The Housing Bubble

The Times Herald reports from California. “If you’re looking to buy a house in Solano County, now may be the best time, a home-building industry spokesman said Friday. The California Building Association’s Charlie Carson said the first part of 2007 will be much like 2006, with building starts down and the prices of existing homes modestly ‘correcting,’ downward.”

“Part of the reason building starts are down, Carson said, is that home builders are still working on selling their existing inventories. ‘Also,’ he added, ‘There is an unprecedented supply of resale homes on the market,’ right now.”

From the Signal. “Although a dropping real estate market has been troubling, 2007 could be the year where the housing market in Santa Clarita bounces back from what became a major slump. Last year, housing inventory increased dramatically in the Santa Clarita Valley, and although there were sales, there was a 25 percent to 40 percent drop from the surge of sales in 2005.”

“‘We’ll have pockets of negativity happening during the year,’ Larry Mankin, executive director of the Santa Clarita Valley Chamber of Commerce, said of 2007.”

The Appeal Democrat. “Home construction in Yuba-Sutter was down but not out last year. The building fever of a few years ago has turned into a chill as the number of building permits pulled in 2006 dropped sharply. ‘It’s definitely dropped,’ said Aaron Busch, Community Development director for Yuba City. ‘But you see reports that everyone else is experiencing the same slump.’”

“Building departments in both areas issued fewer building permits in 2006 from the previous year. Yuba City was down 71 percent. Yuba County, not including Wheatland, dropped 42 percent.”

“The area’s homes have to be priced right in order to make it worth the commute to jobs in Sacramento. ‘As Sacramento drops, Yuba City has to drop too,’ said Darin Gale, legislative advocate for the North State Building Industry Association.”

The North County Times. “A network of scam artists convinced unwitting investors to buy houses using questionable loans and then backed out, leaving the investors on the hook for as much as $5 million apiece, according to a lawsuit filed Friday in Riverside County Superior Court.”

“Temecula attorney Richard Ackerman filed the suit on behalf of an anonymous client, who he said was duped into buying five houses in and around Murrieta in early 2005.”

“According to the suit, the anonymous plaintiff is stuck with 10 loans and payment obligations of more than $20,000 a month, far beyond her ability to pay. All told, the alleged scheme involved as many as 400 investors and an estimated $1.2 billion of property, Ackerman alleged in the complaint.”

“The cash from each new round of loans was used to cover the regular mortgage and tax payments on the last round, giving the arrangement the form of a classic ‘pyramid’ scam, Ackerman said.”

“A San Diego financial adviser said three of her own clients were involved in the operation. Including investors known to the adviser, to Ackerman and to attorney Ashley Abano, the alleged scam took in at least a dozen investors with two to three dozen properties.”

“‘The total number of loans affected is likely in the hundreds, if not thousands, within the Temecula/Murrieta area,’ the complaint filed Friday alleges.”

“The alleged scam could levy a big blow to local real estate values, according to Ackerman and one prominent real-estate agent. Large numbers of empty, foreclosed homes in a neighborhood can make it difficult for the banks to sell them for close to the amount of the mortgages they issued. The empty homes for sale can also force other sellers to slash their prices.”

“Ackerman estimated that renters occupied half or more of the investment properties, but said they were not paying nearly enough to cover the mortgage payments.”

“Rising numbers of foreclosures last year have already begun to undercut the market, economists, analysts and real estate agents have said.”

The Merced Sun Star. “In the summer of 2005, a four- bedroom house at 3812 Avocet Drive in North Merced enjoyed the peak of its real estate career when it sold for $425,000 to buyers from Tracy. This week, 3812 Avocet Drive fell back to earth. The city put a lien on the property because its owners, who apparently never moved into the house, failed to maintain it.”

“The house’s rise and fall illustrates a problem that city code enforcement officers say is becoming more common: Houses that out-of-town investors bought during the real estate boom now stand empty, racking up complaints from neighbors.”

“‘We’re seeing a lot more of that and we will probably see more with the foreclosures that are going on,’ said Code Enforcement Specialist Roberta Medina.”

“‘It’s increasingly common to get calls about ‘beautiful brand new homes that have never been lived in,’ said Code Enforcement Specialist Kelly Roseman. ‘And good luck trying to find an owner,’ she added.”

“In the case of the Avocet Drive house, neighbors say they never saw anyone live in the house after it sold in July 2005. The previous owners bought the house new in 1997 for $119,000 according to public records (and) kept a tidy lawn, said neighbor Nancy Walker. After the original owners left, Walker watched as the grass grew taller and the flowers died.”

“Code Enforcement Specialist Greg McSwain said the new houses standing empty remind him of Los Banos, which attracted its own building boom in the 1960s when the San Luis Reservoir dam was built. Speculators built houses that stood empty for 10 or 12 years, McSwain said.”

