The Housing Bubble

The Union Tribune reports from California. “For years, new-home construction was the engine that drove the growth of the San Diego economy. But since the housing industry hit the brakes, regional growth has slowed to a crawl, local economists said at a forum yesterday.”

“The regional housing downturn has prompted layoffs in real estate and construction, said economist Alan Gin of the University of San Diego. ‘The big story in 2007 is going to be the real estate market and its impact on employment,’ Gin said.”

“Hiring for real estate-related jobs has declined steadily over the past year in San Diego County, Gin said. The local industry began to shed jobs in November, and roughly 6,000 jobs were eliminated during the last two months of 2006.”

“Construction of single-family houses has fallen so sharply that Alan Nevin of MarketPointe Realty Advisors said, ‘The new single-family home here is pretty much of a dodo.’”

“On a related front, the high cost of housing has become the biggest hurdle for employers to overcome in recruiting new employees, said Michael Schuerman, director of research for the San Diego Regional Economic Development Corp.”

“In a 2006 survey of local companies, 90 percent of the employers and 100 percent of the employees identified the high cost of housing as their top local business challenge.”

“As a result, far more people are leaving San Diego County than are moving here. Citing data from the California Department of Finance, Schuerman said only 900 people moved to San Diego County over the past two years, while more than 28,500 residents moved out.”

“That’s ‘hard evidence of what the housing situation is doing,’ he said.”

“Consumer confidence represents an additional risk, speakers said. Consumers also could be shaken by a spike in loan defaults and home foreclosures, Gin said.”

The Wall Street Journal. “In California’s San Diego County, developers have more than 10,000 condos available for sale in new buildings, projects under construction or properties being converted from rentals, says consultant Peter Dennehy.”

“He says that supply is enough to last more than 20 months at the current sales rate. That number excludes several thousand condos being offered for resale by speculators and others.”

“Mr. Dennehy estimates that condo prices have fallen at least 15% to 20% in the county over the past year, though it’s hard to measure price changes because sellers often give incentives such as free upgrades or help with closing costs that aren’t reflected in the price.”

“Many lenders are growing more cautious about how much debt home buyers should be allowed to take on and more inclined to ask for proof of income. This tougher attitude will exclude some marginal buyers from the market, hurting demand, even as a rising number of foreclosures throws more supply on the market.”

“DataQuick said that mortgage lenders sent 37,273 default notices to California homeowners in the fourth quarter, up 145% from a year earlier and the highest in more than eight years.”

“One of California’s weakest markets last year was the Sacramento area. Analyst Anthony Graham says sellers of previously occupied homes there have had trouble competing with the huge discounts and incentives offered by builders.”

“Mr. Graham expects average home prices in the Sacramento metro area to fall between 6% and 8% this year, but believes the market will begin to recover modestly by the fourth quarter, assuming that home builders continue to cut their production.”

“California’s Central Valley, which includes such cities as Bakersfield, Fresno, Merced and Stockton, may take longer to absorb excess new-home inventory and bring prices down to more affordable levels, said Greg Paquin, president of Gregory Group in Folsom, Calif.”

“An exclusive report done for The Wall Street Journal by the National Association of Home Builders showed a return to a buyer’s market in the million-dollar range. But in some places, like San Francisco, where prices have remained high for years, the overall median is $740,000, compared with the median price of $870,000 in the city’s ‘million-dollar’ category, buyers aren’t rushing in.”

“Fatigued by years of fruitless house-hunting, they ‘can’t quite believe’ that the market has finally turned in their favor, according to broker Linda Harrison.”

“Analysts Celia Chen at Moody’s Investor Service’s Economy.com, says many parts of Southern California (are) at ‘high risk’ for a fall. Although the local economy is strong, incomes haven’t kept pace with the sizzling double-digit price increases these markets experienced from 2001 to 2005.”

“And with federal regulators pressuring lenders to cut back on creative financing, fewer buyers are able to stretch their incomes to buy million-dollar homes. That’s what banker David Jaffe discovered when he put his five-bedroom stucco home in Ventura, Calif., on the market 2 1/2 months ago for $979,900. Mr. Jaffe attracted an offer close to his asking price soon after he listed it. But the deal fell apart in escrow when the buyer couldn’t qualify for the loan.”

