The Housing Bubble

The Calgary Herald News reports from Canada. “For only the second time this year, the average resale price of a Calgary home has dropped from the previous month. And the average price of a single-family home has fallen below the $400,000 mark after being above that level for five straight months.”

“The Calgary Real Estate Board reported Tuesday the average residential sale price for November was $360,674, a 3.58 per cent drop from $374,067 in October.”

“Lai Sing Louie, senior market analyst for Canada Mortgage and Housing Corporation in Calgary, said the housing market traditionally slows down a bit at this time of year. ‘In terms of the whole market, the market is still very strong. There’s a lot of active listings out there.’”

“November 2006 new residential combined listings totaled 2,850. That was a 16.47 per cent increase over November 2005 when 2,447 new listings came to the market.”

“‘We’re in a sort of consolidation process right now where you have lots of people sitting on large potential capital gains that if they sell for a little bit less it’s not a big issue to them,’ Louie said.”

From Canada.com. “Canadian builders displayed a surprising burst of confidence in the economy in October by taking out the second-highest level on record.”

“Among cities, Calgary has posted by far the largest gain this year in the value of building permits issued, with a near 45 per cent increase to $4.5 billion, followed by Edmonton and Vancouver. However, all cities west of Ontario have posted double-digit increases as well.”

“Only seven of 28 metropolitan areas surveyed showed declines, with the deepest being in Hamilton and Ottawa.”

The Toronto Star. “Economic growth in Canada in the fourth quarter will be weaker than previously thought, reports and analysts signalled Wednesday, despite a surge in building permits in October.”

“Recent figures showed a decline in house sales and prices in the key market of Calgary, a city that is the chief beneficiary of Alberta’s oil boom. And construction industry groups pointed to a drop in overall activity this year and next.”

“The Bank of Canada said Tuesday that fourth-quarter economic growth would likely be slower than previously anticipated. The Ivey Purchasing Managers Index hinted Wednesday at a sluggish economy in the final quarter. The Ivey report said that purchasing activity growth retreated in November to its lowest level since last year.”

“‘The soft report panders to the idea that the economy is lacking momentum in the fourth quarter,’ said Stewart Hall, markets strategist at HSBC.”

“The Calgary Real Estate Board reported this week that existing home sales in that city fell 11.5 per cent in November from a year ago and that home prices fell 3.6 per cent from October. The year-over-year increase in prices was 36.4 per cent, down from 50-per cent figures seen in the summer.”

The Vancouver Sun. “The Real Estate Board of Greater Vancouver reported MLS-recorded sales of 2,358 units, about 20-per-cent below the same month a year ago. Active listings in Greater Vancouver totalled 11,308 in November, up 30.6 per cent.”

“The average price for a Greater Vancouver single-family home was $765,256 in November, a 3.8-per-cent decrease from October.”

“The Fraser Valley Real Estate Board reported November’s sales, at 1,194, declined 26 per cent compared with November a year ago. Valley listings of 7,391 were up 37 per cent compared to last year.”

“‘Unless we see this dramatic increase in inventory, there isn’t a need to worry about any kind of catastrophe,’ said Tsur Somerville, at the University of B.C.”

“Somerville said the last two celebratory years where people said, ‘Buy real estate, it goes up, we’re doing great.’ That party’s ending. And that’s probably a good thing. No, it is a good thing.’”

“Economist Carol Frketich said that suggests there will be more choice for buyers, and less upward pressure on prices. ‘We don’t see any economic developments out there that would force people to put their homes on the market, which would be an indicator you could see a price correction,’ Frketich said. ‘People are putting their homes up for what they hope they can get.’”

“Dave Rishel, president of the Fraser Valley Real Estate Board said he looks forward to seeing more balance in the market, because ‘if prices [keep going] up the way they were, we’d all be in trouble.’”

“Condominium presales still form an unknown in Greater Vancouver’s markets, Somerville added. Somerville said a large number of pre-sales that were made within the last two years are starting to come into completion, and no one knows how many of them are held by investors who plan to sell.”

“If there has been more unseen speculation by investors looking to cash in on the rising prices of their condos under construction than has been anticipated, and a lot of those purchasers sell into a softening market, ‘that is something that could make things dicier,’ Somerville said.”