“‘Many years later, I’m seeing the same type of thing in Merced,’ he said.”

“Last summer, he responded to complaints about nine separate houses in the new Dunmore Homes subdivision in North Merced. Today the situation doesn’t seem to have changed much. While some of the houses in the neighborhood are clearly occupied and others have for sale signs in the yards, many show no signs of life.”

“Dark windows without curtains watch over empty driveways. ‘It’s surprising to see a property in that type of a neighborhood slide that fast,’ McSwain said.”

“Empty houses also can lead to more serious problems, Medina said. A house on Cormorant Drive that sold for $440,000 in 2005 became a hangout for teenagers after it fell into foreclosure and the owners left, Medina said.”

“‘When a home gets into the condition that the one on Avocet Drive is in, that can really start a downward slide that we don’t want to have happen here,’ said City Councilman Jim Sanders. ‘What happens next is that if that isn’t taken care of, people break into the homes, the crime rates go up.’”

Readers suggested various costs that need to come out of home prices. “What ‘premiums’ need to pop out of the price froth in order to restore affordability? Here is a partial list:”

“1. Appraisal fraud premium (needed, for instance, to pay for builder incentives plus the current market value of a new home out of loan proceeds, or cash-back deals, etc.)”

“2. Subprime premium (due to money loaned on very loose terms — e.g. no money down w/ backloaded debt repayment schedule — to those who will be unable to repay it).”

“3. Irrational exuberance premium (due to buyers who truly believed real 10%+ YOY home equity gains forever were a realistic possibility).”

“4. Flipper squeeze premium (due to flipper encroachment into segments of the housing market, like SFRs, which were traditionally far less commonly used as investment vehicles).”

“5. Move-up premium (buyers from other locales throwing massive amounts of recent home equity gains into a supersized down payment).”

“6. McMansion incentive premium (comps reflect the market value of new McMansions + cars, vacations or cash back deals which are included in the purchase price and financed on the mortgage loan).”

Another added, “7. ‘Dead Man Walking’ premium (property sits because owner insists on a price which gives them a profit {or, these days, which leaves them above water})?” One said, “Commodity and labor premium (abnoramlly high lumber, copper, and labor prices (etc…) due to irrational housing demand (new houses and home improvements).”

The Washington Post. “Knowing what is really hot, vs. what used to be hot but has gone cold, is key to understanding the real estate market today, real estate agents say. The National Association of Realtors recently reported that there are 3.82 million existing homes for sale in the country, more than double the number of unsold homes on the market in early 2001, before the real estate boom began.”

“‘When people have more choices, they become pickier,’ said Melinda Estridge, a real estate agent (in) Bethesda.”

“Will those gleaming stainless appliances help sell your home? How about that spiral staircase? Spiral staircases, are definitely out, the agents said.”

“Some relatively new features, things that were hot just a few years ago, are starting to feel dated, or are actually inciting a negative backlash at least among some buyers.”

“Stainless steel appliances, for example, now draw criticism because some models are hard to keep smudge-free. Glass-front cabinets lose their appeal to some neatness-challenged homeowners who have trouble keeping their dishes arrayed in tidy rows.”

“Some real estate agents say vessel-style sinks, the sleek bowl-shaped, above-counter bathroom sinks, are falling from fashion because they, too, are hard to keep clean.”

“Jane Fairweather, an agent in Bethesda, and many of the real estate agents surveyed, aren’t too keen these days on those cool-looking bowl-style sinks. Water can splash out on the floor, leaving the owner mopping up over and over, particularly during parties when they are getting a lot of use. Several of Fairweather’s clients have ripped out their vessel sinks and replaced them with standard cabinets.”

“‘These fancy sinks are great, wonderful, but when it comes to utility, where do you put the toilet paper and the things you don’t want people to see?,’ said Mark Gude, an agent in Northwest Washington, who specializes in the D.C. market. ‘Bowl sinks are on the way out. Shaving in them is not fun — the gunk, the soap scum, gets everywhere.’”

“Fairweather (said) bamboo, with its variegated honey tones and unique grain patterns — is losing popularity in single-family houses. The problem? They just aren’t as durable as some other kinds of floors.”

“‘People see them as a wonderful new thing, but their day-to-day utility is less than hardwood,’ Fairweather said. ‘They’re not as sturdy, they’re much softer than hardwoods, and if you’re raising children, they’re not so good.’”

“Ginger Harden, a real estate agent in Vienna, said a buyer who was purchasing an almost-new condo in Reston loved the beautiful bamboo floors. When the transaction closed and the seller’s furniture was removed, though, it became apparent that the flooring had faded with exposure to the sun.”