“Mr. Jaffe bought the place in April 2005 for $935,000 in a bidding war, and still hopes to find someone who will meet his asking price. But he doesn’t expect to see lines forming at his door, especially since homes in his price range are affordable to fewer people and no longer have quite the cachet that they once did.”

“‘The market is changing,’ he says. ‘It’s definitely a buyer’s market now.’”

Readers suggested a topic on financial bubbles and real estate. “Something I’ve been thinking about recently: Not only do real estate bubbles exist from time to time, but it seems RE is the asset class that is MOST prone to bubble extremes and boom/bust cycles.”

“Consider: In the past century there have only been two real US stock-market bubbles (I won’t count ‘87 because we were higher by the end of ‘88). There has only been one real gold bubble; 1980. I wouldn’t count any of the runups in oil prices as bubbles, because they were in response to fundamental shifts in supply and demand. There was only one tulip bubble ever, and so on.”

“But RE… we’ve had three in the last 30 years or so: late 70s, late 80s and 2000-05. We also had one in the 20s in addition to various smaller, local bubbles such as Denver in the late 1990s. Look in other countries: The UK has had two in the last 20 years, Germany had one in the early 1990s, SE Asia had one in the mid 1990s until 1997 and of course Japan had the late 1980s… all these bubbles were NOT correlated in time, and formed independently of each other.”

“So I ask: (1) do you agree and (2) what is unique about RE that causes this to happen? One answer to #2 may be that RE is the one asset that is most accessible to the public at large, where herd mentalities and ignorance in financial matters are prevalent.”

One replied, “Real Estate bubbles continue to happen primarily because they’re not (or haven’t been, until now) as dramatic as more liquid bubbles - e.g. stocks and tulips. In particular - the last two bubbles haven’t really been ‘bubbles’ per se, in that the non-inflation-adjusted prices didn’t actually go down in most areas. Thus even after a ’small bubble’ RE is seen as a low-risk (even no-risk) investment. Contrast with stock bubbles which are obvious risks.”

“The only real bad price declines in real estate have been very localized and/or distant history, at least in the US anyhow - Florida in the 20’s, and Hawaii in the 90’s, and the latter still wasn’t that terrible. That’s all about to change.”

Another said, “I think that because RE is the only asset class where J6P can get leverage, relatively small price movements (and expecially falls) have an exaggerated impact on the popular consciousness.”

“Also, RE experiences can be far more localised than Stock Market ones. Consider that since 1968 the NAR’s numbers have never shown a national full-calendar-year annual decline.”

“You could in theory argue that the US as a whole has had zero fully played out RE bubbles in that time, since there have been no actual nationwide busts. (Mind you, have fun arguing that proposition to anyone who lived in the Houston region during the 1980’s.)”

One made a comparison to stocks. “RE has (at least) two differences to the stock market: much larger leverage, and less comparability between objects. One IBM stock is the same as another IBM stock, but houses are not alike.”

“Larger leverage might explain the magnitude of booms and busts, and the incomparability might explain the inertia of RE, which also masks some bubbles in retrospect. You have to plot house prices as a ratio to wages or to consumer prices to see the ups and downs clearly (well done by Robert Shiller or by Rich Toscano about the San Diego RE market).”

One had a personal experience, “Interesting points…if one accepts there were no national bubbles in the last ’70s and ’80s (we have discussed local bubbles during those years many times here).”

“Many people certainly got hurt, even in parts of the country you wouldn’t initially expect. (Example: My family moved to NC in 1988; folks moved away in ‘93. Dad lost about 25% on our house in NOMINAL terms. In North Carolina, not Boston or LA).”

“If there was never the ‘zero to 100 to zero’ effect in RE, the runup and pullback still affected a lot more people, because as realtors™ like to say, everyone needs a place to live, and it’s the middle class’s largest asset.”

The Capital Times reports from Wisconsin. “Fleming Development is seeking city approval for a 12-story condominium tower at the corner of West Johnson and Bassett streets that would include 197 housing units. Prices are expected to start in the $200,000 range.”

“Developer Dan Fleming said he was not concerned about the current glut of new condominiums on the local housing market. There are more than 2,400 unsold condos in Dane County, up from 867 just two years ago. ‘That’s mostly in the upper prices ranges,’ he said. ‘We’ve got a different target market.’”

The Daily Herald from Illinois. “The question in 2007 is whether the housing market will return to historical norms or continue its 2006 sales recession. According to figures released Thursday, the Chicago area was hit harder than the nation at large.”

