The Housing Bubble

The Tracy Press reports from California. “City statistics show that new home construction in Tracy has plummeted. Construction has also slowed down in neighboring Lathrop, and sales of existing homes dropped sharply in the south county in 2006. ‘In general, there is an abundance of homes on the resale market and a number of new homes that have been sitting on the market,’ said Ken Brown of Kencor Development of Stockton and president of the Building Industry Association of the Delta.”

“‘Over the last three months, you’ve seen that inventory (of new homes) go away, mainly because of the concessions given.’ He said that many builders, worried that new homes would sit unoccupied for too long, have reduced prices and offered other incentives to attract buyers. ‘You’re seeing a flattening of the pricing for sure,’ he said.”

“The Central Valley Association of Realtors reported 1,788 existing houses sold in Banta, Tracy and Mountain House by late December. It’s about half as many as in 2005, and the median price of a home dropped from $580,000 in the second half of 2005 to $530,000 in the second half of 2006.”

“In Ripon, prices have dropped about $100,000 from the same time last year, from $546,000 to $450,000.”

“Marge Imfeld, a board member with the Central Valley Association of Realtors said she sees this as a much-needed correction in the market and expressed relief that prices have leveled off. ‘If you look at the previous three years, 30 to 40 percent increases in property values in a year is excessive,’ she said.”

The Daily Independent. “The Ridgecrest Area Association of Realtors selected Dru Hawkins Realtor of the Year. ‘We have seen reductions in some of the homes here that were overpriced,’ Hawkins said. Often, he said, the appraised value of a home and what the owner wants out of it are two different things. Overall, the market (is) forcing people to be more realistic and to price homes more correctly.”

The Union Tribune. “A 280-unit Oceanside condominium complex from one of the county’s most prolific condo converters has been taken over by its largest lender.”

“Developer Maisel-Presley agreed to hand the keys to the River Oaks project over to Bank of America last month after the bank initiated a foreclosure proceeding, according to court records. The bank is owed about $35 million.”

“The lingering slowdown in the housing market both in San Diego and nationwide has put increasing pressure on some condo converters, real estate experts say. With home sales down significantly in the past year, there is now a glut of conversion units on the market. As of November, 115 conversion projects were actively selling in the county, with 5,987 units remaining to be sold in current and future phases, according to The Sullivan Group.”

“‘That’s almost a two-year supply,’ said Peter Dennehy, a VP with The Sullivan Group.”

“Maisel-Presley has another project in default, although it hasn’t been foreclosed upon yet. Beacon Hill, a small project on Kansas Street in University Heights, is behind on a $3.3 million loan from Southwest Community Bank.”

“Maisel-Presley lists the project as an ‘investor special,’ with studio units starting at $99,674. Unlike most condo conversions, units in this project have not been upgraded with granite countertops and new appliances.”

The Voice of San Diego. “National City is sandwiched between two areas that saw skyrocketing production and soaring prices for several years at the beginning of the decade. But that boom is, by most accounts, over. Demand for new housing isn’t what it was a few years ago. And still, more than 4,000 new condo units are slated for the community.”

“Kirk Verner an Imperial Beach resident, and Joseph Knight from Chula Vista, say they’d be surprised if the development happens anytime soon. ‘You know, in the back of [the developers'] minds, they’re thinking, ‘This is not the right place and it’s not the right time,’ Verner said.”

“‘I can’t justify high-rise condos without a sustainable local economy,’ he continued. ‘The car business has been National City’s backbone for a long time, and they want to get rid of a bunch of it.’”

“Verner said he’s worked in National City for more than 15 years and, in that time, has seen it change to a place most people go just for work, not to live. ‘From [Interstate] 15 down, the money’s not here anymore,’ Verner said. ‘[The residents] won’t be able to afford these condos,’ Knight said.”

The North County Times. “The supply of unsold homes for all of San Diego County has since declined by about one-third, to 14,936 as of the end of 2006. ‘I think we’re seeing some investors taking their properties off the (resale) market and putting their houses in the rental market,’ said Dennis Smith, a real estate agent in Carlsbad. ‘As well, I think we’re seeing some sellers who would like to move up, but are finding that people won’t buy their houses for the prices they want and therefore they can’t buy the move-up houses they want.’”

