The Housing Bubble

The Press Enterprise reports from California. “The Coachella Valley’s residential market isn’t immune to the steep downward path housing is headed toward nationally, a regional economist warned Friday. ‘The worst is not over. The worst is in front of us,’ said Christopher Thornberg, a former senior economist with the UCLA Anderson.”

“He warned that the housing slowdown has appeared slower and less daunting than it really is, because it takes a while for home prices to drop. ‘This isn’t going to hit bottom in 2007. This is going to be a mess for quite a while,’ he said. As a result Thornberg said construction-related jobs should feel a bigger pinch and the Inland Empire’s employment growth should slow.”

“Spending binges brought on by cheap goods flooding the country and by the overconfidence of owning a suddenly pricey house have sent personal savings rates plummeting, he said. For the first time in 2005, Americans bought more than what they earned.”

“If consumers start saving slowly, 2007 should be a weak year, Thornberg said. But if they start saving dramatically, 2007 could turn into a recession when the money stops circulating, he said. ‘There’s all sorts of nasty scenarios out there,’ he said.”

“Tom Noble, a residential and commercial real estate developer in Palm Desert, said Thornberg was ‘right on’ with his forecast.”

“‘Having a negative savings rate is a potential disaster,’ he said. Noble agreed that the Coachella Valley’s housing market wasn’t worth praising but described the slowdown in the desert as ‘a less calamitous landing than the national economy,’ he said.”

The Desert Sun. “Thornberg said there is no question that the national housing bubble has popped, but not all regions will be affected the same. ‘The big question is whether it’s going to be a hard or soft landing.’”

“Chapman University economist Esmael Adibi, who regularly tracks valley trends for The Desert Sun, recently noted that the valley is creating jobs at a much slower rate than two years ago and construction spending declined by 5.95 percent from a year earlier.”

“In the months ahead, the economist said, ‘construction spending and home prices are what we have to watch for.’ Those variables are particularly important because of their ‘multiplier effect,’ Adibi said, as they not only create jobs but spur consumer spending on items like furniture, appliances and other home fixtures.”

The Chico Enterprise Record. “Saying that some in the real estate profession are forecasting better times in 2007, two economists predicted there’s continuing misery in the housing business, especially in California.”

“Economist Nancy Sidhu of the Los Angeles Economic Development Corp. and John Mitchell, senior economist for U.S. Bancorp in Oregon, both said the housing industry won’t have much to cheer about during the new year.”

“Not only has the high cost of housing seen in California over 2006 bitten home buyers, sellers and professionals, it’s hurt related industries, from home improvement and furniture stores, to architects, lenders, builders and subcontractors, Mitchell noted.”

“‘The big question is how the housing correction will play out,’ he said. ‘The National Association of Realtors thinks the bottom’s here. I don’t think so.’”

“Looking at November data, Sidhu said that statewide housing resale was down 31 percent from February 2006, and permits issued were down 43 percent from the same date. Sidhu sees further declines in housing permits over 2007.”

“‘We’re seeing fewer Realtors, and offices with fewer professionals,’ said Sidhu, who also sits on the Economic Advisory Committee of the California Chamber of Commerce.”

“Home sellers’ laments about weak prices really means, ‘I didn’t get as much as I thought I was going to get compared to what my neighbor got when he sold his house,’ Sidhu said.”

The Napa Valley Register. “What a difference a few years can make. Back in 2003, neighbors on Eggleston Street opposed Randy Gularte’s plan to build three cottages on a small lot.”

“On a 3-2 vote, the Napa City Council approved the houses, but insisted that Gularte sell them after two years. Last week Gularte was back before the council, asking that he be allowed to keep the houses as rentals beyond the two-year limit.”

“Councilman Mark van Gorder said the requirement should not be waived. The council would not have approved the project in 2003 without this provision, he said. The rest of the council disagreed. Circumstances had changed sufficiently to merit giving Gularte a two-year extension, the majority said.”

