The Housing Bubble

A report from the Arizona Republic. “Buyers for metropolitan Phoenix’s most expensive condominiums have gotten pickier and more cautious at a time when developers are racing to build dozens of elite condo projects across the city. Now, more than 30 of these urban projects are either finished or under construction in multistory buildings close to restaurants and stores.”

“More than 20 of the projects, mainly in Phoenix and Scottsdale, feature units costing $1 million or more, according to the Sullivan Group.”

“‘There are just too many of these luxury condos,’ said Bob Kammrath, a Phoenix commercial real estate analyst. ‘For the life of me I can’t fathom why they would be appealing here. People with that kind of money can buy a nice house and hire someone to take care of the yard.’”

“Condo advocates sell the lifestyle. ‘I don’t think we have scratched the surface,’ said Keith Mishkin, founder of a Phoenix company specializing in urban condos. ‘With more urban product, you create a critical mass and create a community where people can live, work and play in places that are walking distance for them.’”

“The new-home and resale housing markets have been soft this year after an investor-driven boom that pushed prices and sales to records. Condos are feeling the pain, too. ‘A lot of this condo stuff was an extension of this hyper housing market,’ said Jay Butler, at Arizona State University Polytechnic.”

“There already are signs of trouble in the Valley’s overall condo market: Foreclosure notices were filed against Elevation Chandler, a condo-hotel project near Chandler Fashion Center, and Chateaux on Central, a luxury brownstone project on Central Avenue in Phoenix.”

“Some developers are reversing course on condo-conversion projects and turning them back into apartments. Houston real estate company Hines decided to build an office tower near 24th Street and Camelback Road in Phoenix rather than the condo tower it considered initially.”

“It’s hard to gauge real demand. Investors have bought into some of the buildings, hoping for quick sales at higher prices. Many of the buildings are so new that they have yet to run through that portion of buyers who don’t plan to stick around. Some units have become rentals.”

“‘We don’t know how many are being sold to investors,’ Butler said. ‘A lot of the market is going to be for seasonal visitors.’”

“About 5,000 apartment units are expected to be built next year, mostly north of Phoenix, the southwest Valley and far east in Mesa, Gilbert and Queen Creek. Failed condo conversions may hurt some nearby apartment complexes by offering lower rents.”

“Real estate watcher Jay Butler anticipates the return of some concessions because of those failed conversions. He’s already noticed a few complexes posting free rent.”

“‘They are not going to get the big rent increases,’ he said. ‘A lot raised rents (once the housing market stalled), and a lot are finding that they are having trouble keeping tenants.’”

The Denver Post reports from Colorado. “With more than 18,000 foreclosures expected this year, a record for the metro area, Colorado has had the highest foreclosure rate in the country. The current foreclosure epidemic traces more to overbuilding and aggressive lending than to fundamental economic problems.”

“Fidelity Solutions sells about 1,000 foreclosed properties a month, a pace about 40 percent ahead of last year, president Chad Neel said. ‘I am turning away business,’ Neel said. ‘Every client we have says there is a tsunami coming.’”

“When REO property managers can’t sell a home, they call on auctioneers like Dallas-based Hudson & Marshall. ‘They are telling us Colorado is very heavily hit and we will be active here for the next year and a half,’ said co- owner David Webb.”

“In August, Weld County had the worst foreclosure rate in the United States. Many foreclosures came on new homes sold by aggressive builders to people who had no money for a down payment and no real estate agent representing them.”

“Carmen Pedrego said the builder assured her she could own a brand-new home for no more than her monthly rent. After Pedrego signed a first mortgage loan, the agent produced a second mortgage. They totaled 64 percent of the single mother’s take-home pay.”

“Because she had already signed one contract, ‘I felt trapped, like I couldn’t get out of it any more,’ Pedrego said. She signed the second and made two mortgage payments, she said, then filed for bankruptcy. This year, she became one of 11 homeowners in a small Greeley neighborhood who have lost new houses in foreclosure sales.”

“On one Greeley street, seven adjacent new homes have been foreclosed.”

“Builders have been permitted to flood Weld County with a ‘terminal oversupply’ of new houses that devalued existing homes, said Lou Barnes, a Colorado mortgage bank owner.”

