The Housing Bubble

Some November numbers from Dataquick in California. “Southern California home sales remained at their slowest pace in nine years last month. A total of 20,388 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 26.2 percent from 27,637 for November a year ago, according to DataQuick.”

“The median price paid for a Southland home was $487,000 last month. The median peaked at $493,000 last June.”

The LA Times. “Sales continued to tumble. In November, the number of homes sold was the fewest for any November since 1997, DataQuick said. ‘Obviously, there’s a correction going on, but it’s not going to collapse,’ said Delores Conway, at USC. ‘Even with prices flattening, it doesn’t mean that we’re in a serious housing downturn.’”

“The median price in Ventura County also depreciated, falling 8.2% year over year to $562,000 as sales slid 30.8%.”

The Union Tribune. “San Diego County housing prices slipped 6.9 percent last month, the biggest year-over-year drop on record, DataQuick reported. The median price stood at $482,000, the same as in August, but off $36,000 from November 2005’s $518,000, the all-time record.”

“Single-family resale homes rose $5,000 from October to November to $540,000 but were off 4.4 percent from year-ago levels and substantially behind the record of $569,500 set in May. Resale condos were down $24,000 from October to $375,000, representing a 5 percent drop from a year ago. The record of $400,000 was set in March.”

“Newly built houses and condos and newly sold condo conversions fell the most, down 13.8 percent from November 2005, but the $455,000 median was up $500 from October. The record of $527,750 was set a year ago, but analysts suspect the steep decline was likely caused by a large influx of lower-priced condo conversions.”

“Sales totaled 2,987 transactions, down 24.1 percent from a year ago, the 29th straight month of year-over-year declines.”

The Voice of San Diego. “The boom is over. In putting together their five-year financial forecast, Mayor Jerry Sanders’ staff recognized the housing market slowdown underway and expressly worried about the possibility that next year, in 2007, the median price of a single-family home in San Diego County could drop to as low as $550,000.”

“Unfortunately for the mayor’s projections, we’re already there. There are two major local surveyors of home prices: the firm DataQuick Information Systems and the San Diego Association of Realtors. DataQuick puts the median price of a single-family home in San Diego County at $535,000. The Realtors put it at $550,000.”

“The housing market may be correcting itself even faster than the mayor’s gloomy predictions envision.”

The Orange County Register. “After 113 months,- nine-plus years, Orange County housing didn’t produce annualized profits last month. DataQuick’s monthly home-sales recap shows that O.C.’s median home sales price for all residences in November was $616,000, equal to the year-ago mark. It was the first time that there was no year-over-year gain for O.C. housing since May 1997.”

“It was also the fifth straight month home sales fell since a record high of $646,000 was set in June. It’s the longest such monthly losing streak in DataQuick’s 19-year history of O.C. real estate transactions.”

“David Dunn felt as if Christmas were stolen from him when prices for neighboring homes in his new subdivision fell by about $140,000. Now, he says, his home is worth less than he owes, making it next to impossible to refinance before his $3,000-a-month payment doubles. Eleven neighbors who bought before the price cuts are in the same boat.”

“‘They put us in a bad financial situation by lowering the price,’ said Dunn. ‘Some of (the buyers) did 100 percent financing, so they’re completely over their head right now.’”

“Ads offering big discounts and concessions on new homes have been rolling off the press for weeks as builders race to clear inventory before the end of the year. In the case of one KB Home development – up to $70,000 off the purchase price.”

“Wally Welter, an Irvine home shopper, said salesmen for several builders at Ladera Ranch offered concessions worth $100,000 or more. ‘I’ve had salespeople say, ‘Make an offer,’ which you never hear the builder say,’ said Welter. ‘Now, they’re willing to listen.’”

“Most homebuilders are reporting that 40 percent or more of their buyers are canceling this year. Often, cancellations result in the builder getting stuck with an empty home that’s already under construction. The closer the home gets to being finished, said KB Home’s Irvine-based regional manager, Jay Moss, ‘the more anxious the homebuilder gets to make the deal.’”

“Concessions, said housing consultant John Burns, are ‘the talk of the industry. On a completed home, it can be substantial.’”

