The Housing Bubble

The Sacramento Bee reports from California. “On a wintry weekday in California’s fastest-growing small city, Bryan Petersen steps from a sales office to discuss how eager home builders are to make any kind of deal with people like him.”

“‘They’re asking $453,000 and offering $60,000 in incentives,’ he says. He nods back toward the sales rep and grins. ‘And she said, ‘Make me an offer.’ I think you could get this probably for $375,000,’ says Petersen.”

“The nation’s largest publicly traded home builders overbuilt and then jostled for a shrinking share of area home buyers last year. They turned the boomtown suburb of Lincoln, population 39,000, into one of the Sacramento region’s most ruthless sales battlegrounds.”

“It’s no surprise in Lincoln to see advertised price cuts on new homes of $96,000, $103,000, $150,000, even $221,000.”

“The price-cutting battles reveal how pressures on big public companies to sell extra stock can also impact individual sellers and small-time speculators, even entire counties. Real estate experts blame Lincoln’s price wars for fueling a 55 percent drop in new home sales in Sutter and Yuba counties.”

“But the competition among big corporate builders has had a number of collateral effects. Speculators who missed the the window to ‘flip’ their investments now find them nearly impossible to sell. And the alluring discounts for new Lincoln homes have flattened sales to the north in Yuba and Sutter counties.”

“Builders in those two counties sold 811 homes in the first nine months of 2006, after selling 1,789 during the same time in 2005, according to consultant Greg Paquin.”

“Sacramento’s Protrades Connection ran as many as 100 tradespeople and laborers a day to local construction sites at this time last year. Now the demand has dwindled to 40 a day. ‘Construction is very down,’ said branch manager Jay Evans.”

“A survey of quarterly employment trends released Monday shows that caution flags are being raised across all industries as the new year starts. Nearly half of the 100 regional companies in the survey will not hire new employees in the first quarter of 2007. About one in 10 area companies anticipates layoffs during the period, the survey found.”

“By the end of 2006, with the housing slump worsening, Protrades radically changed direction from its emphasis on residential construction, focusing almost entirely on providing workers for commercial construction jobs. ‘If we continued in what was our bread and butter, we’d be looking at going out of business right now,’ Evans said.”

The Bakersfield Californian. “A housing development near Cal State Bakersfield is aimed at young, sophisticated customers with active lives. The company anticipates starting prices may be in the mid- to high-$200,000 range.”

“The company believes future buyers will include young people looking for their first homes or those who are ready to purchase home No. 2. The concept appeals to Isaac Ramos, 20.”

“‘I don’t think there’s something like that to appeal to the younger market. I think Bakersfield could use something like that,’ Ramos said. He’s about to close escrow on his first home, and he’s interested in buying more properties.”

The Orange County Register. “(Realtor) Steve Thomas in Aliso Viejo calculates it would take 7.51 months for buyers to gobble up all homes for sale at the sales pace at Dec. 28 vs. 6.88 months two weeks earlier BUT still way above 3.59 months a year ago.”

“Thomas notes: ‘The active inventory for Orange County continued to grow from the beginning of 2006 until it peaked at the end of August at 16,006 homes on the market. Since August, the inventory has dropped consistently to 11,879 homes today, 4,636 additional homes compared to last year at this time. I am EXTREMELY concerned about the potential for the inventory to grow to 16,000 homes in May and even 20,000 homes in August.’”

“We finish our eyeballing with Leslie Appleton-Young, chief economist for the California Association of Realtors trade group.”

“Us: How do you think O.C. will differ from the nation or state market? Leslie: Because of the greater-than-average inventory of unsold homes on the market, sellers in Orange County will need to be especially motivated and realistic if they are really interested in selling in today’s market. Only those homes that are priced to sell and are in excellent condition will sell quickly.”

“Us: What events might change your outlook, pro or con? Leslie: A recession or spike in mortgage rates is the most obvious negative scenario for housing.”

The Voice of San Diego. “The San Diego Daily Transcript ran a story pointing out that over 3,000 condo units are currently under construction downtown. Additionally, another 7,000 downtown units are either approved or proposed.”

“Friends in the industry tell me that once a building is under construction, the odds are high that it will be finished, which implies that most of those 3,000 units in progress actually will be built to completion.”

