The Housing Bubble

The Wall Street Journal reports on Oregon. “Randy Bither and his wife, Karla, both from Beaverton, Ore., decided to invest in real estate to help finance their plans to move to the countryside. After talking to other investors and a real-estate agent, they decided to buy a newly constructed home and try to flip it for a higher price.”

“The 1,450-square-foot bungalow is located in Beaverton, Ore., a suburb of Portland. Purchase price: $241,000 in July 2006. The Bithers paid $2,000 more than the home’s original price to the builder to get a better grade of kitchen counters and cabinetry and for bamboo flooring throughout the ground floor, Mr. Bither says.”

“Assuming they would sell the home shortly after it was built for 15% to 20% more than they paid, the couple took out a loan with no money down, Mr. Bither says. The 80/20 loan makes the mortgage expensive, close to $2,000 a month, he says. Since they assumed they’d sell the home quickly, they weren’t concerned about carrying the pricey loan, he says.”

“But because the house isn’t selling, they are hoping to find a renter to purchase the home through a lease-option deal to help offset the high mortgage and guarantee a buyer.”

“The slowing housing market, the high-interest loan, and a plethora of other investor owners in the development have stymied his deal, Mr. Bither says. At least three other houses in his development were purchased by investors with similar strategies, he says.”

“He and his wife have listed the home for sale by owner for $250,000, Mr. Bither says. If the buyer has a real-estate agent, the agent’s 3% commission of $7,500 (if the home sells for its asking price), will negate any profit, he says.”

“The couple is also offering the property through a lease-option plan, hoping to find a renter who wants to buy the home at the end of 12 months. As part of the deal, the renter would put down $5,000, pay $1,685 per month in rent and have the option to purchase the home for $262,500, or for 5% more than the home’s current listing price.”

“If a renter puts down $10,000, he or she could rent for $1,266 a month and buy on the same price terms. ‘Whichever option comes first and can stop the bleeding, we’ll take,’ Mr. Bither says.”

The Seattle PI. “Seattle’s market was not to blame for a recent decision to change a planned 34-story downtown building from condominiums to apartments.”

“Rather, the slumping condo markets in cities such as Washington, D.C., Las Vegas, Miami and Boston affected the national firms that fund such buildings, said John Schwartz, northwest regional director of Keller CMS, which is managing the Terry Avenue Apartments project.”

“‘There was quite a bit of skittishness,’ he said. ‘I think the Seattle market clearly has a little different story to tell, but a lot of the big equity players, they take a wider view.’”

“The frenzied condo market in many cities has collapsed since the middle of 2006, dragging down prices and scuttling projects, or at least forcing them to change, according to a New York Times report Tuesday.”

“The story attracted attention in the office of Williams Marketing, a Seattle firm that works with condo developers. ‘We were discussing it,’ company President Leslie Williams said Tuesday morning. ‘No, it’s not holding true here. Some of these national lenders are getting nervous. There’s no doubt about it,’ Williams said.”

“Seattle has fewer than 9,000 condos in the works, according to Williams Marketing Vice President Warren Ballard. ‘We don’t have anywhere near the volume of construction that some other markets have,’ Ballard said. ‘You cannot go anywhere in Seattle and find a finished, brand-new condo to buy.’ Ballard said conversion condos continue to sell well, although the strengthening rental market led some apartment-building owners to forgo conversion.”

“Mike Scott, co-owner of Dupre + Scott Apartment Advisors, said he knew of just one planned conversion that fell through in 2006. He said that a record 7,000 apartments in 143 buildings in King, Pierce and Snohomish counties went condo in 2006 or were scheduled to do so soon.”

Inman News reports on the Twin Cities. “Home sales in the Twin Cities, Minn., market dropped for the ninth straight month in December while prices kept pace with their year-ago levels, according to reports from four Twin Cities-area Realtor associations. There were 2,950 sales of existing single-family homes, condos and townhomes last month, down 18.9 percent from 3,638 sales in December 2005.”

“The median home price in the 13-county region last month registered $229,000, down just 0.4 percent from the same month in 2005. For 2006, the median sales price was $230,000, an increase of 0.5 percent compared to 2005.”

