The Housing Bubble

The San Fernando Valley Business Journal reports from California. “Last year at this time, Millennium Pacific Icon Group was selling units at its condominium conversion project in Winnetka at the rate of about 10 a month. These days the company is averaging two to three sales a month.”

“‘Just in our area we saw about two or three more conversions pop up over the past year,’ said Joseph Yoon, project manager for the Forest Glen Villas. ‘I think that is causing a surplus of units for sale.’”

“‘Glut may be too strong a word,’ said Gary Schaffel, whose Schaffel Development Co. is one of the most active independent condominium developers in the area. ‘There’s more (on the market) than I’d like to see.’”

“The slowdown seems to cut across all price lines. Even at the high end, Schaffel’s properties, for example, were selling out in three to four months back in 2004 and 2005. That pace has held up better in markets like Sherman Oaks than in some others, but it still isn’t near the record setting activity at the height of the housing market, even when you factor out flippers.”

“The main culprit, these developers say, is the amount of property on the market. Even for high-end builders, the increased availability of lower-priced condominium conversions is, at the very least, detracting shoppers from making purchase decisions.”

“As of last year, some 1,800 units mostly in the Valley were approved for condo conversions, according to city reports. But the increase in conversions, coupled with some discounting in existing properties, is making buyers wary.”

“‘People have seen some prices go down and they’re afraid that right now is a bad time to invest,’ said Yoon. ‘People are noticing some prices dipping and they’re afraid they’re going to lose money.’”

“The situation in the local area, though certainly weaker, is far less severe than it is on some other markets such as San Diego, where there have been many foreclosures and builders have begun to offer incentives and thousands of dollars in financial credits to induce buyers.”

“‘In San Diego, we’re buying a project from a public builder for probably seven figures under what the builder put in,’ said Lawrence A. Scott, VP at AvalonBay Communities Inc., a builder of rental apartment complexes. ‘They figure if they write down one-third of the project it’s better than getting half back.’”

The Whittier Daily News. “Sluggish growth in the housing sector over the last year has the potential for a negative impact on the California state budget. That’s the conclusion of a report just released by a Sacramento-based think tank.”

“According to the Legislative Analyst’s Office, the number of residential building construction jobs declined by 2.8 percent between December 2005 and December 2006. The LAO projects that construction will decline by another 13 percent this year, as the real estate slump ‘is having a major adverse impact on the incomes of Realtors, developers, contractors and real estate lenders.’”

“‘We’re definitely seeing a link between the decline and the employment numbers,’ said Jean Ross, executive director of CBP. ‘As for what it means for property taxes and sales taxes, there are warning signs on the horizon.’”

“With fewer homes selling, local governments aren’t getting their normal bump from increasing property taxes. ‘A lot of people forget that when you buy a new home, you buy a new tax bill,’ said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp. ‘Los Angeles also has a documentary transfer tax,’ Kyser said, ‘and fewer sales mean less money collected.’”

“But how much of an impact? ‘There’s no question there are people frantically looking for signs of a housing recovery,’ Kyser said. ‘But I think it will be the rest of this year, and in some areas into 2008, before we see it.’”

The Ventura County Star. “Growth is one of the most challenging issues facing Ventura County, but Bill Watkins, executive director of the UC Santa Barbara Economic Forecast, said he doesn’t have any answers.”

“‘A lot of us in the county want to see more higher-paying jobs, so there are things for our young people to do,’ said Charles Maxey, dean of business at California Lutheran University in Thousand Oaks.”

“Increasingly, it’s becoming a norm for every adult in a family to work, Maxey said. ‘We used to say that if you’re paying more than 30 percent of your income on housing, you’re pushing the limit of what you’re spending,’ he said. ‘And now people just expect that they’re going to pay 40 percent to 50 percent of their income, and it’s really stressing people.’”

“The average salary in the county was $46,928 in 2006, up 5.1 percent from $44,670 in 2005. However, incomes adjusted for inflation based on 2000 salaries were lower: $38,300 in 2006 and $38,000 in 2005.”

“Steve Kinney, president of the Economic Development Corp. of Oxnard said he estimates that people must earn a household income of $80,000 to $100,000 to live comfortably and own a home in the county.”

“Roland Cordobes, a financial adviser in Ventura, said he was stunned by the UCSB assessment.”