“But residents of Garden Grove’s Heritage subdivision maintain that their builder, Brandywine Homes of Irvine, has cut prices well below market values.”

“The homeowners said that the price cuts began in November, just months after the first dozen buyers closed escrow, paying from $770,000 to $888,500 for their homes. The average price was $825,000, property records show. After the builder dropped prices by more than $100,000, all but five of the homes sold in a matter of weeks.”

“‘Usually builders keep their prices up. They try to keep their buyers happy,’ said Christie Vu, who paid almost $870,000 for the home she and her husband, Philip Luu, share with their two young sons. ‘In this case, it’s just the opposite.’”

“The builder’s representatives said during a recent meeting that they are being forced to price the homes to sell and maintain they are getting ‘zero profit’ from the project, homeowners said.”

“Keyvan Samini, an attorney for some of the buyers, said the purchasers relied on the lender and its appraiser to confirm the homes’ $800,000-plus price tags. But appraisers ended up using homes about three miles away as a guide for the first appraisal, and subsequent loan appraisals were based on the first one, Samini said.”

“The appraisals ‘were way too high,’ Samini said. ‘I believe that the builder knew they were too high, or should have known. And it’s not the fault of the buyers. They rely on the expertise of those appraisers.’”

“One of Samini’s clients said he’s facing the possibility of foreclosure because of the price cuts. Dunn said he’s in a financial bind because he’s using an exotic mortgage called an Option ARM, an adjustable-rate loan in which the homeowner can pick his monthly payment from a variety of options.”

“Eventually, he’ll be responsible for making full payments of $6,000 a month, he said, adding, ‘I don’t know how we’ll be able to pay that.’”

“‘It’s not just the financial aspect. It’s the emotional,’ Dunn said. ‘We can’t eat, can’t sleep. I can’t concentrate on work. This is all I think about.’”

The November numbers for Arizona are out. “The local single-family resale market has settled into a very stable pattern, from the hyper-activity of last year. ‘Even though mortgage interest rates have been declining for the last few months, limited home appreciation and household income continues to raise concern about the ability of some homeowners to maintain their homes,’ said Jay Butler, at ASU. ‘This may be especially evident for those that have used some of the more creative financing instruments, such as option payment plans and initially low interest rate adjustable mortgages.’”

The East Valley Tribune. “‘Right now it’s just sort of in a stable situation,’ said Butler. ‘There’s no real reason to see big upward swings or downward swings in the market,’ he said.”

“So far this year, there have been 62,415 sales compared with 104,360 during the same period in 2005.”

The Arizona Republic. “5,040 homes sold for the month of November. Last year, nearly 7,200 homes sold in November. The sales volume was the lowest for a November since 2002.”

“‘Instead of being overactive, or no pulse, it’s running at a normal pulse,’ said Butler. ‘It’s a good, strong pulse. It’s just not the pulse people like.’”

“Prices varied widely throughout the Valley. For example, the median price of a home sold in Scottsdale was $630,000, about 5.9 percent higher than the same time last year. Meanwhile, median prices in Goodyear dropped 11.9 percent to $252,000.”

The Albuquerque Tribune from New Mexico. “Will housing prices ever stop rising? The question becomes more acute when looking at the November home sales figures released Tuesday by the Albuquerque Metropolitan Board of Realtors.”

“The 935 units sold in November represent a 17.3 percent decrease compared to a year earlier. Meanwhile, the number of homes on the market as of Sunday, 4,363, is nearly 52 percent more than the 2,263 from the same day a year earlier.”

“Despite the saturation of homes on the market, the median sales price rose 7.3 percent from $178,900 in November 2005 to $192,000 last month. ‘It can’t continue like that,’ said Cathy Colvin, who leads the realtors board. ‘Not with the amount of homes people have to choose from.’”

The Rocky Mountain News From Colorado. “The rental vacancy rate for single-family homes in the third quarter for the Denver area fell to 6.4 percent, according to a report. A record number of home foreclosures and a soft housing market have increased the supply of rental homes, driving up the vacancy rate, said Gordon Von Stroh, a professor at the University of Denver.”