“Except for DeKalb County, each of the counties surrounding Chicago showed double-digit declines in the number of homes sold, according to the Illinois Association of Realtors. December home sales in Chicago fell even more, plunging 21.5 percent, to 9,600 homes sold.”

“Steve Hovany, president of Schaumburg-based housing research firm Strategy Planning Associates Inc., said there’s a general rule about home prices these days. ‘The basic wisdom is you have to bring your price down to last year’s level to sell it,’ Hovany said. ‘But many people tend to want to wait it out to get their price.’”

The Indianapolis Star. “Metropolitan Indianapolis’ sky-high pace of home foreclosures continued last year as lenders took back about 27,500 houses, almost 36 percent more than in 2005.”

“Many homeowners get trapped by bankruptcy, high medical bills, fraudulent real estate deals and adjustable-rate mortgages. And aggressive lenders and builders can saddle buyers with higher-than-expected payments, particularly in new subdivisions.”

“As heavy as the pace of foreclosures is in the metro area, it is surging even more heavily across the state. Foreclosures in the 83 counties outside the metro area numbered 19,952, a 96 percent gain over 2005.”

“Even so, metro Indy accounted for 58 percent of the 47,550 foreclosures recorded last year throughout the state, although the metro area contains only about 32 percent of the state’s households.”

The Daily Press from Michigan. “Local realtors are saying low prices have been the norm this year. ‘We have a lot of homes for sale and not too many buyers,’ said (realtor) George McLaughlin in Escanaba. It’s part of a nation-wide slowing in real estate sales, which drives down the amount sellers can get for their home.”

“‘People are always reluctant to go with that because they feel like they’re losing equity, and of course they are,’ McLaughlin said. ‘If they want to move their homes, they have to be flexible on the price.’”

“The slow sales can be a good thing for those wanting to buy a home. Jason Gasperich moved to Escanaba in December with his wife. ‘There were plenty of houses to choose from,’ he said.”

The Business Review. “The concentration of residential real estate loans on the books of Michigan banks fell by more than 7 percent in the third quarter, signaling a tightening of underwriting standards - as foreclosures climbed.”

“Michigan banks had residential loans valued at a median 251.6 percent of their tier-one capital, common stock and retained earnings that support lending, in the third quarter. That’s down from 271.9 percent in third-quarter 2005, according to the Federal Deposit Insurance Corp.”

“Michigan banks are in the middle of the pack, Illinois and Wisconsin banks have fewer residential real estate loans as a percentage of tier-one capital while Ohio and Indiana each top 300 percent.”

“The numbers still are worrisome because lenders, stuck with homes that have seen a drop in market value, often are forced to sell such properties at a higher discount so they can limit their losses. Foreclosures in the third quarter for Oakland, Macomb and Wayne counties numbered nearly 15,000.”

“That has a trickle-down effect in that it lowers property values in affected neighborhoods. ‘All banks are experiencing some level of increased foreclosures and it is having an effect,’ said Bruce Balmas, senior VP in charge of mortgage for all of Southeast Michigan at Fifth Third Bank. ‘We will take a foreclosed house and sell it at the current market rate and those levels are down as much as 15 to 20 percent.’”

“‘For years, mortgage fraud was ignored as interest rates fell and the mortgage bankers were making money,’ said Martin Frankel, a (lawyer) specializing in mortgage and construction litigation. ‘But now it is having a significant bottom-line impact.’”

The Detroit Free Press. “Home foreclosure filings surged to record levels across metro Detroit in 2006. In Macomb County, the number of foreclosure filings nearly tripled, from 2,755 in 2005 to 8,192 last year, translating to one home for every 39 in the county.”

“In Oakland County, Michigan’s wealthiest county, the number jumped from 3,754 in 2005 to 7,282, meaning one of every 68 homes. In Wayne County, the number of filings more than doubled, from 18,176 to 40,220, translating to one of every 21 homes.”

“Oakland County’s number translates into an average of more than 100 homes per week going to auction, the largest number county officials ever have seen and more than twice the number in 2004.”

“‘There are a lot of different variables why,’ said Oakland County Sheriff’s Capt. Mike Johnson, who oversees the division responsible for handling foreclosures. ‘But I think a lot of these short-term mortgages, the adjustable rate mortgages, are blindsiding folks.’”

