The Housing Bubble

The East Valley Tribune reports from Arizona. “With the housing market lagging and homes taking months to sell, a Scottsdale-based company is betting homeowners will be eager to try a more unconventional route to successful sales, the auction. National Real Estate Auction Corp. will host a massive real estate auction in downtown Phoenix next month, offering everything from starter homes to multimillion-dollar estates.”

“Home auctions have been around for decades but have gained popularity as an alternative tool for selling in a slow market where competition is tough. Valleywide, there are more than 45,000 properties on the market, at least 10,000 above the norm.”

“‘It’s growing exponentially because more and more people are becoming tired of a lengthy listing,’ said Bill Sheridan, the National Auctioneers Association’s president.”

“(Auctioneer) John McCann hopes to have more than 100 homes at the Valley auction. A typical auction has 20 to 40 properties, so the upcoming Phoenix auction is ambitious, Sheridan said. Auctions allow them to sell fast and at current market value, though that price is sometimes below a seller’s expectations, he said.”

“‘We are accomplishing the goal, but it is sometimes at a discount to what the owner would like to truly have,’ Sheridan said.”

“Scottsdale loan officer Nate Robinson is hoping the auction will boost interest in a 3,000-square-foot house he owns in Buckeye’s Verrado development. He bought it a year ago but had to move soon afterward. Since then, the home has sat empty, and it’s been listed for about four months.”

“‘I think the word auction alone is going to get people out there,’ he said.”

In Business Las Vegas from Nevada. “The number of home closings recorded in the Las Vegas Valley in January fell to its lowest point since May 2004. John Burns, a Southern California-based real estate consultant, said existing home prices will continue to depreciate as long as listings remain high, and he said he doesn’t expect the market to reach ‘healthy levels’ of 15,000 homes until 2008 at the earliest.”

“The Greater Las Vegas Association of Realtors reported there were nearly 24,000 single-family homes, condos and town homes on the market in January.”

“‘I think resale prices are going to be down 6 percent (in 2007),’ Burns said. ‘The new home guys have dropped their prices at least 10 percent and the resale market needs to do the same, and it may take another year or two to do that. Homebuilders do it because they have urgency to sell homes and pay their overhead. Homeowners don’t have inventory. It comes down to nobody wants to sell their home for less than their neighbor.’”

“The median price of existing homes has fallen $10,000 in the last three months and existing homes sold in January for a median price of $278,000, the lowest price since June 2005 when homes sold for $273,000, according to SalesTraq.”

“The decision by more homeowners to put their homes on the market in January isn’t good for the resale market in holding the line on prices, one housing analyst said. ‘You got big inventory out there, and you are going to have some price wars,’ Dennis Smith, the president of HomeBuilders Research, told the audience.”

“Las Vegas housing analyst Steve Bottfeld, who released his monthly housing report Tuesday, said he expects existing-home inventory to reach 24,000 in March and slowly decline to 16,000 by the end of the year.”

“Bottfeld, who tends to be optimistic about the market, said prices may decrease in the first half of the year before climbing in the fall. ‘The disturbing aspect of the still-swelling MLS inventory is that 44 percent of those listings are vacant, and a significant number of them may fall into foreclosure,’ Bottfeld said. ‘This will serve as a dampening force on existing home prices.’”

“In the new home market, sales were off 26 percent in January compared to January 2006 and the 2,135 homes sold were the fewest since May 2004, SalesTraq reported.”

Several readers suggested a spread of the subprime markets over to the prime as a topic. “OK, so subprime is toast. But I don’t think investment losses on stupid loans, and foreclosures of deals that should have never been done to begin with, will sink the economy, do you? No one else seems to think so either, judging by the financial markets.”

“The question is whether there is any evidence that the pain is shifting out of subprime, and is that likely to happen in the future. Mortgage rates on traditional mortgages are still low. So are default rates.”

“I just saw a chart that shows that risk spreads over Treasuries are less than 1.0% across the board — mortgage backed, corporate, municipal, whatever. And Treasury bonds themselves have a NEGATIVE inflation risk premium relative to cash.”

“Is subprime the canary in the coal mine or the whole problem? And is there some proof, even if anectdotal?”

A reply, “I think it just might be the canary. The problem is the whole system of pension & hedge funds that invests in these securities, especially the higher yielding ones. These vehicles are themselves geared, and then investors in them can also be geared, so you have gearing on gearing on gearing.”

“It can’t be healthy, and means you get a domino effect if only one link in the chain fails. But then again, I am a bit ‘glass half empty’ on this subject.”

One saw this argument. “As I understand it the ‘bear’ theory is that ’subprime is toast’ => ‘real estate is toast’ => ‘consumer is toast’ => ‘economy is toast.’”

“Many ‘bulls’ refute this chain of implications as follows: 1.) Real estate doesn’t depend on subprime (o.k. maybe in S. Florida) 2.) The consumer is robust and will keep buying Hummers and Plasmas even as they lose their home equity. 3.) Even if the ‘little’ consumer stops buying the super rich will keep right on going. After all the top wage earners account for ‘most’ of the consumption anyway.”

“I don’t buy argument (1) one iota although I have to admit arguments (2) and (3) may yet prove to have some truth behind them. So yes the economy may well come through this but the real estate market is an all together different story.”

“Ironically the economy stabilizing may yet be the final nail in the coffin for real estate as it may keep the BB helicopters grounded. My theory is that this is exactly the outcome the fed’s want … and likely what most bulls on wall street are counting on.”

Another discounts the stock situation. “That’s because the recession of 2000 was halted by the credit bubble. The ’soft landing’ was enabled by the credit/housing bubble.”