“The foreclosures also increase the supply of renters, he said. ‘Let’s say your home goes into foreclosure and you have three or four kids,’ Von Stroh said. ‘Chances are, you will be looking to rent a home.’”

“The difficulty in selling homes in today’s market is also increasing the rental pool of houses. Ryan McMaken, spokesman for the Division of Housing, has seen it in the northeast Denver neighborhood where he lives. Some of his neighbors who have been transferred from Denver can’t sell their homes, so they’re renting them out instead, he said.”

“But Von Stroh said that people often can’t rent homes for enough to cover their mortgages. The average monthly rental price for all homes was $957.28 per month, compared with $912.47 in 2005. However, average monthly rates are still slightly less than they were three years ago.”

The Denver Post. “At 7.4 percent, condos have the highest vacancy rate. In comparison, single-family houses had a 6.5 percent vacancy rate; townhouses, 5.2 percent; duplexes, 6.5 percent; triplexes, 6 percent; and fourplexes, 6.7 percent.”

“‘Condos seem to be sensitive when there are downturns,’ said McMaken. ‘If we end up (building) a lot of condos that aren’t in high demand, they’ll end up on the rental market.’”

“Last month, 5,051 homes in Colorado entered some stage of foreclosure, up 88 percent from November 2005. ‘It’s sort of the tip of the iceberg, and the problems are going to get worse before they will get better,’ U.S. Bank regional economist Tucker Hart Adams said.”

“‘I think we will see housing prices declining, sales down and new construction down for another year,’ Adams said.”

“Among the 200 large metropolitan areas tracked, Greeley had the highest foreclosure rate. In Weld County, 428 properties entered some stage of foreclosure last month, up 13 percent from the previous month. Weld County had one new filing for every 155 households, more than six times the national average.”

“Colorado should continue to see improvement relative to states such as Nevada, California, Arizona and Florida, said economist Jeff Thredgold.”

“‘Nevada, California, Arizona and, to some extent, Florida will continue to move up in the ranking because there were a substantial amount of flippers and home speculators involved,’ Thredgold said. ‘Many used interest-only mortgages to finance a property. As the market slows down, those speculators would be the first ones to really feel the pain.’”

“Adams said Colorado’s foreclosure problem, and the downturn in the housing market, is far from over. She warned that its impact will be felt throughout the rest of the economy. ‘Housing prices are continuing to go down, and even the people who hang on to their houses have to struggle to do it and cut back in other areas,’ Adams said.”

A housing report from the Baltimore Sun. “The number of homes sold last month in metropolitan Baltimore posted the smallest decline in 10 months as sellers became increasingly willing to forgo price gains.”

“‘Baltimore prices are still positive, and they haven’t gotten into negative territory,’ as prices have done elsewhere in the nation, including Washington and Northern Virginia, said John McClain, at George Mason University. ‘I think Baltimore is going to have a softer landing than Washington or a lot of other places.’”

“Baltimore’s market could still see some declines in average sales price in the coming months, McClain said. The city has seen double-digit price increases that at times topped 20 percent during the housing boom.”

“The November MRIS report showed price declines in Anne Arundel and Harford counties, with prices flat in Baltimore and Carroll counties. And with inventory still high, homes sat on the market last month nearly twice as long, the MRIS said.”

“‘With mortgage rates having fallen over the past six months, and home prices turning negative in this area, that will be a strong inducement for the buyers to enter the market,’ said Lawrence Yun, a senior economist with the Realtors association.”

“It has helped that sellers have begun to come to terms with the current pricing in the market and are realizing it is unrealistic to expect to get last year’s prices for their home, he said.”

“‘A large majority of the sellers have had to go through that denial period,’ said (broker) Carl J. Galler. ‘The new sellers coming into the market are educated as to what’s going on. Sellers are willing to give back money for closing, and going into the process knowing they’ll give concessions and steeling themselves for that.’”

“Real estate agent David L. Jefferson said it is common now to see a seller shave as much as $20,000 to $40,000 from an asking price, especially in higher-priced areas such as Fells Point, Canton and the Inner Harbor, where listings remain high.”