“In some cases, Johnson said, owners simply walk away from homes after overextending themselves. ‘This isn’t the orphan and widow being shoved out in the cold,’ he said.”

The Lansing State Journal from Michigan. “Any way you slice it, 2006 wasn’t a banner year in the local real estate market. In Ingham, Clinton and Eaton counties, sales of residential properties fell by nearly 15 percent compared with 2005. The average sale price fell also, by more than 2 percent.”

“Matt Bowler, president of the Greater Lansing Association of Realtors, noted that 2004 and 2005 were ‘record breaking years,’ which makes 2006 look pale in comparison.”

“(Broker) Dave Ledebuhr in East Lansing, said a combination of low interest rates and the sheer number of homes for sale in the Lansing area has created an almost ideal buyer’s market.”

“‘We kind of feel that, if buyers wait much longer, they’re going to miss this wonderful buying opportunity,’ he said. ‘Interest rates could go up, supply could go down, and prices will go up again. If they don’t buy now, when would they?’”

“He was echoing a new marketing campaign sponsored by The Greater Lansing Association of Realtors. Their slogan: ‘If not now, when?’”

“Roxanne Webster got the message without being told. She began looking for a house two weeks ago ‘because it’s a buyer’s market.’”

“On Friday morning, (realtor) Travis Conti was showing her a split-level home on Lansing’s south side. ‘He keeps surprising me,’ Webster said. ‘Every time I think that this may be the house, he keeps showing me more for the money.’”

NBC 2 reports from Florida. “New figures show the number of home foreclosures is sky-rocketing in Collier County. The numbers are in for 2006 and they’re record-setting. In fact, they doubled in just the last year. Everyone is rushing to sell and those who can’t sell are left without a choice and foreclosure is the only option.”

“Collier resident Jose Giraldo thought he would be able to flip his home quickly. ‘They said it was a good investment at that time, that we’d make some money so we went for it,’ said Giraldo.”

“But now his second Naples Park home is sitting on the market. He bought the home a couple years ago when the market was hot. He’s put thousands of dollars into fixing it up and he says the mortgage payments are just too high to handle.”

“Realtor Glenn Ginsburg says many people are finding themselves in the same situation, they’re in over their heads and are left without a choice. He says what started as investments are now ending as foreclosures.”

“‘Interest rates were at four percent, now it’s twice that,’ said Ginsburg. ‘Put it this way, it’s not unexpected.’”

“‘We are like in a cage, you know?’ said Giraldo. Giraldo doesn’t fear foreclosure, but he does fear his financial future. Right now, he’s paying $2,200 a month for the loan on this home plus the bills and his other mortgage. He says it is just too much to handle. ‘We have to take another loan, and just wait,’ said Giraldo.”

“But according to Ginsburg, the wait won’t be a short one. ‘I think we’re only seeing the tip of the iceberg,’ said Ginsburg. He expects the 2007 market will sink even lower, meaning foreclosures will continue to rise.”

The Gainesville Sun. “In the Gainesville MSA, 3,174 existing homes sold in 2006 compared to 3,993 in 2005.”

“Sherry Patrick, president of the Gainesville-Alachua County Association of Realtors, said the news affected buyers’ moods. ‘The national media started saying every single real estate market in the country was in trouble and people started reading that and thought, ‘I’ll wait for that to bottom,’ but it’s not going to bottom here.’”

“The slowdown in sales means more homes are on the market, currently 1,964 listed in Alachua County, Patrick said. ‘A year or two ago, there might be 700 to 800.’”

“That means homes are on the market longer before being sold and buyers have more time to choose. ‘A few years ago, they’d run out with their Realtor when something came within their price range and they knew they had to make a move right away,’ Patrick said. ‘They were going to lose that house if they didn’t make up their mind.’”

“The current availability of new homes that are priced to sell tends to inhibit sellers of existing homes from getting as much as they’d like to, said Steve Elwood, senior VP with Coldwell Banker/M.M. Parrish.”

“Agent Chris Curry said…many condos that have been converted from apartments are on the market. At the beginning of the year, there were 1,000 condos on the market with 250 selling per month, while at the end of the year 3,300 were on the market with 50 selling per month.”

“‘Everyone saw the pot of gold at the end of the rainbow and started condo-converting,’ he said.”