“Still, Cordobes recommends the county as a place for young families. He stressed that anyone can purchase a home if they have the right mind-set. ‘I think Ventura County is a great place for a young family,’ he said. ‘It’s growing, truly growing. But you have to be determined to make it.’”

“A lot of young people do not understand how to save money, he said. ‘A lot of them are spending $2,000 to $3,000 in rent, yet they say they cannot afford to buy a home,’ he said. ‘I say, if you can afford so many dinners a year? or if you can afford cappuccinos at Starbucks, you can afford a home.’”

“Rents rose 6.1 percent last year, to an average payment of $1,523 per month.”

The Recordnet. “The rising number of foreclosures in San Joaquin County isn’t helping home sellers, because that pumps up the competition, makes it tougher to sell and depresses prices.”

“John Knight, University of the Pacific professor of finance and real estate, said mounting foreclosures depress market prices, because lenders tend to sell low to get rid of the property quickly instead of holding out for the best price.”

“‘My concern is foreclosures,’ said Shane Hart, VP for the Stockton-based Grupe Co. ‘In San Joaquin County, pre-foreclosure notices are three times greater than at the end of 2005. This could translate into increased inventory as these hit the market.’”

Readers suggested a topic surrounding the idea of a “tipping point.” “The last couple of weeks in the world of real estate have sure been interesting. We have all read about new sub-prime lender problems, tightening credit standards, doubts about adequate compensation for lending risk, increased DOM, increased NOD, rising [for sale] inventory, and cautious gloom in the MSM.”

“My question is this: At what point does market frustration morph into a full blown panic? Is it quantifiable? Should we keep an eye on some key numbers/metrics that can predict the tipping point?”

“OR, Is an inevitable panic ephemeral in nature? In other words, will it just arrive out of nowhere, without warning, tsunami style?”

One from New York. “Denial is very powerful. Especially on Long Island. No set of numbers or talking heads are going to effect the way Mr. and Mrs. Jones spend or sell for that matter. They want what they want and housing bubbles don’t happen here. They happen in places that are building tons of houses without secured buyer and hell, L.I. is all used up…hell, they’re not making any more land here. Hence, the tsunami.”

Another said, “I think its about knocking the hamsters off their wheels so they can actually start paying attention and using their noggins. I also believe it’s going to take something that feels cataclysmic for that to occur.”

One had a timeline, “It has to warm up (in areas it is cold) and when that happens more signs will be in the yards. Once the signs are in the yards and people note that nothing is selling, or that the only thing selling is a comp similar to theirs going for 10% less or larger. I say June.”

A reply, “I’m still surprised during conversations at parties, bars, etc., that many people either a: unaware, b: in denial because ‘it’s just a media creation being hyped.’”

“The people on this board, I think, assume that everyone knows what actually, only we know. And those whose business it is to know, but aren’t telling. The comparison made here before to a car crash in slow-motion is appropo. In your cross-section of friends, aqaintances, folks you strike up conversations with, what percentage know what you know?”

And another, “I prefer the continuously zoomed out image of a snail moving toward a buzzsaw accompanied with dramatic music.”

One predicted, “Most buyers in the last two years fell for the line that double digit appreciation every year was the norm. They know their truth and won’t be misled by the facts. Only after they try to refi the loan to find out that the new appraisal is 100K less than they paid for it will they try to find someone to blame for it. Then they’ll pretend to be victims.”

One had a specific example, “Was just talking to a friend who told me about a guy who bought a 500k house at the top of bubble 2005 in Bakersfield. Now does not like it and wants to move but won’t sell because he doesn’t want to lose money, already refusing an offer (and only offer by the way) 60k below asking. Trying to rent it (he moved to Fresno) for $1,600. no takers. Very sad but starting to be more common.”

Another made this comparison. “The situation on the ground brings to mind the period during the December 24, 2004 tsunami between the earthquake and when the waves started hitting the shores around the Indian Ocean’s perimeter.”

“Meanwhile, government scientists puzzled over whether to worry about what they knew was a large-magnitude earthquake, but which they nontheless severely underestimated. By the time the waves were hitting the beaches, it was too late to issue any warnings.”

A reply, “A tsunami happens way too fast. I believe that a better metaphor would be quicksand. The fear doesn’t start until the sand gets to about waist level. I would guess that for most FB’s, the ones that I know anyway, the level is around mid-thigh at this point. They still believe that someone or something will pull them out.”