“‘People are being oversold today on homes,’ said David Berenbaum, executive VP of the National Community Reinvestment Coalition. ‘It’s not uncommon to see more than 50 percent of their income go to their mortgage payment. The debt-to-income ratios are very troublesome.’”

“In Gateway Lakes, new homes purchased in 2005 are being foreclosed in 2006. That caught the attention of David Kiekhaefer, a Greeley broker and builder, who is renting homes in the neighborhood that he and a partner built and were unable to sell in the $180,000 range.”

“He found that two other builders in the same neighborhood, Mark Strodtman and Duane Zeller,were selling homes to Spanish-speaking families who were not represented by a real estate agent for as much as $245,000.”

“Residents who bought houses from Strodtman, said they were lured by offers of low payments, then learned at loan closings that their monthly costs would be hundreds of dollars higher than they expected. ‘They tell me in one year you can refinance,’ said Librado Herrera, who does not read English and depended on Strodtman’s sales assistant to explain the contract.”

“When he called a lender eight months later, he said he was told his loan had a prepayment penalty and his house wasn’t worth $245,000.”

“Foreclosure and real estate records show the prices of his Gateway Lakes houses plunged $50,000 or more after the original buyer lost them. Pedrego’s house, for one, sold for $63,000 less than the $239,000 she paid for it last year.”

“Strodtman said that happened because ‘the banks are dumping them’ and some foreclosed houses ‘are trashed.’ Zeller said his homes are not overpriced and he is not enticing buyers with false promises. ‘I’ve got six homes for sale in there’ that aren’t moving, he said. ‘I’ll sell them below cost just to get out of them.’”

“Laura Mendoza, a real estate agent who listed some of Strodtman’s homes in Gateway Lakes, said she withdrew because she could not find buyers at the builder’s price. ‘Could I get them sold? Huh-uh,’ she said. ‘I didn’t want to stay out there. I didn’t think the prices were right. Somehow they sold them. I don’t know how.’”

“The Post analysis found high foreclosure rates in several communities of one national builder, KB Home. In most cases, the loans for those homes came from KB’s mortgage branch. In a Northglenn neighborhood built by KB Home, 56 of the original buyers have been foreclosed. Fifty-one, or 91 percent, got their loans from KB’s mortgage company.”

“In Kentfield, a Thornton neighborhood, 80 of the original buyers have been foreclosed. Seventy, or 87 percent, borrowed from KB’s mortgage company. About half were foreclosed on their original loans, which KB sold to other lenders, and half refinanced before their foreclosures.”

“Nearly all the original loans were insured by the Federal Housing Administration, which collects fees from borrowers to cover losses.”

“‘Five or six years ago, this was cornfields.’ Matthew Revitte, a Greeley broker specializing in foreclosure sales, is driving through East Meadows, a neighborhood at the city’s edge. Now, he said, ‘it looks like Chernobyl.’”

“On one long block, Revitte counts 14 of 40 houses with defaulted loans. These were built by a local company, Lifestyle Homes, and sold at a time when it was easier to buy a house than rent one, Revitte said.”

“Across the street, real estate agent Mark Llamas listed a house that went for $140,707 three years ago. After a foreclosure, it recently sold for $102,580.”

“Lifestyle Homes president Brad Clarkson said he feels sorry for all the families who bought homes and lost them in East Meadows. But ‘it’s absolutely due to factors beyond our control,’ he said. ‘We had to stop building homes in East Meadows,’ he said. ‘We couldn’t compete with the foreclosures.’”

A housing report from the Boston Globe. “The Massachusetts housing market continued its decline in November, with sales of single-family homes and condominiums dropping by double-digit percentages and sales of single-family homes reaching its lowest November tally since 1992, according to a housing report issued today.”

“The Warren Group said the single-family home median sale price fell 6.5 percent, decreasing to $315,000 in November from $337,000 in November 2005. Last month’s median is down more than 13 percent from the $364,000 peak registered in June 2005, and has now dropped in eight of the last nine months.”

“Condominium sales fell by 10.1 percent from November 2005. Statewide, the condominium median sale price dipped 1.8 percent to $269,900.”

“Through November this year, all 14 Massachusetts counties have seen single-family home sales decline. The declines were most pronounced in Nantucket County (29.6 percent) and Barnstable County (22 percent).”