“Many of those sellers are investors who bought houses or condos during the boom, and some are now dropping their prices to the amount they paid originally, he said.”

“‘At this point, the market is in a transition; it’s kind of bottoming out,’ he said. ‘It won’t turn from a buyer’s back to a seller’s market, but you’ll see more interest from buyers.’”

Some housing bubble reports from Washington and Wall Street. “The Federal Reserve Bank held overnight interest rates steady at 5.25% for the fourth straight meeting on Tuesday and kept the door open for further rate increases, saying inflation risks remain elevated despite a substantial cooling in the housing market.”

“In one of two subtle changes, the committee said growth had slowed, ‘partly reflecting a substantial cooling of the housing market.’ The word ’substantial’ is new to the statement.”

“Fannie Mae, the biggest U.S. mortgage finance company, sued former auditor KPMG LLP for $2 billion today, saying the accounting firm failed to serve its role as an independent watchdog and prevent $6.3 billion in accounting errors.”

“Fannie Mae was repeatedly a victim of KPMG’s conflicting role as consultant and auditor, Fannie Mae said. ‘Replacing KPMG’s ‘consulting engagement’ hat with its ‘auditor’ hat, KPMG approved Fannie Mae’s’ bookkeeping each year, Fannie Mae said. ‘KPMG often did nothing more than rubber-stamp Fannie Mae’s internal accounting decisions.’”

“‘KPMG engaged in a ‘check the box’ approach to its audits, failing to exercise professional judgment and independent scrutiny,’ the suit alleges. KPMG spokesman Tom Fitzgerald said the company plans to pursue its own claims against Fannie Mae as part of pending litigation in federal court.”

“James Cox, a professor of corporate and securities law at Duke University Law School, said the company will have a difficult time proving that it was harmed more than investors who bought Fannie Mae shares at inflated prices when it was overstating its earnings.”

“Cynthia Williams, a professor at the University of Illinois College of Law in Champaign, agreed and said Fannie Mae blaming its own misstatements on KPMG is unusual and ‘you have to ask: ‘Where were they?’”

“Median house prices will decline by 8% to 10% over the next nine months and could create a serious drag on the economy, according to Allen Sinai, president of Decision Economics. Even if the downturn in sales and construction is over early next year, there will be a huge inventory of unsold homes overhanging the housing market, Mr. Sinai told a housing symposium hosted by the Office of Thrift Supervision.”

“‘[M]edian prices of new and existing homes likely will continue to decline, particularly prices in those parts of the United States that have been bid up to unsustainable levels,’ the economist said.”

“Some mortgage companies continue to see weaker housing. The real estate market hasn’t yet bottomed out, Wells Fargo CEO Richard Kovacevich said in an interview. About a fifth of the 375 metropolitan statistical areas in the country have had home price decreases of 20 percent, he said.”

“‘It’s pretty ugly at the moment,’ Kovacevich said. Home prices are ‘really down much more’ than recent economic reports suggest, he said, citing the company’s internal data.”

The Wall Street Journal. “The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study by the Realtors group, down from 40% in the three previous years.”

“In a sign of just how hard it is for first-time buyers to come up with the cash needed to buy a home, 45% of first-time buyers bought their home with no money down, according to the recent NAR survey, up from 43% a year earlier.”

“Jason Colon bought a new three-bedroom, 2½-bath townhouse in Apollo Beach, Fla., last month. Mr. Colon paid $163,000 for the property, which was originally priced at $242,000. The builder also picked up $5,000 of his closing costs.”

“Yet affordability remains a problem for many would-be buyers. In the second quarter, buyers had to stretch more than ever before in 25 of the top 50 markets, according to Bank of America analyst Daniel Oppenheim. Even with the recent price declines, he estimates that it would take a further 7% fall in home prices, combined with a 4% annual increase in nominal incomes, to bring affordability back in line with average levels over the past decade by 2008, if interest rates remain stable.”