One pointed to this contradiction, “I would watch how the tug-of-war plays out between the bleating ’soft landing’ mantra raining down from on high and the steady stream of MSM (and non-MSM) evidence regarding the magnitude of the subprime implosion.”

“Also keep your eye on a growing awareness that in the absence of massive government intervention, the collapse of subprime implies residential real estate price deflation.”

“Finally, look for reflation (aka govt intervention) efforts to either never materialize, to result in higher long-term Treasury yields (another stake in the bubble’s heart) or (worst case scenario!) to successfully respike the punchbowl, enabling liquidity-drunk builders to add further to 2.7m vacant homes already for sale.”

One looked at history, “We probably won’t get wholesale panic, nationwide that is obvious. We might get pockets, mainly in heavy investor infested communities. Most will just be too focused on making a living and their families.”

“This will evolve slowly over the next two years into a full fledged meltdown like Austin in the late 1980s. In 2009 (maybe 08, but more likely 09), we will see large numbers of foreclosures advertised at 50-60c on the 2005 $1 in overbuilt bubble markets especially. Some areas will not get hit this hard (most will likely see 20% at least though).”

“This will continue in 2010 which perhaps will be the bottom; thing is in the 50c on the $1 areas, even the 20% down payment people will end up having to walk (or stay till 2015+).”

One saw this progression. “Panic is not the end…(1) Optimism. (2) Excitement. (3) Thrill. (4) Eupyhoria. (5) Anxiety. (6) Denial. (7) Fear. (8) Depression. (9) Panic. (10) Capitulation. (11) Desperation. (12) Hope. (13) Relief. (14) Optimism.”

“Home sellers still in Denial, must wait 3 months to the end of spring non-buying season.”

The St Petersburg Times reports from Florida. “Sales consultant Mike Morrell of David Weekley Homes was baking cookies last Saturday in the kitchen of a three-bedroom, 3,200-square-foot, $410,000 model home that was on display at the new Southern Hills Plantation, south of downtown on U.S. 41. The cookie count in the early afternoon was up to eight dozen. ‘If you feed them,’ Morrell said, ‘they will come.’”

“In late ‘05, when the Southern Hills sales center opened, the least expensive homes had a bare-bones tag of about $325,000, and that didn’t include the lots, which started at about $80,000. Now some of the smaller ‘cottage’ homes can be had for as low as $248,900, with the lots priced at $66,900.”

“One home built by Windjammer, with four bedrooms, a three-car garage, 4,032 square feet and a two-story pool cage the size of a small concert hall, was priced at $1.3-million but is on special right now for $990,000.” “‘If you’ve got a spare million bucks,’ Southern Hills sales manager Steve Erick said, ‘we’ll even give you change.’”

“In June 2004, on one Saturday, the company sold 302 lots for more than $38-million. A year later, again on a single Saturday, the site sales were similarly stunning: 236 lots for $40-million. The buyers were empty nesters and people from Tampa or states up north looking for second homes.The development, which ultimately could have as many as 999 homes.”

“Only 12 homes have people living in them. Erick is in one of them. He said all of the people who live in Southern Hills got together for a party for Christmas and fit into one family room.”

“After laying off most employees of Construction Compliance Inc. in January, Jesse Battle III is selling his downtown St. Petersburg headquarters. Battle’s cell phone has been disconnected, and colleagues say he contemplates a move to North Carolina.”

“But legal troubles will be hard for the businessman to shake off. As customers flood Tallahassee with written complaints larded with ‘defraud’ and ’scam,’ the state has opened an investigation into some of the 482 deals that collapsed when Battle stopped building last year.”

“‘If I were him I would move somewhere, too. But if he thinks all this stuff won’t follow him, he’s wrong,’ said Bob Shapiro, a Venice cabinet contractor who lost nearly $500,000 when Battle stopped paying bills around October.”

“One person hot on Battle’s tail, and that of Coast Bank, is Port Charlotte attorney Tom Carrero. He’s one of at least five attorneys retained by burned CCI customers. Carrero sent CCI a letter for each of his nearly 45 clients. ‘I said, ‘Hey, you’ve got seven days to complete this home.’ They haven’t responded,’ Carrero said. ‘It looks like they’ll only do something when they get sued.’”

“For people like Shapiro, it hardly matters whether Battle intended to harm his customers or simply failed to negotiate last year’s real estate downturn. In Shapiro’s opinion, Battle realized that houses he completed wouldn’t turn a profit. So he simply stopped work.”