“‘You could see where every piece of furniture had been,’ Harden said. “It was a negative to my buyer.’”

“Stainless steel kitchen appliances, not too long ago a must for any kitchen that wanted to be considered luxe, are beginning to get mixed reviews. The real estate agents gave them a thumbs-down, saying that many buyers were irritated by the need to wipe down the steel all the time to conceal fingerprints. Real estate broker Mark Nash acknowledges that builders say they help sell houses, but said some buyers who own them have gotten irritated by the upkeep.”

“‘I’m hearing people say, ‘I’m tired of it,’ Nash said. ‘They say: ‘I don’t have time to polish it. I have kids. I have dogs. It’s too high maintenance.’”

“So what are the new basics? ‘You want something that in 10 years will still be desirable,’ says Theo Thompson, who had a house built for himself a year ago in Vienna. ‘You want something that in 10 years will still be desirable,’ Thompson said. ‘There are some trendy things that are kind of cool, but look at the houses that were built in the 1980s and 1990s — people think they need to redo the whole thing now.’”

The Seattle Post Intelligencer reports from Washington. “For the sixth month in a row, Seattle had more homes on the market, fewer sales and higher prices than the previous year, according to new statistics for December.”

“But the median house price of $420,000 was down from the previous month for the third time in the past five months, bringing it back to July’s level, according to numbers the Northwest MLS released Friday. ‘It’s more of the same,’ said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.”

“Prices on comparable homes, particularly in higher ranges, are going down, but people are taking advantage of that to buy more than they could have otherwise, Crellin said.”

“Michael Simonsen, CEO of Altos Research, in Palo Alto, Calif., has noticed cooling in the Seattle home market. ‘Any comparison with last year is down in terms of demand and numbers of sales,’ he said.”

” Median prices have not dropped with the changes in inventory and sales because only the good houses are selling, Simonsen said. ‘The lousier properties, they’re either going off the market or they’re just sitting around for a long time.’”

“Simonsen said 36 percent of properties currently on the market have had their prices reduced, relatively high, but lower than reductions of more than 40 percent seen in many San Francisco Bay Area markets. ‘While we see some positive things to keep the bottom falling out, we don’t see any big catalyst that will let prices jump upwards,’ he said.”

“Price cuts might not reassure already skittish buyers, Simonsen said. ‘I kind of think that people are attuned enough to the bubble headlines that if we see year-to-year price declines that might even scare people.’”

“Lucia Riva, who bought a townhouse in Ballard last month, said she wasn’t worried about price declines. ‘You don’t want to buy at the height of the market,’ she said. ‘Properties are taking longer to sell, but they’re not on the market for months and months and months and months if they’re appropriately priced.’”

The Mail Tribune from Oregon. “Existing home sales remain slow and prices have dipped slightly (in) Jackson County. While the number of new houses has fallen 42 percent, the demand for ‘pre-sold’ high-end housing has kept builders busy.”

“‘My understanding is that speculation houses aren’t moving well and we don’t build those,’ said contractor Larry Denn.”

“‘Builders and developers have taken the hard hits and price adjustments. The reductions have been made and if people are going to get in, there is really is no better time than now,’ said George Gardner of Diamond Key Builders.”

“Median pricing for existing homes in Jackson County dropped 5.4 percent to $264,900 for the rolling quarter that ended Dec. 31. Eagle Point, Shady Cove and Talent saw the biggest declines.”

“December’s median price was $259,900, down from $285,000 a year earlier.”

“‘Most of us are waiting for the glut of inventory to get consumed to a level to where we’re closer to the long-term standard in the marketplace,’ Gardner said.”

A housing report from the Arizona Republic. “Mark Wray’s Glendale home has been on the market for almost a year. Andy and Jill Leebrick of north Phoenix put their ‘for sale’ sign up nearly five months ago. After more than a year, Charley and Gerda Zenith finally are poised to sell their home in Cave Creek.”

“It has been difficult for some sellers to adjust to the market realities and reduce prices. Real estate agents point to these key reasons for slow sales: Sellers are holding out for boom prices. There are so many houses that buyers can be picky. Single-family resale inventory stood at more than 42,000 in November 2006. Using November figures, that compares with nearly 23,500 in 2005, and almost 9,400 in 2004.”

“The Zeniths changed agents after seeing too many ‘looky loos’ going through the house, poor communication and worries their price was off the mark. ‘Time went by, the nibbles weren’t there,’ Charley said. ‘I asked the Realtor, ‘Maybe we’re overpriced?’ She said, ‘Oh, no, no, no.’ We saw houses selling. Ours wasn’t moving and you get concerned.’”

“Original listing: $1.8 million. Now under contract for a little more than $1 million. Days on market: More than 500. Their previous agent brought them an offer of $1.45 million but advised the couple to make a counteroffer. They did, at about a $500,000 higher. The buyers walked. Now, the couple wish they had accepted the offer.”

