Appeal. “Forty-one Carson City single-family homes sold in October with a median cost of $302,000, down from $310,000 in September, according to the Northern Nevada Regional MLS.”

“Carson City’s housing boom hit a high in 2005 when the median price of a single-family home jumped 34 percent over a year to $348,500. The market has inched down in the last year. Officials have noted that fewer California buyers are coming into the Nevada market and are instead traveling farther east.”

“‘It seems middle-range housing has had a modest reduction,’ said mortgage broker Sherry Negrete. ‘The lower price range properties have dropped significantly.’”

“New construction by Syncon off Curry Street and the Centex townhouses on Roop bring hope to agents. ‘There’s a lot of new construction going on, which is a sign the market is picking up,’ said Realtor Jim Shirk.”

A housing report from Florida Today. “Stan Smith, professor of finance at the University of Central Florida, said the latest numbers from the Office of Federal Housing Enterprise Oversight indicate there is no housing bubble bursting or about to burst. ‘Central Florida housing markets are currently experiencing the soft landing that many hoped for,’ Smith said.”

“‘As we watch the effects of higher inventories and discounts on new homes, it is possible that the situation may change. But, for right now, the Central Florida housing markets look like a good investment. It may be raining, but the sky’s not falling yet,’ Smith added.”

“‘We’re only having a soft landing, if you believe we hit the bottom, and, let’s face it, the inventory hasn’t gone anywhere. There are more than 10,000 properties in Brevard County. The buyers are coming back, but there’s so many more homes to choose from that sellers have to be realistic,’ said Gene Collins, president of the Melbourne Area Association of Realtors.”

“‘The urgency to ‘buy quickly or it won’t be available’ is gone, so that makes for a fabulous time for buyers,’ Collins said. ‘It’s all on their side of the ledger. Short-term (interest) rates are down, and you have a lot of Realtors who want to work with buyers.’”

“Collins said he expects January to be a strong time for seller, but they have to price their houses smartly. ‘Just because a guy next door got $300,000 for his home last July doesn’t mean you’ll get that in January 2007,’ Collins said. ‘You have to be realistic.’”

The Herald Tribune. “Michael Tringali is having trouble making payments on the massive real estate-related debt he accumulated with help from his former partner, Neil Mohamed Husani.”

“Tringali faces deadlines on three more loans, totaling nearly $34 million, payable in the next three months.”

“The pending foreclosures are the first sign of financial trouble resulting from the series of multimillion-dollar transactions by Husani and Tringali during the last two years, deals that, to some observers, typified the excesses of the boom-boom real estate market of 2004-05.”

“They also represent the strongest example to date of the potential risks that the region’s lenders put themselves in by assigning so much value to the properties when market prices were much lower.”

“Attempts to sell his land to other developers or to get more financing have fallen through. In the meantime, Tringali has not been able to sell houses fast enough to pay a debt that now amounts to nearly $87 million.”

“The ones most to blame for the situation are the banks that lent Tringali all that money, says Jack McCabe, a real estate industry consultant. ‘I don’t know of any other builder in the state that got that kind of credit with minimal assets and experience,’ McCabe said. ‘He is a perfect example of the recklessness on the part of developers, appraisers and bankers that permeated the recent housing boom.’”

“When Tringali met Husani in May 2004, he abandoned his conservative approach to development and home building and went on a whirlwind buying spree. Between July 2004 and January 2006, Husani spent $42 million for about 1,900 acres of land.”

“He then sold the property to Tringali in cashless transactions for $98 million, and Tringali used the high purchase prices and accompanying appraisals to obtain $83 million in loans from seven banks.”

“The market slowed dramatically in 2006, especially in the Myakka City area that is home to two of Tringali’s active developments. ‘It’s been a horrible year,’ said Jim Schmitt, a Realtor who formerly worked for Tringali’s real estate company. ‘There are so many homes on the market.’”

“More than a dozen customers have opted out of contracts, causing Tringali’s inventory of unsold homes at Golden Verna to swell to 19. ‘The big hook was that they were only asking for $2,500 deposits for houses,’ said Mark Pierson, who bought several homes in Golden Verna. ‘Now everyone has gotten buyer’s remorse. Mike is sitting on a bunch of houses and the market is dead.’”

“Residents at Golden Verna are worried that Tringali is not going to have enough money to build the clubhouse and pool he promised. ‘There’s a lot of very unhappy people out here,’ said Larry Bartgis, who owns a Golden Verna house. ‘They charge us $500 a year for a pool and it hasn’t been built yet. That’s not right.’”

“So far, the delays have caused three builders to either postpone or cancel their plans to build in the subdivision.”

“‘It’s a soft market and they don’t want customer deposits sitting around,’ said Mary Smedley, who is the head of sales for Tringali’s La Vista Homes.”

“Tringali remains confident that the market will pick up once home buyers realize the values he is offering. ‘In the long run, the market will turn around. Don’t forget that baby boomers want to move here and they will have to have somewhere to live.’”

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