The Housing Bubble

The San Francisco Chronicle reports from California. “Donald Anthony slashed the asking price on his four-bedroom, two-bathroom house by almost $80,000, and added $40,000 worth of improvements. He’s used three different agents. He listed the 1,800-square-foot home on for-sale-by-owner sites, in newspapers, on cable television and the community site Craigslist. He or his agents have spent at least 50 idle afternoons hosting open houses.”

“But the retired physicist cannot unload the house, now listed at $489,950, well below the price of comparable homes in the fast-growing region between San Francisco and Sacramento. ‘Buyers have vanished,’ Anthony shrugged. ‘If this doesn’t sell post haste, I’m going to bite the bullet and pull it off the market.’”

“‘The residential real estate market in 2006 was characterized by a gap between buyer and seller expectations,’ said California Association of Realtors President Vince Malta. ‘Sellers sensed that the peak of the market was approaching, yet still hoped to obtain the highest possible prices. Buyers’ sense of urgency waned as the number of homes on the market grew.’”

“San Francisco and other expensive coastal cities, including Monterey and Santa Barbara, have become unaffordable for the middle class. ‘I don’t see how the economy can continue with these prices,’ said Stephen Levy, senior economist of the Center for Continuing Study of the California Economy.”

“California’s departing homeowners typically use their substantial equity to fund their next real estate investment. Although some Seattle and Portland residents grumble about ‘Californication,’ the trend has helped keep home prices there rising, said Brian Kreick, broker in Lynnwood, Wash.”

“‘I have clients from southern California who can’t believe what they can get up here for the money,’ Kreick said. ‘I showed one guy a house in Redmond that was $830,000 and still needed a new kitchen. He thought it was a great deal.’”

“‘It’s definitely a friendlier market than earlier this year, but not a dramatically cheaper one,’ Zach Chouteau said. ‘People have gotten really spoiled by the rapidly escalating prices, and it seems like they’re in denial that things have leveled out. They’re just fishing for the best price.’”

The Bakersfield Californian. “Of the 20 percent of homebuyers moving to Bakersfield from other areas in California, the vast majority, about 45 percent, came from Los Angeles County, with about 16 percent from Ventura County, about 10 percent from Northern California and approximately 9 percent from the Bay Area.”

“‘When they are coming from the coast to buy houses, they have a lot more money to spend,’ said Hans Johnson, a research fellow with the Public Policy Institute of California. ‘It can change the market and it can inflate it.’”

“When James Diaz first got a job in Bakersfield eight years ago, he tried commuting every day from his house in Clovis. But the long commute convinced Diaz to buy a house in Bakersfield to stay in during the week. He still spends weekends with his wife in Clovis. ‘Maintaining two homes, two mortgages is expensive,’ he said.”

The North County Times. “Vacancies in North County apartments have continued to drop as home sales have slowed, according to a survey by the San Diego County Apartment Association. ‘There is a perception right now among residents that slowing home sales may lead to lower home prices,’ stated Robert Pinnegar, the association’s executive directore. ‘As a result, fewer residents have left the rental housing market as they wait for prices to bottom out.’”

The Daily News. “Magic Mountain isn’t going away anytime soon. ‘The housing slow-down has taken the steam out of the idea of selling it off and converting it to residential,’ said Jack Kyser, chief economist with the Los Angeles County Economic Development Corporation.”

“‘Because you have a situation now (elsewhere) where developers have put down non-refundable deposits and they’re walking away,’ he said.”

The Victorville Daily Press. “While High Desert home sales continue to show signs of weakness, the region’s market likely isn’t headed into a recession, as some bargain-minded buyers hope.”

“‘In the summer of 2004, anyone could sell a house,’ said (realtor) Caroll Yule in Victorville. But, not anymore says Yule, who notes realtors have reverted to coaxing buyers back into the market with a myriad of incentives.”

“New sales figures show the number of homes sold from Sept. 15 to Oct. 15 dipped 14.5 percent from last month and 31 percent from the same time last year. Home prices were as well 2.5 percent lower than last month’s. Perhaps most important, however, area inventory is up 108 percent from the same lime last year.”