“Gularte argued a sale would displace his daughter, who is living in one home, and her friend who is living in another. These 1,000-square-foot houses would probably sell for $500,000 today, Gularte said. They are being rented for between $1,000 and $1,400 a month, he said.”

“Councilman Peter Mott said Gularte was probably not acting out of pure altruism. This is a flat housing market, he said. If prices were appreciating 25 percent per year, Gularte’s daughter would probably be out of there.”

A topic on the new media campaign, “How about a topic on the media blitz to sway public opinion in the new year? Is it really a good time to buy a house? What are the implications of in light of the recent report on subprime defaults?”

“‘The National Association of Realtors is launching a $40 million advertising campaign to encourage Americans to buy houses amid the ongoing housing slump.’ NAR President Pat Vredevoogd Combs said that now is a good time for consumers to buy a home, given low interest rates and high inventories. ‘You can walk into a marketplace and have a choice what you buy,’ Combs said.’”

One note ad revenues. “I wonder if they are buying higher media weight levels in the more troubled markets. They also have that evr present guerilla PR budget called ‘we’ll pull our ad dollars from your outlet if we see any bad stories.’ I’m sure they use the ‘Good Time to Buy’ ad budget as a carrot and a stick for the media. Publishers will be pressuring editors no doubt.”

“By the way, $40 million is not a lot of money as national ad budgets go these days…unless you can use it to get an additional $40 million of friendly editorial reports from the MSM.”

Another saw this problem. “I’m having a hard time understanding how realtors get away with ‘calling’ a major market. My understanding of a RE broker is that they are there to facilitate a (sometimes) complicated transaction and to advise accordingly.”

“But when a RE broker advises buying, selling or taking something off the market there’s a problem; since they are intimately involved in ‘their’ market,) they could easily have a conflict of interest in the advice they provide, no?”

A reply, “Salesmen don’t have a conflict of interest. Their interest is quite clear: MAKE THE SALE. See? No conflict. People who listen to salesmen as if they are independent advisors with a fiduciary obligation will often end up in deep doodoo.”

Another saw a risk in the media push. “At the end of the day, will the NAR’s propaganda campaign blunt or exacerbate the housing crash’s severity? One might argue that the risk of a hard landing can be reduced by ‘managing’ expectations to the positive.”

“But if the expectations management campaign also features disinformation, in the form of either ignoring or fabricating statistics, the whole effort could blow up when credible contradictory evidence comes to light. The potential problem stems from expectations shock, the sudden realization by vast numbers of individuals that they have been collectively suckered and deceived by the NAR could be devastating.”

The Globe and Mail. “I don’t subscribe to the theory that because of a couple of benign recent U.S. housing statistics, there’s going to be the fabled ’soft landing’ and now is a good time to buy a house.”

“Official statistics are so massaged and seasonally adjusted that I often find them hard to believe. It seems like only yesterday (Dec. 12, 2005, actually) that the NAR was predicting that the U.S. national median house price would rise about 6.1 per cent in 2006. After all, gushed NAR, over a full year, the national median price ‘has never declined since good record keeping began in 1968.’”

“After the recent ‘good’ news about the U.S. housing market, the median price was still down about 2 per cent for the first 11 months of 2006. That makes that NAR forecast fairly embarrassing, but the market has discounted the actual small drop as a mere healthy correction, hardly the harbinger of an incipient downward cascade in house prices, or at least, not yet.

From CNN Money. “We hear lots of stories about the pain: An Indiana man writes to say he can’t sell his house even asking less for it than he paid - four years ago. A Duluth, Minnesota, reader writes, ‘The housing market is brutal, has been for months. Prices dropping at least $20,000, some as high as $60,000 just to get them sold. Most aren’t selling even with the drop.’”

“A reader from northeastern Connecticut moved to Maine and can’t find a buyer for his previous house even though all he’s looking for is to sell for what he owes.”