“‘Is mismanagement criminal?’ Shapiro said. ‘Yes, I think it is. At least in this case.’”

The Herald Tribune. “Coast Bank of Florida passed on the chance to unload a property for less than a third of what the bank loaned on it. So the bank’s foreclosure against developer Michael Tringali will continue.”

“The highest auction bid was $1.6 million, which means Coast would take a $3.34 million loss if it agreed to the sale. ‘We’re not going to accept that,’ Coast spokesman Tramm Hudson said. ‘We’re not willing to do that.’”

“Bradenton-based Coast is in no position to take that kind of hit The company already faces problems stemming from $110 million in loans to nearly 500 home buyers, many of them speculators, who were doing business with Construction Compliance Inc., a St. Petersburg company that has stopped all work.”

“Tringali stopped paying the Coast loan, so the bank is suing to take the property. ‘We see no likely opportunity to get repaid, so we are taking the collateral so that we can either hold on to it or sell it ourselves,’ Hudson said.”

“If the bank can’t sell the land for the full amount of the loan, it would likely sue Tringali to recover the rest of what it is owed.”

“Hudson wanted to emphasize that Coast did not arrange the auction. ‘The bank did not order this auction,’ said Hudson, who attended. ‘The customer of his own volition decided to try and sell properties in this manner.’”

“Tringali offered a number of homes and lots in Sarasota and Manatee counties for sale at the auction, but few bids came in at more than half of the property’s value during the boom.”

The Wall Street Journal. “Aleem Hussain formed his real-estate company in 2004, calling it Main Street USA, after a nearby Disney World attraction. He bought a complex of 27 aging, two-story apartment houses in Orlando and set out to convert them into condos.”

“But not much has gone as planned for Mr. Hussain, nor has it for his hundreds of investors, who include a bunch of local sheriff’s deputies. Today, Mr. Hussain’s company is being liquidated by a federal bankruptcy court, and he is residing in the Seminole County jail, charged with 23 counts of federal mail and wire fraud.”

“Mr. Hussain’s rise and fall illustrates one of the hazards of a frothy property market: inexperienced developers get in over their heads and drag unsophisticated investors down with them.”

“‘Schoolteachers, cops, doctors, priests, everyone thought they were Donald Trump,’ says Lewis Freeman, the court-appointed trustee administering Main Street’s bankruptcy proceeding. Mr. Hussain’s company, he contends, was a ‘microcosm of the total market. You had a lot of unqualified people getting easy money and able to go into businesses in which they didn’t know what they were doing.’”

“Bryan Margeson, a sheriff’s department employee introduced Mr. Hussain at investment seminars and talked about how he thought Orlando’s boom would continue for years. Mr. Margeson, who says he lost $100,000, says Mr. Hussain ‘used me for some credibility, which I didn’t realize they lacked.’”

“Investors and others have filed $19 million of claims in bankruptcy court. The company’s remaining assets are being liquidated by the court. It is unlikely that investors will recoup much of their money, according to several people involved in the case.”

“Mr. Margeson refers to the affair as his ‘$100,000 lesson.’ He notes that he ‘never saw people strong-armed to invest. The sad part is people lined up to invest their money. It was the whole furor of the real-estate market.’”

From TC Palm. “The 29.2-acre site has been cleared and a central road put down. The 82 lots have been pre-approved for homes. But the manager of the project is ready to walk away if the price is right because of the ongoing housing slump.”

“Dan Garcia, manager and co-owner of the Segovia Lakes development, cited market difficulties on Friday for putting the multi-family property on the market for $8.5 million.”

“Garcia said he and his partners decided to sell the subdivision instead of moving forward with construction even after obtaining costly land entitlements and development permits from Indian River County. ‘There’s a lot of inventory that needs to be absorbed in Vero Beach,’ Garcia said. ‘If we find an appropriate buyer, we’ll sell it, the price is negotiable.’”

“Although Garcia said the price was negotiable, it may take some time before a builder will purchase the property, said custom home builder Richard Hope in Vero Beach.”

“‘It’s hard for me to say whether it’s a fair price or not,’ said Hope, immediate past president of the Treasure Coast Home Builders Association. ‘There’s a lot of carrying costs associated with a property like that if someone buys it as an investment to sit on it for a while.’”

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