“‘It was an iffy situation,’ Charley said. ‘Looking back, maybe we should have done something.’”

“Frank and Brenda Bijak in Cave Creek. Original listing: $771,000. Latest listing: $698,000. Days on the market: About 130. They are selling the house themselves and listed it when they built another one nearby. Frank says the couple priced it in the high range for their area because they just wanted to generate some traffic but not necessarily sell too soon before the new house was being built.”

“Now, they’re in the new house and there’s more urgency to sell the old one so they can stop paying two mortgages. They made upgrades to lure buyers. One agent brought the couple an offer of $695,000, with the stipulations that the deal include the couple’s refrigerator, a home warranty and a two-week move-in time. The offer also required them to pay closing costs of up to 4 percent, or nearly $28,000.”

“‘I said, ‘I’m not paying any closing costs until I find out the dollar amount,’ but their Realtor couldn’t give me an amount and I wasn’t going to write an open-ended check.’ Frank said. ‘You scratch your head and say, ‘I know it’s Christmas but I’m not Santa Claus.’”

“The deal also would have included the 3 percent fee to the buyer’s agent, nearly $21,000. And the buyer’s agent wanted an answer in four hours.”

“He said people should not expect a quick sale. ‘It’s a lot about expectations. If you think you are going put a house on market and sell it in 30 days, you are going to get a rude wake-up call.’”

“They expect the market to pick up now that the holidays are over. If not, they may consider hiring an agent or renting the house.”

“Mark Wray in Glendale. Original listing: $465,000. Latest listing: $420,000. Days on the market: About 300. Wray moved down the street and would like to sell the house. When he listed it, he was confident it would sell quickly but that didn’t happen. ‘We were coming off a dynamite year,’ he said. ‘I thought it would take maybe a month or a month and a half to sell.’”

“He initially signed with a limited-service company that got the house on the multiple listing service. Then he tried selling the home himself. He held his own open houses. But there were no offers. He quickly learned a fundamental fact about the Phoenix housing market: Builders have a glut of unsold homes and are offering heavy discounts to sell them.”

“Sellers like Wray who have new subdivisions nearby compete not only in a resale market that has more than 42,000 homes but also with the financial firepower of big public companies worth billions that are pushing to clear inventory.”

“‘I get probably a brochure once a week from the home builders around the corner and they have up to $60,000 incentives,’ Wray said. ‘How can the general person compete with that? That’s crazy.’”

“He knocked $45,000 off the price. A lowball buyer offered $365,000. Wray said he’d think about it and call back. He did, with a higher counteroffer that was rejected.”

“But the buyer kept shopping in the neighborhood and eventually bought for around $375,000. That knocked down the neighborhood comparable price level. There were also several liquidations at $370,000 to $390,000.”

“Even still, he’s holding to his price. ‘I would love to have it sold,’ Wray said. ‘I’m still making monthly payments on the darn thing and not living in it. I’m going to keep pushing on,’ Wray said. ‘If worse comes to worse, I can rent it out or lower it further and just get rid of it.’”

“Andy and Jill Leebrick in north Phoenix. Original listing: $714,999. Latest listing: $645,000. Days on the market: About 130. The couple moved to the Tramanto community a couple of years ago, expecting to take advantage of the rising market. Now, they have another house under construction and expect to close soon. If they don’t sell, they’ll have two mortgages and they need money from the old house to finance the new one.”

“They knew their listing price was in the top third of houses in that area and also knew the market had slowed. ‘But I was optimistic the price we had at that time was competitive enough to sell it in the time frame,’ Andy said.”

“But a price cut was in order as the market languished, and the couple wanted to make it a dramatic one. So they got creative. The Leebricks went to their builder with a proposition: They would cut the price of their old home by $70,000 if the builder would knock half of that amount off of their new house. The builder agreed, and threw in an extra $7,500 reduction in price and $5,000 in free upgrades.”

“‘I was more than willing to make an adjustment but when that was recommended to us, that shocked me,’ Andy said. ‘I didn’t buy into that price because I thought it was too deep.’”

“It made them rethink whether they would get enough from the old house to buy the new one. At one point, they talked about having to get out of the contract, which would have cost them $27,500.”

“‘For us, that is a lot of money,’ he said. ‘Actually, the possibility still exists today. If we don’t get a buyer we still face the possibility of having to back out and lose that money. I think about it every day.’”

“‘We have open houses three Saturdays in a row in and around Thanksgiving,’ Andy said. They will consider upgrades if the deal doesn’t materialize quickly. ‘My palms are starting to sweat,’ Andy said. ‘We have to get something done soon.’”

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