“Yule recalls a similar period nearly two decades ago, when full-time realtors in the High Desert numbered about 900 in 1990, but shrank to a pool of about 400 by 1994.”

“Brad Bodell, operating principal at the Keller Williams in Victorville, said, the adjusting environment is giving realtors and buyers a more ‘realistic’ view of the market.”

“In addition, he said, home owners will see their houses from a ‘broader scope,’ not just in terms of their individual ’stupidity and greed.’”

The Capital Times reports from Wisconsin. “Talk about a tough term as president of the Madison Area Builders Association. Chad Wuebben has spent the past 11 months as front man for the industry trade group as builders suffer through the worst period in over a decade.”

“Just 1,321 permits were issued for new single family homes or duplexes in Dane County through the end of November. That’s down 39 percent from last year and barely half the number of housing starts during the 2003 peak. In fact, 2006 is shaping up as one of the toughest years in memory. And nobody seems to know where the bottom is.”

“Not that a lot of people weren’t warning the housing bubble was going to eventually burst. Madison proved that it wasn’t bulletproof after all and Dane County is now among the most stressed markets in the upper Midwest.”

“Wuebben is convinced the worst is over. ‘I’m not just blowing smoke,’ Wuebben said last week in commenting on the dismal construction numbers. ‘Honestly, I’ve been getting more calls in the last three weeks than in the last three months. I really expect this is going to turn around by spring.’”

“First, however, the real estate industry must deal with a record number of homes for sale, or ‘excess inventory’ as the professionals put it. There are more than 5,200 homes listed for sale in south central Wisconsin, more than twice as many on the market as two years ago.”

“So why do economists worry so much about a slowing housing market? It’s all about consumer psychology. When home values are falling, property owners feel less wealthy even if they are not buying or selling in the near future. So they tend to spend less.”

“Bruce Bittles, chief investment strategist at Robert W. Baird, in his 2007 outlook warns that if the housing plunge continues it could cause ‘a highly-leveraged consumer to significantly reduce spending.’ In other words, there is real risk to the U.S. economy since many Americans are already living beyond their means on money borrowed against inflated home values.”

The St Paul Business Journal from Minnesota. “The housing market continued to sag in the Twin Cities in November, as sellers cut prices while buyers bided their time.”

“Pending sales remain stubborn for the year, down 14.61 percent from one year ago. The change in pending sales from October 06 to November 06 was minus 11.14 percent, the lowest reported month-over-month decline since November 2000.”

The Associated Press reports on Illinois. “It was a rare occurrence in a community with a national reputation for tearing down old houses: A developer bought the historic cottage at 327 S. Oak St. but didn’t bulldoze it into oblivion.”

“The norm in this leafy Chicago suburb and affluent communities around the country has been to allow builders to demolish older homes to make way for far larger, far flashier houses, dubbed ‘McMansions’ by critics.”

“But a teardown tide that surged for a decade has begun to turn, largely due to a housing-market slump.”

“As a five-year real estate boom fizzled this year, teardowns plummeted by at least 20 percent nationally, roughly corresponding to the drop in housing starts, said Stephen Melman of the National Association of Home Builders.”

“National teardown figures are not compiled and difficult to assess, but the National Association of Home Builders has estimated that 75,000 houses are razed and replaced with larger homes annually. The National Trust says Chicago’s suburbs, California’s Bay Area, Palm Springs and neighborhoods around Washington, D.C. are among the hardest-hit areas.”

“The potential profits of teardowns simply are too attractive to dissuade developers for long, said Daniel McMillen, who heads the Center for Urban Real Estate at the University of Illinois at Chicago.”

“‘I think some people might argue that the teardown market was a bubble and now that bubble has burst,’ McMillen said. ‘But I don’t think that is the case. I think the teardown market will bounce back.’”