“At the moment, ZipRealty.com indicates that there are 505 dowtown resale condos listed for sale. The pace of recent downtown sales has been so weak that it would take almost a year just to burn through that existing inventory. It is into this already serious oversupply that a further 3,000 or so units will be released over the next two or three years.”

Independent Newspapers reports from Arizona. “Real estate experts have a mixed view on the future of the real estate market in the Southeast Valley. However all agree it is definitely a buyer’s market.”

“(Realtor) Ron Wilczek said in Mesa, the November home sales rate was $156 per-square foot, which was the lowest of the year for Mesa homes. ‘Let’s wait for what happens over the next one to two months to see if this is a significant trend,’ Mr. Wilczek said. ‘Lower sales and higher inventory have created a seven-month supply of homes.’”

“According to Mr. Wilczek’s figures for homes under $1 million and larger than 1,000 square feet, in November, 3,246 homes were on the market (and) 450 sold.”

“‘Buyers get the best news in Chandler,’ Mr. Wilczek said. ‘A $5 per-square-foot drop in November makes the year-to-date total a $14 decline, plus the number of sales has dropped every month this year. And days on market jumped 18 to a record 101 days.’ In November there were 2,298 homes for sale in Chandler and 306 sold, Mr. Wilczek said. The average home sold was 2,045 square feet at $342,923.”

“He noted smaller cities like Chandler, Gilbert and Queen Creek are suffering from too much inventory.”

“‘What’s hurting them is new home buyers are trying to get rid of their excess inventories. When the housing boom was really happening in 2004 and 2005, developers built all these homes. People were on waiting lists,’ Mr. Wilczek said. ‘Then the market slowed down and interest rates hiked and people backed out of contracts. Developers started offering reductions up to $100,000.’”

“Mr. Wilczek said Gilbert is the fastest growing city in the United States and with the number of houses for sale rising, buyers have more choices.”

“‘November’s sales saw the continuation of a year-long drop in price per-square-foot,’ Mr. Wilczek said. ‘At $162, November’s price is $15 less than in March. Sales continue to decrease and the city has almost a ninth-month supply of homes on the market. The number of homes for sale is going down, perhaps signifying some seller’s dissatisfaction with long market times and dropping prices.’”

“Mr. Wilczek said a rise in Queen Creek home prices in October was probably a fluke. ‘November’s figures show another decline to $124 per-square foot. Queen Creek’s losses have totaled $27 February to October,’ Mr. Wilczek said. ‘This means homes lost about $56,700 in value. The resale market here is still getting beat by new home builders who are slashing prices and giving huge incentives to lower their inventories.’”

“According to Mr. Wilczek, in November there were 1,834 homes for sale in Queen Creek and 169 homes sold.”

“Mr. Wilczek said as far as projections are concerned, the market can generally go two ways this year. ‘A lot of it depends on whether sellers panic or hold firm. Once a seller decides to sell at a greatly reduced price and a few neighbors do the same, they set a trend and change the price of the community,’ Mr. Wilczek said.”

“Mr. Wilczek said he believes many people panicked and unnecessarily rushed to sell their houses when the market started changing last year, thinking they would get the best deal if they sold quickly, which contributed to high inventory. ‘When inventory is back down again, things will be fine,’ Mr. Wilczek said. ‘But if the opposite happens, they won’t.’”

The Lahontan Valley News from Nevada. “Average home prices in Churchill County are starting a downward trend while the numbers of homes sold this year is lower than those of last year.”

“Figures released by Bob Getto, local Realtor and trustee for the Northern Nevada region of the MLS, show the median sales price for homes have dropped from a high of $271,200 in January to $208,200 in November, a $63,000 decrease.”

“The data shows median sales price of local homes has rocketed from $128,000 in the first quarter of 2004 to $238,000 in the second quarter of 2006. While it’s hard to predict future homes prices, ‘my gut feeling is they’ll come down. It needs to come down,’ he said.”

“Broker Kim McCreary theorized that national builders who came to Northern Nevada, builders who ‘tear down a mountain and build houses,’ drove up the price of dirt and overfilled the market with houses.”