“Many would-be buyers are taking a wait-and-see approach. When home prices were soaring, many first-time buyers jumped to buy houses they could barely afford, believing they would be shut out of the market if they didn’t act quickly. Now, with prices falling in many areas, ‘there’s no immediate need to buy, and so they kick the tires more,’ says Frank Borges LLosa, owner of a brokerage in Arlington, Va.”

“Arthur Orkisz, a speechwriter in the Washington, D.C., area, says he expects to hold off until at least next summer before buying his first home. Giveaways such as flat-screen TVs are ‘all nice and dandy, but at the end of the day anyone capable of doing the arithmetic realizes that’s a gimmick to get me in the door,’ he says. ‘That’s not enough of an incentive’ to buy.”

“In much of the country, renting remains a bargain compared with owning, according to an analysis prepared for The Wall Street Journal by Torto Wheaton Research, a unit of CB Richard Ellis Group Inc. In markets such as Las Vegas, San Diego and Washington, the monthly cost of renting the average apartment is roughly half what it would cost to own the median-price home in the third quarter.”

“‘Renting is only marginally less of a bargain’ even with the latest decreases in home prices, says Torto Wheaton senior economist Gleb Nechayev.”

The Orlando Sentinel reports from Florida. “Resales in the core Orlando market fell 34 percent in November to 1,597 homes compared with a year earlier, the Orlando Regional Realtor Association reported Tuesday. It was the largest year-over-year percentage decline so far in 2006.”

“Sellers, adrift in a sea of properties for sale, are feeling the pressure. ‘There’s a lot of competition out there,’ said George Martinez, who has been trying to sell his southeast Orange County condo unit without success for several months. ‘I can’t even find a renter, and I’ve been doing a lot of advertising.’”

“Orlando-area condo sales are now dropping even faster than single-family sales, down 44 percent in November from a year earlier, and the number that sold last month (245) was dwarfed by the Realtors’ 3,483 active listings. And that doesn’t include for-sale-by-owner deals such as Martinez’s.”

“The inventory of single-family homes listed by Realtors in the core Orlando market, 21,122, represented more than 13 months’ worth of homes at the current pace of sales, the most in nearly 11 years.”

“‘With inventory at an all-time high and interest rates at an all-time low, the present is a unique opportunity for buyers to find the home of their dreams under economic conditions that are unlikely to be replicated,’ says ORRA President Randy Martin. ‘The latest economic forecasts suggest that the real estate market correction is coming to an end and that home prices will not be going any lower.’”

The Daily Record. “University of North Florida real estate professor Sid Rosenberg says the Jacksonville area real estate market will rebound from anything resembling a bubble. ‘Compared to other markets in Florida, it is a lot healthier. However, we are fooling ourselves if we don’t think there’s been a slowdown,’ he said.”

“In June, the median home price in Jacksonville peaked at just over $213,000. Since then, it has fallen steadily and stood at about $197,000 as of October.”

“Rosenberg says the median home price needs to drop about another 15 percent. That would make the local median home price about $165,000. ‘A lot of people keep asking prices [that are] too high,’ he said. ‘This is normal. Some will drop their prices, and we will see slowing depreciation. Housing prices right now are about 13 percent too high.’”

The Sun Sentinel. “The worst of the U.S. housing slump is over, according to the National Association of Realtors, but some analysts in South Florida are more skeptical.”

“Analyst Mike Larson in Jupiter said he expects people to put their homes back on the market after the holidays, creating more of a glut. As a result, prices will continue to fall.”

“‘A peak in supply and a bottoming in prices? I don’t think we’re there yet,’ Larson said. ‘I think we’re looking at a relatively weak 2007 market.’”

“‘Three to five years may pass before housing starts and home sales return to their peaks,’ said John Lonski, chief economist for Moody’s Investors Service. Sales of existing homes probably will sink 7 or 8 percent in 2007, compared with this year and new home sales may fall 9 or 10 percent, he said.”

“West Palm Beach housing analyst Brad Hunter said short-term investors who bought at the height of the boom in 2005 might have to sell at a loss. If those sellers lower their asking prices, more sales will occur, helping the South Florida market rebound, Hunter said. ‘But people have been stubborn,’ he said.”

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