“Russ Valone, president of a real estate market research firm, told regional leaders last Friday that inventories have plunged in large part because sellers have found that their homes can’t command the high prices similar homes once brought. Valone said that many had sort of hoped to ‘win the lottery’ by cashing in at the height of the market, and the peak has clearly passed.”

The Orange County Register. “The percentage of Orange County homesellers who lost money on their transactions went up in December for a second straight month, new figures show. The profit rate reaped from the typical Orange County home sale last month also fell from the month before.”

“First American reported this week that 5.7 percent of local homesellers got less than what they paid for their homes, compared to 4.3 percent in November and 2.4 percent in October.”

The Dallas News. “Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California said builders will offer incentives before cutting prices in a development. ‘The price is going to be the last thing to fall,’ she said. ‘If they cut prices for new buyers, the previous buyers feel ripped off and they want the price cut too. (Builders) don’t do that.’”

“Nationwide, DR Horton’s average selling price fell 5.4 percent, with the sharpest declines in the Southwest (22.2 percent).”

“In California, where home sales tumbled 23 percent in 2006 and could drop another 7 percent this year, ‘the worst is over,’ said Leslie Appleton-Young, chief economist for the California Association of Realtors.”

“‘Remember we’re going from a market where you couldn’t afford not to buy. Rates were so low, and prices were appreciating 15 to 20 percent, you just had to do that deal,’ she said. ‘Housing is always going to be sexy…but I think some of the buzz about it, when there’s less money being made, is going to go away.’”

The December numbers are out for the Phoenix area in Arizona. “With 4,620 sales recorded in December, the 2006 Greater Phoenix resale home market continued to slow, with 5,040 sales in November 2006, and 6,480 sales for a year ago. This is the lowest level of activity for 2006 and the lowest for December since 4,785 sales were recorded in 2000. For 2006, a total to 67,035 sales were recorded, in contrast to 110,835 sales for 2005 and 102,115 recordings for 2004.”

“Sales activity declined 40 percent. While this is another record year, the median price has been steadily declining during the year from $267,000 in June to $255,900 in December, which is the lowest median price since $255,000 was reported in July 2005.”

“The rapid growth of sales activity and prices of the last few years has been due largely to the ever-increasing involvement of investors in the market. Thus, the slowdown in the investor market can be a relevant reason for the overall market slowdown and the increase in trouble properties. Many investors have found it increasingly difficult to rent and are trying to sell their homes before they lose them to foreclosure or to sell them to lock in any appreciation.”

“Another source of trouble properties are those households, in anticipation of continued appreciation, that bought more home than they could afford and probably used non-traditional financing to acquire it. Thus, confronting financial issues, these households are trying to sell in order to obtain some appreciation and/or to avoid foreclosure.”

“‘Thus, many of the market issues of 2006 and potentially 2007 can be attributed to individuals, trying to secure their futures, who got emotionally involved through believing in constant success and appreciation,’ said Jay Butler, director of Realty Studies at Arizona State University.”

The Arizona Republic. “Metropolitan Phoenix’s resale housing market finished 2006 with a whimper, capping a tumultuous year in which the region struggled to regain its footing after a buying frenzy driven by speculators. A report shows sales on existing homes in December were the worst for the entire year.”

“Experts blame investors, many of whom fled the Valley, leaving a glut of housing behind. Single-family resale inventory stands at more than 42,000, nearly double that of 2005. ‘They were the driving force,’ said Jay Butler. ‘They were the ones who would pay any price for a home.’”

“Ben Sage of Metrostudy said the big theme of last year was the changing expectations. ‘It was a major turnaround from the previous year, and the major disconnect now is between buyers and sellers over listing prices and what homes are selling for,’ he said.”

“‘I couldn’t wait for 2006 to be over,’ said (realtor) Bridgette Gavagan in the West Valley. ‘It was a very negative year. Three years ago, buyers bought homes to live in, to love them and to raise families and to be there. They weren’t buying it to double their money in six months.’”