“‘Since 1998, price growth has been extraordinarily high, between 6 (percent) and 12 percent each year,’ said Kay McDonough, 2007 president of the Southern Twin Cities Association of Realtors. ‘The calm in appreciation was expected, and is a natural byproduct of the market shift.’”

“Inventory remained high in December, with 22,834 homes available for sale, up 19.6 percent from 19,098 in December 2005.”

The St Paul Pioneer Press. “Home prices flattened around the Twin Cities last year, but on the whole didn’t slide backwards, new year-end data out Wednesday show. That’s a nugget of good news in a housing market that, despite the cheerleading of resolutely optimistic real estate agents, looks as dreary as last month’s Christmas tree.”

“Sales dropped 16 percent for 2006 as inventory, and foreclosures, hit local records.” “Sure, some suburbs saw big gains. But others saw the opposite. In Inver Grove Heights, the median dropped 7 percent from $221,000 to $205,450.”

“Minneapolis Mayor R.T. Rybak and Nancy Homans, St. Paul Mayor Chris Coleman’s policy director, called for action to address rising foreclosures that Rybak described as a crisis that is ‘robbing citizens of the American dream.’”

“Local Realtors attending said that they suspect the worst of the nation’s housing correction has already passed the Twin Cities, conforming to the National Association of Realtors assessment that the nation’s housing market hit bottom in September. As for foreclosures, they spell great opportunities for first-time families seeking affordable housing.”

“‘The last year has been a pause, and that’s OK,’ said veteran Realtor Steve Hyland, new president of the St. Paul Area Association of Realtors. Hyland said he thinks the metro area’s housing market hit bottom months ago, but acknowledged there’s little hard data to prove it.”

“Realtors Wednesday appeared leery of projecting where prices are headed. That may be because last year’s forecast of around 5 percent, near the area’s historical average, didn’t pan out. Mark Allen, chief executive of the Minneapolis Area Association of Realtors, said he predicts home prices will grow about 1 percent in 2007.”

“Others aim higher. ‘If we didn’t see 2 to 5 percent, depending on the area, I’d be surprised,’ said Hyland. ‘Shame on me if we’re way off.’”

Some housing bubble news from Wall Street and Washington. Bloomberg, “Home starts unexpectedly climbed 4.5 percent last month from November, the Commerce Department said in Washington. Building permits jumped 5.5 percent, the most in four years, to a 1.596 million pace, the Commerce Department said.”

“Even with last month’s gain in housing starts, residential construction dropped 13 percent for all of last year, the biggest yearly decline since 1991, to 1.801 million.” “Construction of single-family homes fell 4.1 percent last month to a 1.23 million rate, today’s report showed. Work on multifamily homes, such as townhouses and apartment buildings, surged 42 percent to an annual rate of 412,000.”

“‘The housing market has reached stabilization, but I would not be surprised to see some weaker numbers going forward,’ said Phillip Neuhart, an economist at Wachovia Corp. Favorable weather allowed some builders to get an early start on projects, ‘pushing the headline number up.’”

From CNN Money. “For the full year, single-family home building sank 15 percent and units in buildings with five or more residences slipped about 6 percent.”

“Bernard Markstein, director of forecasting for the National Association of Home Builders, said that the multi-family housing starts can swing widely from month to month. Markstein said for that reason his group is focused on the continued weakness in single-family homes. Starts on single-family homes last month were the second lowest since early 2001, ahead of only last October.”

“‘Getting a permit doesn’t mean they’ll start building tomorrow, but maybe three to six months from now they’ll start some projects again,’ said Markstein. ‘It’s definitely a very weak market. There’s clearly still too much supply on the market.’”

From Reuters. “Lack of progress in reining in mortgage lenders Fannie Mae and Freddie Mac leaves the economy at risk of possible financial crisis, St. Louis Federal Reserve Bank President William Poole said on Wednesday.”

“In a toughly worded address to a financial analysts’ group, Poole said the so-called government-sponsored enterprises or GSEs still need reform, including making clear to investors there is no government guarantee if they get in trouble.”