The Tonganoxie Mirror reports from Kansas. “Whether the signs say ‘For Sale’ or ‘For Rent,’ owners report it’s taking longer to move houses these days. For instance, Realtor Dan Lynch said in 2005, he sold 21 single-family homes in the Tonganoxie subdivision Jackson Heights. ‘This year I think we sold half that,’ Lynch said.”

“Lynch noted, since summer, Tonganoxie area home sales have been a little slower than in the past four years. ‘Probably, we’re going back to more normal times,’ Lynch said. ‘The sales of the past are cooling off a little bit.’”

“‘It’s a little slower than it’s been and I think that’s pretty much maybe nationwide if not just in Kansas,’ said Steve Jones, a Lawrence Realtor. ‘But we’re still pretty positive and there’s still property moving.’”

“However, he said sometimes that takes some enticement. ‘Many sellers both of new and existing homes have either lowered their prices or are offering various incentives such as paying closing costs and prepaid items, part of the first year’s insurance premium, appraisals, various items that would come up on their loan application,’ he said.”

“Jones said he was showing homes in Tonganoxie that had been on the market since early summer. The homes, he said ranged from $159,900 to $169,000. ‘It’s a terrific time for homebuyers, it really is,’ Jones said.”

“Situations like this hurt builders who must pay interest on the money they borrowed to build the homes. Sam Wiles, who’s been building Tonganoxie houses for more than 30 years, sees the other side of the housing market, the side that builders fear, speculative homes that take longer than expected to sell.”

“‘There’s too many houses on the market,’ said Wiles, who finished his last spec home about a year ago. It’s still for sale.”

“A builder’s wait for a buyer can be costly. There’s utility payments, as well as taxes, insurance and interest. ‘Three months on a house will run you about $3,500 in interest so it doesn’t take long to eat your profit up,’ Wiles said.”

“For instance, Wiles said he lost about $40,000 on one of his spec homes.”

“Tonganoxie builder Richard Faherty was concerned a house he’d built through Joy Contracting wouldn’t sale, or rent. After months of not selling, Faherty put the house up for rent. And eventually a renter came around. ‘The Lord sent me mine,’ Faherty said of the person who rented a new house. ‘All I know is pray hard.’”

“Jeanne and Frank Smith have five rental houses in Tonganoxie. Of those, one has been vacant for a month. ‘The rental market has definitely changed,’ Jeanne Smith said. ‘I’d say eight years ago we would be getting a million calls and we’d have the pick of a lot of good renters.’”

“When interest rates for home loans plummeted several years ago, things started to change. People who had rented suddenly qualified for home loans, so they were able to buy rather than rent. ‘It was like lifting the drain out of a sink of water,’ said Smith, who has been in the rental business with her husband for about 18 years.”

“Compounding that, a building boom exploded in Tonganoxie, particularly with new duplexes and townhomes. ‘And then it was just totally flooded,’ Smith said of the rental market.”

“As landlords they know how much they can charge for rent. ‘You can’t go over the ceiling,’ Smith said. ‘If you do you can’t get renters. They can go and buy a house for that price. I feel like we’re stuck, not raising the rent. And taxes and insurance continue to rise.’”

“‘The costs, carpet, everything has gone up in price, everything,’ Smith said. ‘But you can’t really raise the rent.’”

“Marilee and David Drennan own five Tonganoxie rental houses. Like the Smiths, they own older Tonganoxie homes. They don’t have much problem finding renters. ‘Everything that we have is under $600 a month,’ Marilee Drennan said. ‘I think that’s a big part of it.’”

“The Drennans have one house that’s vacant and she expected it would be a month or two before they’re able to rent it. ‘I would probably buy more rentals,’ Drennan said. ‘It’s just sometimes you hit a few bumps. They’re a very good investment…if you can buy real estate under the appraised value.’”

“Susan Nester sees another side of the market, home mortgage foreclosures. Nester oversees sheriff’s sales for the Leavenworth County sheriff’s department. The number of sales, countywide, increased to 153 in 2006, compared to 109 in 2005.”

“‘Most of these are all mortgage foreclosures, people that are not able to pay their mortgages,’ Nester said.”

“Jerry McPherson, a loan officer at Community National Bank, said he understands why there’s an increase in mortgage foreclosures. ‘The economy is not quite as strong, and I think sometimes people fall for the low rates,’ McPherson said.”

