The Housing Bubble

The Review Journal reports from Nevada. “Dennis Smith of Home Builders Research reported a slight increase in Las Vegas new home sales in November to 2,829, up from 2,606 in October. He counted 2,753 resales, the lowest monthly total since early 2004.”

“Median new home prices climbed to $335,850, an 11.3 percent increase from the same month a year ago. However, factoring out the 366 high-rise condo units that closed escrow in November, the median price of a ‘traditional’ single-family home rose 2 percent to $329,655, Smith said.”

“‘Don’t forget there are also sales incentives that could average 10 (percent) to 20 percent. That would result in a year-to-year decrease of about 17 percent. This would be closer to the real price points of new homes,’ he said.”

“SalesTraq, another Las Vegas-based housing research firm, showed similar numbers, with 2,868 new home sales, down 24.6 percent from a year ago. SalesTraq analyst Larry Murphy estimates that 300,000 homes will have been built from 2000 to 2010, compared with 180,000 homes built in the 1990s.”

In Business Las Vegas. “The tough times may not be over for the Las Vegas Valley housing market. Last week, Nevada gained the top spot in the country in the number of homes entering foreclosure. RealtyTrac reported foreclosures in Nevada rose 12 percent from October to November and are up 188 percent from November 2005.”

“And the problem is expected to worsen in 2007 because of the heavy use here of exotic mortgages that will substantially raise monthly payments beyond the ability of some to pay.”

“‘We have this high housing stock, and it’s not going to go away right away,’ said Alan Schlottmann, a UNLV economics professor. ‘It could take a whole nother year.’”

“Las Vegas real estate guru Richard Lee said he wouldn’t be surprised if the price of resale homes fell at least 15 percent during 2007. ‘Over the next 12 months, it needs some sort of an adjustment,’ Lee said. ‘In certain neighborhoods you will see as much as 15 percent and even more. It got overpriced because of investors and low interest rates. The pendulum swung too far and needs to come back a bit.’”

“Inventory jumped from a little over 13,000 in January and surpassed 20,000 for most of the year, a 10-month supply. In a vicious cycle, the inability to sell existing homes prevented many buyers from purchasing a new home.”

“‘It was a surprisingly quick downturn,’ said John Ritter, CEO of developer Focus Property Group. ‘The cancellation rate started to increase in the third quarter of 2005 and when it was slow during the holiday, people thought that was a seasonal slowdown, but that masked what was happening. They didn’t realize until the middle of the first quarter that buyers weren’t coming back. The cancellations continue to rise and the resales started to climb.’”

“The downturn, Ritter said, was prompted by an excess supply prompted by the irrational exuberance of investors and the public. That spurred massive amounts of national television coverage that exacerbated the problem because consumers were worried about buying a home, fearing its price would decline.”

“‘In the last big downturn 15 years ago, we weren’t in a world of 500 cable channels and 20 news outlets all trying to scream for attention,’ Ritter said. ‘The media latched onto this and when it slowed down, it fed the frenzy. People who were looking to buy a home just froze. They were worried about the bubble bursting.’”

The Las Vegas Business Press. “With plans still up in the air about the future of its large land holdings on Harmon Avenue, Edge Resorts has hired a financial consulting firm to help work through different offers and options. The Harbor Island land was formerly designated for the abortive ‘Las Ramblas’ project, abandoned by The Related Co. earlier this year.”

“Edge Director of Public Relations Maggie Feldman added that Edge has no intention of building the Las Ramblas plans. ‘A high percentage of our buyers who had reserved at W have pulled out and reserved at CityCenter or bought a resale at Signature at MGM Grand,’ (broker) Bruce Hiatt said. ‘The question is one of timing and what’s happening in a softening market. Right now we’re not getting any calls for W.’”

The Gazette Journal from Nevada. “Big incentives offered by home builders appear to be helping to keep the new single-family home market afloat in the Reno-Sparks metro area, according to a newly offered report.”

“Incentives offered to buyers, such as $60,000 in free upgrades, a relatively common offering, does not count against the sales price of the home and could account for at least part of the pricing strength shown in the report, said analyst Brian Kaiser.”

“‘It’s not like (builders) are giving away the house and you are seeing a dip in pricing. They are keeping them at $400,000 and piling on some more incentives on top of that so it is not reflected in these numbers,’ Kaiser said.”

“The new home market appears to be in contrast with Northern Nevada’s resale market. The median price for an existing single-family home in the Reno-Sparks metro area has fallen from the previous month in every month this year since May, landing at $312,400 in October.”

“At least part of the slump of the existing homes market could be because sellers are forced to compete with new home builders’ incentives, said Rebecca Dickson, vice president of Dickson Realty’s luxury home division.”

The East Valley Tribune from Arizona. “Over the past couple of years, a mass of Valley and outside developers attempted to capitalize on the housing boom by converting thousands of apartments into condominiums. Now, a consequent glut of properties on the market has some investors ditching the condo idea and switching their projects back to rentals.”