The Wall Street Journal. “A federal district court judge ruled that a Maryland bank must rescind loans made to certain borrowers who took out so-called option adjustable-rate mortgages because it violated the Federal Truth in Lending Act.”

“The ruling comes at a time of heightened scrutiny of option ARMs and other nontraditional mortgages, which grew in popularity during the housing boom.”

The Providence Journal reports from Rhode Island. “Rhode Island’s sales of single-family houses are showing signs of improvement, but not so for the condominium market, according to a report. Condo prices in November fell nearly 22 percent, to $205,500, down from $262,500 in November 2005, according to The Warren Group.”

“Condo prices have now declined for four straight months, and sales in November fell 6.4 percent, to 2,349 units. Condo sales have ‘fluctuated wildly,’ falling in 6 out of the last 11 months, the Warren Group reported.”

“‘Rhode Island’s housing market is still in a state of flux,’ said CEO Timothy Warren Jr. ‘As we are seeing in Massachusetts and Connecticut, unit sales and median sale prices are still under pressure as buyers hold out for better deals in a changing marketplace.’”

“The biggest price change was in Bristol County, where the median price of a condo in November fell 66.5 percent, to $165,000, compared with November 2005. Price changes, however, may appear more dramatic because of the small number of sale units. For example, the price decline in Bristol in November was based on the sale of just eight condos.”

“Providence condo prices also declined in November, with the median price down 25 percent, to $194,000, compared with November 2005. Single-family house sales during the first 11 months of the year fell in all five Rhode Island counties, and the median sale price fell in four of the five counties.”

The Boston Globe from Massachusetts. “A growing number of homeowners and builders, unable to sell their properties the conventional way, are turning to heart -thumping, adrenaline -pumping auctions. The sluggish housing market has translated into a surge in business for auctioneers.”

“‘Buyers and sellers are both turning to the auction method, and we foresee this trend continuing to increase,’ said William Sheridan, president of the National Auctioneers Association.”

“But Kim Sandler, president of the North Shore Association of Realtors, said she doesn’t see the auction trend taking off in Boston’s northern suburbs. While auctions may appeal to investors looking for a bargain, Sandler said, they’re often not ideal for local residents looking to buy a home because such sales have no contingencies. If the high bidder defaults for any reason, he or she forfeits the deposit.”

“‘In this area, an auction is synonymous with desperation,’ added Sandler. ‘In a slow market, house hunters are looking for a good buy. At an auction, they’re looking for a steal.’”

“In recent months, homeowners in Nahant and Boxford have felt the bitter sting of disappointment when their homes failed to command bids that met their minimum prices. The high bid for a sprawling, 5,200-square-foot Boxford home was $460,000, half the $900,000 minimum value the homeowners had placed on it.”

“In Nahant, a single bid of $830,000 was offered and rejected as too low; the homeowners had been hoping to get something closer to their original $1.25 million asking price.”

“Auctioneer Jerome Manning said he turns away a lot of potential sellers because they have unrealistic notions about how much their home is worth. ‘I don’t take jobs if the seller expects me to do magic that their broker couldn’t,’ said Manning. ‘Why would I be so arrogant as to think I could sell a home for a price their broker couldn’t get?’”

“Harvey Goldberg of Rowley, has adopted a different philosophy. He’s offering a ‘real estate deal like no other’ on eBay. His ad invites potential buyers to buy his four-bedroom home with custom kitchen, basement media center, and ‘nifty new granite mailbox post’ for $1.75 million — more than double the appraised value.”

“‘You will be helping not only pay off our mortgage and bills but also pay for my children’s college educations and assisted living for my mother…. Does that not make you feel great???? Well if it does… we are ready to deal!’ the ad states.”

“He posted the ad the second week of December as a joke, hoping someone might be in a giving mood. No such luck. ‘We thought we were going to get kicked out of doing it, because it was tongue-in-cheek, but if someone offers the right price, my wife and I will absolutely sell it,’ Goldberg said. ‘Don’t get me wrong; we love this house. But we love money more.’”

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