“A Gulf Breeze, Florida, reader reports, ‘The market here went sky high and now went down - houses are selling cheap and people are not buying.’”

“Yet, when the NAR released its third quarter median sales prices, the downturn was very modest, just 1.2 percent compared with 12 months earlier. Why is there such disconnect between the numbers and reports from the front lines?”

“According to Janet Branton, VP of business specialties for NAR, the main factor is that many consumers, and a high percentage of real estate agents, the majority of whom have been in the industry less than five years - got used to operating in a bubble. ‘Most agents and many sellers haven’t seen a normal market,’ Branton says.”

“Another factor may be problems with the statistics themselves. Some of it is just not very accurate, according to Jonathan Miller, co-founder of Miller Samuels, a leading real estate appraiser based in Manhattan. For example: ‘A significant portion of the OFHEO index,’ he says, ‘is based on refinanced mortgages, not [solely] on actual market transactions.’”

“Miller also believes that bad news travels much faster these days and comes down harder, causing people’s perception to be more extreme. ‘We seem to pile on the cheerleading when the market goes up and we pile on when the market falls,’ he says. ‘And we pass the word on faster through the blogosphere.’”

“Chief economist for the Mortgage Bankers Association, Doug Duncan, is not as sanguine about a swift recovery in the housing markets, by the way. He believes, based on past slowdowns that the slump will take until at least mid-2007 and likely late 2007, to work through. ‘We have to work off the excess inventory before real estate returns to trend lines,’ he says. That will take 24 to 30 months from the peak, which he has pinpointed as July 2005.”

“Recovery might even take a little longer this time. ‘The long run up may mean that the recovery takes a little longer,’ he says.”

The Journal Gazette reports from Indiana. “Media reports on the housing bubble made consumers cautious about buying new homes, said Jim Lancia, president of Lancia Homes. Job losses at companies such as Waterfield Mortgage Inc., which shed more than 600 employees when the company was sold, also hurt consumer confidence.”

“‘We just crashed in the new home market around here,’ said Ric Zehr, treasurer of the Home Builders Association of Fort Wayne.”

“The large number of houses on the market prevented Realtors from selling more houses, said (broker) Daniel Quintero. Buyers could pick and choose from among the substantial inventory, he said. Foreclosures added to the number of houses on the market.”

The Indystar. “The average price of existing homes sold in three of the nine metro counties, Hancock, Madison and Shelby, fell anywhere from 2.4 to 8.2 percent, according to a 2006 home sale report released Tuesday by an Indianapolis real estate company.”

“H. James Litten, president of F.C. Tucker’s residential division., said the cooling of the housing market last year was almost a given, following a record-setting 2005, when interest rates dipped into the 5 percent range. ‘We dug so deep in the buyer well,’ Litten said. ‘A lot of people who were capable of buying jumped in’ and bought a house, lured by the financial benefits, he said.”

The Dispatch from Ohio. “Developers and landowners have slammed the brakes on annexations in Franklin County. The number and size of annexations in 2006 were the smallest in at least 11 years, records show. Observers say they expect the trend to continue in 2007, as central Ohio’s economy and real-estate market head into another weak year.”

“‘I don’t see it improving,’ said Don Brosius, a lawyer who specializes in annexation cases. ‘It’s going to be a couple of years … because it’s going to be tough to dig out of this hole.’”

“Jim Hilz, director of the Building Industry Association of Central Ohio, said he isn’t surprised that the annexation pipeline is drying up. Homebuilders began seeing a buyer slowdown 18 months ago and it hasn’t stopped.”

“‘We’re experiencing a very difficult time. … It’s not just new-home sales. It’s existing-home sales as well. The inventory is extremely high,’ Hilz said.”

“Unsold homes aren’t the only inventory that’s high. Land that developers expected to need for house sites also is piling up. Dominion Homes and M/I Homes, the biggest builders in central Ohio, said in SEC filings late last year that they both are trying to sell millions of dollars worth of undeveloped land.”