“Depending on the type of loan, low interest rates can climb, leaving homeowners with higher payments than they’d planned on. ‘We’ve been pretty lucky for we haven’t had to take back a lot of houses,’ McPherson said. ‘We’re keeping our fingers crossed on that one.’”

A housing report from the Philadelphia Inquirer. “When Jeremy Ross began condominium shopping last summer, he knew he had an edge. A sluggish market and cautious buyers had begun nudging developers into doling out incentives. Ross said that, going in, he knew that the developer ‘needed me more than I needed him.’”

“He paid 8 percent less than the asking price on a penthouse at the Arch Street Exchange. He also haggled for free parking for a year at an adjacent garage, new windows, extra storage in the basement, and a later closing date.”

“‘If I wouldn’t have got a fair deal, I wouldn’t have done it,’ he said. These days, buyers are often dictating what is ‘fair.’”

“With condo prices down significantly for the first time in more than eight years, some developers are finding they have to be generous, cutting prices by thousands of dollars and throwing in all sorts of extras. Prices of comparable units in Center City fell 5.6 percent on a seasonally adjusted basis from the second quarter to the third, according to Kevin Gillen, a research fellow at the Wharton School.”

“‘This was the first significant down-tick we saw in the indices in the last eight years,’ Gillen said.”

“Some who watch the industry attribute the cooling market to an abundance of inventory. There were more than 2,000 units for sale in the third quarter in Philadelphia, Gillen said. That is more than double the number for sale in the same period a year earlier.”

“‘With the slowdown in the market, people had to become more realistic about pricing,’ said (realtor) Joanne Davidow. Depending on the unit, Davidow said, prices have been slashed anywhere from $10,000 to $1 million.”

The Daily Times from Maryland. “While the numbers of housing units sold in Somerset, Wicomico and Worcester counties have dropped since last year, the amount of active inventory has almost doubled, said Kevin White, president of the Coastal Board of Realtors.”

“‘The market is about as confusing as I’ve ever seen it,’ (builder) Tom Ruark said. ‘Part of that is because it was the best market we’ve ever had. It was probably unrealistic to think that would continue.’”

“In Ocean City, building permits for new residential homes are down from last year, which is indicative of the housing market slowdown there, said Mike Richardson, building official for Ocean City. The town is usually insulated from a down turn, but now the housing market is saturated and people are holding their breath, Richardson said.”

“‘There’s just an awful lot of units sitting out there in a price range of half a million and up,’ Richardson said.”

The Brown Daily Herald from Rhode Island. “While students on College Hill may pay little attention to the backdrop of constant construction in downtown Providence, some can remember when the cityscape was devoid of the several high-rises that have cropped up in recent months. Many of these projects are luxury condominiums and mixed-use spaces.”

“While investors are optimistic, the constructions of these luxury units, coupled with the construction of new luxury units such as the Westminster Lofts and the Jefferson condominiums behind Providence Place, threaten to overwhelm the condominium market.”

“Despite a recent downturn in housing prices and demand, Iselin said there is plenty of market demand for condominiums in the $300,000 to $2.5 million range, the anticipated cost of the new luxury units. ‘I am convinced that we will be able to sell all of our units,’ said Nicholas Iselin, for the Boston-based Intercontinental group, which is building Waterplace.”

“‘We know that the housing market is fluctuating and that some people have been talking about a decreased demand for housing, and that is bad news, but I am confident that the Providence market will more than absorb these units, ‘ said (developer) Ari Heckman.”

“‘Looking at what has happened (in the past few years), people are moving (to Providence) from the Boston area, Connecticut and New York,’ said Thom Deller, director of Providence’s Department of Planning and Development. ‘I am sure the developers are convinced they will be able to move (their condominiums).’”

Some housing bubble reports from Wall Street and Washington. The Star Telegram, “Business stinks at the country’s biggest home builder, and the CEO says it may get worse next year. The Fort Worth company is being as aggressive about reining in its business as it once was about growing it.”

“The company reported that 4 of 10 customers walked away from their contracts. If cancellations continue at their current level, ‘then it’s going to be a much more difficult market than I’d want to spin,’ CEO Don Tomnitz told the analyst.”

“With Horton’s high cancellations, half the company’s units are now spec homes. As a result, Horton is spending heavily on incentives and discounting, reducing profit margins by 450 basis points.”

“Home buyers have been pitting builders against one another, seeking more concessions and better prices. And Horton has leaned on suppliers and subcontractors, which Tomnitz said was helping ‘big time.’”