“Ken Udenze initially listed his south Chandler home for $910,000 in April and has cut the price to around $830,000. He said he has learned to discount some of the optimism he heard about getting top prices and made realistic decisions to cut.”

“‘You have to move ahead of the market,’ he said. ‘It can be hard to do that but it’s what you have to do. Why is a house different from a stock when it comes time to sell it, when you know what the market is going to pay for it? You have to detach yourself from it and be a little bit objective.’”

“There’s still a lot of excess supply that must be sold before the market can recover. ‘The market is clogged by people who are just testing the market to see if they can get top dollar,’ said (broker) Margie O’Campo de Castillo in Phoenix. ‘The other part of the market is people in dire straits. They got into possibly not the right loans for them.’”

“Prices have been falling in recent months according to the newly renamed Realty Studies center at Arizona State University. Jay Butler expects prices to keep dropping in some areas this year, especially those where a lot of investors bought homes in 2004 and 2005 and where new homes are competing.”

“In 2006, sales dropped 57 percent to 1,055 in Ahwatukee Foothills; 41 percent to 4,625 in Chandler; 44 percent to 3,730 in Gilbert; 42 percent to 7,600 in Mesa and 32 percent to 1,785 in Tempe.”

“Sales of existing Scottsdale homes dropped 40 percent in 2006 from the previous year while the median price edged up. Scottsdale Realtor Mark Tait said Scottsdale’s median price increase is misleading because it is skewed upward by luxury home buyers.”

“‘The luxury market is as strong as ever,’ Tait said, adding that prices dropped in other price spectrums and buyer traffic is off considerably. Tait said he rented out a remodeled home he owns near downtown because it would not sell at $425,000.”

The East Valley Tribune. “After flooding the market and driving up prices in recent years, investors now trying to unload properties likely contributed significantly to the market slowdown, Realty Studies director Jay Butler said.”

“‘People would like to see that hypermarket come back but realize it’s not going to,’ Butler said.”

“Some areas are seeing declining prices, and foreclosures are expected to rise this year. Many of the homes facing foreclosure will likely belong to investors, Butler said. ‘They bought too many. They paid too much,’ he said.”

Some housing bubble news from Wall Street and Washington. “M/I Homes, Inc. homes delivered in 2006’s fourth quarter were 1,363, decreasing 16% from 2005’s record-high 1,616. New contracts for the twelve months ended December 31, 2006 were 35% below 2005’s. The Company experienced a 63% cancellation rate during the fourth quarter of 2006.”

“Robert Schottenstein, CEO, commented, ‘Conditions in most of our markets remained difficult throughout the fourth quarter. Although new contracts on a gross basis reached 953 homes for the quarter, the impact of our 63% cancellation rate resulted in new contracts declining 61% for the quarter and year-end backlog units declining 46% compared to December 31, 2005.’”

“Mr. Schottenstein, concluded, ‘For the past six months, we have consistently stated that housing conditions are likely to remain challenging throughout 2007 and we see no reason to deviate from that belief. We are confident that our defensive operating strategy will serve us well as we navigate through these difficult times.’”

“The Company has homebuilding operations in Columbus and Cincinnati, Ohio; Indianapolis, Indiana; Tampa, Orlando and West Palm Beach, Florida; Charlotte and Raleigh, North Carolina; Delaware; and the Virginia and Maryland suburbs of Washington, D.C.”

From MarketWatch. “Despite contentions that the housing market is forming a bottom, 2007 will see ‘a continuation of the challenging operating environment’ for home builders, wrote Raymond James & Associates analyst Rick Murray in a report Wednesday.”

“‘Our fundamental outlook is one of caution, believing that the slowdown is likely to be longer in duration and more difficult than many are forecasting based on inventory levels that are stubbornly high and home prices that are broadly unaffordable,’ he said.”

“Many residential builders are also taking charges on real estate holdings that have fallen in value, and as they write off land options they’ve decided not to pursue. ‘Since we think home-price declines will continue to pressure earnings, 2007 write-downs could equal 5% to 6% of equity written off in 2006,’ wrote Deutsche Bank analyst Nishu Sood, estimating that impairments are likely only half-way done.”