“Conversions in all price ranges are switching back to rentals, local housing analyst RL Brown said. ‘(Investors) found out the buyer pool wasn’t as deep as they thought it was,’ said Marc Huisken, at brokerage Grubb & Ellis in Phoenix.”

“Meanwhile, more condo conversion projects will likely revert back to apartments in 2007, said Tyler Anderson,at commercial real estate brokerage CB Richard Ellis in Phoenix. CG Development recently made the decision to go back to apartments for its Haven project and has plans to begin leasing units in February.”

“Rents could range from $850 for a studio to about $1,400 for a two-bedroom, two-bath with a pool view, CG’s Jon Goldman said. The company is renovating the apartments, putting in granite counter tops, stainless steel appliances and new lighting fixtures.

Readers suggested a topic about incomes and home prices. “I would like to see bloggers reponse on how much money you should make to afford a home that costs:”

150K

300K

500K

50K

1M

“Just to get a feeling for what kind of income does it ‘really’ takes to afford one of these monsters.”

A reply, “The question is income growth. If you have a high income but it is not growing then you will be left behind soon until this bursts and comes back down. Only the very rich at CEO level and above have had income gains of two figures or more year after year.”

Another said, “50K, 95-100K. 250-300K, 500K+ for anything above 750k. If I’m going to buy anything over about 350K, I’m going to pay cash. If I can’t pay cash, I don’t want it.”

One replied, “I agree with you all the way up to 750-1M. I would think that as you get into this range, you can start to spend a larger proportion of your income on housing (as the rest of your costs do not rise proportionally to your income)? So, for example, someone making 300K a year can probably afford to spend a larger % of their income on housing then someone making 30K a year?”

“Other then that, I pretty much agree with you. 3X income seem to be your rule?”

“I have been told by several banker friends down here that qualifing at 10X income is not all that unusual anymore. That’s just amazing, I don’t understand why people would wake up and decide to throw out lending standards that have worked for 100 years. Just don’t get it.”

One suggested alternatives, “Agree. IMO, one should earn about $30K per $100K mortgage up until you get to the $250K income level. At that point, one **could** go to 50% mortgage-to-income, IF they wanted to. Of course, they could also invest that money or (gasp!) give some to charity.”

One suggested caution, “My income is currently very high, about $200,000, and I figure the 2 and a half times that would be $500,000 house. However my income can greatly vary. I could go back to a $90,000 annual rate in a couple weeks. With outsourcing these days and a global economy, I think there is no way people can count on their income levels to remain the same or go higher - not anymore.”

“As a result, I think either the 2 and a half times rule is too high, people ought to go for short term mortgages, or people ought to save enough in government securities to save up for at least 50% of the price of a house before they take out a loan. And that’s in case they have to downsize their jobs.”

“I told this to someone before and they complained: ‘But what about young people who want to start families? They should have a house when they are in their 20s and cannot afford to save 50% of their incomes!’ I tell them that starting a family is a free choice and not a necessity.”

“It’s their own responsibility to look at the global trends and seriously consider how long they think their career and incomes will really last! Many people start families in their 30s. My buddy became a father at age 45. The point is to adjust your savings and investment for the the liklihood of downsizing your job in a global economy.”

Another notes total debt load. “We are comfortable at an income of $200K-$250K with a good 20% down payment in a $700K house. Only one car payment of other debt (1.9% interest). We also have the assets to pay off most of the mortgage if we needed to.”

One poster brings up taxes. “You have to balance home prices with what taxes you’re paying with that property, where you are in your life cycle, and how many people you’re responsible for, and what inheritance you’re counting on (joke, LOL).” “In many homes locally, taxes are the greater proportion of the monthly mortgage payment.”

“I own a home we paid $160k for (with $5k taxes) although it was in tough shape. We’ve dumped another 30K in material cost into it but did almost all labor ourselves. Even though we put 50% down I wouldn’t recommend it to anyone making less than six figures in household income, not if you want to save money for college and retirement at the same time. BTW, we’re not big spenders either.”

And one looks at the total picture. “There are so many variables. Does the person have kids? If so, how many? The income should also allow the person to fully fund retirement and save for a rainy day. I have found that most owners go ‘all in’ on their house. Once they own a house they don’t think they need to save for retirement or a rainy day. Their house will see them through all possible emergencies.”

“The last house my wife and I had we paid less than 2.5 our annual income and I was still nervous as hell. I think a married couple with no kids should stick to 2.5 times income. A married couple with kids should really stay at 2.0 times income because they have so many potential disasters they might face.”

“I think we forget personal safety nets on this blog. If a potential owner has the bank of ‘mom and dad’ to protect them in a bind then this figure gets skewed once again. They can be a little more aggressive.”

A report from Newsday. “Hector Rodriguez sits in his nearly empty home in Hicksville longing for his wife, Annalucya, and 4-year-old son, Daniel. They have been separated since the spring, when Annalucya and Daniel moved into the family’s new home in Atlanta. Rodriguez says he anticipated a fairly quick sale on the house, for which he is asking $380,000.”