The Providence Journal reports from Rhode Island. “Rhode Island’s housing market continued to weaken in October, with prices showing double-digit declines from a year ago. The median price of a condominium in October was $225,000, down 12.2 percent from October of last year, according to The Warren Group. Condo prices in the state have now declined for three straight months.”

“Prices of single-family houses also fell, albeit less sharply. In October, the median price of a single-family house in the state was $262,500, a decrease of 4.2 percent from October of last year.”

“‘Our figures continue to show sluggishness throughout the Rhode Island housing market,’ a news release quotes CEO Timothy Warren Jr., as saying.”

“The nationwide slowdown in the housing market has recently weakened demand for condominiums, Warren said. But as the market weakened, he said, ‘the effects of gravity finally caught up with them.’”

“Rhode Island’s housing market has held up better than the market in Massachusetts, where the median price of a single-family house in October was $312,000, down 6.87 percent from October of last year. The median price of a condo in October was $261,750, down 4.82 percent from the same month last year.”

“‘You never know where the bottom of the market is,’ Warren said, ‘until you’re at the bottom.’”

“Home sales fell in three of Rhode Island’s five counties in October, with Newport’s 32.9 percent drop being the steepest. All five counties experienced price declines, with Newport falling by the biggest margin (11.7 percent) and Bristol by the smallest (1.7 percent). Unit sales now have dropped by double-digit percentages in four straight months and six of the last 10 months.”

From New Hampshire Public Radio. “Over the next few years, people will start to see a mix of affordable and upscale housing with prices rangeing from 140 thousand to over 400 thousand dollars. Close to 900 units are proposed. About half of them have been approved.”

“Real estate veteran Paul LaFlamme says developers want to cash in on the national demand for urban housing.”

“Some observers wonder if the demand exists for all these housing projects. Michael Swack, dean of Southern New Hampshire University’s economic development department, questions if home buyers will think downtown Nashua has enough cultural and social amenities.”

“‘It’s speculative. The markets can change. We’ve seen that in different places, real estate markets can go up and down,’ he said. ‘One of the risks they’re taking is the type of units. When you talk about New Hampshire, people generally still prefer single family homes. It’s not like living in New York or Boston.’”

The Boston Globe. “Citing a soft real estate market and increased construction costs, a major Salem real estate developer disclosed last week that it had scrapped plans to redevelop a downtown block as an $80 million residential and retail development.”

“Lynn Duncan, director of planning and community development in Salem, said the economy would shape any future development of the property. ‘The market always has a lot to do with this; the market right now is not as strong,’ Duncan said.”

“Julianna Tache of Tache Real Estate, said condo prices in Salem had dropped between 5 and 10 percent over the last year. Currently, there are 208 condos listed for sale in the city, at an average listing price of $303,752, and staying on the market for 153 days.”

“The glut of condos and the competitive interest rates favor buyers, Tache said, adding that the market would improve only when the condos on the market are sold. ‘To turn this market around at this point, some of the supply has to be bought,’ she said.”

“A provider of Massachusetts foreclosure data released its November 2006 report today, revealing that foreclosure filings in Massachusetts are shattering previous records. The report shows that 2,188 foreclosures were initiated statewide during the month of October 2006, 111% more than October 2005 and 219% above 2004 levels.”

“‘2006 has been a very unhappy year for thousands of Massachusetts homeowners, we are seeing a massive increase in foreclosure filings,’ said Jeremy Shapiro, president of ForeclosuresMass.com. ‘By October 31st of 2006 every county in Massachusetts already had more foreclosure filings than the entire 2005 calendar year.’”

“October 2006 saw over 70 foreclosure filings per day (including weekends and holidays) and nearly 110 every business day. 11,493 foreclosures were filed for the entire year in 2005. So, with 2 months to go in the year we have already eclipsed 2005 totals by 3,640.”

Some housing bubble reports from Wall Street and the Washington Times. “The risk of a financial crisis is growing as home prices continue to fall and questionable mortgages made in the past two years go into default, finance officials warned yesterday.”