“It was the Boston market’s worst year since the early-1990s housing bust. Reversing a spectacular run-up that made the Hub one of the nation’s most expensive housing markets, the median price last year for existing homes plunged 19.3 percent between the first and second quarters, according to Global Insight. That second-quarter decline was the biggest since 1991.”

“With the glut of suburban homes for sale nearing records, by October it took homeowners on average four months to sell a house. Boston condominium prices slipped 7 percent in the autumn quarter from a year earlier. Foreclosure filings soared as homeowners with adjustable-rate mortgages were hit with higher rates.”

“But prices haven’t fallen enough to ease economists’ warnings that exorbitant housing costs remain a huge drag on Massachusetts’ economic growth. ‘The worst drops are over,’ said Larissa Duzhansky, Global Insight’s economist. ‘Are we going to see every quarter lose? No we’re not, because Boston is still a desirable market.’”

The Boston Herald. “The once-hot condo market has cooled in Boston. City and business leaders are soul-searching about how to spark job growth in a still sluggish local economy.”

“Job growth has been a mixed bag, with Massachusetts, and its economic engine Boston, still recovering from the last recession. Overall, the state is still down 143,800 jobs from 2001. The one area Boston had seen strong growth in - housing - now appears to be cooling.”

“Outgoing City Hall development chief Mark Maloney recently boasted of the city’s big housing push - 17,000 new units since 2000. But even that accomplishment may be in trouble, with condo sales slowing downtown and developers of planned projects weighing whether to start building.”

“Dean Stratouly, the Boston tower developer, called Mayor Thomas M. Menino’s plan to form a City Hall sales group to market Boston to companies a step in the right direction. ‘It’s better late than never,’ Stratouly said. ‘When you have this…exodus from the city…it is horrible. It is a wake-up call.’”

The Worcester Business Journal. “Mark Fitzgibbon, CFA and director of research at Sandler O’Neill & Partners, LP, cites two significant headwinds that will affect the 2007 banking market. One is the yield curve. The second thing impacting the 2007 banking outlook is the slowing housing market, particularly in Massachusetts.”

“‘Credit qualifications will decrease from the current pristine level and credit costs will rise,’ he says. He expects credit quality to deteriorate in 2007, and that there will be more problem loans than we’ve seen historically. Some preliminary signs of this change were apparent in third quarter 2006, he says.”

“The region’s slowing housing market worries everyone from bankers to homebuyers. ‘There is speculation as to whether we’ve bottomed out,’ says Steve Groccia of Bay State Bank. ‘The time houses spend on the market has increased, which is driving prices down. Foreclosures are way up.’”

“Analyst Mark Fitzgibbon agrees that the housing market has slowed to a crawl, particularly in Massachusetts. ‘We are already seeing the impact of higher interest rates in the housing market,’ he says. ‘Some builders have gone bankrupt.’”

“Barnstable and Berkshire counties, with many second-home mortgages, showed the highest foreclosure rates in the Commonwealth in 2006, Fitzgibbons reports. ‘People tend to let their second home go first,’ he says. ‘This is consistent with prior cycles. The consumer appetite for debt has been satiated by mass home equity and principle residence refinancing.’”

“John Merrill of Sovereign Bank Massachusetts warns against interest-only mortgages. ‘Trying to afford mortgage payments is pretty challenging when rates go up,’ he says.”

“Mark Crandall of TD Banknorth suggests that the refinancing craze is over. Meanwhile, the refinancing craze brought out predatory lending practices, the effects of which we’re still seeing, he says.”

The Miami Herald reports from Florida. “From Plantation to Pinecrest, from Coral Springs to Coral Gables, the last few years have been boom times at city halls across South Florida. Thanks to the skyrocketing real estate market, city managers and commissioners have raked in hundreds of millions of dollars in new property-tax revenues.”

“Now, with the real estate market in the doldrums, officials are really going to have problems. ‘Are we worried about whether we’re going to have to raise taxes?’ Pembroke Pines Commissioner Angelo Castillo said. ‘You betcha.’”

“A rising real estate market basically allows officials to take in tons of money without having to increase the tax rate. ‘That’s the cheapest way to grow a government,’ said Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Va., which studies metropolitan growth and development. ‘It’s like found money.’”