“‘The market is a little tougher, but it probably needed to happen,’ McCreary said.”

“Realtor Diane Lowery said developments with standing inventory are doing better than those without readily available homes. ‘We’re not seeing people come in who want to wait five months for a home to be built,’ she said, adding that the situation was different two years ago when people were clamoring to buy homes.”

“‘There’s very few new families,’ Getto said. ‘To meet the average sale price, you’ve gotta have a good job. Jobs are the key - we need good paying jobs.’”

The Statesman reports from Texas. “Builders started construction on a record number of homes in Central Texas in 2006 but slowed the pace as the year drew to a close as inventories rose slightly, new figures show. Builders started 16,743 homes last year, a 10 percent increase from 2005, according to Residential Strategies.”

“But the supply of new, unsold homes also climbed to a record level, prompting builders to start 10 percent fewer homes in the last three months of 2006 than the year-earlier period. ‘While the Austin housing market remains robust, it has not been immune to some of the negative forces that have shaped the national housing picture,’ RS partner Mark Sprague said.”

“Ted Wilson, a partner in the Dallas office, said builders ended up with more unsold homes as the cancellation rate on pending contracts edged up in 2006. Nationally, the cancellation rate climbed from 25 percent to 35 percent during the past year, Wilson said, and the Austin area experienced a similar increase.”

“Buyers are canceling contracts for various reasons. Weak credit is to blame for some cancellations for entry-level homes, and some contracts for higher-priced homes are being canceled by relocation buyers having difficulty selling their homes in slower markets elsewhere. About 2,900 new homes sat on the market in Central Texas in December.”

“The oversupply ‘will prompt many of the builders to offer deeper discounts and incentives,’ Sprague said.”

“Eldon Rude, director of the Austin office of Metrostudy, thinks the large publicly traded builders, which have been looking to other divisions, including Texas, to be more profitable as markets have slowed elsewhere, will build fewer speculative homes in 2007 to bolster profit margins. He also expects the Austin market to attract fewer investor buyers than it did in the past year or two.”

“Rude also expects fewer people to move to Austin this year than last. ‘This is especially true of the people that were relocating to the Austin area over the last two years or so without jobs, taking advantage of the huge increases in the values of their homes in other states,’ Rude said.”

“Travis County home foreclosure postings for the first month of 2007 will rise slightly in today’s auction, to 300 from 295 in December, according to a report. Compared with 278 postings in January 2006, however, foreclosures will be up 8 percent.”

“Many of the upcoming residential foreclosure auctions ‘had an upside-down loan-to-value ratio,’ said George Roddy, president of the firm that tracks foreclosures. ‘Simply put, the homeowner has borrowed more money on the home than it is worth,’ he said. ‘So, generally, the homeowner cannot sell the property for the amount that he or she owes on it, and the lender has invested or loaned more than the property is worth. This creates a no-win situation.’”

“The highest percentage of upside-down postings in the Austin area for January will be in Bastrop County. 30 percent of the postings filed for January are upside-down. Upside-down postings make up 21 percent of the notices filed in Travis County, 21 percent in Williamson County and 23 percent in Hays County.”

“Of the 20 counties tracked in North and Central Texas, Travis ranked sixth in total commercial and residential postings for 2006, with 3,713. Leading the state was Dallas County, with 19,184 postings, followed by Tarrant, 12,763; Bexar, 8,837; Collin, 4,477; and Denton, 4,181. Williamson County, with 2,435 postings, ranked seventh, just behind Travis.”

The Express News. “As the housing market cooled in much of the country, investors swarmed into San Antonio in 2006. Some real estate agents said out-of-state investors, mostly from California, Arizona and Florida, accounted for half their clients.”

“But that wave of investors meant the rental market for single-family homes also got flooded. The average rent dropped $202 a month since 2005, from $1,301 to $1,099, according to the San Antonio Board of Realtors.”

“By the end of October, renters had their pick of more than 2,000 homes. More than 10,650 homes went on the rental market in the first 10 months of the year, 22 percent more homes than last year.”

“Since 2001, the number of sales for homes priced above $300,000 has jumped 115 percent, according to data from the Texas A&M Real Estate Center. Meanwhile, homes that cost $100,000 or less became increasingly scarce in San Antonio.”