“Instead, the 45-year-old baker sits puzzled, wondering why his nice corner property hasn’t moved since he placed it on the market earlier this year. He wonders how long he will be able to carry two mortgages.”

“Rodriguez, like many homeowners trying to ride the wave of the long-running seller’s market, says he didn’t expect things to change on Long Island. ‘The market runs in cycles, and for a long time it’s been a sellers’ market,’ says Susan Fromm, a licensed sales associate in Plainview. She says real estate agents often will advise their clients not to buy before they sell. Some choose not to heed their agents’ advice and become frustrated with the wait.”

“‘People are getting impatient,’ she says. ‘It’s taking longer than they expect.’”

“‘Everyone said I could sell the house in two to three months,’ says Rodriguez. He says visits to Atlanta are few and far between. Between working long hours at his job at a bakery and trying to support two homes, he says he only averages a long weekend trip about once a month.”

“Enrique Bonilla of Smithtown also finds it hard to be separated from his wife, Veronica. After visits to his brother and sister in Scottsdale, Ariz., the newlyweds say they thought living in Arizona would be an appealing change of pace.”

“The couple put their Victorian on the market in May. By June, Enrique got a job in Paradise Valley. Veronica, a real estate agent, stayed behind to sell their home. ‘I moved down there thinking I have a really nice house in New York,’ Enrique says. ‘Somebody will see it and fall in love with it. I got down there [to Arizona], and it wasn’t selling.’”

“They did not buy a house in Arizona, so they are not carrying two mortgages, but their only income now is the recent sales commissions from when he was working in Arizona and the income Veronica brings in from temporary jobs.”

“Denise Frobey of Bayport, says she stayed behind to sell her waterfront home, for which she is asking $749,999, while her husband, Stephen relocated to their new home in Pinehurst, N.C. Frobey says she suddenly found herself dealing with household responsibilities Stephen used to do.”

“‘I never had to do the bills before. This winter I will have snow. I never used the snowblower before because he was always here,’ she says. They put their home on the market in May.”"Rodriguez says in hindsight, he regrets buying the home in Atlanta before selling his Hicksville property first. ‘You never know what’s going to happen. … Everyone should move together,’ he said.”

The Star Banner reports from Florida. “At the start of 2006, realtors, builders and county officials extolled Marion County’s white-hot housing market. But as the year drew to a close, there was an ominous forecast that the local home building boom was headed for a bust.”

“A report released earlier this month by a consultant hired by the Ocala/Marion County Economic Development Corp., said the county’s construction levels would drop by 50 percent during the next two years and tumble back to 2001 numbers. ‘Real buyers just aren’t out there to justify the construction,’ said Policom President William Fruth. ‘[Previous] construction levels just aren’t sustainable.’”

“After the building frenzy of the last few years, contractors and Realtors found themselves in a market flooded with inventory. ‘There are quite a few incentives being offered, now that we have more inventory here,’ Wilbur Van Wyck, president of the Ocala/Marion County Association of Realtors said. ‘Negotiability is back.’”

“‘I don’t question the 50 percent [construction decrease],’ said County Commission Chairman Stan McClain, a local home builder. ‘[Other builders] are telling me their numbers are way off, too. It’s a bust.’”

The Bradenton Herald. “Developers of the SevenShores condominium project on Perico Island have dropped starting prices on their units by about $60,000. But representatives of St. Joe Co., the company building the 13 condominium buildings on 353 acres fronting the Intracoastal Waterway, deny the reduction in price has anything to do with concerns about a slowing condominium and housing market.”

“The lower prices resulted from a dip in construction materials, they maintain. ‘We have adjusted our prices and that price adjustment was due to our ability to work with our (general contractor) and subcontractors, and they experienced price reductions,’ said Joe Romanowski, sales and project manager for the Seven Shores development.”

“When St. Joe first announced prices for SevenShores in May, units started in the $700,000s. A few months later, Romanowski amended the prices to the low $600,000s. Those units now are being offered for $534,900.”

“‘Those (construction) bids came in lower and we were then able to recapture that $500,000 price-point that we wanted to have in the first place,’ Romanowski said. ‘That re-pricing was not due to softness in the market.’”

“Ken Simonson, chief economist for The Associated General Contractors of America, said the decline for the period was a modest 0.2 percent, compared to a year-over-year increase of 6.5 percent for construction materials.”

“But even with reduced unit prices, the developers of SevenShores have only received commitments on nine of 40 units in the project’s first building. St. Joe has been accepting contracts for about seven months. ‘Nine of our most expensive units,’ Jerry Ray is quick to add.”

The Herald Tribune. “State Sen. Mike Bennett’s decision to back off buying the Two Rivers mobile home park on the banks of the Braden River has come as a relief to park residents. As to why he decided to abandon his purchase of Two Rivers, Bennett said he simply could not make the numbers work. So he walked away without losing any money.”

“‘Everything is kind of quiet,’ said Lois Brown, who has lived in the park for seven years. ‘They say the park is not for sale any more, and I think we’ll be all right until condos start booming again.’”

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