“At a site last month, he said, a framing contractor brought his calculator for the first time in a couple of years. ‘Prior to that, he would just come in and sit around and chew the fat and say: ‘Here is the price. Take it or leave it,’ Tomnitz said. ‘So we’ve definitely got their attention now.’”

From Business Week. “The colorful CEO of luxury homebuilder Toll Brothers, Robert Toll, stepped forward on Dec. 5 with the claim that some housing markets might be stabilizing. His comments came as a slight disconnect from the company’s quarterly news.”

“Toll, the nation’s biggest builder in the luxury-home category, has been taking losses on properties, and its customers have grown nervous and far more likely to abandon new contracts on houses as prices retreat.”

“‘You seemed like a very…I guess broken man last time. And here you are a new man,’ Ivy Zelman, an analyst at Credit Suisse First Boston, told Toll Tuesday. ‘I’m wondering which Kool-Aid you’re drinking because I want some.’”

The Sun Sentinel from Florida. “Toll Brothers Inc. said the U.S. housing market may have reached bottom as the largest builder of luxury homes reported the biggest drop in quarterly profit in 16 years.”

“Area housing analysts aren’t convinced that South Florida will see a housing rebound anytime soon. Delray Beach housing consultant David Levin said the problems that led to the slowdown, rising taxes and insurance premiums and a large inventory of existing homes for sale, are still in place.”

“What’s more, Levin said, the end of the hurricane season will not necessarily translate into more people buying homes, as some observers have predicted. ‘I think that’s a lot of wishful thinking,’ Levin said. ‘I don’t see our market right now being bottomed out. The average guy still can’t afford a house because of things like insurance and taxes.’”

From Reuters. “Experts have warned all year that a slowing U.S. economy and rising borrowing costs would lead to an increase in bad loans by homeowners and other borrowers. Grim comments from Britain’s HSBC Holdings Plc about fourth-quarter trends suggest the experts may have been right.”

“‘We think the sky may be falling,’ said Mark Fitzgibbon, director of research at Sandler O’Neill & Partners LP. ‘Credit quality has been deteriorating for two quarters and we think the pace of deterioration will accelerate this quarter.’”

The Denver Post. “A Texas mortgage bank that employed 50 people in the Denver area abruptly closed its doors Friday, signaling more trouble in the subprime lending industry.” “Sebring Capital Partners notified employees of their termination Friday. Carrollton, Texas-based Sebring employed 325 people, including 50 in the Inverness area of Arapahoe County.”

“Subprime lenders are struggling with rising default rates. Eight percent of subprime borrowers are at least 60 days late on their mortgage payments, according to a UBS analysis of loans packaged and sold as securities. That’s up from 4.5 percent a year ago. Banks are responding to rising defaults by closing or trying to sell their subprime operations.”

“A former employee who requested anonymity told The Denver Post that Sebring, like other subprime lenders, was hurt by rising defaults. A major investor stopped funding Sebring’s loans as a result, forcing the company to seek a buyer, the former employee said. Sebring had to close after a potential acquisition fell through.”

“Sebring made loans of $209 million during the second quarter of 2006, down 11 percent from last year, according to Origination News magazine.”

The Australian. “Renowned US economist Stephen Roach believes the US economy will slow to a near ’stall speed’ next year as the housing market in the world’s biggest economy runs out of puff.”

“‘The first thing you hear when you land in the US is the air coming out of the housing market,’ Mr Roach said at a briefing in Sydney.”

The Chicago Tribune. “The speech 10 years ago Tuesday was called ’staid and unremarkable.’ Alan Greenspan, then chairman of the Federal Reserve, was addressing a black-tie dinner for the nation’s ruling elite in Washington.”

“Pundits forget that he expressed the headline comment as a question, not as an observation: ‘But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?’”

“Economist Robert Shiller says he searched back to 1740 and was unable to find the adjective and noun used in tandem before Greenspan spoke. ‘I like the expression, because it’s a good term for what we often have,’ Shiller said. More sensationalistic terms such as ’speculative orgy’ or ‘mania’ overstate normal human foibles in investing, he said.”

“‘It’s just exuberance. There’s nothing wrong about being exuberant,’ he said. ‘It’s irrational only in subtle ways. It’s only wrong in that we don’t quite see fully what’s happening.’”