“There could also be an upcoming ’spike’ in impairments for builders set to report financial results after wrapping up their fiscal years at the end of December, ‘due to the added rigor of year-end accounting reviews and the desire to minimize next year’s fiscal write-offs,’ Sood added.”

From Inman News. “Private-label, subprime mortgage originators will have a more difficult time selling Wall Street investors risky loans in 2007, experts say, even as they face tougher underwriting and disclosure standards from regulators.”

“‘After every good party there’s a hangover,’ said Amy Crews Cutts, deputy chief economist at Freddie Mac. ‘We’ve seen a huge boom in mortgage-related employment, including Realtors.’”

“In the last weeks of 2006 several subprime lenders were closing their doors because of financial difficulties. Kenneth Rosen, of the University of California, Berkeley, said the problem is real, and subprime loan originators and the investors who financed them are to blame.”

“‘Subprime loans, for the last and early part of this decade, were 2 percent of the market,’ he said. ‘Then all of a sudden it became 15 percent of the market because you could securitize them through Wall Street. People who normally wouldn’t meet the criteria were approved for loans. It was a sure thing there would be substantial delinquencies and foreclosures.’”

“‘It’s a way some borrowers, and some mortgage lenders used to get people into homes they had no ability to afford,’ Crews Cutts said of such ‘low doc’ or ‘no doc’ loans that require little or no proof of income. ‘There are some really scary products out there. We’re going to see a crackdown in non-documentation mortgages — you are going to have to show a W-2 or at least income.’”

“Federal Reserve Board Vice Chairman Donald Kohn says a ’stabilization’ that seems to be taking place in the housing market may be vulnerable to a rise in long-term interest rates, or even a decision by the Fed not to lower short-term interest rates.”

“Kohn said housing prices are still high relative to rents and that inventories of unsold homes have only started to edge lower. ‘Uncertainty about where we stand in the housing cycle remains considerable,’ Kohn said. One reason for the uncertainty, Kohn said, is that the downturn ‘was not triggered by a restrictive monetary policy and high interest rates.’”

“The downturn did follow ‘an unusually large run-up’ in housing sales, construction and prices. ‘Our uncertainty about what pushed home prices and sales to those elevated levels raises questions about how the market will adjust now that expectations of the rate of house-price appreciation are being trimmed,’ Kohn said.”

“Kohn said housing starts ‘may be not very far from their trough, but the risks around this outlook still are largely to the downside.’”

“It’s unknown, Kohn said, if ‘the possible stabilization that seems to be taking hold would be immune to a rise in longer-term interest rates should term premiums increase or the federal funds rate fail to follow the downward path currently built into market expectations.’”

“It is still too soon to say rising prices no longer pose a threat to the economy, the President of Federal Reserve Bank of Chicago said today. Michael Moskow said the unemployment rate, now at 4.5 pct, is about at the bottom of the range of the so-called ‘natural rate’ of unemployment.”

“‘This suggests that we need to be vigilant for the possibility of increases in inflationary pressures,’ he said. And he said the Fed has to be worried about inflation expectations, which can cause actual inflation to rise.”

“‘If firms and workers expect inflation to be high, they will want to compensate by raising prices and wages or building in plans for automatic increases,’ he said.”

The Associated Press. “An expected dampening of the world economy in 2007 after three years of healthy growth has the weakening U.S. housing market primarily to blame, a U.N. flagship economic report said.”

“The waning U.S. housing market is a ‘major factor’ in the slackening economic prospects, the report said. The end of the housing boom is expected to depress U.S. consumer demand, slowing the growth of the country’s economy, it said.”

“‘The economic recovery in Japan and Europe is not strong enough to replace the U.S. as the engine for growth of the world economy,’ the report said.”

“A continued widening of the U.S. deficit could erode ‘confidence in the dollar as the world’s main reserve currency,’ the report warned. The U.N. report also warned that if the U.S. housing market falls at a dramatic rate, the global economy could become unhinged, ‘enhancing the risk of a major upheaval in financial markets.’”