“The trouble is, some cities made financial commitments during boom times that they may be hard-pressed to keep when times get tough.”

“‘You can’t ignore the fact that the real estate market is tanking,’ Hollywood Commissioner Peter Bober said. ‘And this is going to have implications for businesses, residents and municipalities. The way to react to that is to try to be more efficient.’”

“Without the homestead exemption, Pembroke Pines resident Douglas Gourley, who was a temporary Florida resident until he changed jobs this year, watched his tax bill rise 60 percent.”

“This year, Gourley’s tax bill was close to $12,500. A couple of years ago, it was less than $7,800. And that’s on top of the $6,000 a year he pays for homeowners insurance.” “So the prospect of rising tax rates is troubling for him. ‘When you get these kinds of increases, it really throws your financial planning into a tizzy,’ he said. ‘All these rising costs are putting burdens on people.’”

The News Press. “The slowdown in Southwest Florida’s housing market could have a positive impact on area road projects. Contractors who had more housing jobs than they could handle a year ago are now faced with residential developer layoffs.”

“At the same time, governments continue to struggle to build enough roads to catch up with that growth.”

“The Corkscrew project also brought in four new bidders. Don DeBerry, senior project manager with Lee Department of Transportation, said Corkscrew was the first job to have bids to come in after several major homebuilders shut down production. ‘They’re thinking it’s going to be two years before it comes back,’ DeBerry said.”

“Darin McMurray, regional VP for Lennar Family of Builders, said the housing slowdown has put people out of work. McMurray agreed now is the best time to get road projects under way.”

“‘This is really an opportunity to take advantage of a slow time,’ he said. ‘There’s not a problem with material. It’s sitting in the warehouses. There’s not a problem with workers. They’re standing in the street.’”

A housing report from the Washington Post. “Plenty of real estate agents note that winter can be a great time for sellers to unload houses and for buyers to find bargains. Sellers are also serious, a plus for buyers.”

“‘People who put their houses on the market in the second half of December or the first two weeks of January are usually doing so because there’s a real need,’ said David Kolakowski, a buyer(s) broker in Bethesda.”

“This year in particular, with slower home sales, the inventory has not dried up at all, agents said. In the District, for instance, the number of homes for sale was 31 percent higher in November than at the same time last year, according to a report released this week by Peter Clute, an agent in Georgetown.”

“‘The inventory will most likely come down a little bit in December, but it should still be high,’ Clute said. ‘There’s still four months’ worth of inventory out there.’”

“Marc and Gina Ciagne spotted a house in the District’s Chevy Chase neighborhood. They were eager to enroll their daughter Jalen in the neighborhood school for kindergarten. So they moved fast. They closed on the house in August and carried two mortgages. They decided not to list their old house on 16th Street NW until after Labor Day.”

“‘We were apprehensive about buying a new house before putting the old one on sale,’ Marc Ciagne said. ‘But we kept focusing on the school issue and that helped us justify and rationalize it.’”

“In the old neighborhood they would have paid private school tuition. By moving, the couple planned to save that money, apply it toward their mortgage payments, and hope for the best. In October, when they received an offer, they pushed to close in mid-November instead of mid-December, as the buyers wanted.”

“Here’s where consumer psychology kicked in. ‘We felt really lucky to get it done before the holidays,’ Marc Ciagne said. ‘We wanted to get it behind us before Thanksgiving. Psychologically, I felt I was going to get really tense if this had to drag on longer.’”

“Keeping a house on the market into the new year, after it has been listed for months, is often a huge mental drain for sellers, especially if they feel the market might slow further the longer they wait, several agents said.”

“Beth Armington decided to sell her Bethesda house in July. When a house two blocks away came on the market, she jumped on it. Meanwhile, her old house sat there. The market started to sour. Armington cut the $1.1 million asking price by $100,000 in mid-August and then another $100,000 six weeks later, without any immediate response.”

“‘Then about a month later came Thanksgiving and we had another open house’ — a rather crowded one, Armington said. Two potential buyers emerged. Last week, the house went under contract for $850,000.”

“She said, ‘It was the first offer I got and I didn’t think I’d get a better one before spring. I didn’t think prices would improve before spring and maybe not even then.’”

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