“Ten years ago, more than 66 percent of the existing homes sold were priced under $100,000. By late 2006, that market share had plummeted to 26 percent.”

“There were signs by the end of the year that San Antonio’s real estate market might be returning to a more normal cycle. As of the last day of November, the number of homes on the market swelled to more than 9,000.”

“One side effect of a healthy housing market and easy lending requirements is a lot of foreclosures. The high number of San Antonio foreclosures in 2006 was reminiscent of the late 1980s when oil busted and the city’s real estate market crashed.”

“But this time around home prices were climbing in neighborhoods across San Antonio. So what happened? Lenders made riskier loans, including many that required no money down, said Jim Gaines, a research economist with Texas A&M University.”

“That caused some families to get in over their heads. ‘The biggest problem with all of that is if you buy a house with no equity in it, you don’t feel like you have a lot to lose,’ Gaines said. ‘It’s easier to walk away from.’”

“In 1996, 3,894 Bexar County homes went into foreclosure. This year, 8,837 homes did.”

Some housing bubble reports from Wall Street and Washington. “In another sign the housing recovery may still be on hold, Lennar Corp. said Tuesday it anticipates posting a fourth-quarter loss on a tough market and land charges. It anticipates quarterly charges in the range of $400 million to $500 million as a result of real estate valuation adjustments and land options it’s walking away from.”

“‘Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery,’ said CEO Stuart Miller.”

“The company said although deliveries increased in 2006, it saw ‘materially lower’ gross margins on home sales ‘as a result of deteriorating market conditions in the home-building industry.’”

“‘We have continued to focus on strengthening our balance sheet by delivering our backlog, selling inventory aggressively and renegotiating our land positions,’ Miller added.”

The New York Times. “Five years ago, the United States economy went through a recession that did virtually no damage to the housing market. In 2007, the question is whether the economy can emerge unscathed from a housing recession.”

“In the bond market, however, the outlook was cloudy at best. Prices in the futures market showed that investors expected that the next move by the Federal Reserve would be to reduce the interest rate it has raised 17 times since mid-2004. That indicates worry about a slowing economy. And another traditional indicator, the yield curve, says the same thing.”

“So the stock market says a boom is here and is going to stay, housing notwithstanding. And the bond market expects a recession — but one that does not damage those who are financially stretched before it begins.”

“‘We think of markets as forecasters,’ said economist Robert J. Barbera. ‘But it is very hard to come up with a model’ that makes sense of the current forecasts.”

“With prices falling in some regions, home builders reported a surge of cancellations of purchase contracts. Housing starts plunged, and although starts showed a reassuring increase in November, newly issued permits to build new homes continued to decline.”

“Oddly enough, rising home sales could be a bad sign in 2007, particularly if prices continue to sag. A surge in sales of existing homes could be an indication that people were being forced to sell.”

From MarketWatch. “Brian Diez entered the mortgage business after a career as a stockbroker, figuring the field would offer him an altruistic benefit, helping families buy their first homes. He learned quickly, however, that not every one of his fellow brokers had their clients’ best interests at heart.”

“‘What became clear to me is every company was really interested in selling as many loans as they can, and not really helping clients,’ said Diez, sales manager in Oceanside, N.Y.’

“The ‘dirty tricks’ he has seen and heard of range from brokers steering clients into products clearly unsuited for them to shady switcheroos at the closing table.”

The Center for Economic and Policy Research. “The big question for the U.S. economy now is whether we will make it through 2007 without a recession. Most of the top economic forecasters are predicting a ’soft landing,’ which means the economy will slow but not so sharply as to cause a recession.”

“But almost all of these same experts failed to forecast the last recession, and they missed the stock market bubble, the largest financial asset bubble in history. And most of them also missed the housing bubble until it began to burst.”

“As this housing wealth disappears, people cut spending. We have already seen an enormous drop in the amount that people borrow on their homes, from $600 billion in 2005 to about $350 billion for 2006.”

“We could possibly get through the international imbalances for another year but the housing bubble collapse is already upon us, with November’s housing starts down 25 percent over the past year, home sales plummeting, and home prices falling.”