The Times Herald Record reports from New York. “During the final three months of the year, the median price of single-family homes sold in Orange County fell to $315,000, down $10,000 from a year ago, according to the Orange County Association of Realtors. The number of homes sold in Orange and Sullivan counties each fell more than 10 percent from a year ago.”

“‘What you really saw was a softening of the market,’ said Ann Garti, CEO of the OCAR, repeating what’s become a mantra of sorts among the real-estate set.”

“The number of homes sold in Orange County has now declined for two years straight. Before 2005, the last drop in sales was logged way back in 1990.”

“Lenny Tarulli and his wife Gladys, moved up from Brooklyn and bought a small cottage in the Mountain Lodge Park area of Blooming Grove. They spent $50,000 turning it into a year-round house. A couple of years ago, when Tarulli’s employer moved from Manhattan to the West Coast, Tartulli put the home up for sale. He figured he’d follow his job.”

“Two years, three agents and more than 100 showings later, the Tarullis are still here. ‘When they see the size of it, and they see what $200,000 will buy them up here, they want more. But that’s all they can afford,’ said Amanda DiVeglio, who’s listing the house. ‘They get up here and they see what’s here, and it’s like a reality check for them.’”

“DiVeglio, who’s lowered the price on the home from $225,000 to $205,500 in about five steps, closes with what’s become another mantra for the new market. ‘I know it’ll sell,’ she said. ‘It’s going to take time.’”

The Hartford Courant from Connecticut. “Sales of single-family houses in Connecticut continued to decline in November, with the Hartford area recording the biggest drop in sales, according to a report released Wednesday.”

“‘There’s the possibility that things are going to get worse before they get better,’ said Steve Lanza, executive editor of the Connecticut Economy at the University of Connecticut.”

“‘Without question, total sales of homes and production of new homes are off, and they are off substantially,’ said Ron Van Winkle, a West Hartford economist. ‘A 15 percent decline in sales is significant. It is a large adjustment.’”

“Hartford County showed the largest decline in sales in November, dropping almost 20 percent. But the median sales price in Hartford County through November was a 2 percent increase from 2005.”

“Van Winkle said (the) median sales prices don’t reflect the concessions that sellers are giving, including making major repairs to houses, and even offering to pay closing costs, which can amount to tens of thousands of dollars.”

“‘We don’t see buyer conditions in these prices,’ he said. ‘You might still be paying $250,000 for a house, but the seller is doing a number of things which, in effect, lower that price. Prices have gone down more than these prices reflect because of those concessions.’”

The Town Crier from Massachusetts. “Home sales in Sudbury fell in 2006…across the state, home sales were down in 2006 from 2005 levels. The good news is that Warren Group statistics show in Sudbury, the drop in sales wasn’t as pronounced as in other towns.”

“Scott Beane, sales manager in Sudbury, said other towns in the area are seeing much greater drops in the number of single family homes sold. He cited MLS numbers that show towns such as Marlboro saw a decrease in sales of more than 55 percent and Stow saw a decrease of more than 33 percent.”

“‘For people relocating, their motivation to sell is high and they will sell to get on with their life,’ (broker) Louis Stephan said, noting that these sellers are more willing to negotiate a price with buyers. For people who are retiring and consider their home as their nest egg, Stephan said this ‘may not be the right time to sell and they might be able to defer two years to maximize their profit.’”

“In fact, the median sales price of homes sold in Sudbury in 2006 was down from the previous year. From January through November, the median home sales price in Sudbury was $625,000, according to the Warren Group. This was down from $682,000 during the same period in 2005.”

“But agents caution that this dip in home prices shouldn’t spell the end of a great housing market because prices are still much higher than they were a few years ago.”

“Unfortunately for sellers, on average, they are waiting a long time to sell their homes and they are facing increased competition. According to Beane, the average house in Sudbury is on the market for 216 days, more than double the amount of time from one year ago. There are also more homes on the market.”

“His advice to sellers to help close a deal on their homes is to be realistic about the selling price and pay attention to the condition of their house as it goes on the market. ‘People aren’t feeling desperation yet, but they are more willing to invest money to fix up their homes, increasing the curb appeal,’ said Beane.”

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