“Banks and mortgage brokers have been passing along to unwary investors as much as $600 billion a year in risky mortgages they made through untested channels in the junk-bond market. That raises the threat of a financial crisis beyond the ability of the Federal Reserve to remedy, said Lewis Ranieri, who is widely credited with creating the multitrillion-dollar market for mortgage-backed securities in the 1980s and 1990s.”

“‘No securities market can stand if we do not have true disclosure, and we do not have true disclosure’ of the growing risks of exotic mortgages, said Mr. Ranieri. ‘This stuff doesn’t just get sold to [professional] money managers. It gets sold to the public and to foreign investors who don’t have a clue what to look for.’”

“Despite the growing dangers, Rep. Barney Frank, incoming chairman of the House Financial Services Committee, indicated he saw no reason for federal legislation to better regulate the mortgage markets to prevent a possible financial meltdown.”

“‘Housing suffered from irrational exuberance’ during the first part of the decade, though it fell short of being a full-blown bubble, he said. ‘The end result of a 10 percent drop in many parts of the country will be a more rational housing market. … If a few speculators get burned, that’s just icing on the cake.’”

“Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get home loans ‘without taking unnecessary risks.’”

“‘We do not want Americans to become overextended and see their dream end in foreclosure,’ Paulson said.”

“There have started to be ‘early signs of credit distress’ in financial institutions’ holdings of so-called ’subprime’ mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.”

“As the housing market trends downward and overextended borrowers find it increasingly difficult to make their mortgage payments, delinquencies, foreclosures and early payment defaults are on the rise, said Dominion Bond Rating Service in a report.”

“When looking at 60-days-plus delinquencies for 2003 through 2006 subprime home equity collateral at 11 months of seasoning, delinquencies are 25 percent higher for the 2006 vintage versus the 2005 collateral and approximately 66 percent higher versus 2003 and 2004 vintages, said Dominion in the report.”

“The weaker performance of the 2006 vintage can be attributed to…greater leverage inherent in ‘affordability products,’ the migration of lenders down the credit spectrum and the sharp decline in home price appreciation rates.”

“In order to support corporate earnings and maintain production volumes that had reached unprecedented levels, subprime originators continued to underwrite ‘affordability products’ and the corresponding ‘loan at the margin,’ the rating service added.”

“Fitch Ratings said its ratings outlook for sub-prime mortgage bonds is ‘negative,’ with the expected number of its downgrades to exceed the number of upgrades next year. Delinquencies, which have risen 50 percent from last year, should climb another 50 percent next year, it said.”

“Losses to date on sub-prime mortgages issued in 2000 are about 5.5 percent, the worst tally ever, according to Michael Youngblood, an analyst at Friedman Billings Ramsey Group Inc. Youngblood has said this year’s loans could have the highest losses ever.”

“A large caliber weapon would be needed if losses on the recent crop of exotic, nonconforming mortgages (i.e., loans not guaranteed by Fannie Mae or Freddie Mac continue to work higher. And why wouldn’t they?”

“In 1998 ‘liars’ loans’ (those with little or no documentation required) amounted to 24% of mortgage originations. To date this year they account for 62%. Interest-only mortgages have vaulted in the same period from virtually no market share in the mainstream lending business to a 50% share.”

“Countrywide Financial released operational data for the month ended November 30, 2006. Mortgage loan fundings for November totaled $38 billion, a decline of 11 percent from November 2005.”

“‘November 2006 operational results continued to reflect transitional market conditions,’ said CEO Angelo Mozilo. ‘Total mortgage loan fundings declined modestly from the prior month. Purchase volume fell as a result of continued softness in the housing market, as well as seasonality.’”

“Potlatch Corporation will cash in on the nation’s growing appetite for recreational acreage by selling off 18 to 20 percent of its vast timber holdings over the next decade, officials said today. The company expects to sell between 15,000 and 20,000 acres of land next year.”

“Over the next decade, Potlatch has identified 100,000 to 120,000 acres for sale in Idaho; 100,000 to 120,000 acres for sale in Minnesota; and 50,000 to 60,000 acres for sale in Arkansas.”