“Now, IMHO, we will likely experience the fallout due in 2000 plus the carnage created by the destruction of the credit/housing bubble — unless they’ve got another bubble on the way (have to wonder about that stock market).”

One looks at the media. “Even the commentators on CNBC, you know, the same ones who hadn’t said a word about problems with subprime until last week when it was no longer possible to ignore - even those guys are saying it’s going to eat into prime.”

“Why would it be confined to subprime? Seriously, how many Amerians can trully afford a 400K and up home? Yet in many areas of the country, that’s all that’s been available for several years.”

“Also, in the Seattle area, and I’m sure many others, realtors and brokers have been encouraging people to borrow outside of their comfort zone- it was an agenda of theirs really for several years now. It was a racket really, to stretch people in all income categories past a rational limit.”

One sees a larger picture. “You are looking at the wrong market. Subprimers (poor credit and/or highly leveraged borrowers) are unable to quickly sell property for the amount they owe. As a result, they are defaulting. These defaults are being reflected in the subprime paper market. In other words, the value of the real asset is falling and that affects both prime and subprime borrowers alike.”

From Reuters. “Subprime mortgage companies’ shares dropped on Friday, extending more than two weeks of declines and triggering slumps in many finance companies’ shares.”

“‘There’s so much fear and loathing and panic in the subprime mortgage sector,’ said Howard Shapiro, a portfolio manager at KBW Asset Management, which has positions in several mortgage lenders.”

“Other decliners included Lehman Brothers Holdings Inc. and Bear Stearns Cos., investment banks perceived as having large exposure to the mortgage market. Share weakness even extended to Fannie Mae, and Freddie Mac, though neither has extensive subprime exposure.”

“But stock investors may be overreacting, analysts said. Even lenders with minimal subprime exposure, such as American Home Mortgage Investment Corp., are selling off.”

“‘They’re getting tarred with the same brush,’ said Lee Norton, an analyst at JS Asset Management, which owns American Home shares. KBW’s Shapiro estimates that total subprime mortgage industry losses for 2006 loans would be in the ballpark of $6 billion.”

“‘There’s no evidence of this yet, but the risk is that subprime is not just an isolated example of overstretched lending, but the first crack in a broader problem in credit in market,’ said Bob Albertson, chief strategist at Sandler O’Neill.”

The Pensacola News Journal reports from Florida. “Kay Ford and her husband are rolling the dice for high stakes Saturday. The Birmingham couple will be on Perdido Key, fingers crossed, hoping they made the right decision to put their two condominiums on the ‘absolute’ auction block.”

“‘They’ve been on and off the market so many times, we just thought we’d go with an auction,’ Kay Ford said.”

“The Fords actually are auctioning three properties, but their Atlantis penthouse overlooking the Gulf of Mexico, and their condo in Legacy Key on Old River, will be absolute. Their third property, also on Perdido Key, also will be auctioned, but with an owner’s reserve that sets a minimum bidding price.”

“(Auctioneer) William Bone believes an increasing number of resort properties will be going to auction in tough condo markets, like the one gripping many Florida coastal communities. Longtime Perdido Key Realtor Brenda Beumer agrees, saying that absolute auctions are a clear sign of a struggling market.”

“‘Absolute auctions are extremely symptomatic of a flat market,’ said Beumer.”

“The condo market on Perdido Key is in a slump, and Beumer said she is starting to see some signs, such as absolute auctions, that owners are willing to bail out of properties at any price.”

“‘When people got their tax bills this year, they began to realize that they can’t afford to hold on to these properties unless something changes,’ Beumer said.”

“Perdido Key Realtor Debi Freed said absolute auctions are fairly rare, and when she does see them, they often involve owners desperate to sell their property.”

“The Fords say that’s not the case with their condos. They own several investment properties along the Gulf Coast, including Destin and Orange Beach. They decided it was time to reduce their holdings and hope their luck holds out.”

The St Petersburg Times. “Dreary times call for desperate measures. That’s why 50 Florida property owners are willing to take an unusual gamble at the Seminole Hard Rock Hotel & Casino on Saturday.”

“Everything from $130,000 condominiums to commercial lots to multimillion-dollar mansions will be for sale to the highest bidders, many of whom will be competing inside a 400-seat casino ballroom at the All In Mega Auction. If all goes as planned, homeowners who have struggled to sell their houses for months will watch them go within six minutes.”

“‘We’ve basically created a new medium of bringing sellers and buyers together, making it kind of like a shopping mall for properties,’ said Jay Bailey, who is running Saturday’s auction. ‘It just doesn’t make sense to put a sign in the yard anymore.’”

“Angelique Lochridge has been trying to sell her parents’ Valrico home for seven months. ‘We’d be happy to just sell it for what we owe at this point,’ Lochridge said. ‘It would be a huge, huge relief to get rid of it.’”

The Herald Tribune. “Sarasota and Manatee home builders have entered 124 residences in the annual Parade of Homes, which begins today. And, despite the cooling of the housing market following the peak of two years ago, only about 20 percent of the models are holdovers from last year.”

“One change from years past: the builders haven’t had to struggle to complete their models on schedule for the event, said Larry Anderson, VP of the Home Builders Association of Sarasota County. That might be because of the cooling of the housing market. Sarasota County single-family building permits fell from 6,039 in 2005 to 3,369 last year.”

“‘Is the glass half-full or half-empty?’ he asked. ‘Compared to last year, obviously we are down. But compared to prior years, we really are in a comparative market to 2003. We would prefer to keep it at this rate and not get into that overheated market. I don’t think that serves anyone very well.’”

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