“Greenspan’s legacy, which he will help shape in the memoir he is writing, will be framed by the expression and by what Greenspan, as the nation’s central banker, did for more than nine years after delivering it. ‘I think it was instructive. The problem was he didn’t keep saying it,’ Shiller said. ‘If he’d have stayed on theme, we might have had a smoother ride and it would have been better for everyone.’”

A pair of housing reports from the New York Times. “Subprime loans, which tend to run roughly three percentage points or more above the rates available to the most creditworthy borrowers, have become the fastest-growing segment of the mortgage industry.”

“As recently as 2000, there were just 719,000 such loans outstanding, about 2.4 percent of all mortgages, according to data from the Mortgage Bankers Association of America. By the end of June, though, subprime loans had reached 5.7 million, or 13.4 percent of the total. More than half are adjustable-rate mortgages, compared with just 18 percent for prime loans.”

“Mortgage companies, banks and investors have been aggressively marketing and trading the loans because their higher interest rates make them far more profitable than prime loans, even after taking into account greater default rates.”

“Roughly 350,000 subprime loans were seriously delinquent at the end of June, over six times the number at the end of 2000.”

“Industry officials argue that on balance, subprime lending has been beneficial because it has given people who previously did not have access to credit the ability to buy homes. ‘We all should be proud as an industry,’ Michael W. Perry, CEO of IndyMac Bank told his peers at the Mortgage Bankers Association’s annual convention in Chicago recently. ‘We have created an enormous amount of wealth for Americans.’”

“Seated next to him on the stage, Daniel H. Mudd, the CEO of Fannie Mae, acknowledged that the industry had helped expand homeownership, but suggested that it may have gotten carried away during the recent boom. ‘Ultimately, putting people in a home they cannot stay in is not a business we should be in,’ he said.”

“Down in Naples, Fla. there was an auction of houses about a month ago. A few dozen houses went on the block in front of about 500 bidders.”

“Based on the official housing statistics, you might have guessed that the sellers would have made out just fine, despite all the talk of a real estate slump. But that wasn’t what happened at the auction. In fact, if you were at the beach club that Saturday, you could have been excused for thinking that the real estate market was crashing.”

“One three-bedroom ranch house with a pool sold for $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, sold for $880,000 at the auction., compared with $1.35 million a year earlier. On average, the houses that changed hands at the auction had fallen about 25 percent in value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the auction’s results.”

“The truth is that the official numbers on house prices, the last refuge of soothing information about the real estate market on the coasts, are deeply misleading. The numbers overlook all those homes that have been languishing on the market for months, getting only offers that their owners have not been willing to accept.”

“In reality, homes across much of Florida, California and the Northeast are worth a lot less than they were a year ago. Tom Doyle, a Naples real estate agent, estimated that a typical house there, sold in the normal way, would go for about 20 percent less than it did the previous fall.”

“In the Boston area, prices have fallen about 10 to 15 percent since the middle of 2005, estimated Chobee Hoy, who owns a real estate brokerage firm in Brookline. Jerome J. Manning, who runs the Massachusetts-based auction company that conducted the Naples sale, told me he thought that values had dropped about 20 percent around Boston. The government, meanwhile, says the average price rose 1 percent from last summer to this summer.”

“In September of last year, Ms. Hoy sold a one-bedroom condominium in Brookline for $395,000. She recently sold another apartment of the same size in the same building for $300,000. Since March, her firm has been listing a house in the Fisher Hill neighborhood of Brookline that cost $995,000 when it last sold, in the summer of 2004. Ms. Hoy expects it to sell this time for less than $900,000.”

“The market in northern Virginia is similar: prices are down 10 to 15 percent, according Mr. Lawler, a former Fannie Mae executive who’s based there. In Portland, Me., the typical house has lost about 10 percent of its value in the last year and a half, said Bill Trask, the former head of the local Realtors’ board.”

“Unfortunately, there are also a lot of families that took on huge mortgage debts based on the ephemeral peak values of their properties. In effect, they cashed in on the housing boom without cashing out. The withdrawals have been so big that the average household in Boston now has slightly less equity in its home than it did in 2000, according to an analysis by Moody’s that took inflation into account.”

“Most worrisome, growing numbers of these families are falling behind on their mortgage payments, and they won’t be able to bail themselves out by refinancing or selling their homes. ‘We’re now going to combine a high amount of debt with falling home values,’ said economist Mark Zandi.”

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