“This is something that our political leaders and policy-makers should have warned people about, rather than encouraging the same kind of speculative excess that dominated our economy during the late 1990s stock market bubble.”

A report from the Washington Post. “Nineteen states and the District of Columbia have moved quickly to warn state-regulated lenders about the hazards to consumers from nontraditional mortgages. Tens of thousands of state-licensed lenders and mortgage brokers are affected by the advisories, also known as a ‘guidance.’”

“Such loans include interest-only mortgages and other arrangements where the borrower cuts monthly costs by paying back less than full interest and principal. Federal banking regulators issued a sternly worded advisory in late September. Within 24 hours of the federal guidance’s release, six states had issued similar warnings to their own lenders, a notable flurry of activity in a field known for its slow-moving bureaucracies.”

“‘They were ready for this; they wanted it,’ said Mike Stevens, of State Bank Supervisors, who said it was the fastest state-by-state regulatory rollout he had ever seen. ‘We had a national need to do this.’”

“In the District, the guidance covers about 1,200 licensed mortgage brokers and lenders. It was adopted Dec. 5. ‘We see a need to protect consumers who were not too savvy,’ said Lily Qi, a spokeswoman for the D.C. Department of Insurance, Securities and Banking. ‘They didn’t understand what they signed when they signed on the bottom line. Some companies can be very aggressive in their marketing, and it can be misleading.’”

“Edward Joseph Face, Virginia’s commissioner of financial institutions, said he was hopeful the state corporation commission would decide on some version of it within the next month.”

“‘I don’t think we’ve ever seen this many adjustable interest-only loans on the books in all of history,’ Face said. ‘I am concerned. There are so many out there, and when the rates start adjusting, it’s not clear that borrowers will have prepared themselves.’”

“In 2003, just 10.6 percent of new loans tracked by First American LoanPerformance, were nontraditional mortgages, but during the first nine months of 2006, about 34.1 percent of all borrowers used these loans to buy or refinance homes. In the Washington area, about 47.7 percent of loans originated in 2006 were nontraditional, compared with 10.7 percent in 2003.”

“Many economists now say the surge in these loans contributed to the real estate boom of the last few years. Regions that had the highest rates of nontraditional lending were also those areas where housing prices rose most quickly.”

The Baltimore Sun. “State assessment notices mailed to 661,000 Maryland property owners show another huge jump in home values despite talk of a flat housing market.”

“In Maryland, properties are reassessed every three years and the change in value is phased in. ‘We’re following the market and looking at values three years old,’ said C. John Sullivan, director of the Maryland Department of Assessments and Taxation.”

“Tom Ballentine, government affairs director for the Maryland Association of Homebuilders, said the slowdown and rising construction costs are hurting some builders. ‘There’s some hope this market will reach its bottom and begin to improve in the second half of 2007,’ he said.”

“Ilene Kessler, president of the Maryland Association of Realtors, said areas around Ocean City are overbuilt, with at least a year’s inventory on the market and concerns about storms driving prices down. ‘Now that the dust has cleared, affordability is more of a factor all over the state,’ Kessler said.”

“Recently, the biggest companies in the homeowners insurance business announced that they will stop writing new policies in some coastal areas of the mid-Atlantic and will otherwise limit coverage there. They have already reduced their coverage in states more prone to hurricanes.”

“Some real estate agents say they expect the situation will make it harder to sell second homes and investment properties on the waterfront. ‘We’ve already been experiencing problems since last year getting insurance for second-home buyers and the investment class, said Schuyler Benson, an owner of a brokerage on Maryland’s Eastern Shore. Some people, he said, are deciding not to buy.”

“Allstate told regulators in Maryland this month that beginning in February it would no longer sell new property insurance in all or part of 11 counties that are on or near water, mostly on the Chesapeake Bay and its tributaries. (Affected are Calvert, Dorchester, Somerset, St. Mary’s, Talbot, Wicomico and Worcester counties and parts of Anne Arundel, Charles, Prince George’s and Queen Anne’s counties.)”

“Allstate also will no longer write new homeowners policies in 19 coastal counties of Virginia, said regional corporate relations manager Debbie Pickford. And in the coast-hugging states of Delaware, New Jersey and Connecticut, the company will not write new business no matter where the property is.”

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