“Investors who giddily rushed into the new-home market during the recent housing boom are now beating a hasty retreat, sometimes at a hefty loss, said David Pressly Jr., president of the National Association of Home Builders.”

“For some speculators, it makes more financial sense to leave a down payment on the table rather than going to settlement on a newly constructed house that has decreased in value or failed to appreciate. ‘It might be cheaper to walk away and not close on a house they may not be able to sell or rent,’ said Pressly.”

“Some would rather give up sizable down payments than be stuck with a house bought at the top of the market, Pressly said. Consider an investor who puts $30,000 down on a new $500,000 house, either under construction or not yet built. For such a buyer, it might be cheaper to default on the sales contract, Pressly said. Losing $30,000 might seem the lesser of two evils, he said.”

The Herald Tribune reports from Florida. “A Tampa Bay condominium converter bailed out of 40 units during the weekend by selling them at absolute auction. The auction raised $5.9 million through the sale of 40 units, meaning the average price was $147,500.”

“The developer had been selling the bigger units at the complex for $300,000-ish. ‘They sold at a discount,’ said Carl Carter, a spokesman for J.P. King Auction Co. ‘It is just a fact of life in the market right now.’”

“The move could be just the beginning of many multi-unit Florida auctions to come, Carter predicted. ‘Right now we are at the front end of what we think is going to be a surge in condominium auctions,’ he said.”

“‘Developers have to face the fact that they either have to get it sold or continue to pay interest and marketing costs,’ Carter said. ‘Some of these people are paying a lot in construction loans. When you’re 12 months into a three-month business plan, it starts hurting.’”

“The auction was advertised as ‘100 elegant colonial-style condominiums in a gated community, 40 selling absolute.’ That terminology provided the seller the ability to back out of any sales past the first 40, and he apparently did so.”

“‘We basically said we were going to sell 40 of these at absolute auction and another 60 with a reserve,’ Carter said. ‘If we had been getting higher prices, we would have put more on the market.’”

The Orlando Sentinel. “The Central Florida economy is expected to continue its pace of slower growth in December, according to the latest CFB Economic Index. Hampering the region’s growth in recent months has been the ongoing struggles in the building-permit category, an indication of a slowing housing market. There has been a decline or projected decline every month since June.”

“In September, the most recent month for which actual data are available, the region (was) weighed down by a 37.28 percent drop in residential building permits.”

“Realtor Ronald Cornette serves as a rental division manager in Bradenton. Q: How has the spiraling inventory level of unsold property impacted the rental market in your area?”

“A: ‘Those investors who thought they would rent their units at a rate high enough to cover expenses are shocked to find it’s impossible. Rentals over $1,800 are harder to fill regardless of the value.’”

“Q: What’s going on with prices, deposits and contract terms generally for rentals? A: ‘While sales prices have risen sharply, rental prices have not. Rental terms are about the same, as well.’”

“Q: Are you seeing a lot of owners who thought they would be flippers? Do you have to educate first time owner-landlords? A: ‘The flippers are having a hard time finding tenants at high rental rates. They may have to bite the bullet and take what they can get, even if the ink is red for now.’”

“Q: I was told by an experienced landlord that a ‘good rental’ generates 1 percent of a property’s purchase price in 1 month. Is that still possible in this market today? A: ‘The old 1 percent rule doesn’t work any more. One half of a percent is more like what we’re seeing now.’”

“Q: Are landlords surprised that the recent increase in prices for the purchase of real estate do not translate into higher rental incomes? A: ‘A skilled and sophisticated investor doesn’t expect rent to cover expense. The novice is the problem. They need to ask more questions when they buy.’”

The Miami Herald. “More troubled waters in residential real estate. This view comes from the trenches: More than 70 percent of real estate professionals in a University of Florida survey last week said it was a bad time to build condos; 46 percent said the same thing about single-family housing.”

“There’s more: Nearly half of this often-bullish group expects not just condos but also single-family home prices to drop. The number in the bearish camp has doubled in just two months.”

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