“It’s quite a change from the region’s boom years. There was the 2001 rush, when more than 4,000 acres were annexed. It also was when the Hayden Run corridor, planned for thousands of new homes between Dublin and Hilliard, was annexed to Columbus.”

The Business Review from Michigan. “Area housing sales dropped 11 percent in 2006, data that shows the second consecutive year for a decline in Washtenaw County and the continued impact of what Realtors call a ‘buyer’s market.’”

“The year-end numbers from the Ann Arbor Area Board of Realtors show a 9.8 percent drop in house sales and a 16.5 percent decline in condo sales. Listings went up 7.6 percent for houses and 12.3 percent for condos. And median sales prices dropped for both, a $7,000 decline to $219,900 for houses and a $10,000 drop to $163,000 for condos.”

“Still, many areas, such as the city of Ann Arbor, held value and sellers hit the mark with listing prices. That, brokers said, may reflect how sellers had to adapt to the marketplace changes. ‘Sellers are quite realistic at this point,’ said (realtor) Dawn Foerg. ‘I think they’re going to be paid back for being realistic.’”

The Detroit News from Michigan. “More than 2,000 idle condominiums, apartments and single-family homes dot the city. Some projects are half-constructed, others are completed and vacant, and even more have yet to begin, while developers have stalled their plans, gone bankrupt, or are desperately trying to lure buyers with closeout prices.”

“‘We have to take a step back,’ said Chris Schultz, who operates a plumbing supply business in the city. ‘Drive down any street, and you’ll see models built. They need to stop approving new projects.’”

The Journal Sentinel from Wisconsin. “New-home sales hit a seven-year low in metro Milwaukee last year. Only 1,934 residential permits were issued in 2006, 600 fewer than any year this decade.”

“‘Right now, it’s slow. Real slow,’ said Mark Elstad, vice president of a West Allis water heater company that works with builders. ‘It started before the fall elections, and I thought it would be temporary. People are not spending, and I don’t really know why.’”

“Larry Gruber, COO of a small-scale custom builder, said the slump has been especially hard on production builders, who need high sales to contain costs. ‘Those guys are dealing. Their prices have come down 5 percent to 15 percent,’ Gruber said.”

“Matt Moroney, director of Metropolitan Builders Association of Greater Milwaukee, blamed the media for squelching more deals in an already difficult year. ‘There was a lot of fear out there for a long time because of all that talk about the housing bubble and whether it was a myth or reality,’ Moroney said. ‘There wasn’t a bubble, and we came to a soft landing.’”

“Metro Milwaukee’s existing home market shrunk in 2006. The four-county region registered 20,071 Realtor-brokered sales in 2006, the smallest volume in at least three years and 7.3% below 2005, Metro MLS reported.”

“‘So much for the housing bubble. We didn’t have a free fall. We had a soft landing,’ said MLS President Tammy Maddente.”

“Price drops were a way of life in 2006, said Dan Buttery, president of Argus Investments Inc. in Milwaukee. ‘Clearly, homes are sitting on the market much longer, with prices coming down after a quarter or six months. And still, they’re only getting tepid responses,’ he said.”

“While Buttery sees no upturn in sight, realty agents are optimistic about 2007. ‘Some markets, like parts of southern California and southern Florida, have had a hard landing,’ said Pete Flint, CEO of the San Francisco-based realty company Trulia.com. ‘But broadly, yes, it was a soft landing. And I’d definitely say we’re through the worst.’”

“To make a sale in 2006, however, ‘a lot of sellers were participating in financing or doing improvements,’ said Bill Berland, president of Milwaukee-based Homestead Realty Inc. Unofficial sales concessions, plus an influx into the resale market of pricey newly built homes that builders couldn’t sell direct to consumers as usual, may mean that what appears modest price appreciation was really just a plateau.”

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