The St Petersburg Times. “Reeling from a string of questionable loans, Coast Bank said it alerted auditors this week to track $66-million it disbursed to build 482 investment homes in partnership with St. Petersburg builder Construction Compliance Inc.”

“The money certainly didn’t all go into completing the houses. Homes finished in the past 11/2 years in places like Sarasota and Charlotte counties number only in the dozens. CCI customers, many promised sure-bet investment houses for no money down, are asking one big question: Where are the millions withdrawn from Coast Bank in their name?”

“Jeff DeNight of St. Petersburg signed up for a CCI house in October 2005. Coast Bank has disbursed $80,000 toward his construction loan, but the insurance agent has nothing to show for it but a vacant lot on a block that DeNight called ’swamp land.’”

The Herald Tribune. “CCI, which was doing much of its work in North Port and Port Charlotte, stopped paying subcontractors in the fall, but customers say the company drew disproportionately on its construction loans. That means the borrowers are facing liens from subcontractors, and Coast could force them to pay the entire amount of the loan.”

“Homes are almost finished for 154, or 32 percent, of the loans. One investment banker who specializes in buying and selling distressed bank debt said Coast could still take big hits, especially on the vacant lots and half-finished houses. ‘The issue then becomes what’s the likelihood of repayment from the borrowers?’ said David Tobin in New York.”

“Tobin doubted that the borrowers or the bank could get the full value of the loans for the land, 482 properties in Pinellas, Sarasota and Charlotte counties. ‘Each time one of those defaults, and they gave to go sell the land, they’re going to take a 50 percent hit, or whatever the number is,’ Tobin said.”

“A lawyer representing borrowers, Thomas Carrero, said that considering the amount of cash drawn and the paucity of work done, he is starting to think that much of the $66 million released by Coast is missing. Carrero said he spoke with a lawyer who is representing multiple CCI subcontractors who are short by $1 million.”

“On Friday morning, the city of Bradenton Beach resolved on a rather large withdrawal at Coast Bank of Florida: $2 million. Coast was seen as the city’s unofficial ‘central bank,’ and had handled millions in various types of deposits for the city and library.”

“The financial blow to Coast could be magnified if city employees and vendors who had regularly used the bank also migrate elsewhere for Bradenton Beach-related transactions. Freedom Bank of Bradenton said this week that it has taken in $2 million to $3 million in deposits from former Coast customers. Other local banks seem to be having a similar experience, though there is no way to gauge the magnitude.”

The Journal Star. “The troubled real estate market in Florida has started to hit home in insulated Nebraska, however indirectly. In its latest earnings report, TierOne Corp., the biggest bank headquartered in Lincoln, reported its own consequences from what’s happening in real estate elsewhere.”

“The bank attributed the increase in non-performing loans and assets primarily to a $16.2 million increase in nonperforming residential construction loans. ‘These loans were made primarily to individual homebuyers on the west coast of Florida, which has and continues to experience a price correction in housing values and delays in housing construction,’ the bank said.”

“Ed Swotek, senior VP for investor relations of TierOne, explained the situation: TierOne goes through mortgage brokers to people building these homes, and has a direct relationship with the homebuyer, who’s financing construction with a 12-month to 18-month loan. Permanent financing happens later, either through TierOne or some other lender.”

“The local governments’ permit processes have been backlogged, Swotek said. ‘So what you have is a homebuyer who wants to have their second home built, they have entered a contract to build this house, the builders down there file for a building permit, and because of the backlog, nothing happens,’ Swotek said.”

“So the homebuyer has been paying interest on the construction loan, there’s no permit, no ground broken, and meanwhile, ‘there has been some cooling of housing values,’ Swotek said. ‘Some are just not making payments on their loan,’ he said. ‘They’re waiting for something to happen.’”

The Wall Street Journal. “Amid a continuing glut of homes for sale in most of the country, buyers should have plenty of choices and lots of bargaining power. In Miami-Dade, the number of existing condos on the market is enough to last 27 months at the current sales rate, says consultant Jack McCabe. The oversupply will grow, he says, as about 8,000 condos are expected to be completed this year and 12,000 in 2008.”

“‘It’s going to get bloody down here,’ Mr. McCabe says. He estimates that condo prices in Miami-Dade fell between 8 percent and 10 percent last year and will drop 20 percent in 2007. Eventually, he predicts, hedge funds and other investors will step in to buy surplus condos in bulk at huge discounts.”

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